-----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, PSCEXA5VttFgXOo4kjO/NoeIyM0Uors8RnosU1HtxVYOXsPCxgQQV3aPDy5uGHsP t/DSqjiGV2oQ21CIXjjARw== 0001021408-01-500405.txt : 20010430 0001021408-01-500405.hdr.sgml : 20010430 ACCESSION NUMBER: 0001021408-01-500405 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010427 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-K405/A SEC ACT: SEC FILE NUMBER: 000-28840 FILM NUMBER: 1613758 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-K405/A 1 d10k405a.txt FORM 10-K405/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-K/A (Amendment No. 1 to Form 10-K) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Name of Exchange -------------- ---------------- Common Stock, par value $0.10 per share The Nasdaq Stock Market 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 and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X] The aggregate market value of the Company's common stock, par value $.10 per share (the "Common Stock") held by non-affiliates of the registrant as of April 16, 2001, was approximately $209.4 million based upon the closing price of $5.60 per share as reported on the Nasdaq National Market for that date. The shares of Common Stock held by each current executive officer and director and by each person who is known to the Company to own 5% or more of the outstanding Common Stock have been excluded from this computation on the basis that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes. As of April 16, 2001, there were 44,041,279 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None IMRglobal Corp. Form 10-K For Year Ended December 31, 2000 Table of Contents
Page ---- Part I Item 1. Business........................................................................... 1 Item 2. Properties......................................................................... 10 Item 3. Legal Proceedings.................................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders................................ 11 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters............................................................... 12 Item 6. Selected Consolidated Financial Data............................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. 14 Item 7A. Quantitative and Qualitative Disclosure About Market Risks......................... 35 Item 8. Financial Statements and Supplementary Data........................................ 35 Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure............................................... 73 Part III Item 10. Directors and Executive Officers of the Registrant................................. 73 Item 11. Executive Compensation............................................................. 75 Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 85 Item 13. Certain Relationships and Related Transactions..................................... 86 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 87 Signatures................................................................................... 91
Explanatory Note This Form 10-K/A replaces in its entirety the Form 10-K previously filed by IMRglobal Corp. on March 26, 2001, and is being filed in order to (a) include Part III, (b) delete the reference to documents incorporated by reference on the cover page, and (c) amend Item 14. No other portion of the previously filed 10- K has been amended. i PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements express or are based on expectations about future events. Forward-looking statements include o Our belief that financial services, healthcare, government, utilities, retail and manufacturing/distribution industries will be the dominant users of our solutions; o Our belief that companies in certain industries will need our services as they do not lend themselves to "off the shelf" solutions; o Our belief that component-based architecture will be the dominant development technology over the next several years; o Our estimation that our future tax rates may increase for our India operations. Other forward-looking statements can be identified by the use of forward-looking language such as "will likely result," "may," "are expected to," "is anticipated," "believes," "estimated," "projected," "intends to" or other similar words. Our actual results are likely to differ, and could differ materially, from the results expressed in, or implied by, these forward-looking statements. There are many factors that could cause these forward-looking statements to be incorrect, including but not limited to the risks described below under "Risk Factors That May Affect Future Results". Additionally, there can be no assurance that our proposed merger with CGI will be consummated. When considering these forward-looking statements, you should keep in mind these risk factors and the other cautionary statements in this annual report on Form 10-K, and should recognize that those forward-looking statements speak only as of the date made. We do not undertake any obligation to update any forward-looking statement included in this annual report. Item 1. Business Merger On February 21, 2001, we announced the execution of a Merger Agreement with CGI Group, Inc., a major IT outsourcing company headquartered in Montreal, Quebec. Pursuant to the merger agreement and subject to its terms and conditions, CGI Florida Corporation will be merged with and into IMRglobal Corp., and IMRglobal Corp. will become a wholly owned subsidiary of CGI Group, Inc. The merger agreement has been approved by our Board of Directors and is subject to approval by our shareholders, certain regulatory approvals, and satisfaction of other closing conditions. General We are a leading global provider of end-to-end information technology solutions to Fortune 500 and Global 2000 companies in key vertical industries. Those industries include financial services, healthcare, government, utilities, retail and manufacturing/distribution. Our services include business consulting, e-business, software development, application maintenance and professional services. 1 In today's global market place where there is significant consolidation, deregulation and privatization, and increasing competition, companies are being forced to change their traditional business models to stay competitive. These changes require sophisticated, highly customized, Web-enabling information technology solutions that will transform companies' current infrastructure to better serve their respective clients. Simultaneously, companies cannot afford to discard the value that has been invested into their legacy systems. Depending on our client's specific needs, we provide a comprehensive suite of products and end-to-end services that address their business requirements quickly and cost effectively. We offer our solutions and services either on a fixed price, fixed time or a time and material basis. We offer our clients a full life-cycle approach to solving their business requirements. We start with planning and design where we provide IT strategy formulation and business consulting services to help clients design the solution that specifically addresses their business requirements. Our development and integration services build and integrate the new solution using our component-based architecture or other Web-enabling technologies. After development, we provide ongoing application management and support of the new solution. A detailed description of our solutions and services is provided in following sections. A major part of our business strategy was to identify and penetrate those industries that we believe would be dominant users of our unique suite of solutions and services. Based on our research, we targeted the financial services, healthcare, government, utilities, retail and manufacturing/distribution industries. Within the financial services industry, we focused mainly on the insurance sector. We believe companies in these targeted industries are facing the most significant changes either through globalization, increased competition, deregulation and privatization or economic pressures. Due to the scope and the pace of these changes, we believe that the IT solutions needed for these industries rarely lend themselves to "off the shelf" packages or services. In addition, the costs to develop and maintain customized solutions are both expensive and time consuming. Many companies in these targeted industries do not possess the required resources to successfully complete these types of projects. Over the past three years, we have worked to address the needs of these industries through our acquisition program and our research and development efforts and we spent $6.2 million, $6.6 million, and $3.5 million, on research and development efforts in 1998, 1999 and 2000, respectively. As a result, we have developed or acquired industry specific IT solutions, which are described in the following sections. 2 Our acquisition efforts have allowed us to expand our specific industry expertise in our targeted markets and/or provide significant expertise in new technologies. Our most recent acquisitions are summarized below:
Acquisition Acquisition Date Location Acquisition Highlights ----------- ---------------- -------- ---------------------- Intuitive Group Ltd. January 2000 London, England o Provides electronic Customer Relationship Management ("eCRM") technology. o Expand life insurance industry expertise. Neverdahl-Loft and December 1999 Lincoln, Nebraska o Expand life insurance Associates, Inc. Industry expertise Orion Consulting, Inc. June 1999 Cleveland, Ohio o Expand healthcare & government industry expertise. o Healthcare claims adjudication technology. Professional Partners and April 1999 Howell, New Jersey o Expand property & casualty Lakewood Software insurance industry expertise. Partners, Inc. ("PLP")
Through our acquisition and research and development programs, we have assembled a number of vertical industry solutions that combine the functionality of customized software with the speed of implementation of a packaged solution. These solutions usually require a relatively low level of customization and lower maintenance costs and are easily modified to meet changing business requirements. Examples of some of our specific market solutions include: o Our Internet focused eCRM solutions have been specifically developed to address needs in the insurance industry in both Europe and North America. This eCRM solution accumulates pertinent client information and timely disseminates this information to insurance industry employees as they talk to their clients. o Our insurance solution includes a suite of component-based applications that support definition of new products, acquisition of new businesses, and the administration, billing, processing and paying of claims and commissions. We customize these applications for clients in property and casualty, life and reinsurance sectors of the insurance business. o Our healthcare solution allows health insurance companies to analyze data and identify trends and anomalies in healthcare claims, which can then be targeted for further investigation. This allows our clients to screen their incoming claims and to identify erroneous reimbursement claims more efficiently. o Our retail solution includes our Price Change Management System which is currently integrated and jointly marketed through our alliance with RETEK, a leading provider of Web-architect software for the global retail industry and its trading partners. 3 Our vertical solutions represent a rapidly growing part of our business at this time. We have continued to focus on developing component-based solutions because we believe that they provide significant benefits to our clients including a faster deployment time and generally lower total cost than fully customized solutions. In addition, we believe that our component-based solutions are more reliable and better tailored to the specific needs of our clients than pre-packaged products. During 2000, we significantly upgraded our component-based solutions to the life insurance market and property and casualty insurance markets. These solutions have resulted in several contracts in 2000 and early 2001, each with a revenue value of at least $1 million. We provide all of our solutions and services on an outsourcing basis. Outsourcing is the use by a client of third party providers to perform activities traditionally handled by that company's internal staff. We believe that outsourcing has proven effective in helping in-house IT departments manage costs while reducing the time needed to complete projects. We augment the benefits of outsourcing by providing our clients with a global network of centers with highly trained and qualified technology professionals. We utilize the time differences between our development centers in our global network to create a 24-hour "virtual workday" during which our technology professionals can work on projects for our clients. One of the competitive advantages, and an important part of our strategy, is to offer our solutions and services on a fixed-price, fixed-time basis. We believe that a high percentage of projects started by internal IT departments are not completed on time or on budget, and many are not completed at all. By offering fixed pricing, we enable our clients to reduce their exposure to increased costs and by using our "on-site, off-site" delivery model, which utilizes one or more of our worldwide delivery centers, we can maintain consistent quality and reduce the project delivery time. For large-scale development projects we can deliver projects faster by using multiple delivery centers. Over the past three years, we have successfully delivered over 100 fixed-price projects. In addition to fixed-price, fixed-time projects, we provide programming and IT consulting services at clients' sites as needed, usually on a time and material basis. We also help our clients with tactical issues such as Year 2000 conversion services and the transition to the Euro currency. Currently, we maintain a staff of approximately 2,200 software development professionals to serve our clients. We maintain dedicated software development centers in Mumbai and Bangalore and operate four other software development centers, one in our corporate and international headquarters in Clearwater, and others in Paris, Sydney and Tokyo. We also have approximately 20 domestic branch/sales offices. We were incorporated in 1988 and we are a Florida corporation. Industry Overview We believe that the industries for which we are developing solutions are faced with dramatic business, technological and economic changes that are forcing them to alter their traditional business methods. These changes include de-mutualization and consolidation in the insurance sector, deregulation of the utility industry, consolidation in the financial services industry and privatization in the healthcare industry. Intense competition and globalization in turn are driving the development of new products and services which must be made available on a cost and time efficient basis. In addition, the utilization of the Internet is forcing the majority of industries to change the way they conduct business. First to market for Internet solutions is a key competitive advantage for many companies. Accordingly, the integration of e-commerce into companies has become an integral part of the competitive environment. 4 These changes require the support of IT and e-business solutions. We believe companies in our targeted industries are faced with competitive and economic pressures to reduce the time and costs needed to develop and market new products. As a consequence, many companies can no longer develop new applications relying solely on their internal IT staff. Moreover, the complexities of the industries in which our clients operate often preclude the use of packaged solutions. We believe these industries require customized solutions with the speed of packaged solutions, and the flexibility to constantly integrate these solutions with updated technologies and legacy systems. In addition, technology is enabling companies to increase productivity, shorten product cycles, enhance client services and create new lines of business. We believe that the rapid pace of these changes has overwhelmed many internal IT departments and has created a skills gap that IT service providers help to bridge. By outsourcing IT services, companies can focus on their core business, access specialized technical skills and implement IT solutions more rapidly while significantly reducing the costs of recruiting, training and retaining IT professionals. The IT services industry has evolved into a highly fragmented environment with several large, national service providers, a small number of international providers and a large number of regional service providers. We believe that in light of recent globalization trends, IT service providers with an increasing global presence will be better able to address the IT needs of the large Fortune 500 and Global 2000 sized companies. Our Delivery Process Our proprietary Total Software Quality Management ("TSQM") process is based in part on software standards published by the Institute of Electrical & Electronic Engineers and the Software Engineering Institute ("SEI") software engineering process models and ISO 9001 quality processes. To position itself for future business from companies in the European Community, as well as from international affiliates of its North American clients, IMRglobal's facilities in India and the U.K. have achieved ISO 9001/9002/9003 certification. IMRglobal is pursuing company-wide ISO 9001/9002/9003 and SEI certification. During each stage of a project, we utilize TSQM to monitor progress and quality, including deviations from project plans that could adversely affect on-time delivery, compliance with project specifications and project financial performance. The project team collects, analyzes and reports on key quality metrics to verify compliance with quality standards used in project execution and the project team serves as a custodian of information regarding the methods, techniques and tools that have been utilized to perform specific tasks. Through this process of constant re-evaluation of our performance on each project, we continuously refine and enhance the TSQM software engineering process as a means to leverage the benefit of our cumulative project experience. The responsibilities for completion of each TSQM phase are allocated among on-site and off-site teams to optimize cost savings and accelerate project delivery. The actual tasks allocated to each team member are determined principally by the amount of client interaction required at the client site to complete the project successfully. The front-end phase, which may include business area analysis, development of a technical strategy, requirements definition, requirements analysis, high-level design and technical architecture is completed by the on-site project manager and the project team through interaction with the client. The implementation phase, which may include programming, unit testing and system testing, is largely performed 5 off-site via satellite link. The off-site teams at our North American, European and Australian offices coordinate the efforts of the on-site and off-site teams and monitor and manage the quality of the over-all project. Working regular business hours, the on-site and off-site teams together use most hours of the clock to deliver projects in fewer elapsed calendar days. Due to the time differences between India, Asia, Europe and North America, we create a virtual "second shift" for our clients allowing for more rapid completion of projects. Our off-site software development centers provide significant opportunities to reduce costs and manage the risks of a project. The software development center is often able to use the excess capacity of a client's existing computing facilities during off-peak hours. This allows additional projects to be undertaken without substantial client investment in new hardware and software. The costs of satellite communications and infrastructure acquired by us at an off-site center will be spread among multiple-clients and projects. If the scope of a project is unexpectedly expanded, we generally are able to draw upon our development centers' resources to increase project personnel. In addition, for larger projects with critically short time frames, the resource availability of an off-site facility allows us to overlap various development phases to accelerate delivery time. Solutions & Services We provide a broad range of IT solutions and services, including; (a) business-consulting; (b) IT strategy formulation; (c) e-business services and solutions; (d) application development; (e) application management and support; and (f) professional services. We deliver each of these services independently or as a comprehensive package. o Business Consulting. We have been significantly increasing our industry business expertise in each of our targeted markets by hiring people with extensive experience in particular industries and by acquiring companies that focus exclusively on a particular vertical industry. We provide specific industry business experience such as helping our healthcare clients by simplifying complex business issues, evaluating their financial and operational performance and supplying advice in the ever-changing healthcare industry. Our healthcare consultants have a national reputation as experts in the Health Insurance Portability and Accountability Act ("HIPAA") and healthcare payment methodologies and help our clients to improve the quality of their services, increase productivity and reduce costs. o IT Strategy Formulation. By combining specific industry business expertise with our technological experience, we are able to assist our clients in formulating effective IT strategies that best match their business objectives. Specific areas would include portfolio optimization, program management, software evaluation and infrastructure strategy. o e-business Services and Solutions. We help clients design and implement solutions involving the Internet and electronic commerce. Currently, our fastest growing e-business solution is our eCRM solution being offered to the insurance industry. Other e-business services include the development of Internet strategies, management of Web content and training. Our senior e-commerce consultants assist clients in understanding the opportunities, procedures and technological challenges associated with conducting electronic commerce. Our technical staff concurrently designs, develops and implements the underlying technologies supporting the e-business initiative, using state-of-the-market development technologies. The scope of e-business projects includes: Web retaining, client extranets, online service centers, supply chain optimization, electronic data interface, corporate intranets, back office integration, sales force extranets and knowledge base management. 6 Our e-business services underwent a dramatic change in the second half of 2000, as many internet companies experienced severe cash flow problems and many went out of business. Accordingly, our clients now utilize our e-business solutions as part of their overall IT strategy as opposed to a stand alone solution. o Application Development. Using an approach similar to the popular Lego(R)-building block approach, we utilize reusable, industry-specific software components to quickly build vertical, industry specific applications for our clients. These pre-built, pre-tested software components, along with components customized for company-specific purposes, are assembled in significantly less time than building an application from scratch and provide clients a solution that fits their business better than a packaged solution. This approach can be used to deliver projects on an accelerated basis for selected platforms, avoiding the functional shortcomings of traditional standardized, pre-packaged software solutions or the time and cost of developing completely new custom solutions. o Application Management and Support. We have four distinct processes for our application management and support services: 1) Corrective maintenance requires software failures to be diagnosed and fixed as they occur. These failures can directly affect business operations and require the highest level of support. Quick fixes and poor documentation often result in increased code complexity and increased future maintenance costs. 2) Adaptive maintenance requires software modification to support changing business requirements or changing technical environments. This includes user enhancements, operating system upgrades and other outside improvements. Enhancement backlogs are generally the biggest source of concern for IT management. 3) Preventive maintenance involves modifications to application systems to improve performance, without changing the basic system. 4) Preventive maintenance identifies and eliminates the maintenance problems that create the need for corrective maintenance. o Professional Services. We also provide professional services on a time and materials basis. In addition to staffing our client's short-term needs, our objective is to leverage professional staffing engagements to learn more about the client's business and IT system needs and position ourselves to provide additional services. 7 Clients and Representative Projects The Company provides solutions and services to large businesses, primarily Fortune 500 and comparably sized companies with intensive information processing needs. Prior to 1998, the Company's marketing efforts were directed to clients on the basis of IT needs rather than industry group. Beginning in 1998, the Company began to redirect its marketing efforts to key vertical markets including insurance, financial services, healthcare & government, retail, manufacturing and distribution and utilities. Companies and clients in these industries have historically provided the greater source of business opportunities for the Company.
