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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, 1997
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)
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 13, 1998, was $568,035,487 based upon the closing price of $34.46 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 13, 1998, there were 25,794,532 shares of the registrant's
Common Stock outstanding.
The closing price and shares outstanding have been adjusted to reflect the
3-for-2 stock split in the form of a stock dividend payable on April 3, 1998 to
shareholders of record on March 20,1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held on or about May 29, 1998 are incorporated by reference
into Part III hereof.
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INFORMATION MANAGEMENT RESOURCES, INC.
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
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 Consolidated 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................... 31
Item 9. Changes in and Disagreements with Independent Auditors on
Accounting and Financial Disclosure......................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant............ 59
Item 11. Executive Compensation........................................ 59
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 59
Item 13. Certain Relationships and Related Transactions................ 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 60
Signatures.................................................... 63
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PART I
THIS REPORT CONTAINS CERTAIN 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, WHICH ARE INTENDED TO BE COVERED BY
THE SAFE HARBORS CREATED THEREUNDER. FORWARD-LOOKING STATEMENTS INCLUDE
STATEMENTS RELATING TO THE COMPANY'S ABILITY TO SELL TRANSITIONAL OUTSOURCING
SERVICES TO EXISTING YEAR 2000 CUSTOMERS, THE POTENTIAL EXTENT OF THE YEAR 2000
PROBLEM AND THE ANTICIPATED GROWTH IN THE YEAR 2000 SERVICES MARKET, ANTICIPATED
GROWTH IN THE APPLICATION MAINTENANCE OUTSOURCING INDUSTRY, THE COMPANY'S
ABILITY TO IMPLEMENT ITS STRATEGIES FOR EXPANDING ITS SERVICES AND
DIFFERENTIATING ITSELF FROM COMPETITORS. OTHER FORWARD-LOOKING STATEMENTS CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE," "PLANS," AND
"INTENDS." ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD BE INACCURATE AND THEREFORE THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS. A DISCUSSION OF CERTAIN FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS IS SET FORTH HEREIN IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
REPORT.
ITEM 1. BUSINESS
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GENERAL
Information Management Resources, Inc. ("IMR" or the "Company") provides
applications software outsourcing solutions for the information technology
("IT") departments of large businesses through an integrated network of global
resources. The Company's services, which generally are offered on a fixed-price,
fixed-time frame basis, include software development, application maintenance,
migration and re-engineering services, and Year 2000 conversion 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 facilities in Bangalore and Mumbai (formerly Bombay), India
and Belfast, Northern Ireland. The Company plans to establish an additional
offshore software development facility in New Delhi, India. The Company links
offshore software development facilities by satellite communications to both the
Company's offices and the offices of many of its clients. A global network of
offices 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 differences between a client's office and the Company's offshore software
development facilities. The Company believes that its proprietary TSQM process,
software engineering methodologies and toolsets, and its offshore software
development centers enable it to provide high quality, cost-effective IT
solutions.
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The Company's clients are primarily Fortune 500 or comparably sized
companies with significant IT budgets and recurring needs for software
development, application maintenance, migration and re-engineering, Year 2000
conversion and IT programming and consulting 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 North America, Inc.
("Michelin"), SPS Payment Systems and Xerox Corporation. Through a staff of
approximately 1,450 software development professionals, the Company serves its
clients from its U.S. headquarters in Clearwater, Florida, its international
offices in London, Sydney and Toronto, its offshore software development centers
in Bangalore, Mumbai and Belfast and its branch sales offices located in Boston,
Chicago, Dallas, Atlanta, Minneapolis and Washington, D.C. The Company plans to
establish an additional offshore software development facility in New Delhi,
India and is considering other locations in Europe, southeast Asia and South
America to expand the Company's global presence.
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., 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
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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 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
centers in Bangalore and Mumbai, India and Belfast, Northern Ireland provide IMR
with a significant cost advantage as well as the ability to provide 24-hour
service to its clients. The Company's costs for offshore software development
personnel have historically 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 an IMR offshore software development center
where a substantial majority of a project's work is performed. Due to the time
difference between the Company's sales offices and delivery centers, the Company
can create a virtual "second shift" for its North American, European and
Australian 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 and methodologies to
support three key services: (i) re-engineering; (ii) migration; and (iii) re-
hosting of legacy systems to emerging technologies, such as client/server
systems. These tools were developed utilizing object-oriented technologies to
allow the Company to reduce both the cost and time required to successfully
complete large scale projects. The Company's TransformIMS, TransformVSAM and
TransformDB2 toolsets support the migration of mainframe-based legacy systems
and their related applications to relational database management systems
environments (e.g., Oracle, Sybase and Informix). With rapidly increasing
demand for Year 2000 conversion services, the Company modified its TransformIMS
toolset to address the Year 2000 problem. Transform2000 supports full life
cycle conversion for Year 2000 projects and automates many of the tasks involved
in resolving Year 2000 problems. Since 1994, IMR has used its Century Change-
Planning Analysis and Conversion ("CC-PAC") methodology and the Transform2000
toolset together to provide full life cycle Year 2000 compliance services.
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STRATEGIES
The Company's objective is to be a leading provider of comprehensive
transitional IT outsourcing services and solutions to the IT departments of
large businesses. 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 help the Company secure the loyalty and trust of
clients and provide 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 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.
Concentrate on Key Technologies. Although a primary growth strategy is to
develop expertise in key vertical markets, the Company continues to focus on
obtaining advanced software development technologies to support its transitional
outsourcing service model. By using software provided by companies such as Texas
Instrument (IEF Composer) and Forte Software, Inc. and using its own proprietary
toolsets, IMR offers a "best of breed" technology solution to clients in several
key areas. These areas include object-oriented client/server
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development and the use of "web enabling" technologies which support the rapid
integration of mainframe systems with newly developed client/server systems
using Internet/intranet development tools. This broad-based technology strategy
reinforces the Company's focus on the successful transition of legacy mainframe
systems to new technical environments. 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 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.
GROWTH STRATEGIES
Convert Year 2000 Projects into Transistional 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
current demand for the Company's Year 2000 services provides the opportunity to
select those accounts with the greatest potential for long-term client
relationships. A key element of the Company's long-term growth strategy is to
expand the scope of the IT services it provides to each client. 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 other transitional outsourcing projects from these
clients. The Company believes that clients who choose to outsource a specific
IT service are more likely to consider outsourcing additional future IT
services.
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, utilities and health care. These industries generally are dominated by
large companies with intensive IT needs. As business has increased in these
targeted vertical markets, the Company believes it has gained a broader
knowledge and expertise of these industries. The Company seeks to leverage this
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. In addition, a component of the Company's
acquisition strategy is to identify companies with expertise 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. In addition,
the Company intends to establish a global network of offshore software
development centers that will benefit from lower personnel costs and available
infrastructures of equipment and facilities. In furtherance of this strategy,
during 1997 the Company acquired offshore development facilities in Mumbai,
Belfast and New Delhi. (The New Delhi facility is currently under renovation.)
Additional facilities are contemplated for eastern Europe and southeast Asia,
although no assurance can be given that the Company ultimately will select these
locations for future expansion.
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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 IT services firms with established customers and
technical expertise, particularly those firms with expertise in the insurance,
financial services, manufacturing, retail, utilities and healthcare markets.
Develop Economic Monetary Unit (EMU) Conversion Services Business. A
number of European countries have announced their intent to adopt a single
Economic Monetary Unit ("EMU") to replace their existing currencies. The
adoption of the EMU will require organizations worldwide to modify existing
software applications in order to accommodate the EMU. The Company believes
that many organizations will outsource EMU conversion projects and that a
significant opportunity exists for the Company to increase revenue by offering
EMU conversion services. The Company has begun to pursue this opportunity by
offering EMU conversion services to several of its existing European customers
and it intends to continue to pursue new customers for its EMU conversion
services.
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. 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) an 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
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, generally 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.
TSQM is based in part on software standards published by the Institute of
Electrical & Electronics Engineering ("IEEE"), Software Engineering Institute
("SEI") software engineering process models and ISO 9001 quality processes. To
position itself for future business from companies in the European Community,
as well as from international affiliates of its North American customers, IMR's
facility in Bangalore, India and Chesham, England have achieved ISO 9001
certification. IMR is pursuing company-wide ISO and SEI certification.
During each stage of a project, IMR utilizes TSQM to monitor progress and
quality, including deviations from project plans that could adversely affect on-
time delivery, compliance with project specifications and project financial
performance. The project team collects, analyzes and reports on key quality
metrics to verify compliance with quality standards used in project execution,
and the project team serves as a custodian of information regarding the methods,
techniques and tools that have been utilized to perform 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.
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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 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., European and
Australian offices 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, Australia, the U.K. and the U.S., the Company can
create a virtual "second shift" for its 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. An offshore
software development center may be able to use the excess capacity of a client's
existing computing facilities during off-peak hours. This should allow
additional projects to be undertaken without substantial client investment in
new hardware and software. The costs of satellite communications and
infrastructure installed by the Company at an offshore center will be spread
among multiple clients and projects. 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 resources available of an
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 which encompass software development, application
maintenance, and migration and re-engineering services; (ii) Year 2000
conversion services; and (iii) programming and consulting services. The Company
delivers each of these services independently or as a comprehensive package.
CORE TRANSITIONAL OUTSOURCING SERVICES
IMR's core 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 three alternatives to
assist clients in developing new applications for IBM mainframe platforms,
selected client/server platforms and other emerging technologies:
. 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;
or
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. system evolution services, in which mainframe legacy systems are re-
developed into new systems using object-oriented technologies and the
Company's proprietary ISEM (Information Systems Evolution
Methodology).
In each case, 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. The Company has four distinct processes
for its application maintenance services: Corrective, Adaptive, Perfective and
Preventive. Corrective maintenance requires software failures to be diagnosed
and fixed as they occur. These failures can directly affect business operations
and require the highest level of support. Quick fixes and poor documentation
result in increased code complexity and increased future maintenance costs.
Adaptive maintenance requires modification of software code to operate in
changing operating environments, such as new mainframe hardware or a new release
of a mainframe operating system. Perfective maintenance is the modification of
legacy code to provide new functionality to meet changing business requirements.
Perfective maintenance backlogs are the biggest source of concern for IT
management. Preventive maintenance is a proactive approach to modifying legacy
software code to ensure successful operation in the future. Year 2000
compliance services are a form of preventive maintenance.
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 development center.
Migration and Re-engineering Services. The Company has developed its
proprietary ISEM methodology, a broad-based strategy for deploying new
technologies and managing the successful integration of legacy mainframe systems
with new client/server systems. Alternatives include: legacy systems re-
development using object-oriented technologies; mainframe integration with new
client/server systems using "web enabling" Internet/intranet technologies; and
tool-enabled re-engineering of legacy systems, in which these systems are
migrated 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
"productivity tools" enable the Company to perform source code analyses, re-
design target databases and convert certain programming languages.
