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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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
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DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
12801 NORTH CENTRAL EXPRESSWAY, SUITE 350
DALLAS, TEXAS 75243
(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 EACH EXCHANGE ON WHICH REGISTERED:
COMMON STOCK, $.10 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
N/A
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Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in a
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 29, 2000, was approximately $6,000,000. As of March 29,
2000, 2,786,352 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrants' definitive Proxy Statement pertaining to the 2000 Annual
Meeting of Shareholders (the "Proxy Statement") and filed or to be filed not
later than 120 days after the end of the fiscal year pursuant to Regulation 14A
is incorporated herein by reference into Part III.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Diversified Corporate Resources, Inc. (the "Company") is an employment
services firm providing professional and technical personnel on a permanent,
contract and temporary placement basis, positioning itself as a single-source
provider of staffing solutions to meet all the professional/technical/
administrative staffing needs of its clients. The Company primarily markets
staffing services in the following disciplines:
Information Technology
Telecommunications
Engineering / Technical
Accounting / Finance
Professional / Technical Sales
Administrative / Human Resources
The Company derives the majority of its revenue from the information
technology and telecommunications markets. The Company currently provides
professional and technical personnel to its clients throughout North America,
and its customer base includes several Fortune 500 companies which it services
through its strategically located regional offices. As of March 29, 2000, the
Company had offices located in the following geographical areas:
Arizona Phoenix
Colorado Denver
Georgia Atlanta
Idaho Meridian
Illinois Chicago
Maine Portland
Missouri Kansas City and St. Louis
North Carolina Raleigh
Pennsylvania Philadelphia
Texas Dallas/Fort Worth, Houston and Austin
Virginia Reston
INDUSTRY OVERVIEW
Unemployment reached an all-time low in 1999, averaging 4.1% in the fourth
quarter, according to the United States Department of Labor's Bureau of Labor
Statistics. Coupled with the long running rapid expansion of the U.S. economy,
the resulting low supply and high demand for technical and professional workers
has fundamentally changed the employment industry. Companies which are
continuing to compete for limited technical and professional personnel are
increasingly utilizing external staffing service organizations to meet their
needs. In the January 28, 2000 Staffing Industry Report, it is reported that the
growth rate for the staffing industry in 1999 was approximately 20% and that the
growth rate for fiscal year 2000 could exceed 20%. In addition, it is also
projected that the information technology ("IT") sector, which had a less than
stellar 1999 because of Y2K-related freezes on new projects, will experience
growth in excess of 19% as increasing demand for project-oriented technical
specialists causes an increase in the demand for contract staffing solutions.
IT jobs continue to lead the list of the fastest growing occupations for
1998-2008 per the United States Department of Labor's employment projections.
The IT services industry has undergone and continues to undergo rapid evolution
and growth. "IT" is a term that now encompasses not only computer and
communications systems hardware, but also the personnel who design, manage and
2
maintain those systems. Growth in the information technology services industry
has been driven by the following factors:
- Businesses' increasing reliance on information technology as a strategic
tool
- Shifts to distributed computing as businesses move to client/server
environments
- Integration of telecommunications products with businesses' computer
systems
- Increased growth in e-commerce and web-based business solutions
As businesses attempt to gain competitive advantage through technological
advances, while also striving to keep rising employment costs in control, they
are increasingly seeking employment services firms, like the Company, to provide
information technology professionals, as well as engineering and technical
professionals, for both their permanent and temporary staffing needs. According
to the December 1999 issue of IT Services Business Report, 71% of the
organizations surveyed by the Association of Technology Staffing Companies use
an agency for recruitment of their contract IT staff and over half of their
permanent IT staff.
The rapid changes in technology and the dynamic growth of the
telecommunications industry have resulted in rapidly fluctuating needs for
personnel with highly developed skill sets and specialization. By utilizing
contract and temporary staffing solutions, businesses can minimize their hiring,
employment and termination costs, as well as target highly specialized personnel
for specific projects.
BUSINESS STRATEGY
The Company's objective is to become a nationally recognized leader in
permanent and contract specific personnel solutions for high-end niche
employment markets through a network of offices to serve clients. The key
elements of the Company's business strategy are:
INCREASE MARKET SHARE AND REGIONAL EXPOSURE
The Company is in the process of furthering its national presence through
the implementation of a regional growth strategy, which will be used to expand
service offerings within each of its regional markets. The Company's recent
regional expansions are summarized as follows:
- Fiscal 2000--Acquired Datatek Corporation located in Phoenix, Arizona
- Fiscal 1999--Acquired Mountain, Ltd., located in Portland, Maine
- Fiscal 1998--Acquired Texcel, Inc. and Texcel Technical Services, Inc.,
located in Philadelphia, Pennsylvania
- Fiscal 1998--Opened offices in Denver, Colorado and Reston, Virginia
Datetek Corporation ("Datatek") is a contract placement firm which provides
consulting and staffing services for the health insurance industry with
expertise in both the private and public sectors of the health insurance
industry. Since 1992, Datatek's focus has been on providing a wide variety of
services including technical personnel support, consulting services and project
management to its customer base.
Mountain, Ltd. ("Mountain") is a consulting telecommunications engineering
firm. Since 1979, Mountain has maintained a sharp focus within this industry.
Mountain has built an outstanding reputation as a contract services firm for the
established operating telephone companies, or Local Exchange Carriers (LECs).
Mountain also specializes in outside plant and network designs projects, along
with most of the associated technical and support disciplines. Mountain
historically assumes telephone company ("telco") project management assignments,
as well as telco project staffing and interim support staffing responsibilities.
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The Texcel, Inc. and Texcel Technical Services, Inc. (jointly referred to as
"Texcel") have been in business since 1985. Texcel is engaged in both permanent
and temporary placements of technical and professional specialists, primarily in
information technology and engineering/technical disciplines. Their market area
is concentrated in Southeastern Pennsylvania, New Jersey and Delaware.
Management Alliance Corporation ("Magic") and Information Systems Consulting
Corporation ("ISCC") have been servicing clients in the Southeast and Midwest
for the past twenty years.
The Company believes that its growing regional exposure will permit it to
better service those clients with geographically dispersed operations desiring a
single-source provider to provide staffing services solutions. As the Company
continues to grow and expand its business, management will continue to examine
opportunities to acquire complementary employment services businesses in
additional geographic markets.
PROVIDE AN "E-COMMERCE" INTERNET SOLUTION FOR OUR CLIENTS
The Company is continuing to aggressively update its "E-COMMERCE" Internet
based recruiting systems to provide its recruiters, and ultimately its
customers, with the most time and cost efficient means of matching staffing
needs with the proper resources. Through its current front office systems and
its national internal database, the Company has amassed a significant resource
database of current resumes. In addition, the Company is currently in the
process of updating its front office software to enable it to provide its
professional staff of recruiters, and ultimately its customers, with faster and
more accurate access to its resource database.
PROVIDE 'SINGLE-SOURCE' SOLUTIONS FOR OUR CLIENTS
The Company is firmly committed to its long-term strategy whereby it will
continue to build and expand on its core disciplines of IT,
engineering/technical, financial/accounting and professional/ technical sales
services by providing trained professionals in evolving areas within these
disciplines. At the same time, the Company believes that offering the full range
of contract, permanent and temporary professional personnel through its national
network of offices is as important as offering a variety of disciplines. The
Company believes that this approach will position it as a single-source national
provider of staffing services and will give the Company the ability to respond
to changes in its market and, to a limited extent, fluctuations in the demand
for staffing services.
FOCUS ON HIGHER MARGIN STAFFING SERVICES DISCIPLINES
The Company serves its clients by delivering services across various
disciplines, such as: IT, engineering/technical, financial/accounting and
professional/technical sales, which generally provide higher margins. The
Company plans to continue to build on its existing strengths by focusing
management time and resources on higher margin services in markets where the
demand for the Company's services is strong. For example, in 1998, the Company
opened offices in Denver, Colorado and Reston, Virginia which focus exclusively
on the IT and engineering/technical disciplines.
RECRUIT AND RETAIN HIGHLY QUALIFIED MARKETABLE PROFESSIONALS
With unemployment at record lows, staffing services companies find it
increasingly challenging to recruit and retain highly qualified professionals.
The Company is meeting this challenge with the following:
- Aggressive direct marketing to targeted groups, including professional
organizations and industry trade groups
- Building/enhancing its Internal database system, enhancing the Company's
ability to track and manage its applicant database
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- Increased utilization of the world wide web, including advertising and web
page development, to attract applicants
- Offering competitive wage and benefit packages
CURRENT BUSINESS ACTIVITIES
The Company operates as a single business segment providing solutions in the
staffing services which can be categorized into functional lines of permanent
and contract placement of professional personnel. Specialty services, consisting
of temporary placements, are offered to the Company's permanent placement
clients as part of the Company's single-source provider strategy. Specified
search parameters and goals generally characterize the permanent placement of
professional personnel. The contract placement of IT and engineering/technical
personnel is generally a more project specific business, with IT and
engineering/technical personnel of the Company undertaking well defined projects
for time periods generally ranging from four weeks to a year or more. The
Company believes that its focus on high margin, high-end niche employment
markets, its single-source provider strategy, its emphasis on recruiting and
retention of qualified applicants, and its plan to pursue improved and expanded
internal training programs will provide competitive advantages to the Company.
PERMANENT PLACEMENT SERVICES
The Company is currently engaged in providing permanent placement services
in Dallas, Houston and Austin, Texas; Atlanta, Georgia; Chicago, Illinois;
Philadelphia, Pennsylvania; Denver, Colorado; Portland, Maine and Raleigh, North
Carolina. The Company offers these services in the following selected core
disciplines:
Information technology:...................... Services include systems design, programming
and network analysis, as well as consulting,
conversions, software development and
information systems disaster control
Telecommunications:.......................... A hybrid between information technology and
engineering/technical, services include
communications systems design, network
analysis, internet infrastructure, cellular
networks, and global positioning systems
Engineering/Technical:....................... Services include process engineering,
industrial engineering and manufacturing
services, as well as software design and
maintenance and related information
technology services. Technical areas serviced
include environmental, construction,
plastics, chemical, computer hardware, food
and metals
Financial/Accounting:........................ Services include financial management,
accounting and analysis
Professional/Technical Sales:................ Services include technical sales, marketing
and management personnel
As part of the Company's strategy to be a single-source provider of
employment services to its clients, the Company provides permanent clerical and
administrative personnel to its existing clients, primarily to support
professional staff and executive management of those clients.
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 range from 15%
5
to 35% of the first year annual salary of the newly placed employee. Although
the employer usually pays these fees, in certain instances the newly placed
employee pays such fees. The Company often 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 will generally
refund the client's fee, or a prorated portion thereof, depending upon the
circumstances.
SPECIALTY SERVICES
Specialty/temporary services, offered as part of the Company's single-source
provider strategy, are offered in virtually all of the Company's service
disciplines. Generally, these are engagements of a shorter nature than those for
contract placement. The services have grown out of demand, primarily from the
Company's permanent placement clients, for temporary employment needs, without
incurring the associated costs of hiring, training, and providing employee
benefits. In addition, temporary-to-permanent placement offers clients the
opportunity to make more informed selections before committing to a permanent
hire. Temporary staffing services opportunities may arise as a direct result of
temporary increases in work volume, special projects, attrition, permanent hire
pre-screening, and leaves of absence, among others.
Specialty/temporary service orders are typically generated as a result of a
referral from the Company's existing permanent placement clients, in addition to
the Company's marketing efforts. The client outlines the particular staffing
need and the Company, utilizing this information, selects an appropriate
individual from its database of available temporary personnel. Clients request
specialty/ temporary personnel for periods generally ranging from one day to
several weeks. The Company generally receives notice of the assignments from
three days to as little as 20 minutes in advance. The Company charges clients an
hourly rate for temporary personnel and generally offers them a guarantee
period, during which the Company will refund the client's payment if the client
notifies the Company that it was dissatisfied with the employee's performance,
and the Company is unable to replace the employee. Substantially all
specialty/temporary personnel assigned by the Company are Company employees and
the Company pays all employment costs, including hourly wages, unemployment
taxes, social security taxes and fringe benefits.
CONTRACT PLACEMENT SERVICES
The Company's contract placement services are primarily within the
information technology, telecommunications, and engineering/technical
disciplines. The Company's contract personnel provide services primarily in the
following areas:
- project management
- systems analysis, development and design
- product implementation
- systems migration and conversions
- technical writing and support documentation
- functional support
- technological training
- project planning
- testing
- systems and network administration
- hardware, network and software evaluation services
6
Contract placements tend to be project specific and for periods ranging from
one month to a 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 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.
DISCONTINUED OPERATIONS (TRAINING OPERATIONS HELD FOR SALE)
In fiscal 1998, the Company initiated a strategy whereby it began to expand
and improve its training of its applicant pool. This strategy was focused on the
development of its wholly owned subsidiary Train International ("Train").
Through Train, the Company offered a wide range of programs to applicants,
clients and independent interested third parties on a fee basis. At
December 31, 1999, the Company approved a plan to sell Train. The Company has
begun discussions with various entities regarding such sale and management is
optimistic that the Company will enter into an agreement regarding the sale of
Train by June 30, 2000. The Company contemplates that any such sale would
include a strategic alliance that would allow the Company to continue to utilize
the services of Train on an outsource basis.
