================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission File Number 0-28840
IMRGLOBAL CORP.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2911475
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 SOUTH MISSOURI AVENUE, CLEARWATER, FLORIDA 33756
(Address of principal executive offices and zip code)
727-467-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of May 5, 2000, there were 38,838,200 outstanding shares of the
Registrant's Common Stock, par value $.10 per share.
<PAGE>
IMRGLOBAL CORP.
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
------------------------------
PAGE
----
ITEM 1. Consolidated Balance Sheets
as of December 31, 1999 and March 31, 2000.................. 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1999 and 2000..................................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999
and 2000.................................................... 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.. 18
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 I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMRGLOBAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------- ---------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 35,021 $ 23,183
Marketable securities .......................... 2,411 449
Accounts receivable, net of allowance........... 46,031 54,892
Unbilled work in process........................ 7,756 7,437
Deferred income taxes........................... 10,606 11,963
Prepaid expenses and other current assets....... 6,340 6,368
---------- ----------
Total current assets ..................... 108,165 104,292
Property and equipment, net of accumulated depreciation 36,973 40,305
Capitalized software costs, net of accumulated amortization 3,839 4,405
Deferred income taxes.............................. 2,309 1,364
Deposits and other assets.......................... 9,317 14,158
Intangible assets, net of accumulated amortization. 143,195 164,034
---------- ----------
Total assets ............................. $ 303,798 $ 328,558
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans.......................... $ 10,258 $ 1,350
Accounts payable................................ 10,349 6,164
Accrued compensation............................ 11,341 12,939
Deferred revenue................................ 3,286 3,388
Other current liabilities....................... 25,840 26,264
---------- ---------
Total current liabilities................. 61,074 50,105
Long-term debt..................................... 985 30,222
Deferred income taxes.............................. 1,594 855
Accrued compensation............................... 5,222 5,914
---------- ---------
Total liabilities......................... 68,875 87,096
---------- ---------
Shareholders' equity:
Preferred stock................................. - -
Common stock.................................... 3,713 3,904
Additional paid-in capital...................... 213,748 220,472
Retained earnings............................... 21,594 23,127
Notes receivable from share sales............... (703) (703)
Treasury stock.................................. (1,118) (2,247)
Accumulated other comprehensive loss............ (2,311) (3,091)
---------- ---------
Total shareholders' equity................ 234,923 241,462
---------- ---------
Total liabilities and shareholders' equity $ 303,798 $ 328,558
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended March 31,
----------------------------
1999 2000
--------- ---------
Revenue...................................... $ 51,888 $ 58,320
Cost of revenue.............................. 27,739 34,742
--------- ---------
Gross profit........................ 24,149 23,578
Selling, general and administrative expenses. 11,338 17,773
Research and development expenses............ 1,232 678
Goodwill and intangible amortization......... 821 2,445
Acquired in-process
research and development.................. 3,410 -
Acquisition costs............................ 1,936 -
--------- ---------
Income from operations.............. 5,412 2,682
Other income (expense):
Interest expense.................... (4) (349)
Interest income and other........... 1,599 458
--------- ---------
Total other income.................. 1,595 109
--------- ---------
Income before provision for income taxes..... 7,007 2,791
Provision for income taxes................... 3,340 1,258
--------- ---------
Net income.......................... $ 3,667 $ 1,533
========= =========
Earnings per share:
Basic............................... $0.12 $0.04
===== =====
Diluted............................. $0.10 $0.04
===== =====
Shares outstanding:
Basic............................... 30,565 38,402
========= =========
Diluted............................. 35,775 42,335
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 3,667 $ 1,533
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ............................... 1,865 3,830
In-process research and development ......................... 3,410 -
Deferred taxes .............................................. 1,249 (1,175)
Tax benefit of stock options ................................ 427 164
Changes in operating assets and liabilities:
