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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 of (IRS Employer
incorporation or organization) Identification No.)
10670 NORTH CENTRAL EXPRESSWAY, SUITE 600
DALLAS, TEXAS 75231
(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
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 [_] No [X]
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 April 12, 2002, was approximately $1,258,000, based on the
closing sales price of the registrant's common stock on the American Stock
Exchange on such date. For purposes of this computation, all executive officers,
directors and ten (10%) beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and ten (10%) beneficial owners are affiliates. As
of April 12, 2002, 2,811,865 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrants' definitive Proxy Statement pertaining to the 2002 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 of this report.
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1
PART I
ITEM 1. BUSINESS
Company Overview
Diversified Corporate Resources, Inc. (the "Company," "our," "we," or
"us,") is an employment services firm focused on providing recruited staffing
solutions for clients requiring personnel with skills in engineering/technical,
information technology, and other professional disciplines. We deliver these
services by providing clients with solutions in permanent/ specialty placement
and/or contract placement.
Largely due to the deterioration of economic conditions throughout
2001, we pursued the implementation of several business initiatives designed to
improve our business operations and sharpen our focus in our market and service
delivery strategies. This has resulted, we believe, in a more efficient
organization that focuses our recruiting efforts in these core skill
disciplines. We believe these skills are most closely correlated to overall
business spending, including capital expenditures and will be in the forefront
of demand as the economy continues on its anticipated 2002 recovery.
The majority of our Company's revenue is generated from staffing
services provided to the following industries; Telecommunications (primarily
regional Bell operating companies, independent telephone companies, local
exchange carriers, competitive local exchange carriers and wireless
communications), High Technology, Manufacturing, State Governmental Agencies,
Financial Services and Health Care. Of those listed above Telecommunications
represents the largest, accounting for approximately 45% of all 2001 revenue
earned. In late 2001, we began PharmaSearch to capitalize on the continuing
growing trend in demand from Pharmaceutical and Bio Sciences industries. Our
business strategy is to provide recruiting solutions in engineering/technical,
information technology, and other professional disciplines to clients throughout
North America. We provide these solutions through two distinct business units:
our Direct Placement / Specialty business and our Contract Group business. As of
March , 2002, our Company had offices located in the following locations:
Arizona Phoenix
Colorado Denver
Georgia Atlanta
Idaho Meridian
Illinois Chicago
Maine Portland
Missouri Kansas City
North Carolina Raleigh
Pennsylvania Philadelphia
Texas Dallas/Fort Worth, Houston and Austin
During 2001 we also announced the engagement of Roth Capital Partners,
LLC, as our financial advisor to assist us in evaluating our strategic options
and provide us with ongoing assistance in pursuing those options. As of March
31, 2002, the engagement is ongoing.
Industry Overview
Unemployment increased to 5.8% in December 2001 according to the United
States Department of Labor's Bureau of Labor Statistics. The December labor
report indicated that personnel supply services (SIC 736) posted its worst year
over year job loss of 15.4% in December, 2001. However, by February 2002,
unemployment declined to 5.5%, an encouraging trend. In addition, the rate of
year-over-year job loss in the personnel supply services sector declined to 13%
in February, while the GDP for the fourth quarter 2001 increased at an annual
rate of 1.4%, as compared to decreasing in the third quarter at an annual rate
of 1.3%. In addition, through February 2002, the Index of Leading Economic
Indicators ("LEI") was up 2.4 percent from its value six months ago in August
2001. The Conference Board indicated in its March 21, 2002 report that should
this trend continue, it believes that the trough of the recession would most
likely be November 2001. These recent trends have led some industry observers to
project that the overall employment marketplace will begin to show improvement
by the second half of 2002 behind an improving economy.
Business Strategy
Our overall business mission is to become a nationally recognized
leader in recruited staffing solutions, including permanent/specialty placement
and contract placement for high-end niche employment markets. We are committed
to a long-term strategy of building and expanding our core recruiting expertise
in the disciplines of engineering/technical, information technology and other
professional skill sets. Historically we have pursued this strategy through
several key elements including increasing management expertise and market share
through acquisitions, providing e-commerce solutions for clients, focus on
highly skilled labor markets and time proven recruiting methods. Further details
of these key elements are:
2
Increase management expertise and market share through acquisition
Our Company has increased its national presence through the
implementation of an acquisition oriented growth strategy, which we used to
expand each of our service offerings. These acquisitions provided us with
additional management depth and market share in our core skill disciplines.
Additionally, these acquisitions provided us with increased exposure to
industries such as telecommunications and healthcare. Completed acquisitions in
1998 through 2000 are 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
Datatek Group Corporation ("Datatek") is primarily a contract placement
firm providing information technology recruited staffing solutions to the
financial services industry and to the health insurance industry with expertise
in both the private and public sectors of the health insurance industry to
clients located throughout the United States. Since 1992, the focus of Datatek
or its predecessor 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 primarily a contract placement firm
providing recruited staffing solutions to companies in the telecommunications
industry located throughout the United States Since 1979, Mountain built an
outstanding reputation as a contract services firm for the established Regional
Bell Operating Companies (RBOC's), Independent Telco's, or Local Exchange
Carriers (LEC's), and Competitive Local Exchange Carriers (CLEC's) . 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. Most
recently, Mountain has began to focus on the growing need for personnel to
address security issues within a company's technology infrastructure as well as
integrating existing Company operations focused on providing staffing solutions
to wireless clients.
Texcel Services, Inc. ("Texcel") is engaged in both permanent and
temporary placements of technical and professional specialists, primarily in
information technology and engineering/technical disciplines. Texcel has been in
business since 1985. Its market area is concentrated in Southeastern
Pennsylvania, New Jersey and Delaware. Most recently, Texcel has formed a unit,
PharmaSearch, focused on providing recruited solutions to the rapidly growing
pharmaceutical and bio sciences industries.
Provide an "e-commerce" Internet solution for our clients
We are continuing to aggressively update our "e-commerce" Internet
based recruiting systems to provide our recruiters, and ultimately our
customers, with the most time and cost efficient means of matching staffing
needs with the proper resources. Through the use of our current front office
systems and our national internal database, we continue to amass a significant
resource database of current resumes. In addition, we are continuing to update
our front office software to provide our professional staff of recruiters with
faster and more accurate access to their resource database.
Focus on highly skilled labor markets
We serve our clients by delivering services across various disciplines,
such as: engineering/technical, information technology and other professional
skills, which generally provide higher margins. We plan to continue to build on
our existing strengths by focusing management's time and resources on higher
margin services in industries where the demand for our Company's services has
been historically strong.
Recruit and retain highly qualified marketable professionals
Our Company recruits qualified applicants primarily through referrals
from other applicants, newspaper and Internet advertising, our extensive
applicant databases, job fairs, and various other media advertisements. In order
to attract permanent, temporary and contract assignment candidates, our Company
places emphasis upon its ability to provide attractive placement opportunities,
competitive compensation, quality and varied assignments, and scheduling
flexibility. The recruiting of skilled engineering/technical, information
technology and other professional skills is a central challenge for participants
in the industry. Management believes that we have positioned ourselves 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 our internal database system, enhancing our
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, and
scanning of existing web based resume job services; and,
. Offering competitive wage and benefit packages.
