<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 1, 1999
-------------------------------
Data Processing Resources Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 0-27612 95-3931443
- --------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
4400 MacArthur Boulevard, Suite 600, Newport Beach, California 92660
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 553-1102
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. OTHER EVENTS
On December 21, 1998, Data Processing Resources Corporation ("DPRC")
acquired Systems & Programming Consultants, Inc., a North Carolina corporation
("SPC"), pursuant to the terms of the Agreement and Plan of Merger, dated June
16, 1998, as amended on October 13, 1998 and on October 20, 1998, by and among
DPRC, DPRC Acquisition Corp., a wholly owned subsidiary of DPRC ("Merger Sub"),
SPC and certain shareholders of SPC (the "Merger Agreement"). In the merger,
Merger Sub was merged with and into SPC, with SPC continuing as the surviving
corporation and a wholly owned subsidiary of DPRC. The merger has been accounted
for as a pooling of interests for financial reporting purposes in accordance
with generally accepted accounting principles. Consolidated financial statements
of DPRC and subsidiaries prepared subsequent to the merger give retroactive
effect to the merger and present the combined operations of DPRC and SPC for all
periods presented. Such consolidated financial statements are attached hereto as
Exhibit 99.1 and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) EXHIBITS
23.1 Consent of Deloitte & Touche LLP, Costa Mesa, California.
99.1 Audited consolidated balance sheets of DPRC and
subsidiaries as of July 31, 1998 and 1997 and the related
consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period
ended July 31, 1998. Unaudited interim consolidated
balance sheet of DPRC and subsidiaries as of October 31,
1998, and the related unaudited interim consolidated
statements of income, shareholders' equity, and cash
flows for the three month periods ended October 31, 1998
and 1997.
2.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATA PROCESSING RESOURCES CORPORATION
(Registrant)
Date: March 1, 1999 By: /s/ James A. Adams
___________________________________
James A. Adams
Vice President, Finance and
Chief Financial Officer
3.
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
Number Description of Exhibit Page
Number
23.1 Consent of Deloitte & Touche LLP, Costa Mesa, California.
99.1 Audited consolidated balance sheets of DPRC and subsidiaries
as of July 31, 1998 and 1997 and the related consolidated
statements of income, shareholders' equity and cash flows
for each of the three years in the period ended July 31,
1998. Unaudited interim consolidated balance sheet of
DPRC and subsidiaries as of October 31, 1998, and the
related unaudited interim consolidated statements of income,
shareholders' equity, and cash flows for the three month
periods ended October 31, 1998 and 1997.
</TABLE>
4.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-53371 of Data Processing Resources Corporation on Form S-3 and Registration
Statement Nos. 333-07145, 333-20627, 333-20629, 333-30663, and 333-45257, all on
Form S-8, of our report dated March 1, 1999 appearing in this Current Report on
Form 8-K of Data Processing Resources Corporation dated March 1, 1999.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Costa Mesa, California
March 1, 1999
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Data Processing Resources Corporation:
We have audited the consolidated balance sheets of Data Processing Resources
Corporation and subsidiaries (the Company) as of July 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended July 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Data Processing
Resources Corporation and subsidiaries at July 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, on December 21,
1998, the Company consummated a merger with Systems & Programming Consultants,
Inc., which was approved by the Company's shareholders. The consolidated
financial statements give retroactive effect, for all periods presented, to the
merger of Data Processing Resources Corporation and Systems & Programming
Consultants, Inc., which has been accounted for as a pooling of interests.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
March 1, 1999
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND 1997 AND
OCTOBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
July 31, October 31,
------------------------- 1998
1998 1997 (unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,881 $ 17,816 $ 40,732
Investments 59,969 32,982
Accounts receivable, net of allowance for doubtful
accounts of $1,369 (1998), $343 (1997), and $2,145
(October 31, 1998) 48,103 26,920 58,778
Prepaid expenses and other current assets 4,601 1,076 4,360
Deferred tax asset 1,538 1,910
-------- -------- --------
Total current assets 155,092 45,812 138,762
PROPERTY, net 4,445 2,049 5,616
OTHER ASSETS 921 329 1,202
INTANGIBLE ASSETS, net of accumulated amortization
of $4,915 (1998), $1,298 (1997), and $6,105
(October 31, 1998) 114,822 67,973 128,304
-------- -------- --------
$275,280 $116,163 $273,884
======== ======== ========
</TABLE>
See accompanying notes to
consolidated financial statements.
2
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND 1997 AND OCTOBER 31, 1998 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
As of July 31, October 31,
------------------------- 1998
1998 1997 (unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 31,694 $ 11,043 $ 17,813
Income taxes payable 1,625 1,534 4,772
Line of credit 2,522 1,766 570
Long-term debt - current portion 259
Deferred income taxes 55
-------- -------- --------
Total current liabilities 35,841 14,657 23,155
LONG-TERM DEFERRED INCOME TAXES 784 81 784
LONG-TERM DEBT 111,288 111,466
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 60,000,000 shares authorized;
13,677,028 and 13,893,354 (July and October 1998) and
12,676,570 (1997) shares issued and outstanding 110,421 94,305 116,068
Deferred compensation associated with performance-
vesting options (1,553) (621)
Retained earnings 18,499 7,181 23,032
Less treasury stock at cost 0 (July and October 1998) and
22,167 shares in treasury (1997) (61)
-------- -------- --------
Total shareholders' equity 127,367 101,425 138,479
-------- -------- --------
$275,280 $116,163 $273,884
======== ======== ========
</TABLE>
See accompaning notes to
consolidated financial statements.
