SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: NOVEMBER 15, 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)
N/A
------------------------------
(Former Name or Former Address,
if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS
During 1999, IMRglobal Corp. acquired Atechsys, S.A. ("Atechsys"),
Fusion Systems Japan Co., Ltd. ("Fusion") and Orion Consulting, Inc.
("Orion") in transactions that were originally accounted for as pooling
of interests in accordance with APB Opinion 16, "Business
Combinations". In accordance with pooling of interests rules the
consolidated financial statements for all prior periods had been
restated to include the accounts of Atechsys, Fusion and Orion.
Restated financial statements for the years ended December 31, 1996,
1997, and 1998 and for the six months ended June 30, 1998 and 1999 were
included in a previous filing on Form 8-K dated August 26, 1999.
On October 22, 1999, IMRglobal announced it will change its accounting
treatment for the mergers with Fusion and Orion from the pooling of
interests method to the purchase method of accounting. The change in
accounting will be retroactive to the merger date of March 26, 1999 for
Fusion and June 15, 1999 for Orion. The factors that led to the
decision to change the accounting treatment included a determination
that certain affiliate transactions may preclude the use of the pooling
of interests accounting method and IMRglobal's Board of Directors'
authorization for a stock buy back. In addition, IMRglobal agreed to
restructure the Fusion merger from an all cash transaction to a
combination of cash and stock.
As a result of the above change in accounting treatment, IMRglobal
Corp.'s consolidated financial statements for all prior periods have
been restated to remove the accounts of Fusion and Orion. Restated
financial statements for the years ended December 31, 1996, 1997 and
1998 are attached as exhibits to and incorporated in this form 8-K.
2
<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 15, 1999 /s/ SATISH K. SANAN
-------------------------------------
Satish K. Sanan
Chief Executive Officer
Date NOVEMBER 15, 1999 /s/ ROBERT M. MOLSICK
-------------------------------------
Robert M. Molsick
Chief Financial Officer
3
<PAGE>
IMRGLOBAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young, LLP Independent Auditors ................. 2
Report of PricewaterhouseCoopers LLP Independent
Certified Public Accountants .................................... 3
Consoldated Balance Sheets as of December 31, 1997 and 1998 ........ 4
Consolidated Statements of Income for the Years Ended
December 31 1996, 1997 and 1998 ................................. 5
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998 .................... 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 ................................ 7
Notes to Consolidated Financial Statements ......................... 8
Management's Discussions and Analysis of
Financial Condition and Results of Operations .................... 40
Selected Consolidated Financial Data ............................... 54
1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
IMRglobal Corp.
We have audited the accompanying consolidated balance sheets of IMRglobal Corp.
as of December 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998, as restated for the 1999 pooling of interests
described in Note 2. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of IMRglobal Corp. as of December 31, 1997 and for the two years then
ended, prior to their restatements for the 1999 pooling of interests described
in Note 2, which statements reflect total assets of $135.4 million as of
December 31, 1997 and total revenues of $83.6 million and $27.9 million for the
years ended December 31, 1997 and 1996, respectively. Those financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for IMRglobal Corp. as of
December 31, 1997 and for the two years then ended prior to the restatement for
the 1999 pooling of interests described in Note 2, is based solely on the report
of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of IMRglobal Corp. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Tampa, Florida
August 20, 1999, except for Note 23,
as to which the date is October 25, 1999
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of IMRglobal Corp.
We have audited the consolidated balance sheet of IMRglobal Corp.
and subsidiaries (the Company) (formerly Information Management Resources, Inc.)
as of December 31, 1997, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years ended December 31,
1997 and 1996 prior to restatement for the pooling of interests transactions
discussed in Note 2 to the consolidated financial statements. 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 (not
presented herein) referred to above present fairly, in all material respects,
the consolidated financial position of IMRglobal, Inc. and subsidiaries as of
December 31, 1997, and the consolidated results of their operations and their
cash flows for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
PricewaterhouseCoopers LLP
Tampa, Florida
February 13, 1998, except for certain information
in Note 13, for which the date is March 9, 1998.
3
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 86,999 $ 78,807
Marketable securities ..................................................... 4,453 31,609
Accounts receivable ....................................................... 13,038 28,538
Unbilled work in process .................................................. 6,390 5,145
Deferred income taxes ..................................................... 1,899 14,141
Prepaid expenses and other current assets ................................. 4,706 3,592
--------- ---------
Total current assets ................................................ 117,485 161,832
Property and equipment, net of accumulated depreciation ...................... 9,963 21,416
Deposits and other assets .................................................... 1,051 3,622
Intangible assets, net of accumulated amortization ........................... 10,157 36,829
--------- ---------
Total assets ........................................................ $ 138,656 $ 223,699
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 3,389 $ 7,750
Accrued compensation ...................................................... 6,439 8,733
Deferred revenue .......................................................... 4,425 3,446
Other current liabilities ................................................. 6,255 19,120
--------- ---------
Total current liabilities ........................................... 20,508 39,049
Long-term debt ............................................................... 918 671
Deferred income taxes ........................................................ 546 1,040
Accrued compensation ......................................................... 2,322 8,046
--------- ---------
Total liabilities ................................................... 24,294 48,806
--------- ---------
Minority interest ............................................................ 4 79
--------- ---------
Shareholders' equity:
Preferred stock, $.10 par value, 10,000,000 shares authorized,
no shares issued and outstanding ....................................... -- --
Common stock, $.10 par value per share, 100,000,000 shares authorized,
26,370,052 and 30,391,786 shares issued and outstanding ................ 2,637 3,039
Additional paid-in capital ................................................ 98,700 139,800
Retained earnings ......................................................... 13,785 33,433
Notes receivable from share sales ......................................... -- (366)
Accumulated other comprehensive expense ................................... (764) (1,092)
--------- ---------
Total shareholders' equity .......................................... 114,358 174,814
--------- ---------
Total liabilities and shareholders' equity .......................... $ 138,656 $ 223,699
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue ......................................... $ 30,988 $ 89,645 $ 170,318
Cost of revenue ................................. 17,642 49,711 90,075
--------- --------- ---------
Gross profit ........................... 13,346 39,934 80,243
Selling, general and administrative ............. 8,230 20,984 34,754
Research and development ........................ -- 919 6,247
Goodwill and intangible amortization ............ 100 1,123 2,074
Acquired in-process research and development .... -- -- 8,200
Acquisition costs ............................... -- -- 145
--------- --------- ---------
Income from operations ................. 5,016 16,908 28,823
--------- --------- ---------
Other income (expense):
Interest expense ............................. (305) (175) (234)
Other income ................................. 345 1,941 4,594
--------- --------- ---------
Total other income ..................... 40 1,766 4,360
--------- --------- ---------
Income before provision
for income taxes and minority interest ....... 5,056 18,674 33,183
Provision for income taxes ...................... 1,436 6,157 13,270
--------- --------- ---------
Income before minority interest ........ 3,620 12,517 19,913
Minority interest in net income ................. (730) (48) (33)
--------- --------- ---------
Net income ............................. $ 2,890 $ 12,469 $ 19,880
========= ========= =========
Basic earnings per share ........................ $ 0.18 $ 0.50 $ 0.69
========= ========= =========
Diluted earnings per share ...................... $ 0.13 $ 0.40 $ 0.57
========= ========= =========
Shares outstanding:
Basic ........................................ 16,177 24,848 28,752
========= ========= =========
Diluted ...................................... 23,026 31,238 35,064
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPRE- COMMON STOCK ADDITIONAL
HENSIVE ------------------------- PAID-IN RETAINED
INCOME SHARES AMOUNT CAPITAL EARNINGS
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Restated balance, January 1, 1996 ......... -- 21,096 $ 2,109 $ -- $ 1,051
Common stock issued
for options exercised ................. -- 306 31 (18) --
Repurchase of common stock ............ -- -- -- -- --
Retirement of treasury stock .......... -- (6,200) (620) (822) (56)
Dividend paid ......................... -- -- -- -- (1,623)
Termination of S Corporation
tax status ........................ -- -- -- 946 (946)
Common stock issued in connection
with initial public offering ...... -- 7,228 723 39,994 --
Acquisition of majority shareholder's
interest in subsidiary ............ -- -- -- (2,500) --
Net income ............................ $ 2,890 -- -- -- 2,890
Foreign currency translation adjustment (59) -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive income .............. $ 2,831
=========
Balance, December 31, 1996 ................ -- 22,430 2,243 37,600 1,316
Common stock issued in connection
with public offering .................. -- 2,587 259 52,289 --
Common stock issued in connection
with business combinations ............ -- 173 17 1,784 --
Acquisition of majority shareholder's
interest in subsidiary ................ -- -- -- (552) --
Common stock issued in connection with
employee stock purchase plan .......... -- 108 11 658 --
Common stock issued
for options exercised ................. -- 1,072 107 152 --
Tax benefit of stock options exercised .... -- -- -- 6,769 --
Net income ................................ $ 12,469 -- -- -- 12,469
Foreign currency translation adjustment ... (650) -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive income .................. $ 11,819
=========
Balance, December 31, 1997 ................ -- 26,370 2,637 98,700 13,785
Common stock issued in connection
with business combinations ............ -- 1,184 118 19,068 (69)
Acquisition of minority shareholder's
interest in subsidiary ................ -- -- -- (135) --
Common stock issued in connection with
employee stock purchase plan ......... -- 31 3 602 --
Common stock issued
for options exercised ................. -- 2,807 281 676 --
Tax benefit of stock options exercised .... -- -- -- 20,889 --
Dividend paid ......................... -- -- -- -- (163)
Notes receivable from stock sale .......... -- -- -- -- --
Net income ................................ $ 19,880 -- -- -- 19,880
Foreign currency translation adjustment ... (269) -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive income .................. $ 19,611
=========
Balance, December 31, 1998 ................ 30,392 $ 3,039 $ 139,800 $ 33,433
========= ========= ========= =========
<CAPTION>
ACCUMULATED
OTHER
COMPRE-
HENSIVE TREASURY
OTHER EXPENSE STOCK TOTAL
--------- --------- --------- ---------
<C> <C> <C> <C>
Restated balance, January 1, 1996 ......... $ -- $ (55) $ (9) $ 3,096
Common stock issued
for options exercised ................. -- -- -- 13
Repurchase of common stock ............ -- -- (1,489) (1,489)
Retirement of treasury stock .......... -- -- 1,498 --
Dividend paid ......................... -- -- -- (1,623)
Termination of S Corporation
tax status ........................ -- -- -- --
Common stock issued in connection
with initial public offering ...... -- -- -- 40,717
Acquisition of majority shareholder's
interest in subsidiary ............ -- -- -- (2,500)
Net income ............................ -- -- -- 2,890
Foreign currency translation adjustment -- (59) -- (59)
--------- --------- --------- ---------
Comprehensive income ..............