Also in December 1999, the Company sold all of its assets of the Geier
Assessment and Performance Systems, Inc. ("GAPS") to the former owners and
managers of the GAPS operations. The sales price was in the form of a $200,000
promissory note, payable over a ten year time period, and a royalty of four
percent per annum from the sale of the Company's proprietary GAPS software
during the life expectancy of such product.
As a result of the above, the results of operations for fiscal year 1999 and
1998 for Train and GAPS have been reflected as "Discontinued Operations."
CUSTOMERS
The Company has provided personnel and human resources solutions to several
Fortune 500 companies and many of the nation's largest companies.
RECRUITING
The Company recruits qualified applicants primarily through referrals from
other applicants, newspaper and Internet advertising, its applicant databases,
job fairs, and various other media advertisements. The Company maintains
extensive records on qualified applicants. In order to attract permanent,
temporary and contract assignment candidates, the Company places emphasis upon
its ability to provide attractive placement opportunities, competitive
compensation, quality and varied assignments, and scheduling flexibility. The
recruiting of skilled IT, telecommunications, engineering/ technical,
financial/accounting and professional/technical sales professionals is a central
challenge for participants in the industry. Management believes that it has
positioned the Company to address this challenge in the future with an approach
which includes:
- Aggressive direct marketing to targeted groups, including professional
organizations and industry trade groups
- Building/enhancing its Internal database system, enhancing the Company's
ability to track and manage its applicant database
- Increased utilization of the world wide web, including advertising and web
page development, to attract applicants, and scanning of existing web
based resume job services
- Offering competitive wage and benefit packages
7
The Company's professional personnel qualifying procedures include
interviewing, testing and reference checking. These procedures also enable the
Company to categorize its professional personnel by preference for job location,
hours and work environment. In order to attract high quality professional
employees, the Company grants paid vacations, holidays and other benefits for
contract and specialty/temporary employees who work a specified minimum number
of hours.
MARKETING
The Company's marketing efforts are largely implemented at the local
regional office level and are focused on higher margin employment markets.
Historically, the Company's staffing services marketing efforts have relied
primarily on telephone solicitation, referrals from other Company offices and,
to a lesser extent, on yellow pages and newspaper advertising, and direct mail.
However, client visits have begun to play a more important role in the Company's
staffing services marketing efforts. To increase its contract placement
services, the Company has actively sought 'approved vendor' status with
prospective clients. This process generally involves a rigorous review of the
Company's fitness to meet the staffing demands of prospective clients and,
management believes, creates a marketing advantage for the Company.
COMPETITION
The Company believes that the availability of qualified candidates, the
quality of service, the scope of geographic service and the price of service are
the principal elements of competition. The Company believes that availability of
qualified applicants 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 applicants.
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.
The employment services industry is very competitive and fragmented. There
are 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 for potential clients and
for technical and professional personnel from providers of outsourcing services,
systems integration, computer systems consultants, other providers of staffing
services, temporary personnel agencies and search firms, ranging from large
national companies to local employment staffing entities. Large national
companies that offer employment staffing services include Robert Half
International, Computer Horizons, Inc. and Alternative Resources Corporation.
Other firms that the Company competes with include Butler International, Inc.,
General Employment Enterprises, Inc., RCM Technologies, Inc., Professional
Staff, PLC, Comforce Corp., National Technical Systems, Inc., and National
TechTeam, Inc. Local employment staffing entities are typically operator-owned,
and each market generally has one or more significant competitor(s). In
addition, the Company competes with national clerical and light industrial
staffing firms that also offer temporary staffing services. These companies
include Interim Services, Inc., Norrell Corporation and Olsten Corp. In
addition, national and regional accounting firms also offer certain employment
staffing services. Finally, the Company also faces the risk that certain of its
current and prospective clients will decide to provide similar services
internally. There can be no assurance that the Company will be able to continue
to compete effectively with existing or potential competitors.
The accelerating development of the Internet is viewed by some to be a
threat to the temporary staffing and executive search industry. The Company
believes that while there are significant advantages to Internet recruiting, and
that it must increase its use of the Internet to remain competitive, it does not
expect that Internet recruiting will completely replace the traditional "brick
and mortar" aspects of recruiting. The Company believes that one of the keys to
its future success will be its ability to combine its recruiting experience with
the benefits of high-traffic Internet sites. Accordingly, the Company is
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currently reviewing its e-commerce strategy and expects to initiate a program to
further utilize the Internet in its recruiting and client servicing activities.
However, there can be no assurances that the Company will be able to
successfully enhance its Internet strategy.
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 temporary 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 422
full-time employees as of December 31, 1999. Of these employees, 318 were
personnel consultants and office managers paid on a commission basis and 104
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
67,700 square feet in Dallas, Texas; the terms of such leases and its amendments
range from four years to seven years. The Company also leases approximately
21,000 square feet in Houston, Texas, 5,200 square feet in Austin, Texas, 3,600
square feet in Kansas City, Missouri, 6,400 square feet in Atlanta, Georgia,
5,200 square feet in Chicago, Illinois, 7,300 square feet in Philadelphia,
Pennsylvania, 6,500 square feet in Denver Colorado, 6,300 square feet in
Raleigh, North Carolina, 3,500 square feet in Yarmouth, Maine, 1,800 square feet
in Phoenix, Arizona, and 1,500 square feet in Meridian, Idaho. Such leases
generally range from three to seven years. The current cost of all of the
Company's office leases is approximately $2,300,000 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
In September 1996 a lawsuit (the "Suit") was filed by Ditto Properties
Company ("Ditto Properties"), whose manager is a business associate of J.
Michael Moore, against DCRI LP No. 2, Inc. ("No. 2"), J. Michael Moore
individually and USFG/DHRG LP No. 1 (collectively, the "Defendants"). Ditto
Properties alleges, among other things, that the Defendants fraudulently induced
Ditto Properties to sell 899,200 shares (the "Shares") of Common Stock to No. 2
and failed to perform under the related Stock Purchase Agreement dated
March 26, 1993 (the "Stock Purchase Agreement"). As the Suit has interfered with
certain of the Company's business activities, the Company filed a separate
lawsuit against Ditto Properties on October 7, 1996.
The Company has incurred legal expenses on its behalf and has advanced
payments on behalf of the Defendants in an effort to prevent potential adverse
impact of the Suit on the Company. The current arrangement between the Company
and the Defendants, in connection with the Suit, is that the Company is
responsible for the legal fees involved in defending the Company and the
Defendants are responsible for any additional legal fees.
9
The Company was named in a lawsuit filed by two former employees (the
"former employees") claiming damages for the fair market value of certain shares
of common stock of certain subsidiaries of the Company, as well as other damages
for breach of contract and various other allegations. The Company had filed a
third party petition against one of these plaintiffs and a counterclaim against
the other plaintiff. All parties involved entered into a settlement on
April 15, 1999. Key terms of the settlement included, among other things
(a) the former employees transferring 35,000 shares of the Company's common
stock to the Company, (b) the Company paying $20,000 to the former employees and
their attorney, (c) the Company obtaining a $5,000,000 judgment against one of
the former employees, which contained a provision that it would not be enforced
and would expire in nine months provided that the former employees abided by the
terms of the settlement agreement, (d) the former employees agree not to solicit
any of the Company's employees or customers for a period of two years, and
(e) the parties executing mutual releases of all claims against each of the
parties involved. The judgment expired on January 15, 2000.
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 has been traded on the American Stock Exchange
under the symbol "HIR" since September 30, 1997. Prior to then it was traded in
the over-the-counter market and listed in pink sheets under the symbol "HIRE".
The following table sets forth the range of high and low sales prices for the
Common Stock as reported on the American Stock Exchange.
1999 1998
----------------------- -----------------------------
HIGH LOW HIGH LOW
---------- ---------- ------------- -------------
Quarter Ended:
March 31..................................... $6 7/8 $5 $14 11/16 $ 7 1/2
June 30...................................... 8 1/8 4 3/4 14 3/4 11 1/4
September 30................................. 5 3 1/4 12 5/16 6 13/16
December 31.................................. 3 3/4 2 3/8 7 5/8 3 9/16
On August 6, 1999, the Company issued 75,000 shares of its common stock to
the shareholders of Mountain in connection with the Company's acquisition of all
of the outstanding stock of Mountain. None of these shares were registered under
the Securities Act of 1933, as amended (the "Securities Act"). The issuance of
such shares was exempt from registration pursuant to Section 4(2) of the
Securities Act.
In 1999, the Company issued 1,868 shares of common stock to certain
employees of the Company and its subsidiaries pursuant to its Stock Bonus Plan.
These shares were issued as a discretionary stock reward and not in lieu of
compensation or an earned or mandatory bonus payment and, therefore, such
issuance did not constitute a sale of securities under Section 5 of the
Securities Act.
The Company had approximately 293 holders of record of Common Stock as of
December 31, 1999. 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
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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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and Item 7--"Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
SELECTED FINANCIAL OPERATING RESULTS FOR FISCAL YEARS ENDED DECEMBER 31,
1999 THROUGH 1995:
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- - ------------------------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT
EARNINGS PER SHARE AMOUNTS)
Operating results:
Net staffing service revenue....................... $53,644 $41,566 $33,812 $27,430 $19,358
Gross margin....................................... 14,951 12,544 10,133 7,755 5,026
Income from continuing operations before income
taxes and extraordinary item..................... 2,222 3,224 2,480 1,764 346
Income from continuing operations.................. 1,368 2,055 2,603 1,539 286
Loss from discontinued operations, net of income
tax benefit...................................... (1,305) (477) -- -- --
Income before extraordinary item................... 63 1,578 2,603 1,539 286
Extraordinary item, net of income taxes............ -- -- 57 246 175
------- ------- ------- ------- -------
Net income......................................... $ 63 $ 1,578 $ 2,660 $ 1,785 $ 461
======= ======= ======= ======= =======
Earnings per common share:
Income from continuing operations before
discontinued operations and extraordinary item:
Basic............................................ $ 0.49 $ 0.75 $ 1.33 $ 0.90 $ 0.16
Diluted.......................................... $ 0.49 $ 0.72 $ 1.25 $ 0.87 $ 0.16
Loss from discontinued operations:
Basic............................................ $ (0.47) $ (0.18) -- -- --
Diluted.......................................... $ (0.47) $ (0.17) -- -- --
Extraordinary item:
Basic............................................ -- -- $ 0.03 $ 0.15 $ 0.10
Diluted.......................................... -- -- $ 0.03 $ 0.14 $ 0.10
Net income:
Basic............................................ $ 0.02 $ 0.57 $ 1.36 $ 1.05 $ 0.26
Diluted.......................................... $ 0.02 $ 0.55 $ 1.28 $ 1.01 $ 0.26
Weighted average common shares:
Basic............................................ 2,760 2,752 1,951 1,702 1,758
Diluted.......................................... 2,778 2,858 2,071 1,763 1,758
Financial Position:
Working capital (deficit).......................... $ 4,187 $ 6,468 $ 9,455 $ 95 $(1,060)
Total assets....................................... 22,548 18,442 15,162 5,204 3,007
Short-term debt and current maturates.............. 2,714 709 2 520 669
Long-term debt..................................... 1,591 1,203 66 68 90
Stockholders' equity (deficit)..................... 12,928 12,617 11,553 1,188 (452)
11
NOTES TO SELECTED FINANCIAL OPERATING RESULTS DATA:
1. On August 6, 1999, the Company completed the acquisition of Mountain.
2. On October 8, 1998, the Company completed the acquisition of Texcel.
3. Fiscal Year 1998 Results of Operations have been reclassified for results of
Operations for Train and GAPS which have been reported as Discontinued
Operations as of December 31, 1999.
4. Income from continuing operations in fiscal years 1997, 1996 and 1995 has
been favorably impacted by the change in valuation allowance for deferred
tax assets related primarily to net operating loss carryforwards.
12
SERVICE REVENUE SUMMARY:
YEAR ENDED DECEMBER 31, INCREASE/(DECREASE)
------------------------------ ---------------------------
1999 1998 1997 1999 VS 1998 1998 VS 1997
-------- -------- -------- ------------ ------------
($ IN MILLIONS)
Permanent placements............................ $26.8 $22.5 $17.6 $ 4.3 $ 4.9
Contract placements............................. 18.8 12.6 8.6 6.2 4.0
Specialty services.............................. 8.0 6.5 7.6 1.5 (1.1)
----- ----- ----- ----- -----
Total staffing service revenue.................. $53.6 $41.6 $33.8 $12.0 $ 7.8
===== ===== ===== ===== =====
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1999 COMPARED WITH 1998
(FISCAL 1998 RESULTS HAVE BEEN RECLASSIFIED FOR THE EFFECTS OF DISCONTINUED
OPERATIONS)
For the year ended December 31, 1999, net staffing service revenue increased
approximately $12.0 million, or 29%, to $53.6 million as compared to
$41.6 million for the previous year. Substantially all of this increase was
attributable to the acquisition of Mountain and Texcel as described below.
