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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly priod ended September 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 November 4, 1998, there were 29,594,874 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
------------------------------
Page
----
Item 1. Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997.................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1998 and 1997....................................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1998 and 1997....................................... 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................................ 9
Part II - Other Information
---------------------------
Item 1. Legal Proceedings...............................................16
Item 5. Other Information...............................................16
Item 6. Exhibits and Reports on Form 8-K................................16
2
<PAGE>
<TABLE>
<CAPTION>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1998 1997
-------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 75,662 $ 85,819
Marketable securities ................................................... 19,204 4,453
Accounts receivable, less allowances of $226 and $0, respectively ....... 23,439 11,156
Unbilled work in process ................................................ 10,444 6,390
Deferred taxes .......................................................... 10,498 1,889
Other current assets .................................................... 3,818 4,664
--------- ---------
Total current assets .............................................. 143,065 114,371
Property and equipment, net of accumulated depreciation .................... 17,817 9,818
Capitalized software costs, net of accumulated amortization ................ -- 47
Deposits and other assets .................................................. 4,013 960
Intangibles, net of accumulated amortization ............................... 15,854 10,157
--------- ---------
Total assets ...................................................... $ 180,749 $ 135,353
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 4,586 $ 3,136
Accrued compensation .................................................... 14,055 8,430
Deferred revenue ........................................................ 1,526 4,413
Other current liabilities ............................................... 15,759 4,599
--------- ---------
Total current liabilities ......................................... 35,926 20,578
Long-term debt ............................................................. 552 885
Other liabilities .......................................................... 542 683
--------- ---------
Total liabilities ................................................. 37,020 22,146
--------- ---------
Shareholders' equity:
Preferred stock ......................................................... -- --
Common stock ............................................................ 2,918 2,565
Additional paid-in capital .............................................. 126,106 98,735
Retained earnings ....................................................... 16,374 12,564
Accumulated other comprehensive loss .................................... (1,669) (657)
--------- ---------
Total shareholders' equity ........................................ 143,729 113,207
--------- ---------
Total liabilities and shareholders' equity ........................ $ 180,749 $ 135,353
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue .................................... $ 42,013 $ 23,044 $ 111,597 $ 56,158
Cost of revenue ............................ 21,245 12,613 58,654 31,026
--------- --------- --------- ---------
Gross profit ...................... 20,768 10,431 52,943 25,132
Selling, general and administrative expenses 8,463 5,425 22,826 13,748
Research and development expenses .......... 1,812 243 3,959 591
Purchased technology and acquisition costs . -- -- 15,545 --
Goodwill and intangible amortization ....... 586 283 1,182 830
--------- --------- --------- ---------
Income from operations ............ 9,907 4,480 9,431 9,963
Other income (expense):
Interest expense .................. (47) (36) (233) (172)
Interest income and other ......... 1,122 552 3,376 1,073
--------- --------- --------- ---------
Total other income ................ 1,075 516 3,143 901
--------- --------- --------- ---------
Income before provision for income taxes
and minority interest ............ 10,982 4,996 12,574 10,864
Provision for income taxes ................. 3,580 1,509 8,694 3,443
--------- --------- --------- ---------
Income before minority interest ... 7,402 3,487 3,880 7,421
Minority interest in net income ............ -- (22) -- (47)
--------- --------- --------- ---------
Net income ........................ $ 7,402 $ 3,465 $ 3,880 $ 7,374
========= ========= ========= =========
Earnings per share:
Basic ............................. $ 0.25 $ 0.14 $ 0.14 $ 0.31
========= ========= ========= =========
Diluted ........................... $ 0.20 $ 0.10 $ 0.10 $ 0.22
========= ========= ========= =========
Shares outstanding:
Basic ............................. 29,154 24,708 27,476 23,532
========= ========= ========= =========
Diluted ........................... 37,816 35,234 37,624 33,932
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 3,880 $ 7,374
Adjustment to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ....................... 2,932 2,583
Purchased technology ................................ 15,400 --
Deferred taxes ...................................... (8,913) (3,363)
Tax benefit of stock options ........................ 14,933 5,872
Unrealized exchange losses .......................... (5) (11)
Minority interest in net income ..................... -- 47
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process .. (11,166) (4,799)
Other current assets .............................. 1,568 50
