-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QcpK6QpVAy/mdnSPUjWlnEsIZlGb9vL+vyLf5DmIuLAjUo/2K8WMdTAVjy6pRCjS 98MzR0dSZ8tGyzYMNdhwUA== 0001016843-99-000203.txt : 19990310 0001016843-99-000203.hdr.sgml : 19990310 ACCESSION NUMBER: 0001016843-99-000203 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMRGLOBAL CORP CENTRAL INDEX KEY: 0001021772 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 592911475 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-28840 FILM NUMBER: 99560833 BUSINESS ADDRESS: STREET 1: 26750 U.S. HGWY 19 N, STE 500 CITY: CLEARWATER STATE: FL ZIP: 3462133761 BUSINESS PHONE: 7277977080 MAIL ADDRESS: STREET 1: 26750 U S HIGHWAY STREET 2: 19 NORTH SUITE 500 CITY: CLEARWATER STATE: FL ZIP: 33761 FORMER COMPANY: FORMER CONFORMED NAME: INFORMATION MANAGEMENT RESOURCES INC DATE OF NAME CHANGE: 19960828 10-Q/A 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 Commission File Number 0-28840 IMRGLOBAL CORP. (Exact name of Registrant as specified in its charter) FLORIDA 59-2911475 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 26750 U.S. HIGHWAY 19 NORTH, SUITE 500, CLEARWATER, FLORIDA 33761 (Address of principal executive offices and zip code) 727-797-7080 (Registrant's telephone number, including area code) INFORMATION MANAGEMENT RESOURCES, INC. (Former name if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------- As of November 4, 1998, there were 29,594,874 outstanding shares of the Registrant's Common Stock, par value $.10 per share. This Quarterly Report on Form 10-Q/A amends and supersedes, to the extent set forth herein, the Registrant's previously filed Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998. IMRGLOBAL CORP. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE ---- ITEM 1. Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 ............... 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1998 and 1997................................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997................................... 5 Notes to Consolidated Financial Statements.................... 6 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................ 13 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ............................................ 20 ITEM 5. Other Information ............................................ 20 ITEM 6. Exhibits and Reports on Form 8-K.............................. 20 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMRGLOBAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) (RESTATED) (SEE NOTE 2) ASSETS Current assets: Cash and cash equivalents ......................................... $ 75,662 $ 85,819 Marketable securities ............................................. 19,204 4,453 Accounts receivable, less allowances of $226 and $0, respectively.. 23,439 11,156 Unbilled work in process .......................................... 10,444 6,390 Deferred taxes .................................................... 10,498 1,889 Other current assets .............................................. 3,818 4,664 --------- --------- Total current assets ........................................ 143,065 114,371 Property and equipment, net of accumulated depreciation .............. 17,817 9,818 Capitalized software costs, net of accumulated amortization .......... -- 47 Deposits and other assets ............................................ 4,013 960 Intangibles, net of accumulated amortization ......................... 22,911 10,157 --------- --------- Total assets ................................................ $ 187,806 $ 135,353 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 4,586 $ 3,136 Accrued compensation .............................................. 14,055 8,430 Deferred revenue .................................................. 1,526 4,413 Other current liabilities ......................................... 15,759 4,599 --------- --------- Total current liabilities ................................... 35,926 20,578 Long-term debt ....................................................... 552 885 Other liabilities .................................................... 542 683 --------- --------- Total liabilities ........................................... 37,020 22,146 --------- --------- Shareholders' equity: Preferred stock ................................................... -- -- Common stock ...................................................... 2,918 2,565 Additional paid-in capital ........................................ 126,106 98,735 Retained earnings ................................................. 23,431 12,564 Accumulated other comprehensive loss .............................. (1,669) (657) --------- --------- Total shareholders' equity .................................. 150,786 113,207 --------- --------- Total liabilities and shareholders' equity .................. $ 187,806 $ 135,353 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 IMRGLOBAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------ ---------------- (RESTATED) (RESTATED) (SEE NOTE 2) (SEE NOTE 2) Revenue .................................... $ 42,013 $ 23,044 $ 111,597 $ 56,158 Cost of revenue ............................ 21,245 12,613 58,654 31,026 --------- --------- --------- --------- Gross profit ...................... 20,768 10,431 52,943 25,132 Selling, general and administrative expenses 8,463 5,425 22,826 13,748 Research and development expenses .......... 1,812 243 3,959 591 Acquired in-process research and development and acquisition costs ....... -- -- 8,345 -- Goodwill and intangible amortization ....... 672 283 1,325 830 --------- --------- --------- --------- Income from operations ............ 9,821 4,480 16,488 9,963 Other income (expense): Interest expense .................. (47) (36) (233) (172) Interest income and other ......... 1,122 552 3,376 1,073 --------- --------- --------- --------- Total other income ................ 1,075 516 3,143 901 --------- --------- --------- --------- Income before provision for income taxes and minority interest ............ 