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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12801 N. CENTRAL EXPRESSWAY, SUITE 350 75243
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(972) 458-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on Which Registered:
COMMON STOCK, PAR VALUE $.10 PER SHARE NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 31, 1997, was $3,266,239, based upon the market value of the
Registrant's common stock of $5.35 per share.
Number of shares of common stock of the registrant outstanding on March 31,
1997 was 1,635,312.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report.
(1) The Registrant's definitive proxy statement in connection with its Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A promulgated under the Securities Exchange Act of
1934, is incorporated by reference to Part III of this Report.
PART I
ITEM 1. BUSINESS
GENERAL
Diversified Corporate Resources, Inc. (the "Company") is a Texas corporation
which was incorporated in 1977 under the name of Diversified Human Resources
Group, Inc.; the Company changed its name in 1994. The Company is an employment
services firm that provides professional and technical personnel on a contract
and permanent placement basis to high-end specialty employment markets, such as
the information technology ("IT") market. While the majority of the Company's
revenues are derived from providing IT staffing solutions, the Company also
fills other high value-added employment positions in the engineering and
technical, accounting and finance, and professional and technical sales
disciplines. The Company offers both contract and permanent placement solutions
in a broad variety of disciplines in order to position itself as a single source
provider of solutions that meet all of a client's high-end staffing needs. The
Company manages its operations as a group of interrelated business units, each
of which is incentivized to share leads and draw from each other's information
resources, as well as to achieve strong independent performance. In addition to
maintaining this competitively balanced business model, the Company focuses on
aggressive recruiting and is enhancing its technical training capabilities. The
Company principally serves its clients, including several Fortune 500 companies,
through its network of offices located in Dallas, Houston and Austin, Texas,
Atlanta, Georgia, Chicago, Illinois, Kansas City, Missouri and Raleigh, North
Carolina.
All references in this Form 10-K to the Company include its wholly-owned
subsidiaries. A list of such subsidiaries is filed as an exhibit to this Form
10-K.
INDUSTRY OVERVIEW
The employment services industry has experienced significant growth in
response to both the changing work environment in the United States and
continued growth in the uses of information technology. Fundamental changes in
the employer-employee relationship continue to occur, with employers developing
heightened criteria for permanent employees and greater demand for
project-oriented contract hiring. This trend has been compounded by the ever
increasing rate of change caused by advances in IT and the corresponding need
for access to professionals with up to date IT skills.
The IT services industry has undergone rapid change and growth. IT services
is a term that now encompasses not only computer and communications systems
hardware but also the personnel who design, manage and maintain those systems.
IT projects tend to be significantly longer and more rigorously defined and
require longer-term, more highly-skilled personnel services than traditional
non-permanent staffing placements. At the same time, these services offer the
opportunity for higher profitability than clerical and light industrial staffing
because of the high value-added nature of professional and technical personnel,
the expanding demand for such qualified personnel and the limited number of
sufficiently skilled personnel to fill these positions. The recruiting and
retention of qualified IT professionals is, therefore, a challenge common to all
companies in the IT services industry. Competitive companies have increased
advertising and recruiting efforts and are implementing strategies such as the
use of recruiting teams, the Internet, and the offering of fully benefited
salaried positions, referral bonuses and specialized training programs.
The growth of the IT services industry has been driven by (i) the
interdependence of software applications, (ii) the integration of
telecommunications and computers, (iii) business' increasing reliance on
information technology as a strategic tool, (iv) the shift to distributed
computing and the movement from mainframe to client server environments, and (v)
the proliferation of computer networks, comprised of hardware and software
manufactured by various vendors. As businesses struggle to integrate multiple
processing platforms and software applications which serve an increasing number
of end-users, systems and applications development has become increasingly
challenging. Furthermore, as businesses continue to focus on their core
competencies but at the same time strive to operate more efficiently with fewer
people, managing and planning staffing requirements to meet IT needs becomes
more difficult. To keep up with these changes, companies require the services of
IT professionals who can manage the integration of computers, operating systems,
networks, and voice and data systems, as well as programming, hardware and
software system design and development, LAN management, Internet Web site
development and management or project staffing. For these employers, contract
personnel offer them the ability to keep personnel costs variable, to achieve
maximum flexibility, and to avoid the negative effects of layoffs.
As a result of technological changes and the continued growth and acceptance
of the use of contract personnel, including IT personnel, management believes
that clients will demand expanded services from their staffing providers.
Management believes that not only do clients desire specialized project staffing
but that clients want the flexibility to take on non-permanent professionals to
fill staffing needs. In addition, the Company believes that a key characteristic
of outsourcing is providing convenience and efficiency to a client and that
clients desire to have their permanent, contract and specialty staffing needs
filled by the same provider.
SALES OF SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS IN 1991 AND SUBSEQUENT
REPOSSESSION
During the period from September 3, 1991 to September 19, 1991, the Company
consummated four separate transactions (the "Purchase Agreements") relating to
the sale of its operating divisions. Taken as a whole, the Purchase Agreements
involved the sale of substantially all of the Company's assets.
As consideration for the Company's agreement to sell its divisions to the
various purchasers involved, the purchasers (a) executed various interest
bearing promissory notes which were payable to the Company over periods of three
to six years; (b) assumed various liabilities and obligations of the Company in
connection with the purchased operations; and (c) agreed to pay the Company a
monthly royalty fee for six years equal to specified percentages of the gross
revenues of the respective divisions purchased by each purchaser. Collection of
the royalty fees and notes receivable, and the discharge of liabilities assumed,
was dependent upon the successful operations of the businesses sold.
Due to the failure of the purchasers to fulfill their obligations, the Company
pursuant to the Purchase Agreements, effectuated foreclosure proceedings to
repossess many of the assets previously sold by the Company.
CURRENT BUSINESS ACTIVITIES
The Company operates along functional lines of contract and permanent
placement of professional personnel, with specialty services consisting of
non-permanent placements being offered to the Company's permanent placement
clients as part of the Company's single source provider strategy. The permanent
placement of professional personnel is generally a fee for placement business,
with specified search parameters and goals. The contract placement of IT and
engineering personnel is generally a more project specific business, with the IT
and engineering personnel of the Company undertaking well defined projects for
periods ranging from four weeks to a year or more. In addition to these
placement services, the Company plans on providing clients, employees and
applicants training and certification through its TrainUSA program. The Company
believes that its focus on high-end niche markets, single source provider
strategy, recruiting and retention of applicants and its future training
programs will provide it with certain competitive advantages.
PERMANENT PLACEMENT SERVICES
The Company is currently engaged in providing permanent placement services in
Dallas, Houston and Austin, Texas, Atlanta, Georgia, Chicago, Illinois and
Raleigh, North Carolina. The Company offers these services in the following
selected core disciplines:
o Information Technologies - Services include systems
design, consulting, conversions, software development, and
information systems disaster control.
o Engineering/Technical - Services include process
engineering, industrial engineering and manufacturing,
software design and maintenance and related information
technology services. Technical areas serviced include
environmental, construction, plastics, chemical,
telecommunications, computer hardware, food, and metals.
o Financial/Accounting - Services range from project-based
accounting work to recruitment and placement of financial
managers.
o Professional/Technical Sales - Services range from
technical sales/marketing personnel to recruitment and
placement of management personnel.
The Company usually enters into written contracts with clients specifying its
fee arrangements prior to undertaking any permanent placement services on behalf
of such clients. Fees typically range from 15% to 35% of the first year's annual
salary. Although these fees are usually paid by the employer, in certain
instances such fees are paid by the newly placed employee. The Company sometimes
offers its clients a 30 day guarantee of permanent professional placements
during which the Company agrees to replace, without additional charge to the
client, any newly placed employee who leaves such job. If the Company is unable
to replace the employee, it may refund the client's fee or a prorated portion
thereof depending upon the circumstances.
The Company recently began providing permanent clerical and administrative
personnel to its existing clients, primarily to support professional staff and
executive management of those clients. The Company believes that permanent
clerical and administrative placement services will be an important offering as
part of its plan to be a single source provider of placement services to its
clients. The Company is also involved in the recruitment and placement of
medical personnel, including therapists, nurses and doctors.
SPECIALTY SERVICES
As part of its single source provider strategy, the Company also provides
specialty services to its clients consisting of the placement of non-permanent
personnel in all of the Company's disciplines. These services have grown out of
the Company's permanent placement services as clients have increasingly desired
to fill non-permanent employment needs without incurring the associated costs of
hiring, training or providing employee benefits or to fill permanent employment
needs with applicants only after having had that applicant work for the client
prior to committing to such hire. Personnel needs that can be filled by
non-permanent or non-permanent-to-permanent employees are primarily caused by
vacation, illness, resignation, increases in work volume, the need to staff
special projects and a desire for pre-screening of permanent hires.
The Company's specialty services are typically initiated by a client's
telephone call to the local Company office or as a result of marketing efforts
on the part of the Company. The Company obtains from the client a description of
the order and uses this information to select an appropriate individual from the
office's list of available non-permanent personnel. Clients request
non-permanent personnel for periods generally ranging from one day to several
weeks. The Company generally receives notice of the assignment from 30 minutes
to three days in advance. On the day of the assignment, the Company verifies
both the prompt arrival of the employee and the employee's performance. The
Company charges clients an hourly rate for non-permanent personnel and generally
absorbs all employment costs, including hourly wages, unemployment taxes, social
security taxes and fringe benefits. The Company generally offers clients a
guarantee period during which the Company will refund the client's payment if
the client notifies the Company that it is dissatisfied with the employee's
performance, and the Company is unable to replace the employee.
The Company screens its non-permanent personnel based on interviewing,
testing and reference checking procedures. These procedures also enable the
Company to categorize its non-permanent professional personnel by preference for
job location, hours and work environment. In order to attract high quality
non-permanent professional employees, the Company grants paid vacations,
holidays and other benefits for non-permanent employees who work a specified
minimum number of hours for the Company.