3
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
October 31,
-------------------------
1998 1997 1996 1998 1997
-------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $262,948 $147,833 $81,100 $91,041 $56,294
COST OF PROFESSIONAL SERVICES 187,767 109,185 60,343 63,251 40,382
------- -------- ------- ------- -------
GROSS MARGIN 75,181 38,648 20,757 27,790 15,912
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 52,155 27,764 14,800 18,067 11,068
COMPENSATION EXPENSE
ASSOCIATED WITH
PERFORMANCE VESTING OPTIONS 2,175 932
-------- -------- ------- ------- -------
OPERATING INCOME 20,851 10,884 5,957 8,791 4,844
INTEREST (EXPENSE) INCOME, net (517) 779 (283) (540) 91
-------- -------- ------- ------- -------
INCOME BEFORE INCOME TAX
PROVISION 20,334 11,663 5,674 8,251 4,935
INCOME TAX PROVISION 9,016 4,735 2,272 3,718 1,999
-------- -------- ------- ------- -------
NET INCOME 11,318 6,928 3,402 4,533 2,936
LESS PREFERRED STOCK DIVIDEND (53) (38)
-------- -------- ------- ------- -------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 11,318 $ 6,875 $ 3,364 $ 4,533 $ 2,936
======== ======== ======= ======= =======
NET INCOME PER SHARE - BASIC $ 0.84 $ 0.61 $ 0.45 $ 0.33 $ 0.22
======== ======== ======= ======= =======
NET INCOME PER SHARE - DILUTED $ 0.81 $ 0.59 $ 0.41 $ 0.32 $ 0.21
======== ======== ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC 13,464 11,312 7,536 13,882 13,255
======== ======== ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - DILUTED 13,918 11,682 8,261 14,264 13,679
======== ======== ======= ======= =======
</TABLE>
See accompanying notes to
consolidated financial statements.
4
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Redeemable
preferred Common stock Treasury stock
----------------- ----------------
stock Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
BALANCE, August 1, 1995 $ - 5,558,968 $ 957 - $ -
Net income
Exercise of stock options and related tax benefit 22,200 85
Accretion to redemption value of preferred shares
Preferred stock dividend
Conversion of preferred shares into common shares concurrent
with initial public offering 592,000 1,580
Issuance of common shares 97,684 265
Repurchase of common shares from profit sharing plan (22,167) (61)
Issuance of redeemable preferred stock 680
Issuance of common shares in initial public offering, net 2,726,000 34,329
Issuance of common shares in connection with acquisition 152,121 3,765
----- ---------- -------- ------- ----
BALANCE, July 31, 1996 680 9,148,973 40,981 (22,167) (61)
Net income
Exercise of stock options and related tax benefit 65,090 741
Preferred stock dividend
Issuance of common shares 6,232 417
Issuance of common shares in second public offering, net 2,395,000 38,882
Issuance of common shares in connection with acquisitions 1,043,040 12,972
Issuance of common shares from employee stock purchase plan 18,235 312
Redemption of redeemable preferred stock (680)
----- ---------- -------- ------- ----
BALANCE, July 31, 1997 12,676,570 94,305 (22,167) (61)
Net income
Exercise of stock options and related tax benefit 524,555 4,089
Issuance of common shares 112,658 402
Issuance of common shares in connection with acquisitions 339,907 7,027
Issuance of common shares from employee stock purchase plan 45,505 931
Retirement of treasury stock (22,167) (61) 22,167 61
Deferred compensation associated with performance-vesting options 3,728
----- ---------- -------- ------- ----
BALANCE, July 31, 1998 13,677,028 110,421
Net income (unaudited)
Exercise of stock options and related tax benefit (unaudited) 96,562 2,424
Issuance of common shares in connection with acquisitions (unaudited) 105,958 2,837
Issuance of common shares from employee stock purchase plan (unaudited) 13,806 386
Deferred compensation associated with performance-vesting options (unaudited)
----- ---------- -------- ------- ----
BALANCE, October 31, 1998 (unaudited) $ - 13,893,354 $116,068 $ -
===== ========== ======== ======= ====
<CAPTION>
Retained
Deferred earnings
compensation (deficit) Total
<S> <C> <C> <C>
BALANCE, August 1, 1995 $ - $(2,963) $ (2,006)
Net income 3,402 3,402
Exercise of stock options and related tax benefit 85
Accretion to redemption value of preferred shares (95) (95)
Preferred stock dividend (38) (38)
Conversion of preferred shares into common shares concurrent
with initial public offering 1,580
Issuance of common shares 265
Repurchase of common shares from profit sharing plan (61)
Issuance of redeemable preferred stock 680
Issuance of common shares in initial public offering, net 34,329
Issuance of common shares in connection with acquisition 3,765
------- ------- --------
BALANCE, July 31, 1996 306 41,906
Net income 6,928 6,928
Exercise of stock options and related tax benefit 741
Preferred stock dividend (53) (53)
Issuance of common shares 417
Issuance of common shares in second public offering, net 38,882
Issuance of common shares in connection with acquisitions 12,972
Issuance of common shares from employee stock purchase plan 312
Redemption of redeemable preferred stock (680)
------- ------- --------
BALANCE, July 31, 1997 7,181 101,425
Net income 11,318 11,318
Exercise of stock options and related tax benefit 4,089
Issuance of common shares 402
Issuance of common shares in connection with acquisitions 7,027
Issuance of common shares from employee stock purchase plan 931
Retirement of treasury stock
Deferred compensation associated with performance-vesting options (1,553) 2,175
------- ------- --------
BALANCE, July 31, 1998 (1,553) 18,499 127,367
Net income (unaudited) 4,533 4,533
Exercise of stock options and related tax benefit (unaudited) 2,424
Issuance of common shares in connection with acquisitions (unaudited) 2,837