10,896 4,996 19,631 10,864 Provision for income taxes ................. 3,580 1,509 8,694 3,443 --------- --------- --------- --------- Income before minority interest ... 7,316 3,487 10,937 7,421 Minority interest in net income ............ -- (22) -- (47) --------- --------- --------- --------- Net income ........................ $ 7,316 $ 3,465 $ 10,937 $ 7,374 ========= ========= ========= ========= Earnings per share: Basic.............................. $ 0.25 $ 0.14 $ 0.40 $ 0.31 ========= ========= ========= ========= Diluted............................ $ 0.19 $ 0.10 $ 0.29 $ 0.22 ========= ========= ========= ========= Shares outstanding: Basic ............................. 29,154 24,708 27,476 23,532 ========= ========= ========= ========= Diluted ........................... 37,816 35,234 37,624 33,932 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 IMRGLOBAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 1998 1997 -------- -------- (RESTATED) (SEE NOTE 2) Cash flows from operating activities: Net income ..................................................... $ 10,937 $ 7,374 Adjustment to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization ............................... 3,075 2,583 Acquired in-process research and development ................ 8,200 -- Deferred taxes .............................................. (8,913) (3,363) Tax benefit of stock options ................................ 14,933 5,872 Unrealized exchange losses .................................. (5) (11) Minority interest in net income ............................. -- 47 Changes in operating assets and liabilities: Accounts receivable and unbilled work-in-process ......... (11,166) (4,799) Other current assets ..................................... 1,568 50 Deposits and other assets ................................ (2,842) (209) Accounts payable and other liabilities ................... 6,292 (633) Accrued compensation ..................................... 5,625 3,024 Income tax ............................................... 1,149 (3,039) Deferred revenue ......................................... (2,887) 2,427 -------- -------- Total adjustments ........................................ 15,029 1,949 -------- -------- Net cash provided by operating activities ................ 25,966 9,323 -------- -------- Cash flows from investing activities: Acquisition of consolidated subsidiaries, net of cash acquired ....................................... (16,277) (3,287) Investment in marketable securities, net ....................... (8,521) (15,837) Additions to capitalized software costs ........................ -- (763) Additions to property and equipment ............................ (8,732) (4,679) -------- -------- Net cash used in investing activities .................... (33,530) (24,566) -------- -------- Cash flows from financing activities: Net repayments from revolving credit line ...................... -- (654) Proceeds from long-term debt and notes ......................... -- 1,180 Payments on long-term debt, notes and capital leases ........... (2,322) (879) Proceeds from issuance of common stock ......................... 645 55,483 -------- -------- Net cash provided by (used in) financing activities ...... (1,677) 55,130 -------- -------- Effect of exchange rate changes ................................... (916) (18) -------- -------- Net increase (decrease) in cash and cash equivalents .............. (10,157) 39,869 Cash and cash equivalents at beginning of year .................... 85,819 24,082 -------- -------- Cash and cash equivalents at end of period ........................ $ 75,662 $ 63,951 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION On November 17, 1998, the Company changed its name from Information Management Resources, Inc. to IMRglobal Corp. ("IMRglobal" or the "Company"). In the opinion of management, the accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments necessary for a fair presentation. The results of operations for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1997, which are contained in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the "Commission"). 2. RESTATEMENT In response to recent interpretative guidance published by the Commission surrounding acquisition-related in-process research and development (IPRD), the Company has revised the original accounting for the purchase price allocation related to the 1998 acquisition of Lyon and the related amortization of intangibles. The Company originally obtained an independent valuation of IPRD for the Lyon acquisition during July 1998. A second independent valuation, which incorporated the Commission's interpretative guidance, was obtained during February 1999. The appraisal of the IPRD considered the time and cost required to complete each project, the estimated after-tax cash flows attributable to each project, the state of development of each project, and associated risks which included the inherent difficulties and uncertainties in completing the projects and thereby achieving technological feasibility and risks related to the viability of and potential changes to future target markets. This analysis results in amounts assigned to IPRD that had not yet reached technological feasibility and does not have alternative future uses. As a result of the second independent valuation, IMRglobal has reduced the second quarter 1998 one-time IPRD charge from $15.4 million to $8.2 million and adjusted the amortization of related intangible assets for the second and third quarters of 1998. The $7.2 million reduction in IPRD has been capitalized as goodwill and amortized over a period not to exceed 20 years. 6 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 2. RESTATEMENTS (Continued) The effects of the restatement resulted in the following impact on the Company's previously reported results of operations for the three and nine month periods ended September 30, 1998 (in thousands).