Balance, December 31, 1996 ................ -- (114) -- 41,045
Common stock issued in connection
with public offering .................. -- -- -- 52,548
Common stock issued in connection
with business combinations ............ -- -- -- 1,801
Acquisition of majority shareholder's
interest in subsidiary ................ -- -- -- (552)
Common stock issued in connection with
employee stock purchase plan .......... -- -- -- 669
Common stock issued
for options exercised ................. -- -- -- 259
Tax benefit of stock options exercised .... -- -- -- 6,769
Net income ................................ -- -- -- 12,469
Foreign currency translation adjustment ... -- (650) -- (650)
--------- --------- --------- ---------
Comprehensive income ..................
Balance, December 31, 1997 ................ -- (764) -- 114,358
Common stock issued in connection
with business combinations ............ -- (59) -- 19,058
Acquisition of minority shareholder's
interest in subsidiary ................ -- -- -- (135)
Common stock issued in connection with
employee stock purchase plan ......... -- -- -- 605
Common stock issued
for options exercised ................. -- -- -- 957
Tax benefit of stock options exercised .... -- -- -- 20,889
Dividend paid ......................... -- -- -- (163)
Notes receivable from stock sale .......... (366) -- -- (366)
Net income ................................ -- -- -- 19,880
Foreign currency translation adjustment ... -- (269) (269)
--------- --------- --------- ---------
Comprehensive income ..................
Balance, December 31, 1998 ................ $ (366) $ (1,092) $ -- $ 174,814
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 2,890 $ 12,469 $ 19,880
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .............................. 789 4,305 5,452
Deferred income taxes ...................................... 855 (2,205) (11,651)
Tax benefit of stock options ............................... -- 6,769 20,889
Other ...................................................... (75) 80 (15)
Minority interest in net income ............................ 730 48 33
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process ........ (3,484) (8,438) (7,719)
Other current assets .................................... (1,259) (2,292) 1,292
Deposits and other assets ............................... (102) (551) (2,789)
Accounts payable and other liabilities .................. 1,813 (88) 5,468
Accrued compensation .................................... 367 7,398 8,134
Income tax .............................................. 1,059 (916) 1,709
Deferred revenue ........................................ 1,947 2,082 (1,232)
-------- -------- --------
Total adjustments ....................................... 2,640 6,192 19,571
-------- -------- --------
Net cash provided by operating activities ............... 5,530 18,661 39,451
-------- -------- --------
Cash flows from investing activities:
Acquisition of interest in consolidated subsidiary,
net of cash received ....................................... (9,968) (3,315) (8,941)
Investment in marketable securities, net ...................... (5,511) 1,191 (26,192)
Additions to capitalized software costs ....................... (302) (1,258) --
Additions to property and equipment ........................... (2,662) (7,012) (13,606)
Increase in equity investment and loans to affiliate .......... (693) -- --
Related party loans ........................................... -- 1,608 1,478
-------- -------- --------
Net cash used in investing activities ................... (19,136) (8,786) (47,261)
-------- -------- --------
Cash flows from financing activities:
Net repayments from revolving credit line ..................... (644) (954) 443
Proceeds from long-term debt and notes ........................ 938 1,181 384
Payments on notes and capital leases .......................... (2,258) (914) (2,616)
Proceeds from issuance of common stock ........................ 41,840 54,076 1,562
Payment of costs in connection with
issuance of common stock ................................... (1,110) (600) --
Purchase of treasury stock, at cost ........................... (1,489) -- --
Payment of dividends .......................................... (822) -- (163)
-------- -------- --------
Net cash provided by (used in) financing activities ..... 36,455 52,789 (390)
-------- -------- --------
Effect of exchange rate changes .................................. (27) (328) 8
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............. 22,822 62,336 (8,192)
Cash and cash equivalents at beginning of year ................... 1,841 24,663 86,999
-------- -------- --------
Cash and cash equivalents at end of year ......................... $ 24,663 $ 86,999 $ 78,807
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NAME CHANGE--On November 17, 1998, the Company changed its name from
Information Management Resources, Inc. to IMRglobal Corp.
BASIS OF REPORTING--IMRglobal Corp. and subsidiaries ("IMRglobal" or the
"Company") provide consulting and technology services to a variety of industries
and customers located primarily in North America, Europe and Asia. The
consolidated financial statements include the accounts of IMRglobal Corp., its
wholly owned subsidiaries and its controlled foreign subsidiary. All significant
intercompany balances and transactions have been eliminated.
The Company's consolidated financial statements had previously been
restated to include the financial statements of Atechsys, S.A., Fusion System
Japan Co., Ltd. and Orion Consulting, Inc. These companies were combined during
1999 in transactions previously accounted for as pooling of interests.
The consolidated financial statements for all periods have been restated
as a result of the change in accounting treatment for the Company's mergers with
Fusion System Japan Co., Ltd. and Orion Consulting, Inc. from the pooling of
interests method to the purchase method of accounting. Accordingly, these
financial statements include the financial statements of Atechsys, S.A. This
company was combined during 1999 in a transaction accounted for as pooling of
interests.
CASH AND CASH EQUIVALENTS--IMRglobal considers all highly liquid
investments with original maturity dates of three months or less to be cash
equivalents. IMRglobal maintains its investments at high quality financial
institutions.
MARKETABLE SECURITIES--All marketable securities are classified as
available-for-sale and are available to support current operations or to take
advantage of other investment opportunities. These securities are stated at
estimated fair value based upon market quotations.
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 are accrued currently. Service
revenue from time-and-materials services is recognized as the services are
provided.
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 contracts.
8
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
GOODWILL--Goodwill originated from the acquisition of certain
subsidiaries, and is being amortized on a straight-line basis over a 10 to 20
year period. IMRglobal periodically reviews the value of its goodwill to
determine if an impairment has occurred. IMRglobal 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 is stated at cost less
accumulated depreciation. Depreciation is primarily computed using the
straight-line method and is charged to income over the estimated useful lives of
the respective assets.
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 included in cost of revenue and 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 of capitalized software costs was approximately $131,000, $1.9
million and $47,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
INCOME TAXES--Prior to November 1996, IMRglobal 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, the S
Corporation election was terminated on November 11, 1996. Subsequent to the
termination of the S Corporation election, IMRglobal became subject to U.S.
federal and state income taxes as C Corporations.
IMRglobal uses 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 of 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 11.)
FOREIGN CURRENCY TRANSLATION--The financial statements of IMRglobal's
foreign subsidiaries use a functional currency which is other than the U.S.
dollar and are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standard 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 rates in effect
during the year. The resulting translation adjustments are not included in
determining net income but are included in accumulated other comprehensive
income. Foreign currency transaction gains and losses are reported in net income
but are not material to any period presented.
9
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPUTATION OF EARNINGS PER SHARE--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>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Weighted average
common stock outstanding ............. 16,177 24,848 28,752
Stock option plans
Shares under option
at end of period .................. 11,438 10,756 10,073
Treasury shares which could
be purchased ...................... (4,589) (4,366) (3,761)
------- ------- -------
Weighted average
common stock equivalents ............. 6,849 6,390 6,312
------- ------- -------
Shares used in diluted earnings
per share calculation ................ 23,026 31,238 35,064
======= ======= =======
</TABLE>
Shares used in the diluted earnings per share calculation have been
restated to reflect the income tax benefit which could be used to purchase
additional treasury shares. This restatement has resulted in a decrease in
shares of 4.2 million, 3.9 million and 3.2 million, and an increase in diluted
earnings per share of $0.02, $0.04 and $0.05, for the years ended December 31,
1996, 1997 and 1998, respectively.
STOCK BASED COMPENSATION--IMRglobal follows the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25), for stock issued under its stock option plans (See Note 13).
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME--During 1998, IMRglobal adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income."
Comprehensive income is comprised solely of foreign currency translation
adjustments. Foreign currency translation adjustments have not been tax effected
because IMRglobal considers foreign earnings to be indefinitely reinvested.
10
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS--During June, 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133), which is effective for IMRglobal on January 1, 2001. This
statement establishes measurement and disclosure criteria for certain derivative
and hedging instruments including foreign exchange forward contracts. Management
is currently assessing the future impact of SFAS No. 133 on IMRglobal's
financial statements.
2. BUSINESS COMBINATIONS:
For all business combinations accounted for as purchases pursuant to
Accounting Principles Board Opinion No. 16, "Business Combinations" (APB Opinion
No. 16), IMRglobal's financial statements include the results of operations for
the acquired businesses from the date of acquisition. For all material business
combinations accounted for as poolings of interests pursuant to APB Opinion No.
16, IMRglobal's financial statements have been restated to include the results
of operations for all periods presented.
IMRGLOBAL LTD. ("IMRGLOBAL-INDIA")--At December 31, 1995, IMRglobal
owned 34.2% of IMRglobal-India, an Indian Limited Liability Company. During
1996, 1997 and 1998, IMRglobal purchased an additional 46.9% of
IMRglobal-India's outstanding common shares for approximately $7.6 million in
cash in several transactions. These acquisitions are accounted for as purchases
pursuant to the provisions of APB Opinion No. 16 and resulting goodwill is being
amortized over a 10-year period. In addition, during November 1996, IMRglobal
acquired an additional 18.4% of IMRglobal-India from IMRglobal's majority
shareholder for approximately $3.1 million in cash. The acquisition from
IMRglobal's majority shareholder is accounted for as a reduction of equity. As a
result of the acquisitions noted above, IMRglobal owns 99.5% of the outstanding
common shares of IMR-India at December 31, 1998.
IMRglobal accounts for its investment in IMRglobal-India utilizing the
consolidation method for all periods presented, because effective control had
been maintained through the continued direct financial interests in
IMRglobal-India held by IMRglobal's majority shareholder.
LINK GROUP HOLDINGS LIMITED AND INFORMATION MANAGEMENT RESOURCES (U.K.)
LIMITED ("IMRglobal-U.K.")--On February 10, 1997 (effective January 8, 1997),
IMRglobal 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 IMRglobal and his spouse. In exchange for Link's common stock,
Link's shareholders received $2.1 million in cash and 161,343 shares (valued at
$1.6 million) of IMRglobal's common stock. In addition, a $1.6 million deferred
cash payment was made 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 the resulting goodwill is being amortized over a 10-year
period.
11
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED):
Coincident with the above acquisition, IMRglobal also acquired 10.5% of
Information Management Resources (U.K.) Limited ("IMRglobal-Ltd."), a United
Kingdom Limited Liability Company, from IMRglobal's majority shareholder and his
spouse for $520,000 in cash. The purchase price was determined through
negotiations between IMRglobal and the shareholder and his spouse. The
acquisition from IMRglobal's majority shareholder is accounted for as a
reduction of equity.