Our professional personnel qualifying procedures include interviewing,
testing and reference checking. These procedures also enable us to categorize
our professional personnel by preference for job location, hours and work
environment. In order to attract high quality professional employees, we grant
paid vacations, holidays and other benefits for contract and specialty/temporary
employees who work a specified minimum number of hours.
Current Business Activities
As previously noted, our Company provides recruited staffing solutions
in specific professional and technical skill sets to major industry groups.
During 2001 we experienced a decline in the demand for our recruited staffing
solutions. This along with the uncertainties associated with the overall macro
economic environment caused us to launch a review of our operating structure and
market strategies. As we announced in November 2001 we continued to implement
initiatives (begun in August 2001 with a Senior Management reorganization)
related to a review of our business process, development and communication of
operating metrics designed to provide enhanced business decision making and the
creation of a more efficient responsibility based organization. The continued
implementation of these initiatives has, we believe, resulted in an enhanced
command and control structure leading to a more efficient delivery of recruited
solutions to our clients. We also began initiatives related to our market and
business strategies that included a sharp definition of our core competencies as
well as our corporate mission and brand identity.
The delivery of these services is organized by the functional
activities of direct and specialty placement and contract placement of
engineering/technical, information technology and other professional personnel.
The business methods by which we provide these services generally characterize
our classification of activities as the direct/specialty placement or contract
placement of professional, IT and engineering/technical personnel.
Our direct/specialty placement methods approximate the traditional
contingency search methods whereby an individual recruiter obtains the client
job order, recruits suitable applicants and facilitates the completion of the
placement activities. These same recruiters will provide contract, temporary and
temp to perm services when requested by clients. We name these services provided
by these recruiters Specialty Services due to the high value added nature of the
relationship between the recruiter and the client. As of March 31, 2002, these
Direct Placement/ Specialty Services are provided through locations in eight
cities.
The contract placement of engineering/technical and information
technology personnel is generally a more project specific business, is based on
larger volumes of recruited personnel and lasts for time periods generally
ranging from four weeks to a year or more. These services are provided clients
through a national recruiting hub model whereby most recruiting activities are
provided for in a location based on both skill set and industry specialties.
Marketing and sales activities are conducted on a national scale by dedicated
personnel who turn service and recruiting responsibilities over to those
specialists best suited to satisfy client demands. As of March 30, 2002 these
contract services are provided through two main hubs located in Phoenix, AZ and
Portland, ME. Satellite activities occur in Kansas City MO and Atlanta, GA.
Direct/Specialty Placement Staffing Services
Our Company, through its Management Alliance Corporation ("Magic") and
Texcel business units, usually enters into written contracts with clients,
specifying the fee arrangements prior to undertaking any permanent placement
services on behalf of such clients. Fees range from 15% to 35% of the first
year's annual salary of the newly placed employee. In addition, we generally
offer our clients a 30-day guarantee of supporting our direct placement process
during which the Company agrees to replace, without additional charge to the
client, any newly placed employee who leaves such job. If we are unable to
replace the employee, we will generally refund the client's fee, or a prorated
portion thereof, depending upon the circumstances.
Specialty/temporary services are provided in virtually all of our core
recruiting service disciplines. Generally, these are engagements of a shorter
nature and in a lesser number of personnel at each client than those for
contract placement. The services have grown out of demand, primarily from our
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 our existing permanent placement clients, in addition to our
marketing efforts. The client outlines the particular staffing need and we,
utilizing this information, select an appropriate individual from our database
of available temporary personnel. Clients request specialty/temporary personnel
for periods generally
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ranging to several months. Generally, clients are charged an hourly rate for
temporary personnel based upon a time card that has been authorized by client
supervisory personnel. Substantially all specialty/temporary personnel assigned
by our Company are Company employees and we pay all employment costs, including
hourly wages, unemployment taxes, social security taxes and fringe benefits.
Contract Staffing Services
Our Company's contract staffing services are also within the
information technology, engineering/technical disciplines and other professional
disciplines. Typically, through its Datatek, Mountain and Information Systems
Consulting Corporation ("ISCC") business units, our Company executes a contract
prior to commencing business with a client. These contracts do not specify the
actual volume of anticipated business nor do they guarantee any level of demand.
Instead they provide the terms, pricing (usually time and materials) and other
performance conditions we must adhere to when we do provide recruited solutions
to clients staffing demands. Generally we offer a limited guarantee based on an
individuals job performance over a short period of time. Unsatisfactory job
performance can result in an assignment termination.
Contract staffing job orders are typically obtained by dedicated
account sales personnel who market according to industry lines. Using industry
knowledge and techniques such as displays at industry trade shows, these
individuals demonstrate that our Company has specialized knowledge of the
workforce requirements necessary to provide clients with the appropriate
recruited solutions.
The contract personnel we recruit and subsequently place generally are
classified as employees and we pay all employment costs, including hourly wages,
unemployment taxes, social security taxes and fringe benefits. The exception
occurs when certain information technology professional personnel meet
applicable compliance requirements and are classified as independent
contractors.
Because of our specialized knowledge of specific industries, our
Company provides individualized attention to each of our clients and develops
and designs tailored service programs based on our clients' unique needs. To
increase our contract placement services, we actively seek "approved vendor"
status with prospective clients. This process generally involves a rigorous
review of our fitness to meet the staffing demands of prospective clients.
Discontinued Operations
In fiscal 1998, our Company initiated a strategy whereby it began to
expand and improve the training of our applicant pool. This strategy was focused
on the development of our wholly owned subsidiary Train International, Inc.
("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, we approved a plan to sell Train. Effective February 1, 2001,
we sold the Train operations to a company owned by the former manager of Train.
The sales price was in the form of a royalty of four and one-half percent of all
training services performed by such company for three years following the
closing of the sale. Our Company intends to continue to utilize the services of
Train on an as needed basis.
Also in December 1999, our Company sold all of the 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 $0.2
million promissory note, payable over a ten-year time period, and a royalty of
four percent from the sale of our Company's proprietary GAPS software during the
life expectancy of such product.
As a result of the above, the results of operations for fiscal years
2000 and 1999 for Train and 1999 for GAPS have been reflected as "Discontinued
Operations."
Customers
We provide personnel and human resources solutions to several Fortune
500 companies and many of the nation's larger companies.
Marketing and Brand Identity
Our Company's marketing efforts are largely implemented at the local
office level and are focused on higher margin employment markets. Historically,
our 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 our staffing services marketing
efforts.
We have continued to consider the most effective way to capitalize on
the strong local brands in our existing businesses (Magic and ISCC) as well as
our recently acquired businesses (Datatek, Mountain and Texcel). The
reorganization and business initiatives noted have provided a beginning to the
creation of an overall brand identity. We continue to take this issue under
consideration while at the same time creating the organizational environment in
which historically distinct brand names may be brought together.