Three Months Nine Months Ended Ended September 30, 1998 September 30, 1998 ------------------ ------------------ Income before income taxes: As previously reported .................. $ 10,982 $ 12,574 * Adjustment related to acquired in-process research and development ............ (86) 7,057 -------- ---------- Restated ............................... $ 10,896 $ 19,631 ======== ========== Net income: As previously reported .................. $ 7,402 $ 3,880 * Adjustment related to acquired in-process research and development ............ (86) 7,057 -------- ---------- Restated ............................... $ 7,316 $ 10,937 ======== ========== Earnings per share - Basic: As previously reported .................. $ 0.25 $ 0.14 * Adjustment related to acquired in-process research and development ............ -- 0.26 -------- ---------- Restated ............................... $ 0.25 $ 0.40 ======== ========== Earnings per share - Diluted: As previously reported .........,........ $ 0.20 $ 0.10 * Adjustment related to acquired in-process research and development ............ (0.01) 0.19 -------- ---------- Restated ............................... $ 0.19 $ 0.29 ======== ==========
*The adjustment results from the increased amortization of intangibles. 7 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of IMRglobal Corp. and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. COMPUTATION OF EARNINGS PER SHARE - Per share data and number of shares outstanding have been adjusted to reflect the 3-for-2 stock splits in the form of stock dividends paid by the Company on April 3, 1998 and July 10, 1997. Basic earnings per share is computed using the weighted average of common stock outstanding. Diluted earnings per share is computed using the treasury stock method which is summarized as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ Weighted average common stock outstanding ... 29,154 24,708 27,476 23,532 Weighted average common stock equivalents ... 8,662 10,526 10,148 10,400 ------ ------ ------ ------ Shares used in diluted earnings per share calculation ...... 37,816 35,234 37,624 33,932 ====== ====== ====== ======
RECLASSIFICATION - Research and development expenses have been reclassified from selling, general and administrative expense, for the three and nine month periods ended September 30, 1997 to conform to the new classification of these expenses for the three and nine month periods ended September 30, 1998. 4. SHAREHOLDERS' EQUITY On June 19, 1997 and March 9, 1998, the Company declared 3-for-2 stock splits in the form of stock dividends payable on July 10, 1997 and April 3, 1998, respectively, to shareholders of record on June 26, 1997 and March 20, 1998, respectively. All applicable share and per share data in the accompanying financial statements have been retroactively adjusted to reflect these dividends. 8 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 4. SHAREHOLDERS' EQUITY (Continued) Changes in shareholders' equity for the nine months ended September 30, 1998 is summarized as follows (in thousands):
Accumulated Comprehensive Other Income Common Paid-in Retained Comprehensive (Loss) Stock Capital Earnings Loss Total ------------- ------- ------- --------- ------------- --------- Balance, December 31, 1997 .... $ -- $ 2,565 $ 98,735 $ 12,564 $ (657) $ 113,207 Common stock issued in connection with acquisitions -- 78 12,068 (70) (59) 12,017 Employee stock purchase plan .. -- 2 346 -- -- 348 Stock options exercised ....... -- 273 24 -- -- 297 Tax benefit of stock options exercised .... -- -- 14,933 -- -- 14,933 Net income .................... 10,937 -- -- 10,937 -- 10,937 Translation adjustment ........ (953) -- -- -- (953) (953) --------- Comprehensive income .......... $ 9,984 -- -- -- -- -- ========= --------- --------- --------- --------- --------- Balance, September 30, 1998 ... $ 2,918 $ 126,106 $ 23,431 $ (1,669) $ 150,786 ========= ========= ========= ========= =========
The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation of comprehensive income (loss) and its components. Comprehensive income (loss) presents a measure of all changes in equity that result from recognized transactions and other economic events during the period other than transactions with stockholders. SFAS 130 requires restatement of all prior period financial statements presented and is effective for periods beginning after December 15, 1997. The Company has elected to disclose this information in the Statement of Shareholders' Equity. As of September 30, 1998, the accumulated other comprehensive loss account consists of cumulative foreign currency translation adjustments. 9 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 5. ACQUISITIONS LYON CONSULTANTS, S.A. ("LYON ACQUISITION") - On May 15, 1998, the Company acquired 100% of the outstanding stock of Lyon Consultants, S.A. ("Lyon"), a privately held software engineering company headquartered in Paris, France. Lyon specializes in rapid software application development, utilizing reusable business and technical software objects, and information technology consulting. In exchange for Lyon's common stock, Lyon's shareholders received $16.0 million in cash and 499,353 shares of the Company's common stock. In addition, $700,000 in cash and 32,000 shares of the Company's common stock is payable to Lyon's former shareholders one year from closing (included in accrued expenses). The Lyon acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the net assets