Deposits and other assets ......................... (2,842) (209)
Accounts payable and other liabilities ............ 6,292 (633)
Accrued compensation .............................. 5,625 3,024
Income tax ........................................ 1,149 (3,039)
Deferred revenue .................................. (2,887) 2,427
-------- --------
Total adjustments ................................. 22,086 1,949
-------- --------
Net cash provided by operating activities ......... 25,966 9,323
-------- --------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries,
net of cash acquired ................................ (16,277) (3,287)
Investment in marketable securities, net .............. (8,521) (15,837)
Additions to capitalized software costs ............... -- (763)
Additions to property and equipment ................... (8,732) (4,679)
-------- --------
Net cash used in investing activities ............. (33,530) (24,566)
-------- --------
Cash flows from financing activities:
Net repayments from revolving credit line ............. -- (654)
Proceeds from long-term debt and notes ................ -- 1,180
Payments on long-term debt, notes and capital leases .. (2,322) (879)
Proceeds from issuance of common stock ................ 645 55,483
-------- --------
Net cash provided by (used in) financing activities (1,677) 55,130
-------- --------
Effect of exchange rate changes ......................... (916) (18)
-------- --------
Net increase (decrease) in cash and cash equivalents .... (10,157) 39,869
Cash and cash equivalents at beginning of year .......... 85,819 24,082
-------- --------
Cash and cash equivalents at end of period .............. $ 75,662 $ 63,951
======== ========
</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
September 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 nine month periods ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year. These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1997, which are contained in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
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.
Computation of Earnings Per Share - Per share data and number of shares
outstanding have been adjusted to reflect the 3-for-2 stock splits in the form
of stock dividends paid by the Company on April 3, 1998 and July 10, 1997. Basic
earnings per share is computed using the weighted average of common stock
outstanding. Diluted earnings per share is computed using the treasury stock
method which is summarized as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1998 1997 1998 1997
------ ------ ------ ------
Weighted average
common stock outstanding ... 29,154 24,708 27,476 23,532
Weighted average
common stock equivalents ... 8,662 10,526 10,148 10,400
------ ------ ------ ------
Shares used in diluted earnings
per share calculation ...... 37,816 35,234 37,624 33,932
====== ====== ====== ======
Reclassification - Research and development expenses have been
reclassified from selling, general and administrative expense, for the three and
nine month periods ended September 30, 1997 to conform to the new classification
of these expenses for the three and nine month periods ended September 30, 1998.
6
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
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.
Changes in shareholders' equity for the nine months ended September 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 12,068 (70) (59) 12,017
Employee stock purchase plan .... -- 2 346 -- -- 348
Stock options exercised ......... -- 273 24 -- -- 297
Tax benefit of
stock options exercised ...... -- -- 14,933 -- -- 14,933
Net income ...................... 3,880 -- -- 3,880 -- 3,880
Translation adjustment .......... (953) -- -- -- (953) (953)
--------- --------- --------- --------- --------- ---------
Comprehensive income ............ $ 2,927 -- -- -- -- --
=========
Balance, September 30, 1998 ..... $ 2,918 $ 126,106 $ 16,374 $ (1,669) $ 143,729
========= ========= ========= ========= =========
</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 Shareholders' Equity. As of September 30, 1998, the accumulated
other comprehensive loss account consists of cumulative foreign currency
translation adjustments.
7
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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, $700,000
in cash and 32,000 shares of the Company's common stock is payable to Lyon's
former shareholders one year from closing (included in accrued expenses). The
Lyon acquisition is accounted for as a purchase pursuant to the provisions of
APB Opinion No. 16. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The excess of the
purchase price over the net assets acquired (goodwill) will be amortized over a
period not to exceed 20 years.
The purchased assets and assumed liabilities in connection with the
acquisition of Lyon were recorded at their estimated fair values at the
acquisition date. 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.
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.
5. Subsequent Event
On October 2, 1998, the Company acquired 100% of the outstanding stock of
Visual Systems Development Corporation ("Visual"), a privately held information
technology company based in Toronto, Ontario. Visual specializes in
client/server and internet application development. In exchange for Visual's
common stock, Visuals' shareholders received $5.5 million in cash and 400,000
shares of the Company's common stock with the potential for additional payments
in the form of IMR stock provided that Visual achieves specified financial and
business objectives. The acquisition will be accounted for as a purchase
pursuant to the provisions of APB Opinion No. 16. The purchase price will be
allocated to the assets acquired and the liabilities assumed based on their
estimated fair values. Any excess of the purchase price over the net assets
acquired (goodwill) will be amortized over a period not to exceed 20 years.
