-----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, SZ9onyTN226R4R/oJ9KA3VuVhUoU/fp56JpqIbZ010H6NIylrgssHHRxZJLxoI9b 4Du7FNEkJJY4dwJryU9NKw== 0001016843-99-001174.txt : 19991122 0001016843-99-001174.hdr.sgml : 19991122 ACCESSION NUMBER: 0001016843-99-001174 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991119 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: 99761252 BUSINESS ADDRESS: STREET 1: 100 SOUTH MISSOURI AVENUE CITY: CLEARWATER STATE: FL ZIP: 33756 BUSINESS PHONE: 7274678000 MAIL ADDRESS: STREET 1: 100 SOUTH MISSOURI AVENUE CITY: CLEARWATER STATE: FL ZIP: 33756 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 JUNE 30, 1999 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) 100 SOUTH MISSOURI AVENUE, CLEARWATER, FLORIDA 33756 ----------------------------------------------------- (Address of principal executive offices and zip code) 727-467-8000 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 15, 1999, there were 38,558,008 outstanding shares of the Registrant's Common Stock, par value $.10 per share. IMRGLOBAL CORP. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE ---- ITEM 1. Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999..................... 3 Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1998 and 1999........................................ 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1999...................................................... 5 Notes to Consolidated Financial Statements.................... 6 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................ 17 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.... 26 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ............................................ 27 ITEM 5. Other Information ............................................ 27 ITEM 6. Exhibits and Reports on Form 8-K.............................. 27 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMRGLOBAL CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, JUNE 30, 1998 1999 ----------- -------- (Restated) (Unaudited) ASSETS Current assets: Cash and cash equivalents .............................. $ 78,807 $ 58,012 Marketable securities .................................. 31,609 27,340 Accounts receivable, net of allowance .................. 28,538 46,292 Unbilled work in process ............................... 5,145 11,100 Deferred taxes ......................................... 14,141 12,797 Prepaid expenses and other current assets .............. 3,592 4,436 --------- --------- Total current assets ............................. 161,832 159,977 Property and equipment, net of accumulated depreciation ... 21,416 36,058 Capitalized software costs, net of accumulated amortization -- 1,271 Deposits and other assets ................................. 3,622 6,000 Intangible assets, net of accumulated amortization ........ 36,829 137,251 --------- --------- Total assets ..................................... $ 223,699 $ 340,557 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ....................................... $ 7,750 $ 11,511 Accrued compensation ................................... 8,733 24,115 Deferred revenue ....................................... 3,446 1,715 Other current liabilities .............................. 19,120 24,407 --------- --------- Total current liabilities ........................ 39,049 61,748 Long-term debt ............................................ 671 1,598 Deferred tax liability .................................... 1,040 791 Accrued compensation ...................................... 8,125 3,117 --------- --------- Total liabilities ................................ 48,885 67,254 --------- --------- Shareholders' equity: Preferred stock ........................................ -- -- Common stock ........................................... 3,039 3,845 Additional paid-in capital ............................. 139,800 226,903 Retained earnings ...................................... 33,433 45,669 Notes receivable from share sales ...................... (366) (366) Accumulated other comprehensive expense ................ (1,092) (2,748) --------- --------- Total shareholders' equity ....................... 174,814 273,303 --------- --------- Total liabilities and shareholders' equity ....... $ 223,699 $ 340,557 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3
IMRGLOBAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1998 1999 1998 1999 --------- --------- --------- --------- Revenue .................................... $ 39,907 $ 62,953 $ 74,523 $ 114,841 Cost of revenue ............................ 21,734 34,375 40,511 62,114 --------- --------- --------- --------- Gross profit ...................... 18,173 28,578 34,012 52,727 Selling, general and administrative expenses 7,968 12,292 15,367 23,630 Research and development expenses .......... 1,158 1,610 2,147 2,842 Goodwill and intangible amortization ....... 363 1,908 653 2,729 Acquired in-process research and development 8,200 -- 8,200 3,410 Acquisition costs .......................... 145 -- 145 1,936 --------- --------- --------- --------- Income from operations ............ 339 12,768 7,500 18,180 Other income (expense): Interest expense .................. (110) -- (186) (4) Interest income and other ......... 1,133 1,081 2,254 2,680 --------- --------- --------- --------- Total other income ................ 1,023 1,081 2,068 2,676 --------- --------- --------- --------- Income before provision for income taxes ... 1,362 13,849 9,568 20,856 Provision for income taxes ................. 3,053 5,280 5,512 8,620 --------- --------- --------- --------- Net income (loss) ................. $ (1,691) $ 8,569 $ 4,056 $ 12,236 ========= ========= ========= ========= Earnings (loss) per share: Basic ............................ ($ 0.06) $ 0.24 $ 0.15 $ 0.37 ========= ========= ========= ========= Diluted .......................... ($ 0.06) $ 0.21 $ 0.12 $ 0.32 ========= ========= ========= ========= Shares outstanding: Basic ............................. 27,951 35,395 27,343 33,112 ========= ========= ========= ========= Diluted ........................... 27,951 40,179 34,862 38,226 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4
IMRGLOBAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1999 -------- -------- Cash flows from operating activities: Net income .......................................................... $ 4,056 $ 12,236 Adjustment to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization .................................... 1,907 4,876 In-process research and development acquired from stock issuance . -- 3,410 Deferred taxes ................................................... (11,160) 3,560 Tax benefit of stock options ..................................... 14,219 2,549 Changes in operating assets and liabilities: Accounts receivable and unbilled work-in-process .............. (7,066) (6,328) Other current assets .......................................... 1,558 698 Deposits and other assets ..................................... (585) (534) Accounts payable and other liabilities ........................ 5,475 (761) Accrued compensation .......................................... 2,954 (6,825) Income tax .................................................... 146 (229) Deferred revenue .............................................. (1,323) (2,949) -------- -------- Total adjustments ............................................. 6,125 (2,533) -------- -------- Net cash provided by operating activities ..................... 10,181 9,703 -------- -------- Cash flows from investing activities: Acquisition of consolidated subsidiaries, net of cash acquired ............................................ (7,944) (14,989) Investment in marketable securities, net ............................ (16,856) 4,269 Additions to capitalized software costs ............................. -- (1,271) Additions to property and equipment ................................. (5,984) (14,149) -------- -------- Net cash used in investing activities ......................... (30,784) (26,140) -------- -------- Cash flows from financing activities: Net repayments from revolving credit line ........................... 202 116 Payments on long-term debt, notes and capital leases ................ (608) (3,889) Proceeds from issuance of common stock .............................. 343 1,069 -------- -------- Net cash used in financing activities ......................... (63) (2,704) -------- -------- Effect of exchange rate changes ........................................ (906) (1,654) -------- -------- Net decrease in cash and cash equivalents .............................. (21,572) (20,795) Cash and cash equivalents at beginning of period ....................... 86,999 78,807 -------- -------- Cash and cash equivalents at end of period ............................. $ 65,427 $ 58,012 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION 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 six month periods ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. The consolidated statements have been restated to include the financial statements of Atechsys, S.A. This company was acquired during 1999 in a transaction accounted for as a pooling of interests. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1998, which are contained in IMRglobal's Annual Report on Form 10-K ("Form 10-K)") as filed with the Securities and Exchange Commission (the "Commission"). Form 8-K filed during November 1999 restates the financial position, results of operations and cash flows for the Atechsys pooling of interest transaction for the three years ended December 31, 1998. 2. RESTATEMENT During 1999, IMRglobal Corp.("IMRglobal") acquired Fusion Systems Japan Co., Ltd. ("Fusion") and Orion Consulting, Inc. ("Orion") in transactions that were originally accounted for as pooling of interests in accordance with APB Opinion 16, "Business Combinations". In accordance with pooling of interests rules the consolidated financial statements for all prior periods were restated to include the accounts of Fusion and Orion. Restated financial statements for the three months ended June 30, 1998 and 1999 were included in a previous filing on Form 10-Q dated August 13, 1999. On October 22, 1999, IMRglobal announced it will change its accounting treatment for the mergers with Fusion and Orion from the pooling of interests method to the purchase method of accounting. The change in accounting will be retroactive to the merger date of March 26, 1999 for Fusion and June 15, 1999 for Orion. The factors that led to the decision to change the accounting treatment included a determination that (i) certain affiliate transactions and (ii) IMRglobal's Board of Directors October 1999 authorization for a stock buyback preclude the use of the pooling of interests accounting method for the Fusion and Orion mergers. In addition, IMRglobal agreed to restructure the Fusion merger from an all stock transaction to a combination of cash and stock. As a result of the above change in accounting treatment, IMRglobal Corp.'s consolidated financial statements for all prior periods have been restated to remove the accounts of Fusion and Orion and treat these acquisitions as purchase business combinations. Restated financial statements for the three and six months ended June 30, 1998 and 1999 are attached to this Form 10-Q/A. 6 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 2. RESTATEMENT (CONTINUED) The effects of the restatement resulted in the following impact on IMRglobal's previously reported results of operations for the three month and six month periods ended June 30, 1998 and 1999 (in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------ ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1999 1998 1999 --------- ---------- --------- ---------- Income before provision for income taxes: As previously reported .................... $ 1,576 $ 13,510 $ 9,282 $ 21,882 Adjustment related to converting the Fusion and Orion transactions from pooling of interests method to the purchase method (214) 339 286 (1,026) --------- ---------- --------- ---------- Restated .................................. $ 1,362 $ 13,849 $ 9,568 $ 20,856 ========= ========== ========= ========== Net income (loss): As previously reported .................... $ (2,493) $ 7,814 $ 3,015 $ 12,716 Adjustment related to converting the Fusion and Orion transactions from pooling of interests method to the purchase method 802 755 1,041 (480) --------- ---------- --------- ---------- Restated .................................. $ (1,691) $ 8,569 $ 4,056 $ 12,236 ========= ========== ========= ========== Earnings per share - Basic: As previously reported .................... $ (0.05) $ 0.20 $ 0.12 $ 0.33 Adjustment related to converting the Fusion and Orion transactions from pooling of interests method to the purchase method (0.01) 0.04 0.03 0.04 --------- ---------- --------- ---------- Restated .................................. $ (0.06) $ 0.24 $ 0.15 $ 0.37 ========= ========== ========= ========== Earnings per share - Diluted: As previously reported .................... $ (0.05) $ 0.17 $ 0.08 $ 0.28 Adjustment related to converting the Fusion an Orion transactions from pooling of interests method to the purchase method (0.01) 0.03 0.02 0.02 Adjustment for restatement of treasury stock method (See Note 2).... 0.00 0.01 0.02 0.02 --------- ---------- --------- ---------- Restated .................................. $ (0.06) $ 0.21 $ 0.12 $ 0.32 ========= ========== ========= ==========