Prior to the above acquisitions, IMRglobal owned 39.5% of IMRglobal-Ltd.
and Link owned 50% of IMRglobal-Ltd. After the above acquisitions IMRglobal
effectively owns 100% of both Link and IMR-Ltd. The operations of Link and
IMRglobal-Ltd. have been merged and the operating company was renamed IMRglobal,
plc ("IMRglobal-U.K.").
IMRGLOBAL (NORTHERN IRELAND) LIMITED--During June 1997, IMRglobal began
operations in Belfast, Northern Ireland and acquired certain assets in exchange
for $270,000 cash and 11,250 shares of IMRglobal's stock. The acquisition was
accounted for as a purchase pursuant to the provisions of APB Opinion No. 16 and
the resulting goodwill is being amortized over a 10-year period.
LYON CONSULTANTS, S.A.--During May, 1998, IMRglobal acquired 100% of the
outstanding stock of Lyon Consultants, S.A. ("Lyon"), a privately held software
engineering company headquartered in Paris, France. Lyon specializes in rapid
software application development utilizing reusable business and technical
software objects, and information technology consulting. In exchange for Lyon's
common stock, Lyon's shareholders received $16.7 million in cash and 531,353
shares (valued at $13.0 million) of IMRglobal's unregistered common stock. Of
the above purchase price, $700,000 of cash and 32,000 shares of IMRglobal's
common stock were remitted one year after the acquisition date. In addition,
IMRglobal may have to make an additional payment to the former stockholders of
Lyon (see Note 17). These amounts are included in the determination of the
purchase price. The Lyon acquisition is accounted for as a purchase pursuant to
the provisions of APB Opinion No. 16 and the resulting goodwill is being
amortized over a 20- year period.
IMRglobal allocated the purchase price of Lyon based on the fair value
of the assets acquired and liabilities assumed. Significant portions of the
purchase price were identified as intangible assets in independent appraisals,
using proven valuation procedures and techniques. These intangible assets
include approximately $8.2 million for acquired in-process research and
development ("IPRD") for projects that did not have future alternative uses and
$2.7 million for developed technology. This allocation represents the estimated
fair value based on risk-adjusted cash flows related to the acquired in-process
research and development projects that give explicit consideration to the SEC
Staff's views on in-process research and development as set forth in the
September 15, 1998 letter to the American Institute of Certified Public
Accountants. At the date of the acquisition the development of the IPRD projects
had not yet reached technological feasibility and the IPRD in progress had no
alternative future use. Accordingly, these costs were expensed as of the
acquisition date. The acquired developed technology is being amortized over a 5-
year period.
12
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED):
Concurrent with the acquisition of Lyon, IMRglobal entered into a
noncancellable 3 year licensing agreement with a seven year renewal option, with
Wyde S.A. ("Wyde"), an unrelated French company. Wyde provides the base
technology upon which the Lyon components have been developed. The licensing
agreement provides for the transfer of Wyde's computer code and technology to
IMRglobal if Wyde should terminate its business. The amount of the licensing
fees is dependent on the value of company work sold and the countries where the
technology is utilized. Future minimum licensing fees payable to Wyde are
$400,000 in 1999 and 2000.
RHO TRANSFORMATIONAL TECHNOLOGIES PTY LIMITED--During June, 1998,
IMRglobal acquired 100% of the outstanding shares of RHO Transformational
Technologies Pty Limited ("RHO"), a privately held software services and
engineering company headquartered in Sydney, Australia. RHO specializes in
software application conversion and maintenance services, utilizing proprietary
tools and provides these services to large global companies with Australian and
Asia Pacific operations. In exchange for RHO's common stock, RHO stockholders
received 285,000 shares of IMRglobal's common stock. The RHO acquisition is
being accounted for as a pooling of interests in accordance with the provisions
of APB Opinion No. 16. Costs of approximately $145,000 related to the
acquisition have been charged to acquisition costs and included in the statement
of income.
The financial statements for 1996 and 1997 have not been restated for
the RHO acquisition due to the immateriality of this transaction. The impact was
a reduction to the 1998 opening retained earnings and comprehensive income of
$69,000 and $59,000, respectively. These amounts are included in common stock
issued in connection with business combinations.
VISUAL SYSTEMS DEVELOPMENT CORPORATION--On October 2, 1998, IMRglobal
acquired 100% of the outstanding shares of Visual Systems Development
Corporation ("Visual"). In exchange for Visual's common stock, Visual's
shareholders received $5.5 million in cash and 400,000 shares (valued at
approximately $7 million) of IMRglobal's common stock. In addition, $3.5 million
of IMRglobal's unregistered common stock are payable if certain specified
business and financial objectives are achieved. Any contingent payment would
result in an increase in the purchase price and the resulting goodwill. The
Visual acquisition is accounted for as a purchase pursuant to the provisions of
APB Opinion No. 16 and the resulting goodwill is being amortized over a 20-year
period.
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.
13
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED):
IMRglobal has also purchased certain assets in the expansion of its
technology expertise and the expansion of its sales office infrastructure.
The Atechsys transaction has been accounted for as a pooling of
interests and accordingly, the consolidated financial statements for the periods
presented have been restated to include the accounts of Atechsys. Results of
operations for the periods prior to the merger with Atechsys are summarized
below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
IMRglobal .................................... $ 27,948 $ 83,550 $ 158,252
Adjustment for pooling of interests .......... 3,040 6,095 12,066
--------- --------- ---------
Combined ............................ $ 30,988 $ 89,645 $ 170,318
========= ========= =========
Net income:
IMRglobal .................................... $ 2,588 $ 11,895 $ 18,909
Adjustment for pooling of interests .......... 302 574 971
--------- --------- ---------
Combined ............................ $ 2,890 $ 12,469 $ 19,880
========= ========= =========
Other changes in shareholders' equity:
IMRglobal .................................... $ 35,059 $ 60,956 $ 40,616
Adjustment for pooling of interests .......... -- (112) (40)
--------- --------- ---------
Combined ............................ $ 35,059 $ 60,844 $ 40,576
========= ========= =========
</TABLE>
14
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MARKETABLE SECURITIES:
IMRglobal currently invests only in 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 1998. 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, 1996, 1997 and 1998.
The following table presents the estimated fair value of marketable
securities by category (in thousands):
1997 1998
------- -------
Bankers' acceptance ............... $ -- $10,157
Commercial paper .................. -- 21,452
Municipal debt securities ......... 4,453 --
------- -------
$ 4,453 $31,609
======= =======
The estimated fair value of marketable securities at December 31, 1998
was $23.0 million due in one year or less and $8.6 million due in one to three
years.
4. ACCOUNTS RECEIVABLE (IN THOUSANDS):
1997 1998
------- -------
Accounts receivable, trade......... $12,940 $24,545
Unbilled accounts receivable-
Time-and-materials contracts..... 98 4,281
Reserve for doubtful accounts...... -- (288)
------- -------
$13,038 $28,538
======= =======
During 1998, IMRglobal established a reserve for doubtful accounts in
the amount of $288,000 with a corresponding charge to income.
15
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COSTS AND ESTIMATED EARNINGS ON COMPLETED AND UNCOMPLETED CONTRACTS
(IN THOUSANDS):
1997 1998
-------- --------
Costs incurred on completed
and uncompleted contracts ......... $ 31,649 $ 31,965
Estimated earnings ................... 16,102 28,514
-------- --------
47,751 60,479
Less billings to date ................ (45,786) (58,780)
-------- --------
$ 1,965 $ 1,699
======== ========
The following is included in the accompanying balance sheets:
1997 1998
-------- --------
Unbilled work in process.............. $ 6,390 $ 5,145
Deferred revenue...................... (4,425) (3,446)
-------- --------
$ 1,965 $ 1,699
======== ========
16
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment at December 31,
1997 and 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
(YEARS) 1997 1998
------- ------- -------
<S> <C> <C> <C>
Land ................................... -- $ -- $ 1,355
Buildings and improvements ............. 10-40 2,729 3,596
Computer equipment ..................... 3- 6 4,757 7,353
Computer software ...................... 3-10 1,812 5,141
Office furniture and equipment ......... 3-12 2,673 4,774
Vehicles ............................... 3-20 124 2,088
Construction in progress ............... 1,652 4,224
------- ------- -------
13,747 28,531
Less accumulated depreciation
and amortization..................... (3,784) (7,115)
------- -------
$ 9,963 $21,416
======= =======
</TABLE>
Depreciation of property and equipment was approximately $560,000, $1.2
million and $3.3 million for the years ended December 31, 1996, 1997 and 1998,
respectively.
7. INTANGIBLE ASSETS (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Goodwill................................ $11,517 $37,863
Acquired technology..................... -- 2,400
Accumulated amortization................ (1,360) (3,434)
------- -------
$10,157 $36,829
======= =======
</TABLE>
17
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER CURRENT LIABILITIES (IN THOUSANDS):
1997 1998
------- -------
Accrued costs on Year 2000 contracts ......... $ -- $ 5,116
Payroll taxes and value added taxes .......... 1,931 3,937
Income taxes ................................. 900 3,524
Deferred income taxes ........................ 40 464
Deferred payments-acquisitions ............... 1,608 1,478
Employee savings plans ....................... 199 724
Revolving credit loan ........................ -- 443
Current portion of long-term debt ............ 295 107
Other ........................................ 1,282 3,327
------- -------
$ 6,255 $19,120
======= =======
During 1998, IMRglobal accrued $5.1 million related to completed Year
2000 projects. IMRglobal is liable to remediate selected issues which arise in
completed projects. Management has committed to clients that personnel will be
available to remediate Year 2000 issues that arise in late 1999 and early 2000.
To accomplish this goal, IMRglobal has committed specific personnel to work on
completed Year 2000 projects. As of December 31, 1998, no claims have been
asserted. IMRglobal has accrued the amount of costs it has committed to incur
based on the complexity of the Year 2000 projects completed and experience level
of personnel required.
9. RELATED PARTIES:
During 1998, IMRglobal advanced $366,000 to three officers. These
officers utilized the proceeds to acquire common stock of IMRglobal. These loans
are secured by the IMRglobal common stock investment, and are repayable in 2003
or upon the officer's termination of employment with IMRglobal. These loans bear
interest at 9.5% which is added to the principal portion of the note. At
December 31, 1998, the loan receivable balance was $385,000, including $19,000
of accrued interest.
At December 31, 1997, other current liabilities include $1.6 million
due to a member of IMRglobal'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.
18
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTIES (CONTINUED):
At December 31, 1996, IMRglobal had outstanding notes payable to
shareholders of $814,000 in connection with the S Corporation termination (See
Note 13). 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, 1996 and 1997 was $19,000 and $12,000, respectively.
Prior to the IMRglobal-U.K. acquisition, IMRglobal-India provided
software development services to IMRglobal-Ltd. at market rates. During the year
ended December 31, 1996, IMRglobal recognized revenues from IMRglobal-Ltd. of
approximately $877,000.
