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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
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, 1996
Commission File Number 0-28840
INFORMATION MANAGEMENT RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2911475
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
26750 U.S. HIGHWAY 19 NORTH, SUITE 500, CLEARWATER, FLORIDA 34621
(Address of principal executive offices and zip code)
813-797-7080
(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:
COMMON STOCK $0.10 PAR VALUE
Title of Class
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
March 21, 1997, was $61,159,999.50 based upon the closing price of $14.50 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 March 21, 1997, there were 9,720,798 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held on or about May 30, 1997 are incorporated by reference
into Part III hereof.
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INFORMATION MANAGEMENT RESOURCES, INC.
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business................................................... 1
Item 2. Properties................................................. 12
Item 3. Legal Proceedings.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 16
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure........................ 55
PART III
Item 10. Directors and Executive Officers of the Registrant......... 55
Item 11. Executive Compensation..................................... 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 57
Item 13. Certain Relationships and Related Transactions............. 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 58
Signatures........................................................... 61
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PART I
ITEM 1. BUSINESS
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THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" UNDER "RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS" AND ELSEWHERE IN THIS REPORT.
GENERAL
Information Management Resources, Inc. (IMR or the "Company") provides
applications software outsourcing solutions for the information technology
("IT") departments of large businesses with intensive information processing
needs. The Company's services, which generally are offered on a fixed-price,
fixed-time frame basis, includes software development, application maintenance,
Year 2000 conversion, and migration and re-engineering services. In addition,
the Company offers programming and consulting services on a time-and-material
basis in order to optimize employee utilization and provide a potential source
of future outsourcing contracts. The Company's services, which it terms
"transitional outsourcing," assist clients in the maintenance of mainframe-based
legacy applications and in the transition from legacy systems to open
architecture, client/server and other emerging technologies. IMR delivers many
of its transitional outsourcing services using its proprietary Total Software
Quality Management ("TSQM") software engineering process and its offshore
software development facility in Bangalore, India. This facility is linked by
satellite communications to both the Company's offices and the offices of many
of its clients. This allows IMR to offer its services on a 24-hour basis
through an on-site, off-site and offshore project team working multiple shifts
made possible by the time difference between North America and India. The
Company believes that its proprietary TSQM process, software engineering
methodologies and toolsets, and its offshore software development center enable
it to provide high quality, cost-effective IT solutions through the utilization
of global resources.
The Company's clients are primarily Fortune 500 or comparably sized companies
with significant IT budgets and recurring needs for software development,
application maintenance, Year 2000 conversion and IT staffing services. IMR
serves clients in a variety of industries including financial services,
insurance, manufacturing, retail and utilities. The Company has provided
transitional outsourcing services for such companies as Commercial Union
Insurance Companies, Dayton Hudson Corporation, John Hancock Financial Services,
Michelin Tire Corporation, SPS Payment Systems and Southern California Edison.
Through a staff of more than 800 software development professionals, the Company
serves its clients from its U.S. headquarters in Clearwater, Florida, its
European headquarters in London, England, its offshore software development
center in Bangalore, India, and its branch offices located in Boston, Chicago
and Dallas.
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INDUSTRY OVERVIEW
Intense competition, deregulation, innovation and rapid technological
advancements are forcing companies to make fundamental changes in their business
processes. These changes have compelled many businesses to downsize staffs and
reduce costs in order to achieve greater returns on investment. While
confronting these internal challenges, companies also face customer demands to
improve service levels, lower costs, reduce delivery time and increase value.
In this competitive environment, improving IT systems is one critical way for
businesses to achieve greater productivity and manage their operations more
efficiently. As a result, the ability of an organization to integrate and
deploy improved information technologies in a cost-effective manner has become
critical to its success.
Although client/server and other emerging technologies offer the promise of
faster, more functional and more flexible software applications, the
implementation of business solutions encompassing these new technologies present
companies with major challenges. Designing, developing and employing these
solutions requires highly skilled individuals trained in many diverse
technologies and architectures. However, there is a shortage of these
individuals, and many large companies are reluctant to expand their IT
departments through additional staffing, particularly at a time when they are
attempting to minimize their fixed costs and reduce workforces. Moreover,
redeploying and retraining in-house resources to develop and implement new
technologies typically is impractical because the in-house IT staff must
continue to support existing legacy systems and dated technology. In addition,
implementing new systems also requires highly developed project management
skills so that projects are completed within budget and on time.
As a result of the challenges presented by the technological transition to
client/server systems and the ongoing need to maintain legacy systems, many
large companies are seeking ways to outsource their IT projects, particularly on
a fixed-price, fixed-time frame basis in order to minimize the risks associated
with such large scale technology projects. Outsourcing enables organizations to
focus on core-competencies, to reduce costs by converting in-house fixed IT
costs to variable costs and to reduce the time-to-completion of significant IT
projects.
Outsourcing represents a particularly cost-effective solution for labor-
intensive IT projects such as the fast approaching Year 2000 problem. Many
existing computer systems run software programs permitting only two-digit
entries for years (e.g., 1997 is read as "97") and therefore cannot properly
process dates in the next century. Software programs that use the two-digit year
date field to perform computations or decision-making functions may fail due to
an inability to correctly interpret dates in the 21st century. For example,
many software systems will misinterpret "00" to mean the year 1900 rather than
2000. Resolving a Year 2000 problem is a highly time and labor-intensive
project often requiring software engineers to analyze millions of lines of
software code and millions of items of data. As a result, the Company believes
that most large Year 2000 conversion projects will be outsourced.
The Company employs a systematic and disciplined approach to every outsourcing
engagement. The three critical components of the IMR solution, which management
believes differentiate the Company from other IT service providers, are: (i) its
TSQM software engineering process; (ii) its offshore software development
capability; and (iii) its proprietary toolsets. Together, these key elements of
the Company's service delivery model help ensure that clients receive high
quality, cost-effective solutions on time and within budget.
The TSQM Software Engineering Process. TSQM is a set of defined software
development processes, techniques and tools that are implemented to maximize
quality in the Company's processes, deliverables and services, and to minimize
project risks. Continuously refined since the Company's inception, TSQM
represents the software engineering process through which the Company defines
and performs projects. For every project, the Company implements its two-phased
TSQM process that encompasses: (i) an extensive front-end assessment
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that defines the scope and risks of the project; and (ii) a fixed-price
implementation stage that is further subdivided into smaller phases with
frequent deliverables and feedback from its clients. Through the rigorous
adherence to its TSQM process, the Company identifies, monitors and manages the
risks associated with the cost, schedule, performance, support and delivery of
projects on a fixed-price, fixed-time frame basis. This process also allows the
Company to detect, correct and mitigate quality defects and to establish
appropriate contingencies for each project.
Offshore Software Development. The Company's offshore software development
center in India provides IMR with a significant cost advantage as well as the
ability to provide 24-hour service to its clients. The Company's costs in India
historically have been significantly lower than costs incurred for comparable
resources in the U.S. Through satellite communications, many of the Company's
clients are linked to IMR's India. Due to the time difference between India,
the U.K. and the U.S., the Company can create a virtual "second shift" for its
North American and European clients allowing for more rapid completion of
projects and off-peak utilization of clients' technology resources. In
addition, for larger projects with critically short time frames, the offshore
facility allows the Company to parallel process many of its development phases
to accelerate delivery time.
Proprietary Toolsets. The Company has made a significant investment to
design and develop a set of proprietary software tools which are used to
facilitate and streamline a Year 2000 conversion project as well as the
migration from mainframe computing environments to flexible open systems and
relational database management systems ("RDBMS") computing environments. These
tools, which are developed utilizing object-oriented technologies, allow the
Company to reduce both the cost and time required to successfully complete large
scale migration projects. The Company's TransformIMS, TransformVSAM and
TransformDB2 toolsets support the migration of mainframe-based legacy systems
(e.g., IMS and DB2) and their related applications to RDBMS environments (e.g.,
Oracle, Sybase and Informix). Transform2000 supports full life cycle conversion
for Year 2000 projects. IMR uses Transform2000 to download application source
code and data to work-stations and to analyze this information to identify two-
digit year field codes. Transform2000 automatically transforms and converts
much of this data to make it Year 2000 compliant.
STRATEGIES
The Company's objective is to be a leading provider of comprehensive
transitional IT outsourcing services and solutions to large businesses with
intensive information processing needs. The Company plans to pursue the
following strategies to achieve this objective:
BUSINESS STRATEGIES
Develop Long-Term Strategic Partner Relationships with Clients. The Company
strives to develop "strategic partner" relationships with its clients whereby
the Company shares both the risk and rewards associated with outsourcing
engagements. To establish these relationships with clients, the Company
endeavors to integrate its on-site personnel into the operations and employee
culture of its clients' IT departments and regularly makes significant
investments in technology to support the strategic technical direction of its
clients. These investments helped the Company secure the loyalty and trust of
clients and provided it with the tools and knowledge to perform similar projects
for other clients. To ensure constant communication, the Company uses several
methods to obtain continuous client feed-back, including client satisfaction
surveys, consultant performance surveys and regularly scheduled meetings with a
client's senior management. A substantial portion of the performance incentive
for the senior executives, sales executives and senior project managers of the
Company is directly linked to client satisfaction and on-time within budget
delivery of quality IT services.
Develop and Enhance Processes, Methodologies and Productivity-Enhancing
Software Tools. The Company is committed to improving and enhancing its TSQM
process as well as its proprietary software
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engineering methodologies and toolsets. With the rapid evolution of technology,
the Company believes it is imperative to invest in research and development. The
Company currently is designing and developing new productivity software tools to
automate testing processes and improve project estimating and risk assessment
techniques. Moreover, the Company plans to add additional modules to its current
software tools which will allow the re-design, migration and conversion of
additional types of databases and programming languages. The Company believes
that this strategy is critical in differentiating the Company from its
competitors.
Focus on Fixed-Price, Fixed-Time Frame Projects. As a core element of its
business philosophy, the Company offers many of its IT services on a fixed-
price, fixed-time frame basis. Management believes that effectively structured
fixed-price, fixed-time frame projects provide clients with significantly
reduced risks while offering the Company the potential benefit of enhanced
margins. In order to reduce the risks to the Company, the fixed-time frame
component of a project is divided into several phases with frequent
deliverables. The Company believes that discrete project phases make it easier
for the Company to commit to a fixed price for a project, meet client
expectations, maintain high quality and control costs. The Company strives to
reduce risks and achieve greater potential profits through shorter development
cycles, the implementation of a rigorous change-order management process and the
use of global resources. Furthermore, in order to monitor its financial
performance, IMR constantly reviews project data and adheres to strict financial
management practices.
Continue to Expand Offshore Software Development Resources. The Company
believes that the availability of high quality technical resources at its
offshore development facilities in India is one of its most significant
competitive advantages due to the lower cost structure and ability to provide
multiple work shifts. The Company's success will depend to a significant extent
on its ability to attract, train, motivate and retain highly skilled employees
in India, particularly project managers, software engineers and other senior
technical personnel. The Company intends to further develop these resources by
focusing on recruiting skilled technical personnel, expanding existing physical
facilities and adding additional facilities in India or other locations. From
time to time, the Company investigates the expansion of its offshore
capabilities to other foreign locations to match its present and projected
business requirements with the availability of qualified technical personnel.
Concentrate on Key Technologies. Through its transitional outsourcing
service delivery model, the Company maintains a high level of knowledge of
advanced technical areas such as IBM mainframe systems, advanced case tools,
client/server technologies, object-oriented technologies and rapid application
development. The Company conducts personnel training to expand the knowledge
base of its employees in these key technological areas.
Attract, Train and Retain Highly Skilled Employees. The future success of
the Company's growth strategy will depend to a significant extent on its ability
to attract, train, motivate and retain highly skilled IT professionals,
particularly project managers, software engineers and other senior technical
personnel. To achieve this objective, the Company maintains programs and
personnel to seek and hire the best available IT professionals and to train
these professionals in both legacy systems and emerging technologies. The
Company believes, however, that in the U.S., U.K. and India there is a shortage
of, and significant competition for, IT professionals with the advanced
technological skills necessary to perform the services offered by the Company.
In order to attract, motivate and retain its employees in the face of these
shortages, the Company focuses on its corporate culture, incentive programs,
compensation and benefits, and provides a career and education management
program to create an individualized structured career growth plan for its
employees.
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GROWTH STRATEGIES
Convert Year 2000 Projects into Long-Term Application Maintenance Outsourcing
Business. As a result of its comprehensive Year 2000 services, the Company has
obtained a significant number of contracts to perform Year 2000 conversion
projects. The demand for the Company's services in this area provides the
opportunity to select those accounts with the greatest long-term potential to
convert its Year 2000 business into long-term application maintenance
outsourcing engagements. A core element of the Company's growth strategy is to
use the client relationships and the knowledge of client computer systems
obtained in providing Year 2000 services to obtain additional IT projects for
these clients. In particular, the Company believes that the detailed knowledge
of its clients' systems gained during performance of its Year 2000 services will
serve as a competitive advantage in securing application maintenance projects
from these clients. Clients that choose to outsource applications maintenance
services can focus their internal resources on new strategic application
development. The Company believes maintenance outsourcing engagements converted
from Year 2000 projects can be a source of low risk, long-term revenues.
Develop Expertise in Key Vertical Markets. Although the Company has a
diverse client base, the Company recently has completed projects for companies
in key vertical markets, including insurance, financial services, manufacturing,
retail and utilities. These industries generally are dominated by large
companies with intensive IT needs. As its business increases in these targeted
vertical markets, the Company believes it will gain a broader knowledge and
expertise of these industries. The Company seeks to leverage this developing
expertise and its existing accounts into a larger concentration of clients in
these targeted markets. Also, the Company plans to design and develop re-usable
object class software code libraries which have specific applications to clients
in these targeted vertical markets.
Expand Geographic Presence. IMR's business model integrates on-site, off-
site and offshore resources to enable the on-time delivery of high quality,
cost-effective IT solutions. As the Company expands its customer base, it
intends to open additional small regional offices to enable the Company to sell
and support existing and new clients in these geographic areas. The Company's
business model does not require a significant number of remote offices, and the
Company seeks to maintain low overhead for each branch office. In addition, the
Company intends to pursue market opportunities in eastern and central Europe and
Southeast Asia through its facility in India, its European headquarters in the
U.K. and, if appropriate, the establishment of additional offshore operations.
Pursue Selective Strategic Acquisitions. Given the highly fragmented nature
of the IT services market, together with significant barriers to entry in major
accounts, the Company believes that opportunities exist to expand through the
selective acquisition of smaller regional IT services firms with established
customers and technical expertise. For example, in February 1997, the Company
completed the acquisition of Link Group Holdings Limited ("Link"), a leading
provider of transitional outsourcing software services in the U.K. and in
Western Europe, including legacy systems maintenance, client/server development,
internet applications development and applications development for Lotus Notes.
THE IMR DELIVERY PROCESS
IMR applies its TSQM software engineering process across all of its services
to deliver high quality, cost-effective IT solutions to its clients. TSQM is a
set of defined software development processes, techniques and tools that are
implemented and enhanced to maximize quality in the Company's processes,
deliverables and services, and to minimize project risks. For every project,
the Company implements its two-phased TSQM software engineering process which
encompasses: (i) an extensive front-end assessment that defines the scope and
risks of the project; and (ii) the fixed-price implementation stage that is
further subdivided into smaller phases with frequent deliverables and feedback
from its clients. Continuously refined since the Company's inception, TSQM
represents the process through which the Company defines and performs projects.
Through
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the rigorous adherence to the TSQM process, the Company identifies, monitors and
manages the risks associated with the cost, schedule, performance, support and
delivery of projects on a fixed-price, fixed-time frame basis. This process also
allows the Company to detect, correct and mitigate quality defects and to
establish appropriate contingencies for each project.
The TSQM process is based in part on the Institute of Electrical & Electronic
Engineers ("IEEE") based software engineering standards, Software Engineering
Institute ("SEI") software engineering process models and ISO 9001 quality
processes. During each stage of a project, IMR monitors 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 specified tasks. Through
this process of constant re-evaluation of the Company's performance on each
project, IMR continuously refines and enhances the TSQM software engineering
process as a means to leverage the benefit of the Company's cumulative project
experience.
The responsibilities for completion of each TSQM phase are allocated among an
on-site, off-site and offshore team 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
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 fixed-price implementation phase, which may
include programming, unit testing and systems testing, is largely performed
offshore via satellite link. The off-site teams at the Company's U.S. and
European headquarters coordinate the efforts of the on-site and offshore teams
and monitor and manage the quality of the overall project. Working regular
business hours, the on-site, off-site and offshore teams together use most hours
of the clock to deliver projects in fewer elapsed calendar days. Due to the time
differences between India, the U.K. and the U.S., the Company can create a
virtual "second shift" for its North American and European clients allowing for
more rapid completion of projects.
The Company's offshore software development center provides significant
opportunities to reduce costs and manage the risks of a project. The offshore
software development center often is 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 the Company at its offshore center are spread among
multiple clients and projects further reducing additional infrastructure
investment required to be made by the client. If the scope of a project is
unexpectedly expanded, the Company generally is able to draw upon its offshore
development center resources to increase project personnel. In addition, for
larger projects with critically short time frames, the offshore facility allows
the Company to parallel process various development phases to accelerate
delivery time.
SERVICES
IMR provides a broad range of IT services, including: (i) core transitional
outsourcing services including software development, application maintenance and
migration and re-engineering services; (ii) Year 2000 conversion; and (iii)
programming and consulting services. The Company delivers each of these services
independently or as a comprehensive package.
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Core Transitional Outsourcing Services.
IMR's transitional outsourcing services assist clients in the development and
maintenance of mainframe-based legacy applications and in the transition from
legacy systems to open architecture, client/server and other emerging
technologies. The Company's core transitional outsourcing services include:
software development, application maintenance, and migration and re-engineering
services.
Software Development Services. The Company offers two alternatives to
assist clients in developing new applications for selected client/server
platforms, other emerging technologies and IBM mainframe platforms:
. fixed-price software development in which the Company assumes total
responsibility and accountability for delivery of systems on-time and
within budget; or
. cooperative development in which the Company's consultants work side-by-
side and share responsibility for completion of a project with in-house IT
personnel to complete full life cycle development projects.
In both cases, the Company uses its TSQM software engineering process, its on-
site, off-site, offshore delivery model and satellite communications to deliver
these projects.
Application Maintenance Services. By assuming the responsibility for
maintenance of selected legacy application systems, the Company is able to
introduce process enhancements that improve service levels to clients requesting
modifications and on-going support. By using a variation of the on-site, off-
site, offshore delivery model, the Company provides 24-hour, 7-day production
and emergency support. On-site team members provide application maintenance
services at the client's facility. These team members carry pagers in the event
of an emergency service request and utilize home personal computers to dial into
a client's system and resolve client problems from remote locations. Routine
application maintenance services, including modifications, enhancements and
documentation, are completed utilizing satellite telecommunications and the
resources of the Company's offshore software development center.
The Company uses its proprietary application maintenance methodology which
involves the following phases:
. Maintenance Improvement Phase. The Maintenance Improvement Phase ("MIP")
allows the Company to utilize the existing support infrastructure,
determine the scope of a project, establish targeted service levels and
performance metrics to be reported, and design a detailed project plan for
the duration of the outsourcing assignment. The Company uses metrics
calculations to define productivity, quality, reliability and client
satisfaction. Productivity metrics define such items as the cost and time
to perform specified functions, the hours to define the time necessary to
identify and resolve a problem, and to perform each service request.