7 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of IMRglobal Corp. ("IMRglobal") 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 split in the form of a stock dividend paid by IMRglobal on April 3, 1998. Basic earnings per share is computed using the weighted average of common stock outstanding. For the three months ended June 30, 1998, diluted loss per share, the effect of incremental shares from common stock equivalents using the treasury stock method, is not included in the calculation of net loss per share as the inclusion of such equivalents would be anti-dilutive. Diluted earnings per share is computed using the treasury stock method which is summarized as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------ 1998 1999 1998 1999 ------- ------- ------- ------- Weighted average common stock outstanding ................... 27,951 35,395 27,343 33,112 Weighted average common stock equivalents ................... 5,400 4,784 7,519 5,114 Dilutive affect of common stock equivalents.... (5,400) -- -- -- ------- ------- ------- ------- Shares used in diluted earnings per share calculation ...................... 27,951 40,179 34,862 38,226 ======= ======= ======= =======
CAPITALIZED SOFTWARE COSTS--Capitalized software costs are recorded at cost less accumulated amortization. Production costs for computer software that is to be utilized as an integral part of a product or process is capitalized when both (i) technological feasibility is established for the software and (ii) all research and development activities have been completed. Amortization is charged to income based upon a revenue formula over the shorter of the remaining estimated economic life of the product or estimated lifetime revenue of the product. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 4. SHAREHOLDERS' EQUITY Changes in shareholders' equity for the six months ended June 30, 1999 are summarized as follows (in thousands):
COMPRE- NOTES ACCUMULATED HENSIVE RECEIVABLE OTHER INCOME COMMON PAID-IN RETAINED FROM STOCK COMPREHENSIVE (EXPENSE) STOCK CAPITAL EARNINGS SALES EXPENSE TOTAL --------- --------- --------- --------- --------- ------------- --------- Balance, December 31, 1998 (Restated) $ -- $ 3,039 $ 139,800 $ 33,433 $ (366) $ (1,092) $ 174,814 Common stock issued in connection with acquisitions ..... -- 692 83,597 -- -- -- 84,289 Employee stock purchase plan ........ -- 3 436 -- -- -- 439 Stock options exercised ............. -- 111 521 -- -- -- 632 Tax benefit of stock options exercised .......... -- -- 2,549 -- -- -- 2,549 Net income .......................... 12,236 -- -- 12,236 -- -- 12,236 Translation adjustment .............. (1,656) -- -- -- -- (1,656) (1,656) --------- Comprehensive income ................ $ 10,580 -- -- -- -- -- -- ========= --------- --------- --------- --------- --------- --------- Balance, June 30, 1999 .............. $ 3,845 $ 226,903 $ 45,669 $ (366) $ (2,748) $ 273,303 ========= ========= ========= ========= ========= =========
5. BUSINESS COMBINATIONS ATECHSYS S.A. ("ATECHSYS")--On January 8, 1999, IMRglobal acquired 100% of the outstanding stock of Atechsys S.A., a privately held information technology company based in Paris, France, specializing in business and technology consulting specific to capital markets businesses. In exchange for Atechsys' common stock, Atechsys' shareholders received 718,859 shares of IMRglobal common stock. The Atechsys acquisition is accounted for as a pooling of interests combination pursuant to the provisions of APB Opinion No. 16. Financial statements for all periods have been restated to give effect to the business combination. Costs of approximately $1.7 million related to the acquisition have been charged to acquisition costs and included in the statement of income for the six months ended June 30, 1999. ECWERKS, INC. ("ECWERKS")--On January 15, 1999, IMRglobal acquired 100% of the outstanding stock of ECWerks, Inc., a privately held electronic commerce business and technology consulting company based in Tampa, Florida. In exchange for ECWerks' common stock, ECWerks' shareholders received 163,054 shares (valued at $3.6 million) of IMRglobal's unregistered common stock. In addition, a contingent payment of up to $28.0 million of common stock is payable if certain specified financial goals are achieved during 1999. Any contingent payment would result in an increase in the purchase price and the resulting goodwill. The ECWerks acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. 9 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 5. BUSINESS COMBINATIONS (CONTINUED) FUSION SYSTEMS JAPAN CO., LTD. ("FUSION")--On March 26, 1999, IMRglobal acquired 100% of the outstanding stock of Fusion Systems Japan Co., Ltd., a privately held business and technology consulting company based in Tokyo, Japan. Fusion is comprised of three divisions, one focused on the capital markets businesses in Japan and Asia-Pacific, a Commercial Services division, which provides information technology ("IT") consulting services to large companies in Japan and a Client Services division which provides voice/data infrastructure solutions in Japan. Fusion also has a subsidiary in Boston that provides IT services to clients in the financial and commercial services industries. In exchange for Fusion's common stock, Fusion's shareholders received 3,735,536 shares (valued at $39.3 million) of IMRglobal common stock. On October 25, 1999, IMRglobal reacquired approximately 1.5 million shares of common stock issued to the Fusion stockholders in exchange for $22.4 million. The Fusion acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. The purchased assets and assumed liabilities in connection with the acquisition of Fusion were recorded at their estimated fair value at the acquisition date. In connection with the Fusion acquisition, we retained an independent appraiser to complete a valuation of the assets of Fusion, including valuation of certain in-process research and development. We identified 27 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 eight modules for the Japan market, nine modules for the worldwide market and ten modules for specific countries outside of Japan. The value associated with these projects was determined using a discounted cash flow 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. Fusion's main product is Fox, an electronic order manager system for the capital markets industry. As of the acquisition date, the general design of the core modules was completed. This design identified the primary core modules required for multiple modules in the capital markets industry. As of the acquisition date over 50% of the Japan modules and under 50% of the worldwide component modules had been coded. Testing has not been completed for these modules. 10 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 5. BUSINESS COMBINATIONS (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).
