SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission File Number 0-28840
IMRGLOBAL CORP.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2911475
- -------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 SOUTH MISSOURI AVENUE, CLEARWATER, FLORIDA 33756
----------------------------------------------------
(Address of principal executive offices and zip code)
727-467-8000
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 1999, there were 38,555,835 outstanding shares of the
Registrant's Common Stock, par value $.10 per share.
<PAGE>
IMRGLOBAL CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE
----
<S> <C>
ITEM 1. Consolidated Balance Sheets
as of December 31, 1998 and September 30, 1999 ..................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1998 and 1999......................................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998
and 1999............................................................ 5
Notes to Consolidated Financial Statements............................ 6
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ................................... 15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............ 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................... 25
ITEM 5. Other Information .................................................... 25
ITEM 6. Exhibits and Reports on Form 8-K...................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMRGLOBAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------- ---------
(Restated) (Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 78,807 $ 58,748
Marketable securities ..................................... 31,609 16,535
Accounts receivable, net of allowance ..................... 28,538 42,577
Unbilled work in process .................................. 5,145 18,866
Deferred taxes ............................................ 14,141 12,792
Prepaid expenses and other current assets ................. 3,592 8,666
--------- ---------
Total current assets ................................... 161,832 158,184
Property and equipment, net of accumulated depreciation ...... 21,416 41,367
Capitalized software costs, net of accumulated amortization .. -- 1,433
Deposits and other assets .................................... 3,622 14,701
Intangible assets, net of accumulated amortization ........... 36,829 137,696
--------- ---------
Total assets ........................................... $ 223,699 $ 353,381
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 7,750 $ 12,112
Accrued compensation ...................................... 8,733 27,582
Deferred revenue .......................................... 3,446 1,472
Other current liabilities ................................. 19,120 22,358
--------- ---------
Total current liabilities .............................. 39,049 63,524
Long-term debt ............................................... 671 1,633
Deferred tax liability ....................................... 1,040 3,545
Accrued compensation ......................................... 8,125 4,402
--------- ---------
Total liabilities ...................................... 48,885 73,104
--------- ---------
Shareholders' equity:
Preferred stock ........................................... -- --
Common stock .............................................. 3,039 3,855
Additional paid-in capital ................................ 139,800 228,338
Retained earnings ......................................... 33,433 50,861
Notes receivable from share sales ......................... (366) (703)
Accumulated other comprehensive expense ................... (1,092) (2,074)
--------- ---------
Total shareholders' equity ............................. 174,814 280,277
--------- ---------
Total liabilities and shareholders' equity ............. $ 223,699 $ 353,381
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue ........................................ $ 45,310 $ 62,159 $ 119,832 $ 177,000
Cost of revenue ................................ 23,380 35,059 63,891 97,173
-------- -------- --------- ---------
Gross profit .......................... 21,930 27,100 55,941 79,827
Selling, general and administrative expenses ... 8,915 16,367 24,282 39,997
Research and development expenses .............. 2,086 1,888 4,233 4,730
Goodwill and intangible amortization ........... 672 2,026 1,325 4,755
Acquired in-process
research and development .................... -- -- 8,200 3,410
Acquisition costs .............................. -- -- 145 1,936
-------- -------- --------- ---------
Income from operations ................ 10,257 6,819 17,756 24,999
Other income (expense):
Interest expense ...................... (47) (3) (233) (6)
Interest income and other ............. 1,121 1,343 3,375 4,022
-------- -------- --------- ---------
Total other income .................... 1,074 1,340 3,142 4,016
-------- -------- --------- ---------
Income before provision for income taxes ....... 11,331 8,159 20,898 29,015
Provision for income taxes ..................... 3,808 2,967 9,319 11,587
-------- -------- --------- ---------
Net income (loss) ..................... $ 7,523 $ 5,192 $ 11,579 $ 17,428
======== ======== ========= =========
Earnings (loss) per share:
Basic ................................. $ 0.25 $ 0.13 $ 0.41 $ 0.50
======== ======== ========= =========
Diluted ............................... $ 0.21 $ 0.12 $ 0.33 $ 0.44
======== ======== ========= =========
Shares outstanding:
Basic ................................. 29,873 38,486 28,195 34,923
======== ======== ========= =========
Diluted ............................... 35,256 42,471 35,016 39,486
======== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
-------- --------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 11,579 $ 17,428
Adjustment to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization .................................. 3,118 8,191
Deferred taxes ................................................. (8,914) 4,156
Tax benefit of stock options ................................... 14,933 2,829
Other .......................................................... (5) --
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process ............ (13,765) (10,378)
Other current assets ........................................ 1,280 (3,532)
Deposits and other assets ................................... (2,837) (9,234)
Accounts payable and other liabilities ...................... 6,953 369
Accrued compensation ........................................ 5,912 (2,074)
Income tax .................................................. 2,398 2,153
Deferred revenue ............................................ (2,883) (3,192)
-------- --------
Total adjustments ........................................... 6,190 (10,712)
-------- --------
Net cash provided by operating activities ................... 17,769 6,716
-------- --------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries,
net of cash acquired .......................................... (8,077) (14,051)
Investment in marketable securities, net .......................... (8,521) 15,075
Additions to capitalized software costs ........................... -- (1,433)
Additions to property and equipment ............................... (8,787) (20,363)
-------- --------
Net cash used in investing activities ....................... (25,385) (20,772)
-------- --------
Cash flows from financing activities:
Net repayments from revolving credit line ......................... 89 (443)
Payments on long-term debt, notes and capital leases .............. (2,322) (5,315)
Proceeds from issuance of common stock ............................ 645 1,120
-------- --------
Net cash used in financing activities ....................... (1,588) (4,638)
-------- --------
Effect of exchange rate changes ...................................... (800) (1,365)
-------- --------
Net decrease in cash and cash equivalents ............................ (10,004) (20,059)
Cash and cash equivalents at beginning of period ..................... 86,999 78,807
-------- --------
Cash and cash equivalents at end of period ........................... $ 76,995 $ 58,748
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and include all adjustments necessary for a fair presentation. The
results of operations for the three and nine month periods ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year. The consolidated statements have been restated to include the financial
statements of Atechsys, S.A., which was acquired during 1999 in a transaction
accounted for as pooling of interests.