YEAR 2000 SERVICES
The Company uses its CC-PAC methodology to provide cost-effective services
related to the Year 2000 problem. The CC-PAC methodology defines the methods
for performing Year 2000 conversion services through five separate phases:
analysis, planning, conversion, testing and implementation. The CC-PAC
methodology, together with the Company's proprietary Year 2000 toolset,
Transform2000, and a rigorous
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process approach form the Company's strategy 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 Year 2000
services. The Company also believes the ability of Transform2000 to address
many of the Year 2000 problems across a broad array of computing environments
and operating platforms to be a source of significant competitive advantage.
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 500 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. Beginning in 1998, the Company plans to
redirect its marketing efforts to key vertical markets including insurance,
financial services, manufacturing, retail and health care. Companies and
clients in these industries have historically provided the greatest source of
business opportunities for the Company.
<TABLE>
<CAPTION>
SOFTWARE DEVELOPMENT SERVICES: APPLICATION MAINTENANCE SERVICES: MIGRATION AND RE-ENGINEERING SERVICES:
- ------------------------------ --------------------------------- --------------------------------------
<S> <C> <C>
Dunn & Bradstreet Inc. Dayton Hudson Corporation Fingerhut
EBSCO Industries, Inc. Michelin North America General Reinsurance
Ford Motor Company Southern California Edison Michelin Tire Corporation
NOVUS Services, Inc. SPS Payment Systems, Inc. Reliastar Life Insurance Company
Whitbread Plc Whitbread Plc SPS Payment Systems, Inc.
Winn Dixie Stores, Inc.
</TABLE>
YEAR 2000 CONVERSION SERVICES: PROGRAMMING & CONSULTING SERVICES:
------------------------------ ----------------------------------
American Greetings Corp. Dayton Hudson Corporation
AON/Combined Insurance NOVUS Services, Inc.
Commercial Union Insurance Company J.C. Penney
John Hancock Financial Services John Hancock Financial Services
Mutual of Omaha Insurance Company Xerox Corporation
PACCAR Inc.
Reliastar Life Insurance Company
9
<PAGE>
During the year ended December 31, 1997, the Company's top five clients
accounted for approximately 35.4% of revenue. 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
9.1% of revenue. During the year ended December 31, 1996, the Company's top
five clients accounted for approximately 59.0% of revenue. In 1996, NOVUS and
SPS represented approximately 31.0% of revenue. The volume of work performed
for specific clients is likely to vary from year to year, and a significant
client in one year may not use the Company's services in a subsequent year.
SALES AND MARKETING
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 international offices in London, Sydney and Toronto
and its domestic sales branch offices located in Boston, Chicago, Dallas,
Atlanta, Minneapolis and Washington, D.C. 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, which is
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 define 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.
As IMR pursues expansion in other areas of Europe and southeast Asia to
expand its global presence, the Company will consider establishing branch sales
offices to pursue business opportunities in those regions, although no assurance
can be given that the Company will select these locations for future expansion.
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-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., Australia, and India. Under an agreement
between the Company and it's majority-owned subsidiary, Information Management
Resources (India) Limited ("IMR-India") the Company owns these components,
libraries, toolsets and methodologies. Finally, the Company maintains
trademarks and service marks to identify its various service
10
<PAGE>
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., India, and Australia are members of the Berne
Convention, an international treaty. As members of the Berne Convention, the
governments of the U.K., India, and Australia have agreed to extend copyright
protection under their domestic laws to foreign works, including works created
or produced in the U.S. The Company believes that laws, rules, regulations and
treaties in effect in the U.S., the U.K., Australia or 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., Australia, or India will not change in
ways that may prevent or restrict the transfer of software components,
libraries and toolsets among India, the U.S., the U.K. and Australia. 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 increases, 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.
The Company believes that many of its principal competitors have
significantly greater financial, technical and market resources and generate
greater revenue 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.
11
<PAGE>
HUMAN RESOURCES
As of March 13, 1998, the Company had approximately 1,535 employees,
including approximately 525 persons in its U.S., U.K. and Australian
headquarters and branch offices and approximately 1,010 in its offshore software
development centers in India and Northern Ireland. Additionally, as of March
13, 1998, the Company had approximately 145 independent contractors performing
various services. None of the Company's employees is subject to a collective
bargaining arrangement.
As of March 13, 1998, approximately 280 of the Company's U.S. employees
were working under the H-1B, non-immigration work permitted visa classification,
which the Company processed for those employees through the U.S. Immigration and
Naturalization Service (the "INS"). The H-1B visa classification enables
U.S. employers to hire qualified foreign workers in positions which require an
education at least equal to a U.S. Baccalaureate Degree in specialty occupations
such as software systems engineering and systems analysis. The H-1B visa
usually permits an individual to work and live in the U.S. for a period of up to
six years. There is a limit on the number of new H-1B petitions that the INS
may approve in any government fiscal year. Historically, this limit generally
has not been reached. In years in which this limit is reached, the Company may
be unable to obtain H-1B visas necessary to bring critical foreign employees to
the U.S. The Company also processes immigrant visas for lawful permanent
residency (evidenced by a card commonly referred to as the "Green Card") for
employees to fill positions for which there are no able, willing and qualified
U.S. workers available to fill the position. 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.
The Company believes that 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 active recruitment programs in
the U.S., the U.K., Canada, Australia, India and certain other countries 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 following table sets forth a description of the Company's principal
facilities:
<TABLE>
<CAPTION>
Location Square Feet (Approx.) Lease Expiration Date Function
- ------------------------- --------------------- --------------------- -----------------------------
<S> <C> <C> <C>
Clearwater, Florida 22,500 sq. ft. July 1999 Corporate headquarters
Chesham, England 12,500 sq. ft. March 2013 U.K. headquarters
Bangalore, India 66,000 sq. ft. June 2000(1) Software development facility
Belfast, Northern Ireland 14,500 sq. ft. September 2002(1) Software development facility
Mumbai, India 28,000 sq. ft. (2) Software development facility
</TABLE>
________________
(1) These leases contain options to extend for an additional five years.
(2) The building at the Company's software development facility in Mumbai is
owned by the Company and the land is leased through March 2096.
12
<PAGE>
In addition, the Company leases branch offices in Boston, Chicago, Dallas,
Atlanta, Minneapolis, Washington, D.C., Toronto and Sydney, which are used
primarily for sales and marketing purposes.
The Company believes that its facilities are near full utilization (other
than its facility in Mumbai, India which has recently undergone significant
expansion and 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, 1997.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
The Common Stock of the Company trades on The Nasdaq Stock Market/SM/
("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
$6.22 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, 1997. Share prices
have been adjusted to reflect a three-for-two stock split in the form of a stock
dividend in July 1997 and a subsequent three-for-two stock split in the form of
a stock dividend to be paid in April 1998.
<TABLE>
<CAPTION>
Fiscal Period High Low
------------- ---- ---
<S> <C> <C>
1996:
November 8, 1996 through
December 31, 1996 $ 9.39 $ 6.17
1997:
March 31, 1997 $12.00 $ 5.00
June 30, 1997 $20.39 $ 6.78
September 30, 1997 $25.25 $17.95
December 31, 1997 $25.33 $13.00
</TABLE>
The number of shareholders of record of the Common Stock as of March 13,
1998, was 58 based on transfer agent reports.
During the year ended December 31, 1996, the Company declared dividends of
approximately $1.6 million. 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 14 to Consolidated Financial Statements.) The
Company did not declare any cash dividend in 1997 and 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 CONSOLIDATED FINANCIAL DATA
------------------------------------
The following selected consolidated financial data has been derived from
the Company's consolidated financial statements. The information below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's Consolidated Financial
Statements and related notes.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997(1) 1996 1995 1994 1993
------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital............................... $ 93,793 $30,728 $ 2,355 $ (340) $(2,504)
Total assets.................................. 135,353 48,953 8,666 7,099 6,453
Long-term debt, net of current portion........ 885 - 1,184 2,153 1,141
Shareholders' equity.......................... 113,207 40,356 2,708 264 (559)
Shares outstanding at year-end................ 25,651 21,710 20,377 20,377 20,377
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenue....................................... 83,550 27,948 22,700 14,102 12,429
Gross profit.................................. 37,591 12,290 9,229 5,439 2,298
Income from operations........................ 15,603 4,684 3,508 829 (3,246)
Net income.................................... 11,895 2,588 2,517 814 (3,673)
Pro forma net income (2)...................... - 2,545 1,612
Diluted earnings per share.................... 0.35 - - - -
Pro forma diluted earnings per share (2)...... - 0.10 0.05
Cash dividends (3)............................ - 1,623 - - 8
Cash dividends per share (2).................. - 0.06 -
Weighted average common stock and
common stock equivalent
outstanding (2).............................. 34,467 26,371 30,831
</TABLE>
___________________
(1) Consolidated Balance Sheet Data at, and Consolidated Statements of Income
Data for the year ended, December 31, 1997 give effect to the Company's
acquisition of Link Group Holdings Limited ("Link") in January 1997.
Revenue from operations for the year ended December 31, 1997 attributable
to this acquisition was $18.0 million.
(2) 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, 1996 and 1995.
Pro forma data has not been calculated for years prior to 1995.
(3) All cash dividends were Subchapter S distributions. Cash dividends are not
anticipated in the foreseeable future.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
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 application maintenance, and migration and re-engineering) and Year
2000 conversion services. In addition, the Company offers programming and
consulting services on a time-and-materials basis.
Revenue from services provided on a fixed-price basis are recognized using
the percentage of completion method. Revenue from services provided on a time-
and-materials 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 generally reserves the right
to renegotiate fixed-price and fixed-time frame commitments in the event of any
change in scope. Under the percentage of completion method, 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 and by inflationary increases in such costs.
Although from time to time the Company has been required to make revisions to
its work completion estimates, 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.
The Company continues to increase its staff of software development
professionals to perform transitional outsourcing and Year 2000 services. The
Company anticipates that revenue from Year 2000 services will continue to exceed
50% of the Company's total revenue over the next two years. 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.
In November 1996, the Company completed its initial public offering in
which it realized net proceeds of $40.7 million. In July 1997, the Company
completed a second public offering in which it realized net proceeds of $52.5
million.
RECENT TRANSACTIONS
Information Management Resources (India) Ltd.
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 and Chief Executive Officer. 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%. During 1997, the Company acquired an
additional 1.7% of IMR-India in three separate transactions, thereby increasing
the Company's total ownership to 99.9%. The remaining 0.1% of IMR-India is
owned by three individuals. Additionally, IMR-India has granted to certain of
its employees options to acquire additional shares which upon issuance
16
<PAGE>
would represent 1.9% 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.
Information Management Resources, plc
As of December 31, 1996, the Company owned 39.5% of the outstanding equity
of Information Management Resources (U.K.), Ltd. ("IMR-Ltd.") and Mr. Satish
Sanan and his spouse together owned 10.5% of such outstanding equity. The
balance of IMR-Ltd.'s outstanding equity was owned by Link. Effective January
8, 1997, the Company acquired 100% of the outstanding shares of Link from its
two owners, Sheila Shipperlee and Philip Shipperlee, a director of the Company.
