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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED JULY 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-27612
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DATA PROCESSING RESOURCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3931443
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 MACARTHUR BOULEVARD, SUITE 600, NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 949-553-1102
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock of the Registrant held by non-
affiliates of the Registrant on October 9, 1998, based on the closing price of
the Common Stock on the Nasdaq National Market on such date, was $144,880,057.
The number of shares of the Registrant's Common Stock outstanding at October
9, 1998, was 11,786,947 shares. The Registrant has no non-voting common
equity.
DOCUMENTS INCORPORATED BY REFERENCE
None
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DATA PROCESSING RESOURCES CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 31, 1998
INDEX
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PAGE
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PART I
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Item 1. Business....................................................... 3
Item 2. Properties..................................................... 11
Item 3. Legal Proceedings.............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters........................................................ 12
Item 6. Selected Financial Data........................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 23
Item 8. Financial Statements and Supplementary Data.................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant............. 24
Item 11. Executive Compensation......................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management. 33
Item 13. Certain Relationships and Related Transactions................. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.............................................................. 37
Signatures............................................................... 41
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Data Processing Resources Corporation and subsidiaries (the "Company" or
"DPRC") is a leading provider of information technology ("IT") staffing
services to a diverse group of corporate clients. Utilizing full-time salaried
and hourly consultants, the Company offers a wide range of staffing solutions
to meet its clients' enterprisewide IT needs. The Company's technical
consultants have expertise on multiple hardware platforms utilizing a wide
variety of software applications and can provide services covering all aspects
of the systems applications development lifecycle, including planning, design,
building and programming, implementation, maintenance and ongoing management.
The Company also provides other specialty staffing services such as Year 2000
conversion, fault-tolerant application development, network management and
desktop services, Internet/intranet development and support, packaged software
implementation (including responsibility for deliverables), software
engineering and help desk support. For the nine months ended September 30,
1998, the Company placed approximately 2,950 technical consultants on projects
for approximately 650 different clients. As of September 30, 1998, the Company
served its clients through the following 17 offices in 12 states and through
one national and four international recruiting offices: Newport Beach,
Woodland Hills, San Francisco, Glendale, San Diego and San Luis Obispo,
California; Denver, Colorado; Seattle, Washington; Omaha, Nebraska; Kansas
City, Kansas; Des Moines, Iowa; St. Louis, Missouri; Phoenix, Arizona; Dallas
and Austin, Texas; Portland, Oregon; Chicago, Illinois; Minneapolis,
Minnesota; London and Southport, England; Sydney, Australia; and Toronto,
Canada.
INDUSTRY OVERVIEW
Over the years, businesses have become increasingly dependent on the use of
IT to manage operations more efficiently and remain competitive. Important
internal functions, ranging from financial reporting to production and
inventory management, have become automated through the use of applications
software. In addition, as information systems have become less expensive, more
powerful and easier to use, the number and level of employees who use and
depend upon these systems have significantly increased.
Due to the rapid development of technology and the shift from closed,
proprietary systems to open systems, many companies' computer systems
incorporate a variety of hardware and software components which may span a
number of technology generations. For example, a company may operate
concurrently on mainframe, midrange and client/server hardware platforms
running a variety of operating systems and relational databases. Systems
applications development has become much more important in this environment as
IT departments strive to integrate a company's information processing
capabilities into a single system while providing for ever-changing
functionality.
The substantial increase in the use of sophisticated information
technologies has occurred at the same time that economic factors have led to
reductions in corporate workforces and a return by businesses to a focus on
their core competencies. Faced with the challenge of implementing and
operating more complex information systems without enlarging their corporate
staffs, businesses are increasingly using IT staffing companies to supplement
their IT operations. Utilizing outside IT technical consultants: (i) allows a
company's management to focus on core business operations; (ii) affords
greater staffing flexibility in IT departments; (iii) increases a company's
ability to adapt to, and keep pace with, rapidly changing and increasingly
complex technologies; (iv) provides access to specialized technical skills on
a project-by-project basis; (v) better matches staffing levels to current
needs; (vi) converts fixed labor costs into variable costs; and (vii) reduces
the cost of recruiting, training and terminating employees as evolving
technologies require new programming skill sets. These factors have caused IT
services to be one of the fastest growing segments of the supplemental
staffing industry. According to the May 1998 Staffing Industry Report,
revenues from technical/computer temporary staffing are estimated to have
grown from $7.1 billion in 1994 to $18.5 billion in 1998. The report further
estimated an annual growth rate for 1998 of approximately 25%.
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While large, the IT staffing services industry is also highly fragmented
with a large number of small businesses, many of which operate in a single
geographic market. This fragmentation, combined with changing client demands
and competitive pressures, has resulted in a recent trend towards industry
consolidation. Faced with a desire to minimize the number of vendors, clients
have begun to demand the services of large IT staffing companies capable of
covering a broad geographic area and offering a full range of IT services.
This has been particularly important in fulfilling the needs of large regional
and national accounts. Within this more competitive environment, smaller
companies may have difficulties competing due to limited service offerings,
geographic concentration and a lack of sufficient working capital and
management resources. As a result, many smaller companies have been acquired
in recent years, and the Company believes that smaller staffing companies are
becoming increasingly receptive to acquisition proposals by larger firms.
BUSINESS STRATEGY
To meet its clients' comprehensive IT needs, DPRC is dedicated to providing
staffing solutions to meet its clients' systems applications development and
other specialized technical needs. The Company's business strategy encompasses
the following key elements, which management believes are necessary to ensure
high-quality standards and to achieve consistently strong financial
performance:
Recruit, Develop and Retain Qualified Technical Consultants. A key element
of the Company's success is its ability to recruit, develop and retain
qualified technical consultants. Management believes that it has been
successful in doing so by: (i) offering its technical consultants competitive
wages and ensuring that they are paid accurately and on time; (ii) offering
its technical consultants an opportunity to purchase a comprehensive employee
benefits package; (iii) effectively and consistently communicating with its
technical consultants; and (iv) providing technical training through licensed
training programs. The Company has licensed a training program to provide its
consultants with technical training in over 160 course titles. Since its
inception, approximately 1,700 courses have been taken by the Company's
consultants. Furthermore, new technical consultants involved in the S/3/G
business are trained in Lawson Software implementation services for
approximately eight to 12 weeks at the Company's Austin office and at a
Lawson-operated facility.
However, qualified technical consultants are in great demand worldwide and,
accordingly, competition for individuals with proven technical skills is
intense. The Company attracts new consultants in its established markets
primarily through referrals from other technical consultants and the Internet
via its website, and, more recently, through the Company's national recruiting
office and direct and indirect recruiting capabilities outside the United
States, including its four international recruiting offices and strategic
partnering relationships. Through these sources, the Company has compiled a
database which includes approximately 75,000 highly qualified technical
consultants which become potential resources to place on assignment. DPRC is
working to continually improve its recruiting capabilities, but expects to
experience the same types of difficulties competing for technical consultants
as other providers of IT staffing services. DPRC competes for technical
consultants with other providers of IT staffing services, providers of
outsourcing services, temporary personnel agencies, systems integrators,
computer systems consultants, clients and potential clients. For fiscal 1998,
the turnover rate for its salaried consultants was approximately 33%. In
addition, approximately 13.7% of DPRC's total full-time equivalent employees
have H1-B non-immigrant work visas. Under current law, there is a limit of
115,000 new H-1B non-immigrant work permitted visa classification petitions
that the United States Immigration and Naturalization Service may approve in
any government fiscal year. In years in which this limit is reached, DPRC may
be unable to obtain H-1B visas necessary to bring critical foreign consultants
to the United States.
Emphasize a Relationship-Oriented Approach. The Company serves as an
extension of its clients' internal information systems operations and as a
long-term partner to fulfill its clients' IT staffing requirements. As a
result, the Company emphasizes a relationship-oriented approach to business,
rather than the transaction- or assignment-oriented approach used by many of
its competitors. This emphasis begins with the Company's Chief Executive
Officer who spends a significant amount of time meeting with key clients,
working with the Company's account managers and recruiters and communicating
with the Company's technical consultants. To develop close client
relationships, the Company's regional managers and account managers regularly
meet with both existing and prospective clients to help design solutions for,
and identify the resources needed to execute,
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their IT strategies. When recruiting internationally, Company personnel are
frequently accompanied by the client, which assists in the final screening,
evaluation and extension of offers to candidates. The Company's account
managers also maintain close communication with their clients during each
project and on an ongoing basis after its completion. The Company believes
that this relationship-oriented approach results in greater client
satisfaction and reduced business development expense.
Focus on Improving Margins. The Company constantly seeks opportunities to
enhance its margins by offering services for which higher margins can be
obtained and by reducing costs. For example, in recent years the Company has
begun to provide specialty staffing services, such as Year 2000 conversion,
fault-tolerant application development, network management and desktop
services, Internet/intranet development and support, packaged software
implementation (including responsibilities for deliverables), software
engineering and help desk support. In addition, the Company has identified,
targeted and expanded into geographic markets which provide relatively greater
profitability than the highly competitive California market. The Company also
actively seeks acquisition candidates with margins that are, at a minimum,
comparable to the Company's. Finally, the Company focuses on enhancing
operating efficiencies and has made and continues to make a substantial
investment in upgrading its automated support systems in order to improve the
efficiency of its accounting, sales, recruiting and marketing operations.
Provide Comprehensive Solutions. The Company offers responsive, timely and
comprehensive IT staffing solutions for all aspects of the systems
applications development lifecycle and for other specialized technical needs.
The Company believes that this ability to provide staffing for the full range
of such services provides an important competitive advantage. The Company also
works to ensure that its technical consultants have the expertise and skills
needed to keep pace with rapidly evolving information technologies.
Maintain Service-Oriented Corporate Culture. The Company believes that its
service-oriented corporate culture has played an integral part in its success.
Consequently, maintaining this culture is of the highest priority to
management. Central to the Company's philosophy is the recognition that its
success is dependent on providing the highest level of service to both its
clients and its technical consultants. This approach begins with the selective
recruitment of corporate level personnel who exhibit a high degree of
integrity and enthusiasm and who embrace the Company's commitment to service.
This deeply ingrained culture filters down to the Company's technical
consultants through a rigorous screening and recruiting process. The Company's
controlled expansion program is designed to enable it to replicate this
culture and preserve the quality of its service in its new markets.
GROWTH STRATEGY
DPRC's growth strategy is to expand the geographic scope of the Company's
business through internal development and acquisitions and to continue to
develop its existing markets by: (i) adding new clients in the geographic
markets it currently serves; (ii) increasing the range of services it provides
to its existing clients; (iii) attracting and retaining qualified technical
consultants from a variety of sources both national and international; and
(iv) pursuing strategic relationships with non-competing professional service
organizations.
Geographic Expansion. In 1993, the Company began a geographic expansion
program in California by opening offices in San Francisco and Woodland Hills.
Since 1994, six new office locations have been internally developed and eight
office locations have been acquired through September 30, 1998. As of
September 30, 1998 the Company had 17 offices in 12 states and one national
and four international recruiting offices (one located in California, two in
England, one in Australia, and one in Canada, respectively). The Company
believes that its geographic expansion will enhance its ability to market its
services to regional and national clients, many of which are seeking to work
with a limited number of vendors capable of servicing multiple locations. New
geographic markets also may be less competitive and may present greater
opportunities for higher margins than the Company's locations in California.
In addition, the Company believes that, through geographic expansion, it will
be better able to establish valuable strategic partnerships with national
accounting and consulting firms and large facility management and data center
outsourcing companies.
As part of its growth strategy, the Company continually reviews and
evaluates potential acquisition candidates and believes that there are
significant acquisition opportunities throughout the United States. In
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evaluating potential acquisition candidates, the Company seeks profitable IT
staffing companies with a proven management team, a core group of highly
qualified technical consultants, a reputation for quality, an attractive
service offering and an established client base. The Company also evaluates
the cultural fit of an acquisition candidate, as well as the candidate's
historical growth rates and financial results. The Company believes that it is
an attractive acquirer due to: (i) its ability to provide an acquired company
with expanded services and a broader geographic base; (ii) the potential for
certain economies of scale and operating efficiencies; (iii) its financial
strength and visibility as a public company; and (iv) its decentralized
management strategy pursuant to which the Company's office managers are given
significant autonomy to make most day-to-day operating decisions.
Growth in Existing Markets. In addition to expanding the geographic scope of
its business, the Company is constantly seeking to add new clients in the
geographic markets it currently serves and to increase the range of services
it provides to its existing clients. The addition of new clients in existing
markets enables the Company to utilize more profitably its administrative and
corporate infrastructure. New clients, particularly in new industries, also
permit the Company to diversify its client base and thus reduce its exposure
to fluctuations in industry business cycles. For example, the Company's client
base, which includes clients in both existing and new locations, increased
from approximately 80 clients in fiscal 1993 to approximately 650 clients in
fiscal 1998. In addition, the Company continues to add new specialty service
offerings as it has done with fault-tolerant applications development, network
management and desktop services, Internet/intranet development and support,
packaged software implementation (including responsibility for deliverables),
software engineering and help desk support. During fiscal 1997 and continuing
in fiscal 1998 and thereafter, the Company launched its Year 2000 conversion
service offering and is positioned to provide Year 2000 conversion project
management and resources to existing and new clients.
In addition to expanding the geographic scope of its business and adding new
clients and services, the Company's growth strategy is dependent upon the
Company's ability to attract and retain qualified technical consultants in
those markets in which the Company has an established presence, as well as in
less established markets. The Company's resource managers are responsible for
recruiting and establishing long-term relationships with the Company's
technical consultants. In recognition of the important role which the resource
manager plays in attracting qualified consultants, the Company has increased
the number of its resource managers from eight on January 31, 1996 to 80 on
July 31, 1998 through acquisitions, new hirings and promotions. The Company
has also implemented a state-of-the-art integrated information management
system which provides most of its offices with on-line access to information
on existing and prospective technical consultants and clients.
Finally, the Company also believes that there are significant growth
opportunities in pursuing strategic relationships with non-competing
professional services organizations, particularly national accounting firms,
consulting firms, facility management companies, data center outsourcing
companies and general staffing companies. The Company is currently serving as
a partner through subcontractor relationships with several such companies and
continues to explore other such opportunities.
ACQUISITIONS
From the time of the Company's Initial Public Offering through September 30,
1998, the Company has added eight offices in six states through the following
acquisitions, representing, in the aggregate, at the time of acquisition,
approximately 760 technical consultants:
EXi Corp ("EXi") In May 1998, the Company acquired EXi Corp., a Minneapolis-
based software engineering staffing company with approximately 80 technical
consultants billable as of the acquisition date, for cash and 68,531 shares of
DPRC's restricted common stock ("Common Stock"). EXi had revenues of
approximately $7.2 million for the 12 months ended March 31, 1998.
S/3/G, Inc. ("S/3/G") In January 1998, the Company acquired substantially
all of the assets of S/3/G, an Austin-based Lawson Software implementation and
support company with approximately 85 technical consultants billable as of the
acquisition date, for $28.2 million in cash and 204,552 shares of DPRC's
Common
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Stock valued at approximately $4.0 million, and an earnout payment to be made
based on S/3/G's performance for the 1998 calendar year. The first installment
of the earnout payment consisting of $5.8 million in cash and 32,880 shares of
restricted Common Stock, was paid in September 1998. The final installment of
the earnout is due in March 1999. S/3/G had revenues of approximately $11.0
million for the 12 months ended December 31, 1997.
SelecTech, Inc. ("SelecTech") In July 1997, the Company acquired SelecTech,
a Chicago-based IT staffing company with approximately 60 technical
consultants billable as of the acquisition date, for $8.1 million in cash and
54,934 shares of restricted Common Stock valued at $928,000. SelecTech had
revenues of approximately $4.6 million for the 12 months ended June 30, 1997.
Computec International Strategic Resources, Inc. ("Computec") In April 1997,
the Company acquired Computec, a Glendale, California-based IT staffing
company with approximately 110 technical consultants billable as of the
acquisition date, for $19.0 million in cash and 677,880 shares of restricted
Common Stock valued at $9.2 million, and earnout payments to be made based on
Computec's performance for the 1997 and 1998 calendar years. The first
installment of the earnout payment, consisting of $390,000 in cash and
14,970 shares of restricted Common Stock, was paid in October 1997. The second
installment of the earnout payment, consisting of $2.3 million in cash and
51,854 shares of restricted Common Stock, was paid in June 1998. The third
installment of the earnout payment, consisting of $3.4 million in cash and
73,078 shares of restricted Common Stock, was paid in September 1998. The
fourth and final installment of the earnout is due in March 1999. As of April
1997, Computec also had three international recruiting offices: two located in
England, one in Australia. In 1998, Computec added a new recruiting office in
Toronto, Canada. Computec had revenues of approximately $19.3 million for the
12 months ended December 31, 1996.
Leardata Info-Services, Inc. ("Leardata") In January 1997, the Company
acquired Leardata, a Dallas-based IT staffing company with approximately 130
technical consultants billable as of the acquisition date, for $17.3 million
in cash and 310,226 shares of restricted Common Stock valued at $4.1 million.
Leardata had revenues of approximately $16.0 million for the 12 months ended
October 31, 1996.
Professional Software Consultants, Inc. ("PSC") In November 1996, the
Company acquired PSC, a Phoenix-based IT staffing company with approximately
130 technical consultants billable as of the acquisition date, for $6.2
million in cash. PSC had revenues of approximately $9.3 million for the 12
months ended October 31, 1996.
ADD Consulting, Inc. In July 1996, the Company acquired the Applications,
Design and Development division ("AD&D") of ADD Consulting, Inc. for $8.8
million in cash and 152,121 shares of restricted Common Stock valued at $2.6
million, adding offices in Omaha and Kansas City, as well as approximately 170
technical consultants billable as of the acquisition date. AD&D had revenues
of approximately $13.9 million for the 12 months ended July 31, 1996.
Systems & Programming Consultants, Inc. In June 1998, the Company entered
into a definitive merger agreement with Systems & Programming Consultants,
Inc. ("SPC"), a Charlotte, North Carolina-based IT staffing company with eight
offices located primarily in the southeastern region of the United States.
This agreement was subsequently amended on October 13, 1998 and October 20,
1998. The merger agreement contemplates accounting for the transaction as a
pooling of interests, with the purchase price payable entirely in Common
Stock. The number of shares to be issued will be approximately 2,800,000 to
3,300,000 shares of Common Stock, with such number to be determined based upon
an implied purchase price of $71.5 million on the date the amendment of
October 20, 1998 to the merger agreement was signed, less deductions for
certain payments and liabilities to be assumed by the Company, and a fixed
price of $21.00 per share of the Company's Common Stock. Of such number of
shares, approximately two-thirds are expected to be issued upon consummation
of the Merger in exchange for the outstanding shares of SPC common stock and
for the cancellation of certain SPC performance-based options and the
remaining number of shares, approximately one-third, will be issued from time
to time thereafter upon exercise of the SPC stock options under the SPC stock
option plan being assumed by DPRC. SPC had approximately 600 billable
consultants and 12-month trailing revenues of approximately $53.0 million as
of the signing of the definitive merger agreement amendment on October 20,
1998. The acquisition is subject to numerous conditions, including, but not
limited to, obtaining the approval of the shareholders of the Company and SPC.
There can be no assurance that such acquisition will be completed or that if
such acquisition is completed, it will be for the expected consideration or on
the terms contemplated.
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The Company continually reviews and evaluates acquisition candidates to
complement and expand its business, and is at various stages of evaluation and
discussion with a number of such candidates. There can be no assurance that
the Company will consummate a transaction with any of the candidates with whom
it is currently in negotiations.
CLIENTS
The Company focuses its sales, service and support efforts primarily on
Fortune 500 and other large and mid-sized companies in various industries with
sophisticated IT needs. Although the Company does not have exclusive
arrangements with any clients, it enjoys service arrangements with a number of
companies which qualify DPRC as one of a limited number of approved service
providers.
During fiscal 1998, the Company served approximately 650 clients. The
Company's 10 largest clients in fiscal 1998 accounted for approximately 25.6%
of the Company's revenues, with the two largest clients accounting for 3.9%
and 3.6% of total revenues, respectively. Although the Company's largest
clients represent a significant percentage of its revenues, several of these
larger clients have several independent assignments ongoing at any one time,
which are administered by separate subsidiaries or divisions. Technical
services are provided to all clients under contractual arrangements of varying
lengths, which are subject to extension, negotiation or cancelation at any
time. Such contracts may include a confidentiality agreement. In addition, all
technical hourly and salaried consultants are required to sign confidentiality
agreements with the Company.