8
<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
rates of wage cost increases in comparison to rates of inflation in the
countries in which IMR does business, the Company's ability to expand its
infrastructure, the rate of revenue growth, future income from operations and
the impact of the year 2000 on the Company's results of operations and financial
condition constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company notes that a variety of risk
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. Reference is made in particular to the
discussion set forth below in this report and set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, as filed with
the Securities and Exchange Commission.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenue. For the three months ended September 30, 1998, revenue increased
to $42.0 million representing a 82.3% increase over revenue of $23.0 million for
the three months ended September 30, 1997. The May 15, 1998 acquisition of Lyon
and the June 30, 1998 acquisition of RHO accounted for approximately $5.0
million of the revenue increase. Revenue from the Company's core transitional
outsourcing services (software development, application maintenance and
migration and re-engineering services) increased to $17.6 million or 129.8% for
the quarter ended September 30, 1998, compared to $7.7 million for the quarter
ended September 30, 1997. Revenue from the Company's Year 2000 conversion
services increased to $20.6 million or 60.1% for the quarter ended September 30,
1998, compared to $12.9 million for the quarter ended September 30, 1997.
Cost of Revenue. Cost of revenue was $21.2 million, or 50.6% of revenue,
for the three months ended September 30, 1998, as compared to $12.6 million, or
54.7% of revenue, for the three months ended September 30, 1997. The decrease in
cost of revenue as a percentage of revenue reflects: (i) productivity gains from
the Company's Year 2000 and other transformation toolsets; (ii) improved
utilization of software development personnel in India and Northern Ireland; and
(iii) a 16.9% devaluation in the Indian Rupee since September 30, 1997, which
resulted in reduced costs at the Company's Indian software development centers.
Wage costs continue to increase at a greater rate than general inflation in each
of the countries in which IMR has operations, and the Company anticipates that
this trend will continue in the near term. The Company has been able to pass
these wage increases on to its customers in the form of increased prices for its
service offerings. However, there can be no assurance that the Company will be
able to continue to increase prices to its customers to offset future wage
increases.
Gross Profit. Gross profit increased 100% to $20.8 million in the third
quarter of 1998 compared to $10.4 million in the prior comparable period. As a
percentage of revenue, gross profit increased to 49.4% in the third quarter of
1998 compared to 45.3% in the third quarter of 1997.
9
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Selling, General And Administrative Expenses. For the three months ended
September 30, 1998, selling, general and administrative (SG&A) expenses
increased to $8.5 million, compared to $5.4 million for the three months ended
September 30, 1997. As a percentage of revenue, SG&A expenses for the three
months ended September 30, 1998 decreased to 20.1% from 23.5% for the same
period in 1997. This decrease as a percentage of revenue occurred due to the
rapid increase in revenue over the last twelve months compared to a lessor rate
of increase in SG&A during the same period. The dollar increase in SG&A expenses
is attributable to the addition of six sales offices, the expansion of sales
personnel, the Lyon and RHO acquisitions, expansion of the Company's delivery
capacity, regionalization of operations and increases in costs related to
expanding the Company's general support staff (primarily recruiting and human
resources personnel). The Company intends to continue to expand its SG&A
infrastructure in order to position the Company for continued revenue growth.
Management does not expect revenue to continue growing at a faster rate than
SG&A in the near term.
Research and Development Expenses. Research and development (R&D) expenses
increased to approximately $1.8 million for the three months ended September 30,
1998 from approximately $243,000 in the comparable period of 1997. As a
percentage of revenue, R&D increased to 4.3% from 1.1% for the same period in
1997. The increase is attributable to: (i) the acquisition of Lyon and the
continued development of Lyon's component technology; (ii) the modification of
Lyon's component technology for certain targeted industries; and (iii) the
expansion of efforts to develop and enhance the Company's transformation
toolsets.
