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Filed Pursuant to Rule 424(b)(3)
Registration Number 333-53371
PROSPECTUS
$115,000,000
[LOGO OF DPRC]
DATA PROCESSING RESOURCES CORPORATION
5 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2005
AND SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES
This Prospectus relates to the resale from time to time by the holders (the
"Selling Securityholders") of up to $115,000,000 aggregate principal amount of
5 1/4% Convertible Subordinated Notes due 2005 (the "Notes") of Data
Processing Resources Corporation, a California corporation (the "Company"),
and the resale of shares of common stock, no par value (the "Common Stock"),
of the Company issuable upon conversion of the Notes (the "Conversion
Shares").
The Notes are convertible, at the option of the holder into shares of Common
Stock of the Company at any time following the initial issuance thereof and
prior to maturity, unless previously redeemed or repurchased, at a conversion
price of $35.50 per share, subject to adjustments in certain events. See
"Description of Notes--Conversion Rights" for a description of events that may
cause adjustments to the conversion price.
Interest on the Notes is payable on April 1 and October 1 of each year,
commencing on October 1, 1998. The Notes are redeemable, in whole or in part,
at the option of the Company, at any time on or after April 1, 2001, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any. If a Change of Control (as
defined herein) occurs, each holder of Notes will have the right, subject to
certain conditions and restrictions, to require the Company to repurchase all
or any part of such holder's Notes at 100% of their principal amount, plus
accrued and unpaid interest and Liquidated Damages, if any. The Notes are
general unsecured obligations of the Company, subordinated in right of payment
to all existing and future Senior Indebtedness (as defined herein) of the
Company and are structurally subordinated to all current and future
liabilities of the Company's subsidiaries. The Indenture governing the Notes
does not limit or prohibit the incurrence of additional indebtedness,
including Senior Indebtedness. See "Description of the Notes."
The Company does not intend to apply for listing of the Notes on any
securities exchange or for inclusion of the Notes on any automated quotation
system. However, the Notes have been designated for trading on the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") Market.
The Conversion Shares have been approved for listing on the Nasdaq National
Market. The Common Stock is quoted on the Nasdaq National Market under the
symbol "DPRC". On June 11, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $30 7/8 per share.
The Notes were originally issued by the Company in a private placement on
March 24, 1998 to the Initial Purchasers (as defined herein). The notes were
thereafter sold by the Initial Purchasers in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), to persons reasonably believed by the Initial Purchasers to
be "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act).
The Selling Securityholders may offer and sell the Notes or the Conversion
Shares from time to time to purchasers directly, or though underwriters,
brokers, dealers or agents, at market prices prevailing at the time of sale or
at negotiated prices.
The Company will not receive any of the proceeds from the sale of any of the
Notes or the Conversion Shares offered hereby. All of the Notes and the
Conversion Shares offered hereby are being offered and sold by the Selling
Securityholders. Any sales of the Notes and the Conversion Shares will be for
the account of the Selling Securityholders. The Company will pay all expenses
incident to the registration of the Notes and the Conversion Shares offered
hereby, except that each Selling Securityholder will pay any and all selling
commissions and underwriting discounts. The Company has agreed to indemnify
the Selling Securityholders against certain liabilities, including certain
liabilities under the Securities Act. See "Plan of Distribution."
SEE "RISK FACTORS" WHICH BEGIN ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OR THE
CONVERSION SHARES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is June 11, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
regulations thereunder, and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy statements and other information filed by
the Company with the Commission, including the reports and other information
incorporated by reference into this Prospectus, can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates or
from the Commission's Internet Web site at http://www.sec.gov. Such reports,
proxy statements and other information concerning the Company are also
available for inspection at the offices of The Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated herein by reference:
(a) The Annual Report of the Company on Form 10-K (File No. 0-27612) for
its fiscal year ended July 31, 1997.
(b) The definitive Proxy Statement of the Company, as filed with the
Commission November 17, 1997.
(c) The Quarterly Report of the Company on Form 10-Q for its fiscal
quarter ended October 31, 1997.
(d) The Quarterly Report of the Company on Form 10-Q for its fiscal
quarter ended January 31, 1998.
(e) The Current Report of the Company on Form 8-K dated January 27, 1998,
as filed with the Commission on February 11, 1998, and the Forms 8-K/A
filed with the Commission on March 5, 1998 and March 20, 1998.
(f) The Current Report of the Company of Form 8-K dated March 5, 1998, as
filed with the Commission on March 5, 1998.
(g) The Current Report of the Company on Form 8-K dated March 24, 1998,
as filed with the Commission on March 24, 1998.
(h) The Current Report of the Company on Form 8-K dated May 20, 1998, as
filed with the Commission on May 21, 1998.
(i) The Current Report of the Company on Form 8-K dated June 9, 1998, as
filed with the Commission on June 10, 1998.
(j) The Registration Statement of the Company on Form 8-A/A Amendment No.
1, filed with the Commission on March 1, 1996, registering the Company's
Common Stock under Section 12(g) of the Exchange Act.
(k) All documents filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of this offering shall
be deemed to be incorporated by reference in this Prospectus. Any statement
contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. As
indicated in the financial statements of the Company set forth in this
Prospectus, the Company has restated its earnings per share in accordance
with SFAS No. 128 "Earnings Per Share" which requires such amounts to be
retroactively restated. Such earnings per share amounts included in the
financial information incorporated by reference above has not been restated
to reflect such change. Therefore, the earnings per share amounts, included
in financial statements contained in this Prospectus supercede those
incorporated by reference.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any or all of the documents that have been incorporated by reference
herein, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference therein). Requests for such copies
should be directed to: Michael A. Piraino, Chief Financial Officer, Data
Processing Resources Corporation, 4400 MacArthur Blvd., Suite 600, Newport
Beach, California 92660, telephone (714) 553-1102.
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SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information contained elsewhere or
incorporated by reference in this Prospectus, including "Risk Factors" and the
Financial Statements and Notes thereto. Except as otherwise noted, references
to "DPRC" or the "Company" include the Company and its subsidiaries.
THE COMPANY
Data Processing Resources Corporation ("DPRC" or the "Company") is a leading
provider of information technology ("IT") staffing services to a diverse group
of corporate clients. Utilizing full-time salaried and hourly technical
consultants, the Company offers a wide range of staffing solutions to meet its
clients' enterprise-wide IT needs. The Company's technical consultants have
expertise on multiple hardware platforms utilizing a wide variety of software
applications and provide services covering all aspects of the systems
applications development lifecycle, including planning, design, building and
programming, implementation, maintenance and ongoing management. In addition,
the Company also provides other specialty staffing services such as Year 2000
conversion, network management and desktop services, internet/intranet
development and support, packaged software implementation and help desk
support.
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
California offices in 1996 to 16 offices in 11 states and three international
recruiting offices (two in England and one in Australia) as of April 1998. Of
the 13 new offices, six were internally developed and seven were acquired. In
addition, through internal development and acquisitions, the Company has added
a number of high 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
provides continuing opportunities for expansion. The Company continually
reviews potential acquisitions and is currently in various stages of
investigating and negotiating with several acquisition candidates, including an
acquisition of significant size which could involve a pooling of interests. The
Company has not entered into a definitive purchase agreement with any
acquisition candidate and there is no assurance that the Company will
consummate a transaction with any of the candidates with whom it is currently
in negotiations.
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; and (v) providing
specialized training through licensed training programs. In connection with a
prior acquisition, the Company acquired international recruiting capabilities
with two offices in England and one in Australia. The Company also attracts new
consultants in its established markets through referrals and the internet.
The Company was incorporated in 1984 as a California corporation, and its
principal executive offices are located at 4400 MacArthur Boulevard, Suite 600,
Newport Beach, California 92660. The Company's telephone number is (714) 553-
1102.
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THE OFFERING
Securities Offered.......... Up to $115.0 million principal amount of 5 1/4%
Convertible Subordinated Notes due 2005 and the
Conversion Shares issuable upon conversion of the
Notes offered by the Selling Securityholders.
Interest Payment Dates...... April 1 and October 1 of each year, commencing
October 1, 1998.
Maturity Date............... April 1, 2005.
Interest.................... 5 1/4% per annum.
Conversion Rights........... The Notes are convertible, at the option of the
Holder, at any time prior to the close of
business on the Stated Maturity (as defined
herein), unless previously redeemed or
repurchased, into Common Stock, at a conversion
rate of approximately 28.17 shares per $1,000
principal amount of Notes (equivalent to a
conversion price of $35.50 per share), subject to
adjustment in certain events. See "Description of
Notes--Conversion Rights."
Optional Redemption......... The Notes are redeemable, in whole or in part, at
the Company's option, at any time on or after
April 1, 2001 upon not less than 30 nor more than
60 days' notice, at the redemption prices set
forth in "Description of Notes--Redemption at the
Company's Option," together with accrued and
unpaid interest and Liquidated Damages, if any,
to the date of redemption. See "Description of
Notes-- Redemption at the Company's Option."
Change of Control........... Upon the occurrence of a Change of Control (as
defined herein), the Company will be required to
offer to purchase the Notes at a purchase price
equal to 100% of the aggregate principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
purchase. See "Description of Notes--Repurchase
of Notes at the Option of Holders Upon a Change
of Control."
Subordination............... The Notes are general unsecured obligations of
the Company, subordinate in right of payment to
all existing and future Senior Indebtedness of
the Company. In addition, the Notes are
structurally subordinated to all existing and
future liabilities of the Company's subsidiaries.
Furthermore, the Company is permitted to borrow
up to $60.0 million under the Credit Facility (as
defined herein), which is Senior Indebtedness.
The Indenture governing the Notes does not limit
or prohibit the incurrence of additional
indebtedness, including Senior Indebtedness by
the Company or its subsidiaries. See "Description
of Notes--Subordination."
Use of Proceeds............. The Company will not receive any proceeds from
the sale of the Notes or the Conversion Shares by
the Selling Securityholders.
Trading..................... The Notes are eligible for trading on the PORTAL
Market. Notes sold pursuant to this Prospectus
are not expected to remain eligible for trading
on the PORTAL Market. The Conversion Shares have
been approved for listing on the Nasdaq National
Market. The Common Stock is quoted on the Nasdaq
National Market under the symbol "DPRC."
Risk Factors................ See "Risk Factors" for a discussion of factors to
be considered before purchasing the Notes and
Conversion Shares offered hereby.
For a more complete description of the Notes, see "Description of Notes." For
a more complete description of the Common Stock, see "Description of Capital
Stock."
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RISK FACTORS
An investment in the Notes or the Conversion Shares offered by this
Prospectus involves a high degree of risk. Prospective purchasers of the Notes
or the Conversion Shares offered hereby should carefully review the following
risk factors as well as the other information set forth or incorporated by
reference in this Prospectus before making an investment in the Notes or the
Conversion Shares.
When used in this Prospectus, including the information incorporated by
reference, the words "anticipate," "estimate," "project," "expect" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act, and are intended to be covered by the safe harbors created thereby.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such statements are subject to
certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated, projected or expected. Among the key factors that may have a direct
bearing on the Company's operating results are the Company's ability to
recruit, develop and retain qualified technical consultants; identify, acquire
and integrate suitable acquisition candidates; obtain sufficient working
capital to support such growth; and compete successfully with existing and
future competitors.
DEPENDENCE ON AVAILABILITY, RECRUITMENT AND MANAGEMENT OF TECHNICAL
CONSULTANTS
The Company's success is dependent upon its ability to attract and manage
technical consultants who possess the skills and experience necessary to meet
the IT staffing requirements of the Company's clients. Qualified technical
consultants are in great demand worldwide and are likely to remain a limited
resource for the foreseeable future. Accordingly, competition for individuals
with proven technical skills is intense. The Company competes for such
individuals with other providers of IT staffing services, providers of
outsourcing services, temporary personnel agencies, systems integrators,
computer systems consultants and clients and potential clients. Factors
influencing such competition include compensation, benefits, growth
opportunities and pre-existing relationships with other employers,
particularly IT staffing companies. Furthermore, as the Company expands into
new geographical areas, it may experience difficulty attracting qualified
technical consultants who have a prior relationship or familiarity with more
established IT staffing companies in such areas. As a result, there can be no
assurance that the Company will be able to recruit the technical consultants
necessary to execute its growth strategy and a failure to do so could have a
material adverse effect on the Company's results of operations and financial
condition. In addition, the Company employs a substantial number of salaried
technical consultants who are paid whether or not they are on assignment. Such
technical consultants must be carefully monitored and managed to minimize the
time they are not on assignment. A failure to manage non-chargeable time of
salaried technical consultants could have a material adverse effect on the
Company's results of operations and financial condition.
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
Variations in the Company's revenues and operating results occur from
quarter to quarter as a result of a number of factors, including the timing of
client engagements during a quarter, changes in pricing of the Company's
services, timing and rate of entrance, introduction of product groups,
availability of qualified technical consultants, the number of business days
in a quarter, consultant hiring and utilization rates, the length of the
Company's sales cycle, the ability of clients to terminate engagements without
penalty, the size and scope of assignments and general economic conditions.
Because a significant portion of the Company's expenses are relatively fixed,
a variation in the number of client assignments or the timing of the
initiation or the completion of client assignments can cause significant
variations in operating results from quarter to quarter. To the extent that
increases in the number of consultants are not followed by corresponding
increases in revenues, the Company's operating results could be materially and
adversely affected. Furthermore, the Company has on occasion experienced a
seasonal pattern in its operating results, with a smaller proportion of the
Company's revenues and
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lower operating income occurring in the second quarter of the fiscal year. The
Company believes these results can be attributed to vacation and holidays
taken by both its clients and its consultants. As a result of the foregoing
factors, the Company's operating results for a future quarter may be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock would likely be negatively affected.
MANAGEMENT OF GROWTH
The Company's business has experienced rapid growth over the years that
could strain the Company's managerial and other resources. The Company's
continued growth depends on adding key managers, attracting, developing and
retaining consultants, adding specialty services and growing its
infrastructure. The Company has broadened its range of services to include
specialty services such as Year 2000 conversion, network management and
desktop services, internet/intranet development and support, packaged software
implementation and help desk support. The Company has expanded from three
offices in the State of California in 1996 to 16 offices in 11 states and
three international recruiting offices (two in England and one in Australia)
as of April 1998. Effective management of these growth initiatives will
require the Company to continue to improve its operational, financial and
other management processes and systems. The failure to manage growth
effectively could have a material adverse effect on the Company's business,
operating results and financial condition.
GROWTH THROUGH ACQUISITIONS
A primary component of DPRC's growth strategy is the acquisition of IT
staffing companies to complement and expand the Company's existing business,
principally in new geographic markets. The successful implementation of this
strategy is dependent on the Company's ability to identify suitable
acquisition candidates, acquire such companies on suitable terms and integrate
their operations with those of the Company. There can be no assurance that the
Company will be able to acquire other companies on suitable terms or otherwise
successfully enter other markets through acquisitions. Moreover, other
staffing companies are actively competing for acquisition candidates, which
has resulted in an increase in the price of acquisition candidates.
Acquisitions may also involve a number of special risks, including: (i)
adverse effects on the Company's reported operating results, including
increased goodwill amortization related to acquired companies and interest
expense related to debt incurred to affect acquisitions; (ii) diversion of
management attention; (iii) risks associated with unanticipated problems,
liabilities or contingencies resulting from acquisitions and entries into new
geographic markets; (iv) difficulties related to the integration of acquired
businesses, some of which may have different cultures, operating strategies,
margins or business risks; and (v) increased general and administrative
expenses incidental to the Company's expansion into new geographic markets.
The occurrence of some or all of the events described in these risks could
have a material adverse effect on the Company's operations and financial
performance.
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. The Company has not entered into
a definitive purchase agreement with respect to any acquisition candidate, no
portion of the net proceeds has been allocated to any specific acquisition and
there is no assurance that the Company will consummate a transaction with any
of the candidates with whom it is currently in negotiations. The Company
recently entered into a non-binding letter of intent with one such potential
acquisition candidate. The letter of intent 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 could be approximately
2,000,000 to 3,000,000 shares of Common Stock with such number to be
determined based upon various contingencies, including but not limited to, the
financial performance of the acquisition candidate, the accounting and tax
treatment of the acquisition and the price of the Common Stock. The
acquisition is subject to numerous conditions, including but not limited to,
performing financial, business and legal due diligence, receiving favorable
accounting and tax treatment, obtaining any necessary board, shareholder,
governmental and other third-party approvals and negotiating the terms of the
acquisition with the potential candidate. The consideration by the Company of
such acquisition is only at the preliminary stage. There can be no assurance
that such acquisition will be completed or that if such acquisition is
completed it will be for the consideration or on the terms contemplated.
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In addition, it is possible that a substantial number of shares of Common
Stock or significant amount of cash could be used for one or more
acquisitions. The Company intends, when possible, to use its Common Stock to
pay for all or a portion of the purchase price for future acquisitions. The
Company's ability to so use its Common Stock could be adversely affected in
the event that the Company's Common Stock does not maintain sufficient value,
potential acquisition candidates are unwilling to accept the Company's Common
Stock as consideration for the sale of their businesses, or the Company does
not then have a sufficient number of authorized shares of Common Stock to
effect such acquisition. With respect to the latter, any increase in the
authorized number of shares of Common Stock would require the consent of the
shareholders of the Company and no assurances can be given that the
shareholders of the Company would approve such an increase. If the Company is
unable to so use its Common Stock, the Company may be required to utilize more
of its cash resources, if available, in order to continue its acquisition
program. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt
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 implement its growth strategy fully.
DEVELOPMENT OF NEW OFFICES
The Company's growth strategy involves the internal development of new
offices as well as the acquisition of existing businesses. The successful
development of new offices is dependent on a number of factors, many of which
are beyond the Company's control, including the Company's ability to: (i)
hire, integrate and retain qualified managers in existing markets as well as
markets in which the Company has no prior operating experience; (ii) apply its
management practices to a significantly larger and geographically dispersed
organization; (iii) initiate and develop new client relationships; (iv) hire,
integrate and retain qualified technical consultants; and (v) identify
suitable locations for new offices. There can be no assurance that the Company
will be able to implement successfully any of the above components of its
strategy.
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. The Company also
competes for technical consultants with the IT staffs of its clients and
potential clients and other technology companies. 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 or a specific geographic region,
including the geographic areas in which the Company operates and into which it
intends to expand. Accordingly, such companies are often able to meet a
broader range of a client's temporary personnel needs, serve a broader
geographic range than the Company and compete more effectively for national
accounts. There can be no assurance that the Company will be able to compete
successfully with its existing and future competitors.
DEDUCTIBILITY OF INTEREST TO THE COMPANY
Section 279 of the Internal Revenue Code of 1996, as amended (the "Code"),
disallows the deduction of interest paid or accrued with respect to certain
subordinated convertible debt which is issued to provide consideration for the
acquisition of stock or assets of another corporation ("Section 279
Acquisition Debt"). Such a disallowance applies to the interest paid or
accrued with respect to Section 279 Acquisition Debt to the extent interest
paid or accrued with respect to such debt in any given taxable year plus
interest paid or accrued on other debt incurred to provide consideration for
an acquisition of stock or assets in such taxable year exceeds a $5.0 million
threshold (the "Five Million Dollar Basket"). To the extent that the Company
uses the proceeds it received from the initial issuance of the Notes to
acquire stock or assets of another corporation, such Notes will constitute
Section 279 Acquisition Debt if the Company fails either a certain debt to
equity ratio or a projected earnings to annual interest expense test. If the
Company is unable to satisfy both of these tests in any given taxable year,
then all or a portion of the Notes would be deemed to be Section 279
Acquisition Debt, and
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Section 279 would disallow the interest deduction with respect to the Notes to
the extent the interest paid on the Notes in any given taxable year exceeds
the Five Million Dollar Basket. The Company intends to continue to acquire
companies. To the extent that the Company uses proceeds it received from the
initial issuance of the Notes to acquire companies, the Company may not be
able to deduct all or a portion of the interest paid on the Notes in any given
taxable year in which the total interest paid or accrued on acquisition debt
by the Company exceeds the Five Million Dollar Basket. If such interest is not
deductible, it could have a material adverse effect on the financial condition
of the Company.
Pursuant to the Taxpayer Relief Act of 1997, Section 163(l) of the Code
disallows the deduction of interest paid or accrued with respect to
convertible debt where there is substantial certainty that the holder will
convert the note into equity of the issuer. Because the conversion price was
computed to be 25.7% greater than the market price for the Company's Common
Stock at the date of the initial issuance of the Notes, the Company does not
believe that there was substantial certainty that the Notes would be converted
at the date of the initial issuance of the Notes. The legislative history to
Section 163(l) establishes a safe harbor only for a conversion price that is
significantly greater than the current price of the stock at the date of
initial issuance. Because there is no current authority establishing what
conversion price would be considered significantly greater than the stock's
current price, there can be no assurance that the Internal Revenue Service
("IRS") or the courts would not establish criteria in the future that would
cause a determination that the Notes should be considered to have substantial
certainty that they would have been converted. If such a determination were
made, the Company's deduction for interest paid or accrued on the Notes would
be disallowed.