The Company's technical consultants provide services ranging from specific,
minor tasks of short duration to large, complex and integrated assignments
which require a number of technical consultants to be on assignment for
several years. Client systems applications development projects tend to be
long term in nature, typically lasting nine to 12 months. Other types of
assignments are typically shorter in duration and can average as little as
three months in length.
The following table sets forth a list of selected clients during calendar
1998:
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AUTOMOBILE MANUFACTURERS ENTERTAINMENT & LEISURE FOOD & BEVERAGE
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American Honda Motor Capitol Records Boston Market
Company
Mazda Motor of America MCA, Inc. Harry & David (Bear Creek Corporation)
Mitsubishi Motor Sales Princess Cruise Lines McDonalds Corporation
of
America Yamaha Motor Corporation Taco Bell
Nissan Motor Corporation Sony Pictures Entertainment, Inc. Nestle USA, Inc.
USA
Toyota Motor Sales, USA,
Inc.
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HEALTHCARE FINANCIAL SERVICES INSURANCE AND OTHER
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Apria Healthcare Group The Capital Group AlliedSignal, Inc.
Blue Cross of California Frank Russell Company AT&T
&
Washington Household Finance Union Pacific
Cedars Sinai Medical Avco Financial Services U.S. West
Center
PacifiCare FHP American Express Safeco Insurance Company of America
International
Unicare/Wellpoint Health
Network, Inc.
</TABLE>
The Company believes the primary competitive factors in attracting and
retaining clients are the ability to provide comprehensive staffing solutions
for all aspects of a client's IT needs, develop a strategic partnering
relationship, understand the specific requirements of a given project and
provide carefully screened technical consultants with the appropriate skills
in a timely manner and at competitive prices. The Company constantly monitors
the quality of the services provided by its technical consultants and obtains
feedback from its clients as to their satisfaction with the services provided.
DPRC OPERATING MODEL
General. The Company's overall operating approach is designed to ensure the
highest level of client, employee and technical consultant satisfaction. From
its corporate headquarters in Newport Beach, California,
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the Company provides its offices with centralized administrative, marketing,
finance, training and legal support. Management recognizes, however, that in
order to motivate its employees, to ensure that clients and consultants
receive quick, responsive service and to adapt to local market conditions, the
Company has developed a decentralized, entrepreneurial structure, with strong
regional management and branch managers who operate each branch office as an
autonomous profit center, and a regional accounting management to support the
regional management.
The Company's regional managers are given significant autonomy to make most
day-to-day operating decisions over their respective regions and are
responsible for: overall guidance and supervision of the region; strategy with
regard to market and account penetration; the hiring and training of branch
managers; targeting acquisition candidates; and promoting the DPRC culture
within the region. The regional managers are, however, subject to mutually
determined goals, objectives, budgets and forecasts for the region that are
consistent with corporate goals, strategies and objectives. In addition,
management workshops, with respect to quarterly planning and progress, are
conducted at various locations usually once each fiscal quarter. While a
branch manager is responsible for most of the administrative functions of
running an office, the majority of a branch manager's time is typically spent
on sales and marketing. Branch manager's compensation is based, in part, on
profits generated by the branch office.
In each office, the Company emphasizes a team-oriented approach in order to
provide high-quality customized solutions to meet its clients' information
services needs. The central role in this team-oriented approach is played by
the Company's account managers and resource managers, who work together to
ensure a successful relationship between the client and DPRC's technical
consultants.
Sales. The account manager has ultimate responsibility for staffing an
assignment on a timely basis. Upon receiving an assignment, the account
manager writes up a proposal with assignment specifications and distributes
the proposal to a resource manager who is responsible for, and has
relationships with, the technical consultants who have the expertise required
for the assignment. The account manager reviews the recommended candidates,
submits the resumes of qualified technical consultants to the client and
schedules client interviews of the candidates. Typically, an assignment is
staffed within five working days. Throughout the life of a project, the
account manager monitors the Company's relationship with the client and the
technical consultants to ensure that both constituencies are satisfied with
the success of the assignment. In addition to servicing existing clients,
account managers spend a significant amount of time developing new client
relationships.
Recruiting. Resource managers work with the account manager to staff
assignments appropriately and are responsible for recruiting, assessing and
establishing long-term relationships with the Company's technical consultants.
Resource managers utilize a variety of methods to recruit technical
consultants. In markets where the Company has an established presence, the
resource manager typically obtains a majority of qualified candidates through
referrals from clients and other technical consultants. In less established
markets, the majority of new candidates are persons who have responded to
advertisements in local newspapers or furnished the Company a resume via the
internet. Resource managers also recruit technical consultants by attending
meetings of local technology-specific user groups and trade shows, making cold
calls and advertising in the yellow pages and trade publications.
Resource managers prescreen all candidates through telephonic interviews and
conduct follow-up interviews to assess each candidate's technical and
interpersonal skills, work ethic and overall character. Generally, at least
three references are obtained for each candidate and additional background
checks may be conducted. In some cases, the candidate is also given a
technical exam over the Internet or by one of several specialists retained by
the Company to assess more accurately the candidate's technical
qualifications. If the candidate meets the Company's standards, the
candidate's profile is finalized and entered into the Company's database as an
available technical consultant. Most offices have on-line access to
information contained in this database. Unlike some of its competitors who
recommend a large number of candidates, some of whom may be inappropriate, the
Company generally recommends only two or three carefully selected candidates
for each available position. Management believes that its clients value the
selective screening role played by the Company.
9
<PAGE>
In June 1998, the Company established a national recruiting office in San
Luis Obispo, California. This office is primarily responsible for conducting
domestic searches and prequalifying and screening candidates for Company
offices. In addition, this office is also responsible for establishing and
implementing national training, policy and procedure for the Company in order
to assist Company offices in their recruiting efforts. The national recruiting
office will, among other things, hold job fairs and coordinate Internet
searches in its national recruiting efforts. Due to the benefits experienced
by the Company in its employment of full-time salaried consultants, the
national recruiting office places an emphasis on hiring such persons.
International recruiting and resourcing represents another element of the
Company's operating approach. Within the Company's four international
recruiting offices and a network of international strategic partners, resource
managers familiar with the local IT talent pool evaluate and screen
candidates, generally with client job specifications available to them. After
carefully reviewing a candidate's expertise, interviews with Company personnel
from the United States are scheduled. Company personnel are frequently
accompanied by the client, which travels to the candidate's country of origin
and assists in the final screening, evaluation and extension of offers to
technical consultants. Once an offer is accepted by the technical consultant,
relocation managers, located in the United States, prepare the necessary
documentation for obtaining the required work permits and visas. In addition,
these relocation managers assist in the actual relocation of the technical
consultant and any immediate family. This assistance may include meeting the
technical consultant upon arrival in the United States, obtaining suitable
housing, transportation, arranging children's enrollment into local schools
and certain other incidentals.
Management believes that one of the primary factors in the Company's success
has been its ability to attract and manage qualified technical consultants who
are compensated on either an hourly or salaried basis. Beginning fiscal 1996,
the Company began hiring more full-time salaried consultants in certain
offices where the local market conditions favor the hiring of full-time
consultants over hourly consultants. Full-time salaried technical consultants
receive a broader range of Company-paid benefits than hourly consultants.
Given the sophisticated nature of most client assignments, the Company's
policy is to utilize technical consultants with substantial employment
experience rather than entry-level or college graduate-level consultants. For
the nine months ended September 30, 1998, the Company placed approximately
2,950 technical consultants with approximately 650 different clients and as of
September 30, 1998, approximately 2,110 technical consultants were on
assignment.
COMPETITION
The IT staffing industry is highly competitive. The Company competes for
both clients and qualified technical consultants with a variety of companies,
including other IT staffing companies, national and regional accounting and
management consulting firms and independent contractors. Several traditional
staffing companies, which have historically emphasized the placement of
clerical and other less highly skilled personnel on short-term assignments,
have begun to provide IT services competitive with those provided by the
Company. The Company also competes for technical consultants with the IT
staffs of its clients and potential clients. In addition, as part of the
Company's growth strategy, the Company competes with other staffing companies
for suitable acquisition candidates.
Several of the Company's competitors are substantially larger than the
Company and have greater financial and other resources. Several of such
competitors have also been in business much longer than the Company and have
significantly greater name recognition throughout the United States, including
the geographic areas in which the Company operates and into which it intends
to expand. Because companies, such as the IT divisions of general staffing
companies, are often able to meet a broader range of a client's temporary
personnel needs and serve a broader geographic range than the Company, they
can be better positioned to compete for national accounts.
The Company believes that the primary competitive factors in obtaining and
retaining clients are the ability to provide comprehensive staffing solutions
for all aspects of a client's IT needs, develop a strategic partnering
relationship, understand the specific requirements of a given project and
provide carefully screened technical consultants with the appropriate skills
in a timely manner and at competitive prices. The primary competitive
10
<PAGE>
factors in attracting and retaining qualified candidates for technical
consultant positions are the ability to offer competitive wages and benefits,
pay such wages in a consistent and timely manner and provide a consistent flow
of high-quality and varied assignments. While the Company believes that it can
compete favorably with its existing and future competitors, there can be no
assurance that the Company will be successful in doing so.
EMPLOYEES
As of July 31, 1998, approximately 2,010 technical consultants
(approximately 1,280 hourly and 730 salaried) were working on full-time
assignments for the Company's clients. The Company's corporate and branch
office staffs consist of 380 full-time employees and six part-time employees.
The Company is not a party to any collective bargaining agreements and
considers its relationships with its employees to be good.
Approximately 90.0% of the direct costs of technical consultants placed by
the Company during fiscal 1998 were treated as employee costs of the Company
for federal and state tax purposes. For such employees, the Company pays
Social Security taxes (FICA), federal and state unemployment taxes, workers'
compensation insurance premiums, certain employee benefits and other employee
costs. The remainder of the technical consultants were treated as independent
contractors for federal and state tax purposes. Certain of the Company's
employees are foreign nationals with H-1B visas.
ITEM 2. PROPERTIES
The Company's leased offices are described in the following table:
<TABLE>
<CAPTION>
APPROXIMATE DATE LEASE DATE OPENED
LOCATION DESCRIPTION SQUARE FEET EXPIRES OR ACQUIRED
-------------------- ----------- ---------- -----------
<S> <C> <C> <C>
Administrative
Corporate Headquarters, Newport
Beach, CA........................ 9,658 January 2000 June 1987
Central Region Office, Omaha, NE. 2,100 June 2004 July 1996
Branch Offices
Newport Beach, CA................ 7,935 January 2000 June 1987
Woodland Hills, CA............... 3,203 February 2003 March 1993
San Francisco, CA................ 3,214 February 2003 March 1993
Denver, CO....................... 4,200 September 2002 November 1995
Seattle, WA...................... 4,601 April 2003 June 1996
Omaha, NE........................ 3,400 June 2004 July 1996
Kansas City, KS.................. 3,039 June 2003 July 1996
Des Moines, IA................... 2,943 July 2003 September 1996
Phoenix, AZ...................... 2,700 February 1999 November 1996
Dallas, TX....................... 9,200 October 1999 January 1997
Portland, OR..................... 2,200 August 2000 February 1997
Austin, TX....................... 10,500 September 2003 January 1998
Chicago, IL...................... 4,850 May 2003 July 1997
Glendale, CA..................... 5,700 May 2003 April 1997
Minneapolis, MN.................. 8,729 March 2001 May 1998
San Diego, CA.................... 220 January 1999 January 1998
St. Louis, MO.................... 200 Month-to-month April 1997
Recruiting Offices
San Luis Obispo, CA.............. 2,800 May 2003 June 1998
Sydney, Australia................ 1,433 July 2001 April 1997
Southport, England............... 400 May 1999 April 1997
London, England.................. 200 Month-to-month April 1997
Toronto, Canada.................. 300 Month-to-month June 1998
------
93,725
======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. As of the date of the filing of this Form 10-
K, there are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of the
Company's Common Stock for the quarters indicated as reported on the Nasdaq
National Market. The Company commenced its initial public offering on March 5,
1996, at a price per share of $14. The Common Stock is traded on the Nasdaq
National Market under the symbol "DPRC".
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1996
Third Quarter (from March 6, 1996)....................... $28 1/4 $18 3/8
Fourth Quarter........................................... $29 1/2 $16
FISCAL YEAR 1997
First Quarter............................................ $24 7/8 $16
Second Quarter........................................... $22 5/8 $15 1/2
Third Quarter............................................ $22 3/8 $17 1/8
Fourth Quarter........................................... $26 3/4 $18
FISCAL YEAR 1998
First Quarter............................................ $28 1/4 $19
Second Quarter........................................... $26 3/4 $22 1/8
Third Quarter............................................ $33 3/4 $23 3/8
Fourth Quarter........................................... $33 3/4 $26 5/8
</TABLE>
As of September 30, 1998, there were approximately 77 holders of record of
the Company's Common Stock.
DPRC has never declared or paid cash dividends on DPRC Common Stock and does
not anticipate paying cash dividends on DPRC Common Stock in the foreseeable
future. DPRC currently intends to retain future earnings to finance its
operations and fund the growth of its business. Any payment of future
dividends will be at the discretion of the Board of Directors of DPRC and will
depend upon, among other things, DPRC's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions relating to its
existing credit facility (or any facility succeeding thereto) prohibiting the
payment of cash dividends and other factors that DPRC's Board of Directors
deems relevant. DPRC's existing credit facility prohibits, without the consent
of the lender, the payment of cash dividends.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the earnout related to the Company's acquisition of
Computec, the Company issued 14,970, 51,854 and 73,078 shares of Common Stock
to the former stockholders of Computec on October 23, 1997, June 30, 1998 and
September 18, 1998, respectively. In connection with the Company's acquisition
and subsequent earnout of S/3/G, the Company issued 204,552 and 32,880 shares
of Common Stock to the former stockholder of S/3/G on January 28, 1998 and
September 21, 1998, respectively. In connection with the Company's acquisition
of EXi Corp., the Company issued 68,531 shares of Common Stock to the former
stockholders of EXi Corp. on May 20, 1998.
The issuance of such shares was exempt from the registration requirements of
the Securities Act of 1933 by virtue of Section 4(2) thereunder. See Note 3 to
the Consolidated Financial Statements for the consideration received by the
Company in connection with the issuance of such shares in connection with the
Company's acquisition of Computec, S/3/G and EXi Corp.
On March 24, 1998, the Company sold $115,000,000 aggregate principal amount
of its 5 1/4% convertible subordinated notes due 2005. The notes are
convertible, at the option of the holder, into shares of Common Stock
12
<PAGE>
of the Company at any time prior to maturity, unless previously redeemed or
repurchased, at a conversion price of $35.50 per share, subject to adjustment
in certain events. The notes were sold by the Company to NationsBanc
Montgomery Securities LLC, Donaldson, Lufkin & Jenrette Securities
Corporation, Robert W. Baird & Co., Incorporated and Lehman Brothers
(collectively, the "Initial Purchasers") pursuant to a purchase agreement
dated March 18, 1998. The price to investors for the notes sold in the
offering was 100% of the principal amount thereof for an aggregate offering
price of $115,000,000. The Company received approximately $111,000,000 in net
proceeds from the sale of the notes after the Initial Purchasers' discount of
3% of the aggregate principal amount of the notes for an aggregate discount of
$3,450,000 and after other issue costs of approximately $500,000. The issuance
of the notes, including the common stock issuable upon conversion of the
notes, was exempt from the registration requirements of the Securities Act of
1933, as amended, since the securities were sold in reliance upon Rule 144A
under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data set forth below as of and for the
fiscal years ended July 31, 1998, 1997, 1996, 1995 and 1994 have been derived
from the audited Consolidated Financial Statements of the Company. The
following information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
----------------------------------------------
1998(1) 1997(2) 1996(3) 1995 1994
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................... $210,568 $115,022 $58,145 $49,558 $34,165
Cost of Professional Services. 150,541 85,979 45,918 40,082 28,047
-------- -------- ------- ------- -------
Gross Margin.................. 60,027 29,043 12,227 9,476 6,118
Selling, General and
Administrative Expenses(4)... 39,434 18,654 6,719 5,769 5,581
-------- -------- ------- ------- -------
Operating Income(4)........... 20,593 10,389 5,508 3,707 537
(Expense) Interest Income,
net.......................... (382) 869 (162) (764) (401)
-------- -------- ------- ------- -------
Income Before Provision for
Income Taxes................. 20,211 11,258 5,346 2,943 136
Provision for Income Taxes.... 8,949 4,542 2,096 1,205 56
-------- -------- ------- ------- -------
Net Income(4)................. $ 11,262 $ 6,716 $ 3,250 $ 1,738 $ 80
======== ======== ======= ======= =======
Net Income Per Share --
Basic(5).................... $ 1.00 $ 0.74 $ 0.61 $ 0.43 $ 0.01
======== ======== ======= ======= =======
Net Income Per Share --
Diluted(5).................. $ 0.96 $ 0.71 $ 0.54 $ 0.38 $ 0.01
======== ======== ======= ======= =======
Weighted Average Common Shares
Outstanding -- Basic(5)...... 11,242 9,090 5,314 4,000 6,323
======== ======== ======= ======= =======
Weighted Average Common Shares
Outstanding -- Diluted(5).... 11,696 9,460 6,039 4,580 6,323
======== ======== ======= ======= =======
<CAPTION>
JULY 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital............... $114,074 $ 30,180 $26,901 $ 1,833 $ 267
Total Assets.................. 264,843 110,287 44,029 7,623 5,638
Total Long-term Debt,
Including Current
Portion(6)(7)................ 111,288 -- -- 4,305 6,185
Series A Convertible Preferred
Stock(8)..................... -- -- -- 1,485 --
Shareholders' Equity
(Deficit)(8)(9)(10)(11)...... 121,673 99,659 40,036 (2,878) (4,524)
</TABLE>
- --------
(1) The statement of income and balance sheet data include the results of
operations and acquired net assets of the Company and S/3/G Inc. beginning
January 28, 1998, and EXi Corp. beginning May 21, 1998.
(2) The statement of income and balance sheet data include the results of
operations and acquired net assets of the Company and PSC beginning
November 27, 1996, Leardata beginning January 7, 1997, Computec beginning
April 30, 1997, and SelecTech beginning July 11, 1997.
13
<PAGE>
(3) The statement of income and balance sheet data include the results of
operations and acquired net assets of the Company and AD&D beginning July
1, 1996.
(4) Selling, general and administrative expenses for fiscal 1994 include
management fees of $586,000 which were paid to a management company
controlled by one of the founders of DPRC. This management fee was
terminated in February 1994 upon the redemption of such founder's
ownership interest in DPRC. Selling, general and administrative expenses
for fiscal 1994 and 1995 also include compensation paid to DPRC's Chief
Executive Officer of $1.7 million and $921,000, respectively. Effective
March 1995, that officer's annual compensation was significantly reduced.
(5) Net income per share was computed as explained in Note 2 of the Notes to
the Consolidated Financial Statements.
(6) On March 24, 1998, the Company completed the sale of $115.0 million of
its convertible subordinated Notes due 2005. The notes were recorded net
of a discount and issue costs of $3,950,000, which will be amortized over
seven years based on the effective interest method. See Note 5 of the
Notes to the Consolidated Financial Statements.
(7) Does not include working capital borrowings under the Company's revolving
credit facility, which were $836,000 and $2.4 million as of July 31, 1995
and 1994, respectively.
(8) The outstanding shares of Series A Convertible Preferred Stock were
subject to mandatory redemption by the Company at any time after March
2005 upon the request of the holders of a majority of such shares then
outstanding. Consequently, such shares were not included in actual
shareholders' equity (deficit) as of July 31, 1995. Such shares
automatically converted into 592,000 shares of Common Stock immediately
prior to the consummation of the initial public offering.
(9) In January 1997, the Company completed a second public offering of
2,395,000 shares of its Common Stock at an offering price of $17.50 per
share for net proceeds of $38.9 million.
(10) In March 1996, the Company completed an initial public offering of
2,726,000 shares of its Common Stock at an offering price of $14.00 per
share for net proceeds of $34.3 million.