CONTRACT PLACEMENT SERVICES
The Company provides IT contract placement services primarily in the Dallas,
Texas, Kansas City and St. Louis, Missouri and Denver, Colorado markets. The
Company's IT personnel provide services in the following areas:
o project management
o systems analysis, development and design
o product implementation
o systems migration and conversions
o technical writing
o documentation support
o functional support
o company educational and project planning
o testing
o systems and network administration
o hardware, network, and software evaluation services
Contract engagements are generally project oriented and typically last from
four weeks to one year or more. The Company usually enters into written
contracts with clients after becoming an approved vendor. Services are then
provided on a time and materials or purchase order basis. The Company provides
individualized attention to each of its clients and develops and designs
tailored service programs based on its clients' unique needs. All contract
personnel assigned by the Company are Company employees. The Company provides
each of its employees with full benefits plans and ensures that there is full
compliance with all federal, state, and local tax withholding and insurance
guidelines.
The Company has provided personnel and human resource solutions to many of
the nation's largest companies including: DSC Communications, Hitachi America,
American Airlines, Compaq Computer Corp., Mobil Oil, Dr. Pepper/7-UP, Texas
Instruments, MCI, Fidelity Investments, Blockbuster, DST Systems, and TU
Electric. The Company backs all service programs with a firm commitment to
excellence.
RECRUITING
The Company recruits qualified applicants primarily through referrals from
other applicants and through newspaper advertising, its data base, job fairs and
various media advertisements. The recruiting of skilled IT, engineering, and
financial and accounting professionals is one of the main challenges for the
Company. The Company plans on meeting this challenge in the future with a
broadened multi-faceted approach, including (i) the use of aggressive direct
marketing to targeted groups, such as professional associations and industry
trade schools, (ii) the building of its SearchNet data base system to both
enhance the Company's ability to track applicants and to provide applicants with
better work opportunities, (iii) the use of the Internet to attract applicants,
(iv) the continued offering of competitive wage and benefit packages, and (v) by
improving its training programs.
The Company maintains extensive files of qualified applicants based upon
advertising, recruitment referral and reference checking procedures. In order to
attract permanent and contract assignment candidates, the Company places
emphasis upon its ability to provide placement opportunities, competitive
compensation, quality and varied assignments, and scheduling flexibility.
During periods of low unemployment, the Company experiences greater
difficulty in obtaining applicants for permanent placement. On the other hand,
the number of persons seeking non-permanent employment has increased
irrespective of economic cycles because of changes in the demographics of the
work force and general increases in cost of living which have resulted in a need
for an increased number of two-income households. In addition, applicants for
permanent placement are frequently willing to accept temporary employment during
their search for permanent positions.
TRAINING
The Company provides training to its counselors and managers, both when they
are hired and on an on-going basis throughout their careers. The primary focus
of such training is on how to effectively market the Company's placement
services and how to screen and hire applicants.
The Company has begun to focus on the training of its applicant pool as part
of its single source provider strategy. Management intends to focus more
resources on this aspect of the business in the future.
MARKETING
The Company's marketing efforts are largely implemented at the local office
level. In marketing its placement services to clients, the Company historically
has relied primarily on telephone solicitation, referrals from other Company
offices and, to a lesser extent, on direct mail, yellow pages and newspaper
advertising. Client visits also play an important role in the Company's
marketing efforts. The Company focuses its marketing efforts on the high-end,
specialized niche markets it serves.
Upon receiving an order from a client, the Company attempts to match the
specifications required by the client with qualified applicants and to arrange
interviews between the client and applicants. In certain cases, the Company
markets a highly qualified applicant to a client even when no specific order has
been received. If the client offers a position to the applicant and the
applicant accepts, the Company receives a fee for these services.
OTHER OPERATIONS AND SERVICES
The Company formed Preferred Funding Corporation ("PFC"), a wholly-owned
subsidiary, in 1994 for the purpose of providing financing to its subsidiary
companies. To date, PFC has facilitated borrowings by the Company, and recently
under an asset based lending arrangement with an unaffiliated third party lender
at lower rates than standard factoring rates. Management of the Company believes
it can reduce the Company's overall cost of funds (which are relatively high
because of the Company's reliance on factoring) thereby improving the Company's
consolidated operating performance.
COMPETITION
The specialty staffing services industry is very competitive and fragmented.
There are relatively limited barriers to entry and new competitors frequently
enter the market. A number of the Company's competitors possess substantially
greater resources than the Company. The Company faces substantial competition
from large national firms and local specialty staffing firms. Large national
firms that offer specialty staffing services include Robert Half International,
Computer Horizons, Inc., and Alternative Resources Corporation. Other firms that
the Company competes with include RCM Technologies, Professional Staff,
Personnel Management, Joulet, ROMAC International, Inc., Source Services Corp.,
Data Processing Corp., Alternative Resources Corp. and General Employment
Enterprises. Local firms are typically operator-owned, and each market generally
has one or more significant competitors. In addition, the Company competes with
national clerical and light industrial staffing firms that also offer specialty
services. These companies include Interim Services, Inc., Norrell Corporation,
AccuStaff Incorporated, and Olsten Corp. In addition. national and regional
accounting firms also offer certain specialty staffing services.
The Company believes that the availability and quality of candidates, the
level of service, the effective monitoring of job performance, the scope of
geographic service and the price of service are the principal elements of
competition. The Company believes that availability of quality candidates is an
especially important facet of competition. Because many candidates pursue other
employment opportunities on a regular basis, it is important that the Company
respond to market conditions affecting candidates. Although the Company believes
it competes favorably with respect to these factors, it expects competition to
increase, and there can be no assurance that the Company will remain
competitive.
REGULATION
Most states require permanent placement firms to be licensed in order to
conduct business. Such licenses may be revoked upon material noncompliance with
state regulations. Any such revocations would have a material adverse effect on
the business of the Company. The Company believes that it is in substantial
compliance with all such regulations and possesses all licenses necessary to
engage in the placement of permanent personnel in the jurisdictions in which it
does business. Various government agencies have advocated proposals from time to
time to license or regulate the placement of non-permanent personnel. The
Company does not believe that such proposals, if enacted, would have a material
adverse effect on its business.
EMPLOYEES
In addition to the non-permanent and contract personnel from time to time
employed by the Company for placement with clients, the Company had
approximately 285 full-time employees as of December 31, 1996. Of these
employees, approximately 250 were personnel consultants and office managers paid
on a commission basis and approximately 35 were administrative and executive
salaried employees. The Company considers its relations with its employees to be
good.
ITEM 2. PROPERTIES
The Company and its wholly-owned subsidiaries currently lease approximately
41,600 square feet in one building in Dallas, Texas; the terms of such leases
and its amendments range from four years to seven years. The Company also leases
approximately 17,000 square feet in Houston, Texas, 5,200 square feet in Austin,
Texas, 2,000 square feet in Kansas City, Missouri, 10,000 square feet in
Atlanta, Georgia, 3,000 square feet in Chicago, Illinois and 2,000 square feet
in Raleigh, North Carolina. Such leases generally range from three to five
years. The current cost of all of the Company's office leases is approximately
$1,185,000 per annum.
The Company believes that all of its present facilities are adequate for its
current needs and that additional space is available for future expansion upon
acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
On September 5, 1996, a lawsuit was filed in the 114th Judicial District of
the District Court of Wood County, Texas, by Ditto Properties Company ("Ditto
Properties") against USFG-DHRG L.P. No. 2, Inc. a/k/a DCRI L.P. No. 2, Inc.
("USFG No. 2"). In addition, J. Michael Moore and the Company were named as
garnishees in the lawsuit. The venue of the lawsuit has since been transferred
to the District Court of Dallas County, Texas, 298th Judicial District.
In this lawsuit, Ditto Properties seeks to rescind a Stock Purchase
Agreement (the "Stock Purchase Agreement"), dated March 26, 1993, between Ditto
Properties and USFG No.2, pursuant to which Ditto Properties had agreed to
transfer 899,200 shares (the "Shares") of common stock, par value $.10 per share
(the "Common Stock"), of the Company to USFG No. 2, alleging that USFG No. 2 had
failed to perform its obligations under the Stock Purchase Agreement. In
addition to rescission of the Stock Purchase Agreement and the title, ownership
and possession of the Shares, the suit seeks imposition of a constructive trust
upon the Shares for Ditto Properties' benefit and, in the alternative, damages
for breach of contract. The sole shareholder of USFG No. 2 is J. Michael Moore,
Chairman of the Board and Chief Executive Officer of the Company.
The Company was added to this lawsuit as a garnishee only because Ditto
Properties sought to garnish the Shares to the extent that the Shares were in
the hands of J. Michael Moore or the Company. In addition, Ditto Properties
seeks to obtain 250 shares (the "Pledged Shares") of USFG No. 2 that Ditto
Properties alleged were pledged to Ditto Properties pursuant to the Stock
Purchase Agreement. Moreover, Ditto Properties sought to foreclose on the
Pledged Shares and requested attorney's fees.
On October 24, 1996, the parties to this suit agreed to the entry of a
Temporary Order and an Agreed Temporary Order (the "Temporary Order") was
entered by the Court. Under the Temporary Order, certificates evidencing the
Shares, owned directly or beneficially by USFG No. 2, are required to be
delivered to a Special Master pursuant to the terms of the Temporary Order. The
Temporary Order provides that USFG No. 2, its officers, directors and
shareholders may conduct all lawful business, but shall obtain the approval of
the Special Master prior to taking certain specified actions regarding the
Shares, including selling, voting, or pledging the Shares. Notwithstanding the
foregoing, all of USFG No. 2's duties, responsibilities and other obligations
under the Temporary Order, including the requirements that the Shares be
delivered to the Special Master or that the approval of the Special Master for
certain actions relating to the Shares be obtained, automatically expire upon
the depositing with the Special Master by USFG No. 2 of cash in the amount of
$1,500,000. Mr. Moore and the Company, both named only as garnishees in the
suit, were non-suited as a result of the Temporary Order and are no longer in
the case. USFG No. 2 has advised the Company that it believes that Ditto
Properties' claims including its claim for rescission of the stock purchase
agreement and other equitable relief, are without merit.
The Company believes, based on discovery in the case, that the efforts of
Ditto Properties and Donald Ditto, Sr. were designed as an attempted hostile
takeover of the Company. In addition, the Company has filed a seperate lawsuit
against Ditto Properties in a separate lawsuit in Dallas, County, Texas, seeking
damages and the reimbursement of expenses alleging that Ditto Properties and
Donald Ditto, Sr. interfered with Company business transactions and proposed
financings resulting in delays of
certain transactions, lost opportunities, lost profits and other significant
losses.