5
Competition
It is our belief 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. 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 our Company
respond to market conditions affecting applicants. Although we believe that we
compete favorably with respect to these factors, it is likely that competition
will increase, and there can be no assurance that we 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 our competitors possess substantially greater resources than our
Company. Additionally, we face 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 the appropriate
technical services, information technology and permanent placement business
units of Adecco SA, CDI Corp, MPS, Inc. and Manpower, Inc. as well as several
other privately held firms. Other companies we compete with include Butler
International, Inc., General Employment Enterprises, Inc., RCM Technologies,
Inc., Professional Staff, PLC, Comforce Corp., Hall Kinion & Associates, Inc.,
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, we compete with national
clerical and light industrial staffing firms, such as Spherion Corporation, that
also offer contract staffing services. National and regional consulting firms
also offer certain employment staffing services. Finally, we face the risk that
certain of our current and prospective clients will decide to provide similar
services internally. There can be no assurance that we 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. We believe that
while there are significant advantages to Internet recruiting, and that we must
increase our use of the Internet to remain competitive, we do not expect that
Internet recruiting will completely replace the traditional "brick and mortar"
aspects of recruiting. In fact, we believe that one of the keys to our future
success will be our ability to combine our recruiting experience with the
benefits of high-traffic Internet sites. Accordingly, we are continuing to
develop and implement our e-commerce strategy and we expect to initiate a
program to further utilize the Internet in our recruiting and client servicing
activities. However, there can be no assurances that we will be able to
successfully enhance our 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 materially adverse effect
on our business. We believe that we are in substantial compliance with all such
regulations and possess all licenses necessary to engage in the placement of
permanent personnel in the jurisdictions in which we do business. Various
government agencies have advocated proposals from time to time to license or
regulate the placement of temporary personnel. We do not believe that such
proposals, if enacted, would have a material adverse effect on our business.
Employees
In addition to the non-permanent and contract personnel from time to time
employed by our Company for placement with clients, we had 302 full-time
employees as of December 31, 2001. Of these employees, 230 were personnel
consultants and office managers paid on a commission basis and 72 were
administrative and executive salaried employees. We consider our relations with
our employees to be good.
ITEM 2. PROPERTIES
Our Company and its wholly owned subsidiaries currently lease approximately
34,000 square feet in Dallas, Texas; the term of this lease is ten years. We
also lease approximately 21,000 square feet in Houston, Texas; 3,200 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; 11,575 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;
and 3,400 square feet in Phoenix, Arizona. Such leases generally range from
three to five years. The current cost of all of our office leases is
approximately $2.5 million per annum.
We believe that all of our present facilities are adequate for our current
needs and that additional space is available for future expansion upon
acceptable terms.
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ITEM 3. LEGAL PROCEEDINGS
In 1996, a lawsuit was filed by Ditto Properties Company ("DPC") against
DCRI L.P. No. 2 ("L.P. No. 2"), which is controlled by Mr. J. Michael Moore
("Mr. Moore"), our Chairman and Chief Executive Officer. Mr. Moore and the
Company were also initially named as garnishees in the lawsuit (the "Ditto
Litigation") with respect to 899,200 shares (the " LP Shares") of common stock
(the "Common Stock") of the Company which were the subject matter of a series of
transactions in 1993 (collectively referred to herein as the "1993
Transactions") which ultimately resulted in the LP Shares being conveyed by DPC
to L.P. No. 2. Subsequent to the initial filing of the litigation by DPC, Mr.
Moore was added as a defendant in such proceedings, and F. Scott Otey ("Otey")
and Jeffery Loadman ("Loadman") intervened as parties to the litigation involved
(herein referred to as the "Ditto Litigation").
On April 12, 2001, DPC and Donald R. Ditto Sr. ("Ditto") filed an amended
petition in the Ditto Litigation and specifically named the Company as a
defendant in such lawsuit. The venue for the Ditto Litigation is the District
Court of Dallas County, Texas, 298th Judicial District (the "Court").
In the Ditto Litigation, DPC, Ditto, Otey and Loadman are seeking, among
other things, each of the following: (a) a rescission of the 1993 Transactions
thereby entitling DPC to title, ownership and possession of the LP Shares, (b)
the imposition of a constructive trust upon the LP Shares for the benefit of
DPC, (c) a declaratory judgement declaring, among other things, (i) that DPC is
entitled to title, ownership and possession in and to the LP Shares and to 250
shares of common stock of L.P. No. 2 (the "Collateral Shares"), and (ii) that
any transfers of the LP Shares by L.P. No. 2 was improper and void ab initio,
(d) a judicial foreclosure order transferring ownership of the LP Shares and the
Collateral Shares to DPC, (e) garnishment of the LP Shares and the Collateral
Shares, (f) a temporary restraining order and permanent injunction related to
the LP Shares and the Collateral Shares, (g) an accounting with respect to the
LP Shares, and (h) damages as below summarized based upon numerous claims
including breach of contract, tortious interference with contractual relations,
breach of fiduciary duty, statutory fraud, common law fraud and fraud in the
inducement. In connection with these claims, DPC, Ditto, Otey and Loadman
contend, among other things, that (i) the Company, Mr. Moore, L.P. No. 2,
U.S.F.G./DHRG L.P. No. 1, a partnership that previously owned the LP Shares and
that is a party to the Ditto Litigation (the "Partnership"), and others
committed acts constituting fraud upon DPC, Ditto, Otey and Loadman, in
connection with the LP Shares, the 1993 Transactions, and in other respects, and
(ii) DPC, Ditto, Otey and Loadman are entitled to recover from the Company, Mr.
Moore, L.P. No. 2, and the Partnership, jointly and severally, compensatory
damages in the amount of at least $6.5 million punitive and exemplary damages
totaling at least $26.1 million, interest on the amount of damages incurred,
legal fees and attorney fees. At this time, the trial date for the Ditto
Litigation is now scheduled for August 19, 2002.
In connection with the Ditto Litigation, the following actions have
occurred: (a) on October 24, 1996, certain of the parties to the Ditto
Litigation entered into an Agreed Temporary Order pursuant to which L.P. No. 2
agreed to deliver to a Special Master, to be designated pursuant to the Agreed
Temporary Order, the LP Shares or $1.5 million in cash (the "Cash Escrow
Amount"), (b) in October, 1996, the Company, L.P. No. 2 and Mr. Moore filed a
lawsuit against DPC and Ditto seeking damages and reimbursement of expenses
alleging, among other things, that DPC and Ditto interfered with Company
transactions and proposed financing resulting in lost opportunities, lost
profits and significant damages, (c) Ditto has previously filed a third lawsuit
against Mr. Moore and one of the entities controlled by Mr. Moore in connection
with certain oil and gas activities, unrelated to the Company's business,
involving the parties to the litigation, (d) ultimately all of the foregoing
lawsuits were combined into one proceeding in the Court, (e) on June 25, 1997,
the Court granted a summary judgment to L.P. No. 2 with respect to the claim
that DPC is entitled to a rescission of the 1993 Transactions, (f) in July, 1997
L.P. No. 2 delivered to the Special Master the Cash Escrow Amount, (g)
subsequent to June, 1997, certain of the LP Shares have been sold by or for the
benefit of L.P. No. 2 (h) all of the LP Shares owned by L.P. No. 2 have been
pledged to secure indebtedness obligations of L.P. No. 2, including indebtedness
owed to the Company, and (i) pursuant to agreements involving L.P. No. 2 and
DPC, the Cash Escrow Amount has been reduced from the original amount of $1.5
million to approximately $0.6 million.