Goodwill Amortization. Goodwill amortization increased to approximately
$586,000 for the three months ended September 30, 1998 from approximately
$283,000 for the three months ended September 30, 1997. The additional expense
primarily reflects the amortization of goodwill generated by the acquisition of
Lyon in May 1998.
Income from Operations. Operating income for the third quarter of 1998 was
$9.9 million compared to $4.5 million in the comparable period of 1997. As a
percentage of revenue, income from operations for the three months ended
September 30, 1998 increased to 23.6% from 19.4% in the comparable period in
1997. The increase in income from operations as a percentage of revenue reflects
a six quarter trend whereby revenue has grown at a faster rate than cost of
revenue and SG&A expenses. The current increase is a result of higher prices for
the Company's services and increased efficiencies relative to the Company's
fixed costs. Due to increased infrastructure investments management does not
expect income from operations as a percentage of revenue to increase
significantly from current levels in the near term.
10
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Other Income (Expense). The Company realized net other income of
approximately $1.1 million in the third quarter of 1998 compared to net other
income of approximately $516,000 in the comparable period of 1997. The increase
in other income resulted primarily from the investment of the net proceeds from
the Company's August 1997 public offering.
Provision for Income Taxes. The provision for income taxes increased to
approximately $3.6 million for the three months ended September 30, 1998 from
approximately $1.5 million for the three months ended September 30, 1997. This
increase is due to increased earnings in the current year. This represents an
effective tax rate of 32.6% and 30.2% for the three month periods ended
September 30, 1998 and September 30, 1997, respectively. Historically, the
Company has enjoyed a low effective tax rate primarily due to the low tax rates
in India. The effective tax rate increased as a result of recent acquisitions in
France and Australia which have higher tax rates than India.
Net Income. Net income increased to a $7.4 million for the three months
ended September 30, 1998 compared to $3.5 million of net income for the
comparable 1997 period. As a percentage of revenue, net income for the three
months ended September 30, 1998 increased to 17.6% from 15.0% in the comparable
period in 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenue. For the nine months ended September 30, 1998, revenue increased to
$111.6 million representing a 98.7% increase over revenue of $56.2 million for
the nine months ended September 30, 1997. The May 15, 1998 acquisition of Lyon
and the June 30, 1998 acquisition of RHO accounted for approximately $9.2
million of the increase. Revenue from the Company's core transitional
outsourcing services (software development, application maintenance and
migration and re-engineering services) increased to $43.1 million or 119.5% over
the first nine months of 1997. Revenue from the Company's Year 2000 conversion
services increased to $58.7 million or 99.8% for the nine months ended September
30, 1998, compared to $29.4 million for the nine months ended September 30,
1997.
Cost of Revenue. Cost of revenue was $58.7 million, or 52.6% of revenue,
for the nine months ended September 30, 1998, as compared to $31.0 million, or
55.2% of revenue, for the nine months ended September 30, 1997. The decrease in
cost of revenue as a percentage of revenue reflects: (i) productivity gains from
the Company's Year 2000 and other transformation toolsets; (ii) a 16.9%
devaluation in the Indian Rupee since September 30, 1997, which resulted in
reduced costs at the Company's Indian software development centers; and (iii)
improved utilization of software development personnel in India and Northern
Ireland. Wage costs continue to increase at a greater rate than general
inflation in each of the countries in which IMR has operations, and the Company
anticipates that this trend will continue in the near term. The Company has been
able to pass these wage increases on to its customers in the form of increased
prices for its service offerings. However, there can be no assurance that the
Company will be able to continue to increase prices to its customers to offset
future wage increases.
11
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Gross Profit. Gross profit increased to $52.9 million in the first nine
months of 1998 compared to $25.1 million in the prior comparable period. As a
percentage of revenue, gross profit increased to 47.4% in the first nine months
of 1998 compared to 44.8% in the first nine months of 1997.
Selling, General and Administrative Expenses. For the nine months ended
September 30, 1998, SG&A expenses increased to $22.8 million, compared to $13.7
million for the nine months ended September 30, 1997. As a percentage of
revenue, SG&A expenses for the nine months ended September 30, 1998 decreased to
20.5% from 24.5% for the same period in 1997. This decrease as a percentage of
revenue occurred due to the rapid increase in revenue in the first nine months
of 1998 compared to a lessor rate of increase in SG&A during the same period.