Under the terms of the acquisition agreement, the Company paid the Shipperlees
$2.1 million in cash and 161,343 shares of the Company's Common Stock at closing
and an additional $1.6 million in cash one year thereafter. Concurrently with
the Link acquisition, the Company acquired the 10.5% interest in IMR-Ltd. held
by Mr. and Mrs. Sanan for $520,000 in cash. The purchase price was approved by
the independent members of the Company's Board of Directors. As a result of the
completion of the Link acquisition and the acquisition of the Sanans' interest
in IMR-Ltd., the Company now owns 100% of both Link and IMR-Ltd. IMR-Ltd. and
Link operate as a single, fully owned subsidiary of IMR under the name
Information Management Resources, plc ("IMR-U.K."). Prior to January 8, 1997,
the Company's investment in IMR-Ltd. was accounted for on the equity method.
Information Management Resources (Northern Ireland) Limited
During June 1997, the Company began operations of Information Management
Resources (Northern Ireland) Limited ("IMR-N.I.") in Belfast, Northern Ireland
and acquired certain assets and operations from Logicom, Ltd., an unaffiliated
company, in exchange for $270,000 cash and 11,250 shares of the Company's
common stock. As part of this transaction, the senior management from Logicom,
Ltd. became employed by IMR-N.I.
INCOME TAX MATTERS
Prior to the consummation of the Company's initial public offering of its
Common Stock in November 1996, the Company had elected S Corporation treatment
under federal income tax laws and the income tax laws of certain states. As a
result, for such tax periods, the Company's earnings were taxed directly to the
Company's then current shareholders. The historical financial statements for
the years 1992 through 1995 do not include a provision for federal and state
income taxes for such periods, except for certain state income taxes imposed at
the corporate level. Accordingly, for such periods and for the period January 1
through November 7, 1996 (the date on which the Company terminated its S
corporation status and became subject to federal and state income taxes at
applicable C Corporation income tax rates) pro forma adjustments for income
taxes were calculated as if the Company had been fully subject to federal and
state income taxes based on the tax laws in effect for the respective periods
using the criteria established under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." See Notes 1 and 12 of Notes to
Consolidated Financial Statements.
IMR-India is eligible for certain favorable tax provisions provided under
the Indian Income-Tax Act, 1961 including: (i) an exemption from payment of
corporate income taxes for a period of five consecutive years in the first eight
years of operation (the "Tax Holiday"); or (ii) an exemption from income taxes
on the profits derived from exporting computer software or transmitting software
from India (the "Export Exemption"). The
17
<PAGE>
Export Exemption remains available after expiration of the Tax Holiday. The
Company considers these earnings to be permanently invested in India and does
not anticipate repatriating any of these earnings to the U.S. If the Company
determines to repatriate any earnings of IMR-India, it will be required to
record a provision for income taxes on such amounts and, upon repatriation of
the funds, pay U.S. taxes thereon. See Note 12 of Notes to Consolidated
Financial Statements.
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 revenue and
percentage change in the dollar amount of such items compared to the prior year.
<TABLE>
<CAPTION>
Percentage of Revenue Percentage Increase
Year ended December 31, Year to Year
----------------------- --------------------------
1997 1996 1995 1996-1997 1995-1996
------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................. 100.0% 100.0% 100.0% 198.9% 23.1%
Cost of revenue..................... 55.0% 56.0% 59.3% 193.5% 16.2%
------- ------ ------
Gross profit........................ 45.0% 44.0% 40.7% 205.9% 33.2%
Selling, general and
administrative expenses.......... 25.0% 26.9% 25.0% 178.0% 32.6%
Goodwill amortization............... 1.3% 0.3% 0.2% 1,023.0% 69.5%
------- ------ ------
Income from operations.............. 18.7% 16.8% 15.5% 233.1% 33.5%
Other income, net................... 2.1% 0.1% - 4,962.9% 150.0%
------- ------ ------
Income before provision for income
taxes and minority interest...... 20.8% 16.9% 15.5% 268.2% 34.0%
======= ====== ======
</TABLE>
During the year ended December 31, 1997, the Company experienced a high
level of revenue growth as compared to the year ended December 31, 1996 which is
summarized as follows:
<TABLE>
<S> <C>
Percentage increase of revenue from 1996 to 1997:
European acquisitions 65.2%
Year 2000 revenue 108.7%
Transitional outsourcing revenue 25.0%
-----
198.9%
=====
</TABLE>
Year 2000 revenue is expected to grow at a significantly reduced rate in
1998 and 1999 as management focuses on selling transitional outsourcing
services. In addition, Year 2000 revenue will rapidly diminish after the year
2000 as many Year 2000 compliance solutions are implemented and tested.
18
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue increased to $83.6 million in 1997, representing a 198.9%
increase over revenue of $27.9 million in 1996. Of this increase, approximately
$18.0 million is attributable to the acquisition of IMR-U.K. The remaining $37.4
million of this increase in revenue was primarily attributable to the continued
expansion of Year 2000 conversion services. Revenue from the Company's Year 2000
conversion services increased to $44.5 million during 1997 (including revenue of
$7.3 million realized by IMR-U.K.) as compared to revenue of $7.5 million for
1996. Revenue from the Company's core transitional outsourcing services
(software development, application maintenance and migration and re-engineering
services) was $29.4 million in 1997 (including $5.6 million of revenue realized
by IMR-U.K.) as compared to $16.3 million for 1996. The Company considers this
increase to be significant because it reflects the Company's continuing effort
to generate growth through increased revenue from both Year 2000 and core
transitional outsourcing services. Revenue from professional services was $9.6
million for 1997 (including $5.1 million of revenue realized for IMR-U.K.) as
compared to revenue of $4.1 million for 1996.
Cost of Revenue. Cost of revenue was $46.0 million, or 55.0% of revenue
for 1997, as compared to $15.7 million, or 56.0% of revenue, for 1996. Cost of
revenue consists primarily of salaries and employee benefits for personnel
dedicated to client projects as well as amortization of capitalized software
costs and facility costs at the India and Northern Ireland software development
facilities. The decrease in cost of revenue as a percentage of revenue
reflects: (i) the Company's implementation of better controls over project
pricing and margins; (ii) a lower percentage of application maintenance service
projects in 1997, as compared to 1996, which carry slightly lower margins than
contracts for the Company's other core transitional outsourcing services and
Year 2000 services; and (iii) improved utilization of software development
personnel in India. This improved utilization reflected the benefits associated
with expansion and training of the Company's India-based personnel. Wage costs
continue to increase at a greater rate than 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 generally has been able to offset these
wage increases to date through increases in prices for its service offerings.
However, there can be no assurance that in the future the Company will be able
to increase its prices in amounts adequate to offset future wage increases.
Gross Profit. Gross profit increased to $37.6 million in 1997 compared to
$12.3 million in the prior comparable period. As a percentage of revenue, gross
profit increased to 45.0% in 1997 as compared to 44.0% in 1996. The Company's
gross profit margin increased for both its U.S. and its India operations.
However, reduced gross profit margins for IMR-U.K. and IMR-N.I. partially offset
this increase. IMR-U.K. derives a substantial portion of its revenue from
professional services which generally result in lower profit margins. IMR-N.I.
experienced lower gross profit during the start-up phase of its operations
(which began in July 1997) as the Company hired and trained its workforce at
that location.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $20.9 million in 1997, as compared to $7.5
million for 1996. Selling, general and administrative expenses consist
primarily of salaries, employee benefits, travel, promotion, telecommunications,
management, finance, administrative and occupancy costs. As a percentage of
revenue, selling, general and administrative expenses decreased to 25.0% in 1997
as compared to 26.9% for 1996. While selling, general and administrative
expenses decreased as a percentage of revenue, the dollar volume increase was
attributable primarily to selling, general and administrative expenses incurred
by IMR-U.K., expansion of domestic offices, additional costs associated with
reporting and accounting responsibilities as a public company, and increases in
costs related to expanding the Company's administrative support staff. The
Company will continue to increase its fixed costs for general and administrative
expenses in anticipation of potential increases in the Company's business volume
in 1998.
19
<PAGE>
Goodwill Amortization. Goodwill amortization increased to approximately
$1.1 million for 1997 from approximately $100,000 for the year 1996. This
increase reflects the goodwill resulting from the Company's acquisition of 64.0%
of IMR-India in the second half of 1996 and the 1997 acquisitions of IMR-U.K.
and IMR-N.I.
Income from Operations. Operating income for 1997 was $15.6 million
compared to $4.7 million in 1996, representing a 233.1% increase. As a
percentage of revenue, income from operations increased to 18.7% in 1997
compared to 16.8% in 1996, primarily due to revenue increasing more rapidly than
operating expenses.
Other Income (Expense). The Company realized net other income of
approximately $1.8 million in 1997 as compared to net other income of
approximately $36,000 in 1996. Other income in 1996 included income related to
the Company's equity investment in IMR-Ltd. of approximately $83,000; interest
and other income of approximately $253,000 offset by approximately $301,000 of
interest expense. During 1997, the Company recognized approximately $2.0 million
in investment income primarily from the investment of remaining net proceeds
from its public offerings in November 1996 and August 1997, and incurred
approximately $175,000 of interest expense primarily for credit facilities in
place in India and the U.K.
Provision for Income Taxes. The provision for income taxes increased to
approximately $5.4 million for 1997 from approximately $1.4 million for 1996.
This represents an effective tax rate of 31.3% and 30.6% for 1997 and 1996,
respectively. 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.
Minority Interest in Net Income. Minority interest in net income decreased
to approximately $48,000 for 1997 from approximately $730,000 in the comparable
period in 1996. This represents the portion of IMR-India's net income which is
allocated to IMR-India minority shareholders. This decrease was a result of the
acquisition of 64.0% of IMR-India by the Company during late 1996, and the
Company's acquisition of an additional 1.7% of IMR-India in 1997. At December
31, 1997, approximately 99.9% of IMR-India was owned by the Company and only
0.1% was owned by the three other individual shareholders.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue increased to $27.9 million in 1996, representing a 23.1%
increase over revenue of $22.7 million in 1995. This increase generally
reflected the growth in Year 2000 conversion services. Revenue from Year 2000
conversion services increased to $7.5 million in 1996 from $557,000 in 1995.
Core transitional outsourcing services (software development, application
maintenance and migration and re-engineering) increased to $16.3 million in 1996
from $14.7 million in 1995. Programming and consulting services revenue
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.
Cost of Revenue. Cost of revenue increased to $15.7 million in 1996
compared to $13.5 million in 1995, reflecting primarily the increase in business
volume and wages payable to technical personnel.
Gross Profit. Gross profit increased to $12.3 million in 1996 from $9.2
million in 1995. As a percentage of revenue, gross profit increased to 44.7% in
1997 from 40.7% in 1996. This increase reflected higher pricing achieved for
the Company's services and a shift of personnel resources from programming and
consulting to more profitable core transitional outsourcing services and Year
2000 conversion service offerings. The increase was partially offset by
increased wages paid to technical personnel.