These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1998, which are contained in IMRglobal's Annual Report on
Form 10-K ("Form 10-K") and Form 8-K as filed with the Securities and Exchange
Commission (the "Commission"), which amended Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --The consolidated financial statements include
the accounts of IMRglobal Corp. ("IMRglobal") and its wholly and majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
COMPUTATION OF EARNINGS PER SHARE--Per share data and number of shares
outstanding have been adjusted to reflect the 3-for-2 stock split in the form of
a stock dividend paid by IMRglobal on April 3, 1998. Basic earnings per share is
computed using the weighted average of common stock outstanding. Diluted
earnings per share is computed using the treasury stock method which is
summarized as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
------- ------- ------- -------
Weighted average
common stock outstanding ....... 29,873 38,486 28,195 34,923
Weighted average
common stock equivalents ....... 5,383 3,985 6,821 4,563
------- ------- ------- -------
Shares used in diluted earnings
per share calculation .......... 35,256 42,471 35,016 39,486
======= ======= ======= =======
6
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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.
3. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the nine months ended September 30,
1999 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
COMPRE- NOTES ACCUMULATED
HENSIVE RECEIVABLE OTHER
INCOME COMMON PAID-IN RETAINED FROM STOCK COMPREHENSIVE
(LOSS) STOCK CAPITAL EARNINGS SALES EXPENSE TOTAL
-------- ------ -------- -------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 (Restated) .. $ -- $3,039 $139,800 $33,433 $(366) $(1,092) $ 174,814
Common stock issued in
connection with acquisitions ........ -- 695 84,372 -- -- -- 85,067
Employee stock purchase plan ........... -- 4 604 -- -- -- 608
Stock options exercised ................ -- 117 733 -- -- -- 850
Tax benefit of
stock options exercised ............. -- -- 2,829 -- -- -- 2,829
Notes receivable from share sales ...... -- -- -- -- (337) -- (337)
Net income ............................. 17,428 -- -- 17,428 -- -- 17,428
Translation adjustment ................. (982) -- -- -- -- (982) (982)
--------
Comprehensive income ................... $ 16,446 -- -- -- -- -- --
======== ------ -------- ------- ----- ------- ---------
Balance, September 30, 1999 ............ $3,855 $228,338 $50,861 $(703) $(2,074) $ 280,277
====== ======== ======= ===== ======= =========
</TABLE>
7
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
4. BUSINESS COMBINATIONS
ATECHSYS S.A. ("ATECHSYS")--On January 8, 1999, IMRglobal acquired 100% of
the outstanding stock of Atechsys S.A., a privately held information technology
company based in Paris, France, specializing in business and technology
consulting specific to capital markets businesses. In exchange for Atechsys'
common stock, Atechsys' shareholders received 718,859 shares of IMRglobal common
stock. The Atechsys acquisition is accounted for as a pooling of interests
combination pursuant to the provisions of APB Opinion No. 16. Financial
statements for all periods have been restated to give effect to the business
combination. Costs of approximately $1.9 million related to the acquisition have
been charged to acquisition costs and included in the statement of income for
the nine months ended September 30, 1999.
ECWERKS, INC. ("ECWERKS")--On January 15, 1999, IMRglobal acquired 100% of
the outstanding stock of ECWerks, Inc., a privately held electronic commerce
business and technology consulting company based in Tampa, Florida. In exchange
for ECWerks' common stock, ECWerks' shareholders received 163,054 shares (valued
at $3.6 million) of IMRglobal's unregistered common stock. In addition, a
contingent payment of up to $28.0 million of common stock is payable if certain
specified financial goals are achieved during 1999. Any contingent payment would
result in an increase in the purchase price and the resulting goodwill. The
ECWerks acquisition is accounted for as a purchase pursuant to the provisions of
APB Opinion No. 16.
FUSION SYSTEM JAPAN CO., LTD. ("FUSION")--On March 26, 1999, IMRglobal
acquired 100% of the outstanding stock of Fusion System Japan Co., Ltd., a
privately held business and technology consulting company based in Tokyo, Japan.
Fusion is comprised of three divisions, one focused on the capital markets
businesses in Japan and Asia-Pacific, a Commercial Services division, which
provides information technology ("IT") consulting services to large companies in
Japan and a Client Services division which provides voice/data infrastructure
solutions in Japan. Fusion also has a subsidiary in Boston that provides IT
services to clients in the financial and commercial services industries. In
exchange for Fusion's common stock, Fusion's shareholders received 3,735,536
shares (valued at $39.3 million) of IMRglobal common stock. On October 25, 1999,
IMRglobal reacquired approximately 1.5 million shares of common stock issued to
the Fusion stockholders in exchange for $22.4 million. The Fusion acquisition is
accounted for as a purchase pursuant to the provisions of APB Opinion No. 16.