Issuance of common shares from employee stock purchase plan (unaudited) 386
Deferred compensation associated with performance-vesting options (unaudited) 932 932
------- ------- --------
BALANCE, October 31, 1998 (unaudited) $ (621) $23,032 $138,479
======= ======= ========
</TABLE>
5
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
October 31,
------------------------
1998 1997 1996 1998 1997
------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 11,318 $ 6,928 $ 3,402 $ 4,533 $ 2,936
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation 824 466 239 318 143
Amortization of intangible assets 3,617 1,270 42 1,190 749
Amortization of debt discount and
issue costs 238 178
Compensation expense associated with
performance-vesting options 2,175 932
Deferred income taxes (1,065) (219) 47 (373)
Changes in operating assets and
liabilities, net of the effect of acquisitions:
Accounts receivable (17,538) (7,414) (1,407) (9,918) (5,622)
Prepaid expenses and other current
assets (4,055) (2,332) 103 (144) (325)
Other long-term assets (66) 108 (25) 9
Accounts payable and accrued liabilities 7,838 2,206 491 (1,964) 384
Income taxes payable 1,155 1,166 (1,185) 3,164 536
-------- -------- ------- -------- -------
Net cash provided by (used in) operating
activities 4,507 2,005 1,840 (2,109) (1,190)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Cash paid for acquisitions, net of cash
acquired (31,018) (44,269) (8,785) (12,860)
Cash paid for earnout obligations (3,453) (1,312) (9,190) (1,496)
(Purchase) liquidation of investments
available-for-sale (59,969) 26,987
Proceeds from sale of land and building 125
Purchase of property (2,720) (729) (639) (1,464) (437)
-------- -------- ------- -------- -------
Net cash (used in) provided by
investing activities (97,035) (46,310) (9,424) 3,473 (1,933)
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
October 31,
----------------------------
1998 1997 1996 1998 1997
----------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from public offerings of
common stock, net $ - $ 38,882 $ 34,329 $ - $ -
Proceeds from Employee Stock
Purchase Plan 931 312 386 144
Proceeds from the exercise of stock
options 2,987 181 29 75 314
Repurchase of common shares from
profit sharing plan (61) (22)
Issuance of common shares 417 265
Redemption of preferred stock (693)
Preferred stock dividend (53) (38)
Proceeds from line of credit 68,787 32,608 21,618 14,173 11,233
Repayment of line of credit (68,031) (31,294) (22,440) (16,125) (10,609)
Repayment of notes payable (124) (13) (4,317) (4)
Repayment of note due to shareholder (151)
Repayment of note due to unsecured
creditor (7) (26) (18) (7)
Proceeds from issuance of notes
payable from debt offering, net 111,050
--------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 115,593 40,321 29,216 (1,513) 1,071
--------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN CASH 23,065 (3,984) 21,632 (149) (2,052)
CASH AND CASH EQUIVALENTS,
beginning of period 17,816 21,800 168 40,881 17,816
--------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 40,881 $ 17,816 $ 21,800 $ 40,732 $ 15,764
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
October 31,
-------------------------------
1998 1997 1996 1998 1997
-------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL INFORMATION -
Cash paid for:
Interest $ 580 $ 210 $ 556 $ 3,224 $ 56
======== ======== ======= ======== =======
Income taxes $ 8,254 $ 4,081 $ 3,102 $ 1,207 $ 1,380
======== ======== ======= ======== =======
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Detail of businesses acquired in
purchase transactions:
Fair value of assets acquired $ 39,614 $ 69,345 $13,880 $ 16,101 $ 734
Common stock issued in acquisitions (5,547) (12,972) (3,765) (2,356) (344)
Cash paid for acquisitions, net of
cash acquired of $221 (1998),
$3,934 (1997) and $0 (1996) (31,018) (49,515) (8,785) (12,860) (1,496)
-------- -------- ------- -------- -------
Liabilities assumed $ 3,049 $ 6,858 $ 1,330 $ 885 $(1,106)
======== ======== ======= ======== =======
Conversion of preferred stock to
common shares $ 1,580
Tax benefit of stock options exercised $ 1,879 $ 560 $ 56
Accretion to redemption value of preferred
stock $ 95
Common shares issued to satisfy
earnout obligations $ 1,480 $ 481
Conversion of accounts payable to
notes payables $ 51
Conversion of notes payable to
preferred stock $ 680
Common shares issued for bonuses $ 402
Deferred compensation associated with
performance-vesting options $ 1,553 $ 932
Retirement of treasury stock $ 61
Reduction of notes payable in exchange
for property $ 128
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1. GENERAL
Business - Data Processing Resources Corporation (DPRC or the Company), a
California corporation, is a leading specialty staffing company providing
information technology services to a diverse group of corporate clients.
On December 21, 1998, DPRC acquired Systems & Programming Consultants, Inc.
(SPC), a North Carolina corporation, pursuant to the terms of the Agreement
and Plan of Merger, dated June 16, 1998, as amended on October 13, 1998 and
on October 20, 1998, by and among DPRC, DPRC Acquisition Corp., a wholly
owned subsidiary of DPRC (Merger Sub), SPC and certain shareholders of SPC
(the Merger Agreement). The Merger Agreement stipulates that Merger Sub be
merged with and into SPC, with SPC continuing as the surviving corporation
as a wholly owned subsidiary of DPRC (the Merger). The consideration
delivered in connection with the Merger was paid in shares of DPRC common
stock. In the Merger, each outstanding share of SPC common stock was
converted into 6.399204 shares of DPRC common stock (approximately 2.2
million shares of DPRC common stock). No fractional shares were issued.