Specifically, $7.0 million of the increase resulted from the inclusion of a full
year of revenue generated by Texcel, which was acquired in October 1998, and an
additional $5.2 million of revenue was generated by the operations of Mountain,
which was acquired in August 1999. Revenue generated by the other operations of
the Company's staffing business was down slightly as compared to the previous
year period with increases in some regions being offset by reductions in other
regions.
As a percentage of net staffing service revenue, revenues derived from
permanent placements increased $4.3 million, or 19% over the previous year and
comprised 50% of the total staffing revenue for fiscal year 1999, as compared to
54% of the revenue for the previous year. The inclusion of revenue for Texcel
accounted for all of the increase in permanent placement revenue. Contract
placement revenue increased $6.2 million, or 49%, over the previous year and
accounted for 35% of net staffing service revenue for fiscal year 1999, as
compared to 30% of the revenue for the previous year. The inclusion of revenue
from Mountain accounted for $5.2 million, or 84%, of the increase in contract
placement revenue, with the remainder coming from the Company's other
operations. Specialty service revenue increased $1.5 million, or 23%, over the
previous year period and accounted for the remaining 15% of net staffing service
revenue. This increase is attributable to the success of our single-source
provider strategy.
As a result of the increase in staffing service revenue, total gross margin
increased approximately $2.5 million, or 20%, to $15.0 million for fiscal year
1999 as compared to $12.5 million in the previous year. As a percentage of net
staffing service revenue, the gross margin percentage for fiscal year 1999 was
28%, down 2 percentage points as compared to the previous year. This decrease is
largely due to the fact that a larger percentage of fiscal 1999 period revenue
was generated from contract placements, which have lower margins than permanent
placements. For example, the gross margins of the recently acquired Mountain are
approximately 17% versus the gross margins on permanent placements which
approximate 30%. As the Company continues to increase its contract customer base
and contract revenue stream, the Company expects that the gross margin will
continue to gradually decline several percentage points.
Selling, general and administrative expenses ("SG&A"), net of depreciation
and amortization, increased $2.5 million, or 28%, to $11.3 million for fiscal
1999 as compared to $8.8 million in the previous year. A significant portion of
the increase in SG&A was attributed to the inclusion of the operations of Texcel
and Mountain. In addition, the Company also incurred increased costs associated
13
with the development of back office support staffs and computer systems
upgrades, as well as additional costs associated with employee insurance
escalation and increased rents. Management is continuing to evaluate these
increased costs and intends to achieve synergies in fiscal year 2000 through
consolidations and integration of back office functions of its recent
acquisitions. For fiscal year 1999, depreciation and amortization expense
amounted to $1.2 million as compared to $0.6 million in the previous year. This
increase is attributable to recent acquisitions completed by the Company.
Included in other expense for 1999 is the write off of $0.2 million of
goodwill associated with the previously acquired operations of Carter Financial
Services, Inc. as compared to $0.2 million loss from joint venture operations in
1998. In addition, for fiscal 1999, the Company reported net interest expense of
$0.1 million, primarily associated with borrowings and deferred payment
obligations related to the Company's acquisitions of Texcel and Mountain. The
Company reported interest income of $0.3 million in the previous year which
arose from the investment of the proceeds from the Company's 1997 public
offering.
For fiscal 1999, income from continuing operations before income taxes
amounted to $2.2 million, down $1.0 million, as compared to the previous year.
The reduction in income from continuing operations before taxes is the result of
several factors:
(1) greater percentage of the current year revenue being generated from
contract placements and specialty services versus higher margin permanent
placements
(2) increased SG&A costs, as noted above
(3) increased amortization and interest expense from acquisitions.
Income tax expense from continuing operations was approximately
$0.9 million for fiscal 1999 as compared to $1.2 million in the previous year.
For 1998, income tax expense was favorably reduced 1.4% as a result of a change
in estimate.
For fiscal 1999, net income from continuing operations amounted to
$1.4 million, down $0.7 million from the previous year.
On December 31, 1999, the Company approved a plan to sell Train. The Company
has begun discussions with various entities regarding such sale and management
anticipates that the Company will enter into an agreement regarding the sale of
Train by June 30, 2000. The Company contemplates that any such sale would
include a strategic alliance that would allow the Company to continue to utilize
the services of Train on an outsource basis. In addition, in December 1999, the
Company sold all of its assets of GAPS to the former owners and managers of the
GAPS operations. The sales price was in the form of a $0.2 million promissory
note, payable over a ten year time period, and a royalty of four percent per
annum from the sale of the Company's proprietary GAPS software during the life
expectancy of such product. Accordingly, fiscal 1999 and 1998 results of
operations reflect treatment of the results of operations of Train and GAPS as
discontinued operations. Losses from the operations of discontinued operations,
net of income tax benefits, amounted to $0.7 million in fiscal year 1999, as
compared to $0.5 million in the previous year. Additionally, included in the
fiscal year 1999 loss on disposal of discontinued operations is a $0.6 million
provision, net of income tax benefit, for the estimated loss on disposal of
Train and GAPS.
As a result of the items discussed above, net income for 1999 amounted to
approximately $63,000 down $1.5 million from the previous year.
14
1998 COMPARED WITH 1997
(FISCAL 1998 RESULTS HAVE BEEN RECLASSIFIED FOR THE EFFECTS OF DISCONTINUED
OPERATIONS)
Net staffing service revenue increased approximately $7.8 million, or 23%,
to $41.6 million in 1998, compared to $33.8 million in 1997. The increase in net
staffing service revenue was primarily attributable to the Company's continued
focus on high-margin, specialty niche employment markets such as the information
technology and engineering/technical disciplines. Approximately $1.8 million, or
23%, of this increase was the result of the Texcel acquisition. This lower than
expected revenue growth is primarily the result of client imposed restrictions
on the hiring of personnel resulting from economic conditions abroad where
several of the Company's clients have extensive operations. It also reflects a
general hiring slowdown in certain industries most affected by recent market
conditions. Permanent placement revenue increased approximately $4.9 million, or
28%, to $22.5 million in 1998 compared to $17.6 million in 1997. The demand for
permanent placement personnel has resulted in a decrease in specialty service
revenue of approximately $1.1 million, or 14%, to $6.5 million in 1998, compared
to $7.6 million in 1997. Contract placement revenue increased approximately
$4.0 million, or 47%, to $12.6 million in 1998, compared to $8.6 million in
1997.
Gross margin increased approximately $2.4 million, or 24%, to $12.5 million
in 1998, compared to $10.1 million in 1997. Gross margin as a percentage of net
staffing service revenue remained relatively unchanged at approximately 30%.
Selling, general and administrative expenses, net of depreciation and
amortization, increased approximately $1.5 million, or 21%, to $8.8 million in
1998, compared to $7.3 million in 1997. The increase was primarily the result of
increased expenses associated with opening new offices, the further development
and expansion of the Company's training programs, the expansion of the Company's
back office to support the growth in sales and increased professional fees
associated with investor relations and public reporting. Selling, general and
administrative expenses, as a percentage of net service revenues, remained
relatively unchanged at 21%. For fiscal year 1998, depreciation and amortization
expense amounted to $0.6 million as compared to $0.3 million in the previous
year. This increase is attributable to recent acquisitions completed by the
Company.
Other income was approximately $69,000 in 1998, compared to an expense of
$25,000 in 1997. This was primarily due to interest earnings on the proceeds
from the Company's 1997 public offering and a current year reduction of interest
expense, resulting from the retirement of all short-term debt during the fourth
quarter of 1997, offset by increased losses from joint venture operation and
interest expense on deferred payment obligations. The loss from joint venture
operation increased approximately $202,000 to $223,000 in 1998 compared to
$21,000 in 1997. As a result, the Company terminated the joint venture in
January, 1999.
For fiscal 1998, income from continuing operations before income taxes
amounted to $3.2 million, an increase of $0.7 million, or 28% as compared to the
previous year period.
Income tax expense from continuing operations was approximately
$1.2 million in 1998, compared to benefit of approximately $0.1 million in 1997.
The benefit in 1997 resulted from a reduction in the valuation allowance on
deferred tax assets in the fourth quarter of 1997, primarily related to net
operating loss carry-forwards. The Company's effective tax rate for 1998 was
approximately 36%.
Results for fiscal year 1998, the first year in which the Company operated
its training segment, have been restated to reflect reporting the results for
this segment as discontinued operations. The losses from discontinued operations
amounted to $0.5 million in fiscal year 1998. This loss was primarily the result
of startup costs associated with the expansion of the Company's training
operation, the integration of the Alliance Training Center acquisition and
completion of the requisite certifications of the Company's training schools.
The Company reported no Training revenue in 1997.
15
Net income decreased approximately $1.1 million, or 41%, to $1.6 million in
1998, compared to $2.7 million in 1997 as a result of the above.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, net cash flow generated from
operations amounted to $1.1 million. In addition, the Company raised
$0.2 million from the issuance of capital stock under stock option agreements
and borrowed $1.5 million under the Company's new line of credit facility. All
of these proceeds combined with $2.6 million of existing cash on hand at
December 31, 1998 was used as follows: (1) $0.8 million for principal payments
under long-term debt obligations, (2) $3.1 million to finance acquisitions,
(3) $0.2 million to repurchase Company stock, (4) $1.2 million for capital
expenditures for computer equipment associated with the upgrade of the Company's
computer systems and automation of the back office and (4) $0.1 million for
miscellaneous general corporate purposes.
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions. In
March, 2000, the Company borrowed $2.8 million under the Company's existing
credit facility. These borrowings were used in connection with the acquisition
of Datatek, Corporation. As of March 22, 2000, total indebtedness under the
credit facility amounted to $3.8 million, leaving $0.8 million available.
Borrowings on this credit facility are due in full on June 30, 2000. Management
expects that cash flow from operations will provide adequate liquidity to fund
its internal 2000 growth plans and operations for the foreseeable future. The
Company's internal 2000 growth plans include the expansion and improvement of
its applicant database and back office and the expansion and opening of new
profit centers in existing cities.
The Company is currently in discussions with several groups to obtain
additional financing through either debt or equity in order to consummate
additional significant acquisitions. As of March 29, 2000, no agreements had
been entered into and there is no certainty that the Company will be successful
in such efforts.
Inflation has not had a significant effect on the Company's operating
results.
YEAR 2000 ISSUE
As a result of certain computer programs being written utilizing two digits
rather than four digits to define the applicable year, any of the Company's
computer programs that had date sensitive software could have recognized a date
using "00" as the Year 1900 rather than the Year 2000 (the "Year 2000 Issue").
This could have resulted in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
The Company made an assessment of the Year 2000 Issue and, as a result, replaced
its accounting software which has enabled the Company's computer systems to
function properly with respect to the Year 2000 Issue. The cost of the software
and implementation was approximately $0.2 million.
In addition, Year 2000 testing and remediation of other aspects of the
Company's infrastructure, including the Company's subsidiaries, is complete. The
Company did not experience any disruption of operations as a result of the Year
2000 Issue and does not expect in the future to experience any disruption of
operations as a result of the Year 2000 Issue.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that reflect projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended. No
assurance
16
can be given that actual results or events will not differ materially from those
projected, estimated, assumed or anticipated in any such forward looking
statements. Important factors (the "Cautionary Disclosures") that could result
in such differences include: general economic conditions in the Company's
markets, including inflation, recession, interest rates and other economic
factors; the availability of qualified personnel; the level of competition
experienced by the Company; the Company's ability to implement its business
strategies and to manage its growth; the level of development revenues and
expenses; the level of litigation expenses; the Company's ability to effectively
implement an e-commerce strategy; those factors identified in the Company's
Prospectus dated September 30, 1997 as risk factors; and other factors that
affect businesses generally. Subsequent written and oral "forward-looking"
statements attributable to the Company or persons acting on its behalf are
expressly qualified by the Cautionary Disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks from fluctuations in interest rates
and the effects of those fluctuations on the earnings of its cash equivalent
short-term investments as well as interest expense on line of credit borrowings.
The cash equivalent short-term investments consist of money market mutual funds
that invest in government securities. Assuming interest rates increased by 200
basis points (2%) above the interest rate at December 31, 1999, on an annualized
basis interest expense would increase by approximately $30,000 on the
outstanding line of credit borrowings of $1.5 million at December 31, 1999.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
See Item 14(a).
QUARTERLY RESULTS
The Company's quarterly operating results have varied in the past and can be
expected to vary in the future. Fluctuations in operating results generally are
caused by a number of factors, including changes in the Company's services mix,
the degree to which the Company encounters competition in its existing or target
markets, general economic conditions, the volume and timing of orders received
during the period, sales and marketing expenses related to entering new markets,
the timing of new services introduced by the Company or its competitors, and
changes in prices for services offered by the Company or its competitors.
The following table presents selected quarterly financial information for
the periods indicated. This information has been derived from unaudited
consolidated financial statements, which, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information. These operating results are not
necessarily indicative of results for any future period.
