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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1998
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 33761 (Address of principal executive offices and zip code)
727-797-7080
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
As of August 5, 1998, there were 29,167,446 outstanding shares of the
Registrant's Common Stock, par value $.10 per share.
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC.
Table of Contents
-----------------
Part I - Financial Information
------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 ................................ 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1998 and 1997 .................................................. 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997........................... 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
Part II - Other Information
---------------------------
Item 1. Legal Proceedings ...................................................... 16
Item 5. Other Information ...................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................ 16
</TABLE>
2
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $64,106 $85,819
Marketable securities 27,539 4,453
Accounts receivable, less allowances of $203 and $0 20,135 11,156
Unbilled work in process 8,607 6,390
Deferred taxes 13,162 1,889
Other current assets 3,742 4,664
-------- --------
Total current assets 137,291 114,371
Property and equipment, net of accumulated depreciation 15,660 9,818
Capitalized software costs, net of accumulated amortization - 47
Deposits and other assets 1,766 960
Intangibles, net of accumulated amortization 14,277 10,157
-------- --------
Total assets $168,994 $135,353
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,221 $3,136
Accrued compensation 13,738 8,430
Deferred revenue 3,074 4,413
Other current liabilities 13,380 4,599
-------- --------
Total current liabilities 34,413 20,578
Long-term debt 609 885
Deferred tax liability 417 546
Other liabilities 121 133
-------- --------
Total liabilities 35,560 22,142
-------- --------
Minority interest 7 4
-------- --------
Shareholders' equity:
Preferred stock - -
Common stock 2,911 2,565
Additional paid-in capital 123,165 98,735
Retained earnings 8,973 12,564
Accumulated other comprehensive loss (1,622) (657)
-------- --------
Total shareholders' equity 133,427 113,207
-------- --------
Total liabilities and shareholders' equity $168,994 $135,353
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $37,257 $18,767 $69,584 $33,114
Cost of revenue 19,988 10,371 37,409 18,413
-------- -------- --------- ---------
Gross profit 17,269 8,396 32,175 14,701
Selling, general and administrative expenses 7,468 4,524 14,363 8,323
Research and development expenses 1,158 227 2,147 348
Purchased technology and acquisition costs 15,545 - 15,545 -
Goodwill amortization 306 276 596 547
-------- -------- --------- ---------
Income (loss) from operations (7,208) 3,369 (476) 5,483
Other income (expense):
Interest expense (110) (69) (186) (136)
Interest income and other 1,133 277 2,254 521
-------- -------- --------- ---------
Total other income (expense) 1,023 208 2,068 385
-------- -------- --------- ---------
Income (loss) before provision for income taxes
and minority interest (6,185) 3,577 1,592 5,868
Provision for income taxes 2,835 1,082 5,114 1,934
-------- -------- --------- ---------
Income (loss) before minority interest (9,020) 2,495 (3,522) 3,934
Minority interest in net income - (18) - (25)
-------- -------- --------- ---------
Net income (loss) $(9,020) $2,477 $(3,522) $3,909
======== ======== ========= =========
Earnings (loss) per share:
Basic $(0.33) $ 0.11 $(0.13) $ 0.17
======== ======== ========= =========
Diluted $(0.33) $0.07 $(0.13) $0.12
======== ======== ========= =========
Shares outstanding:
Basic 27,232 22,590 26,624 22,585
======== ======== ========= =========
Diluted 27,232 33,462 26,624 33,408
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(3,522) $3,909
Adjustment to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 1,822 1,372
Purchased technology 15,400 -
Deferred taxes (11,160) (3,363)
Tax benefit of stock options 14,219 5,015
Unrealized exchange losses (5) (20)
Minority interest in net income - 25
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process (6,026) (5,180)
Other current assets 1,659 274
Deposits and other assets (595) (448)
Accounts payable and other liabilities 5,273 759
Accrued compensation 2,423 1,568
Income tax 224 (1,436)
Deferred revenue (1,340) 4,772
--------- ---------
Total adjustments 21,894 3,338
--------- ---------
Net cash provided by operating activities 18,372 7,247
--------- ---------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries,
net of cash acquired (16,144) (2,838)
Investment in marketable securities, net (16,856) (5,969)
Additions to capitalized software costs - (300)
Additions to property and equipment (5,957) (3,771)
--------- ---------
Net cash used in investing activities (38,957) (12,878)
--------- ---------
Cash flows from financing activities:
Net (repayments) borrowings from revolving credit line - (311)
