<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Date of Report (Date of earliest event reported): August 4, 1999
COMPUWARE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MI 48334-2564
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (248)737-7300
<PAGE> 2
The undersigned hereby amends the following items, financial statements,
exhibits, or other portions of its Current Report on Form 8-K, originally filed
with the Securities and Exchange Commission on August 19, 1999 to report the
acquisition by Compuware Corporation (Compuware) of Data Processing Resources
Corporation (DPRC), as set forth in the pages attached hereto.
Item 2. Acquisition or Disposition of Assets.
On August 26, 1999, the merger of COMP Acquisition Co. ("Acquisition
Sub") with and into DPRC became effective. As a result, on such date (i) DPRC
became a wholly owned subsidiary of Compuware, (ii) all the shares of DPRC
outstanding immediately before the merger that were not then owned by
Acquisition Sub (or Compuware or any other direct or indirect Compuware
subsidiary) were cancelled and automatically converted into the right to receive
from DPRC $24 per share, without interest and subject to reduction for any
applicable federal back-up withholding taxes or any other applicable withholding
or transfer taxes, except for any shares as to which dissenters' rights were
available and/or exercised, (iii) such outstanding shares of DPRC capital stock
that were then owned by Acquisition Sub (or Compuware or any other direct or
indirect Compuware subsidiary) were automatically cancelled and retired and (iv)
each outstanding share of Acquisition Sub was automatically converted into a
share of DPRC Common Stock.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The following audited consolidated financial statements of DPRC and subsidiaries
as of July 31, 1998 and 1997 and for the years ended July 31, 1998, 1997 and
1996 are attached hereto.
The Independent Auditors' Report dated March 1, 1999.
Consolidated Balance Sheets as of July 31, 1998 and 1997.
Consolidated Statements of Income for the years ended July 31, 1998, 1997
and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
July 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended July 31, 1998,
1997 and 1996.
Notes to consolidated financial statements for the years ended July 31,
1998, 1997 and 1996.
The following unaudited interim consolidated financial statements of DPRC as of
and for the nine months ended April 30, 1999 are attached hereto:
Consolidated Balance Sheets as of April 30, 1999 and July 31, 1998.
Consolidated Statements of Income for the three and nine months ended
April 30, 1999 and 1998.
Consolidated Statements of Cash Flows for the nine months ended April 30,
1999 and 1998.
Notes to consolidated financial statements for the three and nine months
ended April 30, 1999 and 1998.
<PAGE> 3
(b) Pro Forma Financial Information.
The following unaudited pro forma consolidated financial statements of
Compuware and DPRC are attached:
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 1999.
Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended March 31, 1999.
Unaudited Pro Forma Condensed Combined Statements of Operations for the
three months ended June 30, 1999.
Notes to unaudited pro forma condensed combined financial statements.
(c) Exhibits.
The following exhibit is filed with this form 8-K/A:
23.1 Independent Auditors' Consent with respect to DPRC's financial
statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Compuware
has duly caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
Dated: September 2, 1999 Compuware Corporation
By: /s/ Laura L. Fournier
--------------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Description
- ----------- --------------------------------------------------------------
23.1 Independent Auditors' Consent with respect to DPRC's financial
statements.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-79821, 333-70549, 333-43971, 333-37873, 333-17263, 33-57364, 333-4522 and
33-70852 all on Form S-8, Registration Statement No. 333-43915 on Form S-3 and
Post-Effective Amendment No. 1 to Registration Statement No. 333-76097 of
Compuware Corporation of our report dated March 1, 1999, on the audited
consolidated financial statements of Data Processing Resources Corporation,
appearing in this Form 8-K/A of Compuware Corporation dated August 4, 1999.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
August 27, 1999
<PAGE> 2
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
Costa Mesa, California
March 1, 1999
<PAGE> 3
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
July 31,
-------------------------
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,881 $ 17,816
Investments 59,969
Accounts receivable, net of allowance for doubtful
accounts of $1,369 (1998) and $343 (1997) 48,103 26,920
Prepaid expenses and other current assets 4,601 1,076
Deferred tax asset 1,538
-------- --------
Total current assets 155,092 45,812
PROPERTY, net 4,445 2,049
OTHER ASSETS 921 329
INTANGIBLE ASSETS, net of accumulated amortization
of $4,915 (1998) and $1,298 (1997) 114,822 67,973
-------- --------
$275,280 $116,163
