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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, 2001
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 April 27, 2001, there were 44,076,525 outstanding shares of the
Registrant's Common Stock, par value $.10 per share.
IMRGLOBAL CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1. Consolidated Balance Sheets
as of December 31, 2000 and March 31, 2001.................... 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 2000 and 2001....................................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 2000 and 2001....................................... 5
Notes to Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................20
ITEM 2. Changes in Securities and Use of Proceeds...................20
ITEM 3. Defaults on Senior Securities...............................20
ITEM 4. Submission of Matters to a Vote of Securities Holders.......20
ITEM 5. Other Information...........................................20
ITEM 6. Exhibits and Reports on Form 8-K............................20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMRGLOBAL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
2000 2001
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 19,689 $ 10,963
Accounts receivable, net of allowance ............................................ 41,738 47,395
Unbilled work in process ......................................................... 13,747 17,588
Deferred income taxes ............................................................ 14,095 14,319
Prepaid expenses and other current assets ........................................ 4,159 3,452
--------- ---------
Total current assets ....................................................... 93,428 93,717
Property and equipment, net of accumulated depreciation ............................. 41,521 40,709
Capitalized software costs, net of accumulated amortization ......................... 5,664 5,664
Deposits and other assets ........................................................... 14,044 12,407
Intangible assets, net of accumulated amortization:
Goodwill ......................................................................... 160,698 152,971
Acquired technology .............................................................. 3,480 3,206
--------- ---------
Total assets ............................................................... $ 318,835 $ 308,674
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 5,151 $ 4,577
Accrued compensation ............................................................. 18,079 16,450
Deferred revenue ................................................................. 6,360 5,195
Other current liabilities ........................................................ 20,286 18,189
--------- ---------
Total current liabilities .................................................. 49,876 44,411
Long-term debt ...................................................................... 30,894 31,050
Deferred income taxes ............................................................... 254 259
Accrued compensation and other ...................................................... 6,031 5,253
--------- ---------
Total liabilities .......................................................... 87,055 80,973
--------- ---------
Shareholders' equity:
Common stock ..................................................................... 4,140 4,437
Additional paid-in capital ....................................................... 216,639 217,478
Retained earnings ................................................................ 21,779 22,454
Notes receivable from share sales ................................................ (469) (469)
Treasury stock ................................................................... (2,661) (2,661)
Accumulated other comprehensive loss ............................................. (7,648) (13,538)
--------- ---------
Total shareholders' equity ................................................. 231,780 227,701
--------- ---------
Total liabilities and shareholders' equity ................................. $ 318,835 $ 308,674
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 2001
-------- --------
Revenue ......................................................................... $ 58,320 $ 61,604
Cost of revenue ................................................................. 34,742 37,115
-------- --------
Gross profit ........................................................... 23,578 24,489
Selling, general and administrative expenses .................................... 17,773 19,123
Research and development expenses ............................................... 678 74
Goodwill and intangible amortization ............................................ 2,445 2,585
-------- --------
Income from operations ................................................. 2,682 2,707
Other income (expense):
Interest expense ....................................................... (349) (536)
Interest income and other .............................................. 458 (59)
-------- --------
Total other income (expense) ........................................... 109 (595)
-------- --------
Income before provision for income taxes and cumulative
effect of a change in accounting method ...................................... 2,791 2,112
Provision for income taxes ...................................................... 1,258 1,437
-------- --------
Income before cumulative effect of a
change in accounting method .................................................. 1,533 675
Cumulative effect of a change in
accounting method, net of income taxes ....................................... (2,707) --
-------- --------
Net income (loss) ...................................................... $ (1,174) $ 675
========= ========
Earnings (loss) per share:
Basic .................................................................. $ (0.03) $ 0.02
======== ========
Diluted ................................................................ $ (0.03) $ 0.02
======== ========
Diluted before cumulative effect of a