In connection with the litigation proceedings, the Company has incurred
legal expenses on its own behalf and, in addition, has funded the legal expenses
of USFG No. 2 incurred in connection with the suit. Management has caused funds
to be advanced on behalf of USFG No. 2 to try to prevent this litigation from
adversely impacting the Company's ability to pursue acquisitions and related
funding strategies. USFG No. 2 has entered into an agreement with the Company
pursuant to which Mr. Moore has agreed to reimburse such legal fees and expenses
deemed personal in nature by the Board. The Board has determined that
approximately 50% of the legal fees paid to the Company's and Mr. Moore's
counsel through October 24, 1996, the date of the Temporary Order, should be
reimbursed by USFG No. 2 to the Company and that all of such fees and expenses
after such date should be reimbursed to the Company. See Notes to the Company's
Consolidated Financial Statements.
On September 13, 1996, a lawsuit was filed in the 44th Judicial District
of the District Court of Dallas County, Texas, by Billie Jean Tapp ("Ms. Tapp")
(which has since been joined by Gary K. Steeds ("Mr. Steeds") as a third party
plaintiff) against the Company, two of the Company's subsidiaries, Management
Alliance Corporation ("MAC") and Information Systems Consulting Corp. ("ISCC")
and three of the Company's officers and directors (J. Michael Moore, M. Ted
Dillard and Donald A. Bailey). The lawsuit has since been administratively
transferred to the District Court of Dallas County, Texas, 160th Judicial
District.
In their lawsuit, Ms. Tapp and Mr. Steeds, (former employees of the Company)
each allege damages in excess of $29 million for breach of contract, conspiracy
and tortious conduct, as well as mismanagement, misappropriation of corporate
assets and self-dealing by Company officers and directors. Their breach of
contract claims include allegations that the Company breached an agreement
purporting to convey up to 20% of the issued and outstanding shares of MAC and
ISCC to each of Ms. Tapp and Mr. Steeds, and certain other alleged agreements.
The Company believes that all of Ms. Tapp's and Mr. Steed's claims are without
merit and has filed an answer and counterclaim against Ms. Tapp and a plea in
abatement and is vigorously defending the lawsuit. In addition, the Company has
filed a third party petition against Mr. Steeds. The Company maintains that
there were no such contractual agreements with Ms. Tapp and Mr. Steeds and that
they are not owed anything by the Company or any of the other defendants in this
case. The Company further denies conspiring to injure either Ms. Tapp or Mr.
Steeds.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.MARKET PRICE OF REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and is
listed in the pink sheets under the symbol "HIRE." The following table sets
forth, for the periods indicated, the range of high and low sales prices for the
Common Stock, which were obtained from a market maker for the Common Stock. Such
prices are as follows:
Period High Low
------ -------------- ----------
1995
1st Quarter................................................. $ .13 $ .13
2nd Quarter................................................. .13 .13
3rd Quarter................................................. .25 .25
4th Quarter................................................. .25 .25
1996
1st Quarter................................................. $ .62 $ .25
2nd Quarter................................................. 1.75 .50
3rd Quarter................................................. 3.75 2.00
4th Quarter................................................. 4.00 3.00
The Company had approximately 180 holders of record of Common Stock as of
March 31, 1997. While the Company knows that a number of beneficial owners of
its Common Stock hold shares in street name, no estimate has been made as to the
number of shareholders owning stock of the Company in street name.
The Company has not paid any cash dividends on its Common Stock since its
inception. The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends in the foreseeable future. Any
future determination as to dividend policy will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of Directors
may deem relevant.
The Company has not sold any securities during 1996 that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
During 1996, the Company granted options to purchase 30,000 shares of Common
Stock to Mr. Donald Bailey, a member of the Board of Directors of the Company;
and subsequent to December 31, 1996, the Company granted options to purchase
30,000 shares of Common Stock to Samuel E. Hunter, a recently named member of
the Board of Directors of the Company. In addition, the Company granted stock
options to J. Michael Moore, Chairman of the Board and Chief Executive Officer
of the Company, and M. Ted Dillard, President of the Company, to purchase
155,000 and 105,000 shares of Common Stock, respectively. See Note 6 to the
Company's Consolidated Financial Statements for a discussion of the terms of
these options. Neither the grant of these options nor the issuance of the
underlying shares of Common Stock on exercise of such options has been
registered under the Securities Act and, pending an effective registration under
the Securities Act, the shares of Common Stock will be issued pursuant to the
exemption from registration under the Securities Act set forth in Section 4(2)
thereunder.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Effective July 31, 1991, the Company sold substantially all of its assets.
In 1993, the Company repossessed certain of those assets, see "Item 1 - Sale of
Substantially All of the Company's Assets and Subsequent Repossession." Because
no audited financial statements with respect to such assets are available for
1992 or 1993, and because such assets represented a substantial portion of the
assets of the Company in 1992 and 1993, no financial information for 1992 and
1993 has been provided.
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 1996 1995 1994
- --------------------------------------------- ----------- ------------ ------------
(in Thousands, except per share data)
Net Service Revenues........................ $27,430 $19,358 $15,233
Gross Margin................................ 7,755 5,026 4,101
Income (loss) before income
taxes (benefit) and
extraordinary credit...................... 1,764 346 16
Income (loss) before
extraordinary credit...................... 1,539 286 16
Net income (loss)........................... 1,785 461 224
Primary income (loss) per share:
Before extraordinary credit............... .84 .16 .01
Net income (loss)......................... .98 .26 .13
Fully diluted income per share:
Before extraordinary credit............... .83 .16 .01
Net income (loss)......................... .96 .26 .13
AS OF DECEMBER 31,
- ------------------------------------------------------------------------------------------------
BALANCE SHEET DATA 1996 1995 1994
- --------------------------------------------- ----------- ------------ ------------
(in Thousands)
(End of Period):
Working Capital............................. $ 361 $ (1,060) $ (1,142)
Total assets................................ 5,129 3,070 2,563
Short-term debt............................. 22 22 102
Long-term debt.............................. 68 90 113
Stockholders' equity
(Capital deficiency)........................ 1,317 (452) (913)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
Net service revenues increased approximately 41.7% to $27.4 million in 1996,
compared to $19.4 million for 1995. Permanent placement revenues increased
approximately 37.8% to $12.6 million in 1996, compared to $9.1 million in 1995.
Specialty service revenues increased approximately 77.0% to $7.5 million in
1996, compared to $4.2 million in 1995. Contract placement revenues increased
approximately 22.9% to $7.4 million in 1996. The increases in revenues in 1996
were primarily attributable to the Company's continued focus on high margin,
high-end niche markets as demonstrated by the redeployment of Company management
and marketing resources and the opening of two new local offices (Austin, Texas
and Raleigh, North Carolina) to service IT clients in those areas, further
implementation of the Company's single source provider strategy through the
continued training and development of the Company's local office management
staff which resulted in sales growth within existing offices and continued
demand for the Company's services.
Gross margin increased approximately 54.3% to $7.8 million in 1996, compared
to $5.0 million in 1995. Gross margin as a percentage of net service revenues
increased to 28.3% in 1996 from 26.0% in 1995, primarily as a result of the
Company's focus on higher margin business, particularly IT, and the Company
implementing programs, allowing fixed costs to be spread over a larger revenue
base.
Selling, general and administrative expenses increased approximately 26.8% to
$5.7 million in 1996, compared to $4.5 million in 1995; representing 20.8% of
1996 revenues. The increase was primarily the result of increased marketing and
recruiting expenses, increased expenditures on the Company's back office,
including accounting, support staff and management information systems to
support the Company's growth strategies, as well as the overall growth in the
Company's business. Included in the increase in selling, general and
administrative expenses was an increase in selling expenses of $261,000 in 1996
over the comparable period in 1995, an increase of $773,000 in general and
administrative expenses primarily for back office administration to support the
Company's growth and an increase of $172,000 primarily related to the
litigations described in Item 3-Legal Proceedings.
Other expenses increased approximately $105,000 to $288,000 in 1996, compared
to $183,000 in 1995, primarily due to increased losses from joint venture
operations and a writedown of long-lived assets.
Provisions for income taxes increased from approximately $60,000 in 1995 to
approximately $225,000 in 1996, as a result of increases in the Company's
taxable income.
As a result of the above factors, net income increased approximately 287.5%
to $1.8 million in 1996, as compared to $461,000 in 1995.
1995 COMPARED TO 1994
Net service revenues increased approximately 27.1% to $19.4 million in 1995,
compared to $15.2 million in 1994. Permanent placement revenues increased
approximately 22.1% to $9.1 million in 1995, compared to $7.5 million in 1994.
Specialty service revenues increased approximately 46.2% to $4.2 million in
1995, compared to $2.9 million in 1994. Contract placement revenues increased
approximately 23.4% to $6.0 million in 1995, compared to $4.9 million in 1994.
The increases in revenues in 1995 were primarily attributable to the
implementation of the Company's strategy to focus on high-end niche markets, the
Company's expansion of its specialty service offerings in all of its offices as
part of the Company's strategy to become a single source provider of staffing
solutions and continued demand for the Company's services.
Gross margin increased approximately 22.6% to $5.0 million in 1995, compared
to $4.1 million in 1994. Gross margin decreased to 26.0% in 1995 from 26.9% in
1994, primarily as a result of increases in employee payroll expenses, as well
as specialty service and contract labor compensation, to meet competitive
pressures.
Selling, general and administrative expenses increased approximately 8.4% in
1995 to $4.5 million, compared to $4.1 million in 1994. The increase was
primarily the result of increased expenditures on the Company's back office,
including accounting, support staff and management information systems, to
support the Company's growth strategies, as well as the overall growth in the
Company's business. Included in the increase in selling, general and
administrative expenses was an increase in selling expenses of $114,000 in 1995
over the comparable period in 1994, and an increase of $236,000 in general and
administrative expenses primarily for back office administration to support the
Company's growth.
Other expenses increased approximately $245,000 in 1995 to $183,000, compared
to other income of $62,000 in 1994, primarily due to decreased gains on
foreclosed assets, losses from joint venture operations and increased interest
expense resulting from an increase in factored accounts receivable.
Provision for income taxes increased from zero in 1994 to approximately
$60,000 in 1995, as a result of increases in the Company's taxable income.