Insurance Financial Services Healthcare & Government --------- ------------------ ----------------------- John Hancock Mutual Life Barclays Bank Blue Cross/Blue Shield CGU Insurance American Express Foundation Health System Pearl Assurance Schroders International American Medical Association ING/Realiastar Banque National de Paris Medical Mutual of Ohio CNA Sakura Bank Ohio Housing & Urban Development Retail Manufacturing & Distribution Utilities ------ ---------------------------- --------- Blockbuster Arrow Electronics Ameritech Target Fleming Foods SAUR Fingerhut Michelin Southern California Edison Winn Dixie Renault Tampa Electric Company Eckerd CGM
During the year ended December 31, 2000, the Company's top two clients accounted for approximately 12% of total revenue and the top five clients accounted for approximately 20% of total revenue. During the year ended December 31, 1999, the Company's top two clients accounted for approximately 11% of total revenue and the top five clients accounted for approximately 20% of total revenue. The volume of work performed for specific clients is likely to vary from year to year, and a significant client in one year may not use the Company's services in a subsequent year. Sales and Marketing We market and sell our services directly through our professional staff and senior management operating at our United States and international regional offices and sales branch offices. We focus our marketing efforts on large corporations within our targeted industries that have significant IT budgets and recurring staffing or software development needs. Marketing personnel identify prospects and enter the information into a database that is consistently maintained. Direct sales representatives utilize those records to initiate the sales cycle from prospect qualification to closing. As a result, we can pre-qualify sales opportunities and minimize the time that direct sales representatives spend on prospect qualification. 8 Our marketing programs include direct mail campaigns, advertising, seminars, conferences and other activities. The sales executive and technical support teams define the scope, deliverables, assumptions and execution strategies for a proposed project. They also develop project estimates, prepare pricing margin, and cash flow analyses, and finalize sales proposals. Management reviews and approves all proposals and the sales staff presents the proposal to the prospective client. Sales personnel are actively involved throughout the execution phase of every project, as we believe successful project implementations will lead to more sales opportunities at that client. Intellectual Property Our business consists of software applications development and other deliverables including written specifications and documentation in connection with specific client engagements. Ownership of these products is generally retained by or assigned to the client. We also develop reusable software components and vertical industry component libraries for application development, as well as software toolsets and proprietary methodologies. Many are developed in one country and subsequently used in another country. Furthermore, we maintain trademarks and service marks in our various service offerings. To protect our intellectual properties, we rely on copyright and trade secret laws, nondisclosure and other contractual arrangements, and technical measures. Competition The IT services market is highly competitive and is served by numerous national, regional and local firms. Our clients generally consist of large corporations principally in the insurance, capital markets, utilities, healthcare, government, retail, manufacturing and distribution, and media and communications industries. Many of our competitors are aggressively pursuing business from these entities. In addition to in-house IT departments, market participants include e-business, systems consulting and integration firms, professional service companies, applications software firms, temporary employment agencies, professional services divisions of large integrated manufacturing and other companies, facilities management and outsourcing companies, accounting and business consulting firms such as the "Big 5" and related entities. We believe that many of our competitors have significantly greater financial, technical and market resources and generate greater revenue than we do. We compete by offering Web enabled vertical industry solutions, component-based software products, a successful service delivery model, excellent referral base, continued focus on client needs, quality of service, competitive prices and strong project management capabilities and technical expertise. Human Resources As of March 7, 2001 we had approximately 2,400 employees, including approximately 2,000 in our United States, U.K., France, Japan, Canada and Australian headquarters and branch offices and approximately 400 in our software development centers in India. Additionally, we had approximately 200 independent contractors performing various services. None of our employees are subject to a collective bargaining arrangement, except for approximately 300 employees in France. As of March 7, 2001, approximately 375 of our United States employees were working under the H-1B non-immigration work permitted visa classification, which we processed for those employees through the United States Immigration and Naturalization Service. The H-1B visa classification enables United States employers to hire qualified foreign workers in positions which required education at least equal to a United States baccalaureate degree in specialty occupations such as software systems engineering and systems analysis. 9 We believe that there is a shortage of, and significant competition for, certain IT professionals particularly those with specific insurance e-business skills. Our future success will depend in large part upon our ability to attract, train, motivate and retain highly skilled employees with the advanced business and technical skills necessary to perform the services we offer. We have active recruiting programs in North America, Europe, and Asia and have developed a recruiting system and database that facilitates the rapid identification of skilled candidates. We also have adopted a career and education management program working with employees to define their objectives and career plans. Through an intensive orientation and training program, we introduce new employees to our TSQM software engineering process and our products and services. Item 2. Properties The following table sets forth a description of our principal facilities:
Square Feet Owned/ Location (Approx.) Lease Expiration Date Function - ------------------------------ ------------ --------------------- -------- Clearwater, Florida 131,000 Owned Corporate headquarters and software development facility Bangalore, India 66,000 March 2007 - Software development facility June 2007 Cleveland, Ohio 30,900 September 2007 Healthcare industry facility Mumbai, India 28,000 Owned Software development facility New Delhi, India 28,000 Owned Future facility Howell, New Jersey 14,300 January 2001 - Insurance industry facility September 2005 Paris, France 14,300 May 2005 - France headquarters and May 2009 software development facility London area (Stevenage) England 13,000 February 2014 - U.K. headquarters and software October 2018 development facility Tokyo, Japan 12,900 January 2003 Japan headquarters and software development facility Toronto, Canada 10,600 October 2002 Canada headquarters Sidney, Australia 8,100 May 2002 Australian headquarters and software development facility
The leases for our headquarters in Bangalore and Paris and our facilities in Toronto contain options to extend the term for an additional five years. We own the building at our software development facility in Mumbai, India and we lease the land through March 2096. We own land and a building in New Delhi, India which may be renovated to house a future facility. At this time we are considering the sale of the New Delhi, India property. In addition, we lease branch offices, which are used primarily for sales and marketing purposes, in Boston, Chicago, Dallas, Minneapolis, New York, Kansas City, Pittsburgh, Sacramento, St. Louis and Harrisburg in the United States, Montreal, Melbourne, Paris and Luxembourg outside the United States. 10 As a result of our acquisitions in 1999 and 2000, we acquired properties under existing leases which we do not intend to utilize. Of approximately 15 properties which have been identified as inactive leases, 4 of these properties have been sublet, and an additional 3 properties have leases expiring in 2001 that will not be renewed. We are actively working to sublease the remaining 8 properties. Item 3. Legal Proceedings We are not a party to any pending material litigation. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the year ended December 31, 2000. 11 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Our common stock is traded on the Nasdaq Stock Market(SM) under the symbol "IMRS." The common stock commenced trading on Nasdaq on November 8, 1996 in connection with the underwritten initial public offering of shares of common stock at an initial price to the public of $6.22 per share. Set forth below are the high and low sales prices for shares of the common stock for the periods indicated. Fiscal Period Ended High Low ------------------- ---- --- 2001: First Quarter (through March 20, 2001) $ 8.13 $4.13 2000: First Quarter $19.00 $8.50 Second Quarter $19.19 $11.13 Third Quarter $14.19 $10.19 Fourth Quarter $11.88 $2.38 1999: First Quarter $32.63 $12.94 Second Quarter $23.25 $13.75 Third Quarter $20.13 $8.00 Fourth Quarter $14.50 $7.00 The number of shareholders of record of the common stock as of March 7, 2001, was 226 based on transfer agent reports. On March 20, 2001, the closing price of our stock as reported on Nasdaq was $5.94. We did not declare any cash dividends in 1999 or 2000 and we do not intend to declare or pay cash dividends in the foreseeable future. We anticipate that all earnings and other cash resources, if any, will be retained for future investment in our business. 12 Item 6. Selected Consolidated Financial Data The following selected financial data for the years 1996 through 2000 should be read along with the audited financial statements. The information below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, ---------------------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- (In thousands, except per share data) Consolidated Statements of Operations Data: Revenue ............................................... $ 30,988 $ 89,645 $ 170,318 $ 222,028 $ 256,172 Gross profit .......................................... 13,346 39,934 80,243 92,857 101,345 Income (loss) from operations ......................... 5,016 16,908 28,823 (10,110) 8,754 Cumulative effect of change in accounting method, net of income taxes .......... -- -- -- -- (2,707) Net income (loss) ..................................... 2,890 12,469 19,880 (11,839) 185 Diluted earnings (loss) per share ..................... 0.13 0.40 0.57 (0.34) 0.00 Cash dividends ........................................ 1,623 -- 163 -- -- Cash dividends per share .............................. 0.07 -- -- -- -- Weighted average common stock and common stock equivalents outstanding, assuming dilution ..................... 23,026 31,238 35,064 34,786 43,261 Consolidated Balance Sheet Data (at year end): Cash, cash equivalents and marketable securities ...... $ 30,307 $ 91,452 $ 110,416 $ 37,432 $ 19,689 Working capital ....................................... 31,371 96,977 122,783 47,091 43,552 Total assets .......................................... 50,563 138,656 223,699 303,798 318,835 Long-term debt, net of current portion ................ 39 918 671 985 30,894 Shareholders' equity .................................. 41,045 114,358 174,814 234,923 231,780 Shares outstanding at period end, net of treasury stock .............................. 22,430 26,370 30,392 37,028 41,069
o Revenue for the year ended December 31, 1997 attributable to the 1997 acquisition was $18.0 million. o Revenue for the year ended December 31, 1998 attributable to 1998 acquisitions was $18.4 million. o Revenue for the year ended December 31, 1999 attributable to 1999 acquisitions was $52.3 million. o Revenue for the year ended December 31, 2000 attributable to the 2000 acquisition was $20.0 million. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Before we discuss our results of operations in detail, we set forth relevant information about recent developments and the significant acquisitions we have made, clarify income tax matters and explain conventions we use throughout this section. Current Developments Merger--On February 21, 2001, we announced the execution of a Merger Agreement with CGI Group, Inc., a major IT outsourcing company headquartered in Montreal, Quebec. The merger agreement has been approved by our Board of Directors and is subject to approval by our shareholders, certain regulatory approvals and satisfaction of other closing conditions. Upon completion of the merger, holders of IMRglobal common stock will receive, for each share of IMRglobal common stock, 1.5974 Class A Subordinate Shares of CGI Group, Inc. See note 23, under Item 8 of this Form 10-K, for additional information. Except as explicitly noted, the following discussion of business results, risk factors and forward-looking statements does not take into account business changes that may be made following the completion of the proposed merger. We currently expect the merger to be completed in 2001. Results of Operation -- We achieved significant revenue and profitability growth in each of the first three quarters of 2000. During the fourth quarter of 2000, we experienced a sharp revenue decline of nearly 30% compared to the third quarter of 2000. This sharp revenue decline resulted in a loss for the three months ended December 31, 2000 and offset most of our profits earned in the first three quarters of 2000. The primary reasons for the fourth quarter revenue decrease were: o Significant reductions in our e-business service offerings as clients either delayed e-business initiatives or cancelled e-business projects. o Delays in the start up of several engagements as clients maintained budgetary reserves in anticipation of a slowing economy in 2001. o Significant decrease in our Asian business units (Australia and Japan) due to the reduction in e-business opportunities and weakening economic conditions in Asia. o The recognition of a $2.3 million client discount in the fourth quarter of 2000. Acquisitions Intuitive Group Limited--On January 28, 2000, we acquired 100% of the outstanding stock of Intuitive Group Limited ("Intuitive"), headquartered in London. Intuitive was a privately held provider of eCRM software solutions and services for the financial services markets. Intuitive had additional offices in Boston and Sydney. In exchange for Intuitive's common stock, Intuitive's shareholders received approximately $18.0 million in cash. In addition, $394,000 in cash and 327,997 shares (valued at approximately $4.2 million) of our common stock was paid to Intuitive shareholders during July 2000 based on the achievement of certain financial objectives for the period ended March 31, 2000, as defined in the acquisition agreement. The contingent payment resulted in a corresponding increase in the purchase price and the resulting goodwill. We have accounted for the Intuitive acquisition as a purchase, and as a result, the operating results of Intuitive are reflected in the consolidated financial results from the date of acquisition. 14 Conventions We use the following conventions throughout the discussion of our results of operations. Revenue Recognition. Revenue from services provided on a fixed-price basis is recognized using the percentage of completion method. We bear the risk of cost over-runs and inflation with respect to our fixed-price projects. In order to mitigate these risks, we subdivide projects into smaller phases, and we generally reserve the right to renegotiate fixed-price and fixed-time frame commitments in the event of any change in scope. Under the percentage of completion method, we must estimate the percentage of completion of each project at the end of each financial reporting period. Estimates are subject to adjustment as projects progress to reflect changes in projected completion costs or dates. Revenue from services provided on a time and material basis is recognized in the period that the services are provided. Revenue attributable to contracts for software licenses is recognized after the software has been delivered and all significant uncertainties regarding client acceptance have expired. Revenue attributable to maintenance is deferred and recognized ratably over the contract period. Certain services in our healthcare practice are provided on a contingency arrangement, based on the recovery of expenses for clients or based on providing litigation support to clients. Previously, we had recognized this revenue, net of an estimated percentage for claims not accepted, as the claims were delivered to the client. Effective January 1, 2000, we adopted Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements. Under the new accounting method, we changed the method of accounting for these revenues to recognize revenue upon client acceptance of claims submitted. The cumulative effect of the change on prior years resulted in a charge to income of $2.7 million (net of income taxes of $1.7 million). This cumulative effect is included in income for the year ended December 31, 2000. Cost of Revenue. Cost of revenue consists primarily of salaries and employee benefits for personnel dedicated to client projects, as well as facility costs at the India software development facilities. Selling, General and Administrative Expenses. Salaries and related taxes and benefits for employees not dedicated to specific client projects make up the majority of our selling, general and administrative expenses. Other significant selling, general and administrative expenses are as follows: o occupancy costs; o telecommunications; o marketing and promotion; and o travel expenses. 15 Income Tax Matters India Operations--Our subsidiary, IMRglobal-India, is eligible for certain favorable tax provisions provided under the Indian Income-Tax Act, including the following: o a tax holiday from corporate income taxes, expiring in 2008. o an exemption from income taxes on the profits derived from exporting computer software or transmitting software from India. The exemption will be phased out over the next five years by 20% each year. The effective tax rate for our India operations has been less than 5% for 1998, 1999 and 2000 as a result of these exemptions. Accordingly, the effective tax rate for our India operations may increase to approximately 35% with the expiration of the tax holiday and tax exemption. 16 Results of Operations The following table summarizes for the years indicated, certain items from the Company's statements of operations expressed as a percentage of revenue and percentage change in the dollar amount of such items compared to the prior year.
Percentage Change December 31 Year to Year ----------------------------------------------------------- ----------------- % of % of % of 1998- 1999- 1998 Revenue 1999 Revenue 2000 Revenue 1999 2000 ---- ------- ---- ------- ---- ------- ------ ------ Revenue ........................................... $ 170,318 100% $ 222,028 100% $ 256,172 100% 30% 15% Cost of revenue ................................... 90,075 53% 129,171 58% 154,827 60% 43% 20% --------- --------- --------- Gross profit .................................. 80,243 47% 92,857 42% 101,345 40% 16% 9% Selling, general and administrative ............... 34,754 20% 58,457 26% 77,172 30% 68% 32% Research & development ............................ 6,247 4% 6,635 3% 3,504 1% 6% (47)% Goodwill and intangible amortization .............. 2,074 1% 6,705 3% 10,448 4% 223% 56% Allowance for acquisition receivables ............. -- -- -- -- 1,632 1% -- -- Restructuring charge and impairment ............... -- -- 16,814 8% (165) -- -- (101)% Acquisition costs ................................. 145 -- 2,168 1% -- -- 1395% (100)% Acquired in-process R&D ........................... 8,200 5% 3,410 2% -- -- (58)% (100)% Charge associated with treasury stock purchase .... -- -- 8,778 4% -- -- -- (100)% --------- --------- --------- Income (loss) from operations ................. 28,823 17% (10,110) (5)% 8,754 3% (135)% 187% --------- --------- --------- Other income (expense): Interest expense ............................... (234) -- (108) -- (2,682) (1)% (54)% 2383% Other income ................................... 4,561 3% 5,264 2% 294 -- 15% (94)% --------- --------- --------- Total other income (expense) ................ 4,327 3% 5,156 2% (2,388) (1)% 19% (146)% --------- --------- --------- Income (loss) before provision for income taxes and cumulative effect of a change in accounting method .............................. 33,150 19% (4,954) (2)% 6,366 2% (115)% (229)% Provision for income taxes ........................ 13,270 8% 6,885 3% 3,474 1% (48)% (50)% --------- --------- --------- Income (loss) before cumulative effect of a change in accounting method ............... 19,880 12% (11,839) (5)% 2,892 1% (160)% (124)% Cumulative effect of a change in accounting method, net of income taxes ............................ -- -- -- -- (2,707) (1)% -- -- --------- --------- --------- Net income (loss) ........................... $ 19,880 12% $ (11,839) (5)% $ 185 -- (160)% 102% ========= ========= =========
17 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenue. Revenue for the year ended December 31, 2000 increased 15% over revenue for the year ended December 31, 1999. Approximately $20 million of this increase was attributable to our acquisition of Intuitive. Excluding our Year 2000 service offering, our revenue increased 37% from 1999 to 2000. Revenue by vertical industry is as follows: Year Ended -------------------- 1999 2000 -------- -------- Finance Solution Services (FSS) .......... $ 84,371 $125,466 Healthcare and Governmental .............. 16,086 39,112 Commercial Services (all other industries) 121,571 91,594 -------- -------- Total ........................... $222,028 $256,172 ======== ======== The reduction of $34.6 million of Year 2000 programming service revenue that was recognized in 1999 was a major reason for the 2000 decrease in Commercial Service revenue. The remaining decrease is attributable to our focus on sales, marketing and research investments being targeted primarily to the financial services and healthcare vertical industries in 2000. Cost of Revenue. As a percentage of revenue, cost of revenue increased from 58% for 1999 to 60% for 2000. A portion of this increase was attributable to less work being performed by our India software development facility which has a significantly lower cost basis compared to our North American and European operations. Many e-business projects did not lend themselves to our offshore model due to the rapid evolution of this technology. Wage costs continue to increase at a greater rate than general inflation in each of the countries in which we have operations. 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 our prices to our clients to offset future wage increases. Gross Profit. Gross profit increased to $101.3 million for the year ended December 31, 2000 compared to $92.9 million for the year ended December 31, 1999. Our gross profit margins, as a percentage of revenue, decreased to 40% for the year ended December 31, 2000 compared to 42% for the year ended December 31, 1999. Selling, General and Administrative Expenses ("SG&A"). SG&A increased to $77.2 million in 2000 from $58.5 million in 1999. This increase is attributable to the following: o Our aggressive expansion of our North American sales force; o Inclusion of a full year of operations in 2000 for our 1999 acquisitions; and o Our January 2000 acquisition of Intuitive. As a percentage of revenue, SG&A increased from 26% in 1999 to 30% in 2000. This increase is primarily attributable to the increase in our North American sales force and sales leadership during 2000. 18 Research and Development Expenses ("R&D"). Research and development decreased to 1% of revenue as management discontinued certain research initiatives at the end of 1999. The decrease is consistent with management's plan, and we anticipate R&D expenses to continue to be approximately 1% of revenue. Goodwill and Intangible Amortization. Goodwill and intangible amortization increased to $10.4 million and 4% of revenue for the year ended December 31, 2000 compared to $6.7 million and 3% of revenue for the year ended December 31, 1999. This increase reflects the following: o Full year of amortization for our 1999 purchase acquisitions; o January 2000 acquisition of Intuitive; and o Payment of contingency payments in 2000 for the 1999 acquisitions of ECWerks and Neverdahl-Loft. Allowance for Acquisition Receivable. During 2000, IMRglobal recognized a $1.6 million bad debt expense for claim recovery receivables that were acquired in our June 15, 1999 purchase acquisition of Orion Consulting, Inc. The revenue attributable to this $1.6 million receivable was recognized prior to our acquisition. During 2000, we also recognized a cumulative effect of a change in accounting method in connection with these claim recovery projects. Income (Loss) from Operations. Income from operations for the year ended December 31, 2000 was $8.8 million compared to a loss of $10.1 million for the year ended December 31, 1999. Excluding non-recurring charges, amortization and depreciation, income from operations would be as follows: 1999 2000 -------- -------- Income (loss) from operations ........... $(10,110) $ 8,754 Non-recurring charges: Allowance for acquired receivables ... -- 1,632 Executive compensation ............... 1,921 -- Restructuring charge ................. 12,377 (165) Impairment of long-lived assets ...... 4,437 -- Acquisition costs .................... 2,168 -- Acquired in-process research and development ................... 3,410 -- Charge associated with treasury stock purchase .................... 8,778 Depreciation and amortization ........... 11,994 16,371 -------- -------- Income from operations, as adjusted ..... $ 34,975 $ 26,592 ======== ======== Income from operations, as adjusted, as a percentage of revenue ................ 16% 10% Other Income (Expense). We used the majority of our invested cash and borrowed approximately $30 million for our 1999 and 2000 acquisitions. Accordingly, investment income decreased $2.9 million in 2000 compared to 1999 while interest expense increased $2.6 million in 2000 compared to 1999. In addition, we recognized a $1.5 million foreign currency loss in 2000 compared to a $900,000 gain in 1999. As a result of the above, other income (expense) decreased to a negative $2.4 million in 2000 compared to a positive $5.2 million in 1999. 19 Provision for Income Taxes. Our effective tax rate for 2000 would be 36% compared to 37% for 1999 if the following items are excluded: o Non-recurring charges o Goodwill and intangible amortization o Change in tax expense due to change in Japan's tax laws o Tax benefits from closure of our Northern Ireland facility o Reduction in our U.K. valuation allowance We calculate the effective tax rate by dividing the provision for income taxes by income before provision for income taxes. Our effective tax rate has increased primarily due to the large increase in non-deductible goodwill and intangible asset amortization. For 2000, only 15% of our goodwill and intangible amortization is deductible. In addition, income tax expense increased due to a change in Japanese tax laws that eliminated our income tax benefit on goodwill amortization in Japan. These income tax increases were partially offset by one-time tax benefits for the favorable write-off of our Northern Ireland operations and the reversal of our U.K. subsidiaries net operating loss valuation allowance. The valuation allowance was reversed based on the realization of U.K. net operating losses through tax planning. We have not recorded deferred income taxes applicable to undistributed earnings of IMRglobal's foreign subsidiaries. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income tax has been provided thereon. Cumulative Effect of a Change in Accounting Method. The cumulative effect of a change in accounting method reflects the adoption of Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Effective January 1, 2000, IMRglobal changed its method of accounting for revenue recognition for certain contract related revenue from claims dollar recovery projects, in accordance with this pronouncement. These projects involve identifying overpaid or erroneously paid insurance claims to be recovered from healthcare providers by medical insurance companies. Previously, IMRglobal recognized revenue, less an estimated percentage for claims not accepted, as identified claims were submitted to the client. Under the new accounting method adopted retroactive to January 1, 2000, IMRglobal now recognizes revenue upon the earlier of collection of the findings based fee or notification of acceptance of submitted claims from the client. The cumulative effect of the change on prior years resulted in a charge to income of $2.7 million (net of income taxes of $1.7 million), which is included in results of operations for the year ended December 31, 2000. Earnings per Share. Diluted earnings per share increased from a loss of ($0.34) per share for the year ended December 31, 1999 to $0.004 for the year ended December 31, 2000. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenue. Revenue increased 30% over revenue in the year ended December 31, 1998. Of this increase, approximately $52.3 million was attributable to our acquisition of ECWerks, Fusion, PLP, Orion and Neverdahl. Revenue for the year ended December 31, 1999 from services not related to our Year 2000 service offering, increased to $187.5 million (including purchase acquisitions), representing a 101% increase over revenue of $93.1 million for the year ended December 31, 1998. Year 2000 revenue decreased to $34.6 million or 16% of total revenue for the year ended December 31, 1999 compared to $77.2 million or 45% of total revenue for the year ended December 31, 1998. Year 2000 revenue will be less than 1% of our revenue in the 20 future. Revenue from our e-business services increased to $43.0 million or 19% of revenue for the year ended December 31, 1999. For the year ended December 31, 1998, our e-business revenue was $3.9 million or less than 3.0% of total revenue. Cost of Revenue. Cost of revenue was $129.2 million, or 58% of revenue for the year ended December 31, 1999, compared to $90.1 million, or 53% of revenue for the year ended December 31, 1998. The increase in cost of revenue as a percentage of revenue reflects underutilized resources. As we completed several large Year 2000 engagements, we were unable to allocate the available staff to new engagements due to delays in initiating new contracts. Gross Profit. Gross profit increased to $92.9 million in the year ended December 31, 1999, compared to $80.2 million in the year ended December 31, 1998. Our gross profit margin, as a percentage of revenue, decreased to 42% in the year ended December 31, 1999 compared to 47% in the year ended December 31, 1998. Selling, General and Administrative Expenses ("SG&A"). SG&A expenses increased to $58.5 million in the year ended December 31, 1999, compared to $34.8 million in the year ended December 31, 1998. The increase in SG&A expenses is attributable to the following: o the ECWerks, Fusion, PLP, Orion and Neverdahl acquisitions; o addition of sales offices; o expansion of sales personnel; o expansion of our delivery capacity; and o converting our operations to a vertical industry focus. In addition to the above, we incurred $1.9 million of non-recurring compensation costs related to certain officers in acquired companies. These payments will not be continued after December 31, 1999. As a percentage of revenue SG&A expenses increased to 26% for the year ended December 31, 1999 compared to 20% for the year ended December 31, 1998. The increase reflects the aggressive expansion of our sales force and marketing efforts without an immediate corresponding increase in our revenue. We also increased our administrative infrastructure as we integrated several new acquisitions. Research and Development. R&D costs increased to $6.6 million in the year ended December 31, 1999, compared to $6.2 million in the year ended December 31, 1998. The increase is attributable to the May 1999 acquisition of Lyon and the related component-ware R&D. We incurred 12 months of R&D expenses for this initiative in 1999 compared to 8 months in 1998. During the fiscal fourth quarter, as part of our 1999 restructuring plan, we terminated several R&D projects unrelated to component-ware. Goodwill and Intangible Amortization. Goodwill and intangible amortization increased to approximately $6.7 million for the year ended December 31, 1999, from approximately $2.1 million for the year ended December 31, 1998. This increase reflects full year amortization of goodwill attributed to our 1998 purchases of Lyon and Visual and the 1999 purchase acquisitions of ECWerks, Fusion, PLP and Orion. Restructuring Charge and Impairment. In the fourth quarter of fiscal 1999, we implemented a restructuring plan to redeploy resources to exploit our expanding e-business practice. This plan resulted in a $12.4 million restructuring cost in 1999. Key components of the restructuring plan included the following: o the closure of two U.K. offices, which were primarily committed to legacy IT systems; o the reduction of our legacy IT workforce in the U.S.; 21 o the write-down of specific legacy software and hardware; and o the reduction of our administrative workforce and infrastructure in order to increase our responsiveness to the new e-business opportunities. During 1999, we recorded a $4.4 million charge for impairment of long-lived assets. It is our policy to periodically, but at least annually, review the value of certain long-lived assets such as goodwill and property and equipment for indication of impairment. During 1999, we determined that the value of certain assets were impaired. These included goodwill for our IMRglobal-UK operation, our investment in real property in New Delhi, India and other property and equipment. Purchase Acquisitions Acquired In-Process Research and Development. The purchased assets and assumed liabilities in connection with the acquisition of Fusion were recorded at their estimated fair value at the acquisition date. We received an appraisal of the intangible assets which indicated that approximately $3.4 million of the acquired intangible assets were acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. To determine the value of the in-process research and development, our appraisal considered several factors including the following: o state of development of each project; o time and cost needed to complete each project; o expected income for each project; o expected discounted cash flow for each project; o associated risks which included the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility; and o risks related to the viability of and potential changes to future target markets. During the year ended December 31, 1998, we recorded $8.2 million of in-process research and development related to the Lyon acquisition. Acquisition Cost. During 1999, we completed the acquisition of Atechsys that was accounted for as a pooling-of-interests. Acquisition costs attributable to that merger were $2.2 million. Acquisition costs for 1998 of $145,000 were attributable to our acquisition of RHO Transformational Technologies Pty Limited, an Australian company. Charge Associated With Treasury Stock Purchase. During October 1999, we incurred a $8.8 million charge in connection with the restructuring of the Fusion acquisition. This acquisition was converted from an all stock transaction to a combination of stock and cash. 22 Income (Loss) From Operations. Loss from operations for the year ended December 31, 1999 was $10.1 million compared to income from operations of $28.8 million for the year ended December 31, 1998. The 1999 loss was primarily attributable to the following non-recurring charges: Restructuring charge ............................. $12.4 million Impairment of long-lived assets .................. 4.4 million Acquired in-process research and development ..... 3.4 million Acquisition costs ................................ 2.2 million Charge associated with treasury stock purchase ... 8.8 million Non-recurring compensation for former owners of acquired companies (included in SG&A) ...... 1.9 million ------------- Total ..................................... $33.1 million ============= Excluding non-recurring charges, income from operations was 10% of revenue for the year ended December 31, 1999 compared to 22% for the year ended December 31, 1998. Other Income. We realized net other income of approximately $5.2 million for the year ended December 31, 1999, compared to net other income of approximately $4.3 million in the year ended December 31, 1998. In 1999, we recognized approximately $4.2 million in investment income primarily from the investment of our excess cash, and we incurred approximately $108,000 of interest expense related to credit facilities in the U.S., France and Japan. During 1998, we recognized approximately $4.6 million in investment income primarily from the investment of our excess cash, and we incurred approximately $234,000 of interest expense primarily for credit facilities in India and Australia. Provision for Income Taxes. The provision for income taxes decreased to $6.9 million in the year ended December 31, 1999, from $13.3 million in the year ended December 31, 1998. The effective tax rate based on the provision for income taxes and excluding one-time charges for in-process research and development and acquisition costs was 42% for 1999 and 32% for 1998. We calculate the effective tax rate by dividing the provision for income taxes by income before provision for income taxes. The higher effective tax rate for the year ended December 31, 1999 is partially attributable to only 34% of goodwill and intangible amortization expense being deductible for income tax purposes. Goodwill and intangible asset amortization has increased 223% from fiscal 1998 to fiscal 1999. In addition, we have historically enjoyed a low effective tax rate for our India operations. Accordingly, the effective tax rate has increased as a result of recent acquisitions in France, Canada, Japan and the United States, which have higher income tax rates than India. Net Income (Loss) per Share. Our diluted loss per share for the year ended December 31, 1999 was $0.34 compared to net income per share of $0.57 for the year ended December 31, 1998. When we exclude non-recurring charges (net of income taxes), fiscal 1999 net income per share was $0.41 compared to $0.80 for fiscal 1998. 23 Quarterly Results of Operations The following table contains portions of our unaudited quarterly statements of operations data for each of the eight quarters beginning January 1, 1999 and ending December 31, 2000. This information is derived from, and should be read along with, our financial statements and the related notes appearing elsewhere in this document. We believe that this table is a fair presentation of that information but the results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
Quarter Ended ---------------------------------------------------------------------------------------------- 1999 2000 ---------------------------------------------- --------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31 -------- -------- -------- -------- -------- -------- -------- -------- (In thousands, except per share data) Revenue ............... $ 51,888 $ 62,953 $ 62,159 $ 45,028 $ 58,320 $ 69,365 $ 75,208 $ 53,279 Gross profit .......... 24,149 28,578 27,100 13,030 23,578 29,796 32,520 15,451 Income (loss) from operations ......... 5,412 12,768 6,819 (35,109) 2,682 6,628 10,410 (10,966) Diluted earnings (loss) per share .... $ 0.10 $ 0.21 $ 0.12 $ (0.78) $ (0.03) $ 0.09 $ 0.14 $ (0.19) Quarter Ended ---------------------------------------------------------------------------------------------- 1999 2000 ---------------------------------------------- --------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31 -------- -------- -------- -------- -------- -------- -------- -------- Revenue ............... 100% 100% 100% 100% 100% 100% 100% 100% Gross profit .......... 47 45 44 29 40 43 43 29 Income (loss) from operations ......... 10 20 11 (78) 5 10 14 (21)
24 Our income from operations has historically fluctuated from quarter to quarter and these fluctuations may continue. Due to the high level of acquisition activity in 1999 our income from operations has been reduced by one-time charges for certain quarters. In addition, during the fourth quarter of 1999, we incurred restructuring charges and impairment of long-lived assets. The impact of nonrecurring charges on income (loss) from operations is summarized as follows:
1999 2000 -------------------------------------------- -------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations ... $ 5,412 $ 12,768 $ 6,819 $(35,109) $ 2,682 $ 6,628 $ 10,410 $(10,966) One-time charges: Restructuring charges ........... -- -- -- 12,377 -- -- -- (165) Allowance for acquired receivables ......... -- -- -- -- -- -- -- 1,632 Impairment of long-lived assets . -- -- -- 4,437 -- -- -- -- Acquired in-process research and development .................. 3,410 -- -- -- -- -- -- -- Acquisition costs ............... 1,936 -- -- 232 -- -- -- -- Charge associated with treasury stock purchase ...... -- -- -- 8,778 -- -- -- -- Nonrecurring compensation for former owners of acquired companies (included in SG&A) . -- -- 110 1,811 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Total nonrecurring charges ...... 5,346 -- 110 27,635 -- -- -- 1,467 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations excluding nonrecurring charges $ 10,758 $ 12,768 $ 6,929 $ (7,474) $ 2,682 $ 6,628 $ 10,410 $ (9,499) ======== ======== ======== ======== ======== ======== ======== ========
Liquidity and Capital Resources At December 31, 2000, we had liquid assets including cash, cash equivalents and marketable securities of $19.7 million compared to $37.4 million at December 31, 1999. The decrease in liquid assets was primarily due to the payment of approximately $18.4 million in contingent payments related to our 1998 acquisition of Lyon, our 1999 acquisitions of Neverdahl and ECWerks and our 2000 acquisition of Intuitive, and to costs incurred in the construction of the second phase of our new corporate headquarters. Net cash provided by (used in) operations in 1998, 1999 and 2000 was $39.5 million, $(7.0) million and $13.8 million, respectively. This increase in cash provided by operations in 2000 is primarily the result of depreciation and amortization. Net cash used in investing activities in 1998, 1999 and 2000 was $47.3 million, $26.9 million and $46.4 million, respectively. In 2000, we expended $31.3 million for the acquisition of Intuitive and contingency payments related to our 1998 and 1999 acquisitions. We also expended $9.8 million on capital additions primarily related to the completion of our corporate headquarters. In 1999, we expended $25.1 million on acquisitions and $25.6 million for capital expenditures. In 1998, we acquired certain subsidiaries for $8.9 million in cash and purchased property and equipment for $13.6 million. 25 Net cash provided by (used in) financing activities in 1998, 1999 and 2000 was $(390,000), $(8.7) million and $20.0 million, respectively. In 2000, we entered into a $15 million revolving credit agreement. Proceeds from long-term debt of $21.0 million (net of repayments of $10.3 million) were used primarily for the contingent payments related to our acquisitions and facilities expansion. In 1999, we expended $14.8 million on treasury stock transactions including $13.7 million related to the restructuring of the Fusion acquisition. This utilization of cash was partially offset by net borrowings under our credit agreements of $4.9 million. We maintain $45.0 million of credit facilities expiring in 2003. These facilities bear interest at a spread over LIBOR of 0.6% to 2.0% and are collateralized by virtually all of our assets. The interest rate may be increased by up to an additional 1.15% based on certain financial ratios. IMRglobal's subsidiary in France has obtained loans from French government agencies at 0% interest payable in annual installments through March 2002. These loans are collateralized by furniture, fixtures and equipment located in IMRglobal's office in France. At December 31, 2000, $357,000 was outstanding under these loan agreements. Of this amount, $143,000 is due in 2001 and $214,000 is due in 2002. We continuously review our future cash requirements, together with our available bank lines of credit, anticipated leveraging of our global corporate headquarters, 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 Payment of contingent acquisition obligations; o Continued expansion of existing business; and o Anticipated levels of capital expenditures. Asset Management Our accounts receivable balance was $41.7 million at December 31, 2000, a decrease of $4.3 million from December 31, 1999. The decrease was primarily due the change in accounting method for our Health Care recovery projects, which reduced receivables by $4.4 million. A common financial measure is the calculation of days sales outstanding in accounts receivable ("DSO"). At December 31, 2000, our DSO was 71 days. In addition, accounts receivable in Canada, France, Japan and the 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. Risk Factors That May Affect Future Results You should carefully consider the factors described below which may affect our future results. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. 26 CGI's stock price is volatile and the value of CGI's common stock issued in the merger will depend on its market price at the time of the merger. No adjustment will be made to the exchange ratio as a result of changes in the market price of CGI's common stock. In accordance with the merger agreement, each share of IMRglobal common stock will be exchanged for 1.5974 shares of CGI common stock. Accordingly, the value of IMRglobal shares is related to the value of CGI shares. The market price of CGI common stock, like that of shares of many other technology companies, has been and may continue to be volatile. For example, from January 1, 1999 to December 31, 2000, CGI common stock traded as high as $24.50 per share and as low as $3.50 per share. Accordingly, if the merger is completed, CGI's common stock price could decrease from its present levels. Recently, the stock market in general, and the shares of technology companies in particular, have experienced significant price fluctuations. The market price may continue to fluctuate significantly in response to various factors, including: o quarterly variations in operating results or growth rates; o the announcement of technological innovations; o changes in estimates by security analysts; o market conditions in the industry; o announcements and actions by competitors; o regulatory and judicial actions; and o general economic conditions. IF THE MERGER DOES NOT OCCUR, THE COMPANIES WILL NOT BENEFIT FROM THE EXPENSES THEY HAVE INCURRED IN THE PURSUIT OF THE MERGER. The merger may not be completed. If the merger is not completed, IMRglobal and CGI will have incurred substantial expenses for which neither company will have received any ultimate benefit. IF THE MERGER DOES NOT OCCUR, THE VALUE OF IMRGLOBAL SHARES OF COMMON STOCK MAY DECREASE SUBSTANTIALLY. The merger may not be completed. In the absence of a merger, investors may perceive IMRglobal as being less valuable and the stock price may decrease from present levels. WE FACE SIGNIFICANT COMPETITION IN THE INFORMATION TECHNOLOGY, INTERNET-RELATED AND SOFTWARE MARKETS THAT ARE NEW, INTENSELY COMPETITIVE AND RAPIDLY CHANGING. We will lose clients and our business will suffer if we are unable to successfully compete with information technology (known as "IT") consulting firms, software integration firms, application software vendors and internal IT departments. Many of the companies that provide these services have significantly greater financial, technical and marketing resources, generate greater revenue and have greater name recognition 27 than we do. In addition, there are relatively few barriers to entry into our markets. We have faced, and expect to continue to face, additional competition from new entrants into our markets. We believe that the principal competitive factors in our markets include: o quality of service, price and speed of delivery; o ability to integrate strategy, technology and creative design services; o targeted industry knowledge; o Internet expertise and talent; and o project management capability. We believe that our ability to compete also depends in part on competitive factors outside our control, including: o the ability of our competitors to hire, retain and motivate their personnel; o the development by others of software that is competitive with our products and services; and o our competitors' responsiveness to client needs. OUR REVENUE GROWTH AND OPERATING PROFIT COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO INTEGRATE RECENTLY ACQUIRED BUSINESSES. We may be unable to successfully integrate newly acquired businesses, which may result in lower than expected revenue growth and profitability. Over the past 2 years, we have expanded our operations through the acquisition of additional companies that complement our business. We may not be able to continue to identify and acquire companies that have the potential to increase our overall value at prices that are attractive to us, or at all. We may not be able to achieve the anticipated benefits from our recent acquisitions unless the operations of the acquired businesses are successfully combined with our business in a timely manner. The integration of acquisitions requires substantial attention from management. The diversion of the attention of management and any difficulties encountered in the transition process could have an adverse impact on this integration and, as a result, on our business results. In addition, the process of integrating various businesses could cause the interruption of, or a loss of momentum in, the activities of some or all of these businesses, which would also have an adverse affect on our business results. IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO PROVIDE QUALITY SERVICES AND MAINTAIN PROFITABILITY. If we do not manage our growth effectively, the quality of our services we offer could decline and result in a loss of future revenue from dissatisfied clients. In order to continue to provide quality service to our clients we must attract and retain key personnel. We expect that the number of our employees, particularly skilled technical, marketing and management employees will increase. Our growth places, and will continue to place, significant demands on our employee base especially on members of senior management who have to manage more people, and face a large number of, and increasingly complex, issues as our company grows. For example, we must continue to develop and improve our operational, financial, communications and other internal systems, both in the United States and offshore to meet the demands of a larger company. 28 THE LOSS OF ANY LARGE CLIENTS WOULD REDUCE OUR REVENUE AND PROFITABILITY. If we are unable to service and meet the expectations of any of our large clients, our clients could purchase services that we provide from a competitor and the loss of a major client could, in turn, reduce our revenue and profitability. Because many of our contractual engagements involve projects that are critical to our clients' businesses, our failure to meet a client's expectations could result in a cancellation or nonrenewal of the contract and could damage our reputation and adversely affect our ability to attract new business. Furthermore, we generally are not the exclusive outside source of IT products and services to our clients. Accordingly, a client's dissatisfaction with our performance could lead the client to purchase these services from a competitor, thereby reducing our revenue and profitability. We derive and believe that we will continue to derive a significant portion of our revenue from a limited number of large corporate clients. In the year ended December 31, 2000, our five largest clients accounted for 20% of our total revenue. During that period, John Hancock Mutual Life Insurance company accounted for 8% and Michelin North American, Inc. accounted for 4% of revenue. The volume of work performed for specific clients is likely to vary from year to year. SIGNIFICANT FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR REVENUE AND RESULTS OF OPERATION. We are subject to risks that, as a result of currency fluctuations, the translation of foreign currencies into United States dollars for accounting purposes will adversely affect our results of operations. For these countries where we have significant sales, a stronger dollar will result in reduced revenue and operating profit. Countries where we have significant sales include U.K., France, Japan, Australia and Canada. In addition, we presently incur a significant amount of our costs in local currency in India and may establish additional offshore centers in other countries. In contrast, we presently generate over one-half of our revenue in United States dollars. The remaining revenue consists of British Pounds, French Francs, Japanese Yen, Australian dollars and Canadian dollars. A significant strengthening in the Indian Rupee against the United States Dollar or the other foreign currencies noted above, will result in a reduction in our revenue. Historically, we have not hedged any material portion of our foreign exchange transactions. IF WE CANNOT MONITOR OUR INTERNATIONAL BUSINESS EXPOSURE IN INDIA, FRANCE, JAPAN AND OTHER COUNTRIES WHERE WE HAVE SIGNIFICANT OPERATIONS, OUR RESULTS OF OPERATIONS MAY DECLINE. Our international operations and business activities are subject to the following risks: o difficulty in managing international operations in seven different countries due to time differences; o potential foreign tax consequences, including taxes payable on the repatriation of earnings from our India operations; o compliance with, and unexpected changes in, a growing variety of foreign laws and regulations in any of the seven major countries where we have significant operations; o compliance with employment laws in France and Japan, which are more stringent than employment laws in the U.S.; and o unexpected changes in the local and regional political climate in India and the possible reactions to those changes by the international community, including economic sanctions. 29 IF WE CANNOT RECRUIT AND RETAIN HIGHLY SKILLED SOFTWARE DEVELOPMENT PROFESSIONALS, WE MAY NOT BE ABLE TO KEEP PACE WITH THE CONTINUING CHANGES IN INFORMATION PROCESSING TECHNOLOGY, INDUSTRY STANDARDS AND CLIENT PREFERENCES AND AS A RESULT WE MAY NOT BE ABLE TO MANAGE AND COMPLETE EXISTING PROJECTS OR OBTAIN NEW PROJECTS. If we are not successful in attracting, training, motivating and retaining highly skilled software development professionals, particularly project managers, software engineers and other senior technical personnel, we may not be able to effect our growth strategy, manage and complete our existing projects, and bid for or obtain new projects. In particular, we believe that there is a shortage of, and significant competition for, internet software development professionals with the advanced technological skills necessary to perform the services offered by us. Our ability to maintain and renew existing engagements and obtain new business depends, in large part, on our ability to hire, train and retain technical personnel with the IT skills to keep pace with the continuing changes in information processing technology, evolving industry standards and changing client preferences. COMPLIANCE WITH EXISTING UNITED STATES IMMIGRATION LAWS, OR CHANGES IN THESE TYPES OF LAWS COULD MAKE IT DIFFICULT TO HIRE FOREIGN NATIONALS OR LIMIT OUR ABILITY TO RETAIN H-1B EMPLOYEES IN THE UNITED STATES, AND COULD REQUIRE US TO INCUR UNEXPECTED LABOR COSTS. We may not be able to bring to the United States foreign employees who are critical to our business and who work for us pursuant to the non-immigrant work permitted visa ("H-1B") classification in years in which the limit on the number of new H-1B petitions that the United States Immigration and Naturalization Services may approve in any government fiscal year has been reached. As of December 31, 2000, approximately 375 of our United States employees were working for us pursuant to the H-1B classification. If we are not successful in bringing these employees in the H-1B classification to the United States, our labor costs may increase, as we may have to subcontract our work to outside contractors at higher rates than our current labor costs. THE LOSS OF COMMUNICATIONS WITH OUR OFFSITE SOFTWARE DEVELOPMENT CENTERS COULD PREVENT US FROM LEVERAGING THESE OFFSITE CENTERS AND FROM PROVIDING 24-HOUR SERVICE TO OUR CLIENTS, AND ANY ALTERNATIVE TO THIS TYPE OF COMMUNICATION WOULD NOT PROVIDE US WITH COST ADVANTAGES OR AN EFFECTIVE MEANS OF TRANSMISSION FOR OUR CLIENTS. Any loss of our ability to transmit voice and data through satellite and other forms of communication, at commercially reasonable prices, could have a material adverse effect on our financial condition because a significant element of our business strategy is to continue to leverage our offsite software development centers in Bangalore and Mumbai, India. For example, if we were to depend on telephone lines which are an alternative means to satellite communications, we would incur significant costs and the transmissions would be slower than those by satellite, particularly in India where there is minimal infrastructure for telephone lines by comparison to the U.S. or Europe. WE ARE EXPOSED TO GREATER BUSINESS RISKS RELATING TO THE ECONOMIC ENVIRONMENT OF OUR OPERATIONS IN OTHER COUNTRIES, ESPECIALLY INDIA, THAN WE ARE FOR OUR OPERATIONS IN THE UNITED STATES. Our business may be harmed by future changes in inflation and interest rates in countries in which we establish operations. For example, in the past, India has experienced significant inflation, low growth in gross domestic product and shortages of foreign exchange. Accordingly, the Indian government tightly regulates the flow of capital out of India. While we anticipate that we will have access to this cash to finance our ongoing operations and expansion, there is no guarantee that the Indian government will allow us access to these funds for investment outside of India. At December 31, 2000 we had less than $500,000 of our cash held in India. 30 WE ARE EXPOSED TO GREATER BUSINESS RISKS RELATING TO THE SOCIAL ENVIRONMENT OF OUR OPERATIONS IN OTHER COUNTRIES, ESPECIALLY INDIA, THAN WE ARE FOR OUR OPERATIONS IN THE UNITED STATES. We may be adversely affected by political or social changes in countries in which we establish software development facilities. For example, India has recently experienced civil unrest and terrorism and, from time to time, has been involved in regional conflicts with Pakistan. If these instances of civil unrest, terrorism and Pakistani conflicts continue, our India operations could be disrupted. THE ELIMINATION OF BENEFITS GRANTED BY THE GOVERNMENT OF INDIA COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS. The elimination of benefits granted by the government of India could have a material adverse effect on our financial results. The Indian government has exercised and continues to exercise significant influence over many aspects of the Indian economy, and its actions concerning the economy would adversely affect private sector entities, including us. During the past five years, India's government has provided significant tax incentives and relaxed some regulatory restrictions in order to encourage foreign investment in specified sectors of the economy, including the software development industry. We have directly benefitted from tax holidays, liberalized import and export duties and preferential rules concerning foreign investment and repatriation. Notwithstanding these benefits, however, India's central and state governments remain significantly involved in the Indian economy as regulators. IF BUSINESSES AND CONSUMERS DO NOT ADOPT THE INTERNET AS A MEANS FOR COMMERCE, OUR E-BUSINESS CONSULTING SERVICE BUSINESS WILL FAIL AND OUR GROWTH WILL DECLINE. If commerce on the Internet does not grow, or grows more slowly than expected, our growth would decline and our business would be seriously harmed. The future success of our e-business consulting services depends heavily on the acceptance and use of the Internet as a means for commerce. The widespread acceptance and adoption of the Internet for conducting business is likely only in the event that the Internet provides businesses with greater efficiencies and improvements. Businesses and consumers may reject the Internet as a viable commercial medium for a number of reasons, including: o potentially inadequate network infrastructure; o delays in the development of Internet enabling technologies and performance improvements; o delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; o delays in the development of security and authentication; o insufficient technology necessary to ensure secure transmission of confidential information; o changes in, or insufficient availability of, telecommunications services to support the Internet; and o failure of companies to meet their clients' expectations in delivering goods and services over the Internet. IF WE DO NOT KEEP PACE WITH THE LATEST TECHNOLOGICAL CHANGES, PARTICULARLY RELATING TO E-BUSINESS AND OTHER INTERNET-RELATED SERVICES, AND OUR CLIENTS CHOOSE TO INVEST IN LEADING TECHNOLOGY, WE MAY LOSE OUR CLIENT BASE AND OUR REVENUES MAY DECLINE. Failure to respond successfully to technological developments, evolving industry standards and changing client preferences or failure to respond in a timely or cost-effective way, will seriously harm our business and operating results. In addition, we must hire, train and retain technologically knowledgeable professionals so that they can fulfill the increasingly sophisticated needs of our clients. We expect to derive a 31 substantial portion of our revenue from creating e-business systems that are based upon today's leading technologies and that are capable of adapting to future technologies. We cannot assure you that we will be successful in addressing these developments on a timely basis or that even if we address them, we will be successful in the marketplace. INCREASING GOVERNMENT REGULATION, PARTICULARLY THAT RELATING TO ELECTRONIC COMMERCE, COULD HARM THE DEVELOPMENT OF THE INTERNET AND AS A RESULT THE DEMAND FOR OUR SERVICES TO CREATE ELECTRONIC BUSINESS CHANNELS WOULD DECREASE. Any state, federal or foreign government legislation or regulation applicable to electronic commerce could dampen the growth of the Internet and decrease its acceptance as a communications and commercial medium. If this type of decline occurs, companies may decide in the future not to use our services to create electronic business channels. This decrease in the demand for our services would seriously harm our business and operating results. Although there are currently few of these laws and regulations, both state, federal and foreign governments may adopt a number of these laws and regulations. New laws and regulations may affect the following: o user privacy; o the pricing and taxation of goods and services offered over the Internet; o the content of Websites; o consumer protection; and o the characteristics and quality of products and services offered over the Internet. For example, the Telecommunications Act of 1996 prohibits the transmission of some types of information and content over the Internet. The scope of the Act's prohibition is currently unsettled. In addition, although courts recently held that substantial portions of the Communication Decency Act are unconstitutional, federal or state governments may enact, and courts may uphold, similar legislation in the future. Future legislation could expose companies involved in Internet commerce to liability. IF OUR CONTRACTS LIMITING LIABILITY ARE NOT ENFORCEABLE OR IF WE ARE NOT SUFFICIENTLY COVERED BY INSURANCE, WE MAY BE LIABLE TO OUR CLIENTS FOR DAMAGES TO THEIR COMPUTER SYSTEMS AND THESE CLAIMS BY OUR CLIENTS AGAINST US COULD RESULT IN A SUBSTANTIAL COST TO US AND HARM OUR FINANCIAL CONDITION. Any failure in a client's system could result in a claim for substantial damages against us, regardless of our responsibility for this type of failure. We attempt to limit contractually our liability for damages arising from negligent acts, errors, mistakes, or omissions in rendering our IT products and services, but the limitations of liability set forth in our service contracts may not be enforceable in all instances or may not otherwise protect us from liability for damages. In addition, our general liability insurance coverage, including coverage for errors or omissions, may not continue to be available on reasonable terms or may not be available in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could materially adversely affect our result of operations and financial condition. 