PERCENT DATE PERCENT COMPLETE PERCENT AMOUNT FOX PRODUCT/ R&D PROTOTYPE COMPLETE CALENDAR COMPLETE IN COMPONENT START DATE COMPLETE MAN MONTHS TIME VALUE BASIS CONCLUDED THOUSANDS - -------------------------- ---------- -------- ---------- ---- ----------- --------- --------- Japan: BTA 01-Aug-97 01-Jun-99 90% 90% 90% 90% $ 120 STA/BTA/OBA merge 31-Dec-98 31-Mar-00 19% 19% 19% 19% 40 Extended Limit Type 01-Nov-98 01-May-99 80% 80% 80% 80% 50 AA 01-Aug-97 01-Jul-99 86% 86% 86% 86% 110 XA 01-Feb-99 01-Jan-00 16% 16% 16% 16% 20 OES-Upgrades 01-Jan-98 01-Jul-99 82% 82% 82% 82% 170 LH JASDAQ 01-Nov-97 01-Aug-99 80% 80% 90% 90% 330 LH TIFFE 01-Mar-99 01-Sep-99 14% 14% 57% 57% 160 World: STA 30-Jun-98 30-Jun-00 37% 37% 68% 68% 110 BTA 30-Jun-98 30-Jun-00 37% 37% 68% 68% 140 OBA 30-Jun-98 30-Jun-00 37% 37% 68% 68% 110 STA/BTA/OBA merge 31-Dec-98 30-Jun-00 21% 16% 61% 61% 50 TT 01-Jan-98 30-Jun-00 21% 49% 60% 60% 30 DBA 01-Jan-98 30-Jun-00 21% 49% 60% 60% 50 FOX Router 01-Dec-96 01-Dec-99 32% 77% 83% 83% 20 MGS 30-Jun-97 01-Dec-00 51% 51% 63% 63% 90 OES 01-Jan-98 01-Dec-00 42% 42% 57% 57% 130 ------ Subtotal carried forward 1,730
11
IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 5. BUSINESS COMBINATIONS (CONTINUED) PERCENT DATE PERCENT COMPLETE PERCENT AMOUNT FOX PRODUCT/ R&D PROTOTYPE COMPLETE CALENDAR COMPLETE IN COMPONENT START DATE COMPLETE MAN MONTHS TIME VALUE BASIS CONCLUDED THOUSANDS - ----------------------- ---------- --------- ---------- -------- ----------- --------- --------- Balance brought forward 1,730 World: LH HK 01-Oct-98 01-Oct-99 28% 48% 64% 64% 220 LH TAIWAN 01-Oct-98 01-Oct-99 28% 48% 64% 64% 290 LH KOREA 01-Oct-98 01-Mar-00 31% 34% 65% 65% 210 LH SING 01-Oct-98 01-Mar-00 31% 34% 65% 65% 100 LH AUS 01-Oct-98 01-Sep-99 32% 53% 66% 66% 250 LH SH 01-Oct-98 01-Mar-00 31% 34% 65% 65% 90 LH LON 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130 LH EUREX 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130 LH PARIS 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130 LH FRANK 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130 ------ $3,410 ======
Based on the results of the appraisal, $3.4 million was attributed to the in-process research and development for the Fusion acquisition and expensed in the first quarter of 1999 when the acquisition was consummated. PROFESSIONAL PARTNERS, INC. AND LAKEWOOD SOFTWARE TECHNOLOGY CENTER, INC. ("PLP")--On April 28, 1999, IMRglobal acquired 100% of the outstanding stock of PLP, a privately held provider of information technology services to the Property and Casualty insurance industry. In exchange for PLP's common stock, PLP's shareholders received $12.0 million in cash. The PLP acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. ORION CONSULTING, INC. ("ORION")--On June 15, 1999, IMRglobal acquired 100% of the outstanding stock of Orion, a privately held management consulting firm, headquartered in Cleveland, Ohio, primarily serving the Health Care industry. In exchange for Orion's common stock, Orion's shareholders received 3,028,414 shares of IMRglobal's common stock. The Orion acquisition is being accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. 12 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 5. BUSINESS COMBINATIONS (CONTINUED) Separate results of operations for the periods prior to the merger with Atechsys are summarized below (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 1998 1998 ------------------ ---------------- Revenue: IMRglobal ......................... $ 37,222 $ 69,584 Adjustment for pooling of interests 2,685 4,939 -------- -------- Combined .................... $ 39,907 $ 74,523 ======== ======== Pro forma net income: IMRglobal ......................... $ (1,892) $ 3,621 Adjustment for pooling of interests 201 435 -------- -------- Combined .................... $ (1,691) $ 4,056 ======== ======== Other changes in shareholders' equity: IMRglobal ............................ $ 22,098 $ 23,742 Adjustment for pooling of interests (43) (43) -------- -------- Combined .................... $ 22,055 $ 23,699 ======== ======== 13
IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 6. SEGMENT INFORMATION (IN THOUSANDS): THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ----------------------------- JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 ------------- ------------- ------------- ------------- Revenue by service offering: Core service offerings ............ $ 16,374 $ 47,064 $ 30,394 $ 79,778 Year 2000 ......................... 20,262 11,994 38,083 27,669 Professional services ............. 3,271 3,895 6,046 7,394 --------- --------- --------- --------- Total revenue ............... $ 39,907 $ 62,953 $ 74,523 $ 114,841 ========= ========= ========= ========= Income from operations: Sales organizations ............... $ 7,682 $ 16,305 $ 13,865 $ 27,303 Software Development Centers ...... 2,523 (19) 4,780 1,794 --------- --------- --------- --------- Income from operations - sales and delivery centers 10,205 16,286 18,645 29,097 Research and development .......... (1,158) (1,610) (2,147) (2,842) Goodwill amortization ............. (363) (1,908) (653) (2,729) Other costs ....................... (8,345) -- (8,345) (5,346) --------- --------- --------- --------- Income from operations ...... $ 339 $ 12,768 $ 7,500 $ 18,180 ========= ========= ========= =========
The Company is engaged in one business segment. The sales organization provides IT transitional outsourcing services to large companies in North America, Europe, Japan and Australia. Software Development Centers consist of two Indian facilities and one Northern Ireland facility that provide software development services to the sales organizations. Intercompany sales are accounted for at prices representative of unaffiliated party transactions and are eliminated in consolidation. 14 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 7. ACQUISITIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS): During 1998 and 1999, IMRglobal completed several acquisitions (see Note 5). The following unaudited table compares IMRglobal's reported operating results to pro forma information prepared on the basis that the acquisition had taken place at the beginning of the fiscal year for each of the periods presented (in thousands except per share amounts): JUNE 30, --------------------------- 1998 1999 ----------- ----------- As reported: Revenue .................... $ 74,523 $ 114,841 Net income ................. $ 4,056 $ 12,236 Basic earnings per share ... $ 0.15 $ 0.37 Diluted earnings per share.. $ 0.12 $ 0.32 Pro forma (unaudited): Revenue .................... $ 109,372 $ 139,067 Net income ................. $ 2,843 $ 10,913 Basic earnings per share ... $ 0.08 $ 0.29 Diluted earnings per share.. $ 0.07 $ 0.26 In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1998 or 1999 or of future operations of the combined companies under the ownership and management of IMRglobal. 