Proceeds from long-term debt and notes - 1,180
Payments on long-term debt, notes and capital leases (608) (867)
Proceeds from issuance of common stock 343 574
--------- ---------
Net cash provided by (used in) financing activities (265) 576
--------- ---------
Effect of exchange rate changes (863) 32
--------- ---------
Net decrease in cash and cash equivalents (21,713) (5,023)
Cash and cash equivalents at beginning of year 85,819 24,082
--------- ---------
Cash and cash equivalents at end of period $64,106 $19,059
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and include all adjustments necessary for a fair presentation. The
results of operations for the three and six month periods ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1997, which are contained in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of Information Management Resources, Inc. ("IMR" or the
"Company"), and its wholly and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Marketable Securities - The Company currently invests in only high
quality, short-term investments which are classified as available-for-sale as
defined by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As such
there were no significant differences between amortized cost and estimated fair
value at June 30, 1998. Additionally, because investments are short-term and are
generally allowed to mature, realized gains and losses have been minimal through
June 30, 1998.
Computation of Earnings per Share - Per share data and number of shares
outstanding have been adjusted to reflect the 3-for-2 stock splits in the form
of stock dividends paid by the Company on April 3, 1998 and July 10, 1997. Basic
earnings (loss) per share is computed using the weighted average of common stock
outstanding. For 1998, diluted loss per share, the effect of incremental shares
from common stock equivalents using the treasury stock method, is not included
in the calculation of net loss per share as the inclusion of such equivalents
would be anti-dilutive. Diluted earnings per share is computed using the
treasury stock method which is summarized as follows (in thousands):
6
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
2. Summary of Significant Accounting Policies (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Weighted average
common stock outstanding 27,232 22,590 26,624 22,585
Weighted average
common stock equivalents 10,482 10,872 10,876 10,823
---------- ---------- --------- ----------
Subtotal 37,714 33,462 37,500 33,408
Dilutive affect of common
stock equivalents (10,482) - (10,876) -
---------- ---------- --------- ----------
Shares used in diluted earnings
per share calculation 27,232 33,462 26,624 33,408
========== ========== ========= ==========
</TABLE>
Reclassification - Research and development expenses have been
reclassified from selling, general and administrative expense for the three and
six month periods ended June 30, 1997 to conform to the new classification of
these expenses for the three and six month periods ended June 30, 1998.
3. Shareholders' Equity
On June 19, 1997 and March 9, 1998, the Company declared 3-for-2 stock
splits in the form of stock dividends payable on July 10, 1997 and April 3,
1998, respectively, to shareholders of record on June 26, 1997 and March 20,
1998, respectively. All applicable share and per share data in the accompanying
financial statements have been retroactively adjusted to reflect these
dividends.
7
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
3. Shareholders' Equity (Continued)
Changes in shareholders' equity for the six months ended June 30, 1998
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Comprehensive Other
Income Common Paid-in Retained Comprehensive
(Loss) Stock Capital Earnings Loss Total
------------- ------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ $ 2,565 $ 98,735 $ 12,564 $ (657) $ 113,207
Common stock issued in
connection with acquisitions - 78 10,135 (69) (59) 10,085
Employee stock purchase plan - 1 159 - - 160
Stock options exercised - 267 (83) - - 184
Tax benefit of
stock options exercised - - 14,219 - - 14,219
Net loss (3,522) - - (3,522) - (3,522)
Translation adjustment (906) - - - (906) (906)
--------------
Comprehensive loss $ (4,428) - - - - -
============== ---------- --------- ----------- ------------ ----------
Balance, June 30, 1998 $ 2,911 $ 123,165 $ 8,973 $ (1,622) $ 133,427
========== ========= =========== ============ ==========
</TABLE>
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation of comprehensive income (loss) and its components. Comprehensive
income (loss) presents a measure of all changes in equity that result from
recognized transactions and other economic events during the period other than
transactions with stockholders. SFAS 130 requires restatement of all prior
period financial statements presented and is effective for periods beginning
after December 15, 1997. The Company has elected to disclose this information in
the Statement of Stockholders' Equity. As of June 30, 1998, the accumulated
other comprehensive loss account consists of cumulative foreign currency
translation adjustments.