Quality and reliability metrics identify and define the number of defects
within a project, production failure rates, the mean time between failures
and statistics on problem reports such as mean time to respond and resolve
a problem. Client satisfaction metrics are identified through periodic
client surveys and establish specified client service level measurements.
Through the use of metrics, the Company believes that it is better able to
identify the costs to perform contracts on a fixed-price basis, thereby
enhancing the Company's ability to estimate the fees for these contracts.
. Assimilation. Through the assimilation phase, the Company's consultants
assimilate knowledge of its client's business and software applications.
This knowledge is acquired through contact with the client's IT personnel,
review of client documentation and hands-on experience. The Company's
consultants create project management and procedures manuals, implement
appropriate metrics
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programs and implement process changes. During this phase, first level
support is provided by client personnel and second level support and all
systems work is provided by the Company's consultants.
. Transition. During the transition phase, the Company's consultants assume
full responsibility for first level support. In many cases the Company
transitions certain functions, such as full life cycle maintenance support,
to the Company's offshore software development center.
. Steady State. This is the normal state of application support where
production and emergency support, analysis and acceptance testing are
conducted on-site. Remaining activities, including routine maintenance,
enhancements and documentation, are often conducted offshore.
Migration and Re-engineering Services. The Company's migration and re-
engineering services allow a client to migrate its legacy computing environments
to open systems platforms and client/server architectures. The Company's
Transform series of re-engineering tools automate many of the processes required
to implement advanced client/server technologies, thereby substantially reducing
the time and cost to perform these services. These tools enable the Company to
perform a source code analysis and to re-design target databases and convert
certain programming languages. If necessary, the Company's software engineers
also re-design and convert user interfaces.
Year 2000 Services.
The Company uses its Century Change-Planning Analysis conversion ("CC-
PAC(SM)") methodology to provide a cost-effective solution to the Year 2000
problem. The CC-PAC methodology defines the methods for performing Year 2000
conversion services through four separate phases: analysis, planning, conversion
and implementation. The CC-PAC methodology, together with the Company's
proprietary Year 2000 toolset, Transform2000, and a rigorous process approach
form the Company's "total solution" to resolving millennium problems. The
Company believes that the full life cycle solution provided by the CC-PAC
methodology and use of the Transform2000 toolset differentiates IMR from other
companies by reducing costs and providing services for all phases of a Year 2000
solution. The Company expects to continue to derive an increasingly larger
percentage of its total revenue from these services for each of the next three
years. At the present time the Company is engaged to perform Year 2000 services
for more than 40 clients, substantially all of whom are new customers for the
Company. The Company believes that the demand for Year 2000 services will
continue after the turn of the century, although this demand is expected to
diminish significantly after the year 2000 as many Year 2000 compliance
solutions are tested and implemented.
The four phases of the CC-PAC methodology are:
. Analysis Phase. During the analysis phase, the client's entire software
applications portfolio is downloaded and, using the Transform2000 toolset,
a complete inventory of all applications is produced. Through CC-PAC, the
Company also identifies date dependent applications and determines the
"failure horizon" which is the earliest point in the future that these
applications are likely to fail. The Company also identifies the impact of
millennium conversion on system objects, including programs, copybooks and
job control languages. Based on this inventory and analysis, the Company
uses Transform2000 to determine required design modifications, code
revisions and other measures that are necessary to eliminate Year 2000
failures. The Transform2000 toolset allows the Company to capture and store
data elements and information regarding a client's system in a central
repository. This data can then be used to provide project analysis,
planning, conversion and implementation. Through CC-PAC, the Company also
prepares an effort estimate and initial costing estimate for the full life
cycle Year 2000 project.
. Planning Phase. Planning represents the most critical phase of a Year 2000
project. During the
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planning phase, a detailed plan for each application conversion is produced
which serves as a timetable for completion and a roadmap for activities to
be performed and resources and programs to be used in the conversion. Based
on business priorities and the estimated "failure horizon," the
applications are sequenced for conversion. Through CC-PAC, the Company
identifies date dependent functions and interfaces as well as the bridging
strategy, the testing strategy and replacement strategy, if any. During
planning, the Company also identifies a pilot conversion of the
characteristics of a typical client application as a proof of concept. The
analysis and planning phases generally are provided on a combined basis and
result in the production of a pilot project in which a small number of
isolated Year 2000 problems are identified and resolved.
. Conversion Phase. Based on the conversion plan adopted during the planning
phase, the client's applications are then converted using the Transform2000
toolset and any required manual programming. The Transform2000 toolset
automates many aspects of the software conversion process and reduces the
time required to complete the phases of a millennium conversion. Large
applications are generally divided into small modules to minimize the time
period during which applications are converted and tested and to enable
staged delivery of Year 2000 compliant modules.
. Implementation Phase. This phase involves full testing of the converted
applications as well as synchronization and re-introduction of applications
in the client's system. Unit and system testing are generally conducted
offshore. Final acceptance and systems testing is conducted on-site at the
client's facility. Any changes which have been made by the client's staff
are then tested for century date compliance, retrofitted into the system
and converted by the Company before final testing is conducted. The system
is then placed into production. Conversion and implementation generally are
provided under a single contract to identify and resolve all Year 2000
problems within a designated client software system.
Programming and Consulting Services.
The Company also provides programming and consulting services at client
sites on an "as-needed" basis. The Company's programming consultants are
typically engaged on a time-and-materials basis to assist on-site with the
analysis, design and development of software applications and to augment the
client's internal IT staff. In contrast to its core transitional outsourcing
services, professional programming services typically involve the performance of
discrete tasks at the specific direction of the client. The Company's
objectives in providing professional staffing services include developing an
understanding of the client's business and IT systems needs and positioning the
Company to provide consulting and outsourcing services after the Company has
established a business relationship with the client through the consulting
assignment. The Company does not generally accept professional staffing
services, engagements of less than six months.
CLIENTS AND REPRESENTATIVE PROJECTS
IMR provides services to large businesses, primarily Fortune 200 and
comparably sized companies with intensive information processing needs. To
date, the Company's marketing efforts have been directed to clients on the basis
of IT needs rather than industry group. Companies and clients in the insurance,
financial services, manufacturing, retail and utilities industries have
historically provided the greatest source of business opportunities for the
Company.
9
<PAGE>
CORE TRANSITIONAL OUTSOURCING SERVICES
--------------------------------------
<TABLE>
<CAPTION>
SOFTWARE DEVELOPMENT SERVICES: APPLICATION MAINTENANCE SERVICES: MIGRATION AND RE-ENGINEERING SERVICES:
<S> <C> <C>
EBSCO Industries, Inc. Dayton Hudson Corporation American Airlines, Inc.
Ford Motor Company Michelin Tire Corporation Hogan Systems, Inc.
NOVUS Services, Inc. Philip Morris International, Inc. Southern California Edison Co.
Southern California Edison SPS Payment Systems, Inc. Zimmer Corporation
Winn Dixie Stores, Inc. Target Stores Target Stores
YEAR 2000 CONVERSION SERVICES: PROGRAMMING & CONSULTING SERVICES:
----------------------------- ----------------------------------
Commercial Union Insurance Companies Fingerhut Corporation
Consolidated Edison of New York International Paper
John Hancock Financial Services S2 Systems, Inc.
Reliastar Life Insurance Company Detroit Edison
Rochester Gas and Electric
</TABLE>
During 1996, the Company's top five clients accounted for approximately
59.0% of revenues. NOVUS Services, Inc. ("NOVUS")(formerly known as Discover
Card Services, Inc.) and SPS Payment Systems, Inc. ("SPS"), which are affiliated
companies, together accounted for approximately 31.0% of revenues. During
1995, the Company's top five clients accounted for approximately 65.6% of
revenues. In 1995, NOVUS and SPS represented approximately 35.1% of revenues,
while units of Dayton Hudson Corporation represented approximately 12.0% of
revenues. 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
The Company markets and sells its services directly through its
professional staff and senior management operating out of its U.S. headquarters
in Clearwater, Florida, its European headquarters in London and through direct
sales persons located in Boston, Chicago and Dallas. The Company focuses its
marketing efforts on large corporations with significant IT budgets and
recurring staffing or software development needs. Marketing personnel identify
prospects and opportunities and enter the prospects into a prospect/client
database consistently maintained and updated. Direct sales representatives
utilize the database records to initiate the sales cycle from prospect
qualification to close. As a result of this marketing system, the Company
prequalifies sales opportunities, and direct sales representatives are able to
minimize the time spent on prospect qualifications.
Marketing programs include direct mail campaigns, seminars, conferences and
other activities intended to generate and maintain an interest in the Company's
services. The sales executive and technical support team defines the scope,
deliverables, assumptions and execution strategies for a proposed project,
develop project estimates, prepare pricing and margin analyses, and finalize
sales proposals. Management reviews and approves the proposal, and the sales
staff person presents the proposal to the client. Sales personnel remain
actively involved in the project through the execution phase. Although the
Company maintains a broad and diverse client base, the Company intends to focus
its future marketing efforts principally toward prospective clients in the
financial services, insurance, manufacturing, retail and utilities industries.
INTELLECTUAL PROPERTY
The Company's business includes the development of software applications
and other deliverables including written specifications and documentation in
connection with specific client engagements. Ownership of software and
associated deliverables created for clients is generally retained by or assigned
to the client, and the Company does not retain an interest in such software or
deliverables. The Company also develops object-
10
<PAGE>
oriented software components and libraries that can be reused in application
software development, as well as certain software toolsets and proprietary
methodologies. Many of the Company's software components, libraries, toolsets
and methodologies are developed in India and used in the U.S., the U.K. and
India. The Company retains ownership of these components, libraries, toolsets
and methodologies. Finally, the Company maintains trademarks and service marks
to identify its various service offerings. In order to protect its proprietary
rights in these various intellectual properties, the Company relies upon a
combination of copyright and trade secret laws, nondisclosure and other
contractual arrangements, and technical measures. The U.K. and India are members
of the Berne Convention, an international treaty. As members of the Berne
Convention, the governments of the U.K. and India have agreed to recognize
protections on copyrights conferred under the laws of foreign countries,
including the laws of the U.S. The Company believes that laws, rules,
regulations and treaties in effect in the U.S., the U.K. and India are adequate
to protect it from misappropriation or unauthorized use of its copyrights.
However, there can be no assurance that such laws will not change and, in
particular, that the laws of the U.K. and India will not change in ways that may
prevent or restrict the transfer of software components, libraries and toolsets
from India to the U.S. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to deter
misappropriation of its Year 2000 proprietary rights or any of its other
intellectual property or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its rights. The Company presently
holds no patents or registered copyrights. The Company expects that the risk of
infringement claims against the Company will increase if more of the Company's
competitors are able to successfully obtain patents for software products and
processes.
As the number of competitors providing IT services, new and overlapping
processes and methodologies used in such services will become more pervasive.
Although the Company's intellectual property has never been the subject of an
infringement claim and the Company believes that its services and products do
not infringe on the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the Company in the
future. Assertion of such claims against the Company could result in
litigation, and there is no assurance that the Company would prevail in such
litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Furthermore, litigation, regardless of its outcome, could result in substantial
cost to the Company and could divert management's attention from the Company's
operations. Any infringement claim or litigation against the Company could,
therefore have a material adverse effect on the Company's results of operations
and financial condition.
COMPETITION
The IT services market is highly competitive and is served by numerous
national, regional and local firms. The Company's clients generally consist of
large corporations principally in the financial services, insurance,
manufacturing, retail and utilities industries, and many of the Company's
competitors are aggressively pursuing business from those entities. In addition
to in-house MIS departments, market participants include systems consulting and
integration firms, professional services companies, applications software firms,
temporary employment agencies, professional services divisions of large
integrated manufacturing and other companies (such as IBM and MCI), facilities
management and outsourcing companies and "Big Six" accounting firms and related
entities.
11
<PAGE>
The Company competes with, among others, Andersen Consulting, "Big Six"
accounting firms, Cambridge Technology Partners, Inc., Cap Gemini Worldwide,
Computer Horizons Corp., Computer Task Group, F. I. Group, plc, ISSC (a
subsidiary of IBM), Keane, Inc., SHL Systemhouse (a division of MCI) and
Whittman-Hart, Inc. In addition , in offering its Year 2000 services, the
Company competes with Alydaar Corp., Computer Horizons Corp., Cap Gemini
Worldwide, Data Dimensions, Inc., ISSC and MatriDigm Corporation.
The Company believes that many of its principal competitors have
significantly greater financial, technical and market resources and generate
greater revenues than IMR. The Company competes by offering a successful
services delivery model, excellent referral base and continued focus on
responsiveness to customer needs, quality of services, competitive prices,
project management capabilities and technical expertise.
HUMAN RESOURCES
As of March 20, 1997, the Company had approximately 875 employees. The
Company employed approximately 315 persons in its U.S. headquarters and branch
offices, and approximately 475 in its offshore software development center in
India and approximately 85 persons in its offices in the U.K. Additionally, as
of March 20, 1997, the Company had approximately 70 independent contractors
performing various services. None of the Company's employees is subject to a
collective bargaining arrangement.
The Company believes that in the U.S., the U.K. and India there is a shortage
of, and significant competition for, IT professionals and that its future
success will depend in large part upon its ability to attract, train, motivate
and retain highly skilled employees with the advanced technical skills necessary
to perform the services offered by the Company. The Company has an active
recruitment program in the U.S., the U.K. and India and has developed a
recruiting system and database that facilitates the rapid identification of
skilled candidates. The Company also has adopted a career and education
management program working with employees to define their objectives and career
plans. Through an intensive orientation and training program, the Company
introduces new employees to the TSQM software engineering process and the
Company's services.
ITEM 2. PROPERTIES
----------
The Company leases its corporate headquarters building (approximately 24,000
square feet) in Clearwater, Florida under a lease expiring in July 1998.
Approximately 11,000 square feet of this facility have been subleased through
November 1997. The Company leases branch offices in Boston, Chicago and Dallas
which are used primarily for sales and marketing purposes. The Company occupies
a leased facility (approximately 50,000 square feet) in Bangalore, India for
software development under a lease expiring in May 2005, with an option to
extend an additional five years, and a 12,500 square foot headquarters in
Chesham, England approximately 30 miles outside of London under a lease expiring
in 2013.
In March 1997, the Company acquired 100% of the outstanding stock of
Movietone, Ltd. ("Movietone"), an Indian limited liability company. Movietone
has no significant ongoing activities and its only significant asset is a
building located in Bombay, India. The acquisition of Movietone provided the
Company with a 28,000 square foot facility in Bombay suitable to carry on the
Company's business and located in an area designated for certain tax incentives
and relaxed regulatory restrictions similar to those applicable to IMR's
Bangalore operations. Currently, the Company is in the process of renovating
this facility and expects it to be operational by the third quarter of 1997.
No assurance can be given that renovations of the Bombay facility will be
completed on time or that the Indian government will continue to provide tax and
other incentives to the software industry or in the area in which this facility
is located.
12
<PAGE>
The Company believes that its facilities are near full utilization (other than
its facility in Bombay, India which is under renovation).
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is 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, 1996.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
The Common Stock of the Company is traded on the Nasdaq National Market
("Nasdaq") 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 the Company's Common Stock at an initial price to the
public of $14.00 per share (the "Offering").
Set forth below are the high and low sales prices for shares of the Common
Stock commencing November 8, 1996 and ending December 31, 1996.
<TABLE>
<CAPTION>
Fiscal Period High Low
------------- ---- ---
<S> <C> <C>
November 8, 1996 through
December 31, 1996 $21.125 $13.875
</TABLE>
The number of shareholders of record of the Common Stock as of March 20, 1997,
was 30 based on transfer agent reports.
During the years ended December 31, 1996 and 1995, the Company declared
dividends of $1,623,303 and $0, respectively. The 1996 dividends represented
distributions, to the shareholders of the Company prior to the Company's initial
public offering, equal to the Company's undistributed S corporation earnings
from October 27, 1988 through the date of termination of the Company's S
corporation status on November 11, 1996. (See Note 16 to Consolidated Financial
Statements.) The Company does not intend to declare or pay cash dividends in
the foreseeable future. Management anticipates that all earnings and other cash
resources of the Company, if any, will be retained by the Company for investment
in its business.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
------------------ ----
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital............................ $30,729 $ 2,355 $ (340) $(2,504) $ 1,065
Total assets............................... 48,953 8,666 7,099 6,453 2,927
Long-term debt, net of current portion..... - 1,184 2,153 1,141 -
Shareholders' equity....................... 40,356 2,708 264 (559) 1,321
Shares outstanding at year-end............. 9,649 9,056 9,056 9,056 75
OPERATING DATA:
Revenues................................... 27,948 22,700 14,102 12,429 10,132
Gross profit............................... 11,704 8,991 5,439 2,298 3,724
Income from operations..................... 4,684 3,508 829 (3,246) 701
Net income................................. 2,588 2,518 814 (3,673) 656
Pro forma net income (1)(3)................ 2,545 1,612
Pro forma net income per share (1)(3)...... 0.22 0.12
Cash dividends (2)......................... 1,623 - - 8 158
Cash dividends per share (3)............... 0.14 -
Weighted average common stock and
common stock equivalent
outstanding (3)........................... 11,720 13,703
</TABLE>
____________________
(1) Pro forma net income and net income per share give effect to the Company's
conversion from an S corporation to a C Corporation for U.S. federal and
state income tax purposes. As an S corporation, the Company was not subject
to income taxes but instead passed its tax attributes through to its
shareholders. As a C corporation, the Company will be subject to income
taxes at corporate income tax rates. The pro forma data above presents net
income and net income per share as if the Company had been subject to C
corporation income taxes for the years ended December 31, 1995 and 1996.
(2) All cash dividends were Subchapter S distributions. Dividends are not
anticipated in the foreseeable future.
(3) Pro forma data has not been calculated for years prior to 1995.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS SET FORTH IN "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND
ELSEWHERE IN THIS REPORT.
OVERVIEW
IMR provides application software outsourcing solutions for the IT departments
of large businesses with intensive information processing needs. The Company's
services, which generally are offered on a fixed-price, fixed time-frame basis,
include core transitional outsourcing services (software development
applications maintenance and re-engineering and migration) and Year 2000
conversion services. In addition, the Company offers programming and consulting
services on a time-and-materials basis. The Company achieved record revenues in
1996. This revenue growth primarily reflected an increased demand for the
Company's Year 2000 service offering. A majority of the growth occurred in the
second half of 1996, as the Company's Year 2000 strategy and sales efforts
produced several significant client engagements.
Revenues from services provided on a fixed-price basis are recognized using
the percentage of completion method. Revenues from services provided on a time-
and-material basis are recognized in the period that services are provided. The
Company bears the risk of cost over-runs and inflation with respect to its
fixed-price projects. In order to mitigate these risks, the Company subdivides
its projects into smaller phases, and the Company and its clients agree on a
fixed-price and fixed-time frame prior to commencement of each phase. These
agreements may be revised, pending approval by the Company and its clients, when
a significant change in the scope or cost of a phase arises that neither the
Company nor the client had anticipated. Under the percentage of completion
method, the Company must estimate the percentage of completion of each project
at the end of each financial reporting period. Estimates are subject to
adjustment as a project progresses to reflect changes in projected completion
costs or dates. The cumulative impact of any revision in estimates of the
percentage of work completed is reflected in the financial reporting period in
which the change in the estimate becomes known. Since the Company bears the risk
of cost over-runs and inflation associated with fixed-price, fixed-time frame
projects, the Company's operating results may be adversely affected by
inaccurate estimates of contract completion costs and dates. Although from time
to time the Company has been required to make revisions to its work completion
estimate, to date none of such revisions, in the aggregate, have had a material
adverse effect on the Company's operating results or financial condition in any
reporting period. See "Risk Factors That May Effect Future Results."