As a result of the above factors, net income increased approximately 105.2%
to $461,000 in 1995, compared to $224,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $361,000 at December 31, 1996, compared with a working
capital deficit of $1.0 million at December 31, 1995. The increase in working
capital of approximately $1.4 million during 1996 was primarily due to the
Company's profitable operations.
Cash flow provided by operating activities of $1.2 million resulted primarily
from the profitable operation of the Company and an increase in accounts payable
and accrued expenses, which supported increases in accounts receivable resulting
from revenue growth. The Company made capital expenditures of approximately
$424,000 in 1996, primarily to improve its facilities and back office. Net
reductions in debt associated with financing activities approximated $284,000 in
1996.
The Company has entered into factoring arrangements involving advances on its
outstanding accounts receivable for fees ranging from 2% to 7% of factored
receivables, based on the number of days the receivable is outstanding. The
proceeds from factored accounts receivable were used to fund the operations of
the Company's business during 1996, 1995 and 1994. In addition, in 1996 the
Company entered into a loan agreement, which replaced one of the Company's
factoring arrangements, providing for borrowings of up to $1 million, subject to
an accounts receivable borrowing base. The interest rate on this arrangement is
the lender's prime rate plus 2.5%, and the Company must pay a monthly
administrative fee of 0.6% multiplied by the average daily outstanding balance
under the arrangement. The maximum amount outstanding under these arrangements
were approximately $985,000, $762,000 and $650,000 during 1996, 1995 and 1994,
respectively.
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
Management of the Company anticipates that the cash flow from operations will
provide adequate liquidity to fund its operations for the foreseeable future.
Inflation has not had a significant effect on the Company's operating
results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information for this item has been omitted, inasmuch as the Company
will include this information in its definitive proxy statement to be filed with
the Commission, pursuant to Regulation 14A, within 120 days of the close of the
fiscal year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item has been omitted, inasmuch as the Company
will include this information in its definitive proxy statement to be filed with
the Commission, pursuant to Regulation 14A, within 120 days of the close of the
fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information for this item has been omitted, inasmuch as the Company
will include this information in its definitive proxy statement to be filed with
the Commission, pursuant to Regulation 14A, within 120 days of the close of the
fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information for this item has been omitted, inasmuch as the Company
will include this information in its definitive proxy statement to be filed with
the Commission, pursuant to Regulation 14A, within 120 days of the close of the
fiscal year ended December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page 16 of all financial
statements and schedules filed as a part of this report.
All other schedules are omitted as they are not applicable or not
required, or because the required information is included in the
financial statements or notes thereto.
(iii) Exhibits
Reference is made to the Index to Exhibits on pages 34 through 37 for
a list of all exhibits filed as part of this report.
(b) Reports on Form 8-K.
Not Applicable.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No.
Independent Auditor's Report.............................................................................. 17
Consolidated Balance Sheets - December 31, 1996 and 1995.................................................. 18
Consolidated Statements of Operations - Years Ended December 31, 1996, 1995, and 1994..................... 19
Consolidated Statements of Stockholders' Equity (Capital Deficiency) - Years Ended
December 31, 1996, 1995, and 1994.................................................................... 20
Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995, and 1994..................... 21
Notes to Consolidated Financial Statements................................................................ 22
Schedule II - Valuation and Qualifying Accounts - Years Ended December 31, 1996,
1995,
and 1994............................................................................................. 33
All other schedules have been omitted because they are either not applicable or
the information required by the schedule is included in the financial statements
or the notes thereto.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Diversified Corporate Resources, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of
Diversified Corporate Resources, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity (capital deficiency), and cash flows for each of the three years in the
period ended December 31, 1996. Our audits also included the financial statement
schedule listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidate financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 aspects, the consolidated financial position of
Diversified Corporate Resources, Inc. and subsidiaries as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Weaver and Tidwell, L.L.P.
------------------------------
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 10, 1997
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------------
CURRENT ASSETS: 1996 1995
---------------- ----------------
Cash and cash equivalents..................................................... $ 514,354 $ 69,627
Accounts receivable, less allowance for doubtful accounts
of approximately $494,000 and $412,000, respectively......................... 3,387,138 2,140,623
Notes receivable (Note 9)..................................................... 114,009 13,052
Prepaid expenses and other current assets..................................... 88,953 96,806
---------------- ----------------
TOTAL CURRENT ASSETS........................................................ 4,104,454 2,320,108
EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, NET (Note 3).................................................... 701,944 467,043
OTHER ASSETS:
Investment in and advances to joint venture (Note 12).......................... 152,905 103,838
Notes receivable (Note 9)...................................................... 21,690 -
Other.......................................................................... 147,879 179,153
================ ================
$5,128,872 $3,070,142
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 4)................................ $3,721,897 $3,358,163
Current maturities of long-term debt (Note 5)................................. 21,834 21,603
---------------- ----------------
TOTAL CURRENT LIABILITIES.................................................... 3,743,731 3,379,766
DEFERRED LEASE RENTS................................................................ - 52,531
LONG TERM DEBT (Note 5)............................................................. 68,157 90,048
COMMITMENTS AND CONTINGENCIES (Notes 2 and 11)
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Note 6):
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued...................................................... - -
Common stock, $.10 par value; 10,000,000 shares
authorized, 1,881,161 shares issued.......................................... 188,116 188,116
Additional paid-in capital..................................................... 3,615,151 3,615,151
Accumulated deficit............................................................ (2,301,108) (4,086,045)
Common stock held in treasury (245,849 and 122,950 shares,
respectively), at cost..................................................... (185,175) (169,425)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY).............................. 1,316,984 (452,203)
---------------- ----------------
$5,128,872 $3,070,142
================ ================
See notes to consolidated financial statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
----------------- --------------- ----------------
NET SERVICE REVENUES
Permanent Placement......................................... $12,573,995 $ 9,124,545 $ 7,471,318
Specialty Services.......................................... 7,451,563 4,209,685 2,879,143
Contract Placement.......................................... 7,404,730 6,023,655 4,882,253
----------------- --------------- ----------------
27,430,288 19,357,885 15,232,714
COST OF SERVICES (Note 1)....................................... 19,675,352 14,332,011 11,131,682
----------------- --------------- ----------------
GROSS MARGIN.................................................... 7,754,936 5,025,874 4,101,032
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................................................ (5,702,992) (4,497,097) (4,146,979)
OTHER INCOME (EXPENSES):
Gain (loss) on sale of assets held for sale, net............ (23,207) 16,784 (14,397)
Gain on foreclosure of division assets...................... 2,620 22,815 133,000
Loss from joint venture operations.......................... (90,313) (47,826) -
Interest expense, net....................................... (235,327) (237,111) (140,916)
Other, net.................................................. 57,869 62,487 84,524
----------------- --------------- ----------------
(288,358) (182,851) 62,211
----------------- --------------- ----------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ..................................... 1,763,586 345,926 16,264
INCOME TAXES, net of tax benefit from utilization
of net operating loss carry forward (Note 7)................ (224,774) (60,054) -
----------------- --------------- ----------------
INCOME BEFORE EXTRAORDINARY ITEM............................... 1,538,812 285,872 16,264
EXTRAORDINARY ITEM - gain on debt
restructuring, net of income tax (Note 8)................... 246,125 174,811 208,212
----------------- --------------- ----------------
NET INCOME................................................ $1,784,937 $ 460,683 $ 224,476
================= =============== ================
PRIMARY INCOME PER SHARE:
Income before extraordinary item............................ $ .84 $ .16 $ .01
Extraordinary item.......................................... .14 .10 .12
----------------- --------------- ----------------
PRIMARY INCOME PER SHARE........................................ $ .98 $ .26 $ .13
================= =============== ================
FULLY DILUTED INCOME PER SHARE:
Income before extraordinary item............................ $ .83 $ .16 $ .01
Extraordinary item.......................................... .13 .10 .12
----------------- --------------- ----------------
FULLY DILUTED INCOME PER SHARE.................................. $ .96 $ .26 $ .13
================= =============== ================
See notes to consolidated financial statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Additional
Common paid-in Accumulated Treasury
stock capital deficit stock Total
------------ -------------- -------------- ------------- --------------
BALANCE, January 1, 1994 $ 188,116 $ 3,615,151 $ (4,771,204) $ (169,425) $(1,137,362)
Net income......................... - - 224,476 - 224,476
------------ -------------- -------------- ------------- --------------
BALANCE, December 31, 1994............. 188,116 3,615,151 (4,546,728) (169,425) (912,886)
Net income......................... - - 460,683 - 460,683
------------ -------------- -------------- ------------- --------------
BALANCE, December 31, 1995............. 188,116 3,615,151 (4,086,045) (169,425) (452,203)
Net income......................... - - 1,784,937 - 1,784,937
Treasury stock purchase............ - - - (15,750) (15,750)
------------ -------------- -------------- ------------- --------------
BALANCE, December 31, 1996.............$ 188,116 $ 3,615,151 $ (2,301,108) $ (185,175) $ 1,316,984
============ ============== ============== ============= ==============
See notes to consolidated financial statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
---------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................... $ 1,784,937 $ 460,683 $ 224,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................................... 188,760 132,182 86,026
Provision for losses on accounts receivable...................... 81,434 207,363 41,000
Increase in accounts receivable.................................. (1,327,949) (473,232) (898,070)
Decrease in receivables from net assets foreclosed............... - - 236,973
Decrease in refundable federal income taxes...................... - - 30,779
(Increase) decrease in current maturities of
notes receivable................................................ (100,957) 12,311 (4,471)
(Increase) decrease in prepaid expenses and
other current assets............................................ 7,853 (90,602) (150,331)
(Increase) decrease in long term notes receivable................ (21,690) 11,533 22,576
Increase in other assets......................................... (108,106) (17,910) (135,387)
Increase in fixed assets from foreclosure........................ - - (177,884)
Increase in accounts payable and accrued expenses................ 610,701 104,419 805,221
Decrease in deferred lease rents................................. (52,531) (65,066) (80,273)
Decrease in obligations resulting from
settlement agreements........................................... - - (217,150)
Equity in loss of joint venture.................................. 90,313 47,336 -
Obligations written off in restructuring......................... - (20,634) -
---------------- --------------- ----------------
Net cash provided by (used in) operating activities........... 1,152,765 308,383 (216,515)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (423,661) (312,396) (157,014)
---------------- --------------- ----------------
Net cash used in investing activities........................... (423,661) (312,396) (157,014)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loan...................................... - - 10,000
Issuance of notes payable.......................................... - - 50,000
Repayment of short-term debt....................................... - (64,500) (110,000)
Increase (decrease) in proceeds from factored receivables.......... (246,967) 110,637 396,931
Purchase of treasury stock......................................... (15,750) - -
Principal payments under long-term debt
obligations to others............................................. (21,660) (18,277) (30,397)
---------------- --------------- ----------------
Net cash provided by (used in) financing activities............. (284,377) 27,860 316,534
---------------- --------------- ----------------
Net increase (decrease) in cash and
cash equivalents.................................................. 444,727 23,847 (56,995)
Cash and cash equivalents at beginning of year..................... 69,627 45,780 102,775
================ =============== ================
Cash and cash equivalents at end of year........................... $ 514,354 $ 69,627 $ 45,780
================ =============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest............................. $ 249,000 $ 264,000 $ 163,000
See notes to consolidated financial statements
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the operations of Diversified
Corporate Resources, Inc. and its subsidiaries (the "Company"). All intercompany
accounts and transactions have been eliminated in consolidation.