change in accounting method ......................................... $ 0.04 $ 0.02
======== ========
Shares outstanding:
Basic .................................................................. 38,402 43,438
======== ========
Diluted ................................................................ 38,402 44,435
======== ========
Diluted before cumulative effect of a
change in accounting method ......................................... 42,335 44,435
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
IMRGLOBAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 2001
-------- --------
Cash flows from operating activities:
Net income (loss) ............................................................... $ (1,174) $ 675
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ................................................ 3,830 4,074
Tax benefit of stock options ................................................. 164 41
Income taxes ................................................................. 35 (73)
Cumulative effect of a change in accounting method ........................... 2,707 --
Changes in operating assets and liabilities:
Accounts receivable, unbilled work-in-process and deferred revenue ........ (6,368) (10,662)
Other assets .............................................................. (86) 1,894
Other liabilities ......................................................... (5,843) (4,737)
-------- --------
Total adjustments ......................................................... (5,561) (9,463)
-------- --------
Net cash used in operating activities ..................................... (6,735) (8,788)
-------- --------
Cash flows from investing activities:
Acquisition of consolidated subsidiaries,
net of cash acquired ........................................................ (16,682) --
Marketable securities, net ...................................................... 1,962 --
Additions to capitalized software costs ......................................... (807) (220)
Additions to property and equipment ............................................. (3,794) (748)
Related party loan .............................................................. (4,902) (75)
-------- --------
Net cash used in investing activities ..................................... (24,223) (1,043)
-------- --------
Cash flows from financing activities:
Net advances (repayments) from revolving credit line ............................ 275 --
Payments on long-term debt ...................................................... (200) (318)
Increase in long-term debt ...................................................... 20,196 523
Proceeds from issuance of common stock .......................................... 586 1,095
Purchase of treasury shares ..................................................... (1,129) --
-------- --------
Net cash provided by financing activities ................................. 19,728 1,300
-------- --------
Effect of exchange rate changes .................................................... (608) (195)
-------- --------
Net decrease in cash and cash equivalents .......................................... (11,838) (8,726)
Cash and cash equivalents at beginning of period ................................... 35,021 19,689
-------- --------
Cash and cash equivalents at end of period ......................................... $ 23,183 $ 10,963
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(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, 2001 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, 2000, 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 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.
Revenue attributable to contracts for software licenses that do not
require significant modification is recognized after the software has been
delivered and all significant uncertainties regarding client acceptance have
expired. Service revenue from time-and-materials services is recognized as the
services are provided. Revenue attributable to maintenance is deferred and
recognized ratably over the contract period.
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.
Effective January 1, 2000, the Company changed its method of accounting
for revenue recognition for contract related revenue from claims dollar recovery
projects, in accordance with Staff Accounting Bulletin (SAB) No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS. These projects involve identifying overpaid
or erroneously paid insurance claims to be recovered from healthcare providers
by medical insurance companies. Previously, the Company recognized revenue, less
an estimated percentage for claims not accepted, as identified claims were
submitted to the client. Under the new accounting method adopted retroactive to
January 1, 2000, the Company now recognizes revenue upon the earlier of
collection of the findings based fee or notification of acceptance of submitted
claims from the client. The cumulative effect of the change on prior years
resulted in a charge to income of $2.7 million (net of income taxes of $1.7
million), which is included in results of operations for the quarter ended March
31, 2000.
6
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the quarter ended March 31, 2000, the Company recognized $498,000
in revenue that was included in the cumulative effect adjustment as of January
1, 2000.
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,
---------------------
2000 2001
------- -------
Weighted average common stock outstanding ................ 38,402 43,438
Stock option plans
Options assumed exercised ............................. 8,111 1,861
Treasury stock which could be purchased ............... (4,178) (864)
------- -------
Weighted average common stock equivalents ................ 3,933 997
------- -------
Shares used in diluted earnings per share calculation .... 42,335 44,435
======= =======
For the quarter ended March 31, 2000 the effect of incremental shares
from common stock equivalents is not included in the calculation of diluted net
loss per share as the inclusion of such equivalents would be anti- dilutive.
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.