(11) The Company recorded a charge to retained earnings of approximately $4.8
million in February 1994 in connection with the redemption of all shares
of Common Stock not owned by the founder.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to the historical information contained herein, this Form 10-K
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve a number of risks and uncertainties, including, without limitation,
the Company's ability to recruit and retain qualified technical consultants;
identify, acquire and integrate suitable acquisition candidates; obtain
sufficient working capital to support such growth; compete successfully with
existing and future competitors; and other factors described throughout this
Form 10-K and the Company's Form 10-Q for the quarters ended October 31, 1997,
January 31, 1998 and April 30, 1998. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. Words such as "believes", "anticipates", "expects",
"intends", and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
The Company undertakes no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may arise after the date of
this report. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the
Company's business, including the risk factors set forth in the Company's
prospectus dated June 11, 1998.
OVERVIEW
Early in fiscal 1994, the Company began to implement a growth strategy
focused on expanding its geographic coverage, increasing its service offerings
and enhancing overall profitability. The Company has expanded from three
offices in 1996 located in California to 17 offices in 12 states and one
national and four international recruiting offices (one in California, two in
England, one in Australia and one in Canada,
14
<PAGE>
respectively) as of July 1998. Of the 14 new offices, six were internally
developed and eight were acquired. Through internal development and
acquisitions, the Company has added a number of higher margin, specialty
service areas and increased its percentage of full-time salaried consultants.
The Company plans to continue its acquisition strategy in order to further
expand its geographic scope and broaden its service offerings. The Company
believes that both the size and fragmented nature of the IT services industry
provide continuing opportunities for expansion. The Company continually
reviews potential acquisitions and is currently in various stages of
investigating and negotiating with several acquisition candidates.
The Company's business strategy encompasses a number of key elements which
management believes are necessary to ensure high-quality standards and to
achieve consistently strong financial performance. The primary element of this
strategy is to recruit, develop and retain qualified technical consultants. To
compete for scarce IT resources, the Company focuses on: (i) expanding its
pool of experienced and specialized recruiters; (ii) offering its technical
consultants competitive wages; (iii) offering its technical consultants an
opportunity to purchase a comprehensive employee benefits package; (iv)
effectively communicating with its technical consultants; (v) providing
specialized training through licensed training programs; and (vi) expanding
its national recruiting organization. In connection with a prior acquisition,
DPRC gained international recruiting capabilities through two offices in
England and one in Australia. DPRC opened another recruiting office post-
acquisition in Canada. The Company also attracts new consultants in its
established markets through referrals and the Internet.
Substantially all of the Company's revenues are based on the hourly billings
of its technical consultants and are recognized as services are provided. The
average billing rate as of July 31, 1998 was approximately $68.00 per hour, up
from approximately $60.50 per hour as of July 31, 1997. Billing rates vary
from market to market, are determined according to the skill level of the
technical consultant on assignment and, are individually negotiated with each
client. Although the Company has historically paid its technical consultants
only when they were actually on assignment with a client, a significant number
of the consultants added through acquired companies are salaried employees who
are paid whether or not they are on assignment. Typically, the gross margins
associated with such salaried consultants are higher than for consultants who
are paid only when they are on assignment, if the unassigned time of these
consultants is managed effectively.
Although the Company serves a large number of clients in a broad range of
industry groups, approximately 14.3% of the Company's revenues in fiscal 1998,
down from 21.7% in fiscal 1997, were derived from the Company's eight largest
foreign automobile and motorcycle manufacturers with operations in Southern
California. Approximately 25.6% of the Company's fiscal 1998 revenues were
derived from its ten largest clients. This compares to 32.1% for fiscal 1997.
The Company's largest two clients comprised 3.9% and 3.6% of the Company's
total revenue, respectively. A significant increase or decrease in demand by a
large client could have a substantial effect on the Company's revenues, and
revenues from any one client can vary materially from period to period.
15
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents unaudited quarterly consolidated financial
information for each of the Company's last eight fiscal quarters. In the
opinion of the Company's management, this quarterly information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this Form 10-K and includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
unaudited quarterly results set forth herein. The Company's quarterly results
have in the past been subject to fluctuations, and thus, the operating results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------
7/31/98 4/30/98 1/31/98 10/31/97 7/31/97 4/30/97 1/31/97 10/31/97
------- ------- ------- -------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $64,556 $56,135 $44,783 $45,094 $39,756 $31,355 $23,777 $20,134
Cost of Professional
Services............... 45,369 39,872 32,610 32,690 28,938 23,435 18,172 15,434
------- ------- ------- ------- ------- ------- ------- -------
Gross Margin............ 19,187 16,263 12,173 12,404 10,818 7,920 5,605 4,700
Selling, General and
Administrative
Expenses............... 12,773 10,714 7,920 8,027 6,945 5,191 3,665 2,853
------- ------- ------- ------- ------- ------- ------- -------
Operating Income........ $ 6,414 $ 5,549 $ 4,253 $ 4,377 $ 3,873 $ 2,729 $ 1,940 $ 1,847
======= ======= ======= ======= ======= ======= ======= =======
Net Income.............. $ 3,385 $ 2,938 $ 2,417 $ 2,522 $ 2,352 $ 1,855 $ 1,261 $ 1,248
======= ======= ======= ======= ======= ======= ======= =======
Net Income Per Share --
Basic................. $ 0.29 $ 0.26 $ 0.22 $ 0.23 $ 0.21 $ 0.18 $ 0.16 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
Net Income Per Share --
Diluted............... $ 0.28 $ 0.25 $ 0.21 $ 0.22 $ 0.21 $ 0.18 $ 0.16 $ 0.16
======= ======= ======= ======= ======= ======= ======= =======
Weighted Average Common
Shares Outstanding --
Basic................. 11,490 11,344 11,102 11,033 10,942 10,222 7,703 7,492
======= ======= ======= ======= ======= ======= ======= =======
Weighted Average Common
Shares Outstanding --
Diluted............... 11,975 11,842 11,512 11,457 11,403 10,530 8,065 7,840
======= ======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Gross Margin Percentage. 29.7% 29.0% 27.2% 27.5% 27.2% 25.3% 23.6% 23.3%
Operating Income
Percentage............. 9.9% 9.9% 9.5% 9.7% 9.7% 8.7% 8.2% 9.2%
EBITA(1)................ $ 7,560 $ 6,630 $ 4,918 $ 5,131 $ 4,512 $ 3,060 $ 2,129 $ 1,958
EBITA Percentage........ 11.7% 11.8% 11.0% 11.4% 11.3% 9.8% 9.0% 9.7%
</TABLE>
- --------
(1) Represents earnings before interest, taxes and amortization.
Demand for the Company's services is generally lower in the quarter ending
January 31 due to reduced activity during the holiday season and a lower
number of working days for those clients which curtail operations between
Christmas and New Years Day. The Company anticipates that its business will
continue to be subject to such seasonal variations.
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues represented by
certain items in the Company's consolidated statement of income for the
indicated periods.
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED JULY 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues................................................... 100.0% 100.0% 100.0%
Cost of Professional Services.............................. 71.5% 74.8% 79.0%
----- ----- -----
Gross Margin............................................... 28.5% 25.2% 21.0%
Selling, General and Administrative Expenses............... 18.7% 16.2% 11.5%
----- ----- -----
Operating Income........................................... 9.8% 9.0% 9.5%
Net Income................................................. 5.3% 5.8% 5.6%
</TABLE>
16
<PAGE>
FISCAL YEAR ENDED JULY 31, 1998 COMPARED TO FISCAL YEAR ENDED JULY 31, 1997
Revenues. Revenues increased $95.5 million, or 83.1%, to $210.6 million for
fiscal 1998 as compared to $115.0 million for fiscal 1997. This increase
resulted primarily from a combination of acquisitions and internal revenue
growth. The internal growth rate, which excludes revenue from the first twelve
months after the closing date for each acquisition, was approximately 34%.
Included in internal growth is approximately $1.2 million in revenue from the
opening of new offices in St. Louis, Missouri, Portland, Oregon and San Diego,
California. Additionally, the internal growth is due to a combination of: (i)
new information technology projects; (ii) increased demand in the networking
and communications market; (iii) a broadening of the types of services being
provided such as network management and desktop services, Year 2000, Tandem
and packaged software implementations; (iv) direct international recruiting
through the Company's Computec subsidiary, as well as, direct and indirect
recruiting in the Far East; and (v) increased billing rates resulting from an
increase in consultant wages.
Gross Margin. Gross margin increased $31.0 million, or 106.7%, to $60.0
million, for fiscal 1998 as compared to $29.0 million for fiscal 1997. As a
percentage of revenues, gross margin increased for fiscal 1998 to 28.5% as
compared to 25.2% for the prior year period. This gross margin percentage
improvement reflects higher gross margins from: (i) acquisitions of companies
with higher gross margin business, such as network management and desk top
services; packaged software implementation, software engineering and
international recruiting; (ii) emphasis on expansion of the higher margin
businesses in existing markets, including network management and desktop
services, Year 2000 conversions and software engineering; and (iii) cross
selling of higher margin services such as Tandem, packaged software
implementations and international recruiting into all markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $20.8 million, or 111.4%, to $39.4 million
for fiscal 1998, as compared to $18.7 million for fiscal 1997. As a percentage
of revenues, selling, general and administrative expenses also increased to
18.7% for fiscal 1998, as compared to 16.2% for the prior year period. This
increase is primarily attributable to the increased amortization of intangible
assets related to acquisitions of $2.4 million, and increased expenses of $3.0
million related to corporate management personnel and infrastructure required
to support actual and planned Company growth.
Operating Income. Operating income increased $10.2 million, or 98.2%, to
$20.6 million for fiscal 1998 from $10.4 million for the same period in 1997.
As a percentage of revenues, operating income increased to 9.8% for fiscal
1998 as compared to 9.0% for fiscal 1997 reflecting the increase in gross
margins offset by the increase in selling, general and administrative expenses
as a percentage of revenues.
Interest Income (Expense), net. The Company had net interest expense of
$382,000 for fiscal 1998 as compared to net interest income of $869,000 for
fiscal 1997 primarily as a result of interest expense on the $115.0 million
aggregate principal amount of 5 1/4% convertible subordinated notes issued in
March 1998, which was offset by interest income from the investment of
proceeds of those notes and as a result of interest on borrowings related to
the acquisition of S/3/G.
Provision for Income Taxes. The Company's effective tax rate increased to
44.3% in fiscal 1998 from 40.3% in fiscal 1997. The increase in the effective
tax rate is primarily due to nondeductible amortization of goodwill.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Revenues. Revenues increased $56.9 million, or 97.8%, to $115.0 million for
fiscal 1997 as compared to $58.1 million for fiscal 1996. This increase
resulted primarily from the contribution of revenues from the acquisitions of
AD&D (acquired in July 1996), PSC (acquired in November 1996), Leardata
(acquired in January 1997), Computec (acquired in April 1997) and SelecTech
(acquired in July 1997), and from the San Francisco branch (opened in 1993),
the Denver branch (opened in November 1995), the Seattle branch (opened in
June 1996), the Des Moines branch (opened in September 1996), the Portland
branch (opened in February 1997) and
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<PAGE>
from increased revenues of the Company's locations in California. The internal
growth rate, excluding acquisitions, for fiscal 1997 was 22.7%. The increases
were also due to: (i) new information technology projects; (ii) increased
demand in the networking and communications market; and (iii) a broadening of
the types of services being provided such as network management and desktop
services and Year 2000 services.
Gross Margin. Gross margin increased $16.8 million, or 137.5%, to $29.0
million, for fiscal 1997 as compared to $12.2 million for fiscal 1996. As a
percentage of revenues, gross margin increased for fiscal 1997 to 25.2% as
compared to 21.0% for the prior year period. This gross margin percentage
improvement reflects higher gross margins from: (i) AD&D, PSC, Leardata,
Computec and SelecTech due to their higher mix of salaried consultants; (ii)
the opening of the branch offices in Denver, Seattle, Des Moines and Portland;
and (iii) the gross margin improvement program in existing markets and a
change in the mix of service offerings, with an increased component of higher
margin services in fiscal 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $11.9 million, or 177.6%, to
$18.7 million for fiscal 1997, as compared to $6.7 million for fiscal 1996.
Selling, general and administrative expenses also increased as a percentage of
revenues to 16.2% for fiscal 1997, as compared to 11.5% for the prior year
period. This increase primarily resulted from: (i) amortization of intangible
assets related to the acquisitions of AD&D, PSC, Leardata, Computec and
SelecTech, (ii) investment in additional management personnel and corporate
infrastructure required to support planned Company growth, particularly sales
and recruiting personnel; and (iii) costs related to new branch openings.
Operating Income. Operating income increased $4.9 million, or 88.6%, to
$10.4 million for fiscal 1997 from $5.5 million for the same period in 1996.
As a percentage of revenues, operating income decreased to 9.0% for fiscal
1997 as compared to 9.5% for fiscal 1996 reflecting the increase in selling,
general and administrative expenses as a percentage of revenues, offset, in
part, by gross margin improvement.
Interest Income (Expense), net. The Company had net interest income of
$869,000 for fiscal 1997 as compared to interest expense of $162,000 for
fiscal 1996 as a result of the repayment of the Company's interest bearing
debt with a portion of the proceeds of the Company's initial public offering
of securities in March 1996, the proceeds of the Company's second public
offering of securities (the "Offering") in January 1997, and the investment of
the remaining proceeds of both offerings in interest bearing investment grade
securities.
Provision for Income Taxes. The Company's effective tax rate increased to
40.4% in fiscal 1997 from 39.2% in fiscal 1996. The increase in the effective
tax rate is primarily due to nondeductible amortization of goodwill on certain
acquisitions offset by the tax benefit associated with investment in short-
term tax exempt cash equivalents. The Company expects the effective rate to
increase over the next year to reflect a full year of non-deductible goodwill
amortization resulting from the acquisitions made in 1997.
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented in the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, investments available for sale and working
capital totaled $40.6 million, $60.0 million and $114.1 million, respectively,
as of July 31, 1998. Cash generated by operating activities increased to $6.6
million in fiscal 1998 as compared to $2.9 million in fiscal 1997 and $1.8
million in fiscal 1996. The increases were due to higher operating income
partially offset by the increased use of working capital primarily
attributable to an increase in accounts receivable that resulted from the
growth in revenue.
Cash used in investing activities increased to $97.1 million in fiscal 1998
as compared to $46.3 million in fiscal 1997 and $9.4 million in fiscal 1996.
The increase in fiscal 1998 as compared to fiscal 1997 is due primarily
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to the investment of $60.0 million of the proceeds of the $115.0 million
convertible debt offering into investments with a maturity greater than 90
days, partially offset by a lower use of cash for acquisitions. The increase
in the use of cash for investing activities in fiscal 1997 over fiscal 1996
was due primarily to an increase in the use of cash for acquisitions.
Cash provided by financing activities increased to $113.3 million in fiscal
1998 as compared to $39.4 million in fiscal 1997 and $29.2 million in fiscal
1996. The increase in fiscal 1998 as compared to fiscal 1997 was due to the
issuance of $115.0 million of convertible subordinated notes, recorded net of
discount and issue costs of $3.9 million, partially offset by a decrease in
proceeds raised from the issuance of Common Stock. The increase in cash
provided by financing activities in fiscal 1997 as compared to fiscal 1996 was
due to an higher amount of funds raised from an issuance of Common Stock and a
decrease in the repayment of notes payable.
On March 24, 1998 the Company completed the sale of its 5 1/4% convertible
subordinated notes due 2005. The Company used a portion of the proceeds to
repay $19.5 million of debt outstanding on its credit facility and expects to
use the remaining net proceeds for working capital, and other general
corporate purposes, including acquisitions. Interest payments of approximately
$3.0 million are payable on April 1 and October 1 of each year beginning on
October 1, 1998. The Company anticipates that cash generated from operating
activities will be sufficient to fund these interest payments.
The Company has a five-year, $60.0 million Revolving/Term Loan Agreement
(the "Credit Facility") with a bank syndicate. The Credit Facility consists of
a revolving line of credit of $60.0 million principal amount, and bears
interest at the prime rate to the prime rate plus .5% or LIBOR plus 0.50% to
1.75% depending on defined financial conditions. At the end of three years,
the outstanding principal balance on the facility converts to a two-year fully
amortized term loan. The Credit Facility contains various covenants, including
the maintenance of defined financial ratios such as net worth. As of July 31,
1998, the Company had no borrowings outstanding under the Credit Facility and
was in compliance with all bank covenants.
The Company previously completed the acquisition by merger of Computec on
April 30, 1997. The definitive agreement obligates the Company to make earnout
payments contingent upon Computec's earnings before interest and taxes through
December 31, 1998. Specifically, the earnout is conditioned upon Computec's
obtaining a higher earnings before interest and taxes in calendar years 1997
and 1998 as compared to calendar years 1996 and 1997, respectively, and if
achieved, will be calculated based upon a multiple of the calendar year's
earnings before interest and taxes that is in excess of the prior year's
earnings before interest and taxes. The earnout is payable 60% in cash and 40%
in shares of common stock. The aggregate amount of the initial consideration
and the earnout may not exceed $70.0 million. The first installment of the
earnout payment, consisting of $390,000 in cash and 14,970 shares of Common
Stock, was paid in October 1997. The second installment of the earnout
payment, consisting of $2.3 million in cash and 51,854 shares of Common Stock,
was paid in June 1998. The third installment of the earnout payment,
consisting of $3.4 million in cash and 73,078 shares of Common Stock, was paid
in September 1998 and is recorded in the consolidated financial statements as
intangible assets, accounts payable and accrued liabilities as July 31 1998.
The fourth and final installment of the earnout is due in March 1999. Should
Computec achieve its contingent earnout thresholds, the obligation under this
arrangement could be material to the consolidated financial statements. The
Company expects to pay any such earnout payment from existing cash and cash
equivalents, cash flow from operations and available borrowings under the
Credit Facility.
On January 27, 1998, the Company completed the acquisition of substantially
all the assets of S/3/G for approximately $28.2 million in cash and 204,552
shares of restricted DPRC Common Stock, valued at approximately $4.0 million.
The Company borrowed $25.5 million under the credit facility to finance a
portion of the cash purchase price of such acquisition. The definitive
purchase agreement obligates the Company to make additional earnout payments
semi-annually, contingent upon earnings before interest and taxes of the S/3/G
business through December 31, 1998. The earnout is conditioned upon the S/3/G
business first obtaining a 30.0%
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<PAGE>
growth rate in calendar year 1998 as compared to calendar year 1997 and, if
achieved, will be calculated based upon a multiple of the amount of the
calendar year 1998 earnings before interest and taxes that is in excess of
such threshold. The earnout is payable semi-annually, 85% in cash and 15% in
shares of Common Stock. The first installment of the earnout payment,
consisting of $5.8 million in cash and 32,880 shares of Common Stock, was paid
in September 1998 and is recorded in the consolidated financial statements as
intangible assets, accounts payable and accrued liabilities as July 31, 1998.
The second and final installment of the earnout is due in March 1999. Should
the S/3/G business achieve its earnout thresholds, the obligation under this
arrangement could be material to the consolidated financial statements. The
Company expects to pay any such earnout payment from existing cash and cash
equivalents, cash flow from operations and available borrowings under the
Credit Facility.
The Company is in the process of installing and implementing a new financial
accounting system at a cost of up to $9.5 million. This new financial system
is expected to take 18-24 months to fully install, test and implement in all
regional office locations. The Company expects to pay the costs of this
project with existing cash and cash equivalents, investments, cash flow from
operations and available borrowings under the Credit Facility.
The Company anticipates that its primary uses of working capital in future
periods will be for acquisitions, the internal development of new offices,
investments in its management information systems, earnout payments and the
funding of increases in accounts receivable. Although the Company seeks to use
its common stock to make acquisitions, to the extent possible, a substantial
portion of the purchase price for acquisitions has been paid in cash. The
Company continually reviews and evaluates acquisition candidates to complement
and expand its business, and is at various stages of evaluation and discussion
with a number of such candidates. Such acquisition candidates may also require
that all or a significant portion of the purchase price be paid in cash. The
Company's ability to grow through acquisitions is dependent on the
availability of suitable acquisition candidates and the terms on which such
candidates may be acquired, which may be adversely affected by competition for
such acquisitions. The Company cannot predict to what extent new offices will
be added through acquisitions as compared to internal development.
The Company anticipates that the opening of new offices will require an
investment of approximately $150,000 to $250,000 per office to acquire
equipment and supplies and to fund operating losses for the initial nine- to
12-month period of operations which management believes will generally be
required for a new office to achieve profitability. The Company expenses the
costs of opening a new office as incurred, except for the cost of equipment
and other capital assets, which are capitalized. Generally, expenditures for
such capital assets for a new office will be less than $100,000. There can be
no assurance that future offices will achieve profitability within a nine- to
12-month period after opening. The Company anticipates making additional
capital expenditures in connection with the development of new offices in
future periods and the improvement of its network and operating system
infrastructure and management reporting system.
