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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission File Number 0-28840
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)
26750 U.S. HIGHWAY 19 NORTH, SUITE 500, CLEARWATER, FLORIDA 33761
(Address of principal executive offices and zip code)
727-797-7080
(Registrant's telephone number, including area code)
INFORMATION MANAGEMENT RESOURCES, INC.
(Former name if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
As of August 5, 1998, there were 29,167,446 outstanding shares of the
Registrant's Common Stock, par value $.10 per share.
This Quarterly Report on Form 10-Q/A amends and supersedes, to the
extent set forth herein, the Registrant's previously filed Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1998.
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997...................... 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1998 and 1997......................................... 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997................ 5
Notes to Consolidated Financial Statements..................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 19
ITEM 5. Other Information.............................................. 19
ITEM 6. Exhibits and Reports on Form 8-K............................... 19
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMRGLOBAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(RESTATED)
(SEE NOTE 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 64,106 $ 85,819
Marketable securities .................................. 27,539 4,453
Accounts receivable, less allowances of $203 and $0 .... 20,135 11,156
Unbilled work in process ............................... 8,607 6,390
Deferred taxes ......................................... 13,162 1,889
Other current assets ................................... 3,742 4,664
--------- ---------
Total current assets ............................. 137,291 114,371
Property and equipment, net of accumulated depreciation ... 15,660 9,818
Capitalized software costs, net of accumulated amortization -- 47
Deposits and other assets ................................. 1,766 960
Intangibles, net of accumulated amortization .............. 21,420 10,157
--------- ---------
Total assets ..................................... $ 176,137 $ 135,353
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 4,221 $ 3,136
Accrued compensation ................................... 13,738 8,430
Deferred revenue ....................................... 3,074 4,413
Other current liabilities .............................. 13,380 4,599
--------- ---------
Total current liabilities ........................ 34,413 20,578
Long-term debt ............................................ 609 885
Deferred tax liability .................................... 417 546
Other liabilities ......................................... 121 133
--------- ---------
Total liabilities ................................ 35,560 22,142
--------- ---------
Minority interest ......................................... 7 4
--------- ---------
Shareholders' equity:
Preferred stock ........................................ -- --
Common stock ........................................... 2,911 2,565
Additional paid-in capital ............................. 123,165 98,735
Retained earnings ...................................... 16,116 12,564
Accumulated other comprehensive loss ................... (1,622) (657)
--------- ---------
Total shareholders' equity ....................... 140,570 113,207
--------- ---------
Total liabilities and shareholders' equity ....... $ 176,137 $ 135,353
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------- ------------ ---------- ----------
(RESTATED) (RESTATED)
(SEE NOTE 2) (SEE NOTE 2)
<S> <C> <C> <C> <C>
Revenue ....................................... $ 37,257 $ 18,767 $ 69,584 $ 33,114
Cost of revenue ............................... 19,988 10,371 37,409 18,413
-------- -------- -------- --------
Gross profit ......................... 17,269 8,396 32,175 14,701
Selling, general and administrative expenses .. 7,468 4,524 14,363 8,323
Research and development expenses ............. 1,158 227 2,147 348
Acquired in-process research and development
and acquisition costs ...................... 8,345 -- 8,345 --
Goodwill amortization ......................... 363 276 653 547
-------- -------- -------- --------
Income (loss) from operations ........ (65) 3,369 6,667 5,483
Other income (expense):
Interest expense ..................... (110) (69) (186) (136)
Interest income and other ............ 1,133 277 2,254 521
-------- -------- -------- --------
Total other income (expense) ......... 1,023 208 2,068 385
-------- -------- -------- --------
Income (loss) before provision for income taxes
and minority interest ............... 958 3,577 8,735 5,868
Provision for income taxes .................... 2,835 1,082 5,114 1,934
-------- -------- -------- --------
Income (loss) before minority interest (1,877) 2,495 3,621 3,934
Minority interest in net income ............... -- (18) -- (25)
-------- -------- -------- --------
Net income (loss) .................... $ (1,877) $ 2,477 $ 3,621 $ 3,909
======== ======== ======== ========
Earnings (loss) per share:
Basic ................................ $ (0.07) $ 0.11 $ 0.14 $ 0.17
======== ======== ======== ========
Diluted .............................. $ (0.07) $ 0.07 $ 0.10 $ 0.12
======== ======== ======== ========
Shares outstanding:
Basic ................................ 27,232 22,590 26,624 22,585
======== ======== ======== ========
Diluted .............................. 27,232 33,462 37,500 33,408
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
-------- ---------
(RESTATED)
(SEE NOTE 2)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income .............................................. $ 3,621 $ 3,909
Adjustment to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ............................... 1,879 1,372