THREE MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net services revenues................. $8,911 $10,388 $10,464 $11,803 $11,678 $11,704 $14,360 $15,902
Cost of services...................... 6,318 7,179 7,370 8,155 8,194 8,433 10,234 11,832
------ ------- ------- ------- ------- ------- ------- -------
Gross margin........................ 2,593 3,209 3,094 3,648 3,484 3,271 4,126 4,070
Selling, general and administrative
expenses............................ 2,074 2,357 2,361 2,597 2,655 2,943 3,601 3,290
Other income (expenses)............... 90 80 89 (190) (6) (8) (40) (186)
------ ------- ------- ------- ------- ------- ------- -------
Income from continuing operations
before income taxes................. 609 932 822 861 823 320 485 594
Income tax expense.................... (192) (350) (309) (318) (315) (134) (161) (244)
------ ------- ------- ------- ------- ------- ------- -------
Income from continuing operations..... 417 582 513 543 508 186 324 350
Loss from discontinued operations, net
of tax benefit...................... (40) (31) (199) (207) (125) (136) (139) (905)
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $ 377 $ 551 $ 314 $ 336 $ 383 $ 50 $ 185 $ (555)
====== ======= ======= ======= ======= ======= ======= =======
Basic earnings per share:
From continuing operations.......... $ 0.15 $ 0.21 $ 0.18 $ 0.20 $ 0.18 $ 0.07 $ 0.12 $ 0.13
Net income (loss)................... 0.14 0.20 0.11 0.12 0.14 0.02 0.07 (0.20)
Diluted earnings per share:
From continuing operations.......... $ 0.15 $ 0.20 $ 0.18 $ 0.20 $ 0.18 $ 0.07 $ 0.12 $ 0.13
Net income (loss)................... 0.13 0.19 0.11 0.12 0.14 0.02 0.07 (0.20)
Weighted average shares outstanding:
Basic............................... 2,740 2,748 2,809 2,712 2,756 2,732 2,772 2,781
Diluted............................. 2,858 2,912 2,891 2,769 2,790 2,765 2,774 2,781
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the Proxy
Statement is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Shareholder" in the Proxy
Statement is incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference in
response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (i) and (ii) Financial Statements and Financial Statement Schedule
Reference is made to the listing on page 21 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 on
notes thereto.
(iii) Exhibits
Reference is made to the Index to Exhibits on pages 45 through 50 for a list
of all exhibits filed as part of this report.
(b) Reports on Form 8-K
On March 22, 2000, the Company filed with the Securities and Exchange
Commission, a report on Form 8- K, dated March 7, 2000 with respect to the
acquisition of Datatek.
19
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.
REGISTRANT
Date: March 30, 2000 By: /s/ J. MICHAEL MOORE
-----------------------------------------
J. Michael Moore
CHIEF EXECUTIVE OFFICER
(PRINCIPAL 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 and on the dates indicated.
Date: March 30, 2000 By: /s/ J. MICHAEL MOORE
-----------------------------------------
J. Michael Moore
Chairman, Chief Executive Officer and
Principal Executive Officer
Date: March 30, 2000 By: /s/ M. TED DILLARD
-----------------------------------------
M. Ted Dillard
President and Secretary
Date: March 30, 2000 By: /s/ DOUGLAS G. FURRA
-----------------------------------------
Douglas G. Furra
Chief Financial Officer and
Principal Financial Officer
Date: March 30, 2000 By: /s/ ANTHONY G. SCHMECK, JR.
-----------------------------------------
Anthony G. Schmeck, Jr.
Chief Accounting Officer
Date: March 30, 2000 By: /s/ DEBORAH A. FARRINGTON
-----------------------------------------
Deborah A. Farrington
Director
Date: March 30, 2000 By: /s/ SAMUEL E. HUNTER
-----------------------------------------
Samuel E. Hunter
Director
Date: March 30, 2000 By: /s/ A. CLINTON ALLEN
-----------------------------------------
A. Clinton Allen
Director
20
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE NO.
--------
Report of Independent Accountants........................... 22
Consolidated Balance Sheets at December 31, 1999 and 1998... 23
Consolidated Statements of Operations for each of the three
years ended December 31, 1999, 1998 and 1997.............. 24
Consolidated Statements of Stockholders' Equity for each of
the three years ended December 31, 1999, 1998 and 1997.... 25
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999, 1998 and 1997.............. 26
Notes to Consolidated Financial Statements.................. 27
Report of Independent Accountants on the Financial Statement
Schedule.................................................. 43
Schedule II--Valuation and Qualifying Accounts--for each of
the three years ended December 31, 1999, 1998 and 1997.... 44
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Diversified
Corporate Resources, Inc. and its subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in United States which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers, LLP
Dallas, Texas
March 22, 2000
22
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 847,171 $ 3,472,990
Trade accounts receivable, less allowance for doubtful
accounts of approximately $1,005,000 and $734,000,
respectively............................................ 9,987,318 6,780,639
Receivables from related parties.......................... 75,263 52,756
Prepaid expenses and other current assets................. 256,714 302,004
Federal income taxes receivable........................... 148,523 48,094
Deferred income taxes..................................... 713,853 374,292
----------- -----------
Total current assets.................................... 12,028,842 11,030,775
Property and equipment, net................................. 3,342,524 3,114,908
Other assets:
Intangibles, net.......................................... 6,882,809 3,646,925
Investment in and advances to joint venture............... -- 377,127
Deferred income taxes..................................... -- 123,004
Other..................................................... 293,574 149,439
----------- -----------
$22,547,749 $18,442,178
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses............... $ 5,128,069 $ 3,853,681
Short-term borrowing under line of credit................. 1,480,000 --
Current maturities of capital lease obligations........... 13,413 43,824
Current maturities of long-term debt...................... 1,220,733 665,169
----------- -----------
Total current liabilities............................... 7,842,215 4,562,674
Deferred lease rents........................................ 93,528 59,522
Deferred income taxes....................................... 93,487 --
Capital lease obligations, net of current maturities........ -- 23,766
Long-term debt, net of current maturities................... 1,590,757 1,178,924
----------- -----------
Total liabilities....................................... 9,619,987 5,824,886
----------- -----------
Commitments and contingencies............................... -- --
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none
issued.................................................. -- --
Common stock, $.10 par value; 10,000,000 shares
authorized, 3,289,946 and 3,177,446 shares issued,
respectively............................................ 328,995 317,745
Additional paid-in capital................................ 12,378,909 11,927,899
Retained earnings......................................... 1,999,549 1,936,736
Common stock held in treasury (549,594 and 483,549 shares,
respectively), at cost.................................. (1,541,302) (1,349,865)
Receivables from related parties.......................... (238,389) (215,223)
----------- -----------
Total stockholders' equity.............................. 12,927,762 12,617,292
----------- -----------
$22,547,749 $18,442,178
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Net service revenues:
Permanent placement....................................... $26,794,032 $22,463,649 $17,592,923
Specialty services........................................ 7,992,416 6,472,457 7,609,008
Contract placement........................................ 18,857,452 12,630,072 8,609,602
----------- ----------- -----------
53,643,900 41,566,178 33,811,533
Cost of services............................................ 38,692,929 29,022,379 23,678,331
----------- ----------- -----------
Gross margin................................................ 14,950,971 12,543,799 10,133,202
----------- ----------- -----------
Selling, general and administrative expenses:
Selling, general and administrative expenses.............. 11,282,160 8,772,201 7,320,583
Depreciation and amortization expense..................... 1,206,692 616,941 307,651
----------- ----------- -----------
12,488,852 9,389,142 7,628,234
----------- ----------- -----------
Other income and (expense) items:
Loss from joint venture operations........................ -- (223,362) (21,072)
Interest income (expense), net............................ (84,599) 283,773 (35,468)
Other, net................................................ (155,048) 9,019 31,729
----------- ----------- -----------
(239,647) 69,430 (24,811)
----------- ----------- -----------
Income from continuing operations before income taxes,
discontinued operations and extraordinary item............ 2,222,472 3,224,087 2,480,157
Income tax (expense) benefit................................ (854,881) (1,169,239) 123,195
----------- ----------- -----------
Income from continuing operations before discontinued
operations and extraordinary item......................... 1,367,591 2,054,848 2,603,352
Discontinued operations, net of income tax benefits:
Loss from operations of discontinued training
operations.............................................. (700,079) (476,983) --
Loss on disposal of discontinued training operations...... (604,699) -- --
----------- ----------- -----------
Income before extraordinary item............................ 62,813 1,577,865 2,603,352
Extraordinary item:
Gain on debt restructuring, net of income taxes........... -- -- 56,627
----------- ----------- -----------
Net income.................................................. $ 62,813 $ 1,577,865 $ 2,659,979
=========== =========== ===========
Basic earnings per share:
Income from continuing operations......................... $ 0.49 $ 0.75 $ 1.33
Loss from discontinued operations......................... (0.47) (0.18) --
Extraordinary item........................................ -- -- 0.03
----------- ----------- -----------
Net income.............................................. $ 0.02 $ 0.57 $ 1.36
=========== =========== ===========
Weighted average common shares outstanding.................. 2,760,371 2,752,154 1,951,117
=========== =========== ===========
Diluted earnings per share:
Income from continuing operations......................... $ 0.49 $ 0.72 $ 1.25
Loss from discontinued operations......................... (0.47) (0.17) --
Extraordinary item........................................ -- -- 0.03
----------- ----------- -----------
Net income.............................................. $ 0.02 $ 0.55 $ 1.28
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding............................................... 2,777,606 2,857,577 2,071,223
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
RECEIVABLES
ADDITIONAL RETAINED FROM
COMMON PAID-IN EARNINGS TREASURY RELATED
STOCK CAPITAL (DEFICIT) STOCK PARTIES TOTAL
-------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,
1996....................... $188,116 $ 3,615,151 $(2,301,108) $ (185,175) $(129,193) $ 1,187,791
Advances to related
parties.................... -- -- -- -- (170,807) (170,807)
Repayments from related
parties.................... -- -- -- -- 300,000 300,000
Tax effect of stock options
exercised.................. -- 57,750 -- -- -- 57,750
Issuance of common stock..... 110,479 7,407,603 -- -- -- 7,518,082
Net income................... -- -- 2,659,979 -- -- 2,659,979
-------- ----------- ----------- ----------- --------- -----------
BALANCE, December 31,
1997....................... 298,595 11,080,504 358,871 (185,175) -- 11,552,795
Advances to related
parties.................... -- -- -- -- (215,223) (215,223)
Tax effect of stock options
exercised.................. -- 105,545 -- -- -- 105,545
Issuance of common stock..... 19,150 741,850 -- -- -- 761,000
Treasury stock purchase...... -- -- -- (1,164,690) -- (1,164,690)
Net income................... -- -- 1,577,865 -- -- 1,577,865
-------- ----------- ----------- ----------- --------- -----------
BALANCE, December 31,
1998....................... 317,745 11,927,899 1,936,736 (1,349,865) (215,223) 12,617,292
Advances to related
parties.................... -- -- -- -- (23,166) (23,166)
Tax effect of stock options
exercised.................. -- 22,744 -- -- -- 22,744
Issuance of common stock..... 14,750 444,766 -- -- -- 459,516
Treasury stock purchase...... -- -- -- (211,437) -- (211,437)
Net income................... -- -- 62,813 -- -- 62,813
Retirement of treasury
stock...................... (3,500) (16,500) -- 20,000 -- --
-------- ----------- ----------- ----------- --------- -----------
BALANCE, December 31,
1999....................... $328,995 $12,378,909 $ 1,999,549 $(1,541,302) $(238,389) $12,927,762
======== =========== =========== =========== ========= ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flow from operating activities:
Net income................................................ $ 62,813 $ 1,577,865 $ 2,659,979
Adjustments to reconcile net income to cash provided by
operating activities:
Extraordinary item...................................... -- -- (87,118)
Depreciation and amortization........................... 1,272,365 636,107 307,652
Write off of intangible assets and other................ 156,320 -- 5,103
Loss from disposal of discontinued operations........... 604,699 -- --
Provision for allowances................................ 249,637 (38,531) 42,663
Equity in loss of joint venture......................... -- 223,362 21,072
Income tax effect of options exercised.................. 22,744 105,545 57,750
Deferred income taxes................................... 103,667 174,552 (671,848)
Deferred lease rents.................................... 34,006 6,391 53,131
Accretion of interest on deferred payment obligations... 190,466 36,411 --
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable..................................... (1,119,339) (743,561) (1,538,313)
Federal income taxes receivable......................... 51,166 153,342 (201,436)
Prepaid expenses and other current assets............... (36,698) (200,358) (71,257)
Other assets............................................ (154,075) -- --
Trade accounts payable and accrued expenses............. (375,740) (325,220) 244,972
----------- ----------- -----------
Cash provided by operating activities................. 1,062,031 1,605,905 822,350
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (1,213,480) (1,845,902) (894,519)
Business acquisition costs, net of cash acquired.......... (3,113,879) (2,198,440) --
Other assets.............................................. (6,287) (20,236) (11,397)
Loans and advances to related parties..................... (77,058) (256,510) (172,956)
Repayment from related parties............................ 31,385 10,305 309,244
Net advances to joint venture............................. -- (373,851) (94,805)
----------- ----------- -----------
Cash used in investing activities..................... (4,379,319) (4,684,634) (864,433)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock.................................. 181,641 190,219 8,668,065
Public offering costs..................................... -- -- (1,119,983)
Repurchase of treasury stock.............................. (211,437) (1,075,159) --
Principal payments under long-term debt obligations....... (758,735) (63,529) (21,831)
Increase (decrease) in borrowings under factoring and loan
agreements.............................................. -- -- (400,682)
Net short-term borrowings................................. 1,480,000 -- (97,652)
Book overdraft............................................ -- -- (98,158)
----------- ----------- -----------
Cash provided by (used in) financing activities....... 691,469 (948,469) 6,929,759
----------- ----------- -----------
Change in cash and cash equivalents....................... (2,625,819) (4,027,198) 6,887,676
Cash and cash equivalents at beginning of year............ 3,472,990 7,500,188 612,512
----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 847,171 $ 3,472,990 $ 7,500,188
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest.................................... $ 31,000 $ 11,000 $ 159,000
=========== =========== ===========
Cash paid for taxes....................................... $ 322,000 $ 538,000 $ 783,000
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
BASIS OF PRESENTATION
The consolidated financial statements include the operations of Diversified
Corporate Resources, Inc. and its wholly owned subsidiaries (the "Company"). All
inter-company accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company is a Texas corporation and is engaged, through its subsidiaries,
in the permanent, specialty and contract placement of personnel in various
industries and in information technology training services. The Company
currently operates offices in the following locations:
Arizona Phoenix
Colorado Denver
Georgia Atlanta
Idaho Meridian
Illinois Chicago
Maine Portland
Missouri Kansas City and St. Louis
North Carolina Raleigh
Pennsylvania Philadelphia
Texas Dallas/Fort Worth, Houston and Austin
Virginia Reston
The offices are responsible for marketing to clients, recruitment of
personnel, operations, local advertising, initial customer credit evaluation and
customer cash collection follow-up. The Company's executive offices, located in
Dallas, Texas, provide centralized training, payroll, final customer credit
evaluation, customer invoicing and collection efforts, as well as certain other
accounting and administrative services for its offices.