IMMIGRATION ISSUES
The Company believes that its success has resulted in part from its ability
to attract, develop and retain persons from other countries with technical and
project management skills. There is a limit on the number of 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, the Company may be unable to
obtain H-1B visas necessary to bring critical foreign consultants to the
United States. Compliance with existing United States immigration laws, or
changes in such laws making it more difficult to hire foreign nationals or
limiting the ability of the Company to retain H-1B employees in the United
States, could have a material adverse effect on the Company's results of
operations and financial condition.
DEPENDENCE ON CERTAIN CLIENTS; INDUSTRY AND GEOGRAPHIC CONCENTRATION
The Company's 10 largest clients accounted for approximately 32.0% of its
revenues in fiscal 1997, with its largest client accounting for approximately
5.0% of its revenues during that period. A significant decrease in demand by,
or the loss of, a large client could have a substantial adverse effect on the
Company's revenues and results of operations. Furthermore, revenues from any
one client often vary materially from period to period. Although the Company
strives to build long-term relationships with its clients, it does not
generally have long-term contractual arrangements with them, and services are
usually provided on an assignment-by-assignment basis. In addition, the
Company's contracts are normally cancelable by the client at any time without
penalty.
The Company's business is dependent in part on the economic strength of its
clients. While the Company serves a large number of clients in a range of
industry groups, approximately 21.7% of the Company's revenues in fiscal 1997
were derived from eight foreign automobile and motorcycle manufacturers with
operations in Southern California. Regulatory changes which adversely affect
this industry group could have an adverse effect on the Company's revenues and
profitability. Similarly, a substantial deterioration in general economic
conditions in Southern California could adversely affect the Company.
RISKS ASSOCIATED WITH YEAR 2000 CONVERSION EFFORTS
As the year 2000 approaches, many date-sensitive computer applications will
fail because they are unable to process dates properly beyond December 31,
1999. As a result, businesses have been and will be required to
6
<PAGE>
devote significant resources to converting their information systems over the
next two years. In the event that Year 2000 conversions result in a
significant increase in competition for technical consultants or the Company's
clients devote substantial resources to such conversions and decrease their
expenditures on projects worked on by the Company's technical consultants, the
Company's business, financial condition and results of operations may be
materially adversely affected. The Company earned approximately 4.0% and 9.0%
of its revenue from Year 2000 conversions in the 1997 fiscal year and the six
months ended January 31, 1998, respectively. The Company expects that it will
continue to receive increased revenues from additional Year 2000 conversions
in the near term. However, the Company expects that revenues derived from Year
2000 conversions will steadily decline. In the absence of additional revenue
from other sources, a decline in such engagements could have a material
adverse effect on the Company's business, operating results and financial
condition.
EMPLOYMENT LIABILITY RISKS
Providers of staffing services employ and place people in the workplaces of
other businesses. Risks inherent in such activity include possible claims of
errors and omissions, misuse of client proprietary information,
misappropriation of funds, discrimination and harassment, theft of client
property, other criminal activity or torts and other claims. While the Company
has not historically experienced any material claims of these types, there can
be no assurance that the Company will not experience such claims in the
future.
SUBORDINATION OF NOTES
The Notes are general subordinated obligations of the Company and are
subordinated in right of payment to all existing and future Senior
Indebtedness. In addition, the Notes are structurally subordinated to all
existing and future liabilities of the Company's subsidiaries. By reason of
such subordination, in the event of the insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of the Company, the
assets of the Company will be available to pay the obligation on the Notes
only after all Senior Indebtedness has been paid in full and, therefore, there
may not be sufficient assets remaining to pay amounts due on any or all of the
Notes then outstanding. The holders of any indebtedness of the Company's
subsidiaries will be entitled to payment of the indebtedness from the assets
of the subsidiaries prior to the holders of any general unsecured obligation
of the Company including the Notes. The Indenture permits the Company and its
subsidiaries to incur additional indebtedness, including Senior Indebtedness.
Borrowings under the Credit Facility constitute Senior Indebtedness and such
borrowings are guaranteed by the Company's subsidiaries. The Credit Facility
contains certain restrictions on the Company's ability to incur additional
indebtedness. In the event of a payment default with respect to Senior
Indebtedness, no payments may be made on account of the Notes until such
default has been cured or waived. In addition, under certain circumstances, no
payments with respect to the Notes may be made for a period of up to 179 days
if certain non-payment defaults exist with respect to Senior Indebtedness of
the Company. See "Description of Notes--Subordination" and "Description of
Credit Facility."
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes may require
the Company to repurchase all or a portion of such Holder's Notes. If a Change
of Control were to occur, there could be no assurance that the Company would
have sufficient financial resources or would be able to arrange financing to
pay the repurchase price for all Notes tendered by Holders thereof. The
Company's ability to repurchase the Notes in such event may be limited by law,
the Indenture and the terms of other agreements relating to borrowings that
constitute Senior Indebtedness, as such indebtedness or agreements may be
entered into, replaced, supplemented or amended from time to time. The Company
may be required to refinance Senior Indebtedness in order to make any such
payment. If the Company is prohibited from repurchasing the Notes, such
failure would constitute an Event of Default under the Indenture, which may,
in turn, constitute a further default under certain of the Company's existing
agreements relating to borrowings and the terms of other indebtedness that the
Company may enter into from time to time. In such circumstances, the
subordination provisions in the Indenture would prohibit payments to the
Holders of the Notes. Furthermore, the Company may not have the financial
ability to
7
<PAGE>
repurchase the Notes in the event that maturity of Senior Indebtedness is
accelerated as a result of a default under the applicable loan or similar
agreement. See "Description of Notes--Repurchase of Notes at the Option of the
Holder upon Change of Control."
CONTROL OF THE COMPANY
As of April 30, 1998, Ms. Weaver controlled the vote of approximately 19.2%
of the outstanding shares of Common Stock, Mr. Lewis controlled the vote of
approximately 10.3% of the outstanding shares of Common Stock, and Mr.
Lancashire controlled the vote of approximately 6.1% of the outstanding shares
of the Common Stock. While not controlling a majority of the outstanding
shares, Ms. Weaver, Mr. Lewis and Mr. Lancashire have significant influence
with respect to the election of directors and other issues submitted to the
Company's shareholders. Such concentration of ownership could also have the
effect of making it more difficult for a third party to acquire control of the
Company and may discourage third parties from attempting to do so. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect the prevailing
market price for the Common Stock and the ability of the Company to raise
equity capital. As of April 30, 1998, the Company had 11,367,666 shares of
Common Stock outstanding. Approximately 60.1% of the outstanding shares of
Common Stock are freely tradeable, except those shares acquired in the public
market by "affiliates" to the Company, as that term is defined in Rule 144 of
the Securities Act ("Rule 144"). The remaining outstanding shares of Common
Stock are "restricted securities" within the meaning of Rule 144 and may only
be sold subject to the limitations imposed by Rule 144. Of such restricted
securities, approximately 80.0% of such shares are now eligible for resale
under Rule 144.
The Company has also granted certain "piggyback" and demand registration
rights with respect to certain restricted securities. As of April 30, 1998,
approximately 2,205,483 shares are, or in the next six months will be, subject
to piggyback registration rights, and approximately 1,945,997 of such shares
are, or in the next six months will be, also subject to demand registration
rights. In addition all shares of Common Stock to be issued in connection with
the Computec earnout arrangement will be subject to both piggyback and demand
registration rights and all shares of Common Stock to be issued in connection
with the S3G earnout arrangement will be subject to piggyback registration
rights. The holders of all such piggyback registration rights have agreed to
waive their rights to include their shares in this Prospectus and the related
Shelf Registration until September 24, 1998. Nonetheless, upon the exercise of
such piggyback registration rights or upon any of such holder's exercise of
its demand registration rights, such exercise could result in the sale of a
significant number of shares of Common Stock into the public market. See
"Description of Capital Stock--Shares Eligible for Future Sale."
As of April 30, 1998, options to purchase 1,357,572 shares of Common Stock
have been granted and are outstanding under the Company's 1994 Stock Option
Plan, as amended, and options to purchase an additional 455,023 shares may be
granted under such plan. As of April 30, 1998, an additional 197,422 shares of
Common Stock may be issued under the Company's Employee Stock Purchase Plan.
In addition, pursuant to the earnout arrangements agreed to in connection with
the acquisition of Computec International Strategic Resources, Inc. in April,
1997 (the "Computec Acquisition") and the acquisition of S3G, Inc. in January
1998 (the "S3G Acquisition"), the Company is required to pay 40% and 15%,
respectively, of such earnout in shares of Common Stock.
The Company intends, when possible, to use its Common Stock to pay all or a
portion of the purchase price for future acquisitions. Although the Company
has not entered into a definitive purchase agreement with respect to any
acquisition candidate, the Company is in preliminary negotiations with several
acquisition candidates whereby all or a portion of the purchase price could be
paid in Common Stock. It is possible that a substantial number of shares of
Common Stock could be issued in connection with one or more of these or any
subsequent acquisition. In addition, the Company may increase the number of
its authorized shares of Common Stock, which increase could be significant.
See "Description of Capital Stock."
8
<PAGE>
The Company can make no prediction as to the effect, if any, that sales of
shares of its Common Stock, or the availability of shares for future sale,
will have on the market price of the Common Stock prevailing from time to time
or on the Company's ability to sell equity securities or equity-related
securities at times and prices that it deems appropriate or on the ability of
Selling Securityholders or other Holders to sell or the prices that such
persons receive on the sale of the Notes or the Conversion Shares.
ABILITY TO ISSUE PREFERRED STOCK WITHOUT FURTHER SHAREHOLDER APPROVAL
The Company's Articles of Incorporation permit the Board of Directors to
establish the rights, preferences, privileges and restrictions of, and to
issue, shares of Preferred Stock (as defined herein) without any further vote
or action by the Company's shareholders. The issuance of Preferred Stock could
adversely affect the Holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plans to issue any shares of Preferred Stock. See
"Description of Capital Stock."
INTANGIBLE ASSETS
A significant percentage of the Company's total assets are intangible
assets. These intangible assets substantially represent amounts attributable
to goodwill recorded in connection with the Company's acquisitions. Any
impairment in the value of such assets could have a material adverse effect on
the Company's financial condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price and volume of the Common Stock has fluctuated over a broad
range since the completion of the Company's initial public offering in March
1996. Numerous factors, including announcements of fluctuations in the
Company's or its competitors' operating results and market conditions for IT
staffing or technology stocks in general, could have a significant impact on
the future price of the Common Stock and the Notes. In addition, the stock
market in recent years has experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. These broad fluctuations may adversely
affect the market price of the Common Stock.
9
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the Notes
or the Conversion Shares offered hereby. The Notes and the Conversion Shares
are being sold by the Selling Securityholders.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges for each of the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED JULY ENDED
31, JANUARY 31,
------------------------- -----------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........ 1.0x 1.3x 4.6x 9.6x 41.9x 35.3x 31.3x
</TABLE>
The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings. Earnings is defined as pretax income from continuing operations
adjusted by adding fixed charges and excluding interest capitalized during the
period. Fixed charges means the total of interest expenses and amortization of
financing costs, the estimated interest component of rental expense on
operating leases and preferred stock dividends.
The foregoing ratios are historical and have not been adjusted for events
occurring subsequent to January 31, 1998. For the earnings to fixed charges
ratios which have been adjusted for the issuance of $115.0 million principal
amount of the Notes, the application of the net proceeds therefrom to repay
$19.5 million of bank indebtedness and the effect of certain acquisitions made
by the Company, see "Unaudited Pro Forma Consolidated Statement of Income
Data."
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
The selected consolidated financial data set forth below as of and for the
fiscal years ended July 31, 1993, 1994, 1995, 1996 and 1997 have been derived
from the audited consolidated financial statements of the Company. The
selected consolidated financial data as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 have been derived from the unaudited
consolidated financial statements of the Company, which include all
adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the results of
operations for the periods presented. The results of operations for the six
months ended January 31, 1998 are not necessarily indicative of results that
may be expected for the Company's fiscal year ending July 31, 1998. The
consolidated balance sheet data as of January 31, 1998, as adjusted, gives
effect to the sale by the Company of $115.0 million principal amount of the
Notes and the application of the net proceeds therefrom to repay $19.5 million
of bank indebtedness incurred in conjunction with the S3G Acquisition. The
following information should be read in conjunction with the Financial
Statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED JULY 31, ENDED JANUARY 31,
-------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998(1)
------- ------- ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $23,163 $34,165 $49,558 $58,145 $115,022 $ 43,911 $ 89,877
Cost of professional
services............... 19,397 28,047 40,082 45,918 85,979 33,606 65,300
------- ------- ------- ------- -------- -------- --------
Gross margin............ 3,766 6,118 9,476 12,227 29,043 10,305 24,577
Selling, general and
administrative
expenses(2)............ 3,648 5,581 5,769 6,719 18,654 6,518 15,947
------- ------- ------- ------- -------- -------- --------
Operating income(2)..... 118 537 3,707 5,508 10,389 3,787 8,630
Interest income
(expense), net......... (113) (401) (764) (162) 869 326 189
------- ------- ------- ------- -------- -------- --------
Income before provision
for income taxes....... 5 136 2,943 5,346 11,258 4,113 8,819
Provision for income
taxes.................. 4 56 1,205 2,096 4,542 1,604 3,880
------- ------- ------- ------- -------- -------- --------
Net income(2)........... $ 1 $ 80 $ 1,738 $ 3,250 $ 6,716 $ 2,509 $ 4,939
======= ======= ======= ======= ======== ======== ========
Net income per share--
basic(3)............... $ 0.57 $ 0.74 $ 0.33 $ 0.45
======= ======== ======== ========
Net income per share--
diluted(3)............. $ 0.54 $ 0.71 $ 0.32 $ 0.43
======= ======== ======== ========
OTHER CONSOLIDATED FI-
NANCIAL DATA:
EBITDA(4)............... $ 132 $ 609 $ 3,790 $ 5,716 $ 12,036 $ 4,234 $ 10,314
Cash flow provided by
(used in) operating
activities............. $ (454) $ (804) $ 2,130 $ 1,787 $ 2,857 $ 1,070 $ 1,615
Ratio of earnings to
fixed charges.......... 1.0x 1.3x 4.5x 9.0x 38.4x 32.2x 30.3x
<CAPTION>
AS OF JANUARY 31,
AS OF JULY 31, 1998
-------------------------------------------- ---------------------
AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(5)
------- ------- ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 27 $ 25 $ 248 $21,855 $ 17,812 $ 15,295 $106,845
Working capital......... 817 267 1,833 26,901 30,180 35,596 127,146
Total assets............ 3,487 5,638 7,623 44,029 110,287 145,422 236,972
Total debt.............. 2,485 8,555 5,146 -- -- 25,500 121,000
Series A Convertible
Preferred Stock(6)..... -- -- 1,485 -- -- -- --
Shareholders' equity
(deficit)(6)(7)........ 217 (4,524) (2,878) 40,036 99,659 110,058 110,058
</TABLE>
11
<PAGE>
- --------
(1) The Computec Acquisition and the SelecTech Acquisition were completed on
April 30, 1997 and July 10, 1997, respectively. Consequently, the
Consolidated Statement of Income Data for the six months ended January 31,
1998 (which includes the acquired operations for the entire period) are
not directly comparable to the Consolidated Statement of Income Data for
the six months ended January 31, 1997. See "Unaudited Pro Forma
Consolidated Statement of Income Data."
(2) Selling, general and administrative expenses for fiscal 1993 and 1994
include management fees of $820,000 and $586,000, respectively, which were
paid to a management company controlled by one of the founders of the
Company. This management fee was terminated in February 1994 upon the
redemption of such founder's ownership interest in the Company. Selling,
general and administrative expenses for fiscal 1993, 1994 and 1995 also
include compensation paid to Ms. Weaver of $975,000, $1.7 million and
$921,000, respectively. Effective March 1995, Ms. Weaver's annual
compensation was significantly reduced.
(3) In the second quarter of 1998, the Company adopted SFAS No. 128, "Earnings
Per Share." In accordance with SFAS No. 128, net income per share for
fiscal 1996 and 1997 and interim periods have been restated. Basic net
income per share is computed using the weighted average number of common
shares outstanding during the reporting period. Diluted net income per
share is computed using the weighted average number of common shares
outstanding and the dilutive effect of stock options. The weighted average
number of shares outstanding used in the basic calculation was 5,675,000
and 9,090,000 for the fiscal years ended July 31, 1996 and 1997, and
7,597,000 and 11,068,000 for the six months ended January 31, 1997 and
1998, respectively. For diluted net income per share, the weighted average
number of shares outstanding has been increased by 364,000 and 370,000
shares for the fiscal years ended July 31, 1996 and 1997, and 339,000 and
416,000 shares for the six months ended January 31, 1997 and 1998,
respectively, for the dilutive effect of stock options.
(4) EBITDA represents the sum of operating income and depreciation and
amortization. EBITDA is not intended to represent cash flows from
operations as defined by GAAP and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity. EBITDA is included
herein as it is a basis upon which the Company assesses its financial
performance and its ability to service indebtedness.
(5) The As Adjusted, Consolidated Balance Sheet Data as of January 31, 1998,
gives effect to the sale by the Company of an aggregate of $115.0 million
principal amount of the Notes and the application of the net proceeds
therefrom to repay $19.5 million of bank indebtedness incurred in
conjunction with the S3G Acquisition. See "Unaudited Pro Forma
Consolidated Statement of Income Data."
(6) 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) at July 31, 1995. Such shares automatically
converted into 592,000 shares of Common Stock immediately prior to the
consummation of the initial public offering of the Company's common stock
in March 1996.
(7) The Company recorded a charge to retained earnings of $4.8 million in
February 1994 in connection with the redemption of all shares of Common
Stock not owned by Ms. Weaver.
12
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
The Unaudited Pro Forma Consolidated Statement of Income Data for the year
ended July 31, 1997 gives effect to the S3G Acquisition, the SelecTech
Acquisition, the Computec Acquisition, the Leardata Acquisition and the PSCI
Acquisition as if such transactions had occurred on August 1, 1996 through the
respective date of each acquisition. The Unaudited Pro Forma Consolidated
Statement of Income Data for the six months ended January 31, 1998 gives pro
forma effect to the S3G Acquisition as if such transaction had occurred on
August 1, 1996. The Unaudited Pro Forma Consolidated Statement of Income Data
for the six months ended January 31, 1997 gives pro forma effect to the S3G
Acquisition, the SelecTech Acquisition, the Computec Acquisition, the Leardata
Acquisition and the PSCI Acquisition as if such transactions had occurred on
August 1, 1996. The adjustments, including giving effect to the sale by the
Company of $115.0 million principal amount of the Notes and the application of
the net proceeds therefrom to repay $19.5 million of bank indebtedness
incurred in conjunction with the S3G Acquisition, are described in the
accompanying notes.
The Unaudited Pro Forma Consolidated Statement of Income Data does not
purport to represent what the Company's results of operations actually would
have been if those transactions had been consummated on the dates indicated,
or what such results will be for any future date or for any future period. In
addition, the Unaudited Pro Forma Consolidated Statement of Income Data has
been prepared by Company management and is presented for informational
purposes only. The pro forma adjustments are based on management's preliminary
assumptions regarding purchase accounting adjustments for the S3G Acquisition
based on currently available information. The final allocation of the purchase
price for the S3G Acquisition will be adjusted to the extent that actual
amounts differ from management's estimates. The Unaudited Pro Forma
Consolidated Statement of Income Data should be read in conjunction with the
Financial Statements included elsewhere in this Prospectus.
13
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
SIX MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
DPRC S3G(A) ADJUSTMENTS CONSOLIDATED
------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues.............................. $89,877 $6,999 $ -- $96,876
Cost of professional services......... 65,300 2,825 -- 68,125
------- ------ ------- -------
Gross margin.......................... 24,577 4,174 -- 28,751
Selling, general and administrative
expenses............................. 15,947 1,595 636 b 18,178
------- ------ ------- -------
Operating income...................... 8,630 2,579 (636) 10,573
Interest income (expense), net........ 189 -- (689)c (988)
(488)d
------- ------ ------- -------
Income before provision for income
taxes................................ 8,819 2,579 (1,813) 9,585
Provision for income taxes............ 3,880 -- 353 e 4,233
------- ------ ------- -------
Net income............................ $ 4,939 $2,579 $(2,166) $ 5,352
======= ====== ======= =======
Net income per share--basic(f)........ $0.45 $0.48
======= =======
Net income per share--diluted(f)...... $0.43 $0.46
======= =======
Weighted average common shares--basic. 11,068 11,267
Weighted average common shares--dilut-
ed................................... 11,484 11,685
OTHER FINANCIAL DATA:
EBITDA(g)............................. $10,314 $12,891
Ratio of earnings to fixed charges.... 31.3x 7.9x
</TABLE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FROM AUGUST 1, 1996
THROUGH THE DATE OF ACQUISITION
-------------------------------------------
SIX MONTHS ENDED JANUARY 31, 1997
DPRC S3G(A) SELECTECH COMPUTEC PSCI LEARDATA ADJUSTMENTS CONSOLIDATED
------- ------ --------- -------- ------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $43,911 $3,046 $2,450 $10,059 $3,963 $7,806 $ -- $71,235
Cost of professional
services............... 33,606 1,332 1,297 6,263 3,110 5,386 -- 50,994
------- ------ ------ ------- ------ ------ ------- -------
Gross margin............ 10,305 1,714 1,153 3,796 853 2,420 -- 20,241
Selling, general and
administrative
expenses............... 6,518 856 563 2,123 554 1,398 1,490 b,h 13,502
------- ------ ------ ------- ------ ------ ------- -------
Operating income........ 3,787 858 590 1,673 299 1,022 (1,490) 6,739
Interest income (ex-
pense), net............ 326 (6) -- -- (14) 68 (1,785)c (1,881)
(470)d
------- ------ ------ ------- ------ ------ ------- -------
Income before provision
for income taxes....... 4,113 852 590 1,673 285 1,090 (3,745) 4,858
Provision for income
taxes.................. 1,604 -- -- -- -- -- 583 e 2,187
------- ------ ------ ------- ------ ------ ------- -------
Net income.............. $ 2,509 $ 852 $ 590 $ 1,673 $ 285 $1,090 $(4,328) $ 2,671
======= ====== ====== ======= ====== ====== ======= =======
Net income per share--
basic(f)............... $0.33 $0.30
======= =======
Net income per share--
diluted(f)............. $0.32 $0.29
======= =======
Weighted average common
shares--basic.......... 7,597 8,805
Weighted average common
shares--diluted........ 7,936 9,143
OTHER FINANCIAL DATA:
EBITDA(g)............... $ 4,234 $ 8,897
Ratio of earnings to
fixed charges.......... 35.3x 3.0x
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of Income
Data.