The dollar increase in SG&A expenses is attributable to the Lyon and RHO
acquisitions, the addition of six sales offices, the expansion of sales
personnel, expansion of the Company's delivery capacity, regionalization of
operations and increases in costs related to expanding the Company's general
support staff (primarily recruiting and human resources personnel). The Company
intends to continue to expand its SG&A infrastructure in order to generate
continued revenue growth.
Research and Development Expenses. R&D expenses increased to approximately
$4.0 million for the nine months ended September 30, 1998 from approximately
$591,000 in the comparable period of 1997. As a percentage of revenue, R&D
expenses increased to 3.5% from 1.1% for the same period in 1997. The increase
in dollars is attributable to: (i) the acquisition of Lyon and the continued
development of Lyon's component technology; (ii) the modification of component
technology for certain targeted industries; and (iii) the expansion of efforts
to develop and enhance the Company's transformation toolsets.
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
$1.2 million for the nine months ended September 30, 1998 from approximately
$830,000 for the nine months ended September 30, 1997. The additional expense
primarily reflects the amortization of goodwill generated by the acquisition of
Lyon in May 1998 and IMR-Northern Ireland in 1997.
12
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Income from Operations. Operating income for the first nine months of 1998
of $9.4 million compared to income of $10.0 million in the comparable period of
1997. The approximate $500,000 decrease in income from operations was the result
of a one-time charge 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
$25.0 million compared to $10.0 million in the comparable period in 1997.
Excluding these one-time charges, as a percentage of revenue, income from
operations for the nine months ended September 30, 1998 increased to 22.4% from
17.7% in the comparable period in 1997. The current increase is a result of
higher prices for the Company's services and increased efficiencies relative to
the Company's fixed costs. Due to increased infrastructure investments
management does not expect income from operations as a percentage of revenue to
increase significantly from current levels in the near term.
Other Income (Expense). The Company realized net other income of
approximately $3.1 million in the first nine months of 1998 compared to net
other income of approximately $901,000 in the comparable period of 1997. The
increase in net other income resulted primarily from the investment of the net
proceeds from the Company's August 1997 public offering.
Provision for Income Taxes. The provision for income taxes increased to
approximately $8.7 million for the nine months ended September 30, 1998 from
approximately $3.4 million for the nine months ended September 30, 1997. This
increase is due to increased earnings, excluding the one-time charges for
purchased technology and acquisition costs, in the current year. This represents
an effective tax rate of 30.9% and 31.7% for the nine month periods ended
September 30, 1998 and 1997, respectively. The effective tax rate is lower in
the current period due to proportionally higher earnings of IMR-India for the
first three months of 1998, which earnings are taxed at a lower rate than
earnings generated in the U.S., as well as due to the Company's investment in
tax free marketable securities in the first three months of 1998.
Net Income. Net income decreased to $3.9 million for the nine months ended
September 30, 1998 compared to $7.4 million of net 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 nine months of 1998, excluding the one-time
charges for purchased technology and acquisition costs, is approximately $19.4
million compared to net income of approximately $7.4 million in the comparable
period of 1997. Excluding one-time charges as a percentage of revenue, net
income for the nine months ended September 30, 1998 increased to 17.4% from
13.1% in the comparable period in 1997.
13
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Liquidity and Capital Resources
As of September 30, 1998, the Company had working capital of $107.1
million; a current ratio of 4.0 to 1.0; liquid assets (cash, cash equivalents
and marketable securities) of $94.9 million; and available bank lines of credit
of approximately $11.0 million. Additionally, cash provided by operations was
$26.0 million for the nine months ended September 30, 1998. During June 1998,
the Company entered into a contract to purchase land and construct new
facilities for its corporate headquarters. The total price of this project is
expected to be approximately $8.0 million of which $2.0 million has been
expended as of September 30, 1998. The Company has no other material financial
commitments. The Company continuously reviews its future cash requirements,
together with its available bank lines of credit and internally generated funds.
The Company believes it has adequate capital resources to meet all working
capital obligations and fund the development of its current business operations.
Year 2000
Introduction. Many existing computer systems run software programs
permitting only two-digit entries to reference the year in the date field (e.g.,
1998 is read as "98") and therefore cannot properly process dates in the next
century. Software programs that use the two-digit year date field to perform
computations or decision-making functions may fail due to an inability to
correctly interpret dates in the 21st century. For example, many software
systems will misinterpret "00" to mean the year 1900 rather than 2000.