Nature of Operations and Concentration of Credit Risk
The Company is a Texas corporation and is engaged, through its wholly-owned
subsidiaries, in the permanent and specialty placement of personnel in various
industries, and in contract placement services. The Company operates offices in
a number of cities which are responsible for marketing to clients, recruitment
of personnel, operations, local advertising, credit and collections. The
Company's executive offices provide centralized training, payroll, collections
and certain accounting and administrative services for its offices. The Company
maintains cash on deposit in interest bearing accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses on such
accounts and believes it is not exposed to any significant credit risk on cash
and equivalents.
Revenue Recognition
Fees for placement of permanent personnel are recognized as income at the
time the applicants accept employment. Provision is made for estimated losses in
realization (principally due to applicants not commencing employment or not
remaining in employment for the guaranteed period). Revenue from specialty
services and contract placements are recognized upon performance of services by
the Company. Cost of services consists of expenses for the operation of the
Company's offices (principally commissions, direct wages paid to non-permanent
personnel, and payroll taxes) and a provision for uncollectible accounts
(approximately $165,000 in 1996 and $116,000 in 1995 and 1994). Accounts
receivable at December 31, 1996 and 1995, includes approximately $185,000 of
unbilled receivables which will be billed during 1997 and $36,000 of unbilled
receivables that were billed in 1996, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased
with remaining maturities of three months or less to be cash equivalents for
purposes of the consolidated statements of cash flows.
Depreciation and Amortization
Equipment, furniture, and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the individual assets (which range from three to
seven years) or the related lease terms, if applicable, whichever is shorter.
Intangible assets are amortized on the straight-line method over their estimated
useful lives which range from three to ten years.
Leases
Capital leases are recorded at the inception of the lease at the lower of
the discounted present value of future minimum lease payments or the fair value
of the asset.
Rent expense on operating leases is recorded on a straight-line basis over
the terms of the leases.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently payable plus deferred
taxes related primarily to differences between the basis of installment sales,
property and equipment and accounts receivable for financial and income tax
reporting. The deferred taxes represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
Income Per Share
Income per share was determined by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding (common stock equivalents are excluded if the effects of inclusion
are antidilutive). The weighted average number of primary shares outstanding for
the years ended December 31, 1996, 1995, and 1994 were 1,814,016 , 1,758,211 and
1,758,211, respectively. For the years ended December 31, 1996, 1995 and 1994,
the fully diluted shares outstanding were 1,860,284, 1,758,211 and 1,758,211,
respectively.
Reclassifications
The Consolidated Statements of Operations for prior years have been restated
to reflect gross margin and selling, general and administrative expenses on a
consistent basis with the current year presentation. Certain other amounts
previously reported in the 1995 and 1994 financial statements have been
reclassified for comparative purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting Pronouncements
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. The statement was adopted by the Company in the
first quarter of 1996. Under provisions of the statement, impairments, measured
using fair market value, are recognized whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable and the future undiscounted cash flows attributable to the asset are
less than its carrying value. Accordingly, the Company recognized a reduction in
market value of a certain long-lived asset.
This write down resulted in a charge to 1996 earnings of approximately $37,000.
In October 1995, SFAS No. 123, "Stock Based Compensation," was issued. This
statement requires the Company to choose between two different methods of
accounting for stock options. The statement defines a fair-value-based method of
accounting for stock options but allows an entity to continue to measure
compensation cost for stock options using the accounting prescribed by APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Use of the
APB 25 accounting method results in no compensation cost being recognized if
options are granted at an exercise price at the current market value of the
stock. The Company will continue to use the intrinsic value method under APB 25
but is required by SFAS 123 to make pro forma disclosure of net income and
earnings per share as if the fair value method had been applied in its 1996
financial statements. See Note 6 to the consolidated financial statements for a
more complete discussion of this matter.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SALE AND REPOSSESSION OF ASSETS:
General
In May, 1993, the Company repossessed from one of the purchasers of Company
assets most of the assets (the "Power Placement Assets") previously sold by the
Company to such purchaser.
Pursuant to an agreement dated December 16, 1993 and after operating the
Power Placement Assets since May, 1993, the Company sold the capital stock of
Recruiters Network Group, Inc. ("RNG"), a wholly-owned subsidiary of the Company
formed to operate these assets, to Donald A. Bailey ("Bailey"), then acting
President of and a Director of the Company. As part of the purchase agreement,
Bailey provided funding to enable RNG to reimburse the Company for RNG payroll
costs, RNG issued a $40,000 promissory note payable to the Company (secured by
RNG stock, RNG assets and personally guaranteed by Bailey), RNG issued a $15,000
promissory note payable to a former landlord of the Company and guaranteed by
Bailey, and $57,400 was paid to the Company in the form of one or more
affiliates of Bailey releasing the Company from certain obligations and
liabilities payable by the Company to Bailey. These promissory notes are
reflected as notes receivable in the balance sheet at December 31, 1995. Prior
to the sale, the Company had considered closing RNG due to recurring operating
losses during 1993. As of the date of this report all promissory notes have been
paid in full.
In December of 1992, another purchaser of Company assets caused both
Management Alliance Group Corp., formerly named Financial Recruiters, Inc.
("MAGC") and Gary K. Steeds, Inc. ("GKS") to seek protection from their
respective creditors under the federal bankruptcy laws.
In 1993, the Company was able to obtain the necessary court approval to
allow the Company to foreclose upon the accounts receivable and certain other
assets of MAGC and GKS. The Company foreclosed upon MAGC and GKS assets on
January 3, 1994. During December, 1993, the Company formed Management Alliance
Corporation ("MAC") and Information Systems Consulting Corp. ("ISC"), two
wholly-owned subsidiary corporations, to operate the employment placement
service businesses which MAGC and GKS operated prior to the aforesaid
foreclosure action taken by the Company.
Financial Information
The Company's Consolidated Statement of Operations includes income from the
operation of the repossessed employment placement service businesses for the
years ended December 31, 1996, 1995 and 1994.
Costs of services consist primarily of expenses for the payrolls associated
with the operation of the Company's offices (principally commissions, direct
wages paid to non-permanent personnel, and payroll taxes) and a provision for
uncollectible accounts (approximately $165,000, $116,000 and $116,000 in 1996,
1995 and 1994, respectively).
During the years ended December 31, 1996, 1995 and 1994, and due to the
various foreclosure transactions described above, the Company has recognized
gains of $3,000, $23,000 and $133,000, respectively, on the foreclosure of
divisional assets; such gains primarily represent deferred income from note
payments and Company liabilities assumed and paid by the third party purchasers
of the Company's divisional assets.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the net book value of the MAGC and GKS assets
foreclosed upon and repossessed by the Company on January 3, 1994:
INFORMATION
MANAGEMENT SYSTEMS
ALLIANCE CONSULTING
CORPORATION CORP. CORPORATE TOTAL
---------------- --------------- --------------- ---------------
Accounts receivable $ 267,186 $ 228,510 $ 1,505 $ 497,201
Receivables from affiliates 143,955 183,273 - 327,228
Equipment, furniture and
leasehold improvements, net 99,839 62,386 15,659 177,884
Other assets 26,282 - 87,462 113,744
Accounts payable, office reserves,
accrued rents and expenses, notes and
capital lease obligations (387,780) (311,101) (128,250) (827,131)
---------------- --------------- --------------- ---------------
Net Book Value $ 149,482 $ 163,068 $ (23,624) $ 288,926
================ =============== =============== ===============
The adjusted net book value of the MAGC and GKS assets, which were
repossessed at January 3, 1994, are reflected in the gain on foreclosure of
divisional assets in the Consolidated Statement of Operations for the years
ended December 31, 1996, 1995 and 1994.
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consist of:
DECEMBER 31,
----------------------------------------
1996 1995
----------------- -----------------
Office equipment and furniture.................................. $ 1,368,378 $ 944,717
Less accumulated depreciation and amortization.................. (666,434) (477,674)
================= =================
$ 701,944 $ 467,043
================= =================
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of:
DECEMBER 31,
----------------------------------------
1996 1995
----------------- -----------------
Accounts payable................................................. $ 516,469 $ 727,866
Accrued expenses................................................. 437,421 371,603
Accrued compensation............................................. 1,743,183 1,031,434
Accrued payroll taxes............................................ 134,874 178,704
Factored accounts receivable liability........................... 400,682 647,650
Cash overdraft................................................... - 192,624
Other ........................................................... 489,268 208,282
================= =================
$ 3,721,897 $ 3,358,163
================= =================
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into factoring arrangements involving advances on
its outstanding accounts receivable for fees ranging from 2% to 7% of the
factored receivable, based on the number of days the receivable is outstanding.
In addition, on August 26, 1996, the Company entered into an asset based lending
arrangement with fees and interest based upon the average outstanding bank line
of credit balance each month. Management anticipates that its average cost of
funds under this arrangement will be 18% to 20% during 1997. The maximum amount
outstanding under these arrangements was approximately $985,000, $762,000 and
$650,000 during 1996, 1995 and 1994, respectively. The proceeds from accounts
receivable pledged under these arrangements were used to fund the operations of
the Company during the years ended December 31, 1996, 1995 and 1994.