The purchased assets and assumed liabilities in connection with the
acquisition of Fusion were recorded at their estimated fair value at the
acquisition date. In connection with the Fusion acquisition, we retained an
independent appraiser to complete a valuation of the assets of Fusion, including
valuation of certain in-process research and development. We identified 27
project categories for which technological feasibility had not been achieved as
of the acquisition date and for which there was no alternative future use. The
project categories include eight modules for the Japan market, nine modules for
the worldwide market and ten modules for specific countries outside of Japan.
The value associated with these projects was determined using a discounted
cash flow model with a risk adjusted discount rate of 25%. The model reflects
revenue to be generated beginning in 1999 and continuing through 2006 for all
projects. The valuation also incorporated a stage of completion methodology
where the value was adjusted based on the technology's percentage of completion.
8
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
Fusion's main product is Fox, an electronic order manager system for the
capital markets industry. As of the acquisition date, the general design of the
core modules was completed. This design identified the primary core modules
required for multiple modules in the capital markets industry. As of the
acquisition date over 50% of the Japan modules and under 50% of the worldwide
component modules had been coded. Testing has not been completed for these
modules.
The schedule below details the status of each project as of the acquisition
date and its appraised in-process research and development value (dollar amounts
in thousands).
<TABLE>
<CAPTION>
PERCENT
DATE PERCENT COMPLETE PERCENT AMOUNT
FOX PRODUCT/ R&D PROTOTYPE COMPLETE CALENDAR COMPLETE IN
COMPONENT START DATE COMPLETE MAN MONTHS TIME VALUE BASIS CONCLUDED THOUSANDS
- ------------------------ ---------- ---------- ---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Japan:
BTA 01-Aug-97 01-Jun-99 90% 90% 90% 90% $ 120
STA/BTA/OBA merge 31-Dec-98 31-Mar-00 19% 19% 19% 19% 40
Extended Limit Type 01-Nov-98 01-May-99 80% 80% 80% 80% 50
AA 01-Aug-97 01-Jul-99 86% 86% 86% 86% 110
XA 01-Feb-99 01-Jan-00 16% 16% 16% 16% 20
OES-Upgrades 01-Jan-98 01-Jul-99 82% 82% 82% 82% 170
LH JASDAQ 01-Nov-97 01-Aug-99 80% 80% 90% 90% 330
LH TIFFE 01-Mar-99 01-Sep-99 14% 14% 57% 57% 160
World:
STA 30-Jun-98 30-Jun-00 37% 37% 68% 68% 110
BTA 30-Jun-98 30-Jun-00 37% 37% 68% 68% 140
OBA 30-Jun-98 30-Jun-00 37% 37% 68% 68% 110
STA/BTA/OBA merge 31-Dec-98 30-Jun-00 21% 16% 61% 61% 50
TT 01-Jan-98 30-Jun-00 21% 49% 60% 60% 30
DBA 01-Jan-98 30-Jun-00 21% 49% 60% 60% 50
FOX Router 01-Dec-96 01-Dec-99 32% 77% 83% 83% 20
MGS 30-Jun-97 01-Dec-00 51% 51% 63% 63% 90
OES 01-Jan-98 01-Dec-00 42% 42% 57% 57% 130
-----
Subtotal carried forward 1,730
</TABLE>
9
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
<TABLE>
<CAPTION>
PERCENT
DATE PERCENT COMPLETE PERCENT AMOUNT
FOX PRODUCT/ R&D PROTOTYPE COMPLETE CALENDAR COMPLETE IN
COMPONENT START DATE COMPLETE MAN MONTHS TIME VALUE BASIS CONCLUDED THOUSANDS
- ------------------------ ---------- ---------- ---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance brought forward 1,730
World:
LH HK 01-Oct-98 01-Oct-99 28% 48% 64% 64% 220
LH TAIWAN 01-Oct-98 01-Oct-99 28% 48% 64% 64% 290
LH KOREA 01-Oct-98 01-Mar-00 31% 34% 65% 65% 210
LH SING 01-Oct-98 01-Mar-00 31% 34% 65% 65% 100
LH AUS 01-Oct-98 01-Sep-99 32% 53% 66% 66% 250
LH SH 01-Oct-98 01-Mar-00 31% 34% 65% 65% 90
LH LON 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130
LH EUREX 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130
LH PARIS 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130
LH FRANK 01-Oct-98 01-Jun-00 26% 29% 63% 63% 130
------
$3,410
======
</TABLE>
Based on the results of the appraisal, $3.4 million was attributed to the
in-process research and development for the Fusion acquisition and expensed in
the first quarter of 1999 when the acquisition was consummated.
PROFESSIONAL PARTNERS, INC. AND LAKEWOOD SOFTWARE TECHNOLOGY CENTER, INC.
("PLP")--On April 28, 1999, IMRglobal acquired 100% of the outstanding stock of
PLP, a privately held provider of information technology services to the
Property and Casualty insurance industry headquartered in Howell, New Jersey. In
exchange for PLP's common stock, PLP's shareholders received $12.0 million in
cash. The PLP acquisition is accounted for as a purchase pursuant to the
provisions of APB Opinion No. 16.
10
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IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
ORION CONSULTING, INC. ("ORION")--On June 15, 1999, IMRglobal acquired 100%
of the outstanding stock of Orion, a privately held management consulting firm,
headquartered in Cleveland, Ohio, primarily serving the Health Care industry. In
exchange for Orion's common stock, Orion's shareholders received 3,028,414
shares (valued at $41.4 million) of IMRglobal's common stock. The Orion
acquisition is being accounted for as a purchase pursuant to the provisions of
APB Opinion No. 16.