20
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 32.6% to $7.5 million in 1996 from $5.7
million in 1995. Selling, general and administrative costs were 26.9% of
revenue in 1996 as compared to 25.0% of revenue 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 Company
upgraded satellite links, expanded IMR-India's facilities, and added additional
personnel and equipment in the U.S. and India to service potential increases in
service contracts.
Goodwill Amortization. Amortization of goodwill increased to $100,000 in
1996 compared to $59,000 in 1995. This increase reflected the acquisition of an
additional 64.0% of IMR-India in the second half of 1996.
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 Mumbai and Trivandrum. This $428,000 net gain was partially offset
by a $110,000 loss in the Company's 39.5% equity investment in IMR-Ltd. During
1996, the Company realized a gain of $83,000 on its equity investment in IMR-
Ltd. 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 $301,000 and $349,000, respectively. The
Company repaid most of its long-term debt at the end of 1996 from the proceeds
of its initial public offering.
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 S
Corporation tax status and recognized a nonrecurring tax charge of $1.1 million.
(See Note 12 of Notes to Consolidated Financial Statements.) Prior to this
termination, the 1995 provision for income taxes reflected only those taxes
related to IMR-India. To provide more meaningful information, the Company's
financial statements also reflect the pro forma effect as if the Company has
been a C Corporation for all periods presented. 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.
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.
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.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the eight quarters beginning January 1, 1996 and
ending December 31, 1997. The information relating to the quarters beginning
January 1, 1996 and ending on December 31, 1997 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
--------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept 30 June. 30 March 31
------- -------- ------- -------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $27,392 $23,044 $18,767 $14,347 $8,503 $7,048 $6,307 $6,090
Gross profit......... 12,459 10,431 8,396 6,305 3,775 3,130 2,785 2,600
Income from
operations.......... 5,641 4,480 3,369 2,113 1,476 1,125 1,073 1,010
Basic earnings
per share......... $ 0.18 $ 0.14 $ 0.11 $ 0.06 $ 0.05 $ 0.04 $ 0.04 $ 0.03
Diluted earnings
per share......... $ 0.13 $ 0.10 $ 0.08 $ 0.04 $ 0.04 $ 0.02 $ 0.02 $ 0.02
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
1997 1996
---------------------------------------- ----------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit... 45.5 45.3 44.7 43.9 44.4 44.4 44.2 42.7
Income from
operations.. 20.6 19.4 18.0 14.7 17.4 16.0 7.0 16.6
</TABLE>
The Company's operations and related revenue 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.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $93.8 million of working capital as
compared to working capital of $30.7 million at December 31, 1996. This
increase primarily resulted from the receipt of $52.5 million from the Company's
secondary public offering in July 1997. The Company's initial public offering
in 1996 generated $40.7 million of cash proceeds. At December 31, 1997 and
1996, the Company held $90.3 and $29.7 million, respectively, in cash and cash
equivalents and marketable securities.
Net cash provided by operations in 1997, 1996 and 1995 was $19.4 million,
$5.2 million and $1.0 million, respectively. This increase in cash provided by
operations reflects primarily increases in profitability and improvements in
contract management. Cash flow from operations in 1997 were sufficient to cover
1997 investing activities and debt maturities.
Net cash (used in) provided by investing activities in 1997, 1996 and 1995
was ($10.3 million), ($19.1 million) and $503,000, respectively. In 1997, the
Company acquired certain subsidiaries for $3.1 million in cash and purchased
property and equipment for $7.0 million. In 1996, the Company acquired a
majority interest in IMR-India for $10.0 million, invested in marketable
securities of $5.5 million and purchased property and equipment for $2.6
million.
The Company maintains an unsecured $10.0 million line of credit with
NationsBank which allows the Company to borrow up to 80% of the book value of
the Company's U.S. accounts receivable. Interest is at 30-day LIBOR plus 1.0%
(6.9% as of December 31, 1997). At December 31, 1997, there was no amount
outstanding under this line of credit and approximately $7.0 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, 1997, the Company
was in compliance with these covenants.
IMR-India maintains an export sales account receivable discounting
facility. Loans under this facility could be denominated in Indian rupees or
U.S. dollars until February 1996. Thereafter the loans are denominated in
Indian rupees. Principal payments on amounts borrowed under this facility are
due within 90 days of the loan. Interest is payable at a rate set by the
Reserve Bank of India (currently 11.0%). At December 31, 1997 and 1996, no
amounts were due under this facility. The maximum amount available under this
facility at December 31, 1997 was approximately $761,000. The facility is
collateralized by IMR-India's total export accounts receivable, property and
equipment, and is personally guaranteed by Satish K. Sanan, the Company's
President and Chief Executive Officer.
The Company believes that its current cash levels, accessible funds under
its credit facilities and cash flows from future operations, will be adequate to
meet its continued expansion objectives, anticipated levels of capital
expenditures and debt repayment requirements, including those that may be
required pursuant to the integration of its acquisitions, for the foreseeable
future.
YEAR 2000 IMPACT ON INTERNAL OPERATIONS
The Company's management has evaluated the Year 2000 impact on the
Company's internal financial and operational systems. The Company has undertaken
remedial measures based upon this evaluation. The Company anticipates that the
installation of its new information systems and changes to its remaining
information systems in order to make them Year 2000 compliant will be completed
by December 31, 1998. The Company currently does not expect that the year 2000
will cause operational problems or result in the Company incurring costs
material to the Company's financial condition or results of operations. However,
23
<PAGE>
delays in implementing these internal information systems or a failure to fully
identify all Year 2000 dependencies in the Company's internal information
systems could have material adverse consequences, including an adverse impact on
the Company's ability to communicate with or provide services to its customers
and its ability to invoice its customers for its services. In addition, the
Company faces risks to the extent that suppliers of products, services and
systems purchased by the Company, and others with whom the Company transacts
business on a worldwide basis, do not have business systems or products that
comply with the Year 2000 requirements. In the event any such third party is
unable to timely provide the Company with products, services or systems due to
such third party's Year 2000 noncompliance, the Company's operating results
could be materially adversely affected. Furthermore, there can be no assurance
that these or other factors relating to Year 2000 issues, including litigation,
will not have a material adverse effect on the Company's business, results of
operations or financial condition.
ASSET MANAGEMENT
The Company's accounts receivable increased $5.5 million to $11.2 million
at December 31, 1997 from $5.7 million at December 31, 1996. This increase was
partially offset by an increase of $2.4 million in deferred revenue from $1.9
million at December 31, 1996 to $4.4 million at December 31, 1997. A
significant portion of the Company's business is executed on a fixed-price,
fixed-time frame basis. Revenue on fixed-price contracts does not necessarily
correlate to actual billings. Accordingly, accounts receivable may increase
significantly in periods where there is a significant increase in deferred
revenue (i.e., billings issued in advance of revenue recognition).
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, 1997 should factor in rapidly increasing revenue at year-end
(revenue was $27.4 million for the fourth quarter of 1997 compared to $8.5
million for the fourth quarter of 1996). Based on the above, DSO was 37 days
and 60 days at December 31, 1997 and 1996, respectively. The 23 day decrease
was primarily attributable to improved payment practices of the Company's
customers and involving project staff in the collection process. In addition,
during December 1996, the Company advanced billed significant components which
increased accounts receivable and deferred revenue.
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 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., the U.K. and Australia for comparably-skilled employees,
although wage costs in India are presently increasing at a faster rate than
other locations. 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.
24
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financing Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" which is effective for periods ending
after December 15, 1998. This statement establishes standards for computing and
presenting comprehensive income which includes translation adjustments. In June
1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which is also effective for periods ending after December
15, 1998. This statement establishes additional disclosure requirements for
business segments.
Management is currently assessing the future period impact of SFAS No. 130
and 131 on the Company's presentation of results of operations, changes in
shareholders' equity and segment disclosures.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
CONVERSION OF YEAR 2000 PROJECTS INTO TRANSITIONAL OUTSOURCING BUSINESS.
The Company realized 53.2% and 26.9% of total revenue from Year 2000 conversion
services in 1997 and 1996, respectively and the Company expects this trend to
continue in the near term. However, the Company believes that demand for Year
2000 conversion services will begin to diminish rapidly 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 that the Company will be successful in generating additional business
from its Year 2000 clients for other services. The Company's inability to
implement this growth strategy would have a material adverse effect on the
Company's results of operations and financial condition.
MANAGEMENT OF GROWTH. An important element of the Company's strategy is to
pursue continued rapid growth of its business. The Company's revenue increased
approximately 199.0% in the year ended December 31, 1997, from $27.9 million
in 1996 to $83.6 million in 1997. As of March 13, 1998, the Company employed
approximately 1,450 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
revenue without a corresponding and timely reduction in staffing and other
expenses, or a staffing increase that is unaccompanied by a corresponding
increase in revenue, could also have a material adverse effect on the Company's
results of operations and its financial condition.
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 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
25
<PAGE>
depends, in large part, on its ability to hire and retain technical personnel
with the IT skills to keep pace with continuing changes in information
processing technology, evolving industry standards and changing client
preferences. An inability to hire such additional qualified personnel will
impair the Company's ability to 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 to retain 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 retain its existing or new
employees. Accordingly, there can be no assurance that the Company will be
successful in retaining current or future employees. In addition, a majority of
the Company's present employees reside in India. Historically, the Company's
wage costs in India have been significantly lower than its wage costs in the
U.S. for comparably skilled employees, although wage costs in India are
presently increasing at a faster rate than in the U.S.
VOLATILITY OF STOCK PRICE. The Company has experienced a significant
increase in the market price of its Common Stock since the Company's initial
public offering in November 1996. The trading price of the Company's Common
Stock also has been highly volatile 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, changing industry perception of valuations of companies that provide
Year 2000 conversion services, the announcement of new Year 2000 conversion
services contracts, new customers, technological innovations or new products by
the Company or its competitors, 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. 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.
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 Chairman of the Board, President, Chief Executive Officer and
principal 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.
DEPENDENCE ON OFFSHORE SOFTWARE DEVELOPMENT CENTERS. A significant element
of the Company's business strategy is to continue to leverage its offshore
software development centers in Bangalore and Mumbai, India and Belfast,
Northern Ireland as well as a new offshore center planned for New Delhi, India.
The Company believes that the use of a strategically located network of offshore
software development centers will provide IMR with potential cost advantages 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 its offshore software development facilities. Any loss of the
Company's ability to transmit voice and data through satellite communications
could have a material adverse effect on the Company's results of operations and
financial condition. In the past, India has experienced significant inflation,
low growth in gross domestic product and shortages of foreign exchange.