Acquired in-process research and development ................ 8,200 --
Deferred taxes .............................................. (11,160) (3,363)
Tax benefit of stock options ................................ 14,219 5,015
Unrealized exchange losses .................................. (5) (20)
Minority interest in net income ............................. -- 25
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process ......... (6,026) (5,180)
Other current assets ..................................... 1,659 274
Deposits and other assets ................................ (595) (448)
Accounts payable and other liabilities ................... 5,273 759
Accrued compensation ..................................... 2,423 1,568
Income tax ............................................... 224 (1,436)
Deferred revenue ......................................... (1,340) 4,772
-------- --------
Total adjustments ........................................ 14,751 3,338
-------- --------
Net cash provided by operating activities ................ 18,372 7,247
-------- --------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries,
net of cash acquired ....................................... (16,144) (2,838)
Investment in marketable securities, net ....................... (16,856) (5,969)
Additions to capitalized software costs ........................ -- (300)
Additions to property and equipment ............................ (5,957) (3,771)
-------- --------
Net cash used in investing activities .................... (38,957) (12,878)
-------- --------
Cash flows from financing activities:
Net (repayments) borrowings from revolving credit line ......... -- (311)
Proceeds from long-term debt and notes ......................... -- 1,180
Payments on long-term debt, notes and capital leases ........... (608) (867)
Proceeds from issuance of common stock ......................... 343 574
-------- --------
Net cash provided by (used in) financing activities ...... (265) 576
-------- --------
Effect of exchange rate changes ................................... (863) 32
-------- --------
Net decrease in cash and cash equivalents ......................... (21,713) (5,023)
Cash and cash equivalents at beginning of year .................... 85,819 24,082
-------- --------
Cash and cash equivalents at end of period ........................ $ 64,106 $ 19,059
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
On November 17, 1998, the Company changed its name from Information
Management Resources, Inc. to IMRglobal Corp. ("IMRglobal" or the "Company").
In the opinion of management, the accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and include all adjustments necessary for a fair presentation. The
results of operations for the three and six month periods ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1997, which are contained in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission ("Commission").
2. Restatement
In response to recent interpretative guidance published by the Commission
surrounding acquisition-related in-process research and development (IPRD), the
Company has revised the original accounting for the purchase price allocation
related to the 1998 acquisition of Lyon and the related amortization of
intangibles. The Company originally obtained an independent valuation of IPRD
for the Lyon acquisition during July 1998. A second independent valuation, which
incorporated the Commission's interpretive guidance, was obtained during
February 1999. The appraisal of the IPRD considered the time and cost required
to complete each project, the estimated after-tax cash flows attributable to
each project, the state of development of each project, and associated risks
which included the inherent difficulties and uncertainties in completing the
projects and thereby achieving technological feasibility and risks related to
the viability of and potential changes to future target markets. This analysis
results in amounts assigned to IPRD that had not yet reached technological
feasibility and does not have alternative future uses.
As a result of the second independent valuation, IMRglobal has reduced the
second quarter 1998 one-time IPRD charge from $15.4 million to $8.2 million and
adjusted the amortization of related intangible assets for the second and third
quarters of 1998. The $7.2 million reduction in IPRD has been capitalized as
goodwill and amortized over a period not to exceed 20 years.
6
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
2. Restatement (Continued)
The effects of the restatement resulted in the following impact on the
Company's previously reported results of operations for the three and six month
periods ended June 30, 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Income (loss) before income taxes:
As previously reported .................. $ (6,185) $ 1,592
* Adjustment related to acquired in-process
research and development ............ 7,143 7,143
--------- ---------
Restated ............................... $ 958 $ 8,735
========= =========
Net income (loss):
As previously reported .................. $ (9,020) $ (3,522)
* Adjustment related to acquired in-process
research and development ............ 7,143 7,143
--------- ---------
Restated ............................... $ (1,877) $ 3,621
========= =========
Earnings (loss) per share - Basic:
As previously reported .................. $ (0.33) $ (0.13)
* Adjustment related to acquired in-process
research and development ............ 0.26 0.27
--------- ---------
Restated ............................... $ (0.07) $ 0.14
========= =========
Earnings (loss) per share - Diluted:
As previously reported .................. $ (0.33) $ (0.13)
* Adjustment related to acquired in-process
research and development ............ 0.26 0.23
--------- ---------
Restated .............................. $ (0.07) $ 0.10
========= =========
</TABLE>
*The adjustment results from the decrease in the value assigned to
acquired in-process technology and the increased amortization of
intangibles.