Additionally, DPRC assumed the outstanding options under the SPC Stock
Option Plan. Such SPC options are fully vested and exercisable to purchase
approximately 1.1 million shares of DPRC common stock at a weighted average
option exercise price of approximately $4.06 per share. The Merger was
approved on December 17, 1998, at a special meeting of SPC shareholders and
on December 21, 1998, at a special meeting of DPRC shareholders. The
effective date of the Merger was December 21, 1998.
The consolidated financial statements, included herein, give retroactive
effect, for all periods presented, to the Merger, as such business
combination has been accounted for as a pooling of interests, in accordance
with generally accepted accounting principles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Unaudited Interim Periods - In the opinion of the Company's management, the
unaudited financial statements as of October 31, 1998, and for the three
months ended October 31, 1998 and 1997, 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.
Results of interim periods are not necessarily indicative of future
results.
Cash and Cash Equivalents - The Company considers all highly-liquid
investments with an original maturity of three months or less to be cash
equivalents.
9
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)(Continued)
- --------------------------------------------------------------------------------
Investments - Investments consist of high-quality money market instruments
with original maturities greater than three months, but less than one year,
and are stated at fair value. At July 31, 1998, the Company's investments
are all classified as available-for-sale. Unrealized gains and losses on
securities classified as available-for-sale were not significant.
Property - The cost of furniture, fixtures and equipment is depreciated
using straight-line and accelerated methods based on the estimated useful
lives of the related assets, generally three to ten years. Leasehold
improvements are amortized over the lesser of five or fifteen years or the
life of the lease. The Company capitalizes the development costs related
to the customization and testing of purchased software for use within the
Company in accordance with Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. These
costs along with the costs of purchased software will be amortized over
five to seven years.
Intangible Assets - Intangible assets include covenants not-to-compete and
goodwill, which represent the excess of cost over fair value of net assets
acquired. Covenants not-to-compete and goodwill are amortized using the
straight-line method over 3 and 25 years, respectively. The recoverability
of intangible assets is determined by comparing the carrying value of
intangible assets to the estimated future operating income of the Company
on an undiscounted cash-flow basis. Should the carrying value of
intangible assets exceed the estimated operating income for the expected
period of benefit, an impairment for the excess would be recorded at that
time. As of July 31, 1998, no impairment has been recognized.
Revenue Recognition - The Company recognizes revenue as services are
performed.
Fair Value of Financial Instruments - Management believes the carrying
amounts of cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable approximate fair value due to the short
maturity of these financial instruments. The fair value of the long-term
debt is based on current quoted market prices and is estimated to be
$129,375,000 as of July 31, 1998. As of October 31, 1998, the fair value
of the long-term debt is estimated to be $99,901,000 (unaudited).
Income Taxes - The Company provides for income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, the Company generally considers all
expected future events other than enactments of changes in the tax laws or
rates.
Interim financial statements include taxes provided for at the Company's
estimated effective annual rates.
Stock-Based Compensation - The Company continues to account for its stock-
based awards using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations. Statement of Financial
10
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Accounting Standards (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 of accounting for
stock options issued under the Company's stock option plan (Note 8).
Net Income Per Share - In the second quarter of 1998, the Company adopted
SFAS No. 128, Earnings Per Share. Under this standard, primary net income
per share is replaced by basic net income per share, and fully diluted net
income per share is replaced by diluted net income per share. Additionally,
SFAS No. 128 provides, that upon consummation of a pooling of interests
transaction, earnings per share be based on the aggregate of the weighted-
average outstanding shares of the constituent businesses, adjusted to
equivalent shares of the surviving business. Consequently, the earnings per
share computations do not give dilutive effect to SPC stock options in
periods prior to the Merger. All historical earnings per share information
has been restated as required by SFAS No. 128.
Net income per share is computed by dividing net income available to common
shareholders by the weighted average number of common and common equivalent
shares outstanding during the periods presented.
The following is a reconciliation between the number of shares used in the
basic and diluted net income per share calculations (in thousands):
<TABLE>
<CAPTION>
As of July 31, October 31,
------------------------------------ ------------------------
1998 1997 1996 1998 1997
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic net income per share -
Weighted average number of common
shares outstanding 13,464 11,312 7,536 13,882 13,255
Effect of dilutive securities -
stock options 454 370 725 382 424
------ ------ ----- ------ ------
Diluted net income per share -
Weighted average number of common
shares outstanding 13,918 11,682 8,261 14,264 13,679
====== ====== ===== ====== ======
</TABLE>
Reclassifications - Certain items in the prior period financial statements
have been reclassified to conform to the current period presentation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and related disclosures at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these
estimates.
11
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED)(Continued)
- --------------------------------------------------------------------------------
Bankruptcy Filing and Plan of Reorganization - In December 1994, SPC filed
a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code. Effective October 1995, SPC's plan of reorganization was
approved by the court (the Plan of Reorganization) and the bankruptcy case
was closed in May 1996.
Recent Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about
operating segments in annual financial statements and, to a lesser extent,
in interim financial reports issued to shareholders. SFAS Nos. 130 and 131
are effective for the Company beginning in fiscal 1999. As both SFAS Nos.