RECLASSIFICATIONS--Certain amounts in the 2000 financial statements
have been reclassified to conform to 2001 presentation.
7
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
3. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the three months ended March 31,
2001 are summarized as follows (in thousands):
COMPRE- NOTES ACCUMULATED
HENSIVE ADDITIONAL RECEIVABLE OTHER
INCOME COMMON PAID-IN RETAINED FROM SHARE TREASURY COMPREHENSIVE
(LOSS) STOCK CAPITAL EARNINGS SALES STOCK LOSS TOTAL
------- ------- -------- -------- ------- --------- --------- ---------
Balance, December 31, 2000 ........ $ -- $ 4,140 $216,639 $ 21,779 $ (469) $ (2,661) $ (7,648) $ 231,780
Employee stock purchase plan ...... -- 4 239 -- -- -- -- 243
Stock options exercised ........... -- 293 559 -- -- -- -- 852
Tax benefit of
stock options exercised ........ -- -- 41 -- -- -- -- 41
Net income ........................ 675 -- -- 675 -- -- -- 675
Translation adjustment ............ (5,890) -- -- -- -- -- (5,890) (5,890)
-------
Comprehensive loss ................ $(5,215) -- -- -- -- -- -- --
======= ------- -------- -------- ------- --------- --------- ---------
Balance, March 31, 2001 ........... $ 4,437 $217,478 $ 22,454 $ (469) $(2,661) $ (13,538) $ 227,701
======= ======== ======== ======== ======= ========= =========
Comprehensive loss is comprised entirely of foreign currency
translation adjustments. Comprehensive loss for the three months ended March 31,
2000 was $2.0 million.
4. 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
Solutions and Services ("IT") segment provides consulting and technology
services to large companies in North America, Europe and Asia. The Health Care
and Government Solutions segment provides business and consulting services to
clients in the health care and governmental industries. Software Development
Centers consist of two Indian facilities 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.
8
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
4. SEGMENT INFORMATION (IN THOUSANDS) (CONTINUED)
Information regarding the reporting segments is as follows:
INFORMATION HEALTH
TECHNOLOGY CARE AND SOFTWARE
SOLUTIONS GOVERNMENT DELIVERY
AND SERVICES SOLUTIONS CENTERS TOTAL
-------- -------- -------- --------
THREE MONTHS ENDED MARCH 31, 2001
Revenue from external clients ........ $ 50,523 $ 11,081 $ -- $ 61,604
======== ======== ======== ========
Intersegment revenue ................. $ 773 $ -- $ 7,189 $ 7,962
======== ======== ======== ========
Depreciation expense ................. $ 1,243 $ 78 $ 168 $ 1,489
======== ======== ======== ========
Segment net maragin .................. $ 3,175 $ 1,053 $ 1,138 $ 5,366
======== ======== ======== ========
Segment assets ....................... $140,931 $ 16,124 $ 13,647 $170,702
THREE MONTHS ENDED MARCH 31, 2000
Revenue from external clients ........ $ 49,852 $ 8,270 $ 198 $ 58,320
======== ======== ======== ========
Intersegment revenue ................. $ 3,161 $ -- $ 6,037 $ 9,198
======== ======== ======== ========
Depreciation expense ................. $ 1,007 $ 50 $ 328 $ 1,385
======== ======== ======== ========
Segment net margin ................... $ 3,100 $ 2,411 $ 294 $ 5,805
======== ======== ======== ========
Segment net assets ................... $132,705 $ 17,479 $ 22,590 $172,774
======== ======== ======== ========
9
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
4. 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,
----------------------------
2000 2001
--------- ---------
Total net margin for reportable segments ...... $ 5,805 $ 5,366
Research and development ...................... (678) (74)
Goodwill and intangible amortization .......... (2,445) (2,585)
Other income (expense) ........................ 109 (595)
--------- ---------
Income before provision for income taxes
and cumulative effect of a change
in accounting method ....................... $ 2,791 $ 2,112
========= =========
December 31, March 31,
------------ ---------
2000 2001
--------- ---------
Total assets for reportable segments .......... $ 172,475 $ 170,702
Elimination of intersegment receivables ....... (31,913) (32,524)
Deferred income taxes ......................... 14,095 14,319
Intangible assets ............................. 164,178 156,177
--------- ---------
Total assets .................................. $ 318,835 $ 308,674
========= =========
10
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
5. 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 three European offices, the write-down of specific
mainframe software and hardware and the reduction of its global workforce.
