<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27612
DATA PROCESSING RESOURCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3931443
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 MACARTHUR BOULEVARD, SUITE 600 92660
NEWPORT BEACH, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(949) 553-1102
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Number of shares of common stock outstanding as of October 31, 1998 is
11,786,947.
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DATA PROCESSING RESOURCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION
AND SIGNATURE
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of October 31,1998 and July
31, 1998.................................................... 3
Consolidated Statements of Income for the Three Months Ended
October 31, 1998 and 1997................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended October 31, 1998 and 1997............................. 5
Notes to Consolidated Financial Statements................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 15
PART II. Other Information............................................ 16
Item 1. Legal Proceedings............................................ 16
Item 2. Changes in Securities and Use of Proceeds.................... 16
Item 3. Defaults Upon Senior Securities.............................. 16
Item 4. Submission of Matters to Vote of Security Holders............ 16
Item 5. Other Information............................................ 16
Item 6. Exhibits and Reports on Form 8-K............................. 16
SIGNATURE.............................................................. 17
</TABLE>
2
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1998 1998
----------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents............................... $ 40,572 $ 40,581
Investments............................................. 32,982 59,969
Accounts Receivable (net of allowance for doubtful
accounts of $1,950 and $1,246 as of October 31, 1998
and July 31, 1998, respectively)....................... 49,193 39,310
Prepaid Expenses and Other Current Assets............... 4,360 4,601
Deferred Tax Asset...................................... 711 711
-------- --------
Total Current Assets.................................. 127,818 145,172
Property, net............................................. 5,213 4,092
Other Assets.............................................. 1,013 757
Intangible Assets, net.................................... 128,304 114,822
-------- --------
$262,348 $264,843
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts Payable and Accrued Liabilities................ $ 15,303 $ 29,793
Income Taxes Payable.................................... 3,553 1,305
-------- --------
Total Current Liabilities............................... 18,856 31,098
Long-Term Deferred Income Taxes........................... 784 784
Long-Term Debt, net....................................... 111,466 111,288
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; 11,786,947 and 11,570,621 shares issued and
outstanding as of October 31, 1998 and July 31, 1998,
respectively........................................... 109,089 103,420
Retained Earnings....................................... 22,153 18,253
-------- --------
Total Shareholders' Equity............................ 131,242 121,673
-------- --------
$262,348 $264,843
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED OCTOBER
31,
----------------
1998 1997
------- -------
<S> <C> <C>
Revenues...................................................... $73,623 $45,094
Cost of Professional Services................................. 51,026 32,690
------- -------
Gross Margin................................................ 22,597 12,404
Selling, General and Administrative Expenses.................. 14,991 8,027
------- -------
Operating Income.............................................. 7,606 4,377
Interest (Expense) Income, net................................ (515) 127
------- -------
Income Before Provision for Income Taxes...................... 7,091 4,504
Provision for Income Taxes.................................... 3,191 1,982
------- -------
Net Income.................................................... $ 3,900 $ 2,522
======= =======
Net Income per Share--Basic................................... $ 0.33 $ 0.23
======= =======
Net Income per Share--Diluted................................. $ 0.32 $ 0.22
======= =======
Weighted Average Common Shares Outstanding--Basic............. 11,660 11,033
======= =======
Weighted Average Common Shares Outstanding--Diluted........... 12,042 11,457
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 3,900 $ 2,522
Adjustments to Reconcile Net Income to Net Cash Used
in Operating Activities:
Depreciation........................................ 299 124
Amortization........................................ 1,190 749
Amortization of Debt Discount and Issue Costs....... 178 --
Changes in Operating Assets and Liabilities, net of
the Effect of Acquisitions:
Accounts Receivable............................... (9,127) (4,104)
Prepaid Expenses and Other Assets................. (144) (325)
Accounts Payable and Accrued Liabilities.......... (2,574) (141)
Income Taxes Payable.............................. 2,264 612
--------- --------
Net Cash Used in Operating Activities........... (4,014) (563)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid for Acquisitions, Net of Cash Acquired........ (12,860) --
Proceeds from the Sale of Investments Available for
Sale................................................... 26,987 --
Cash Paid for Earnout Obligations....................... (9,190) (1,496)
Purchase of Property.................................... (1,393) (430)
--------- --------
Net Cash Provided by (Used in) Investing
Activities..................................... 3,544 (1,926)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan.............. 386 144
Proceeds from the Exercise of Stock Options............. 75 314
--------- --------
Net Cash Provided by Financing Activities....... 461 458
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS:................ (9) (2,031)
Cash and Cash Equivalents, Beginning of Period............ 40,581 17,812
--------- --------
Cash and Cash Equivalents, End of Period.................. $ 40,572 $ 15,781
========= ========
SUPPLEMENTAL INFORMATION--CASH PAID FOR:
Interest................................................ $ 3,190 $ 17
========= ========
Income Taxes............................................ $ 1,206 $ 1,370
========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Detail of Businesses Acquired in Purchase Transactions:
Fair Value of Assets Acquired......................... $ 16,101 $ 734
Common Stock Issued in Acquisitions................... (2,356) (344)
Cash Paid for Acquisitions............................ (12,860) (1,496)
--------- --------
Liabilities Assumed (Relieved)........................ $ 885 $ (1,106)
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
1. GENERAL
Business
Data Processing Resources Corporation ("DPRC or the Company"), a California
corporation, is a leading specialty staffing company providing information
technology services to a diverse group of corporate clients.