Separate results of operations for the periods prior to the merger with
Atechsys are summarized below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1998
------- --------
<S> <C> <C>
Revenue:
IMRglobal ......................... $42,013 $111,597
Adjustment for pooling of interests 3,297 8,235
------- --------
Combined ................. $45,310 $119,832
======= ========
Pro forma net income:
IMRglobal ......................... $ 7,316 $ 10,936
Adjustment for pooling of interests 207 643
------- --------
Combined ................. $ 7,523 $ 11,579
======= ========
Other changes in shareholders' equity:
IMRglobal ......................... $ 2,901 $ 26,643
Adjustment for pooling of interests 159 115
------- --------
Combined ................. $ 3,060 $ 26,758
======= ========
</TABLE>
11
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
5. SEGMENT INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue by service offering:
Core service offerings ................ $ 20,930 $ 51,842 $ 51,323 $ 131,620
Year 2000 ............................. 20,568 6,062 58,651 33,731
Professional services ................. 3,812 4,255 9,858 11,649
-------- -------- --------- ---------
Total revenue ................... $ 45,310 $ 62,159 $ 119,832 $ 177,000
======== ======== ========= =========
Income from operations:
Sales organizations ................... $ 11,230 $ 10,769 $ 25,094 $ 38,072
Software Development Centers .......... 1,785 (36) 6,565 1,758
-------- -------- --------- ---------
Income from operations -
sales and delivery centers ... 13,015 10,733 31,659 39,830
Research and development .............. (2,086) (1,888) (4,233) (4,730)
Goodwill amortization ................. (672) (2,026) (1,325) (4,755)
Other costs ........................... -- -- (8,345) (5,346)
-------- -------- --------- ---------
Income from operations .......... $ 10,257 $ 6,819 $ 17,756 $ 24,999
======== ======== ========= =========
</TABLE>
The Company is engaged in one business segment. The sales organization
provides IT transitional outsourcing services to large companies in North
America, Europe, Japan and Australia. Software Development Centers consist of
two Indian facilities and one Northern Ireland facility that provide software
development services to the sales organizations. Intercompany sales are
accounted for at prices representative of unaffiliated party transactions and
are eliminated in consolidation.
12
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
6. ACQUISITIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
During 1998 and 1999, IMRglobal completed several acquisitions (see Note
4). The following unaudited table compares IMRglobal's reported operating
results to pro forma information prepared on the basis that the acquisition had
taken place at the beginning of the fiscal year for each of the periods
presented (in thousands except per share amounts):
SEPTEMBER 30,
-----------------------
1998 1999
---------- --------
As reported:
Revenue............................................ $119,832 $177,000
Net income......................................... $ 11,579 $ 17,428
Basic earnings per share........................... $ 0.41 $ 0.50
Diluted earnings per share......................... $ 0.33 $ 0.44
Pro forma (unaudited):
Revenue............................................ $189,338 $198,634
Net income......................................... $ 11,298 $ 17,138
Basic earnings per share........................... $ 0.32 $ 0.45
Diluted earnings per share......................... $ 0.27 $ 0.40
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of 1998 or 1999 or of future
operations of the combined companies under the ownership and management of
IMRglobal.
7. CONTINGENCIES
During May 1998, IMRglobal acquired 100% of Lyon Consultants S.A. ("Lyon")
for approximately $16.7 million in cash and 531,353 shares in IMRglobal (See
Note 4). In addition, the acquisition agreement provides that if the average
price of the IMRglobal shares on NASDAQ is less than $27.24 per share for the
seven trading days prior to May 15, 1999, then IMRglobal will pay the former
Lyon shareholders the difference between the average price on NASDAQ and $27.24
multiplied by 499,353 shares. On May 15, 1999 the average price of IMRglobal's
shares for the seven trading days prior to May 15, 1999 was $18.768 per share.
Accordingly, the liability to the former shareholders of Lyon was approximately
$4.2 million.
13
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
7. CONTINGENCIES (CONTINUED)
Subsequent to May 10, 1999, IMRglobal renegotiated the above contingency.
IMRglobal's current agreement is that if the average price of the IMRglobal
shares on NASDAQ is less than $34.05 per share for the seven trading days prior
to May 15, 2000, then IMRglobal will pay the former Lyon shareholders the
difference between the average price on NASDAQ and $34.05 for only the shares
continuing to be held by the former Lyon shareholders. In addition, if the
IMRglobal shares on NASDAQ is $34.05 per share or higher for any consecutive
trading days between May 15, 1999 and May 15, 2000, then the above contingency
is released without any further obligation from IMRglobal.
8. RELATED PARTY
Other assets include a $5.0 million note receivable from IMRglobal's Chief
Executive Officer ("CEO") in accordance with his employment agreement. This note
bears interest at prime plus 1% (currently 9.3%) and is repayable at the earlier
of five years from the loan date or 180 days after the CEO terminates employment
with IMRglobal.
During October 1999 an additional $15.0 million cash was advanced to
IMRglobal's CEO in a separate note agreement collateralized by the personal
assets of IMRglobal's CEO. This loan bears interest at prime plus 1% and is due
on demand after December 31, 1999.
All of the above loans, plus interest, were repaid in full on November 12,
1999.