The Company anticipates that revenues from Year 2000 services will continue to
increase significantly as a percentage of the Company's total revenues over the
next three years. The Company recently increased its staff of software
development professionals to approximately 800 as of March 20, 1997 principally
to perform the significant additional services required by its new Year 2000
contracts. The Company believes that demand for Year 2000 conversion services
will diminish significantly after the year 2000 as many Year 2000 compliance
solutions are implemented and tested. See "Risk Factors That May Effect Future
Results."
16
<PAGE>
In November, 1996, the Company completed its initial public offering in
which it realized proceeds of $40.7 million (net of $1.1 million in offering
costs). The net proceeds were utilized to acquire the remaining interest in
Information Management Resources (India) Limited ("IMR-India"), repay debt and
pay a Subchapter S distribution to pre-Offering shareholders. In addition,
proceeds of the Offering allocated to potential acquisitions were used in the
first quarter of 1997 to acquire Link, the remaining interest in Information
Management Resources (U.K.), Ltd. ("IMR-U.K.") and Movietone (a company having
facilities in Bombay, India's strategic Santa Cruz Electronics Export Processing
Zone). The remaining cash is currently invested in short-term, investment-grade
securities.
AFFILIATE RELATIONSHIPS
From December 1994 until August 1996, the Company owned approximately 34.2% of
the outstanding equity of IMR-India. In August 1996, the Company completed the
acquisition of a 10.5% equity interest from Second India Investment Fund, B.V.
In November 1996, the Company acquired an additional 18.4% of IMR-India from
Satish K. Sanan, the Company's President, Chief Executive Officer and majority
shareholder. In December, 1996, the Company completed the acquisition of an
additional 35.1% of IMR-India from India Magnum Fund N.V., thereby increasing
the Company's total ownership of IMR-India to 98.2%. The remaining 1.2% is
owned by five individuals. Additionally, IMR-India has granted to certain of
its employees options to acquire additional shares which, if fully vested, would
upon exercise represent 3.5% of IMR-India's equity, and would cause the
Company's equity interest to decrease. The Company's financial statements have
been consolidated with the financial statements of IMR-India for all periods
since September 1993, the date the Company first acquired an equity interest in
IMR-India.
As of December 31, 1996, the Company owned 39.5% of the outstanding equity of
IMR-U.K. and Mr. Satish Sanan and his spouse together owned 10.5% of such
outstanding equity. The balance of IMR-U.K.'s outstanding equity was owned by
Link. The Company's acquisition of Link in February 1997, together with the
Company's acquisition of the Mr. and Mrs. Sanan's interest in IMR-U.K. that same
month, provided the Company with 100% ownership of IMR-U.K. and Link. IMR-U.K.
provides IT services in the U.K. and certain countries in western Europe. IMR-
U.K. and Link will operate as a single, fully owned subsidiary of IMR. In
accordance with the terms of the acquisition agreement, the effective date of
the Link acquisition was January 8, 1997. Prior to January 8, 1997, the
Company's investment in IMR-U.K. was accounted for on the equity method.
Effective January 8, 1997, the Company will include the financial operations of
IMR-U.K. and Link in its financial statements on a consolidated basis.
17
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes for the years indicated, certain items from the
Company's statements of income expressed as a percentage of revenues and
percentage change in the dollar amount of such items compared to the prior year.
<TABLE>
<CAPTION>
Percentage Increase
Percentage of Revenues (Decrease)
Year ended December 31, Year to Year
------------------------- ---------------------
1996 1995 1994 1995-1996 1994-1995
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 23.1% 61.0%
Cost of revenues.............. 58.1% 60.4% 61.4% 18.5% 58.3%
------- ------- -------
Gross profit.................. 41.9% 39.6% 38.6% 30.2% 65.3%
Selling, general and
administrative expenses..... 25.1% 24.1% 32.7% 28.0% 18.9%
------- ------- -------
Income from operations........ 16.8% 15.5% 5.9% 33.5% 323.2%
======= ======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased to $27.9 million, representing a 23.1% increase
over prior year revenues of $22.7 million. Revenue growth for the year reflects
management's decision in 1995 to aggressively pursue Year 2000 business.
Revenues from Year 2000 services increased to $7.5 million in 1996 from $557,000
in 1995. Of these revenues, $6.0 million revenues were realized in the last two
quarters. Core transitional outsourcing services (software development,
application maintenance and migration and re-engineering) increased to $14.8
million in 1996 from $13.3 million in 1995. The Company considers this increase
to be significant because it reflects the Company's continuing effort to
generate growth through increased revenues from both Year 2000 and its core
transitional outsourcing services. Programming and consulting services
revenues declined to $4.1 million in 1996 from $7.4 million in 1995 due to the
reallocation of personnel and sales efforts to higher margin core transitional
outsourcing and Year 2000 projects. In 1996 and 1995, international customers
represented 6.5% and 6.4% of the Company's revenues, respectively.
Cost of Revenues. Cost of revenues consist primarily of consultant wages,
payroll taxes and benefits, operation and maintenance of the Company's offshore
development facility in India, computer hardware and software, relocation,
training and recruitment costs. Cost of revenues increased to $16.2 million in
1996 compared to $13.7 million in 1995 due to the increases in business volume
and wages payable to technical personnel.
Gross Profit. Gross profit increased to $11.7 million in 1996 from $9.0
million in 1995. As a percentage of revenue, gross profit increased to 41.9%
from 39.6%. This increase reflected higher pricing achieved for the Company's
services and a shift of personnel resources to more profitable core transitional
outsourcing and Year 2000 service offerings. The increase was partially offset
by wages paid to technical personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.0% to $7.0 million in 1996 from $5.5
million in 1995. Selling, general and administrative expenses consist primarily
of salaries, employee benefits, travel, promotion, telecommunications,
management, finance, administrative and occupancy costs. Selling, general and
administrative costs were 25.1% of revenues in 1996
18
<PAGE>
as compared to 24.1% of revenues in 1995. This increase reflected additional
costs to establish a new incentive program for project personnel which commenced
in the second half of 1995 as well as additional general and administrative
expenses to expand the Company's infrastructure of administrative support
personnel and equipment. In particular, the satellite links were upgraded and
the India facility's general and administrative infrastructure was expanded.
Income from Operations. Income from operations was $4.7 million in 1996
compared to $3.5 million in 1995, representing an increase of 33.5%.
Other Income (Expense). The Company realized net other income of $36,000 in
1996 compared to $14,000 in 1995. Other income in 1995 included a $428,000 net
gain realized from the sale by IMR-India of certain of its assets and real
property in Bombay and Trivandrum. This 1995 gain was partially offset by a
$110,000 loss in the Company's 39.5% equity investment in IMR-U.K. During 1996,
the Company realized an $83,000 gain on its equity investment in IMR-U.K. In
addition, the Company recognized approximately $132,000 of investment income
from the investment of the net proceeds of its initial public offering.
Interest expense for 1996 and 1995 was $300,000 and $349,000, respectively.
However, the Company repaid most of its long-term debt at the end of 1996.
Minority Interest in Net Income. The minority interest in net income
increased slightly to $730,000 in 1996 from $712,000 in 1995. This represents
the equity investment in IMR-India's net income held by shareholders of IMR-
India other than the Company. The increase represents higher profitability in
IMR-India in 1996. However, this increase was offset by an increase in the
percentage of IMR-India owned by the Company
Provision for Income Taxes. The provision for income taxes increased from
$293,000 in 1995 to $1.4 million in 1996. In November 1996, IMR terminated its
Subchapter S Corporation tax status and recognized a nonrecurring tax charge of
$1.1 million. (See Note 14 to Consolidated Financial Statements.) Prior to
this termination, the 1995 provision for income taxes only reflected only those
taxes related to IMR-India.
IMR has not recorded deferred income taxes applicable to undistributed
earnings of IMR-India. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U. S. federal and state income tax
has been provided thereon.
To provide more meaningful information, the Company's financial statements
also reflect the pro forma effect as if the Company was a C Corporation through
1996 and 1995. The pro forma provision for income taxes increased to $1.4
million in 1996 or 30.6% of net income before provision for income taxes and
minority interest, from $1.2 million in 1995, or 34.0% of net income before
provision for income taxes and minority interest. The decrease in the pro forma
effective tax as a percentage of net income reflects the larger portion of the
net income being contributed by IMR-India, which enjoys a lower tax rate than
IMR.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues were $22.7 million in 1995, representing a 61.0% increase
from revenues of $14.1 million in 1994. This increase reflected increases in
both the size and the number of client projects. In 1995, the Company realized
a significant increase in revenues from software development, application
maintenance and migration and re-engineering projects. Revenues from the
Company's five largest clients in 1995 represented 65.6% of 1995 revenues, while
revenues from the Company's five largest clients in 1994 represented 49.0% of
1994 revenues. In particular, the Company benefited from a large migration
contract that commenced in late 1994 and continued throughout 1995 as well as a
large software development project that started in mid-1995.
Cost of Revenues. Cost of revenues were $13.7 million in 1995, representing a
58.3% increase over cost of revenues of $8.7 million in 1994. Cost of revenues
represented 60.4% and 61.4% of revenues in 1995 and 1994, respectively. This
decrease as a percentage of revenues reflects the Company's implementation of
tighter controls over project pricing and margins as well as an increase in
higher margin Year 2000 projects. This decrease would have been larger except
for the benefits of a number of higher margin contracts completed in the first
quarter of 1994. In addition, in 1995 the Company incurred lower expenses due
to the temporary reduction in personnel costs and other expenses during the
consolidation of the Company's India offshore software development center from
locations in Bombay and Trivandrum to the present location in Bangalore.
Gross Profit. Gross profit was $9.0 million in 1995, representing a 65.3%
increase over gross profit of $5.4 million in 1994. As a percentage of
revenues, gross profit increased from 38.6% in 1994 to 39.6% in the same period
for 1995 for the reasons stated above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.4 million in 1995 representing an 18.9% increase
over selling, general and administrative expenses of $4.6 million in 1994.
Selling, general and administrative expenses were 24.2% and 32.7% of revenues in
1995 and 1994, respectively. The decrease as a percentage of revenues was a
result of the Company's ability to achieve significantly higher revenues in 1995
without a corresponding increase in management, finance, administrative and
occupancy costs, a large portion of which are fixed in nature. The annual bonus
payable to Mr. Sanan (equal to 10% of the Company's net pre-tax profits from
U.S. operations) increased to $255,000 in 1995 from $34,000 in 1994.
Income (Loss) from Operations. Income from operations was $3.5 million in
1995, representing a 323.2% increase over income from operations of $829,000 in
1994. As a percentage of revenues, income from operations increased from 5.9%
in 1994 to 15.4% in the same period for 1995 for the reasons stated above.
Other (Expense) Income. The Company realized other income of $14,000 in 1995
as compared to $498,000 in 1994. Other income in 1995 included a $428,000 net
gain realized upon the sale of real estate and assets by IMR-India, offset by
interest expense of $349,000 and the Company's share of losses in IMR-U.K. of
$110,000. Other income in 1994 reflected income of $1.0 million derived from
the Company's sale of a portion of its equity interest in IMR-India to India
Magnum plus $71,000 realized upon the sale by IMR-India of certain assets and
real property, partially offset by interest expense of $473,000 and the
Company's share of a loss in IMR-U.K. of $126,000. At the beginning of 1994,
the Company's interest in IMR-U.K. was 50.0%. The Company phased down the
operations in IMR-U.K. in early 1994 and recommenced operations after receiving
a 50.0% investment by The Link Group of Companies Limited in late 1994. The
Company's interest in IMR-U.K.'s loss decreased from $126,000 in 1994 to
$110,000 in 1995, reflecting the decrease in the Company's interest from 50.0%
in 1994 to 39.5% in 1995.
20
<PAGE>
Minority Interest in Net (Income) Loss. In 1995, the minority interest in net
income was $712,000 as compared to $63,000 in 1994. This sustained increase
reflects significantly increased profits realized by IMR-India in 1995, as well
as the decrease in the Company's equity interest. In 1995, the Company held a
34.2% equity interest in IMR-India, while the Company held a 69.3% equity
interest in 1994.
Provision (Benefit) for Income Taxes. The tax provision was $293,000 in 1995
as compared to $451,000 in 1994. During 1994, the Company paid $365,000 of India
withholding taxes incurred in connection with the Company's sale of a portion of
its equity interest in IMR-India to India Magnum. The 1995 tax provision
includes taxes payable on the gain realized from the 1995 sale by IMR-India of
certain assets and real property as well as an increase in taxable income for
domestic operations of IMR-India in 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the 8 quarters beginning January 1, 1995 and ending
December 31, 1996. The information relating to the quarters beginning January 1,
1995 and ending on December 31, 1996 is derived from and is qualified by
reference to the audited Consolidated Financial Statements appearing elsewhere
in this document and, in the opinion of management, includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of that information. The results of operations for any quarter are
not necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
1995 1996
--------------------------------------- ---------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....... $5,203 $5,372 $5,853 $6,272 $6,090 $6,307 $7,048 $8,503
Gross profit... 2,144 1,678 2,247 2,923 2,556 2,619 2,942 3,588
Income from
operations... 806 547 790 1,365 1,010 1,073 1,125 1,476
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
1995 1996
--------------------------------------- ---------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit... 41.2 31.2 38.4 46.6 42.0 41.5 41.7 42.2
Income from
operations... 15.5 10.2 13.5 21.7 16.6 17.0 16.0 17.4
</TABLE>
The Company's operations and related revenues and operating results
historically have varied substantially from quarter to quarter, and the Company
expects these variations to continue. Among the factors causing these variations
have been the number, timing and scope of IT projects in which the Company is
engaged, the contractual terms of such projects, delays incurred in the
performance of such projects, the accuracy of estimates of resources and time
frames required to complete ongoing projects, and general economic conditions. A
high percentage of the Company's operating expenses, particularly personnel and
rent, are relatively fixed in advance of any particular quarter. As a result,
unanticipated variations in the number and timing of the Company's projects or
in employee utilization rates may cause significant variations in operating
results in any particular quarter. An unanticipated termination of a major
project, a client's decision not to pursue a new project or proceed to
succeeding stages of a current project, or the completion during a quarter of
several major client projects could require the Company to pay underutilized
employees and therefore have a material adverse effect on the Company's results
of operations and financial condition.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $30.7 million of working capital as
compared to working capital of $2.3 million at December 31, 1995. This increase
primarily resulted from the Company's receipt in 1996 of net proceeds of $40.7
million from its initial public offering. At December 31, 1996, the Company held
$29.7 million in cash and cash equivalents and marketable securities.
Net cash provided by (used in) operations in 1996, 1995 and 1994 was $5.2
million, $1.0 million and ($747,000), respectively. This increase in cash
provided by operations reflects primarily increases in profitability and
improvements in contract management and collection of revenues.
Net cash (used in) provided by investing activities in 1996, 1995 and 1994 was
($19.1 million), $503,000 and $1.3 million, respectively. In 1996, the Company
acquired a majority interest in IMR-India for $10.0 million, invested in
marketable securities of $5.6 million and purchased property and equipment for
$2.6 million. Future plans call for the continued expansion of the India
facilities throughout 1997 of which over $2.0 million has been expended in the
first quarter of 1997.
Subsequent to the initial public offering, the Company repaid its outstanding
long-term debt of approximately $900,000 and approximately 50% of the final
Subchapter S distribution (See Note 16 to the Consolidated Financial
Statements). The remaining 50% was classified as notes payable - shareholders at
December 31, 1996, and was paid in full by the Company during March 1997.
The Company maintains a line of credit with Barnett Bank which allows the
Company to borrow up to 80% of the book value of the Company's accounts
receivable with interest at 30-day LIBOR plus 1.8% (7.4% as of December 31,
1996). At December 31, 1996, there was no amount outstanding and payable under
this line of credit and approximately $4.0 million was available for borrowing.
Provisions of this line of credit and certain notes payable contain financial
covenants, including covenants which require the Company to maintain certain
financial ratios. At December 31, 1996, the Company was in compliance with these
covenants.
The Company maintains an export sales accounts receivable discounting facility
with Canara Bank, an Indian government owned bank. Principal payments on amounts
borrowed are due within 90 days of their respective borrowings. Interest is
currently payable at 13.0%. At December 31, 1996, December 31, 1995 and December
31, 1994, approximately $0, $655,000 and $425,000, respectively, were due under
this facility. The maximum amount available under this facility at December 31,
1996 was approximately $832,000. The facility is collateralized by IMR-India's
export accounts receivable and property and equipment.
ASSET MANAGEMENT
The Company's accounts receivables increased $2.8 million to $5.7 million at
December 31, 1996 from $2.9 million at December 31, 1995. This increase was
partially offset by an increase of $1.9 million in deferred revenues from
$17,000 at December 31, 1995 to $1.9 million at December 31, 1996. A significant
portion of the Company's business is executed on a fixed-price, fixed-time
frame basis. Revenues on fixed-price contracts do not necessarily correlate to
actual billings. Accordingly, accounts receivable may increase significantly in
periods where there is a significant increase in deferred revenues (i.e.,
billings issued in advance of revenue recognition).
22
<PAGE>
A common financial measure is the calculation of days sales outstanding (DSO)
in accounts receivable. Management believes that the calculation of DSO at
December 31, 1996 should factor in (i) rapidly increasing revenues at year-end
(revenues were $8.5 million for the fourth quarter of 1996 compared to $6.3
million for the fourth quarter of 1995) and (ii) the net increase in deferred
revenues during the last quarter of approximately $576,000. When these factors
are considered, DSO was 57 days and 46 days at December 31, 1996 and 1995,
respectively. The 11 day increase was primarily attributable to delays in
payments by customers. The delayed issuance of purchase orders by two customers
accounted for $415,000 of invoices being overdue at December 31, 1996. The
amounts payable by these two customers were collected in full during 1997. At
March 21, 1997, more than 97% of the December 31, 1996 accounts receivable
balance had been collected. Although there can be no assurance, the Company
believes the remaining December 31, 1996 accounts receivable balance will also
be collected.
The Company has invested excess funds received from its initial public
offering in investment-grade securities and money market instruments.
EFFECTS OF INFLATION
The Company's most significant costs are the salaries and related benefits for
its consultants and other professionals. Competition in the U.S., the U.K. and
India for IT professionals with the advanced technological skills necessary to
perform the services offered by the Company have caused wages to increase at a
rate greater than the general rate of inflation. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. Further, India has in the past experienced
significant inflation. Historically, the Company's wage costs in India have been
significantly lower than its wage costs in the U.S. and the U.K. for comparably-
skilled employees, although wage costs in India are presently increasing at a
faster rate than in the U.S. and the U.K.. There can be no assurance that the
Company will be able to recover cost increases through increases in the prices
that it charges for its services in the U.S. and elsewhere.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), was issued. SFAS 128 is designed to modify
the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of earnings per share data on an
international basis. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The Company will adopt SFAS 128 on its effective
date. Management is currently assessing the impact of SFAS No. 128 on the
Company's presentation of earnings per share data in future periods.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
MANAGEMENT OF GROWTH. An important element of the Company's strategy is to
pursue continued rapid growth of its business. The Company's revenues increased
approximately 23.1% in 1996, from $22.7 million in 1995 to $27.9 million in
1996. As of March 20, 1997, the Company employed approximately 800 software
development professionals. The Company's growth will continue to place
significant demands on its management and other resources. In particular, the
Company will have to continue to increase the number of its personnel,
particularly skilled technical, marketing and management personnel, and continue
to develop and improve its operational, financial, communications and other
internal systems, both in the U.S. and offshore. The Company's inability to
manage its growth effectively could have a material adverse effect on the
quality of the Company's services and projects, its ability to attract and
retain key personnel, its business prospects and its results of operations and
financial condition. Any unexpected shortfall in revenues without a
corresponding and timely reduction in staffing and other expenses, or a staffing
increase that is unaccompanied by a corresponding increase in revenues, could
also have a material adverse effect on the Company's results of operations and
its financial condition.