5. LONG-TERM DEBT:
DECEMBER 31,
--------------------------------------
1996 1995
----------------- -----------------
Long-term debt consists of:
Non-interest bearing note due to the Federal Deposit Insurance
Corporation with quarterly installments of $5,000 due July 1997..... $ 20,000 $ 40,000
Adjustable rate (approximately 10%) mortgage note due in monthly
installments through June, 2013..................................... 69,991 71,651
----------------- -----------------
89,991 111,651
Less current maturities of long-term debt........................... (21,834) (21,603)
================= =================
Total long-term debt................................................ $ 68,157 $ 90,048
================= =================
During the year ended December 31, 1994, the Company settled a 9% adjustable
rate note payable to the FDIC and a 10% promissory note also due to the FDIC in
November, 1993, for $5,000 down and a non-interest bearing note for $60,000
payable in $5,000 quarterly installments.
Approximately $95,000 in obligations assumed by third party purchasers
during 1991, was recorded by the Company as part of the foreclosure upon and
repossession of assets previously owned by the Company. The obligations included
a $70,000 mortgage note payable that is secured by a first lien on certain real
estate, which now has a net book value of $50,000.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:
Total
-----------
1997........................................................ $ 21,834
1998........................................................ 2,026
1999........................................................ 2,238
2000........................................................ 2,473
2001........................................................ 2,732
2002 and thereafter......................................... 58,688
-----------
$ 89,991
6. STOCKHOLDERS' EQUITY:
Pursuant to the terms of two purchase agreements, the Company was to
receive 27,499 and 278,352 shares, respectively, of the Company's common stock
from two former officers and directors of the Company in connection with these
agreements. A former officer and director had pledged certain shares to various
lenders to secure certain debts, which are currently in default. As a result of
a breach of certain pledge agreements operating in favor of the Federal Deposit
Insurance Corporation ("FDIC"), the FDIC foreclosed
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on a total of 100,000 shares of the Company's common stock. At December 31,
1996, 112,349 shares of common stock of the former officers and directors has
been conveyed to the Company.
In October, 1995, options to purchase 50,000 shares of Common Stock
(150,000 shares in the aggregate) were granted to each of the following: J.
Michael Moore, the Chairman of the Board and Chief Executive Officer of the
Company, M. Ted Dillard, President, Secretary, Treasurer, and director of the
Company, and Donald A. Bailey, a director of the Company. The terms and
conditions of each of these options are as follows: (a) each of the optionees
(i) were immediately vested as to 15,000 shares (45,000 shares in the
aggregate), (ii) became vested as to the remaining 35,000 shares, (105,000
shares in the aggregate) on December 31, 1996, (b) vesting is contingent upon
the optionee's continued involvement as an officer or director of the Company,
(c) at such time as an optionee becomes vested with respect to shares of Common
Stock, such optionee may thereafter purchase the number of shares to which the
optionee is vested, subject to certain conditions, (d) the option price for
options exercised is $.50 per share, (e) subject to earlier termination as
herein provided, vested options (i) may be exercised at any time or times within
five years from the date of vesting, and (ii) must be exercised prior to the
expiration of five years from the date of vesting, and (f) if an optionee ceases
to be an officer or director of the Company, the options then vested as to such
optionee must be exercised within the earlier of (i) six calendar months from
the date on which optionee's continuous involvement with the Company is
terminated for any reason other than as provided in subsections (ii) and (iii)
below, (ii) twelve calendar months from the date on which optionee's continuous
involvement with the Company is terminated due to death, total disability or
retirement at age 65, (iii) three months from the date of termination of
employment of optionee by the Company for cause, or (iv) October 31, 2000 (five
years from the date of authorization of these options). Pursuant to a Board of
Directors meeting on December 27, 1996, the Board of Directors unanimously
approved the immediate vesting of all of the aforementioned options effective
December 31, 1996. Subsequent to December 31, 1996, M. Ted Dillard and Donald A.
Bailey exercised their right to purchase these stock options. While their funds
have been tendered, no shares have been issued as of the date of this report.
Under provisions of the Company's 1996 Nonqualified Stock Option Plan (the
"Plan"), options to purchase an aggregate of 600,000 shares of the Company's
common stock may be granted to key personnel of the Company. Options may be
granted for a term of up to ten years to purchase common stock at a price or
prices established by the Board of Directors of the Company. At December 31,
1996, options to purchase 320,000 shares of common stock had been granted to
four individuals (each of whom is now an officer or director of the Company) at
prices which range from $2.50 per share to $8.00 per share.
In December, 1996, options to purchase an additional 30,000 shares of Common
Stock were granted to Mr. Bailey; subsequently, Samuel E. Hunter, an individual
recently named as a member of the Board of Directors of the Company, was also
granted options to purchase 30,000 shares of Common Stock. The terms and
conditions of these options are as follows: (a) each of the optionees will
become vested as to their option shares on a prorata quarterly basis commencing
January 1, 1997 and ending on December 31, 1999, (b) prior to such options
becoming vested, vesting is contingent upon the optionee's continued involvement
as a director of the Company, (c) at such time as an optionee becomes vested
with respect to shares of Common Stock, such optionee may thereafter purchase
the number of shares to which the optionee is vested, subject to certain
conditions, (d) the option price for options exercised is $3.00, $4.00 and $5.00
per share for options vesting in 1997, 1998 and 1999, respectively, (e) subject
to earlier termination as herein provided, vested options (i) may be exercised
at any time prior to termination, and (ii) must be exercised prior to December
31, 2001, and (f) if an optionee ceases to be a director of the Company, the
options then vested as to such optionee must be exercised within the earlier of
(i) six calendar months from the date on which optionee's continuous involvement
with the Company is terminated for any reason other than death or disability,
(ii) twelve calendar months from the date on which optionee's continuous
involvement with the Company is terminated due to death or disability, or (iii)
December 31, 2001.
In December, 1996, the Board of Directors of the Company approved the
issuance of additional stock options to Messrs. Moore and Dillard pursuant to a
plan under which Messrs. Moore and Dillard have the right to purchase,
respectively, 155,000 and 105,000 shares of Common Stock at varying prices
subject to
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the following conditions: (a) effective as of December 31, 1996, Mr. Moore
became vested as to 77,500 shares and Mr. Dillard became vested as to 52,500
shares, (b) Mr. Moore will become vested as to an additional 46,500 shares and
31,000 shares, respectively, on December 31, of the years 1997 and 1998, (c) Mr.
Dillard will become vested as to an additional 31,500 shares and 21,000 shares,
respectively, on December 31, of the years 1997 and 1998, (d) prior to the
options becoming vested, vesting is contingent upon the optionee's continued
involvement as an officer or director of the Company, (e) the per share exercise
price for options becoming vested in 1996, 1997 and 1998 are, respectively,
$2.50, $4.00 and the lesser of $8.00 or the price per share if the Company
effectuates a public offering of its Common Stock subsequent to the date hereof
and prior to December 31, 1998, and (f) subject to earlier termination as herein
provided, vested options (i) may be exercised at any time or times prior to
termination, and (ii) must be exercised prior to December 31, 2001, and (g) if
an optionee ceases to be an officer and director of the Company, the options
then vested as to such optionee must be exercised within the earlier of (i) six
calendar months from the date on which optionee's continuous involvement with
the Company is terminated for any reason other than due to death or disability,
(ii) twelve calendar months from the date on which optionee's continuous
involvement with the Company is terminated due to death or disability, or (iii)
December 31, 2001.
In 1996, the Company entered into an agreement with a consultant (who is
not otherwise affiliated with the Company) which provides for payment to the
consultant of (a) a placement fee of 0.1% of the amount of all long-term debt
(other than secured, bank indebtedness) or equity capital raised by the Company
during the period of the agreement, and (b) an acquisition fee of 0.5% of the
purchase price of any business acquired by the Company during the period of the
agreement, provided that the consultant supplies the lead or provides due
diligence relating to such acquisition. This agreement includes provisions
related to the grant of stock options to the consultant, but no options have
been granted because the Board of Directors of the Company did not approve the
grant of such options. This agreement may be canceled by either party upon
thirty days notice.
As disclosed in Note 1 to the financial statements, the Company continues to
use the intrinsic value based method to measure stock based compensation. If the
Company had used the fair value method required by SFAS 123, compensation
expense would have increased by $218,400 for the year ended December 31, 1996.
There would have been no material effect on income taxes. Primary and fully
diluted earnings per share would have decreased by $.12. The effect on earnings
and earnings per share for the year ended December 31, 1995, would have been
insignificant.
7. FEDERAL INCOME TAXES:
The income tax provision and the amount computed by applying the federal
statutory income tax rate to income (loss) before income taxes differs as
follows:
DECEMBER 31,
--------------------------------------------------
1996 1995 1994
--------------- ------------- -------------
Tax provision (benefit at statutory rate)................... $ 599,619 $ 156,632 $ 76,322
Net operating loss carried forward to future periods........ (599,619) (156,632) (76,322)
Alternative minimum tax..................................... 28,105 - -
State income taxes.......................................... 200,544 60,054 -
=============== ============= =============
Total................................................ $ 228,649 $ 60,054 $ -
=============== ============= =============
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allocation of income taxes is:
DECEMBER 31,
--------------------------------------------------
1996 1995 1994
--------------- ------------- -------------
Operations...................................................... $ 224,774 $ 60,054 $ -
Extraordinary item.............................................. 3,875 - -
=============== ============= =============
Total.................................................... $ 228,649 $ 60,054 $ -
=============== ============= =============
The components of the Company's deferred tax asset (liability) are as
follows:
DECEMBER 31,
------------------------------------
1996 1995
----------------- ----------------
Net operating loss carryforward........................................... $ 872,700 $ 1,483,100
Allowance for doubtful accounts........................................... 167,900 142,000
Other..................................................................... 15,100 39,200
---------------- ----------------
Gross deferred tax asset.................................................. 1,055,700 1,664,300
Valuation allowance....................................................... (1,055,700) (1,664,300)
---------------- ----------------
$ - $ -
================= ================
The Company's valuation allowance decreased $608,600 and $111,840 during the
years ended December 31, 1996 and 1995, respectively. The Company has a net
operating loss carryforward of approximately $2,567,000 as of December 31, 1996,
which, if unused, expires in 2006 through 2008. However, due to a more than 50%
change in ownership beginning with an April 1991 transaction, the Company's net
operating loss carryforward is subject to certain limitations pursuant to
provisions of the Internal Revenue Code. The amount of the Company's net
operating loss available for use as of December 31, 1996, was approximately
$274,000. An additional $467,000 will become available annually through 2001.