7
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
3. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of IMRglobal Corp. and its wholly and majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
MARKETABLE SECURITIES - The Company currently invests in only high
quality, short-term investments which are classified as available-for-sale as
defined by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As such
there were no significant differences between amortized cost and estimated fair
value at June 30, 1998. Additionally, because investments are short-term and are
generally allowed to mature, realized gains and losses have been minimal through
June 30, 1998.
COMPUTATION OF EARNINGS PER SHARE - Per share data and number of shares
outstanding have been adjusted to reflect the 3-for-2 stock splits in the form
of stock dividends paid by the Company on April 3, 1998 and July 10, 1997. Basic
earnings (loss) per share is computed using the weighted average of common stock
outstanding. For the three months ended June 30, 1998, diluted loss per share,
the effect of incremental shares from common stock equivalents using the
treasury stock method, is not included in the calculation of net loss per share
as the inclusion of such equivalents would be anti-dilutive. Diluted earnings
per share is computed using the treasury stock method which is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average
common stock outstanding ... 27,232 22,590 26,624 22,585
Weighted average
common stock equivalents ... 10,482 10,872 10,876 10,823
--------- --------- --------- ---------
Subtotal ............. 37,714 33,462 37,500 33,408
Dilutive affect of common
stock equivalents .......... (10,482) -- -- --
--------- --------- --------- ---------
Shares used in diluted earnings
per share calculation ...... 27,232 33,462 37,500 33,408
========= ========= ========= =========
</TABLE>
RECLASSIFICATION - Research and development expenses have been
reclassified from selling, general and administrative expense for the three and
six month periods ended June 30, 1997 to conform to the new classification of
these expenses for the three and six month periods ended June 30, 1998.
8
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
4. SHAREHOLDERS' EQUITY
On June 19, 1997 and March 9, 1998, the Company declared 3-for-2 stock
splits in the form of stock dividends payable on July 10, 1997 and April 3,
1998, respectively, to shareholders of record on June 26, 1997 and March 20,
1998, respectively. All applicable share and per share data in the accompanying
financial statements have been retroactively adjusted to reflect these
dividends.
Changes in shareholders' equity for the six months ended June 30, 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Comprehensive Other
Income Common Paid-in Retained Comprehensive
(Loss) Stock Capital Earnings Loss Total
------------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 .... $ -- $ 2,565 $ 98,735 $ 12,564 $ (657) $ 113,207
Common stock issued in
connection with acquisitions -- 78 10,135 (69) (59) 10,085
Employee stock purchase plan .. -- 1 159 -- -- 160
Stock options exercised ....... -- 267 (83) -- -- 184
Tax benefit of
stock options exercised .... -- -- 14,219 -- -- 14,219
Net income .................... 3,621 -- -- 3,621 -- 3,621
Translation adjustment ........ (906) -- -- -- (906) (906)
---------
Comprehensive income .......... $ 2,715 -- -- -- -- --
========= --------- --------- --------- --------- ---------
Balance, June 30, 1998 ........ $ 2,911 $ 123,165 $ 16,116 $ (1,622) $ 140,570
========= ========= ========= ========= =========
</TABLE>
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation of comprehensive income (loss) and its components. Comprehensive
income (loss) presents a measure of all changes in equity that result from
recognized transactions and other economic events during the period other than
transactions with stockholders. SFAS 130 requires restatement of all prior
period financial statements presented and is effective for periods beginning
after December 15, 1997. The Company has elected to disclose this information in
the Statement of Stockholders' Equity. As of June 30, 1998, the accumulated
other comprehensive loss account consists of cumulative foreign currency
translation adjustments.