32 WE RISK HAVING COST OVERRUNS IN FIXED-PRICE, FIXED-TIME FRAME CONTRACTS WHICH MAY REDUCE OUR PROFITABILITY. Our failure to estimate accurately the resources and time required for a project, future rates of inflation and currency translations, or our failure to complete our contractual obligations within the time frame committed could reduce our profitability. As a core element of our business philosophy, our strategy is to offer many of our IT services on fixed-price, fixed-time frame contracts, rather than contracts in which payment to us is determined solely on a time and materials basis. Although we use our total software quality management software engineering process and our past project experience to reduce the risks associated with estimating, planning and performing fixed-price, fixed-time frame projects, we bear the risk of cost over-runs and inflation in connection with these projects. INCREASING WAGE COSTS IN INDIA COULD RESULT IN FLUCTUATIONS IN OUR REVENUE AND EARNINGS. If wage costs in India, where approximately 20% of our employees reside, continue to increase, our revenue and earnings may fluctuate. Wage costs in India are presently increasing at a faster rate than in the United States. Historically, our wage costs in India have been significantly lower than our wage costs in the United States for comparably skilled employees. However, in light of the current wage increases in India, we cannot assure you that this will remain the same. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS FROM INFRINGEMENT OR MISUSE, WE MAY LOSE REVENUE TO THE UNAUTHORIZED USERS OF THESE PROPERTY RIGHTS. We cannot assure you that the steps we have taken to protect our proprietary rights will be adequate to prevent misappropriation of our proprietary rights or any of our other intellectual property. We also cannot assure you that we will be able to detect unauthorized use and take appropriate steps to enforce our rights. For example, we currently license the use of our FOX products in Asia. However, we presently hold no patents or registered copyrights for these products. The unauthorized use of our FOX technology by potential clients or one of our competitors may result in our inability to receive revenue from these unauthorized users. We anticipate that we will continue to license some types of technologies to our clients. We cannot assure you that we will be able to successfully license these technologies or protect them from infringement or misuse. Moreover, we cannot assure you that the combination of copyright and trade secret laws, nondisclosure and other contractual arrangements, and technical measures on which we rely will not change in ways that may prevent or restrict the transfer of software components, libraries and toolsets among the United States, India, the U.K., France, Canada, Japan and Australia. Under the Berne Convention, an international treaty, the governments of these countries have agreed to extend copyright protection under their domestic laws to foreign works, including works created or produced in the United States. WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS AND ANY INFRINGEMENT CLAIM COULD RESULT IN SUBSTANTIAL COST TO US AND DIVERT MANAGEMENT'S ATTENTION FROM OUR OPERATIONS. Claims that we have infringed on the intellectual property rights of others may be asserted against us in the future. These claims may result in litigation and we may not prevail in this type of litigation, or we may be unable to obtain a license for the use of any infringed intellectual property from a third party on commercially reasonable terms. Additionally, we anticipate that in the future, we will license some types of technologies to 33 our clients. We cannot assure you that we will be able to prevent infringement claims against us in connection with our licensing efforts. We expect that the risk of infringement claims against us will increase if more of our competitors are able to successfully obtain patents for software products and processes. These types of claims, regardless of their outcome, could result in substantial costs to us and divert management's attention from our operations. Any infringement claim or litigation against us could, therefore, have a material adverse effect on our financial results. In addition, we cannot assure you that the combination of contractual arrangements and copyright and trade secret laws on which we rely will not change in ways that may result in our infringing upon the intellectual property rights of others. IF WE LOSE OUR KEY PERSONNEL, PARTICULARLY MR. SATISH SANAN, OUR BUSINESS MAY SUFFER. Our continued success depends in large part upon the continued availability of key management personnel, particularly the services of Mr. Sanan. The loss of the services of Mr. Sanan would have a material adverse effect on us. We do not currently maintain nor do we intend to acquire key man insurance on the life of Mr. Sanan. OUR CHARTER DOCUMENTS, FLORIDA LAWS AND OUR AGREEMENT WITH CGI COULD DISCOURAGE ACQUISITION PROPOSALS AND DELAY OR PREVENT A CHANGE OF CONTROL. The protective provisions in our charter documents, which are designed to provide our Board of Directors with time to consider whether a hostile takeover offer is in our shareholders' best interests, could discourage potential acquisition proposals and could delay or prevent a change of control of our corporation. These provisions could also diminish the opportunities for our shareholders to participate in tender offers, including tender offers at a price above the then current market price for our common stock. These provisions may also inhibit fluctuations in our stock price that could result from takeover attempts. In addition, Florida law also contains provisions that may delay, defer or prevent a non-negotiated merger or other business combination. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval from our Board of Directors. Some of these provisions may, however, discourage a future acquisition not approved by the Board of Directors in which shareholders might receive an attractive value for their shares or that a substantial number or even the majority of our shareholders might believe to be in their best interest. As a result, shareholders who desire to participate in this type of transaction may not have the opportunity to do so. Additionally we have agreed to a "break-up fee" payable under certain circumstances. This break-up fee is equal to $13.0 million. This may discourage prospective acquirors from making a bid to purchase the Company. 34 THERE ARE SUBSTANTIAL SHARES ELIGIBLE FOR FUTURE SALE. SALES OF THESE SHARES MAY RESULT IN LOWER MARKET PRICES FOR OUR COMMON STOCK. Sales of a substantial number of our shares into the public market or the perception that these sales could occur, could materially and adversely affect the price of our shares and could impair our ability to obtain capital through future offerings of equity securities. Satish K. Sanan, our Chairman, beneficially owns approximately 12.6 million shares, which number includes shares underlying options which are exercisable by Mr. Sanan. A significant number of these shares have been pledged by Mr. Sanan. In the past, large numbers of shares owned by Mr. Sanan have been sold, either by him or by the pledgee of the shares. The same may occur in the future and those sales may have a negative effect on the price of our shares. Item 7A. 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. Item 8. Financial Statements and Supplementary Data Financial Statements: Report of Independent Certified Public Accountants Consolidated Balance Sheets - December 31, 1999 and 2000 Consolidated Statements of Operations - Years Ended December 31, 1998, 1999 and 2000 Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 1998, 1999 and 2000 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1999 and 2000 Notes to Consolidated Financial Statements Selected quarterly financial data is included in Item 7 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations". 35 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders IMRglobal Corp. We have audited the accompanying consolidated balance sheets of IMRglobal Corp. as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IMRglobal Corp. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the financial statements, in 2000, the Company changed its method of accounting for revenue recognition on findings based fee contracts. Ernst & Young LLP Tampa, Florida February 9, 2001 36 IMRglobal Corp. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, ----------------------- 1999 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents ............................................ $ 35,021 $ 19,689 Marketable securities ................................................ 2,411 -- Accounts receivable .................................................. 46,031 41,738 Unbilled work in process ............................................. 7,756 13,747 Deferred income taxes ................................................ 10,606 14,095 Prepaid expenses and other current assets ............................ 6,340 4,159 --------- --------- Total current assets ........................................... 108,165 93,428 Property and equipment, net of accumulated depreciation ................. 36,973 41,521 Capitalized software costs, net of accumulated amortization ............. 3,839 5,664 Deferred income taxes ................................................... 2,309 -- Related party receivable (Note 9) ....................................... -- 4,809 Deposits and other assets ............................................... 9,317 9,235 Intangible assets, net of accumulated amortization: Goodwill ............................................................. 138,535 160,698 Acquired technology .................................................. 4,660 3,480 --------- --------- Total assets ................................................... $ 303,798 $ 318,835 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ..................................................... $ 10,349 $ 5,151 Accrued compensation ................................................. 11,341 18,079 Deferred revenue ..................................................... 3,286 6,360 Current debt ......................................................... 10,891 700 Other current liabilities ............................................ 25,207 19,586 --------- --------- Total current liabilities ...................................... 61,074 49,876 Long-term debt .......................................................... 985 30,894 Deferred income taxes ................................................... 1,594 254 Accrued compensation and other long-term liabilities .................... 5,222 6,031 --------- --------- Total liabilities .............................................. 68,875 87,055 --------- --------- Commitments and contingencies (Notes 2, 10, 12 and 19) Shareholders' equity: Preferred stock, $.10 par value, 10,000,000 shares authorized, no shares issued and outstanding .................................. -- -- Common stock, $.10 par value per share, 100,000,000 shares authorized, 37,126,795 and 41,400,850 shares issued ........................... 3,713 4,140 Additional paid-in capital ........................................... 213,748 216,639 Retained earnings .................................................... 21,594 21,779 Notes receivable from share sales .................................... (703) (469) Treasury stock, 99,000 and 331,360 shares at cost .................... (1,118) (2,661) Accumulated other comprehensive loss ................................. (2,311) (7,648) --------- --------- Total shareholders' equity ..................................... 234,923 231,780 --------- --------- Total liabilities and shareholders' equity ..................... $ 303,798 $ 318,835 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 37 IMRglobal Corp. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year Ended December 31, ------------------------------------- 1998 1999 2000 --------- --------- --------- Revenue ....................................... $ 170,318 $ 222,028 $ 256,172 Cost of revenue ............................... 90,075 129,171 154,827 --------- --------- --------- Gross profit ......................... 80,243 92,857 101,345 Selling, general and administrative ........... 34,754 58,457 77,172 Research and development ...................... 6,247 6,635 3,504 Goodwill and intangible amortization .......... 2,074 6,705 10,448 Allowance for acquired receivables ............ -- -- 1,632 Restructuring charge .......................... -- 12,377 (165) Impairment of long-lived assets ............... -- 4,437 -- Acquisition costs ............................. 145 2,168 -- Acquired in-process research and development .. 8,200 3,410 -- Charge associated with treasury stock purchase -- 8,778 -- --------- --------- --------- Income (loss) from operations ........ 28,823 (10,110) 8,754 --------- --------- --------- Other income (expense): Interest expense ........................... (234) (108) (2,682) Other income ............................... 4,561 5,264 294 --------- --------- --------- Total other income (expense) ......... 4,327 5,156 (2,388) --------- --------- --------- Income (loss) before provision for income taxes and cumulative effect of a change in accounting method .......................... 33,150 (4,954) 6,366 Provision for income taxes .................... 13,270 6,885 3,474 --------- --------- --------- Income (loss) before cumulative effect of a change in accounting method ................ 19,880 (11,839) 2,892 Cumulative effect of a change in accounting method, net of income taxes .. -- -- (2,707) --------- --------- --------- Net income (loss) .................... $ 19,880 $ (11,839) $ 185 ========= ========= ========= Earnings (loss) per share: Basic ...................................... $ 0.69 $ (0.34) $ 0.00 ========= ========= ========= Diluted .................................... $ 0.57 $ (0.34) $ 0.00 ========= ========= ========= Diluted before cumulative effect of a change in accounting method ............. $ 0.57 $ (0.34) $ 0.07 ========= ========= ========= Shares outstanding: Basic ...................................... 28,752 34,786 39,837 ========= ========= ========= Diluted .................................... 35,064 34,786 43,261 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 38 IMRglobal Corp. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands)
Compre- Additional hensive Common Stock Paid-In Retained Income Shares Amount Capital Earnings ------ ------ ------ ------- -------- Balance, December 31, 1997 ........... $ -- 26,370 $ 2,637 $ 98,700 $ 13,785 Common stock issued in connection with business combinations ........ -- 1,184 118 18,933 (69) Employee stock purchase plan ......... -- 31 3 602 -- Stock options exercised .............. -- 2,807 281 676 -- Tax benefit of stock options exercised -- -- -- 20,889 -- Dividends paid (Atechsys) ............ -- -- -- -- (163) Notes receivable from stock sale ..... -- -- -- -- -- Net income ........................... $ 19,880 -- -- -- 19,880 Foreign currency translation adjustment ........................ (269) -- -- -- -- -------- ------ --------- -------- -------- Comprehensive income .............. $ 19,611 ======== Balance, December 31, 1998 ........... 30,392 3,039 139,800 33,433 Common stock issued in connection with business combinations ........ -- 6,958 695 84,372 -- Employee stock purchase plan ......... -- 59 6 798 -- Stock options exercised .............. -- 1,175 118 630 -- Tax benefit of stock options exercised -- -- -- 1,661 -- Notes receivable from stock sale ..... -- -- -- -- -- Purchase and retirement of common stock ...................... -- (1,457) (145) (13,513) -- Net loss ............................. $(11,839) -- -- -- (11,839) Foreign currency translation adjustment ........................ (1,219) -- -- -- -- -------- ------ --------- -------- -------- Comprehensive loss ................ $(13,058) ======== Balance, December 31, 1999 ........... 37,127 3,713 213,748 21,594 Common stock issued in connection with contingency payments related to acquisitions ........... -- 1,160 116 9,395 -- Cash contingency payment related to acquisition ............ -- -- -- (8,500) -- Employee stock purchase plan ......... -- 153 15 1,250 -- Stock options exercised .............. -- 2,961 296 267 -- Tax benefit of stock options exercised -- -- -- 479 -- Purchase of treasury shares .......... -- -- -- -- -- Reduction of notes receivable from share sales .................. -- -- -- -- -- Net income ........................... $ 185 -- -- -- 185 Foreign currency translation adjustment ........................ (5,337) -- -- -- -- -------- ------ --------- -------- -------- Comprehensive loss ................ $ (5,152) ======== Balance, December 31, 2000 ........... 41,401 $ 4,140 $ 216,639 $ 21,779 ====== ======== ========= ======== Notes Accumulated Receivable Other from Treasury Comprehensive Shares Sales Stock Loss Total ------------ ----- ---- ----- Balance, December 31, 1997 ........... $ -- $ -- $ (764) $ 114,358 Common stock issued in connection with business combinations ........ -- -- (59) 18,923 Employee stock purchase plan ......... -- -- -- 605 Stock options exercised .............. -- -- -- 957 Tax benefit of stock options exercised -- -- -- 20,889 Dividends paid (Atechsys) ............ -- -- -- (163) Notes receivable from stock sale ..... (366) -- -- (366) Net income ........................... -- -- -- 19,880 Foreign currency translation adjustment ........................ -- (269) (269) ------- ------- --------- --------- Comprehensive income .............. Balance, December 31, 1998 ........... (366) -- (1,092) 174,814 Common stock issued in connection with business combinations ........ -- -- -- 85,067 Employee stock purchase plan ......... -- -- -- 804 Stock options exercised .............. -- -- -- 748 Tax benefit of stock options exercised -- -- -- 1,661 Notes receivable from stock sale ..... (337) -- -- (337) Purchase and retirement of common stock ...................... -- (1,118) -- (14,776) Net loss ............................. -- -- -- (11,839) Foreign currency translation adjustment ........................ -- (1,219) (1,219) ------- ------- --------- --------- Comprehensive loss ................ Balance, December 31, 1999 ........... (703) (1,118) (2,311) 234,923 Common stock issued in connection with contingency payments related to acquisitions ........... -- -- -- 9,511 Cash contingency payment related to acquisition ............ -- -- -- (8,500) Employee stock purchase plan ......... -- 32 -- 1,297 Stock options exercised .............. -- -- -- 563 Tax benefit of stock options exercised -- -- -- 479 Purchase of treasury shares .......... -- (1,575) -- (1,575) Reduction of notes receivable from share sales .................. 234 -- -- 234 Net income ........................... -- -- -- 185 Foreign currency translation adjustment ........................ -- -- (5,337) (5,337) ------- ------- --------- --------- Comprehensive loss ................ Balance, December 31, 2000 ........... $ (469) $(2,661) $(7,648) $ 231,780 ======== ======= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. 39 IMRglobal Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ---------------------------------- 1998 1999 2000 -------- -------- -------- Cash flows from operating activities: Net income (loss) .......................................... $ 19,880 $(11,839) $ 185 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization ........................... 5,452 11,994 16,371 Deferred income taxes ................................... (7,035) 3,838 (1,834) Tax benefit of stock options ............................ 20,889 1,661 479 Restructuring charges and impairment of long-lived assets -- 16,647 (165) Cumulative effect of a change in accounting method ...... -- -- 2,707 Other ................................................... 18 1,780 -- Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable and unbilled work-in-process .. (7,719) (776) (4,256) Other current assets .............................. 1,292 659 1,395 Deposits and other assets ......................... (2,789) (3,906) 175 Accounts payable and other liabilities ............ 5,468 (3,708) (7,857) Accrued compensation .............................. 8,134 (18,416) 4,948 Income taxes ...................................... (2,907) (3,026) (23) Deferred revenue .................................. (1,232) (1,874) 1,632 -------- -------- -------- Total adjustments .................................... 19,571 4,873 13,572 -------- -------- -------- Net cash provided by (used in) operating activities .. 39,451 (6,966) 13,757 -------- -------- -------- Cash flows from investing activities: Acquisition of interest in consolidated subsidiaries, net of cash received .................................... (8,941) (25,109) (31,301) Investment in marketable securities, net ................... (26,192) 29,198 2,411 Additions to capitalized software costs .................... -- (3,839) (2,825) Additions to property and equipment ........................ (13,606) (25,622) (9,778) Related party loans ........................................ 1,478 (1,478) (4,900) -------- -------- -------- Net cash used in investing activities ................ (47,261) (26,850) (46,393) -------- -------- -------- Cash flows from financing activities: Net advances (repayments) from revolving credit line ....... 443 8,840 (10,258) Proceeds from long-term debt ............................... 384 -- 31,298 Payments on long-term debt ................................. (2,616) (3,962) (1,522) Proceeds from issuance of common stock ..................... 1,562 1,215 1,860 Purchase of treasury shares ................................ -- (14,776) (1,575) Other ...................................................... (163) -- 234 -------- -------- -------- Net cash provided by (used in) financing activities .. (390) (8,683) 20,037 -------- -------- -------- Effect of exchange rate changes ............................... 8 (1,287) (2,733) -------- -------- -------- Net decrease in cash and cash equivalents ..................... (8,192) (43,786) (15,332) Cash and cash equivalents at beginning of year ................ 86,999 78,807 35,021 -------- -------- -------- Cash and cash equivalents at end of year ...................... $ 78,807 $ 35,021 $ 19,689 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 40 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Basis of Reporting--IMRglobal Corp. and subsidiaries ("IMRglobal" or the "Company") provide consulting and technology services to a variety of industries and clients located in North America, Europe and Asia. The consolidated financial statements include the accounts of IMRglobal Corp., and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company's consolidated financial statements for 1998 and prior years have been restated to include the financial statements of Atechsys, S.A. This company was combined during 1999 in a transaction accounted for as a pooling of interests (Note 2). Cash and Cash Equivalents--IMRglobal considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. IMRglobal maintains its investments at high quality financial institutions. Marketable Securities--All marketable securities are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. These securities are stated at estimated fair value based upon market quotations. Revenue Recognition--Fixed-price contract revenue and revenue from the sale of software that requires significant modification is recognized using the percentage of completion method of accounting, under which the sales value of performance, including earnings thereon, is recognized on the basis of the percentage that each contract's cost to date bears to the total estimated cost. Any anticipated losses upon contract completion are accrued currently. Revenue attributable to contracts for software licenses that do not require significant modification is recognized after the software has been delivered and all significant uncertainties regarding client acceptance have expired. Service revenue from time-and-materials services is recognized as the services are provided. Revenue attributable to maintenance is deferred and recognized ratably over the contract period. Unbilled work-in-progress represents revenue on contracts to be billed in subsequent periods in accordance with the terms of the contract. Deferred revenue represents amounts billed in excess of revenue earned in accordance with the terms of the contracts. Effective January 1, 2000, the Company changed its method of accounting for revenue recognition for contract related revenue from claims dollar recovery projects, in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. These projects involve identifying overpaid or erroneously paid insurance claims to be recovered from healthcare providers by medical insurance companies. Previously, the Company recognized revenue, less an estimated percentage for claims not accepted, as identified claims were submitted to the client. Under the new accounting method adopted retroactive to January 1, 2000, the Company now recognizes revenue upon the earlier of collection of the findings based fee or notification of acceptance of submitted claims from the client. The cumulative effect of the change on prior years resulted in a charge to income of $2.7 million (net of income taxes of $1.7 million), which is included in results of operations for the year ended December 31, 2000. 41 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (Continued): Per share information related to the change in accounting method for the year ended December 31, 2000 is as follows: Income per share before cumulative effect of a change in accounting method .................... $0.07 Cumulative effect of a change in accounting method per share ............................... $0.07 Earnings per share ................................ $0.00 The pro forma amounts for the year ended December 31, 1999, as reflected below, have been adjusted for the effect of the retroactive application of the new method of revenue recognition, net of related taxes, had the new method been in effect during the year. The change in method of recognizing revenue does not affect earlier years, since the Company did not perform claims dollar recovery projects prior to 1999 (in thousands, except share data): As reported: Net loss ............................... $(11,839) Basic loss per share ................... $ (0.34) Diluted loss per share ................. $ (0.34) Pro Forma (unaudited): Net loss ............................... $(14,546) Basic loss per share ................... $ (0.42) Diluted loss per share ................. $ (0.42) For each of the quarters in the year ended December 31, 2000, the Company recognized amounts in revenue that were included in the cumulative effect adjustment as of January 1, 2000. These amounts, as well as the effect of that revenue on income during those periods, are reflected in the table below (in thousands):
March 31 June 30 September 30 December 31 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue recognized ......... $ 498 $ 773 $ 199 $ 298
Property and Equipment--Property and equipment is stated at cost less accumulated depreciation. Depreciation is primarily computed using the straight-line method and is charged to income over the estimated useful lives of the respective assets. Expenditures for renewals and improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to operation as incurred. 42 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (Continued): Goodwill--Goodwill arising from purchase business combinations is being amortized on a straight-line basis over 10 to 20 years. IMRglobal periodically reviews the value of its goodwill to determine if an impairment has occurred. IMRglobal determines if the potential impairment of recorded goodwill exists by the undiscounted value of expected future operating cash flow in relation to the assets to which this goodwill applies. If impairment of recorded goodwill does exist, IMRglobal adjusts the recorded goodwill to fair market value. 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 (a) technological feasibility is established for the software and (b) all research and development activities for the other components of the product or process have been completed. Amortization is included in cost of revenue and 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. Amortization of capitalized software costs was $47,000, $0 and $700,000 for the years ended December 31, 1998, 1999 and 2000, respectively. At December 31, 1999 and 2000 accumulated amortization for capitalized software costs was $-0- and $700,000, respectively. Income Taxes--IMRglobal uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is provided against the future benefit of deferred tax assets if it is determined that it is more likely than not that the future tax benefits associated with the deferred tax asset will not be realized. Foreign Currency Translation--The financial statements of IMRglobal's foreign subsidiaries use a functional currency which is other than the U.S. dollar and are translated into U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation." Assets and liabilities are translated at exchange rates in effect on the reporting date. Income and expense items are translated at the average exchange rates in effect during the year. The resulting translation adjustments are not included in determining net income but are included in accumulated other comprehensive income. Foreign currency transaction gains and losses are reported in other income (Note 18). Computation of Earnings per Share--Basic earnings (loss) per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share assume the exercise of stock options for which market price exceeds exercise price, less shares assumed purchased by the Company with related proceeds. Options are not included in the computation of diluted loss per share in 1999 due to their anti dilutive effect. 43 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (Continued): Shares used in the computation of earnings (loss) per share are summarized as follows (in thousands):