14
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, some matters discussed in our report
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We note that a variety of risk factors could cause our
actual results and experience to differ materially from the anticipated results
or other expectations expressed in our forward-looking statements including the
following:
o rates of wage cost increases in comparison to rates of inflation in the
countries in which we do business;
o our ability to expand our infrastructure;
o the rate of revenue growth;
o future income from operations; and
o the impact of the year 2000 on our results of operations and financial
condition.
Reference is made in particular to the remaining discussion in this report and
set forth in our Annual Report on Form 10-K for the fiscal year ended December
31, 1998, as filed with the Commission.
IMPACT OF GOODWILL AND INTANGIBLE ASSET AMORTIZATION ON RESULTS OF
OPERATIONS. We have consummated several acquisitions over the past two years
utilizing the purchase method of accounting. Accordingly, goodwill and
intangible asset amortization has made a significant impact on our operating
results. The following table provides net income and diluted earnings per share
excluding the impact of goodwill and intangible asset amortization. In addition,
the table also excludes one-time charges for in-process research and development
and acquisition costs for the nine months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------ ------- ------- --------
<S> <C> <C> <C> <C>
Net income as reported .................... $7,523 $ 5,192 $11,579 $ 17,428
Goodwill and intangible amortization ...... 672 2,026 1,325 4,755
Acquired in-process research and
development ............................ -- -- 8,200 3,410
Acquisition costs ......................... -- -- 145 1,936
Income tax impact of above items .......... -- (400) -- (1,764)
------ ------- ------- --------
Net income, as revised .................... $8,195 $ 6,818 $21,249 $ 25,765
====== ======= ======= ========
Earnings per share diluted, as revised .... $ 0.23 $ 0.16 $ 0.61 $ 0.65
====== ======= ======= ========
</TABLE>
15
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUE. For the three months ended September 30, 1999, our revenue
increased to $62.2 million, representing a 37.2% increase over revenue of $45.3
million for the three months ended September 30, 1998. The acquisitions
accounted for under the purchase method between October 1998 and September 1999
contributed a substantial portion of the revenue increase, including
approximately $6.0 million of licensing fees. Revenue from our service offerings
not related to our Year 2000 service offerings, increased to $56.1 million
(including revenue from purchase acquisitions), representing a 126.7% increase
over non Year 2000 revenue of $24.7 million for the three months ended September
30, 1998. A substantial portion of this revenue growth is attributable to our
e-business service offerings, which represent 23.0% of revenue for the three
months ended September 30, 1999. Revenue from our Year 2000 conversion services
decreased 70.5% to $6.1 million for the quarter ended September 30, 1999
compared to $20.6 million for the quarter ended September 30, 1998. As a
percentage of total revenue, Year 2000 revenue decreased to 9.8% for the three
months ended September 30, 1999 as compared to 45.4% for the three months ended
September 30, 1998. We expect that Year 2000 revenue will continue to decrease
over the next two quarters.
COST OF REVENUE. Cost of Revenue was $35.1 million, or 56.4% of revenue,
for the three months ended September 30, 1999, as compared to $23.4 million, or
51.6% of revenue, for the three months ended September 30, 1998. The increase in
cost of revenue as a percentage of revenue was primarily attributable to reduced
utilization of our software development facilities in India and Northern Ireland
and increased training costs.
GROSS PROFIT. Gross profit increased 23.6% to $27.1 million in the three
months ended September 30, 1999 compared to $21.9 million in the three months
ended September 30, 1998. As a percentage of revenue, our gross profit decreased
to 43.6% in the three months ended September 30, 1999 compared to 48.4% in the
three months ended September 30, 1998. The decrease in gross profit was
primarily attributable to reduced utilization and training costs at our software
development facilities. This decrease was partially offset by higher margins in
our e-business service offerings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended
September 30, 1999, SG&A expenses increased to $16.4 million, compared to $8.9
million for the three months ended September 30, 1998.
16
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
As a percentage of revenue, SG&A expenses for the three months ended
September 30, 1999 increased to 26.3% from 19.7% for the same period in 1998.
The primary reason for the increase as a percentage of revenue was due to the
integration costs related to acquisitions and the following:
o 100% expansion of our sales force over the past 12 months;
o Aggressive implementation of certain marketing initiatives;
o Integration costs related to the multiple acquisitions made over the
past 12 months; and
o Revenue growth being lower than expected.
We intend to reduce the rate that we expand our SG&A infrastructure over
the next three to nine months.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $1.9 million for the three months ended September 30, 1999 compared
to $2.1 million for the three months ended September 30, 1998. As a percentage
of revenue, R&D was 3.0% for the three months ended September 30, 1999 and 4.6%
for the three months ended September 30, 1998. We anticipate that R&D expenses
will continue to be approximately 2.0% to 3.0% of revenue for the remainder of
1999.
GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible amortization
increased to approximately $2.0 million for the three months ended September 30,
1999 from approximately $672,000 for the three months ended September 30, 1998.
The additional expense primarily reflects the amortization of goodwill and
intangibles generated by our 1998 and 1999 acquisitions.
INCOME FROM OPERATIONS. Income from operations for the three months ended
September 30, 1999 was $6.8 million compared to $10.3 million for the three
months ended September 30, 1998. As a percentage of revenue, income from
operations for the three months ended September 30, 1999 decreased to 11.0% from
22.6% in the three months ended September 30, 1998.
OTHER INCOME. We realized $1.3 million of other income (net of other
expenses) in the three months ended September 30, 1999 and $1.1 million in the
three months ended September 30, 1998. Net other income consists primarily of
investment income generated by our cash and marketable securities.