8. DEBT RESTRUCTURING:
During the years ended December 31, 1996, 1995 and 1994, the Company settled
certain delinquent accounts payable on a discounted basis as follows:
December 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
Gain on Debt Restructuring, net of income taxes .................. $246,125 $174,811 $208,212
========= ========== ==========
9. RELATED PARTY TRANSACTIONS:
Pursuant to an agreement dated December 16, 1993 and after operating the
Power Placement Assets since May, 1993, the Company sold the capital stock of
Recruiters Network Group, Inc. ("RNG"), a wholly-owned subsidiary of the Company
formed to operate these assets, to an officer and director of the Company. As
part of the purchase agreement the officer and director provided funding to
enable RNG to reimburse the Company for RNG payroll costs, RNG issued a $40,000
promissory note payable to the Company (secured by RNG stock, RNG assets and
personally guaranteed by the officer and director), RNG issued a $15,000
promissory note payable to a former landlord of the Company and guaranteed by
the officer and director, and $57,400 was paid to the Company in the form of the
officer and a director releasing the Company from certain obligations and
liabilities payable by the Company to this officer and director.
Pursuant to the terms of two purchase agreements for the sale of certain
assets by the Company in 1991, the Company was to receive 27,499 and 278,352
shares, respectively, of the Company's common stock from two former officers and
directors of the Company. One of these individuals pledged certain shares to
various lenders to secure certain debts, which are currently in default. As a
result of a breach of certain pledge
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreements operating in favor of the Federal Deposit Insurance Corporation
("FDIC"), the FDIC foreclosed on a total of 100,000 shares of the Company's
common stock which had been pledged by one of these individuals to the Company.
At December 31, 1996, 112,349 shares of the common stock of these former
officers and directors have been conveyed to the Company.
During 1991, USFG-DHRG #1, Ltd. ("USFG Ltd."), then the controlling
stockholder of the Company, loaned the Company $175,000 on a one-year, 10% note,
due November 3, 1992, to be used in the operations of the business. The Company
made principal payments of $75,500 during 1992, and borrowed from USFG Ltd. an
additional $50,000 during the year. During 1993, the Company borrowed from USFG
Ltd. an additional $100,000, and repaid $135,000. During 1994 and 1995, the
Company repaid $100,000 and $14,500, respectively, of such loan. As of December
31, 1995, these loans were repaid in full.
The Company leased approximately 2,000 square feet for approximately $2,000
per month from United States Funding Group, Inc. ("USFG") through January, 1996,
which was used as its principal offices. USFG is wholly owned by J. Michael
Moore, Chairman of the Board and Chief Executive Officer of the Company.
During 1996 and 1995, the Company paid various expenses on behalf of USFG
and Mr. Moore in the amount of approximately $160,000 and $25,000, respectively.
Of the $160,000 in 1996, approximately $105,000 (which represents approximately
50% of the total legal expense) relates to litigation defense associated with a
lawsuit with Ditto Properties, Inc., in connection with the Company being named
therein as garnishee. (See Part I, Item 3. Legal Proceedings.) Mr. Moore has
agreed to reimburse the Company for advancing such litigation expenses and has
executed a note to the Company. The note has a six month maturity and is
expected to be repaid during 1997. The Company has reflected such loans in notes
receivable and prepaid expenses and other current assets for 1996 and prepaid
expenses and other current assets in 1995 in the Consolidated Balance Sheets.
The remaining loans bear interest at 10% and includes monthly payments over 36
months.
In January of 1996, the Company loaned $25,000 to United States Funding
Group Oil and Gas, Inc., an entity wholly-owned by Mr. Moore, Chairman of the
Board and Chief Executive Officer of the Company. Such loan was evidenced by a
promissory note bearing interest at the rate of 1% per month on the unpaid
balance. In addition, a 10% loan origination and administration fee was charged.
Payments on the loan were scheduled on a monthly basis with a minimum payment of
$2,000 plus interest due on the last day of each month. As of March 31, 1997,
this note has been paid in full.
During 1995, the Company advanced a total of $37,000 to former officers of
its wholly-owned subsidiary companies. During 1996, an additional advance of
$4,000 was made. These advances are reflected in prepaid expenses and other
current assets in the balance sheet at December 31, 1995. The balance of $41,000
was written off when the former officer left the Company during 1996.
During January, 1995, the Company entered into a joint venture agreement
with CFS, Inc. for the purpose of providing personnel services to certain
businesses requiring minority suppliers and to others. Laurie Moore, the wife of
J. Michael Moore, the Chief Executive Officer and Chairman of the Board of the
Company, was a minority shareholder of CFS, Inc. until her interest was
purchased by the majority shareholder of CFS, Inc. in 1996, which was made
effective retroactive to January 1, 1995. (See Note 12. Joint Venture
Operations, for more information.)
10. EMPLOYEE BENEFIT PLANS:
During the year ended December 31, 1991, the Company adopted the Diversified
Human Resources Group, Inc. Employees' Stock Ownership Plan ("ESOP"). Due to the
financial difficulties incurred by the Company during the year ended December
31, 1991, an initial contribution was not made to the ESOP, and to date, no
contributions have been made. Management is currently evaluating the possibility
of initiating the ESOP or some other form of stock ownership plan for certain of
its employees.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company rents office space under various operating leases. The Company
is liable for the future minimum lease payments for the periods subsequent to
December 31, 1996, as follows:
Operating
leases
---------------
1997.......................................... $ 1,185,027
1998.......................................... 1,136,944
1999.......................................... 972,221
2000.......................................... 821,959
2001.......................................... 774,737
2002 and thereafter........................... 848,392
---------------
5,739,280
Less sublease income...................................... -
---------------
Future minimum lease payments............................. $ 5,739,280
===============
The aggregate amount of past due rental payments owed by the Company to one
of its landlords was approximately $31,000 as of December 31, 1996. The Company
has previously negotiated with this landlord, and plans to settle this
obligation during renegotiation of the lease when it expires. Such amount is
reflected in the 1997 future minimum lease payments set forth in the table
above. Rent expense was approximately $1,027,000, $894,000 and $897,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
Employment Agreements
The Company had entered into employment contracts with certain key officers
at December 31, 1996.
The Board of Directors of the Company approved employment agreements with
both J. Michael Moore, Chairman of the Board and Chief Executive Officer of the
Company, and M. Ted Dillard, President, Secretary and Treasurer of the Company,
the terms of which are as follows: (a) annual compensation of $150,000 for Mr.
Moore and $125,000 for Mr. Dillard, (b) a term of three (3) years with the
possibility of renewal unless terminated and (c) the right to participate in any
and all retirement plans and fringe benefit programs which the Company now has
in effect or may hereafter adopt.
Subsequent to December 31, 1996, the Company has formed EMSR, Inc. (formerly
an office of the Company) as a wholly-owned subsidiary of the Company.
Management has entered into a preliminary agreement with Scott Higby, the
President of EMSR, Inc., for an equity arrangement pursuant to which Mr. Higby
will be granted stock options that will vest over a four year period. The option
calls for a nominal exercise price whereby Mr. Higby may exercise options
granting him up to 25% of the stock of EMSR, Inc. on a prorata basis over a four
year period.
Other Contingencies
As discussed in Note 9, the Company was named as a garnishee in a lawsuit
against the majority shareholder, which the Company believes is without merit.
As the result of an Agreed Temporary Order dated October 24,1996, the Company
was non-suited in this matter. Additionally, the Company has been named in a
lawsuit filed by two former employees claiming damages in excess of $29 million
each for breach of contract and various other allegations. Management believes
these claims to be without merit. (See Part I, Item 3. Legal Proceedings.)
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is involved in certain other litigation and disputes not
previously noted. Management believes claims are adequately provided for in
accounts payable and accrued expenses in the Company's financial statements at
December 31, 1996 and 1995. Management believes that certain other litigation
are without merit and has concluded that the ultimate resolution of such
disputes will not have a material effect on the Company's consolidated financial
statements.
12. JOINT VENTURE OPERATIONS:
During January, 1995, the Company entered into a joint venture agreement
with CFS, Inc., for the purpose of providing personnel services to certain
businesses requiring minority suppliers and to others. CFS, Inc. is a minority
operated corporation, which because of its status, supplies services to clients
requiring a certain portion of its business to be allocated to minority owned
and operated vendors. The Company provides CFS, Inc. with personnel and contract
labor on a subcontractor basis. Laurie Moore, the wife of J. Michael Moore, the
Chief Executive Officer and Chairman of the Board of the Company, owned 49% of
the Supplier. The majority shareholder of CFS, Inc. purchased the 49% ownership
interest of Ms. Moore, pursuant to a transaction which was made effective
retroactive to January 1, 1995. Ms. Moore received no monetary gain on this
transaction. The Company has a 49% ownership interest in the joint venture and
is allocated 65% of the net income or loss resulting from the joint venture
operations. The joint venture had assets of $150,000 and a debt of $291,000 owed
to the Company at December 31, 1996. The joint venture recorded net losses for
the years ended December 31, 1996 and 1995, respectively, of $139,000 and
$74,000. Accordingly, the Company recognized $90,000 and $48,000, respectively,
in losses from joint venture operations in the Consolidated Statement of
Operations for the year ended December 31, 1996 and 1995.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONS ADDITIONS
BALANCE AT CHARGED CHARGED TO BALANCE
BEGINNING TO COSTS OTHER AT END OF
Description OF PERIOD & EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ----------- ------------- -----------
For the Year Ended December 31, 1994:
Allowance for doubtful accounts........$ 164,000 $ 116,000 $ 803,000 (1) $ 878,000 $ 205,000
========== ========== =========== ============= ===========
Valuation allowance for
deferred taxes.........................$1,851,494 $ - $ - $ 75,354 $1,776,140
========== ========== =========== ============= ===========
For the Year Ended December 31, 1995: (1)
Allowance for doubtful accounts........$ 205,000 $ 116,000 $1,028,000 $ 937,000 $ 412,000
=========== ========== =========== ============= ===========
Valuation allowance for
deferred taxes.........................$1,776,140 $ - $ - $ 111,840 $1,664,300
=========== ========== =========== ============= ===========
For the Year Ended December 31, 1996: (1)
Allowance for doubtful accounts........$ 412,000 $ 165,000 $1,256,000 $ 1,339,000 $ 494,000
=========== ========== =========== ============= ===========
Valuation allowance for
deferred taxes.........................$ 1,664,300 $ - $ - $ 608,600 $1,055,700
=========== ========== =========== ============= ===========
(1) Estimated reduction in sales for applicants who accepted employment, but
did not start work or did not remain in employment for the guaranteed
period.