During the third quarter of 2000, IMRglobal initiated a plan to consolidate
Canadian operations by closing three western Canada offices. The restructuring
charge is summarized as follows (in thousands):
CASH PAID ACCRUED
WRITE- THROUGH ADJUSTMENT CHARGE
RESTRUCTURING DOWN MARCH 31, FOR CERTAIN MARCH 31,
CHARGE OF ASSETS 2001 RESERVES 2001
-------- -------- -------- -------- --------
Closure of European facilities:
Severance payments
(80 employees) ............... $ 664 $ -- $ (1,386) $ 722 $ --
Long-term commitments ........... 4,626 -- (1,045) (2,032) 1,549
Goodwill ........................ 348 (348) -- -- --
Property and equipment .......... 1,089 (1,089) -- -- --
Closure of Canadian facilities:
Severance payments
(40 employees) ............... 298 -- (298) -- --
Long-term commitments ........... 271 -- (131) -- 140
Property and equipment .......... 339 (339) -- -- --
Other severance payments ........... --
(70 employees) .................. 1,809 -- (1,696) (113) --
Property and equipment ............. 3,691 (3,691) -- -- --
Other restructuring costs .......... 157 (126) (295) 343 79
-------- -------- -------- -------- --------
$ 13,292 $ (5,593) $ (4,851) $ (1,080) $ 1,768
======== ======== ======== ======== ========
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, 2001.
11
IMRGLOBAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
6. CONTINGENCIES
IMRglobal's French subsidiary, Lyon, has claimed a special tax
exemption related to research and development (R&D) for the 1993 through 1995
fiscal years. The French taxing authorities have challenged this exemption and
have made an assessment of $786,000. Lyon contested the decision and the tax
authorities asked the French Ministry of Research to rule on the issue. The
Ministry of Research ruled that the time spent developing the concept would be
considered as R&D charges, but programming time would not. Accordingly, the
estimate was revised downward and $100,000 has been accrued as a liability in
the accompanying balance sheet related to this issue.
7. RELATED PARTY TRANSACTION
Deposits and other assets include a 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 1/2%) and is repayable at
the earlier of May, 2004 or 180 days after the CEO terminates employment with
IMRglobal. At December 31, 2000 and March 31, 2001, the amount drawn on this
facility was $4.8 million and $5.0 million, respectively.
12
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMRGLOBAL CORP.
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 expectation to complete our merger with CGI Group Inc. in
June 2001;
o our belief that we have adequate capital reserves to meet all
working capital obligations.
Reference is made in particular to the remaining discussion in this report and
as set forth in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, as filed with the Commission.
CURRENT DEVELOPMENTS
MERGER--On February 21, 2001, we announced the execution of a Merger
Agreement with CGI Group Inc., a major IT outsourcing company headquartered in
Montreal, Quebec. The merger agreement has been approved by our Board of
Directors and is subject to approval by our shareholders, certain regulatory
approvals and satisfaction of other closing conditions. Upon completion of the
merger, holders of IMRglobal common stock will receive, for each share of
IMRglobal common stock, 1.5974 Class A Subordinate Shares of CGI Group Inc.
Except as explicitly noted, the following discussion of business results, risk
factors and forward- looking statements does not take into account business
changes that may be made following the completion of the proposed merger. We
currently expect the merger to be completed in June 2001.