14
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FROM AUGUST 1, 1996
THROUGH THE DATE OF ACQUISITION
-------------------------------------------
DPRC S3G(a) SELECTECH COMPUTEC PSCI LEARDATA ADJUSTMENTS CONSOLIDATED
-------- ------ --------- -------- ------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JULY
31, 1997
Revenues................ $115,022 $9,200 $4,533 $14,943 $3,963 $7,806 $ -- $155,467
Cost of professional
services............... 85,979 3,901 2,331 9,327 3,110 5,386 -- 110,034
-------- ------ ------ ------- ------ ------ ------- --------
Gross margin............ 29,043 5,299 2,202 5,616 853 2,420 -- 45,433
Selling, general and
administrative
expenses............... 18,654 2,213 1,376 2,886 554 1,398 2,468 b,h 29,549
-------- ------ ------ ------- ------ ------ ------- --------
Operating income........ 10,389 3,086 826 2,730 299 1,022 (2,468) 15,884
Interest income 869 (18) -- -- (14) 68 (2,840)c (2,887)
(expense), net......... (952)d
-------- ------ ------ ------- ------ ------ ------- --------
Income before provision
for income taxes....... 11,258 3,068 826 2,730 285 1,090 (6,260) 12,997
Provision for income
taxes.................. 4,542 -- -- -- -- -- 1,443 e 5,985
-------- ------ ------ ------- ------ ------ ------- --------
Net income.............. $ 6,716 $3,068 $ 826 $ 2,730 $ 285 $1,090 $(7,703) $ 7,012
======== ====== ====== ======= ====== ====== ======= ========
Net income per share-- $ 0.74 $ 0.70
basic(f)............... ======== ========
Net income per share-- $ 0.71 $ 0.68
diluted(f)............. ======== ========
Weighted average common
shares--basic.......... 9,090 9,978
Weighted average common
shares--diluted........ 9,460 10,334
OTHER FINANCIAL DATA:
EBITDA(g)............... $ 12,036 $ 20,350
Ratio of earnings to
fixed charges.......... 41.9x 4.1x
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Consolidated Statements of Income
Data.
15
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
FOR THE FISCAL YEAR ENDED JULY 31, 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998
(a) The unaudited pro forma consolidated statement of income data for the
fiscal year ended July 31, 1997 includes the results of operations of S3G
for the 12-month period September 30, 1997. The unaudited pro forma
consolidated statements of income data for the six months ended January
31, 1997 and 1998 include the results of operations of S3G for the six
month periods ended December 31, 1996 and 1997, respectively.
(b) The adjustment represents the additional amortization related to goodwill
and non-compete covenants acquired with the purchase of the Acquisitions
assuming such acquisitions had occurred as of August 1, 1996 as follows
(in thousands):
<TABLE>
<S> <C>
Fiscal year ended July 31, 1997................................... $2,819
Six months ended January 31, 1998................................. 636
Six months ended January 31, 1997................................. 1,711
</TABLE>
(c) The adjustment represents the reduction of interest income and additional
interest expense associated with the purchase of the Acquisitions assuming
such acquisitions had occurred as of August 1, 1996 (in thousands):
<TABLE>
<S> <C>
Fiscal year ended July 31, 1997................................... $2,840
Six months ended January 31, 1998................................. 689
Six months ended January 31, 1997................................. 1,785
</TABLE>
(d) The adjustment represents the net effect on interest expense associated
with the Notes and amortization of deferred financing costs, net of
interest income assuming a rate of return of 5.0% on available cash (in
thousands):
<TABLE>
<S> <C>
Fiscal year ended July 31, 1997..................................... $952
Six months ended January 31, 1998................................... 488
Six months ended January 31, 1997................................... 470
</TABLE>
(e) The adjustment represents the additional income tax effects associated
with the Acquisitions and the corresponding unaudited pro forma
adjustments.
(f) The pro forma basic and diluted weighted average number of shares
outstanding assuming the Acquisitions had occurred as of August 1, 1996
were 9,978,000 and 10,334,000 for the year ended July 31, 1997, 8,805,000
and 9,143,000 for the six months ended January 31, 1997 and 11,267,000,
and 11,685,000 for the six months ended January 31, 1998, respectively.
(g) Unaudited pro forma EBITDA represents the sum of income from operations
and depreciation and amortization and excludes non-recurring charges,
consisting primarily of excess compensation paid to the former owners of
the Acquisitions prior to their acquisition by DPRC. EBITDA is not
intended to represent cash flows from operations as defined by GAAP and
should not be considered as an alternative to net income as an indicator
of the Company's operating performance or to cash flows as a measure of
liquidity. Unaudited pro forma EBITDA is included herein as it is a basis
upon which the Company assesses its pro forma financial performance and
its ability to service pro forma indebtedness.
(h) The adjustment represents the reduction of excess payroll costs above
amounts stipulated in employment agreements and other (in thousands):
<TABLE>
<S> <C>
Fiscal year ended July 31, 1997..................................... $351
Six months ended January 31, 1998................................... --
Six months ended January 31, 1997................................... 221
</TABLE>
16
<PAGE>
SELLING SECURITYHOLDERS
The Notes were originally issued by the Company in a private placement to
NationsBanc Montgomery Securities LLC, Donaldson, Lufkin & Jenrette Securities
Corporation, Robert W. Baird & Co. Incorporated and Lehman Brothers (the
"Initial Purchasers") on March 24, 1998 at a purchase price of 100% per Note.
The Notes were thereafter sold by the Initial Purchasers in transactions
exempt from the registration requirements of the Securities Act to persons
reasonably believed by the Initial Purchasers to be "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act).
The Selling Securityholders may from time to time offer and sell pursuant to
this Prospectus any or all of the Notes and the Conversion Shares. All of the
Notes and the Conversion Shares offered hereby are offered by the Selling
Securityholders. Any sales of the Notes or the Conversion Shares will be for
the account of such persons or entities and none of the proceeds of such
offering will be received by the Company. The term "Selling Securityholder"
includes the holders listed below, the beneficial owners of the Notes and
their transferees, pledgees, donees or other successors.
The following table sets forth information with respect to the Selling
Securityholders and the respective principal amount of Notes beneficially
owned by each Selling Securityholder that may be offered and sold pursuant to
this Prospectus. Such information has been obtained from the Selling
Securityholders and has not been independently verified by the Company.
<TABLE>
<CAPTION>
PERCENTAGE NUMBER OF PERCENTAGE PERCENTAGE OF
PRINCIPAL OF TOTAL CONVERSION OF COMMON TOTAL VOTING
AMOUNT OF OUTSTANDING SHARES THAT STOCK POWER AFTER
NAME NOTES OWNED NOTES MAY BE SOLD(1) OUTSTANDING(2) CONVERSION(3)
---- ----------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
General Motors Employees
Domestic Group Pension
Trust.................. $15,677,000 13.63% 441,604 3.89% 3.89%
SMALLCAP World Fund,
Inc.................... 7,600,000 6.61 214,084 1.88 1.88
Paloma Securities,
L.L.C.................. 5,500,000 4.78 154,929 1.36 1.36
Donaldson, Lufkin &
Jenrette Securities
Corporation(4)......... 5,290,000 4.60 149,014 1.31 1.31
Deutsche Bank A.G....... 5,000,000 4.35 140,845 1.24 1.24
State of Oregon--Equity. 4,975,000 4.33 140,140 1.23 1.23
CFW-C, L.P. ............ 4,500,000 3.91 126,760 1.12 1.12
California Public
Employees' Retirement
System................. 3,750,000 3.26 105,633 * *
Societe Generale
Securities Corp. ...... 3,750,000 3.26 105,633 * *
Van Kampen American
Capital Harbor Fund.... 3,426,000 2.98 96,507 * *
Delaware State
Employees'
Retirement Fund........ 2,625,000 2.28 73,943 * *
Silverton International
Fund Limited .......... 2,500,000 2.17 70,422 * *
Nicholas Applegate
Income & Growth........ 2,295,000 2.00 64,647 * *
San Diego County
Convertible............ 2,019,000 1.76 56,873 * *
Aim Balanced Fund....... 2,000,000 1.74 56,338 * *
The Northwestern Mutual
Life Insurance Company. 2,000,000 1.74 56,338 * *
Lincoln National
Convertible Securities
Fund................... 1,700,000 1.48 47,887 * *
Motors Insurance
Corporation............ 1,456,000 1.23 41,014 * *
Alexandra Global
Investment
Fund I Ltd. ........... 1,250,000 1.09 35,211 * *
The Class IC Company,
Ltd. .................. 1,150,000 1.00 32,394 * *
ICI American Holdings
Inc. Defined Benefit
Plans Trust............ 1,105,000 * 31,126 * *
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE NUMBER OF PERCENTAGE PERCENTAGE OF
AMOUNT OF OF TOTAL CONVERSION OF COMMON TOTAL VOTING
NOTES OUTSTANDING SHARES THAT STOCK POWER AFTER
NAME OWNED NOTES MAY BE SOLD(1) OUTSTANDING(2) CONVERSION(3)
---- --------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan & Co. Inc. . 1,000,000 * 28,169 * *
Lehman Brothers,
Inc.(5)................ 940,000 * 26,478 * *
Delaware PERS........... 890,000 * 25,070 * *
Zeneca Holdings Defined
Benefit Plans Trust.... 860,000 * 24,225 * *
Thermo Electron Balanced
Investment Fund........ 770,000 * 21,690 * *
San Diego City
Retirement............. 657,000 * 18,507 * *
Carrigaholt Capital
(Bermuda) L.P. ........ 650,000 * 18,309 * *
Chrysler Corp. Master
Retirement Trust....... 650,000 * 18,309 * *
Weirton Trust........... 580,000 * 16,338 * *
Heritage Income Growth
Trust.................. 500,000 * 14,084 * *
Reserve Convertible
Securities Fund........ 500,000 * 14,084 * *
Wake Forest University.. 493,000 * 13,887 * *
Starvest Fund--
Discretionary.......... 400,000 * 11,267 * *
Van Kampen American
Capital Convertible
Securities Fund........ 389,000 * 10,957 * *
The J.W. McConnell
Family Foundation
Charitable Foundation.. 360,000 * 10,140 * *
IBM Retirement Fund..... 350,000 * 9,859 * *
Orrington Investments
Limited Partnership.... 300,000 * 8,450 * *
Hillside Capital
Incorporated Corporate
Account................ 250,000 * 7,042 * *
Engineer Joint Pension
Fund................... 243,000 * 6,845 * *
General Motors
Foundation, Inc........ 232,000 * 6,535 * *
Walker Art Center....... 220,000 * 6,197 * *
First Church of Christ,
Scientist-Endowment.... 205,000 * 5,774 * *
Nalco Chemical Company.. 200,000 * 5,633 * *
Orrington International
Fund Ltd. ............. 200,000 * 5,633 * *
Christian Science
Trustees for Gifts and
Endowments............. 185,000 * 5,211 * *
Aloha Airlines, Inc.
Non-Pilots Pension
Trust.................. 165,000 * 4,647 * *
Baptist Health.......... 157,000 * 4,422 * *
Fox Family Foundation... 133,000 * 3,746 * *
Kapiolani Medical
Center................. 125,000 * 3,521 * *
Aloha Airlines Pilots
Retirement Trust....... 85,000 * 2,394 * *
Boston Museum of Fine
Art.................... 66,000 * 1,859 * *
Forest Alternative
Strategies Fund II LP
Series B-3............. 65,000 * 1,830 * *
Hawaiian Airlines Pilots
Retirement Plan........ 60,000 * 1,690 * *
Forest Greyhound........ 55,000 * 1,549 * *
Forest Global
Convertible Fund
Series B-3............. 53,000 * 1,492 * *
Forest Global
Convertible Fund
Series B-1............. 50,000 * 1,408 * *
Dunham & Assoc Fund II.. 46,000 * 1,295 * *
Summer Hill Global
Partners L.P. ......... 45,000 * 1,267 * *
Forest Global
Convertible Fund
Series B-5............. 40,000 * 1,126 * *
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE NUMBER OF PERCENTAGE PERCENTAGE OF
PRINCIPAL OF TOTAL CONVERSION OF COMMON TOTAL VOTING
AMOUNT OF OUTSTANDING SHARES THAT STOCK POWER AFTER
NAME NOTES OWNED NOTES MAY BE SOLD(1) OUTSTANDING(2) CONVERSION(3)
---- ------------ ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Hawaiian Airlines
Employees Pension
Plan--IAM.............. 40,000 * 1,126 * *
Forest Global
Convertible Fund Series
B-2.................... 38,000 * 1,070 * *
Forest Performance Fund. 36,000 * 1,014 * *
Fox Family Foundation
dtd 10/10/87........... 30,000 * 845 * *
Robert L. Weida......... 25,000 * 704 * *
Dunham & Assoc Fund III. 24,000 * 676 * *
Hawaiian Airlines
Pension Plan for
Salaried Employees..... 10,000 * 281 * *
Other holders of
Notes(6)(7)............ 22,060,000 621,439
------------ ---------
TOTAL................. $115,000,000 3,239,436
</TABLE>
- --------
* Less than 1%.
(1) Assumes conversion of the full amount of Notes held by such holder at the
initial conversion price of $35.50 per share; such conversion price is
subject to adjustment as described under "Description of Notes--
Conversion." Accordingly, the number of shares of Common Stock issuable
upon conversion of the Notes may increase or decrease from time to time.
Under the terms of the Indenture, fractional shares will not be issued
upon conversion of the Notes; cash will be paid in lieu of fractional
shares, if any.
(2) Computed in accordance with Rule 13d-3(d)(1) promulgated under the
Exchange Act and based upon 11,367,666 shares of Common Stock outstanding
as of April 30, 1998, treating as outstanding the number of Conversion
Shares shown as being issuable upon the assumed conversion by the named
holder of the full amount of such holder's Notes but not the conversion
of the Notes of any other holder. Includes Common Stock, if any,
beneficially owned by the holder other than the Conversion Shares.
(3) Represents the percentage of the voting power each holder will have after
the conversion such holder's Notes based upon 11,367,666 shares of Common
Stock outstanding as of April 30, 1998, treating as outstanding the
number of Conversion Shares shown as being issuable upon the assumed
conversion by the named holder of the full amount of such holder's Notes
but not the conversion of the Notes of any other holder. Includes Common
Stock, if any, beneficially owned by the holder other than the Conversion
Shares.
(4) Donaldson, Lufkin & Jenrette Securities Corporation has engaged in
transactions with and performed various investment banking and other
services for the Company in the past, and may do so from time to time in
the future. Donaldson, Lufkin & Jenrette Securities Corporation was one
of the Initial Purchasers in the original issuance of the Notes for which
it received a discount on the purchase price. The Company has been
advised that: (i) The Equitable Companies Incorporated ("Equitable"), as
part of a group, is the beneficial owner of approximately 7.2% 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, a Selling Securityholder.
(5) Lehman Brothers, Inc. has engaged in transactions with and performed
various investment banking and other services for the Company in the
past, and may do so from time to time in the future. Lehman Brothers,
Inc. was one of the Initial Purchasers in the original issuance of the
Notes for which it received a discount on the purchase price.
(6) Information concerning other Selling Securityholders will be set forth in
amendments to the Registration Statement of which this Prospectus is a
part or in supplements to this Prospectus, from time to time to the
extent required.
(7) Assumes that any other holders of Notes, or any future transferees,
pledgees, donees or successors of or from any such other holders of
Notes, do not beneficially own any Common Stock other than the Common
Stock issuable upon conversion of the Notes at the initial conversion
rate.
19
<PAGE>
None of the Selling Securityholders, other than as set forth in notes (4)
and (5) above, has, or within the past three years has had, any position,
office or other material relationship with the Company or any of its
predecessors or affiliates. Because the Selling Securityholders may, pursuant
to this Prospectus, offer all or some portion of the Notes or the Conversion
Shares, no estimate can be given as to the amount of the Notes or the
Conversion Shares that will be held by the Selling Securityholders upon
termination of any such sales. In addition, the Selling Securityholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of their Notes, in transactions exempt from the registration
requirements of the Securities Act, since the date on which they provided the
information contained in the table above regarding their Notes. Information
regarding changes with respect to the Selling Securityholders, including to
add additional Selling Securityholders, as applicable, will be set forth in
supplements to this Prospectus if and when necessary. See "Plan of
Distribution."
20
<PAGE>
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the Notes
or the Conversion Shares offered hereby. The Notes and the Conversion Shares
may be sold from time to time to purchasers directly by the Selling
Securityholders. Alternatively, the Selling Securityholders may from time to
time offer the Notes or the Conversion Shares through brokers, dealers or
agents who may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers of the
Notes or the Conversion Shares for whom they may act as agent. The Selling
Securityholders and any such brokers, dealers or agents who participate in the
distribution of the Notes or the Conversion Shares may be deemed to be
"underwriters," and any profits on the sale of the Notes or the Conversion
Shares by them and any discounts, commissions or concessions received by any
such brokers, dealers or agents might be deemed to be underwriting discounts
and commissions under the Securities Act. To the extent the Selling
Securityholders may be deemed to be underwriters, the Selling Securityholders
may be subject to certain statutory liabilities of the Securities Act,
including, but not limited to, Sections 11, 12 and 17 of the Securities Act
and Rule l0b-5 under the Exchange Act.
The Notes and the Conversion Shares offered hereby may be sold from time to
time in one or more transactions at fixed prices, at prevailing market prices
at the time of sale, at varying prices determined at the time of sale or at
negotiated prices. The Notes or the Conversion Shares may be sold by one or
more of the following methods, without limitation: (a) a block trade in which
the broker or dealer so engaged will attempt to sell the Notes or the
Conversion Shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction; (b) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (d) an exchange
distribution in accordance with the rules of such exchange; (e) face-to-face
transactions between sellers and purchasers without a broker-dealer; (f)
through the writing of options; and (g) other. At any time a particular offer
of the Notes or the Conversion Shares is made, a revised Prospectus or
Prospectus Supplement, if required, will be distributed which will set forth
the aggregate amount and type of Notes or Conversion Shares being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, any discounts, commissions and other items constituting
compensation from the Selling Securityholders and any discounts, commissions
or concessions allowed or reallowed or paid to dealers. Such Prospectus
Supplement and, if necessary, a post-effective amendment to the Registration
Statement of which this Prospectus is a part, will be filed with the
Commission to reflect the disclosure of additional information with respect to
the distribution of the Notes or the Conversion Shares. In addition, the Notes
or the Conversion Shares covered by this Prospectus may be sold in private
transactions or under Rule 144 rather than pursuant to this Prospectus.
To the best knowledge of the Company, there are currently no plans,
arrangements or understandings between any Selling Securityholders and any
broker, dealer, agent or underwriter regarding the sale of the Notes or the
Conversion Shares by the Selling Securityholders. There is no assurance that
any Selling Securityholder will sell any or all of the Notes or the Conversion
Shares offered by it hereunder or that any such Selling Securityholder will
not transfer, devise or gift such Notes or Conversion Shares by other means
not described herein.
21
<PAGE>
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation,
Regulation M, which may limit the timing of purchases and sales of any of the
Notes or the Conversion Shares by the Selling Securityholders and any other
such person. Furthermore, under Regulation M under the Exchange Act, any
person engaged in the distribution of the Notes or the Conversion Shares may
not simultaneously engage in market-making activities with respect to the
particular Notes or the Conversion Shares being distributed for certain
periods prior to the commencement of and during such distribution. All of the
foregoing may affect the marketability of the Notes or the Conversion Shares
and the ability of any person or entity to engage in market-making activities
with respect to the Notes or the Conversion Shares.
Pursuant to the Registration Rights Agreement entered into in connection
with the offer and sale of the Notes by the Company, each of the Company and
the Selling Securityholders will be indemnified by the other against certain
liabilities, including certain liabilities under the Securities Act, or will
be entitled to contribution in connection therewith.
The Company has agreed to pay substantially all of the expenses incidental
to the registration, offering and sale of the Securities to the public other
than commissions, fees and discounts of underwriters, brokers, dealers and
agents.