In the past, the Company has incurred legal fees on its own behalf and has
funded certain of the legal fees and expenses of Mr. Moore and related parties
in connection with the Ditto Litigation. As the result of the Company being
named as a defendant in such case, in 2001 the Company determined that it should
have separate counsel from Mr. Moore and L.P. No. 2. In 2001, the Board of
Directors of the Company (a) approved the payment to Mr. Moore of up to $0.25
million to fund legal fees and expenses anticipated to be incurred by Mr. Moore
and related parties in the Ditto Litigation, (b) authorized the Company to enter
into an Indemnification Agreement with each of the officers and directors of the
Company pursuant to which these individuals will be indemnified in connection
with matters related to the Ditto Litigation; the form of these Indemnification
Agreements is filed as Exhibit 10.2 to our Form 10-Q for the first quarter ended
March 31, 2001 (such exhibit is hereby incorporated by reference), and (c)
approved an amendment to the Bylaws of the Company to require the Company to
indemnify its present and former officers and directors to the full extent
permitted by the laws of the state of Texas, in connection with any litigation
in which such persons became a party subsequent to March 29, 2001 and in which
such persons are involved in connection with performing their duties as an
officer or director of the Company. Through March 31, 2002, the Company has
expended approximately $0.2 million (in connection with the aforesaid $0.25
million to be paid to or for the benefit of Mr. Moore) on behalf of Mr. Moore in
the defense of the Ditto matter. Since engaging its own counsel in connection
with the Ditto Litigation, the Company has paid for the legal fees and expenses
of our counsel. No amount of loss reserves has been established with respect to
the Ditto Litigation because management of the Company
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does not believe that the amount of any damage claims against the Company in
connection with the Ditto Litigation should adversely impact our financial
condition.
We are also involved in certain other litigation and disputes not noted.
With respect to these matters, management believes the claims against us are
without merit and has concluded that the ultimate resolution of such will not
have a material effect on our consolidated financial position or results of
operations.
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
Our 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.
2001 2000
---- ----
High Low High Low
Quarter Ended:
March 31 $3.800 $2.813 $3.750 $2.250
June 30 3.550 1.480 3.313 2.625
September 30 1.790 1.400 5.500 2.750
December 31 1.490 0.800 4.500 2.625
In November 2001, our Company entered into an agreement with Roth Capital
Partners, LLC, pursuant to which Roth Capital Partners, LLC, has committed to
provide certain investment banking services for the benefit of the Company. As
part of the consideration for these services, our Company has agreed to issue
warrants to purchase 76,000 shares of our Common Stock with an exercise price of
$1.03 per share and an expected expiration date of November 15, 2006. While the
Company has not yet executed a formal warrant document with respect to these
warrants, the issuance of these warrants, and the shares to be issued upon
exercise of these warrants, have not been registered under the Securities Act of
1933, as amended (the "Securities Act"). The agreement referred to above was a
privately negotiated transaction without solicitation or advertising with an
investment banker that is a "sophisticated investor" within the meaning of the
Securities Act and had access to all information concerning, our Company that it
needed to make an informed decision with respect to the agreement, including the
warrants to be granted thereunder, and the shares to be issued upon exercise of
these warrants. The warrants, and the shares to be issue upon exercise of such
warrants, will bear a legend with respect to the restrictions on transfer of the
warrants and the underlying shares of our Stock to be acquired on exercise of
the warrants.
Effective as of October, 2001, our Company entered into agreements with the
former owners of Mountain and Texcel in connection with restructuring the
repayment terms of the debt obligations payable by the Company to such persons.
In connection with such agreements, the Company has tentatively agreed to issue
warrants to purchase, for $1.09 per share, an aggregate of 117,800 and 86,680
shares of our Common Stock to the former owners of Mountain and Texcel,
respectively. Neither the issuance of these warrants, nor the shares to be
issued upon exercise of these warrants, has been registered under the Securities
Act. The issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act. The agreements referred to above were privately negotiated
transactions without solicitation or advertising with individuals who are
"sophisticated investors" within the meaning of the Securities Act and had
access to all the information concerning our Company that it needed to make an
informed decision with respect the agreements involved, the Company, the
issuance of these warrants, and the shares to be issued upon exercise of these
warrants. The documents to evidence these warrants and shares will bear a legend
with respect to the securities restrictions on transfer.
In October, 2001, we committed to issue 24,444 shares of Common Stock to
certain employees of Texcel. None of these shares have been issued, but all of
such shares are to be issued as a discretionary stock award 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.
We had approximately 334 holders of record of Common Stock as of December
31, 2001. While we know that a number of beneficial owners of our 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.
8
We have not paid any cash dividends on our Common Stock since our
inception. We expect that we will retain all available earnings generated by our
operations for the development and growth of our business and do 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 our
Company, and such other factors as the Board of Directors may deem relevant.
9
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,
2001 through 1997:
Years Ended December 31, 2001 2000 1999 1998 1997
- ------------------------ ---- ---- ---- ---- ----
(In thousands, except earnings per share amounts)
Operating results:
Net staffing service revenue $ 71,593 $ 81,005 $ 53,644 $ 41,566 $ 33,812
Gross margin 28,985 42,123 34,060 28,395 23,202
Income (loss) from continuing operations before discontinued
operations, income taxes and extraordinary item (4,872) 2,983 2,222 3,224 2,480
Income tax (benefit) expense (894) 1,190 855 1,169 (123)
Income (loss) from continuing operations (3,978) 1,793 1,368 2,055 2,603
Loss from discontinued operations, net of income tax benefit - (81) (1,305) (477) -
Income (loss) before extraordinary item (3,978) 1,712 63 1,578 2,603
Extraordinary item, net of income taxes
- - - - 57
--------- -------- ------- -------- --------
Net income (loss) $ (3,978) $ 1,712 $ 63 $ 1,578 $ 2,660
========= ======== ======= ======== ========
Earnings per common share:
Income (loss) from continuing operations before discontinued operations and
extraordinary item:
Basic $ (1.41) $ 0.64 $ 0.49 $ 0.75 $ 1.33
Diluted $ (1.41) $ 0.64 $ 0.49 $ 0.72 $ 1.25
Loss from discontinued operations:
Basic - $ (0.03) $ (0.47) $ (0.18) -
Diluted - $ (0.03) $ (0.47) $ (0.17) -
Extraordinary item:
Basic - - - - $ 0.03
Diluted - - - - $ 0.03
Net income (loss):
Basic $ (1.41) $ 0.61 $ 0.02 $ 0.57 $ 1.36
Diluted $ (1.41) $ 0.61 $ 0.02 $ 0.55 $ 1.28
Weighted average common shares:
Basic 2,813 2,791 2,760 2,752 1,951
Diluted 2,813 2,796 2,778 2,858 2,071
Financial Position:
Working capital (deficit) $ (2,519) $ 8,410 $ 4,112 $ 6,468 $ 9,455
Total assets 23,213 31,811 22,548 18,442 15,162
Short-term debt and current maturities 6,488 1,449 2,714 709 2
Long-term debt 424 7,855 1,591 1,203 66
Stockholders' equity 10,981 14,829 12,928 12,617 11,553
Notes to Selected Financial Operating Results Data:
1. Fiscal 2001 results exclude $750 deferred tax benefit, which is available
to offset future years tax expense.