The Company believes that the existing cash and cash equivalents, cash flow
from operations and available borrowings under the Credit Facility will be
sufficient to meet the Company's presently anticipated working capital needs
for at least the next 12 months, although the Company is evaluating various
potential acquisitions which could require a substantial portion of the
existing cash and cash equivalents and availability under the Credit Facility
and could be completed within the next 12 months. To the extent the Company
uses all of its cash resources and existing credit for acquisitions, the
Company may be required to obtain additional funds, if available, through
additional borrowings or equity financings. There can be no assurance that
such capital will be available on acceptable terms. If the Company is unable
to obtain sufficient financing, it may be unable to fully implement its growth
strategy.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and display of
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comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about
operating segments in annual financial statements and, to a lesser extent, in
interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are
effective for the Company beginning in fiscal 1999. As both SFAS Nos. 130 and
131 deal with financial disclosure, the Company does not anticipate the
adoption of these new standards will have a material impact on its financial
position or results of operations.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 establishes
disclosure standards for pensions and other postretirement benefits. SFAS No.
132 is effective for the Company beginning in fiscal 1999. The Company does
not anticipate that the adoption of this new standard will have a material
impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the Company beginning
in the first quarter of fiscal 2000. The Company does not anticipate that the
adoption of this new standard will have a material impact on its financial
position or results of operations.
YEAR 2000
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the use of computer programs which have been written using two digits, rather
than four, to define the applicable year of business transactions. In
evaluating the Company's state of readiness the Company is considering the
following key areas: (i) the Company's principal staffing and financial
systems; (ii) software used in the Company's internal computer network; (iii)
third-party vendors; (iv) customers; and (v) telecommunications and other
support systems. The Company is addressing each of these areas in three
separate phases. The first phase identifies all systems in each area that may
contain potential Year 2000 issues. The second phase involves an investigation
into whether a Year 2000 issue actually exists for each system identified. The
third phase involves actual resolution of the issue and/or the development of
a contingency plan.
The Company has completed an evaluation of the principal staffing and
financial systems. These systems are licensed from and maintained by third-
party software development companies, which the Company believes are Year
2000-compliant. The Company has obtained representations from these companies
that indicate that the systems are Year 2000-compliant. In addition to those
representations, the Company will conduct its own tests of these critical
systems to ensure that they are Year 2000-compliant. The initial testing of
these systems should be completed by March 31, 1999. In addition, the Company
is currently in the process of installing a new financial system, which
management believe is, and the software vendor has represented as being, Year
2000-compliant. The Company does not anticipate any significant disruptions of
the business resulting from its principal staffing and financial systems.
The Company has completed the first phase of an evaluation of the mission
critical software used on the Company's internal computer network. Software
used on the Company's internal computer network is substantially all licensed
from major software vendors that have represented that their products are
compliant or will be compliant by January 1, 2000. The Company is currently in
the second phase of the process which involves investigating and documenting
these facts for each software product supported by the Company. This phase is
expected to be completed by January 31, 1999. The Company does not anticipate
any significant disruptions of the business resulting from such software.
The Company is just beginning a review of other third-party vendors. The
first phase of this review should be completed by December 31, 1998 and the
second phase should be completed by March 31, 1999. The Company, however,
believes that it's exposure in regards to third-party vendors is minimal, as
the Company is mainly a service provider and is not dependent on a supply of
raw materials or inventory. With the exception of
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basic utilities, payroll processing and benefit administration, any disruption
to the Company's other vendors is not likely to significantly disrupt the
Company's business. The Company does rely on a third-party vendors for payroll
processing and benefits administration. The payroll-processing vendor has
indicated that its product is Year 2000-compliant. The Company is requesting
documentation from the benefits administrator and should have an evaluation of
their degree of readiness by December 31, 1998. The Company is dependent on
basic public infrastructure, such as telecommunications and utilities, in
order to function normally. Significant long-term interruptions of this
infrastructure could have an adverse effect on the operations of the Company.
As part of the second phase, the Company will be contacting major
telecommunications and utility companies to determine whether any significant
interruptions of service are probable. Notwithstanding the Company's efforts
in this area, there can be no assurance that the Company can develop a
contingency plan that effectively deals with a major failure of public
infrastructure.
The Company has begun an evaluation of the potential risks associated with
its customers' Year 2000 issues. The Company will attempt to evaluate whether
a potential disruption of revenue could result from a Year 2000 problem in a
customer's system. The first phase will involve polling of the Company's
customers and consultants. The first phase will be completed by January 31,
1999. The second phase will be planned based on the results of the initial
evaluation. The Company feels that Year 2000 issues are not likely to cause a
significant disruption of development projects that its consultants are
working on and may, in some cases, actually create a demand for more
consultant hours in order to respond to Year 2000 disruptions.
The Company has just begun a review of non-information technology systems,
such as telephones, office equipment and facility related systems. This first
phase of identifying potential issues will be completed by January 31, 1999.
The second phase of evaluating actual Year 2000 problems should be completed
by March 31, 1999.
The Company does not believe that it will need to acquire any significant
new software systems in response to Year 2000 issues. The decision to develop
and implement a new financial system was made independent of Year 2000
concerns for the purposes of improving the Company's efficiency and financial
reporting capabilities. Most of the cost related to Year 2000 will be for
additional technical services retained to supplement the existing information
systems staff for Year 2000 projects. The Company has incurred minimal
expenses thus far on Year 2000 issues and expects to incur up to $250,000 to
complete the project.
Depending on the area involved, the Company is in either the first or second
phase of its evaluation of Year 2000 issues. These phases are scheduled to be
completed as discussed above. Upon completion of Phase 2 for each area, the
contingency planning phase will begin. The Company anticipates that all its
evaluations and contingency plans will be completed and documented by June 30,
1999. There can be no assurance that any such plans will fully mitigate any
potential failures or problems. Furthermore, there may be certain mission-
critical third parties, such as utilities, telecommunication companies, or
vendors where alternative arrangements or sources are limited or unavailable.
The extent and magnitude of the Year 2000 problem as it will affect the
Company, both before, and for some period after, January 1, 2000, are
difficult to predict or quantify for a number of reasons. Among the most
important are the lack of control over systems that are used by the third
parties who are critical to the Company's operation, such as
telecommunications and utilities companies, the complexity of testing
interconnected networks and applications that depend on third-party networks
and the uncertainty surrounding how others will deal with liability issues
raised by Year 2000-related failures. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might
be incurred as a result of Year 2000-related failures that occur despite the
Company's implementation of the Plan.
Although the Company is not currently aware of any material operational
issues associated with preparing its internal systems for the Year 2000, or
material issues with respect to the adequacy of mission-critical third- party
systems, there can be no assurance, due to the overall complexity of the Year
2000 issue, that the Company will not experience material unanticipated
negative consequences and/or material costs caused by undetected
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errors or defects in such systems or by the Company's failure to adequately
prepare for the results of such errors or defects, including costs or related
litigation, if any. The impact if such consequences could have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
A discussion of the Company's accounting policies for financial instruments
and further disclosures relating to financial instruments is included in the
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements. The Company monitors the risks associated with interest
rates and financial instrument positions.
The Company's revenue derived from international operations is not material
and, therefore, the risk related to foreign currency exchange rates is not
material.
INVESTMENT PORTFOLIO
The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents and investments. The Company
invests its cash and cash equivalents and investments in high-quality and
highly liquid investments consisting of taxable money market instruments,
corporate bonds and some tax-exempt securities. The average yields on the
Company's investments in the first half of the fiscal year resulted primarily
from investments in tax-exempt securities and averaged approximately 3.5%. As
of July 31, 1998, the Company's cash and cash equivalents and investments
consisted primarily of taxable money market instruments, corporate and tax-
exempt securities with maturities of less than one year with an average yield
of approximately 5.6%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION CONCERNING INCUMBENT DIRECTORS AND NOMINEES TO BOARD OF DIRECTORS
Information is set forth below concerning the incumbent Directors and
nominees to the Board of Directors, and the year in which each incumbent
Director was first elected as a Director of the Company. All of the incumbent
Directors, except Mr. Lancashire, are also nominees for election as Directors
at the next Annual Meeting of Shareholders of the Company. Each nominee has
furnished the information as to his or her beneficial ownership of Common
Stock as of November 23, 1998 and, if not employed by the Company, the
nominee's principal occupation. Each nominee has consented to being named in
this Form 10-K/A as a nominee for Director and has agreed to serve as a
Director if elected. Ages are shown as of November 23, 1998.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY DIRECTOR
NAME AGE OR PRINCIPAL OCCUPATION SINCE
---- --- ------------------------- --------
<C> <C> <S> <C>
Mary Ellen Weaver.......... 47 Chairman of the Board, Chief 1985
Executive Officer and Director
President, Chief Operating Officer
David M. Connell........... 54 and Director 1995
J. Christopher Lewis(1)(2). 42 Director 1995
Patrick C. Haden(1)(2)..... 45 Director 1997
Christopher W. Lancashire.. 59 Director 1997
Thomas G. Carlisle(3)...... 49 Nominee Director --
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) The Company is contractually obligated to nominate Mr. Carlisle as a
Director of the Company in accordance with the Agreement and Plan of
Merger, dated as of June 16, 1998, as amended October 13, 1998 and
October 20, 1998, by and among the Company, DPRC Acquisition Corp.,
Systems & Programming Consultants, Inc. ("SPC") and certain shareholders
of SPC, pursuant to which, among other things, DPRC Acquisition Corp.
will be merged with and into SPC, with SPC surviving as a wholly-owned
subsidiary of the Company. This transaction is anticipated to close
during the week of December 21, 1998 if approved by the shareholders of
DPRC and SPC and satisfaction or waiver of the other conditions to
closing.
Mary Ellen Weaver has served as Chairman of the Board and Chief Executive
Officer of the Company since February 1994 and served as President of the
Company from May 1989 to September 1994. Ms. Weaver also served as Chief
Financial Officer of the Company from December 1989 to February 1994 and as
Vice President from 1985 to May 1989. Ms. Weaver has been a director of the
Company since September 1985. Prior to joining the Company, Ms. Weaver was
employed by XXCAL, Inc., EG&G, Inc. and Thomas Temporaries.
David M. Connell has served as President and Chief Operating Officer of the
Company since September 1994 and as Director since March 1995. From October
1993 to September 1994, Mr. Connell provided consulting services to the
Company. Prior to his service with the Company, Mr. Connell was engaged by
Welsh, Carson, Anderson & Stowe, an investment fund which specializes in
acquiring information services companies and healthcare companies, to manage
the following portfolio companies: from June 1990 to July 1993, Mr. Connell
served as Chairman and Chief Executive Officer of Specialized Mortgage
Services, Inc., an information services company; from 1988 to 1990, he served
as Chairman and Chief Executive Officer of Wold Communications, Inc., which
became Keystone Communication, Inc. as a result of a merger with Bonneville
Satellite Communications, Inc.; and from 1985 to 1988, Mr. Connell served as
Chairman and Chief Executive Officer of a systems integration subsidiary of
Decision Data Computer Corporation. In each of these three prior positions,
Mr. Connell formulated and implemented merger and acquisition growth
strategies for the companies in addition to being responsible for overall
operations.
J.Christopher Lewis was elected a Director of the Company in March 1995.
Since 1982, Mr. Lewis has been a general partner of RLH, a Los Angeles based
partnership which invests in management buy-out and
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venture capital transactions. Mr. Lewis also serves as a Director of
California Beach Restaurants, Inc., Tetra Tech, Inc. ("Tetra Tech"), PIA
Merchandising Services, Inc. ("PIA") and several private companies.
Patrick C. Haden became a member of the Board of Directors of the Company in
June 1997. Since 1987, Mr. Haden has been a general partner of RLH, a Los
Angeles based partnership which invests in management buy-out and venture
capital transactions. Mr. Haden also serves as a director of Tetra Tech, PIA
and several private companies.
Christopher W. Lancashire became a member of the Board of Directors of the
Company in June 1997. Since 1992, Mr. Lancashire has served as President and
Chief Executive Officer of Computec International Strategic Resources, Inc.
("Computec"), a wholly-owned subsidiary of the Company, acquired by the
Company in April 1997. Mr. Lancashire serves as a Director of MQ Tech, a
specialist information technology consulting company.
Thomas G. Carlisle has served as a director and the President of Systems &
Programming Consultants, Inc. ("SPC") since he co-founded SPC in January 1980.
In addition to serving as the President of SPC, Mr. Carlisle initially worked
as a systems consultant, doing design and development projects, and later
worked as a project manager at various clients of SPC. Prior to the formation
of SPC in 1980, Mr. Carlisle worked for Springs Industries, first as a
programmer/analyst, then as a manager and a consultant. On December 29, 1994,
SPC filed a voluntary petition for bankruptcy relief under Chapter 11 of the
United States Bankruptcy Code. In May 1995, SPC sold its major proprietary
software product and discontinued its solutions division, which was
established in 1990 to develop proprietary software products for the financial
institution and publishing markets. The capital expenditures made to develop
these products exhausted SPC's cash resources before an adequate revenue
stream could be achieved from the sale of the software. On October 6, 1995
SPC's plan of reorganization was confirmed and the case was closed by order of
the court dated May 16, 1996. Mr. Carlisle was a director and executive
officer of SPC during this time.
THE BOARD OF DIRECTORS
COMMITTEES
The standing committees of the Board are the Audit Committee (the "Audit
Committee") and the Compensation Committee (the "Compensation Committee"). The
Audit Committee, which during fiscal 1998 consisted of Mr. Lewis and Mr.
Haden, met two times during the fiscal year ended July 31, 1998 ("fiscal
1998"). The Compensation Committee, which during fiscal 1998 consisted of Mr.
Lewis and Mr. Haden, met two times during fiscal 1998.
The Audit Committee makes recommendations concerning the engagement of
independent public accountants; reviews with the independent public
accountants the plans for and scope of the audit, the audit procedures to be
utilized and results of the audit; approves the professional services provided
by the independent public accountants; reviews the independence of the
independent public accountants; and reviews the adequacy and effectiveness of
the Company's internal accounting controls.
The Compensation Committee determines compensation for the Company's
executive officers and administers the Company's 1994 Stock Option Plan.
MEETINGS AND REMUNERATION
During fiscal 1998, the Board held four meetings and took various actions by
written consent. Each incumbent Director attended at least 75% of the
aggregate of (i) the total number of meetings held by the Board during fiscal
1998 (or during the period within which such individual was a Director) and
(ii) the total number of meetings held by all committees of the Board during
fiscal 1998 (or during the period within which such individual was a Director
or member of such committee of the Board).
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Each Director is elected to hold office until the next annual meeting of
shareholders and until his respective successor is elected and qualified.
Directors who are employees or officers of the Company do not receive
compensation for service on the Board or any committee of the Board. Each
Director of the Company who is not an officer or employee of the Company or a
subsidiary of the Company is entitled to receive $1,200 for each meeting of
the Board attended by such Director. Mr. Haden and Mr. Lewis have waived the
right to receive such compensation. In addition, Directors of the Company are
reimbursed for their reasonable out-of-pocket expenses in connection with
their travel to and attendance at the meetings of the Board.
EXECUTIVE OFFICERS, COMPENSATION AND OTHER INFORMATION
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages (as of November 23, 1998)
and current offices held by all executive officers of the Company.
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITION WITH THE COMPANY OFFICER SINCE
---- --- ------------------------- -------------
<S> <C> <C> <C>
Mary Ellen Weaver....... 47 Chairman of the Board, Chief Executive Officer and Director 1985
David M. Connell........ 54 President, Chief Operating Officer and Director 1994
Michael A. Piraino...... 45 Executive Vice President and Secretary 1996
Richard E. Earley....... 53 Senior Vice President, Marketing 1996
James A. Adams.......... 38 Vice President and Chief Financial Officer 1998
</TABLE>
Executive officers of the Company are elected by and serve at the discretion
of the Board. Each of the executive officers has entered into an employee
agreement with the Company. See "Employee Agreements." None of the executive
officers has any family relationship to any nominee for Director or to any
other executive officer of the Company. Set forth below is a brief description
of the business experience for the previous five years of all executive
officers except Ms. Weaver and Mr. Connell. See "Information Concerning
Incumbent Directors and Nominees to Board of Directors."
Michael A. Piraino joined the Company as Senior Vice President and Chief
Financial Officer in January 1996 and has served as its Executive Vice
President since February 1998. Prior to joining the Company, Mr. Piraino had
served as Executive Vice President, Director and Chief Development Officer of
Imagyn Medical Technologies, Inc. (formerly known as Urohealth Systems, Inc.)
from October 1994. From July 1993 to October 1994, Mr. Piraino served as
Senior Vice President and Chief Financial Officer of Syncor International
Corporation. Mr. Piraino served as Senior Vice President and Chief Financial
Officer of Total Pharmaceutical Care, Inc. from May 1989 to June 1993. Prior
to May 1989, Mr. Piraino held executive officer positions with Lorimar Home
Video and Winn Enterprises. Mr. Piraino began his career with a national
accounting firm. He is a certified public accountant.
Richard E. Earley joined the Company as Senior Vice President, Marketing in
March 1996. Prior to joining the Company, since February 1992, Mr. Earley
served as the General Manager of the National Business Unit of DRT Systems
International, a subsidiary of Deloitte & Touche LLP which provides data
processing consulting services. From September 1988 to January 1992, Mr.
Earley served as Chief Operating Officer for Unitech Systems, a utility
software firm. From February 1980 to September 1988, Mr. Earley served as
Senior Vice President of Cap Gemini America and its predecessor, a data
processing consulting firm.
James A. Adams joined the Company as Vice President and Chief Financial
Officer of the Company in June 1998. Prior to joining the Company, Mr. Adams
served as Vice President and Chief Financial Officer of MaterniCare, Inc. from
February 1997. From February 1994 to February 1997, Mr. Adams served as
Vice President of Finance for Apria Healthcare, Inc. and one of its
predecessor companies Abbey Healthcare, Inc. From May 1989 to February 1994
Mr. Adams served as Controller for Hofman Restaurants. Prior to
26
<PAGE>
May 1989, Mr. Adams held financial positions with The Restaurant Enterprises
Group and Rockwell International. Mr. Adams began his career with the national
accounting firm of Ernst & Young LLP and is a certified public accountant.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and certain of its officers, and persons who own more than 10% of a
registered class of the Company's equity securities (collectively,
"Insiders"), to file reports of ownership and changes in ownership with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 3, 4 or 5
were required for those persons, the Company believes that its Insiders
complied with all applicable Section 16(a) filing requirements for fiscal
1998, except with respect to the filing of a late Form 3 to report the
addition of James A. Adams as a Section 16 officer and to report an option
grant to him, the filing of a late Form 4 to report the exercise of certain
stock options and the subsequent sale of the underlying shares by David M.
Connell, the failure to file Forms 4 to report the acquisition of shares by
Christopher W. Lancashire in connection with the Computec Earnout (as defined
below), and the filing of a late Form 5 to report certain option grants to
each of David M. Connell, Richard E. Earley and Michael A. Piraino.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation for services rendered to the
Company in all capacities for each of the fiscal years in the three year
period ended July 31, 1998 by the Chief Executive Officer and each person
serving as an executive officer of the Company at July 31, 1998 whose salary
and bonus exceeded $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- AWARDS
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR ($)(1) ($) ($)(2) OPTIONS(#) ($)(3)
- ---------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mary Ellen Weaver........ 1998 225,000 235,000 -- -- --
Chairman of the Board
and 1997 125,000 196,000 -- 54,000 --
Chief Executive Officer 1996 225,000 27,000 -- -- --
David M. Connell......... 1998 225,000 175,000 2,577,080 30,000 --
President and 1997 174,000 141,000 823,313 32,000 --
Chief Operating Officer 1996 174,000 38,920 -- 25,000 --
Michael A. Piraino....... 1998 182,292 155,000 568,750 25,000 --
Executive Vice President
and 1997 159,626 113,000 156,250 28,000 --
Secretary 1996 80,774 12,000 -- 80,000 --
Richard E. Earley........ 1998 155,775 82,500 77,500 15,000 --
Senior Vice President,
Marketing 1997 150,000 38,000 -- 23,000 --
1996 58,850 -- -- 80,000 --
</TABLE>
- --------
(1) Amounts shown include compensation earned by executive officers as well
as amounts deferred at the election of those officers.
(2) Represents the dollar value between the exercise price of options for
Common Stock granted to the Named Executive Officer and the fair market
value of such Common Stock on the date of exercise.