Accounts receivable and unbilled work-in-process ......... (3,690) (5,370)
Other current assets ..................................... (321) (148)
Deposits and other assets ................................ (446) 62
Accounts payable and other liabilities ................... 2,026 (5,843)
Income tax ............................................... (262) 1,210
Deferred revenue ......................................... (1,205) (998)
-------- --------
Total adjustments ........................................ 3,053 (8,268)
-------- --------
Net cash provided by (used in) operating activities ...... 6,720 (6,735)
-------- --------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries,
net of cash acquired ....................................... 5,455 (16,682)
Investment in marketable securities, net ....................... (2,955) 1,962
Additions to capitalized software costs ........................ (703) (807)
Additions to property and equipment ............................ (6,295) (3,794)
Related party loan ............................................. - (4,902)
-------- --------
Net cash used in investing activities .................... (4,498) (24,223)
-------- --------
Cash flows from financing activities:
Net advances (repayments) from revolving credit line ........... (223) 275
Payments on long-term debt, notes and capital leases ........... (1,262) (200)
Proceeds from issuance of common stock ......................... 759 586
Increase in long-term debt ..................................... - 20,196
Purchase of treasury shares .................................... - (1,129)
-------- --------
Net cash provided by (used in) financing activities ...... (726) 19,728
-------- --------
Effect of exchange rate changes ................................... (703) (608)
-------- --------
Net increase (decrease) in cash and cash equivalents .............. 793 (11,838)
Cash and cash equivalents at beginning of period .................. 78,807 35,021
-------- --------
Cash and cash equivalents at end of period ........................ $ 79,600 $ 23,183
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and include all adjustments necessary for a fair presentation. The
results of operations for the three month period ended March 31, 2000 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, 1999, which are contained in IMRglobal's Annual Report on
Form 10-K ("Form 10-K") as filed with the Securities and Exchange Commission
(the "Commission").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --The consolidated financial statements
include the accounts of IMRglobal Corp. ("IMRglobal") and its wholly and
majority owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
REVENUE RECOGNITION --Fixed-price contract revenue and revenue from the
sale of software that requires significant modification 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.
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):
Three Months Ended
March 31,
------------------
1999 2000
------- -------
Weighted average
common stock outstanding ... 30,565 38,402
Weighted average
common stock equivalents ... 5,210 3,933
------ ------
Shares used in diluted earnings
per share calculation ...... 35,775 42,335
====== ======
6
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE COSTS--Capitalized software costs are recorded at
cost less accumulated amortization. Production costs for computer software that
is to be utilized as an integral part of a product or process is capitalized
when both (a) technological feasibility is established for the software and (b)
all research and development activities have been completed. Amortization is
charged to income based upon a revenue formula over the shorter of the remaining
estimated economic life of the product or estimated lifetime revenue of the
product.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
3. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the three months ended March 31, 2000
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Compre- Notes Accumulated
hensive Additional Receivable Other
Income Common Paid-in Retained from Share Treasury Comprehensive
(Loss) Stock Capital Earnings Sales Stock Loss Total
------ ----- ------- -------- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31 1999 ....... $ - $ 3,713 $213,748 $21,594 $(703) $(1,118) $(2,311) $234,923
Common stock issued in
connection with acquisitions - 83 6,082 - - - - 6,165
Employee stock purchase plan .... - 4 292 - - - - 296
Stock options exercised ......... - 104 186 - - - - 290
Tax benefit of
stock options exercised ...... - - 164 - - - - 164
Purchase of treasury stock ...... - - - - - (1,129) - (1,129)
Net income ...................... 1,533 - - 1,533 - - - 1,533
Translation adjustment .......... (780) - - - - - (780) (780)
------
Comprehensive income ............ $ 753 - - - - - - -
====== ------- -------- ------- ----- -------- -------- --------
Balance, March 31, 2000 ......... $ 3,904 $220,472 $23,127 $(703) $(2,247) $(3,091) $241,462
======= ======== ======= ====== ======== ======== ========
</TABLE>
Comprehensive income was $2.7 million for the three months ended March 31,
1999 and the difference between comprehensive income and net income is related
to translation adjustments.