PROVISION FOR INCOME TAXES. Our effective tax rate was 36.4% for the three
months ended September 30, 1999 compared to 33.6% for the three months ended
September 30, 1998. The higher effective tax rate for the three months ended
September 30, 1999 is partially attributable to intangible asset amortization
not being fully deductible for income tax purposes. Intangible asset
amortization has increased 201.5% from the three months ended September 30, 1998
to the three months ended September 30, 1999. In addition, we have historically
enjoyed a low effective tax rate primarily due to our industry's low tax rates
in India. Accordingly, the effective tax rate has increased as a result of
recent acquisitions in France, Canada, Japan, Australia and the United States,
which have higher tax rates than India.
17
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
We have not recorded deferred income taxes applicable to undistributed
earnings of IMRglobal-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.
NET INCOME. Net income decreased to $5.2 million for the three months ended
September 30, 1999 compared to $7.5 million for the three months ended September
30, 1998. As a percentage of revenue, net income for the three months ended
September 30, 1999 decreased to 8.4% from 16.6% in the three months ended
September 30, 1998. This decrease reflects lower gross profits and higher SG&A
expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUE. For the nine months ended September 30, 1999, our revenue
increased to $177.0 million, representing a 47.7% increase over revenue of
$119.8 million for the nine months ended September 30, 1998. The acquisitions
accounted for under the purchase method between May 1998 and September 1999
contributed a substantial portion of the revenue increase. Revenue from our
service offerings not related to our Year 2000 service offerings, increased to
$143.3 million (including purchase acquisitions), representing a 134.2% increase
over non Year 2000 revenue of $61.2 million for the nine months ended September
30, 1998. Revenue from our Year 2000 conversion services decreased 42.5% to
$33.7 million for the nine months ended September 30, 1999 compared to $58.7
million for the nine months ended September 30, 1998. As a percentage of total
revenue, Year 2000 revenue decreased to 19.1% for the nine months ended
September 30, 1999 as compared to 48.9% for the nine months ended September 30,
1998. We expect that Year 2000 revenue will continue to decrease over the next
two quarters.
COST OF REVENUE. Cost of Revenue was $97.2 million, or 54.9% of revenue,
for the nine months ended September 30, 1999, as compared to $63.9 million, or
53.3% of revenue, for the nine months ended September 30, 1998. The increase in
cost of revenue as a percentage of revenue was primarily attributable to reduced
utilization of our software development facilities in India and Northern
Ireland.
Wage costs continue to increase at a greater rate than general inflation in
each of the countries in which we have operations, and we anticipate that this
trend will continue in the near term. Historically, we have been able to pass
these wage increases on to our clients in the form of increased prices for our
service offerings. However, we cannot assure you that we will be able to
continue to increase prices to our clients to offset future wage increases.
GROSS PROFIT. Our gross profit increased 42.7% to $79.8 million in the nine
months ended September 30, 1999 compared to $55.9 million in the nine months
ended September 30, 1998. As a percentage of revenue, our gross profit decreased
to 45.1% in the nine months ended September 30, 1999 compared to 46.7% in the
nine months ended September 30, 1998.
18
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the nine months ended
September 30, 1999, SG&A expenses increased to $40.0 million, compared to $24.3
million for the nine months ended September 30, 1998. The dollar increase in
SG&A expense is attributable to the following:
o purchase acquisitions;
o implementation of certain marketing initiatives;
o the expansion of sales personnel and sales offices; and
o expansion of our general support staff, primarily recruiting and human
resources personnel.
As a percentage of revenue, SG&A expenses for the nine months ended
September 30, 1999 increased to 22.6% from 20.3% for the same period in 1998.
The primary reasons for the increase as a percentage of revenue were expansion
of sales and marketing activities, integration costs related to acquisitions and
revenue increasing at a lower rate than anticipated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to approximately $4.7 million for the nine months ended September 30,
1999 from approximately $4.2 million in the nine months ended September 30,
1998. As a percentage of revenue, R&D decreased to 2.7% in the nine months ended
September 30, 1999 from 3.5% for the nine months ended September 30, 1998.
During the first nine months of 1999, in accordance with Statement of
Financial Accounting Standard (SFAS) 86, we capitalized approximately $1.3
million of software costs related to our component based products for the
insurance industry and our maintenance toolset. We did not capitalize software
costs during 1998.
GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible amortization
increased to approximately $4.8 million for the nine months ended September 30,
1999 from approximately $1.3 million for the nine months ended September 30,
1998. The additional expense primarily reflects the amortization of goodwill and
intangibles generated by two acquisitions in 1998 and four acquisitions in 1999.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The
purchased assets and assumed liabilities in connection with the acquisition of
Fusion were recorded at their estimated fair values at the acquisition date of
March 26, 1999. We received an appraisal of the intangible assets which
indicated that approximately $3.4 million of the acquired intangible assets was
acquired IPRD that had not yet reached technological feasibility and had no
alternative future use (See Note 4). To determine the value of the IPRD, the
Company's appraisal considered, among other factors, the state of development of
each project, the time and cost needed to complete each project, expected
income, discounted cash flow and associated risks which included the inherent
difficulties and uncertainties in completing each project and thereby achieving
technological feasibility and risks related to the viability of and potential
changes to future target markets. This analysis results in amounts assigned to
the cost of in-process research and development for projects that had not yet
reached technological feasibility and had no alternative future uses.
Accordingly, the acquired IPRD was charged to expense by the Company in the
quarter ended March 31, 1999.
19
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
During the nine months ended September 30, 1998, in connection with our
acquisition of Lyon, we incurred an $8.2 million expense for acquired in-process
research and development costs. This expense was based on an appraisal of the
intangible assets acquired in the Lyon acquisition.