8
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
4. Acquisitions
Lyon Consultants, S.A. ("Lyon Acquisition") - On May 15, 1998, the Company
acquired 100% of the outstanding stock of Lyon Consultants, S.A. ("Lyon"), a
privately held software engineering company headquartered in Paris, France. Lyon
specializes in rapid software application development, utilizing reusable
business and technical software objects, and information technology consulting.
In exchange for Lyon's common stock, Lyon's shareholders received $16.0 million
in cash and 499,353 shares of the Company's common stock. In addition, $0.7
million in cash is payable to Lyon's former shareholders one year from closing
(included in accrued expenses). The Lyon acquisition is accounted for as a
purchase pursuant to the provisions of APB Opinion No. 16. The purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase price over the net assets
acquired (goodwill) will be amortized over a period not to exceed 20 years.
The purchased assets and assumed liabilities in connection with the
acquisition of Lyon were recorded at their estimated fair values at the
acquisition date. During July 1998, the Company received an appraisal of the
intangible assets which indicated that approximately $15.4 million of the
acquired intangible assets was in-process purchased technology that had not yet
reached technological feasibility. Because there can be no assurance that the
Company will be able to successfully complete the development and integration of
the in-process technology into its suite of software products or that the
acquired technology has any alternative future use, the acquired in-process
technology was charged to expense during the second quarter of 1998.
The following pro forma condensed statement of operations for the six
months ended June 30, 1998 and 1997 gives effect to the Lyon acquisition as if
it had been consummated as of the beginning of the period.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
------------------ ---------------
(In thousands except per share data)
<S> <C> <C>
Total revenue $ 74,879 $ 40,194
Net (loss) income (3,181) 4,404
Basic (loss) income per share $(0.12) $0.19
Diluted (loss) income per share $(0.12) $0.13
</TABLE>
RHO Transformational Technologies Pty. Limited ("RHO Acquisition") - On
June 30, 1998, the Company acquired 100% of the outstanding stock of RHO
Transformational Technologies Pty. Limited ("RHO"), a privately held software
services and engineering company headquartered in Sydney, Australia. RHO
specializes in software application conversion and maintenance services, using
proprietary tools. In exchange for RHO's common stock, RHO's shareholders
received 285,000 shares of the Company's common stock. The RHO acquisition is
accounted for as a pooling-of-interests combination pursuant to the provisions
of APB Opinion No. 16. Current year financial statements have been restated to
give affect to the business combination. Prior year financial statements have
not been restated due to the immateriality of the business combination. Costs of
approximately $145,000 related to the acquisition have been charged to
acquisition costs and included in the statements of operations.
9
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, some matters
discussed in this report, including but not limited to statements relating to
the Company's anticipated construction of a new corporate headquarters,
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Company notes that a variety of risk factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Reference is made in particular to the discussion
set forth below in this report and set forth in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenue. For the three months ended June 30, 1998, revenue increased to
$37.3 million representing a 98.5% increase over revenue of $18.8 million for
the three months ended June 30, 1997. The May 15, 1998 acquisition of Lyon and
the June 30, 1998 acquisition of RHO accounted for approximately $3.0 million of
the revenue increase. Revenue from the Company's core transitional outsourcing
services (software development, application maintenance and migration and
re-engineering services) increased to $13.7 million or 125.9% for the quarter
ended June 30, 1998, compared to $6.1 million for the quarter ended June 30,
1997. Revenue from the Company's Year 2000 conversion services increased to
$20.3 million or 96.7% for the quarter ended June 30, 1998, compared to $10.3
million for the quarter ended June 30, 1997.