22
<PAGE>
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
were issued pursuant to an indenture (the "Indenture") dated as of March 24,
1998 by and between the Company and State Street Bank and Trust Company of
California, N.A., as trustee (the "Trustee"). The following summary of the
Notes, the Indenture and the Registration Rights Agreement (as defined herein)
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Indenture and the
Registration Rights Agreement, including the definitions therein of certain
terms. Copies of the Indenture and the Registration Rights Agreement may be
obtained from the Company upon request. Capitalized terms used herein without
definition have the meanings ascribed to them in the Indenture or the
Registration Rights Agreement, as appropriate. As used in this section, the
"Company" refers to DPRC, exclusive of its Subsidiaries. Wherever particular
provisions or defined terms of the Indenture (or the form of Note which is
part thereof) or the Registration Rights Agreement are referred to in this
summary, such provisions or defined terms are incorporated by reference as a
part of the statements made and such statements are qualified in their
entirety by such reference. Certain definitions of terms used in the following
summary are set forth under "--Certain Definitions."
GENERAL
The Notes are general, unsecured obligations of the Company, limited in
aggregate principal amount to $115.0 million. The Notes are subordinated in
right of payment to all existing and future Senior Indebtedness, as described
under "--Subordination" below. The Notes will be issued only in fully
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes mature on April 1, 2005. The Notes bear interest at the rate of 5
1/4% per annum from their date of issuance, or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable semi-
annually in cash in arrears on April 1 and October 1 of each year, commencing
October 1, 1998 to the persons in whose names such Notes are registered at the
close of business on March 15 and September 15 immediately preceding such
Interest Payment Date. Principal of, premium, if any, interest on, and
Liquidated Damages with respect to, the Notes will be payable, the Notes will
be convertible and the Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office or agency shall be maintained in Los Angeles, California.
Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
At the option of the Company, payment of interest and Liquidated Damages may
be made by check mailed to the Holders of the Notes at the addresses set forth
upon the registry books of the Company. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Until otherwise designated by the Company,
the Company's office or agency will be the corporate trust office of the
Trustee presently located in Los Angeles, California.
The Indenture does not contain any financial covenants or any restrictions
on the payment of dividends, the issuance or repurchase of securities of the
Company or the incurrence of Indebtedness or Senior Indebtedness. The
Indenture contains no covenants or other provisions to afford protection to
Holders of Notes in the event of a highly leveraged transaction or a change of
control of the Company, except to the limited extent described under "--
Repurchase of Notes at the Option of the Holder Upon a Change of Control."
CONVERSION RIGHTS
Each Holder of Notes will have the right at any time prior to the close of
business on the Stated Maturity of the Notes, unless previously redeemed or
repurchased, at the Holder's option, to convert any portion of the principal
amount thereof that is $1,000 or an integral multiple thereof into shares of
Common Stock at the Conversion Price of $35.50 per share (subject to
adjustment as described below). The right to convert a Note called for
redemption or delivered for repurchase and not withdrawn will terminate at the
close of business on the Business Day immediately prior to the Redemption Date
or Repurchase Date for such Note, unless the Company subsequently fails to pay
the applicable Redemption Price or Repurchase Price, as the case may be.
23
<PAGE>
In the case of any Note that has been converted into Common Stock after any
Record Date, but on or before the next Interest Payment Date, interest, the
stated due date of which is on such Interest Payment Date, shall be payable on
such Interest Payment Date notwithstanding such conversion, and such interest
shall be paid to the Holder of such Note who is a Holder on such Record Date.
Any Note converted after any Record Date but before the next Interest Payment
Date (other than Notes called for redemption) must be accompanied by payment
of an amount equal to the interest payable on such Interest Payment Date on
the principal amount of Notes being surrendered for conversion; provided that
no such payment shall be required with respect to interest payable on April 1,
2001. No fractional shares of Common Stock will be issued upon conversion but,
in lieu thereof, an appropriate amount will be paid in cash by the Company
based on the market price of Common Stock (determined in accordance with the
Indenture) at the close of business on the day of conversion. As a result of
the foregoing provisions, Holders that surrender Notes for conversion on a
date that is not an Interest Payment Date will not receive any interest for
the period from the Interest Payment Date next preceding the date of
conversion to the date of conversion or for any later period, except for Notes
that are called for redemption on a Redemption Date between a Record Date and
the corresponding Interest Payment Date as provided above.
The Conversion Price will be subject to adjustment in certain events,
including (a) any payment of a dividend (or other distribution) payable in
Common Stock on any class of Capital Stock of the Company, (b) any issuance to
all or substantially all holders of Common Stock of rights, options or
warrants entitling them to subscribe for or purchase Common Stock at less than
the then current market price of Common Stock (determined in accordance with
the Indenture); provided, however, that if such rights, options or warrants
are only exercisable upon the occurrence of certain triggering events, then
the Conversion Price will not be adjusted until such triggering events occur,
(c) certain subdivisions, combinations or reclassifications of the outstanding
Common Stock, (d) any distribution to all or substantially all holders of
Common Stock of evidences of indebtedness, shares of Capital Stock (other than
Common Stock), cash or other assets (including securities, but excluding those
dividends, rights, options, warrants and distributions referred to above and
distributions in connection with the liquidation, dissolution or winding up of
the Company and excluding dividends and distributions paid exclusively in cash
and in mergers and consolidations to which the third succeeding paragraph
applies), (e) any distribution consisting exclusively of cash (excluding any
cash portion of distributions referred to in (d) above, or cash distributed
upon a merger or consolidation to which the third succeeding paragraph
applies) to all or substantially all holders of Common Stock in an aggregate
amount that, combined together with (i) all other such all-cash distributions
made within the then preceding 12 months in respect of which no adjustments
have been made and (ii) any cash and the fair market value of other
consideration paid or payable in respect of any tender offer by the Company or
any of its Subsidiaries for Common Stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 15.0% of the
Company's market capitalization (defined as being the product of the then
current market price of the Common Stock times the number of shares of Common
Stock then outstanding) on the record date of such distribution, and (f) the
completion of a tender offer made by the Company or any of its Subsidiaries
for Common Stock to the extent that the aggregate consideration, together with
(i) any cash and other consideration payable in a tender offer by the Company
or any of its Subsidiaries for Common Stock expiring within the 12 months
preceding the expiration of such tender offer in respect of which no
adjustment has been made and (ii) the aggregate amount of any such all-cash
distributions referred to in (e) above to all holders of Common Stock within
the 12 months preceding the expiration of such tender offer in respect of
which no adjustments have been made, exceeds 15.0% of the Company's market
capitalization on the expiration of such tender offer. In the event of a
distribution to all or substantially all of the holders of Common Stock of
rights, warrants or options to subscribe for or purchase any securities (other
than those referred to in (b) above), the Company may, instead of making an
adjustment in the Conversion Price, provide that each Holder of a Note, who
converts the Note after the record date for such distribution and prior to the
expiration of such rights, shall be entitled to receive upon such conversion
of the Note, in addition to shares of Common Stock, an appropriate number of
such rights, warrants or options. No adjustment of the Conversion Price will
be required to be made until the cumulative adjustments amount to one percent
or more of the Conversion Price as last adjusted.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the Conversion Price, the
Holders of Notes may, in certain circumstances, be deemed to have
24
<PAGE>
received a distribution subject to United States federal income tax as a
dividend; in certain other circumstances, the absence of such an adjustment
may result in a taxable dividend to the holders of Common Stock. See "Certain
Federal Income Tax Considerations."
The Company, from time to time and to the extent permitted by law, may
reduce the Conversion Price by any amount for any period of at least 20
Business Days, in which case the Company shall give at least 15 days notice of
such reduction, if the Board of Directors has made a determination that such
reduction would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in
the Conversion Price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights
to acquire stock) or from any event treated as such for United States federal
income tax purposes. See "Certain Federal Income Tax Considerations."
In case of any reclassification or change of outstanding shares of Common
Stock issuable upon conversion of the Notes (other than certain changes in par
value) or consolidation or merger of the Company with or into another Person
or any consolidation or merger of another Person with or into the Company
(with certain exceptions), or in case of any sale, transfer or conveyance of
all or substantially all of the assets of the Company, each Note then
outstanding will, without the consent of any Holder of Notes, become
convertible only into the kind and amount of securities, cash and other
property receivable upon such reclassification, change, consolidation, merger,
sale, transfer or conveyance by a holder of the number of shares of Common
Stock into which such Note was convertible immediately prior thereto after
giving effect to any adjustment event; provided, that if the kind or amount of
securities, cash and other property is not the same for each share of Common
Stock held immediately prior to such reclassification, change, consolidation,
merger, sale, transfer or conveyance, any Holder who fails to exercise any
right of election shall receive per share the kind and amount of securities,
cash or other property received per share by a plurality of non-electing
shares.
The Company will use all reasonable efforts to cause all registrations to be
made with, and to obtain any approvals by, any governmental authority under
any Federal or state law of the United States that may be required on the part
of the Company in connection with the conversion of the Notes into Common
Stock. If at any time during the two-year period following the date of the
original issuance of the Notes a registration statement under the Securities
Act covering the shares of Common Stock issuable upon conversion of the Notes
is not effective or is otherwise unavailable for effecting resales of such
shares, shares of Common Stock issued upon conversion of the Notes
("Restricted Shares") may not be sold or otherwise transferred except in
accordance with or pursuant to an exemption from, or otherwise in a
transaction not subject to, the registration requirements of the Securities
Act, and, if a registration statement under the Securities Act is not
effective or is otherwise unavailable for effecting resales of such shares at
the time of a conversion, the Restricted Shares will bear a legend to that
effect. The Transfer Agent for the Common Stock will not be required to accept
for registration of transfer any Restricted Shares, except upon presentation
of satisfactory evidence that these restrictions on transfer have been
complied with, all in accordance with such reasonable regulations as the
Company may from time to time agree with the Transfer Agent. Under certain
circumstances, the holders of the Restricted Shares will be entitled to
Liquidated Damages during such period. See "--Registration Rights; Liquidated
Damages."
SUBORDINATION
The Notes are general, unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Indebtedness. The Notes are
structurally subordinated in right of payment to all Indebtedness and other
liabilities (including trade payables) of the Company's Subsidiaries. In
addition, the Company has available borrowing capacity of $60.0 million
(subject to customary borrowing conditions) under the Credit Facility.
Indebtedness under the Credit Facility constitutes Senior Indebtedness. The
Indenture does not restrict the incurrence of Senior Indebtedness or other
Indebtedness by the Company or its Subsidiaries or the ability of the Company
to transfer assets or business operations to its Subsidiaries, subject to the
provisions described under "--Repurchase of Notes at the Option of the Holder
Upon a Change of Control" and "--Limitation on Merger, Sale or Consolidation."
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<PAGE>
The Indenture provides that no payment may be made by the Company, directly
or through any Subsidiary, on account of the principal of, premium, if any,
interest on or Liquidated Damages with respect to, the Notes, or to acquire
any of the Notes (including repurchases of Notes at the option of the Holder)
for cash or property (other than Junior Securities), or on account of the
redemption provisions of the Notes, (i) upon the maturity of any Senior
Indebtedness, by lapse of time, acceleration (unless waived) or otherwise,
unless and until all principal of, premium, if any, and interest on and other
amounts payable in respect of Senior Indebtedness are first paid in full (or
such payment is duly provided for), or (ii) in the event of default in the
payment of any principal of, premium, if any, or interest on any Senior
Indebtedness when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise (collectively, a "Payment
Default"), unless and until such Payment Default has been cured or waived or
otherwise has ceased to exist. The payment of cash, property or securities
(other than Junior Securities) upon conversion of a Note will constitute
payment on a Note and therefore will be subject to the subordination
provisions in the Indenture.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits, or would permit with (a) the passage of time, (b) the giving of
notice, (c) the making of any payment of the Notes then required to be made or
(d) any combination thereof (collectively, a "Non-Payment Default"), the
holders of Senior Indebtedness under the Credit Facility or the holders of
other Senior Indebtedness having a principal amount then outstanding in excess
of $10.0 million (or with respect to which other Senior Indebtedness the
holders are obligated to lend in excess of $10.0 million principal amount) or
their respective representatives immediately to accelerate the maturity of
such Senior Indebtedness and (ii) written notice of such Non-Payment Default
being given to the Company and the Trustee by the holders of Senior
Indebtedness under the Credit Facility or by the holders of such other Senior
Indebtedness or their respective representatives (a "Payment Notice"), then,
unless and until such Non-Payment Default has been cured or waived or
otherwise has ceased to exist, no payment (by setoff or otherwise) may be made
by or on behalf of the Company, directly or through any Subsidiary, on account
of the principal of, premium, if any, interest on or Liquidated Damages with
respect to, the Notes, or to acquire or repurchase any of the Notes for cash
or property, or on account of the redemption provisions of the Notes, in any
such case other than payments made with Junior Securities. Notwithstanding the
foregoing, unless (i) the Senior Indebtedness in respect of which such Non-
Payment Default exists has been declared due and payable in its entirety
within 179 days after the Payment Notice is delivered as set forth above (the
"Payment Blockage Period"), and (ii) such declaration has not been rescinded
or waived, at the end of the Payment Blockage Period, the Company shall be
required to pay to the Holders of the Notes all regularly scheduled payments
on the Notes that were not paid during the Payment Blockage Period due to the
foregoing prohibitions (and upon the making of such payments any acceleration
of the Notes made during the Payment Blockage Period shall be of no further
force or effect) and to resume all other payments as and when due on the
Notes. Not more than one Payment Notice may be given in any consecutive 365-
day period, irrespective of the number of defaults with respect to Senior
Indebtedness during such period. In no event, however, may the total number of
days during which any Payment Blockage Period is or Payment Blockage Periods
are in effect exceed 179 days in the aggregate during any consecutive 365-day
period.
Upon any distribution of assets of the Company upon any dissolution, winding
up, total or partial liquidation or reorganization of the Company, whether
voluntary or involuntary, in bankruptcy, insolvency, receivership or a similar
proceeding or upon assignment for the benefit of creditors or any marshaling
of assets or liabilities (i) the holders of all Senior Indebtedness will first
be entitled to receive payment in full (or have such payment duly provided
for) before the Holders of the Notes are entitled to receive any payment on
account of the principal of, premium, if any, interest on and Liquidated
Damages with respect to, the Notes (other than Junior Securities) and (ii) any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (other than Junior Securities) to
which the Holders of the Notes or the Trustee on behalf of the Holders would
be entitled (by setoff or otherwise), except for the subordination provisions
contained in the Indenture, will be paid by the liquidating trustee or agent
or other person making such a payment or distribution directly to the holders
of Senior Indebtedness or their representative to the extent necessary to make
payment in full of all such Senior Indebtedness remaining unpaid, after giving
effect to any concurrent payment or distribution, or provision therefor, to
the holders of such Senior Indebtedness.
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<PAGE>
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Subsidiary (other than Junior
Securities) shall be received by the Holders of the Notes or the Trustee on
behalf of the Holders or any Paying Agent at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of Senior
Indebtedness, and shall be paid or delivered by such Holders or the Trustee or
such Paying Agent, as the case may be, to the holders of the Senior
Indebtedness remaining unpaid or unprovided for or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness may have been
issued, ratably according to the aggregate amounts remaining unpaid on account
of the Senior Indebtedness held or represented by each, for application to the
payment of all Senior Indebtedness remaining unpaid, to the extent necessary
to pay or to provide for the payment of all such Senior Indebtedness in full
after giving effect to any concurrent payment or distribution, or provision
therefor, to the holders of such Senior Indebtedness.
No provision contained in the Indenture or the Notes affects the obligation
of the Company, which is absolute and unconditional, to pay, when due,
principal of, premium, if any, and interest on, and Liquidated Damages with
respect to, the Notes. The subordination provisions of the Indenture and the
Notes do not prevent the occurrence of any Default or Event of Default under
the Indenture or limit the rights of the Trustee or any Holder of any Notes,
subject to the preceding paragraphs, to pursue any other rights or remedies
with respect to the Notes.
The Company conducts certain of its operations through its Subsidiaries.
Accordingly, the Company's ability to meet its cash obligations in the future
may be dependent upon the ability of its Subsidiaries to make cash
distributions to the Company. The ability of its Subsidiaries to make
distributions to the Company is and will continue to be restricted by, among
other limitations, applicable provisions of the laws of national and state
governments and may be restricted by contractual provisions. The Indenture
does not limit the ability of the Company's Subsidiaries to incur such
contractual restrictions in the future. The right of the Company to
participate in the assets of any Subsidiary (and thus the ability of Holders
of the Notes to benefit indirectly from such assets) is generally subject to
the prior claims of creditors, including trade creditors, of that Subsidiary
except to the extent that the Company is recognized as a creditor of such
Subsidiary, in which case the Company's claims would still be subject to any
security interest of other creditors of such Subsidiary. The Notes, therefore,
are structurally subordinated to obligations to creditors, including trade
creditors, of Subsidiaries of the Company with respect to the assets of the
Subsidiaries against which such creditors have a more direct claim.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its Subsidiaries or a marshaling of assets or liabilities of the
Company and its Subsidiaries, Holders of Notes may receive ratably less than
other creditors.
REDEMPTION AT THE COMPANY'S OPTION
The Notes will not be subject to redemption prior to April 1, 2001 and will
be redeemable on and after such date at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice to each Holder,
at the following Redemption Prices (expressed as percentages of the principal
amount) if redeemed during the 12-month period commencing April 1 of the years
indicated below, in each case (subject to the right of Holders of record on a
Record Date to receive interest due on an Interest Payment Date that is on or
prior to such Redemption Date) together with accrued and unpaid interest and
Liquidated Damages, if any, to, but excluding, the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 103.00%
2002........................................................... 102.25%
2003........................................................... 101.50%
2004........................................................... 100.75%
2005........................................................... 100.00%
</TABLE>
27
<PAGE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption (the
"Redemption Date"), to the Holder of each Note to be redeemed to such Holder's
last address as then shown upon the registry books of the Registrar. The
notice of redemption must state the Redemption Date, the Redemption Price and
the amount of accrued interest and Liquidated Damages, if any, to be paid. Any
notice that relates to a Note to be redeemed in part only must state the
portion of the principal amount to be redeemed and must state that on and
after the Redemption Date, upon surrender of such Note, a new Note or Notes in
principal amount equal to the unredeemed portion thereof will be issued. On
and after the Redemption Date, interest will cease to accrue on the Notes or
portions thereof called for redemption, unless the Company defaults in its
obligations with respect thereto. The Notes will not have the benefit of any
sinking fund.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, the Company is required to make an irrevocable and unconditional
(except as described below) offer (the "Repurchase Offer") to purchase all
Notes on the date ("Repurchase Date") that is no later than 45 Business Days
(except as described below) after the occurrence of such Change of Control at
a cash price (the "Repurchase Price") equal to 100% of the principal amount
thereof, together with accrued and unpaid interest and Liquidated Damages, if
any, to (but excluding) the Repurchase Date. A Holder of Notes may accept the
Repurchase Offer with respect to all or a portion of its Notes (provided that
the principal amount of such Notes must be $1,000 or an integral multiple
thereof). The Repurchase Offer shall be made within 25 Business Days following
a Change of Control and shall remain open for 20 Business Days following its
commencement except to the extent that a longer period is required by
applicable law (the "Repurchase Offer Period"). Upon expiration of the
Repurchase Offer Period, the Company shall purchase all Notes tendered in
response to the Repurchase Offer. If required by applicable law, the
Repurchase Date and the Repurchase Offer Period may be extended as so
required.
On or before the Repurchase Date, the Company will (i) accept for payment
Notes or portions thereof properly tendered pursuant to the Repurchase Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price
(together with accrued and unpaid interest and Liquidated Damages, if any) of
all Notes so tendered and (iii) deliver to the Trustee the Notes so accepted,
together with an officers' certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Repurchase
Price (together with accrued and unpaid interest and Liquidated Damages, if
any), and the Trustee will promptly authenticate and mail or deliver to such
Holders a new Note or Notes equal in principal amount to any unpurchased
portion of the Notes surrendered. Any Notes not so accepted will be promptly
mailed or delivered by the Company to the Holder thereof. The Company will
publicly announce the results of the Repurchase Offer on or as soon as
practicable after the Repurchase Date.
The phrase "all or substantially all" of the assets of the Company, as
included in the definition of Change of Control, is likely to be interpreted
by reference to applicable state law at the relevant time, and will be
dependent on the facts and circumstances existing at such time. As a result,
there may be a degree of uncertainty in ascertaining whether a sale or
transfer of "all or substantially all" of the assets of the Company has
occurred.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The provisions of the Indenture relating to a Change of Control may not
afford the Holders of the Notes protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction that may adversely affect Holders, if such transaction does not
constitute a Change of Control. Moreover, certain events with respect to the
Company which may involve an actual change of control of the Company may not
constitute a Change of Control for purposes of the Indenture.
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<PAGE>
The Company may not have sufficient financial resources available to fulfill
its obligation to repurchase the Notes upon a Change of Control or to
repurchase other debt securities of the Company or its Subsidiaries providing
similar rights to the holders thereof. Further, the right to require the
Company to repurchase Notes as a result of the occurrence of a Change of
Control could create an event of default under Senior Indebtedness as a result
of which any repurchase could be blocked by the subordination provisions of
the Notes. Failure of the Company to repurchase the Notes when required would
result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by the subordination provisions. Any such default
would, in turn, cause a default under the Credit Facility. As a result, any
repurchase of the Notes could be blocked by the subordination provisions of
the Notes. See "--Subordination."