Year Ended December 31, --------------------------- 1998 1999 2000 ------ ------ ------ Weighted average common stock outstanding ........... 28,752 34,786 39,837 Stock option plans Options assumed exercised ........................ 11,229 -- 6,674 Treasury stock which could be purchased .......... (4,917) -- (3,250) ------ ------ ------ Weighted average common stock equivalents ........... 6,312 -- 3,424 ------ ------ ------ Shares used in diluted earnings per share calculation 35,064 34,786 43,261 ====== ====== ======
Stock Based Compensation--IMRglobal follows the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), for stock issued under its stock option plans (Note 13). 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for IMRglobal for 1998, 1999 and 2000 include the estimated useful life of goodwill for purchase acquisitions, estimation of valuation allowances for income taxes, estimation of accounts receivable allowances and estimation of costs to complete for fixed-price projects. Comprehensive Income--Comprehensive income is comprised entirely of foreign currency translation adjustments. Foreign currency translation adjustments have not been tax effected because IMRglobal considers foreign earnings to be indefinitely reinvested. Reclassifications--Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform with the 2000 presentation. 2. Business Combinations: For all business combinations accounted for as purchases pursuant to Accounting Principles Board Opinion No. 16, "Business Combinations" (APB Opinion No. 16), IMRglobal's financial statements include the results of operations for the acquired businesses from the date of acquisition. For all material business combinations accounted for as poolings of interests pursuant to APB Opinion No. 16, IMRglobal's financial statements have been restated to include the results of operations for all periods presented. 44 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Business Combinations (Continued): Lyon Consultants, S.A.--During May, 1998, IMRglobal 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 $16.7 million in cash and 531,353 shares (valued at $13.0 million) of IMRglobal's unregistered common stock. Of the above purchase price, $700,000 of cash and 32,000 shares of IMRglobal's common stock were remitted one year after the acquisition date. In addition, the acquisition agreement, as amended, provided that if the average price of the IMRglobal shares on NASDAQ was less than $34.05 per share for the seven trading days prior to May 15, 2000, IMRglobal would pay the former Lyon shareholders in cash or shares, at the option of IMRglobal the difference between the average price on NASDAQ and $34.05 multiplied by 499,353 shares. During June 2000, IMRglobal paid $8.5 million in cash as a final settlement of this contingency which resulted in a reduction of additional paid-in capital. The Lyon acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. IMRglobal allocated the purchase price of Lyon based on the fair value of the assets acquired and liabilities assumed. Significant portions of the purchase price were identified as intangible assets in independent appraisals, using proven valuation procedures and techniques. These intangible assets include approximately $8.2 million for acquired in-process research and development ("IPRD") for projects that did not have future alternative uses and $2.7 million for developed technology. At the date of the acquisition, the development of the IPRD projects had not yet reached technological feasibility and the IPRD in progress had no alternative future use. Accordingly, these costs were expensed as of the acquisition date. The acquired developed technology is being amortized over a 5-year period. Concurrent with the acquisition of Lyon, IMRglobal entered into a noncancellable 3 year licensing agreement with a seven year renewal option, with Wyde S.A. ("Wyde"), an unrelated French company. Wyde provides the base technology upon which the Lyon components have been developed. The licensing agreement provides for the transfer of Wyde's computer code and technology to IMRglobal if Wyde should terminate its business. The amount of the licensing fees is dependent on the value of company work sold and the countries where the technology is utilized. Future minimum licensing fees payable to Wyde are $750,000 in 2001. RHO Transformational Technologies Pty Limited--During June, 1998, IMRglobal acquired 100% of the outstanding shares 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, utilizing proprietary tools and provides these services to large global companies with Australian and Asia Pacific operations. In exchange for RHO's common stock, RHO stockholders received 285,000 shares of IMRglobal's common stock. The RHO acquisition was accounted for as a pooling of interests in accordance with the provisions of APB Opinion No. 16. Costs of approximately $145,000 related to the acquisition have been charged to acquisition costs and are included in the statement of operations. 45 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Business Combinations (Continued): The financial statements for 1997 were not restated for the RHO acquisition due to the immateriality of this transaction. The impact was a reduction to the 1998 opening retained earnings and comprehensive income of $69,000 and $59,000, respectively. These amounts are included in common stock issued in connection with business combinations. Visual Systems Development Corporation--On October 2, 1998, IMRglobal acquired 100% of the outstanding shares of Visual Systems Development Corporation ("Visual"). In exchange for Visual's common stock, Visual's shareholders received $5.5 million in cash and 400,000 shares (valued at approximately $7 million) of IMRglobal's common stock. In addition, during January 2000, 275,908 shares (valued at approximately $2.5 million) of IMRglobal's unregistered common stock was issued to the Visual shareholders based on the accomplishment of specified 1999 business and financial objectives. The contingent payment resulted in an increase in the purchase price and the resulting goodwill. The Visual acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. 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 $2.2 million related to the acquisition have been charged to acquisition costs and included in the statement of operations for the year ended December 31, 1999. 46 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Business Combinations (Continued): The Atechsys transaction has been accounted for as a pooling of interests and accordingly, the consolidated financial statements for the periods presented have been restated to include the accounts of Atechsys. Results of operations for the periods prior to the merger with Atechsys are summarized below (in thousands): Year Ended December 31, ------------ 1998 ------------ Revenue: IMRglobal ................................... $ 158,252 Adjustment for pooling of interests ......... 12,066 --------- Combined ............................. $ 170,318 ========= Net income: IMRglobal ................................... $ 18,909 Adjustment for pooling of interests ......... 971 --------- Combined ............................. $ 19,880 ========= Other changes in shareholders' equity: IMRglobal ................................... $ 40,616 Adjustment for pooling of interests ......... (40) --------- Combined ............................. $ 40,576 ========= ECWerks, Inc. ("ECWerks") -- On January 15, 1999, IMRglobal acquired 100% of the outstanding stock of ECWerks, Inc., a privately held electronic commerce business ("e-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 556,336 shares (valued at $4.3 million) of IMRglobal's common stock was issued to the ECWerks' shareholders based on the accomplishment of specified financial goals during 1999. The contingent payment resulted in a corresponding 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. Fusion System Japan Co., Ltd. ("Fusion")--On March 26, 1999, IMRglobal acquired 100% of the outstanding stock of Fusion System Japan Co., Ltd., a privately held business and technology consulting company based in Tokyo, Japan. Fusion focused on the capital markets businesses in Japan and Asia-Pacific. Fusion also had 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 47 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Business Combinations (Continued): (valued at approximately $39.3 million) of IMRglobal common stock. The Fusion acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No.16. 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. This transaction was accounted for as a treasury stock purchase where the repurchased shares of treasury stock were immediately retired. The excess of the $22.4 million paid to the Fusion stockholders over the fair market value of the common stock reacquired by IMRglobal on October 25, 1999 was included in the statement of operations for the year ended December 31, 1999 as an $8.8 million charge associated with treasury stock purchase. The Company allocated the purchase price of Fusion based on the fair value of the assets acquired and liabilities assumed. Significant portions of the purchase price were identified as intangible assets in independent appraisals, using proven valuation procedures and techniques. These intangible assets include approximately $3.4 million for acquired in-process research and development ("IPRD") for projects that did not have future alternative uses and $3.3 million for developed technology. At the date of the acquisition the development of IPRD projects had not yet reached technological feasibility and the IPRD in progress had no alternative future use. Accordingly, these costs were expensed as of the acquisition date. The acquired developed technology is being amortized over a 5-year period. 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 Consulting, Inc., headquartered in Cleveland, Ohio. Orion was a privately held management consulting firm 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 (valued at approximately $41.4 million). The Orion acquisition has been accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. During 2000, IMRglobal took a charge of $1.6 million against income for purchased accounts receivable existing at June 15, 1999 which had not been collected in 2000. 48 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Business Combinations (Continued): Neverdahl-Loft & Associates, Inc. ("Neverdahl")-- On December 7, 1999, IMRglobal acquired 100% of the outstanding stock of Neverdahl, a privately held full-service information technology consulting firm focused on the life insurance industry headquartered in Lincoln, Nebraska. In exchange for Neverdahl's common stock, Neverdahl's shareholders received approximately $10.0 million in cash. In addition, $2.0 million in cash was paid to the Neverdahl shareholders for the attainment of specified financial objectives for the six months ended June 30, 2000. The contingent payment resulted in a corresponding increase in the purchase price and the resulting goodwill. The Neverdahl acquisition is being accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. Intuitive Group Limited ("Intuitive")--On January 28, 2000, IMRglobal acquired 100% of the outstanding stock of Intuitive Group Limited, headquartered in London. Intuitive was a privately held provider of Customer Relationship Management ("eCRM") software solutions and services for the financial services markets. Intuitive had additional offices in Boston and Sydney. In exchange for Intuitive's common stock, Intuitive's shareholders received approximately $18.0 million in cash. In addition, $394,000 in cash and 327,997 shares of IMRglobal common stock was paid to Intuitive shareholders during July 2000 based on the achievement of certain financial objectives for the period ended March 31, 2000, as defined in the original agreement. The contingent payment resulted in a corresponding increase in the purchase price and the resulting goodwill. The Intuitive acquisition is accounted for as a purchase pursuant to the provisions of APB Opinion No. 16. The following unaudited table compares IMRglobal's reported operating results to pro forma information prepared as if the Intuitive acquisition had taken place at the beginning of the fiscal year for each of the periods presented (in thousands except per share amounts): December 31, -------------------- 1999 2000 -------- -------- As reported: Revenue ................................. $222,028 $256,172 Net income (loss) ....................... $(11,839) $ 185 Basic earnings (loss) per share ......... $ (0.34) $ 0.00 Diluted earnings (loss) per share ....... $ (0.34) $ 0.00 Pro forma (unaudited): Revenue ................................. $275,442 $258,056 Pro forma net income (loss) ............. $(12,636) $ 536 Pro forma basic earnings (loss) per share ........................... $ (0.34) $ 0.01 Pro forma diluted earnings (loss) per share ........................... $ (0.34) $ 0.01 49 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Business Combinations (Continued): 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 1999 or 2000 or of future operations of the combined companies under the ownership and management of IMRglobal. 3. Marketable Securities: IMRglobal invests only in high quality, short-term investments which it classifies as available-for-sale. As such there were no significant differences between amortized cost and estimated fair value at December 31, 1999. Additionally, because investments are short-term and are generally allowed to mature, realized gains and losses have been minimal for the years ended December 31, 1998, 1999 and 2000. At December 31, 1999, marketable securities consist of commercial paper with an estimated fair value of $2.4 million. No marketable securities were held at December 31, 2000. 4. Accounts Receivable (In thousands): December 31, -------------------- 1999 2000 -------- -------- Accounts receivable, trade .............. $ 45,300 $ 39,523 Unbilled accounts receivable- ........... Time-and-materials contracts ......... 3,055 4,207 Allowance for doubtful accounts ......... (2,324) (1,992) -------- -------- $ 46,031 $ 41,738 ======== ======== Allowance for doubtful accounts: December 31, ---------------------------- 1998 1999 2000 ------- ------- ------- Beginning balance .................. $ -- $ (288) $(2,324) Purchase acquisitions .............. -- (2,062) -- Charged to costs & expense ......... 288 (321) (2,473) Deductions ............... ......... -- 347 2,805 ------- ------- ------- Ending balance ..................... $ 288 $(2,324) $(1,992) ======= ======= ======= 50 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Costs and Estimated Earnings on Completed and Uncompleted Contracts (In thousands): December 31, ----------------------- 1999 2000 -------- -------- Costs incurred on completed and uncompleted contracts ... $ 53,915 $ 38,891 Estimated earnings ............. 42,897 21,601 -------- -------- 96,812 60,492 Less billings to date .......... (92,342) (53,105) -------- -------- $ 4,470 $ 7,387 ======== ======== The following is included in the accompanying balance sheets: December 31, ----------------------- 1999 2000 -------- -------- Unbilled work in process ....... $ 7,756 $ 13,747 Deferred revenue ............... (3,286) (6,360) -------- -------- $ 4,470 $ 7,387 ======== ======== 6. Property and Equipment (In thousands): December 31, Estimated ---------------------- Useful Life (Years) 1999 2000 ----------- -------- -------- Land ......................... -- $ 2,596 $ 2,626 Buildings and improvements ... 10-40 15,001 27,202 Computer equipment ........... 3-6 10,205 11,967 Computer software ............ 3-10 2,514 2,324 Office furniture and equipment 3-12 7,553 10,000 Vehicles ..................... 3-20 461 852 Construction in progress ..... 8,114 -- -------- -------- 46,444 54,971 Less accumulated depreciation and amortization .......... (9,471) (13,450) -------- -------- $ 36,973 $ 41,521 ======== ======== 51 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Property and Equipment (In thousands) (Continued): Depreciation of property and equipment was approximately $3.3 million, $5.3 million and $5.2 million for the years ended December 31, 1998, 1999 and 2000, respectively. Equipment and furnishings held under capital lease was approximately $45,000 and $2.8 million at December 31, 1999 and 2000, respectively. Amortization of assets held under capital leases is included in depreciation expense. Accumulated amortization on equipment and furnishings held under capital lease was approximately $10,000 and $120,000 at December 31, 2000, respectively. 7. Intangible Assets (In thousands): December 31, Estimated ---------------------- Useful Life (Years) 1999 2000 ------------ --------- --------- Goodwill ......................... 10-20 $ 145,804 $ 177,079 Less accumulated amortization .... (7,269) (16,381) --------- --------- $ 138,535 $ 160,698 ========= ========= Acquired technology .............. 5 $ 6,000 $ 6,000 Less accumulated amortization .... (1,340) (2,520) --------- --------- $ 4,660 $ 3,480 ========= ========= 8. Other Current Liabilities (In thousands): December 31, ---------------------- 1999 2000 --------- --------- Accrued costs on Year 2000 contracts ...... $ 450 $ -- Acquisition costs ......................... -- 1,594 Restructuring charges ..................... 7,082 1,935 Payroll taxes and value added taxes ....... 8,351 2,019 Income taxes .............................. 3,152 925 Deferred income taxes ..................... 483 1,168 Employee savings plans .................... 1,373 4,665 Suppliers ................................. 1,458 4,817 Other ..................................... 2,858 2,463 --------- --------- $ 25,207 $ 19,586 ========= ========= 52 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Other Current Liabilities (In thousands) (Continued): During 1998, IMRglobal accrued $5.1 million related to completed Year 2000 projects. IMRglobal is liable to remediate selected issues which arise in completed projects. In 1998 management had committed to clients that personnel would be available to remediate Year 2000 issues, if any, that arose in late 1999 and early 2000. To accomplish this goal, IMRglobal had committed specific personnel to work on completed Year 2000 projects. IMRglobal had accrued the amount of costs it committed to incur based on the complexity of the Year 2000 projects completed and experience level of personnel required. Changes in accrued costs of Year 2000 contracts are summarized as follows: Year Ended December 31, ----------------------- 1999 2000 --------- ---------- Beginning balance ................................ $ 5,116 $ 450 Charged to costs and expenses - change in estimate (600) -- Payment of accrued costs ......................... (4,066) (450) ------- ------- Ending balance ................................... $ 450 $ -0- ======= ======= 9. Related Parties: IMRglobal has granted a credit facility to IMRglobal's Chief Executive Officer ("CEO") in accordance with his employment agreement. This facility is a revolving credit arrangement for up to $5.0 million with interest at prime plus 1% (currently 10.5%) and is repayable at the earlier of May, 2004 or 180 days after the CEO terminates employment with IMRglobal. At December 31, 2000 the amount drawn on this facility was $4.8 million. Accrued interest related to this facility approximates $135,000 at December 31, 2000, and is included in deposits and other assets in the accompanying balance sheet. During October 1999, an additional $15.0 million in cash was advanced to IMRglobal's CEO in a separate note agreement collateralized by the personal assets of IMRglobal's CEO. Interest was charged at prime plus 1% . This additional advance was repaid in full with interest on November 12, 1999. Interest income earned by IMRglobal on the above loans for the year ended December 31, 1999 and 2000 was approximately $223,000 and $460,000, respectively. During 1998 and 1999, IMRglobal advanced $703,000 to three officers. These officers utilized the proceeds to acquire common stock of IMRglobal. These loans are secured by the IMRglobal common stock investment, and are repayable in 2003 or upon the officer's termination of employment with IMRglobal. 53 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Related Parties (Continued): As part of the restructuring described in Note 16, one of the officers terminated employment with IMR in December 1999. The officer's employment separation agreement provided that if, during the period December 31, 1999 through December 31, 2000, the closing price of the Company's stock exceeded $24.40 per share for 5 consecutive days, the employee would repay the balance owed on the loan. If the share price did not reach $24.40 per share, the employee could surrender his 5,000 shares, in which event the loan together with the accrued interest would be deemed forgiven. The stock price did not exceed $24.40 during the agreed period and IMR purchased the stock as treasury shares effective December 31, 2000. The related write-off of approximately $126,000 is reflected in the restructuring reserve at December 31, 2000. The remaining officer loans bear interest at 9.5%, which is added to the principal portion of the note. At December 31, 2000, the principal balance of $469,000 is included as a contra-equity account and the related accrued interest of $92,000 is included in deposits and other assets in the accompanying balance sheet. A member of IMRglobal's Board of Directors also owns approximately 10% and is board member of a client of IMRglobal. During 2000, approximately $600,000 of revenue was attributable to this client. At December 31, 2000, $275,000 was included in accounts receivable and was more than 120 days overdue. A note receivable was executed with this client during January 2001 calling for monthly payments of $12,000 over the next two years. 10. Credit Facilities: Revolving Credit Loans IMRglobal maintains revolving credit facilities totaling approximately $45 million with various financial institutions. Of these facilities, $30 million (the "Original Line of Credit") will expire in February 2003 and $15 million (the "Additional Line of Credit") will expire in December 2003. The facilities bear interest at a spread over LIBOR whereby the spread may be 0.6% to 2.0% based on certain ratios and the specific financial institution. At December 31, 2000, the weighted average interest rate on the revolving credit facilities was 8.24%. These facilities are collateralized by virtually all of the assets of IMRglobal, including a mortgage on the headquarters premises located in Clearwater, Florida. The facilities also contain certain covenants which require IMRglobal to achieve specific levels of earnings and to maintain specific balance sheet and cash flow ratios. At December 31, 2000, IMRglobal was not in compliance with certain of the loan covenants related to tangible net worth and stockholders' equity. Management has obtained waivers from the banks related to these covenants as of December 31, 2000. Additionally, the tangible net worth covenant contained in the Original Line of Credit was amended such that the Company expects to be in compliance with it for the remainder of 2001. Amounts outstanding under the Additional Line of Credit have been refinanced under the Original Line of Credit, subsequent to December 31, 2000. The amount outstanding on these credit facilities at December 31, 2000, was $28.5 million which is due in 2003 and included in the maturity schedule below. 54 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Credit Facilities (Continued): Capital Leases IMRglobal has leased some of the furniture, fixtures and infrastructural computer equipment located in its headquarters premises through transactions that are classified as capital leases. These leases are for periods ranging from 3 years to 5 years and allow for the purchase of the asset being leased for a nominal value at the end of the lease term. The assets are capitalized as part of the Company's property, plant and equipment. Related depreciation expense on these assets is included in depreciation expense. Specific interest rates vary from transaction to transaction and range from 9.27% to 9.89%. At December 31, 2000, the amount outstanding under capitalized leases was $2.7 million at a weighted average interest rate of 9.50%. The amount due per year under capitalized leases are included in the maturity schedule below. Term Loans IMRglobal's subsidiary in France has obtained loans from French government agencies at 0% interest payable in annual installments through March 2002. These loans are collateralized by furniture, fixtures and equipment located in IMRglobal's offices in France. At December 31, 2000, $357,000 was outstanding under these loan agreements. Of this amount, $143,000 is due in 2001 and $214,000 is due in 2002, which is included in the maturity schedule below. Long-Term Debt (In thousands):
December 31, ------------------- 1999 2000 ------- ------- France: Loans from French government agencies at 0% interest payable in annual installments through March 2002; collateralized by property and equipment .................................... $ 553 $ 357 Japan: Loans from financial institutions at various interest rates payable in monthly installments through September 2002 collateralized by property and equipment (repaid during 2000) ........................ 1,065 -- US: Capital leases at various interest rates payable in monthly installments through 2005, collateralized by furniture and equipment ................................ -- 2,739 Revolving credit loans .................................... 10,258 28,498 ------- ------- 11,876 31,594 Less current portion ......................................... 10,891 700 ------- ------- Long-term debt, net of current portion ....................... $ 985 $30,894 ======= =======
55 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Credit Facilities (Continued): Maturities of long-term debt at December 31, 2000 are as follows (in thousands): 2002 ................................... $ 811 2003 ................................... 29,140 2004 ................................... 544 2005 ................................... 399 ------- $30,894 ======= 11. Income Taxes: The provision (benefit) for income taxes is as follows (in thousands):
Year Ended December 31, ------------------------------------ 1998 1999 2000 -------- -------- -------- Current: Federal ...................................... $ 16,073 $ 1,193 $ -- State (net of federal tax benefit) ........... 1,379 142 -- Foreign ...................................... 2,853 1,712 3,098 -------- -------- -------- Total current provision for income taxes .. 20,305 3,047 3,098 Deferred: Federal ...................................... (5,445) 4,145 118 State (net of federal tax benefit) ........... (467) 502 13 Foreign ...................................... (1,123) (809) 245 -------- -------- -------- Total deferred provision for (benefit from) income taxes ........................... (7,035) 3,838 376 -------- -------- -------- Total provision for income taxes .......... $ 13,270 $ 6,885 $ 3,474 ======== ======== ========
56 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes (Continued): The components of the net deferred tax asset (liability) are as follows (in thousands): December 31, ---------------------- 1999 2000 -------- -------- Deferred tax assets: Allowance for doubtful accounts ........ $ 794 $ 422 Intangibles ............................ 1,964 -- Accrued compensation ................... 5,320 7,134 Property, equipment and accrued expenses associated with restructuring charge 3,248 432 Research and development credits ....... -- 338 Depreciation methods ................... -- 250 Net operating loss ..................... 15,446 27,126 Other .................................. 770 1,086 -------- -------- Total deferred tax assets ........... 27,542 36,788 -------- -------- Deferred tax liabilities: Cash to accrual conversion ............. (3,530) (1,623) Intangibles ............................ (4,333) (3,596) Other .................................. (554) (1,016) -------- -------- Total deferred tax liabilities ... (8,417) (6,235) -------- -------- Net deferred tax asset before valuation allowance .................... 19,125 30,553 Valuation allowance ....................... (8,287) (17,880) -------- -------- Deferred tax asset net of valuation allowance ............. $ 10,838 $ 12,673 ======== ======== The balance sheet classification of the net deferred tax asset is summarized as follows (in thousands): 1999 2000 -------- -------- Deferred tax asset - current ............. $ 10,606 $ 14,095 Deferred tax asset - noncurrent ........... 2,309 -- Deferred tax liability - current .......... (483) (1,168) Deferred tax liability - noncurrent ....... (1,594) (254) -------- -------- $ 10,838 $ 12,673 ======== ======== 57 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes (Continued): As reflected above IMRglobal has recorded a valuation allowance of $8.3 million and $17.9 million, respectively, against the deferred tax asset which is summarized as follows (in thousands): December 31, ------------------- 1999 2000 ------- ------- United States: Net operating loss attributable to stock option exercises (allocated to shareholders' equity) .............. $ 5,000 $16,612 Foreign: Net operating loss for UK subsidiaries 1,905 -- Accrued compensation costs for Japan subsidiary ................... 1,382 1,268 ------- ------- $ 8,287 $17,880 ======= ======= As of December 31, 2000, IMRglobal had approximately $70.1 million of U.S. net operating loss carryforwards for regular income tax purposes which will expire between 2013 and 2020. The net operating loss primarily resulted from the deductible expense recognized for income tax purposes upon stock option exercises. During the years ended December 31, 1998, 1999 and 2000, various non-statutory stock options were exercised resulting in tax benefits (net of any valuation allowance) of approximately $20.9 million, $1.7 million and $.5 million, respectively, which were directly credited to shareholders' equity. Under the Indian Income Tax Act of 1961 (the "Act"), a substantial portion of IMRglobal-India's income is exempt from Indian Income Tax as profits attributable to export operations or a tax holiday expiring in 2008. Under the Act, there are certain alternative minimum tax provisions which impose tax on net profits at a rate of 10.5%. Management has determined that these provisions are not currently applicable due to the tax holiday. Accordingly, the effective tax rate imposed on IMRglobal-India's income is substantially less than the current statutory rate of 35%. Undistributed earnings of IMRglobal's foreign subsidiaries amounted to approximately $39.2 million at December 31, 2000. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income taxes has been provided thereon. On remittance, certain countries impose withholding taxes that, subject to certain limitations, are then available for use as tax credits against a U.S. tax liability, if any. Determination of the amount of unrecognized deferred United States income tax liability or foreign tax withholding is not practicable because of the complexities associated with its hypothetical calculation. 58 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes (Continued): The following table accounts for the differences between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rates of 34% in 1998 and 35% in 1999 and 2000 to the income before income taxes (in thousands).