23
<PAGE>
DEPENDENCE ON KEY EXECUTIVE. The Company's success will depend in large part
upon the continued availability of the services of Satish K. Sanan, the
Company's President, Chief Executive Officer and majority shareholder. The loss
of the services of Mr. Sanan would have a material adverse effect on the
Company. The Company does not intend to maintain key man insurance on the life
of Mr. Sanan.
VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock
has been highly volatile at relatively low trading volumes since the Company's
initial public offering and has been and is likely to continue to be subject to
wide fluctuations in response to a variety of factors, including quarterly
variations in operating results, the signing of services contracts, new
customers, consolidations in the industry, technological innovations or new
products by the Company or its competitors, developments in patents or other
intellectual property rights, general conditions in the IT services industry,
revised earnings estimates, comments or recommendations issued by analysts who
follow the Company, its competitors or the IT services industry and general
economic and market conditions. In addition, it is possible that in some future
period the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock could be materially adversely affected. Additionally, the stock market in
general, and the market for technology stocks in particular, have experienced
extreme price volatility in recent years. Volatility in price and volume has had
a substantial effect on the market prices of many technology companies for
reasons unrelated or disproportionate to the operating performance of such
companies. These broad market fluctuations could have a significant impact on
the market price of the Common Stock.
RELIANCE ON SIGNIFICANT CLIENTS. The Company has derived and believes that it
will continue to derive a significant portion of its revenues from a limited
number of large corporate clients. During 1996, the Company's five largest
clients accounted for approximately 59.0% of revenues. NOVUS and SPS, which are
affiliated companies, together accounted for approximately 31.0% of revenues in
1996. The volume of work performed for specific clients is likely to vary from
year to year, and a major client in one year may not provide the same level of
revenues in any subsequent year. The loss of any large client could have a
material adverse effect on the Company's results of operations and financial
condition. Because many of its contracted engagements involve projects that are
critical to the operations of its clients' businesses, IMR's failure to meet a
client's expectations could result in a cancellation or nonrenewal of the
contract and could damage the Company's reputation and adversely affect its
ability to attract new business. Furthermore, under substantially all of its
contracts, the Company is not the exclusive outside source for IT services to
the client. Accordingly, a client's dissatisfaction with IMR's performance could
lead the client to purchase these services from another competitor.
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL. The future success of the
Company's growth strategy will depend to a significant extent on its ability to
attract, train, motivate and retain highly skilled software development
professionals, particularly project managers, software engineers and other
senior technical personnel. The Company believes that in the U.S., the U.K. and
India there is a shortage of, and significant competition for, software
development professionals with the advanced technological skills necessary to
perform the services offered by the Company. The Company's ability to maintain
and renew existing engagements and obtain new business depends, in large part,
on its ability to hire and retain technical personnel with the IT skills that
keep pace with continuing changes in information processing technology, evolving
industry standards and changing client preferences. An inability to hire such
additional qualified personnel could impair the Company's ability to adequately
manage and complete its existing projects and to bid for or obtain new projects.
Further, the Company must train and manage its growing employee base, requiring
an increase in the level of responsibility for both existing and new management
personnel. There can be no assurance that the management skills and systems
currently in place will be adequate or that the Company will be able to
assimilate new employees successfully. Accordingly, there can be no assurance
that the Company will be successful in
24
<PAGE>
retaining current or future employees. In addition, a significant number of the
Company's employees reside in India. Historically, the Company's India wage
costs have been significantly lower than its wage costs in the U.S. and the U.K.
for comparably skilled employees, although wage costs in India are presently
increasing at a faster rate than in the U.S.
DEPENDENCE ON INDIA OFFSHORE SOFTWARE DEVELOPMENT CENTER. A significant
element of the Company's business strategy is to continue to leverage its
offshore software development center in Bangalore, India which provides IMR with
a cost advantage as well as the ability to provide 24-hour service to its
clients. In order to provide its service delivery model, the Company must
maintain active satellite communications between its offices, the offices of its
clients in the U.S. and elsewhere and the Bangalore offshore software
development facility. Any loss of the Company's ability to transmit voice and
data through satellite communications to India could have a material adverse
effect on the Company's results of operation and financial condition. In the
past, India has experienced significant inflation, low growth in gross domestic
product and shortages of foreign exchange. India also has experienced civil
unrest and terrorism and, from time to time, has been involved in conflict with
neighboring countries. No assurance can be given that the Company will not be
adversely affected by changes in inflation, interest rates, taxation, social
stability or other political, economic or diplomatic developments in or
affecting India in the future. In addition, the Indian government has exercised
and continues to exercise significant influence over many aspects of the Indian
economy, and Indian government actions concerning the economy could have an
adverse impact on private sector entities, including the Company. During the
past five years, India's government has provided significant tax incentives and
relaxed certain regulatory restrictions in order to encourage foreign investment
in specified sectors of the economy, including the software development
industry. Certain of those benefits which have directly affected the Company
include, among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment and repatriation. Notwithstanding these
benefits, however, India's central and state governments remain significantly
involved in the Indian economy as regulators. The elimination of any of the
benefits realized by the Company from its Indian operations could have a
material adverse effect on the Company's results of operation and financial
condition.
FIXED-PRICE, FIXED-TIME FRAME CONTRACTS. As a core element of its business
philosophy, the Company's strategy is to offer many of its IT services on fixed-
price, fixed-time frame contracts, rather than contracts in which payment to the
Company is determined solely on a time-and-materials basis. Although the Company
uses its TSQM software engineering process and its past project experience to
reduce the risks associated with estimating, planning and performing the fixed-
price projects, the Company bears the risk of cost over-runs and inflation in
connection with these projects. The Company's failure to estimate accurately the
resources and time required for a project or its failure to complete its
contractual obligations within the time frame committed could have a material
adverse effect on the Company's results of operation and financial condition.
POTENTIAL DECREASE IN SERVICES AFTER ADDRESSING THE YEAR 2000 PROBLEM. The
Company expects to derive a significantly higher percentage of its total
revenues from Year 2000 conversion services for at least the next three years.
The Company realized 26.9% of total revenues from Year 2000 conversion services
in 1996. The Company believes that demand for Year 2000 conversion services will
begin to diminish significantly after the year 2000 as many Year 2000 compliance
solutions are implemented and tested. A core element of the Company's growth
strategy is to use the business relationships and the knowledge of its clients'
computer systems obtained in providing its Year 2000 services to generate
additional IT projects for these clients. There can be no assurance, however,
that the Company will be successful in generating additional business from its
Year 2000 clients for other services. In addition, by utilizing significant
resources during the next several years to solve its clients' Year 2000
problems, the Company's ability to continue to deliver other IT services could
be adversely affected.
25
<PAGE>
COMPETITION. The IT services market is highly competitive and served by
numerous national, regional and local firms, all of which are either an existing
or potential competitor of the Company. Many of these competitors have
significantly greater financial, technical and marketing resources and generate
greater revenue than the Company, and there can be no assurance that the Company
will not lose existing clients to such competitors. The Company believes that
its ability to compete also depends in part on a number of factors outside its
control, including the ability of its competitors to hire and retain
professional and technical employees, the price at which others offer comparable
services and the extent of its competitors' responsiveness to client needs.
POTENTIAL LIABILITY TO CLIENTS. Many of the Company's engagements involve
projects that are critical to the operations of its clients' businesses and
provide benefits that may be difficult to quantify. Any failure in a client's
system could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. Although the
Company attempts to limit contractually its liability for damages arising from
negligent acts, errors, mistakes or omissions in rendering its IT services,
there can be no assurance the limitations of liability set forth in its service
contracts will be enforceable in all instances or would otherwise protect the
Company from liability for damages. Although the Company maintains general
liability insurance coverage, including coverage for errors or omissions, there
can be no assurance that such coverage will continue to be available on
reasonable terms or will be available in sufficient amounts to cover one or more
large claims, or that the insurer will not disclaim coverage as to any future
claim. The successful assertion of one or more large claims against the Company
that exceed available insurance coverage or changes in the Company's insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could adversely affect the Company's results of
operations and financial condition.
IMMIGRATION ISSUES. The Company believes that its success in part has resulted
from its ability to attract and retain persons with technical and project
management skills from other countries, especially India. As of March 20,
approximately 150 of the Company's U.S. employees were working for the Company
in the H-1B, non-immigrant work permitted visa classification. There is a limit
on the number of new H-1B petitions that the U.S. Immigration and Naturalization
Service may approve in any government fiscal year, and in years in which this
limit is reached, the Company may not be able to obtain H-1B visas necessary to
bring critical foreign employees to the U.S. Compliance with existing U.S.
immigration laws, or changes in such laws making it more difficult to hire
foreign nationals or limiting the ability of the Company to retain H-1B
employees in the U.S., could require the Company to incur additional unexpected
labor costs and expenses. Any such restrictions or limitations on the Company's
hiring practices could have a material adverse effect on the Company's results
of operations and financial condition.
POSSIBLE ACQUISITIONS. Given the highly fragmented nature of the IT services
market, together with significant barriers to entry in major accounts, the
Company believes that opportunities exist to expand through the selective
acquisition of smaller regional IT services firms with established customers.
Although the Company recently has completed the acquisition of IMR-U.K., Link
and Movietone, there can be no assurance that the Company will be able to
identify additional suitable acquisition candidates available for sale at
reasonable prices, consummate any acquisition or successfully integrate any
acquired business into the Company's operations. Further, acquisitions may
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
circumstances, legal liabilities and amortization of acquired intangible assets,
some or all of which could have a material adverse effect on the Company's
results of operations and financial condition. Client satisfaction or
performance problems at a single acquired firm could have a material adverse
impact on the reputation of the Company as a whole.
26
<PAGE>
INTELLECTUAL PROPERTY RIGHTS. In order to protect its proprietary rights in
its various intellectual properties, the Company relies upon a combination of
copyright and trade secret laws, nondisclosure and other contractual
arrangements, and technical measures. India and the U.K. are members of the
Berne Convention, an international treaty. As members of the Berne Convention,
the governments of India and the U.K. have agreed to recognize protections on
copyrights conferred under the laws of foreign countries, including the laws of
the U.S. The Company believes that laws, rules, regulations and treaties in
effect in the U.S., the U.K. and India are adequate to protect it from
misappropriation or unauthorized use of its copyrights. However, there can be no
assurance that such laws will not change and, in particular, that the laws of
India or the U.K. will not change in ways that may prevent or restrict the
transfer of software components, libraries and toolsets from India to the U.S.
or the U.K. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to deter misappropriation of its
Year 2000 proprietary rights or any of its other intellectual property, or that
the Company will be able to detect unauthorized use and take appropriate steps
to enforce its rights. The Company presently holds no patents or registered
copyrights. Although the Company believes that its intellectual property rights
do not infringe on the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the company in the
future, that assertion of such claims will not result in litigation or that the
Company would prevail in such litigation or be able to obtain a license for the
use of any infringed intellectual property from a third party on commercially
reasonable terms. The Company expects that the risk of infringement claims
against the Company will increase if more of the Company's competitors are able
to successfully obtain patents for software products and processes. Any such
claims, regardless of their outcome, could result in substantial cost to the
Company and divert management's attention from the Company's operations. Any
infringement claim or litigation against the Company could, therefore, have a
material adverse effect on the Company's results of operations and financial
condition.
VARIABILITY OF QUARTERLY OPERATIONS AND FINANCIAL RESULTS. The Company's
operations and related revenues and operating results historically have varied
substantially from quarter to quarter, and the Company expects these variations
to continue. Among the factors causing these variations have been the number,
timing and scope of IT projects in which the Company is engaged, the contractual
terms of such projects, delays incurred in the performance of such projects, the
accuracy of estimates of resources and time frames required to complete ongoing
projects, and general economic conditions. A high percentage of the Company's
operating expenses, particularly personnel and rent, are relatively fixed in
advance of any particular quarter. As a result, unanticipated variations in the
number and timing of the Company's projects or in employee utilization rates may
cause significant variations in operating results in any particular quarter. An
unanticipated termination of a major project, a client's decision not to pursue
a new project or proceed to succeeding stages of a current project, or the
completion during a quarter of several major client projects could require the
Company to continue to pay underutilized employees and therefore have a material
adverse effect on the Company's results of operations and financial condition.
As a result of the foregoing factors, the Company's operating results for a
future quarter may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock likely will be
adversely affected.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Report on Form 10-K
contains certain forward-looking statements, including, among others: (i) the
potential extent of the Year 2000 problem and the anticipated growth in the Year
2000 services market; (ii) presently anticipated trends in the Company's results
of operations and financial condition; (iii) the ability of the Company to rely
on cash generated from operations and the proceeds of this Offering to finance
its working capital requirements; (iv) the Company's business strategy for
expanding its services; and (v) the Company's ability to distinguish itself from
its current and future competitors. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties. Actual results could differ materially from these
forward-looking statements. In addition to the other risks described elsewhere
in this "Risk Factors" discussion, important factors to consider in evaluating
such forward-looking statements include: (i) the shortage of reliable
27
<PAGE>
market data regarding the Year 2000 conversion services market; (ii) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (iii)
unanticipated working capital or other cash requirements; (iv) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the Year 2000 conversion services market; (v) the
Company's failure to perform Year 2000 conversion projects to a client's
satisfaction; and (vi) various competitive factors that may prevent the Company
from competing successfully in the marketplace. In light of these risks and
uncertainties, many of which are described in greater detail elsewhere in this
"Risk Factors That May Effect Future Results" discussion, there can be no
assurance that the forward-looking statements contained in this Prospectus will
in fact transpire.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial Statements:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Changes in Shareholders' Equity - Year Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data is included in Item 7 under the heading
"Managements's Discussion and Analysis of Financial Condition and Results
of Operations -- Quarterly Results of Operations".
The financial statements begin on the following page.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of Information Management Resources, Inc.
We have audited the accompanying consolidated balance sheets of Information
Management Resources, Inc. and subsidiary (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1996, 1995
and 1994. 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 did not audit the financial statements of
Information Management Resources (India) Limited, a consolidated subsidiary, as
of December 31, 1995 and for the years ended December 31, 1995 and 1994,
constituting approximately 31% of consolidated assets as of December 31, 1995
and approximately 81% and 86% of consolidated cost of revenues for the years
ended December 31, 1995 and 1994, respectively (see Note 2). Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Information
Management Resources (India) Limited, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respect, the consolidated financial position of Information Management
Resources, Inc. and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P
Tampa, Florida
March 7, 1997
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To The Board of Directors of
Information Management Resources (India) Limited
We have audited the accompanying balance sheet of Information Management
Resources (India) Limited (a company incorporated in India) as of December 31,
1995, and the related statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1995 and December 31, 1994. 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 generally accepted auditing
standards in the United States of America. 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 financial position of Information Management
Resources (India) Limited as of December 31, 1995, and the results of its
operations and its cash flows for the years ended December 31, 1995 and December
31, 1994 in conformity with generally accepted accounting principles in the
United States of America.