2. CONTINGENCIES During May 1998, IMRglobal acquired 100% of Lyon Consultants S.A. ("Lyon") for approximately $16.7 million in cash and 531,353 shares in IMRglobal. In addition, the acquisition agreement provides that if the average price of the IMRglobal shares on NASDAQ is less than $27.24 per share for the seven trading days prior to May 15, 1999, then IMRglobal will pay the former Lyon shareholders the difference between the average price on NASDAQ and $27.24 multiplied by 499,353 shares. On May 15, 1999 the average price of IMRglobal's shares for the seven trading days prior to May 15, 1999 was $18.768 per share. Accordingly, the liability to the former shareholders of Lyon was approximately $4.2 million. 15 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 2. CONTINGENCIES (CONTINUED) Subsequent to May 10, 1999, IMRglobal renegotiated the above contingency. IMRglobal's current agreement is that if the average price of the IMRglobal shares on NASDAQ is less than $34.05 per share for the seven trading days prior to May 15, 2000, then IMRglobal will pay the former Lyon shareholders the difference between the average price on NASDAQ and $34.05 for only the shares continuing to be held by the former Lyon shareholders. In addition, if the IMRglobal shares on NASDAQ is $34.05 per share or higher for any consecutive trading days between May 15, 1999 and May 15, 2000, then the above contingency is released without any further obligation from IMRglobal. 16 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information, some matters discussed in our report 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. We note that a variety of risk factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements including the following: o rates of wage cost increases in comparison to rates of inflation in the countries in which we do business; o the rate of revenue growth; o future income from operations; and o the impact of the year 2000 on our results of operations and financial condition. Reference is made in particular to the remaining discussion in this report and set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as filed with the Commission. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 REVENUE. For the three months ended June 30, 1999, our revenue increased to $63.0 million, representing a 57.8% increase over revenue of $39.9 million for the three months ended June 30, 1998. Acquisitions contributed a substantial portion of the revenue increase. Revenue from our service offerings not related to our Year 2000 service offerings, increased to $51.0 million (including revenue from purchase acquisitions), representing an 159.4% increase over non Year 2000 revenue of $19.6 million for the three months ended June 30, 1998. Revenue from our Year 2000 conversion services decreased 40.8% to $12.0 million for the quarter ended June 30, 1999 compared to $20.3 million for the quarter ended June 30, 1998. As a percentage of total revenue, Year 2000 revenue decreased to 19.1% for the three months ended June 30, 1999 as compared to 50.8% for the three months ended June 30, 1998. We expect that Year 2000 revenue will continue to decrease over the next three quarters. COST OF REVENUE. Cost of Revenue was $34.4 million, or 54.6% of revenue, for the three months ended June 30, 1999, as compared to $21.7 million, or 54.5% of revenue, for the three months ended June 30, 1998. Wage costs continue to increase at a greater rate than general inflation in each of the countries in which we have operations, and we anticipate that this trend will continue in the near term. Historically, we have been able to pass these wage increases on to our clients in the form of increased prices for our service offerings. However, we cannot assure you that we will be able to continue to increase prices to our clients to offset future wage increases. 17 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 GROSS PROFIT. Gross profit increased 57.3% to $28.6 million in the three months ended June 30, 1999 compared to $18.2 million in the three months ended June 30, 1998. As a percentage of revenue, our gross profit decreased to 45.4% in the three months ended June 30, 1999 compared to 45.5% in the three months ended June 30, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended June 30, 1999, SG&A expenses increased to $12.3 million, compared to $8.0 million for the three months ended June 30, 1998. The increase in SG&A expense is primarily attributable to the following: o purchase acquisitions; o expansion of sales personnel; and o expansion of our general support staff, primarily recruiting and human resources personnel. As a percentage of revenue, SG&A expenses for the three months ended June 30, 1999 decreased to 19.5% from 20.0% for the same period in 1998. We intend to continue to expand our SG&A infrastructure in preparation for anticipated revenue growth. We do not expect SG&A to decrease further as a percentage of revenue in the near term. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $1.6 million for the three months ended June 30, 1999 from $1.2 million in the three months ended June 30, 1998. As a percentage of revenue, R&D was 2.6% for the three months ended June 30, 1999 and 2.9% for the three months ended June 30, 1998. We anticipate that R&D expenses will continue to be approximately 2.0% to 3.0% of revenue for the remainder of 1999. During the second quarter of 1999, in accordance with Statement of Financial Accounting Standard (SFAS) 86, we capitalized approximately $567,000 of software costs related to our component based products for the insurance industry and our maintenance toolset. We did not capitalize software costs during 1998. We anticipate that the amount of capitalized software will continue to increase through the remainder of 1999 at levels consistent with the rate of increase for the first half of 1999. GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible amortization increased to approximately $1.9 million for the three months ended June 30, 1999 from approximately $363,000 for the three months ended June 30, 1998. The additional expense primarily reflects the amortization of goodwill and intangibles generated by our 1998 and 1999 acquisitions. 