Year Ended December 31, ------------------------------------ 1998 1999 2000 -------- -------- -------- Statutory tax provision .................... $ 11,604 $ (1,734) $ 2,228 State taxes, net of federal benefit ........ 897 584 13 Foreign and U.S. tax effects attributable to foreign operations ...... (273) (515) (401) Acquisition costs and compensation expense associated with treasury stock repurchase -- 3,920 -- Intangible asset amortization and impairment 788 3,233 5,376 Income exempt from taxation ................ -- -- (2,154) Increase (decrease) in valuation allowance . 135 1,377 (2,019) Other net .................................. 119 20 431 -------- -------- -------- Total provision for income taxes ..... $ 13,270 $ 6,885 $ 3,474 ======== ======== ========
The components of pre-tax earnings are as follows (in thousands):
Year Ended December 31, ------------------------------------ 1998 1999 2000 -------- -------- -------- United States .............................. $ 30,763 $ 2,717 $ (3,752) Foreign .................................... 2,387 (7,671) 10,118 -------- -------- -------- $ 33,150 $ (4,954) $ 6,366 ======== ======== ========
59 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Leases: IMRglobal leases office facilities and certain residential premises for employees under noncancellable operating lease agreements. Rental expense under these leases was approximately $2.3 million, $4.2 million, and $4.3 million in 1998, 1999 and 2000, respectively. Future minimum lease payments as of December 31, 2000 for leases with noncancellable terms in excess of one year are approximately as follows (in thousands): 2001....................................... $ 4,177 2002....................................... 4,198 2003....................................... 2,759 2004....................................... 2,347 2005....................................... 1,859 Thereafter................................. 3,787 ----------- Total minimum payments............ $ 19,127 =========== 13. Shareholders' Equity, Stock Option and Stock Purchase Plans: On March 9, 1998, IMRglobal declared a 3-for-2 stock split in the form of stock dividends payable on April 3, 1998 to shareholders of record on March 20, 1998. All applicable share and per share amounts in the accompanying financial statements have been retroactively adjusted. Employee Stock Option Plans--IMRglobal has the IMRglobal Corp. Stock Incentive Plan, as amended and restated ("the Stock Plan"). Options to acquire up to 16.0 million shares of common stock may be granted to employees under the Stock Plan. These options give the employees the right to purchase common stock at an exercise price at least equal to the fair market value of the stock at the date of the option's grant. All options granted vest over periods up to 5 years and expire 7 to 10 years from their grant date. During August 1999, the Board of Directors authorized the creation of the 1999 Employee Stock Incentive Plan ("the 99 Stock Plan"). The 99 Stock Plan was primarily created to provide non-qualified stock options to employees of newly acquired companies. This plan excludes executive officers and directors of IMRglobal. A total of 3,000,000 shares of common stock have been authorized for issuance under this plan. 60 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Shareholders' Equity, Stock Option and Stock Purchase Plans (Continued): Nonemployee Directors Stock Option Plan--During 1996, IMRglobal established the Nonemployee Directors Stock Option Plan, whereby nonemployee directors may be granted non-qualified options to purchase common stock. A total of 337,500 shares of common stock have been authorized for issuance under this plan. The exercise price of the stock option may not be less than the fair market value of the common stock on the date of the grant. Each nonemployee director is granted an option of 22,500 shares for each two year period they serve on the Board. The options expire 10 years from the grant date. Beginning with the grant date, these options vest 50% at the end of the first year and 100% at the end of the second year. As of December 31, 2000, 180,000 options are available for future grants and 135,000 options are outstanding, of which 90,000 are exercisable. Stock Option Disclosures--IMRglobal applies APB Opinion No. 25 and related interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized in connection with the issuance of these options. Had compensation cost for IMRglobal's stock option plan been determined based on the fair value at the grant dates for the awards under the plan consistent with the method of SFAS Statement No. 123, IMRglobal's net income and earnings per share for the year ended December 31, 1998, 1999 and 2000 would have been reduced to the adjusted amounts indicated below:
1998 1999 2000 ---------- ---------- ---------- Net income (loss) (in thousands): As reported ................... $ 19,880 $ (11,839) $ 185 As adjusted ................... $ 14,152 $ (20,889) $ (5,921) Diluted earnings (loss) per share: As reported ................... $ 0.57 $ (0.34) $ 0.00 As adjusted ................... $ 0.40 $ (0.60) $ (0.14)
The pro forma disclosures are not likely to be representative of the effects on reported net income for future years. The estimated per share fair value of options granted during 1998, 1999 and 2000 was $17.12, $10.56 and $6.62, respectively. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1998, 1999 and 2000, respectively: no dividend yield for each year presented; risk-free interest rates of 5.3%, 5.7% and 5.7%; expected lives of the options prior to exercise of 5.5 years for all years presented. For options granted prior to IMRglobal's initial public offering in November, 1996, volatility of the stock price was omitted from the pricing model as permitted by SFAS No. 123. For 1998, 1999 and 2000 option grants, a volatility measure of 92%, 88% and 95%, respectively, was employed. 61 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Shareholders' Equity, Stock Option and Stock Purchase Plans (Continued): A summary of the status of IMRglobal's stock option plans as of December 31, 1998, 1999 and 2000, and changes during the years ended on those dates is presented below:
1998 1999 2000 --------------------------- ----------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Fixed Options Shares Exchange Price Shares Exchange Price Shares Exchange Price - -------------------- ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 12,544,793 $ 2.96 10,807,388 $ 6.01 11,812,093 $ 7.97 Granted 1,279,450 $ 25.28 2,564,510 $ 14.23 2,189,750 8.52 Exercised (2,807,291) $ 0.34 (1,174,733) $ 0.93 (2,961,490) 0.41 Cancelled (209,564) $ 16.80 (385,072) $ 16.30 (1,638,875) 17.05 ---------- ---------- ---------- Outstanding at end of year 10,807,388 $ 6.01 11,812,093 $ 7.97 9,401,478 $ 8.79 ========== ========== ========== Options exercisable at year-end 7,375,447 7,013,117 4,978,028 ========== ========== ==========
62 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Shareholders' Equity, Stock Option and Stock Purchase Plans (Continued): The following table summarizes certain information about stock options at December 31, 2000:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price --------------- ----------- ---------------- -------------- ----------- -------------- $0.04 - $ 0.04 59,000 5.5 $0.04 59,000 $0.04 $0.22 - $ 0.22 3,049,737 5.5 $0.22 2,977,737 $0.22 $2.25 - $ 3.19 931,600 8.8 $2.93 169,857 $2.25 $4.44 - $ 6.22 418,000 4.9 $5.87 375,750 $5.89 $7.03 - $10.50 1,875,606 8.9 $9.79 292,338 $9.03 $11.00 - $15.50 1,078,735 8.7 $13.15 162,903 $14.66 $17.06 - $24.19 1,636,550 6.9 $19.80 746,893 $19.36 $28.75 - $37.17 352,250 7.3 $33.57 193,550 $34.55 --------- --- ------ --------- ------ $0.04 - $37.17 9,401,478 7.1 $8.79 4,978,028 $5.91 ========= =========
As of December 31, 2000, options to purchase 1,853,939 shares of Common Stock were available for future grants. Employee Stock Purchase Plan--IMRglobal's Employee Stock Purchase Plan (the "Stock Purchase Plan") became effective on October 1, 1996. A total of 450,000 shares of IMRglobal's Common Stock have been reserved for issuance under the Stock Purchase Plan. An employee electing to participate in the Stock Purchase Plan must authorize a stated dollar amount or percentage of the employee's regular pay to be deducted by IMRglobal from the employee's pay for the purpose of purchasing shares of Common Stock on a quarterly basis. The price at which employees may purchase Common Stock is 85% of the closing price of the Common Stock on the Nasdaq National Market on the first day of the quarter or the last day of the quarter, whichever is lower. 63 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Employee Benefit Plans: Defined contribution plans cover employees in the United States and certain other countries, including Australia, France and India. Employees may contribute to these plans and IMRglobal matches these contributions in varying amounts. Defined contribution pension expense for the years ended December 31, 1998, 1999 and 2000 was $1.3 million, $2.5 million and $2.6 million, respectively. During 1998, IMRglobal established a deferred compensation plan which allows certain U.S. employees to defer portions of their annual compensation. These assets are placed in a "rabbi trust" and are presented as assets of IMRglobal as they are available to the general creditors of IMRglobal in the event of IMRglobal's insolvency. The value of the assets at December 31, 1999 and 2000 was $6.4 million and $6.1 million, respectively, and is included in other assets. The related liability at December 31, 1999 and 2000 was $2.8 million and $3.7 million, respectively, and is included in accrued compensation. The assets are invested in variable life insurance products. At December 31, 2000, book value approximated fair value. 15. Concentrations of Credit Risk: Financial instruments which potentially subject IMRglobal to concentration of credit risk consist principally of cash and cash equivalents, marketable securities, trade receivables and variable rate debt. IMRglobal maintains its cash with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. IMRglobal places its cash equivalents and marketable securities in investment grade short-term debt instruments and limits the amount of credit exposure to any one commercial issuer. Concentrations of credit risk with respect to accounts receivable is limited due to the dispersion of IMRglobal's client base across different industries and geographies. IMRglobal's two largest clients accounted for approximately 15%, 11% and 12% of revenue in 1998, 1999 and 2000, respectively, and 6% and 4% of accounts receivable as of December 31, 1999 and 2000, respectively. No other client accounted for 10% of revenue or accounts receivable for the above periods. The carrying amount of IMRglobal's borrowings under its long-term credit arrangements approximates fair value. 64 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Restructuring Charge In the fourth quarter of 1999, IMRglobal implemented a restructuring plan to redeploy resources and better align its organization with its corporate strategy. The restructuring plan included the closure of three European offices within our Information Technology and Software Delivery segments, the write-down of specific mainframe software and hardware and the reduction of its global workforce. During the third quarter of 2000, IMRglobal initiated a plan to consolidate Canadian operations by closing three western Canada offices. The restructuring charges are summarized as follows (in thousands):
Cash Paid Accrued Write- Additional Through Adjustment Charge Restructuring Down Restructuring December 31, for Certain December 31, Charge of Assets Charges 2000 Reserves 2000 ------------- --------- ------------- ------------ ----------- ------------ Closure of European facilities: Severance payments (80 employees) .................. $ 664 $ -- $ -- $ (1,386) $ 722 $ -- Long-term commitments .............. 4,626 -- -- (988) (2,032) 1,606 Goodwill ........................... 348 (348) -- -- -- -- Property and equipment ............. 1,089 (1,089) -- -- -- -- Closure of Canadian facilities: Severance payments (40 employees) .................. -- -- 298 (263) -- 35 Long-term commitments .............. -- -- 271 (101) -- 170 Property and equipment ............. -- (339) 339 -- -- -- Other severance payments .............. -- (70 employees) ................... 1,809 -- -- (1,655) (113) 41 Property and equipment ................ 3,691 (3,691) -- -- -- -- Other restructuring costs ............. 150 (126) 7 (291) 343 83 -------- -------- -------- -------- -------- -------- $ 12,377 $ (5,593) $ 915 $ (4,684) $ (1,080) $ 1,935 ======== ======== ======== ======== ======== ========
Long-term commitments relating to real estate leases are expected to be paid over the life of the underlying lease agreements which expire through 2013. The remaining accrued charge is expected to be paid by December 31, 2001. During 2000, IMRglobal negotiated a more favorable settlement of long-term commitments related to the European facilities than had previously been anticipated and the payment of more generous severance payments for U.K. employees. 65 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Impairment of Long-Lived Assets: IMRglobal IMRglobal measures the potential impairment of recorded goodwill and significant property and equipment on an annual basis. During 1999, IMRglobal determined that certain assets were impaired and recognized impairment charges as follows (in thousands):
Amount of Method Used to Determine Assets Impaired Impairment Fair Market Value --------------- ---------- ------------------------ Goodwill related to U.K. subsidiaries $ 3,783 Discounted cash flow Real estate in New Delhi, India 279 Independent appraisal Other property and equipment 375 Value offered by independent third party ---------------- $ 4,437 ================
After recording the above impairment, the carrying value of our idle facility held for future use was $1.2 million. 18. Other Income (in thousands): Year Ended December 31, ------------------------------- 1998 1999 2000 ------- ------- ------- Investment income .......... $ 4,585 $ 4,234 $ 1,323 Foreign exchange ........... -- 901 (1,455) Other income (expense) ..... (24) 129 426 ------- ------- ------- $ 4,561 $ 5,264 $ 294 ======= ======= ======= 19. Commitments and Contingencies: IMRglobal from time to time is involved in legal actions arising in the ordinary course of business. With respect to these matters, management believes that it has adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on IMRglobal's future financial position. 66 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. Commitments and Contingencies (Continued): IMRglobal's French subsidiary, Lyon, has claimed a special tax exemption related to research and development (R&D) for the 1993 through 1995 fiscal years. The French taxing authorities have challenged this exemption and have made an assessment of $786,000. Lyon contested the decision and the tax authorities asked the French Ministry of Research to rule on the issue. The Ministry of Research ruled that the time spent developing the concept would be considered as R&D charges, but programming time would not. Accordingly, the estimate was revised downward and $100,000 has been accrued as a liability in the accompanying balance sheet as of December 31, 2000 related to this issue. 20. Supplemental Disclosure of Cash Flow Information (In thousands):
Year Ended December 31, -------------------------------- 1998 1999 2000 ------- -------- ------- Cash paid during the year for interest .... $ 223 $ 108 $ 2,682 ======= ======== ======= Cash paid during the year for income taxes $ 1,726 $ 5,381 $ 6,874 ======= ======== ======= Noncash investing and financing activities: Common stock issued in connection with acquisition of subsidiaries ..... $19,186 $ 85,067 $ 9,511 ======= ======== ======= Deferred payments for acquisition of subsidiaries ...................... $ 1,478 $ -- $ -- ======= ======== =======
21. Segment Information (In thousands): IMRglobal operates several business units located in North America, Europe and Asia for which financial information is maintained and reported to the chief operating decision makers of the Company. In determining the reporting segments of the Company, management has aggregated the business units that have similar economic characteristics, products and services and types of client. IMRglobal has three reporting segments. The Information Technology ("IT") segment provides consulting and technology services to large companies in North America, Europe and Asia. The Health Care and Government Solutions segment provides business and consulting services to clients in the health care and governmental industries. Software Delivery Centers consist of two Indian facilities and one Northern Ireland facility that provide software development services to the IT segment organizations. The Northern Ireland facility was closed in 1999 (Note 16). The chief operating decision makers evaluate performance and allocate resources based on revenue and net margin. Net margin is gross profit less selling, general and administrative expenses. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. IMRglobal does not allocate income taxes, other income or expense, research and development, intangible amortization or non-recurring charges to its reporting segments. In addition, IMRglobal accounts for services provided by the Software Development Centers to the IT segment at current market prices. 67 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Segment Information (In thousands) (Continued): Information regarding the reporting segments is as follows:
Health Care and Software Information Government Delivery Technology Solutions Centers Total ----------- ----------- --------- ----- 2000 Revenue from external clients $ 216,662 $ 39,112 $ 398 $256,172 ========= ========= ======== ======== Intersegment revenue ........ $ 6,475 $ -- $ 26,225 $ 32,700 ========= ========= ======== ======== Depreciation expense ........ $ 4,068 $ 275 $ 880 $ 5,223 ========= ========= ======== ======== Segment net margin .......... $ 11,814 $ 9,673 $ 2,686 $ 24,173 ========= ========= ======== ======== Segment assets .............. $ 142,779 $ 16,892 $ 12,804 $172,475 ========= ========= ======== ======== 1999 Revenue from external clients $ 203,963 $ 16,086 $ 1,979 $222,028 ========= ========= ======== ======== Intersegment revenue ........ $ -- $ -- $ 30,115 $ 30,115 ========= ========= ======== ======== Depreciation expense ........ $ 3,605 $ 122 $ 1,563 $ 5,290 ========= ========= ======== ======== Segment net margin .......... $ 26,843 $ 3,902 $ 3,655 $ 34,400 ========= ========= ======== ======== Segment assets .............. $ 124,710 $ 14,967 $ 22,314 $161,991 ========= ========= ======== ======== 1998 Revenue from external clients $ 169,005 $ -- $ 1,313 $170,318 ========= ========= ======== ======== Intersegment revenue ........ $ -- $ -- $ 34,535 $ 34,535 ========= ========= ======== ======== Depreciation expense ........ $ 1,983 $ -- $ 1,348 $ 3,331 ========= ========= ======== ======== Segment net margin .......... $ 38,073 $ -- $ 7,416 $ 45,489 ========= ========= ======== ======== Segment assets .............. $ 161,822 $ -- $ 22,884 $184,706 ========= ========= ======== ========
68 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Segment Information (In thousands) (Continued): Following are reconciliations of reporting segment net margin and assets to the amounts included in the consolidated financial statements:
Year Ended December 31, ------------------------------------ 1998 1999 2000 -------- -------- -------- Total net margin for reportable segments ................. $ 45,489 $ 34,400 $ 24,173 Research and development ................................. (6,247) (6,635) (3,504) Goodwill and intangible amortization ..................... (2,074) (6,705) (10,448) Restructuring charge ..................................... -- (12,377) 165 Impairment of long-lived assets .......................... -- (4,437) -- Acquired in-process research and development ............. (8,200) (3,410) -- Acquisition costs ........................................ (145) (2,168) -- Charge associated with treasury stock purchase ........... -- (8,778) -- Allowance for acquired receivables ....................... -- -- (1,632) Other income (expense) ................................... 4,327 5,156 (2,388) -------- -------- -------- Consolidated income (loss) before provision for income taxes and cumulative effect of an accounting change .................................. $ 33,150 $ (4,954) $ 6,366 ======== ======== ========
December 31, ------------------------ 1999 2000 --------- --------- Total assets for reportable segments ....... $ 161,991 $ 172,475 Elimination of intersegment receivables .... (14,303) (31,913) Deferred income taxes ...................... 12,915 14,095 Intangible assets .......................... 143,195 164,178 --------- --------- Consolidated total assets .................. $ 303,798 $ 318,835 ========= ========= 69 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Segment Information (In thousands) (Continued):
Year Ended December 31, ---------------------------------- 1998 1999 2000 -------- -------- -------- Geographic financial information is summarized as follows: Revenue by geography: North America ......................................... $117,718 $149,435 $177,948 Europe ................................................ 44,585 46,925 52,109 Asia Pacific .......................................... 8,015 25,668 26,115 -------- -------- -------- Total revenue ................................... $170,318 $222,028 $256,172 ======== ======== ========
As of December 31, ------------------- 1999 2000 ------- ------- Long-lived assets allocated to segments: Sales organizations: North America ............................ $28,718 $33,825 Europe ................................... 879 995 Asia Pacific ............................. 771 986 Software Development Centers: India .................................... 6,547 5,715 Northern Ireland ......................... 58 -- ------- ------- Total long-lived assets .................. $36,973 $41,521 ======= ======= 70 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. Supplemental Quarterly Information (Unaudited):
Quarter Ended ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (In thousands except per share data) 1999 Revenue .............................................. $ 51,888 $ 62,953 $ 62,159 $ 45,028 Gross profit ......................................... 24,149 28,578 27,100 13,030 Income (loss) from operations ........................ 5,412 12,768 6,819 (35,109) Net income (loss) .................................... 3,667 8,569 5,192 (29,267) Diluted earnings (loss) per share .................... $ 0.10 $ 0.21 $ 0.12 $ (0.78) 2000 Revenue .............................................. $ 58,320 $ 69,365 $ 75,208 $ 53,279 Gross profit ......................................... 23,578 29,796 32,520 15,451 Income (loss) from operations ........................ 2,682 6,628 10,410 (10,966) Income loss before cumulative effect of a change in accounting method .................. 1,533 3,695 5,970 (8,306) Diluted earnings (loss) per share before cumulative effect of a change in accounting method ....................... $ 0.04 $ 0.09 $ 0.14 $ (0.20) Cumulative effect of a change in accounting method ................................. (2,707) -- -- -- Net income (loss) .................................... (1,174) 3,695 5,970 (8,306) Diluted earnings (loss) per share .................... $ (0.03) $ 0.09 $ 0.14 $ (0.19)
During the quarter ended December 31, 1999, IMRglobal incurred charges of $25.6 million for restructuring charge (Note 16), impairment of assets (Note 17) and charge associated with treasury stock purchase (Note 2). Effective the quarter ended March 31, 2000, IMRglobal incurred a charge of $2.7 million for a change in accounting method (Note 1). Accordingly, net loss and diluted loss per share as reported here differs from amounts reported in our March 31, 2000 10-Q, as filed. During the quarter ended December 31, 2000, IMRglobal incurred a $1.6 million charge related to losses on receivables acquired in the purchase of Orion in 1999 (Note 2) and a $2.3 million charge related to a client discount. 71 IMRglobal Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Events Subsequent to Auditor's Opinion Date (Unaudited): On February 21, 2001 CGI Group Inc. ("CGI") and IMRglobal Corp. announced the signing of a definitive merger agreement providing for the acquisition of IMRglobal. Under the terms of the definitive agreement, IMRglobal shareholders will receive 1.5974 Class A Subordinate Shares of CGI for each share of IMRglobal Common Stock. The IMRglobal Board of Directors has received an opinion from its financial advisor to the effect that the exchange ratio in the merger is fair, from a financial point of view, to IMRglobal and its shareholders. The Board of Directors of IMRglobal has unanimously determined that the merger is fair to and in the best interest of the shareholders of IMRglobal and has resolved to recommend to the shareholders that they approve the merger. The chairman and CEO of IMRglobal, who owns, directly and indirectly, 28% of the outstanding shares of IMRglobal, has agreed to support the transaction at a special shareholders' meeting. 72 Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure There have been no disagreements with any of IMRglobal's accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure. PART III Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- The following table contains information with respect to our Directors and Executive Officers: Name Age Title ---- --- ----- Satish K. Sanan 53 President, Chief Executive Officer and Chairman of the Board of Directors (1) Vincent Addonisio 46 Executive Vice President, Chief Administrative Officer and Director (1) Michael J. Dean 41 Chief Financial Officer Philip Shipperlee 54 Director Charles C. Luthin 58 Director (1)(2)(3) Jeffrey S. Slowgrove 44 Director (2)(3) (1) Member of the Executive Committee (2) Member of the Compensation Committee (3) Member of the Audit Committee Satish K. Sanan Mr. Sanan co-founded IMRglobal in 1988 and has served as Chief Executive Officer and as Chairman of The Board of Directors of IMRglobal since its inception and as President from inception except during 1999. Mr. Sanan also has served as a director of each of IMRglobal's subsidiaries since the date the respective subsidiary was formed or acquired. Mr. Sanan serves as a director of Padua Stables, Inc. (a private company controlled by Mr. Sanan) and is a majority partner of Padua Stables, L.P. Prior to founding IMRglobal, Mr. Sanan was employed by SHL Systemhouse Limited from 1980 to 1988 where he was responsible for planning, directing and controlling the achievement of sales and delivery objectives. Vincent Addonisio Mr. Addonisio has been a director of IMRglobal since September 1996. Mr. Addonisio has been Executive Vice President and Chief Administrative Officer since December 1999. Prior to that he was Senior Vice President of IMRglobal since June 1998. Mr. Addonisio also serves as a director for various subsidiaries of IMRglobal. Mr. Addonisio served as president of Parker Communications Network, Inc., a point of sale marketing network company, from January 1997 until June 1998. From July 1993 until November 1996, Mr. Addonisio was employed by ABR Information Services, Inc., a benefits administration outsourcing company in various positions that included executive vice president, chief financial officer and treasurer, he was also a director of the company. Mr. Addonisio also currently serves as a director and a member of the audit committee of Reptron Electronics, Inc., an unrelated publicly traded company. 73 Michael J. Dean Mr. Dean joined IMRglobal as a controller in 1994. During IMRglobal's November 1996 initial public offering, Mr. Dean served as CFO, a position he resumed in 2000. Prior to joining IMRglobal, Mr. Dean served for ten years as a Manager for Harper, Van Scoik & Company, a Certified Public Accounting firm in Clearwater, Florida. Mr. Dean is a Certified Public Accountant. Philip Shipperlee Mr. Shipperlee has served as a director of IMRglobal since September 1996 and has been an executive of IMRglobal since January 1997, most recently as President - European Operations. Mr. Shipperlee served as managing director of Link Group Holdings, Ltd. ("Link") from June 1980 until IMRglobal's acquisition of Link in January 1997. Mr. Shipperlee served as managing director of Information Management Resources (U.K.) Ltd. from 1994 until January 1997 when operations were merged with Link. Charles C. Luthin Mr. Luthin has been a director of IMRglobal since August 1995. From October 1994 until July 1995, he served as Vice President-Finance of IMRglobal. Since 1995, Mr. Luthin has served as vice president-finance for Eckerd Family Youth Alternatives, Inc., a not-for-profit entity located in Clearwater, Florida. From 1993 until 1994, Mr. Luthin served as president of Dow Sherwood Corporation, a corporation that owns and operates restaurants. From 1989 until 1993, Mr. Luthin served as vice president-finance and chief financial officer of Trans-marine Management Company, providing financial management and analysis for business interests of George M. Steinbrenner. From 1980 until 1989, Mr. Luthin served in various capacities for Walt Disney World Company, including vice president, finance and planning-parks, where he was responsible for financial analysis and long-term planning for that company's theme park operations. Jeffery S. Slowgrove Mr. Slowgrove co-founded IMRglobal in 1988 with Mr. Sanan and has served as a director of IMRglobal since its inception. Mr. Slowgrove also served as IMRglobal's Treasurer from November 1988 through June 1998 and as a director of IMRglobal's India subsidiary from June 1990 through September 1998. Since June 1998, Mr. Slowgrove has been the President of JSS Management Consulting, Inc., a consulting firm in Palm Harbor, Florida, providing funding for start-up organizations and consultation on the business and management issues facing companies during early rapid growth and expansion phases. Mr. Slowgrove also serves as a Director for several of the companies that he provides funding and services, including Procyon Corp. (a public company), Spire, Inc. (a private company) and several other private companies. None of the companies that are served by Mr. Slowgrove are related to or currently conduct business with IMRglobal except for Spire, Inc. with which IMRglobal conducted some business during 2000. 74 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 of the Exchange Act requires IMRglobal's directors and officers and persons who own more than 10% of a registered class of IMRglobal's equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulations to furnish IMRglobal with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms furnished to IMRglobal and written representations from the executive officers and directors, IMRglobal believes that all Section 16(a) filing requirements were met during 2000. Item 11. Executive Compensation ---------------------- The following table sets forth information concerning the compensation of IMRglobal's Chief Executive Officer and its three other executive officers determined as of the end of the last year (hereafter referred to as the "Named Executive Officers") for the years ended December 31, 2000, 1999 and 1998.