Furthermore, both India and Northern Ireland have experienced civil unrest and
terrorism and, from
26
<PAGE>
time to time, have been involved in regional conflicts. No assurance can be
given that the Company will not be adversely affected by future changes in
inflation, interest rates, taxation, social stability or other political,
economic or diplomatic developments in or affecting countries in which the
Company establishes offshore software development facilities. 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 a material adverse effect 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 concerning foreign
investment and repatriation. Notwithstanding these benefits, however, India's
central and state governments remain significantly involved in the Indian
economy as regulators. Provided that the Company meets specified requirements,
including investments in facilities and the employment and training of a minimum
number of personnel, the government of Northern Ireland has committed to provide
monetary grants to the Company to encourage employment in its offshore
development center in Belfast, Northern Ireland. The elimination of any of
these benefits could have a material adverse effect on the Company's results of
operations and financial condition.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS. The Company expects that
international revenues will account for an increasingly significant percentage
of the Company's revenues. As a result, the Company is subject to a number of
risks, including, among other things, difficulties relating to administering its
business globally, managing foreign operations, currency fluctuations,
restrictions against the repatriation of earnings, export requirements and
restrictions, and multiple and possibly overlapping tax structures. These risks
could have a material adverse effect on the Company's results of operations and
financial condition. Any earnings generated in countries other than the United
States may be permanently invested or may be subject to considerable taxation if
repatriated to the United States. The Company presently incurs a significant
amount of its costs in local currency in India and expects to establish
additional offshore centers in other countries. In contrast, the Company
presently generates most of its revenue in U.S. dollars. Accordingly, the
Company is subject to risks that, as a result of currency fluctuations, the
translation of foreign currencies into U.S. dollars for accounting purposes will
adversely affect its results of operations. Historically, the Company has not
hedged any meaningful portion of its foreign exchange transactions.
POTENTIAL LIABILITY TO CLIENTS. Many of the Company's contracted
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.
27
<PAGE>
POSSIBLE ACQUISITIONS. The Company may make selective acquisitions of IT
services firms with established customers. To date, the Company has made no
material acquisition of an unaffiliated company. Consequently, there can be no
assurance that the Company will be able to identify suitable acquisition
candidates available for sale at reasonable prices, consummate any acquisition
or successfully integrate any acquired business into the Company's operations.
Acquisitions may involve difficulties related to the integration of acquired
businesses, some of which may have different cultures, operating methodologies,
margins or business risks. The failure to timely integrate the Company's
business with that of an acquired entity may result in a material adverse effect
on the Company's results of operations and financial condition. Further,
acquisitions may involve a number of special risks, including diversion of
management's attention, failure to retain key acquired personnel and clients,
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.
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 fixed-price, fixed-time frame 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,
future rates of inflation and currency translations, 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.
RELIANCE ON SIGNIFICANT CLIENTS. The Company has derived and believes that
it will continue to derive a significant portion of its revenue from a limited
number of large corporate clients. During 1997, the Company's five largest
clients accounted for approximately 35.4% of revenue. NOVUS and SPS, which are
affiliated companies, together accounted for approximately 9.1% of revenue in
1997. 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
revenue 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, the Company generally 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.
VARIABILITY OF QUARTERLY OPERATIONS AND FINANCIAL RESULTS. The Company's
operations and related revenue 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
28
<PAGE>
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.
COMPETITION. The IT services market is highly competitive and served by
numerous national, regional and local firms, all of which are either existing or
potential competitors of the Company. In addition, a significant and increasing
number of companies have recently announced that they offer Year 2000 conversion
services or automated Year 2000 conversion software products. Many of the
Company's 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 DECREASE IN DEMAND FOR YEAR 2000 SERVICES. The Company currently
is engaged in extensive efforts to increase its infrastructure of personnel,
facilities, equipment and other resources to meet anticipated growth in the
demand for Year 2000 conversion and other IT services. A rapid near-term
decline in the demand for Year 2000 conversion services would have a material
adverse financial effect on the Company. The Company faces various risks that
may cause the demand for its Year 2000 services to decline such as the risk that
a competitor may introduce automated software processes or tools that would
enable companies more easily to perform their own Year 2000 conversion services,
and the risk that the Company will fail to perform Year 2000 conversion services
correctly for a specific client under circumstances which might result in
negative publicity and possible litigation.
IMMIGRATION ISSUES. The Company believes that its success has resulted in
part from its ability to attract and retain persons with technical and project
management skills from other countries, especially India. As of March 13, 1998,
approximately 280 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. 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.
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, the U.K., and Australia are
members of the Berne Convention, an international treaty. As members of the
Berne Convention, the governments of India, the U.K. and Australia have agreed
to extend copyright protection under their domestic laws to foreign works,
including
29
<PAGE>
works created or produced in the U.S. The Company believes that laws, rules,
regulations and treaties in effect in the U.S., India and Australia 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, the U.K. or Australia will not change in
ways that may prevent or restrict the transfer of software components, libraries
and toolsets among India, the U.S., the U.K. and Australia 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.
Additionally, the Company anticipates that in the future it will license certain
technologies to its customers. There can be no assurance that the Company will
be able to successfully license these technologies, protect them from
infringement or misuse, or prevent infringement claims against the Company in
connection with its licensing efforts. 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.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Report on Form 10-K
contains certain forward-looking statements, including, among others: (i) the
ability of the Company to sell transitional outsourcing services to existing
Year 2000 customers; (ii) the potential extent of the Year 2000 problem and the
anticipated growth in the Year 2000 services market; (iii) anticipated growth in
the application maintenance outsourcing industry; (iv) presently anticipated
trends in the Company's results of operations and financial condition; (v) the
ability of the Company to rely on cash generated from operations to finance its
working capital requirements; (vi) the Company's business strategy for expanding
its services, including plans to develop EMU conversion services business; and
(vii) 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 market data
regarding the Year 2000 conversion services and other application maintenance
services, markets; (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 Report on Form 10-K will in fact transpire.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Selected quarterly financial data is included in Item 7 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations".
The financial statements begin on the following page.
31
<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 subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1997, 1996
and 1995. 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. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Information Management Resources, Inc. and subsidiaries as of December 31, 1997
and 1996, and the consolidated results of their operations and their cash flows
for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Tampa, Florida
February 13, 1998, except for the information in Note 22,
for which the date is March 9, 1998.
32
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
-------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 85,819 $24,082
Marketable securities............................................ 4,453 5,644
Accounts receivable.............................................. 11,156 5,670
Unbilled work in process......................................... 6,390 1,074
Other current assets............................................. 6,553 2,069
-------- -------
Total current assets....................................... 114,371 38,539
Property and equipment, net of accumulated depreciation............. 9,818 3,703
Capitalized software costs, net of accumulated amortization......... 47 720
Deposits and other assets........................................... 960 596
Goodwill, net of accumulated amortization........................... 10,157 5,395
-------- -------
Total assets............................................... $135,353 $48,953
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 3,136 $ 1,364
Accrued compensation............................................. 8,430 1,117
Deferred revenue................................................. 4,413 1,965
Other current liabilities........................................ 4,599 3,365
-------- -------
Total current liabilities.................................. 20,578 7,811
Long-term debt...................................................... 885 -
Deferred tax liability.............................................. 546 634
Other liabilities................................................... 133 85
-------- -------
Total liabilities.......................................... 22,142 8,530
-------- -------
Minority interest................................................... 4 67
-------- -------
Commitments and contingencies (Notes 11,13 and 18)
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, 25,650,615 and 21,710,453 issued and outstanding.. 2,565 2,171
Additional paid-in capital....................................... 98,735 37,635
Retained earnings................................................ 12,564 669
Cumulative foreign currency translation adjustment............... (657) (119)
-------- -------
Total shareholders' equity................................. 113,207 40,356
-------- -------
Total liabilities and shareholders' equity................. $135,353 $48,953
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue....................................... $83,550 $27,948 $22,700
Cost of revenue............................... 45,959 15,658 13,471
------- ------- -------
Gross profit......................... 37,591 12,290 9,229
Selling, general and administrative expenses.. 20,865 7,506 5,662
Goodwill amortization 1,123 100 59
------- ------- -------
Income from operations............... 15,603 4,684 3,508
------- ------- -------
Other income (expense):
Interest expense........................... (175) (301) (349)
Other income............................... 1,947 336 363
------- ------- -------
Total other income................... 1,772 35 14
------- ------- -------
Income before provision
for income taxes and minority interest..... 17,375 4,719 3,522
Provision for income taxes.................... 5,432 1,401 293
------- ------- -------
Income before minority interest...... 11,943 3,318 3,229
Minority interest in net income............... (48) (730) (712)
------- ------- -------
Net income........................... $11,895 $ 2,588 $ 2,517
======= ======= =======
Basic earnings per share...................... $ 0.49
=======
Diluted earnings per share.................... $ 0.35
=======
Pro forma adjustment (See Note 1):
Historical net income......................... $ 2,588 $ 2,517
Pro forma adjustment to income tax expense.... (43) (905)
------- -------
Pro forma net income.......................... $ 2,545 $ 1,612
======= =======
Pro forma basic earnings per share............ $ 0.16 $ 0.08
======= =======
Pro forma diluted earnings per share.......... $ 0.10 $ 0.05
======= =======
Shares outstanding:
Basic...................................... 24,129 15,458 20,364
======= ======= =======
Diluted.................................... 34,467 26,371 30,831
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative
Foreign Retained
Additional Currency Earnings
Common Stock Paid-In Translation (Accumulated Treasury
----------------
Shares Amount Capital Adjustment Deficit) Stock Total
------- ------- ----------- ------------ ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995......... 20,377 $2,037 $ 35 $ 3 $(1,811) $ - $ 264
Repurchase of common stock....... - - - - - (9) (9)
Translation adjustment........... - - - (65) - - (65)
Net income....................... - - - - 2,517 - 2,517
------ ------ ------- ----------- ------- -------- --------
Balance, December 31, 1995....... 20,377 2,037 35 (62) 706 (9) 2,707
Common stock issued
for options exercised......... 306 31 (18) - - - 13
Repurchase of common stock....... - - - - - (1,489) (1,489)
Retirement of treasury stock..... (6,200) (620) (822) - (56) 1,498 -
Dividends paid................... - - - - (1,623) - (1,623)
Termination of S Corporation
tax status.................... - - 946 - (946) - -
Common stock issued in
connection with initial
public offering............... 7,228 723 39,994 - - - 40,717
Acquisition of majority
shareholder's interest in
subsidiary.................... - - (2,500) - - - (2,500)
Translation adjustment........... - - - (57) - - (57)
Net income....................... - - - - 2,588 - 2,588
------ ------ ------- ----------- ------- -------- --------
Balance, December 31, 1996....... 21,711 2,171 37,635 (119) 669 - 40,356
Common stock issued in
connection with
public offering............... 2,587 259 52,289 - - - 52,548
Common stock issued in
connection with acquisitions.. 173 17 1,784 - - - 1,801
Acquisition of majority
shareholder's interest in
subsidiary.................... - - (552) - - - (552)
Common stock issued in
connection with employee
stock purchase plan........... 108 11 658 - - - 669
Common stock issued for
options exercised............. 1,072 107 152 - - - 259
Tax benefit of stock options
exercised..................... - - 6,769 - - - 6,769
Net income....................... - - - - 11,895 - 11,895
Translation adjustment........... - - - (538) - - (538)
------ ------ ------- ----------- ------- -------- --------
Balance, December 31, 1997....... 25,651 $2,565 $98,735 $(657) $12,564 $ - $113,207
====== ====== ======= =========== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 11,895 $ 2,588 $ 2,518
Adjustment to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization.................................. 4,280 778 491
Deferred taxes................................................. (2,195) 855 42
Tax benefit of stock options................................... 6,769 - -
Gain on sale of property and equipment......................... - - (521)
Unrealized exchange losses..................................... 80 9 63
(Gain) loss in equity investment............................... - (83) 110
Minority interest in net income................................ 48 730 712
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process............ (7,455) (3,130) (1,638)
Other current assets........................................ (2,295) (1,220) (69)
Deposits and other assets................................... (522) (91) (14)
Accounts payable and other liabilities...................... 490 2,029 (751)
Accrued compensation........................................ 7,313 254 332
Income tax.................................................. (1,043) 487 (3)
Deferred revenue............................................ 2,070 1,947 (244)
-------- -------- -------
Total adjustments........................................... 7,540 2,565 (1,490)
-------- -------- -------
Net cash provided by operating activities................... 19,435 5,153 1,028
-------- -------- -------
Cash flows from investing activities:
Acquisition of interest in consolidated subsidiaries.............. (3,315) (9,968) -
Investment in marketable securities, net.......................... 1,191 (5,511) -
Proceeds from sale of property and equipment...................... - - 1,391
Additions to capitalized software costs........................... (1,258) (302) (170)
Additions to property and equipment............................... (6,913) (2,605) (710)
Increase in equity investment and loans to affiliate.............. - (693) (8)
-------- -------- -------
Net cash provided by (used in ) investing activities........ (10,295) (19,079) 503
-------- -------- -------
Cash flows from financing activities:
Net (repayments) borrowings from revolving credit line............ (935) (655) 230
Proceeds from long-term debt and notes............................ 1,181 900 208
Payments on notes and capital leases.............................. (909) (2,258) (1,233)
Proceeds from issuance of common stock............................ 54,076 41,840 -
Payment of costs in connection with issuance of common stock...... (600) (1,110) -
Purchase of treasury stock at cost................................ - (1,489) (9)
Payment of dividends.............................................. - (822) -
-------- -------- -------
Net cash provided by (used in) financing activities......... 52,813 36,406 (804)
-------- -------- -------
Effect of exchange rate changes...................................... (216) (19) (119)
-------- -------- -------
Net increase in cash and cash equivalents............................ 61,737 22,461 608
Cash and cash equivalents at beginning of year....................... 24,082 1,621 1,013
-------- -------- -------
Cash and cash equivalents at end of year............................. $ 85,819 $ 24,082 $ 1,621
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Reporting--Information Management Resources, Inc. and subsidiaries
("IMR" or the "Company") provide 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 North America, Europe and Australia. The consolidated financial statements
include the accounts of Information Management Resources, Inc., its wholly
owned subsidiaries and its effectively controlled foreign subsidiary. All
significant intercompany balances and transactions have been eliminated.