9
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
5. ACQUISITIONS
LYON CONSULTANTS, S.A. ("LYON ACQUISITION") - On May 15, 1998, the Company
acquired 100% of the outstanding stock of Lyon Consultants, S.A. ("Lyon"), a
privately held software engineering company headquartered in Paris, France. Lyon
specializes in rapid software application development, utilizing reusable
business and technical software objects, and information technology consulting.
In exchange for Lyon's common stock, Lyon's shareholders received $16.0 million
in cash and 499,353 shares of the Company's common stock. In addition, $0.7
million in cash is payable to Lyon's former shareholders one year from closing
(included in accrued expenses). The Lyon acquisition is accounted for as a
purchase pursuant to the provisions of APB Opinion No. 16. The purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase price over the net assets
acquired (goodwill) will be amortized over a period not to exceed 20 years.
The purchased assets and assumed liabilities in connection with the
acquisition of Lyon were recorded at their estimated fair values at the
acquisition date. In connection with the Lyon acquisition, the Company retained
an independent appraiser to complete a valuation of the assets of Lyon,
including valuation of certain in-process research and development. The Company
identified 5 project categories for which technological feasibility had not been
achieved as of the acquisition date and for which there was no alternative
future use. The project categories include (i) LC Ready-Banking; (ii) LC
Ready-Insurance; (iii) LC Ready-Manufacturing; (iv) LC Ready-Utilities and (v)
Other European modules.
The value associated with these projects was determined using a discounted
cashflow model with a risk adjusted discount rate of 25%. The model reflects
revenue to be generated beginning in 1999 and continuing through 2006 for all
projects. The valuation also incorporated a stage of completion methodology
where the value was adjusted based on the technology's percentage of completion.
As of the acquisition date, the general design of the core component
modules was completed. This design identified the primary core component modules
required for four targeted industries which was further subdivided between the
European and North American markets. As of the acquisition date 30% of the North
American component modules and 60% of the European component modules had been
coded. Testing has not been completed for these modules.
10
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
5. ACQUISITIONS (Continued)
The schedule below details the status of each project as of the
acquisition date and its appraised in-process research and development value
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Percentage Complete
-----------------------------------------------------------
Pre Estimated
Acquisition Completion Time Labor Cost Complexity Overall IPRD
Project Costs Date Based Based Based Based Conclusion Value
------- ----------- ---------- ----- ----- ----- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LC Ready-
Banking ..... $ 952 Sep 1999 51% 48% 46% 65% 50% $1,600
LC Ready-
Insurance ... $1,223 Sep 1999 58% 55% 52% 60% 55% 3,400
LC Ready-
Manufacturing $ 629 Dec 1999 48% 31% 28% 55% 40% 1,300
LC Ready-
Utilities ... $ 419 Dec 1999 19% 20% 20% 50% 20% 1,100
Other
European .... $1,471 Mar 1999 -- 57% 53% 70% 55% 800
------
Total .... $8,200
======
</TABLE>
Based on the results of the appraisal, $8.2 million was attributed to the
in-process research and development purchased in the Lyon acquisition and
expensed during the second quarter when the acquisition was completed.
The following pro forma condensed statement of operations for the six
months ended June 30, 1998 and 1997 gives effect to the Lyon acquisition as if
it had been consummated as of the beginning of the period.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
(In thousands except per share data)
<S> <C> <C>
Total revenue ..................... $ 74,879 $ 40,194
Net income ........................ 3,962 4,404
Basic income per share ............ $ 0.15 $ 0.19
Diluted income per share .......... $ 0.11 $ 0.13
</TABLE>
11
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
5. ACQUISITIONS (Continued)
RHO TRANSFORMATIONAL TECHNOLOGIES PTY. LIMITED ("RHO ACQUISITION") - On
June 30, 1998, the Company acquired 100% of the outstanding stock of RHO
Transformational Technologies Pty. Limited ("RHO"), a privately held software
services and engineering company headquartered in Sydney, Australia. RHO
specializes in software application conversion and maintenance services, using
proprietary tools. In exchange for RHO's common stock, RHO's shareholders
received 285,000 shares of the Company's common stock. The RHO acquisition is
accounted for as a pooling-of-interests combination pursuant to the provisions
of APB Opinion No. 16. Current year financial statements have been restated to
give affect to the business combination. Prior year financial statements have
not been restated due to the immateriality of the business combination. Costs of
approximately $145,000 related to the acquisition have been charged to
acquisition costs and included in the statements of operations.