13
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
% OF % OF PERCENT
2000 REVENUE 2001 REVENUE CHANGE
-------------- ----------- -------------- ----------- -----------
Revenue................................. $ 58,320 100% $ 61,604 100% 6%
Cost of revenue......................... 34,742 60% 37,115 60% 7%
-------------- ----------- -------------- ----------- -----------
Gross profit................... 23,578 40% 24,489 40% 4%
Selling, general and administrative..... 17,773 30% 19,123 31% 8%
Research and development................ 678 1% 74 -- (89)%
Goodwill and
intangible amortization.............. 2,445 4% 2,585 4% 6%
-------------- ----------- -------------- ----------- -----------
Income from operations......... 2,682 5% 2,707 4% 1%
Other income (expense):
Interest expense..................... (349) (1)% (536) (1)% 54%
Other income (expense)............... 458 1% (59) -- (113)%
-------------- ----------- -------------- ----------- -----------
Total other income (expense)... 109 -- (595) (1)% (646)%
-------------- ----------- -------------- ----------- -----------
Income before provision for
income taxes and cumulative effect
of a change in accounting method..... 2,791 5% 2,112 3% (24)%
Provision for income taxes.............. 1,258 2% 1,437 2% 14%
-------------- ----------- -------------- ----------- -----------
Income before cumulative
effect of a change in
accounting method.................... 1,533 3% 675 1% (56)%
Cumulative effect of a change
in accounting method, net
of income taxes...................... (2,707) (5)% -- -- 100%
-------------- ----------- -------------- ----------- -----------
Net income (loss)....................... $ (1,174) (2)% $ 675 1% 157%
============== =========== ============== =========== ===========
14
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUE. Revenue for the three months ended March 31, 2001 increased 6%
over revenue for the three months ended March 31, 2000. This increase was driven
by a 23% increase in US revenue to $41.9 million for the quarter ended March 31,
2001 compared to $34.1 million for the quarter ended March 31, 2000. This
increase was partially offset by a 56% decrease in Asia Pacific revenue. The
increase in US revenue was primarily due to the following:
o increase in Financial Services revenue driven by Customer
Relationship Management ("CRM") and Component Based Development
("CBD") solutions; and
o continued growth in our Health Care and Government sectors.
Revenue by vertical industry is as follows:
THREE MONTHS ENDED
-------------------------------------------------------
PERCENT OF PERCENT OF
2000 REVENUE 2001 REVENUE
---------- ---------- ---------- ----------
Financial Services..................... $ 28,571 49% $ 31,309 51%
Health Care and Governmental........... 8,270 14% 11,081 18%
Commercial Services.................... 21,479 37% 19,214 31%
---------- ---------- ---------- ----------
$ 58,320 100% $ 61,604 100%
========== ========== ========== ==========
Our 5 largest clients accounted for 26% of our revenue for the three
months ended March 31, 2001.
COST OF REVENUE. Cost of revenue as a percentage of revenue remained
flat at 60% for the three months ended March 31, 2001 compared to 60% for the
three months ended March 31, 2000.
GROSS PROFIT. Gross profit as a percentage of revenue remained flat at
40% for the three months ended March 31, 2001 compared to 40% for the three
months ended March 31, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). As a percentage
of revenue, SG&A expenses for the three months ended March 31, 2001 increased to
31% from 30% for the same period in 2000. The increase was primarily due to
additional investments to support our sales and marketing initiatives.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). Research and development
expenses decreased 89% compared to the same period in the prior year as we
completed certain research initiatives during 2000. In addition, most of our
2001 R&D initiatives are being funded by projects with some of our clients.
15
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible
amortization increased 6% for the three months ended March 31, 2001 compared to
the three months ended March 31, 2000. This increase primarily reflects the
additional amortization of goodwill and intangibles generated by our acquisition
of Intuitive Group Ltd. in 2000.
INCOME FROM OPERATIONS. Income from operations increased 1% over the
same period of the prior year. As a percentage of revenue, income from
operations for the three months ended March 31, 2001 decreased to 4% from 5% in
the three months ended March 31, 2000. Excluding amortization and depreciation,
income from operations for the three months ended March 31, 2001 increased to
$6.8 million from $6.5 million in the three months ended March 31, 2000.