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 municipal government securities at
December 31, 1997 and 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 revenue on contracts to be billed in
subsequent periods in accordance with the terms of the contract. Deferred
revenue represents amounts billed in excess of revenue earned in accordance with
the terms of the contract. Service revenue from time-and-materials services is
recognized as the services are provided.
Goodwill--Goodwill originated from the acquisition of certain subsidiaries,
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.
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.
37
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 reflected in income.
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. Amortization expense related to capitalized
software costs was approximately $1.9 million, $131,000 and $7,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
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
14), 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
12.)
Pro Forma Net Income--To properly reflect the Company's pro forma net
income for 1996 and 1995, 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 $1.1 million one-time income tax expense resulting from the termination of
the S Corporation status.
Foreign Currency Translation--The financial statements of the Company's
foreign subsidiaries 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 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.
38
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Computation of Earnings per Share--All amounts have been adjusted for the
common stock splits described in Notes 14 and 22. 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):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average
common stock outstanding...... 24,129 15,458 20,364
Weighted average
common stock equivalents...... 10,338 10,913 10,467
------ ------ ------
Shares used in diluted earnings
per share calculation......... 34,467 26,371 30,831
====== ====== ======
</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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements--In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income"
which is effective for periods ending after December 15, 1998. This statement
establishes standards for computing and presenting comprehensive income which
includes translation adjustments. In June 1997, FASB issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
also effective for periods ending after December 15, 1998. This statement
establishes additional disclosure requirements for business segments.
Management is currently assessing the future period impact of SFAS No. 130
and 131 on the Company's presentation of results of operations, changes in
shareholders' equity and segment disclosures.
Reclassifications--Certain prior year amounts have been reclassified to
conform with the 1997 presentation.
39
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS
Information Management Resources (India) Ltd. (IMR-India) - At December 31,
1994, IMR owned 34.2% of IMR-India, an Indian Limited Liability Company. During
1996 and 1997, IMR purchased an additional 47.3% of IMR-India's outstanding
common shares for approximately $7.2 million in cash in five 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% 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. As a result of
the acquisitions noted above, IMR owns 99.9% of the outstanding common shares of
IMR-India at December 31, 1997.
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.
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 provided transitional software
outsourcing solutions to the information technology departments of large
businesses located in the U.K. Prior to the acquisition, Link was owned by a
Board member of IMR and his spouse. In exchange for Link's common stock, Link's
shareholders received $2.1 million in cash and 161,343 shares of the Company's
common stock. In addition, $1.6 million in cash is payable to Link's former
shareholders during February, 1998. The Link acquisition is accounted for as a
purchase pursuant to the provisions of APB Opinion No. 16 and resulting goodwill
is being amortized over a 10-year period.
Coincident with the above acquisition, the Company also acquired 10.5% of
Information Management Resources (U.K.) Limited ("IMR-Ltd."), a United Kingdom
Limited Liability Company, 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
acquisition from IMR's majority shareholder is accounted for as a reduction of
equity.
Prior to the above acquisitions, the Company owned 39.5% of IMR-Ltd. and
Link owned 50% of IMR-Ltd. After the above acquisitions the Company effectively
owns 100% of both Link and IMR-Ltd. The operations of Link and IMR-Ltd. have
been merged and the operating company was renamed Information Management
Resources, plc ("IMR-U.K.").
40
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS (CONTINUED)
Movitone Electronics Limited - In March 1997, the Company acquired 100% of
the outstanding stock of Movitone Electronics Limited, an Indian Limited
Liability Company, for approximately $1.7 million in cash. Movitone Electronics
Limited has no significant ongoing activities and its only significant asset is
a building located in India's Santacruz Electronics Export Processing Zone in
Mumbai, India. The acquisition is recorded as a purchase pursuant to the
provisions of APB Opinion No. 16. The entire purchase price was allocated to
the building as it approximated its fair value.
Information Management Resources (Northern Ireland) Limited - During June
1997, the Company began operations in Belfast, Northern Ireland and acquired
certain assets in exchange for $270,000 cash and 11,250 shares of the Company's
stock. The acquisition is accounted for as a purchase pursuant to the
provisions of APB Opinion No. 16, "Business Combinations" and resulting goodwill
will be amortized over a 10-year period.
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, 1997
and 1996. Additionally, because investments are short-term and are generally
allowed to mature, realized gains and losses have been minimal for the years
ended December 31, 1997 and 1996.
The following table presents the estimated fair value of marketable
securities by category (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Municipal debt securities .............. $ 4,397 $ 5,512
Interest income receivable ............. 56 132
-------- --------
$ 4,453 $ 5,644
======== ========
</TABLE>
The maturity of the above marketable securities at December 31, 1997, is
less than one year.
41
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCOUNTS RECEIVABLE:
The major classifications of accounts receivable at December 31, 1997 and
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accounts receivable, trade ................. $ 11,091 $ 4,997
Unbilled accounts receivable-
time-and-materials contracts ............ 65 673
-------- --------
$ 11,156 $ 5,670
======== ========
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON COMPLETED AND UNCOMPLETED CONTRACTS (IN
THOUSANDS):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Costs incurred on completed
and uncompleted contracts................ $ 31,649 $ 6,692
Estimated earnings.......................... 16,102 3,381
-------- --------
47,751 10,073
Less billings to date....................... (45,774) (10,964)
-------- --------
$ 1,977 $ (891)
======== ========
</TABLE>
The following is included in the accompanying balance sheets:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Unbilled work in process.................... $ 6,390 $ 1,074
Deferred revenue............................ (4,413) (1,965)
------- -------
$ 1,977 $ (891)
======= =======
</TABLE>
42
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER CURRENT ASSETS (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Income tax receivable......................... $ 754 $ -
Deferred tax asset............................ 1,889 -
Prepaid expenses.............................. 1,232 701
Refundable deposit............................ 2,000 -
Affiliate receivable.......................... - 1,201
Grant income receivable....................... 297 -
Software product inventory.................... 12 41
Other current assets.......................... 369 126
------- -------
$ 6,553 $ 2,069
======= =======
</TABLE>
7. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment at December 31, 1997
and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Life
(Years) 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Building and improvements....... 10-40 $ 2,671 $ 348
Computer equipment.............. 5- 6 4,415 2,175
Computer software............... 5-10 1,795 1,497
Office furniture and equipment.. 5-12 2,462 955
Equipment under capital leases.. 5 183 486
Automobiles..................... 3- 5 124 -
Construction in progress........ - 1,652 4
------- -------
13,302 5,465
------- -------
Less accumulated depreciation
and amortization............. (3,484) (1,762)
------- -------
$ 9,818 $ 3,703
======= =======
</TABLE>
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 $1.2 million, $547,000 and $425,000 for the years ended December
31, 1997, 1996 and 1995, respectively. Accumulated amortization on equipment
under capital leases was approximately $93,000 and $403,000 at December 31, 1997
and 1996, respectively.
43
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. GOODWILL:
Goodwill at December 31, 1997 and 1996 was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Goodwill......................................... $11,517 $5,632
Accumulated amortization......................... (1,360) (237)
------- ------
$10,157 $5,395
======= ======
</TABLE>
9. OTHER CURRENT LIABILITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Note payable - IMR-U.K. acquisition.............. $1,608 $ -
Current portion of long-term debt................ 295 -
Current maturities of capital lease obligations.. 62 55
Notes-payable-shareholders....................... - 814
Income tax payable............................... 258 477
Deferred tax liability........................... 40 258
Accrued payroll taxes and value added taxes...... 988 423
Accrued sales and use taxes...................... 89 -
Employee savings plans........................... 199 394
Initial public offering costs.................... - 125
Software costs................................... - 245
Accrued expenses................................. 1,060 574
------ ------
$4,599 $3,365
====== ======
</TABLE>
44
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTIES
At December 31, 1997, other current liabilities include $1.6 million due to
a member of the Company's Board of Directors and his spouse in connection with
the acquisition of Link (See Note 2). This amount was noninterest bearing and
was paid in full during February 1998.
At December 31, 1996, the Company had outstanding notes payable to
shareholders of $814,000 in connection with the S Corporation termination (See
Note 14). These notes were unsecured with interest at 8% and were paid in full
during February 1997. Interest expense on notes payable-shareholder for the
year ended December 31, 1997, 1996 and 1995 was approximately $12,000, $19,000
and $18,000, respectively.