(3) The aggregate amount of all other compensation does not exceed the lesser
of either $50,000 or 10% of the total annual salary and bonus for each
such officer.
27
<PAGE>
EMPLOYMENT AGREEMENTS
Ms. Weaver has a four-year employment agreement which terminates on July 31,
1999. Ms. Weaver's employment agreement was amended to reduce her base salary
to $125,000 per year from $225,000 effective August 5, 1996 and to increase
her base salary to $225,000 per year effective August 1, 1997. Ms. Weaver also
receives an annual incentive bonus of up to $225,000. Effective September 2,
1997, Ms. Weaver's employment agreement was amended to provide that payment of
her incentive bonus will be based primarily on the achievement of certain
financial goals to be established by the Board of Directors. The Company may
terminate Ms. Weaver's employment with or without cause. In the event her
employment is terminated without cause, Ms. Weaver is entitled to receive her
base salary and certain benefits for up to 24 months and is entitled to
receive a prorated incentive bonus through the date of termination. Ms.
Weaver's employment agreement also includes certain non-competition
agreements, confidentiality agreements and indemnification agreements.
Mr. Connell also has a four-year employment agreement which terminates on
July 31, 1999. Effective August 1, 1997, Mr. Connell's employment agreement
was amended to increase his base salary to $225,000 per year. Mr. Connell is
also able to earn an incentive bonus of up to 100% of his base salary under an
incentive plan based primarily on the achievement of specified financial
objectives. In the event Mr. Connell's employment is terminated without cause,
he is entitled to receive his base salary and certain benefits for up to 18
months and a prorated incentive bonus through the date of termination.
Effective January 15, 1996, Mr. Connell was granted an option to purchase
25,000 shares of Common Stock under the Company's 1994 Stock Option Plan. The
option has an exercise price of $9.00 per share and vests over four years,
with 25% vesting on the first anniversary of the date of grant, and the
remainder vesting in 12 equal quarterly installments over the following three
years. Mr. Connell was previously and subsequently granted additional stock
options. See "--Fiscal Year-End Option Values" for the total number of
unexercised options held by Mr. Connell.
Mr. Piraino has a two-year employment agreement which terminates on February
28, 2000. Effective March 1, 1998, Mr. Piraino's employment agreement was
amended to increase his base salary to $192,500 per year. Mr. Piraino's
employment agreement also provides for an incentive plan under which he is
able to earn up to 100% of his base salary. In the event of termination
without cause, Mr. Piraino is entitled to receive his base salary, the pro-
rated bonus under the incentive plan to which he was entitled during
employment, and certain benefits for up to twelve months. Effective January
15, 1996, Mr. Piraino was granted an option to purchase 80,000 shares of
Common Stock under the Company's 1994 Stock Option Plan. The option has an
exercise price of $9.00 per share and vests over four years, with 25% vesting
on the first anniversary of the date of grant, and the remainder vesting in 12
equal quarterly installments over the following three years. Since this
initial grant, Mr. Piraino was granted additional stock options. See "--Fiscal
Year-End Option Values" for the total number of unexercised options held by
Mr. Piraino.
Mr. Earley has an employment arrangement with the Company which provides for
a base salary of $165,000 and an incentive plan identical to Mr. Connell's
under which he is able to earn up to 100% of his base salary. In addition, Mr.
Earley will be entitled to receive a bonus based on his achievement of certain
goals. In the event of termination without cause, Mr. Earley is entitled to
receive his base salary and certain benefits for up to six months. Mr. Earley
was granted an option to purchase 80,000 shares of Common Stock under the
Company's 1994 Stock Option Plan effective March 5, 1996. The option has an
exercise price of $14.00 and vests over four years, with 25% vesting on the
first anniversary of the date of grant, and the remainder vesting in 12 equal
quarterly installments over the following three years. Since this initial
grant, Mr. Earley was granted additional stock options. See "--Fiscal Year-End
Option Values" for the total number of unexercised options held by Mr. Earley.
Mr. Adams has an employment agreement which terminates on June 1, 1999 and
provides for a base salary of $150,000 and an incentive plan under which he is
able to earn up to 50% of his base salary based primarily on the achievement
of specified financial objectives. In the event of termination without cause,
Mr. Adams is entitled to receive his base salary, the pro-rated bonus under
the incentive plan to which he was entitled during employment, and certain
benefits for up to six months. Mr. Adams was granted an option to purchase
28
<PAGE>
30,000 shares of Common Stock on June 2, 1998 under the Company's 1994 Stock
Option Plan. The option has an exercise price of $29.125 and vests over four
years, with 25% vesting on the first anniversary date of the grant, and the
remainder vesting in 12 equal quarterly installments over the following three
years. In addition, Mr. Adams' employment agreement provides that he will be
granted an option to purchase an additional 20,000 shares upon the achievement
of certain performance objectives.
STOCK OPTIONS
The following table sets forth information concerning each grant of stock
options made during fiscal 1998 to each of the Named Executive Officer.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
----------------------------------------------- ---------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER OF SHARES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED PERIOD PER SHARE DATE 5% 10%
---- ------------------ ------------- -------------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Mary Ellen Weaver....... -- -- -- -- -- --
David M. Connell........ 30,000(2)(3) 7.4% $22.25 10/30/07 $419,787 $1,063,823
Michael A. Piraino...... 25,000(2)(4) 6.2% $22.25 10/30/07 $349,823 $ 886,519
Richard E. Earley....... 15,000(2)(3) 3.7% $22.25 10/30/07 $209,894 $ 531,912
</TABLE>
- --------
(1) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming
that the stock price on the date of grant appreciates at the indicated
annual rate, compounded annually for the entire term of the option.
(2) The options vest over a four-year period with 25% becoming exercisable on
October 31, 1998 and the remaining 75% vesting in equal quarterly
installments thereafter over the three years ending October 31, 2001.
(3) The options become immediately exercisable upon the sale or other
transfer of substantially all of the Company's assets, a merger or
consolidation in which the Company is not the consolidated or surviving
corporation or any acquisition of 35% or more of the outstanding shares
of Common Stock of the Company by any person.
(4) The options become immediately exercisable upon (i) the sale, lease,
exchange or other transfer of substantially all of the Company's assets,
(ii) a merger or consolidation in which the Company is not the continuing
or surviving corporation or in which substantially all of the outstanding
shares of Common Stock of the Company are converted to cash, other
property or securities of another corporation, and in either case, where
the shareholders of the Company do not own at least 50% of the voting
power of the surviving corporation or parent of the surviving
corporation, (iii) any acquisition of 35% or more of the outstanding
shares of Common Stock of the Company by any person, (iv) the approval by
the shareholders of any plan for the liquidation or dissolution of the
Company, (v) a majority of the Board of Directors of the Company shall
cease to be, during any period of two consecutive years, persons who were
members of the Board at the beginning of such period, together with other
persons whose nomination was approved by at least two-thirds of such
directors, or (vi) any change of control which would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A under
the Exchange Act, regardless of whether the Company is subject to the
reporting requirement at such time.
29
<PAGE>
The following table sets forth the number and value as of July 31, 1998 of
shares underlying unexercised options held by each of the Named Executive
Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AS OF JULY 31, 1998 AS OF JULY 31, 1998(1)($)
------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Mary Ellen Weaver(2).... 40,500 13,500 $ 647,798 $ 215,933
David M. Connell(3)(4).. 157,072 49,128 $4,489,082 $ 693,451
Michael A. Piraino(5)... 29,750 63,750 $ 556,254 $1,116,689
Richard E. Earley(3)(6). 57,250 55,750 $1,030,914 $ 911,971
</TABLE>
- --------
(1) Based on the fair market value (the closing price for the Company's
Common Stock as reported on the Nasdaq National Market as of July 31,
1998, ($32.875 per share)), less the exercise price payable upon exercise
of such options.
(2) All of the options granted to Ms. Weaver vest over a two-year period in
eight equal quarterly installments beginning on February 26, 1997 and
ending on November 26, 1998.
(3) The options become immediately exercisable upon the sale of substantially
all of the Company's assets, a merger or consolidation in which the
Company is not the consolidated or surviving corporation or any
acquisition of 35% or more of the outstanding shares of Common Stock by
any person.
(4) 119,200 of the options granted to Mr. Connell are subject to vesting over
a three and one-half year period. Of such options, 25% became exercisable
on March 1, 1995 and the remaining 75% vest in equal quarterly
installments thereafter over the three years ending March 1, 1998. 25,000
of the options granted to Mr. Connell vest over a four-year period with
25% exercisable on January 15, 1997 and the remaining 75% vesting in equal
quarterly installments thereafter over the three years ending January 15,
2000. 28,000 of the options granted to Mr. Connell vest over a two-year
period in eight equal quarterly installments beginning on February 26,
1997 and ending on November 26, 1998. 4,000 of the options granted to Mr.
Connell vest over a four-year period with 25% exercisable on March 25,
1998 and the remaining 75% vesting in equal quarterly installments
thereafter over the three years ending March 25, 2001. The remaining
30,000 options granted to Mr. Connell vest as set forth in the Option
Grants in Last Fiscal Year Table above.
(5) 24,000 of the options granted to Mr. Piraino vest over a two-year period
in eight equal quarterly installments beginning on February 26, 1997 and
ending on November 26, 1998. 4,000 of the options granted to Mr. Piraino
vest over a four-year period with 25% exercisable on March 25, 1998 and
the remaining 75% vesting in equal quarterly installments thereafter over
the three years ending March 25, 2001. 25,000 options granted to Mr.
Piraino vest as set forth in the Option Grants in Last Fiscal Year Table
above. The remaining 40,500 options granted to Mr. Piraino vest as set
forth in "--Employment Agreements." The options become immediately
exercisable upon (i) the sale, lease, exchange or other transfer of
substantially all of the Company's assets, (ii) a merger or consolidation
in which the Company is not the continuing or surviving corporation or in
which substantially all of the outstanding shares of Common Stock of the
Company are converted to cash, other property or securities of another
corporation, and in either case, where the shareholders of the Company do
not own at least 50% of the voting power of the surviving corporation or
parent of the surviving corporation, (iii) any acquisition of 35% or more
of the outstanding shares of Common Stock of the Company by any person,
(iv) the approval by the shareholders of any plan for the liquidation or
dissolution of the Company, (v) a majority of the Board of Directors of
the Company shall cease to be, during any period of two consecutive years,
persons who were members of the Board at the beginning of such period,
together with other persons whose nomination was approved by at least two-
thirds of such directors, or (vi) any change of control which would be
required to be reported in response to Item
30
<PAGE>
6(e) of Schedule 14A of Regulation 14A under the Exchange Act, regardless
of whether the Company is subject to the reporting requirement at such
time.
(6) 23,000 of the options granted to Mr. Earley vest over a two-year period in
eight equal quarterly installments beginning on February 26, 1997 and
ending on November 26, 1997. 15,000 options granted to Mr. Earley vest as
set forth in the Option Grants in Last Fiscal Year Table above. The
remaining 75,000 options granted to Mr. Earley vest as set forth in "--
Employment Agreements."
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "1994 Plan") permits option grants
to employees, directors, officers and consultants of the Company in order to
further the growth, development and financial success of the Company. The 1994
Plan provides for the grant of incentive stock options and non-statutory stock
options. The Company has reserved, subject to shareholder approval at the
Special Meeting of Shareholders of Company on December 21, 1998, 3,000,000
shares of Common Stock for issuance upon the exercise of options granted under
the 1994 Plan. The 1994 Plan is administered by the Compensation Committee of
the Board of the Company. The Compensation Committee has discretion to
determine which eligible individuals are to receive option grants, the number
of shares subject to each such grant, the status of any granted option as
either an incentive stock option or a non-statutory option, and the vesting
schedule to be in effect for the option grant. The maximum term of options
granted under the 1994 Plan is ten years, subject to earlier termination
following an optionee's cessation of service with the Company. Options granted
under the 1994 Plan are non-transferable and generally expire 90 days after
the termination of an optionee's service to the Company. If a holder of an
option is permanently disabled or dies during his or her service to the
Company, such option generally may be exercised up to one year (90 days for
death) following such disability or death. Subject to certain restrictions,
the Board may amend or modify the 1994 Plan at any time. The 1994 Plan will
terminate on December 31, 2004, unless sooner terminated by the Board.
EMPLOYEE STOCK PURCHASE PLAN
On October 1, 1996, the Company adopted an Employee Stock Purchase Plan, as
amended ("Purchase Plan") which was approved by the shareholders on December
17, 1996. The Purchase Plan allows employees of the Company to purchase Common
Stock, without having to pay any commissions on the purchases. The maximum
amount that any employee can contribute to the Purchase Plan per quarter is
$6,250, and the total number of shares which are reserved by the Company for
purchase under the Purchase Plan is 250,000 of which 186,260 shares were
available for purchase as of July 31, 1998.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws require the Company to indemnify its directors and
officers to the fullest extent permitted by California law against expenses,
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of the fact that
any such person is or was a director or officer of the Company. The Company is
also required to advance to such director or officer expenses incurred in
defending any such proceeding, to the maximum extent permitted by such law.
The Company's Bylaws also provide that the Board, in its discretion, may
provide for indemnification of or advance of expenses to other agents of the
Company. The Company is also authorized under its Articles of Incorporation
and Bylaws to enter into indemnification contracts with its directors,
officers, employees and agents, and indemnification agreements were entered
into with all of the Company's certain officers and directors prior to the
completion of the Company's initial public offering which closed on March 11,
1996 (the "Public Offering"). The Company has purchased liability insurance
covering its directors and officers.
In addition, the Company's Articles of Incorporation provide that the
liability of the Company's directors for monetary damages will be eliminated
to the fullest extent permissible under California law. This provision in
31
<PAGE>
the Articles of Incorporation does not eliminate a director's duty of care to
the Company, and in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief would remain available under
California law. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
To the extent the Board or the shareholders of the Company may in the future
wish to limit or repeal the ability of the Company to provide indemnification
as set forth in the Company's Articles of Incorporation or Bylaws, such repeal
or limitation may not be effective as to directors and officers who are
parties to the indemnification agreements, because their rights to full
protection would be contractually assured by the indemnification agreements.
It is anticipated that similar contracts may be entered into, from time to
time, with future directors of the Company.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any pending or threatened litigation that
may result in claims for indemnification by any director, officer, employee or
other agent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was established prior to the beginning
of fiscal 1997 and during fiscal 1998 consisted of Mr. Lewis and Mr. Haden.
Neither Mr. Lewis nor Mr. Haden was at any time during fiscal 1997 or fiscal
1998 or at any other time an officer or employee of the Company. There are no
compensation committee interlocks between the Company and other entities
involving the Company's executive officers and Board members who serve as
executive officers or Board members of such other entities.
32
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 23, 1998 by: (i) each
person (or group or affiliated persons) who is known by the Company to own
beneficially more than 5% of the Company's Common Stock; (ii) each of the
Company's Directors and nominee Directors; (iii) each of the executive
officers named in the Summary Compensation Table; and (iv) the Company's
Directors and executive officers as a group. Except as indicated in the
footnotes to this table, the persons named in the table, based on information
provided by such persons, have sole voting and sole investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
------------------------------------ ------------------ ----------
<S> <C> <C>
Mary Ellen Weaver(1)(2)......................... 2,137,150 17.8%
David M. Connell(1)(3).......................... 175,200 1.4%
Michael A. Piraino(1)(4)........................ 54,357 *
Richard E. Earley(1)(5)......................... 77,053 *
James A. Adams (1).............................. -- *
J. Christopher Lewis............................ 100,000 *
c/o Riordan, Lewis & Haden
300 S. Grand Avenue, 29th Floor,
Los Angeles, California 90071
Patrick C. Haden................................ 80,000 *
c/o Riordan, Lewis & Haden
300 S. Grand Avenue, 29th Floor,
Los Angeles, California 90071
Christopher W. Lancashire(6).................... 747,782 6.3%
c/o Computec International Strategic Resources,
Inc.
801 North Brand Boulevard, Suite 650
Glendale, California 91203
Richard J. Riordan(7)........................... 1,000,000 8.4%
200 Spring Street
Los Angeles, California 90012
The Equitable Companies Incorporated(8)......... 1,010,800 8.5%
1290 Avenue of the Americas
New York, New York 10104
Thomas G. Carlisle(9)........................... -- *
c/o Systems & Programming Consultants, Inc.
212 Tryon Street, Suite 700
Charlotte, North Carolina 28281
All directors, nominee directors and executive
officers as a group (9 persons)................ 3,696,482 30.1%
</TABLE>
- --------
* Less than 1%.
(1) The address of such persons is c/o Data Processing Resources Corporation,
4400 MacArthur Blvd., Suite 600, Newport Beach, CA 92660.
(2) Includes 54,000 shares issuable upon exercise of options which are
exercisable as of, or will become exercisable within 60 days of November
23, 1998.
(3) Represents shares issuable upon exercise of options which are exercisable
as of, or will become exercisable within 60 days of, November 23, 1998.
33
<PAGE>
(4) Includes 52,500 shares issuable upon exercise of options which are
exercisable as of, or will become exercisable within 60 days of, November
23, 1998.
(5) Includes 76,750 shares issuable upon exercise of options which are
exercisable as of, or will become exercisable within 60 days of, November
23, 1998.
(6) Includes 408,891 shares owned by Mr. Lancashire's spouse.
(7) The information presented is based upon information filed with the
Securities and Exchange Commission on Schedule 13G by the shareholder on
November 2, 1998.
(8) The number listed represents shares of Common Stock beneficially owned by
a group consisting of The Equitable Companies Incorporated, Alpha
Assurances Vie Mutuelle, AXA Assurances I.A.R.D. Mutuelle, AXA Assurances
Vie Mutuelle, AXA Courtage Assurance Mutuelle and AXA-UAP. Such shares of
Common Stock are held by Alliance Capital Management L.P., a subsidiary of
The Equitable Companies Incorporated.
(9) The Company has entered into an Agreement and Plan of Merger, dated as of
June 16, 1998, as amended October 13, 1998 and October 20, 1998, by and
among the Company, DPRC Acquisition Corp., a North Carolina corporation
and wholly owned subsidiary of the Company, Systems & Programming
Consultants, Inc. ("SPC"), and certain shareholders of SPC, pursuant to
which, among other things, DPRC Acquisition Corp. will be merged with and
into SPC, with SPC surviving as a wholly-owned subsidiary of the Company.
This transaction is anticipated to close during the week of December 21,
1998 if approved by the shareholders of DPRC and SPC and satisfaction or
waiver of the other conditions to closing. Assuming that 6.04 shares of
the Company's Common Stock will be issued in the Merger for each share of
Common Stock of SPC, Mr. Carlisle will beneficially own 1,088,426 shares
of Common Stock of the Company. Of such number: (i) 350,006 shares are
purchasable under a fully vested stock option (options to purchase
287,419 shares are exercisable at any time until December 15, 2006 at a
price of approximately $4.14 per share and options to purchase 62,587
shares are exercisable at any time until December 8, 2007 at a price of
approximately $7.39 per share), (ii) 75,892 shares are held of record by
SPC Stock Bonus Plan for the benefit of Thomas Carlisle and (iii) 110,399
shares are held of record by TEC Investments Limited Partnership in which
Mr. Carlisle is a general partner and may be deemed to be a beneficial
owner of the shares held by such entity. See "Certain Transactions."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two Directors of the Company, J. Christopher Lewis and Patrick C. Haden, and
a beneficial owner of more than 5% of the shares of Common Stock of the
Company, Richard J. Riordan, can require the Company to register the shares of
Common Stock owned by them for resale at any time under both demand
registration rights and piggyback registration rights. See "Security Ownership
of Certain Beneficial Owners and Management."
In fiscal 1994, one of the Company's larger clients desired to outsource its
entire information systems department through an employee leasing arrangement
which would not adversely affect the employment package for the personnel
staffing such department. Because the Company does not provide such employee
leasing services and was unable to provide a comparable employment package to
consultants working for this company, a separate company, Information
Technology Resources, Inc. ("ITR"), was formed by Mary Ellen Weaver, the
Company's Chief Executive Officer, and certain other persons, including
certain former employees of the client, with Ms. Weaver owning approximately
79.0% of the outstanding capital stock as of July 31, 1998. As a result of
this arrangement, the Company provides certain management services to ITR to
support its operations, for which the Company receives a management fee.