REVENUE RECOGNITION AND COST OF SERVICES
Fees for placement of permanent personnel are recognized as income at the
time the applicant accepts employment. A provision is made for estimated losses
in realization of such fees (principally due to applicants not commencing
employment, or not remaining in employment for the guaranteed period). Revenues
from specialty services and contract placements are recognized by the Company
upon performance of services. 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. Accounts receivable at
December 31, 1999 and 1998 include approximately $585,000 and $491,000,
respectively, of unbilled receivables that were billed in 2000 and 1999,
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 the
purposes of the consolidated statements of cash flows.
27
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the Company's financial instruments consist
of notes receivable from related parties, line of credit borrowings and
long-term debt. The Company believes that the recorded values approximate fair
value due to the Company's ability to obtain such borrowings at comparable
interest rates.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the individual assets or the related lease terms, if applicable, whichever is
shorter. Upon retirement or sale, the cost and related accumulated depreciation
and amortization are removed from the accounts and any resulting gains or losses
are included in the consolidated statement of operations. Maintenance and repair
costs are charged to expense as incurred. The estimated useful lives of each
class of assets are as follows:
Computer equipment and software............................. 5 Years
Equipment and furniture..................................... 3-7 Years
Leasehold improvements...................................... 5-7 Years
ADVERTISING COSTS
Advertising costs are expensed as incurred. For the years ended
December 31, 1999, 1998 and 1997, advertising expenses amounted to approximately
$919,000, $411,000 and $343,000, respectively.
EARNINGS PER SHARE
Basic earnings per share ("EPS") was determined by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted EPS includes these shares plus common stock equivalents
outstanding during the year. (Common stock equivalents are excluded if the
effects of inclusion are anti-dilutive.)
Following is a reconciliation of the weighted average number of shares
outstanding during the year for basic and diluted EPS:
1999 1998 1997
--------- --------- ---------
Basic....................................... 2,760,371 2,752,154 1,951,117
Net effect of dilutive stock options........ 17,235 105,423 120,106
--------- --------- ---------
Diluted..................................... 2,777,606 2,857,577 2,071,223
========= ========= =========
Options and warrants not considered because
effects of inclusion would be
anti-dilutive............................. 185,090 127,590 255,590
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end.
28
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to the current year presentation.
INTANGIBLES
Intangibles consist of covenants not to compete and goodwill (excess of
purchase price over fair value of net assets acquired) arising from business
combinations and are being amortized on a straight-line basis over periods
ranging from 3 to 20 years based on their estimated useful lives or contract
terms.)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Computer equipment and software.................... $ 3,071,644 $ 2,466,334
Equipment and furniture............................ 1,814,910 1,457,109
Leasehold improvements............................. 386,589 292,123
----------- -----------
5,273,143 4,215,566
Less accumulated depreciation and amortization..... (1,930,619) (1,100,658)
----------- -----------
Property and equipment, net...................... $ 3,342,524 $ 3,114,908
=========== ===========
Depreciation and amortization of property and equipment was approximately
$971,000, $585,000 and $308,000 for the years ended December 31, 1999, 1998 and
1997, respectively. Amortization of assets under capital leases in 1999, 1998
and 1997 was approximately $39,000, $31,000 and $11,000 and the unamortized
balance was approximately $47,000 at December 31, 1999. These assets are
included in equipment and furniture.
29
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTANGIBLES
Intangibles consist of:
DECEMBER 31,
AMORTIZATION -----------------------
PERIOD 1999 1998
------------ ---------- ----------
Non-compete agreements................... 3-5 years $ 100,000 $ 50,000
Goodwill................................. 10-20 years 7,097,269 3,648,096
---------- ----------
7,197,269 3,698,096
Accumulated amortization................. (314,460) (51,171)
---------- ----------
$6,882,809 $3,646,925
========== ==========
Amortization of intangibles was approximately $301,000 for 1999 and $51,000
for 1998. The cost assigned to the non-compete agreements is the amount stated
in the purchase agreements.
4. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Trade accounts payable and accrued expenses consist of:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Trade accounts payable............................... $ 588,140 $ 262,097
Accrued expenses..................................... 439,289 269,940
Accrued compensation................................. 3,456,995 2,992,607
Accrued payroll expense.............................. 193,645 329,037
Provision for loss on disposal of discontinued
training operations................................ 450,000 --
---------- ----------
$5,128,069 $3,853,681
========== ==========
Included in accrued compensation are accrued commissions, contractors'
payroll and management bonuses.
5. LINE OF CREDIT AND LONG-TERM DEBT:
On July 8, 1999, the Company entered into a revolving line of credit
agreement with Compass Bank. The agreement permits borrowings of up to
$4,500,000. The borrowings are collateralized by the Company's accounts
receivable and other assets and are based upon a borrowing base as defined in
the agreement. The agreement also contains various financial and non-financial
covenants, the most restrictive of which require the Company to maintain net
worth of $8,900,000 and interest coverage, as defined in the agreement, of not
less than 2 to 1. The Company was in compliance with these covenants at
December 31, 1999 and 1998. Outstanding balances bear interest at the bank's
index rate unless the Company elects the LIBOR base rate plus 2 1/4% for
specific advances under the agreement. Interest is payable quarterly and all
outstanding principal and interest is due June 30, 2000. Borrowings at
December 31, 1999 amounted to $1,480,000, with a remaining balance of $3,020,000
available. The weighted average interest rate on the borrowings was 8.18% at
December 31, 1999.
30
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LINE OF CREDIT AND LONG-TERM DEBT: (CONTINUED)
Long-term debt consists of:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Present value of minimum deferred payment obligations
(discounted at 8%):
Texcel acquisition................................. $1,330,001 $1,844,093
Mountain acquisition............................... 1,481,489 --
---------- ----------
2,811,490 1,844,093
Less current maturities of long-term debt............ 1,220,733 665,169
---------- ----------
Total long-term debt............................... $1,590,757 $1,178,924
========== ==========
The aggregate maturities of long-term debt as of December 31, 1999 are as
follows:
2000........................................................ $1,220,733
2001........................................................ 1,054,864
2002........................................................ $ 535,893
----------
$2,811,490
==========
6. BUSINESS ACQUISITIONS
TEXCEL, INC. AND TEXCEL TECHNICAL SERVICES, INC.:
On October 8, 1998, the Company completed the acquisition of substantially
all of the assets and assumed certain liabilities of Texcel, Inc. and Texcel
Technical Services, Inc. (collectively "Texcel"). The purchase price consisted
of $1,800,000 in cash, 100,000 shares of the Company's common stock valued at
$4.8125 per share (which was the then market value at the date the acquisition
was announced less a discount for the restrictive nature of the stock) and three
annual deferred payments of $930,000 the first of which was paid October 1,
1999. The remaining two payments are due October 1, 2000 and 2001, respectively.
The deferred payments will be reduced up to $200,000 each if certain levels of
profitability are not maintained. Texcel is based in the Philadelphia area and
is engaged in both permanent and temporary placements of technical and
professional specialists, primarily in Pennsylvania, Delaware and New Jersey. In
connection with the acquisition, the Company incurred acquisition costs
amounting to approximately $196,000, which includes $89,000 paid to Ms. Deborah
A. Farrington, a non-employee Director of the Company, pursuant to her
consulting agreement with the Company, for negotiating the transaction.
31
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS ACQUISITIONS (CONTINUED)
Following is a summary of the transaction:
Costs:
Fair value of assets acquired............................. $ 695,610
Covenants not to compete.................................. 50,000
Goodwill.................................................. 3,483,954
----------
Total................................................... $4,229,564
==========
Source:
Cash...................................................... $1,995,954
Present value of minimum deferred payments................ 1,752,360
Fair value of common stock issued......................... 481,250
----------
Total................................................... $4,229,564
==========
The Texcel acquisition was accounted for under the purchase method. The
results of Texcel are included in the statement of operations beginning
October 1, 1998. Goodwill is being amortized over twenty years utilizing the
straight-line method. The contingent deferred payments (approximately $200,000
each) will be recorded as goodwill when earned.
32
MOUNTAIN, LTD.:
On August 6, 1999, the Company completed the acquisition of all of the
outstanding stock of Mountain Ltd. ("Mountain"). The purchase price consists of
approximately $2,430,000 in cash, 75,000 shares of the Company's common stock
valued at $3.705 per share and three annual deferred payments of approximately
$1,180,000 each, beginning October 1, 2000. The deferred payments will be
reduced up to 50% each if certain levels of profitability are not maintained.
Mountain is based in the Portland, Maine area and is engaged in contract
placements of technical and professional specialists, primarily in the
telecommunications industry. In connection with the acquisition, the Company
incurred acquisition costs amounting to approximately $336,000 which includes
$40,000 paid to Ms. Deborah A. Farrington, a non-employee Director of the
Company, pursuant to her consulting agreement with the Company, for negotiating
the transaction.
Following is a summary of the transaction:
Costs:
Fair value of assets acquired............................. $1,215,986
Covenant not to compete................................... 50,000
Goodwill.................................................. 3,259,364
----------
Total................................................... $4,525,350
==========
Source:
Cash...................................................... $2,765,986
Present value of minimum deferred payments................ 1,481,489
Fair value of common stock issued......................... 277,875
----------
Total................................................... $4,525,350
==========
The Mountain acquisition was accounted for under the purchase method. The
results of the operations of Mountain are included in the Company's statement of
operations beginning August 6, 1999. Goodwill is being amortized over twenty
years utilizing the straight-line method. The contingent deferred payments
(approximately $590,000 each) will be recorded as goodwill when earned.
Pro Forma Results of Operations (unaudited): The following unaudited pro
forma results of operations for 1999 have been prepared assuming the Mountain
acquisition had taken place at the beginning of the period. The following
unaudited pro forma results of operations for 1998 have been prepared assuming
the Mountain acquisition and the 1998 acquisition of Texcel had taken place at
the beginning of the period. The results of operations give effect to certain
adjustments, including amortization of intangible assets, interest effects of
the transaction, income taxes and the additional shares of common stock issued
in the transaction. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of results which may occur in
the future.
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Net service revenues............................... $61,940,868 $55,842,409
Net income from continuing operations before
taxes............................................ $ 2,369,194 $ 3,884,667
Net income from continuing operations.............. $ 1,455,624 $ 2,451,195
Net income......................................... $ 150,846 $ 1,974,212
Basic earnings per share:
Net income from continuing operations............ $ 0.52 $ 0.86
Net income....................................... $ 0.05 $ 0.68
Diluted earnings per share:
Net income from continuing operations............ $ 0.52 $ 0.83
Net income....................................... $ 0.05 $ 0.66
33
7. STOCK BASED COMPENSATION
Under provisions of the Company's 1998 and 1996 Amended and Restated
Nonqualified Stock Option Plans (the "Plans"), options to purchase an aggregate
of 800,000 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 Compensation Committee of
the Board of Directors of the Company or its appointee. The options granted in
1999, 1998 and 1997 vest in varying amounts over periods ranging from three to
five years.
On October 23, 1998, the Board of Directors approved the repricing of
options to purchase 298,167 shares of the Company's common stock, which are held
by key employees of the Company. Such action reduced to $5.125 per share the
exercise price on the options involved, representing the market value of the
common stock at the date of repricing. The options previously had exercise
prices ranging from $8.00 per share to $12.75 per share. The Board of Directors
also has imposed a condition that no such options could have been exercised
prior to October 23, 1999.