Prior to the IMR-U.K. acquisitions, IMR-India provided software development
services to IMR-Ltd. at market rates. During the years ended December 31, 1996
and 1995, the Company recognized revenue from IMR-Ltd. of approximately $877,000
and $109,000, respectively. At December 31, 1996, IMR-Ltd. owed IMR-India
$646,000 for these services.
At December 31, 1996, the Company had two notes receivable from IMR-Ltd.
totaling $692,500, which resulted from cash advances. During 1996, the Company
recognized approximately $35,000 of interest income on these notes. As a result
of the 1997 IMR-U.K. acquisitions, these intercompany notes are eliminated in
the consolidated financial statements.
Cash flows from financing activities included proceeds from notes payable-
shareholder of approximately $208,000 for the year ended December 31, 1995 and
payments on notes payable-shareholders of approximately $814,000, $350,000 and
$50,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
11. CREDIT FACILITIES:
Revolving Credit Facilities
The Company maintains an uncollateralized $10.0 million revolving credit
facility which allows the Company to borrow up to 80% of the book value of the
Company's U.S. accounts receivable. Interest is at LIBOR plus 1% (currently
6.9%). No borrowings have been made under this facility. The maximum amount
available under this facility at December 31, 1997 was $7.0 million.
IMR-India maintains an export sales accounts receivable discounting
facility. Loans under this facility could be denominated in Indian rupees or
U.S. dollars until February 1, 1996. Thereafter the loans are denominated in
Indian rupees. Principal payments on amounts borrowed are due within 90 days of
the loan. Interest is payable at a rate set by the Reserve Bank of India
(currently 11.0%). At both December 31, 1997 and
45
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. CREDIT FACILITIES (CONTINUED):
1996, no amount was due under this facility. The maximum amount available under
this facility at December 31, 1997 was approximately $761,000. The facility is
collateralized by IMR-India's total export accounts receivable, property and
equipment, and is personally guaranteed by Satish K. Sanan, the Company's
President and Chief Executive Officer.
Long-Term Debt
Long-term debt at December 31, 1997 and 1996 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
IMR-India:
Loan payable with interest at LIBOR plus 3.0%
(currently 8.9%) principal repayable in eight
equal semiannual installments of $148 commencing
February 1998, collateralized by property
and equipment..................................... $1,180 $ -
------ -----
Less current portion................................ 295 -
------ -----
Long-term debt, net of current portion.............. $ 885 $ -
====== =====
</TABLE>
Current maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................. $295
2000.............................................. 295
2001.............................................. 295
----
$885
====
</TABLE>
Provisions of the revolving credit facilities and certain notes payable
contain certain financial covenants, the most restrictive of which is the
maintenance of certain financial ratios. At December 31, 1997, the Company was
in compliance with these covenants.
46
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. CREDIT FACILITIES (CONTINUED):
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 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.
12. INCOME TAXES:
The provision (benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -----
Current:
<S> <C> <C> <C>
Federal................................... $ 6,378 $ 412 $ -
State and local........................... 911 66 -
Foreign................................... 338 68 251
------- ------ -----
Total current provision
for income taxes................. 7,627 546 251
Deferred:
Federal................................... (1,920) 735 -
State and local........................... (275) 118 -
Foreign................................... - 2 42
------- ------ -----
Total deferred provision (benefit)
for income taxes................. (2,195) 855 42
------- ------ -----
Total provision for income taxes.... $ 5,432 $1,401 $ 293
======= ====== =====
</TABLE>
Upon termination of the S Corporation election, as described in Note 1,
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 1996 income taxes included a $1.1 million nonrecurring
expense resulting from the termination of the S Corporation election. In
accordance with applicable sections of the Internal Revenue Code (IRC), the
Company elected to pay this nonrecurring expense over a four year period
beginning in 1996.
47
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED):
The components of the net deferred tax asset (liability) are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Deferred tax assets:
Accrued expenses............................... $1,684 $ 11
Net operating loss............................. 310 -
Foreign net operating loss-U.K................. 315 -
------ -----
Total deferred tax assets................ 2,309 11
------ -----
Deferred tax liabilities:
Property and equipment......................... (115) (97)
Cash to accrual conversion..................... (500) (806)
Foreign........................................ (40) -
Other.......................................... (36) -
------ -----
Total deferred tax liabilities........... (691) (903)
------ -----
Net deferred tax asset (liability)
before valuation allowance.................. 1,618 (892)
Valuation allowance foreign
net operating loss............................. (315) -
------ -----
Net deferred tax asset (liability)
net of valuation allowance..................... $1,303 $(892)
====== =====
</TABLE>
Balance sheet classification of net deferred tax asset (liability) is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Deferred tax asset-current................ $1,889 $ -
Deferred tax liability-current (foreign).. (40) (258)
Deferred tax liability-noncurrent......... (546) (634)
------ -----
$1,303 $(892)
====== =====
</TABLE>
In addition to the above, at December 31, 1996, the Company had a U.S. net
operating loss carryforward related to its Indian subsidiary of approximately
$700,000 which was reduced by a valuation allowance. In the current year the
amount was fully utilized.
48
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED):
As reflected above, as of December 31, 1997, the Company has recorded a
valuation allowance of approximately $315,000 against the deferred tax asset
related to the net operating loss incurred by its U.K. subsidiary.
During the year ended December 31, 1997, various non-statutory stock
options were exercised of which a tax benefit of approximately $6.8 million was
directly credited to shareholder's equity.
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 tax effect related to the unremitted
earnings, net of foreign tax credits, is currently estimated to be approximately
$1.5 million.
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U.S. federal income
tax rates of 35% in 1997 and 34% in 1996 and 1995 to the income before income
taxes and minority interest (in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Statutory tax provision........................ $ 6,081 $1,604 $1,198
State taxes, net of federal benefit............ 737 34 -
U.S. S Corporation not subject to federal
Income taxes................................ - (989) (779)
Difference between federal and foreign
tax rates on permanently reinvested income
of foreign subsidiary....................... (1,802) (365) (175)
(Income) loss in foreign equity investment..... - (22) 37
Termination of S Corporation status............ - 1,075 -
Increase in valuation allowance................ 315 - -
Other net...................................... 101 64 12
------- ------ ------
Total provision for income taxes................... $ 5,432 $1,401 $ 293
======= ====== ======
</TABLE>
49
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LEASES:
The Company leases office facilities and certain residential premises
for employees under noncancellable operating lease agreements. Rental expense
under these leases was approximately $1,138,000, $604,000 and $517,000 during
1997, 1996 and 1995, respectively. Future minimum lease payments as of December
31, 1997 for leases with noncancellable terms in excess of the one year are
approximately as follows (in thousands):
<TABLE>
<S> <C>
1998............................................. $1,624
1999............................................. 1,194
2000............................................. 1,017
2001............................................. 824
2002............................................. 758
Thereafter....................................... 1,620
------
Total minimum payments.................. $7,037
======
</TABLE>
14. 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.
On November 11, 1996, in connection with the termination of IMR's S
corporation election (see Note 1) IMR's remaining retained earnings were
classified to additional paid-in capital.
During November 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 7,228,125 shares of common stock. The Company's
common stock commenced trading on the Nasdaq National Market on November 8,
1996.
On June 19, 1997, the Company declared a 3-for-2 stock split in the form of
a stock dividend payable on July 10, 1997 to shareholders of record on June 26,
1997. All applicable share and per share amounts in the accompanying financial
statements have been retroactively adjusted.
During July 1997, the Company completed a secondary public offering and
received $52.5 million in cash (net of offering expenses of $600,000) in
exchange for the issuance of 2,587,500 shares of common stock.
50
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
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 16,003,455.
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 7 to 10 years from their grant date.
Nonemployee Directors Stock Option Plan--During September 1996, the Company
established the Nonemployee Directors Stock Option Plan, whereby nonemployee
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
337,500. The exercise price of the stock option may not be less than the fair
market value of the common stock on the date of the grant. Each nonemployee
director is granted an option grant of 22,500 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, 1997, 270,000 options
are available for future grants and 67,500 options are outstanding of which
33,750 are exercisable.
Stock Option Disclosures--The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," 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, "Accounting for Stock Based Compensation," the
Company's net income and earnings per share for the years ended December 31,
1997, 1996 and 1995 would have been reduced to the adjusted amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Pro forma net income:
As reported......................... $11,895 $2,545 $1,612
As adjusted (unaudited)............. $11,733 $2,089 $1,565
Pro forma diluted earnings per share:
As reported......................... $ 0.35 $ 0.09 $ 0.05
As adjusted (unaudited)............. $ 0.34 $ 0.08 $ 0.05
</TABLE>
51
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
The estimated per share fair value of options granted during 1997, 1996 and
1995 was $5.11, $0.27 and $0.04, 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 1997, 1996
and 1995, respectively: no dividend yield for each year presented; risk-free
interest rates of 6.0%, 7.9% and 5.9%; expected lives of the options prior to
exercise of 6.5, 11.3 and 9.9 years. For options granted prior to the Company's
initial public offering in November, 1996, volatility of the stock price was
omitted from the pricing model as permitted by SFAS No. 123. For 1997 option
grants, a volatility measure of 85% was employed.
A summary of the status of the Company's stock option plan as of December
31, 1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
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 11,632,657 $ 0.46 4,962,263 $0.05 2,345,063 $0.05
Granted 2,015,700 $16.12 7,265,250 $0.66 3,133,215 $0.05
Exercised (1,071,748) $ 0.25 (306,383) $0.05 - $0.05
Cancelled (31,514) $ 2.25 (288,473) $0.05 (516,015) $0.05
---------- ---------- ---------
Outstanding at
end of year 12,545,095 11,632,657 4,962,263
========== ========== =========
Options exercisable
at year-end 9,541,970 10,240,673 4,067,258
========== ========== =========
</TABLE>
52
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
The following table summarizes certain information about stock options at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
at 12/31/97 Contractual Life Exercise Prices at 12/31/97 Exercise Prices
----------- ---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
3,450,203 8.5 years $ 0.05 3,382,703 $ 0.05
6,240,015 8.5 years $ 0.22 6,001,515 $ 0.22
527,178 8.5 years $ 2.49 41,502 $ 2.49
19,500 8.8 years $ 4.45 3,750 $ 4.45
292,500 8.8 years $ 6.22 112,500 $ 6.22
108,000 9.2 years $ 5.05 - $ 5.05
5,625 9.2 years $ 8.22 - $ 8.22
3,375 9.0 years $ 8.89 - $ 8.89
5,625 9.5 years $11.85 - $11.85
11,250 9.5 years $20.05 - $20.05
957,750 9.8 years $18.41 - $18.41
924,075 9.9 years $15.08 - $15.08
---------- ---------
12,545,096 9,541,970
========== =========
</TABLE>
As of December 31, 1997, options to purchase 3,458,360 shares of Common
Stock were available for future grants.
Employee Stock Purchase Plan--The Company's Employee Stock Purchase Plan
(the "Stock Purchase Plan") became effective on October 1, 1996. A total of
450,000 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.
53
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDER'S EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
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 is 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.