ARTHUR ANDERSEN & ASSOCIATES
Bombay, India
September 6, 1996
30
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $24,081,743 $1,620,968
Marketable securities.......................................... 5,643,535 -
Accounts receivable............................................ 5,669,626 2,905,920
Unbilled work in process....................................... 1,073,965 708,094
Accounts receivable, affiliates................................ 646,220 -
Notes receivable, affiliate.................................... 533,750 -
Other current assets........................................... 890,341 468,940
----------- ----------
Total current assets..................................... 38,539,180 5,703,922
Property and equipment, net of accumulated depreciation........... 3,702,918 1,699,084
Capitalized software costs, net of accumulated amortization....... 719,978 548,691
Note receivable, affiliate........................................ 158,750 -
Deposits and other assets......................................... 437,716 263,382
Goodwill, net of accumulated amortization......................... 5,394,569 451,370
----------- ----------
Total assets............................................. $48,953,111 $8,666,449
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans......................................... $ - $ 655,466
Accounts payable............................................... 1,364,043 490,317
Accrued expenses............................................... 2,878,049 1,484,443
Income tax payable............................................. 476,750 -
Deferred income taxes.......................................... 257,832 -
Current portion of long-term debt.............................. - 326,640
Current maturities of capital lease obligations................ 55,444 132,642
Current portion of notes payable-shareholders.................. 813,754 242,457
Deferred revenue............................................... 1,964,576 17,270
----------- ----------
Total current liabilities................................ 7,810,448 3,349,235
Long-term debt.................................................... - 1,077,077
Notes payable-shareholder......................................... - 107,054
Capital lease obligations......................................... - 54,514
Deferred income taxes............................................. 634,396 46,684
Other liabilities................................................. 84,879 82,507
----------- ----------
Total liabilities........................................ 8,529,723 4,717,071
----------- ----------
Minority interest................................................. 67,107 1,241,266
----------- ----------
Commitments and contingencies (Notes 13, 15 and 22)
Shareholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares authorized,
no shares issued and outstanding............................ - -
Common stock, $.10 par value per share, 40,000,000 shares
authorized, 9,649,090 and 9,055,960 issued and outstanding.. 964,909 905,600
Additional paid-in capital..................................... 38,841,667 1,167,244
Retained earnings.............................................. 669,034 705,956
Cumulative foreign currency translation adjustment............. (119,329) (61,938)
----------- ----------
40,356,281 2,716,862
Less treasury stock at cost, 5,000 shares at December 31, 1995.... - (8,750)
----------- ----------
Total shareholders' equity............................... 40,356,281 2,708,112
----------- ----------
Total liabilities and shareholders' equity............... $48,953,111 $8,666,449
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues........................................................ $27,948,076 $22,700,170 $14,101,653
Cost of revenues................................................ 16,243,746 13,708,782 8,662,244
----------- ----------- -----------
Gross profit........................................... 11,704,330 8,991,388 5,439,409
Selling, general and administrative expenses.................... 7,020,679 5,482,982 4,610,481
----------- ----------- -----------
Income from operations................................. 4,683,651 3,508,406 828,928
Other income (expense):
Income (loss) in equity investment........................... 83,131 (110,038) (125,842)
Interest expense............................................. (300,526) (348,652) (472,606)
Other income................................................. 253,048 472,609 1,097,015
----------- ----------- -----------
Total other income..................................... 35,653 13,919 498,567
----------- ----------- -----------
Income before provision
for income taxes and minority interest....................... 4,719,304 3,522,325 1,327,495
Provision for income taxes...................................... 1,401,244 292,747 450,504
----------- ----------- -----------
Income before minority interest........................ 3,318,060 3,229,578 876,991
Minority interest in net income................................. (730,373) (711,993) (62,587)
----------- ----------- -----------
Net income............................................. $ 2,587,687 $ 2,517,585 $ 814,404
=========== =========== ===========
Pro forma adjustment (See Note 2):
Historical net income........................................... $ 2,587,687 $ 2,517,585
Pro forma adjustment to income tax expense...................... (42,756) (905,114)
----------- -----------
Pro forma net income............................................ $ 2,544,931 $ 1,612,471
=========== ===========
Pro forma net income per share.................................. $ 0.22 $ 0.12
=========== ===========
Weighted average common and
common stock equivalent shares outstanding................... 11,720,451 13,702,994
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Foreign Retained
Common Stock Additional Currency Earnings
----------------------- Paid-In Translation (Accumulated Treasury
Shares Amount Capital Adjustment Deficit) Stock Total
----------- ---------- ------------ ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994....... 9,055,960 $ 905,596 $ 1,167,248 $ (5,642) $(2,626,033) $ - $ (558,831)
Translation adjustments........ - - - 8,723 - - 8,723
Net income..................... - - - - 814,404 - 814,404
---------- --------- ----------- ---------- ------------ ------------ -----------
Balance, December 31, 1994..... 9,055,960 905,596 1,167,248 3,081 (1,811,629) - 264,296
Repurchase of common stock..... - - - - - (8,750) (8,750)
Translation adjustments........ - - - (65,019) - - (65,019)
Net income..................... - - - - 2,517,585 - 2,517,585
---------- --------- ----------- ---------- ------------ ------------ -----------
Balance, December 31, 1995..... 9,055,960 905,596 1,167,248 (61,938) 705,956 (8,750) 2,708,112
Issuance of common stock
for options exercised....... 136,170 13,617 - - - - 13,617
Repurchase of common stock..... - - - - - (1,489,272) (1,489,272)
Retirement of treasury stock... (2,755,540) (275,554) (1,167,248) - (55,220) 1,498,022 -
Dividends paid................. - - - - (1,623,303) - (1,623,303)
Termination of S Corporation
tax status.................. - - 946,086 - (946,086) - -
Common stock issued in
connection with initial
public offering............. 3,212,500 321,250 40,395,794 - - - 40,717,044
Acquisition of majority
shareholder's interest in
subsidiary.................. - - (2,500,213) - - - (2,500,213)
Translation adjustments........ - - - (57,391) - - (57,391)
Net income..................... - - - - 2,587,687 - 2,587,687
---------- --------- ----------- ---------- ------------ ------------ -----------
Balance, December 31, 1996..... 9,649,090 $ 964,909 $38,841,667 $(119,329) $ 669,034 $ - $40,356,281
========== ========= =========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 2,587,687 $ 2,517,585 $ 814,404
Adjustment to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization.................................... 777,751 491,085 545,696
Gain on sale of property and equipment........................... - (520,672) (76,473)
Gain on sale of subsidiary....................................... - - (1,013,503)
Unrealized exchange losses....................................... 8,790 62,862 4,938
(Gain) loss in equity investment................................. (83,131) 110,038 125,842
Minority interest in net income.................................. 730,373 711,993 62,587
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process.............. (3,129,577) (1,638,061) (568,910)
Accounts receivable-affiliate................................. (646,220) - -
Other current assets.......................................... (573,324) (69,167) (160,708)
Deposits and other assets..................................... (91,203) (14,042) (65,528)
Accounts payable.............................................. 873,726 (716,594) 604,019
Accrued expenses.............................................. 1,393,606 282,439 (848,277)
Income tax payable............................................ 476,750 - -
Deferred income taxes......................................... 865,407 39,395 64,849
Deferred revenue.............................................. 1,947,306 (243,544) (281,204)
Other liabilities............................................. 14,979 14,821 45,629
------------ ----------- -----------
Total adjustments............................................. 2,565,233 (1,489,447) (1,561,043)
------------ ----------- -----------
Net cash provided by (used in) operating activities........... 5,152,920 1,028,138 (746,639)
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of interest in consolidated subsidiary.................. (9,967,942) - -
Investment in marketable securities................................. (5,511,475) - -
Proceeds from sale of investment in subsidiary...................... - 2,500 1,883,012
Proceeds from sale of property and equipment........................ - 1,388,478 284,004
Additions to capitalized software costs............................. (302,014) (170,088) (385,603)
Additions to property and equipment................................. (2,604,738) (710,217) (312,282)
Increase in equity investment and loans to affiliate................ (692,500) (7,746) (159,402)
------------ ----------- -----------
Net cash provided by (used in ) investing activities.......... (19,078,669) 502,927 1,309,729
------------ ----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings from revolving credit line.............. (655,466) 230,227 (138,421)
Proceeds from long-term debt........................................ 900,000 - 574,586
Payments on long-term debt.......................................... (1,777,150) (1,024,881) (440,292)
Proceeds from notes payable-shareholder............................. - 207,605 20,555
Payments on notes payable-shareholder............................... (349,511) (50,426) -
Proceeds from capital lease obligation.............................. - - 15,107
Payments on capital lease obligations............................... (131,712) (157,954) (180,327)
Proceeds from issuance of common stock.............................. 41,840,367 - -
Payment of costs in connection with issuance of common stock........ (1,109,706) - -
Purchase of treasury stock at cost.................................. (1,489,272) (8,750) -
Payment of dividends................................................ 822,156 - -
------------ ----------- -----------
Net cash provided by (used in) financing activities........... 36,405,394 (804,179) (148,792)
------------ ----------- -----------
Effect of exchange rate charges........................................ (18,870) (118,815) (272)
------------ ----------- -----------
Net increase in cash and cash equivalents.............................. 22,460,775 608,071 414,026
Cash and cash equivalents at beginning of year......................... 1,620,968 1,012,897 598,871
------------ ----------- -----------
Cash and cash equivalents at end of year............................... $ 24,081,743 $ 1,620,968 $ 1,012,897
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.............................. $ 300,526 $ 377,100 $ 438,100
============ =========== ===========
Cash paid during the year for income taxes.......................... $ 132,421 $ 229,500 $ 33,200
============ =========== ===========
Supplemental schedule of noncash investing and financing activities:
Note payable-shareholders issued in lieu of dividend................ $ 801,147 $ - $ -
============ =========== ===========
Capital lease obligations incurred for property and equipment....... $ - $ - $ 26,383
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
Information Management Resources, Inc. and subsidiary (the Company) provides
transitional software outsourcing solutions to the information technology
departments of large businesses. The Company's services are provided to a
variety of industries and customers located primarily in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation--The consolidated financial statements include the
accounts of Information Management Resources, Inc. (IMR) and its majority owned
or effectively controlled foreign subsidiary, Information Management Resources
(India) Limited, an Indian limited liability company (IMR-India). The Company's
investment in Information Management Resources (U.K.) Limited (IMR-U.K.) is
accounted for on the equity method. All significant inter-company balances and
transactions have been eliminated.
Effective September 1993, IMR acquired a 69.3% interest in IMR-India. IMR-
India was incorporated in India in June 1990. Throughout 1994, IMR had a
controlling financial interest in IMR-India. During December 1994, IMR sold a
portion of its ownership in IMR-India thereby reducing its investment from 69.3%
to 34.2%. The sale resulted in net cash proceeds of approximately $1,883,000 and
resulted in a net gain of approximately $1,014,000, which is included in other
income for the year ended December 31, 1994. During 1996, IMR purchased an
additional 45.6% (260,000 shares) of IMR-India's outstanding common shares for
approximately $6.9 million in cash in two separate transactions. These
acquisitions are accounted for as purchases pursuant to the provisions of APB
Opinion No. 16, "Business Combinations" and resulting goodwill is being
amortized over a 10-year period. In addition, during November 1996, IMR acquired
an additional 18.4% (104,800 shares) of IMR-India from the Company's majority
shareholder for approximately $3.1 million in cash. The acquisition from IMR's
majority shareholder is accounted for as a reduction of equity (See Note 21).
IMR accounts for its investment in IMR-India utilizing the consolidation
method for all periods presented, because effective control had been maintained
through the continued direct financial interest in IMR-India held by IMR's
majority shareholder. IMR-India's financial statements are prepared in
conformity with U.S. generally accepted accounting principles.
As a result of the acquisitions noted above, IMR owns 98.2% of the outstanding
common shares of IMR-India.
35
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
IMR also owns 39.5% of IMR-U.K. Prior to November 1994, IMR had effective
control of IMR-U.K. through IMR's majority shareholder's financial interest in
IMR-U.K. Management believes that the effect of not consolidating IMR-U.K. in
the Company's financial statements for periods prior to November 1994 is not
material. During February 1997, the Company acquired the remaining 60.5% of IMR-
U.K. (see Note 22).
Cash and Cash Equivalents--The Company considers all highly liquid investments
with original maturity dates of three months or less to be cash equivalents. The
Company maintains its investments at high quality financial institutions.
Marketable Securities--The Company's short-term investments are classified as
available-for-sale as defined by Statement of Financial Accounting Standard
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." These investments consist of United States and municipal government
securities at December 31, 1996 and are stated at estimated fair value based
upon market quotes.
Revenue Recognition--Fixed-price contract revenue 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 would be accrued currently.
Unbilled work-in-progress represents revenues on contracts to be billed in
subsequent periods as per in accordance with the terms of the contract. Deferred
revenue represents amounts billed in excess of revenue earned. Service revenue
from time-and-materials services is recognized as the services are provided.
Software product sales are recorded as the products are shipped to the
customers.
Goodwill--Goodwill originated from the acquisition of IMR-India and is being
amortized utilizing the straight-line basis over a 10-year period. The Company
periodically reviews the value of its goodwill to determine if an impairment has
occurred. The Company measures the potential impairment of recorded goodwill by
the undiscounted value of expected future operating cash flow in relation to the
assets to which this goodwill applies.
Research and Development Costs--Research and development costs represent costs
incurred for new product development and are included in selling, general and
administrative expenses in the financial statements as incurred.
Software Product Inventory--Software products represent third-party purchases
of software held for resale and are stated at the lower of cost or market; cost
being determined on the first-in, first-out (FIFO) method. Software products are
included in other current assets.
36
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Property and Equipment--Property and equipment, including property under
capital lease agreements, are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method and is charged to income
over the estimated useful lives of the respective assets. Maintenance and
repairs are expensed as incurred, while renewals and betterments are
capitalized.
Fully depreciated assets are retained in property and depreciation accounts
until they are removed from service. Cost and accumulated depreciation on assets
retired or disposed of are removed from the accounts and any gain and losses
resulting therefrom are credited or charged to operations.
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 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.
Income Taxes--Prior to November 1996, the Company elected to be taxed as an S
Corporation under the provisions of the Internal Revenue Code whereby taxable
income is generally reported by the shareholders on their individual income tax
returns. In connection with the initial public offering (See Note 16), the S
Corporation election was terminated on November 11, 1996 and subsequently the
Company became subject to U.S. federal and state income taxes as a C
Corporation. The Company utilizes 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 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. (See Note 14.)
Pro Forma Net Income--To properly reflect the Company's pro forma net income,
the provision for income taxes has been adjusted as if the Company had been a
taxable entity subject to federal and state income taxes at the marginal rates
applicable to such periods. In addition, the pro forma adjustment to income tax
expense for the year ended December 31, 1996 excludes the $1,075,000 one-time
income tax expense resulting from the termination of the S Corporation status.
37
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Foreign Currency Translation--The financial statements of IMR-India utilize
a functional currency which is other than the U.S. dollar and are translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Assets and liabilities of IMR-India are translated at exchange
rates in effect on the reporting date. Income and expense items are translated
at the average exchange rate for the year. The resulting translation adjustments
are not included in determining net income but are accumulated as a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are reported in net income but were not material to any period presented.
Computation of Net Income per Share--Net income per common and common
equivalent shares for the years ended December 31, 1996 and 1995, have been
computed using the weighted average number of common and common equivalent
shares outstanding using the treasury stock method, as adjusted for the common
stock split described in Note 16, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Weighted average
common stock outstanding........................ 6,870,188 9,050,960
Weighted average
common stock equivalents........................ 4,850,263 4,652,034
---------- ----------
Shares used in net income share calculation........ 11,720,451 13,702,994
========== ==========
</TABLE>
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements--In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings per Share" which is effective for
periods ending after December 15, 1997. This statement establishes standards for
computing and presenting earnings per share data. Management is currently
assessing the impact of SFAS No. 128 on the Company's presentation of earnings
per share data in future periods.
Reclassification--Certain prior year financial statement balances have been
reclassified to conform to the 1996 presentations.
38
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MARKETABLE SECURITIES:
The Company currently invests in only 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,
1996. Additionally, because investments are short-term and are generally allowed
to mature, realized gains and losses have been minimal through December 31,
1996.
The following table presents the estimated fair value of marketable securities
by category:
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Municipal debt securities..................... $ 5,511,475
Interest income receivable.................... 132,060
------------
$ 5,643,535
============
</TABLE>
The maturity of the above marketable securities at December 31, 1996, is
between one and three years.
4. ACCOUNTS RECEIVABLE:
The major classifications of accounts receivable at December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accounts receivable, trade........................ $4,997,144 $2,320,252
Unbilled accounts receivable-
time-and-materials contracts................... 672,482 585,668
---------- ----------
$5,669,626 $2,905,920
========== ==========
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON COMPLETED AND UNCOMPLETED CONTRACTS:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Costs incurred on completed
and uncompleted contracts................... $ 6,692,453 $ 4,369,463
Estimated earnings............................. 3,380,593 1,443,266
------------ -----------
10,073,046 5,812,729
Less billings to date.......................... (10,963,657) (5,121,905)
------------ -----------
$ (890,611) $ 690,824
============ ===========
</TABLE>
39
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COSTS AND ESTIMATED EARNINGS ON COMPLETED AND UNCOMPLETED CONTRACTS
(CONTINUED):
The following is included in the accompanying balance sheets:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Unbilled work in process -fixed-price contracts................. $ 1,073,965 $ 708,094
Deferred revenue-fixed price contracts.......................... (1,964,576) (17,270)
----------- -----------
$ (890,611) $ 690,824
=========== ===========
</TABLE>
6. OTHER CURRENT ASSETS:
Other current assets at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Employee advances...................................... $ 73,548 $ 141,044
Software product inventory............................. 40,992 84,094
Prepaid expenses....................................... 701,027 234,857
Other receivable....................................... 52,987 -
Advances to affiliates................................. 21,787 -
Deferred income taxes.................................. - 8,945
----------- -----------
$ 890,341 $ 468,940
=========== ===========
</TABLE>
7. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment at December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
(Years) 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Building and improvements............................ 10-40 $ 348,118 $ 159,164
Computer equipment................................... 5 - 6 2,175,260 1,104,225
Computer software.................................... 5-10 1,497,076 615,163
Office furniture and equipment....................... 5-12 954,645 555,418
Equipment under capital leases....................... 5 485,603 503,171
Construction in progress............................. 4,692 1,276
----------- -----------
5,465,394 2,938,417
Less accumulated depreciation
and amortization.................................. (1,762,476) (1,239,333)
----------- -----------
$ 3,702,918 $ 1,699,084
=========== ===========
</TABLE>
40
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PROPERTY AND EQUIPMENT (CONTINUED):
The equipment under capital lease is pledged as collateral for the related
lease obligations.
Depreciation and amortization expense related to property and equipment was
approximately $547,000, $425,000 and $426,000 for the years ended December 31,
1996, 1995 and 1994, respectively. Accumulated amortization on equipment under
capital leases was approximately $403,000 and $313,000 at December 31, 1996 and
1995, respectively.
8. CAPITALIZED SOFTWARE COSTS:
Capitalized software costs at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
========= ========
<S> <C> <C>
Capitalized software costs................. $ 857,705 $555,691
Accumulated amortization................... (137,727) (7,000)
--------- --------
$ 719,978 $548,691
========= ========
</TABLE>
Amortization expense related to capitalized software costs was approximately
$131,000 in 1996 and $7,000 in 1995. No adjustments were made during 1996,
1995, or 1994 to write down capitalized software costs to net realizable value.
9. GOODWILL:
Goodwill at December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Goodwill............................ $5,631,559 $ 588,745
Accumulated amortization............ (236,990) (137,375)
---------- ---------
$5,394,569 $ 451,370
========== =========
</TABLE>
Amortization expense related to goodwill was approximately $100,000, $60,000
and $120,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
41
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ACCRUED EXPENSES:
Accrued expenses at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accrued payroll and incentives.............................. $ 882,664 $ 556,515
Accrued payroll taxes....................................... 423,056 368,974
Employee Stock Purchase Plan................................ 393,665 -
Accrued vacations........................................... 234,640 306,433
Initial public offering costs .............................. 125,000 -
Software costs.............................................. 245,000 -
Due to affiliate............................................ - 27,027
Other....................................................... 574,024 225,494
----------- -----------
$2,878,049 $1,484,443
=========== ===========
</TABLE>
11. REVOLVING CREDIT LOANS:
IMR-India maintains an export sales accounts receivable discounting
facility. Up to February 1996, loans under this facility could be denominated in
Indian rupees or U.S. dollars. Thereafter, the loans are denominated in Indian
rupees. Principal payments on amounts borrowed are due within 90 days of their
respective borrowings. Interest is payable at a rate set by the Reserve Bank of
India (currently 13%). At December 31, 1996 and 1995, $0 and approximately
$655,000, respectively, was due under this facility. The maximum amount
available under this facility at December 31, 1996 was approximately $832,000.
The facility is collateralized by IMR-India's total export accounts receivable,
property and equipment, and is guaranteed by the Company's majority shareholder.
Provisions of the above credit agreement contain certain financial
covenants, the most restrictive of which are the maintenance of certain
financial ratios.
12. NOTES PAYABLE-SHAREHOLDER:
Notes payable-shareholder at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
8% unsecured notes payable, due on demand.................... $ 801,147 $ -
8% unsecured notes payable with principal and
interest payable January 1996 through
January 1998.............................................. - 361,777
Accrued interest on above notes.............................. 12,607 17,604
--------- ---------
Total notes payable-shareholder..................... 813,754 379,381
Less: Advances to shareholder................................ - (29,870)
Current portion of notes payable-shareholder....... (813,754) (242,457)
--------- ---------
Notes payable, shareholder,
net of current portion........................... $ - $ 107,054
========= =========
</TABLE>
Interest expense on notes payable-shareholder for the years ended December 31,
1996, 1995 and 1994 was approximately $19,000, $18,000 and $21,000,
respectively.
42
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Term note payable with interest payable monthly at the
financial institution's base rate plus 1.25% per annum,
principal payable in monthly installments of $16,250
commencing August 1996, collateralized by the
Company's accounts receivable and equipment,
assignment of certain assets owned by the majority
majority shareholder and guaranteed by the
Company's majority shareholder......................... $ - $ 877,157
7% per annum uncollateralized convertible note payable
to a minority shareholder of IMR-India, interest
payable semiannually, principal payable in semi-
annual installments of $131,640 commencing
September 1996 (under circumstances as defined in
the agreement)......................................... - 526,560
--------- ----------
- 1,403,717
Less current portion.................................... - 326,640
--------- ----------
$ - $1,077,077
========= ==========
</TABLE>
A provision of the 7% uncollateralized convertible note payable required IMR-
India common stock to achieve a certain value, as defined in the agreement, by
June 30, 1996. In the event such shares of common stock did not achieve this
value, the note would be repayable, or the lender had the option to convert the
outstanding loan balance into 70,000 shares of IMR-India common stock by
September 30, 1996. In June 1996, the value of IMR-India shares of common stock
was achieved under an agreement for the purchase of the stock of the
lender/minority shareholder. Upon completion of the purchase during August 1996,
IMR-India's obligation to repay the note and the lender's option to convert this
outstanding loan balance into 70,000 shares of IMR-India common stock were
canceled, and this note was converted into additional paid-in capital of IMR-
India.
In August 1996, IMR-India obtained approval of a U.S. dollar denominated term
loan of $1,300,000 from a financial institution to finance the expansion of
their facility in Bangalore, India. The loan will be repayable in eight equal
semiannual installments of $162,500 commencing September 1997. Interest on the
loan is payable semiannually at the rate of LIBOR plus 3% per annum. The loan is
collateralized by a first lien on IMR-India's property and equipment and a
guarantee by the Company's majority shareholder. At December 31, 1996, no amount
had been drawn on this loan.