7
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
4. BUSINESS COMBINATIONS
INTUITIVE GROUP LIMITED ("INTUITIVE")--On January 28, 2000, IMRglobal
acquired 100% of the outstanding stock of Intuitive Group Limited, headquartered
in London. Intuitive was a privately held provider of e-business and customer
relationship management ("eCRM") software solutions and services for the life
insurance and financial services markets. Intuitive has additional offices in
Boston and Sydney. In exchange for Intuitive's common stock, Intuitive's
shareholders received approximately $18.0 million in cash. In addition, $5.0
million in cash or IMRglobal common stock is payable to the Intuitive
shareholders during June 2000 based on the achievement of certain financial
objectives for the period ending March 31, 2000. The contingent payment will
result in an increase in the purchase price and the resulting goodwill. The
Intuitive acquisition is accounted for as a purchase pursuant to the provisions
of APB Opinion No. 16.
5. ACQUISITIONS
During 1999 and 2000, IMRglobal completed several acquisitions. The
following unaudited table compares IMRglobal's reported operating results to pro
forma information prepared on the basis that the acquisition had taken place at
the beginning of the fiscal year for each of the periods presented (in thousands
except per share amounts):
March 31,
-----------------------
1999 2000
----------- ----------
As reported:
Revenue............................ $ 51,888 $ 58,320
Net income......................... $ 3,667 $ 1,533
Basic earnings per share.......... $ 0.12 $ 0.04
Diluted earnings per share........ $ 0.10 $ 0.04
Pro forma (unaudited):
Revenue............................ $ 76,139 $ 60,204
Net income......................... $ 3,224 $ 1,884
Basic earnings per share.......... $ 0.09 $ 0.05
Diluted earnings per share........ $ 0.08 $ 0.04
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 acquisitions been consummated at the beginning of 1999 or 2000 or of future
operations of the combined companies under the ownership and management of
IMRglobal.
8
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
6. SEGMENT INFORMATION (IN THOUSANDS)
IMRglobal operates several business units located in North America, Europe
and Asia for which financial information is maintained and reported to the chief
operating decision makers of the Company. In determining the reporting segments
of the Company, management has aggregated the business units that have similar
economic characteristics, products and services and types of customers.
IMRglobal has three reporting segments. The Information Technology ("IT")
segment provides consulting and technology services to large companies in North
America, Europe and Asia. The Health Care Solutions segment provides business
and consulting services to clients in the health care industry. Software
Development Centers consist of two Indian facilities and one Northern Ireland
facility that provide software development services to the IT segment
organizations.
The chief operating decision makers evaluate performance and allocate
resources based on revenue and net margin. Net margin is gross profit less
selling, general and administrative expenses. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. IMRglobal does not allocate income taxes, other income or
expense, research and development, intangible amortization and non-recurring
charges to its reporting segments. In addition, IMRglobal accounts for services
provided by the Software Development Centers to the IT segment at current market
prices.
Information regarding the reporting segments is as follows:
Health Software
Information Care Delivery
Technology Solutions Centers Total
THREE MONTHS ENDED MARCH 31, 2000 -------- -------- -------- --------
Revenue from external customers $ 50,072 $ 8,050 $ 198 $ 58,320
======== ========= ======= ========
Intersegment revenue.......... $ 3,161 $ - $ 6,037 $ 9,198
======== ========= ======= ========
Depreciation expense.......... $ 766 $ 50 $ 328 $ 1,144
======== ========= ======= ========
Segment net margin............ $ 3,100 $ 2,411 $ 294 $ 5,805
======== ========= ======= ========
Segment assets................ $132,705 $ 17,479 $22,590 $172,774
======== ========= ======= ========
THREE MONTHS ENDED MARCH 31, 1999
Revenue from external customers $ 51,734 $ - $ 154 $ 51,888
======== ========= ======= ========
Intersegment revenue.......... $ - $ - $ 8,724 $ 8,724
======== ========= ======= ========
Depreciation expense.......... $ 780 $ - $ 263 $ 1,043
======== ========= ======= ========
Segment net margin............ $ 10,936 $ - $ 1,875 $ 12,811
======== ========= ======= ========
Segment assets................ $135,521 $ - $26,470 $161,991
======== ========= ======= ========
9
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
6. SEGMENT INFORMATION (IN THOUSANDS) (CONTINUED)
Following are reconciliations of reporting segment net margin and assets
to the amounts included in the consolidated financial statements:
Three Months Ended March 31,