12
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, some matters
discussed in this report, including but not limited to statements relating to
the Company's anticipated construction of a new corporate headquarters,
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Company notes that a variety of risk factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Reference is made in particular to the discussion
set forth below in this report and set forth in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, as filed with the
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUE. For the three months ended June 30, 1998, revenue increased to
$37.3 million representing a 98.5% increase over revenue of $18.8 million for
the three months ended June 30, 1997. The May 15, 1998 acquisition of Lyon and
the June 30, 1998 acquisition of RHO accounted for approximately $3.0 million of
the revenue increase. Revenue from the Company's core transitional outsourcing
services (software development, application maintenance and migration and
re-engineering services) increased to $13.7 million or 125.9% for the quarter
ended June 30, 1998, compared to $6.1 million for the quarter ended June 30,
1997. Revenue from the Company's Year 2000 conversion services increased to
$20.3 million or 96.7% for the quarter ended June 30, 1998, compared to $10.3
million for the quarter ended June 30, 1997.
COST OF REVENUE. Cost of revenue was $20.0 million, or 53.7% of
revenue, for the three months ended June 30, 1998, as compared to $10.4 million,
or 55.3% of revenue, for the three months ended June 30, 1997. The decrease in
cost of revenue as a percentage of revenue reflects: (i) improved utilization of
software development personnel in India and Northern Ireland, and (ii) a 19.2%
devaluation in the Indian Rupee since June 30, 1997, which resulted in reduced
costs at the Company's Indian software development centers. Wage costs continue
to increase at a greater rate than general inflation in each of the countries in
which IMR has operations, and the Company anticipates that this trend will
continue in the near term. The Company has been able to pass these wage
increases on to its customers in the form of increased prices for its service
offerings. However, there can be no assurance that the Company will be able to
continue to increase prices to its customers to offset future wage increases.
GROSS PROFIT. Gross profit increased to $17.3 million in the second
quarter of 1998 compared to $8.4 million in the prior comparable period. As a
percentage of revenue, gross profit increased to 46.3% in the second quarter of
1998 compared to 44.7% in the second quarter of 1997.
13
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months
ended June 30, 1998, selling, general and administrative (SG&A) expenses
increased to $7.5 million, compared to $4.5 million for the three months ended
June 30, 1997. As a percentage of revenue, SG&A expenses for the three months
ended June 30, 1998 decreased to 20.0% from 24.1% for the same period in 1997.
This decrease as a percentage of revenue occurred due to the rapid increase in
revenue over the last twelve months compared to a lessor rate of increase in
SG&A in the same period. The dollar increase in SG&A expenses is attributable to
the Lyon and RHO acquisitions, addition of SG&A expenses resulting from
expansion of the Company's delivery capacity, regionalization of operations,
increases in costs related to expanding the Company's general support staff
(primarily sales, recruiting and human resources personnel) and costs related to
the establishment of Information Management Resources (Northern Ireland) Ltd.
("IMR-N.I.") in the third quarter of 1997. The Company intends to continue to
expand its SG&A infrastructure in order to generate continued revenue growth.
Management does not expect revenue to continue growing at a faster rate than
SG&A in the near term.
RESEARCH AND DEVELOPMENT. Research and development (R&D) increased to
approximately $1.2 million for the three months ended June 30, 1998 from
approximately $227,000 in the comparable period of 1997. As a percentage of
revenue, R&D increased to 3.1% from 1.2% for the same period in 1997. The
increase is attributable to: (i) the acquisitions of Lyon and RHO; (ii)
cessation of capitalizing software costs in 1997 in connection with the
substantial completion of the Company's TRANSFORM 2000 toolset; and (iii) the
expansion of efforts to develop and enhance new and existing methodologies and
software tools.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The
purchased assets and assumed liabilities in connection with the acquisition of
Lyon were recorded at their estimated fair values at the acquisition date. The
Company received an appraisal of the intangible assets which indicated that
approximately $8.2 million of the acquired intangible assets was acquired IPRD
that had not yet reached technological feasibility and had no alternative future
use (See Note 2). To determine the value of the IPRD, the Company's appraisal
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, discounted cash
flow and associated risks which included the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the viability of and potential changes to
future target markets. This analysis results in amounts assigned to the cost of
in-process research and development for projects that had not yet reached
technological feasibility and had no alternative future uses. Accordingly, the
acquired IPRD was charged to expense by the Company in its quarter ended June
30, 1998. In addition, the Company recorded a one-time charge of approximately
$145,000 for costs related to the RHO acquisition.