Cost of Revenue. Cost of revenue was $20.0 million, or 53.7% of
revenue, for the three months ended June 30, 1998, as compared to $10.4 million,
or 55.3% of revenue, for the three months ended June 30, 1997. The decrease in
cost of revenue as a percentage of revenue reflects: (i) improved utilization of
software development personnel in India and Northern Ireland, and (ii) a 19.2%
devaluation in the Indian Rupee since June 30, 1997, which resulted in reduced
costs at the Company's Indian software development centers. Wage costs continue
to increase at a greater rate than general inflation in each of the countries in
which IMR has operations, and the Company anticipates that this trend will
continue in the near term. The Company has been able to pass these wage
increases on to its customers in the form of increased prices for its service
offerings. However, there can be no assurance that the Company will be able to
continue to increase prices to its customers to offset future wage increases.
Gross Profit. Gross profit increased to $17.3 million in the second
quarter of 1998 compared to $8.4 million in the prior comparable period. As a
percentage of revenues, gross profit increased to 46.3% in the second quarter of
1998 compared to 44.7% in the second quarter of 1997.
10
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Selling, General and Administrative Expenses. For the three months
ended June 30, 1998, selling, general and administrative (SG&A) expenses
increased to $7.5 million, compared to $4.5 million for the three months ended
June 30, 1997. As a percentage of revenue, SG&A expenses for the three months
ended June 30, 1998 decreased to 20.0% from 24.1% for the same period in 1997.
This decrease as a percentage of revenue occurred due to the rapid increase in
revenue over the last twelve months compared to a lessor rate of increase in
SG&A in the same period. The dollar increase in SG&A expenses is attributable to
the Lyon and RHO acquisitions, addition of SG&A expenses resulting from
expansion of the Company's delivery capacity, regionalization of operations,
increases in costs related to expanding the Company's general support staff
(primarily sales, recruiting and human resources personnel) and costs related to
the establishment of Information Management Resources (Northern Ireland) Ltd.
("IMR-N.I.") in the third quarter of 1997. The Company intends to continue to
expand its SG&A infrastructure in order to generate continued revenue growth.
Management does not expect revenue to continue growing at a faster rate than
SG&A in the near term.
Research and Development. Research and development (R&D) increased to
approximately $1.2 million for the three months ended June 30, 1998 from
approximately $227,000 in the comparable period of 1997. As a percentage of
revenue, R&D increased to 3.1% from 1.2% for the same period in 1997. The
increase is attributable to: (i) the acquisitions of Lyon and RHO; (ii)
cessation of capitalizing software costs in 1997 in connection with the
substantial completion of the Company's Transform 2000 toolset; and (iii) the
expansion of efforts to develop and enhance new and existing methodologies and
software tools.
Purchased Technology and Acquisition Costs. The purchased assets and
assumed liabilities in connection with the acquisition of Lyon were recorded at
their estimated fair values at the acquisition date. The Company received an
appraisal of the intangible assets which indicated that approximately $15.4
million of the acquired intangible assets was in-process purchased technology
that had not yet reached technological feasibility. Because there can be no
assurance that the Company will be able to successfully complete the development
and integration of the in-process research and development into its suite of
software products or that the acquired technology has any alternative future
use, the acquired in-process research and development was charged to expense by
the Company in its quarter ended June 30, 1998. In addition, the Company
recorded a one-time charge of approximately $145,000 for costs related to the
RHO acquisition.
Goodwill Amortization. Goodwill amortization increased to approximately
$306,000 for the three months ended June 30, 1998 from approximately $276,000
for the three months ended June 30, 1997. The additional expense reflects the
amortization of goodwill generated by the acquisition of Lyon in May 1998, and
IMR-N.I. in July 1997.