Effective as of December 9, 1998, a non-employee directors option plan was
approved, subject to shareholder approval, and the Company's three non-employee
directors were granted options to purchase 15,000 shares, each at $5.75 vesting
quarterly in 1999, representing the then market value of the common stock. Under
the plan, beginning January 1, 2000, each non-employee director will be granted
options to purchase 12,500 shares on January 1 of each year they continue to
serve. The option will be granted at the then market value of the common stock
and will vest quarterly. In connection with the implementation of this plan, all
non-employee directors forfeited all of their existing options which had not
vested at December 31, 1998.
Following is a summary of the Company's stock options as of and for the
years ended December 31, 1999, 1998 and 1997:
WEIGHTED NUMBER OF
AVERAGE SHARES OF
EXERCISE UNDERLYING RANGE OF
PRICE OPTIONS EXERCISE PRICES
-------- ---------- ---------------
Outstanding at December 31, 1997......... $ 6.28 495,500 $2.50 to $10.00
=======
Exercisable at December 31, 1997......... 3.14 223,000 2.50 to 10.00
=======
Granted.................................. 11.00 321,667 4.81 to 12.75
Exercised................................ 3.06 (91,500) 2.50 to 4.00
Forfeited................................ 10.54 (73,500) 5.00 to 12.75
-------
Outstanding at December 31, 1998......... 6.30 652,167 2.50 to 12.75
=======
Exercisable at December 31, 1998......... 5.93 214,000 2.50 to 12.75
=======
Granted.................................. 4.58 48,000 3.00 to 5.875
Exercised................................ 2.50 (72,500) 2.50 to 2.50
Forfeited................................ 8.57 (79,000) 2.50 to 12.75
-------
Outstanding at December 31, 1999......... 6.33 548,667 3.00 to 12.75
=======
Exercisable at December 31, 1999......... 6.01 275,867 3.00 to 12.75
=======
34
7. STOCK BASED COMPENSATION (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVG. AVG.
NUMBER CONTR. LIFE IN EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING YEARS PRICE OUTSTANDING PRICE
- - ------------------------ ----------- -------------- -------- ----------- --------
$3.00 to $5.88.......... 446,167 2.77 $ 4.93 181,000 $ 4.91
$10.00 to $12.75........ 102,500 3.40 $12.14 94,867 $12.14
------- -------
$3.00 to $12.75......... 548,667 2.88 $ 6.33 275,867 $ 6.01
======= =======
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123")
establishes a fair value basis of accounting for stock based compensation plans.
Had the compensation for the Company's stock based compensation plans been
determined consistent with SFAS 123, the Company's net income would approximate
the amounts below:
1999 1998 1997
----------------------- ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------- ----------- ----------
SFAS 123 compensation cost...... $ -- $ 317,305 $ -- $ 331,566 $ -- $ 273,145
APB 25 compensation cost
Net income (loss)............... 62,813 (254,501) 1,577,865 1,246,299 2,659,979 2,386,834
Basic earnings per share:
Income from continuing
operations.................. $ 0.49 $ 0.38 $ 0.75 $ 0.63 $ 1.33 $ 1.19
Loss from discontinued
operations.................. (0.47) (0.47) (0.18) (0.18) -- --
Extraordinary item............ 0.03 0.03
Net income.................... 0.02 (0.09) 0.57 0.45 1.36 1.22
Diluted earnings per share:
Income from continuing
operations.................. 0.49 0.38 0.72 0.62 1.25 1.12
Loss from discontinued
operations.................. (0.47) (0.47) (0.17) (0.18) -- --
Extraordinary item............ 0.03 0.03
Net income.................... 0.02 (0.09) 0.55 0.44 1.28 1.15
The effects of applying SFAS 123 as disclosed above are not indicative of
future amounts.
The fair value of each stock option granted in 1999, 1998 and 1997 is
estimated on the date of the grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
1999 1998 1997
--------- ---------- ----------
Expected term............................... 5.0 years 4.02 years 3.75 years
Expected dividend yield..................... 0.00% 0.00% 0.00%
Expected volatility......................... 55.32% 60.33% 40.55%
Risk-free interest rate..................... 5.33% 5.51% 6.10%
The weighted-average grant date fair value of options granted during the
years ended December 31, 1999, 1998 and 1997 was $2.53, $5.71 and $3.17,
respectively.
The Company granted a total of 82,590 stock warrants with an exercise price
of $13.50 to an investment banker for service rendered in connection with the
Company's public offering. These
35
7. STOCK BASED COMPENSATION (CONTINUED)
warrants are outstanding and exercisable as of December 31, 1999. The fair value
of these stock warrants granted in 1997 was estimated on the date of grant to be
approximately $161,000 using the Black-Scholes option-pricing model with the
following assumptions: an expected term of 2.5 years, an expected dividend yield
of 0.00%; an expected stock price volatility of 40.55%; and a risk-free interest
rate of 5.84%.
8. STOCKHOLDERS' EQUITY
In October and November 1997, the Company completed a public offering of
949,785 shares, including 123,885 shares from the underwriters exercise of its
over allotment option, of its common stock at $10.00 per share. An additional,
314,100 shares were sold by certain selling shareholders in the offering. After
deducting the underwriting discounts and non-accountable expense allowance, the
net proceeds to the Company were approximately $8.5 million. The net increase to
stockholders' equity was approximately $7.4 million after netting approximately
$1.1 million in offering costs.
During 1999, 1998 and 1997, 72,500, 91,500 and 155,000 shares, respectively,
were issued in connection with the exercise of stock options. 100,000 and 75,000
shares were issued in the Texcel and Mountain acquisitions, respectively. In
1999 and 1998, pursuant to share repurchase programs authorized by the Board of
Directors, as a result of market conditions, the Company reacquired 102,913 and
237,700 shares, respectively at an aggregate cost of approximately $211,000 and
$1,165,000, respectively. In 1999, the Company retired 35,000 shares of treasury
stock. The amount credited to additional paid in capital upon the original
issuance of such shares was estimated to be greater than the Company's cost of
reacquiring such shares. Accordingly, the carrying value in excess of the par
value of such shares was charged to additional paid in capital upon
cancellation.
9. FEDERAL INCOME TAXES
The income tax provision (benefit) and the amount computed by applying the
federal statutory income tax rate to income before income taxes differs as
follows:
DECEMBER 31,
----------------------------------
1999 1998 1997
--------- ---------- ---------
Tax provision at statutory rate for
continuing operations.................... $ 777,862 $1,128,430 $ 898,546
Loss from discontinued operations.......... (815,946) (271,410) --
Utilization of net operating loss
carryforward............................. -- -- (163,312)
Change in valuation allowance exclusive of
utilization of net operating loss
carryforward............................. -- -- (892,388)
Other, principally change of estimate...... 3,769 (43,666) 19,658
Alternative minimum tax credits............ -- -- (39,889)
State income taxes, net of federal income
tax benefits............................. 73,250 84,475 84,681
--------- ---------- ---------
$ 38,935 $ 897,829 $ (92,704)
========= ========== =========
36
9. FEDERAL INCOME TAXES (CONTINUED)
The allocation of income taxes (benefit) is:
DECEMBER 31,
------------------------------------
1999 1998 1997
--------- ---------- -----------
Continuing operations.................... $ 854,881 $1,169,239 $ (123,195)
Discontinued operations.................. (815,946) (271,410) --
Extraordinary item....................... -- -- 30,491
--------- ---------- -----------
$ 38,935 $ 897,829 $ (92,704)
========= ========== ===========
Current.................................. $ 162,007 $ 723,277 $ 579,144
Deferred................................. (123,072) 174,552 173,747
Realization of net operating loss
carryforward........................... -- -- 210,105
Change in valuation allowance............ -- -- (1,055,700)
--------- ---------- -----------
$ 38,935 $ 897,829 $ (92,704)
========= ========== ===========
Deferred income taxes reflect the impact of "temporary differences" between
the amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. In the fourth quarter of 1997, the Company
determined that it was more likely than not that it would realize its deferred
tax assets and, accordingly, reduced the related valuation allowance by
approximately $846,000. This change of estimate increased basic and diluted
earnings per share $0.43 and $0.41, respectively.
Temporary differences and carryforwards, which give rise to deferred tax
assets and liabilities, at December 31, 1999, 1998 and 1997 are as follows:
1999 1998
--------------------------- ---------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSET LIABILITIES ASSET LIABILITIES
------------ ------------ ------------ ------------
Current:
Net operating loss carryforward............. $163,312 $ -- $163,312 $ --
Reserves and accruals....................... 550,541 -- 210,980 --
-------- -------- -------- --------
Subtotal-current.......................... 713,853 -- 374,292 --
-------- -------- -------- --------
Non - current:
Net operating loss carryforward............. 149,258 -- 312,570 --
Other basis differences principally related
to property and equipment and
intangibles............................... -- 280,154 -- 213,375
Reserves and accruals....................... 37,409 -- 23,809 --
Subtotal non-current...................... 186,667 280,154 336,379 213,375
-------- -------- -------- --------
Total......................................... $900,520 $280,154 $710,761 $213,275
======== ======== ======== ========
Net current................................... $713,853 $374,292
======== ========
Net non-current............................... $ 93,487 $123,004
======== ========
The Company has a net operating loss carryforward of approximately $895,000
as of December 31, 1999, which, if unused, expires in 2006 through 2008.
Additionally, due to a more than 50% change in ownership beginning with an
April 1991 transaction, the Company's net operating loss carry-forward 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 for the
year-ended December 31, 1999, was
37
9. FEDERAL INCOME TAXES (CONTINUED)
approximately $467,000. An additional $467,000 and $426,000 will become
available in 2000 and 2001, respectively.
10. CONCENTRATION OF CREDIT RISK
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 cash equivalents.
Net service revenues from one customer represented approximately 12% 14% and
13% of total staffing services revenues in 1999, 1998 and 1997, respectively.
11. RELATED PARTY TRANSACTIONS
During 1999, 1998 and 1997, the Company paid various expenses on behalf of
Mr. Moore or various entities that he controls in the amount of approximately
$72,000, $77,000 and $173,000, respectively. Such amounts are non-interest
bearing and are not collateralized. The 1999 amount is included in receivables
from related parties in the Company's consolidated balance sheets and all other
amounts have been repaid. The majority of these amounts are related to
litigation associated with a lawsuit with Ditto Properties, Inc., in connection
with the Company initially being involved therein as garnishee and rent for
office space. Subsequent to December 31, 1999, through March 22, 2000, the
Company advanced an additional $89,000 to Mr. Moore or various entities that he
controls primarily related to the lawsuit with Ditto Properties.
During 1998, the Company advanced Mr. Moore $20,000 which was evidenced by a
note bearing interest at 8%. This note was repaid in 1999.
On July 17, 1998, M. Ted Dillard ("Mr. Dillard"), the Company's President,
exercised options to purchase 84,000 shares of the Company's common stock for an
aggregate purchase price of $257,250. The purchase price was paid with 7,500
shares (acquired in 1997) of the Company's common stock valued at $89,500 (based
upon the closing price of the Company's common stock on July 16, 1998, on the
American Stock Exchange) and the remainder was paid in cash. In connection with
this transaction the Company loaned Mr. Dillard approximately $149,000, which
was subsequently reduced to approximately $90,000 (the "Tax Loan") to cover his
income tax liability associated with the transaction. The Tax Loan was approved
by the Compensation Committee of the Board of Directors and ratified by the
Board of Directors. The Tax Loan bears interest at the applicable federal rate,
the interest is payable quarterly, is collateralized by 20,000 shares of the
Company's common stock and is due July 17, 2003. The Company did receive an
income tax deduction related to this transaction. In addition, on October 12,
1998, the Board of Directors approved a loan to Mr. Dillard of approximately
$125,000 (the "Company Loan"). The Company Loan bears interest at 8%, is payable
quarterly, is collateralized by 43,400 and 35,400 shares of the Company's common
stock as of December 31, 1999 and 1998, respectively, and is due October 12,
2001.
The collateral for the Company Loan will be increased if the market value of
the Company's common stock declines to the point where the market value of all
stock pledged is less than the stated amount of the Company Loan. The Tax Loan
and the Company Loan are classified as receivables from related party in the
Company's consolidated balance sheet and have been deducted from stockholders'
equity.
Interest income from related parties amounted to approximately $16,000,
$7,200 and $5,100 in fiscal 1999, 1998 and 1997, respectively.
38
11. RELATED PARTY TRANSACTIONS (CONTINUED)
On January 12, 1999, the Company entered into (a) a note purchase agreement
(the "Agreement") with Compass Bank (the "Bank"), and DCRI LP No. 2, Inc., a
Texas corporation (the "Borrower"), which is principally owned by Mr. Moore,
pursuant to which the Company agreed to purchase from the Bank, in the event of
a default by the Borrower and Mr. Moore (as guarantor), the following: (i) two
promissory notes (collectively the "Notes") executed by the Borrower payable to
the Bank in the principal amount of $500,000 and (ii) all instruments
collateralizing repayment of the Notes, including without limitation, a pledge
agreement related to 165,000 shares of the Company's common stock which are
owned by the Borrower as collateral for the Notes, and (b) a bank transaction
agreement (the "Related Agreement") with the Borrower and Mr. Moore, which
obligated the Borrower and/ or Mr. Moore to (i) pledge to the Company an
additional 50,000 shares of the common stock to collateralize the Company under
the terms of both the Agreement and the Related Agreement, (ii) pay the Company
for entering into the Agreement by conveying to the Company 5,000 shares of
common stock which are owned by the Borrower, and (iii) waive the right of
Mr. Moore to exercise options to purchase, at $2.50 per share, 5,000 shares of
common stock pursuant to options previously granted to Mr. Moore by the Company.