The Company's State of Readiness. The Company is in the process of
assessing the impact the year 2000 will have on its internal operating systems,
relationships with its third-party vendors and relationships with its clients.
After completing the first phase of this assessment, the Company believes that
the year 2000 will not give rise to any event that will have a material adverse
effect on the Company's results of operations and financial condition.
Although the Company continues to review its information technology or "IT"
systems, as well as its non-IT systems, for Year 2000 compliance, to date, the
Company has discovered that only its internal accounting system is not Year 2000
compliant. The Company expected to replace this accounting system in fiscal year
1999 for reasons other than the fact that the system is not Year 2000 compliant
and it has not accelerated replacement plans for such system in light of its
non-compliance. The Company does not believe that the costs associated with the
replacement of the accounting system will have a material impact on the
Company's results of operations and financial condition. The Company has not
identified any other IT or non- IT system that is subject to a material risk of
disruption due to the year 2000.
The Company has assessed whether a system failure experienced by any of the
Company's third-party vendors would negatively impact the Company's operations
or financial condition. The Company has determined that a Year 2000 system
failure experienced by the Company's satellite and communication vendors could
potentially interrupt communications between client sites and the Company's
software development
14
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
centers. This interruption could result in loss of revenue, increased costs and
project delays. Management has contacted its satellite and communications
vendors in order to assess whether they anticipate any communications failures
or interruptions, as a result of the year 2000. If no such failures or
interruptions are anticipated, the Company does not expect to experience any
adverse effects on its results of operations and financial condition. If,
however, it is determined that one or more of the Company's satellite or
communications vendors may encounter year 2000 related failures or
interruptions, the Company will be required to develop a contingency plan. It is
anticipated that a contingency plan, if necessary, will be developed by the
third quarter of 1999. The Company has determined that a system failure
experienced by the satellite and communication vendors or by any other
third-party vendors would not have a material effect on the Company's results of
operations and financial condition.
Risks Presented by the Year 2000. Many of the Company's client engagements
include Year 2000 conversion services that are critical to the operations of its
clients' businesses. Any failure in a client's system could result in a claim
for substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to limit
contractually its liability for damages arising from negligent acts, errors,
mistakes or omissions in rendering its IT services, there can be no assurance
the limitations of liability set forth in its service contracts will be
enforceable in all instances or would otherwise protect the Company from
liability for damages. Although the Company maintains general liability
insurance coverage, including coverage for errors or omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the Company that exceed
available insurance coverage or changes in the Company's insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, could adversely affect the Company's results of
operations and financial condition.
The Company's Contingency Plans. The Company is a high quality provider of
Year 2000 compliance services. Accordingly, if the Company experiences a failure
in its Year 2000 preparedness, experienced staff will be redeployed to address
any potential Year 2000 compliance issue.
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/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 November 12, 1998 /s/ SATISH K. SANAN
------------------- -----------------------------
Satish K. Sanan
Chief Executive Officer
Date November 12, 1998 /s/ ROBERT M. MOLSICK
------------------- -----------------------------
Robert M. Molsick
Chief Financial Officer
17
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description Page
- -------- ----------- ----
27 Financial Data Schedule............................................19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 75,662
<SECURITIES> 19,204
<RECEIVABLES> 23,665
<ALLOWANCES> 226
<INVENTORY> 0
<CURRENT-ASSETS> 143,065
<PP&E> 23,667
<DEPRECIATION> 5,850
<TOTAL-ASSETS> 180,749
<CURRENT-LIABILITIES> 35,926
<BONDS> 552
0
0
<COMMON> 2,918
<OTHER-SE> 140,811
<TOTAL-LIABILITY-AND-EQUITY> 180,749
<SALES> 0
<TOTAL-REVENUES> 111,597
<CGS> 0
<TOTAL-COSTS> 58,654
<OTHER-EXPENSES> 43,286
<LOSS-PROVISION> 226
<INTEREST-EXPENSE> 233
<INCOME-PRETAX> 12,574
<INCOME-TAX> 8,694
<INCOME-CONTINUING> 3,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,880
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.10
</TABLE>