11
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Income (Loss) from Operations. Operating income (loss) was a loss for
the second quarter of 1998 of $7.2 million compared to income of $3.4 million in
the comparable period of 1997. This decrease in income from operations was the
result of one-time charges for purchased technology of $15.4 million related to
the Lyon acquisition and approximately $145,000 of acquisition costs related to
the RHO acquisition. Excluding these one-time charges income from operations was
$8.3 million compared to $3.4 million in the comparable period in 1997.
Excluding these one-time charges, as a percentage of revenue, income from
operations for the three months ended June 30, 1998 increased to 22.4% from
18.0% in the comparable period in 1997. The increase in income from operations
as a percentage of revenue reflects a five quarter trend whereby revenue has
grown at a faster rate than cost of revenue and SG&A expenses. The current
increase is a result of higher prices for the Company's services and increased
efficiencies relative to the Company's fixed costs. Due to increased
infrastructure investments management does not expect income from operations as
a percentage of revenue to increase significantly from current levels in the
near term.
Other Income (Expense). The Company realized net other income of
approximately $1.0 million in the second quarter of 1998 compared to net other
income of approximately $208,000 in the comparable period of 1997. Other income
in the second quarter of 1997 included interest expense of $69,000 and
investment and other income of $277,000. During the second quarter of 1998, the
Company recognized approximately $1.2 million in investment income primarily
from the investment of the net proceeds from its August 1997 public offering and
interest expense of approximately $110,000.
Provision for Income Taxes. The provision for income taxes increased to
approximately $2.8 million for the three months ended June 30, 1998 from
approximately $1.1 million for the three months ended June 30, 1997. This
increase is due to increased earnings, excluding the one-time charges for
purchased technology and acquisition costs, in the current year. This represents
an effective tax rate of 30.3% and 30.2% (excluding one-time charges) for the
three month periods ended June 30, 1998 and June 30, 1997, respectively.
Net Income (Loss). Net income (loss) decreased to a $9.0 million loss
for the three months ended June 30, 1998 compared to $2.5 million of income for
the comparable 1997 period. This decrease is attributed to $15.5 million of
one-time charges related to acquisitions consummated in the second quarter of
1998. Net income from operations for the second quarter of 1998 excluding the
one-time charges for purchased technology and acquisition costs, is
approximately $6.5 million compared to net income of approximately $2.5 million
in the comparable period in 1997. Excluding one-time charges, as a percentage of
revenue, net income for the three months ended June 30, 1998 increased to 17.5%
from 13.2% in the comparable period in 1997.
12
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenue. For the six months ended June 30, 1998, revenue increased to
$69.6 million representing a 110.1% increase over revenue of $33.1 million for
the six months ended June 30, 1997. The May 15, 1998 acquisition of Lyon and the
June 30, 1998 acquisition of RHO accounted for approximately $4.0 million of the
increase. Revenue from the Company's core transitional outsourcing services
(software development, application maintenance and migration and re-engineering
services) increased to $25.4 million or 113.0% over the first six months of
1997. Revenue from the Company's Year 2000 conversion services increased to
$38.1 million or 130.8% for the six months ended June 30, 1998, compared to
$16.5million for the six months ended June 30, 1997.
Cost of Revenue. Cost of revenue was $37.4 million, or 53.8% of
revenue, for the six months ended June 30, 1998, as compared to $18.4 million,
or 55.6% of revenue, for the six months ended June 30, 1997. The decrease in
cost of revenue as a percentage of revenue reflects: (i) a higher percentage of
Year 2000 conversion services, application development and legacy transformation
projects in the current year, which generally have resulted in higher margins
than contracts for the Company's professional service and maintenance service
offerings; (ii) a 19.2% devaluation in the Indian Rupee since June 30, 1997,
which resulted in reduced costs at the Company's Indian software development
centers; and (iii) improved utilization of software development personnel in
India and Northern Ireland. Wage costs continue to increase at a greater rate
than general inflation in each of the countries in which IMR has operations, and
the Company anticipates that this trend will continue in the near term. The
Company has been able to pass these wage increases on to its customers in the
form of increased prices for its service offerings. However, there can be no
assurance that the Company will be able to continue to increase prices to its
customers to offset future wage increases.