43
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (CONTINUED):
IMR maintains a line of credit which was refinanced during May 1996 to a
balance equal to 80% of the outstanding accounts receivable balance (as defined)
of IMR at a rate of LIBOR plus 1.8% (7.4% at December 31, 1996). At December
31, 1996, no amount was outstanding on the line of credit. The line of credit
is collateralized by the Company's accounts receivable, property and equipment
and investment in subsidiaries.
Provisions of the line of credit and certain notes payable contain certain
financial covenants, the most restrictive of which is the maintenance of certain
financial ratios. At December 31, 1996, the Company was in compliance with
these covenants.
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial instruments.
Fair value is defined as the price at which a financial instrument could be
liquidated in an orderly manner over a reasonable time period under present
market conditions. IMR's adjustable rate loans reprice frequently at current
market rates. The rates of the Company's fixed obligations (also see Note 12)
approximate those rates of the adjustable loans. Therefore, the fair value of
these loans has been estimated to be approximately equal to their carrying
value.
The fair value of IMR's time deposits and short-term borrowings are considered
to approximate their carrying amounts because the interest rates on these
instruments are regulated by the Reserve Bank of India, the Indian central bank,
and are varied periodically to reflect market conditions. The fair value of
IMR-India's uncollateralized convertible note payable at December 31, 1995
cannot be practicably determined due to certain unique features including a
clause (subsequently invoked) that provided for its cancellation.
14. INCOME TAXES:
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 412,508 $ - $ -
State and local............................. 66,000 - -
Foreign..................................... 67,656 250,598 385,699
--------- --------- ---------
Total current provision
for income taxes........................ 546,164 250,598 385,699
Deferred:
Federal..................................... 735,000 - -
State and local............................. 118,000 - -
Foreign..................................... 2,080 42,149 64,805
--------- --------- --------
Total deferred provision
for income taxes........................ 855,080 42,149 64,805
---------- --------- ---------
Total provision for income taxes.......... $1,401,244 $ 292,747 $ 450,504
========== ========= =========
</TABLE>
44
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES (CONTINUED):
Upon termination of the S Corporation election, as described in Note 2,
current and deferred income taxes reflecting the tax effects of temporary
differences between the Company's financial statement and the tax bases of
certain assets and liabilities became liabilities of the Company. Accordingly,
the above provision for income taxes includes a $1,075,000 nonrecurring expense
resulting from the termination of the S Corporation election. In accordance with
applicable sections of the Internal Revenue Code (IRC), the Company will defer
the payment of 75% of the nonrecurring charge over the next three years.
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses........................ $ 10,918 $ 8,945
Deferred tax liabilities:
Property and equipment.................. (96,896) (46,684)
Cash to accrual conversion.............. (806,250) -
--------- --------
Total deferred tax liabilities........ (903,146) (46,684)
--------- --------
$(892,228) $(37,739)
========= ========
</TABLE>
Balance sheet classification of net deferred tax asset (liability) is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax asset-current................ $ - $ 8,945
Deferred tax liability-current............ (257,832) -
Deferred tax liability-noncurrent......... (634,396) (46,684)
--------- --------
$(892,228) $(37,739)
========= ========
</TABLE>
In addition, the Company has a deferred tax asset of $640,000 related to IMR-
India's net operating loss carryforward for U.S. income tax purposes for that
portion of income earned onsite in the U.S. These net operating losses expire
through 2008. The Company has recorded a valuation allowance with regard to the
future tax benefits related to these net operating losses, due to the
uncertainty of their ultimate realization.
45
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES (CONTINUED):
Under the Indian Income Tax Act of 1961 (the "Act"), a substantial portion of
IMR-India's income is exempt from Indian Income Tax as profits attributable to
export operations or a tax holiday expiring in 1998. Under the Act, there are
certain alternative minimum tax provisions which impose tax on net profits at a
rate of approximately 13%. Management has received an opinion of legal counsel
that these provisions are not currently applicable due to the tax holiday.
Accordingly, the effective tax rate imposed on IMR-India's income is
substantially less than the current statutory rate of 43%.
IMR has not recorded deferred income taxes applicable to undistributed
earnings of IMR-India. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for United States Federal and state
income tax has been provided thereon. The unremitted earnings, net of foreign
tax credits, are immaterial.
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 rate of 34% to the income (loss) before income taxes and minority interest.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Statutory tax provision................................ $1,604,000 $1,198,000 $ 451,000
State taxes, net of federal benefit.................... 34,000 - -
U.S. S Corporation not subject to federal
Income taxes........................................ (989,000) (779,000) (449,000)
Foreign withholding tax on gain incurred by
S Corporation....................................... - - 365,000
Difference between federal and foreign
tax rates on permanently reinvested income
of foreign subsidiary............................... (365,000) (175,000) (13,000)
(Income) loss in foreign equity investment............. (22,000) 37,000 43,000
Termination of S Corporation status.................... 1,075,000 - -
Other, net............................................. 64,000 12,000 54,000
---------- ---------- ---------
Total provision for income taxes................. $1,401,000 $ 293,000 $ 451,000
========== ========== =========
</TABLE>
46
<PAGE>
Information Management Resources, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. LEASES:
The Company leases certain equipment under capital leases. Future minimum
lease payments under capital leases as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
Total minimum payments..................... $ 63,330
Less amount representing interest.......... 7,886
---------
Present value of minimum payments.......... 55,444
Less current portion....................... 55,444
---------
Long-term lease obligation................. $ -
=========
</TABLE>
The Company leases office facilities and certain residential premises for
foreign employees under noncancelable operating lease agreements. Rental
expense under these leases was approximately $604,000, $517,000 and $406,000
during 1996, 1995 and 1994, respectively. Future minimum lease payments as of
December 31, 1996 for leases with noncancelable terms in excess of the one year
are approximately as follows:
<TABLE>
<S> <C>
1997....................................... $ 638,000
1998....................................... 392,000
1999....................................... 145,000
2000....................................... 139,000
2001....................................... 146,000
Thereafter................................. 661,000
----------
Total minimum payments................ $2,121,000
==========
</TABLE>
During November 1995, IMR entered into a noncancelable lease agreement to
sublease a portion of its office facilities. Rental income under this lease was
approximately $145,000 in 1996 and $5,000 during 1995. Future minimum lease
receipts as of December 31, 1996 are approximately $140,000 for 1997.
47
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS:
On September 12, 1996, the Company filed Amended and Restated Articles of
Incorporation which (i) effected a reclassification of each share of its
voting and nonvoting common stock into 10 shares of common stock, par value $.10
per share, (ii) increased the Company's authorization of common stock to
40,000,000 shares; and (iii) created and authorized 10,000,000 shares of
preferred stock, par value $.10 per share, under terms that allow the Board of
Directors to designate one or more classes of preferred stock and to designate
the rights, privileges, preferences and limitations of each such class. All
applicable share and per share amounts in the accompanying financial statements
have been retroactively adjusted to reflect this reclassification.
On November 11, 1996, in connection with the termination of IMR's S
corporation election (see Note 2) IMR's remaining retained earnings were
classified to additional paid-in capital.
During 1996, the Company completed an initial public offering and received
$40.7 million in cash (net of offering expenses of $1.1 million) in exchange for
the issuance of 3,212,500 shares of common stock. The Company's common stock
commenced trading on the Nasdaq National Market on November 8, 1996.
Employee Stock Option Plan--IMR has granted non-qualified stock options to
certain employees with vesting periods of up to five years. The number of
shares of common stock authorized for issuance under this plan is 5,445,980.
These options give the employee the right to purchase common stock at an
exercise price estimated by management to be at least equal to the fair value of
the stock at the date of the option's grant. For all options granted the term
during which employees may exercise the option was initially 10 years. On July
15, 1996 management reset the term for all options granted through that date to
10 years starting July 15, 1996. All options granted subsequent to July 15,
1996 expire 10 years from their grant date. In the case of the options granted
at the time of the Company's initial public offering in November of 1996, the
exercise price is equal to $14 per share, the initial public offering price.
Outside Directors Stock Option Plan--In September 1996, the Company
established the Outside Directors Stock Option Plan, whereby outside directors
may be granted non-qualified options to purchase common stock. The number of
shares of common stock authorized for issuance under this plan is 150,000. 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 outside director is granted an
option grant of 10,000 shares each biannual period which they serve on the Board
which 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, 1996, 120,000 options are available for future grants
and 30,000 options are outstanding of which none are exercisable.
48
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
Stock Option Disclosures--The Company 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 the Company's stock options 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 123, the Company's net income and earnings per
share for the years ended December 31, 1996 and 1995 would have been reduced to
the adjusted amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Pro forma net income:
As reported........................ $2,544,931 $1,612,471
As adjusted (unaudited)............ $2,088,873 $1,564,632
Pro forma earnings per share:
As reported........................ $ 0.22 $ 0.12
As adjusted (unaudited)............ $ 0.18 $ 0.11
</TABLE>
The estimated per share fair value of options granted during 1996 and 1995
was $1.48 and $0.10, 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 1996 and 1995,
respectively: no dividend yield for each year presented; risk-free interest
rates of 7.9% and 5.9%; expected lives of the options prior to exercise of 11.3
and 9.9 years. Because the Company was not publicly held when the majority of
the grants were made, volatility of the stock price was omitted from the pricing
model as permitted by SFAS 123.
A summary of the status of the Company's stock option plan as of December 31,
1996, 1995, and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ----------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------- ---------- ---------------- -------- ------------------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,205,450 $ 0.10 1,042,250 $ 0.10 820,760 $ 0.10
Granted 3,229,000 $ 1.48 1,392,540 $ 0.10 221,490 $ 0.10
Exercised (136,170) $ 0.10 - $ 0.10 - $ -
Cancelled (128,210) 0.10 (229,340) 0.10 - $ -
---------- ---------- ---------
Outstanding at
end of year 5,170,070 2,205,450 1,042,250
========= ========= =========
Options exercisable
at year-end 4,551,410 1,807,670 428,130
</TABLE>
49
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
The following table summarizes certain information about stock options at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
at 12/31/96 Contractual Life Exercise Prices at 12/31/96 Exercise Prices
------------ ---------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
1,941,070 9.5 years $ 0.10 1,866,070 $ 0.10
2,803,340 9.5 years $ 0.50 2,670,340 $ 0.50
285,660 9.5 years $ 5.06 - $ 5.06
10,000 9.8 years $ 10.00 - $ 10.00
130,000 9.8 years $ 14.00 15,000 $ 14.00
----------- -----------
5,170,070 4,551,410
=========== ===========
</TABLE>
As of December 31, 1996, options to purchase 275,910 shares of Common Stock
were available for future grants. Between the date of the initial public
offering and December 31, 1996, no options were granted.
Employee Stock Purchase Plan--The Company's Employee Stock Purchase Plan (the
"Stock Purchase Plan") became effective on October 1, 1996. A total of 200,000
shares of the Company'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 the Company 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.
The initial award of shares under this plan were granted subsequent to
December 31, 1996.
IMR-India Stock Option Plan--IMR-India has adopted a separate Employee Share
Option Policy which provides for grants of options to employees to purchase
common shares of IMR-India. The maximum number of options that may be granted
under the policy was 51,900 common shares. Under the policy, options granted to
an employee will vest upon completion of five years of continuous employment
with IMR-India or its affiliates. Vested options are valid for exercise during
the employees' employment with IMR-India or its affiliates and for a period of
six months thereafter. Options not exercised within six months of cessation of
employment expire.
50
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
A summary of the status of IMR-India's stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------- ------------
<S> <C> <C>
Balance, January 1, 1994............. 13,000
Granted.............................. 4,000 $0.00
---------
Balance December 31, 1994............ 17,000
Granted.............................. 8,500 $0.28
---------
Balance, December 31, 1995........... 25,500
Canceled............................. (5,000) $0.00
---------
Balance, December 31, 1996........... 20,500 $0.00--$0.28
=========
</TABLE>
At December 31, 1996 and 1995, vested options were 1,000 and 1,000,
respectively. There were no options exercisable at December 31, 1996, 1995 and
1994.
Compensation expense has been recognized on the difference between fair value
at the date of the grant and the exercise price pursuant to APB Opinion No. 25.
Compensation expense is recognized over the life of the options. Compensation
expense under this plan for the years ended December 31, 1996, 1995 and 1994
approximated $2,000, $24,000 and $46,000, respectively. Under IMR-India's
policy, options to be granted subsequent to September 6, 1996 are to be granted
at an exercise price equal to the fair market value of the common shares of IMR-
India at the time of the grant.
17. EMPLOYEE BENEFIT PLANS:
IMR implemented a 401(k) defined contribution pension plan (the "Plan"),
effective January 1, 1992, for employees meeting certain service requirements.
IMR will match 50% of employees' contributions, up to 4% of their pay, limited
to a maximum contribution of $1,000 per employee. Additional contributions may
be made at the discretion of management. Contributions made to the Plan by IMR
totaled approximately $20,000, $19,000 and $11,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
51
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. EMPLOYEE BENEFIT PLANS (CONTINUED):
IMR-India maintains certain employee benefit plans that cover substantially
all employees. The employees' provident fund, pension and family pension plans
are statutory defined contribution retirement benefit plans. Under the plans,
employees contribute 10 percent of base compensation, which is matched by a 10
percent contribution by IMR-India. Contributions made to the plan by IMR-India
totaled approximately $79,000, $32,000 and $32,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
The gratuity plan is a statutory postemployment benefit plan providing defined
lump sum benefits based on years of service and final average compensation.
IMR-India makes annual contributions to an employees' gratuity fund established
with a government-owned insurance corporation. The contributions are based on
actuarial valuations made by the insurance corporation as of March 31 each year.
Contributions are made to this plan by IMR-India were less than $15,000 for each
of the years ended December 31, 1996, 1995 and 1994.
18. RELATED PARTIES:
IMR-India provides software development services to IMR-U.K. at market rates.
During the years ended December 31, 1996, 1995, and 1994, the Company recognized
revenue from IMR-U.K. of approximately $877,000, $109,000 and $-0-,
respectively. At December 31, 1996 and 1995, IMR-U.K. owed IMR-India $646,000
and $60,000, respectively for these services.
At December 31, 1996, the Company had two notes receivable from IMR-U.K.
totaling $692,500, which resulted from cash advances. These notes bear interest
at 10% and 8% which is payable quarterly. Principal is payable in installments
through 1998. During 1996, the Company recognized approximately $35,000 of
interest income on these notes.
19. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. The Company maintains its cash and cash equivalents with high
credit quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable is limited
due to the dispersion of the Company's customer base across different industries
and geographies. The Company's two largest customers accounted for
approximately 40%, 40% and 34% of revenue for the years ended December 31, 1996,
1995 and 1994, respectively, and 30% and 33% of accounts receivable as of
December 31, 1996 and 1995, respectively. No other customer accounted for 10% of
revenues for the above periods.
52
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. OTHER INCOME:
Other income is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ----------
<S> <C> <C> <C>
Gain on disposition of property and
equipment in connection with relocation
of IMR-India operations, net of relocation
costs of $102,058 in 1995....................... $ - $427,907 $ 71,209
Gain on disposition of IMR-India stock............ - - 1,013,503
Investment and other income....................... 253,048 44,702 12,303
-------- -------- ----------
$253,048 $472,609 $1,097,015
======== ======== ==========
</TABLE>
21. ACQUISITION OF IMR-INDIA:
As described in Note 2, the Company acquired an additional 64.0% of IMR-India
during 1996 which was accounted for as a purchase. The following unaudited pro
forma information presents a summary of consolidated results of operations of
the Company as if the acquisition had occurred on January 1, 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue.............................. $27,948,076 $22,700,170
=========== ===========
Pro forma net income................. $ 2,747,613 $ 1,800,631
=========== ===========
Pro forma net income per share....... $ 0.23 $ 0.13
=========== ===========
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as reduction in minority interest in
net income and additional amortization expense as a result of goodwill. They do
not purport to be indicative of the results of operations which actually would
have resulted had the combination been in effect on January 1, 1995, or of
future results of operations of the consolidated entities.
53
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. SUBSEQUENT EVENTS:
Link Group Holdings, Limited and Information Management Resources (U.K.),
Limited--On February 10, 1997 (effective January 8, 1997), the Company acquired
100% of the outstanding stock of Link Group Holdings Limited ("Link"), a United
Kingdom limited liability company. Link provides transitional software
outsourcing solutions to the information technology departments of large
businesses located in the U.K. In exchange for Link's common stock, Link's
shareholders received $2.1 million in cash and 71,708 shares of the Company's
common stock. In addition, $1.6 million in cash is payable to Link's
shareholders one year from closing. The Link acquisition will be accounted for
as a purchase pursuant to the provisions of APB Opinion No. 16. The purchase
price will be allocated to the assets acquired and liabilities assumed based on
their estimated fair values. The excess of the purchase price over the net
assets acquired will be amortized over a period not to exceed ten years.
Coincident with the above acquisition, the Company also acquired 10.5% of IMR-
U.K. from the Company's majority shareholder and his spouse for $520,000 in
cash. The purchase price was determined through negotiations between the
Company and the shareholder and his spouse. The excess of the $520,000 purchase
price over the net assets acquired will be charged as a reduction in equity.
Prior to the above acquisitions, the Company owned 39.5% of IMR-U.K. (see Note
2) and Link owned 50% of IMR-U.K. After the above acquisitions, the Company
effectively owned 100% of both Link and IMR-U.K.
Movietone, Ltd.--In March 1997, the Company acquired 100% of the outstanding
stock of Movietone, Ltd. (an Indian limited liability company) for approximately
$1.7 million in cash. Movietone, Ltd. has no significant ongoing activities and
its only significant asset is a building located in India's Santacruz
Electronics Export Processing Zone. The acquisition will be recorded as a
purchase pursuant to the provisions of APB Opinion No. 16. The entire purchase
price will be allocated to the building as it approximates its fair value.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There have been no disagreements with the Company's independent accountants
involving accounting and financial disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------
<S> <C> <C>
Satish K. Sanan(1)........................ 49 Chairman of the Board; President and Chief
Executive Officer; Director
John R. Hindman........................... 48 Chief Financial Officer
Jeffery S. Slowgrove...................... 39 Treasurer; Director
Kasi V. Sridharan......................... 42 Executive Vice President
Dilip Patel............................... 38 Vice President-General Counsel; Secretary
Ashutosh Gupta............................ 41 President and Director, IMR-India
Philip Shipperlee......................... 50 Director; Managing Director, IMR-U.K.
Michael J. Dean........................... 37 Vice President - Finance, Europe
Charles C. Luthin (1)(2)(3)............... 54 Director
Vincent Addonisio (1)(2)(3)............... 42 Director
</TABLE>
_______________
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee
Satish K. Sanan founded the Company in 1988 together with Mr. Slowgrove and
has served as President, Chief Executive Officer and a director of the Company
since its inception. Mr. Sanan also has served as a director of IMR-U.K. since
1993 and as Chairman of the Board of Directors of IMR-India since 1990. Prior
to founding the Company, he 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.
Ashutosh Gupta has served as President of IMR-India since August 1995 and
as a director of IMR-India since January 1996. Prior to joining the Company,
Mr. Gupta served in various positions for Citicorp Overseas Software Limited,
located in Bombay, India from January 1988 until August 1995, including Group
Head, International Marketing.
John R. Hindman has served as Chief Financial Officer since March 1997.
From November 1993 to September 1996, Mr. Hindman served as Chief Operating
Officer and Chief Financial Officer of Precision Systems, Inc.(PSI), a software
systems provider to the telecommunications industry. From September 1996 until
February 1997, Mr. Hindman served as a financial consultant to PSI. From July
1988 until October 1993, Mr. Hindman served as Chief Financial Officer of
Kimmins Environmental, a specialty contracting firm.