Long-Term Compensation Awards -------- Annual Compensation ------------------------------------ Securities Other Underlying All Other Name and Principal Position Year Salary Bonus Compensation(1) Options Compensation(2) --------------------------- --- ------ ----- --------------- ------------ ---------------- Satish K. Sanan................................... 2000 $500,000 $824,248 $ - 150,000 $ 113,638(3) Chairman of the Board and 1999 500,660 582,218 - 100,000 249,936(3) Chief Executive Officer 1998 500,660 805,929 100,000 150,000 108,436(3) Vincent Addonisio................................. 2000 $192,308 $ 75,000 $ 75,000 20,000 $ - Executive Vice President 1999 175,000 75,000 75,000 100,000 - and Chief Administrative 1998 81,923 75,000 76,000 150,000 - Officer Michael J. Dean (4)............................... 2000 $ 92,308 $ 30,000 $ 10,000 40,000 $ - Chief Financial Officer 1999 - - - - - 1998 - - - - - Robert M. Molsick (5)............................. 2000 $113,387 $ - $ - - $ - Chief Financial Officer 1999 115,000 20,000 5,000 - - 1998 90,231 12,500 13,500 45,000 -
_________ (1) Other annual compensation consists of deferred compensation contributed by the Company under IMRglobal's Key Employee Deferred Compensation Plan. (2) In accordance with SEC rules, other compensation in the form of perquisites and other personal benefits is omitted, such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officer for such year. (3) Includes $1,000 annual contribution on behalf of Mr. Sanan to IMRglobal's 401(K) Plan and annual automobile benefits of $6,000 to $27,000. The remaining amounts represent premiums for life insurance policies with benefits primarily payable to beneficiaries designated by Mr. Sanan. (4) Mr. Dean was promoted to Chief Financial Officer in November 2000. (5) Mr. Molsick commenced employment with IMRglobal in April 1998 as Chief Financial Officer. In November 2000 Mr. Molsick resigned from IMRglobal. 75 Mr. Sanan had entered into a five year employment agreement effective October 31, 1996 with IMRglobal. The employment agreement was for a term expiring on the fifth anniversary of the effective date, and provided for automatic renewal for additional one year periods until either IMRglobal or Mr. Sanan served a 180 day notice of non-renewal. The employment agreement could have been terminated by IMRglobal only with cause. Cause was defined as including: (a) theft or embezzlement with regard to material property of IMRglobal; or (b) continued neglect in fulfilling his duties as Chief Executive Officer as a result of alcoholism, drug addiction or excessive unauthorized absenteeism, after written notification from the Board of Directors of such neglect and failure to cure within a reasonable time. Pursuant to the employment agreement, Mr. Sanan was to be paid a base salary as determined by the Compensation Committee plus automobile expenses. The Compensation Committee set Mr. Sanan's base annual compensation at $500,000 effective January 1, 1999. The employment agreement also provided for an annual incentive bonus equal to at least 2% of "Cash Earnings", which was defined as gross profit less selling, general and administrative expenses, less research and development expenses plus depreciation. This annual incentive is capped at $1 million. Mr. Sanan is eligible to receive stock options exercisable at fair market value on the grant date, in such amounts and subject to such vesting provisions as determined by the Compensation Committee. IMRglobal also has agreed to maintain and to pay the premiums for approximately $10.2 million of life insurance policies with benefits primarily payable to beneficiaries designated by Mr. Sanan. The amount of these payments in 2000 was $272,000. During 2000, various life insurance plans were canceled and/or responsibility for payment assumed by Mr. Sanan. The amount of coverage maintained by IMRglobal was reduced to approximately $10.2 million. IMRglobal has been granted a security interest in the death benefit and cash surrender value which approximates the amount of the cumulative premium payments made by IMRglobal. IMRglobal also agreed to provide Mr. Sanan an unsecured line of credit of up to $5,000,000 at an interest rate of 1% above prime. The employment agreement provided that Mr. Sanan would receive all standard benefits made available to other executive employees of IMRglobal. The employment agreement further provided that in the event that IMRglobal terminated Mr. Sanan's employment without cause, Mr. Sanan would receive a severance payment equal to three times the greater of (a) Mr. Sanan's then current base salary plus the amount of his prior year bonus and the annualized value of any current benefits, or (b) his compensation as reported for tax purposes for the immediately preceding calendar year. The employment agreement contains a noncompetition covenant for a period of three years following termination of employment by Mr. Sanan for any reason other than by IMRglobal for cause. In connection with the proposed merger with CGI Group Inc. ("CGI"), Mr. Sanan entered into a new employment agreement and certain related agreements with IMRglobal and CGI. These agreements provide, among other things that: . while the merger agreement is in effect and following completion of the merger, Mr. Sanan will not be entitled to the severance benefits provided under his existing employment agreement which might otherwise be payable upon a termination of his employment without cause by IMRglobal or following specified "constructive" terminations of his employment. These severance benefits waived by Mr. Sanan include a payment equal to three times his gross employment income attributable to IMRglobal for the previous calendar year (which could have totaled as much as $(US)96.0 million based on Mr. Sanan's compensation for the year 2000 as reported for tax purposes), the vesting of all of his employee stock options, and the continuation of certain insurance benefits; . upon completion of the merger, revised terms to his continuing employment, including a new bonus arrangement so that Mr. Sanan will no longer be entitled to the financial performance bonus in his existing employment agreement equal to 2% of IMRglobal's consolidated pre-tax cash earnings, up to a maximum of $(US)1.0 million and will instead be entitled to an annual financial performance bonus of up to $(US)500,000; 76 . immediately prior to completion of the merger, the $(US)5.0 million loan (and any accrued interest) to Mr. Sanan pursuant to a line of credit provided to him by IMRglobal under his existing employment agreement will be eliminated either by the forgiveness of the loan or the payment of a bonus to Mr. Sanan in an amount equal to the loan which will be used to repay the loan; . an overpayment to Mr. Sanan in respect to his year 2000 bonus in the amount of $(US)286,832 will be credited against his year 2001 bonus, if earned, and Mr. Sanan will be required to repay this overpayment to the extent that it exceeds the aggregate amount of his 2001 bonus; and . at the time the merger is completed, his existing employment agreement will be replaced by a new employment agreement. The new employment agreement with Mr. Sanan, which will become effective at the time the merger is completed provides for: . Mr. Sanan's employment by IMRglobal; . a two year term, with automatic one year renewals unless notice of termination is given at least 120 days prior to the expiration of the term by either Mr. Sanan or IMRglobal; . responsibilities for Mr. Sanan as are reasonably agreed upon by Mr. Sanan and CGI; . an annual base salary of $(US)500,000; . an annual financial performance bonus of up to 100% of base salary keyed to performance criteria related to CGI and IMRglobal; . the granting to Mr. Sanan of employee stock options by CGI in a manner consistent with grants to executive vice presidents of CGI located in the United States; . the immediate vesting of all stock options granted to Mr. Sanan prior to the completion of the merger in the event he is terminated without "cause" (as defined in his new employment agreement) upon not less than 120 days prior written notice; . the provision to Mr. Sanan of insurance benefits, car allowances, and the payment by IMRglobal each year of up to $(US)106,020 in premiums on life insurance policies for the benefit of Mr. Sanan; and . if he is an employee of CGI at such time, the appointment of Mr. Sanan to the board of directors of CGI as a board vacancy occurs or, in any event, the nomination for election of Mr. Sanan as a CGI director at CGI's next annual meeting of shareholders, if he continues as an employee of CGI at that time, subject to any necessary shareholder approval. At the time the merger agreement was signed, CGI and IMRglobal also entered into amendments to the existing employment agreements between IMRglobal and each of Vincent Addonisio, IMRglobal's Executive Vice President and Chief Administrative Officer, and Philip Shipperlee, IMRglobal's President of European Operations. These amendments provide: . that the amounts these individuals have borrowed from IMRglobal pursuant to loans provided to them under their existing employment agreements and used by each of them to purchase shares of 77 IMRglobal common stock that secure such loans (each loan is approximately $(US)234,500 plus accrued interest of approximately $(US)50,000 on each loan) will be forgiven and IMRglobal's security interest in its common stock released at the time the merger is completed (each loan was used by each of Mr. Addonisio and Mr. Shipperlee to purchase IMRglobal common stock with a current market value of approximately $(US)75,000 for each); . the employee will be obligated to repay the loan amounts plus accrued interest if he voluntarily terminates his employment (other than by reason of death or disability) within six months after the consummation of the merger; and . if the employee's employment with IMRglobal is terminated for any reason after the consummation of the merger, any unvested stock options granted to him by IMRglobal prior to the merger will become immediately and fully exercisable and all of his outstanding stock options will remain exercisable for 36 months after the termination of employment. These amendments to the employment agreement of Messrs. Addonisio and Shipperlee will terminate if the merger agreement is terminated. Option Grants in Last Fiscal Year Options granted to Named Executive Officers in fiscal 2000 had exercise prices equal to the fair market value of the common stock on the date of the grant as determined by the Board of Directors. These options are non- qualified stock options and vest over three years from the date of the grant. The following table sets forth information concerning options granted to the Named Executive Officers during the year ended December 31, 2000:
Individual Grants Potential Realizable --------------------------------------------------- Number of Percent of Value at Assumed Securities Total Annual Rate of Stock Underlying Granted to Exercise or Price Appreciation for Options Employees In Base Price Expiration Option Term(1) -------------------------- Executive Officer Granted Fiscal Year Per Share Date 5% 10% - ----------------- ------- ----------- --------- ---------- ------------- ----------- Satish K. Sanan....... 150,000 0.7% $13.19 03/16/10 $1,244,268 $3,153,219 Vincent Addonisio..... 20,000 0.1% $ 3.19 12/21/10 $ 40,123 $ 101,681 Michael J. Dean....... 30,000 0.1% $ 7.84 11/14/10 $ 147,916 $ 374,848 Michael J. Dean....... 10,000 0.0% $ 3.19 12/21/10 $ 20,062 $ 50,840
____________ (1) The potential realizable value is calculated based on the ten-year term of the option at the time of its grant. It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option. The actual realizable value of the options based on the actual market price may substantially exceed the potential realizable value shown in the table. 78 Option Exercises in Last Fiscal Year and Year-end Option Values The following table sets forth the aggregate dollar value of all options exercised and the total number of unexercised options held, on December 31, 2000, by the Named Executive Officers:
Number of Securities Underlying Unexercised Value of Unexercised Shares Options at In-the-Money Options at Acquired Value December 31, 2000 December 31, 2000(1) ------------------------------------ -------------------------------- Executive Officer on Exercise Realized(2) Exercisable Unexercisable Exercisable Unexercisable - ------------------- ----------- --------------- -------------- ------------------- -------------- --------------- Satish K. Sanan......... 2,800,000 $30,440,340 2,845,237 - $14,660,875 $ - Vincent Addonisio....... - - - 20,000 - 43,740 Michael J. Dean......... 31,000 341,310 50,000 10,000 266,528 21,870
- -------------- (1) The closing price for IMRglobal's common stock as reported by The Nasdaq Stock Market(TM) on December 29, 2000 was $5.375. Value is calculated on the basis of the difference between the option exercise price and $5.375, multiplied by the number of shares of common stock underlying the option in accordance with SEC rules. (2) Value realized is calculated based on the difference between the option exercise price and the closing market price of our common stock on the date of exercise multiplied by the number of shares to which the exercise relates. As the founder of the Company, Mr. Sanan's beneficial ownership of IMRglobal exceeded 90% prior to the Company's Initial Public Offering ("IPO") in November 1996. The 2.8 million shares acquired on exercise by Mr. Sanan represented a portion of his pre-IPO ownership structure. Compensation Committee Interlocks and Insider Participation Until June 1998, IMRglobal's Compensation Committee was comprised of Messrs. Luthin and Addonisio. Mr. Addonisio was named Senior Vice President of IMRglobal in June 1998. The Compensation Committee is currently comprised of Messrs. Luthin and Slowgrove. Mr. Slowgrove served as an officer of IMRglobal from November 1988 to June 1998. Mr. Luthin served as Vice President-Finance of IMRglobal from October 1994 until July 1995. Neither Messrs. Slowgrove nor Luthin was an officer or employee of IMRglobal or any of its subsidiaries at any time during 2000. Directors' Compensation Compensation of IMRglobal's directors who are not also employees of IMRglobal currently consists of an annual director's fee of $5,000 plus $1,000 for each meeting of the Board of Directors attended and $500 for each committee meeting attended which is held independently of a board meeting. Each director is entitled to receive reimbursement of out-of-pocket expenses incurred to attend meetings of the Board of Directors. Nonemployee directors also are eligible to receive options under IMRglobal's 1996 Directors Stock Option Plan. Directors who are officers or employees of IMRglobal do not receive any additional compensation for their services as directors. The terms of the options granted under the Directors Stock Option Plan, including the exercise price, dates and number of shares subject to the options, are specified in the Directors Stock Option Plan. The Directors Stock Option Plan provides for the automatic grant of non-qualified stock options to nonemployee directors. Each nonemployee director receives an option to purchase 22,500 shares of common stock on the date of, and at the time immediately following, every other annual meeting of IMRglobal's shareholders (the "Bi- Annual Grant"). Each nonemployee director who is first appointed or elected to the Board at any time other than at an Annual Meeting 79 of IMRglobal's Shareholders at which a Bi-Annual Grant is made, will be granted an option to purchase a number of shares of common stock equal to the product of (a) 22,500 multiplied by (b) a fraction, the numerator of which is the number of days during the period beginning on such date and ending on the date of the next Bi-Annual Grant, and the denominator of which is 730 (the "Interim Grant"). Bi-Annual Grants and Interim Grants vest 50% on the date the nonemployee director completes 12 months of continuous service on the Board of Directors, and 100% on the date the nonemployee director completes 24 months of continuous service on the Board of Directors. No option is transferable by the nonemployee director other than by will or laws of descent and distribution, or pursuant to a qualified domestic relations order. The exercise price of all options is equal to the fair market value of the shares on the date of grant as defined under the Directors Stock Option Plan, and the term of each option is ten years. The Directors Stock Option Plan will continue in effect for a period of ten years unless sooner terminated by the Board of Directors. The CGI merger will result in the acceleration of the vesting of options for the directors Charles C. Luthin and Jeffery S. Slowgrove (each individual has options to purchase 22,500 IMRglobal shares otherwise vesting 50% on May 26, 2001 and 100% on May 26, 2002 at an exercise price of $(US)15.50 per share). When these options are converted into options to purchase CGI Class A Subordinate Shares at the effective time of the merger, they will all become fully vested. Upon completion of the merger, all outstanding options under the directors stock option plan of IMRglobal will remain exercisable until December 31, 2001. Change In Control Arrangements On February 19, 2001, we announced the execution of a Merger Agreement with CGI Group Inc. At the effective time of the merger, each then-outstanding stock option of IMRglobal Corp. will be assumed by CGI Group Inc. and rolled over into options to purchase CGI Group Inc. Class A Subordinate shares. The number of shares underlying the new CGI Group Inc. options will equal the number of shares of IMRglobal Corp. common stock to which the corresponding IMRglobal Corp. option was subject prior to the effective date, multiplied by the exchange ratio specified in the merger agreement, rounded down to the nearest whole CGI Group Inc. common share. The per share exercise price of each new CGI Group Inc. option will equal the exercise price of the corresponding IMRglobal Corp. options, divided by the exchange ratio. 80 REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION(1) The Board of Directors has delegated to the Compensation Committee the authority to establish and administer IMRglobal's compensation programs. The Compensation Committee is comprised of two nonemployee directors: Charles C. Luthin and Jeffery S. Slowgrove. The committee is responsible for: . determining the most effective total executive compensation strategy based upon the business needs of IMRglobal and consistent with shareholders' interests; . administering IMRglobal's executive compensation plans, programs and policies; . monitoring corporate performance and its relationship to compensation of executive officers; and . making appropriate recommendations concerning matters of executive compensation. Compensation Philosophy The policies of the Compensation Committee with respect to executive officers, including the Chief Executive Officer, are to provide compensation sufficient to attract, motivate and retain executives of outstanding ability and potential. To emphasize sustained performance of IMRglobal's executive officers, the committee has adopted policies to align executive compensation with the creation of shareholder value as measured in the equity markets. These policies are implemented using a mix of the following key elements: . IMRglobal pays base salaries that are generally competitive with other leading information technology ("IT") services companies with which IMRglobal competes for talent. To ensure that its salaries are sufficient to attract and retain highly qualified executives and other key employees, IMRglobal regularly compares its salaries with those of its competitors and sets salary parameters based on this review; . IMRglobal pays cash bonuses and discretionary contributions to the Key Employee Deferred Compensation Plan based on the achievement of specific operating goals and high levels of performance; and . IMRglobal provides significant equity-based incentives pursuant to IMRglobal's Amended and Restated Stock Incentive Plan and Employee Stock Purchase Plan, as amended, to ensure that IMRglobal's executive officers and key employees are motivated to achieve IMRglobal's long- term goals. Base Salary The Compensation Committee recognizes the importance of maintaining compensation practices and levels of compensation competitive with other leading companies and other software development firms with which IMRglobal competes for personnel. Base salary represents the fixed component of the executive compensation program. Base salary levels are established based on an annual review of published executive salary levels at similar IT services companies and on the basis of individual performance. The industry group index shown on IMRglobal's Stock Performance Graph includes certain of the IT services companies included in the compensation ____________ (1) This Section is not "soliciting material," is not deemed "filed" with the SEC and is not to be incorporated by reference in any filing of IMRglobal under the Securities Act of 1933, as amended or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. 81 survey. Periodic increases in base salary are the result of individual contributions evaluated against established annual long-term performance objectives and an annual salary survey of comparable companies in IMRglobal's industry. Base salaries for IMRglobal executives other than for the Chief Executive Officer were increased during 2000 and they remain within the range of the comparable companies surveyed. The base salary for the Chief Executive Officer remained unchanged. Cash Bonuses Cash bonus awards are another component of IMRglobal's compensation program and are designed to reward IMRglobal's executives and other senior managers for assisting IMRglobal in achieving its operational goals through exemplary individual performance. Bonuses, if any, are both linked to the achievement of specified individual and corporate goals as well as a review of personal performance which is determined at the discretion of the committee. Corporate performance goals upon which 2000 bonuses were based included: . continued high client satisfaction levels; . completion of existing client engagements within the scope of budgeted time and cost; and . the meeting of quarterly and annual revenue, profitability and other financial goals. In 2001, the committee reviewed IMRglobal's 2000 corporate performance goals and determined that the goals had been achieved or exceeded except for the meeting of revenue and profitability goals for the last quarter of 2000. Based on such achievement, the committee awarded bonuses to most of its executive officers, which were within targeted bonus levels. Equity Compensation IMRglobal's Stock Option Plan and Stock Purchase Plan have been established to provide all employees, including executive officers, of IMRglobal with an opportunity to share, along with the shareholders in IMRglobal's long-term performance. The committee strongly believes that a primary goal of the compensation program should be to provide key employees who have significant responsibility for the management, growth and future success of IMRglobal with an opportunity to increase their ownership in IMRglobal and potentially gain financially from increases in the price of IMRglobal's common stock. The interests of shareholders, executives and employees should thereby be closely aligned. Executives are eligible to receive stock options generally not more often than once a year, giving them the right to purchase shares of common stock in the future at a price equal to fair market value at the date of grant. All grants must be exercised according to the provisions of IMRglobal's Stock Option Plan. All options granted to executive officers are exercisable at the fair market value of the common stock at the grant date, generally vest over a period of 3 to 5 years and expire no later than ten years from the date of grant. Chief Executive Officer Life Insurance Plans As part of the 1996 employment agreement with Mr. Sanan (IMRglobal's Chief Executive Officer), IMRglobal agreed to pay the premiums for approximately $10.2 million of life insurance policies with benefits payable to beneficiaries designated by Mr. Sanan. IMRglobal owns the cash value of these policies. During 1999, IMRglobal entered into an additional split-dollar life insurance agreement with Mr. Sanan to acquire an additional $50.0 million of life insurance coverage. Under this agreement, IMRglobal pays the insurance premiums on Mr. Sanan's behalf. IMRglobal has been granted a security interest in the cash value and death benefit of each policy equal to the amount of the cumulative premium payments made by IMRglobal. 