At December 31, 1996, IMRglobal had two notes receivable from
IMRglobal-Ltd. totaling $692,500, which resulted from cash advances. During
1996, IMRglobal recognized approximately $35,000 of interest income on these
notes. As a result of the 1997 IMRglobal-U.K. acquisition, these intercompany
notes are eliminated in the consolidated financial statements.
Cash flows from financing activities included payments on notes
payable-shareholders of approximately $350,000 and $814,000 for the years ended
December 31, 1996 and 1997.
10. CREDIT FACILITIES:
REVOLVING CREDIT FACILITIES
IMRglobal maintains an uncollateralized $10.0 million revolving credit
facility which allows IMRglobal to borrow up to 80% of the book value of U.S.
accounts receivable. Interest is at LIBOR plus 1% (currently 6.3%). No
borrowings have been made under this facility.
Certain subsidiaries of IMRglobal maintain additional revolving credit
line arrangements. Interest rates are based on the lending institution's prime
rate (ranging from 6.5% to 9.0% at December 31, 1998). At December 31, 1997 and
1998, the amount outstanding on these credit facilities was $0 and $443,000,
respectively. The maximum amount available under these facilities at December
31, 1998 was approximately $3.9 million. The respective subsidiaries accounts
receivable and certain property and equipment collateralize these facilities.
19
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CREDIT FACILITIES (CONTINUED):
LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1998 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
France:
Loans from French government agencies
at 0% interest payable in annual installments
commencing March 1999 through March 2002;
collateralized by property and equipment ..................... $ 33 $ 778
India:
Loan payable with interest at LIBOR plus 3.0%
(8.9% at December 31, 1997), principal repayable
in eight equal semiannual installments of $148
commencing February 1998, collateralized by property
and equipment (balance prepaid during 1998) .................. 1,180 --
------ ------
1,213 778
Less current portion............................................. 295 107
------ ------
Long-term debt, net of current portion........................... $ 918 $ 671
====== ======
Maturities of long-term debt at December 31, 1998 are as follows (in thousands):
2000.......................................................... $ 210
2001.......................................................... 192
2002.......................................................... 269
------
$ 671
======
</TABLE>
At December 31, 1998, IMRglobal was in compliance with financial
covenants of the credit and debt facilities described above.
20
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES:
The provision (benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal ............................................. $ 412 $ 6,378 $ 16,073
State (net of federal tax benefit) .................. 66 911 1,379
Foreign ............................................. 103 1,073 2,853
-------- -------- --------
Total current provision for income taxes ......... 581 8,362 20,305
Deferred:
Federal ............................................. 735 (1,920) (5,445)
State (net of federal tax benefit) .................. 118 (275) (467)
Foreign ............................................. 2 (10) (1,123)
-------- -------- --------
Total deferred provisions (benefit)
for income taxes .............................. 855 (2,205) (7,035)
-------- -------- --------
Total provision for income taxes ................. $ 1,436 $ 6,157 $ 13,270
======== ======== ========
</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 IMRglobal's financial statement and the tax bases of certain
assets and liabilities became liabilities of IMRglobal. 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, IMRglobal elected to pay this
nonrecurring expense over a four year period beginning in 1996.
The components of the net deferred tax asset (liability) are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
Deferred tax assets:
<S> <C> <C>
Accrued compensation ................................ $ 1,579 $ 5,087
Accrued costs on Year 2000 contracts................. -- 2,102
Net operating loss .................................. 625 5,375
Research and development tax credit.................. -- 1,759
Other ............................................... 10 459
-------- --------
Total deferred tax assets ........................ 2,214 14,782
</TABLE>
21
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Cash to accrual conversion ................... (500) (238)
Intangibles .................................. -- (750)
Foreign ...................................... (40) (460)
Other ........................................ (46) (247)
-------- --------
Total deferred tax liabilities ......... (586) (1,695)
-------- --------
Net deferred tax asset before
valuation allowance .......................... 1,628 13,087
Valuation allowance - foreign ................... (315) (450)
-------- --------
Deferred tax asset
net of valuation allowance ................... $ 1,313 $ 12,637
======== ========
</TABLE>
The balance sheet classification of the net deferred tax asset is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax asset - current ................... $ 1,899 $ 14,141
Deferred tax liability - current................. (40) (464)
Deferred tax liability - noncurrent ............. (546) (1,040)
-------- --------
$ 1,313 $ 12,637
======== ========
</TABLE>
As reflected above, as of December 31, 1997 and 1998, IMRglobal has
recorded a valuation allowance of approximately $315,000 and $450,000,
respectively, against the deferred tax asset related to net operating losses and
non deductible accruals and reserves of a foreign subsidiary.
22
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED):
As of December 31, 1998, IMRglobal had approximately $13 million of net
operating loss carryforwards for regular income tax purposes which will expire
between 2012 and 2013. The net operating loss primarily resulted from the
benefits realized upon stock option exercises.
During the years ended December 31, 1997 and 1998, various
non-statutory stock options were exercised resulting in tax benefits of
approximately $6.8 million and $20.9 million, respectively, which were directly
credited to shareholders' equity.
Under the Indian Income Tax Act of 1961 (the "Act"), a substantial
portion of IMRglobal-India's income is exempt from Indian Income Tax as profits
attributable to export operations or a tax holiday expiring in 2007. Under the
Act, there are certain alternative minimum tax provisions which impose tax on
net profits at a rate of 10.5%. Management has determined that these provisions
are not currently applicable due to the tax holiday. Accordingly, the effective
tax rate imposed on IMRglobal-India's income is substantially less than the
current statutory rate of 35%.
Undistributed earnings of IMRglobal's foreign subsidiaries amounted to
approximately $22 million at December 31, 1998. These earnings are considered to
be indefinitely reinvested and, accordingly, no provision for United States
federal and state income taxes has been provided thereon. On remittance, certain
countries impose withholding taxes that, subject to certain limitations, are
then available for use as tax credits against a U.S. tax liability, if any.
Determination of the amount of unrecognized deferred United States income tax
liability or foreign tax withholding is not practicable because of the
complexities associated with its hypothetical calculation.
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 34% in 1996 and 35% in 1997 and 1998 to the income before income
taxes and minority interest (in thousands).
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Statutory tax provision .......................... $ 1,718 $ 6,536 $11,604
State taxes, net of federal benefit .............. 34 737 897
U.S. S Corporation income not subject to
federal income taxes .......................... (989) -- --
Foreign and U.S. tax effects
attributable to foreign operations ............ (311) (1,607) 515
Termination of S Corporation status .............. 1,075 -- --
Increase in valuation allowance .................. -- 315 135
Other net ........................................ (91) 176 119
------- ------- -------
Total provision for income taxes ........... $ 1,436 $ 6,157 $13,270
======= ======= =======
</TABLE>
23
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LEASES:
IMRglobal leases office facilities and certain residential premises for
employees under noncancellable operating lease agreements. Rental expense under
these leases was approximately $660,000, $1.2 million, and $2.3 million during
1996, 1997 and 1998, respectively. Future minimum lease payments as of December
31, 1998 for leases with noncancellable terms in excess of one year are
approximately as follows (in thousands):
1999..................................... $ 2,768
2000..................................... 1,974
2001..................................... 1,754
2002..................................... 1,631
2003..................................... 1,152
Thereafter............................... 5,050
--------
Total minimum payments.......... $ 14,329
========
13. SHAREHOLDERS' EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS:
On September 12, 1996, IMRglobal 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 IMRglobal'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 IMRglobal's
S corporation election (see Note 1), IMRglobal's remaining retained earnings
were transferred to additional paid-in capital. Also, a cash dividend of $1.6
million was paid to the shareholders of the S Corporation as a final
distribution of Subchapter S earnings.
During November 1996, IMRglobal 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. IMRglobal's
common stock commenced trading on the Nasdaq National Market on November 8,
1996.
24
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
On March 9, 1998 and June 17, 1997, IMRglobal declared 3-for-2 stock
splits in the form of stock dividends payable on April 3, 1998 and July 10,
1997, respectively, to shareholders of record on March 20, 1998 and June 26,
1997, respectively. All applicable share and per share amounts in the
accompanying financial statements have been retroactively adjusted.
During July 1997, IMRglobal completed a 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.
On May 29, 1998, the shareholders approved (i) an amendment of
IMRglobal's Amended and Restated Articles of Incorporation to increase the
number of shares of IMRglobal's Common Stock authorized for issuance from
40,000,000 to 100,000,000 shares and (ii) an increase in the number of shares of
Common Stock available for grant under IMRglobal's Stock Incentive Plan from
12,253,455 to 16,003,455 shares.
EMPLOYEE STOCK OPTION PLAN--IMRglobal has granted certain employees
non-qualified stock options 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 employees the right to purchase common stock at an
exercise price at least equal to the fair market value of the stock at the date
of the option's grant. 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,
IMRglobal 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 of 22,500 shares for each two year period they
serve on the Board. The options 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, 1998, 225,000 options are
available for future grants and 112,500 options are outstanding, of which 67,500
are exercisable.
25
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
STOCK OPTION DISCLOSURES--IMRglobal applies APB Opinion No. 25 and
related interpretations in accounting for stock options. Accordingly, no
compensation cost has been recognized in connection with the issuance of these
options. Had compensation cost for IMRglobal's stock option 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 No. 123, IMRglobal's net income and
earnings per share for the year ended December 31, 1996, 1997 and 1998 would
have been reduced to the adjusted amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Net income (in thousands):
As reported ...................... $ 2,890 $ 12,469 $ 19,880
As adjusted (unaudited) .......... $ 2,387 $ 11,142 $ 14,152
Diluted earnings per share:
As reported ...................... $ 0.13 $ 0.40 $ 0.57
As adjusted (unaudited) .......... $ 0.10 $ 0.36 $ 0.40
</TABLE>
The pro forma disclosures are not likely to be representative of the
effects on reported net income for future years.
The estimated per share fair value of options granted during 1996, 1997
and 1998 was $0.31, $12.46 and $17.12, respectively. The fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
in 1996, 1997 and 1998, respectively: no dividend yield for each year presented;
risk-free interest rates of 5.9%, 6.0% and 5.3%; expected lives of the options
prior to exercise of 10.4, 6.5 and 5.0 years. For options granted prior to
IMRglobal'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
and 1998 option grants, a volatility measure of 85% and 80%, respectively, was
employed.