------------------------
1999 2000
----------- -----------
Total net margin for reportable segments..... $ 12,811 $ 5,805
Research and development..................... (1,232) (678)
Goodwill and intangible amortization......... (821) (2,445)
Acquired in-process research and development. (3,410) -
Acquisition costs............................ (1,936) -
Other income................................. 1,595 109
----------- ----------
Consolidated income
before provision for income taxes......... $ 7,007 $ 2,791
=========== ==========
December 31, March 31,
----------- ------------
1999 2000
----------- ------------
Total assets for reportable segments......... $ 161,991 $ 172,774
Elimination of intersegment receivables...... (14,303) (21,577)
Deferred income taxes........................ 12,915 13,327
Intangible assets............................ 143,195 164,034
----------- ------------
Consolidated total assets.................... $ 303,798 $ 328,558
=========== ============
10
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
7. RESTRUCTURING CHARGE
In the fourth quarter of 1999, IMRglobal implemented a restructuring plan
to redeploy resources to exploit its expanding e-business service offering and
better align its organization with its corporate strategy. The restructuring
plan included the closure of two UK offices, the write-down of specific
mainframe software and hardware and the reduction of its global workforce. The
restructuring charge is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Cash Accrued
Paid Through Charge
Restructuring Write-Down March 31, March 31,
Charge of Assets 2000 2000
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Closure of U.K. facilities:
Severance payments
(80 employees)...... $ 664 $ - $ (640) $ 24
Long-term commitments.. 4,626 - (242) 4,384
Goodwill............... 348 (348) - -
Property and equipment. 1,089 (1,089) - -
Other severance payments
(70 employees)...... 1,809 - (1,147) 662
Property and equipment. 3,691 (3,691) - -
Other restructuring
costs............... 150 - (30) 120
-------- --------- --------- --------
$ 12,377 $ (5,128) $ (2,059) $ 5,190
========= ========= ========= ========
</TABLE>
Long-term commitments relating to real estate leases are expected to be
paid over the life of the underlying lease agreements which expire through 2013.
The remaining accrued charge is expected to be paid by December 31, 2000.
8. CONTINGENCIES
During May 1998, IMRglobal acquired 100% of Lyon Consultants S.A. ("Lyon")
for approximately $16.7 million in cash and 531,353 shares in IMRglobal. In
addition, the acquisition agreement provides that if the average price of the
IMRglobal shares on NASDAQ is less than $27.24 per share for the seven trading
days prior to May 15, 1999, then IMRglobal will pay the former Lyon shareholders
the difference between the average price on NASDAQ and $27.24 multiplied by
499,353 shares. On May 15, 1999 the average price of IMRglobal's shares for the
seven trading days prior to May 15, 1999 was $18.768 per share. Accordingly, the
liability to the former shareholders of Lyon would have been approximately $4.2
million at that date.
11
<PAGE>
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
8. CONTINGENCIES (CONTINUED)
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. At May 11, 2000, the
estimated liability for the contingency was $9.0 million.
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.
9. RELATED PARTY TRANSACTION
Other assets include a $4.9 million note receivable from IMRglobal's Chief
Executive Officer ("CEO") in accordance with his employment agreement. This note
bears interest at prime plus 1% (currently 9.3%) and is repayable at the earlier
of May, 2004 or 180 days after the CEO terminates employment with IMRglobal.
12
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, some matters discussed in our report
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We note that a variety of risk factors could cause our
actual results and experience to differ materially from the anticipated results
or other expectations expressed in our forward-looking statements including the
following:
o our ability to continue to increase our revenue;
o our ability to reduce the rate that we expand our selling, general
and administrative infrastructure;
o our ability to leverage our global corporate headquarters and obtain
financing in fiscal 2000; and
o our anticipation that research and development expenses will be under
2.0% of revenue for the remainder of fiscal 2000.
Reference is made in particular to the remaining discussion in this report and
set forth in our Annual Report on Form 10-K for the fiscal year ended December
31, 1999, as filed with the Commission.
CURRENT DEVELOPMENTS
RESULTS OF OPERATIONS. After our 1996 initial public offering, we
experienced sequential revenue and per share growth (excluding one-time charges)
for each of the eleven quarters ended June 30, 1999. However, both revenue and
earnings decreased in the following two quarters and included a loss for the
three months ended December 31, 1999.