Except as described herein, no modification of the Indenture regarding the
provisions on repurchase at the option of any Holder of a Note upon a Change
of Control that adversely affects a Holder is permissible without the consent
of the Holder of the Note so affected. In the event of a Change of Control, if
Holders of in excess of two-thirds of the outstanding aggregate principal
amount of the Notes so determine at any time following the occurrence of such
Change of Control and before the close of business on the Business Day
immediately preceding the Repurchase Date, such event shall not be treated as
a Change of Control for purposes of the Indenture. In such event, (i) the
Company shall not be required to make the Repurchase Offer, (ii) to the extent
the Repurchase Offer has already been made, such Repurchase Offer shall be
deemed revoked and (iii) to the extent any Notes have been tendered in
response to any such revoked Repurchase Offer, such tender shall be rescinded
and the Notes so tendered shall be promptly returned to the Holders thereof.
For purposes of any such determination by the Holders of the outstanding
Notes, Notes held by the Company or an Affiliate of the Company (including any
Person that would become an Affiliate of the Company (or its successor) as a
consequence of the event or series of events that otherwise would be treated
as a Change of Control for purposes of the Indenture) shall be disregarded.
To the extent applicable, the Company will comply with the provisions of
Rule 13e-4 and 14e-1 or any other tender offer rules under the Exchange Act
and any other securities laws, and will file a Schedule 13E-4 or any other
schedule if required under such rules, in connection with any offer by the
Company to repurchase Notes at the option of the Holders upon a Change of
Control.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into, or sell, lease, convey or transfer all
or substantially all of its assets (on a consolidated basis), whether in a
single transaction or a series of related transactions, to another Person or
group of affiliated Persons (other than to its wholly owned Subsidiaries),
unless (i) either (a) in the case of a merger or consolidation, the Company is
the surviving entity or (b) the resulting, surviving or transferee entity is a
corporation organized under the laws of the United States, any state thereof
or the District of Columbia and expressly assumes by supplemental indenture
all of the obligations of the Company in connection with the Notes and the
Indenture; and (ii) no Default or Event of Default shall exist immediately
before or after giving effect to such transaction.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made, shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor corporation had been named therein
as the Company, and the Company will be released from its obligations under
the Indenture and the Notes, except as to any obligations that arise from or
as a result of such transaction.
REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the
Trustee, within 15 days after it is or would have been required to file such
with the Commission, annual and quarterly consolidated financial statements
substantially equivalent to financial
29
<PAGE>
statements that would have been included in reports filed with the Commission
if the Company were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission and, in each case,
together with a management's discussion and analysis of financial condition
and results of operations as such would be so required.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on, or Liquidated Damages with respect to,
the Notes as and when due and payable and the continuance of any such failure
for 30 days, (ii) the failure by the Company to pay all or any part of the
principal of, or premium, if any, on the Notes when and as the same become due
and payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, pursuant to any Repurchase Offer, (iii) the failure of the
Company to perform any conversion of Notes required under the Indenture and
the continuance of any such failure for 30 days, (iv) the failure by the
Company to observe or perform any other covenant or agreement contained in the
Notes or the Indenture and, subject to certain exceptions, the continuance of
such failure for a period of 60 days after written notice is given to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount of the Notes outstanding, (v) certain
events of bankruptcy, insolvency or reorganization in respect of the Company
or any of its Significant Subsidiaries, (vi) failure of the Company or any
Significant Subsidiary to make any payment at maturity, including any
applicable grace period, in respect of Indebtedness (other than non-recourse
obligations) in an amount in excess of $15.0 million and continuance of such
failure for 30 days after written notice is given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25.0% in
aggregate principal amount of Notes outstanding, (vii) default by the Company
or any Significant Subsidiary with respect to any Indebtedness (other than
non-recourse obligations), which default results in the acceleration of
Indebtedness in an amount in excess of $15.0 million without such Indebtedness
having been discharged or such acceleration having been rescinded or annulled
for 30 days after written notice is given to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25.0% in aggregate
principal amount of Notes outstanding and (viii) final unsatisfied judgments
not covered by insurance aggregating in excess of $15.0 million, at any one
time rendered against the Company or any of its Significant Subsidiaries and
not stayed, bonded or discharged within 60 days. The Indenture will provide
that if a Default occurs and is continuing, the Trustee must, within 90 days
after the occurrence of such Default, give to the Holders notice of such
Default, but the Trustee shall be protected in withholding such notice if it
in good faith determines that the withholding of such notice is in the best
interest of the Holders, except in the case of a Default in the payment of the
principal of, premium, if any, or interest on or Liquidated Damages with
respect to, any of the Notes when due or in the payment of any redemption or
repurchase obligation.
The Indenture provides that if an Event of Default occurs and is continuing
(other than an Event of Default specified in clause (v) above with respect to
the Company), then in every such case, unless the principal of all of the
Notes shall have already become due and payable, either the Trustee or the
Holders of at least 25.0% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given
by Holders), may declare all principal, premium, if any, accrued interest and
Liquidated Damages, if any, on or with respect to the Notes to be due and
payable immediately. If an Event of Default specified in clause (v) above with
respect to the Company occurs, all principal, premium, if any, accrued
interest and Liquidated Damages, if any, will be immediately due and payable
on all outstanding Notes without any declaration or other act on the part of
the Trustee or the Holders. The Holders of no less than a majority in
aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-payment of
the principal of, premium, if any, and interest on, and Liquidated Damages
with respect to, the Notes that have become due solely by such acceleration,
have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a
default in the payment of principal of, interest on, or Liquidated Damages
with respect to, any Note not yet
30
<PAGE>
cured, or a default with respect to any covenant or provision that cannot be
modified or amended without the consent of the Holder of each outstanding Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and
applicable law, the Holders of a majority in aggregate principal amount of the
Notes at the time outstanding will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee.
The Indenture provides that no Holder may pursue any remedy under the
Indenture, except for a default in the payment of principal, premium, if any,
or interest or Liquidated Damages, if any, on the Notes, unless the Holder
gives to the Trustee written notice of a continuing Event of Default, the
Holders of at least 25.0% in principal amount of the outstanding Notes make a
written request to the Trustee to pursue the remedy, such Holders offer to the
Trustee indemnity satisfactory to the Trustee against any loss, liability or
expense, the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity, and the Trustee shall not
have received a contrary direction from the Holders of a majority in principal
amount of the outstanding Notes.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding,
the Company and the Trustee are permitted to amend or supplement the Indenture
or any supplemental indenture or modify or waive the rights of the Holders;
provided, that no such modification may, without the consent of each Holder
affected thereby: (i) change the Stated Maturity of any Note or reduce the
principal amount thereof or the rate (or extend the time for payment) of
interest thereon or any premium payable upon the redemption thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the conversion of any Note or the enforcement of any such payment on
or after the due date thereof (including, in the case of redemption, on or
after the Redemption Date), or reduce the Repurchase Price, or alter the
Repurchase Offer (other than as set forth herein) or redemption provisions in
a manner adverse to the Holders, or (ii) reduce the percentage in principal
amount of the outstanding Notes, the consent of whose Holders is required for
any such amendment, supplemental indenture or waiver provided for in the
Indenture or (iii) adversely affect the right of such Holder to convert Notes.
A supplemental indenture entered into in compliance with the "Limitation on
Merger, Sale or Consolidation" covenant would not require the consent of the
Holders of the Notes.
NO PERSONAL LIABILITY OF SHAREHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES
The Indenture provides that no shareholder, employee, officer, director or
partner, as such, past, present or future, of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Indenture or the Notes by reason of his, her or its
status as such shareholder, employee, officer, director or partner.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Company or Trustee may require a Holder, among other things, to
furnish appropriate endorsements, legal opinions and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Notes selected for
redemption. Also, the Company is not required to transfer or exchange any
Notes for a period of 15 days before the mailing of a Repurchase Offer or
notice of redemption.
The registered holder of a Note may be treated as the owner of it for all
purposes.
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<PAGE>
BOOK ENTRY, DELIVERY AND FORM
Notes initially resold to "qualified institutional buyers," as defined in
Rule 144A under the Securities Act ("QIBs"), are evidenced by one or more
global Notes (the "Global Note"), which were deposited on March 24, 1998, the
date of the closing of the sale of the Notes (the "Closing Date") with, or on
behalf of, the Depositary and registered in the name of Cede & Co. ("Cede") as
the Depositary's nominee. Except as set forth below, the Global Note may be
transferred, in whole or in part, only to another nominee of the Depositary or
to a successor of the Depositary or its nominee.
QIBs may hold their interests in the Global Note directly through the
Depositary if such holders are participants in the Depositary, or indirectly
through organizations which are participants in the Depositary (the
"Participants"). Transfers between Participants will be effected in accordance
with the Depositary's rules and will be settled in same-day funds.
The Depositary has advised the Company that it is a limited-purpose trust
company that was created to hold securities for its Participants and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, "Indirect Participants")
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly. QIBs may elect to hold Notes purchased by them
through the Depositary. QIBs who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through Participants or
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary, (i) upon deposit of the Global Notes, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with an
interest in the Global Notes and (ii) ownership of the Notes evidenced by the
Global Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to
the interests of Participants), the Participants and the Indirect
Participants. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own and that
security interests in negotiable instruments can only be perfected by delivery
of certificates representing the instruments. Consequently, the ability to
transfer Notes evidenced by the Global Notes will be limited to such extent.
So long as the Depositary or its nominee is the registered owner of a Note,
the Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Notes for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Notes, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a Person having a beneficial
interest in Notes represented by a Global Note to pledge such interest to
Persons that do not participate in the Depositary's system, or to otherwise
take actions with respect to such interest, may be affected by the lack of a
physical certificate evidencing such interest.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of Notes by the Depositary, or for maintaining, supervising or
reviewing any records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, interest on, and
Liquidated Damages with respect to, any Note represented by a Global Note
registered in the name of the Depositary or its nominee on the applicable
record date will be payable by the Trustee to or at the direction of the
Depositary or its nominee in its capacity as the registered Holder of the
Global Notes representing such Notes under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the Persons in whose
names the Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither the Company nor the Trustee has or
will have any
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responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including, principal, premium, if any, interest, or
Liquidated Damages with respect thereto), or to immediately credit the
accounts of the relevant Participants with such payment, in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the Global Notes as shown on the records of the Depositary.
Payments by the Participants and the Indirect Participants to the beneficial
owners of Notes will be governed by standing instructions and customary
practice and will be the responsibility of the Participants or the Indirect
Participants.
Holders who desire to convert their Notes into Common Stock pursuant to the
terms of the Notes should contact their brokers or other Participants or
Indirect Participants to obtain information on procedures, including proper
forms and cut-off times, for submitting such requests.
If (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance
of Notes in definitive form under the Indenture, then, upon surrender by the
Depositary of the Global Notes, Certificated Notes will be issued to each
person that the Depositary identifies as the beneficial owner of the Notes
represented by the Global Notes. In addition, subject to certain conditions,
any Person having a beneficial interest in a Global Note may, upon request to
the Trustee, exchange such beneficial interest for Notes in the form of
Certificated Notes. Upon any such issuance, the Trustee is required to
register such Certificated Notes in the name of such Person or Persons (or the
nominee of any thereof), and cause the same to be delivered thereto. All such
Certificated Notes shall be subject to the legend requirements under any
applicable federal or state securities laws.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the Notes, and the Company and the Trustee may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration
and delivery, and the respective principal amounts, of the Notes to be
issued).
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration Rights
Agreement as of March 24, 1998 (the "Registration Rights Agreement"). Pursuant
to the Registration Rights Agreement, the Company agreed to file with the
Commission on or prior to 60 days after the Closing Date a shelf registration
statement under the Securities Act (the "Shelf Registration Statement") on
Form S-3 or another appropriate form to cover resales of Transfer Restricted
Securities by the holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. The Company also agreed to use its reasonable efforts to cause the
Shelf Registration Statement to be declared effective by the Commission within
120 days after the Closing Date and to keep the Shelf Registration Statement
effective until the earlier of such date that is two years after the latest
date of initial issuance of the Notes or the date all Transfer Restricted
Securities covered by the Shelf Registration Statement have been sold or there
cease to be outstanding any Transfer Restricted Securities. For purposes of
the foregoing, "Transfer Restricted Securities" means each Note and share of
Common Stock issued upon conversion thereof until the earlier of the date on
which such Note or share of Common Stock has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement or the date on which such Note or share of Common Stock is
distributed to the public pursuant to Rule 144 under the Securities Act or is
saleable pursuant to Rule 144(k) under the Securities Act (or any similar
provisions then in force). This Prospectus and the related Registration
Statement of the Company has been prepared and filed to satisfy the foregoing
requirements of the Registration Rights Agreement.
If (i) the Shelf Registration Statement is not filed with the Commission on
or prior to 60 days after the Closing Date, (ii) the Shelf Registration
Statement has not been declared effective by the Commission within 120 days
after the Closing Date or (iii) the Shelf Registration Statement is filed and
declared effective but shall thereafter cease to be effective or the
prospectus contained therein ceases to be usable for a period of time which
shall exceed 90 days in the aggregate during any 365-day period (each such
event referred to in clauses (i) through (iii), a "Registration Default"), the
Company will accrue liquidated damages ("Liquidated
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Damages") to each Holder of Transfer Restricted Securities, during the first
90-day period immediately following the occurrence of such Registration
Default in an amount equal to $0.05 per week per $1,000 principal amount of
Notes and, if applicable, on an equivalent basis per share (subject to
adjustment in the event of stock splits, stock recombinations, stock dividends
and the like) of Common Stock constituting Transfer Restricted Securities held
by such Holder. The rate of accrual of the Liquidated Damages will increase by
an additional $0.05 per week per $1,000 principal amount of Notes and, if
applicable, by an equivalent amount per week per share (subject to adjustment
as set forth above) of Common Stock constituting Transfer Restricted
Securities for each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages with respect to
any Registration Default of $0.25 per week per $1,000 principal amount of
Notes or, if applicable, an equivalent amount per week per share (subject to
adjustment as set forth above) of Common Stock constituting Transfer
Restricted Securities. All accrued Liquidated Damages shall be paid to the
Holders of Notes or shares of Common Stock (as applicable) in the same manner
as interest payments on the Notes on semi-annual payment dates which
correspond to interest payment dates for the Notes. Following the cure of a
Registration Default, Liquidated Damages will cease to accrue with respect to
such Registration Default. The use of the Shelf Registration Statement for
effecting resales of Transfer Restricted Securities may be suspended in
certain circumstances described in the Registration Rights Agreement upon
notice by the Company to the holders of the Transfer Restricted Securities,
subject to the rights of the holders of Transfer Restricted Securities to
receive Liquidated Damages if the aggregate number of days of such suspensions
in any 365-day period exceeds the period described above.
A Holder who sells Transfer Restricted Securities pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
stockholder in this Prospectus or a related prospectus and to deliver a
prospectus to purchasers and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such Holder (including
certain indemnification provisions). Holders of the Transfer Restricted
Securities will be required to make certain representations to the Company (as
described in the Registration Rights Agreement) and will be required to
deliver information to be used in connection with the Shelf Registration
Statement in order to have their Transfer Restricted Securities included in
the Shelf Registration Statement and this Prospectus. If a Holder fails to
provide such information within the prescribed time periods, the Transfer
Restricted Securities of such Holder will not be included in the Shelf
Registration Statement or this Prospectus and the Holder will not be entitled
to any Liquidated Damages. A Holder's ability to sell such Transfer Restricted
Securities may be limited or the price at which such Transfer Restricted
Securities can be sold may be adversely affected if the Transfer Restricted
Securities are not included in the Shelf Registration Statement or this
Prospectus.
GOVERNING LAW
The Indenture and the Notes provide that they are to be governed in
accordance with the laws of the State of New York.
THE TRUSTEE
State Street Bank and Trust Company of California, N.A. is the Trustee under
the Indenture. A successor Trustee may be appointed in accordance with the
terms of the Indenture.
The Indenture contains certain limitations on the rights of the Trustee, in
the event it becomes a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in
other transactions with the Company and its Subsidiaries; provided, however,
that if it acquires any conflicting interest (as defined), it must eliminate
such conflict or resign.
In case an Event of Default shall occur (and shall not be cured or waived),
the Trustee will be required to use the degree of care of a prudent person in
the conduct of its own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
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CERTAIN DEFINITIONS
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York, New York or Los
Angeles, California are authorized or obligated by law or executive order to
close.
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is
a party that is required to be classified and accounted for as a capital lease
obligation under GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Change of Control" means (i) an event or series of events as a result of
which any "person" or "group" (as such terms are used in Sections 13(d)(3) and
14(d) of the Exchange Act) (excluding the Company or any wholly owned
Subsidiary thereof or any employee benefit plan of the Company or any such
subsidiary) is or becomes, directly or indirectly, the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not
applicable) of more than 50.0% of the combined voting power of the then
outstanding securities entitled to vote generally in elections of directors,
managers or trustees, as applicable, of the Company or any successor entity
("Voting Stock"), (ii) the completion of any consolidation or merger of the
Company with or into any other Person, or sale, conveyance, transfer or lease
by the Company of all or substantially all of its assets to any Person, or any
merger of any other Person into the Company in a single transaction or series
of related transactions, and, in the case of any such transaction or series of
related transactions, the outstanding Common Stock is changed or exchanged as
a result, unless the shareholders of the Company immediately before such
transaction own, directly or indirectly, immediately following such
transaction, at least a majority of the combined voting power of the
outstanding voting securities of the Person resulting from such transaction in
substantially the same proportion as their ownership of the Voting Stock
immediately before such transaction, (iii) such time as the Continuing
Directors do not constitute a majority of the Board of Directors (or, if
applicable, a successor corporation to the Company), or (iv) if the Common
Stock is neither listed for trading on a U.S. national securities exchange nor
approved for trading on an established automated over-the-counter trading
market in the United States; provided that a Change of Control shall not be
deemed to have occurred if either (x) the last sale price of the Common Stock
for any five trading days during the 10 trading days immediately preceding the
Change of Control is at least equal to 105.0% of the Conversion Price in
effect on such day, or (y) with respect to a merger or consolidation otherwise
constituting a Change of Control described in clause (ii) above, at least
90.0% of the consideration in such transaction or transactions consists of
common stock or securities convertible into common stock that are, or upon
issuance will be, traded on a United States national securities exchange or
approved for quotation on the Nasdaq National Market.
"Continuing Director" means at any date a member of the Company's Board of
Directors (i) who was a member of such board on the date of initial issuance
of the Notes or (ii) who was nominated or elected by at least a majority of
the directors who were Continuing Directors at the time of such nomination or
election or whose election to the Company's Board of Directors was recommended
or endorsed by at least a majority of the directors who were Continuing
Directors at the time of such nomination or election.
"Disqualified Capital Stock" means, with respect to the Company, Capital
Stock of the Company that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the
happening of an event or the passage of time would be, required to be redeemed
or repurchased (including at the option of the holder thereof) by the Company,
in whole or in part, on or prior to the Stated Maturity of the Notes, provided
that only the portion of such Capital Stock which is so convertible,
exercisable, exchangeable or redeemable or subject to repurchase prior to such
Stated Maturity shall be deemed to be Disqualified Capital Stock.
"Indebtedness" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of any such Person, (i) in respect
of borrowed money (whether or not the lender has recourse to all or
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any portion of the assets of such person), (ii) evidenced by credit or loan
agreements, bonds, notes, debentures or similar instruments (including,
without limitation, notes or similar instruments given in connection with the
acquisition of any business, properties or assets of any kind), (iii)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks, (iv) for the payment of money relating to a Capitalized Lease
Obligation or (v) evidenced by a letter of credit, bank guarantee or a
reimbursement obligation of such Person with respect to any letter of credit;
(b) all obligations of such Person issued or assumed as the deferred purchase
price of property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business); (c) all net
obligations of such Person under Interest Swap and Hedging Obligations; (d)
all liabilities of others of the kind described in the preceding clauses (a),
(b) or (c) that such Person has guaranteed or that is otherwise its legal
liability, or which is secured by a lien on property of such Person, and all
obligations to purchase, redeem or acquire any Capital Stock; and (e) any and
all deferrals, renewals, extensions, modifications, replacements,
restatements, refinancings and refundings (whether direct or indirect) of, or
any indebtedness or obligation issued in exchange for, any liability of the
kind described in any of the preceding clauses (a), (b), (c) or (d), or this
clause (e), whether or not between or among the same parties.
"Interest Swap and Hedging Obligations" means the obligations of any Person
under any interest rate or currency protection agreement, future agreement,
option agreement, swap agreement, cap agreement or other interest rate or
currency hedge agreement, collar agreement or other similar agreement or
arrangement to which such Person is a party or beneficiary.