OTHER INCOME (EXPENSE). We realized $595,000 of other expense (net of
other income) in the three months ended March 31, 2001 as compared to $109,000
of other income (net of other expense) in the three months ended March 31, 2000.
This change reflects a $187,000 increase in interest expense and a $397,000
decrease in investment income.
PROVISION FOR INCOME TAXES. Our effective tax rate was 68% for the
three months ended March 31, 2001 compared to 45% for the three months ended
March 31, 2000. Excluding nondeductible intangible asset amortization and
non-taxable life insurance proceeds received in 2000, our effective tax rate for
the three months ended March 31, 2001 was 34% compared to 36% for the three
months ended March 31, 2000.
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.
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD.
Income before cumulative effect of a change in accounting method decreased 56%
for the three months ended March 31, 2001 compared to the three months ended
March 31, 2000. This decrease was primarily attributable to the provision for
income taxes.
Excluding amortization and depreciation (net of income taxes), pro
forma income before cumulative effect of a change in accounting method was $4.0
million for the three months ended March 31, 2001 compared to $4.3 million for
the three months ended March 31, 2000.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD. The cumulative
effect of a change in accounting method reflects the adoption of Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
Effective January 1, 2000, IMRglobal changed its method of accounting for
revenue recognition for certain contract related revenue from claims dollar
recovery projects, in accordance with this pronouncement. These projects involve
identifying overpaid or erroneously paid insurance claims to be recovered from
healthcare
16
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
providers by medical insurance companies. Previously, IMRglobal recognized
revenue, less an estimated percentage for claims not accepted, as identified
claims were submitted to the clients. Under the new accounting method adopted
retroactive to January 1, 2000, IMRglobal now recognizes revenue upon the
earlier of collection of the findings based fee or notification of acceptance of
submitted claims from the client. The cumulative effect of the change on prior
years resulted in a charge to income of $2.7 million (net of income taxes of
$1.7 million), which is included in results of operations for the quarter ended
March 31, 2000.
EARNINGS PER SHARE. Diluted earnings per share before cumulative effect
of a change in accounting method decreased 50% for the three months ended March
31, 2001 compared to the three months ended March 31, 2000.
Excluding amortization and depreciation (net of income taxes), pro
forma earnings per share was $0.09 for the three months ended March 31, 2001
compared to $0.10 for the three months ended March 31, 2000.
SHARES OUTSTANDING - DILUTED. Shares outstanding - diluted increased
approximately 2.1 million shares for the quarter ended March 31, 2001 compared
to the quarter ended March 31, 2000 primarily due to stock option exercises
during 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had liquid assets including cash and cash
equivalents of $11.0 million, as compared to $19.7 million at December 31, 2000.
The decrease was primarily due to increased accounts receivable and work in
process and payment of 2000 incentives in the first quarter of 2001.
Additionally, we had working capital at March 31, 2001 of $49.3 million and
available bank lines of credit approximating $16.6 million.
Net cash used in operating activities was $8.8 million for the three
months ended March 31, 2001. The negative cash flow from operations was
primarily due to a 17% increase in accounts receivable and unbilled
work-in-process balances which was driven by the 16% sequential revenue growth
for the quarter ended March 31, 2001. In addition, current liabilities decreased
as a result of the payment of fiscal year 2000 incentive compensation during the
first quarter of 2001.
Net cash used in investing activities was $1.0 million for the three
months ended March 31, 2001. We invested $748,000 in property and equipment and
$220,000 in capitalized software.
Net cash provided by financing activities was $1.3 million for the
three months ended March 31, 2001. The primary source of cash was proceeds from
issuance of common stock upon the exercise of stock options.
As of March 31, 2001, cash and cash equivalents totaled $11.0 million,
of which $8.6 million was held outside of the U.S. Liquid assets in India were
$410,000 and require governmental approval for repatriation outside of India.