For the three months ended March 31, 2000, our profitability improved
significantly compared to the three months ended December 31, 1999. This
improvement was primarily due to the expansion of our revenue as our clients
engaged in more IT projects after their Year 2000 technology issues were
settled. However, our earnings for the three months ended March 31, 2000 are
still below the levels achieved a year earlier for the three months ended March
31, 1999. The decrease in earnings is primarily a result of lower utilization of
our billable resources in the U.S., U.K. and India and the 1999 expansion of our
selling, general and administrative expenses in expectation of higher revenue
growth than was actually achieved.
NON-CASH CHARGES. Due to the large number of acquisitions consummated in
the past two years and the completion of our global headquarters in Clearwater,
Florida, our amortization and depreciation expense have increased significantly
as a proportion of our total expenses. Accordingly, in addition to our analysis
of income from operations, net income and earnings per share we also present
such results on a pro forma basis exclusive of the impact of amortization and
depreciation.
13
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUE. For the three months ended March 31, 2000, our revenue increased
to $58.3 million, representing a 12.4% increase over revenue of $51.9 million
for the three months ended March 31, 1999. This increase is attributable to the
acquisitions accounted for under the purchase method between March 31, 1999 and
March 31, 2000. Revenue from our service offerings not related to our Year 2000
service offerings, increased to $58.3 million (including revenue from purchase
acquisitions), representing a 61.0% increase over non Year 2000 revenue of $36.2
million for the three months ended March 31, 1999. A substantial portion of this
revenue growth is attributable to our e-business service offerings, which
represent 30.9% of revenue for the quarter ended March 31, 2000, compared to
12.3% for the quarter ended March 31, 1999. Revenue from our business consulting
services also increased substantially representing 19.8% of revenue for the
quarter ended March 31, 2000 compared to 7.3% of revenue for the quarter ended
March 31, 1999. Revenue from our Year 2000 conversion services decreased 100.0%
to $-0- for the quarter ended March 31, 2000 compared to $15.7 million for the
quarter ended March 31, 1999.
COST OF REVENUE. Cost of Revenue was $34.7 million, or 59.6% of revenue,
for the three months ended March 31, 2000, as compared to $27.7 million, or
53.5% of revenue, for the three months ended March 31, 1999. The increase in
cost of revenue as a percentage of revenue was primarily attributable to reduced
utilization of our software development facilities in India and Northern
Ireland.
GROSS PROFIT. Gross profit decreased 2.4% to $23.6 million in the three
months ended March 31, 2000 compared to $24.1 million in the three months ended
March 31, 1999. As a percentage of revenue, our gross profit decreased to 40.4%
in the three months ended March 31, 2000 compared to 46.5% in the three months
ended March 31, 1999. The decrease in gross profit was primarily attributable to
reduced utilization at our software development facilities. This decrease was
partially offset by higher margins in our e-business service offerings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). For the three
months ended March 31, 2000, SG&A expenses increased to $17.8 million, compared
to $11.3 million for the three months ended March 31, 1999. As a percentage of
revenue, SG&A expenses for the three months ended March 31, 2000 increased to
30.5% from 21.9% for the same period in 1999. The primary reason for the
increase as a percentage of revenue was due to the following:
o 100% expansion of our sales force over the past 12 months;
o Aggressive implementation of certain marketing initiatives; and
o Integration costs related to the multiple acquisitions made over the
past 12 months.
We expect to reduce the rate that we expand our SG&A infrastructure over
the next nine months.
14
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $678,000 for the three months ended March 31, 2000 compared to $1.2
million for the three months ended March 31, 1999. As a percentage of revenue,
R&D was 1.2% for the three months ended March 31, 2000 and 2.4% for the three
months ended March 31, 1999. This reduction reflects our decision to terminate
several R&D initiatives during the end of fiscal 1999. We anticipate that R&D
expenses will be under 2.0% of revenue for the remainder of fiscal 2000.
GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible amortization
increased to approximately $2.4 million for the three months ended March 31,
2000 from approximately $821,000 for the three months ended March 31, 1999. The
additional expense primarily reflects the amortization of goodwill and
intangibles generated by our 1999 acquisitions.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. During the three months
ended March 31, 1999 in connection with our acquisition of Fusion Systems Japan
Co., Ltd., we incurred a $3.4 million expense for acquired in-process research
and development costs. This expense was based on an appraisal of the intangible
assets acquired in the acquisition.