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND 1997 (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
July 31,
-----------------------
1998 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 31,694 $ 11,043
Income taxes payable 1,625 1,534
Line of credit 2,522 1,766
Long-term debt - current portion 259
Deferred income taxes 55
-------- --------
Total current liabilities 35,841 14,657
LONG-TERM DEFERRED INCOME TAXES 784 81
LONG-TERM DEBT 111,288
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 60,000,000 shares authorized;
13,677,028 (1998) and 12,676,570 (1997)
shares issued and outstanding 110,421 94,305
Deferred compensation associated with performance-
vesting options (1,553)
Retained earnings 18,499 7,181
Less treasury stock at cost 0 (1998) and
22,167 shares in treasury (1997) (61)
-------- --------
Total shareholders' equity 127,367 101,425
-------- --------
$275,280 $116,163
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES $ 262,948 $ 147,833 $ 81,100
COST OF PROFESSIONAL SERVICES 187,767 109,185 60,343
--------- --------- ---------
GROSS MARGIN 75,181 38,648 20,757
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 52,155 27,764 14,800
COMPENSATION EXPENSE
ASSOCIATED WITH
PERFORMANCE VESTING OPTIONS 2,175
--------- --------- ---------
OPERATING INCOME 20,851 10,884 5,957
INTEREST (EXPENSE) INCOME, net (517) 779 (283)
--------- --------- ---------
INCOME BEFORE INCOME TAX
PROVISION 20,334 11,663 5,674
INCOME TAX PROVISION 9,016 4,735 2,272
--------- --------- ---------
NET INCOME 11,318 6,928 3,402
LESS PREFERRED STOCK DIVIDEND (53) (38)
--------- --------- ---------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 11,318 $ 6,875 $ 3,364
========= ========= =========
NET INCOME PER SHARE - BASIC $ 0.84 $ 0.61 $ 0.45
========= ========= =========
NET INCOME PER SHARE - DILUTED $ 0.81 $ 0.59 $ 0.41
========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC 13,464 11,312 7,536
========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - DILUTED 13,918 11,682 8,261
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Redeemable Common stock Treasury stock
preferred ----------------- ----------------
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
<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
</TABLE>
<PAGE> 7
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 11,318 $ 6,928 $ 3,402
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation 824 466 239
Amortization of intangible assets 3,617 1,270 42
Amortization of debt discount and
issue costs 238
Compensation expense associated with
performance-vesting options 2,175
Deferred income taxes (1,065) (219) 47
Changes in operating assets and
liabilities, net of the effect of acquisitions:
Accounts receivable (17,538) (7,414) (1,407)
Prepaid expenses and other current
assets (4,055) (2,332) 103
Other long-term assets (66) 108
Accounts payable and accrued liabilities 7,838 2,206 491
Income taxes payable 1,155 1,166 (1,185)
-------- -------- -------
Net cash provided by (used in) operating
activities 4,507 2,005 1,840
CASH FLOWS FROM INVESTING
ACTIVITIES:
Cash paid for acquisitions, net of cash
acquired (31,018) (44,269) (8,785)
Cash paid for earnout obligations (3,453) (1,312)
(Purchase) liquidation of investments
available-for-sale (59,969)
Proceeds from sale of land and building 125
Purchase of property (2,720) (729) (639)
-------- -------- -------
Net cash (used in) provided by
investing activities (97,035) (46,310) (9,424)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <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
Proceeds from the exercise of stock
options 2,987 181 29
Repurchase of common shares from
profit sharing plan (61)
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
Repayment of line of credit (68,031) (31,294) (22,440)
Repayment of notes payable (124) (13) (4,317)
Repayment of note due to shareholder (151)
Repayment of note due to unsecured
creditor (7) (26) (18)
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
--------- -------- --------
NET INCREASE (DECREASE)
IN CASH 23,065 (3,984) 21,632
CASH AND CASH EQUIVALENTS,
beginning of period 17,816 21,800 168
--------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 40,881 $ 17,816 $ 21,800
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 9
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION
Cash paid for:
Interest $ 580 $ 210 $ 556
======== ======== =======
Income taxes $ 8,254 $ 4,081 $ 3,102
======== ======== =======
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
Common stock issued in acquisitions (5,547) (12,972) (3,765)
Cash paid for acquisitions, net of
cash acquired of $221 (1998),
$3,934 (1997) and $0 (1996) (31,018) (49,515) (8,785)
-------- -------- -------
Liabilities assumed $ 3,049 $ 6,858 $ 1,330
======== ======== =======
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
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
Retirement of treasury stock $ 61
Reduction of notes payable in exchange
for property $ 128
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 10
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996
1. GENERAL
Business - Data Processing Resources Corporation (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.