130 and 131 deal with financial disclosure, the Company does not anticipate
the adoption of these new standards will have a material impact on its
financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 establishes
disclosure standards for pensions and other postretirement benefits. SFAS
No. 132 is effective for the Company beginning in fiscal 1999. The Company
does not anticipate that the adoption of this new standard will have a
material impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the Company
beginning in the first quarter of fiscal 2000. The Company does not
anticipate that the adoption of this new standard will have a material
impact on its financial position or results of operations.
12
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
3. PROPERTY
Property consists of the following (in thousands):
<TABLE>
<CAPTION>
As of
As of July 31, October 31,
----------------------------- ------------------
1998 1997 1998
<S> <C> <C> <C>
(unaudited)
Building and improvements $ - $ 310 $ -
Equipment 4,245 2,000 4,683
Furniture and fixtures 2,017 1,310 2,138
Leasehold improvements 421 113 455
Purchased software 774 95 1,696
------- ------- -------
7,457 3,828 8,972
Accumulated depreciation and amortization (3,012) (1,779) (3,356)
------- ------- -------
$ 4,445 $ 2,049 $ 5,616
======= ======= =======
</TABLE>
4. ACQUISITIONS
Between August 1996 and July 1998, the Company completed six acquisitions.
Each acquisition was accounted for as a purchase. The excess of cost over
fair value of net assets acquired was allocated to goodwill, which is
amortized using the straight-line method over 25 years. The consolidated
financial statements of the Company include the results of operations for
each acquired business from the acquisition date. A summary of the more
significant acquisitions is as follows:
In January 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of S3G, Inc., a Texas Corporation (S3G). Under
the terms of the asset purchase agreement, the purchase price was $32.2
million, consisting of $28.2 million in cash and 204,552 shares of
restricted DPRC common stock, valued at approximately $4.0 million. In
addition, S3G has the right to receive certain additional consideration
contingent upon S3G's adjusted earnings before interest and taxes through
December 31, 1998. The earnout is payable semi-annually, 85% in cash and
15% in shares of restricted common stock. The first installment of the
earnout payment consisting of $5.8 million in cash and 32,880 shares of
restricted common stock, valued at approximately $817,000, was paid in
September 1998 and was accrued as of July 31, 1998 upon resolution of the
earnout contingency. The second and final installment of the earnout is due
in March 1999 and will be recorded as an addition to goodwill, if earned.
13
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
In July 1997, the Company acquired all of the outstanding capital stock of
SelecTech, Inc. (SelecTech). Under the terms of the agreement, the purchase
price was approximately $9.0 million, consisting of $8.1 million in cash
and 54,934 shares of restricted common stock valued at approximately
$928,000.
In April 1997, the Company completed the acquisition by merger of Computec
International Strategic Resources, Inc. (Computec). Under the terms of the
agreement, the purchase price was approximately $28.2 million, consisting
of $19.0 million in cash and 677,880 shares of restricted common stock,
valued at approximately $9.2 million. The definitive agreement also
provides for an earnout contingent upon Computec's earnings before interest
and taxes through December 31, 1998. The earnout is payable 60% in cash and
40% in shares of restricted common stock. The aggregate amount of the
initial consideration and the earnout may not exceed $70.0 million. The
first installment of the earnout payment, consisting of $390,000 in cash
and 14,970 shares of restricted common stock, valued at approximately
$241,000, was paid in October 1997. The second installment of the earnout
payment, consisting of $2.3 million in cash and 51,854 shares of restricted
common stock, valued at approximately $1.2 million, was paid in June 1998.
The third installment of the earnout payment, consisting of $3.4 million in
cash and 73,078 shares of restricted common stock valued at approximately
$1.8 million, was paid in September 1998 and was accrued as of July 31,
1998 upon resolution of the earnout contingency. The fourth and final
installment of the earnout is due in March 1999 and will be recorded as an
addition to goodwill, if earned.
In January 1997, the Company acquired all of the outstanding capital stock
of LEARDATA Info-Services, Inc. (Leardata). Under the terms of the
agreement, the purchase price was approximately $21.4 million, consisting
of $17.3 million in cash and 310,226 shares of restricted common stock,
valued at approximately $4.1 million.
In November 1996, the Company acquired all of the outstanding common stock
of Professional Software Consultants, Inc. (PSC). Under the terms of the
agreement, the purchase price was approximately $6.2 million in an all-cash
transaction.
The allocation of the purchase prices for all acquisitions and other
purchase accounting adjustments is as follows (in thousands):
<TABLE>
<CAPTION>
July 31, October 31,
----------------------------- --------------------
1998 1997 1998
<S> <C> <C> <C>
(unaudited)
Total purchase price, net $36,486 $63,593 $15,702
Net assets acquired (2,073) (8,677) (1,117)
Covenant not-to-compete (350) (100)
Acquisition costs 300 1,987 150
------- ------- -------
Excess of purchase price over net assets acquired $34,363 $56,903 $14,635
======= ======= =======
</TABLE>
14
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
During 1998 and 1997, the Company recorded additional goodwill as a result
of earnout obligations of $15,753,000 and $1,106,000 respectively.