GOODWILL AMORTIZATION. Goodwill amortization increased to approximately
$363,000 for the three months ended June 30, 1998 from approximately $276,000
for the three months ended June 30, 1997. The additional expense reflects the
amortization of goodwill generated by the acquisition of Lyon in May 1998, and
IMR-N.I. in July 1997.
14
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
INCOME (LOSS) FROM OPERATIONS. Operating income (loss) was a loss for
the second quarter of 1998 of $65,000 compared to income of $3.4 million in the
comparable period of 1997. This decrease in income from operations was the
result of one-time charges for acquired IPRD of $8.2 million related to the Lyon
acquisition and approximately $145,000 of acquisition costs related to the RHO
acquisition. Excluding these one-time charges income from operations was $8.3
million compared to $3.4 million in the comparable period in 1997. Excluding
these one-time charges as a percentage of revenue, income from operations for
the three months ended June 30, 1998 increased to 22.2% from 18.0% in the
comparable period in 1997. The increase in income from operations as a
percentage of revenue reflects a five quarter trend whereby revenue has grown at
a faster rate than cost of revenue and SG&A expenses. The current increase is a
result of higher prices for the Company's services and increased efficiencies
relative to the Company's fixed costs. Due to increased infrastructure
investments management does not expect income from operations as a percentage of
revenue to increase significantly from current levels in the near term.
OTHER INCOME (EXPENSE). The Company realized net other income of
approximately $1.0 million in the second quarter of 1998 compared to net other
income of approximately $208,000 in the comparable period of 1997. Other income
in the second quarter of 1997 included interest expense of $69,000 and
investment and other income of $277,000. During the second quarter of 1998, the
Company recognized approximately $1.2 million in investment income primarily
from the investment of the net proceeds from its August 1997 public offering and
interest expense of approximately $110,000.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
approximately $2.8 million for the three months ended June 30, 1998 from
approximately $1.1 million for the three months ended June 30, 1997. This
increase is due to increased earnings, excluding the one-time charges for
acquired IPRD and acquisition costs, in the current year. This represents an
effective tax rate of 30.5% and 30.2% (excluding one-time charges) for the three
month periods ended June 30, 1998 and June 30, 1997, respectively.
NET INCOME (LOSS). Net income (loss) decreased to a $1.9 million loss
for the three months ended June 30, 1998 compared to $2.5 million of income for
the comparable 1997 period. This decrease is attributed to $8.3 million of
one-time charges related to acquisitions consummated in the second quarter of
1998. Net income from operations for the second quarter of 1998 excluding the
one-time charges for acquired IPRD and acquisition costs, is approximately $6.5
million compared to net income of approximately $2.5 million in the comparable
period in 1997. Excluding one-time charges, as a percentage of revenue, net
income for the three months ended June 30, 1998 increased to 17.4% from 13.2% in
the comparable period in 1997.
15
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUE. For the six months ended June 30, 1998, revenue increased to
$69.6 million representing a 110.1% increase over revenue of $33.1 million for
the six months ended June 30, 1997. The May 15, 1998 acquisition of Lyon and the
June 30, 1998 acquisition of RHO accounted for approximately $4.0 million of the
increase. Revenue from the Company's core transitional outsourcing services
(software development, application maintenance and migration and re-engineering
services) increased to $25.4 million or 113.0% over the first six months of
1997. Revenue from the Company's Year 2000 conversion services increased to
$38.1 million or 130.8% for the six months ended June 30, 1998, compared to
$16.5 million for the six months ended June 30, 1997.