Management fees earned by the Company were $360,000, $1,035,000 and $1,084,000
for the fiscal years ended 1998, 1997 and 1996, respectively. The management
fees paid to DPRC have historically represented in excess of 90% of ITR's
profit before such management fees. As part of the services provided to ITR,
the Company from time to time makes advances to ITR to assist it with its
working capital needs. ITR also contracts with the Company for technical
consultants to meet its staffing needs. Revenues from the billing of technical
consultants to ITR were $3,012,000, $3,460,000 and $4,974,000 for the fiscal
years ended 1998, 1997 and 1996, respectively. The Company also had trade
accounts receivable for technical consultants due from ITR of $154,000,
$180,000 and $133,000 as of July 31, 1998, 1997 and 1996,
34
<PAGE>
respectively. Management believes that the terms of DPRC's relationship with
ITR, taken as a whole, are no less favorable to the Company than could be
obtained in a transaction with an unrelated third party and that the
management services arrangement with ITR is at least as profitable to the
Company as if the Company were to provide services to ITR's client directly.
Receivables from affiliates (including a receivable from ITR related to these
management services) amounted to $16,000, $23,000 and $104,000 as of July 31,
1998, 1997 and 1996, respectively. Effective August 1, 1997 the management
service agreement with ITR has been renegotiated to reflect a reduction in the
management fee.
In fiscal 1998, Christopher W. Lancashire, a member of the Company's Board
of Directors, who is also the President of Computec International Strategic
Resources, Inc. ("Computec"), one of the Company's operating subsidiaries,
acquired a 33% ownership interest in Message & Ques Tech., Inc. ("MQTECH"), a
software development company, which interest was subsequently increased to
80%. The Company is providing technical consultants to MQTECH through its
Computec subsidiary. Revenue from MQTECH totaled approximately $1.3 million
for fiscal 1998 and accounts receivable as of July 31, 1998 totaled
approximately $629,000. Mr. Lancashire and his spouse have provided a personal
guarantee for payment of all present and future accounts receivable owed to
the Company by MQTECH.
In connection with the acquisition of Computec by the Company, Mr.
Lancashire entered into an employment agreement effective as of April 29, 1997
with Computec which ends December 31, 1998 pursuant to which Mr. Lancashire is
entitled to receive an annual base salary of $140,000. The Company may
terminate Mr. Lancashire's employment with or without cause. In the event his
employment is terminated without cause, he is entitled to receive his base
salary and certain benefits until December 31, 1999 and is entitled to have
released to him any remaining shares of the 286,965 shares of Common Stock of
the Company held in escrow collateralizing certain indemnification obligations
pursuant to the terms of the Computec acquisition agreements. The acquisition
agreements also provide that the Company shall grant options covering up to
155,000 shares (and up to 205,000 shares previously granted if any of such
previously granted shares are forfeited) of Common Stock under the 1994 Plan
to certain employees of Computec, including Mr. Lancashire and his spouse, to
be designated by Mr. Lancashire on or prior to January 1, 1999 at an exercise
price equal to the then current fair market value of the Common Stock at the
date of grant pursuant to the terms of such acquisition agreements. The
Company is obligated to make earnout payments contingent upon Computec's
earnings before interest and taxes through December 31, 1998 (the "Computec
Earnout"). The maximum amount that Mr. Lancashire or his spouse may receive in
connection with the Computec Earnout, either individually or beneficially, is
an aggregate of approximately $36.5 million which is payable in a combination
of 60% in cash and 40% in shares of restricted Common Stock. The first
installment of the Computec Earnout payment, consisting of $390,000 in cash
and 14,970 of restricted Common Stock, valued at approximately $241,000, was
paid in October 1997. The second installment of the Computec Earnout payment,
consisting of $2.3 million in cash and 51,854 shares of restricted Common
Stock, valued at approximately $1.2 million, was paid in June 1998. The third
installment of the Computec Earnout payment, consisting of $3.4 million in
cash and 73,078 shares of restricted Common Stock valued at approximately $1.8
million, was paid in September 1998 and was accrued as of July 31, 1998 upon
resolution of the earnout contingency. The fourth and final installment of the
Computec Earnout is due in March 1999. In addition, Mr. Lancashire and his
spouse were granted registration rights with respect to all shares of the
Common Stock received in connection with the acquisition of Computec and any
additional of Common Stock which may be issued to the Lancashires' in
connection with the Computec Earnout.
In connection with the consummation of the acquisition of SPC by the
Company, Thomas G. Carlisle, a nominee Director of the Company and his
brother, a director and executive officer of SPC, Richard K. Carlisle, will
each receive $100,000 to agree that for a period of three years from the date
of execution of the noncompetition agreement or two years after the date of
termination of his employment with the acquiring company, whichever is the
last to occur, he will not, without the prior written consent of the Company,
directly or indirectly, in the United States, be connected in any manner with
any business which competes with the business of the acquiring company. They
will also each receive, effective upon consummation of the merger, an
employment agreement with a term of one to three years which provides for a
base salary of $125,000 plus the right to receive a bonus of up to 40% of that
base salary if certain earnings thresholds for the business of SPC are
35
<PAGE>
achieved. In the event that the employment of either of them is terminated
without cause, he is entitled to receive 90 days' advance written notice and
payment of his base salary and certain health and life insurance benefits
until the earlier to occur of: (i) six months after termination, (ii) the
expiration of the employment agreement or (iii) the full-time employment of
the person with another company. The Merger Agreement also provides that the
Company shall grant options to purchase up to 250,000 shares of Common Stock
under the 1994 Plan to certain employees of SPC as of the effective date of
the merger at an exercise price equal to the then current fair market value of
the Common Stock. Any number of these options may, but not necessarily be,
allocated to the officers of SPC, including Thomas G. Carlisle and Richard K.
Carlisle. The Merger Agreement also provides that the Company will add Thomas
G. Carlisle as a Director after consummation of the merger and nominate him as
a Director at the 1998 Annual Meeting. In the merger, Mr. Carlisle will
receive approximately 1,088,426 shares of Common Stock of the Company. See
"Security Ownership of Certain Beneficial Owners and Management." In addition,
Mr. Carlisle's brother, Richard K. Carlisle, a director and officer of SPC
prior to the merger, and an employee of SPC after the merger, will own
approximately 1,088,342 shares of Common Stock of the Company after the merger
assuming a 6.04 exchange ratio. Such number includes a fully vested option to
purchase approximately 351,945 shares of Common Stock, 75,808 shares of Common
Stock held of record by SPC Stock Bonus Plan for the benefit of Richard
Carlisle and 110,085 shares of Common Stock held of record by RKC Investments
Limited Partnership in which Richard Carlisle is a general partner and may be
deemed to be a beneficial owner of the shares held by such entity.
The Company has been advised that: (i) the Equitable Companies Incorporated
("Equitable"), as part of a group, is the beneficial owner of more than 5% of
the Company's Common Stock, which shares of Common Stock are held by Alliance
Capital Management L.P., a subsidiary of Equitable; and (ii) Equitable has a
controlling interest in Donaldson, Lufkin & Jenrette Securities Corporation,
an investment banking firm that has rendered investment banking services to
the Company from time to time and has received approximately $1,100,000 from
the Company in fees, discounts and commissions during fiscal 1998.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(A) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS
REPORT:
Independent Auditors' Report................................... F-1
Consolidated Balance Sheets as of July 31, 1998 and 1997....... F-2
Consolidated Statements of Income for the Years Ended July 31,
1998, 1997 and 1996........................................... F-3
Consolidated Statements of Shareholders' Equity for the Years
Ended July 31, 1998, 1997 and 1996............................ F-4
Consolidated Statements of Cash Flows for the Years Ended July
31, 1998, 1997 and 1996....................................... F-5
Notes to Consolidated Financial Statements for the Years Ended
July 31, 1998, 1997 and 1996.................................. F-6 thru F-15
2. FINANCIAL STATEMENT SCHEDULES
Schedule II. Valuation and Qualifying Accounts for the Years
Ended July 31, 1998, 1997 and 1996............................ S-1
</TABLE>
37
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.1 Agreement of Purchase and Sale of Assets dated July 1, 1996, by
and among Data Processing Resources Corporation, ADD
Consulting, Inc. and Gerald R. Ladd(1)
2.2 Registration Rights Agreement dated July 1, 1996, by and
between Data Processing Resources Corporation and ADD
Consulting, Inc.(1)
2.3 Stock Purchase Agreement dated December 16, 1996, by and among
Data Processing Resources Corporation, Leardata Info-Services,
Inc., General Atlantic Leardata Partners, L.P., Bruce M. Smith,
Chris P. Smith, Steve P. Donaldson, Robert M. Howe and
Barbara A. Kuhler(5)
2.4 Form of Registration Rights Agreement to be entered into among
Data Processing Resources Corporation, Leardata Info-Services,
Inc., General Atlantic Leardata Partners, L.P., Bruce M. Smith,
Chris P. Smith, Steve P. Donaldson, Robert M. Howe and Barbara
A. Kuhler(5)
2.5 Agreement and Plan of Merger dated April 29, 1997, by and among
Data Processing Resources Corporation, DPRC Acquisition Corp.,
Computec International Strategic Resources, Inc., Christopher
W. Lancashire, Alicia R. Lancashire and Merrill Lynch Trust
Company of California, as Trustee of The Lancashire Charitable
Remainder Unitrust.(6)
2.6 Registration Rights Agreement dated April 29, 1997, by and
among Data Processing Resources Corporation, Christopher W.
Lancashire and Alicia R. Lancashire.(6)
2.7 Agreement of Purchase and Sale of Assets dated January 27,
1998, by and among Data Processing Resources Corporation,
S/3/G, Inc. and Michael G. McCarthy(8)
2.8 Registration Rights Agreement dated January 27, 1998, by and
between Data Processing Resources Corporation and S/3/G,
Inc.(8)
2.9 Agreement and Plan of Merger dated as of June 16, 1998, by and
among Data Processing Resources Corporation, DPRC Acquisition
Corp., Systems & Programming Consultants, Inc., Richard K.
Carlisle, Thomas G. Carlisle, Jeffery Carter and Robert
Gallagher (The "Merger Agreement")(11)
2.10 Letter Agreement amending certain terms of the Merger
Agreement, dated October 13, 1998++
2.11 Letter Agreement amending certain terms of the Merger
Agreement, dated October 20, 1998(12)
3.1 Restated Articles of Incorporation of the Company(2)
3.2 Restated Bylaws of the Company(2)
4.1 Investors' Rights Agreement dated as of March 2, 1995, by and
among the Company and the Holders who are signatories thereto,
as amended by Amendment No. 1(2)
4.2 Specimen Common Stock certificate(2)
4.3 Indenture dated as of March 24, 1998 between Data Processing
Resources Corporation and State Street Bank and Trust Company
of California, N.A. and Form of Note(9)
4.4 Registration Rights Agreement dated as of March 24, 1998
between Data Processing Resources Corporation and NationsBanc
Montgomery Securities, LLC, Donaldson, Lufkin, Jenrette
Securities Corporation, Robert W. Baird & Co., Incorporated and
Lehman Brothers (the "Initial Purchasers")(9)
4.5 Purchase Agreement dated as of March 18, 1998 between Data
Processing Resources Corporation and the Initial Purchasers(9)
10.1 Employment Agreement dated as of August 1, 1995 between the
Company and David M. Connell(2)*
10.2 Employment Agreement dated as of August 1, 1995 between the
Company and Mary Ellen Weaver(2)*
10.3 Employment Agreement dated as of January 5, 1996 between the
Company and Michael A. Piraino(2)*
10.4 1994 Stock Option Plan, as amended(3)*
10.5 Form of Stock Option Agreement(2)*
10.6 Management Services Agreement dated as of December, 1993
between the Company and Information Technology Resources,
Inc.(2)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.7 Covenant Not to Compete dated as of February 28, 1994 by and
among the Company and Thomas A. Ballantyne, III, Candice M.
Ballantyne, and Ballantyne Computer Service, Inc.(2)
10.8 Form of Indemnification Agreement between the Company and each
of its directors and certain officers(2)*
10.9 Employment Agreement dated as of March 1, 1996 between the
Company and Richard E. Earley(2)*
10.10 Employee Stock Purchase Plan(7)*
10.11 Credit Agreement dated as of September 25, 1997 between Data
Processing Resources Corporation and Wells Fargo Bank, National
Association (The "Credit Agreement")(7)
10.12 Employment Agreement dated April 29, 1997, by and between DPRC
Acquisition Corp. and Christopher W. Lancashire(6)*
10.13 Amendments to Employment Agreement dated as of August 1, 1995
between the Company and Mary Ellen Weaver(7)*
10.14 Amendment No. 1 to the Credit Agreement, dated March 10,
1998(10)
10.15 Amendment No. 2 to the Credit Agreement, dated June 10,
1998(10)
10.16 Amendment No. 3 to the Credit Agreement, dated October 5,
1998++
10.17 Employment Agreement dated as of June 1, 1998 between the
Company and James Adams*+
21.1 List of All Subsidiaries of the Company++
23.1 Consent of Deloitte & Touche LLP+
27.1 Financial Data Schedule for the Company for the Year Ended July
31, 1998++
</TABLE>
- --------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 1, 1996, as filed with the Securities and Exchange Commission
on July 16, 1996 and, as amended, on August 27, 1996.
(2) Incorporated by reference to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (No. 333-00098) as filed with the
Securities and Exchange Commission on March 5, 1996.
(3) Incorporated by reference to the Company's definitive proxy statement
with form of proxy attached as filed with the Securities and Exchange
Commission on November 19, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1996.
(5) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-18719) as filed with the
Securities and Exchange Commission on January 21, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 30, 1997 as filed with the Securities and Exchange
Commission on May 15, 1997.
(7) Incorporated by reference to the 21 Company's Annual Report on Form 10-K
for the fiscal year ended July, 31, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 27, 1998, as filed with the Securities and Exchange
Commission on February 11, 1998.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 24, 1998, as filed with the Securities and Exchange
Commission on March 24, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1998.
(11) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 16, 1998, as filed with the Securities and Exchange
Commission on June 17, 1998.
(12) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 20, 1998, as filed with the Securities and Exchange
Commission on October 22, 1998.
+ Filed herewith.
++ Previously filed with initial Form 10-K for the fiscal year ended July
31, 1998.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
39
<PAGE>
(B) REPORTS ON FORM 8-K.
The Registrant filed the following reports on Form 8-K with the Securities
and Exchange Commission during the fourth quarter of 1998:
Current Report on Form 8-K dated May 20, 1998, describing under Item 5
the acquisition by merger of EXi Corp., a Minnesota corporation
("EXi"), pursuant to an Agreement and Plan of Merger dated as of May
20, 1998, by and among the Company, DPRC Acquisition Corp., a Minnesota
corporation and wholly owned subsidiary of the Company, EXi and the
shareholders of EXi, and attaching a copy of the corresponding press
release dated May 21, 1998.
Current Report on Form 8-K dated June 9, 1998, attaching as Exhibit 27
the Restated Financial Data Schedules required as a result of the
Company's restatement of its earnings per share in accordance with SFAS
No. 128 "Earnings Per Share" which requires such amounts to be
retroactively stated.
Current Report on Form 8-K dated June 16, 1998, describing under Item 5
the execution of an Agreement and Plan of Merger, dated June 16, 1998,
by and among the Company, DPRC Acquisition Corp., a North Carolina
corporation and wholly owned subsidiary of the Company, Systems &
Programming Consultants, Inc., a North Carolina corporation ("SPC"),
and certain shareholders of SPC (the "Merger Agreement"), and attaching
a copy of the Merger Agreement.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to the
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATA PROCESSING RESOURCES CORPORATION
By:
/s/ Michael A. Piraino
______________________________________
Michael A. Piraino
Executive Vice President
Date: November 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment to the report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, Chief November 24, 1998
____________________________________ Executive Officer and
Mary Ellen Weaver Director (Principal
Executive Officer)
* President, Chief Operating November 24, 1998
____________________________________ Officer and Director
David M. Connell
/s/ Michael A. Piraino Executive Vice President November 24, 1998
____________________________________ (Principal Financial
Michael A. Piraino Officer)
/s/ James A. Adams Vice President, Chief November 24, 1998
____________________________________ Financial Officer (Principal
James A. Adams Accounting Officer)
* President, Chief Executive November 24, 1998
____________________________________ Officer of Computec
Christopher W. Lancashire International Strategic
Resources, Inc. and Director
* Director November 24, 1998
____________________________________
J. Christopher Lewis
* Director November 24, 1998
____________________________________
Patrick C. Haden
</TABLE>
*By:
/s/ Michael A. Piraino
_______________________________
Michael A. Piraino
Attorney-in-Fact
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Data Processing Resources
Corporation:
We have audited the accompanying consolidated balance sheets of Data
Processing Resources Corporation and subsidiaries (the "Company") as of July
31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended July 31, 1998. Our audits also included the consolidated financial
statement schedule listed in the index at Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Data Processing Resources
Corporation and subsidiaries as of July 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended July 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Costa Mesa, California
September 25, 1998
(October 20, 1998 as to Note 4 paragraph 11)
F-1
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................... $ 40,581 $ 17,812
Investments................................................. 59,969 --
Accounts Receivable, net of allowance for doubtful accounts
of $1,246 (1998) and $262 (1997)........................... 39,310 21,839
Prepaid Expenses and Other Current Assets................... 4,601 1,076
Deferred Tax Asset.......................................... 711 --
-------- --------
Total Current Assets..................................... 145,172 40,727
Property, net................................................ 4,092 1,429
Other Assets................................................. 757 158
Intangible Assets, net of accumulated amortization of $4,915
(1998) and $1,298 (1997).................................... 114,822 67,973
-------- --------
$264,843 $110,287
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities.................... $ 29,793 $ 9,003
Income Taxes Payable........................................ 1,305 1,489
Deferred Income Taxes....................................... -- 55
-------- --------
Total Current Liabilities................................ 31,098 10,547
Long-Term Deferred Income Taxes.............................. 784 81
Long-Term Debt............................................... 111,288 --
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock; 2,000,000 shares authorized; no shares
issued and outstanding..................................... -- --
Common Stock, no par value; 20,000,000 shares authorized;
11,570,621 (1998) and 11,013,686 (1997) shares issued and
outstanding................................................ 103,420 92,668
Retained Earnings........................................... 18,253 6,991
-------- --------
Total Shareholders' Equity............................... 121,673 99,659
-------- --------
$264,843 $110,287
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenues........................................... $210,568 $115,022 $58,145
Cost of Professional Services...................... 150,541 85,979 45,918
-------- -------- -------
Gross Margin..................................... 60,027 29,043 12,227
Selling, General and Administrative Expenses....... 39,434 18,654 6,719
-------- -------- -------
Operating Income................................... 20,593 10,389 5,508
Interest (Expense) Income, net..................... (382) 869 (162)
-------- -------- -------
Income Before Provision for Income Taxes........... 20,211 11,258 5,346
Provision for Income Taxes......................... 8,949 4,542 2,096
-------- -------- -------
Net Income......................................... $ 11,262 $ 6,716 $ 3,250
======== ======== =======
Net Income Per Share -- Basic...................... $ 1.00 $ 0.74 $ 0.61
======== ======== =======
Net Income Per Share -- Diluted.................... $ 0.96 $ 0.71 $ 0.54
======== ======== =======
Weighted Average Common Shares Outstanding --
Basic............................................ 11,242 9,090 5,314
======== ======== =======
Weighted Average Common Shares Outstanding --
Diluted.......................................... 11,696 9,460 6,039
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
---------- -------- --------- --------
<S> <C> <C> <C> <C>
BALANCE, August 1, 1995................ 4,000,000 $ 2 $(2,880) $ (2,878)
Net Income............................. 3,250 3,250
Exercise of Stock Options and Related
Tax Benefit........................... 22,200 85 -- 85
Accretion to Redemption Value on
Preferred Shares...................... -- -- (95) (95)
Conversion of Preferred Shares into
Common Shares Concurrent with Initial
Public Offering....................... 592,000 1,580 -- 1,580
Issuance of Common Shares in Initial
Public Offering, net.................. 2,726,000 34,329 -- 34,329
Issuance of Common Shares in Connection
with Acquisition...................... 152,121 3,765 -- 3,765
---------- -------- ------- --------
BALANCE, July 31, 1996................. 7,492,321 39,761 275 40,036
Net Income............................. 6,716 6,716
Exercise of Stock Options and Related
Tax Benefit........................... 65,090 741 -- 741
Issuance of Common Shares in Second
Public Offering, net.................. 2,395,000 38,882 -- 38,882
Issuance of Common Shares in Connection
with Acquisitions..................... 1,043,040 12,972 -- 12,972
Issuance of Common Shares from Employee
Stock Purchase Plan................... 18,235 312 -- 312
---------- -------- ------- --------
BALANCE, July 31, 1997................. 11,013,686 92,668 6,991 99,659
Net Income............................. 11,262 11,262
Exercise of Stock Options and Related
Tax Benefit........................... 171,523 2,794 -- 2,794
Issuance of Common Shares in Connection
with Acquisitions..................... 339,907 7,027 -- 7,027
Issuance of Common Shares from Employee
Stock Purchase Plan................... 45,505 931 -- 931
---------- -------- ------- --------
BALANCE, JULY 31, 1998................. 11,570,621 $103,420 $18,253 $121,673
========== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................ $ 11,262 $ 6,716 $ 3,250
Adjustments to Reconcile Net Income to Net Cash
Provided by
Operating Activities:
Depreciation.................................... 753 377 166
Amortization of intangible assets............... 3,617 1,270 42
Amortization of debt discount and issue costs... 238 -- --
Deferred income taxes........................... (238) (219) 47
Changes in Operating Assets and Liabilities, net
of the Effect of Acquisitions:
Accounts receivable............................. (13,826) (5,721) (759)
Prepaid expenses and other current assets....... (4,062) (2,332) 77
Accounts payable and accrued liabilities........ 7,576 1,653 16
Income taxes payable............................ 1,269 1,113 (1,052)
-------- -------- -------
Net Cash Provided by Operating Activities....... 6,589 2,857 1,787
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid for Acquisitions, Net of Cash Acquired.. (31,018) (44,269) (8,785)
Cash Paid for Earnout Obligations................. (3,453) (1,312) --
Purchase of Investments Available-For-Sale........ (59,969) -- --
Purchase of Property.............................. (2,665) (694) (612)
-------- -------- -------
Net Cash Used in Investing Activities........... (97,105) (46,275) (9,397)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Public Offerings of Common Stock,
net.............................................. -- 38,882 34,329
Proceeds from Employee Stock Purchase Plan........ 931 312 --
Proceeds from the Exercise of Stock Options....... 1,304 181 29
Proceeds from Line of Credit...................... 19,500
Repayment of Line of Credit....................... (19,500) -- (836)
Repayment of Notes Payable........................ -- -- (4,305)
Proceeds from Issuance of Notes Payable from Debt
Offering, net.................................... 111,050 -- --
-------- -------- -------
Net Cash Provided by Financing Activities....... 113,285 39,375 29,217
-------- -------- -------
NET INCREASE (DECREASE) IN CASH................... 22,769 (4,043) 21,607
Cash and Cash Equivalents, Beginning of Year...... 17,812 21,855 248
-------- -------- -------
Cash and Cash Equivalents, End of Year............ $ 40,581 $ 17,812 $21,855
======== ======== =======
SUPPLEMENTAL INFORMATION -- CASH PAID FOR:
Interest.......................................... $ 426 $ 83 $ 424
======== ======== =======
Income Taxes...................................... $ 8,099 $ 3,648 $ 3,102
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Conversion of Preferred Stock to Common Stock..... -- -- $ 1,580
Tax Benefit of Stock Options Exercised............ $ 1,490 $ 560 $ 56
Detail of Businesses Acquired in Purchase
Transactions:
Fair Value of Assets Acquired.................... $ 39,614 $ 69,345 $13,880
Common Stock Issued in Acquisitions.............. (5,547) (12,972) (3,765)
Cash Paid for Acquisitions, Including Cash
Acquired of $221 (1998), $3,934 (1997) and $0
(1996).......................................... (31,018) (49,515) (8,785)
-------- -------- -------
Liabilities Assumed.............................. $ 3,049 $ 6,858 $ 1,330
======== ======== =======
Common Stock Issued to Satisfy Earnout
Obligations...................................... $ 1,480 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
1. GENERAL
Business -- Data Processing Resources Corporation (the "Company"), a
California corporation, is a leading specialty staffing company providing
information technology services to a diverse group of corporate clients.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents -- The Company considers all highly-liquid
investments with an original maturity of three months or less to be cash
equivalents.