82 During 2000, the Compensation Committee reduced the life insurance coverage that IMRglobal will pay on Mr. Sanan to $10.2 million. The intent of these agreements is that, in the event of Mr. Sanan's death, the proceeds provide surviving family members sufficient liquidity to pay estate taxes and to reduce the possibility of a large block of IMRglobal's common stock being put on the open market to the potential detriment of IMRglobal's market price. Chief Executive Officer Compensation The Compensation Committee uses the same procedures described above for the other executive officers in setting the annual salary, bonus and stock option awards for Satish K. Sanan, IMRglobal's Chief Executive Officer. Mr. Sanan's 2000 base salary was set at $500,000. Under Mr. Sanan's Employment Agreement, he is entitled to an annual incentive bonus equal to 2% of "Cash Earnings," which is defined as gross profit less selling, general and administrative expenses, less research and development expenses, plus depreciation expense. For 2000, the Compensation Committee granted Mr. Sanan a one-time incentive of $150,000 if the Company achieved a revenue target of $56.2 million for the quarter ended June 30, 2000 and a one-time incentive of $150,000 if the Company achieved a revenue target of $61.6 million for the quarter ended September 30, 2000. These targets were achieved and Mr. Sanan earned 100% of this special bonus. For 2000, the total bonus was approximately $824,000. In addition, as a strategy to stabilize IMRglobal's market price in the event of Mr. Sanan's death, IMRglobal also agreed to pay the premiums for $10.2 million of life insurance policies with most of the benefits payable to surviving family members of Mr. Sanan. The anticipated annual premium is approximately $100,000. During 2000, IMRglobal achieved many of its corporate objectives except for meeting financial targets for the last quarter of fiscal 2000. The Committee concluded that Mr. Sanan was responsible for accomplishing many of these objectives. In addition, the Committee noted that Mr. Sanan's incentive was based on a formula linked to IMRglobal's 2000 financial results. The Committee believed that the total compensation paid to Mr. Sanan in 2000 of $1.3 million was appropriate and consistent with the quality of leadership he offers to IMRglobal. No stock options were issued to Mr. Sanan related to fiscal year 2000 performance. For 2001, the Compensation Committee determined that Mr. Sanan's base compensation will remain at $500,000 and his annual incentive calculation for fiscal 2001 will continue to be based on 2% of "Cash Earnings", again capped at $1 million. All other provisions of Mr. Sanan's employment agreement remain unchanged. In connection with the proposed merger, Mr. Sanan has agreed to a new employment contract with CGI to be effective upon completion of the merger. Section 162(m) of the Internal Revenue Code limits IMRglobal to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is "performance-based compensation" within the meaning of the code. The committee has determined to satisfy the requirements for "performance-based compensation" with respect to compensation awarded to its Named Executive Officers whenever possible and to the extent then practicable. Compensation Committee, Jeffery S. Slowgrove Charles C. Luthin 83 Performance Graph Performance Comparison. The following graph and table compare the cumulative total shareholder return on IMRglobal's common stock from November 8, 1996, the date of the initial public offering of the common stock, through December 31, 2000 with (a) the Russell 2000 Index (which does not include IMRglobal), and (b) a peer group index* selected by IMRglobal which includes six publicly traded companies in IMRglobal's industry. The information included in the table was supplied by the Nasdaq Stock Market. The comparisons reflected in the graph and table, however, are not intended to forecast the future performance of the common stock and may not be indicative of such future performance. The graph and table assume an investment of $100 in the common stock and cash index on November 8, 1996, and the reinvestment of all dividends. November 8, 1996 December 31, 2000 ---------------- ----------------- IMRglobal Corp.......... 100 86 Russell 2000 Index...... 100 148 Peer Group.............. 100 47 [Graph Omitted] Cumulative Total Return ----------------------------------------------- 11/8/96 12/96 12/97 12/98 12/99 12/00 ------- ------- ------- ------- ------- ------- IMRglobal Corp...... 100 151 402 473 202 86 Russell 2000 Index.. 100 106 129 126 153 148 Peer Group.......... 100 109 187 175 301 47 _____________ *The peer group index reflects the stock performance of the following companies: Computer Horizons Corp., Cambridge Technology Partners, Inc., Sapient Corporation, CIBER, Inc., Keane, Inc. and MarchFirst, Inc. 84 Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The following table sets forth, as of April 16, 2001, the beneficial ownership of IMRglobal's outstanding common stock of (a) each person known by IMRglobal to own beneficially more than 5% of IMRglobal's outstanding common stock, (b) each director, (c) each executive officer, and (d) all executive officers and directors as a group:
Common Stock Beneficially Owned (1) ------------------------------------- Number of Shares Percentage of Name And Address Of Beneficial Owners Of Common Stock Class - -------------------------------------------------------------------- ------------------ --------------- Massachusetts Financial Services Company (2)........................ 4,549,661 10.3% 500 Boylston St. Boston, MA 02116 State of Wisconsin Investment Board (2)............................. 3,350,800 7.6% P.O. Box 7842 Madison, WI 53707 Satish K. Sanan (3)................................................. 12,577,597 28.2% Vincent Addonisio (4)............................................... 226,750 * Michael J. Dean (5)................................................. 61,050 * Philip Shipperlee (6)............................................... 150,871 * Charles C. Luthin (7)............................................... 45,425 * Jeffery S. Slowgrove (8)............................................ 748,450 1.7% All executive officers and directors as a group (6 persons) (9)..... 13,810,143 30.8%
______________ *Less than 1% of the outstanding common stock (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. For purposes of calculating the percentage beneficially owned, the number of shares deemed outstanding includes (i) 44,041,279 shares outstanding as of April 16, 2001 and (ii) shares issuable by IMRglobal pursuant to options held by the respective person or group which may be exercised within 60 days following the date of this Form 10-K ("Presently Exercisable Options"). Presently Exercisable Options are deemed to be outstanding and to be beneficially owned by the person or group holding such options for the purpose of computing the percentage ownership of such person or group but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group. Unless otherwise provided, the street address of each beneficial owner is c/o IMRglobal Corp., 100 South Missouri Avenue, Clearwater, Florida 33756. (2) For purposes of this Form 10-K, IMRglobal has relied upon information reported by the respective shareholder to the SEC pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended, as of April 16, 2001. (3) Includes 491,000 shares issuable upon the exercise of Presently Exercisable Options. Also includes: 6,441,360 shares held in the A&S Family Limited Partnership, the sole general partner of which is a corporation controlled by Mr. Sanan. (4) Includes 182,500 shares issuable upon the exercise of Presently Exercisable Options. Also includes 29,250 shares held in a family limited partnership controlled by Mr. Addonisio. (5) Includes 50,000 shares issuable upon the exercise of Presently Exercisable Options. (6) Includes 52,500 shares issuable upon the exercise of Presently Exercisable Options. (7) Includes 45,000 shares issuable upon the exercise of Presently Exercisable Options. (8) Includes 172,250 shares held in trusts which are controlled by Mr. Slowgrove. (9) Includes an aggregate of 821,000 shares issuable upon the exercise of Presently Exercisable Options. 85 Item 13. Certain Relationships and Related Transactions ---------------------------------------------- Loans to Officers and Directors IMRglobal has granted a credit facility to Satish Sanan, IMRglobal's Chief Executive Officer ("CEO"), in accordance with his employment agreement. This facility is a revolving credit arrangement for up to $5.0 million with interest at prime plus 1% (currently 9.5%) and is repayable at the earlier of May, 2004 or 180 days after the CEO terminates employment with IMRglobal. At December 31, 2000 the amount drawn on this facility was $4.8 million. During 2000, the highest balance on the above loans to IMRglobal's CEO was $4.9 million. Interest income earned by IMRglobal on the above loans for the year ended December 31, 2000 was $460,000. Mr. Sanan is paid an incentive based on the estimated Cash Earnings for each quarter. During the quarter ended December 31, 2000, IMRglobal's Cash Earnings were less than the amount estimated. Accordingly, Mr. Sanan was overpaid $288,000 at December 31, 2000. This amount is being recovered from Mr. Sanan in 2001 as a reduction of his 2001 incentive. During 1998 and 1999, the Company advanced $703,000 to three officers. These officers utilized the proceeds to acquire common stock of IMRglobal. These loans are secured by the IMRglobal common stock investment, and are repayable in 2003 or upon the officer's termination of employment with IMRglobal. These loans bear interest at 9.5% which is added to the principal portion of the note. One of the officers (Mr. Hindman) terminated employment with IMR in December 1999. Mr. Hindman's employment separation agreement provided that if, during the period December 31, 1999 through December 31, 2000, the closing price of the Company's stock exceeded $24.40 per share for 5 consecutive days, the employee would repay the balance owed on the loan. If the share price did not reach $24.40 per share, the employee could surrender his 5,000 shares, in which event the loan together with the accrued interest would be deemed forgiven. The stock price did not exceed $24.40 during the agreed period and IMR purchased the stock as treasury shares effective December 31, 2000. The related write-off of approximately $126,000 was charged to operations in 2000. At December 31, 2000, the loan receivable balance was $566,000 including $97,000 of accrued interest and is summarized as follows: Vincent Addonisio....................... $283,000 Philip Shipperlee....................... 283,000 -------- $566,000 ======== Revenue from Related Company Mr. Slowgrove, a director of IMRglobal, is also a director of Spire, Inc. Beginning in fiscal 2000, Spire, Inc. engaged IMRglobal to perform services under several time and materials contracts. During 2000, approximately $600,000 of revenue was attributable to this client. At December 31, 2000, $275,000 was included in accounts receivable and was more than 120 days overdue. A note receivable was executed with this client during January 2001 calling for monthly payments of $12,000 over the next two years. 86 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Financial Statements -------------------- See Part II, Item 8. (2) Financial Statement Schedules ----------------------------- Financial Statement Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. (b) Form 8-K -------- (1) Reports on Form 8-K filed during the quarter ended December 31, 2000: None (c) Exhibits -------- The following exhibits are filed as a part of, or are incorporated by reference into, this Report on Form 10-K: 87 EXHIBIT INDEX ------------- Exhibit Number Description - ------ ---------------------------------------------------------------------- 2.1 Agreement and Plan of Merger, dated as of February 21, 2001, between IMRglobal Corp., CGI Group Inc. and CGI Florida Corporation. (Incorporated by reference to Exhibit 3 filed with CGI Group Inc.'s Schedule 13D filed on March 2, 2001) (Commission File No. 0-28840) 3.1 Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 3.2 Restated Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.1 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of Incorporation and Restated Bylaws of the Registrant defining rights of the holders of Common Stock of the Registrant. 4.2 Specimen Stock Certificate. (Incorporated by reference to Exhibit 3.1 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 9.1 Voting Agreement, dated as of February 21, 2001, between Satish K. Sanan and A&S Family Limited Partnership, CGI Group Inc. and CGI Florida Corporation (Incorporated by reference to Exhibit 2 filed with CGI Group Inc.'s Schedule 13D filed on March 2, 2001) (Commission File No. 0-28840) 10.1 Master Services Agreement dated April 1, 1996 between the Registrant and IMR-India. (Incorporated by reference to Exhibit 10.4 filed with IMR's Registration Statement on Form S-1) (Registration No. 333- 12037). 10.2 Master Services Agreement dated April 1, 1996 between IMR-U.K. and IMR-India. (Incorporated by reference to Exhibit 10.5 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.3 Master Services Agreement for Information Technology Professional and related schedules between the Registrant and Dayton Hudson Corporation. (Incorporated by reference to Exhibit 10.9 filed with IMR's Registration Statement on Form S-1) (Registration No. 333- 12037). 10.4 Master Services Agreement and related schedules between the Registrant and Dean Witter Discover & Co., Inc. (Incorporated by reference to Exhibit 10.10 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.5 Master Agreement for Computer Consulting and Programming Services and related schedules between the Registrant and Target Stores. (Incorporated by reference to Exhibit 10.12 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.8 Form of Employment Agreement between Registrant and Satish K. Sanan. (Incorporated by reference to Exhibit 10.15 with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.9 401(k) Profit Sharing Plan effective January 1, 1992 and Amendment thereto effective January 1, 1994. (Incorporated by reference to Exhibit 10.17 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.10 Stock Incentive Plan effective July 15, 1996. (Incorporated by reference to Exhibit 10.18 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.11 Form of Directors Stock Option Plan. (Incorporated by reference to Exhibit 10.19 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.12 Form of Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.20 filed with IMR's Registration Statement on Form S-1) (Registration No. 333-12037). 10.14 Loan Agreement between IMR-India and Canara Bank and related documents. (Incorporated by reference to Exhibit 10.27 filed with IMR's Registration Statement on Form S-1) (Registration No. 333- 12037). 88 EXHIBIT INDEX (Continued) Exhibit Number Description - ------ ---------------------------------------------------------------------- 10.15 Loan Agreement between IMR-India and Exim Bank of India and related documents. (Incorporated by reference to Exhibit 10.28 filed with IMR's Registration Statement on Form S-1) (Registration No. 333- 12037). 10.16 Employee Stock Purchase Plan, as amended. (Incorporated herein by reference to Exhibit 10.29 filed with Annual Report on Form 10-K) (Commission File No. 0-28840). 10.17 Acquisition Agreement dated January 13, 1997 between the Registrant and Philip and Sheila Shipperlee relating to the acquisitions of Link Group Holdings Limited. (Incorporated herein by reference to Exhibit 2.1 filed with Current Report on Form 8-K filed with the Commission on January 13, 1997) (Commission File No. 0-28840). 10.18 Share Purchase Agreement dated January 13, 1998 between the Registrant and Satish and Anne Sanan relating to the acquisition of IMR-U.K. (Incorporated herein by reference to Exhibit 10.30 filed with the Company's Registration Statement on Form S-1) (Registration No. 333- 30741). 10.19 Share Purchase Agreement dated May 15, 1998 between the Registrant and Jean Rene Lyon, Pierre Barberis, Marie-Amelie Barberis, Romain Barberis and Didier Lamour (Sellers) relating to the acquisition of Lyon Consultants, S.A. (Incorporated herein by reference to Exhibit 2.1 filed with the Company's Current Report on Form 8-K filed with the Commission on May 28, 1998) (Commission File No. 0-28840). 10.20 Share Exchange Agreement dated March 26, 1999 between the Registrant and Fusion Systems Japan Co., Ltd. (Seller) relating to the acquisition of Fusion Systems Japan Co., Ltd. (Incorporated herein by reference to Exhibit 2.1 filed with the Company's Current Report on Form 8-K filed with the Commission on April 8, 1999) (Commission File No. 0-28840). 10.21 Agreement and Plan of Merger dated June 15, 1999 between the Registrant and Orion Consulting, Inc. (Seller) relating to the acquisition of Orion Consulting, Inc. (Incorporated herein by reference to Exhibit 2.1 filed with the Company's Current Report on Form 8-K filed with the Commission on June 29, 1999) (Commission File No. 0-28840). 10.22 First Amendment to the Acquisition Agreement dated March 26, 1999 between the Registrant and Fusion Systems Japan Co., Ltd. (Seller) relating to the acquisition of Fusion Systems Japan Co., Ltd. (Incorporated herein by reference to Exhibit 2.1 filed with the Company's Current Report on Form 8-K filed with the Commission on November 4, 1999) (Commission File No. 0-28840). 10.23 Information Management Resources, Inc. First Amended and Restated Stock Incentive Plan (Incorporated by reference with IMRglobal's Registration Statement on Form S-8) (Registration No. 333-87095). 10.24 IMRglobal Corp. 1999 Employee Stock Incentive Plan (Incorporated by reference with IMRglobal's Registration Statement on Form S-8) (Registration No. 333-86753) 10.25 First Amendment to Executive Employment Agreement between Registrant and Satish K. Sanan. (Incorporated herein by reference to Exhibit 10.25 filed with the Annual Report on Form 10-K filed with the Commission on March 30, 2000) (Commission File no. 0-28840) 10.26 Restated Revolving Credit Agreement Between Registrant and First Union National Bank dated January 19, 2000. (Incorporated herein by reference to Exhibit 10.26 filed with the Annual Report on Form 10-K filed with the Commission on March 30, 2000) (Commission File no. 0-28840) 10.27 First Amendment To Restated Revolving Credit Agreement between Registrant and First Union National Bank dated March 17, 2000. (Incorporated herein by reference to Exhibit 10.27 filed with the Annual Report on Form 10-K filed with the Commission on March 30, 2000) (Commission File no. 0-28840) 10.28 Second Amendment to Restated Revolving Credit Agreement between Registrant and First Union National Bank dated June 14, 2000. (Incorporated herein by reference to Exhibit 10.28 filed with the Annual Report on Form 10-K filed with the Commission on March 26, 2001) (Commission File no. 0-28840). 89 EXHIBIT INDEX (Continued) Exhibit Number Description - ------ ---------------------------------------------------------------------- 10.29 Loan Agreement between Registrant and AmSouth Bank dated December 8, 2000. (Incorporated herein by reference to Exhibit 10.29 filed with the Annual Report on Form 10-K filed with the Commission on March 26, 2001) (Commission File no. 0-28840). 10.30 Voting Agreement, dated as of February 21, 2001, by and among CGI Group Inc., CGI Florida Corporation, Satish K. Sanan and A&S Family Limited Partnership. (Incorporated herein by reference to Exhibit 10.1 filed with CGI Group Inc.'s Registration Statement on Form F-4 filed with the Commission on April 2, 2001) (Registration No. 333-58116). 10.31 Letter Agreement, dated February 21, 2001, by and among CGI Group Inc., IMRglobal Corp. and Satish K. Sanan. (Incorporated herein by reference to Exhibit 10.2 filed with CGI Group Inc.'s Registration Statement on Form F-4 filed with the Commission on April 2, 2001) (Registration No. 333-58116). 10.32 Executive Employment Agreement, dated as of February 21, 2001, by and between IMRglobal Corp. and Satish K. Sanan. (Incorporated herein by reference to Exhibit 10.3 filed with CGI Group Inc.'s Registration Statement on Form F-4 filed with the Commission on April 2, 2001) (Registration No. 333-58116). 10.33 Amendment to Executive Employment Agreement of Philip Shipperlee. (Incorporated herein by reference to Exhibit 10.4 filed with CGI Group Inc.'s Registration Statement on Form F-4 filed with the Commission on April 2, 2001) (Registration No. 333-58116). 10.34 Amendment to Executive Employment Agreement of Vincent Addonisio. (Incorporated herein by reference to Exhibit 10.5 filed with CGI Group Inc.'s Registration Statement on Form F-4 filed with the Commission on April 2, 2001) (Registration No. 333-58116). 21.1 List of Subsidiaries. (Incorporated herein by reference to Exhibit 21.1 filed with the Annual Report on Form 10-K filed with the Commission on March 26, 2001) (Commission File no. 0-28840). 23.1 Consent of Ernst & Young L.L.P. (Incorporated herein by reference to Exhibit 23.1 filed with the Annual Report on Form 10-K filed with the Commission on March 26, 2001) (Commission File no. 0-28840). _________ +Confidential treatment has been granted with respect to portions of these documents. The omitted portions of these documents have been filed separately with the Securities and Exchange Commission. 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on this 27th day of April, 2001. IMRglobal Corp. By: /s/ Satish K. Sanan ---------------------------- Satish K. Sanan Chief Executive Officer 91 -----END PRIVACY-ENHANCED MESSAGE-----