COST OF REVENUE. Cost of revenue was $37.4 million, or 53.8% of
revenue, for the six months ended June 30, 1998, as compared to $18.4 million,
or 55.6% of revenue, for the six months ended June 30, 1997. The decrease in
cost of revenue as a percentage of revenue reflects: (i) a higher percentage of
Year 2000 conversion services, application development and legacy transformation
projects in the current year, which generally have resulted in higher margins
than contracts for the Company's professional service and maintenance service
offerings; (ii) a 19.2% devaluation in the Indian Rupee since June 30, 1997,
which resulted in reduced costs at the Company's Indian software development
centers; and (iii) improved utilization of software development personnel in
India and Northern Ireland. Wage costs continue to increase at a greater rate
than general inflation in each of the countries in which IMR has operations, and
the Company anticipates that this trend will continue in the near term. The
Company has been able to pass these wage increases on to its customers in the
form of increased prices for its service offerings. However, there can be no
assurance that the Company will be able to continue to increase prices to its
customers to offset future wage increases.
GROSS PROFIT. Gross profit increased to $32.2 million in the first six
months of 1998 compared to $14.7 million in the prior comparable period. As a
percentage of revenue, gross profit increased to 46.2% in the first six months
of 1998 compared to 44.4% in the first six months of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended
June 30, 1998, selling, general and administrative (SG&A) expenses increased to
$14.4 million, compared to $8.3 million for the six months ended June 30, 1997.
As a percentage of revenue, SG&A expenses for the six months ended June 30, 1998
decreased to 20.6% from 25.1% for the same period in 1997. This decrease as a
percentage of revenue occurred due to the rapid increase in revenue in the first
six months of 1998 compared to the rate of increase in SG&A in the same period.
The dollar increase in SG&A expenses is attributable to the Lyon and RHO
acquisitions, addition of SG&A expenses resulting from expansion of the
Company's delivery capacity, regionalization of operations, increases in costs
related to expanding the Company's general support staff (primarily sales,
recruiting and human resources personnel) and costs related to the establishment
of IMR-N.I. in the third quarter of 1997. The Company intends to continue to
expand its SG&A infrastructure in order to generate continued revenue growth.
16
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
RESEARCH AND DEVELOPMENT. Research and development (R&D) increased to
approximately $2.1 million for the six months ended June 30, 1998 from
approximately $348,000 in the comparable period of 1997. As a percentage of
revenue, R&D increased to 3.1% from 1.1% for the same period in 1997. The
increase in dollars is attributable to: (i) the acquisition of Lyon and RHO;
(ii) cessation of capitalizing software costs in 1997 in connection with the
substantial completion of the Company's TRANSFORM 2000 toolset; and (iii) the
expansion of efforts to develop and enhance new and existing methodologies and
software tools.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The
purchased assets and assumed liabilities in connection with the acquisition of
Lyon were recorded at their estimated fair values at the acquisition date. The
Company received an appraisal of the intangible assets which indicated that
approximately $8.2 million of the acquired intangible assets was acquired IPRD
that had not yet reached technological feasibility and had no alternative future
use (See Note 2). To determine the value of the IPRD, the Company's appraisal
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, discounted cash
flow and associated risks which included the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the viability of and potential changes to
future target markets. This analysis results in amounts assigned to the cost of
in-process research and development for projects that had not yet reached
technological feasibility and had no alternative future uses. Accordingly, the
acquired IPRD was charged to expense by the Company in its quarter ended June
30, 1998. In addition, the Company recorded a one-time charge of approximately
$145,000 for costs related to the RHO acquisition.
GOODWILL AMORTIZATION. Goodwill amortization increased to approximately
$653,000 for the six months ended June 30, 1998 from approximately $547,000 for
the six months ended June 30, 1997. The additional expense reflects the
amortization of goodwill generated by the acquisition of Lyon in May 1998,
IMR-N.I. and certain minority stockholders interests in IMR-India during 1997.
INCOME FROM OPERATIONS. Operating income for the first six months of
1998 was $6.7 million compared to income of $5.5 million in the comparable
period of 1997. This increase in income from operations was reduced
significantly as the result of one-time charges for acquired IPRD of $8.2
million related to the Lyon acquisition and approximately $145,000 of
acquisition costs related to the RHO acquisition. Excluding these one-time
charges income from operations was $15.0 million compared to $5.5 million in the
comparable period in 1997. Excluding these one-time charges, as a percentage of
revenue, income from operations for the six months ended June 30, 1998 increased
to 21.6% from 16.6% in the comparable period in 1997. The current increase is a
result of higher prices for the Company's services and increased efficiencies
relative to the Company's fixed costs. Due to increased infrastructure
investments management does not expect income from operations as a percentage of
revenue to increase significantly from current levels in the near term.