Investments -- Investments consist of high-quality money market instruments
with original maturities greater than three months, but less than one year,
and are stated at fair value. At July 31, 1998, the Company's investments are
all classified as available-for-sale. Unrealized gains and losses on
securities classified as available-for-sale were not significant.
Property -- The cost of furniture, fixtures and equipment is depreciated
using straight-line and accelerated methods based on the estimated useful
lives of the related assets, generally three to seven years. Leasehold
improvements are amortized over the lesser of five years or the life of the
lease. The Company capitalizes the development costs related to the
customization and testing of purchased software for use within the Company in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. These costs along
with the costs of the purchased software itself will be amortized over five to
seven years.
Intangible Assets -- Intangible assets include covenants not-to-compete and
goodwill, which represent the excess of cost over fair value of net assets
acquired. Covenants not-to-compete and goodwill are amortized using the
straight-line method over 3 and 25 years, respectively. The recoverability of
intangible assets is determined by comparing the carrying value of intangible
assets to the estimated future operating income of the Company on an
undiscounted cash-flow basis. Should the carrying value of intangible assets
exceed the estimated operating income for the expected period of benefit, an
impairment for the excess would be recorded at that time. As of July 31, 1998,
no impairment has been recognized.
Revenue Recognition -- The Company recognizes revenue as services are
performed.
Fair Value of Financial Instruments -- Management believes the carrying
amounts of cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable approximate fair value due to the short
maturity of these financial instruments. The fair value of the long-term debt
is based on current quoted market prices and is estimated to be $129,375,000
as of July 31, 1998. As of September 25, 1998, the fair value of the long-term
debt is estimated to be $119,462,000.
Income Taxes -- The Company provides for income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than enactments of changes in the tax laws or rates.
Additional Stock Plan Information -- The Company continues to account for
its stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and its related interpretations. No compensation expense has
been recognized in the financial statements for employee stock arrangements.
F-6
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share -- In the second quarter of 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share. Under this standard, primary net income per share is replaced by basic
net income per share, and fully diluted net income per share is replaced by
diluted net income per share. All historical earnings per share information
has been restated as required by SFAS No. 128.
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding during the periods presented. Diluted net income per share is
computed by dividing net income available to common shareholders by the
weighted average number of common and common equivalent shares outstanding
during the periods presented assuming the conversion of all shares of the
Company's convertible preferred stock into Common Stock and the exercise of
all in-the-money stock options. Common equivalent shares have not been
included where inclusion would be antidilutive. The effect of the 5 1/4%
convertible subordinated notes issued in March 1998 was not dilutive during
fiscal 1998.
The following is a reconciliation between the number of shares used in the
basic and diluted net income per share calculations (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Basic net income per share:
Weighted average number of common shares
outstanding........................................ 11,242 9,090 5,314
Effect of dilutive securities:
Stock options....................................... 454 370 725
------- ------ ------
Diluted net income per share:
Weighted average number of common shares
outstanding........................................ 11,696 9,460 6,039
======= ====== ======
</TABLE>
Reclassifications -- Certain items in the prior period financial statements
have been reclassified to conform to the current period presentation.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and related disclosures at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Recent Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about
operating segments in annual financial statements and, to a lesser extent, in
interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are
effective for the Company beginning in fiscal 1999. As both SFAS Nos. 130 and
131 deal with financial disclosure, the Company does not anticipate the
adoption of these new standards will have a material impact on its financial
position or results of operations.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 establishes
disclosure standards for pensions and other postretirement benefits. SFAS No.
132 is effective for the Company beginning in fiscal 1999. The Company does
not anticipate that the adoption of this new standard will have a material
impact on its financial position or results of operations.
F-7
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the Company beginning
in the first quarter of fiscal 2000. The Company does not anticipate that the
adoption of this new standard will have a material impact on its financial
position or results of operations.
3. PROPERTY
Property consists of the following at July 31, 1998 and 1997:
<TABLE>
<CAPTION>
JULY 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Equipment.................................................... 3,969 1,732
Furniture and Fixtures....................................... 1,757 1,090
Leasehold Improvements....................................... 353 53
Purchased Software........................................... 678 --
------ ------
6,757 2,875
Accumulated Depreciation and Amortization.................... (2,665) (1,446)
------ ------
4,092 1,429
====== ======
</TABLE>
4. ACQUISITIONS
Between August 1996 and July 1998, the Company completed six acquisitions.
Each acquisition was accounted for as a purchase. The excess of cost over fair
value of net assets acquired was allocated to goodwill, which is amortized
using the straight-line method over 25 years. The consolidated financial
statements of the Company include the results of operations for each acquired
business from the acquisition date. A summary of the more significant
acquisitions is as follows:
In January 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of S/3/G, Inc., a Texas Corporation ("S/3/G").
Under the terms of the asset purchase agreement, the purchase price was $32.2
million, consisting of $28.2 million in cash and 204,552 shares of restricted
DPRC common stock, valued at approximately $4.0 million. In addition, S/3/G
has the right to receive certain additional consideration contingent upon
S/3/G's adjusted earnings before interest and taxes through December 31, 1998.
The earnout is payable semi-annually, 85% in cash and 15% in shares of
restricted common stock. The first installment of the earnout payment
consisting of $5.8 million in cash and 32,880 shares of restricted common
stock, valued at approximately $817,000, was paid in September 1998 and was
accrued as of July 31, 1998 upon resolution of the earnout contingency. The
second and final installment of the earnout is due in March 1999 and will be
recorded as an addition to goodwill.
In July 1997, the Company acquired all of the outstanding capital stock of
SelecTech, Inc. ("SelecTech"). Under the terms of the agreement, the purchase
price was approximately $9.0 million, consisting of $8.1 million in cash and
54,934 shares of restricted common stock valued at approximately $928,000.
In April 1997, the Company completed the acquisition by merger of Computec
International Strategic Resources, Inc. ("Computec"). Under the terms of the
agreement, the purchase price was approximately $28.2 million, consisting of
$19.0 million in cash and 677,880 shares of restricted common stock, valued at
F-8
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
4. ACQUISITIONS (CONTINUED)
approximately $9.2 million. The definitive agreement also provides for an
earnout contingent upon Computec's earnings before interest and taxes through
December 31, 1998. The earnout is payable 60% in cash and 40% in shares of
restricted common stock. The aggregate amount of the initial consideration and
the earnout may not exceed $70.0 million. The first installment of the earnout
payment, consisting of $390,000 in cash and 14,970 shares of restricted common
stock, valued at approximately $241,000, was paid in October 1997. The second
installment of the earnout payment, consisting of $2.3 million in cash and
51,854 shares of restricted common stock, valued at approximately
$1.2 million, was paid in June 1998. The third installment of the earnout
payment, consisting of $3.4 million in cash and 73,078 shares of restricted
common stock valued at approximately $1.8 million, was paid in September 1998
and was accrued as of July 31, 1998 upon resolution of the earnout
contingency. The fourth and final installment of the earnout is due in March
1999 and will be recorded as an addition to goodwill.
In January 1997, the Company acquired all of the outstanding capital stock
of LEARDATA Info-Services, Inc. ("Leardata"). Under the terms of the
agreement, the purchase price was approximately $21.4 million, consisting of
$17.3 million in cash and 310,226 shares of restricted common stock, valued at
approximately $4.1 million.
In November 1996, the Company acquired all of the outstanding common stock
of Professional Software Consultants, Inc. ("PSC"). Under the terms of the
agreement, the purchase price was approximately $6.2 million in an all-cash
transaction.
The allocation of the purchase prices for all acquisitions and other
purchase accounting adjustments is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Total Purchase Price, net............................ $ 36,486 $ 63,593
Net Assets Acquired.................................. (2,073) (8,677)
Covenant Not-to-Compete.............................. (350) (100)
Acquisition Costs.................................... 300 1,987
---------- ----------
Excess of Purchase Price Over Net Assets Acquired.... $ 34,363 $ 56,803
========== ==========
</TABLE>
During 1998 and 1997, the Company recorded additional goodwill as a result
of earnout obligations of $15,753 and $1,106, respectively.
Unaudited pro forma combined results of operations for the periods ended
July 31, 1998 and 1997 would have been as follows had each of the acquisitions
occurred as of the beginning of the respective periods (in thousands, except
per share data):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Pro Forma Revenues....................................... $224,189 $160,242
Pro Forma Net Income..................................... $ 11,854 $ 7,758
Pro Forma Net Income Per Share -- Basic.................. $ 1.04 $ 0.77
Pro Forma Net Income Per Share -- Diluted................ $ 1.00 $ 0.74
Weighted Average Common and Common Equivalent Shares
Outstanding:
Basic.................................................. 11,403 10,054
Diluted................................................ 11,857 10,424
</TABLE>
F-9
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
4. ACQUISITIONS (CONTINUED)
Pro forma adjustments have been applied to reflect the purchase, which
includes the elimination of expenses that are not expected to have a
continuing impact on the Company such as certain redundant personnel costs,
excess owner's compensation and cost of line of business not acquired, and the
addition of amortization related to the intangible assets acquired.
On June 16, 1998, the Company entered into a definitive merger agreement
with Systems & Programming Consultants, Inc. ("SPC") which was subsequently
amended on October 13 and October 20, 1998 (the "Amended Merger Agreement").
The Amended Merger Agreement contemplates accounting for the transaction as a
pooling of interests with the purchase price payable entirely in Common Stock.
The number of shares to be issued will be approximately 2,800,000 to 3,300,000
shares of Common Stock with such number to be determined based upon an implied
purchase price of $71.5 million on the date the October 20, 1998 amendment to
the merger agreement was signed, less deductions for certain payments and
liabilities to be assumed by the Company, and a fixed price of $21.00 per
share of the Company's Common Stock. Of such number of shares, approximately
two-thirds are expected to be issued upon consummation of the merger in
exchange for the outstanding shares of SPC common stock and for the
cancellation of certain SPC performance-based options and the remaining number
of shares, approximately one-third, will be issued from time to time
thereafter upon exercise of the SPC stock options under the SPC stock option
plan being assumed by DPRC. The acquisition is subject to numerous conditions,
including but not limited to, obtaining the approval of the shareholders of
the Company and SPC. There can be no assurance that such acquisition will be
completed or that if such acquisition is completed it will be for the expected
consideration or on the terms contemplated.
Unaudited pro forma combined results of operations for the periods ended
July 31, 1998 and 1997 would have been as follows had the merger with SPC
occurred as of the beginning of the respective periods (in thousands, except
per share data):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Pro Forma Revenues....................................... $262,947 $147,833
Pro Forma Net Income Available to Common Shareholders.... $ 11,319 $ 6,835
Pro Forma Net Income Per Share -- Basic.................. $ .86 $ .64
Pro Forma Net Income Per Share -- Diluted................ $ .78 $ .58
Weighted Average Common and Common Equivalent Shares
Outstanding:
Basic.................................................. 13,093 10,762
Diluted................................................ 14,473 11,735
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------
1998 1997
------- ------
<S> <C> <C>
Accounts Payable............................................. $ 3,078 $1,355
Accrued Salaries, Bonuses and Related Benefits............... 11,663 5,655
Commissions Payable.......................................... 1,155 877
Accrued Earnout Obligations.................................. 11,823 1,106
Accrued Interest Payable..................................... 2,074 10
------- ------
$29,793 $9,003
======= ======
</TABLE>
F-10
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
6. LONG-TERM DEBT
On March 24, 1998, the Company completed the sale of $115.0 million of its 5
1/4% convertible subordinated notes due 2005 (the "Notes") in a private
offering under Rule 144A to qualified institutional buyers. The Notes are
convertible at any time at the option of the holders into shares of common
stock of DPRC at a conversion price of $35.50 per share of common stock of the
Company. The Notes mature on April 1, 2005 and are non-callable for the first
three years. The Company used a portion of the net proceeds of the offering
for repayment of $19.5 million of debt outstanding under its credit facility.
Interest is payable on April 1 and October 1 of each year, commencing on
October 1, 1998. The Notes were recorded net of a discount and issue costs of
$3,950,000, which will be amortized over seven years based on the effective
interest method. As of July 31, 1998, accumulated amortization was $238,000.
As of July 31, 1998, there have been no conversions of notes to common stock.
On June 10, 1998, the Company amended its five-year, $60.0 million
Revolving/Term Loan Agreement (the "Credit Facility") with a bank syndicate.
The Credit Facility consists of a revolving line of credit of $60.0 million
principal amount, and bears interest ranging from the prime rate to the prime
rate plus .5% or from LIBOR plus 0.50% to LIBOR plus 1.75% depending on
defined financial conditions. At the end of three years, the outstanding
principal balance on the facility converts to a two-year fully amortized term
loan. The Credit Facility is guaranteed by the Company's subsidiaries and
secured by substantially all of the assets of the Company and its
subsidiaries, including accounts receivable and equipment and a pledge of all
of the stock of the Company's subsidiaries. The Credit Facility contains
various covenants, including the maintenance of defined financial ratios such
as net worth. As of July 31, 1998, the Company had no borrowings outstanding
under the credit facility and was in compliance with bank covenants. The
Company's Credit Facility prohibits the payment of dividends without the prior
written consent of the lender.
7. SHAREHOLDERS' EQUITY
Second Public Offering -- In January 1997, the Company completed a second
public offering of 2,395,000 shares of its common stock at an offering price
of $17.50 per share for net proceeds of $38.9 million.
Initial Public Offering -- In March 1996, the Company completed an initial
public offering of 2,726,000 shares of its common stock at an offering price
of $14.00 per share for net proceeds of $34.3 million.
Stock Split -- On January 8, 1996, the Company amended its Articles of
Incorporation to increase the number of authorized shares of common stock from
8,000,000 to 20,000,000, to authorize 2,001,480 shares of preferred stock (of
which 1,480 were designated Series A Convertible Preferred Stock) and to
effect a 400-for-one stock split of its common stock. All shares and per share
amounts included in the accompanying financial statements and footnotes have
been restated to reflect the stock split.
Preferred Stock -- In March 1995, the Company issued 1,480 shares of Series
A preferred stock for $1,601,000, less costs of $208,000 associated with the
issuance. The Series A preferred stock had a liquidation preference of $1,082
per share, plus 8.0% interest per annum and was redeemable at an amount equal
to the sum of $2,850 per share. Immediately prior to the consummation of the
initial public offering, the outstanding shares of Series A Convertible
Preferred Stock automatically converted into an aggregate of 592,000 shares of
common stock. The shares of Series A Convertible Preferred Stock were canceled
upon said conversion and ceased to be authorized.
F-11
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
8. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Stock Option Plan -- In 1994, the Company adopted the 1994 Stock Plan (the
"Stock Plan") under which incentive and non-statutory stock options to acquire
shares of the Company's common stock may be granted to officers, employees and
consultants of the Company. The Stock Plan is administered by the Board of
Directors and permits the issuance of options as of July 31, 1998 of up to
3,000,000 shares, subject to shareholder approval, of the Company's common
stock. Incentive stock options must be issued at an exercise price not less
than the fair market value of the underlying shares on the date of grant.
Options granted under the Stock Plan vest over various terms up to four years
and are exercisable over a period of time, not to exceed ten years, and are
subject to other terms and conditions specified in each individual employee
option agreement. A summary of employee stock options is as follows (number of
shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE FAIR VALUE OF
SHARES EXERCISE PRICE OPTIONS GRANTED
--------- -------------- ----------------
<S> <C> <C> <C>
Outstanding August 31, 1995....... 284 $ 1.32
Granted.......................... 395 $14.16 $ 6.75
Exercised........................ (22) $ 1.31
Canceled......................... (40) $25.55
-----
Outstanding July 31, 1996......... 617 $ 8.20
-----
Granted.......................... 785 $18.79 $ 8.87
Exercised........................ (65) $ 2.78
Canceled......................... (152) $17.99
-----
Outstanding July 31, 1997......... 1,185 $14.17
-----
Granted.......................... 407 $25.49 $26.09
Exercised........................ (172) $ 7.24
Canceled......................... (80) $20.43
-----
OUTSTANDING JULY 31, 1998......... 1,340 $18.12
=====
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES: OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.31--$16.88 496,930 7.42 $10.33 338,454 $ 9.29
$18.50--$22.38 474,649 8.66 $20.05 137,311 $19.81
$23.50--$29.50 368,000 9.43 $26.13 16,620 $25.58
-------------- --------- -------
$ 1.31--$29.50 1,339,579 8.41 $18.12 492,385 $12.77
========= =======
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share, had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated
through the use of option-pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option-pricing model, with the
following weighted average assumptions: expected life, 6.7 years; stock
volatility, 44.3%; risk-free interest rates, 5.7%; and no dividends during the
expected term. The Company's calculations are based on a single-option
valuation approach and forfeitures are recognized as they occur. If the
computed
F-12
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
8. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS (CONTINUED)
fair values of the 1996, 1997 and 1998 awards had been amortized to expense
over the vesting period of the awards, pro forma net income would have been
$3.1 million, or $0.59 per basic share and $0.52 per diluted share, in 1996;
$5.9 million, or $0.65 per basic share and $0.62 per diluted share, in 1997;
and $9.6 million, or $0.86 per basic share and $0.82 per diluted share, in
1998. However, the impact of the outstanding non-vested stock options granted
prior to 1995 has been excluded from the pro forma calculation; accordingly,
the 1996 and 1997 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculations will apply to all applicable
stock options.