acquired (goodwill) will be amortized over a period not to exceed 20 years. The purchased assets and assumed liabilities in connection with the acquisition of Lyon were recorded at their estimated fair values at the acquisition date. In connection with the Lyon acquisition, the Company retained an independent appraiser to complete a valuation of the assets of Lyon, including valuation of certain in-process research and development. The Company identified 5 project categories for which technological feasibility had not been achieved as of the acquisition date and for which there was no alternative future use. The project categories include (i) LC Ready-Banking; (ii) LC Ready-Insurance; (iii) LC Ready-Manufacturing; (iv) LC Ready-Utilities and (v) Other European modules. The value associated with these projects was determined using a discounted cashflow model with a risk adjusted discount rate of 25%. The model reflects revenue to be generated beginning in 1999 and continuing through 2006 for all projects. The valuation also incorporated a stage of completion methodology where the value was adjusted based on the technology's percentage of completion. As of the acquisition date, the general design of the core component modules was completed. This design identified the primary core component modules required for four targeted industries which was further subdivided between the European and North American markets. As of the acquisition date 30% of the North American component modules and 60% of the European component modules had been coded. Testing has not been completed for these modules. 10 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 5. ACQUISITIONS (Continued) The schedule below details the status of each project as of the acquisition date and its appraised in-process research and development value (dollar amounts in thousands):
Percentage Complete ----------------------------------------------------------- Pre Estimated Acquisition Completion Time Labor Cost Complexity Overall IPRD Project Costs Date Based Based Based Based Conclusion Value - ---------------- ----------- ---------- ----- ----- ----- ---------- ---------- ----- LC Ready- Banking........ $ 952 Sep 1999 51% 48% 46% 65% 50% $1,600 LC Ready- Insurance...... $1,223 Sep 1999 58% 55% 52% 60% 55% 3,400 LC Ready- Manufacturing.. $ 629 Dec 1999 48% 31% 28% 55% 40% 1,300 LC Ready- Utilities ..... $ 419 Dec 1999 19% 20% 20% 50% 20% 1,100 Other European ...... $1,471 Mar 1999 -- 57% 53% 70% 55% 800 ------ Total $8,200 ======
Based on the results of the appraisal, $8.2 million was attributed to the in-process research and development purchased in the Lyon acquisition and expensed during the second quarter when the acquisition was completed. RHO TRANSFORMATIONAL TECHNOLOGIES PTY. LIMITED ("RHO ACQUISITION") - On June 30, 1998, the Company acquired 100% of the outstanding stock of RHO Transformational Technologies Pty. Limited ("RHO"), a privately held software services and engineering company headquartered in Sydney, Australia. RHO specializes in software application conversion and maintenance services, using proprietary tools. In exchange for RHO's common stock, RHO's shareholders received 285,000 shares of the Company's common stock. The RHO acquisition is accounted for as a pooling-of-interests combination pursuant to the provisions of APB Opinion No. 16. Current year financial statements have been restated to give affect to the business combination. Prior year financial statements have not been restated due to the immateriality of the business combination. Costs of approximately $145,000 related to the acquisition have been charged to acquisition costs and included in the statements of operations. 11 IMRGLOBAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 6. SUBSEQUENT EVENT On October 2, 1998, the Company acquired 100% of the outstanding stock of Visual Systems Development Corporation ("Visual"), a privately held information technology company based in Toronto, Ontario. Visual specializes in client/server and internet application development. In exchange for Visual's common stock, Visuals' shareholders received $5.5 million in cash and 400,000 shares of the Company's common stock with the potential for additional payments in the form of IMR stock provided that Visual achieves specified financial and business objectives. The acquisition will be accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. The purchase price will be allocated to the assets acquired and the liabilities assumed based on their estimated fair values. Any excess of the purchase price over the net assets acquired (goodwill) will be amortized over a period not to exceed 20 years. 12 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, some matters discussed in this report, including but not limited to statements relating to rates of wage cost increases in comparison to rates of inflation in the countries in which IMR does business, the Company's ability to expand its infrastructure, the rate of revenue growth, future income from operations and the impact of the year 2000 on the Company's results of operations and financial condition constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company notes that a variety of risk factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Reference is made in particular to the discussion set forth below in this report and set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Commission. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 REVENUE. For the three months ended September 30, 1998, revenue increased to $42.0 million representing a 82.3% increase over revenue of $23.0 million for the three months ended September 30, 1997. The May 15, 1998 acquisition of Lyon and the June 30, 1998 acquisition of RHO accounted for approximately $5.0 million of the revenue increase. Revenue from the Company's core transitional outsourcing services (software development, application maintenance and migration and re-engineering services) increased to $17.6 million or 129.8% for the quarter ended September 30, 1998, compared to $7.7 million for the quarter ended September 30, 1997. Revenue from the Company's Year 2000 conversion services increased to $20.6 million or 60.1% for the quarter ended September 30, 1998, compared to $12.9 million for the quarter ended September 30, 1997. COST OF REVENUE. Cost of revenue was $21.2 million, or 50.6% of revenue, for the three months ended September 30, 1998, as compared to $12.6 million, or 54.7% of revenue, for the three months ended September 30, 1997. The decrease in cost of revenue as a percentage of revenue reflects: (i) productivity gains from the Company's Year 2000 and other transformation toolsets; (ii) improved utilization of software development personnel in India and Northern Ireland; and (iii) a 16.9% devaluation in the Indian Rupee since September 30, 1997, which resulted in reduced costs at the Company's Indian software development centers. Wage costs continue to increase at a greater rate than general inflation in each of the countries in which IMR has operations, and the Company anticipates that this trend will continue in the near term. The Company has been able to pass these wage increases on to its customers in the form of increased prices for its service offerings. However, there can be no assurance that the Company will be able to continue to increase prices to its customers to offset future wage increases. GROSS PROFIT. Gross profit increased 100% to $20.8 million in the third quarter of 1998 compared to $10.4 million in the prior comparable period. As a percentage of revenue, gross profit increased to 49.4% in the third quarter of 1998 compared to 45.3% in the third quarter of 1997. 13 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended September 30, 1998, selling, general and administrative (SG&A) expenses increased to $8.5 million, compared to $5.4 million for the three months ended September 30, 1997. As a percentage of revenue, SG&A expenses for the three months ended September 30, 1998 decreased to 20.1% from 23.5% for the same period in 1997. This decrease as a percentage of revenue occurred due to the rapid increase in revenue over the last twelve months compared to a lessor rate of increase in SG&A during the same period. The dollar increase in SG&A expenses is attributable to the addition of six sales offices, the expansion of sales personnel, the Lyon and RHO acquisitions, expansion of the Company's delivery capacity, regionalization of operations and increases in costs related to expanding the Company's general support staff (primarily recruiting and human resources personnel). The Company intends to continue to expand its SG&A infrastructure in order to position the Company for continued revenue growth. Management does not expect revenue to continue growing at a faster rate than SG&A in the near term. RESEARCH AND DEVELOPMENT EXPENSES. Research and development (R&D) expenses increased to approximately $1.8 million for the three months ended September 30, 1998 from approximately $243,000 in the comparable period of 1997. As a percentage of revenue, R&D increased to 4.3% from 1.1% for the same period in 1997. The increase is attributable to: (i) the acquisition of Lyon and the continued development of Lyon's component technology; (ii) the modification of Lyon's component technology for certain targeted industries; and (iii) the expansion of efforts to develop and enhance the Company's transformation toolsets. GOODWILL AMORTIZATION. Goodwill amortization increased to approximately $672,000 for the three months ended September 30, 1998 from approximately $283,000 for the three months ended September 30, 1997. The additional expense primarily reflects the amortization of goodwill generated by the acquisition of Lyon in May 1998. INCOME FROM OPERATIONS. Operating income for the third quarter of 1998 was $9.8 million compared to $4.5 million in the comparable period of 1997. As a percentage of revenue, income from operations for the three months ended September 30, 1998 increased to 23.4% from 19.4% in the comparable period in 1997. The increase in income from operations as a percentage of revenue reflects a six quarter trend whereby revenue has grown at a faster rate than cost of revenue and SG&A expenses. The current increase is a result of higher prices for the Company's services and increased efficiencies relative to the Company's fixed costs. Due to increased infrastructure investments management does not expect income from operations as a percentage of revenue to increase significantly from current levels in the near term. 14 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 OTHER INCOME (EXPENSE). The Company realized net other income of approximately $1.1 million in the third quarter of 1998 compared to net other income of approximately $516,000 in the comparable period of 1997. The increase in other income resulted primarily from the investment of the net