INDEX TO EXHIBITS
EXHIBIT
2(a) Agreement and Plan of Merger. (1)
3(a) Articles of Incorporation of the Registrant as amended. (1)
3(b) Amended and Restated By-laws of the Registrant. (1)
10(a)Agreement dated December 14, 1992 between the Registrant and Veritas,
Inc., a Texas corporation. (2)
10(b)Agreement dated March 11, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and First In Temporaries, Inc., a
Florida corporation. (2)
10(c)Agreement dated March 12, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and Nesco Service Company, a Delaware
general partnership. (2)
10(d)Agreement dated as of April 5, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and Shear Healthcare Resources, Inc., a
Florida corporation. (2)
10(e)Agreement dated April 1, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and Management Alliance Group Corp., a
Texas corporation. (2)
10(f)Foreclosure Agreement dated May 3, 1993 between the Company, Power
Placement Corporation, a Texas corporation, P&E Group, Inc., a Texas
corporation, and Cary Tobolka, an individual. (2)
10(g)Employment Contract Agreement executed April 21, 1994 between
Management Alliance Corporation and Information Systems Consulting
Corp., wholly-owned Texas subsidiaries of the Registrant, and Gary K.
Steeds, Dallas, Texas, an employee. (6)(10)
10(h)Employment Contract Agreement effective December 1, 1993 between
Management Alliance Corporation and Information Systems Consulting
Corp, wholly-owned Texas subsidiaries of the Registrant, and Billie J.
Tapp, Dallas, Texas, an employee. (6)(10)
10(i)Interim Employment Contract Agreement effective December 1, 1993
between Management Alliance Corporation and Information Systems
Consulting Corp., wholly-owned Texas subsidiaries of the Registrant,
and Gary K. Steeds, Dallas, Texas, an employee. (6)(10)
10(j)Item not used.
10(k)Settlement Agreement by and between the Registrant and
Bailey/Appel/DH Group. (3)
10(l)Option Agreement by and between the Registrant and Bailey/Appel/DH
Group. (3)
10(m)Joint and Mutual Release by and between the Registrant and
Bailey/Appel/DH Group. (3)
10(n)The Diversified Human Resources Group, Inc. Employees' Stock
Ownership Plan. (3)
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
10(o)Settlement and Sale of Stock by and between Registrant and D. Joy
Perkins. (3)
o STOCK OPTION, CONSULTING AND RELEASE AGREEMENT by and between
Registrant and D. Joy Perkins, dated December 4, 1990.
o RESIGNATION AGREEMENT by and between Registrant and Perkins,
dated December 4, 1990.
o OPTION AGREEMENT by and between Registrant and Perkins, dated
December 4, 1990.
o STOCK PLEDGE AGREEMENT by Registrant in favor of Perkins, dated
December 4, 1990.
o $35,000 PROMISSORY NOTE made payable to Registrant from Perkins,
dated December 4, 1990, paid in full by transfer of Registrant's
Common Stock pursuant to Option Agreement.
o $104,425 PROMISSORY NOTE made payable to Perkins from Registrant,
dated January 3, 1991.
o STOCK PLEDGE AGREEMENT by and between Registrant and Perkins,
dated January 3, 1991.
o CONSULTING AGREEMENT by and between Registrant and Perkins, dated
December 4, 1990.
o JOINT AND MUTUAL RELEASE by and between Registrant and Perkins,
dated December 4, 1990.
o NONSOLICITATION AND NONDISCLOSURE AGREEMENT by and between
Registrant and Perkins, dated December 4, 1990. (1)
10(p)Amendment No. 1 to the Diversified Human Resources Group, Inc.
nonqualified Stock Option Agreement. (3)(10)
10(q)Settlement Agreement and Joint and Mutual Release entered into by the
Registrant, the Directors of the Registrant, William M. Brothers, an
individual, and Southwest Securities Incorporated, a Texas
Corporation, dated May 1, 1991. (4)
10(r)Option Agreement and Amendment to Option Agreement by and between the
Registrant and three former directors, dated April 30, 1991 and June
5, 1991, respectively. (4)(10)
10(s)Agreement for transfer of medical insurance plan sponsorship and plan
assets dated February 1, 1992. (4)
10(t)Agreement for transfer of 401(k) plan sponsorship and plan assets
dated April 27, 1992. (4)
10(u)First Asset Purchase Agreement dated August 29, 1991, entered into by
the Registrant and Veritas, Inc., a Texas corporation. (4)
10(v)Second Asset Purchase Agreement dated September 3, 1991, entered into
by the Registrant and P&E Group, Inc., a Texas Corporation. (4)
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
10(w)Third Asset Purchase Agreement dated August 28, 1991, entered into by
the Registrant and Financial Recruiters, Inc., a Texas corporation.
(4)
10(x)Fourth Asset Purchase Agreement dated September 19, 1991, entered
into by the Registrant and Gary K. Steeds, Inc., a Texas corporation.
(4)
10(y)Tri-Party Agreement dated January 4, 1994, entered into by the
Registrant and Management Alliance Corporation and Information Systems
Consulting Corp., Texas corporations, that are wholly-owned
subsidiaries of the Registrant. (5)
10(z)Agreement dated December 29, 1993, entered into by the Registrant,
Recruiters Network Group, Inc., a Texas corporation, and Donald A.
Bailey, acting President and director of the Registrant (5).
10(z)(i) Joint Venture Agreement dated April 20, 1995, entered into by
Management Alliance Corporation, Texas corporation that is a
wholly-owned subsidiary of the Registrant, and CFS, Inc., a minority
owned business. (7)
10(z)(ii) Contract Agreement for Franchise Packaging and Market Plan dated
April 21, 1995, entered into by Management Alliance Corporation, a
Texas corporation that is a wholly-owned subsidiary of the Registrant,
and the Research Market Center, owned by an individual. (7)
10(z)(iii) Employment Contract Agreement entered into June 9, 1995, between
Management Alliance Corporation, a wholly-owned subsidiary of the
Registrant, and Anthony J. Bruno, Chicago, Illinois, an
employee.(7)(10)
10(z)(iv) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and J. Michael Moore, executed December 1,
1995.(8)(10)
10(z)(v) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and M. Ted Dillard, executed December 1, 1995.(8)(10)
10(z)(vi) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and Donald A. Bailey, executed December 1,
1995.(8)(10)
10(z)(vii) Loan Agreement by and between Information Systems Consulting
Corp. (a wholly-owned subsidiary of the Company) and Concord Growth
Corp. executed August 26, 1996.(9)
10(z)(viii) Amendment to Loan Agreement by and between Information Systems
Consulting Corp. and Concord Growth Corp. (9)
10(z)(ix) General Continuing Guaranty of Preferred Funding Corporation in
favor of Concord Growth Corporation (9)
10(z)(x) General Continuing Guaranty of the Company in favor of Concord
Growth Corporation (9)
10(z)(xi) General Continuing Guaranty of Management Alliance Corporation in
favor of Concord Growth Corporation (9)
10(z)(xii) The Registrant's 1996 Nonqualified Stock Option Plan, effective
as of December 27, 1996.(9)(10)
10(z)(xiii) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and J. Michael Moore, executed April 10, 1997.(9)(10)
10(z)(xiv)Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and M. Ted Dillard, executed April 10, 1997.(9)(10)
10(z)(xv) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and Donald A. Bailey, executed April 10, 1997.(9)(10)
10(z)(xvi)Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and Samuel E. Hunter, executed April 10, 1997.(9)(10)
INDEX TO EXHIBITS (CONTINUED)
10(z)(xvii)Employment Contract by and between Diversified Corporate
Resources, Inc. and J. Michael Moore, executed April 10, 1997.(9)(10)
10(z)(xviii)Employment Contract by and between Diversified Corporate
Resources, Inc. and M. Ted Dillard, executed April 10, 1997.(9)(10)
17(a)Resignation of Director-Employment Termination Agreement by and
between Registrant and D. Joy Perkins, dated December 4, 1990. (3)
21 List of Subsidiaries. (9)
- --------------------------------------------
(1) Filed as an exhibit of corresponding number to Registration Statement
No. 33-760 FW on Form S-18 and incorporated herein by reference.
(2) Filed as an exhibit to Form 8-K dated March 26, 1993, and incorporated
herein by reference.
(3) Filed as an exhibit of corresponding number in Form 10-K for the year
ended December 31, 1990, and incorporated herein by reference.
(4) Filed as an exhibit of corresponding number in Form 10-K for the year
ended December 31, 1991, and incorporated herein by reference.
(5) Filed as an exhibit to Form 8K for January 4, 1994, and incorporated
herein by reference.
(6) Filed as an exhibit of corresponding number in Form 10-K for the year
ended December 31, 1993, and incorporated herein by reference.
(7) Filed as an exhibit of corresponding number in Form 10-K for the year
ended December 31,1994, and incorporated herein by reference.
(8) Filed as an exhibit of corresponding number in Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference.
(9) Filed herewith.
(10) Stock option plans, management contracts or compensatory arrangements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Diversified Corporate Resources, Inc.
Date: April 15, 1997 By: /s/ J. Michael Moore
-----------------------
J. Michael Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ J. Michael Moore Chairman and Chief Executive Officer
- ------------------------
J. Michael Moore
/s/ M. Ted Dillard President, Principal Financial Officer
- ------------------------ and Director
M. Ted Dillard
/s/ Donald A. Bailey Director
- ------------------------
Donald A. Bailey
/s/ Samuel E. Hunter Director
- ------------------------
Samuel E. Hunter