Unaudited pro forma combined results of operations for the periods ended
July 31, 1998 and 1997 would have been as follows had each of the
acquisitions occurred as of the beginning of the respective periods (in
thousands, except per share data):
<TABLE>
<CAPTION>
July 31,
------------------------------------
1998 1997
<S> <C> <C>
Pro forma revenues $276,568 $193,053
Pro forma net income available to common shareholders $ 11,927 $ 7,949
Pro forma net income per share - Basic $ .88 $ .65
Pro forma net income per share - Diluted $ .85 $ .63
Weighted average common shares outstanding - Basic 13,624 12,276
Weighted average common shares outstanding - Diluted 14,078 12,646
</TABLE>
Pro forma adjustments have been applied to reflect the purchase, which
includes the elimination of expenses that are not expected to have a
continuing impact on the Company such as certain redundant personnel costs,
excess owner's compensation and cost of line of business not acquired, and
the addition of amortization related to the intangible assets acquired.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
As of July 31, As of
-------------------------------- October 31,
1998 1997 1998
<S> <C> <C> <C>
(unaudited)
Accounts payable $ 3,773 $ 1,791 $ 4,981
Accrued salaries, bonuses and related benefits 12,641 7,157 10,967
Commissions payable 1,272 932 1,343
Accrued earnout obligations 11,823 1,106
Accrued interest payable 2,074 10 377
Unearned revenues 111 47 145
------- ------- -------
$31,694 $11,043 $17,813
======= ======= =======
</TABLE>
15
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Medical Claims Payable - The Company sponsors a medical plan for SPC
employees (the Medical Plan) which is administered by an independent
insurance company. Subject to certain limitations, the Medical Plan
provides for the Company to make claim payments on behalf of its employees.
The Company has obtained a stop-loss policy which limits the exposure of
the Company to $25,000 per participant per year and $825,000 per year in
the aggregate. Management believes that the Company has adequately recorded
both known claims and incurred but not reported claims based on actuarial
data obtained from the Medical Plan administrator, its assessment of past
claim history and other relevant supporting data. Claims payable ($579,000
at July 31, 1998) are included in accounts payable.
6. DEBT
On March 24, 1998, the Company completed the sale of $115.0 million of its
5-1/4% convertible subordinated notes due 2005 (the Notes) in a private
offering under Rule 144A to qualified institutional buyers. The Notes are
convertible at any time at the option of the holders into shares of common
stock of DPRC at a conversion price of $35.50 per share of common stock of
the Company. The Notes mature on April 1, 2005 and are non-callable for the
first three years. The Company used a portion of the net proceeds of the
offering for repayment of $19.5 million of debt outstanding under its
credit facility. Interest is payable on April 1 and October 1 of each year,
commencing on October 1, 1998. The Notes were recorded net of a discount
and issue costs of $3,950,000, which will be amortized over seven years
based on the effective interest method. As of July 31, 1998, accumulated
amortization was $238,000. As of July 31, 1998, there have been no
conversions of notes to common stock.
On June 10, 1998, the Company amended its five-year, $60.0 million
Revolving/Term Loan Agreement (the Credit Facility) with a bank syndicate.
The Credit Facility consists of a revolving line of credit of $60.0 million
principal amount, and bears interest ranging from the prime rate to the
prime rate plus .5% or from LIBOR plus .5% to LIBOR plus 1.75% depending on
defined financial conditions. At the end of three years, the outstanding
principal balance on the facility converts to a two-year fully amortized
term loan. The Credit Facility is guaranteed by the Company's subsidiaries
and secured by substantially all of the assets of the Company and its
subsidiaries, including accounts receivable and equipment and a pledge of
all of the stock of the Company's subsidiaries. The Credit Facility
contains various covenants, including the maintenance of defined financial
ratios such as net worth. As of July 31, 1998, the Company had no
borrowings outstanding under the credit facility and was in compliance with
bank covenants. The Company's Credit Facility prohibits the payment of
dividends without the prior written consent of the lender.
Upon consummation of the Merger, the Company repaid all amounts outstanding
under SPC's Line of Credit and terminated the agreement. Upon termination,
the Company paid the lender an early termination fee of $12,500.
Notes payable totaling $259,000 as of July 31, 1997 were paid off in fiscal
1998.
16
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
7. SHAREHOLDERS' EQUITY
Second Public Offering - In January 1997, the Company completed a second
public offering of 2,395,000 shares of its common stock at an offering
price of $17.50 per share for net proceeds of $38.9 million.
Initial Public Offering - In March 1996, the Company completed an initial
public offering of 2,726,000 shares of its common stock at an offering
price of $14.00 per share for net proceeds of $34.3 million.
Stock Split - On January 8, 1996, the Company amended its Articles of
Incorporation to increase the number of authorized shares of common stock
from 8,000,000 to 20,000,000, to authorize 2,001,480 shares of preferred
stock (of which 1,480 were designated Series A Convertible Preferred Stock)
and to effect a 400-for-one stock split of its common stock. All shares and
per share amounts included in the accompanying financial statements and
footnotes have been restated to reflect the stock split.
Preferred Stock - In March 1995, the Company issued 1,480 shares of Series
A preferred stock for $1,601,000, less costs of $208,000 associated with
the issuance. The Series A preferred stock had a liquidation preference of
$1,082 per share, plus 8.0% interest per annum and was redeemable at an
amount equal to the sum of $2,850 per share. Immediately prior to the
consummation of the initial public offering, the outstanding shares of
Series A Convertible Preferred Stock automatically converted into an
aggregate of 592,000 shares of common stock. The shares of Series A
Convertible Preferred Stock were canceled upon said conversion and ceased
to be authorized.
SPC Preferred Stock - In October 1995, SPC, through its Plan of
Reorganization, issued 680,000 shares of redeemable preferred stock, par
value $1.00 per share, in exchange for the retirement of $680,000 in
general unsecured claims from individuals related to principal shareholders
of SPC. Terms of the preferred stock provide for amongst other items, a
cumulative 10% per annum dividend payable quarterly, certain voting rights
upon the occurrence of an event of default, equity participation rights
upon the sale or liquidation of the Company and a redemption premium
ranging from 101% to 105% of par value based on the year the preferred
stock is redeemed. In February 1997, SPC redeemed all of the outstanding
preferred stock in accordance with the Plan of Reorganization for $693,000,
which included a premium of $13,000.
8. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Stock Option Plans - In 1994, the Company adopted the 1994 Stock Plan (the
Stock Plan) under which incentive and non-statutory stock options to
acquire shares of the Company's common stock may be granted to officers,
employees and consultants of the Company. The Stock Plan is administered by
the Board of Directors and permits the issuance of options, as of July 31,
1998, of up to 3,000,000 shares, subject to shareholder approval which was
received December 21, 1998, 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
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
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.
SPC Stock Option Plan - In June 1996, SPC adopted a stock option plan
whereby certain officers, directors, and employees would be granted options
to purchase SPC common stock at the estimated fair value of SPC common
stock at the date of grant. The plan is administered by a committee
appointed by the Board of Directors, and permits the issuance of options
for the purchase of up to 1,920,000 shares. Options granted under the plan
vest immediately or upon achievement of certain operating performance
targets. The options expire in ten years and are subject to other terms and
conditions specified in each individual employee option agreement.
A summary of employee stock options is as follows (number of shares in
thousands):
<TABLE>
<CAPTION>
Weighted
Number average
of exercise
shares price
<S> <C> <C>
Outstanding, August 31, 1995 284 $ 1.32
Granted 395 $14.17
Exercised (22) $ 1.31
Canceled (40) $25.55
-----
Outstanding, July 31, 1996 617 $ 8.21
Granted 1,684 $10.65
Exercised (65) $ 2.78
Canceled (151) $17.99
-----
Outstanding, July 31, 1997 2,085 $ 9.59
Granted 782 $16.30
Exercised (171) $ 7.24
Canceled (80) $20.43
-----
Outstanding, July 31, 1998 2,616 $11.42
=====
</TABLE>
18
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
Number of remaining average Number of average
Range of options contractual exercise options exercise
exercise price outstanding life price exercisable price
<S> <C> <C> <C> <C> <C>
$1.31 - $ 2.25 158,430 6.25 $ 1.48 141,855 $ 1.39
$3.57 900,363 8.38 $ 3.57 900,363 $ 3.57
$6.37 - $29.50 1,556,817 8.86 $16.97 727,326 $11.69
--------- ---------
$1.31 - $29.50 2,615,610 8.53 $11.42 1,769,544 $ 6.73
========= =========
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share, had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option-pricing
model, with the following weighted average assumptions as of July 31, 1998,
1997, and 1996, respectively: expected life, 6.7, 6.1, and 6.1 years; stock
volatility, 44.3%, 36.2%, and 36.2%; risk-free interest rates, 5.7%, 6.5%,
and 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 1998, 1997 and 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net income and net income per share
for the years ended July 31 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Pro forma net income $9,655,000 $6,060,000 $3,214,000
Pro forma net income per share - basic $ 0.72 $ 0.54 $ 0.43
Pro forma net income per share - diluted $ 0.69 $ 0.52 $ 0.39
</TABLE>
The impact of the outstanding non-vested stock options granted prior to
1995 has been excluded from the pro forma calculation; accordingly, the
1996 and 1997 pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculations will apply to all applicable stock
options.
19
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Retirement Savings Plan - The Company has several retirement savings plans
(the Plans) which qualify under Section 401(k) of the Internal Revenue
Code. Eligible employees may contribute up to 20% of their annual
compensation, as defined by the Plans. During the year ended July 31, 1998,
the Company contributed $152,000 to the Plans, which is recorded in
selling, general and administrative expenses.
Employee Stock Purchase Plan - In October 1996, the Company adopted an
Employee Stock Purchase Plan (the ESP Plan). The ESP Plan allows employees
of the Company to purchase common stock without having to pay any
commissions on the purchases. The maximum amount that any employee can
contribute to the ESP Plan per quarter is $6,250. The total number of
shares which are reserved by the Company for purchase under the ESP Plan is
250,000, of which 186,260 shares remain unpurchased as of July 31, 1998.
Performance Options - In December 1997, the Company granted 184,591 options
at an exercise price of $6.37 to certain of the Company's branch managers.
These options (the SPC Performance Options) vested upon the achievement of
certain operating performance goals, primarily branch profitability. Such
options have been accounted for as variable stock options, in which
compensation is measured at the point in time the achievement of such
performance goals become probable. During the year ended July 31, 1998,
the Company determined that it was probable such goals would be reached and
recorded $2,175,000 in compensation expense. Upon the consummation of the
Merger, the holders of the SPC Performance Options agreed to the
cancellation of such options in exchange for 115,473 shares of DPRC common
shares. This exchange resulted in additional compensation expense of
$932,000.
Profit Sharing Plan - Effective January 1, 1990, SPC amended its profit
sharing plan to include a stock bonus feature. Under this arrangement, the
Company has the option of making its annual matching contribution to the
Plan in cash or equivalent fair market value in shares of its common
shares. In March 1996, the Company transferred 70,205 of its shares to the
profit sharing plan as part of its contribution to the plan in the amount
of $200,000.
The plan is a defined contribution plan designed to cover all of the
Company's salaried employees. In addition to the stock bonus feature, a
401(k) provision is included and the Company contributes an amount equal to
50.0% of the participants' salary reduction amount, which is limited to
5.0% of the participant's annual salary each year.