The proceeds from the loans evidenced by the Notes have been partially advanced
by the Bank and have been used in part to fund Mr. Moore's purchase, at $2.50
per share (for an aggregate amount of $181,250), of 72,500 shares of common
stock pursuant to exercising stock options previously granted to him by the
Company. The aforementioned transactions have been approved by both the Board of
Directors of the Company and the Audit Committee of the Board of Directors of
the Company. In connection with the exercise of the options, the Company loaned
Mr. Moore approximately $23,000 to cover his income tax liability associated
with this transaction.
More-O Corporation ("More-O"), of which Mr. Moore and Samuel E. Hunter, a
director of the Company, are minority shareholders, paid the Company $15,000 for
the sub-lease of office space in 1999. More-O also paid Train-International
approximately $2,000 for training services provided to certain of More-O's
clients in 1999.
12. EMPLOYEE BENEFIT PLAN
In 1993, the Company implemented a 401(K) plan for the benefit of its
employees. Company contributions to the plan in 1999, 1998 and 1997 totaled
approximately $119,000, $72,000 and $20,000, respectively. Beginning in
January 1998, the Company's contribution was used to purchase Company common
stock.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company rents office space under various operating leases. Certain of
the leases have escalating rent payments. The Company is liable for the future
minimum lease payments for the periods subsequent to December 31, 1999 as
follows:
YEAR AMOUNT
- - ---- ----------
2000........................................................ $1,969,111
2001........................................................ 955,816
2002........................................................ 652,477
2003........................................................ 408,708
2004........................................................ 3,028
----------
Total....................................................... $3,989,140
==========
39
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense was approximately $2,267,000, $1,637,000 and $1,298,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
In 1996, the Company was named as a garnishee in a lawsuit against its
largest shareholder. As the result of an Agreed Temporary Order dated
October 24, 1996, the Company was non-suited in this matter. The Company has
filed a separate lawsuit against the plaintiff seeking damages and reimbursement
of expense, alleging that plaintiffs interfered with Company business
transactions and proposed financing resulting in delays of certain transactions,
lost opportunities, lost profits and other significant losses. The Company is
also involved in certain other litigation and disputes not previously noted.
With respect to the aforementioned matters, management believes the claims
against the Company are without merit and has concluded that the ultimate
resolution of such will not have a material negative effect on the Company's
consolidated financial statements.
14. JOINT VENTURE OPERATIONS
During January, 1995, the Company entered into a joint venture agreement
with Carter Financial Services, Inc., ("CFSI") for the purpose of primarily
providing personnel services to certain businesses requiring minority suppliers.
CFSI 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 provided CFSI with
substantially all of its personnel and contract labor on a subcontractor basis
at cost. Laurie Moore, the wife of J. Michael Moore, the Chief Executive Officer
and Chairman of the Board of the Company, owned 49% of CFSI. On August 15, 1996,
the majority shareholder of CFSI 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 her investment in CFSI
or on this transaction. Through December 31, 1998, the Company had a 49%
ownership interest in the joint venture and was allocated 65% of the net income
or loss resulting from the joint venture operations.
Effective January 20, 1999, the joint venture was terminated and the Company
acquired substantially all of the assets including an additional 35% income
interest in the Atlanta and Chicago operations and assumed certain liabilities
of the joint venture. No gain or loss was recognized on the termination.
At December 31, 1999, the Company wrote off $156,000 of previously
capitalized goodwill related to this joint venture reflected in other expenses
in the consolidated statement of operations.
15. NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the Alliance acquisition in 1998, the Company incurred
deferred payment obligations totaling $75,000, the present value of which was
approximately $67,000. Additionally, the Company assumed certain capital lease
obligations for the lease of computer equipment with a gross commitment of
approximately $110,000, the present value of which were approximately $101,000.
See Note 16. Discontinued Operation.
In connection with the Texcel acquisition in 1998, the Company incurred
deferred payment obligations of $2,040,000, the present value of which was
approximately $1,752,000, and issued 100,000 shares of common stock valued at
$481,250.
In connection with the Mountain acquisition in 1999, the Company incurred
deferred payment obligations of $1,770,000, the present value of which was
approximately $1,481,000, and issued 75,000 shares of common stock valued at
$278,000.
40
15. NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
In connection with the exercising of stock options on July 17, 1998, the
Company received 7,500 shares of its common stock valued at $89,500.
16. SEGMENT INFORMATION
As of December 31, 1999, the Company approved plans to dispose of its
training operation and is now operating as one business segment of staffing
services.
17. DISCONTINUED OPERATIONS (TRAINING OPERATIONS HELD FOR SALE)
In December 1999, the Company sold all of its assets of the Geier Assessment
and Performance Systems, Inc. (GAPS) to the former owner and managers of the
GAPS operations. GAPS was engaged in developing software for use in testing and
improving the work performance of the Company's employees, and clients
employees. The sales price was in the form of a $200,000 promissory note,
payable over a ten year time period, and a royalty of four percent per annum
from the sale of certain GAPS proprietary software. The Company recognized a
loss on disposal of $394,000 (before income tax benefits of $152,000) on the
sale of GAPS in December 1999.
On December 31, 1999, the Company's Board of Directors approved a plan
whereby the Company would place its remaining training business assets (Train)
for sale. Train has historically provided information technology training to its
client's employees and the Company's applicant pool on a fee basis. The Company
has begun discussions with various entities regarding such sale and management
believes that the Company will enter into an agreement regarding the sale of
Train by mid-year 2000. In connection with the plan to dispose of Train, the
Company has recorded a loss of $589,000 (before income tax benefits of $226,000)
which includes a provision for estimated operating losses for the period from
January 1, 2000 through June 30, 2000.
The results of operations and remaining operating assets and liabilities of
GAPS and Train have been presented as discontinued operations and are summarized
below:
Results of operations for discontinued operations are as follows:
1999 1998
----------- ---------
Net service revenue.................................. $ 1,498,945 $ 673,796
Cost of sales........................................ 1,295,113 491,395
----------- ---------
Gross margin....................................... 203,832 182,401
Selling, general and administrative expenses......... 1,327,589 937,718
Other income and (expenses........................... (13,944) 6,924
----------- ---------
Income before income taxes........................... (1,137,701) (748,393)
Income tax benefit................................... 437,622 271,410
----------- ---------
Net loss............................................. (700,079) (476,983)
=========== =========
Accounts receivable and other........................ $ 260,000 $ 232,000
=========== =========
Accounts payable and accrued expenses................ $ 241,000 $ 76,000
=========== =========
18. SUBSEQUENT EVENTS.
On March 7, 2000, the Company completed the acquisition of substantially all
of the assets of Datatek Corporation (Datatek) a privately held contract
placement firm based in Phoenix Arizona. The purchase price consisted of:
(i) $3.0 million in cash paid at closing which consisted of $2.75 million
41
18. SUBSEQUENT EVENTS. (CONTINUED)
from the Company's line of credit and $0.25 million of existing cash (ii) four
annual installment payments, payable on January 1 of each of the years 2001
through 2004, in the anticipated amount of $170,625 each; such amounts will be
higher if Datatek's adjusted EBITDA (earning before interest, taxes,
depreciation and amortization) for 1999 exceeded $900,000 (after completion of
an audit of Datatek's operating results for 1999), (iii) contingent payments
payable annually, on April 15 of each of the years 2001 through 2005, in an
amount equal to twenty-five percent (25%) of the increased profits of the
business acquired from Datatek (increased profits are based upon Datatek's
profits in 1999), and (iv) 75,000 shares of the Company's common stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Diversified Corporate Resources, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 22, 2000, appearing in the 1999 Annual Report on Form 10-K of
Diversified Corporate Resources, Inc., also included an audit of the financial
statement schedule listed in the accompanying index. In our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers, LLP
Dallas, Texas
March 22, 2000
43
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
BALANCE PROVISIONS
BALANCE AT ACQUIRED CHARGED TO PROVISIONS BALANCE AT
BEGINNING OF THROUGH COSTS & CHARGED TO END OF
PERIOD ACQUISITIONS EXPENSES REVENUES(1) DEDUCTIONS PERIOD
------------ ------------ ---------- ----------- ---------- ----------
For the Year Ended December 31,
1997:
Trade accounts receivable
allowances.................. $ 494,000 $ -- $391,000 $1,881,000 $2,230,000 $ 536,000
Valuation allowance for
deferred tax assets......... $1,055,700 $ -- $ -- $ -- $1,055,700 $ --
For the Year Ended December 31,
1998:
Trade accounts receivable
allowances.................. $ 536,000 $236,000 $111,000 $2,390,000 $2,539,000 $ 734,000
For the Year Ended December 31,
1999:
Trade accounts receivable
allowances.................. $ 734,000 $ 21,000 $333,000 $3,131,000 $3,214,000 $1,005,000
Reserve for estimated losses
from discontinued
operations.................. $ -- $ -- $450,000 $ -- $ -- $ 450,000
- - ------------------------
(1) Estimated reduction in revenues for applicants who accepted employment, but
did not start work or did not remain in employment for the guaranteed
period.
44
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
1.1 Form of Underwriting Agreement (Incorporated by reference
from Exhibit 1.1 to the Company's Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Reg.
No. 333-31825))
2.1 Asset Purchase Agreement, dated as of October 7, 1998,
between the Company, DCRI Acquisition Corporation,
Texcel, Inc., Texcel Technical Services, Inc., Thomas W.
Rinaldi, Gary E. Kane, Paul J. Cornely and Deborah A. Jan
Francisco; (schedules have been omitted pursuant to
Regulation S-K 601(b)(2)). (Incorporated by reference to
Exhibit 2.1 of the Company's Form 8-K filed on October 21,
1998.)
2.2 Asset Purchase Agreement between the Company and
JCAP, Inc., effective June 1, 1998 (Incorporated by
reference to Exhibit 10.1 of the Company's Form 10Q filed on
August 13, 1998)
2.3 Purchase Agreement, by and between the Company and the
Shareholders of MOUNTAIN, LTD.-TM- (The schedules have been
omitted pursuant to Regulation S-K 601(b) (2). (Incorporated
by reference from Exhibit 10.3 to the Company Form 10Q filed
on August 16, 1999)
2.4 Purchase Agreement, dated as of March 6, 2000, by and among
Diversified Corporate Resources, Inc., Datatek Consulting
Group Corporation, Datatek Corporation, Julia L. Wesley and
Michael P. Connolly. (The Schedules have been omitted
pursuant to Regulation S-K 601 (b)(2). (Incorporated by
reference from Exhibit 2.1 to the Company Form 8K filed on
March 7, 2000)
3.1 Articles of Incorporation of the Company as amended
(Incorporated by reference from Exhibit 3(a) to the
Company's Registration Statement on Form S-18 (Reg.
No. 33-760 FW))
3.1 Bylaws of the Company (Incorporated by reference from
Exhibit 3(b) to the Company's Registration Statement on
Form S-18 (Reg. No. 33-760 FW))
3.2 Amendment No. 1 to Bylaws of the Company (Incorporated by
reference to Exhibit 3.4 of the Company's Form 10Q filed on
May 15, 1998)
3.3 Amendment No. 2 to Bylaws of the Company (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10Q filed on
November 16, 1998)
3.4 Amendment No. 3 to Bylaws of the Company (Incorporated by
reference to Exhibit 3.4 of the Company's Form 10K filed on
March 30, 1999)
4.1 Form of Certificate of Designation for Designating Series A
Junior Participating Preferred Stock, $.10 par value
(Incorporated by reference to Exhibit A of Exhibit 4.1 of
the Company's Form 8-K filed on May 8, 1998)
4.2 Rights Agreement, dated as of May 1, 1998, between the
Company and Harris Trust and Savings Bank which includes the
form of Certificate of Designation for Designating Series A
Junior Participating Preferred Stock, $.10 par value, as
Exhibit A, the form of Right Certificate as Exhibit B and
the Summary of Rights to Purchase Series A Junior
Participating Preferred Stock as Exhibit C. (Incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on
May 8, 1998)
4.3 Form of Common Stock Warrant (Incorporated by reference from
Exhibit 1.2 to the Company's Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Reg.