ACQUISITION COSTS. During the nine months ended September 30, 1999, we
completed one acquisition that was accounted for as a pooling of interests.
Acquisition expenses attributable to that merger were approximately $1.9
million.
INCOME FROM OPERATIONS. Income from operations for the nine months ended
September 30, 1999 was $25.0 million compared to $17.8 million for the nine
months ended September 30, 1998. As a percentage of revenue, income from
operations for the nine months ended September 30, 1999 decreased to 14.1% from
14.8% in the nine months ended September 30, 1998. Both periods reflect certain
one-time charges related to acquisition costs and acquired in-process research
and development costs. Excluding these one-time charges, as a percentage of
revenue, income from operations for the nine months ended September 30, 1999
decreased to 17.1% from 21.8% in the nine months ended September 30, 1998. This
decrease reflects the lower gross profit described above combined with higher
SG&A expenses.
OTHER INCOME. We realized approximately $4.0 million of other income (net
of other expenses) in the nine months ended September 30, 1999 compared to net
other income of approximately $3.1 million in the nine months ended September
30, 1998. Net other income consists primarily of investment income generated by
our cash and marketable securities.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
approximately $11.6 million for the nine months ended September 30, 1999 from
approximately $9.3 million for the nine months ended September 30, 1998.
Excluding one-time charges this represents an effective tax rate of 37.7% and
31.9% for the nine month periods ended September 30, 1999 and 1998,
respectively.
The higher effective tax rate for the nine months ended September 30, 1999
is partially attributable to goodwill and acquired technology amortization not
being fully deductible for income tax purposes. Intangible asset amortization
has increased 258.9% from the nine months ended September 30, 1998 to the nine
months ended September 30, 1999. In addition, we have historically enjoyed a low
effective tax rate primarily due to our industry's low tax rates in India.
Accordingly, the effective tax rate has increased as a result of recent
acquisitions in France, Canada, Japan, Australia and the United States, which
have higher tax rates than India.
We have not recorded deferred income taxes applicable to undistributed
earnings of IMRglobal-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.
20
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET INCOME. Net income increased to $17.4 million for the nine months ended
September 30, 1999 compared to $11.6 million for the nine months ended September
30, 1998. Net income for the nine months ended September 30, 1999, excluding
one-time charges, was approximately $21.4 million compared to net income of
approximately $19.9 million excluding one-time charges for the nine months ended
September 30, 1998. Excluding one-time charges, as a percentage of revenue, net
income for the nine months ended September 30, 1999 decreased to 12.1% from
16.6% in the nine months ended September 30, 1998.
DILUTED EARNINGS PER SHARE. Diluted earnings per share was $0.44 for the
nine months ended September 30, 1999 and $0.33 for the nine months ended
September 30, 1998. Excluding one-time charges, diluted earnings per share was
$0.54 for the nine months ended September 30, 1999 as compared to $0.57 for the
nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had:
o working capital of $94.7 million;
o liquid assets including cash, cash equivalents and marketable
securities of approximately $75.3 million; and
o available bank lines of credit of approximately $13.9 million.
Net cash provided by operating activities was $6.7 million for the nine
months ended September 30, 1999. The positive cash flow from operations
primarily reflects our continuing profitability and the tax benefits generated
through the exercise of employee stock options.
Net cash used in investing activities was $20.8 million for the nine months
ended September 30, 1999. For the nine months ended September 30, 1999, we
invested an additional $14.1 million in the acquisition of subsidiaries and
purchased $20.4 million of property and equipment.
Net cash used in financing activities was $4.6 million for the nine months
ended September 30, 1999.
We maintain an uncollateralized $10.0 million revolving credit facility
which allows us to borrow up to 80% of the book value of our United States
accounts receivable. Our interest rate for this facility varies and is 1% above
LIBOR (currently 7.0%). At September 30, 1999, we had not borrowed any funds
under this facility and the $10.0 million was available to us. Provisions of
this line of credit and certain notes payable contain financial covenants,
including covenants that require us to maintain certain financial ratios. At
September 30, 1999, we were in compliance with these covenants. This credit
facility can be canceled at any time by the bank or by us.
21
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Certain of our subsidiaries maintain additional revolving credit line
arrangements. At September 30, 1999, there were no amounts outstanding under
these facilities and the maximum amount available was approximately $3.9
million. The respective subsidiary's accounts receivable and certain property
and equipment collateralize these facilities.
During September 1998, we entered into contracts to purchase land and
construct new facilities for our corporate headquarters. The total price of this
project (including furniture, fixtures and equipment) is expected to be
approximately $28.0 million of which $20.4 million has been expended as of
September 30, 1999. Completion of this project is scheduled for January 2000.
We continuously review our future cash requirements, together with our
available bank lines of credit and internally generated funds. We believe we
have adequate capital resources to meet all working capital obligations and fund
the development of our current business operations, including the following
business objectives:
o Continued expansion of existing business;
o Continued funding of research and development initiatives;
o Anticipated levels of capital expenditures including the construction
of our corporate headquarters;
o Strategic mergers and acquisitions; and
o Any debt repayment requirements, including those that may be required
pursuant to the integration of our acquisitions.
ASSET MANAGEMENT
Our accounts receivable balance was $42.6 million at September 30, 1999.