Interim Financial Data
The interim financial data as of October 31, 1998 and for the three months
ended October 31, 1998 and 1997 is unaudited. The information reflects all
adjustments, consisting only of normal recurring entries, that, in the opinion
of management, are necessary to present fairly the financial position and
results of operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the full fiscal year. For further information refer
to the Company's Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal
year ended July 31, 1998. Certain reclassifications have been made in the
consolidated financial statements to conform amounts previously reported for
fiscal 1998 to the fiscal 1999 presentation.
2. ACQUISITIONS
In fiscal 1998 and 1999, the Company completed four acquisitions as follows:
In January 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of S3G, Inc., a Texas Corporation ("S3G").
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 ("Common Stock"), valued at approximately $4.0 million. In
addition, S3G has the right to receive certain additional consideration
contingent upon S3G's adjusted earnings before interest and taxes through
December 31, 1998. The earnout is payable 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. The
second and final installment of the earnout is due in March 1999 and will be
recorded as an addition to goodwill.
In May 1998, the Company acquired all of the outstanding capital stock of
EXi Corp., a Minnesota Corporation ("EXi").
In October 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of RIDGE Consultants, Inc. ("Ridge").
In November 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Vista High-Tech Resources, Inc. and Vista High-
Tech Resources of RI, Inc., (collectively, "Vista").
6
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DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1988 AND 1997
2. ACQUISITIONS (CONTINUED)
Unaudited pro forma consolidated results of operations for the three months
ended October 31, 1998 and 1997 would have been as follows had the acquisition
of S/3/G occurred as of the beginning of the period (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31,
1997
------------
<S> <C>
Pro forma revenues...................................................... $49,462
Pro forma net income.................................................... $ 3,002
Pro forma net income per share--basic................................... $ 0.27
Pro forma net income per share--diluted................................. $ 0.26
Pro forma weighted average common shares outstanding--basic............. 11,238
Pro forma weighted average common shares outstanding--diluted........... 11,662
</TABLE>
Pro forma adjustments have been applied to reflect the purchase of S/3/G
including the addition of amortization related to the intangible assets
acquired and reduction in interest income and additional interest expense.
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 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 certain conditions, including but not limited to,
obtaining the approval of the shareholders of the Company on or about December
21, 1998 and SPC on or about December 17, 1998. 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 three months
ended October 31, 1998 and 1997 would have been as follows had the merger with
SPC occurred as of the beginning of the respective periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
-------------------
1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Pro forma revenues..................................... $ 91,041 $ 56,294
Pro forma net income................................... $ 4,551 $ 2,785
Pro forma net income per share--basic.................. $ 0.33 $ 0.22
Pro forma net income per share--diluted................ $ 0.31 $ 0.20
Pro forma weighted average common shares outstanding--
basic................................................. 13,647 12,705
Pro forma weighted average common shares outstanding--
diluted............................................... 14,819 13,732
</TABLE>
7
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1988 AND 1997
2. ACQUISITIONS (CONTINUED)
The pro forma net income for the three months ended October 31, 1998
includes a charge for deferred compensation associated with performance-
vesting options on SPC.
Upon the completion of the merger, the Company will record a charge
representing all costs associated with the merger. Pro forma net income per
share and weighted average shares outstanding are based on an assumed exchange
ratio of 6.04 shares of DPRC Common Stock for each SPC share of common stock
outstanding.
3. 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 the purchase of acquisitions and earnout payments in the amount of
approximately $22.1 million for the three months ended October 31, 1998.
Interest is payable on April 1 and October 1 of each year. The Notes were
recorded net of a discount and issue costs of $3,950,000, which is being
amortized over seven years based on the effective interest method. As of
October 31, 1998, accumulated amortization was $416,000. As of October 31,
1998, there have been no conversions of notes to Common Stock.
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 prime rate plus 1/2% or LIBOR plus 1/2% to 1
3/4% 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 October 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.