Gross Profit. Gross profit increased to $32.2 million in the first six
months of 1998 compared to $14.7 million in the prior comparable period. As a
percentage of revenues, gross profit increased to 46.2% in the first six months
of 1998 compared to 44.4% in the first six months of 1997.
Selling, General and Administrative Expenses. For the six months ended
June 30, 1998, selling, general and administrative (SG&A) expenses increased to
$14.4 million, compared to $8.3 million for the six months ended June 30, 1997.
As a percentage of revenues, SG&A expenses for the six months ended June 30,
1998 decreased to 20.6% from 25.1% for the same period in 1997. This decrease as
a percentage of revenue occurred due to the rapid increase in revenue in the
first six months of 1998 compared to the rate of increase in SG&A in the same
period. The dollar increase in SG&A expenses is attributable to the Lyon and RHO
acquisitions, addition of SG&A expenses resulting from expansion of the
Company's delivery capacity, regionalization of operations, increases in costs
related to expanding the Company's general support staff (primarily sales,
recruiting and human resources personnel) and costs related to the establishment
of IMR-N.I. in the third quarter of 1997. The Company intends to continue to
expand its SG&A infrastructure in order to generate continued revenue growth.
13
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Research and Development. Research and development (R&D) increased to
approximately $2.1 million for the six months ended June 30, 1998 from
approximately $348,000 in the comparable period of 1997. As a percentage of
revenue, R&D increased to 3.1% from 1.1% for the same period in 1997. The
increase in dollars is attributable to: (i) the acquisition of Lyon and RHO;
(ii) cessation of capitalizing software costs in 1997 in connection with the
substantial completion of the Company's Transform 2000 toolset; and (iii) the
expansion of efforts to develop and enhance new and existing methodologies and
software tools.
Purchased Technology and Acquisition Costs. The purchased assets and
assumed liabilities in connection with the acquisition of Lyon were recorded at
their estimated fair values at the acquisition date. The Company received an
appraisal of the intangible assets which indicated that approximately $15.4
million of the acquired intangible assets was in-process purchased technology
that had not yet reached technological feasibility. Because there can be no
assurance that the Company will be able to successfully complete the development
and integration of the in-process research and development into its suite of
software products or that the acquired technology has any alternative future
use, the acquired in-process research and development was charged to expense by
the Company in its quarter ended June 30, 1998. In addition, the Company
recorded a one-time charge of approximately $145,000 for costs related to the
RHO acquisition.
Goodwill Amortization. Goodwill amortization increased to approximately
$596,000 for the six months ended June 30, 1998 from approximately $547,000 for
the six months ended June 30, 1997. The additional expenses reflects the
amortization of goodwill generated by the acquisition of Lyon in May 1998,
IMR-N.I. and certain minority stockholders interests in IMR-India during 1997.
Income (loss) from Operations. Operating income (loss) was a loss for
the first six months of 1998 of $476,000 compared to income of $5.5 million in
the comparable period of 1997. This decrease in income from operations was the
result of one-time charges for purchased technology of $15.4 million related to
the Lyon acquisition and approximately $145,000 of acquisition costs related to
the RHO acquisition. Excluding these one-time charges income from operations was
$15.1 million compared to $5.5 million in the comparable period in 1997.
Excluding these one-time charges, as a percentage of revenue, income from
operations for the six months ended June 30, 1998 increased to 21.7% from 16.6%
in the comparable period in 1997. The current increase is a result of higher
prices for the Company's services and increased efficiencies relative to the
Company's fixed costs. Due to increased infrastructure investments management
does not expect income from operations as a percentage of revenue to increase
significantly from current levels in the near term.