Cash and Cash Equivalents - The Company considers all highly-liquid
investments with an original maturity of three months or less to be cash
equivalents.
<PAGE> 11
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
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.
<PAGE> 12
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
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 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,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
Basic net income per share -
Weighted average number of common
shares outstanding 13,464 11,312 7,536
Effect of dilutive securities -
stock options 454 370 725
------ ------ -----
Diluted net income per share -
Weighted average number of common
shares outstanding 13,918 11,682 8,261
====== ====== =====
</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.
<PAGE> 13
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
<PAGE> 14
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
3. PROPERTY
Property consists of the following (in thousands):
<TABLE>
<CAPTION>
As of July 31,
---------------------------
1998 1997
<S> <C> <C>
Building and improvements $ - $ 310
Equipment 4,245 2,000
Furniture and fixtures 2,017 1,310
Leasehold improvements 421 113
Purchased software 774 95
------- -------
7,457 3,828
Accumulated depreciation and amortization (3,012) (1,779)
------- -------
$ 4,445 $ 2,049
======= =======
</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.
<PAGE> 15
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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,
--------------------------
1998 1997
<S> <C> <C>
Total purchase price, net $36,486 $63,593
Net assets acquired (2,073) (8,677)
Covenant not-to-compete (350)
Acquisition costs 300 1,987
------- -------
Excess of purchase price over net assets acquired $34,363 $56,903
======= =======
</TABLE>
<PAGE> 16
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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,
--------------------------------
1998 1997
<S> <C> <C>
Accounts payable $ 3,773 $ 1,791
Accrued salaries, bonuses and related benefits 12,641 7,157
Commissions payable 1,272 932
Accrued earnout obligations 11,823 1,106
Accrued interest payable 2,074 10
Unearned revenues 111 47
------- -------
$31,694 $11,043
======= =======
</TABLE>
<PAGE> 17
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
<PAGE> 18
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
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.
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.
<PAGE> 19
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
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 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>
<PAGE> 20
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
<PAGE> 21
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
<PAGE> 22
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (Continued)
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>
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>
<PAGE> 23
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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>
<PAGE> 24
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
<PAGE> 25
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997, AND 1996 (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.
<PAGE> 26
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1999 AND JULY 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1999 1998
-----------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents............................................................. $ 29,657 $ 40,881
Investments........................................................................... 22,294 59,969
Accounts Receivable (net of allowance for doubtful accounts of $2,663 and $1,369
as of April 30, 1999 and July 31, 1998, respectively).............................. 52,786 48,103
Prepaid Expenses and Other Current Assets............................................. 8,708 4,601
Deferred Tax Asset.................................................................... 711 1,538
-------- --------
Total Current Assets.................................................................. 114,156 155,092
Property, net......................................................................... 9,209 4,445
Other Assets 1,095 921
Intangible Assets, net................................................................ 176,785 114,822
-------- --------
$301,245 $275,280
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities.............................................. $ 30,043 $ 31,694
Income Taxes Payable.................................................................. 581 1,625
Line of Credit........................................................................ -- 2,522
-------- --------
Total Current Liabilities............................................................. 30,624 35,841
Long-Term Deferred Income Taxes....................................................... 784 784
Long-Term Debt, net................................................................... 111,440 111,288
Commitments and Contingencies
Shareholders' Equity:
Common Stock; no par value; 60,000,000 shares authorized; 14,727,376 and
13,677,028 shares issued and outstanding as of April 30, 1999 and July
31, 1998, respectively........................................................ 127,033 110,421
Compensation Expense Associated with Performance-Vesting Options................. -- (1,553)
Retained Earnings................................................................ 31,364 18,499
-------- --------
Total Shareholders' Equity.................................................. 158,397 127,367
-------- --------
$301,245 $275,280
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 27