Retirement Savings Plan -- The Company has several retirement savings plans
(the "Plans") which qualify under Section 401(k) of the Internal Revenue Code.
Eligible employees may contribute up to 20% of their annual compensation, as
defined by the Plans. During the year ended July 31, 1998, the Company
contributed $152,000 to the Plans, which is recorded in selling, general and
administrative expenses. No Company contributions were made during fiscal 1996
or 1997.
Employee Stock Purchase Plan -- In October 1996, the Company adopted an
Employee Stock Purchase Plan (the "ESP Plan"). The ESP Plan allows employees
of the Company to purchase common stock without having to pay any commissions
on the purchases. The maximum amount that any employee can contribute to the
ESP Plan per quarter is $6,250. The total number of shares which are reserved
by the Company for purchase under the ESP Plan is 250,000, of which 186,260
shares remain unpurchased as of July 31, 1998.
9. INCOME TAXES
The provision for income taxes includes the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $7,412 $3,693 $1,563
State............................................... 1,729 1,068 475
------ ------ ------
9,141 4,761 2,038
Deferred:
Federal............................................. (131) (196) 32
State............................................... (61) (23) 26
------ ------ ------
(192) (219) 58
------ ------ ------
Provision for Income Taxes........................... $8,949 $4,542 $2,096
====== ====== ======
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JULY 31,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income Taxes at Statutory Federal Rate.................... 35.0% 35.0% 35.0%
State Taxes, net of Federal Benefit....................... 5.4 6.0 6.2
Tax-Exempt Interest Income................................ (0.6) (2.7) (2.3)
Amortization of Non-Deductible Goodwill................... 3.6 2.5 --
Other..................................................... 0.9 0.5 1.3
Benefit of Graduated Rates................................ -- (1.0) (1.0)
---- ---- ----
Total..................................................... 44.3% 40.3% 39.2%
==== ==== ====
</TABLE>
F-13
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
9. INCOME TAXES (CONTINUED)
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. The income effects of these temporary differences representing
significant portions of deferred tax assets and deferred tax liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
JULY 31,
------------
1998 1997
----- -----
<S> <C> <C>
Amortization of Goodwill...................................... $(549) $(149)
Bad Debt Reserve.............................................. 444 82
Change of Accounting from Cash to Accrual Method for Acquired
Subsidiaries................................................. (415) (679)
State Income Taxes............................................ 252 371
Vacation Accrual.............................................. 244 172
Other......................................................... (49) 14
Net Operating Losses.......................................... -- 53
----- -----
Total Deferred Tax Liability.................................. $ (73) $(136)
===== =====
</TABLE>
During fiscal 1998, the Company established a net deferred tax liability of
$129,000 in connection with basis differences resulting from several of its
acquisitions (Note 4).
10. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities, certain equipment and vehicles
under lease agreements classified as operating leases. Future minimum lease
payments under such noncancelable operating leases are summarized as follows
at July 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999................................................................. $1,281
2000................................................................. 1,072
2001................................................................. 915
2002................................................................. 872
2003................................................................. 677
Thereafter........................................................... 91
------
Total Future Minimum Lease Payments.................................. $4,908
======
</TABLE>
Rent expense amounted to $1,466,000, $625,000, and $227,000 for the years
ended July 31, 1998, 1997, and 1996, respectively, and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.
11. RELATED-PARTY TRANSACTIONS
In fiscal 1994, one of the Company's larger clients desired to outsource its
entire Information Systems department through an employee leasing arrangement.
Because the Company does not provide such employee leasing services and was
unable to provide a comparable employment benefit package to consultants
working for this company, Information Technology Resources, Inc. ("ITR"), was
formed by the founder of the Company and certain other persons, including
certain former employees of ITR's client, with the founder of the Company
owning approximately 79.0% of the outstanding capital stock as of July 31,
1998. As a result of this arrangement, the Company provides certain management
services to ITR to support its operations, for which the Company receives a
management fee pursuant to a management services agreement effective August 1,
1997. Management
F-14
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
11. RELATED-PARTY TRANSACTIONS (CONTINUED)
fees earned by the Company were $360,000, $1,035,000 and $1,084,000 for the
years ended 1998, 1997 and 1996, respectively. ITR also contracts with the
Company for technical consultants to meet its staffing needs. For the year
ended July 31, 1998, 1997 and 1996, the Company recorded revenues of
$3,012,000, $3,460,000 and $4,974,000 from billing of ITR technical
consultants.
In fiscal 1998, a member of DPRC's Board of Directors, who is also the
President of one of the Company's operating subsidiaries, acquired a 33%
ownership interest in Message & Ques Tech., Inc. ("MQTECH"), a software
development company, which interest was subsequently increased to 80%. The
Company is providing technical consultants to MQTECH through its Computec
subsidiary. Revenue from MQTECH totaled approximately $1.3 million for fiscal
1998 and accounts receivable as of July 31, 1998 totaled approximately
$629,000. This Director has provided a personal guarantee for payment of all
present and future accounts receivable owed to the Company by MQTECH.
12. CONCENTRATION OF CREDIT RISK
The Company's revenues are generated from credit sales to customers located
throughout the United States. The Company performs ongoing credit evaluations
of its customers and maintains reserves for potential credit lines and
generally does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations. The Company's ten largest customers represented 25.6% of total
revenues in fiscal 1998, and as a result, the Company has a large proportion
of its receivables outstanding with these customers. Accounts receivable from
the Company's ten largest customers was $8,949,000 as of July 31, 1998.
In each of fiscal 1998, 1997 and 1996, the Company had sales to a major
customer, not necessarily the same customer in each period, of approximately
$8,300,000, $5,800,000 $5,794,000, respectively. Given the significant amount
of revenues derived from these customers, the loss of any such customer or the
uncollectability of related receivables could have a material adverse effect
on the Company's financial condition and results of operations.
F-15
<PAGE>
SCHEDULE II
DATA PROCESSING RESOURCES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT THE CHARGES TO RECOVERIES BALANCE AT THE
BEGINNING OF BAD DEBTS AND DEDUCTIONS/ END OF THE
DESCRIPTION THE PERIOD EXPENSE OTHER(1) WRITE-OFFS PERIOD
----------- -------------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1998
Allowance For Doubtful
Accounts.............. $262 $1,124 $110 $(250) $1,246
1997
Allowance For Doubtful
Accounts.............. $129 $ 99 $110 $ (76) $ 262
1996
Allowance For Doubtful
Accounts.............. $ 63 $ 105 -- $ (39) $ 129
</TABLE>
- --------
(1) Represents the Allowance For Doubtful Accounts of the acquired companies as
of the acquisition dates.
S-1
<PAGE>
EXHIBIT 10.17
DATA PROCESSING RESOURCES CORPORATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("this Agreement") is made effective on May 12,
1998, by and between DATA PROCESSING RESOURCES CORPORATION, a California
corporation ("DPRC"), and James A. Adams ("Employee"), with reference to the
following:
A. DPRC wishes to employ Employee, and Employee desires to be so employed,
in the capacity of Vice President and Chief Financial Officer at DPRC's
Corporate office (currently located at 4400 MacArthur Blvd.), which employment
is sometimes hereinafter referred to as "the Employment"), at compensation as
detailed on Exhibit A.
B. DPRC and Employee now wish to formalize the terms of the Employment, as
hereinafter provided.
NOW, THEREFORE, in consideration for the promises and obligations set forth
below, DPRC and Employee agree as follows:
1. Employment.
----------
DPRC agrees to employ, and Employee agrees to be so employed by DPRC on the
terms and conditions described below. Employee agrees that during his/her
employment by DPRC (sometimes referred to in this Agreement as "the Employment
Period"), Employee shall devote his/her full-time efforts to his/her duties as
an Employee of DPRC.
2. Duties and Compensation.
-----------------------
2.1 Employee agrees to perform any and all duties now or in the future
assigned to Employee by DPRC, in his/her capacity as Vice President and Chief
Financial Officer or otherwise.
2.2 As consideration for said performance of duties and adherence to the
covenants in this Agreement, Employee shall be entitled to the Compensation.
Employee understands and acknowledges that the Compensation will constitute the
full and exclusive consideration to be received by Employee for all services
performed by Employee in connection with DPRC's employment of Employee, and for
the performance of all his/her promises and obligations under this Agreement.
2.2.1 DPRC may adopt, or continue in force, benefit plans for the
benefit of its employees or certain of its employees, which may include, but not
be limited to, group life insurance, medical insurance, etc. DPRC may terminate
any or all such plans at any time and may choose not to adopt any additional or
replacement plans. Employee's rights under any benefits plans now in force or
later adopted by DPRC shall be governed solely by the terms of such plans.
<PAGE>
3. Covenants of Employee.
---------------------
3.1 Employee agrees that during the Employment Period, Employee will not
engage in any activity competitive with or adverse to DPRC's business or
welfare, whether alone, as a partner, or as an officer, director, employee or
shareholder of any other corporation and shall not otherwise undertake planning
for or the organization of any business activity competitive with DPRC's
business or combine or conspire with other employees or representatives of DPRC
for the purpose of organizing any such competitive business activity.
3.2 It is understood that Employee will gain knowledge and make contacts
with DPRC's customers and clients (sometimes collectively referred to in this
Agreement as "the Clients") and prospective clients of DPRC in the course of
his/her employment that would provide Employee with an unfair competitive
advantage for Employee over DPRC, as compared to a normally competitive
situation, in the event Employee should seek to solicit business from the
Clients and said prospective clients. In recognition of this understanding,
Employee agrees that, upon termination of the Employment Period, he/she will not
engage in unfair competition, as defined below, against DPRC. For the purposes
of this Agreement, the term "unfair competition" shall be construed to include
without limitation the following specific prohibitions:
(a) Employee shall not interfere or attempt to interfere in any way
with any existing relationships of DPRC with the Clients with whom DPRC has
participated in at least one project or placement within the previous two (2)
years, and shall not solicit, divert or take away or attempt to solicit, divert
or take away any business of DPRC that is either under contract or in
negotiation at the time of the termination of the Employment Period.
(b) For a period of two (2) years following the termination of the
Employment Period, Employee shall not interfere or compete in any way with any
proposal efforts of DPRC already in progress (that is, a proposal sent to or
being then currently developed for a specific Client or potential client of
DPRC) at the time of the termination of the Employment Period.
(c) For a period of two (2) years following the termination of the
Employment Period, Employee shall not make use of any of his/her personal
relationships or business contacts developed during the Employment Period and
utilized for business purposes, for the benefit of his/herself, or another, in a
competitive manner with respect to the business of DPRC.
(d) For a period of two (2) years following the termination of the
Employment Period, Employee shall not induce, solicit or influence or attempt to
induce, solicit or influence any person, who is engaged as an employee or
otherwise by DPRC, to terminate his or his/her employment or other engagement
with DPRC.
3.3 Employee acknowledges and understands that during the Employment
Period, Employee will have access to and will utilize and review information
which constitutes valuable, important and confidential trade secrets, as that
term is interpreted under the Uniform Trade Secrets Act (California Civil Code
Section 3426 et seq.) and/or confidential and proprietary material and
-- ---
-2-
<PAGE>
information of or relating to the business of DPRC necessary for the successful
conduct of the DPRC's business. This information includes, but is not limited
to: (a) DPRC's listings of and data regarding the Clients (past and current),
(b) DPRC's information regarding potential customers and clients, (c) data
relating to the personnel, supervisory structure and procedures of the Clients;
(d) specific computer technician staffing needs of the Clients; (e) the
identity, whereabouts, capabilities and availability of contractors in DPRC's
database; (f) DPRC's bidding, billing and pricing practices; (g) the nature and
type of services rendered by DPRC to the Clients; and (h) other methodologies,
computer programs, employee and contractor resumes, employee databases,
processes, compilations of information, results of proposals, job notes,
reports, and records (all of which information is sometimes referred to in this
Agreement as "the Secrets"). Employee understands further that the Secrets have
been and will be accumulated, by Employee and other personnel at DPRC, at a
considerable expense to DPRC (including but not limited to compensation paid to
DPRC personnel dealing with the Secrets and the Clients), and that DPRC has and
will continue to expend its resources in order to maintain actively and
vigorously the confidentiality of the Secrets, as such information is extremely
valuable to DPRC, and well worth the expense of enforcement and preservation of
such confidentiality. Accordingly, Employee agrees to execute DPRC's standard
confidentiality agreement requested from each of its employees, at such time as
he/she shall be requested by DPRC to do so.
3.4 At the time of or before the termination of Employee's employment with
DPRC, Employee agrees to deliver promptly to DPRC all notes, books, electronic
data (regardless of storage media), correspondence and other written and
graphical records (including all copies thereof in Employee's possession or
under Employee's control relating to any business, work, the Clients or any
other aspect of DPRC, including but not limited to all original and copies of
all or any part thereof.
3.5 Employee agrees to comply with DPRC's current rules, regulations and
practices, including but not limited to those rules concerning vacation and sick
leave, as they may from time to time be adopted or modified, so long as they are
uniformly applied to all employees.
3.6 Employee hereby agrees to indemnify DPRC against any and all joint and
several liability, loss, damage, costs or expense which DPRC may hereafter
incur, suffer or be required to pay by reason of the violation or breach of any
agreement to which Employee was or is bound in connection with Employee's prior
employment.
4. Relief.
------
In the event of a breach or threatened breach by Employee of any of the
provisions of this Agreement, Employee agrees that DPRC, in addition to and not
in limitation of any other rights, remedies, or damages available to DPRC at law
or in equity, shall be entitled to a preliminary and a permanent injunction in
order to prevent or restrain any such breach by Employee or by Employee's
partners, agents, representatives, servants, employers, employees, and/or any
and all persons directly or indirectly acting for or with Employee.
-3-
<PAGE>
5. Miscellaneous Provisions.
------------------------
5.1 In the event that any of the provisions of this Agreement shall be
held to be invalid or unenforceable, then all other provisions shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included in the Agreement. In the event that
any provision relating to the time period of any restriction imposed by this
Agreement shall be declared by a court of competent jurisdiction to exceed the
maximum time period which such court deems reasonable and enforceable, then the
time period of restriction deemed reasonable and enforceable by the court shall
become and shall thereafter be the maximum time period.
5.2 This Agreement shall be binding upon the heirs, executors,
administrators, and successors-in-interest of the parties hereto.
5.3 This Agreement shall be construed and enforced according to the laws
of the State of California, excluding its choice of law rules.
5.4 This Agreement supersedes all previous correspondence, promises,
representations, and agreements, if any, either written or oral. No provision of
this Agreement may be modified except by a writing signed by both DPRC and
Employee.
5.5 Except as otherwise provided in this Agreement, DPRC and the Employee
hereby consent to the resolution by binding, non-appealable arbitration of all
claims or controversies in any way arising out of, relating to or associated
with the Employee's employment with DPRC or its termination ("Claims"), that
DPRC may have against the Employee or that the Employee may have against DPRC or
against its officers, directors, employees, agents or clients. The Claims
covered by this Agreement include, but are not limited to, Claims for wages or
other compensation due; Claims for breach of any contract or covenant, express
or implied; tort Claims; Claims for discrimination or harassment; Claims for
benefits, including stock options, except as excluded below; and Claims for
violation of any federal, state or other governmental constitution, statute,
ordinance or regulation. This consent to arbitrate, however, shall not apply to,
or cover Claims for workers' compensation benefits; Claims for unemployment
compensation benefits; Claims by DPRC for injunctive and/or other equitable
relief; Claims relating to unfair competition or solicitation and/or the use or
disclosure of trade secrets, confidential information, proprietary information
or other intellectual property rights of DPRC or its clients; and Claims based
upon an employee's pension or other benefit plan, the terms of which contain an
arbitration or other non- judicial dispute resolution procedure, in which case
the provisions of such plan shall apply. Any arbitration required by this
Agreement shall be conducted in Orange County, California in accordance with the
commercial arbitration rules of the American Arbitration Association then
existing, and any award, order or judgment pursuant to such arbitration may be
enforced in any court of competent jurisdiction and the prevailing party shall
be entitled to recover its fees and expenses incurred in connection with such
arbitration. All such arbitration proceedings shall be conducted on a
confidential basis.
-4-
<PAGE>
6. Termination of Employment.
-------------------------
DPRC and Employee each acknowledge and understand that the employment of
Employee by DPRC is at will, and that said employment of Employee shall be
terminable by either DPRC or Employee at any time, without notice. No policies
or procedures of DPRC or benefits provided by DPRC, whether oral or written,
express or implied, formal or informal, are intended, nor shall they be
construed to limit the right or ability of DPRC or Employee to terminate said
employment as set forth above. Except as otherwise agreed in writing or as
otherwise provided by this Agreement, upon termination of employment neither
DPRC nor Employee shall have any further obligation to each other by way of
compensation or otherwise.
7. Acknowledgment by Employee.
--------------------------
Employee has carefully read and considered the provisions of this Agreement
and agrees that all of the above-stated restrictions, obligations and promises
are fair and reasonable and reasonably required for the protection of the
interests of DPRC. Employee further acknowledges that the goodwill and value of
DPRC is enhanced by these provisions and that said enhancement is desired by
Employee. Finally, Employee indicates his/her acceptance of this Agreement by
signing and returning the enclosed copy of the Agreement where indicated below.
"DPRC" "EMPLOYEE"
DATA PROCESSING
RESOURCES CORPORATION,
a California corporation
By:/s/ Phoebe Stenton /s/ James A. Adams
------------------------------------ --------------------------------
Phoebe Stenton James A. Adams
Vice President, Corporate Services
Dated: May 12, 1998 Dated: May 12, 1998
-5-
<PAGE>
EXHIBIT A
COMPENSATION PLAN FOR JAMES A. ADAMS (EMPLOYEE)
Base Compensation:
- -----------------
Employee will be paid an annual base salary of $150,000. to be paid bi-
weekly and subject to customary withholding of payroll taxes. Base salary will
be reviewed in February, 1999, for possible annualized merit increase to be
effective March 1, 1999.
Bonus:
- -----
Employee will be eligible for an annual bonus based on criterion and
performance standards to be established by Michael A. Piraino in accordance with
the Company's regular practices. Bonus will be 25% of salary (annualized) at
target, with a minimum bonus of 10% and a maximum bonus of 50% of annual base
salary.
Term:
- ----
One year beginning on or before June 1, 1998.
Incentive Stock Options:
- -----------------------
DPRC will grant Employee options to purchase 30,000 shares of Company
stock, subject to Board approval, at closing market price the day prior to Board
approval. Employee will have the opportunity to be granted options on an
additional 20,000 shares of Company stock, subject to Board approval, based upon
the completion of mutually determined management objectives. Options shall vest
over four years from issue date, with 25% vesting after one year, and one-
twelfth of the remainder vesting in each of the following twelve quarters.
Severance:
- ---------
DPRC and Employee acknowledge that employment is at will and may be
terminated by DPRC or Employee with or without cause and with or without notice.
However, should DPRC terminate employment without cause, DPRC will continue
Employee salary and benefits for six months, and will pay the Bonus described in
Paragraph 2 prorated to date of termination. This provision will survive the
expiration of this Agreement.
-6-
<PAGE>
ALL COMPENSATION PLANS ARE SUBJECT TO CHANGE BY MANAGEMENT.
AGREED AND ACCEPTED:
/s/ James A. Adams May 12, 1998
- ---------------------------- ------------------------
James A. Adams (date)
-7-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
53371 of Data Processing Resources Corporation on Form S-3, Registration
Statement No. 333-61017 on Form S-4 and Registration Statements Nos. 333-07145,
333-20627, 333-20629, 333-30663 and 333-45257, all on Form S-8, of our report
dated September 25, 1998 (October 20, 1998 as to Note 4, paragraph 11),
appearing in Amendment No.1 to the Annual Report on Form 10-K/A of Data
Processing Resources Corporation for the year ended July 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
November 24, 1998