2. Fiscal 2000 results include the results of Datatek as of March 7, 2000; the
date the Company completed the acquisition.
3. Fiscal 1999 results include the results of Mountain Ltd. as of August 6,
1999; the date the Company completed the acquisition.
4. Fiscal 1998 results include the results of Texcel as of October 8, 1998;
the date the Company completed the acquisition.
5. 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.
6. Income from continuing operations in fiscal years 1997 has been favorably
impacted by the change in valuation allowance for deferred tax assets
related primarily to a net operating loss carryforward.
7. Fiscal 2000, 1999, 1998, 1997 results have been reclassified for Direct
cost of contract placement and specialty services, to conform to the
current year disclosure.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Service Revenue Summary:
Year ended December 31, Increase (Decrease)
----------------------- -------------------
2001 2000 1999 2001 Vs 2000 2000 Vs 1999
---- ---- ---- ------------ ------------
(Dollars in millions)
Permanent placements $18.2 $31.5 $26.8 $ (13.3) $ 4.7
Contract and Specialty placements 53.4 49.5 26.8 3.9 22.7
----- ----- ----- ------- ------
Total staffing service revenue $71.6 $81.0 $53.6 $ (9.4) $ 27.4
===== ===== ===== ======= ======
2001 Compared with 2000
For the year ended December 31, 2001, net service revenue decreased $9.4
million, or 12%, to $71.6 million as compared to $81.0 million for the previous
year. As noted in the table above, revenue derived from contract and specialty
placements increased $3.9 million. Approximately $2.2 million of the increase in
revenue derived from contract and specialty placements was attributable to the
inclusion of the results of Datatek, which was acquired in March 2000. The
balance of the growth in revenue from contract and specialty placements of $1.7
million, or 3%, was attributable to increased contract placements with existing
customers and the addition of new customers. Permanent placement revenue
decreased $13.3 million, or 42% as a result of the continuing effect of hiring
freezes and staff reductions implemented by our customers due to the softening
of the economy. Contract placement and specialty services revenue accounted for
75% of revenue for the year ended December 31, 2001, up from 61% for the
previous year.
For the year ended December 31, 2001, gross margin decreased by $13.1
million, or 31%, to $29.0 million as compared to $42.1 million in the previous
year. All of the absolute decrease in gross margin dollars is due to the decline
in permanent placement revenues. As a percentage of contract and specialty
placement revenue, the gross margin derived from contract and specialty
placements for the year ended December 31, 2001 was 20%, down one percentage
point as compared to the previous year.
Operating expenses amounted to $32.7 million for the year ended December
31, 2001; a decrease of $5.9 million as compared to the previous year. Included
in operating expenses for the year ended December 31, 2001 was $14.9 million of
variable sales expenses, which were down $6.3 million as compared to the
previous year period due to the decline in permanent placement revenue. In
addition, for the year ended December 31, 2001, general and administrative
expenses amounted to $15.1 million. Included in this amount is $0.6 million of
excess rent paid during the year, principally for space at the Company's Dallas
office. The Company has entered into new lease agreements effective January 1,
2002, which result in the elimination of this incremental rent expense going
forward. Also included in general and administrative expense for 2001 was
approximately $0.4 million in legal costs associated with the Ditto matter.
General and administrative expenses in 2000 were $15.6 million. Depreciation and
amortization expense amounted to $1.9 million as compared to $1.7 million in the
previous year period. This increase is due to amortization expense related to
our acquisitions. Also during the year ended December 31, 2001, we recorded a
$0.8 million charge for restructuring, severance and asset write-offs.
Approximately $0.3 million of this charge was related to the resignation of our
former president, and $0.2 million was related to the write-off of leasehold
improvements and the establishment of a reserve for future rents for facilities
no longer occupied.
For the year ended December 31, 2001, net interest expense was $1.1
million, an increase of $0.5 million as compared to the previous year. Included
in the interest expense for the year ended December 31, 2001 was $0. 3 million
related to default wavier fees and the write-off of previously deferred
commitment fees as a result of the events of default, and $0.1 million
associated with the issuance of warrants to the former owners of Texcel and
Mountain. The remaining interest expense is associated with borrowings on our
line of credit and deferred payment obligations related to our acquisitions.
For the year ended December 31, 2001, we reported a net loss before taxes
of $4.9 million, as compared to net income before taxes of $3.0 million in the
previous year. The reduction in revenue from permanent placements and the
restructuring and severance costs noted above, contributed to the change in net
income before taxes.
During for the year ended December 31, 2001, we reported an income tax
benefit of $0.9 million as compared to income tax expense of $1.2 million for
the previous year period. In addition, at December 31, 2001, the Company has a
net operating loss carry forward of $1.2 million which it will use to offset
future tax expense.
As a result of the items discussed above, we reported a $4.0 million net
loss for the year ended December 31, 2001 as compared to net income of $1.7
million for the previous year.
11
2000 Compared with 1999
For the year ended December 31, 2000, net staffing service revenue
increased approximately $27.4 million, or 51%, to $81.0 million as compared to
$53.6 million for the previous year. The acquisition of Mountain and Datatek
accounted for 36% of the revenue growth while existing operations grew 15%.
Specifically, $9.0 million of the increase resulted from the inclusion of
revenue generated by Mountain, which was acquired in August 1999, through the
anniversary date of the acquisition, an additional $10.4 million of revenue was
generated by the operations of Datatek, which was acquired in March 2000 and
existing operations increased $8.0 million.
Contract and specialty placement revenue accounted for 61% of net service
revenue for fiscal year 2000, as compared to 50% of the revenue for the previous
year. The inclusion of revenue from the recently acquired Mountain and Datatek
operations, which are primarily contract placement operations, accounted for
substantially all of this change. Permanent placement revenues comprised 39% of
net service revenue for fiscal year 2000, as compared to 50% of the revenue for
the previous year. As a percentage of net service revenue, net revenue derived
from contract placements will continue to increase, largely due to our strategic
decision to focus our growth in contract placement through acquisitions.
Gross margin increased as a result of the increase in staffing service
revenue, total gross margin increased approximately $8.0 million, or 24%, to
$42.1 million for fiscal year 2000 as compared to $34.1 million in the previous
year. As a percentage of contract and specialty placement revenue, the gross
margin derived from contract and specialty placements for the year ended
December 31, 2000 was 21%, down six percentage point as compared to the previous
year. This decrease is the result of the inclusion of lower margin but higher
revenue volume contract operations of our Mountain and Datatek acquisitions.