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------------------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.........................................................$ 93,229 $ 70,424 $ 274,463 $ 182,901
Cost of Professional Services.................................... 65,490 49,858 191,618 131,108
------------ ----------- ----------- -----------
Gross Margin.................................................. 27,739 20,566 82,845 51,793
Selling, General and Administrative Expenses..................... 17,759 14,314 53,404 36,433
Merger-Related Expenses.......................................... -- -- 3,054 --
Compensation Expense Associated with Performance-Vesting
Options....................................................... 932
Operating Income................................................. 9,980 6,252 25,455 15,360
Interest Expense, net............................................ (986) (342) (2,431) (218)
------------ ----------- ----------- -----------
Income Before Provision for Income Taxes......................... 8,994 5,910 23,024 15,142
Provision for Income Taxes....................................... 3,921 2,719 10,159 6,634
------------ ----------- ----------- -----------
Net Income.......................................................$ 5,073 $ 3,191 $ 12,865 $ 8,508
============ =========== =========== ===========
Net Income per Share--Basic......................................$ 0.35 $ 0.24 $ 0.91 $ 0.64
============ =========== =========== ===========
Net Income per Share--Diluted....................................$ 0.33 $ 0.23 $ 0.87 $ 0.62
============ =========== =========== ===========
Weighted Average Common Shares Outstanding--Basic................ 14,525 13,566 14,212 13,382
============ =========== =========== ===========
Weighted Average Common Shares Outstanding--Diluted.............. 18,323 14,064 17,894 13,826
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 28
DATA PROCESSING RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 12,865 $ 8,508
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................... 994 526
Amortization................................................................... 4,246 2,500
Amortization of debt discount and issue costs.................................. 217 59
Compensation expense associated with performance-vesting options............... 932 --
Changes in operating assets and liabilities, net of the effect of acquisitions:
Accounts receivable....................................................... (2,038) (9,413)
Deferred income taxes..................................................... 827 --
Prepaid expenses and other assets......................................... (4,250) (2,082)
Accounts payable and accrued liabilities.................................. 529 4,360
Income taxes payable......................................................
(39) (672)
----------- ------------
Net cash provided by operating activities............................ 14,283 3,786
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired.................................... (30,237) (28,067)
Proceeds from the sale of investments available for sale............................ 37,675 --
Proceeds from the sale of land and building......................................... -- 125
Cash paid for contingent acquisition obligations, net............................... (28,911) (1,384)
Purchase of property................................................................ (5,612) (1,460)
----------- ------------
Net cash used in investing activities................................ (27,085) (30,786)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable from private debt offering, net............. -- 111,050
Net (repayments of) proceeds from line of credit.................................... (2,522) 1,137
Proceeds from employee stock purchase plan.......................................... 1,684 667
Purchase of common stock from profit sharing plan................................... (22) --
Proceeds from the exercise of stock options.........................................
2,438 1,903
----------- ------------
Net cash (used in) provided by financing activities.................. 1,578 114,757
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (11,224) 87,757
Cash and cash equivalents, beginning of period........................................... 40,881 17,817
----------- ------------
Cash and cash equivalents, end of period................................................. 29,657 $ 105,574
=========== ============
SUPPLEMENTAL INFORMATION--CASH PAID FOR:
Interest............................................................................ $ 6,314 $ 444
=========== ============
Income taxes........................................................................ $ 9,488 $ 6,835
=========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Tax benefit of stock options exercised.............................................. $ 924 $ 973
Detail of businesses acquired in purchase transactions:
Fair value of assets acquired....................................................... $ 37,667 $ 33,640
Common stock issued in acquisitions............................................ (6,636) (3,989)
Cash paid for acquisitions, net of cash acquired............................... (30,237) (28,067)
----------- ------------
Liabilities assumed (relieved)................................................. $ 794 $ 1,584
=========== ============
Accrual to satisfy earnout obligation.................................................... $ 8,730 $ --
Shares issued to satisfy earnout obligation.............................................. $ 6,992 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 29
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1999 AND 1998
1. GENERAL
Business
Data Processing Resources Corporation (DPRC or the Company), a California
corporation, is a leading national 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 (see Note 3).