proceeds from the Company's August 1997 public offering. PROVISION FOR INCOME TAXES. The provision for income taxes increased to approximately $3.6 million for the three months ended September 30, 1998 from approximately $1.5 million for the three months ended September 30, 1997. This increase is due to increased earnings in the current year. This represents an effective tax rate of 32.9% and 30.2% for the three month periods ended September 30, 1998 and September 30, 1997, respectively. Historically, the Company has enjoyed a low effective tax rate primarily due to the low tax rates in India. The effective tax rate increased as a result of recent acquisitions in France and Australia which have higher tax rates than India. NET INCOME. Net income increased to $7.3 million for the three months ended September 30, 1998 compared to $3.5 million of net income for the comparable 1997 period. As a percentage of revenue, net income for the three months ended September 30, 1998 increased to 17.4% from 15.0% in the comparable period in 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 REVENUE. For the nine months ended September 30, 1998, revenue increased to $111.6 million representing a 98.7% increase over revenue of $56.2 million for the nine months ended September 30, 1997. The May 15, 1998 acquisition of Lyon and the June 30, 1998 acquisition of RHO accounted for approximately $9.2 million of the increase. Revenue from the Company's core transitional outsourcing services (software development, application maintenance and migration and re-engineering services) increased to $43.1 million or 119.5% over the first nine months of 1997. Revenue from the Company's Year 2000 conversion services increased to $58.7 million or 99.8% for the nine months ended September 30, 1998, compared to $29.4 million for the nine months ended September 30, 1997. COST OF REVENUE. Cost of revenue was $58.7 million, or 52.6% of revenue, for the nine months ended September 30, 1998, as compared to $31.0 million, or 55.2% of revenue, for the nine months ended September 30, 1997. The decrease in cost of revenue as a percentage of revenue reflects: (i) productivity gains from the Company's Year 2000 and other transformation toolsets; (ii) a 16.9% devaluation in the Indian Rupee since September 30, 1997, which resulted in reduced costs at the Company's Indian software development centers; and (iii) improved utilization of software development personnel in India and Northern Ireland. Wage costs continue to increase at a greater rate than general inflation in each of the countries in which IMR has operations, and the Company anticipates that this trend will continue in the near term. The Company has been able to pass these wage increases on to its customers in the form of increased prices for its service offerings. However, there can be no assurance that the Company will be able to continue to increase prices to its customers to offset future wage increases. 15 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 GROSS PROFIT. Gross profit increased to $52.9 million in the first nine months of 1998 compared to $25.1 million in the prior comparable period. As a percentage of revenue, gross profit increased to 47.4% in the first nine months of 1998 compared to 44.8% in the first nine months of 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the nine months ended September 30, 1998, SG&A expenses increased to $22.8 million, compared to $13.7 million for the nine months ended September 30, 1997. As a percentage of revenue, SG&A expenses for the nine months ended September 30, 1998 decreased to 20.5% from 24.5% for the same period in 1997. This decrease as a percentage of revenue occurred due to the rapid increase in revenue in the first nine months of 1998 compared to a lessor rate of increase in SG&A during the same period. The dollar increase in SG&A expenses is attributable to the Lyon and RHO acquisitions, the addition of six sales offices, the expansion of sales personnel, expansion of the Company's delivery capacity, regionalization of operations and increases in costs related to expanding the Company's general support staff (primarily recruiting and human resources personnel). The Company intends to continue to expand its SG&A infrastructure in order to generate continued revenue growth. RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses increased to approximately $4.0 million for the nine months ended September 30, 1998 from approximately $591,000 in the comparable period of 1997. As a percentage of revenue, R&D expenses increased to 3.5% from 1.1% for the same period in 1997. The increase in dollars is attributable to: (i) the acquisition of Lyon and the continued development of Lyon's component technology; (ii) the modification of component technology for certain targeted industries; and (iii) the expansion of efforts to develop and enhance the Company's transformation toolsets. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The purchased assets and assumed liabilities in connection with the acquisition of Lyon were recorded at their estimated fair values at the acquisition date. The Company received an appraisal of the intangible assets which indicated that approximately $8.2 million of the acquired intangible assets was acquired IPRD that had not yet reached technological feasibility and had no alternative future use (See Note 2). To determine the value of the IPRD, the Company's appraisal considered, among other factors, the state of development of each project, the time and cost needed to complete each project, expected income, discounted cash flow and associated risks which included the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility and risks related to the viability of and potential changes to future target markets. This analysis results in amounts assigned to the cost of in-process research and development for projects that had not yet reached technological feasibility and had no alternative future uses. Accordingly, the acquired IPRD was charged to expense by the Company in its quarter ended June 30, 1998. In addition, the Company recorded a one-time charge of approximately $145,000 for costs related to the RHO acquisition. GOODWILL AMORTIZATION. Goodwill amortization increased to approximately $1.3 million for the nine months ended September 30, 1998 from approximately $830,000 for the nine months ended September 30, 1997. The additional expense primarily reflects the amortization of goodwill generated by the acquisition of Lyon in May 1998 and IMR-Northern Ireland in 1997. 16 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 INCOME FROM OPERATIONS. Operating income for the first nine months of 1998 was $16.5 million compared to income of $10.0 million in the comparable period of 1997. Operating income for the nine months ended September 30, 1998 includes a one-time charge for acquired IPRD of $8.2 million related to the Lyon acquisition and approximately $145,000 of acquisition costs related to the RHO acquisition. Excluding these one-time charges income from operations was $24.8 million compared to $10.0 million in the comparable period in 1997. Excluding these one-time charges, as a percentage of revenue, income from operations for the nine months ended September 30, 1998 increased to 22.3% from 17.7% in the comparable period in 1997. The current increase is a result of higher prices for the Company's services and increased efficiencies relative to the Company's fixed costs. Due to increased infrastructure investments management does not expect income from operations as a percentage of revenue to increase significantly from current levels in the near term. OTHER INCOME (EXPENSE). The Company realized net other income of approximately $3.1 million in the first nine months of 1998 compared to net other income of approximately $901,000 in the comparable period of 1997. The increase in net other income resulted primarily from the investment of the net proceeds from the Company's August 1997 public offering. PROVISION FOR INCOME TAXES. The provision for income taxes increased to approximately $8.7 million for the nine months ended September 30, 1998 from approximately $3.4 million for the nine months ended September 30, 1997. This increase is due to increased earnings in the current year. This represents an effective tax rate, excluding one-time charges, of 31.1% and 31.7% for the nine month periods ended September 30, 1998 and 1997, respectively. The effective tax rate is lower in the current period due to proportionally higher earnings of IMR-India for the first three months of 1998, which earnings are taxed at a lower rate than earnings generated in the U.S., as well as due to the Company's investment in tax free marketable securities in the first three months of 1998. NET INCOME. Net income increased to $10.9 million for the nine months ended September 30, 1998 compared to $7.4 million of net income for the comparable 1997 period. This increase is partially offset by $8.3 million of one-time charges related to acquisitions consummated in the second quarter of 1998. Net income for the first nine months of 1998, excluding the one-time charges for acquired IPRD and acquisition costs, is approximately $19.3 million compared to net income of approximately $7.4 million in the comparable period of 1997. Excluding one-time charges as a percentage of revenue, net income for the nine months ended September 30, 1998 increased to 17.3% from 13.1% in the comparable period in 1997. 17 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had working capital of $107.1 million; a current ratio of 4.0 to 1.0; liquid assets (cash, cash equivalents and marketable securities) of $94.9 million; and available bank lines of credit of approximately $11.0 million. Additionally, cash provided by operations was $26.0 million for the nine months ended September 30, 1998. During June 1998, the Company entered into a contract to purchase land and construct new facilities for its corporate headquarters. The total price of this project is expected to be approximately $8.0 million of which $2.0 million has been expended as of September 30, 1998. The Company has no other material financial commitments. The Company continuously reviews its future cash requirements, together with its available bank lines of credit and internally generated funds. The Company believes it has adequate capital resources to meet all working capital obligations and fund the development of its current business operations. YEAR 2000 INTRODUCTION. Many existing computer systems run software programs permitting only two-digit entries to reference the year in the date field (e.g., 1998 is read as "98") and therefore cannot properly process dates in the next century. Software programs that use the two-digit year date field to perform computations or decision-making functions may fail due to an inability to correctly interpret dates in the 21st century. For example, many software