ACQUISITION COSTS. During the three months ended March 31, 1999, we
acquired Atechsys S.A., which was accounted for as a pooling of interests.
Acquisition costs attributable to this merger were approximately $1.9 million.
INCOME FROM OPERATIONS. Income from operations for the three months ended
March 31, 2000 was $2.7 million compared to $5.4 million for the three months
ended March 31, 1999. As a percentage of revenue, income from operations for the
three months ended March 31, 2000 decreased to 4.6% from 10.4% in the three
months ended March 31, 1999. Excluding amortization, depreciation and one-time
charges for acquired in-process research and development and acquisition costs,
income from operations for the three months ended March 31, 2000 decreased to
$6.5 million compared to $12.6 million for the three months ended March 31,
1999.
OTHER INCOME. We realized $109,000 of other income (net of other expenses)
in the three months ended March 31, 2000 and $1.6 million in the three months
ended March 31, 1999. In 2000, net other income consists primarily of $458,000
of investment income offset by interest expense of $349,000. This reduction
reflects the decrease in our invested cash balances over the past year and an
expansion of our credit facilities. In 1999, other income consists primarily of
investment income generated by our cash and marketable securities
15
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
PROVISION FOR INCOME TAXES. Our effective tax rate was 45.1% for the three
months ended March 31, 2000 compared to 47.7% for the three months ended March
31, 1999. Excluding non-deductible acquisition costs, intangible asset
amortization, and life insurance distributions, our effective tax rate was 35.7%
for the three months ended March 31, 2000 compared to 34.2% for the three months
ended March 31, 1999. We have historically enjoyed a low effective tax rate
primarily due to our industry's low tax rates in India. Accordingly, the
effective tax rate has increased as a result of recent acquisitions in Japan,
and the United States, which have higher tax rates than India.
We have not recorded deferred income taxes applicable to undistributed
earnings of IMRglobal-India. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for United States federal and state
income tax has been provided thereon.
NET INCOME. Net income decreased to $1.5 million for the three months
ended March 31, 2000 compared to $3.7 million for the three months ended March
31, 1999. Excluding amortization, depreciation and one-time charges, net income
decreased to $4.3 million for the three months ended March 31, 2000 compared to
$9.1 million for the three months ended March 31, 1999. This decrease reflects
lower gross profits and higher SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had:
o working capital of $54.2 million;
o liquid assets including cash, cash equivalents and marketable securities
of approximately $23.6 million; and
o available bank lines of credit of approximately $1.9 million.
Net cash used in operating activities was $6.7 million for the three
months ended March 31, 2000. The negative cash flow from operations primarily
reflects the growth in our accounts receivable balances as a result of revenue
growth and decreased current liabilities as we paid significant accrued
compensation and restructuring charges in the March 31, 2000 quarter.
Net cash used in investing activities was $24.2 million for the three
months ended March 31, 2000. We invested an additional $16.7 million in the
acquisition of a subsidiary, $3.8 million for property and equipment and $4.9
million in a loan to our CEO.
Net cash provided by financing activities was $19.7 million for the three
months ended March 31, 2000. We added $20.2 million of bank debt in the quarter
primarily to finance our investing activities.
16
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Of the $23.6 million of liquid assets at March 31, 2000, $20.2 million was
held outside of the U.S. Over $12.0 million of the liquid assets held outside of
the U.S. will be subject to additional taxation if transferred to the U.S. In
addition, liquid assets in India were $8.1 million and require governmental
approval for repatriation outside of India. Although we anticipate receiving
India government approval to repatriate these funds to other foreign
jurisdictions, this approval is not assured.
We maintain a $30.0 million credit facility expiring in February 2003.
This facility bears interest at LIBOR plus 0.6% (currently 6.2%) and is
collateralized by virtually all of our assets. The interest rate may be
increased by up to an additional 1.15% based on certain financial ratios. At
March 31, 2000, we had $700,000 available under this facility. Certain of our
subsidiaries also maintain additional revolving credit line facilities totaling
$3.3 million. At March 31, 2000, the amount available under these facilities was
$1.9 million. The respective subsidiary's accounts receivable and property and
equipment collateralize these facilities.