18 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 ACQUISITION COSTS AND ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. During the quarter ended June 30, 1998, in connection with our acquisition of Lyon, we incurred an $8.2 million expense for acquired in-process research and development costs. This expense was based on an appraisal of the intangible assets acquired in the Lyon acquisition. In addition, IMRglobal recorded a one-time charge of approximately $145,000 for costs related to the RHO acquisition. INCOME FROM OPERATIONS. Income from operations for the three months ended June 30, 1999 was $12.8 million compared to $338,000 for the three months ended June 30, 1998. As a percentage of revenue, income from operations for the three months ended June 30, 1999 increased to 20.3% from .9% in the three months ended June 30, 1998. The period ended June 30, 1998 reflects certain one-time charges related to acquisition costs and acquired in-process research and development costs. Excluding these one-time charges, as a percentage of revenue, income from operations for the three months ended June 30, 1999 decreased to 20.3% from 21.8% in the three months ended June 30, 1998. OTHER INCOME. We realized $1.1 million of other income (net of other expenses) in the three months ended June 30, 1999 and $1.0 million in the three months ended June 30, 1998. Net other income consists primarily of investment income generated by our cash and marketable securities. PROVISION FOR INCOME TAXES. The provision for income taxes increased to approximately $5.3 million for the three months ended June 30, 1999 from approximately $3.1 million for the three months ended June 30, 1998. Our effective tax rate was 38.1% for the three months ended June 30, 1999 compared to 31.4% for the three months ended June 30, 1998 excluding non-deductible one-time charges for acquisition and in-process research and development. Historically, IMRglobal 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, Canada, Japan and Australia which have higher tax rates than India. In addition, amortization of goodwill and other intangible assets is often not deductible for income tax purposes. Intangible asset amortization has increased 425.6% from the second quarter of 1998 to the second quarter of 1999. We have not recorded deferred income taxes applicable to undistributed earnings of IMRglobal-India. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income tax has been provided thereon. 19 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 NET INCOME. Net income increased to $8.6 million for the three months ended June 30, 1999 compared to a $1.7 million loss for the three months ended June 30, 1998. Net income for the three months ended June 30, 1999, excluding one-time charges, was approximately $8.6 million compared to net income of approximately $6.7 million for the three months ended June 30, 1998. Excluding one-time charges, as a percentage of revenue, net income for the three months ended June 30, 1999 decreased to 13.6% from 16.7% in the three months ended June 30, 1998. This decrease was primarily attributable to higher goodwill amortization expense and a higher effective income tax rate. DILUTED EARNINGS PER SHARE. Diluted earnings per share was $0.21 for the three months ended June 30, 1999 and ($0.06) for the three months ended June 30, 1998. Excluding one-time charges, diluted earnings per share was $0.21 for the three months ended June 30, 1999 as compared to $0.19 for the three months ended June 30, 1998. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 REVENUE. For the six months ended June 30, 1999, our revenue increased to $114.8 million, representing a 54.1% increase over revenue of $74.5 million for the six months ended June 30, 1998. The acquisitions accounted for under the purchase method between May 1998 and June 1999 contributed substantially to the revenue increase. Revenue from our service offerings not related to our Year 2000 service offerings, increased to $87.2 million (including purchase acquisitions), representing an 139.2% increase over non Year 2000 revenue of $36.4 million for the six months ended June 30, 1998. Revenue from our Year 2000 conversion services decreased 27.4% to $27.7 million for the six months ended June 30, 1999 compared to $38.1 million for the six months ended June 30, 1998. As a percentage of total revenue, Year 2000 revenue decreased to 24.1% for the six months ended June 30, 1999 as compared to 51.1% for the six months ended June 30, 1998. We expect that Year 2000 revenue will continue to decrease over the next three quarters. COST OF REVENUE. Cost of Revenue was $62.1 million, or 54.1% of revenue, for the six months ended June 30, 1999, as compared to $40.5 million, or 54.4% of revenue, for the six months ended June 30, 1998. The decrease in cost of revenue as a percentage of revenue primarily reflects productivity gains from the use of our toolsets. Wage costs continue to increase at a greater rate than general inflation in each of the countries in which we have operations, and we anticipate that this trend will continue in the near term. Historically, we have been able to pass these wage increases on to our clients in the form of increased prices for our service offerings. However, we cannot assure you that we will be able to continue to increase prices to our clients to offset future wage increases. GROSS PROFIT. Our gross profit increased 55.0% to $52.7 million in the six months ended June 30, 1999 compared to $34.0 million in the six months ended June 30, 1998. As a percentage of revenue, our gross profit increased to 45.9% in the six months ended June 30, 1999 compared to 45.6% in the six months ended June 30, 1998. 20 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended June 30, 1999, SG&A expenses increased to $23.6 million, compared to $15.4 million for the six months ended June 30, 1998. The dollar increase in SG&A expense is attributable to the following: o purchase acquisitions; o addition of seven sales offices; o the expansion of sales personnel; and o expansion of our general support staff, primarily recruiting and human resources personnel. As a percentage of revenue, SG&A expenses were 20.6% for the six months ended June 30, 1999 and the comparable period in 1998. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to approximately $2.8 million for the six months ended June 30, 1999 from approximately $2.1 million in the six months ended June 30, 1998. As a percentage of revenue, R&D decreased to 2.5% in the six months ended June 30, 1999 from 2.9% for the six months ended June 30, 1998. During the first six months of 1999, in accordance with Statement of Financial Accounting Standard (SFAS) 86, we capitalized approximately $1.3 million of software costs related to our component based products for the insurance industry and our maintenance toolset. We did not capitalize software costs during 1998. We anticipate that the amount of capitalized software will continue to increase through the remainder of 1999 at levels consistent with the rate of increase for the first half of 1999. GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible amortization increased to approximately $2.7 million for the six months ended June 30, 1999 from approximately $653,000 for the six months ended June 30, 1998. The additional expense primarily reflects the amortization of goodwill and intangibles generated by two acquisitions in 1998 and four acquisitions in 1999. 