26
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
A summary of the status of IMRglobal's stock option plan as of December
31, 1996, 1997 and 1998, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------------- -------------------------------- --------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------- ----------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,962,262 $ 0.05 11,632,657 $ 0.46 12,545,095 $ 1.31
Granted 7,265,250 $ 0.66 2,015,700 $ 16.12 1,279,450 $ 25.28
Exercised (306,382) $ 0.05 (1,071,748) $ 0.25 (2,804,291) $ 0.34
Cancelled (288,473) $ 0.05 (31,514) $ 2.25 (215,440) $ 16.50
----------- -------- ----------- --------- ----------- ---------
Outstanding at
end of year 11,632,657 12,545,095 10,804,814
=========== =========== ===========
Options exercisable
at year-end 10,240,673 9,541,970 7,375,447
=========== =========== ===========
</TABLE>
27
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
The following table summarizes certain information about stock options
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICES AT 12/31/98 EXERCISE PRICES
----------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
7,445,929 7.5 years $ 0.05-2.25 6,881,640 $ 0.05-2.25
310,500 7.8 years $ 4.45-6.22 162,000 $ 4.45-6.22
108,000 8.2 years $ 5.05 21,600 $ 5.05
7,875 8.1 years $ 8.45 1,350 $ 8.45
775,310 8 years $ 11.85-15.08 141,627 $ 11.85-15.08
1,129,700 8.8 years $ 18.25-18.75 164,980 $ 18.25-18.75
285,000 9.2 years $ 20.06-22.93 2,250 $ 20.06-22.93
555,000 9.5 years $ 24.06-31.75 -- $ 24.06-31.75
187,500 9.8 years $ 34.38-37.17 -- $ 34.38-37.17
---------- ----------
10,804,814 7,375,447
========== ==========
</TABLE>
As of December 31, 1998, options to purchase 1,587,718 shares of Common
Stock were available for future grants.
EMPLOYEE STOCK PURCHASE PLAN--IMRglobal's Employee Stock Purchase Plan
(the "Stock Purchase Plan") became effective on October 1, 1996. A total of
450,000 shares of IMRglobal'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 IMRglobal 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.
28
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SHAREHOLDERS' EQUITY, STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED):
IMRGLOBAL-INDIA STOCK OPTION PLAN--IMRglobal-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 vest upon completion of five years of continuous
employment with IMRglobal-India or its affiliates. Vested options are valid for
exercise during the employees' employment with IMRglobal-India or its affiliates
and for a period of six months thereafter. Options that are not exercised within
six months of cessation of employment expire.
A summary of the status of IMRglobal-India's stock option plan is as
follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
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
Exercised .......................... (8,220) $ 0.23
Canceled ........................... (9,325) $ (0.23)
---------
Balance, December 31, 1998 ......... 2,455 $0.23-$22.82
========= ============
At December 31, 1997 and 1998, exercisable options were 6,400 and 0,
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, 1996, 1997
and 1998 was less than $3,000 annually. Under IMRglobal-India's policy, options
granted subsequent to September 6, 1996 are granted at an exercise price equal
to the fair market value of the common shares of IMRglobal-India at the time of
the grant. During 1998, management decided not to issue any additional shares
under this plan.
29
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS:
Defined contribution plans cover employees in the United States and
certain other countries, including Australia, France and India. Employees may
contribute to these plans and IMRglobal matches these contributions in varying
amounts. Defined contribution pension expense for the years ended December 31,
1996, 1997 and 1998 was $130,000, $327,000 and $1.3 million, respectively.
During 1998, IMRglobal established a deferred compensation plan which
allows certain U.S. employees to defer portions of their annual compensation.
These assets are placed in a "rabbi trust" and are presented as assets of
IMRglobal as they are available to the general creditors of IMRglobal in the
event of the IMRglobal's insolvency. The value of the assets at December 31,
1998 was $2.8 million and is included in other assets. The related liability is
included in accrued compensation. The assets are invested in variable life
insurance products. At December 31, 1998 book value approximated fair value.
15. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject IMRglobal to
concentration of credit risk consist principally of cash and cash equivalents,
marketable securities and trade receivables. IMRglobal maintains its cash with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. IMRglobal 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 IMRglobal's customer base across different
industries and geographies. IMRglobal's two largest customers accounted for
approximately 36%, 16% and 15% of revenue for the years ended December 31, 1996,
1997 and 1998, respectively, and 11% and 4% of accounts receivable as of
December 31, 1997 and 1998, respectively. No other customer accounted for 10% of
revenue or accounts receivable for the above periods.
30
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. OTHER INCOME (IN THOUSANDS):
1996 1997 1998
------- ------- -------
Investment income ................. $ 201 $ 2,014 $ 4,585
Income (loss) in equity investment 83 -- --
Other income (expense) ............ 61 (73) 9
------- ------- -------
$ 345 $ 1,941 $ 4,594
======= ======= =======
17. COMMITMENTS AND CONTINGENCIES:
During June 1998, IMRglobal purchased land for the construction of new
facilities for its corporate headquarters. The land and commitments for the
construction of the first two buildings on the site are expected to cost
approximately $28 million, of which approximately $4.2 million has been expended
at December 31, 1998.
IMRglobal 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 defenses and/or provided adequate accruals for
related costs such that the ultimate outcome will not have a material adverse
effect on IMRglobal's future financial position.
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 2). 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 10, 1999 was $18.768
per share. Accordingly, the liability to the former shareholders of Lyon would
have been approximately $4.2 million at that date.
Subsequent to May 10, 1999, IMRglobal renegotiated this 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. Conversely, if the price
of 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 to IMRglobal.
31
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (CONTINUED):
IMRglobal's French subsidiary has claimed a special tax exemption for
the 1993 through 1995 fiscal years. The French taxing authorities have
challenged this exemption and have made an assessment of approximately $500,000.
Ongoing discussions are being held between IMRglobal's French management and the
French taxing authorities regarding this issue. The amount of assessment,
$500,000 is included as a liability in the accompanying financial statements.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -------
<S> <C> <C> <C>
Cash paid during the year for interest .... $ 310 $ 135 $ 223
============ =========== =======
Cash paid during the year for income taxes $ 175 $ 1,664 $ 1,726
============ =========== =======
Noncash investing and financing activities:
Notes payable-shareholders issued in
lieu of dividend .................... $ 801 $ -- $ --
============ =========== =======
Common stock issued in connection
with acquisition of subsidiaries .... $ -- $ 1,801 $19,186
============ =========== =======
Deferred payments for acquisition
of subsidiaries ..................... $ -- $ 1,608 $ 1,478
============ =========== =======
</TABLE>
32
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT INFORMATION (IN THOUSANDS):
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
Revenue by service offering:
Core service offerings ........... $ 19,425 $ 35,543 $ 66,930
Year 2000 ........................ 7,487 44,479 77,217
Professional services ............ 4,076 9,623 26,171
--------- --------- ---------
Total revenue .............. $ 30,988 $ 89,645 $ 170,318
========= ========= =========
Revenue by geography:
North America .................... $ 27,230 $ 63,059 $ 117,718
Europe ........................... 3,040 24,273 44,585
Asia Pacific ..................... 718 2,313 8,015
--------- --------- ---------
Total revenue .............. $ 30,988 $ 89,645 $ 170,318
========= ========= =========
Income from operations:
Sales organizations:
North America .............. $ 3,468 $ 12,335 $ 28,960
Europe ..................... 333 1,429 6,561
Asia Pacific ............... -- 134 1,839
Software Development Centers... 1,315 5,052 8,129
--------- --------- ---------
Income from operations -
sales and development
centers ............. 5,116 18,950 45,489
Research and development ... -- (919) (6,247)
Goodwill amortization ...... (100) (1,123) (2,074)
Other costs ................ -- -- (8,345)
--------- --------- ---------
Income from operations ........ $ 5,016 $ 16,908 $ 28,823
========= ========= =========
33
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT INFORMATION (IN THOUSANDS) (CONTINUED):
AS OF DECEMBER 31,
----------------------
1997 1998
--------- ---------
Identifiable assets:
Sales organizations:
North America .................. $ 128,348 $ 205,334
Europe ......................... 10,556 30,334
Asia Pacific ................... 633 4,108
Software Development Centers:
India .......................... 13,519 22,247
Northern Ireland ............... 2,663 2,565
Eliminations ...................... (17,063) (40,889)
--------- ---------
Total assets ................... $ 138,656 $ 223,699
========= =========
IMRglobal is engaged in one business segment. The sales organizations
provide consulting and technology services to large companies in North America,
Europe and Asia. Software Development Centers consist of two Indian facilities
and one Northern Ireland facility that provide software development services to
the sales organizations. Intercompany sales between geographical areas are
accounted for at prices representative of unaffiliated party transactions and
are eliminated in consolidation.
The chief operating decision makers of IMRglobal review revenue by
geography and service offering. Operating results and other financial measures
are reviewed on a consolidated basis, as regional managers have discretion in
allocating resources among service offerings and due to the significant amount
of intercompany transactions across all geographic regions. Operating results by
geography include charges for sales, general and administrative expenses.
34
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. ACQUISITIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
During 1998, IMRglobal completed two acquisitions using the purchase
method of accounting (See Note 2). The following unaudited table compares
IMRglobal's reported operating results to pro forma information prepared on the
basis that the acquisitions had taken place at the beginning of the fiscal year
for each of the periods presented (in thousands except per share amounts):
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
As reported:
Revenue .................. $ 89,645 $ 170,318
Net income ............... $ 12,469 $ 19,880
Basic earnings per share . $ 0.50 $ 0.69
Diluted earnings per share $ 0.40 $ 0.57
Pro forma (unaudited):
Revenue .................. $ 120,436 $ 187,079
Pro forma net income ..... $ 15,190 $ 20,772
Pro forma basic earnings
per share ............. $ 0.58 $ 0.71
Pro forma diluted earnings
per share ............. $ 0.47 $ 0.58
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 1996, 1997 or 1998 or of
future operations of the combined companies under the ownership and management
of IMRglobal.