Operating expenses amounted to $38.5 million for the year ended December
31, 2000, an increase of $6.9 million as compared to the previous year. Included
in operating expenses for the year ended December 31, 2000 was $21.2 million of
variable sales expenses, which were up $2.1 million as compared to the previous
year period due primarily to the increase in permanent placement revenue. In
addition, for the year ended December 31, 2000, general and administrative
expenses amounted to $15.6 million, up $4.3 million as compared to the previous
year. Inclusion of the operations of Mountain and Datatek accounted for half of
the increase in SG&A. The remaining increase is due to increased revenue in our
existing business. Depreciation and amortization expense amounted to $1.7
million as compared to $1.2 million in the previous year period. This increase
is due to amortization expense related to our acquisitions.
For the year ended December 31, 2000, we reported net interest expense of
$0.6 million, primarily associated with borrowings on our line of credit and
interest on deferred payment obligations related to our acquisitions of Texcel,
Mountain and Datatek. Interest expense was $0.1 million in fiscal year 1999.
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.
For fiscal 2000, net income from continuing operations amounted to $1.8
million, an increase of $0.4 million from the previous year.
Income tax expense from continuing operations was $1.2 million for fiscal
2000 compared to $0.9 million in the previous year. Our effective tax rate has
remained fairly consistent.
Losses from the operations of discontinued operations and loss on disposal
of discontinued operations, net of income tax benefits, amounted to $0.1 million
in fiscal year 2000, as compared to $1.3 million in the previous year. In 1999
our Company approved a plan to sell our training operation. The sale was
completed in February 2001.
As a result of the items discussed above, net income for 2000 amounted to
approximately $1.7 million, an increase of $1.6 million, as compared to the
previous year.
Liquidity and Capital Resources
For the year ended December 31, 2001, cash provided by operating activities
approximated $2.7 million, principally from the collection of accounts
receivable. Substantially all of the cash generated was used to repay borrowings
under our revolving credit agreement and for capital expenditures approximating
$0.4 million.
As of December 31, 2001, we were not in compliance with the amended terms
and conditions of our financing agreement with our primary lender. Through
February 28, 2002, we operated under the terms and conditions of the Fourth
Amendment and Forbearance Agreement. Subsequent to the expiration of this
agreement, our primary lender has verbally expressed to the Company that it may
exercise its right to declare the obligations to be due and payable. They have
also indicated in the same conversations that
12
they will assist the Company, to the extent feasible, in its efforts to secure a
new lending agreement with a new lender.
The Company has also failed to make the required acquisition agreement
payments of $1.2 million, $0.9 million and $0.2 million to the former owners of
Mountain, Texcel, and Datatek respectively, which were due on October 1, 2001,
October 8, 2001, and January 1, 2002, respectively. The Company has entered into
agreements with the former owners of each of Mountain, Texcel and Datatek
pursuant to which our payment obligations have been deferred for varying periods
of time subject to the Company timely funding the installment obligations
payable to each of these former owners. At this time, the Company is in
compliance with the terms of such agreements. The agreements with both Texcel
and Mountain contain certain cross-default clauses so that a default under one
transaction will constitute a default under the other transaction.
Pursuant to the Note Purchase Agreement entered into in January 1999, by
and between DCRI LP No. 2 ("LP No. 2"), Mr. J. Michael Moore, our Chairman and
Chief Executive Officer, Compass Bank and the Company, the Company is obligated
to purchase from the Bank the promissory notes (the "Notes") issued by LP No. 2
to the Bank. In March 2002, the Company was notified that an entity affiliated
with Mr. Moore has entered into a purchase agreement with the Bank which upon
completion would eliminate the Company's obligation to the Bank. As of April 21,
2002 the amount payable to the Bank is approximately $0.3 million. The Bank
obligation is currently secured by 168,500 shares of our common stock pledged to
the Bank by LP. No. 2 and or Mr. Moore. Based on the current market price of our
common stock on April 21, 2002, the unsecured balance of the liability to the
bank by all parties involved is approximately $0.2 million. While there can be
no assurance that the purchase of the Notes by this new entity will be
successful, the Company has previously notified the Bank that under the terms of
our lending agreement, the Company does not have funds available to purchase
this liability. Additionally, the Notes are guaranteed by Mr. Moore and we
believe, based upon financial information provided by Mr. Moore that Mr. Moore
has the financial ability to satisfy the Notes.
The Company has commitments over the next ten years, under operating and
capital leases, of approximately $8.7 million, of which, $1.6 million will be
due in 2002.
We have reported a loss for year ended December 31, 2001 of $4 million. In
addition, given the current state of the economy and the cyclical nature of our
business, we may continue to report losses for the foreseeable future.
These factors, among others, indicate that the Company may be unable to
continue as a going concern.
We are currently evaluating various financing and restructuring strategies,
to be utilized to meet the working capital requirements of the company as well
as satisfy our acquisition obligations.
In January 2002, we filed a claim for refundable income taxes with the
Internal Revenue Service for $0.8 million resulting from the carry back of our
operating loss to 1999 and 2000. This amount was received in February 2002. As a
result of a change to federal tax laws in March 2002 which will allow us to
carry our operating loss back five years rather than two, we will file an
additional claim for refundable income taxes of $0.7 million resulting from the
carry back of our operating loss to 1996, 1997 and 1998.
Lastly, we have engaged Roth Capital Partners, LLC, to act as our financial
advisors in assisting us in evaluating our strategic options to maximize
shareholder value and to provide ongoing assistance in pursuing those options.
We can provide no assurance that we will be successful in implementing the
changes necessary to accomplish these objectives, or if we are successful, that
the changes will improve our cash flow and liquidity.
Inflation has not had a significant effect on our operating results.
Significant Accounting Policies
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 upon performance
of services. Direct cost of contract placement and specialty services consists
of direct wages and related payroll taxes paid to non-permanent personnel.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides guidelines on revenue
recognition. Management has considered the provisions of SAB 101 and does not
believe SAB 101 has any impact on our consolidated financial statements.
13
Recent Accounting Pronouncements
In September 1998, the FASB issued SFAS No. 133. "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities in the financial statements and
measure those instruments at fair value. In September 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 was
originally effective for all fiscal quarters of years beginning after September
15, 1999. SFAS No. 137 deferred the effective date of SFAS No. 133 to all fiscal
quarters of all years beginning after September 15, 2000. SFAS No. 133 has no
impact upon us as we had no derivative financial instruments.
In September 2001, the Financial Accounting Standards Board approved SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets. SFAS No 141 requires that the purchase method of accounting
be used for all business combinations initiated after September 30, 2001. SFAS
No. 142 will be effective for fiscal years beginning after December 15, 2001 and
will require 1) intangible assets (as defined in SFAS 141) to be reclassified
into goodwill, 2) the ceasing amortization of goodwill, and 3) the testing of
goodwill for impairment for transaction and at interim periods (if an event or
circumstance would result in an impairment). We expect to adopt SFAS 142 on
January 1, 2002. We have not yet determined what the impact of SFAS 142 will be
on our results of operations and financial position.