21 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The purchased assets and assumed liabilities in connection with the acquisition of Fusion were recorded at their estimated fair values at the acquisition date of March 26, 1999. We received an appraisal of the intangible assets which indicated that approximately $3.4 million of the acquired intangible assets was acquired IPRD that had not yet reached technological feasibility and had no alternative future use (See Note 5). 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, acquired IPRD of $3.4 million was charged to expenses by the Company in the quarter ended March 31, 1999. During the six months ended June 30, 1998, in connection with our acquisition of Lyon, we incurred an $8.2 million expense for acquired in-process research and development costs. This expense was based on an appraisal of the intangible assets acquired in the Lyon acquisition. ACQUISITION COSTS. During the six months ended June 30, 1999, we completed one acquisition that was accounted for as a pooling of interests. Acquisition expenses attributable to that merger were approximately $1.9 million. During the six months ended June 30, 1998, we recorded a one-time charge of approximately $145,000 for costs related to the RHO acquisition. INCOME FROM OPERATIONS. Income from operations for the six months ended June 30, 1999 was $18.2 million compared to $7.5 million for the six months ended June 30, 1998. As a percentage of revenue, income from operations for the six months ended June 30, 1999 increased to 15.8% from 10.1% in the six months ended June 30, 1998. Both periods reflect certain one-time charges related to acquisition costs and acquired in-process research and development costs. Excluding these one-time charges, as a percentage of revenue, income from operations for the six months ended June 30, 1999 decreased to 20.5% from 21.3% in the six months ended June 30, 1998. This decrease was primarily attributable to goodwill amortization expense. OTHER INCOME. We realized approximately $2.7 million of other income (net of other expenses) in the six months ended June 30, 1999 compared to net other income of approximately $2.1 million in the six months ended June 30, 1998. Net other income consists primarily of investment income generated by our cash and marketable securities. PROVISION FOR INCOME TAXES. The provision for income taxes increased to approximately $8.6 million for the six months ended June 30, 1999 from approximately $5.5 million for the six months ended June 30, 1998. Excluding one-time charges this represents an effective tax rate of 38.1% and 30.8% for the six month periods ended June 30, 1999 and 1998, respectively. 22 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 The higher effective tax rate for the six months ended June 30, 1999 is partially attributable to goodwill and acquired technology amortization not being fully deductible for income tax purposes. Intangible asset amortization has increased 317.9% from the six months ended June 30, 1998 to the six months ended June 30, 1999. In addition, we have historically enjoyed a low effective tax rate primarily due to our industry's low tax rates in India. Accordingly, the effective tax rate has increased as a result of recent acquisitions in France, Canada, Japan, Australia and the United States, which have higher tax rates than India. We have not recorded deferred income taxes applicable to undistributed earnings of IMRglobal-India. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income tax has been provided thereon. NET INCOME. Net income increased to $12.2 million for the six months ended June 30, 1999 compared to $4.1 million for the six months ended June 30, 1998. Net income for the six months ended June 30, 1999, excluding one-time charges, was approximately $16.2 million compared to net income of approximately $12.4 million for the six months ended June 30, 1998. Excluding one-time charges, as a percentage of revenue, net income for the six months ended June 30, 1999 decreased to 14.1% from 16.6% in the six months ended June 30, 1998. This decrease was primarily attributable to higher goodwill amortization expense and a higher effective income tax rate. DILUTED EARNINGS PER SHARE. Diluted earnings per share was $0.32 for the six months ended June 30, 1999 and $0.12 for the six months ended June 30, 1998. Excluding one-time charges, diluted earnings per share was $0.42 for the six months ended June 30, 1999 as compared to $0.36 for the six months ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, we had: o working capital of $98.2 million; o liquid assets including cash, cash equivalents and marketable securities of approximately $85.4 million; and o available bank lines of credit of approximately $13.9 million. Net cash provided by operating activities was $9.7 million for the six months ended June 30, 1999. The positive cash flow from operations primarily reflects our continuing profitability and the tax benefits generated through the exercise of employee stock options. Net cash used in investing activities was $26.1 million for the six months ended June 30, 1999. For the six months ended June 30, 1999, we invested an additional $15.0 million in the acquisition of subsidiaries and purchased $14.1 million of property and equipment. Net cash used in financing activities was $2.7 million for the six months ended June 30, 1999. 23 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) We maintain an uncollateralized $10.0 million revolving credit facility which allows us to borrow up to 80% of the book value of our United States accounts receivable. Our interest rate for this facility varies and is 1% above LIBOR (currently 6.3%). At June 30, 1999, we had not borrowed any funds under this facility and the $10.0 million was available to us. Provisions of this line of credit and certain notes payable contain financial covenants, including covenants that require us to maintain certain financial ratios. At June 30, 1999, we were in compliance with these covenants. This credit facility can be canceled at any time by the bank or by us. Certain of our subsidiaries maintain additional revolving credit line arrangements. Interest rates are based on the lending institution's prime rate (ranging from 6.5% to 9.0% at June 30, 1999). At June 30, 1999, the amount outstanding under these facilities was $559,000 and the maximum amount available was approximately $3.9 million. The respective subsidiary's accounts receivable and certain property and equipment collateralize these facilities. During June 1998, we entered into contracts to purchase land and construct new facilities for our corporate headquarters. The total price of this project (including furniture, fixtures and equipment) is expected to be approximately $28.0 million of which $14.4 million has been expended as of June 30, 1999. Completion