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, December 31, 1995.. 25,500 $0.00--$0.28
Canceled.................... (5,000) $ 0.00
------
Balance, December 31, 1996.. 20,500 $0.00--$0.28
Granted..................... 4,000 $ 22.82
Canceled.................... (4,500) $ (0.00)
------
Balance, December 31, 1997.. 20,000 $ 4.66
====== ============
</TABLE>
At December 31, 1997 and 1996, exercisable options were 6,400 and 1,000,
respectively.
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, 1997, 1996
and 1995 approximated $800, $2,000 and $24,000, 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.
54
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 75% of employees' contributions, up to 5% 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 $142,000, $20,000 and $19,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
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 $118,000, $79,000 and $32,000 for the years ended
December 31, 1997, 1996 and 1995, 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, 1997,
1996 and 1995.
16. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
marketable securities and trade receivables. The Company maintains its cash
with high credit quality financial institutions and, by policy, limits the
amount of credit exposure to any one financial institution. The Company places
its cash equivalents and marketable securities in investment grade short-term
debt instruments and limits the amount of credit exposure to any one commercial
issuer.
Concentrations of credit risk with respect to accounts receivable is
limited due to the dispersion of the Company's customer base across different
industries and geographies. The Company's two largest customers accounted for
approximately 17%, 40% and 40% of revenue for the years ended December 31,
1997, 1996 and 1995, respectively, and 14% and 30% of accounts receivable as of
December 31, 1997 and 1996, respectively. No other customer accounted for 10%
of revenue or accounts receivable for the above periods.
55
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. OTHER INCOME:
Other income is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----- ------
<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 in 1995.................... $ - $ - $ 428
Investment income........................... 2,014 192 45
Income (loss) in equity investment.......... - 83 (110)
Other income (expense)...................... (67) 61 -
------ ----- -----
$1,947 $ 336 $ 363
====== ===== =====
</TABLE>
18. COMMITMENTS AND CONTINGENCIES:
During August 1997, IMR-India entered into an agreement to purchase land
and building in New Delhi, India for $1.7 million. As of December 31, 1997,
$185,000 had been advanced to the sellers of this property. This transaction is
expected to be finalized during April 1998.
The Company from time to time is involved in legal actions arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defense and/or provided adequate accruals for related
costs such that the ultimate outcome will not have a material adverse effect on
the Company's future financial position.
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Cash paid during the year for interest....... $ 132 $ 301 $ 377
====== ===== =====
Cash paid during the year for income tax..... $1,595 $ 132 $ 230
====== ===== =====
Noncash investing and financing activities:
Notes payable-shareholders issued in
lieu of dividend....................... $ - $ 801 $ -
====== ===== =====
Capital lease obligations incurred for
property and equipment................. $ 83 $ - $ -
====== ===== =====
Common stock exchanged for
acquisition of subsidiaries............ $1,800 $ - $ -
====== ===== =====
</TABLE>
56
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. GEOGRAPHIC INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
North America....................... $ 63,059 $ 27,230 $ 21,811
Europe.............................. 18,706 - -
Asia Pacific........................ 23,439 14,470 13,802
Eliminations........................ (21,654) (13,752) (12,913)
-------- -------- --------
Total revenue................. $ 83,550 $ 27,948 $ 22,700
======== ======== ========
Income (loss) from operations:
North America....................... $ 11,663 $ 3,545 $ 2,458
Europe.............................. (642) - -
Asia Pacific........................ 5,705 1,398 1,082
Eliminations........................ (1,123) (259) (32)
-------- -------- --------
Total income from operations.. $ 15,603 $ 4,684 $ 3,508
======== ======== ========
Total assets at December 31:
North America....................... $128,348 $ 49,654
Europe.............................. 9,916 -
Asia Pacific........................ 14,152 6,189
Eliminations........................ (17,063) (6,890)
-------- --------
Total assets.................. $135,353 $ 48,953
======== ========
</TABLE>
Intercompany sales between geographic areas are accounted for at prices
representative of unaffiliated party transactions.
North American operations primarily provide transitional outsourcing
services to large United States and Canadian companies. European operations
primarily provide transitional outsourcing services to large companies in the
United Kingdom, Germany and the Netherlands. In addition, European operations
include a Northern Ireland software facility which provides services to IMR's
North American and European affiliates. Asia Pacific operations consist
primarily of two Indian software facilities which provide services to IMR's
North American, European and other Asia Pacific affiliates. Beginning in 1997,
the Asia Pacific operation began providing outsourcing services to large
Australian companies.
57
<PAGE>
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. ACQUISITIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
During 1997 and 1996, the Company acquired an additional 65.3% of IMR-
India, completed the IMR-U.K. acquisition and acquired certain operations in
Northern Ireland (See Note 2). The following unaudited table compares the
Company's reported net income to pro forma information which excludes the
results of all acquisitions.
<TABLE>
<CAPTION>
December 31,
----------------
1997 1996
------- -------
<S> <C> <C>
As reported:
Net revenues........................ $83,550 $27,948
Net income.......................... $11,895 $ 2,588
Basic earnings per share............ $ 0.49 $ 0.16
Diluted earnings per share.......... $ 0.35 $ 0.10
Pro forma (unaudited):
Net revenues........................ $65,372 $27,948
Net income.......................... $ 8,989 $ 2,463
Basic earnings per share............ $ 0.37 $ 0.16
Diluted earnings per share.......... $ 0.26 $ 0.09
</TABLE>
The 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 had the acquisitions been
in effect as of January 1, 1995, or of future results of operations of the
consolidated entities.
22. SUBSEQUENT EVENT:
On March 9, 1998, the Company declared a 3-for-2 stock split in the form of
a stock dividend payable on April 3, 1998 to shareholders of record on March 20,
1998.
All applicable share and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect the above transaction.
58
<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
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement, pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, not later than 120 days after the end of its
fiscal year. Accordingly, certain information required by Part III has been
omitted under Item G of the General Instructions for Form 10-K. Only these
sections of the definitive Proxy Statement which specifically address the items
set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item 10 with respect to the directors and
executive officers of the Company is incorporated herein by reference to the
material under the captions "Election of Directors" and "Executive Officers" 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, 1997.
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, 1997.
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,
1997.
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, 1997.
59
<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, 1997.
(c) Exhibits
--------
The following exhibits are filed as a part of, or are incorporated
by reference into, this Report on Form 10-K:
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 26th day of March,
1998.
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.
Signature Title Date
--------- ----- ----
/s/ Satish K. Sanan President; Chief Executive Officer March 26, 1998
- --------------------------
Satish K. Sanan (Principal Executive Officer)
and Director
/s/ John R. Hindman Chief Financial Officer March 26, 1998
- --------------------------
John R. Hindman (Principal Financial Officer)
/s/ Michael J. Dean Vice President-Finance, Controller March 26, 1998
- --------------------------
Michael J. Dean (Principal Accounting Officer)
/s/ Jeffery S. Slowgrove Treasurer, Director March 26, 1998
- --------------------------
Jeffery S. Slowgrove
/s/ Philip Shipperlee Managing Director, IMR-U.K.; March 26, 1998
- --------------------------
Philip Shipperlee Director
/s/ Charles C. Luthin Director March 26, 1998
- --------------------------
Charles C. Luthin
/s/ Vincent Addonisio Director March 26, 1998
- --------------------------
Vincent Addonisio
63
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -------------------------------------------------------------------------------------------------------
<C> <S>
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>
61
<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.
10.30*** Acquisition Agreement dated January 13, 1997 between the Registrant and Philip and Sheila
Shipperlee relating to the acquisition of Link Group Holdings Limited.
10.31**** Share Purchase Agreement dated January 13, 1997 between the Registrant and Satish and Anne
Sanan relating to the acquisition of IMR-U.K.
11.1 Computation of Net Income Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Coopers & Lybrand, L.L.P.
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
_______________
*Incorporated herein by reference to Exhibit of the same number filed with
the Company's Registration Statement on Form S-1 (Registration No. 333-
12037).
**Incorporated herein by reference to the Exhibit of the same number field
with the Company's Annual Report on Form 10-K for the year ended December
31, 1996 (Commission File No. 0-28840).
***Incorporated herein by reference to Exhibit 2.1 filed with the Company's
Current Report on Form 8-K filed with the Commission on January 13, 1997
(Commission File No. 0-28840).
****Incorporated herein by reference to Exhibit 10.30 filed with the Company's
Registration Statement on Form S-1 (Registration No. 333-30741).
+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.
62
<PAGE>
EXHIBIT NUMBER 11.1
INFORMATION MANAGEMENT RESOURCES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
----------- ------------
<S> <C> <C>
Net income $ 11,895
==========
Pro Forma Net Income $ 2,545
==========
BASIC:
Weighted average common shares outstanding 24,129 15,458
========== ==========
Basic earnings per share $ 0.49
==========
Pro forma basic earnings per share $ 0.16
==========
DILUTED:
Common Shares 24,129 15,458
Stock Option Plans
Shares under option at year-end 10,756 11,438
Treasury Shares which could be purchased (418) (525)
---------- ----------
Weighted average common and
common equivalent shares outstanding 34,467 26,371
========== ==========
Diluted earnings per share $ 0.35
==========
Pro forma diluted earnings per share $ 0.10
==========
</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.)
Holding Company Limited Organized in the United Kingdom
Information Management Resources, plc Organized in the United Kingdom
Information Management Resources (Northern Ireland) Limited Organized in the United Kingdom
Information Management Resources (U.K.) Limited Organized in the United Kingdom
The Link Group Holdings Limited Organized in the United Kingdom
Link Associates Limited Organized in the United Kingdom
Contract Link Limited Organized in the United Kingdom
Link Workgroup Solutions Limited Organized in the United Kingdom
Information Management Resources (Australia)
Pty. Ltd. Organized in Australia
Information Management Resources Canada Ltd. Organized in Canada
Movitone, Ltd. Organized in India
Information Management Resources IOR, Ltd. Organized in Mauritius
</TABLE>
Each company does business in the name listed above.
<PAGE>
EXHIBIT NUMBER 23.1
-------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Information Management Resources, Inc. on Form S-8 (File No. 333-24027) of our
report dated February 13, 1998, except for the information in Note 22, for which
the date is March 9, 1998, on our audit of the consolidated financial
statements of Information Management Resources, Inc. and subsidiaries as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand, L.L.P.
Tampa, Florida
March 27, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 85,819
<SECURITIES> 4,453
<RECEIVABLES> 11,156
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 114,371
<PP&E> 13,302
<DEPRECIATION> 3,484
<TOTAL-ASSETS> 135,353
<CURRENT-LIABILITIES> 20,578
<BONDS> 885
0
0
<COMMON> 2,565
<OTHER-SE> 110,642
<TOTAL-LIABILITY-AND-EQUITY> 135,353
<SALES> 0
<TOTAL-REVENUES> 83,550
<CGS> 0
<TOTAL-COSTS> 45,959
<OTHER-EXPENSES> 21,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 17,375
<INCOME-TAX> 5,432
<INCOME-CONTINUING> 11,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,895
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.35
</TABLE>