Actual Results May Differ from Forward-Looking Statements
Statements in this Annual Report on Form 10-K that are not historical
facts, including, but not limited to, projections or expectations of future
financial or economic performance of our Company and statements of our plans and
objectives for future operations, are "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended ("the Exchange Act") and
involve a number of risks and uncertainties. No assurance 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 our markets, including
inflation, recession, interest rates and other economic factors; the
availability of qualified personnel; our ability to successfully integrate
acquisitions or joint ventures with our operations (including the ability to
successfully integrate businesses that may be diverse as to their type,
geographic area or customer base); the level of competition experienced by our
Company; our ability to implement its business strategies and to manage its
growth; the level of development revenues and expenses; the level of litigation
expenses; our ability to effectively implement an e-commerce strategy; those
factors identified in our Prospectus dated September 30, 1997 as risk factors;
and other factors that affect businesses generally. Subsequent written and oral
"forward-looking" statements attributable to our Company, or persons acting on
its behalf, are expressly qualified by the Cautionary Disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our 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. Assuming interest rates increased by 200 basis points (2%) above the
interest rate at December 31, 2001, on an annualized basis interest expense
would increase by approximately $0.1 million on the outstanding line of credit
borrowings of $3.6 million at December 31, 2001.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
See Item 14(a).
Quarterly Results
Our 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 our services mix, the degree to which
we encounter competition in our 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 our Company or our competitors, and changes in prices for
services offered by our Company or our 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. Fiscal 2000 results
been reclassified for direct cost of contract placement and specialty services
to conform to the current year presentation.
Three Months ended (unaudited)
----------------------------------------------------------------------------------------------
March June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
31, 2000 2000 2000 2000 2001 2001 2001 2001
-------- ------- -------- -------- -------- ------- --------- -------
(In thousands, except per share data)
Net service revenues $17,569 $20,311 $21,604 $21,521 $19,931 $19,816 $17,654 $14,192
Direct cost of services 7,383 9,789 10,821 10,889 10,758 11,459 11,238 9,153
------- ------- ------- ------- ------- ------- ------- -------
Gross margin 10,186 10,522 10,783 10,632 9,173 8,357 6,416 5,039
Operating expenses:
Variable selling expenses 5,159 5,336 5,101 5,617 4,921 4,292 3,083 2,690
Selling, general &
administrative expenses 3,782 3,738 4,217 3,827 4,105 3,813 3,788 3,337
Restructuring and severance
expenses - - - - 439 - - 352
Depreciation and amortization
expense 376 427 464 469 483 481 474 480
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 869 1,021 1,001 719 (775) (229) (929) (1,820)
------- ------- ------- ------- ------- ------- ------- -------
Interest and other expenses 59 187 157 224 185 176 290 468
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax 810 834 844 495 (960) (405) (1,219) (2,288)
Income tax (benefit) expense 321 335 337 197 (378) (154) (466) 104
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations 489 499 507 298 (582) (251) (753) (2,392)
Loss from discontinued operations,
net of tax benefit - - (81) - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 489 $ 499 $ 426 $ 298 $ (582) $ (251) $ (753) $(2,392)
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share:
From continuing operations $ 0.18 $ 0.18 $ 0.18 $ 0.11 $ (0.21) $ (0.09) $ (0.27) $ (0.85)
Net income (loss) 0.18 0.18 0.15 0.11 (0.21) (0.09) (0.27) (0.85)
Diluted earnings per share:
From continuing operations $ 0.18 $ 0.18 $ 0.18 $ 0.11 $ (0.21) $ (0.09) $ (0.27) $ (0.85)
Net income (loss) 0.18 0.18 0.15 0.11 (0.21) (0.09) (0.27) (0.85)
Weighted average shares
outstanding:
Basic 2,739 2,786 2,819 2,819 2,816 2,812 2,812 2,813
Diluted 2,739 2,787 2,830 2,829 2,816 2,812 2,812 2,813
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(i) On October 3, 2001, management of Diversified Corporate Resources, Inc.
(the "Company") dismissed PriceWaterhouseCoopers L.L.P. ("PwC") as the Company's
independent accountants. Such action was approved by the Company's Board of
Directors and Audit Committee on October 5, 2001. In approving the dismissal of
PwC, the Company's Board of Directors and Audit Committee cited cost
considerations as the reason for the change.
(ii) PwC's reports on the Company's financial statements for the past two years
did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
(iii) No event listed in Paragraphs (A) through (D) of Item 304a(1)(v) of
Regulation S-K occurred within the Company's two most recent fiscal years and
the subsequent interim periods preceding the dismissal of PwC.
(iv) During the two most recent fiscal years and the subsequent interim period
preceding the dismissal of PwC, there were no disagreements with PwC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PwC, would have caused it to make a reference to the subject
matter of the disagreements in connection with its report.
(v) A copy of a letter from PwC indicating its agreement with the statements
made by the Company in response to Item 4 of Form 8-K is filed as Exhibit 16.1
to the Company's Form 8-K filed on October 9, 2001.
(b) New Independent Accountants
(i) As of October 5, 2001, the Company has engaged Weaver and Tidwell L.L.P.
("Weaver") as the Company's principal accountants to audit the Company's
financial statements for the 2001 fiscal year. The action was approved by the
Company's Board of Directors and Audit Committee. Neither the Company nor anyone
on its behalf has consulted with Weaver regarding (A) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements, or (B) any matter that was either the subject of a disagreement (as
defined in Item 304(a)(1)(iv) of Regulation S- K) or a reportable event (as
described in Item 304(a)(1)(v) of Regulation S-K).
(ii) Pursuant to Item 304(a)(2)(D) of Regulation S-K, the Company has
requested Weaver to review this disclosure before it is filed and has provided
Weaver with the opportunity to furnish the Company with a letter addressed to
the Commission containing any new information, clarification of the Company's
expression of its views, or the respects in which it does not agree with the
statements made by the Company in this disclosure. Weaver has advised the
Company that it does not have any new information or clarification of the
Company's expression of its views and that it agrees with the statements made by
the Company in this disclosure.
PART III
The information for these items is incorporated by reference to the
definitive proxy statement to be filed by our Company with the Securities and
Exchange Commission pursuant to Regulation 14A under the Exchange Act within 120
days of the close of the fiscal year ended December 31, 2001.
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 19 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 42 through 46 for a
list of all exhibits filed as part of this report.
(b) Reports on Form 8-K
On October 9, 2001, we filed with the Securities and Exchange
Commission, to change our Certifying Accountants from
PricewaterhouseCoopers, LLP to Weaver and Tidwell, LLP.
16
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: April 23, 2002 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: April 23, 2002 By: /s/ J. Michael Moore
--------------------
J. Michael Moore
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: April 23, 2002 By: /s/ James E. Filarski
---------------------
James E. Filarski
President and Director
Date: April 23, 2002 By: /s/ Anthony G. Schmeck, Jr.
---------------------------
Anthony G. Schmeck, Jr.
Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer )
Date: April 23, 2002 By: /s/ Deborah A. Farrington
-------------------------
Deborah A. Farrington
Director
Date: April 23, 2002 By: /s/ Samuel E. Hunter
--------------------
Samuel E. Hunter
Director
17
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page No.