The increase of $14.0 million from December 31, 1998 was primarily due to new
acquisitions and revenue growth of 47.7%. A common financial measure is the
calculation of days sales outstanding in accounts receivable. We refer to days
sales outstandings as DSO. We believe that the calculation of DSO should be done
on our quarterly results of operations to factor in our historic rapid revenue
growth rate. Based on the above, DSO was 62 days at September 30, 1999. The Lyon
and Atechsys acquisitions add approximately 5 days to our DSO as collection
practices of accounts receivable in France have historically been slower than
collections in other geographical areas. In addition, accounts receivable in
Canada, France, Japan and U.K. include value added taxes that are not included
in revenue. Without value added taxes, DSO would be approximately 3 days less
than the above levels.
22
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
COSTS ASSOCIATED WITH THE ASSESSMENT AND RESOLUTION OF OUR YEAR 2000 CONVERSION
PROJECTS
INTRODUCTION. Many existing computer systems run software programs
permitting only two-digit entries to reference the year in the date field. For
example, 1999 is read as 99. As a result of this limitation, many existing
computer systems cannot properly process dates in the next century. Software
programs that use the two-digit year date field to perform computations or
decision-making functions may fail due to an inability to correctly interpret
dates in the 21st century. For example, many software systems will misinterpret
"00" to mean the year 1900 rather than 2000.
OUR STATE OF READINESS. We have assessed the impact that Year 2000 will
have on our information technology and non-information technology systems,
relationships with our third-party vendors and relationships with our clients.
Although we continue to review all of our systems, for Year 2000
compliance, we have discovered that only our internal accounting system is not
Year 2000 compliant. A new accounting system has been selected and we expect to
have replaced the non-compliant accounting system by the end of 1999. The
implementation of a new accounting system was made for reasons other than the
fact that the system to date is not Year 2000 compliant. Accordingly, we have
not accelerated replacement plans for such system in light of its
non-compliance. To date, we have incurred expenses approximating $50,000 related
to Year 2000 compliance and we anticipate that the total cost should not exceed
$100,000. These estimates primarily reflect the costs related to our personnel.
We do not believe that the costs associated with the replacement of the
accounting system will have a material impact on our results of operations and
financial condition. We have not identified any other IT or non-IT system that
is subject to a material risk of disruption due to Year 2000. We do not believe
a formal contingency plan is required for internal systems.
We have assessed whether a system failure experienced by any of our
third-party vendors would negatively impact our operations or financial
condition. We have determined that a Year 2000 system failure experienced by our
satellite and communications vendors could potentially interrupt communications
between client sites and our software development centers. This interruption
could result in loss of revenue, increased costs and project delays. We have
contacted our satellite and communications vendors in order to assess whether
they anticipate any communications failures or interruptions as a result of the
Year 2000. We have been informed that no such failures or interruptions are
presently anticipated. If, however, further analysis determines that one or more
of our satellite or communications vendors may encounter Year 2000 related
failures or interruptions, we will be required to develop a contingency plan. It
is anticipated that a contingency plan, if necessary, will be developed by the
end of 1999. We have determined that a system failure experienced by the
satellite and communication vendors could have a material effect on our results
of operations and financial condition. System failure by any other third-party
vendor would not have a material affect on our results of operations and
financial condition.
RISKS PRESENTED BY THE YEAR 2000. Many of our client engagements include
Year 2000 conversion services that are critical to the operations of our
clients' businesses. Any failure in a client's system could result in a claim
for substantial damages against us, regardless of our responsibility for such
failure.
23
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
IMRglobal is exposed to market risk from changes in interest rates and
exchange rates between the U.S. dollar and the currencies of various countries
in which we operate. IMRglobal does not engage in hedging transactions and is
not a party to any leveraged derivatives.
24
<PAGE>
IMRGLOBAL CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending material litigation.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule (SEC use only).
o The Registrant filed a report on Form 8-K on August 27, 1999 under
Item 5 disclosing restated financial statements for the pooling of
interests acquisitions of Atechysys, S.A., Fusion Systems Japan Co.
Ltd. and Orion Consulting, Inc.
o The Registrant filed a report on Form 8-K on November 15, 1999 under
Item 5 disclosing restated financial statements for the pooling of
interests acquisition of Atechsys, S.A.
o The Registrant filed a report on Form 8-K on September 10, 1999
under Item 5 disclosing updated annual business information.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMRGLOBAL CORP.
Date NOVEMBER 12, 1999 /s/ SATISH K. SANAN
-------------------- --------------------------
Satish K. Sanan
Chief Executive Officer
Date NOVEMBER 12, 1999 /s/ ROBERT M. MOLSICK
-------------------- --------------------------
Robert M. Molsick
Chief Financial Officer
26
<PAGE>
IMRGLOBAL CORP.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
27 Financial Data Schedule ................................ 28
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 58,748
<SECURITIES> 16,535
<RECEIVABLES> 44,526
<ALLOWANCES> 1,949
<INVENTORY> 0
<CURRENT-ASSETS> 158,184
<PP&E> 52,524
<DEPRECIATION> 11,157
<TOTAL-ASSETS> 353,381
<CURRENT-LIABILITIES> 63,524
<BONDS> 1,633
0
0
<COMMON> 3,855
<OTHER-SE> 276,422
<TOTAL-LIABILITY-AND-EQUITY> 353,381
<SALES> 0
<TOTAL-REVENUES> 177,000
<CGS> 0
<TOTAL-COSTS> 97,173
<OTHER-EXPENSES> 54,659
<LOSS-PROVISION> 169
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 29,015
<INCOME-TAX> 11,587
<INCOME-CONTINUING> 17,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,428
<EPS-BASIC> .50
<EPS-DILUTED> .44
</TABLE>