No. 333-31825))
45
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
4.4 Amended and Restated 1996 Nonqualified Stock Option Plan of
the Company, effective as of December 28, 1996 (Incorporated
by reference from Exhibit 10(z)(21) to the Company's
Form 10-K for the year ended December 31, 1996)
4.5 Amendment No. 1 to the Company's Amended and Restated 1996
Nonqualified Stock Option Plan (Incorporated by reference to
Exhibit 10.5 of the Company's Form 10Q filed on May 15,
1998)+
4.6 1998 Nonqualified Stock Option Plan, effective as of
January 1, 1998 (Incorporated by reference to Exhibit 10.14
of the Company's Form 10Q filed on May 15, 1998)+
4.7 1998 Non-employee Director Stock Option Plan, effective as
of December 9, 1998 (Incorporated by reference to
Exhibit 4.7 of the Company's Form 10K filed on March 30,
1999)+
4.8 First Amendment to Rights Agreement (Incorporated by
reference from Exhibit 10.5 to the Company Form 10Q filed on
August 16, 1999)
10.1 Stock Option Agreement between the Company and J. Michael
Moore, executed May 15, 1997 (Incorporated by reference
from Exhibit 4.10 to the Company's Form S-8 (Reg.
No. 333-27867) filed on May 27, 1997)+
10.2 Stock Option Agreement between the Company and M. Ted
Dillard, executed May 15, 1997 (Incorporated by reference
from Exhibit 4.10 to the Company's Form S-8 (Reg.
No. 333-27867) filed on May 27, 1997)+
10.3 Stock Option Agreement between the Company and Douglas G.
Furra, effective June 1, 1997 (Incorporated by reference to
Exhibit 10.11 of the Company's Form 10Q filed on May 15,
1998)+
10.4 First Amendment to Amended and Restated Stock Option
Agreement between the Company and J. Michael Moore effective
September 30, 1998 (Incorporated by reference to
Exhibit 10.4 of the Company's Form 10K filed on March 30,
1999)+
10.5 First Amendment to Amended and Restated Stock Option
Agreement between the Company and M. Ted Dillard effective
September 30, 1998 (Incorporated by reference to
Exhibit 10.5 of the Company's Form 10K filed on March 30,
1999)+
10.6 Stock Option Agreement between the Company and J. Michael
Moore effective as of April 29, 1998 (Incorporated by
reference to Exhibit 10.6 of the Company's Form 10K filed on
March 30, 1999)+
10.7 Stock Option Agreement between the Company and M. Ted
Dillard effective as of April 29, 1998 (Incorporated by
reference to Exhibit 10.7 of the Company's Form 10K filed on
March 30, 1999)+
10.8 Stock Option Agreement between the Company and Douglas G.
Furra effective as of April 29, 1998 (Incorporated by
reference to Exhibit 10.8 of the Company's Form 10K filed on
March 30, 1999)+
10.9 Amendment to Stock Option Agreement (Pricing Amendment) for
J. Michael Moore effective as of October 23, 1998
(Incorporated by reference to Exhibit 10.9 of the Company's
Form 10K filed on March 30, 1999)++
10.10 Amendment to Stock Option Agreement (Pricing Amendment) for
M. Ted Dillard effective as of October 23, 1998
(Incorporated by reference to Exhibit 10.10 of the Company's
Form 10K filed on March 30, 1999)+
46
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
10.11 Amendment to Stock Option Agreement (Pricing Amendment) for
Douglas G. Furra effective as of October 23, 1998
(Incorporated by reference to Exhibit 10.11 of the Company's
Form 10K filed on March 30, 1999)+
10.12 Form of Amendment to Stock Option Agreement (Pricing
Amendment) for certain employees of the Company including
Anthony J. Bruno and James Woo, effective as of October 23,
1998 (Incorporated by reference to Exhibit 10.12 of the
Company's Form 10K filed on March 30, 1999)+
10.13 Stock Option Agreement between the Company and Samuel E.
Hunter, executed May 15, 1997 (Incorporated by reference
from Exhibit 4.10 to the Company's Form S-8 (Reg.
No. 333-27867) filed on May 27, 1997)+
10.14 First Amendment to Stock Option Agreement between the
Company and Samuel E. Hunter, effective March 20, 1998
(Incorporated by reference to Exhibit 10.13 of the Company's
Form 10Q filed on May 15, 1998)+
10.15 Stock Option Agreement between the Company and Deborah A.
Farrington, effective November 13, 1997 (Incorporated by
reference to Exhibit 10.12 of the Company's Form 10Q filed
on May 15, 1998)+
10.16 Stock Option Agreement (1998) Re: Hunter between the Company
and Samuel E. Hunter effective as of April 29, 1998
(Incorporated by reference to Exhibit 10.16 of the Company's
Form 10K filed on March 30, 1999)+
10.17 Stock Option Agreement (1998) Re: Farrington between the
Company and Deborah A. Farrington effective as of April 29,
1998 (Incorporated by reference to Exhibit 10.17 of the
Company's Form 10K filed on March 30, 1999)+
10.18 Stock Option Agreement (1998) Re: Allen between the Company
and A. Clinton Allen effective as of April 29, 1998
(Incorporated by reference to Exhibit 10.18 of the Company's
Form 10K filed on March 30, 1999)+
10.19 Partial Option Termination Agreement Re: Hunter between the
Company and Samuel E. Hunter effective December 9, 1998
(Incorporated by reference to Exhibit 10.19 of the Company's
Form 10K filed on March 30, 1999)+
10.20 Partial Option Termination Agreement Re: Farrington between
the Company and Deborah A. Farrington effective December 9,
1998 (Incorporated by reference to Exhibit 10.20 of the
Company's Form 10K filed on March 30, 1999)+
10.21 Partial Option Termination Agreement Re: Allen between the
Company and A. Clinton Allen effective December 9, 1998
(Incorporated by reference to Exhibit 10.21 of the Company's
Form 10K filed on March 30, 1999)+
10.22 Directors Option Agreement Re: Hunter between the Company
and Samuel E. Hunter effective as of December 9, 1998
(Incorporated by reference to Exhibit 10.22 of the Company's
Form 10K filed on March 30, 1999)+
10.23 Directors Option Agreement Re: Farrington between the
Company and Deborah A. Farrington effective as of
December 9, 1998 (Incorporated by reference to
Exhibit 10.23 of the Company's Form 10K filed on March 30,
1999)+
10.24 Directors Option Agreement Re: Allen between the Company and
A. Clinton Allen effective as of December 9, 1998
(Incorporated by reference to Exhibit 10.24 of the Company's
Form 10K filed on March 30, 1999)+
47
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
10.25 Stock Option granted to Anthony J. Bruno, effective
November 13, 1997 (Incorporated by reference to
Exhibit 10.6 of the Company's Form 10Q filed on May 15,
1998)+
10.26 Stock Option granted to James Woo, effective November 13,
1997 (Incorporated by reference to Exhibit 10.7 of the
Company's Form 10Q filed on May 15, 1998)+
10.27 Stock Option granted to Scott Higby, effective January 14,
1998 (Incorporated by reference to Exhibit 10.8 of the
Company's Form 10Q filed on May 15, 1998)+
10.28 Stock Option granted to John Wilson, effective April 23,
1998 (Incorporated by reference to Exhibit 10.9 of the
Company's Form 10Q filed on May 15, 1998)+
10.29 Form of Stock Option granted to certain employees of the
Company, effective November 13, 1997 (Incorporated by
reference to Exhibit 10.10 of the Company's Form 10Q filed
on May 15, 1998)+
10.30 Form of Stock Option Agreements, dated as of October 8,
1998, between the Company and certain non-shareholder
employees of DCRI Acquisition Corporation (Incorporated by
reference to Exhibit 10.2 of the Company's Form 8-K filed on
October 21, 1998)+
10.31 Employment Contract between the Company and J. Michael
Moore, executed April 10, 1997 (Incorporated by reference
from Exhibit 10(z)(xviii) to the Company's Form 10-K for the
year ended December 31, 1996)+
10.32 Employment Contract between the Company and M. Ted Dillard,
executed April 10, 1997 (Incorporated by reference from
Exhibit 10(z)(xviii) to the Company's Form 10-K for the year
ended December 31, 1996)+
10.33 First Amendment to Employment Agreement between the Company
and J. Michael Moore effective September 30, 1998
(Incorporated by reference to Exhibit 10.33 of the Company's
Form 10K filed on March 30, 1999)+
10.34 First Amendment to Employment Agreement between the Company
and M. Ted Dillard effective September 30, 1998
(Incorporated by reference to Exhibit 10.34 of the Company's
Form 10K filed on March 30, 1999)+
10.35 Employment Agreement entered into as of June 1, 1997 between
the Company and Douglas G. Furra (Incorporated by reference
to Exhibit 10.2 of the Company's Form 10Q filed on May 15,
1998)+
10.36 Employment Agreement entered into as of January 1, 1998
between Management Alliance Corporation, a wholly-owned
subsidiary of the Company, and Anthony J. Bruno
(Incorporated by reference to Exhibit 10.1 of the Company's
Form 10Q filed on May 15, 1998)+
10.37 Employment Agreement entered into as of January 1, 1998
between Management Alliance Corporation and James Woo
(Incorporated by reference to Exhibit 10.3 of the Company's
Form 10Q filed on May 15, 1998)+
10.38 Employment Agreement, effective as of October 1, 1998,
between DCRI Acquisition Corporation, Thomas W. Rinaldi and
the Company (Incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K filed on October 21, 1998)+
10.39 Standard Form Office Lease between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited and Lafarge Corporation
dated February 26, 1993 (Incorporated by reference from
Exhibit 10.17 to the Company's Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Reg.
No. 333-31825))
48
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
10.40 First Amendment to the Office Lease between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited and Lafarge
Corporation dated February 20, 1995 (Incorporated by
reference from Exhibit 10.18 to the Company's Amendment
No. 1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-31825))
10.41 Second Amendment to the Office Lease between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited and Lafarge
Corporation dated February 22, 1995 (Incorporated by
reference from Exhibit 10.19 to the Company's Amendment
No. 1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-31825))
10.42 Third Amendment to the Office Lease between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited and Lafarge
Corporation dated November 3, 1995 (Incorporated by
reference from Exhibit 10.20 to the Company's Amendment
No. 1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-31825))
10.43 Fourth Amendment to the Office Lease between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited and Lafarge
Corporation dated October 24, 1996 (Incorporated by
reference from Exhibit 10.21 to the Company's Amendment
No. 1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-31825))
10.44 Fifth Amendment to the Office Lease between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited and Lafarge
Corporation dated January 7, 1997 (Incorporated by reference
from Exhibit 10.22 to the Company's Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Reg.
No. 333-31825))
10.45 Note Receivable dated June 22, 1998, between the Company and
J. Michael Moore (Incorporated by reference to Exhibit 10.2
of the Company's Form 10Q filed on August 13, 1998)
10.46 Note Receivable effective July 17, 1998, between the Company
and M. Ted Dillard (Incorporated by reference to
Exhibit 10.3 of the Company's Form 10Q filed on
November 16, 1998)
10.47 Note Receivable effective July 17, 1998, between the Company
and M. Ted Dillard (Incorporated by reference to
Exhibit 10.4 of the Company's Form 10Q filed on
November 16, 1998)
10.48 Security Agreement effective July 17, 1998, between the
Company and M. Ted Dillard (Incorporated by reference to
Exhibit 10.5 of the Company's Form 10Q filed on
November 16, 1998)
10.49 Security Agreement effective October 12, 1998, between the
Company and M. Ted Dillard (Incorporated by reference to
Exhibit 10.6 of the Company's Form 10Q filed on
November 16, 1998)
10.50 Consulting Agreement effective May 12, 1998 between the
Company and Deborah A. Farrington (Incorporated by reference
to exhibit 10.7 of the Company's Form 10Q filed on
November 16, 1998)
10.51 Note Purchase Agreement dated as of January 12, 1999 among
the Company, Compass Bank and DCRI LP No. 2 Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed on January 28, 1999)
10.52 Pledge Agreement dated as of January 12, 1999 between
Compass Bank and DCRI LP No. 2, Inc. (Incorporated by
reference to Exhibit 10.2 of the Company's Form 8-K filed on
January 28, 1999)
49
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
10.53 Bank Transaction Agreement dated as of January 12, 1999
among the Company, DCRI LP No. 2, Inc. and J. Michael Moore
(Incorporated by reference to Exhibit 10.3 of the Company's
Form 8-K filed on January 28, 1999)
10.54 Revolving Loan and Security Agreement, by and between the
Company and Compass Bank (Incorporated by reference from
Exhibit 10.1 to the Company's Form 10Q filed on August 16,
1999)
10.55 Revolving Promissory Note, by and between the Company and
Compass Bank (Incorporated by reference from Exhibit 10.2 to
the Company's Form 10Q filed on August 16, 1999)
10.56 Employment Agreement, by and between the Company and Joseph
H. Hosmer (Incorporated by reference from Exhibit 10.4 to
the Company's Form 10Q filed on August 16, 1999)+
10.57 Employment Agreement, by and between the Company and Julia
L. Wesley, dated as of March 6, 2000 (Incorporated by
reference from Exhibit 10.1 to the Company's Form 8K filed
on March 7, 2000)+
10.58 Employment Agreement, by and between the Company and Michael
P. Connolly dated as of March 6, 2000 (Incorporated be
reference from Exhibit 10.2 to the Company's Form 8K filed
on March 7, 2000)+
21 List of Subsidiaries*
23.1 Consent of PricewaterhouseCoopers LLP*
27 Financial Data Schedule*
(* Filed herewith)
(+ Compensation plan, benefit plan or employment contract or arrangement)
50