9. INCOME TAXES
The provision for income taxes includes the following (in thousands):
<TABLE>
<CAPTION>
For the years ended
July 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $7,717 $3,841 $1,698
State 1,821 1,113 516
------ ------ ------
9,538 4,954 2,214
Deferred:
Federal (385) (196) 32
State (137) (23) 26
------ ------ ------
(522) (219) 58
------ ------ ------
Provision for income taxes $9,016 $4,735 $2,272
====== ====== ======
</TABLE>
20
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
For the year ended
July 31,
-----------------------------
1998 1997 1996
<S> <C> <C> <C>
Income taxes at statutory federal rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 5.4 6.0 6.2
Tax-exempt interest income (0.6) (2.6) (2.2)
Amortization of nondeductible goodwill 3.6 2.4
Other 1.0 0.8 2.0
Benefit of graduated rates 0.0 (1.0) (1.0)
----- ----- -----
Total 44.4 % 40.6 % 40.0 %
===== ===== =====
</TABLE>
21
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and
income tax purposes. The income tax effects of these temporary differences
representing significant portions of deferred tax assets and deferred tax
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
As of July 31,
-------------------------------
1998 1997
<S> <C> <C>
Amortization of goodwill $(549) $(149)
Bad debt reserve 522 114
Change of accounting from cash to accrual method for (415) (679)
acquired subsidiaries
State income taxes 252 371
Vacation accrual 318 215
Other (201) (61)
Deferred compensation for performance stock options 827
Net operating losses 53
----- -----
Total deferred tax asset (liability) $ 754 $(136)
===== =====
</TABLE>
During fiscal 1998, the Company established a net deferred tax liability of
$129,000 in connection with basis differences resulting from several of its
acquisitions (Note 4).
10. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases its office facilities, certain equipment and
vehicles under lease agreements classified as operating leases. Future
minimum lease payments under such noncancelable operating leases are
summarized as follows at July 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999 $2,448
2000 2,013
2001 1,587
2002 1,450
2003 1,231
Thereafter 440
------
Total future minimum lease payments $9,169
======
</TABLE>
22
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Rent expense amounted to $2,084,000, $1,167,000, $635,000 and $592,000 for
the years ended July 31, 1998, 1997, 1996 and the three months ended
October 31, 1998, respectively, and has been included in selling, general
and administrative expenses in the accompanying consolidated statements of
income.
Litigation - The Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
11. RELATED-PARTY TRANSACTIONS
In fiscal 1994, one of the Company's larger clients desired to outsource
its entire Information Systems department through an employee leasing
arrangement. Because the Company does not provide such employee leasing
services and was unable to provide a comparable employment benefit package
to consultants working for this company, Information Technology Resources,
Inc. (ITR), was formed by the founder of the Company and certain other
persons, including certain former employees of ITR's client, with the
founder of the Company owning approximately 79.0% of the outstanding
capital stock as of July 31, 1998. As a result of this arrangement, the
Company provides certain management services to ITR to support its
operations, for which the Company receives a management fee pursuant to a
management services agreement effective August 1, 1997. Management fees
earned by the Company were $360,000, $1,035,000, $1,084,000 and $45,000 for
the years ended 1998, 1997, 1996 and the three months ended October 31,
1998, respectively. ITR also contracts with the Company for technical
consultants to meet its staffing needs. For the years ended July 31, 1998,
1997 and 1996 and the three months ended October 31, 1998, the Company
recorded revenues of $3,012,000, $3,460,000, $4,974,000 and $693,000,
respectively, from billing of ITR technical consultants.
In fiscal 1998, a member of DPRC's Board of Directors, who is also the
President of one of the Company's operating subsidiaries, acquired a 33%
ownership interest in Message & Ques Tech., Inc. (MQTECH), a software
development company, which interest was subsequently increased to 80%. The
Company is providing technical consultants to MQTECH through its Computec
subsidiary. Revenue from MQTECH totaled approximately $1.3 million for
fiscal 1998 and accounts receivable as of July 31, 1998 totaled
approximately $629,000. The related-party Director has provided a personal
guarantee for payment of all present and future accounts receivable owed to
the Company by MQTECH.
Two shareholders of the Company held unsecured notes payable in the amount
of $86,198 with interest stated at 6.5% until June 1996, at which time the
notes were paid.
23
<PAGE>
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996, AND
THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
12. CONCENTRATION OF CREDIT RISK
The Company's revenues are generated from credit sales to customers located
throughout the United States. The Company performs ongoing credit
evaluations of its customers, maintains reserves for potential credit
losses and generally does not require collateral. The Company's ten largest
customers represented 31.6% of total revenues in fiscal 1998.
In each of fiscal 1998, 1997 and 1996, the Company had sales to a major
customer, not necessarily the same customer in each period, of
approximately $8,300,000, $5,800,000 and $5,794,000, respectively. Given
the significant amount of revenues derived from these customers, the loss
of any such customer or the uncollectibility of related receivables could
have a material adverse effect on the Company's financial condition and
results of operations.
13. UNAUDITED QUARTERLY INFORMATION
In the opinion of management, all adjustments necessary to fairly present
the unaudited quarterly information are included for all quarters
presented.
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------------
October 31, January 31, April 30, July 31,
1997 1998 1998 1998
-------------------------------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $56,294 $56,183 $70,424 $80,047
Income before income tax provision (1) 4,935 4,297 5,910 5,192
Net income available to common shareholders 2,936 2,381 3,191 2,810
Net income per share - basic 0.22 0.18 0.24 0.20
Net income per share - diluted 0.21 0.17 0.23 0.20
Weighted average common shares
outstanding - basic 13,255 13,324 13,566 13,712
Weighted average common shares
outstanding - diluted 13,679 13,734 14,064 14,197
</TABLE>
(1) Net income before income tax provision for the three-month period ended
July 31, 1998, includes a charge for compensation expense of $2,175,000.
* * * * * *
24