of this project is scheduled for January 2000. We continuously review our future cash requirements, together with our available bank lines of credit and internally generated funds. We believe we have adequate capital resources to meet all working capital obligations and fund the development of our current business operations, including the following business objectives: o Continued expansion of existing business; o Continued funding of research and development initiatives; o Anticipated levels of capital expenditures including the construction of our corporate headquarters; and o Any debt repayment requirements, including those that may be required pursuant to the integration of our acquisitions. ASSET MANAGEMENT Our accounts receivable balance was $46.3 million at June 30, 1999. The increase of $17.8 million from December 31, 1998 was primarily due to new acquisitions and revenue growth of 54.1%. A common financial measure is the calculation of days sales outstanding in accounts receivable. We refer to days sales outstanding as DSO. We believe that the calculation of DSO should be done on our quarterly results of operations to factor in our historic rapid revenue growth rate. Based on the above, DSO was 66 days at June 30, 1999. The Lyon and Atechsys acquisitions add approximately 3 days to our DSO as collection practices of accounts receivable in France have historically been slower than collections in other geographical areas. In addition, accounts receivable in Canada, France, Japan and U.K. include value added taxes that are not included in revenue. Without value added taxes, DSO would be approximately 3 days less than the above levels. 24 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COSTS ASSOCIATED WITH THE 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., 1999 is read as "99") 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. IMRGLOBAL'S STATE OF READINESS. IMRglobal has assessed the impact that Year 2000 will have on its information technology and non-information technology systems, relationships with its third-party vendors and relationships with its clients. As a result of the initial assessment, IMRglobal believes that the Year 2000 will not give rise to any event that will have a material adverse effect on IMRglobal's results of operations and financial condition. Although IMRglobal continues to review its IT systems, as well as its non-IT systems, for Year 2000 compliance, to date, IMRglobal has discovered that only its internal accounting system is not Year 2000 compliant. IMRglobal is replacing 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. Through June 30, 1999, IMRglobal has incurred expenses approximating $30,000 related to Year 2000 compliance and anticipates that the total cost should not exceed approximately $100,000. These cost estimates primarily reflect the costs related to IMRglobal personnel. IMRglobal does not believe that the costs associated with the replacement of the accounting system will have a material impact on IMRglobal's results of operations and financial condition. IMRglobal has not identified any other IT or non-IT system that is subject to a material risk of disruption due to the Year 2000. IMRglobal does not believe a formal contingency plan is required for internal systems. IMRglobal has assessed whether a system failure experienced by any of IMRglobal's third-party vendors would negatively impact the IMRglobal's operations or financial condition. IMRglobal has determined that a Year 2000 system failure experienced by IMRglobal's satellite and communication vendors could potentially interrupt communications between client sites and IMRglobal's software development 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. No such failures or interruptions are presently anticipated, and IMRglobal does not expect to experience any adverse effects on its results of operations and financial condition. If, however, further analysis determines that one or more of IMRglobal's satellite or communications vendors may encounter Year 2000 related failures or interruptions, IMRglobal 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. IMRglobal has determined that a system failure experienced by the satellite and communication vendors could have a material effect on IMRglobal's results of operations and financial condition. System failure by any other third party vendor would not have a material affect on IMRglobal's results of operations and financial condition. 25 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RISKS PRESENTED BY THE YEAR 2000. Many of IMRglobal'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 IMRglobal, regardless of IMRglobal's responsibility for such failure. Although IMRglobal 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 IMRglobal from liability for damages. IMRglobal 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 IMRglobal that exceed available insurance coverage or changes in IMRglobal's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect IMRglobal's results of operations and financial condition. IMRGLOBAL'S CONTINGENCY PLANS. IMRglobal is a high quality provider of Year 2000 compliance services. Accordingly, if IMRglobal experiences a failure in its Year 2000 preparedness, experienced staff will be redeployed to address any potential Year 2000 compliance issue. Otherwise, IMRglobal has no material contingency plan identified for Year 2000 readiness issues. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS IMRglobal is exposed to market risk from changes in interest rates and exchange rates between the U.S. dollar and the currencies of various countries in which we operate. IMRglobal does not engage in hedging transactions and is not a party to any leveraged derivatives. 26 IMRGLOBAL CORP. 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 27 Financial Data Schedule (for SEC use only). o The Registrant filed a report on Form 8-K on April 8, 1999 under Item 2 disclosing the acquisition of Fusion Systems Japan Co., Ltd. o The Registrant filed a report on Form 8-K on June 29, 1999 under Item 2 disclosing the acquisition of Orion Consulting, Inc. 27 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 NOVEMBER 19, 1999 /s/ SATISH K. SANAN - ------------------------- ----------------------- Satish K. Sanan Chief Executive Officer Date NOVEMBER 19, 1999 /s/ ROBERT M. MOLSICK - ------------------------- ---------------------- Robert M. Molsick Chief Financial Officer 28 IMRGLOBAL CORP. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ----- 27 Financial Data Schedule...................................... 30 29 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1999 JUN-30-1999 58,012 27,340 48,487 2,195 0 159,977 45,455 9,397 340,557 61,748 1,598 0 0 3,845 269,458 340,557 0 114,841 0 62,114 34,397 150 4 20,856 8,620 12,236 0 0 0 12,236 0.37 0.32
-----END PRIVACY-ENHANCED MESSAGE-----