55
<PAGE>
Michael J. Dean has served as Vice President-Finance, Europe since March
1997. Prior to this assignment, Mr. Dean served as Chief Financial Officer of
the Company from July 1996 until March 1997. Previously he served as Controller
of the Company since July 1994. Prior to joining the Company, 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.
Kasi V. Sridharan has served as Executive Vice President since March 1997.
Mr. Sridharan served as Vice President-Finance of the Company from October 1995
until March 1997. Mr. Sridharan also has served as a director of IMR-U.K. since
March 1996 and as a director of IMR-India since April 1994. He served as Vice
President-Finance of IMR-India from April 1992 until October 1995. From
November 1988 until March 1992, Mr. Sridharan served as Chief Financial Officer
for the Centre for Development of Advanced Computing in Pune, India. Mr.
Sridharan is a Chartered Accountant.
Jeffery S. Slowgrove founded the Company in 1988 together with Mr. Sanan
and has served as Treasurer and a director of the Company since its inception.
Mr. Slowgrove also has served as a director of IMR-India since 1990.
Dilip Patel has served as Vice President-General Counsel and Secretary of
the Company since March 1996. From August 1990 until March 1996, Mr. Patel was
an attorney in the International Department of the Tampa, Florida law firm
Fowler, White, Gillen, Boggs, Villareal & Banker, P.A. From 1983 until 1988 he
practiced law as a solicitor with Cartwright, Cunningham, Haselgrove & Co. in
London, England. Mr. Patel is a member of and is Board Certified in Immigration
and Nationality law by the Florida Bar. He is admitted as a Solicitor of the
Supreme Court of England and Wales.
Philip Shipperlee has served as a director of the Company since August 1996
and has served as the Managing Director of IMR-U.K. since 1994. Mr. Shipperlee
served as the Managing Director of Link Group Holdings Limited since June 1980.
The Company expects Mr. Shipperlee to continue to serve as Managing Director of
IMR-U.K. after operations have been combined with Link.
Charles C. Luthin has been a director of the Company since August 1995.
From October 1994 until July 1995, he served as Vice President-Finance of the
Company. 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, and he currently
serves on that company's board of directors. 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, most recently as Vice
President, Finance and Planning-Parks, where he was responsible for financial
analysis and long-term planning for that company's theme park operations.
Vincent Addonisio has been a director of the Company since August 1996. Mr.
Addonisio has served as President of Parker Communications Network, Inc., a
point of sale marketing network company, since January 1997. From July 1993
until November 1996, Mr. Addonisio served as a Director, Executive Vice
President, Chief Financial Officer and Treasurer of ABR Information Services,
Inc., a benefits administration outsourcing company.
56
<PAGE>
Mr. Addonisio served as Chief Financial Officer of AER Energy Resources, Inc., a
battery manufacturing company, from October 1992 until June 1993. From April
1991 until September 1992, Mr. Addonisio served as Vice President and Chief
Financial Officer of IQ Software, Inc., a software development company. From
1983 to 1991, he served as Chief Financial Officer and Director of Proto
Systems, a high technology company.
The Board of Directors is divided into three classes, each of whose members
will serve for a staggered three-year term. The Board is comprised of two Class
I directors (Messrs. Sanan and Addonisio), two Class II directors (Messrs.
Shipperlee and Luthin) and one Class III director (Mr. Slowgrove). At each
annual meeting of shareholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring. The terms of the initial Class I directors, Class II directors and
Class III directors will expire upon the election and qualification of successor
directors at the annual meeting of shareholders held following the end of fiscal
years 1996, 1997 and 1998, respectively. There are no family relationships
between any of the directors or executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item 11 with respect to management
remuneration and transactions is incorporated herein by reference to the
material under the caption "Executive Compensation" in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days after the close of the Company's fiscal year ended
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item 12 with respect to security ownership
of certain beneficial owners and management is incorporated herein by reference
to the material under the caption "Stock Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement to be filed with the Commission
within 120 days after the close of the Company's fiscal year ended December 31,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item 13 with respect to certain
relationships and related transactions is incorporated herein by reference to
the material under the caption "Certain Relationships and Related Transactions"
in the Company's Proxy Statement to be filed with the Commission within 120 days
after the close of the Company's fiscal year ended December 31, 1996.
57
<PAGE>
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
--------------------
The financial statements of the Company and reports of independent
auditors as set forth under Item 8 of this Report on Form 10-K are
incorporated herein by reference.
(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
--------
There were no reports on Form 8-K filed during the quarter ended
December 31, 1996.
(c) Exhibits
--------
The following exhibits are filed as a part of, or are incorporated
by reference into, this Report on Form 10-K:
58
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Restated Bylaws of the Registrant.
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.
10.1* Memorandum and Articles of Association of IMR-India.
10.2* Articles of Association of IMR-U.K.
10.3* Joint Venture Agreement dated October 17, 1994 among the Registrant, Satish K. Sanan, Anne
Sanan and The Link Group; as amended pursuant to Amendment to Joint Venture Agreement dated
December 11, 1995 and Second Amendment to Joint Venture Agreement dated February 29, 1996.
10.4*+ Master Services Agreement dated April 1, 1996 between the Registrant and IMR-India.
10.5*+ Master Services Agreement dated April 1, 1996 between IMR-U.K. and IMR-India.
10.6* Share Purchase Agreement dated July 22, 1996 between the Registrant and Second India.
10.7* Share Purchase Agreement dated July 4, 1996 between the Registrant and Satish K. Sanan.
10.8* Share Purchase Agreements dated September 12, 1996 between the Registrant and India Magnum.
10.9*+ Master Services Agreement for Information Technology Professional and related schedules between
the Registrant and Dayton Hudson Corporation.
10.10*+ Master Services Agreement and related schedules between the Registrant and Dean Witter Discover &
Co., Inc.
10.11 [Reserved]
10.12*+ Master Agreement for Computer Consulting and Programming Services and related schedules
between the Registrant and Target Stores.
10.13* Revolving Line of Credit Business Loan Agreement dated June 5, 1996 between the Registrant and
Barnett Bank of Pinellas County and related Promissory Note, Commercial Security Agreement and
Continuing Unlimited Commercial Guaranty, each dated June 5, 1996.
10.14* Principal Plus Interest Business Loan Agreement dated June 5, 1996 between the Registrant and
Barnett Bank of Pinellas County and related Promissory Note, Commercial Security Agreement and
Continuing Unlimited Commercial Guaranty, each dated June 5, 1996.
10.15* Form of Employment Agreement between Registrant and Satish K. Sanan.
10.16* Form of Employment Agreement for Executive Officers.
10.17* 401(k) Profit Sharing Plan effective January 1, 1992 and Amendment thereto effective January 1, 1994.
10.18* Stock Incentive Plan effective July 15, 1996.
10.19* Form of Directors Stock Option Plan.
10.20* Form of Employee Stock Purchase Plan.
10.21* Lease Agreement dated March 22, 1993 between the Registrant and ABR Plymouth Plaza, Ltd.
regarding 22,578 square feet of office space located at 26750 U.S. Highway 19 North, Clearwater,
Florida; First Amendment to Lease Agreement dated October 18, 1995 and Second Amendment to
Lease Agreement dated December 11, 1995.
10.22* Sub-Lease Agreement dated October 17, 1995 between the Registrant and ABR Information Services,
Inc. regarding 11,289 square feet of office space located at 26750 U.S. Highway 19 North,
Clearwater, Florida.
</TABLE>
59
<PAGE>
EXHIBIT INDEX
-------------
(CONTINUED)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ----------------------------------------------------------------------------------
<S> <C>
10.23* Stockholders' Agreement dated July 1, 1994.
10.24* Form of Termination of Stockholders' Agreement.
10.25* Form of Indemnification Agreement.
10.26* Form of S Corporation Termination, Tax Allocation and Indemnification Agreement.
10.27* Loan Agreement between IMR-India and Canara Bank and related documents.
10.28* Loan Agreement between IMR-India and Exim Bank of India and related documents.
10.29 Employee Stock Purchase Plan, as amended.
11.1 Computation of Pro Forma Net Income Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of Arthur Andersen & Associates.
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
__________
* Incorporated by reference to Exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (Registration No. 333-12037).
+ 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.
60
<PAGE>
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 March,
1997.
Information Management Resources, Inc.
By: /s/ Satish K. Sanan
-------------------------------------
Satish K. Sanan
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Satish K. Sanan and Dilip Patel, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Satish K. Sanan President; Chief Executive Officer March 27, 1997
- ---------------------------- --------------------
Satish K. Sanan (Principal Executive Officer)
and Director
/s/ John R. Hindman Chief Financial Officer March 27, 1997
- ---------------------------- --------------------
John R. Hindman (Principal Financial Officer)
/s/ Michael J. Dean Vice President-Finance, Europe March 27, 1997
- ----------------------------- --------------------
Michael J. Dean (Principal Accounting Officer)
/s/ Jeffery S. Slowgrove Treasurer, Director March 27, 1997
- ----------------------------- --------------------
Jeffery S. Slowgrove
/s/ Philip Shipperlee Managing Director, IMR-U.K.; March 27, 1997
- ----------------------------- --------------------
Philip Shipperlee Director
/s/ Charles C. Luthin Director March 27, 1997
- ----------------------------- --------------------
Charles C. Luthin
/s/ Vincent Addonisio Director March 27, 1997
- ----------------------------- --------------------
Vincent Addonisio
</TABLE>
61
<PAGE>
FIRST AMENDMENT TO
INFORMATION MANAGEMENT RESOURCES, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Information Management Resources, Inc. Employee Stock Purchase Plan is
amended, effective as of April 1, 1997, by deleting in its entirety Section 4(b)
thereof and substituting therefor the following new Section 4(b):
"SECTION 4.
SECURITIES SUBJECT TO THE PLAN AND PURCHASE PERIODS
. . .
(b) Purchase Period means each three-month calendar period, beginning on
February 1, May 1, August 1 and November 1.
For purposes of implementing this amendment, with respect to Shares
purchased on March 31, 1997 pursuant to the provisions of the Plan prior to the
amendment, no sales of such Shares shall be permitted until July 1, 1997.
For the transition month of April 1 - 30, 1997, notwithstanding the
provisions of Section 6(e) of the Plan, no changes in payroll deduction amounts
will be permitted for Participants with deductions in effect for the period
January 1 - March 31, 1997; the amounts in effect for the period January 1 -
March 31, 1997 will remain in effect for those Participants during April of
1997.
In addition, for eligible employees who become Participants at the
beginning of the transition month of April 1997, the payroll deduction amounts
which they elect for the period April 1 - 30 shall remain in effect through the
end of the full three-month Purchase Period of May 1 - July 31. Similarly,
withdrawals submitted during the month of April 1997 shall be deemed effective
as of the last day of the Purchase Period ending July 31, 1997. Hence, anyone
who withdraws during the month of April 1997 shall not be eligible to rejoin the
Plan until the Purchase Period commencing on November 1, 1997.
The provisions of Section 9(c) regarding Participants who cease to be
employees during April 1997 shall not be affected by the amendment or the
transition rules set forth herein.
The Committee (and, to the extent authority is delegated, the Plan
Administrator) shall have the right to announce further transition rules in
order to provide for ease of administration of the Plan during the transition
caused by this amendment.
ADOPTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY
ON MARCH 19, 1997, TO BE EFFECTIVE APRIL 1, 1997.
__________________________________
CORPORATE SECRETARY
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1.
PURPOSE
The purpose of the Information Management Resources, Inc. Employee Stock
Purchase Plan (the "Plan") is to promote the interests of the Company by
providing the opportunity to purchase Shares to Employees in order to attract
and retain Employees by providing an incentive to work to increase the value of
Shares and a stake in the future of the Company which corresponds to the stake
of each of the Company's shareholders. The Plan is intended to be an "employee
stock purchase plan" as defined in Section 423 of the Internal Revenue Code of
1986, as amended ("Code"). The provisions of the Plan shall, accordingly, be
construed so as to comply with the requirements of Section 423 of the Code
whenever possible.
SECTION 2.
DEFINITIONS
2.1 "BASE PAY" means regular straight-time and overtime earnings received
from the Company, excluding payments for incentive compensation, bonuses and
other special payments.
2.2 "BOARD" means the Board of Directors of Information Management
Resources, Inc.
2.3 "COMMITTEE" means the Compensation Committee of the Board.
2.4 "COMPANY" means Information Management Resources, Inc., a Florida
corporation, and any successor to such organization.
2.5 "CUSTODIAN" means American Stock Transfer and Trust Company, whose
address is 40 Wall Street, New York, New York 10005, or such other person as the
Committee shall designate from time to time.
2.6 "EFFECTIVE DATE" means the date set by the Board for the Plan to
become effective, which date shall be October 1, 1996. The Effective Date shall
be subject to the terms of Section 7(e) and to shareholder approval pursuant to
Section 17.
2.7 "EXERCISE DATE" means the last day of a Purchase Period (as such term
is defined in Section 4(b) hereof), on which date all Participants' outstanding
Purchase Rights will automatically be exercised.
2.8 "FAIR MARKET VALUE" of each Share on any date means the price
determined below on the last business day immediately preceding the date of
valuation:
(a) The closing sales price per Share, regular way, or in the absence
thereof the mean of the last reported bid and asked quotations, on such date on
-2-
<PAGE>
the exchange having the greatest volume of trading in the Shares during the
thirty-day period preceding such date (or if such exchange was not open for
trading on such date, the next preceding date on which it was open); or
(b) If there is no price as specified in (a), the final reported sales
price per Share, or if not reported, the mean of the closing high bid and low
asked prices in the over-the-counter market for the Shares as reported by the
National Quotation Bureau Incorporated, or if such organization is not in
existence, by an organization providing similar services, on such date (or if
such date is not a date for which such system or organization generally provides
reports, then on the next preceding date for which it does so); or
(c) If there also is no price as specified in (b), the price per Share
determined by the Board by reference to bid-and-asked quotations for the Shares
provided by members of an association of brokers and dealers registered pursuant
to Subsection 15(b) of the Exchange Act, which members make a market in the
Shares, for such recent dates as the Board shall determine to be appropriate for
fairly determining current market value; or
(d) If there also is no price as specified in (c), an amount per Share
determined in good faith by the Board based on such relevant facts, which may
include opinions of independent experts, as may be available to the Board.
2.9 "PARTICIPANT" means an employee of the Company or of a parent or
subsidiary of the Company who has enrolled in the Plan by completing a
Participation Form (as such term is defined in Section 5 hereof) with the Plan
Administrator. The terms parent and subsidiary have the meanings set forth in
Code Sections 424(e) and (f), respectively.
2.10 "PLAN ADMINISTRATOR" means the Vice President-General Counsel of the
Company, or any such other person so designated by the Board.
2.11 "PURCHASE PERIOD" means a calendar quarter period as defined in
Section 4(b) hereof.
2.12 "PURCHASE RIGHT" means a Participant's option to purchase shares of
Common Stock that is deemed to be granted to a Participant during a Purchase
Period pursuant to Section 7.
2.13 "SECTION 16(B) INSIDER" means those persons subject to the
requirements of Section 16(b) of the Securities Exchange Act of 1934, as
amended.
2.14 "SHARES" means the common stock, par value $.10 per share, of
Information Management Resources, Inc., and any other stock or securities
(including any other share or securities of an entity other than Information
Management Resources, Inc.) for or into which the outstanding shares of such
common stock are hereinafter exchanged or changed.
2.15 "TRADING DAY" refers to a day during which the Nasdaq National Market
is available for trading the Shares.
SECTION 3.
ELIGIBILITY
(a) Participation in the Plan is voluntary. All full-time employees of the
Company, including officers and directors who are full-time employees but who
are not members of the Committee, who have completed at least six (6) months of
continuous service with the Company are eligible to participate in the Plan.
-3-
<PAGE>
The employee's entry date in the Plan shall be the first day of the Purchase
Period immediately following the date the employee has satisfied the eligibility
provisions. Full-time employees mean those employees who work at least twenty
(20) hours per week and for more than five (5) months in any calendar year.
(b) Notwithstanding any provision of the Plan to the contrary, no employee
may participate in the Plan if prior to the grant of Purchase Rights or if
following a grant of Purchase Rights under the Plan, the employee would own,
directly or by attribution, stock, Purchase Rights or other stock options to
purchase stock representing five percent (5%) or more of the total combined
voting power or value of all classes of the stock of the Company, or any parent
or subsidiary (as defined in Code Sections 424(e) and (f), respectively) as
referenced in Code Section 423(b)(3).
SECTION 4.
SECURITIES SUBJECT TO THE PLAN AND PURCHASE PERIODS
(a) The maximum number of Shares which may be granted and purchased under
the Plan may not exceed Two Hundred Thousand (200,000) Shares (subject to
adjustment as provided in Section 15), which may be authorized but unissued
shares, re-acquired shares or shares bought on the open market. If any Purchase
Right granted shall expire or terminate for any reason without having been
exercised in full, the unpurchased Shares shall again become available for
purposes of the Plan, unless the Plan has been terminated.
(b) Purchase Period means each three month calendar quarter period,
beginning on January 1, April 1, July 1, and October 1, with the first such
Purchase Period (the "Initial Purchase Period") beginning concurrently with the
Effective Date of the Plan.
SECTION 5.
PARTICIPATION
Eligible employees become Participants in the Plan by authorizing payroll
deductions or other contributions to the Plan through the execution of a
"Participation Form" filed with the Plan Administrator no later than fifteen
(15) days prior to the start date of a Purchase Period.
SECTION 6.
PAYROLL DEDUCTIONS/CONTRIBUTIONS
(a) In order to purchase Shares each Participant must elect and indicate on
the Participation Form the amount he/she wishes to authorize the Company to
deduct at regular payroll intervals during the Purchase Period, expressed either
as (1) an integral percentage amount of such Participant's Base Pay for the
applicable payroll period, with a minimum deduction of $10.00 per payday and a
maximum percentage to be set by the Committee, or (2) a dollar amount to be
deducted pro rata at regular payroll intervals during the Purchase Period, with
a minimum deduction of $10.00 per payday and a maximum dollar amount per payday
to be set by the Committee. The Committee shall determine from time to time
whether method (1) or (2), or both, shall be utilized. The Participation Form
will include authorization for the Company to make payroll deductions from the
Participant's Base Pay. In addition to the foregoing, with respect to the
Initial Purchase Period, each Participant may indicate on the Participation Form
an amount he/she wishes to contribute to his/her account for the exercise of
-4-
<PAGE>
his/her Purchase Rights with respect to such Initial Purchase Period, subject to
the limitation of Section 6(b). The Participant shall forward with the
Participation Form a cash payment equal to such amount.
(b) Purchase Rights granted to a Participant under the Plan for any
calendar year may not represent Shares with a value in excess of Twenty Five
Thousand Dollars ($25,000.00). The Twenty Five Thousand Dollar ($25,000.00)
limit is determined based upon the Fair Market Value of the Shares subject to a
Purchase Right as of the first day (or the grant date, if different) of the
Purchase Period during which such Purchase Rights are granted. Participants will
be notified if this limitation becomes applicable to them.
(c) The amounts deducted from the Participant's Base Pay or otherwise
contributed by the Participant shall be credited to a bookkeeping account
established in the Participant's name under the Plan, but no actual separate
account will be established by the Company to hold such amounts. There shall be
no interest paid on the balance credited to a Participant's account. Amounts
deducted from the Participant's Base Pay or otherwise contributed may be
commingled with the general assets of the Company and may be used for its
general corporate purposes prior to the purchase of Shares during a Purchase
Period.