The consolidated financial statements, included herein, give retroactive
effect, for all periods presented, to the acquisition of SPC, as such business
combination has been accounted for as a pooling of interests, in accordance with
generally accepted accounting principles.
Interim Financial Data
The interim financial data as of April 30, 1999 and for the three and nine
months ended April 30, 1999 and 1998 is unaudited. The information reflects all
adjustments, consisting only of normal recurring entries, that, in the opinion
of management, are necessary to present fairly the financial position and
results of operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full fiscal year. This report should be read in
conjunction with the Company's Annual Report on Form 10-K/A (Amendment No. 1)
for the fiscal year ended July 31, 1998, Form 10-Q for the quarters ended
October 31, 1998, and January 31, 1999, the Company's Registration Statement on
Form S-4 (No. 333-61017) as declared effective by the Securities and Exchange
Commission on November 13, 1998, and the Company's Current Report on Form 8-K,
dated March 1, 1999, which gives retroactive effect to the Merger with SPC.
Certain reclassifications have been made in the consolidated financial
statements to conform amounts previously reported for fiscal 1998 to the fiscal
1999 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income Per Share--In the second quarter of 1998, the Company adopted
SFAS No. 128 "Earnings Per Share." SFAS No. 128 redefines earnings per share
under generally accepted accounting principles. Under the new standard, primary
net income per share is replaced by basic net income per share and fully diluted
net income per share is replaced by diluted net income per share. All historical
earnings per share information has been restated as required by SFAS No. 128.
Basic net income per share is computed using the weighted average number of
common shares outstanding during the periods presented. Diluted net income per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the periods presented assuming the exercise
of all in-the-money stock options. The effect of the 5 1/4% convertible
subordinated notes issued in March 1998 was not dilutive for the three and nine
months ended April 30, 1998, but was dilutive for the three and nine months
ended April 30, 1999. Common equivalent shares have not been included where
inclusion would be antidilutive.
<PAGE> 30
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED APRIL 30TH ENDED APRIL 30
-----------------------------------------
1999 1998 1999 1998
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Basic net income per share:
Weighted average number of common shares outstanding......... 14,525 13,566 14,212 13,382
Effect of dilutive securities:
Stock options................................................ 559 498 443 444
Convertible notes............................................ 3,239 -- 3,239 --
Diluted net income per share:
Weighted average number of common shares outstanding......... 18,323 14,064 17,894 13,826
</TABLE>
Provider Contract--During fiscal year 1998, the Company entered into a
provider contract with a major customer whereby the Company provides management
services to the customer for a fee. Under the contract, the Company manages
temporary staffing services for the customer, either through the Company's staff
or through outside service providers. The Company bills the customer for all
services rendered, and remits payments to the outside contractors for services
provided by them. Payments received by the Company for services provided by
other entities are not reflected in the consolidated statement of income, as the
Company bears no credit risk under the contract and does not retain any
liability for services provided by such outside contractors. Billings to the
customer and liabilities recognized related to the outside service providers
totaled $630,000 for the three and nine months ended April 30, 1998, $11.9
million for the three months ended April 30, 1999, and $21.1 million for the
nine months ended April 30, 1999.
Comprehensive Income--The Company adopted SFAS No. 130, Reporting
Comprehensive Income, in fiscal year 1999. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Other than net income, the
Company does not have any other elements of comprehensive income requiring
separate disclosure.
3. ACQUISITIONS
In fiscal 1998 and 1999, the Company completed five acquisitions accounted
for as purchases. 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. During
fiscal 1999, the Company also completed the acquisition of SPC, accounted for as
a pooling of interests. A summary of the acquisitions in fiscal 1998 and 1999 is
as follows:
In January 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of S3G, Inc. (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, the former shareholder of S3G had the
right to receive certain additional consideration contingent upon S3G's adjusted
earnings before interest and taxes through December 31, 1998. The earnout was
paid 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, was paid in September 1998. The
final installment of the earnout consisting of $23.5 million in cash and 164,167
shares of restricted common stock was paid in May 1999.
In May 1998, the Company acquired by merger all of the outstanding capital
stock of EXi Corp., (EXi) a Minnesota Corporation.
<PAGE> 31
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1999 AND 1998
3. ACQUISITIONS--(CONTINUED)
In October 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of RIDGE Consultants, Inc. (Ridge).