"Junior Securities" means any Qualified Capital Stock and any Indebtedness
of the Company that is fully subordinated in right of payment to the Notes and
has no scheduled installment of principal due, by redemption, sinking fund
payment or otherwise, on or prior to the Stated Maturity of the Notes.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Senior Indebtedness" means all obligations of the Company to pay the
principal of, premium, if any, interest (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding,
whether or not a claim for post-petition interest is allowable as a claim in
any such proceeding) and rent payable on or in connection with, and all
letters of credit, reimbursement obligations and fees, costs, expenses and
other amounts and liabilities accrued or due on or in connection with, any
Indebtedness of the Company, whether outstanding on the date of the Indenture
or thereafter created, incurred, assumed, guaranteed or in effect guaranteed
by the Company, unless the instrument creating or evidencing such Indebtedness
expressly provides that such Indebtedness is not senior or superior in right
of payment to the Notes or is pari passu with, or subordinated to, the Notes;
provided that in no event shall Senior Indebtedness include (a) Indebtedness
of the Company owed or owing to any Subsidiary of the Company, (b)
Indebtedness of the Company representing or with respect to any account
payable or other accrued current liability or obligation incurred in the
ordinary course of business in connection with the obtaining of materials or
services, (c) any liability for taxes owed or owing by the Company or any
Subsidiary of the Company or (d) the Notes.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1-02(w) of Regulation S-
X promulgated by the Commission as in effect as of the date of the Indenture.
"Stated Maturity" when used with respect to any Note, means April 1, 2005.
"Subsidiary" with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power normally entitled to vote in the
election of directors is at the time, directly or indirectly, owned by such
Person, by such Person and one or more Subsidiaries of such Person or by one
or more Subsidiaries of such Person, (ii) a partnership in which such Person
or a Subsidiary of such Person is, at the time, a general partner and owns
alone or together with one or more Subsidiaries of such Person a majority of
the partnership interests, or (iii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person or
such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has at least a majority
ownership interest.
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DESCRIPTION OF CREDIT FACILITY
The following summary of the Credit Facility does not purport to be complete
and is subject to the detailed provisions thereof and various related
documents entered into in connection with the Credit Facility.
The Credit Facility consists of a revolving line of credit in the principal
amount of $60.0 million, and, as of the effectiveness of the Second Amendment
in June 1998, bears interest at variable rates, depending on defined financial
conditions, from the prime rate to the prime rate plus 0.50% or, in the case
of a Eurodollar advance, LIBOR plus 0.50% to LIBOR plus 1.75%. Additional
pricing options and alternatives are available depending on certain financial
conditions and are available for working capital and general corporate
purposes, including permitted acquisitions. At the end of three years, the
outstanding balance on the facility converts to a two-year fully amortized
term loan. The Company is required to pay certain fees in connection with the
Credit Facility, including an annual commitment fee payable quarterly ranging
from 0.20% to 0.35% of the unused portion of the Credit Facility. As of April
30, 1998, all amounts previously borrowed under the Credit Facility have been
repaid. The Company can reborrow amounts previously paid up to the credit
limit of $60.0 million.
Borrowings under the Credit Facility are 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 by
the Company of all of the capital stock of its subsidiaries.
The Credit Facility contains certain financial covenants which require the
Company to maintain a specified current ratio, funded debt ratio, earnings
(before interest, taxes depreciation and amortization expenses) and
shareholders' equity. The Credit Facility contains customary representations
and warranties and requires compliance by the Company with certain other
covenants, including, without limitation, covenants limiting: (i) payment of
subordinated obligations; (ii) dispositions of property; (iii) mergers and
consolidations; (iv) acquisitions; (v) payment of dividends and other
distributions; and (vi) indebtedness and guaranty obligations. The Credit
Facility also contains customary events of default, including; without
limitation: (a) the failure to pay interest, principal or other amounts
payable in connection with the Credit Facility when due; (b) the material
inaccuracy of representations or warranties; and (c) insolvency, bankruptcy
proceedings or material judgments. Additionally, the Credit Facility contains
cross-default provisions to certain other indebtedness of the Company.
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DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Common Stock and the
Preferred Stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by, the Articles of Incorporation and Bylaws
of the Company and the provisions of applicable law.
COMMON STOCK
The Company has 20,000,000 authorized shares of Common Stock, of which
11,367,666 shares were outstanding as of April 30, 1998. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and preferences applicable to
the holders of any then outstanding Preferred Stock. Holders of Common Stock
have no preemptive rights and no right to convert their Common Stock into any
other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are,
and all shares of Common Stock to be outstanding upon completion of the
Offering will be, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to the terms of any series
of Preferred Stock which the Company may issue in the future.
The Company is considering an increase in the number of its authorized
shares of Common Stock because the number of shares of Common Stock (as
determined on an as converted basis of all convertible securities, including
the Notes, and on an as exercised basis of all rights to acquire Common
Stock), together with the number of shares of Common Stock which could be used
in connection with future or prior acquisitions, could equal almost 20,000,000
shares. The increase may be significant. Any such amendment will need the
approval of the shareholders of the Company. There can be no assurances that
the shareholders of the Company will approve such an amendment.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DPRC."
PREFERRED STOCK
The Company has 2,000,000 authorized shares of Preferred Stock ("Preferred
Stock"). No shares of Preferred Stock are outstanding. The Board has the
authority without any further action by the Company's shareholders to issue
one or more series and to establish the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and
the number of shares constituting any series or the designation of such
series. The issuance of Preferred Stock could adversely affect the holders of
Common Stock and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plans to issue
any shares of Preferred Stock. See "Risk Factors--Ability to Issue Preferred
Stock Without Further Shareholder Approval."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock of the Company is U.S.
Stock Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 30, 1998, the Company had 11,367,666 shares of Common Stock
outstanding. Approximately 60.1% of the outstanding shares of Common Stock are
freely tradeable, except those shares acquired in the public market by
"affiliates" to the Company, as that term is defined in Rule 144. The
remaining outstanding shares of Common Stock are "restricted securities"
within the meaning of Rule 144 and may only be sold at prescribed times and
subject to the manner of sale, volume, notice and information restrictions of
Rule 144. Of such restricted securities, approximately 80.0% of such shares
are now eligible for resale under Rule 144.
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Of such restricted securities, the 2,180,490 shares held by Ms. Weaver, the
1,173,147 shares held by Mr. Lewis, the 80,000 shares held by Mr. Haden and
the 692,850 shares held by Mr. Lancashire may be sold pursuant to Rule 144. In
addition, Mr. Lewis and Mr. Haden each have certain demand registration
rights, pursuant to which Mr. Lewis and Mr. Haden can each require the
Company, at any time, but not on more than two occasions, to use its best
efforts to register at least a majority of his then outstanding registrable
securities under the Securities Act. Mr. Lewis and Mr. Haden each have certain
piggyback registration rights to include the shares owned by him in certain
other registered offerings of securities by the Company or other shareholders
of the Company. Mr. Lancashire has similar demand and piggyback registration
rights with respect to the 692,850 shares of Common Stock issued to him and
his wife in the Computec Acquisition, together with any shares of Common Stock
issued to him and his wife pursuant to the earnout arrangement in connection
with the Computec Acquisition, and such shares are eligible for resale under
Rule 144. Since January 10, 1998, the former shareholders of SelecTech, Inc.
have had similar piggyback registration rights with respect to the
54,934 shares of Common Stock issued to them in the acquisition of SelecTech,
Inc. by the Company in July 1997, and such shares will become eligible for
resale under Rule 144, and the piggyback registrations will terminate
concurrently therewith, on July 10, 1998. Finally, beginning no later than
July 27, 1998, S3G has certain piggyback registration rights with respect to
the 204,552 shares of Common Stock issued to it in the S3G Acquisition,
together with any shares of Common Stock issued to it pursuant to the earnout
arrangement in connection with the S3G Acquisition, and such shares will
become eligible for resale under Rule 144 on January 27, 1999. The holders of
all piggyback registration rights have agreed to waive their rights to include
their shares in this Prospectus and the related Shelf Registration Statement
until September 24, 1998.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of: (i) 1.0% of the then outstanding shares of the
Company's Common Stock (approximately 113,700 shares as of April 30, 1998); or
(ii) the average weekly trading volume in the over-the-counter market during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
In addition, as of April 30, 1998 options to purchase 1,357,572 shares of
Common Stock have been granted and are outstanding under the Company's 1994
Stock Option Plan, as amended, and options to purchase an additional 455,023
shares may be granted under such plan. As of April 30, 1998, an additional
197,422 shares of Common Stock may be issued under the Company's Employee
Stock Purchase Plan. In addition, pursuant to the earnout arrangements in
connection with the Computec Acquisition and the S3G Acquisition, the Company
is required to pay 40.0% and 15.0%, respectively, of such earnout arrangement
in shares of Common Stock.
The Company intends, when possible, to use its Common Stock to pay all or a
portion of the purchase price for future acquisitions. Although the Company
has not entered into a definitive purchase agreement with respect to any
acquisition candidate, the Company is in preliminary negotiations with several
acquisition candidates whereby all or a portion of the purchase price could be
paid in Common Stock. It is possible that a substantial number of shares of
Common Stock could be issued in connection with one or more of these or any
subsequent acquisition. In addition, the Company may increase the number of
its authorized shares of Common Stock, which increase could be significant.
See "Description of Capital Stock."
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
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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 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 officers and directors prior to the completion
of the initial public offering of common stock by the Company, 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 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.
40
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences of the acquisition, ownership and disposition of Notes
by a beneficial owner of Notes. This discussion is based upon the United
States federal tax law now in effect, which is subject to change, possibly
retroactively. The tax treatment of Holders of the Notes may vary depending
upon their particular situations. Certain Holders (including insurance
companies, tax exempt organizations, financial institutions, subsequent
purchasers of Notes and broker-dealers) may be subject to special rules not
discussed below. In addition, this discussion does not describe any tax
consequences arising under the laws of any state, locality or taxing
jurisdiction other than the United States federal government. In general, this
discussion assumes that a Holder holds such Note as a capital asset and not as
part of a "hedge," "straddle," "conversion transaction," "synthetic security"
or other integrated investment. Prospective investors are urged to consult
their tax advisors regarding the United States federal tax consequences of
acquiring, holding and disposing of Notes, as well as any tax consequences
that may arise under the laws of any foreign, state, local or other taxing
jurisdiction.
As used herein, the term "United States Holder" means a beneficial owner of
a Note that is, for United States federal income tax purposes, a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the law of the United
States or of any political subdivision thereof, an estate whose income is
includible in gross income for United States federal income tax purposes
regardless of its source or a trust, if a United States court is able to
exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
STATED INTEREST
Stated interest on a Note will be taxable to a United States Holder as
ordinary interest income at the time that such interest accrues or is
received, in accordance with the United States Holder's regular method of
accounting for federal income tax purposes. The Company expects that the Notes
will not be considered to be issued with original issue discount for federal
income tax purposes.
PAYMENTS ON REGISTRATION DEFAULT
The treatment of interest as described above with respect to the Notes is
based in part on the assumption that as of the date of issuance of the Notes,
the possibility that Liquidated Damages would be paid to United States Holders
of the Notes pursuant to a Registration Default was remote. The IRS may take a
different position, which could affect the timing and character of interest
income by United States Holders of the Notes. While not free from doubt, if
Liquidated Damages are in fact paid, the Company believes that each United
States Holder will be required to include the Liquidated Damages in income in
accordance with such United States Holder's method of accounting as ordinary
income.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for income tax purposes on a
conversion of the Notes into shares of Common Stock. However, cash paid in
lieu of a fractional share of Common Stock will result in taxable gain (or
loss), which will be capital gain (or loss) to the extent that the amount of
such cash exceeds (or is exceeded by) the portion of the adjusted basis of the
Note allocable to such fractional share. The adjusted basis of shares of
Common Stock received on conversion will equal the adjusted basis of the Note
converted, reduced by the portion of adjusted basis allocated to any
fractional share of Common Stock exchanged for cash. The holding period of an
investor in the Common Stock received on conversion will include the period
during which the converted Notes were held.
The conversion price of the Notes is subject to adjustment under certain
circumstances. See "Description of Notes--Conversion Rights." Section 305 of
the Code and the Treasury Regulations issued thereunder may
41
<PAGE>
treat the Holders of the Notes as having received a constructive distribution,
resulting in ordinary income to the extent of the Company's current and
accumulated earnings and profits if and to the extent that certain adjustments
in the conversion price that may occur in limited circumstances (particularly
an adjustment to reflect a taxable dividend to holders of Common Stock)
increase the proportionate interest of a Holder of Notes in the fully diluted
Common Stock, whether or not such Holder ever exercises its conversion
privilege. Moreover, if there is not a full adjustment to the conversion price
of the Notes to reflect a stock dividend or other event increasing the
proportionate interest of the holders of outstanding Common Stock in the
assets or earnings and profits of the Company, then such increase in the
proportionate interest of the holders of the Common Stock generally will be
treated as a distribution to such holders, taxable as ordinary income to the
extent of the Company's current and accumulated earnings and profits.
MARKET DISCOUNT
Investors acquiring Notes should note that the resale of Notes may be
adversely affected by the market discount provisions of Sections 1276 through
1278 of the Code. Under the market discount rules, if a Holder of a Note
purchases it at market discount (i.e., at a price below its stated redemption
price at maturity) in excess of a statutorily-defined de minimis amount and
thereafter recognizes gain upon a disposition or retirement of the Note, then
the lesser of the gain recognized or the portion of the market discount that
accrued on a ratable basis (or, if elected, on a constant interest rate basis)
generally will be treated as ordinary income at the time of the disposition.
Moreover, any market discount on a Note may be taxable to an investor to the
extent of appreciation at the time of certain otherwise non-taxable
transactions (e.g., gifts). Any accrued market discount not previously taken
into income prior to a conversion of a Note, however, should (under Treasury
Regulations not yet issued) carry over to the Common Stock received on
conversion and be treated as ordinary income upon a subsequent disposition of
such Common Stock to the extent of any gain recognized on such disposition. In
addition, absent an election to include market discount in income as it
accrues, a holder of a market discount debt instrument may be required to
defer a portion of any interest expense that otherwise may be deductible on
any indebtedness incurred or maintained to purchase or carry such debt
instrument until the holder disposes of the debt instrument in a taxable
transaction.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Except as described above under "--Conversion of Notes into Common Stock,"
upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, a United States Holder will generally recognize taxable
gain or loss equal to the difference between the sum of cash plus the fair
market value of all other property received on such disposition (except to the
extent such cash or property is attributable to accrued interest which will be
taxable as ordinary income) and such Holder's adjusted tax basis in the Note.
Each United States Holder of Common Stock into which the Notes are converted
will generally recognize gain or loss upon the sale, exchange, redemption or
other disposition of the Common Stock measured under rules similar to those
described in the preceding sentence for the Notes. Gain or loss recognized on
the disposition of a Note or Common Stock generally will be capital gain or
loss (subject to the market discount rules described above under "--Market
Discount." Pursuant to the recently enacted Taxpayer Relief Act of 1997, long-
term capital gains tax rates will apply to dispositions by individuals of
capital assets (such as the Notes or Common Stock) held for more than
18 months. The maximum long-term capital gains tax rate applicable to
individuals is currently 20.0% (10.0% for individuals in the 15% tax bracket).
Mid-term capital gains tax rates will apply to dispositions by individuals of
capital assets held for more than one year but not more than 18 months. The
maximum mid-term capital gains tax rate applicable to individuals is currently
28.0% (15.0% for individuals in the 15.0% tax bracket). Corporate taxpayers
continue to be subject to a maximum regular tax rate of 35.0% on all capital
gains and ordinary income.
The exchange of a Note by a United States Holder for a new Note should not
constitute a taxable exchange of the Note. As a result, a United States Holder
should not recognize taxable gain or loss upon receipt of a new Note, a United
States Holder's holding period for a new Note should generally include the
holding period for the Note so exchanged and such Holder's adjusted tax basis
in a new Note should generally be the same as such Holder's adjusted tax basis
in the Note so exchanged.
42
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
A United States Holder of a Note, or of Common Stock issued upon conversion
of a Note, may be subject to information reporting and possibly backup
withholding. If applicable, backup withholding would apply at a rate of 31.0%
with respect to dividends or interest on, or the proceeds of a sale, exchange,
redemption, retirement, or other disposition of, such Note or Common Stock, as
the case may be, unless (i) such United States Holder is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable backup withholding rules. Amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as
a credit against such United States Holder's United States federal income tax
and may entitle the United States Holder to a refund, provided that the
required information is provided to the IRS.
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1999, modify the currently effective information reporting and backup
withholding procedures and requirements, and provide certain presumptions
regarding the status of Holders when payments to the Holders cannot be
reliably associated with appropriate documentation provided to the payer. To
avoid backup withholding with respect to payments made after December 31,
1999, initial United States Holders will be required to provide certification,
if applicable, that conforms to the requirements of the Final Withholding
Regulations, subject to certain transitional rules which may apply to extend
until December 31, 1999 a certification given in accordance with prior
Treasury Regulations. Because the application of the Final Withholding
Regulations will vary depending on the United States Holder's particular
circumstances, United States Holders are urged to consult their tax advisors
regarding the application of the Final Withholding Regulations.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PROSPECTIVE
HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES
OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF A NOTE AND OF COMMON STOCK
INTO WHICH A NOTE MAY BE CONVERTED (INCLUDING THE APPLICABILITY AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
LEGAL MATTERS
Certain legal matters with respect to the validity of the Notes and the
Conversion Shares offered hereby have been passed upon for the Company by
Riordan & McKinzie, a Professional Law Corporation, Orange County, California.
Certain attorneys of Riordan & McKinzie, a Professional Law Corporation, hold
shares of Common Stock of the Company.
43
<PAGE>
EXPERTS
The financial statements of Data Processing Resources Corporation as of July
31, 1996 and 1997 and for each of the three years in the period ended July 31,
1997 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the Registration Statement, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Computec International Strategic Resources, Inc.
as of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and elsewhere in the Registration Statement, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Leardata Info-Services, Inc. as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the Registration Statement, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
44
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DATA PROCESSING RESOURCES CORPORATION
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of July 31, 1996 and 1997 and as of January
31, 1998 (unaudited)..................................................... F-3
Consolidated Statements of Income for the Fiscal Years Ended July 31,
1995, 1996 and 1997 and for the Six Months Ended January 31, 1997 and
1998 (unaudited)......................................................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
July 31, 1995, 1996 and 1997 and for the Six Months Ended January 31,
1998 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 31,
1995, 1996 and 1997 and for the Six Months Ended January 31, 1997 and
1998 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
Independent Auditors' Report.............................................. F-16
Balance Sheets as of December 31, 1995 and 1996........................... F-17
Statements of Income for the Years Ended December 31, 1994, 1995 and 1996. F-18
Statements of Shareholders' Equity for the Years Ended December 31, 1994,
1995 and 1996............................................................ F-19
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996..................................................................... F-20
Notes to Financial Statements............................................. F-21
LEARDATA INFO-SERVICES, INC.