(d) Payroll deductions shall begin on the first payday of each Purchase
Period, and shall end on the last payday of each Purchase Period. Eligible
employees may participate in the Plan and, except with respect to the Initial
Purchase Period, may purchase Shares only through payroll deductions.
Notwithstanding the above, a Participant on an approved leave of absence may
continue participating in the Plan by making cash payments to the Company within
a normal pay period equal to the amount of the normal payroll deduction had the
leave of absence not occurred. The right of a Participant on an approved leave
of absence to continue participating in the Plan shall terminate upon the
expiration of twelve (12) weeks of leave, unless the Participant's right to re-
employment by the Company after a longer leave is guaranteed by statute or
contract, in which case termination of the right to participate will occur upon
the expiration of such extended period.
(e) So long as a Participant remains an employee of the Company, payroll
deductions will continue in effect from Purchase Period to Purchase Period,
unless at least fifteen (15) calendar days prior to the first day of the next
succeeding Purchase Period the Participant:
(i) elects a different rate by filing a new Participation Form
with the Plan Administrator; or
(ii) withdraws from the Plan in accordance with Section 9 hereof.
SECTION 7.
GRANT OF PURCHASE RIGHT
(a) Subject to Section 7(d) and Section 7(e) hereof, and the effective date
provisions of Section 17, at 5:01 p.m. Eastern Standard Time, on the last day of
each Purchase Period (the Exercise Date), each Participant who has not withdrawn
from the Plan pursuant to Section 9 shall be deemed to have been granted a
Purchase Right as of the first day of the Purchase Period to purchase as many
whole Shares as can be purchased with the balance credited to such Participant's
account as of the Exercise Date. The balance remaining in each Participant's
account, if any, will be held for the purchase of Shares in the next succeeding
Purchase Period or otherwise applied in accordance with the terms hereof.
-5-
<PAGE>
(b) The price at which each Purchase Right to purchase Shares shall be
exercised is the lower of:
(i) 85% of the Fair Market Value of the Shares on the first day of a
Purchase Period; provided, however, that if during any Purchase Period a
registration statement is declared effective by the Securities and Exchange
Commission with respect to an initial public offering of the Shares, the price
shall be 85% of the price to the public in such offering; or
(ii) 85% of the Fair Market Value of the Shares on the last
Trading Day of such Purchase Period.
(c) The Committee has the power, exercisable at any time prior to the start
of a Purchase Period, to set a maximum dollar value Purchase Right for that
Purchase Period, subject to the limitations in Section 6(b). The maximum dollar
value will continue in effect from Purchase Period to Purchase Period until the
Committee once again exercises its power to adjust the limitation.
(d) Notwithstanding anything to the contrary contained herein, each
Participant who has not withdrawn from the Plan pursuant to Section 9 during the
Initial Purchase Period, shall be deemed to have been granted a Purchase Right
with respect to the Initial Purchase Period as of the first day of the trading
of the Shares on the Nasdaq National Market.
(e) Notwithstanding anything to the contrary contained herein, no
Participant shall be entitled to exercise any Purchase Right unless and until a
registration statement has been filed and declared effective by the Securities
and Exchange Commission with respect to an initial public offering of the
Shares.
SECTION 8.
EXERCISE OF PURCHASE RIGHT
(a) Subject to Section 7(e) and the effective date provisions of Section
17, each outstanding Purchase Right shall be deemed automatically exercised as
of 5:01 p.m. of the Exercise Date (the last day of the Purchase Period). The
exercise of the Purchase Right is accomplished by applying the balance credited
to each Participant's account as of the Exercise Date to the purchase on the
Exercise Date as many whole Shares as can be purchased at the purchase price in
effect for the Purchase Period. The balance remaining in each Participant's
account, if any, will be held for the purchase of Shares in the next succeeding
Purchase Period or otherwise applied in accordance with the terms hereof.
(b) If a Participant purchases the maximum share amount determined in
accordance with the terms of Section 7(c), any amount not applied to the
purchase of Shares for that Purchase Period will be held for the purchase of
Shares in the next Purchase Period.
(c) If the number of Shares for which Purchase Rights are exercised exceeds
the number of Shares available in any Purchase Period under the Plan, the Shares
available for exercise will be allocated by the Plan Administrator pro rata
among the Participants in such Purchase Period in proportion to the relative
amounts credited to their accounts. Any amounts not thereby applied to the
purchase of Shares under the Plan will be refunded to the Participants after the
end of the Purchase Period.
-6-
<PAGE>
SECTION 9.
WITHDRAWAL AND TERMINATION OF PURCHASE RIGHTS
(a) A Participant may withdraw from the Plan during a Purchase Period by
providing written notice to the Plan Administrator on or before 5:00 p.m. of the
last business day of such Purchase Period. Such withdrawal will become
effective upon receipt by the Plan Administrator of such notice, payroll
deductions will cease as soon as is administratively feasible from the date of
such notice, and no additional payroll deductions will be made on behalf of such
Participant during the Purchase Period. Such notice shall be on a form (the
"Withdrawal Form") provided by the Plan Administrator for that purpose. The
Withdrawal Form will permit a Participant to elect to receive all accumulated
payroll deductions and any other contributions made by the Participant as a
refund without penalty or to exercise such Participant's outstanding Purchase
Rights to purchase Shares on the following Exercise Date in the amount of all
payroll deductions withheld during the Purchase Period or other contributions
made to the Participant's account prior to the Participant's withdrawal.
(b) Any Participant who withdraws from the Plan pursuant to Section 9(a)
will not be eligible to rejoin the Plan until the second (2nd) Purchase Period
following the Purchase Period of withdrawal. A Participant wishing to resume
participation may re-enroll in the Plan by completing and filing a new
Participation Form for a subsequent Purchase Period by following the applicable
enrollment procedures.
(c) If a Participant ceases to be an employee of the Company or a parent or
subsidiary of the Company for any reason during a Purchase Period, his or her
outstanding Purchase Right will immediately terminate, and all sums previously
collected from such Participant during such Purchase Period under the terminated
Purchase Right will be refunded to the Participant.
SECTION 10.
RIGHTS AS SHAREHOLDER
(a) A Participant is not a shareholder with respect to Shares to be
purchased during a Purchase Period until the Purchase Right is exercised on the
Exercise Date. Thus, a Participant will not have a right to any dividend or
distribution made prior to the Exercise Date on Shares purchased during the
Purchase Period.
(b) Upon a written request made to the Custodian, the Participant will be
entitled to receive, as soon as practicable after the Exercise Date, a stock
certificate for the number of purchased Shares. The Custodian may impose upon,
or pass through to, the Participant a reasonable fee for the transfer of Shares
in the form of stock certificates from the Custodian to the Participant. It is
the responsibility of each Participant to keep his or her address current with
the Company through the Plan Administrator and with the Custodian.
SECTION 11.
SALE OF SHARES ACQUIRED UNDER THE PLAN
(a) Participants may sell the Shares they acquire under the Plan only in
compliance with the restrictions set forth below.
-7-
<PAGE>
(i) Section 16(b) Insiders may be subject to certain restrictions in
connection with their transactions under the Plan and with respect to the sale
of Shares obtained under the Plan, including, but not limited to, the Company's
Insider Trading Policy, as the same may exist from time to time.
(ii) Shares obtained under the Plan by a Participant must comply with
the Company's Insider Trading Policy, as the same may exist from time to time.
(iii) No Participant purchasing Shares under the Plan shall be
entitled to sell such Shares until the latest to occur of (A) the date which is
one hundred eighty (180) days after the Effective Date; or (B) the first day of
the second (2nd) Purchase Period immediately following the Purchase Period in
which the Shares were obtained. For purposes of this restriction, the Company
may, at its option, include the following legend on any certificates
representing the Shares so purchased:
"The shares represented by this Certificate are subject to certain
restrictions on sale and disposition contained in the Information
Management Resources, Inc. Employee Stock Purchase Plan, a copy of which is
on file with the Corporation."
(b) In order to insure compliance with the restrictions and requirements
herein, the Company may issue appropriate "stop transfer" instructions to its
transfer agent, if any, and, if the Company transfers its own securities, it may
make appropriate notations to the same effect in its own records. By executing
the Participation Form, each Participant acknowledges and agrees to the
Company's rights described in this Section 11(b).
(c) A Participant shall immediately inform the Plan Administrator in
writing if the Participant transfers any Shares purchased through the Plan
within two (2) years from the date of grant of the related Purchase Right. Such
transfer shall include disposition by sale, gift or other manner. The
Participant may be requested to disclose the manner of the transfer, the date of
the transfer, the number of Shares involved and the transfer price. By executing
the Participation Form, each Participant obligates himself or herself to provide
such information to the Plan Administrator.
(d) The Company is authorized to withhold from any payment to be made to a
Participant, including any payroll and other payments not related to the Plan,
amounts of withholding and other taxes due in connection with any transaction
under the Plan, and a Participant's enrollment in the Plan will be deemed to
constitute his or her consent to such withholding.
SECTION 12.
PLAN ADMINISTRATION
(a) The Plan shall be administered by the Committee. No member of the Board
will be eligible to participate in the Plan during his or her period of
Committee service.
(b) The Committee shall have the plenary power, subject to and within the
limited of the express provisions of the Plan:
(i) to determine the commencement and termination date of the
offering of Shares under the Plan; and
-8-
<PAGE>
(ii) to interpret the terms of the Plan, establish and revoke rules
for the administration of the Plan and correct or reconcile any defect or
inconsistency in the Plan.
(c) The Committee may delegate all or part of its authority to administer
the Plan to the Plan Administrator, who may in turn delegate the day-to-day
operations of the Plan to the Custodian. The Custodian will establish and
maintain, as agent for the Participants, accounts for the purpose of holding the
Shares and/or cash contributions as may be necessary or desirable for the
administration of the Plan.
(d) The Board may waive or modify any requirement that a notice or election
be made or filed under the Plan a specified period in advance in an individual
case or by adoption of a rule or regulation under the Plan, without the
necessity of an amendment to the Plan.
SECTION 13.
TRANSFERABILITY
(a) Any account maintained by the Custodian for the benefit of a
Participant with respect to Shares acquired pursuant to the Plan may only be in
the name of the Participant; provided, however, that the Participant may elect
to maintain such account with right of joint ownership with such Participant's
spouse. Such election may only be made on a form (the "Joint Account Form")
provided by the Company.
(b) Neither payroll deductions or other contributions credited to a
Participant's account nor any Purchase Rights or other rights to acquire Shares
under the Plan may be assigned, transferred, pledged or otherwise disposed of by
Participants other than by will or the laws of descent and distribution and,
during the lifetime of a Participant, Purchase Rights may be exercised only by
the Participant.
SECTION 14.
MERGER OR LIQUIDATION OF THE COMPANY
In the event the Company merges with another corporation and the Company is
not the surviving entity, or in the event all or substantially all of the stock
or assets of the Company is acquired by another company, or in the event of
certain other similar transactions, the Committee may, in its sole discretion
and in connection with such transaction, cancel each outstanding Purchase Right
and refund all sums previously collected from Participants under the canceled
outstanding Purchase Rights, or, in its discretion, cause each Participant with
outstanding Purchase Rights to have his or her outstanding Purchase Right
exercised immediately prior to such transaction and thereby have the balance of
his or her account applied to the purchase of whole and fractional Shares
(subject to the maximum dollar limitation, if any, of Section 7(c)) at the
purchase price in effect for the Purchase Period, which would be treated as
ending with the effective date of such transaction. The balance of the account
not so applied will be refunded to the Participant. In the event of a merger in
which the Company is the surviving entity, each Participant is entitled to
receive, for each Share as to which such Participant's outstanding Purchase
Rights are exercised, as nearly as reasonably may be determined by the
Committee, in its sole discretion, the securities or property that a holder of
one Share was entitled to receive upon the merger.
-9-
<PAGE>
SECTION 15.
ADJUSTMENT FOR CHANGES IN CAPITALIZATION
To prevent dilution or enlargement of the rights of Participants under the
Plan, appropriate adjustments may be made in the event any change is made to the
Company's outstanding common stock by reason of any stock dividend, stock split,
combination of shares, exchange of shares or other change in the Shares effected
without the Company's receipt of consideration. Adjustments may be made to the
maximum number and class of securities issuable under the Plan, the maximum
number and class of securities purchasable per outstanding Purchase Right and
the number and class of securities and price per share in effect under each
outstanding Purchase Right. Any such adjustments may be made retroactively
effective to the beginning of the Purchase Period in which the change in
capitalization occurs, and any such adjustment will be made by the Committee in
its sole discretion.
SECTION 16.
AMENDMENT AND TERMINATION
The Committee may terminate or amend the Plan at any time, subject to the
following restrictions. First, the provisions of Sections 4, 5, 6, 7 and 8
which govern the formula for the automatic grant of Purchase Rights under the
Plan may not be amended more than once in any six (6) month period. Second, any
termination or amendment made to the Plan may not affect or change Purchase
Rights previously granted under the Plan without the consent of the affected
Participant, and any amendment that materially increases the benefits or number
of Shares under the Plan (except for certain allowable adjustments in the event
of changes to the Company's capital structure or for changes authorized by the
Plan to be made by the Committee or the Plan Administrator) or materially
modifies the eligibility requirements of the Plan shall be subject to
shareholder approval. If not sooner terminated by the Committee, the Plan shall
terminate at the time Purchase Rights have been exercised with respect to all
Shares reserved for grant under the Plan.
SECTION 17.
SHAREHOLDER APPROVAL AND EFFECTIVE DATE
The Plan is subject to the approval of shareholders of the Company holding
a majority of the shares of the Common Stock.
The Plan shall be deemed to have been adopted as of the Effective Date upon
the date of its approval by the shareholders of the Company. Until the Plan is
approved by the shareholders, no Purchase Rights shall be deemed granted or
exercised under Sections 7 and 8. Upon approval of the Plan by the Company's
shareholders, Purchase Rights shall be deemed granted and exercised as of the
appropriate dates in the Plan as of the Effective Date, and Shares purchased
shall be deemed purchased as of the applicable Exercise Date. In the event the
Plan is not approved by the shareholders on or before December 31, 1996, the
Plan shall be deemed not to have been adopted, and all payroll deduction amounts
withheld on behalf of Participants pursuant to Section 6 shall be refunded to
such Participants.
SECTION 18.
NO EMPLOYMENT RIGHTS
Participation in the Plan will not impose any obligations upon the Company
to continue the employment of the Participant for any specific period and will
not affect the right of the Company to terminate such person's employment at any
time, with or without cause.
-10-
<PAGE>
SECTION 19.
COSTS
Except as set forth in Section 10(b), costs and expenses incurred in the
administration of the Plan and the maintenance of accounts with the Custodian
may be shared by the Participant and the Company, to the extent provided in this
Section 19. Any brokerage fees and commissions for the purchase of Shares under
the Plan (including Shares purchased upon reinvestment of dividends and
distributions) will be shared equally by the Participant and the Company, but
any brokerage fees and commissions for the sale of Shares under the Plan by a
Participant will be borne by such Participant.
SECTION 20.
REPORTS
After the close of each Purchase Period, each Participant in the Plan will
receive a report from the Custodian indicating the amount of the Participant's
contributions to the Plan during the Purchase Period, the amount of the
contributions applied to the purchase of Shares for the Purchase Period, the
purchase price per share in effect for the Purchase Period and the amount of the
contributions (if any) carried over to the next Purchase Period.
SECTION 21.
GOVERNING LAW
The validity, construction and effect of the Plan and any rules and
regulations relating to the Plan will be determined in accordance with laws of
the State of Florida, without giving effect to principles of conflicts of laws,
and applicable Federal law.
SECTION 22.
COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS
The Plan, the granting and exercising of Purchase Rights hereunder, and the
other obligations of the Company, the Plan Administrator and the Custodian under
the Plan will be subject to all applicable federal and state laws, rules, and
regulations, and to such approvals by any regulatory or governmental agency as
may be required. The Company may, in its discretion, postpone the issuance or
delivery of Shares upon exercise of Purchase Rights until completion of such
registration or qualification of such Shares or other required action under any
federal or state law, rule, or regulation, listing or other require action with
respect to any automated quotation system or stock exchange upon which the
Shares or other Company securities are designated or listed, or compliance with
any other contractual obligation of the Company, as the Company may consider
appropriate, and may require any Participant to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of Shares in compliance with applicable laws, rules, and
regulations, designation or listing requirements, or other contractual
obligations.
SECTION 23.
EFFECT OF PLAN
The provisions of the Plan shall, in accordance with its terms, be binding
upon and inure to the benefit of, all successors of each employee participating
in the Plan, including, without limitation, such employee's estate and the
executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such employee.
-11-
<PAGE>
EXHIBIT NUMBER 11.1
-------------------
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARY
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Pro Forma Net Income $ 2,544,931 $ 1,612,471
=========== ===========
PRIMARY:
Common Shares 6,870,188 9,050,960
Stock Option Plans
Shares under option at year-end 5,083,287 5,294,445
Treasury Shares which could be purchased (233,024) (676,130)
----------- -----------
Pro forma weighted average common and
common equivalent shares outstanding 11,720,451 13,669,275
=========== ===========
Pro forma net income per share $ 0.22 $ 0.12
=========== ===========
FULLY DILUTED:
Common Shares 6,870,188 9,050,960
Stock Option Plans
Shares under option at year-end 5,083,287 5,294,445
Treasury Shares which could be purchased (169,492) (676,130)
----------- -----------
Pro forma weighted average common and
common equivalent shares outstanding 11,783,983 13,669,275
=========== ===========
Pro forma net income per share $ 0.22 $ 0.12
=========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
INFORMATION MANAGEMENT RESOURCES, INC.
LIST OF SUBSIDIARIES
The subsidiaries of the Registrant are as follows:
<TABLE>
<S> <C>
Information Management Resources (India) Limited Organized in India
Information Management Resources (U.K.) Limited Organized in the United Kingdom
The Link Group Holdings Limited Organized in the United Kingdom
Information Management Resources UK
Holding Company Limited Organized in the United Kingdom
Movietone, Ltd. Organized in India
Information Management Resources IOR, Ltd. Organized in Mauritius
Information Management Resources Canada Ltd. Organized in Canada
</TABLE>
Each company does business in the name listed above.
<PAGE>
EXHIBIT 23.1
------------
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Information Management Resources, Inc. and subsidiary on Form S-8 (File No.
333-24027) of our report dated March 7, 1997, on our audits of the consolidated
financial statements of Information Management Resources, Inc. and subsidiary as
of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994, which is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
March 27, 1997
<PAGE>
EXHIBIT 23.2
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report on the financial statements of Information Management Resources (India)
Limited included in this December 31, 1996 annual report on Form 10-K of
Information Management Resources, Inc., into Information Management Resources,
Inc.'s previously filed Form S-8 registration statement File No. 333-24027.
ARTHUR ANDERSEN & ASSOCIATES
Bombay, India
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,081,743
<SECURITIES> 5,643,535
<RECEIVABLES> 5,669,626
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,539,180
<PP&E> 5,465,394
<DEPRECIATION> 1,762,476
<TOTAL-ASSETS> 48,953,111
<CURRENT-LIABILITIES> 7,810,448
<BONDS> 0
0
0
<COMMON> 964,909
<OTHER-SE> 39,391,372
<TOTAL-LIABILITY-AND-EQUITY> 48,953,111
<SALES> 0
<TOTAL-REVENUES> 27,948,076
<CGS> 0
<TOTAL-COSTS> 16,243,746
<OTHER-EXPENSES> 7,020,679
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300,526
<INCOME-PRETAX> 4,719,304
<INCOME-TAX> 1,401,244
<INCOME-CONTINUING> 3,318,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,587,687
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