systems will misinterpret "00" to mean the year 1900 rather than 2000. THE COMPANY'S STATE OF READINESS. The Company is in the process of assessing the impact the year 2000 will have on its internal operating systems, relationships with its third-party vendors and relationships with its clients. After completing the first phase of this assessment, the Company believes that the year 2000 will not give rise to any event that will have a material adverse effect on the Company's results of operations and financial condition. Although the Company continues to review its information technology or "IT" systems, as well as its non-IT systems, for Year 2000 compliance, to date, the Company has discovered that only its internal accounting system is not Year 2000 compliant. The Company expected to replace this accounting system in fiscal year 1999 for reasons other than the fact that the system is not Year 2000 compliant and it has not accelerated replacement plans for such system in light of its non-compliance. The Company does not believe that the costs associated with the replacement of the accounting system will have a material impact on the Company's results of operations and financial condition. The Company has not identified any other IT or non-IT system that is subject to a material risk of disruption due to the year 2000. The Company has assessed whether a system failure experienced by any of the Company's third-party vendors would negatively impact the Company's operations or financial condition. The Company has determined that a Year 2000 system failure experienced by the Company's satellite and communication vendors could potentially interrupt communications between client sites and the Company's software development 18 IMRGLOBAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) centers. This interruption could result in loss of revenue, increased costs and project delays. Management has contacted its satellite and communications vendors in order to assess whether they anticipate any communications failures or interruptions, as a result of the year 2000. If no such failures or interruptions are anticipated, the Company does not expect to experience any adverse effects on its results of operations and financial condition. If, however, it is determined that one or more of the Company's satellite or communications vendors may encounter year 2000 related failures or interruptions, the Company will be required to develop a contingency plan. It is anticipated that a contingency plan, if necessary, will be developed by the third quarter of 1999. The Company has determined that a system failure experienced by the satellite and communication vendors or by any other third-party vendors would not have a material effect on the Company's results of operations and financial condition. RISKS PRESENTED BY THE YEAR 2000. Many of the Company's client engagements include Year 2000 conversion services that are critical to the operations of its clients' businesses. Any failure in a client's system could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. Although the Company attempts to limit contractually its liability for damages arising from negligent acts, errors, mistakes or omissions in rendering its IT services, there can be no assurance the limitations of liability set forth in its service contracts will be enforceable in all instances or would otherwise protect the Company from liability for damages. Although the Company maintains general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that such coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against the Company that exceed available insurance coverage or changes in the Company's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect the Company's results of operations and financial condition. THE COMPANY'S CONTINGENCY PLANS. The Company is a high quality provider of Year 2000 compliance services. Accordingly, if the Company experiences a failure in its Year 2000 preparedness, experienced staff will be redeployed to address any potential Year 2000 compliance issue. Otherwise, the Company has no material contingency plan identified for Year 2000 readiness issues. 19 IMRGLOBAL CORP. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any pending material litigation. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) 27 Financial Data Schedule b) 1. The Registrant filed a report on Form 8-K/A on July 29, 1998 under Item 7 providing financial statements of Lyon Consultants, S.A. and pro-forma financial information related to the acquisition of Lyon Consultants, S.A. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMRGLOBAL CORP. Date MARCH 9, 1999 /s/ SATISH K. SANAN ------------------------ -------------------------------------- Satish K. Sanan Chief Executive Officer Date MARCH 9, 1999 /s/ ROBERT M. MOLSICK ------------------------ -------------------------------------- Robert M. Molsick Chief Financial Officer 21 IMRGLOBAL CORP. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 27 Financial Data Schedule..............................23 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 75,662 19,204 23,665 226 0 143,065 23,667 5,850 187,806 35,926 552 0 0 2,918 147,868 187,806 0 111,597 0 58,654 36,229 226 233 19,631 8,694 10,937 0 0 0 10,937 .40 .29 Amounts inapplicable or not disclosed as a separate line on the Statement of Financial Position or Results of Operations are reported as 0 herein.
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