17
IMRGLOBAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We maintain $45.0 million of credit facilities expiring in 2003. These
facilities bear interest at a spread over LIBOR of 0.6% to 2.0% and are
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, 2001, we had $16.0 million available under these facilities. Certain
of our subsidiaries also maintain additional revolving credit line facilities
totaling $600,000. At March 31, 2001, the amount available under these
facilities was $600,000. The respective subsidiary's accounts receivable and
property and equipment collateralize these facilities.
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; and
o any debt repayment requirements.
ASSET MANAGEMENT
Our accounts receivable balance was $47.4 million at March 31, 2001, an
increase of $5.7 million from December 31, 2000. The increase was primarily due
to revenue growth of 16% over the fourth quarter of 2000. A common financial
measure is the calculation of days sales outstanding in accounts receivable
("DSO"). At March 31, 2001, our DSO was 70 days. 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 3 days less than the above levels.
At March 31, 2001, unamortized goodwill was $153.0 million compared to
$160.7 million at December 31, 2000. The decrease reflects amortization for the
three months ended March 31, 2001 of $2.1 million and currency devaluations for
goodwill of approximately $5.6 million primarily associated with IMRglobal's
Japan subsidiary.
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PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
IMRGLOBAL CORP.
MARKET RISKS
We are exposed to market risk from changes in interest rates and
foreign currency exchange rates. We occasionally enter into hedging transactions
to manage the foreign currency risk. We do not hold or issue derivative
financial instruments for trading purposes.
INTEREST RATES
IMRglobal has variable-rate long-term debt obligations, subject to
market risk from changes in interest rates. Sensitivity analysis is one
technique used to measure the impact of changes in interest rates on the value
of market-risk sensitive financial instruments. A hypothetical 10% movement in
interest rates would not have a material impact on IMRglobal's future earnings
or cash flows.
FOREIGN CURRENCY
We conduct business in the United States and around the world. Our most
significant foreign currency transaction exposures relate to Canada, the United
Kingdom, France (Euro currency), Australia and Japan. The primary purpose of our
foreign currency hedging activities is to protect against foreign currency
exchange risk from intercompany financing and trading transactions. We enter
into foreign currency forward contracts with durations of generally less than 12
months to hedge such transactions. We have not entered into foreign currency
forward contracts for speculative or trading purposes. All foreign currency
forward contracts are marked-to-market, with gains and losses recognized in
earnings, on a current basis. In addition, since we enter into forward contracts
only as a hedge, any change in currency rates would not result in any material
gain or loss, as any gain or loss on the underlying foreign denominated balance
would be offset by the loss or gain on the forward contract. At March 31,2001,
IMRglobal had no open foreign currency hedging contracts.
During the ordinary course of business, IMRglobal enters into certain
contracts denominated in foreign currency. Potential foreign currency exposures
arising from these contracts are analyzed during the contract bidding process.
IMRglobal generally manages these transactions by ensuring that most costs to
service contracts are incurred in the same currency in which revenue is
received. By matching revenue and costs to the same currency, IMRglobal has been
able to substantially mitigate foreign currency risk to earnings.
Approximately 35% of IMRglobal's revenue is generated outside of the
United States. Using sensitivity analysis, a hypothetical ten-percent increase
in the value of the U.S. dollar against all currencies would decrease annual
revenue by 3.5%, while a hypothetical ten-percent decrease in the value of the
U.S. dollar against all currencies would increase revenue by 3.5%. In the
opinion of management, expenses incurred in local currency would offset a
substantial portion of this fluctuation. As a result, a hypothetical 10%
movement of the value of the U.S. Dollar against all currencies in either
direction would impact IMRglobal's earnings before interest and taxes by
approximately $600,000 on an annual basis. This amount would be offset, in part,
from the impact of local income taxes.
19
IMRGLOBAL CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending material litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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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 11, 2001 /s/ SATISH K. SANAN
---------------------------- ---------------------------------------
Satish K. Sanan
Chief Executive Officer
Date MAY 11, 2001 /s/ MICHAEL J. DEAN
---------------------------- ---------------------------------------
Michael J. Dean
Chief Financial Officer
21