In November 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Vista High-Tech Resources, Inc. and Vista
High-Tech Resources of RI, Inc. (collectively, Vista). Under the terms of the
asset purchase agreement, the former shareholder of Vista has the right to
receive certain additional consideration contingent upon Vista's adjusted
earnings before interest and taxes through July 31, 1999. The earnout is payable
on or before September 30, 1999, 65% in cash and 35% in shares of restricted
DPRC common stock.
In December 1998, the Company acquired 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). 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.
In April 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of Qualitech Systems, Inc. and Qualitech Systems of
South Florida, Inc. (collectively, Qualitech).
Unaudited pro forma consolidated results of operations for the nine months
ended April 30, 1998 would have been as follows had the acquisition of S3G
occurred as of the beginning of the period (in thousands, except per share
data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 1998
------------------
<S> <C>
Pro forma revenues................................................. $190,244
Pro forma net income............................................... $ 7,886
Pro forma net income per share--basic............................... $ 0.57
Pro forma net income per share--diluted............................. $ 0.56
Pro forma weighted average common shares outstanding--basic......... 13,716
Pro forma weighted average common shares outstanding--diluted....... 14,156
</TABLE>
Pro forma adjustments have been applied to reflect the purchase of S3G
including the addition of amortization related to the intangible assets acquired
and reduction in interest income and additional interest expense.
<PAGE> 32
DATA PROCESSING RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1999 AND 1998
4. 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
acquisitions and earnout payments in the amount of approximately $59.1 million
for the nine months ended April 30, 1999. 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 April 30, 1999,
accumulated amortization was $753,000. As of April 30, 1999, there have been no
conversions of notes to common stock.
The Company has a five-year, $60.0 million Revolving/Term Loan Agreement
(the "Credit Facility") with a bank syndicate. The Credit Facility consists of a
revolving line of credit of $60.0 million principal amount, and bears interest
at the prime rate to prime rate plus .5% or LIBOR plus 0.50% to 1.75% depending
on defined financial conditions. On June 30, 2001, 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
April 30, 1999, 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.
5. RELATED PARTY TRANSACTIONS
Information Technology Resources, Inc. (ITR) was formed by the founder of
the Company and certain other persons, including certain former employees of
ITR's primary client, with the founder owning approximately 79.0% of the
outstanding capital stock. Effective as of December 31, 1998, the founder sold a
portion of her stock in ITR to reduce her ownership interest to less than 10.0%
of the outstanding capital stock. 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 $135,000 and $270,000 for the nine months ended April
30, 1999 and 1998, respectively. ITR also contracts with the Company for
technical consultants to meet its staffing needs. For the nine months ended
April 30, 1999 and 1998, the Company recorded revenues of $2,023,000 and
$2,295,000 from billing ITR for technical consultants, respectively.
In fiscal 1998, a former member of DPRC's Board of Directors, who was 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 provided technical consultants to MQTECH through its Computec
subsidiary. Revenue from MQTECH totaled approximately $200,000 and $2.2 million
for the three and nine months ended April 30, 1999 respectively. Accounts
receivable as of April 30, 1999 totaled approximately $681,000. This former
director has provided a personal guarantee for full payment of the outstanding
receivable.
6. SUBSEQUENT EVENTS
In June 1999, the Company announced the acquisition of substantially
all of the assets and assumption of certain liabilities of IT Services, Inc.
(ITSI). ITSI has the right to receive certain additional consideration
contingent upon ITSI's adjusted earnings before interest and taxes for the
twelve month periods ending April 30, 2000, and April 30, 2001. The earnouts are
payable in cash and restricted DPRC common stock, the combination of which to be
determined by the Company, with a minimum of 60% payable in cash. The earnouts
are due on or before July 1, 2000, and 2001, or as soon as practicable
thereafter, and will be recorded as an addition to goodwill.
<PAGE> 33
Compuware Corporation and Subsidiaries
Pro Forma Condensed Combined Financial Statements
(Unaudited)
The unaudited pro forma condensed combined balance sheet as of June 30, 1999
gives effect to the acquisition as if it had occurred on June 30, 1999. The
unaudited pro forma condensed combined statement of operations for the year
ended March 31, 1999 gives effect to the acquisition as if it had occurred on
April 1, 1998. The unaudited pro forma condensed combined statement of
operations for the three months ended June 30, 1999 gives effect to the
acquisition as if had occurred April 1, 1999. The unaudited pro forma
information is based on the historical financial statements of the Registrant
and Data Processing Resources Corporation (DPRC) giving effect to the
transaction under the purchase method of accounting as well as assumptions and
adjustments as indicated in the Notes to Pro Forma Condensed Combined Financial
Statements below.