Independent Auditors' Report.............................................. F-25
Balance Sheets as of December 31, 1994 and 1995........................... F-26
Statements of Income for the Years Ended December 31, 1993, 1994 and 1995. F-27
Statements of Stockholders' Equity for the Years Ended December 31, 1993,
1994 and 1995............................................................ F-28
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995..................................................................... F-29
Notes to Financial Statements............................................. F-30
</TABLE>
F-1
<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, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity (deficit) and cash flows for each of the three years in
the period ended July 31, 1997. These financial statements 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 at July 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended July 31, 1997 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Costa Mesa, California
September 19, 1997
(September 25, 1997, as to Note 5 and
March 6, 1998, as to Note 2, with respect to earnings per share)
F-2
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
----------------- JANUARY 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $21,855 $ 17,812 $ 15,295
Accounts receivable (net of allowance for
doubtful accounts of $129, $262 and $640
(unaudited) as of July 31, 1996 and 1997 and
January 31, 1998, respectively).............. 8,436 21,839 28,144
Prepaid expenses and other current assets..... 387 1,076 1,940
Deferred tax asset............................ 216 -- --
------- -------- --------
Total current assets........................ 30,894 40,727 45,379
Property:
Equipment..................................... 896 1,732 2,326
Furniture and fixtures........................ 209 1,090 2,213
Leasehold improvements........................ 26 53 95
------- -------- --------
1,131 2,875 4,634
Less accumulated depreciation and
amortization................................. (392) (1,446) (2,016)
------- -------- --------
Property, net............................... 739 1,429 2,618
Other assets.................................... 69 158 413
Intangible assets (net of accumulated
amortization of $41 and $1,298 as of July 31,
1996 and 1997, respectively)................... 12,327 67,973 97,012
------- -------- --------
$44,029 $110,287 $145,422
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities...... $ 3,690 $ 9,003 $ 9,509
Income taxes payable.......................... 303 1,489 219
Deferred income taxes......................... -- 55 55
------- -------- --------
Total current liabilities................... 3,993 10,547 9,783
Long-term deferred income taxes................. -- 81 81
Long-term debt.................................. -- -- 25,500
Commitments and contingencies
Shareholders' equity:
Preferred stock; 2,000,000 shares authorized;
no shares issued and outstanding............. -- -- --
Common stock; 20,000,000 shares authorized;
7,492,321, 11,013,686, and 11,300,745
(unaudited) shares issued and outstanding as
of July 31, 1996 and 1997 and January 31,
1998, respectively........................... 38,125 90,472 95,452
Additional paid-in capital.................... 1,636 2,196 2,676
Retained earnings............................. 275 6,991 11,930
------- -------- --------
Total shareholders' equity.................. 40,036 99,659 110,058
------- -------- --------
$44,029 $110,287 $145,422
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JULY 31, ENDED JANUARY 31,
-------------------------- -----------------------
1995 1996 1997 1997 1998
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................... $49,558 $58,145 $115,022 $43,911 $89,877
Cost of professional
services................... 40,082 45,918 85,979 33,606 65,300
------- ------- -------- ------- -------
Gross margin............... 9,476 12,227 29,043 10,305 24,577
Selling, general and
administrative expenses.... 5,769 6,719 18,654 6,518 15,947
------- ------- -------- ------- -------
Operating income............ 3,707 5,508 10,389 3,787 8,630
Interest income (expense),
net........................ (764) (162) 869 326 189
------- ------- -------- ------- -------
Income before provision for
income taxes............... 2,943 5,346 11,258 4,113 8,819
Provision for income taxes.. 1,205 2,096 4,542 1,604 3,880
------- ------- -------- ------- -------
Net income.................. $ 1,738 $ 3,250 $ 6,716 $ 2,509 $ 4,939
======= ======= ======== ======= =======
Net income per share--basic. $0.57 $0.74 $0.33 $0.45
======= ======== ======= =======
Net income per share--
diluted.................... $0.54 $0.71 $0.32 $0.43
======= ======== ======= =======
Weighted average common
shares outstanding--basic.. 5,675 9,090 7,597 11,068
Weighted average common
shares outstanding--
diluted.................... 6,039 9,460 7,936 11,484
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, August 1, 1994..... 4,000,000 $ 2 $ -- $(4,526) $ (4,524)
Net income.................. -- -- -- 1,738 1,738
Accretion to redemption
value on preferred shares.. -- -- -- (92) (92)
---------- ------- ------ ------- --------
Balance, July 31, 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 29 56 -- 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 38,125 1,636 275 40,036
Net income.................. 6,716 6,716
Exercise of stock options
and related tax benefit.... 65,090 181 560 -- 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 90,472 2,196 6,991 99,659
Net income (unaudited)...... 4,939 4,939
Exercise of stock options
and related tax benefits
and other (unaudited)...... 46,749 260 480 -- 740
Issuance of common shares in
connection with
acquisitions (unaudited)... 219,522 4,332 -- -- 4,332
Issuance of common shares
from employee stock
purchase plan (unaudited).. 20,788 388 -- -- 388
---------- ------- ------ ------- --------
Balance, January 31, 1998
(unaudited)................ 11,300,745 $95,452 $2,676 $11,930 $110,058
========== ======= ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JULY 31, ENDED JANUARY 31,
-------------------------- -----------------------
1995 1996 1997 1997 1998
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income............... $ 1,738 $ 3,250 $ 6,716 $ 2,509 $ 4,939
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation.......... 83 166 377 147 265
Amortization.......... -- 42 1,270 300 1,419
Deferred income taxes. (263) 47 (219) -- --
Changes in operating
assets and
liabilities, net of
the effect of
acquisitions:
Accounts receivable.. (1,264) (759) (5,721) (1,570) (3,563)
Prepaid expenses and
other assets........ (426) 77 (2,332) (950) (947)
Accounts payable and
accrued liabilities. 903 16 1,653 559 355
Income taxes payable. 1,359 (1,052) 1,113 75 (853)
------- ------- -------- -------- --------
Net cash provided by
operating
activities......... 2,130 1,787 2,857 1,070 1,615
Cash flows from investing
activities:
Cash paid for
acquisitions, net of
cash acquired........... -- (8,785) (45,581) (18,924) (28,067)
Cash paid for contingent
acquisition obligations. -- -- -- -- (1,496)
Cash received under
contingent acquisition
obligations............. -- -- -- -- 112
Purchase of property..... (142) (612) (694) (373) (891)
Decrease in restricted
investment.............. 250 -- -- -- --
------- ------- -------- -------- --------
Net cash provided by
(used in) investing
activities......... 108 (9,397) (46,275) (19,297) (30,342)
Cash flows from financing
activities:
Proceeds from public
offerings of common
stock, net.............. -- 34,329 38,882 39,054 --
Proceeds from employee
stock purchase plan..... -- -- 312 -- 388
Proceeds from the
exercise of stock
options................. -- 29 181 -- 322
Proceeds (Repayment) of
line of credit.......... (1,534) (836) -- -- 25,500
Repayment of notes
payable................. (1,874) (4,305) -- -- --
Proceeds from issuance of
preferred stock, net.... 1,393 -- -- -- --
------- ------- -------- -------- --------
Net cash provided by
(used in) financing
activities......... (2,015) 29,217 39,375 39,054 26,210
------- ------- -------- -------- --------
Net increase (decrease) in
cash..................... 223 21,607 (4,043) 20,827 (2,517)
Cash and cash equivalents,
beginning of year........ 25 248 21,855 21,855 17,812
------- ------- -------- -------- --------
Cash and cash equivalents,
end of year.............. $ 248 $21,855 $ 17,812 $ 42,682 $ 15,295
======= ======= ======== ======== ========
Supplemental
information -- Cash paid
for:
Interest................. $ 725 $ 424 $ 83 $ 11 $ 47
======= ======= ======== ======== ========
Income taxes............. $ 108 $ 3,102 $ 3,648 $ 1,528 $ 4,894
======= ======= ======== ======== ========
Supplemental schedule of
noncash financing and
investing activities:
Conversion of preferred
stock to common stock... -- $ 1,580 -- -- --
Tax benefit of stock
options exercised....... -- $ 56 $ 560 -- $ 418
Detail of businesses
acquired in purchase
transactions:
Fair value of assets
acquired............... -- $13,880 $ 69,345 $ 8,049 $ 33,718
Common stock issued in
acquisitions........... -- (3,765) (12,972) (4,043) (4,333)
Cash paid for
acquisitions........... -- (8,785) (49,515) (18,924) (29,746)
------- ------- -------- -------- --------
Liabilities assumed
(relieved)............. -- $ 1,330 $ 6,858 $ 1,188 $ (361)
======= ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
1. GENERAL
Business -- Data Processing Resources Corporation (the "Company"), which was
incorporated in California in 1984, is a leading specialty staffing company
providing information technology services to a diverse group of corporate
clients.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Periods -- In the opinion of the Company's management, the
unaudited consolidated financial statements as of January 31, 1998 and for the
six month interim periods ended January 31, 1998 and 1997 have been prepared
and include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows of the Company.
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.
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 five to seven years. Leasehold
improvements are amortized over the lesser of five years or the life of the
lease.
Intangible Assets -- Intangible assets include goodwill which represents the
excess of cost over fair value of net assets acquired, and is amortized using
the straight-line method over 25 years. Long-lived assets and certain
identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is determined when the carrying amount of such
asset exceeds the associated undiscounted cash flows.
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, accounts receivable and accounts payable
approximate fair value due to the short maturity of these financial
instruments.
Income Taxes -- The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109. SFAS No. 109 is 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 law or
rates.
Net Income Per Share -- Net income per share has been computed by dividing
net income by the weighted average number of shares of common and common
equivalent shares outstanding during the period. Weighted average common and
common equivalent shares included common shares and stock options using the
treasury stock method. Net income per share for the year ended July 31, 1995
is not presented because it was not considered indicative of the ongoing
entity.
Reclassifications -- Certain items in the prior period financial statements
have been reclassified to conform to the current period presentation.
F-7
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the second quarter of 1998, the
Company adopted SFAS No. 128, Earnings per Share. Net income per share for
fiscal 1996 and 1997 and interim periods have been restated. The statement
establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per
share previously found in Accounting Principles Board ("APB") Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
About Capital Structure. The statement establishes standards for disclosing
information about an entity's capital structure. The disclosure requirements
of SFAS No. 129 are effective for periods ending after December 15, 1997.
Management does not believe that the adoption of SFAS No. 129 will have a
significant impact on its consolidated financial statements.
In June 1997, the 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.
3. ACQUISITIONS
Between July 1996 and July 1997, the Company completed five 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. An adjustment to the value of
common stock issued in each transaction was recorded to reflect the impact of
restrictions on disposal of the stock. The consolidated financial statements
of the Company include the results of operations for each acquired business
from the acquisition date.
In July 1996, the Company acquired the information technology staffing
business, including two branch facilities and substantially all of the related
assets, of the Applications Design and Development division of ADD Consulting,
Inc. ("AD&D"). The aggregate purchase price of the acquisition was $11.7
million, consisting of $8.8 million in cash, 152,121 shares of restricted
Company common stock valued at $2.6 million and a deferred payment of
$300,000.
F-8
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
3. ACQUISITIONS (CONTINUED)
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 which included a purchase price adjustment based on PSC's earnings
before interest and taxes through December 31, 1996.
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
$4.1 million.
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
$9.2 million. The definitive agreement also calls for an earnout contingent
upon Computec's earnings before interest and taxes through December 31, 1998.
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 $7.0 million in cash and
54,934 shares of restricted common stock, valued at $928,000, and a purchase
price adjustment of $1.1 million, which was paid in September 1997 and is
recorded in intangible assets and accounts payable and accrued liabilities as
of July 31, 1997.
The allocation of the purchase prices for all acquisitions and other
purchase accounting adjustments is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Total purchase price, net.................................. $12,850 $63,593
Net assets acquired........................................ (801) (9,376)
Adjustments to conform accounting policies................. 199 699
Acquisition costs.......................................... 120 1,987
------- -------
Excess of purchase price over net assets acquired.......... $12,368 $56,903
======= =======
</TABLE>
Unaudited pro forma combined results of operations for the periods ended
July 31, 1995, 1996 and 1997 (AD&D only) would have been as follows had each
of the acquisitions occurred as of the beginning of the respective periods (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Revenues............................................. $59,975 $114,953 $146,267
Pro forma net income................................. $ 2,065 $ 4,143 $ 7,827
Pro forma net income per share....................... $0.41 $0.57 $0.77
Weighted average common and common equivalent shares
outstanding......................................... 5,078 7,232 10,150
</TABLE>
Pro forma adjustments have been applied to reflect the purchase, which
includes the elimination of excess payroll costs above amounts stipulated in
employment agreements, reduction in interest income and additional interest
expense and the addition of amortization related to the intangible assets
acquired.
F-9
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
JULY 31,
------------- JANUARY 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable...................................... $ 949 $1,365 $2,293
Accrued salaries, bonuses and related benefits........ 2,379 5,655 6,439
Commissions payable................................... 362 877 777
Accrued purchase price adjustment..................... -- 1,106 --
------ ------ ------
$3,690 $9,003 $9,509
====== ====== ======
</TABLE>
5. DEBT
Effective October 1996, the Company obtained a two-year, $20 million credit
facility (the "Credit Agreement") with a bank. The credit facility consisted
of a revolving line of credit in the principal amount of $10 million, and bore
interest at the prime rate or LIBOR plus 1.0% and an acquisition facility in
the principal amount of $10 million which bore interest at the prime rate or
LIBOR plus 1.25%. Both facilities were collateralized by accounts receivable
and equipment. All outstanding borrowings under the Credit Agreement were
repaid with the proceeds from the second public offering (see Note 6). As of
July 31, 1997, the Company had no outstanding borrowings and was in compliance
with all covenants thereunder.
On September 25, 1997, the Company obtained a five-year, $60 million
Revolving/Term Loan Agreement (the "New Credit Agreement") with a bank
syndicate. The New Credit Agreement consists of a revolving line of credit in
the principal amount of $60 million, and bears interest at the prime rate to
prime rate plus 1.0% or LIBOR plus 0.75% to 2.25% depending on defined
financial covenants. At the end of three years, the outstanding balance on the
facility converts to a two-year fully amortized term loan. The facility is
collateralized by substantially all of the assets of the Company and its
subsidiaries, including accounts receivable and equipment. Additional pricing
options and alternatives are available depending on certain financial
conditions. The New Credit Agreement contains various covenants, including the
maintenance of defined financial ratios, such as net worth.
6. 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, authorize 2,001,480 shares of preferred stock (of
which 1,480 were designated Series A Convertible Preferred Stock) and 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.
F-10
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
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, compounded annually applied to such
an amount from the date of original issuance, less any dividends previously
paid. The stock was redeemable at an amount equal to the sum of $2,850 per
share, plus any declared and unpaid dividends, and was payable in twelve equal
quarterly installments. Holders of Series A preferred stock were entitled to
receive noncumulative cash dividends at an annual rate of $87 per share,
payable in preference and priority to any dividend on common stock when, and
as declared by, the Board of Directors.
The Company had 2,001,480 authorized shares of preferred stock, of which
1,480 shares had been designated Series A Convertible Preferred Stock as of
July 31, 1995. 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.
Dividends -- The Company's Credit Agreement and New Credit Agreement
prohibit the payment of dividends without the prior written consent of the
lender.
7. 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, 1997 of up to
1,500,000 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:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
NUMBER OF AVERAGE FAIR VALUE
SHARES EXERCISE PRICE OF OPTIONS GRANTED
-------------- -------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding August 1,
1994..................... -- --
Granted.................. 284 $ 1.32 $ --
-------------
Outstanding July 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.................. 168 23.72 $24.12
Exercised................ (47) 5.55
Canceled................. (5) 20.15
-------------
Outstanding January 31,
1998 (unaudited)......... 1,301 $15.69
=============
</TABLE>
F-11
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
7. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at July 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES: OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.31--$14.00 446,630 7.76 years $ 5.57 233,873 $ 3.89
16.88-- 18.75 456,000 9.56 17.87 35,750 16.88
19.88-- 27.25 282,477 9.38 21.81 26,342 21.61
--------- --------
$ 1.31--$27.25 1,185,107 8.84 $14.17 295,965 $ 7.05
========= ========
</TABLE>
Additional Stock Plan Information -- The Company continues to account for
its stock-based awards using the intrinsic value method in accordance with 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.
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, 6.1 years; stock
volatility, 36.2%; risk-free interest rates, 6.5%; 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 fair values of the 1996 and 1997 awards had been amortized to expense
over the vesting period of the awards, pro forma net income would have been
$3.1 million or $0.52 per share in 1996 and $5.9 million or $0.62 per share in
1997. However, the impact of the outstanding nonvested 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 a retirement savings plan (the
"Plan") which qualifies under Section 401(k) of the Internal Revenue Code.
Eligible employees may contribute up to 20% of their annual compensation, as
defined by the Plan. Company contributions are fully discretionary, and no
Company contributions have been made to the Plan during any year.
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 231,765
shares remain reserved as of July 31, 1997.
F-12
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
8. INCOME TAXES
The provision for income taxes includes the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $1,153 $1,563 $3,693
State.............................................. 315 475 1,068
------ ------ ------
1,468 2,038 4,761
Deferred:
Federal............................................ (227) 32 (196)
State.............................................. (36) 26 (23)
------ ------ ------
(263) 58 (219)
------ ------ ------
Provision for income taxes.......................... $1,205 $2,096 $4,542
====== ====== ======
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<CAPTION>
YEARS ENDED JULY 31,
-----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Income taxes at statutory federal rate.............. 35.0% 35.0% 35.0%
State taxes, net of federal benefit................. 6.3 6.2 6.0
Tax exempt interest income.......................... -- (2.3) (2.7)
Non-deductible goodwill............................. -- -- 2.5
Other............................................... 0.7 1.3 0.5
Benefit of graduated rates.......................... (1.1) (1.0) (1.0)
------ ------ ------
Total........................................... 40.9% 39.2% 40.3%
====== ====== ======
</TABLE>
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,
----------
1996 1997
---- -----
<S> <C> <C>
State income taxes.............................................. $158 $ 371
Goodwill........................................................ -- (149)
Bad debt reserve................................................ 42 82
Vacation accrual................................................ 16 172
Net operating losses............................................ -- 53
Change of accounting from cash to accrual method for acquired
subsidiaries................................................... -- (679)
Other........................................................... -- 14
---- -----
Total deferred tax asset (liability)............................ $216 $(136)
==== =====
</TABLE>
During fiscal 1997, the Company established a net deferred tax liability of
$571,000 in connection with basis differences resulting from several of its
acquisitions (Note 3).
During fiscal 1997, the Company settled an examination by the Internal
Revenue Service for the years ended July 31, 1992, 1993 and 1994 for an
immaterial amount.
The provision for income taxes for the six month periods ended January 31,
1997 and 1998 are based on the estimated effective tax rate for the Company
for the full fiscal year.
F-13
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
9. 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, 1997 (in thousands):
<TABLE>
<S> <C>
1998.............................................. $1,065
1999.............................................. 1,023
2000.............................................. 665
2001.............................................. 408
2002.............................................. 366
Thereafter........................................ 275
------
Total future minimum lease payments............... $3,802
======
</TABLE>
Rent expense amounted to $170,000, $227,000 and $625,000, for the years
ended July 31, 1995, 1996, and 1997, respectively, and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.
10. 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 owning
approximately 75.6% 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. Management fees earned by the
Company were $934,000, $1,084,000 and $1,035,000, for the years ended 1995,
1996 and 1997, respectively. ITR also contracts with the Company for technical
consultants to meet its staffing needs. For the year ended July 31, 1995, 1996
and 1997, the Company recorded revenues of $3,678,000, $4,974,000 and
$3,460,000 from billing of ITR technical consultants. Effective August 1, 1997
the management service agreement with ITR has been renegotiated to reflect a
reduction in the management fee.
11. 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 32.1% of total
revenues in fiscal 1997, 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 $3,733,000 as of July 31, 1997.
In each of fiscal 1995, 1996 and 1997, the Company had sales to a major
customer, not necessarily the same customer in each period, of approximately
$6,072,000, $5,794,000 and $5,800,000, 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-14
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
12. S3G ACQUISITION (UNAUDITED)
On January 27, 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 DPRC 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 unaudited pro forma consolidated statement of income for the six months
ended January 31, 1998 has been prepared by consolidating the statement of
income of DPRC for the six months ended January 31, 1998 with the statement of
income of S3G for the six months ended December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JANUARY 31, 1998
----------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Pro forma revenues................................ $96,876
Pro forma net income.............................. $ 5,536
Pro forma net income per share--basic............. $0.49
Pro forma net income per share--diluted........... $0.47
Pro forma weighted average common shares
outstanding--basic............................... 11,267
Pro forma weighted average common shares
outstanding--diluted............................. 11,685
</TABLE>
The above pro forma financial data is based on management's preliminary
assumptions regarding purchase accounting adjustments for the S3G Acquisition
based on currently available information. The final allocation of the purchase
price for the S3G Acquisition will be adjusted to the extent that actual
amounts differ from management's estimates.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Computec International Strategic Resources, Inc.:
We have audited the accompanying balance sheets of Computec International
Strategic Resources, Inc. (the Company) as of December 31, 1995 and 1996, and
the related statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements present fairly, in all material
respects, the financial position of Computec International Strategic
Resources, Inc. at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
March 14, 1997
(April 29, 1997 as to Note 8)
F-16
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ 621,667 $ 470,073
Accounts receivable.................................. 1,884,959 2,869,089
Prepaid expenses and other current assets............ 345,355 326,830
Deferred income taxes (Note 5)....................... 40,281
---------- ----------
Total current assets............................... 2,892,262 3,665,992
Property:
Buildings and improvements........................... 75,516 103,200
Furniture and fixtures............................... 73,126 59,758
Equipment............................................ 143,185 175,976
Leasehold improvements............................... 93,411 14,970
---------- ----------
385,238 353,904
Less accumulated depreciation and amortization....... (123,966) (113,449)
---------- ----------
Property, net...................................... 261,272 240,455
Other Assets........................................... 2,500 23,091
---------- ----------
$3,156,034 $3,929,538
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities (Note 3).... $ 490,890 $ 786,482
Note payable to shareholders......................... 48,453
Deferred income taxes (Note 5)....................... 80,218
---------- ----------
Total current liabilities.......................... 539,343 866,700
Deferred Income Taxes (Note 5)......................... 397,236 243,025
Commitments and Contingencies (Note 6).................