35
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED):
The following quarterly information is unaudited and has been restated
to give effect to the acquisition of Atechsys which was accounted for using the
pooling of interests method.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
- ----
Revenue .................................................. $ 15,432 $ 20,092 $ 24,683 $ 29,438
Gross profit ............................................. 6,644 8,930 11,067 13,293
Income from operations ................................... 2,262 3,713 4,856 6,077
Diluted earnings per share ............................... $ 0.05 $ 0.09 $ 0.11 $ 0.15
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
- ----
Revenue .................................................. $ 34,616 $ 39,907 $ 45,309 $ 50,486
Gross profit ............................................. 15,839 18,173 21,929 24,302
Income from operations ................................... 7,161 339 10,256 11,067
Diluted earnings (loss) per share ........................ $ 0.17 $( 0.06) $ 0.21 $ 0.24
</TABLE>
36
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED) (CONTINUED):
The reconciliation of the quarterly information as presented compared
to the quarterly information as previously reported is summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
----
Revenue as previously reported ..................... $14,347 $18,767 $23,044 $27,392
Adjustment for pooling of interests ................ 1,085 1,325 1,639 2,046
------- ------- ------- -------
Revenue ....................................... $15,432 $20,092 $24,683 $29,438
======= ======= ======= =======
Gross profit as previously reported ................ $ 6,305 $ 8,396 $10,431 $12,459
Adjustment for pooling of interests ................ 339 534 636 834
------- ------- ------- -------
Gross profit .................................. $ 6,644 $ 8,930 $11,067 $13,293
======= ======= ======= =======
Income from operations as previously reported ...... $ 2,113 $ 3,369 $ 4,480 $ 5,641
Adjustment for pooling of interests ................ 149 344 376 436
------- ------- ------- -------
Income from operations ........................ $ 2,262 $ 3,713 $ 4,856 $ 6,077
======= ======= ======= =======
Diluted earnings per share
as previously reported .......................... $ 0.04 $ 0.08 $ 0.10 $ 0.13
Adjustment for restatement of
treasury stock method (See Note 1) .............. 0.01 0.01 0.01 0.02
Adjustment for pooling of interests ................ 0.00 0.00 0.00 0.00
------- ------- ------- -------
Pro forma diluted earnings per share ....... $ 0.05 $ 0.09 $ 0.11 $ 0.15
======= ======= ======= =======
</TABLE>
37
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED) (CONTINUED):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
----
Revenue as previously reported .................................. $ 32,327 $ 37,257 $ 42,013 $ 46,655
Adjustment for pooling of interests ............................. 2,289 2,650 3,296 3,831
-------- -------- -------- --------
Revenue .................................................... $ 34,616 $ 39,907 $ 45,309 $ 50,486
======== ======== ======== ========
Gross profit as previously reported ............................. $ 14,907 $ 17,269 $ 20,768 $ 22,970
Adjustment for pooling of interests ............................. 932 904 1,161 1,332
-------- -------- -------- --------
Gross profit ............................................... $ 15,839 $ 18,173 $ 21,929 $ 24,302
======== ======== ======== ========
Income (loss) from operations
as previously reported ........................................ $ 6,732 $ (65) $ 9,821 $ 10,470
Adjustment for pooling of interests ............................. 429 404 435 597
-------- -------- -------- --------
Income from operations ..................................... $ 7,161 $ 339 $ 10,256 $ 11,067
======== ======== ======== ========
Diluted earnings (loss) per share as previously reported ........ $ 0.15 $ (0.07) $ 0.19 $ 0.21
Adjustment for restatement of treasury stock method (See Note 1) 0.02 0.00 0.01 0.02
Adjustment for pooling of interests ............................. 0.00 0.01 0.01 0.01
-------- -------- -------- --------
Pro forma diluted earnings (loss) per share ................ $ 0.17 ($ 0.06) $ 0.21 $ 0.24
======== ======== ======== ========
</TABLE>
23. SUBSEQUENT EVENTS:
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 $520,000 in
cash and 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.
38
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. SUBSEQUENT EVENTS (CONTINUED):
FUSION SYSTEM JAPAN CO., LTD. ("FUSION")--On March 26, 1999, IMRglobal
acquired 100% of the outstanding stock of Fusion Systems 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 Service 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 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.
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. 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.
ORION CONSULTING, INC. ("ORION")--On June 15, 1999, IMRglobal acquired
100% of the outstanding stock of Orion Consulting, Inc., headquartered in
Cleveland, Ohio. Orion was a privately held management consulting firm primarily
serving the Health Care industry. In exchange for Orion's common stock, Orion's
shareholders received 3,028,414 shares of IMRglobal's common stock. The Orion
acquisition has been accounted for as a purchase pursuant to the provisions of
APB Opinion No. 16.
39
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our business has grown significantly during the past two years both
through acquisitions and through internal growth. Before we discuss our results
of operations in detail, we set forth relevant information about recent
developments and the significant acquisitions we have made, clarify income tax
matters and explain conventions we use throughout this section.
CURRENT DEVELOPMENTS
We experienced sequential revenue and earnings per share growth for
each of the 11 quarters following our initial public offering. This trend did
not continue for the three months ended September 30, 1999. Both revenue and
earnings per share decreased from the amounts reported for the three months
ended June 30, 1999.
The primary reasons for the decrease in revenue growth are as
follows:
o slower than anticipated conversion of proof of concept and
advisory engagements to full back-end projects for our IT
consulting and component-based development services and our
component-based solutions;
o a longer sales cycle, mostly driven by the current market
conditions;
o our attempt to aggressively grow our core business and, at the
same time, position the company to sell and support vertical
industry based solutions; and
o delays in the start up of several large engagements.
On October 22, 1999, we announced that we will change our accounting
treatment for our mergers with Fusion Systems of Japan Co., Ltd. ("Fusion") and
Orion Consulting, Inc. ("Orion") from the pooling of interests method to the
purchase method of accounting. The change in accounting will be retroactive to
the merger dates of March 26, 1999 for Fusion and June 15, 1999 for Orion. The
factors that led to the decision to change the accounting treatment included a
determination that certain affiliate transactions may preclude the use of the
pooling of interests accounting method and our Board of Director's authorization
for a stock buy back. In addition, we agreed to restructure the Fusion merger
from an all cash transaction to a combination of cash and stock.
40
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ACQUISITIONS
LYON CONSULTANTS, S.A.--On May 15, 1998, we acquired 100% of the
outstanding stock of Lyon, a privately held software engineering company
headquartered in Paris, France. Lyon specializes in rapid software application
development, utilizing reusable business and technical software components, and
in information technology consulting. Lyon's shareholders received $16.7 million
in cash and 531,353 shares of our common stock in exchange for their Lyon stock.
In addition, we were obligated to make a contingent payment of approximately
$4.2 million in May 1999 based on our stock price on May 15, 1999. We
renegotiated this contingent payment with the former shareholders of Lyon and
will make a payment in May 2000 if our stock price is less than $34.05 per
share. We have accounted for the Lyon acquisition as a purchase, and as a
result, the operating results of Lyon are reflected in the consolidated
financial statements from the date of acquisition.
RHO TRANSFORMATIONAL TECHNOLOGIES PTY. LIMITED --On June 30, 1998, we
acquired 100% of the outstanding stock of RHO, a privately held software
services and engineering company headquartered in Sydney, Australia. RHO
specializes in software application conversion and maintenance services using
proprietary tools. RHO's shareholders received 285,000 shares of our common
stock in exchange for their RHO common stock. We have accounted for the RHO
acquisition as a pooling of interests combination. We have restated our
financial statements for the year ended December 31, 1998 to give effect to the
business combination, but prior years have not been restated because the changes
were immaterial. As a result of this acquisition, we have incurred costs of
approximately $145,000 and have charged these costs to acquisition costs in our
income statements.
VISUAL SYSTEMS DEVELOPMENT CORPORATION --On October 2, 1998, we
acquired 100% of the outstanding stock of Visual, an information technology
company based in Toronto, Canada. Visual specializes in client/server and
Internet application development. Visual's shareholders received $5.5 million in
cash and 400,000 shares of our common stock in exchange for their Visual stock.
Additional payments of up to $3.5 million in the form of our common stock are
payable if Visual achieves certain financial and business objectives specified
in the purchase agreement. We have accounted for the Visual acquisition as a
purchase.
ATECHSYS S.A.--On January 8, 1999, we acquired 100% of the outstanding
stock of Atechsys, a privately held information technology company based in
Paris, France. Atechsys specializes in business and technology consulting
services to the capital markets industry. Atechsys' shareholders received
718,859 shares of our common stock in exchange for their Atechsys common stock.
We have accounted for the Atechsys acquisition as a pooling of interests
combination. We have restated prior year financial statements to give effect to
the business combination. As a result of this acquisition, we have incurred
costs of approximately $1.7 million and have charged these costs to acquisition
costs in our 1999 income statement.
41
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ECWERKS, INC --On January 15, 1999, we acquired 100% of the outstanding
stock of ECWerks, a privately held electronic commerce business and technology
consulting company based in Tampa, Florida. ECWerks' shareholders received
163,054 shares of our common stock in exchange for their ECWerks common stock.
In addition, we are required to make a contingent payment of up to $28.0 million
in cash or shares of our common stock if certain financial goals specified in
the purchase agreement are achieved during 1999. We have accounted for the
ECWerks acquisition as a purchase.
FUSION SYSTEMS JAPAN CO., LTD.--On March 26, 1999, we acquired 100% of
the outstanding stock of Fusion, a privately held business and technology
consulting company based in Tokyo, Japan. Fusion specializes in capital markets
consulting and technology solutions and provides technology consulting services
from its offices in Tokyo and Boston. Fusion's shareholders originally received
3,735,536 shares of our common stock in exchange for their Fusion common stock.
On October 25, 1999, we amended this agreement to provide the former Fusion
stockholders $22.4 million cash in exchange for 1,456,860 shares of our common
stock. We have accounted for the Fusion acquisition as a purchase and as a
result, the operating results of Fusion are to be reflected in the consolidated
financial statements from the date of acquisition.
PROFESSIONAL PARTNERS, INC. AND LAKEWOOD SOFTWARE TECHNOLOGY CENTER,
INC.--On April 28, 1999, we purchased 100% of the outstanding stock of
Professional Partners and Lakewood Software, which we refer to as PLP, a
privately held provider of information technology services to the property and
casualty insurance industry. PLP's shareholders received $12.0 million in cash
in exchange for their PLP common stock. We have accounted for the PLP
acquisition as a purchase, and as a result, the operating results of PLP are to
be reflected in the consolidated financial statements from the date of
acquisition.
ORION CONSULTING, INC.--On June 15, 1999, we acquired 100% of the
outstanding stock of Orion. Orion was a privately held management-consulting
firm, headquartered in Cleveland, Ohio, that primarily served the healthcare
industry. Orion's shareholders received 3,028,414 shares of our common stock in
exchange for their Orion common stock. We have accounted for the Orion
acquisition as a purchase , and as a result, the operating results of Orion are
to be reflected in the consolidated financial statements from the date of
acquisition.
INCOME TAX MATTERS
SUBCHAPTER S ELECTIONS FOR CERTAIN UNITED STATES OPERATIONS--Prior to
November 1996, our stockholders had elected to be taxed as an S Corporation
under the provisions of the Internal Revenue Code. As a result, taxable income
was generally reported by the shareholders on their individual income tax
returns. In connection with our initial public offering, the S Corporation
election was terminated in November, 1996. Subsequent to the termination of the
S Corporation election, we became subject to United States federal and state
income taxes.
We have adjusted the provision for income taxes in our financial
statements as if we had been a taxable entity subject to federal and state
income taxes at the marginal rates applicable to such periods to accurately
reflect our pro forma net income. However, the pro forma adjustment to income
tax expense in our financial statements for the year ended December 31, 1996,
excludes a one-time income tax expense resulting from the termination of our S
Corporation status.
42
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
INDIA OPERATIONS --Our subsidiary, IMRglobal-India, is eligible for
certain favorable tax provisions provided under the Indian Income-Tax Act,
including the following:
o an exemption from corporate income taxes for a period of five
consecutive years in the first eight years of operation;
o an exemption from income taxes on the profits derived from
exporting computer software or transmitting software from India.