14
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Other Income (Expense). The Company realized net other income of
approximately $2.1 million in the first six months of 1998 compared to net other
income of approximately $385,000 in the comparable period of 1997. Other income
in the first six months of 1997 included interest expense of $136,000 and
interest and other income of $521,000. During the first six months of 1998, the
Company recognized approximately $2.3 million in investment income primarily
from the investment of the net proceeds from its August 1997 public offering and
interest expense of approximately $186,000.
Provision for Income Taxes. The provision for income taxes increased to
approximately $5.1 million for the six months ended June 30, 1998 from
approximately $1.9 million for the six months ended June 30, 1997. This increase
is due to increased earnings, excluding the one-time charges for purchased
technology and acquisition costs, in the current year. This represents an
effective tax rate of 29.8% and 33.0% for the six month periods ended June 30,
1998 and 1997, respectively. The effective tax rate is lower in the current
period due to proportionally higher earnings of IMR-India for the first three
months of 1998, which earnings are taxed at a lower rate then earnings generated
in the U.S., and the Company's investment in tax free marketable securities in
the first three months of 1998.
Net Income (Loss). Net income (loss) decreased to a $3.5 million loss
for the six months ended June 30, 1998 compared to $3.9 million of income for
the comparable 1997 period. This decrease is attributable to $15.5 million of
one-time charges related to acquisitions consummated in the second quarter of
1998. Net income from operations for the first six months of 1998, excluding the
one-time charges for purchased technology and acquisition costs, is
approximately $12.0 million compared to net income of approximately $3.9 million
in the comparable period of 1997. Excluding one-time charges as a percentage of
revenue, net income for the six months ended June 30, 1998 increased to 17.3%
from 11.8% in the comparable period in 1997.
Liquidity and Capital Resources
As of June 30, 1998, the Company had working capital of $102.9 million;
a current ratio of 4.0 to 1.0; liquid assets (cash, cash equivalents and
marketable securities) of $91.6 million; and available bank lines of credit of
approximately $11.0 million. Additionally, cash provided by operations was $18.4
million for the six months ended June 30, 1998. During June 1998, the Company
entered into a contract to purchase land and construct new facilities for its
corporate headquarters. The total price of this project is expected to be
approximately $8.0 million. The Company has no other material financial
commitments. The Company continuously reviews its future cash requirements,
together with its available bank lines of credit and internally generated funds.
The Company believes it has adequate capital resources to meet all working
capital obligations and fund development of its current business operations.
15
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company is not a party to any pending material litigation.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. The Registrant filed a report on Form 8-K on May 28, 1998 under
Item 2 disclosing the acquisition of Lyon Consultants, S.A.
2. The Registrant filed a report on Form 8-K/A on July 29, 1998
under Item 7 providing financial statements of Lyon Consultants,
S.A. and pro-forma financial information related to the
acquisition of Lyon Consultants, S.A.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION MANAGEMENT RESOURCES, INC.
Date August 14, 1998 /s/Satish K. Sanan
--------------- --------------------------
Satish K. Sanan
Chief Executive Officer
Date August 14, 1998 /s/Robert M. Molsick
--------------- --------------------------
Robert M. Molsick
Chief Financial Officer
17
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> $64,106
<SECURITIES> 27,539
<RECEIVABLES> 20,338
<ALLOWANCES> 203
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 137,291
<PP&E> 20,892
<DEPRECIATION> 5,232
<TOTAL-ASSETS> 168,994
<CURRENT-LIABILITIES> 34,413
<BONDS> 609
0<F1>
0<F1>
<COMMON> 2,911
<OTHER-SE> 130,516
<TOTAL-LIABILITY-AND-EQUITY> 168,994
<SALES> 0<F1>
<TOTAL-REVENUES> 69,584
<CGS> 0<F1>
<TOTAL-COSTS> 37,409
<OTHER-EXPENSES> 32,448
<LOSS-PROVISION> 203
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 1,592
<INCOME-TAX> 5,114
<INCOME-CONTINUING> (3,522)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (3,522)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
<FN>
<F1> Amounts inapplicable or not disclosed as a separate line on the Statement
of Financial Position or Results of Operations are reported as 0 herein.
</FN>
</TABLE>