17
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
OTHER INCOME (EXPENSE). The Company realized net other income of
approximately $2.1 million in the first six months of 1998 compared to net other
income of approximately $385,000 in the comparable period of 1997. Other income
in the first six months of 1997 included interest expense of $136,000 and
interest and other income of $521,000. During the first six months of 1998, the
Company recognized approximately $2.3 million in investment income primarily
from the investment of the net proceeds from its August 1997 public offering and
interest expense of approximately $186,000.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
approximately $5.1 million for the six months ended June 30, 1998 from
approximately $1.9 million for the six months ended June 30, 1997. This increase
is due to increased earnings, excluding the one-time charges for acquired IPRD
and acquisition costs, in the current year. This represents an effective tax
rate, excluding one-time charges, of 29.9% and 33.0% for the six month periods
ended June 30, 1998 and 1997, respectively. The effective tax rate is lower in
the current period due to proportionally higher earnings of IMR-India for the
first three months of 1998, which earnings are taxed at a lower rate than
earnings generated in the U.S., and the Company's investment in tax free
marketable securities in the first three months of 1998.
NET INCOME. Net income decreased to $3.6 million for the six months
ended June 30, 1998 compared to $3.9 million of income for the comparable 1997
period. This decrease is attributable to $8.3 million of one-time charges
related to acquisitions consummated in the second quarter of 1998. Net income
from operations for the first six months of 1998, excluding the one-time charges
for acquired IPRD and acquisition costs, is approximately $12.0 million compared
to net income of approximately $3.9 million in the comparable period of 1997.
Excluding one-time charges as a percentage of revenue, net income for the six
months ended June 30, 1998 increased to 17.2% from 11.8% in the comparable
period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had working capital of $102.9 million;
a current ratio of 4.0 to 1.0; liquid assets (cash, cash equivalents and
marketable securities) of $91.6 million; and available bank lines of credit of
approximately $11.0 million. Additionally, cash provided by operations was $18.4
million for the six months ended June 30, 1998. During June 1998, the Company
entered into a contract to purchase land and construct new facilities for its
corporate headquarters. The total price of this project is expected to be
approximately $8.0 million. The Company has no other material financial
commitments. The Company continuously reviews its future cash requirements,
together with its available bank lines of credit and internally generated funds.
The Company believes it has adequate capital resources to meet all working
capital obligations and fund development of its current business operations.
18
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending material litigation.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 27. Financial Data Schedule
b) 1. The Registrant filed a report on Form 8-K on May 28, 1998
under Item 2 disclosing the acquisition of Lyon Consultants,
S.A.
2. The Registrant filed a report on Form 8-K/A on July 29,
1998 under Item 7 providing financial statements of Lyon
Consultants, S.A. and pro-forma financial information
related to the acquisition of Lyon Consultants, S.A.
19
<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 MARCH 9, 1999 /s/ SATISH K. SANAN
---------------------- -------------------------------------
Satish K. Sanan
Chief Executive Officer
Date MARCH 9, 1999 /s/ ROBERT M. MOLSICK
---------------------- -------------------------------------
Robert M. Molsick
Chief Financial Officer
20
<PAGE>
IMRGLOBAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
27 Financial Data Schedule................................22
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 64,106
<SECURITIES> 27,539
<RECEIVABLES> 20,338
<ALLOWANCES> 203
<INVENTORY> 0
<CURRENT-ASSETS> 137,291
<PP&E> 20,892
<DEPRECIATION> 5,232
<TOTAL-ASSETS> 176,137
<CURRENT-LIABILITIES> 34,413
<BONDS> 609
0
0
<COMMON> 2,911
<OTHER-SE> 137,659
<TOTAL-LIABILITY-AND-EQUITY> 176,137
<SALES> 0
<TOTAL-REVENUES> 69,584
<CGS> 0
<TOTAL-COSTS> 37,409
<OTHER-EXPENSES> 25,305
<LOSS-PROVISION> 203
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 8,735
<INCOME-TAX> 5,114
<INCOME-CONTINUING> 3,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,621
<EPS-PRIMARY> .14
<EPS-DILUTED> .10
<FN>
Amounts inapplicable or not disclosed as a separate line on the Statement of
Financial Position or Results of Operations are reported as 0 herein.
</FN>
</TABLE>