Compuware has a fiscal year end of March 31 while DPRC has a fiscal year end of
July 31. The operations of Compuware for the year ended March 31, 1999 have been
combined with DPRC's operations for the twelve months ended January 31, 1999.
The operations of Compuware for the three months ended June 30, 1999 have been
combined with DPRC's operations for the three months ended April 30, 1999.
The unaudited pro forma condensed combined financial statements are presented
for illustrative purposes only and are not necessarily indicative of the
financial position or operating results that would have been achieved had the
transaction been in effect during the periods presented and should not be
construed as representative of future operations.
<PAGE> 34
COMPUWARE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Compuware DPRC (a) Adjustments Results
----------------- ----------- ------------ ---------------
June 30, April 30,
1999 1999
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 94,913 $ 29,657 $ (84,040)(c) $ 40,530
Investments 131,430 22,294 153,724
Accounts receivable, net 507,140 52,786 559,926
Deferred tax asset 16,045 711 16,756
Prepaid expenses and other current assets 28,563 8,708 37,271
----------------- ----------- ------------ ---------------
Total current assets 778,091 114,156 (84,040) 808,207
----------------- ----------- ------------ ---------------
INVESTMENTS 139,852 139,852
----------------- ----------- ------------ ---------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
ACCUMULATED DEPRECIATION AND
AMORTIZATION 95,711 9,209 (4,400)(b) 100,520
----------------- ----------- ------------ ---------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 46,790 46,790
----------------- ----------- ------------ ---------------
OTHER:
Accounts receivable 194,468 194,468
Deferred tax asset 10,831 10,831
Excess of cost over fair value of net assets acquired,
less accumulated amortization 100,405 176,785 237,603(b) 514,793
Other assets 42,972 1,095 44,067
----------------- ----------- ------------ ---------------
Total other assets 348,676 177,880 237,603 764,159
----------------- ----------- ------------ ---------------
TOTAL ASSETS $ 1,409,120 $ 301,245 $ 149,163 $ 1,859,528
================= =========== ============ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 188,974 $ 30,043 $ 4,000(c) $ 223,017
Income taxes payable 8,730 581 9,311
Deferred revenue 278,563 278,563
----------------- ----------- ------------ ---------------
Total current liabilities 476,267 30,624 4,000 510,891
DEFERRED INCOME TAXES 784 784
DEFERRED REVENUE 83,781 83,781
LONG TERM DEBT 3,560 (b)
111,440 300,000 (c) 415,000
----------------- ----------- ------------ ---------------
Total liabilities 560,048 142,848 307,560 1,010,456
----------------- ----------- ------------ ---------------
SHAREHOLDERS' EQUITY:
Common stock and additional paid-in capital 461,706 127,033 (127,033)(b) 461,706
Retained earnings 393,726 31,364 (31,364)(b) 393,726
Foreign currency translation adjustment (6,360) (6,360)
----------------- ----------- ------------ ---------------
Total shareholders' equity 849,072 158,397 (158,397) 849,072
----------------- ----------- ------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 1,409,120 $ 301,245 $ 149,163 $ 1,859,528
================= =========== ============ ===============
</TABLE>
See notes to pro forma financial statements.