4. 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 the 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 owning
approximately 79.0% of the outstanding capital stock. 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 fees earned by the Company were $45,000 and $153,000 for the three
months ended October 31, 1998 and 1997, respectively. ITR also contracts with
the Company for technical consultants to meet its staffing needs. For the
three months ended October 31, 1998 and 1997, the Company recorded revenues of
$693,000 and $720,000 from billing of ITR technical consultants, respectively.
8
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1988 AND 1997
4. RELATED PARTY TRANSACTIONS (CONTINUED)
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 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 Computec
International Strategic Resources, Inc. ("Computec"), a subsidiary of the
Company. Revenue from MQTECH totaled approximately $1.1 million for the three
months ended October 31, 1998 and accounts receivable as of October 31, 1998
totaled approximately $567,000. This Director has provided a personal
guarantee for payment of all present and future accounts receivable owed to
the Company by MQTECH.
9
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q 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; manage growth; identify, acquire and integrate suitable
acquisition candidates; obtain sufficient working capital to support such
growth; compete successfully with existing and future competitors; the
Company's ability to address the potential exposures of Year 2000; and other
factors described throughout this Form 10-Q and in the Company's Form 10-K/A
(Amendment No. 1) for the year ended July 31, 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
proxy and prospectus dated November 13, 1998.
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997
Revenues. Revenues increased $28.5 million, or 63.3%, to $73.6 million for
the three months ended October 31, 1998 as compared to $45.1 million for the
three months ended October 31, 1997. This increase resulted primarily from a
combination of acquisitions, principally S/3/G, Inc. ("S/3/G") and EXi Corp.
("EXi"), and internal growth. The internal growth rate, which excludes revenue
from the first twelve months after the closing of each acquisition, was
approximately 36% as compared to 32% in the first quarter of fiscal 1998.
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 packaged
software implementations, network management and desktop services, Tandem and
Year 2000 conversions; (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 $10.2 million, or 82.2%, to $22.6
million, for the three months ended October 31, 1998 as compared to $12.4
million for the three months ended October 31, 1997. As a percentage of
revenues, gross margin increased for the three months ended October 31, 1998
to 30.7% as compared to 27.5% for the same period in fiscal 1998. This gross
margin percentage improvement reflects: (i) acquisitions of companies with
higher gross margin business, such as packaged software implementation and
software engineering (ii) emphasis on expansion of the higher margin
businesses in existing markets, including network management and desktop
services, Year 2000 conversions and software engineering; (iii) cross-selling
of higher margin services, such as packaged software implementations and
Tandem into all markets; and (iv) internal growth in the Company's
international recruiting.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.0 million, or 86.8%, to $15.0 million for
the three months ended October 31, 1998, as compared to $8.0 million for the
three months ended October 31, 1997. Selling, general and administrative
expenses also increased as a percentage of revenues to 20.4% for the three
months ended October 31, 1998, as compared to 17.8% for the same period in
fiscal 1998. This increase is primarily attributable to the increased
amortization of intangible assets related to acquisitions, increased expenses
related to corporate management personnel and infrastructure required to
support actual and planned Company growth, and increased bad debt expense.
10
<PAGE>
Operating Income. Operating income increased $3.2 million, or 73.8%, to $7.6
million for the three months ended October 31, 1998 from $4.4 million for the
same period in fiscal 1998. As a percentage of revenues, operating income
increased to 10.3% for the three months ended October 31, 1998 as compared to
9.7% for the three months ended October 31, 1997 reflecting the increase in
gross margins offset by the increase in selling, general and administrative
expenses.
Interest (Expense) Income, net. The Company had net interest expense of
$515,000 for the three months ended October 31, 1998 as compared to net
interest income of $127,000 for the three months ended October 31, 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.
Provision for Income Taxes. The Company's effective income tax rate
increased to 45.0% for the three months ended October 31, 1998 from 44.0% for
the three months ended October 31, 1997. The increase in the effective tax
rate is primarily due to the effect of nondeductible amortization of goodwill
and a reduction in the tax benefit associated with investment in short-term
tax exempt cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments and working capital totaled $73.6
million and $109.0 million, respectively, as of October 31, 1998. Cash used in
operating activities increased to $4.0 million for the three months ended
October 31, 1998 as compared to $563,000 in the same period in fiscal 1998.
The increases in cash used were due to the increased use of working capital
primarily attributable to an increase in accounts receivable balances that
resulted from the growth in revenue and an increase in the days sales
outstanding ("DSO") to 61 days for the first quarter of fiscal 1999, and a
reduction in accounts payable and accrued liabilities partially offset by
higher operating income. The increase in DSO is primarily due to acquisitions,
integration of acquisitions and increase in revenue.
Cash provided by investing activities increased to $3.5 million in fiscal
1999 as compared to cash used in fiscal 1998 of $1.9 million. The increase in
cash provided in fiscal 1999 is due primarily to the sale of investments of
$27.0 million offset partially by cash used in connection with its ongoing
acquisition program and earnouts related to previous acquisitions of $22.1
million.