We may be obligated to pay certain cash contingent payments in connection
with our 1998 acquisition of Lyon, our 1999 acquisition of Neverdahl and our
2000 acquisition of Intuitive. The Lyon contingency is based on the difference
between the average of our stock price as listed on NASDAQ for the seven trading
days prior to May 15, 2000 and $34.05 per share multiplied by 499,353 shares.
The Intuitive acquisition contingency is $5.0 million and can be paid in cash or
IMRglobal common stock. If it is paid in cash it will be paid through a capital
investment from our India subsidiary into our U.K. subsidiary during June 2000.
The maximum amount of Neverdahl acquisition contingencies is $2.5 million and is
payable in August 2000.
We anticipate leveraging our global corporate headquarters to obtain $17.0
million to $24.0 million of financing in the next thirty to sixty days. Part of
the proceeds from this financing may be required to fund the Lyon contingency.
To the extent this financing is not received, we will seek additional sources of
cash from our international operations and other financing sources.
We continuously review our future cash requirements, together with our
available bank lines of credit and internally generated funds. We believe we
have adequate capital resources to meet all working capital obligations and fund
the development of our current business operations, including the following
business objectives:
o Continued expansion of existing business;
o Continued funding of research and development initiatives;
o Anticipated levels of capital expenditures including the construction
of our corporate headquarters; and
o Any debt repayment requirements, including those that may be required
pursuant to the integration of our acquisitions.
17
<PAGE>
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ASSET MANAGEMENT
Our accounts receivable balance was $54.9 million at March 31, 2000, an
increase of $8.9 million from December 31, 1999. The increase was primarily due
to a new acquisition and revenue growth of 29.5% over the prior quarter. A
common financial measure is the calculation of days sales outstanding in
accounts receivable ("DSO"). At March 31, 2000, our DSO was 82 days. The Orion
acquisition added approximately 12 days to our DSO due to the traditionally
longer payment cycles prevalent in the health care industry. In addition,
accounts receivable in Canada, France, Japan and the U.K. include value added
taxes that are not included in revenue. Without valued added taxes, DSO would be
approximately 4 days less than the above levels.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
IMRglobal is exposed to market risk from changes in interest rates and
exchange rates between the U.S. dollar and the currencies of various countries
in which we operate. IMRglobal does not engage in hedging transactions and is
not a party to any leveraged derivatives.
18
<PAGE>
IMRGLOBAL CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending material litigation.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
o The Registrant filed a report on Form 8-K on January 4, 2000 under
Item 5 disclosing the restructuring plan and amendment to the
Fusion acquisition.
o The Registrant filed a report on Form 8-K on January 25, 2000 under
Item 5 disclosing lower than anticipated revenue and earnings for
the fourth quarter of 1999.
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 May 15, 2000 /s/ Satish K. Sanan
------------ ------------------------------
Satish K. Sanan
Chief Executive Officer
Date May 15, 2000 /s/ Robert M. Molsick
------------ ------------------------------
Robert M. Molsick
Chief Financial Officer
20
<PAGE>
IMRGLOBAL CORP.
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 MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 23,183
<SECURITIES> 449
<RECEIVABLES> 57,182
<ALLOWANCES> 2,290
<INVENTORY> 0
<CURRENT-ASSETS> 104,292
<PP&E> 50,920
<DEPRECIATION> 10,615
<TOTAL-ASSETS> 328,558
<CURRENT-LIABILITIES> 50,105
<BONDS> 30,222
0
0
<COMMON> 3,904
<OTHER-SE> 237,558
<TOTAL-LIABILITY-AND-EQUITY> 328,558
<SALES> 0
<TOTAL-REVENUES> 58,320
<CGS> 0
<TOTAL-COSTS> 34,742
<OTHER-EXPENSES> 20,930
<LOSS-PROVISION> (34)
<INTEREST-EXPENSE> 349
<INCOME-PRETAX> 2,791
<INCOME-TAX> 1,258
<INCOME-CONTINUING> 1,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,533
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1>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>