<PAGE> 35
COMPUWARE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Adjusted Pro Forma Pro Forma
Compuware DPRC (a) Adjustments Results
---------------- ---------------- ---------------- -------------
March 31, January 31,
1999 1999
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 683,354 $ 683,354
Maintenance fees 334,371 334,371
Professional services fees 620,720 $ 331,705 952,425
---------------- ---------------- ---------------- -------------
Total revenues 1,638,445 331,705 1,970,150
---------------- ---------------- ---------------- -------------
OPERATING EXPENSES:
Cost of software license fees 28,097 28,097
Cost of maintenance 37,286 37,286
Cost of professional services 506,765 277,142 783,907
Software product development 64,957 64,957
Sales and marketing 418,019 418,019
Administrative and general 78,333 23,359 $ 17,841(d) 119,533
Merger-related costs 3,054 3,054
Compensation expense associated with options 932 932
Purchased research and development 4,350 4,350
---------------- ---------------- ---------------- -------------
Total operating expenses 1,137,807 304,487 17,841 1,460,135
---------------- ---------------- ---------------- -------------
INCOME FROM OPERATIONS 500,638 27,218 (17,841) 510,015
OTHER INCOME 29,403 (2,086) (26,354)(e) 963
---------------- ---------------- ---------------- -------------
INCOME BEFORE INCOME TAXES 530,041 25,132 (44,195) 510,978
INCOME TAX PROVISION 180,178 11,339 (9,409)(f) 182,108
---------------- ---------------- ---------------- -------------
NET INCOME $ 349,863 $ 13,793 $ (34,786) $ 328,870
================ ================ ================ =============
Basic earnings per share $ 0.95 $ 0.90
================ =============
Basic weighted average shares
used in computation 366,734 366,734
Diluted earnings per share $ 0.87 $ 0.82
================ =============
Diluted weighted average shares
used in computation 402,036 402,036
See notes to pro forma financial statements.
</TABLE>
<PAGE> 36
COMPUWARE CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Adjusted Pro Forma Pro Forma
Compuware DPRC (a) Adjustments Results
---------------- ---------------- ---------------- ----------------
June 30, April 30,
1999 1999
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 160,952 $ 160,952
Maintenance fees 97,740 97,740
Professional services fees 184,359 $ 93,229 277,588
---------------- ---------------- ---------------- ----------------
Total revenues 443,051 93,229 536,280
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Cost of software license fees 5,946 5,946
Cost of maintenance 10,380 10,380
Cost of professional services 158,480 76,772 235,252
Software product development 17,325 17,325
Sales and marketing 100,315 100,315
Administrative and general 14,690 6,477 $ 4,144(d) 25,311
---------------- ---------------- ---------------- ----------------
Total operating expenses 307,136 83,249 4,144 394,529
---------------- ---------------- ---------------- ----------------
INCOME FROM OPERATIONS 135,915 9,980 (4,144) 141,751
OTHER INCOME (EXPENSE) 5,846 (986) (6,480)(e) (1,620)
---------------- ---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 141,761 8,994 (10,624) 140,131
INCOME TAX PROVISION 51,034 3,921 (2,344)(f) 52,611
---------------- ---------------- ---------------- ----------------
NET INCOME $ 90,727 $ 5,073 $ (8,280) $ 87,520
================ ================ ================ ================
Basic earnings per share $ 0.25 $ 0.24
================ ================
Basic weighted average shares
used in computation 357,899 357,899
Diluted earnings per share $ 0.24 $ 0.23
================ ================
Diluted weighted average shares
used in computation 385,423 385,423
</TABLE>
See notes to pro forma financial statements.
<PAGE> 37
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
a) Certain reclassifications were made to conform DPRC's categorizations to
those of Compuware.
b) The unaudited pro forma financial information assumes a total purchase price
for DPRC of approximately $501 million in cash plus $2.5 million to pay
related fees and expenses. This amount includes the assumption of
subordinated debt with a fair market value of approximately $115 million.
These pro forma adjustments represent the estimated valuation adjustments of
DPRC's assets and liabilities resulting from the preliminary allocation of
the purchase price and elimination of stockholders' equity.
c) Compuware has entered into a four year unsecured credit agreement with
several major financial institutions for $900 million. This acquisition will
be funded by drawing on $300 million of this line, using existing cash and
investments of approximately $84.0 million and other current payables of
$4.0 million. In addition the existing DPRC debentures ($115 million) will
be called and funded through additional borrowings under the Compuware
credit agreement.
d) Represents the amortization of the cost over fair value of net assets
acquired over a twenty year period and the amortization of the commitment
fee on the new credit agreement.
e) Represents interest expense on new borrowing at 6.5%, net of interest
expense on DPRC debentures, commitment fees on the line of credit, and
reduced interest income associated with the use of approximately $84.0
million of cash and investments with an approximate return of 5.5%.
f) Represents the estimated tax effect of the pro forma adjustments at a 35%
effective tax rate exclusive of the goodwill amortization which is not tax
deductible.