The export exemption remains available after expiration of the
tax holiday described above.
The effective tax rate for our India operations has been less than 5%
for 1996, 1997 and 1998 as a result of these exemptions. Recent legislation in
India indicates that these tax exemptions will continue in the near future.
However, we cannot be certain that the Indian government will not significantly
modify or eliminate these tax exemptions at some later date.
CONVENTIONS
We use the following conventions throughout the discussion of our
results of operations:
REVENUE RECOGNITION. Revenue from services provided on a fixed-price
basis is recognized using the percentage of completion method. We bear the risk
of cost over-runs and inflation with respect to our fixed-price projects. In
order to mitigate these risks, we subdivide projects into smaller phases, and we
generally reserve 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, we must estimate the percentage of completion of each project
at the end of each financial reporting period. Estimates are subject to
adjustment as projects progress to reflect changes in projected completion costs
or dates.
Revenue from services provided on a time and materials basis is
recognized in the period that the services are provided. Certain services in our
healthcare practice are provided on a contingency basis based on the recovery of
expenses for clients or based on providing litigation support to clients.
Revenue for recovery projects and litigation work is recognized when the
outcomes of the projects are known.
COST OF REVENUE. Cost of revenue consists primarily of salaries and
employee benefits for personnel dedicated to client projects, as well as
facility costs at the India and Northern Ireland software development
facilities.
43
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Salaries and related
taxes and benefits for employees not dedicated to specific client projects make
up the majority of our selling, general and administrative expenses. Other
significant selling, general and administrative expenses are as follows:
o occupancy costs;
o telecommunications;
o marketing and promotion; and
o travel expenses.
RESULTS OF OPERATIONS
The following table summarizes several items from our statements of
income expressed as a percentage of revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenue .................................... 100.0% 100.0% 100.0%
Cost of revenue ............................ 56.9 55.5 52.9
------ ------ ------
Gross profit ............................... 43.1 44.5 47.1
Selling, general and administrative expenses 26.6 23.4 20.4
Research and development ................... 0.0 1.0 3.7
Goodwill and intangible amortization ....... 0.3 1.3 1.2
Costs related to acquisitions .............. 0.0 0.0 4.9
------ ------ ------
Income from operations ..................... 16.2 18.8 16.9
Other income, net .......................... 0.1 2.0 2.6
------ ------ ------
Income before provision for income taxes
and minority interest ................... 16.3 20.8 19.5
Provision for income taxes ................. 4.6 6.9 7.8
Minority interest .......................... 2.4 0.0 0.0
------ ------ ------
Net income ................................. 9.3% 13.9% 11.7%
====== ====== ======
</TABLE>
44
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased to $170.3 million in the year ended
December 31, 1998, representing a 90.0% increase over revenue of $89.6 million
in the year ended December 31, 1997. Of this increase, approximately $18.4
million was attributable to our acquisition of Lyon, RHO and Visual. Revenue for
the year ended December 31, 1998 from services not related to our Year 2000
service offering, increased to $93.1 million (including purchase acquisitions),
representing a 106.1% increase over revenue of $45.2 million for the year ended
December 31, 1997. Year 2000 revenue increased to $77.2 million or 45.3% of
total revenue for the year ended December 31, 1998 compared to $44.5 million or
49.6% of total revenue for the year ended December 31, 1997.
COST OF REVENUE. Cost of revenue was $90.1 million, or 52.9% of
revenue for the year ended December 31, 1998, compared to $49.7 million, or
55.5% of revenue, for the year ended December 31, 1997. The decrease in cost of
revenue as a percentage of revenue reflects the following:
o productivity gains from Year 2000 service offerings and other
toolsets;
o a 17.8% devaluation of the Indian Rupee since September 1997,
which resulted in reduced costs at our Indian software
development centers; and
o improved utilization of software development personnel in India
and Northern Ireland.
Wage costs continue to increase at a greater rate than general
inflation in each of the countries in which we have operations. 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. Gross profit increased to $80.2 million in the year ended
December 31, 1998, compared to $39.9 million in the year ended December 31,
1997. Our gross profit margin, as a percentage of revenue, increased to 47.1% in
the year ended December 31, 1998, compared to 44.5% in the year ended December
31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
to $34.8 million in the year ended December 31, 1998, compared to $21.0 million
in the year ended December 31, 1997. The increase in SG&A expenses is
attributable to the following:
o the Lyon, RHO and Visual acquisitions;
o addition of sales offices;
o expansion of sales personnel;
o expansion of our delivery capacity; and
o regionalization of operations.
45
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
As a percentage of revenue, SG&A expenses decreased to 20.4% in the
year ended December 31, 1998, compared 1998,compared to 23.4% for the year ended
December 31, 1997. We are aggressively expanding our sales force and marketing
efforts, which will generate higher SG&A in the near term.
RESEARCH AND DEVELOPMENT. R&D costs increased to $6.2 million in the
year ended December 31, 1998, compared to $919,000 in the year ended December
31, 1997. The increase is attributable to the following:
o the acquisition of Lyon and the continued development of Lyon's
component technology;
o modification of component technology for certain targeted
industries; and
o expansion of efforts to develop and enhance our transformation
toolsets.
GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible
amortization increased to approximately $2.1 million for the year ended December
31, 1998, from approximately $1.1 million for the year ended December 31, 1997.
This increase primarily reflects goodwill attributed to our purchases of Lyon
and Visual.
IN-PROCESS RESEARCH AND DEVELOPMENT. The purchased assets and assumed
liabilities in connection with the acquisition of Lyon were recorded at their
estimated fair values at the acquisition date. We received an appraisal of the
intangible assets which indicated that approximately $8.2 million of the
acquired intangible assets were acquired in-process research and development
that had not yet reached technological feasibility and had no alternative future
use. To determine the value of the in-process research and development, our
appraisal considered several factors including the following:
o state of development of each project;
o time and cost needed to complete each project;
o expected income for each project;
o expected discounted cash flow for each project;
o associated risks which included the inherent difficulties and
uncertainties in completing each project and thereby achieving
technological feasibility; and
o risks related to the viability of and potential changes to
future target markets.
In-process research and development was charged to expense in the
quarter ended June 30, 1998. In addition, we recorded a one-time charge of
approximately $145,000 for costs related to the RHO acquisition. We did not
incur in-process research and development or acquisition costs in 1997.
46
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
INCOME FROM OPERATIONS. Income from operations for the year ended
December 31, 1998 was $28.8 million compared to $16.9 million in the year ended
December 31, 1997, representing a 70.5% increase. As a percentage of revenue,
income from operations was 16.9% in the year ended December 31, 1998, compared
to 18.8% in the year ended December 31, 1997. The decrease reflects one-time
charges totaling approximately $8.3 million related to acquired in-process
research and development and acquisition costs. Excluding one-time charges,
income from operations was 21.8% as a percentage of revenue for the year ended
December 31, 1998.
OTHER INCOME. We realized net other income of approximately $4.4
million in the year ended December 31, 1998, compared to net other income of
approximately $1.8 million in the year ended December 31, 1997. In 1998, we
recognized approximately $4.6 million in investment income primarily from the
investment of the remaining net proceeds from our public offering of common
stock in August 1997, and we incurred approximately $234,000 of interest expense
related to credit facilities in India and Australia. During 1997, we recognized
approximately $2.0 million in investment income primarily from the investment of
remaining net proceeds from our public offerings of common stock in November
1996 and August 1997, and we incurred approximately $175,000 of interest expense
primarily for credit facilities in India and the U.K.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$13.3 million in the year ended December 31, 1998, from $6.2 million in the year
ended December 31, 1997. The effective tax rate based on the provision for
income taxes and excluding one-time charges for in-process research and
development and acquisition costs was 32.0% for 1998 and 33.0% for 1997. We
calculate the effective tax rate by dividing the provision for income taxes by
income before provision for income taxes and minority interest.
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 increased 59.4% to $19.9 million in the year
ended December 31, 1998, from $12.5 million in the year ended December 31, 1997.
As a percentage of revenue, net income was 11.7% for 1998, compared to 13.9% for
1997. When we exclude one-time charges for in-process research and development
and acquisition costs, 1998 net income as a percentage of revenue was 16.6%.
DILUTED EARNINGS PER SHARE. Diluted earnings per share increased to
$0.57 for the year ended December 31, 1998, from $0.40 for the year ended
December 31, 1997. Excluding one-time charges for in-process research and
development and acquisition costs, pro forma diluted earnings per share was
$0.80 for the year ended December 31, 1998, compared to $0.40 for the year ended
December 31, 1997.
47
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased to $89.6 million in the year ended December
31, 1997, representing a 189.3% increase over revenue of $31.0 million in the
year ended December 31, 1996. Of this increase, approximately $18.0 million was
attributable to the acquisition of IMRglobal-U.K. Revenue for the year ended
December 31, 1997 from our services offerings not related to our Year 2000
service offering, increased to $45.2 million (including purchase acquisitions),
representing a 92.2% increase over revenue of $23.5 million for the year ended
December 31, 1996. Year 2000 revenue increased 494.1% to $44.5 million for the
year ended December 31, 1997, compared to $7.5 million for the year ended
December 31, 1996.
COST OF REVENUE. Cost of revenue was $49.7 million, or 55.5% of revenue
for the year ended December 31, 1997, compared to $17.6 million, or 56.9% of
revenue, for the year ended December 31, 1996.
GROSS PROFIT. Gross profit increased to $39.9 million in the year ended
December 31, 1997, compared to $13.3 million in the year ended December 31,
1996. As a percentage of revenue, gross profit increased to 44.5% in the year
ended December 31, 1997, compared to 43.1% in the year ended December 31, 1996.
Our gross profit margin increased for our United States, France and India
operations. However, reduced gross profit margins for IMRglobal-U.K. and
IMRglobal-Northern Ireland offset this increase. IMRglobal-U.K. derived a
substantial portion of its revenue from professional services, which generally
result in lower profit margins. IMRglobal-Northern Ireland experienced lower
gross profit during the start-up phase of its operations (which began in July
1997) as it hired and trained its workforce.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
to $21.0 million in the year ended December 31, 1997, compared to $8.2 million
in the year ended December 31, 1996. As a percentage of revenue, SG&A expenses
decreased to 23.4% in the year ended December 31, 1997, compared to 26.6% for
the year ended December 31, 1996. This decrease reflects the rapid increase in
revenue in 1997 compared to a lesser rate of increase in SG&A expenses during
the same period for our United States operations. The dollar increase in SG&A
expenses is attributable to the following:
o acquisition of IMRglobal-U.K.;
o addition of United States sales offices;
o expansion of our delivery capacity;
o expansion of our general support staff (primarily recruiting and
human resources personnel); and
o additional costs associated with reporting and accounting
responsibilities as a public company.