Shareholders' Equity (Note 8):
Common stock; 50,000 shares authorized; 50,000 shares
issued and outstanding.............................. 50,000 50,000
Retained earnings.................................... 2,169,455 2,769,813
---------- ----------
Total shareholders' equity......................... 2,219,455 2,819,813
---------- ----------
$3,156,034 $3,929,538
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues.................................... $7,693,801 $14,240,511 $19,304,747
Cost of professional services............... 4,972,999 8,750,671 11,809,889
---------- ----------- -----------
Gross margin................................ 2,720,802 5,489,840 7,494,858
Selling, general and administrative expenses
(Note 6)................................... 2,119,580 3,157,896 3,734,601
---------- ----------- -----------
Income before provision for income taxes.... 601,222 2,331,944 3,760,257
Provision for income taxes (Note 5)......... 275,895 992,041 102,853
---------- ----------- -----------
Net income.................................. $ 325,327 $ 1,339,903 $ 3,657,404
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1994............... 50,000 $50,000 $ 504,225 $ 554,225
Net income............................. 325,327 325,327
------ ------- ----------- -----------
Balance, December 31, 1994............. 50,000 50,000 829,552 879,552
Net income............................. 1,339,903 1,339,903
------ ------- ----------- -----------
Balance, December 31, 1995............. 50,000 50,000 2,169,455 2,219,455
Net income............................. 3,657,404 3,657,404
Distribution to shareholders........... (3,057,046) (3,057,046)
------ ------- ----------- -----------
Balance, December 31, 1996............. 50,000 $50,000 $ 2,769,813 $ 2,819,813
====== ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
--------- ---------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................ $ 325,327 $1,339,903 $ 3,657,404
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 29,698 39,889 50,374
Deferred income taxes................... 258,405 (184,552) --
Changes in operating assets and
liabilities:
Accounts receivable................... (357,770) (617,396) (984,130)
Prepaid expenses and other assets..... (180,135) (159,806) (2,066)
Accounts payable and accrued
liabilities.......................... 11,732 335,822 295,592
--------- ---------- -----------
Net cash provided by operating
activities......................... 87,257 753,860 2,983,462
Cash Flows From Investing Activities--
Purchase of property.................... (69,406) (208,430) (245,070)
Cash Flows From Financing Activities:
Note payable to shareholders.............. -- 48,453 (48,453)
Distribution to shareholders.............. -- -- (2,841,533)
--------- ---------- -----------
Net cash (used in) provided by
financing activities............... (69,406) 48,453 (2,889,986)
Net Increase (Decrease) In Cash........... 17,851 593,883 (151,594)
Cash, beginning of year................... 9,933 27,784 621,667
--------- ---------- -----------
Cash, end of year......................... $ 27,784 $ 621,667 $ 470,073
========= ========== ===========
Supplemental Information--
Cash paid for income taxes.............. $ 4,390 $1,093,695 $ 215,602
========= ========== ===========
</TABLE>
Noncash Information--
During July 1996, the Company distributed $3,057,046 of cash and certain
assets to the shareholders. The assets were distributed at their net book
value of $215,513 and no gain/loss was recognized upon distribution.
See accompanying notes to financial statements.
F-20
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. GENERAL
Business--Computec (the Company), which was incorporated in the State of
California on January 1, 1988, is a leading specialty staffing company
providing information technology personnel services principally to major
corporations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property--The cost of buildings and improvements, furniture, fixtures and
equipment is depreciated using the straight-line method based on the estimated
useful lives of the related assets, 25 years and generally three to five
years. Leasehold improvements are amortized over the lesser of five years or
the life of the lease.
Revenue Recognition--The Company recognizes revenue as services are
performed.
Income Taxes--The Company provides for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. SFAS No. 109 is 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.
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.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Accounts payable........................................... $185,241 $134,483
Accrued salaries, bonuses and related benefits............. 83,901 307,798
Other accrued expenses..................................... 221,748 344,201
-------- --------
$490,890 $786,482
======== ========
</TABLE>
F-21
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
4. EMPLOYEE BENEFIT PLANS
The Company has a retirement savings plan (the Plan) which qualifies under
Section 401(k) of the Internal Revenue Code (IRC). Eligible employees may
contribute up to 20%, but not to exceed the amount allowed by the IRC, of
their annual compensation, as defined by the Plan. Company contributions are
fully discretionary, and no Company contributions have been made to the Plan.
5. INCOME TAXES
Prior to 1996, the Company was taxed as a C corporation and was subject to
normal statutory rates. Effective January 1, 1996, the Company elected to be
taxed as an S corporation under the rules of the IRC, whereby the income and
expense items are normally included in the personal tax returns of the
stockholders.
Effective January 1, 1995, the Company changed its method of accounting for
tax purposes from the cash method to the accrual method. As a result of the
change, the Company is required to amortize the net adjustment related to this
change in accounting method into taxable income over six years. This net
adjustment is a built-in gain item and is subject to a corporate level federal
tax of 35%. Accordingly, the Company is subject to the built-in gains tax in
1996. In addition, the Company will continue to be subject to built-in gains
over the next three years in connection with the amortization of the cash to
accrual adjustment as long as it remains an S Corporation.
The provision for income taxes in 1996 in the accompanying statements of
income results from the built-in gains tax and California income taxes at a
statutory rate of 1.5%.
The provision for income taxes includes the following at fiscal year ended
December 31:
<TABLE>
<CAPTION>
1994 1995 1996
-------- ---------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 9,770 $ 940,026 $ 77,608
State....................................... 7,720 236,567 58,957
-------- ---------- --------
17,490 1,176,593 136,565
Deferred:
Federal..................................... 199,417 (154,696) 49,693
State....................................... 58,988 (29,856) (83,405)
-------- ---------- --------
258,405 (184,552) (33,712)
-------- ---------- --------
Provision for income taxes.................... $275,895 $ 992,041 $102,853
======== ========== ========
</TABLE>
F-22
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
5. INCOME TAXES (CONTINUED)
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows at December 31:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- -----
<S> <C> <C> <C>
Income taxes at statutory federal rate.................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit....................... 7.3 5.6 0.4
Meals and entertainment................................... 4.5 1.2
S corporation income not subject to federal tax........... (33.1)
Other..................................................... 1.1 1.7 0.2
Benefit of graduated rates................................ (2.0) (1.0) 0.3
---- ---- -----
45.9% 42.5% 2.8%
==== ==== =====
</TABLE>
The Company provides deferred income taxes for temporary differences between
assets and liabilities recognized for financial reporting and income tax
purposes. As discussed above, the Company changed its tax status to an S
corporation for federal tax purposes. As such, all federal deferred taxes are
the responsibility of the shareholders.
The income effects of these temporary differences representing significant
portions of deferred tax assets and deferred tax liabilities are as follows at
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
State income taxes.................................... $ 113,148 $ --
Accrual to cash adjustment............................ (94,791) (80,933)
Vacation accrual...................................... 21,924 715
--------- ---------
Net current deferred tax asset (liability).......... $ 40,281 $ (80,218)
========= =========
Accrual to cash adjustments........................... $(379,166) $(242,799)
Depreciation.......................................... (18,070) (226)
--------- ---------
Net long-term deferred tax liability................ $(397,236) $(243,025)
========= =========
</TABLE>
F-23
<PAGE>
COMPUTEC INTERNATIONAL STRATEGIC RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
6. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases its office facilities under lease
agreements classified as operating leases. Future minimum lease payments under
such noncancelable operating leases are summarized as follows at December 31,
1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31:
------------
<S> <C>
1997........................................................... $138,548
1998........................................................... 138,548
1999........................................................... 138,548
2000........................................................... 145,143
2001........................................................... 148,440
Thereafter..................................................... 185,550
--------
Total future minimum lease payments.............................. $894,777
========
</TABLE>
Rent expense amounted to $57,000, $60,600 and $114,900 for the years ended
December 31, 1994, 1995 and 1996, respectively, and has been included in
selling, general and administrative expenses in the accompanying statements of
income.
Revolving Line of Credit--The Company maintains a line of credit arrangement
with a domestic lending institution. Under this agreement, the Company has a
line of $250,000 without the requirement of a compensating balance. The
interest rate varies with the prime rate. The line is personally guaranteed by
the shareholders. As of December 31, 1996, the Company did not have any
outstanding balance due on the credit line.
7. CONCENTRATIONS OF CREDIT RISK
The Company's revenues are generated from credit sales to customers
primarily located in California. 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 68% of total
revenues in fiscal 1996, and as a result, the Company has a large proportion
of its receivables outstanding with these customers. Accounts receivable to
the Company's ten largest customers was $1,966,000 as of December 31, 1996.
In each of fiscal 1994, 1995 and 1996, the Company had revenues to a major
customer, not necessarily the same customer in each period, of approximately
$922,000, $1,523,000 and $3,593,000, 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.
8. SUBSEQUENT EVENT
On February 25, 1997, the Board of Directors approved a recapitalization of
the Company, whereby the Company will have Class A and Class B common shares.
The authorized capital stock will consist of 2,000,000 shares of Class A
stock, of which 200,000 shares will be issued and outstanding, and 3,000,000
shares of Class B stock, of which 300,000 will be issued and outstanding.
On April 29, 1997, the Company entered into an agreement for the merger of
the Company with DPRC Acquisition Corp. The initial consideration for the
stock is approximately $32,606,000, comprised of $19,563,600 in cash and
$13,042,400 in stock. Additional consideration is contingent and will be
determined based on predetermined formulas on various dates within the next
two years.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Leardata Info-Services, Inc.
Dallas, Texas
We have audited the accompanying balance sheets of Leardata Info-Services,
Inc. (the Company) as of December 31, 1994 and 1995, and the related
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 financial statements present fairly, in all material
respects, the financial position of Leardata Info-Services, Inc. at December
31, 1994 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
March 11, 1996
F-25
<PAGE>
LEARDATA INFO-SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $1,193,582 $1,855,221
Accounts receivable ................................. 1,825,330 2,203,230
Prepaid expenses and other current assets............ 41,925 24,504
Income tax receivable................................ -- 90,815
---------- ----------
Total current assets............................... 3,060,837 4,173,770
Property:
Furniture and fixtures............................... 248,816 249,392
Equipment............................................ 364,886 274,509
---------- ----------
613,702 523,901
Less accumulated depreciation........................ (404,970) (436,889)
---------- ----------
Property, net...................................... 208,732 87,012
---------- ----------
$3,269,569 $4,260,782
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 194,465 $ 145,987
Income taxes payable................................. -- 29,600
---------- ----------
Total current liabilities.......................... 194,465 175,587
Deferred income taxes (Note 2)......................... 36,000 20,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 5,000,000 shares
authorized, 3,864,480 shares issued and outstanding
(liquidation value is equal to par value, plus
accumulated undistributed dividends, none of which
have been declared)................................. 386,448 386,448
Common stock, $.01 par value; 1,000,000 shares
authorized, 300,574 shares issued and outstanding in
1995 (none in 1994)................................. -- 3,006
Additional paid-in capital........................... 146,392 173,444
Due from stockholders (Note 6)....................... -- (115,058)
Retained earnings.................................... 2,506,264 3,617,355
---------- ----------
Total stockholders' equity......................... 3,039,104 4,065,195
---------- ----------
$3,269,569 $4,260,782
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
LEARDATA INFO-SERVICES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Revenues.................................... $7,778,566 $11,198,789 $13,953,621
Cost of professional services............... 5,100,973 7,352,010 9,354,747
---------- ----------- -----------
Gross margin............................... 2,677,593 3,846,779 4,598,874
Selling, general and administrative
expenses................................... 1,990,842 2,440,049 2,879,801
---------- ----------- -----------
Operating income............................ 686,751 1,406,730 1,719,073
Interest and other income................... 55,400 23,815 62,018
---------- ----------- -----------
Income before provision for income taxes.... 742,151 1,430,545 1,781,091
Provision for income taxes (Note 2)......... 278,000 520,000 670,000
---------- ----------- -----------
Net income.................................. $ 464,151 $ 910,545 $ 1,111,091
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
LEARDATA INFO-SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ -------------- PAID-IN RETAINED DUE FROM
SHARE AMOUNT SHARE AMOUNT CAPITAL EARNINGS STOCKHOLDER TOTAL
--------- -------- ------- ------ -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993................... 3,864,480 $386,448 -- $ -- $146,392 $1,131,568 $ -- $1,664,408
Net income............. -- -- -- -- -- 464,151 -- 464,151
--------- -------- ------- ------ -------- ---------- --------- ----------
Balance, December 31,
1993................... 3,864,480 386,448 -- -- 146,392 1,595,719 -- 2,128,559
Net income............. -- -- -- -- 910,545 -- 910,545
--------- -------- ------- ------ -------- ---------- --------- ----------
Balance, December 31,
1994................... 3,864,480 386,448 -- -- 146,392 2,506,264 -- 3,039,104
Loan to stockholder.... -- -- -- -- -- -- (85,000) (85,000)
Net income............. -- -- -- -- -- 1,111,091 -- 1,111,091
Exercise of stock
options............... -- -- 300,574 3,006 27,052 -- (30,058) --
--------- -------- ------- ------ -------- ---------- --------- ----------
Balance, December 31,
1995................... 3,864,480 $386,448 300,574 $3,006 $173,444 $3,617,355 $(115,058) $4,065,195
========= ======== ======= ====== ======== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements
F-28
<PAGE>
LEARDATA INFO-SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 464,151 $ 910,545 $1,111,091
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities--
Depreciation expense..................... 51,841 82,015 210,263
Deferred income taxes.................... -- 36,000 (16,000)
Changes in operating assets and
liabilities--
Accounts receivable..................... (807,841) (438,190) (377,900)
Prepaid expenses and other current
assets................................. (7,210) (8,703) (73,394)
Accounts payable and accrued
liabilities............................ (53,169) (51,488) (48,477)
Income taxes payable.................... -- -- 29,600
---------- ---------- ----------
Net cash provided by (used in)
operating activities.................. (352,228) 530,179 835,183
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment................................. (49,758) (122,418) (88,544)
---------- ---------- ----------
Cash flows from financing activities:
Due from stockholder....................... -- -- (85,000)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................ (401,986) 407,761 661,639
Cash and cash equivalents, beginning of
year....................................... 1,187,807 785,821 1,193,582
---------- ---------- ----------
Cash and cash equivalents, end of year...... $ 785,821 $1,193,582 $1,855,221
========== ========== ==========
Supplemental information--cash paid for
income taxes............................... $ 278,000 $ 435,500 $ 691,000
========== ========== ==========
</TABLE>
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
During the year ended December 31, 1995, stockholders of the Company
exercised stock options and collectively received 300,574 shares of common
stock in exchange for notes from such stockholders.
See accompanying notes to financial statements.
F-29
<PAGE>
LEARDATA INFO-SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Organization--Leardata Info-Services, Inc. provides contract
programming and data processing consulting services to a diverse group of
business enterprises.
Cash and Cash Equivalents--The Company considers all highly-liquid
investments with an original maturity of three months or less to be cash
equivalents.
Depreciation--Depreciation of furniture, fixtures and equipment is computed
using the straight-line method over an estimated useful life of five years.
Revenue Recognition--The Company provides programming and consulting
services based upon contracts of variable duration which are cancelable based
on 15-day written notice. Revenues are recognized as billable time is incurred
and are billed within the same period. Contract labor costs are also
recognized as time is incurred and are accrued within the same period.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions regarding the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements--In March 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 121, Accounting for Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of, which becomes
effective for fiscal years beginning after December 14, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company will adopt this statement in fiscal 1997 as required,
and its adoption is not expected to have a significant effect on earnings,
financial condition or cash flows.
In October 1995, Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which requires adoption of the
disclosure provisions no later than years beginning after December 15, 1995
and adoption of the recognition and measurement provisions for nonemployee
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period which is usually the vesting period. Pursuant to the new
accounting standard, companies are encouraged, but are not required, to adopt
the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, but would be required to disclose in a note to the financial
statements pro forma net income and, if presented, earnings per share as if
the company had applied the new method of accounting. The Company has
determined that it will not change to the fair value method and will continue
to use Accounting Principle Board Opinion No. 25 for measurement and
recognition for employee stock-based transactions.
Reclassifications--Certain items in a prior period financial statements may
have been reclassified to conform to the current period presentation.
F-30
<PAGE>
LEARDATA INFO-SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
2. INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $250,000 $427,000 $605,000
State.......................................... 28,000 52,600 81,000
-------- -------- --------
278,000 479,600 686,000
Deferred:
Federal........................................ -- 36,000 (14,100)
State.......................................... -- 4,400 (1,900)
-------- -------- --------
-- 40,400 (16,000)
-------- -------- --------
Provision for income taxes....................... $278,000 $520,000 $670,000
======== ======== ========
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows at December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes at statutory federal rate..................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit........................ 3.8% 4.0 4.4%
Meals and entertainment.................................... 0.4 0.7 0.4
Other--Non Taxable Dividends............................... (1.4) (1.0) (2.5)
Other...................................................... .7 (1.3) 1.3
---- ---- ----
37.5% 36.4% 37.6%
==== ==== ====
</TABLE>
Deferred income taxes are provided for temporary differences between
financial statement carrying amounts and the taxable basis of assets and
liabilities using tax rates currently in effect. Deferred income taxes relate
primarily to temporary differences between the financial statement carrying
amount and the taxable basis of furniture, fixtures and equipment. The income
effects of these temporary differences representing portions of deferred tax
assets and deferred tax liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Total deferred tax asset--employee benefits............. $ 14,000 $ 11,000
Total deferred tax liability--furniture, fixtures and
equipment.............................................. (50,000) (31,000)
-------- --------
Net..................................................... $(36,000) $(20,000)
======== ========
</TABLE>
3. STOCKHOLDERS' EQUITY
The preferred stock ranks senior to the common stock with respect to the
payment of dividends, voting rights and distributions in liquidation. The
preferred stock's liquidation value is equal to par value plus any
undistributed dividends, none of which have been declared at December 31,
1995. Additionally, preferred stock is convertible to common stock on a one-
to-one basis. Preferred stock dividends are payable when declared by the Board
of Directors.
F-31
<PAGE>
LEARDATA INFO-SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
3. STOCKHOLDERS' EQUITY (CONTINUED)
The Company has adopted an incentive stock option plan, pursuant to which
500,000 shares of common stock have been reserved for issuance upon the
exercise of the options. Options totaling 343,513 shares have been granted to
key employees of the Company. The outstanding common stock options are
exercisable through January 2, 1996, at an exercise price of $0.38 per common
share.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at January 1, 1993......................... 343,513 $0.10-$0.38
-------
Outstanding at December 31, 1993....................... 343,513 $0.10-$0.38
-------
Outstanding at December 31, 1994....................... 343,513 $0.10-$0.38
Exercised.............................................. 300,574 $0.10
-------
Outstanding at December 31, 1995....................... 42,939 $0.38
=======
</TABLE>
4. EMPLOYEE BENEFIT PLANS
The Company established a 401(k) Savings Plan and Trust which is a defined
contribution plan covering eligible employees upon hiring. Participants may
make tax-deferred 401(k) contributions. The Company may make a discretionary
matching contribution of up to 25% of the participants' deferred contribution,
but in no case may the Company's contribution exceed 6% of the participants'
compensation. All participants' deferred contributions are 100% vested. All
other contributions vest according to years of employment. The vesting
percentages are as follows:
<TABLE>
<S> <C>
Less than 2 years.................................................... 0%
2 years but less than 3 years........................................ 20%
3 years but less than 4 years........................................ 40%
4 years but less than 5 years........................................ 60%
5 years but less than 6 years........................................ 80%
6 years or more...................................................... 100%
</TABLE>
Participants' deferred contributions are limited to 15% of the participants'
compensation, not to exceed federal limits of $9,240 in 1995. The Company's
matching contribution was $18,661, $30,788 and $23,550 representing 25% of the
participants' deferred contribution for the years ended December 31, 1993,
1994 and 1995, respectively.
F-32
<PAGE>
LEARDATA INFO-SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease ending October 31,
1999. The total minimum future rental payments under the lease are as follows:
<TABLE>
<S> <C>
1996............................................................. $122,046
1997............................................................. 122,046
1998............................................................. 122,046
1999............................................................. 101,705
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was
$145,672, $138,560 and $122,898, respectively.
6. RELATED PARTY TRANSACTION
In May 1995, the Company entered into a loan agreement with the Chief
Executive Officer of the Company for $85,000. The loan bears interest at the
prime rate (8.5% at December 31, 1995) and is payable upon any of the
following events: (i) sale of the Company, (ii) initial public offering, (iii)
recapitalization, or (iv) repurchase of shares.
In the event that none of the above occurs within a three-year period, the
loan and accrued interest (compounded annually) will be due and payable on May
10, 1998. Interest income on the loan for the year ended December 31, 1995 was
$4,672.
The remaining $30,058 included in due from stockholders relates to two
salary advances used for exercising the incentive stock options described in
Note 3. These advances bear no interest and are repayable monthly by salary
reductions beginning in January 1996 and terminating on November 15, 1997.
7. CONCENTRATIONS OF CREDIT RISK
The Company's revenues are generated from credit sales to customers in
approximately 30 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's ten largest customers represented
53% of total revenues in fiscal 1995, and as a result, the Company has a large
proportion of its receivables outstanding with these customers. Accounts
receivable to the Company's ten largest customers was $1,390,443 as of
December 31, 1995.
F-33
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Selling Securityholder.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the Notes and the Conversion Shares
offered hereby, nor does it constitute an offer to sell or a solicitation of
an offer to buy any of the Notes or the Conversion Shares offered hereby to
any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that
information contained herein is correct as of any date subsequent to the date
hereof.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... (ii)
Incorporation of Certain Documents by Reference........................... (iii)
Summary................................................................... 1
The Company............................................................... 1
The Offering.............................................................. 2
Risk Factors.............................................................. 3
Use of Proceeds........................................................... 10
Ratio of Earnings to Fixed Charges ....................................... 10
Selected Consolidated Financial Data...................................... 11
Unaudited Pro Forma Consolidated Statement of Income Data................. 13
Selling Securityholders................................................... 17
Plan of Distribution ..................................................... 21
Description of Notes...................................................... 23
Description of Credit Facility............................................ 37
Description of Capital Stock.............................................. 38
Certain Federal Income Tax Considerations................................. 41
Legal Matters............................................................. 43
Experts................................................................... 44
Index to Financial Statements............................................. F-1
</TABLE>
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$115,000,000
[LOGO OF DPRC APPEARS HERE]
DATA PROCESSING
RESOURCES CORPORATION
5 1/4% CONVERTIBLE
SUBORDINATED NOTES
DUE 2005
AND SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION
OF THE NOTES
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PROSPECTUS
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June 11, 1998
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