On March 24, 1998, the Company completed the sale of $115 million of its 5
1/4% convertible subordinated Notes due 2005. 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 the purchase
acquisitions in the period and expects to use remaining net proceeds of the
offering for working capital and other general corporate purposes, including
acquisitions. Interest is payable on April 1 and October 1 of each year.
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 prime rate plus 1/2% or LIBOR plus 1/2% to 1
3/4%, 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 October
31, 1998, the Company had no borrowings outstanding under the Credit Facility
and was in compliance with bank covenants.
The Company previously completed the acquisition by merger of Computec
International Strategic Resources, Inc. ("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
11
<PAGE>
the prior year's earnings before interest and taxes. The earnout is payable
60% in cash and 40% in shares of restricted DPRC common stock ("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,
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. 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, investments, 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 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, which was subsequently repaid
in fiscal 1998. 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% 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 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, was paid in
September 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, investments, cash flow from operations and
available borrowings under the Credit Facility.
In October 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Vista High-Tech Resources, Inc. and Vista High-
Tech Resources of RI, Inc., (collectively, "Vista"). Vista has the right to
receive certain additional consideration contingent upon Vista's adjusted
earnings before interest and taxes through July 31, 1999. The earnout is
payable 65% in cash and 35% in shares of restricted Common Stock. The earnout
is due on or before September 30, 1999.
The Company is in the process of installing and implementing a new financial
accounting system at a cost of up to $9.5 million. The 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
12
<PAGE>
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.
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 has begun 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 its
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 basic utilities, payroll processing, bank
services 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
13
<PAGE>
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 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 it's
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 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.
14
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
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 included in the Company's annual report on Form 10-K. 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.
15
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the earnout provisions of the merger agreement governing
the acquisition on April 30, 1998 of Computec International Strategic
Resources, Inc. ("Computec"), the Company issued 36,539 shares of restricted
DPRC common stock to Christopher W. Lancashire and 36,539 shares of restricted
DPRC common stock to his spouse, Alicia R. Lancashire, on September 18, 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.
In connection with the earnout provisions of the purchase agreement
governing the acquisition on January 27, 1998 of substantially all of the
assets and assumption of certain liabilities of S3G, Inc., the Company
issued 32,880 shares of restricted DPRC common stock on September 21, 1998 to
MGM Holdings, Inc. (formerly S3G, Inc.). The issuance of such shares was
exempt from the registration requirements of the Securities Act of 1933 by
virtue of Section 4(2) thereunder.
In connection with the Company's acquisition of substantially all of the
assets and assumption of certain liabilities of RIDGE Consultants, Inc.
("RIDGE") on October 6, 1998, the Company issued 92,815 shares of restricted
DPRC common stock. The issuance of such shares was exempt from the
registration requirements of the Securities Act of 1933 by virtue of Section
4(2) thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 Amendment No. 3 to Revolving/Term Loan Agreement *
Exhibit 27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed the following reports on Form 8-K with the Securities
and Exchange Commission during the first quarter of fiscal 1999:
Current Report on Form 8-K, dated August 6, 1998, reporting under Item 7
certain unaudited condensed financial statements of LEARDATA Info-Services,
Inc., and Computec International Strategic Resources, Inc.
- --------
* Previously filed as an exhibit to Form 10-K as of July 31, 1998
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport Beach, State of
California, on the 15th day of December, 1998.
DATA PROCESSING RESOURCES
CORPORATION
/s/ James A. Adams
By: _________________________________
James A. Adams,
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERNALLY
PREPARED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 3 MONTHS ENDED OCTOBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR PERIOD
ENDED OCTOBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 40,572
<SECURITIES> 0
<RECEIVABLES> 49,193
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 127,818
<PP&E> 5,213
<DEPRECIATION> 0
<TOTAL-ASSETS> 262,348
<CURRENT-LIABILITIES> 18,856
<BONDS> 0
0
0
<COMMON> 109,089
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 262,348
<SALES> 0
<TOTAL-REVENUES> 73,623
<CGS> 0
<TOTAL-COSTS> 51,026
<OTHER-EXPENSES> 14,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515
<INCOME-PRETAX> 7,091
<INCOME-TAX> 3,191
<INCOME-CONTINUING> 3,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,900
<EPS-PRIMARY> .33<F1>
<EPS-DILUTED> .32<F2>
<FN>
<F1>EPS IS REPORTED AS "BASIC EPS," AS PRESCRIBED BY SFAS NO. 128
<F2>EPS IS REPORTED AS "DILUTED EPS," AS PRESCRIBED BY SFAS NO. 128
</FN>
</TABLE>