48
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible assets
amortization increased to approximately $1.1 million for the year ended December
31, 1997, from approximately $100,000 for the year ended December 31, 1996. This
increase reflects the goodwill resulting from our acquisition of 64.0% of
IMR-India in the second half of 1996 and our 1997 acquisitions of IMR-U.K. and
IMR-Northern Ireland.
INCOME FROM OPERATIONS. Income from operations for the year ended
December 31, 1997 was $16.9 million compared to $5.0 million in the year ended
December 31, 1996. As a percentage of revenue, income from operations increased
to 18.8% in the year ended December 31, 1997, compared to 16.2% in the year
ended December 31, 1996.
OTHER INCOME. We realized net other income of approximately $1.8
million in the year ended December 31, 1997, compared to net other income of
approximately $40,000 in 1996. During 1997, we recognized approximately $2.0
million in investment income primarily from the investment of remaining net
proceeds from our public offerings of common stock in November 1996 and August
1997. Investment income for 1996 was approximately $201,000.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$6.2 million in 1997, from $1.4 million in 1996. The effective tax rate was
33.0% for 1997 and 28.4% for 1996. The increase in the effective tax rate was
due to the expansion of our business in France, Australia and Canada, which
diluted the tax savings we realize from our India operations. The effective tax
rate is calculated by dividing the provision for income taxes by income before
provision for income taxes and minority interest.
MINORITY INTEREST IN NET INCOME. Minority interest in net income
decreased to approximately $48,000 for the year ended December 31, 1997, from
approximately $730,000 in the comparable period in the year ended December 31,
1996. This represents the portion of IMR-India's net income that is allocated to
IMR-India's minority shareholders. This decrease was a result of our acquisition
of 64.0% of IMR-India during late 1996, and our acquisition of an additional
1.7% of IMR-India in 1997. On December 31, 1997, we owned approximately 99.9% of
IMR-India, with the remainder owned by the three other individual shareholders.
NET INCOME. Net income increased 331.5% to $12.5 million in the year
ended December 31, 1997, from $2.9 million in the year ended December 31, 1996.
As a percentage of revenue, net income was 13.9% for 1997 and 9.3% for 1996.
49
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
QUARTERLY RESULTS OF OPERATIONS
The following table contains portions of our unaudited quarterly
statements of operations data for each of the eight quarters beginning January
1, 1997 and ending December 31, 1998. The information relating to the quarters
beginning January 1, 1997, and ending on December 31, 1998, is derived from, and
should be read along with, our financial statements and the related notes
appearing elsewhere in this document. We believe that this table is a fair
presentation of that information but the results of operations for any quarter
are not necessarily indicative of the results to be expected for any future
period.
<TABLE>
<CAPTION>
QUARTERS ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------
1997 1998
------------------------------------------------- --------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ............... $ 15,432 $ 20,092 $ 24,683 $ 29,438 $ 34,616 $ 39,907 $ 45,309 $ 50,486
Gross profit .......... 6,644 8,930 11,067 13,293 15,839 18,173 21,929 24,302
Income from operations 2,262 3,713 4,856 6,077 7,161 339 10,256 11,067
Diluted earnings (loss)
per share ........... $ 0.05 $ 0.09 $ 0.11 $ 0.15 $ 0.17 ($ 0.06) $ 0.21 $ 0.24
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------------------------
1997 1998
------------------------------------------------- --------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit .......... 43.1 44.4 44.8 45.2 45.8 45.5 48.4 48.1
Income from operations 14.7 18.5 19.7 20.6 20.7 0.8 22.6 21.9
</TABLE>
50
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had:
o working capital of $122.8 million;
o liquid assets including cash, cash equivalents and marketable
securities of approximately $110.4 million; and
o available bank lines of credit of approximately $13.9 million.
Net cash provided by operating activities was $5.5 million for the year
ended December 31, 1996, $18.7 million for the year ended December 31, 1997 and
$39.5 million for the year ended December 31, 1998. 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 $19.1 million for the year
ended December 1996, $8.8 million for the year ended December 1997 and $47.3
million for the year ended December 31, 1998. During 1996, we 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 $2.7
million. During 1997, we invested $3.3 million in the acquisition of two
subsidiaries and purchased property and equipment for $7.0 million. During 1998,
we invested $8.9 million in the acquisition of subsidiaries, invested $26.2
million in marketable securities and purchased property and equipment for $13.6
million.
Net cash provided by or (used in) financing activities was $36.5
million for the year ended December 31, 1996, $52.8 million for the year ended
December 31, 1997 and ($390,000) for the year ended December 31, 1998. During
the years ended December 31, 1996 and 1997 we received net proceeds from public
offerings of $40.7 million and $53.5 million.
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
the LIBOR rate (6.3% at December 31, 1998). On December 31, 1998 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. On December 31, 1998 we were in compliance with these
covenants. This credit facility can be cancelled at any time by the bank or by
us.
Certain of our subsidiaries maintain additional revolving credit line
arrangements. Interest rates are based on the lending institution's prime rate
(ranging from 6.5% to 9.0% on December 31, 1998). On December 31, 1998 the
amount outstanding under these facilities was $443,000, and the maximum amount
available was approximately $3.5 million. The respective subsidiary's accounts
receivable and certain property and equipment collateralize these facilities.
51
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During June 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 $4.2 million has been expended as of
December 31, 1998. Completion of this project is scheduled for January 2000.
We periodically 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; 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 $13.0 million on December 31, 1997
and $28.5 million on December 31, 1998. The increase for these periods was
primarily due to new acquisitions and revenue growth. A significant portion of
our 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 are significant increases in deferred revenue (I.E., billings issued in
advance of revenue recognition).
A common financial measure is the calculation of days sales outstanding
in accounts receivable. We refer to days sales outstanding as DSO. We believe
that DSO should be calculated based on our quarterly results of operations to
factor in our historic rapid revenue growth rate. Based on the above, DSO was 40
days on December 31, 1997 and 51 days on December 31, 1998. The Lyon and
Atechsys acquisitions add approximately three 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 and U.K. include value added taxes that are not included in
revenue. Without value added taxes, DSO would be approximately three days less
than the above levels.
52
<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. 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 are in the process of assessing the impact
the Year 2000 will have on our 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
replace the non-compliant accounting system by the end of November 1999. The
implementation of a new accounting system was made for reasons other than the
fact that the system is not Year 2000 compliant. To date, we have incurred
expenses approximating $30,000 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 the 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 communication 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 communication 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 communication vendors may encounter Year 2000 related
failures or interruptions, we will be required to develop a contingency plan. We
anticipate that a contingency plan, if necessary, will be developed by the
fourth quarter 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. We have described the risks associated with such claims from our
clients under "Risk Factors - We may have liability to clients for damages to
their computer systems because our contracts limiting the liability may not be
enforceable or because we may not be covered by insurance."
53
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the years 1994 through 1998
should be read along with the audited financial statements contained in this
document. Such financial information other than for fiscal years 1994 and 1995
was taken from these financial statements. The financial statements for 1996
through 1998 were audited. The information below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenue ........................................ $ 14,752 $24,115 $30,988 $ 89,645 $170,318
Gross profit ................................... 5,665 9,734 13,346 39,934 80,243
Income from operations ......................... 1,014 3,696 5,016 16,908 28,823
Net income ..................................... 999 2,702 2,890 12,469 19,880
Pro forma net income ........................... 682 1,797 -- -- --
Diluted earnings per share ..................... 0.05 0.09 0.13 0.40 0.57
Pro forma diluted earnings per share ........... 0.03 0.06 -- -- --
Cash dividends ................................. -- -- 1,623 -- 163
Cash dividends per share ....................... -- -- 0.07 -- --
Weighted average common stock and
common stock equivalents outstanding ........ 21,084 31,550 23,026 31,238 35,064
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash, cash equivalents and marketable securities $ 1,167 $ 1,832 $30,307 $ 91,452 $110,416
Working capital ................................ (146) 2,729 31,371 96,977 122,783
Total assets ................................... 7,421 9,484 50,563 138,656 223,699
Long-term debt, net of current portion ......... 2,153 1,184 39 918 671
Shareholders' equity ........................... 462 3,091 41,045 114,358 174,814
Shares outstanding at period end ............... 21,096 21,096 22,429 26,370 30,392
</TABLE>
54
<PAGE>
IMRGLOBAL CORP.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------ ----
23.1 Consent of Ernst & Young LLP 56
23.2 Consent of PriceWaterhouseCoopers LLP 57
27.1 Financial Data Schedule 58
55
EXHIBIT NUMBER 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-86823, Form S-8 No. 333-24027 and Form S-8 No. 333-86753)
pertaining to IMRglobal Corp. and the Information Management Resources, Inc.
Employee Stock Purchase Plan of our report dated August 20, 1999 (except for
Note 23 as to which the date is October 25, 1999), with respect to the
consolidated financial statements of IMRglobal Corp. included in this Current
Report (Form 8-K), for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Tampa, Florida
November 12, 1999
56
EXHIBIT NUMBER 23.2
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (Nos. 333- 24027 and 333-86753) of Information Management
Resources, Inc. Employee Stock Purchase Plan and on Form S-3 (No. 333-86823) of
IMRglobal Corp. of our report dated February 13, 1998 relating to the financial
statements of IMRglobal Corp. (formerly Information Management Resources)
("IMRglobal"), which appears in the Current Report on Form 8-K of IMRglobal
dated November 15, 1999.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS, LLP
Tampa, Florida
November 15, 1999
57
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIODS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 78,807 86,999 24,663
<SECURITIES> 31,609 4,453 5,644
<RECEIVABLES> 28,826 13,038 6,558
<ALLOWANCES> 288 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 161,832 117,485 40,064
<PP&E> 28,531 13,747 5,571
<DEPRECIATION> 7,115 3,784 1,807
<TOTAL-ASSETS> 223,699 138,656 50,563
<CURRENT-LIABILITIES> 39,049 20,508 8,693
<BONDS> 671 918 39
0 0 0
0 0 0
<COMMON> 3,039 2,637 2,243
<OTHER-SE> 171,775 111,721 38,802
<TOTAL-LIABILITY-AND-EQUITY> 223,699 138,656 50,563
<SALES> 0 0 0
<TOTAL-REVENUES> 170,318 89,645 30,988
<CGS> 0 0 0
<TOTAL-COSTS> 90,075 49,711 17,642
<OTHER-EXPENSES> 51,132 23,026 8,330
<LOSS-PROVISION> 288 0 0
<INTEREST-EXPENSE> 234 175 305
<INCOME-PRETAX> 33,183 18,674 5,056
<INCOME-TAX> 13,270 6,157 1,436
<INCOME-CONTINUING> 19,880 12,469 2,890
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 19,880 12,469 2,890
<EPS-BASIC> 0.69 0.50 0.18
<EPS-DILUTED> 0.57 0.40 0.13
</TABLE>