-----------
Reports of Independent Accountants 19
Consolidated Balance Sheets at December 31, 2001 and 2000 21
Consolidated Statements of Operations for each of the three years ended December 31, 2001,
2000 and 1999 22
Consolidated Statements of Stockholders' Equity for each of the three years ended
December 31, 2001, 2000 and 1999 23
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2001,
2000 and 1999 24
Notes to Consolidated Financial Statements 25
Reports of Independent Accountants on the Financial Statement Schedule 39
Schedule II-Valuation and Qualifying Accounts for each of the three years ended
December 31, 2001, 2000 and 1999 41
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.
We have audited the accompanying consolidated balance sheet of Diversified
Corporate Resources, Inc. and subsidiaries as of December 31, 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Diversified Corporate Resources, Inc. and subsidiaries as of December 31, 2001,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of $3,978,000
during the year ended December 31, 2001, and, as of that date, had a working
capital deficiency of $2,519,000. As described more fully in Note 2, "Liquidity
and Management Plans" to the consolidated financial statements, such working
capital deficiency is the result of the Company being in default on its
revolving credit agreement and the acceleration of certain other payment
obligations. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 2, "Liquidity and Management Plans". The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 22, 2002
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Diversified
Corporate Resources, Inc and its subsidiaries at December 31, 2000, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2001
20
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
----------------------------------
2001 2000
----------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 159 $ 499
Trade accounts receivable, less allowance for doubtful accounts of approximately $340 and
$1,318 respectively 7,281 15,132
Prepaid expenses and other current assets 308 356
Federal income taxes receivable 1,513 261
Deferred income taxes - 853
---------- ---------
Total current assets 9,261 17,101
Property and equipment, net 2,531 3,576
Other assets:
Intangibles, net 10,780 10,492
Receivables from related parties 418 418
Other 223 224
---------- ---------
$23,213 $31,811
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses $ 4,440 $ 7,242
Obligations not liquidated because of outstanding checks 852 -
Borrowings under revolving credit agreement 3,584 -
Current maturities of capital lease obligations 99 78
Current maturities of long-term debt 2,805 1,371
---------- ---------
Total current liabilities 11,780 8,691
Deferred lease rents 28 45
Deferred income taxes - 391
Borrowings under revolving credit agreement - 6,676
Capital lease obligations, net of current maturities 120 230
Long-term debt, net of current maturities 304 949
---------- ---------
Total liabilities 12,232 16,982
---------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized, none issued - -
Common stock, $.10 par value; 10,000 shares authorized, 3,397 and 3,397
shares issued, respectively 340 340
Additional paid-in capital 12,794 12,639
Retained earnings (deficit) (266) 3,712
Common stock held in treasury (586 and 579 shares, respectively), at cost (1,649) (1,624)
Receivables from related parties (238) (238)
---------- ---------
Total stockholders' equity 10,981 14,829
---------- ---------
$23,213 $31,811
========== =========
See notes to consolidated financial statements.
21
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
Years ended December 31,
----------------------------------------------
2001 2000 1999
--------------- --------------- ----------
Net service revenues:
Permanent placement $ 18,163 $ 31,531 $ 26,794
Contract placement and specialty services 53,430 49,474 26,850
-------- -------- --------
71,593 81,005 53,644
Direct cost of contract placement and specialty services 42,608 38,882 19,584
-------- -------- --------
Gross margin 28,985 42,123 34,060
-------- -------- --------
Operating expenses:
Variable selling expenses 14,986 21,213 19,109
Selling, general and administrative expenses 15,043 15,564 11,282
Restructuring and severance expenses 791 - -
Depreciation and amortization expense 1,918 1,736 1,207
-------- -------- --------
32,738 38,513 31,598
-------- -------- --------
Other expense items:
Interest expense, net 1,117 601 84
Other expense, net 2 26 155
-------- -------- --------
1,119 627 239
-------- -------- --------
Income (loss) from continuing operations before income taxes and discontinued
operations (4,872) 2,983 2,223
Income tax (benefit) expense (894) 1,190 855
-------- -------- --------
Income (loss) from continuing operations before discontinued operations (3,978) 1,793 1,368
Discontinued operations, net of income tax benefits:
Loss from operations of discontinued training operations - - (700)
Loss on disposal of discontinued training operations - (81) (605)
-------- -------- --------
Net income (loss) $(3,978) $1,712 $ 63
======== ======== ========
Basic earnings per share:
Income (loss) from continuing operations $ (1.41) $ 0.64 $ 0.49
Loss from discontinued operations - (0.03) (0.47)
-------- -------- --------
Net income (loss) $ (1.41) $ 0.61 $ 0.02
======== ======== ========
Weighted average common shares outstanding 2,813 2,791 2,760
======== ======== ========
Diluted earnings per share:
Income (loss) from continuing operations $ (1.41) $ 0.64 $ 0.49
Loss from discontinued operations - (0.03) (0.47)
-------- -------- --------
Net income (loss) $ (1.41) $ 0.61 $ 0.02
======== ======== ========
Weighted average common and common equivalent shares outstanding 2,813 2,796 2,778
======== ======== ========
See notes to consolidated financial statements
22
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
Receivables
Additional Retained From
Common Paid-In Earnings Treasury Related
Stock Capital (deficit) Stock Parties Total
-------- --------- --------- -------- -------- -------
BALANCE, December 31, 1998 $ 318 $11,927 $ 1,937 $ (1,350) $ (215) 12,617
Advances to related parties - - - - (23) (23)
Tax effect of stock options exercised - 23 - - - 23
Issuance of common stock 15 444 - - - 459
Treasury stock purchase (211) (211)
Net income - - 63 - - 63
Retirement of treasury stock (4) (16) - 20 -
-------- ------- ------- -------- -------- -------
BALANCE, December 31, 1999 329 12,378 2,000 (1,541) (238) 12,928
Issuance of common stock 11 261 - - - 272
Treasury stock purchase - - - (83) - (83)
Net income - - 1,712 - - 1,712
-------- ------- ------- -------- -------- -------
BALANCE, December 31, 2000 340 12,639 3,712 (1,624) (238) 14,829
Value of warrants issued - 152 - - - 152
Treasury stock purchase (25) - (25)
Other capital contribution - 3 - - - 3
Net income (loss) - - (3,978) - (3,978)
-------- ------- ------- -------- -------- -------
BALANCE, December 31, 2001 $ 340 $12,794 $ (266) $(1,649) $ (238) $10,981
======== ======= ======= ======== ======== =======
See notes to consolidated financial statements
23
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands )
Years Ended December 31,
---------------------------------------
2001 2000 1999
---------------------------------------
Cash flow from operating activities:
Net income (loss) $ (3,978) $ 1,712 $ 63
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,918 1,736 1,272
Write off of intangible assets and other 93 - 156
Loss from disposal of discontinued operations - 81 605
Provision for allowances (978) 306 250
Income tax effect of options exercised - - 23
Deferred income taxes 462 212 104
Deferred lease rents (17) (50) 34
Accretion of interest on deferred payment obligations 153 243 190
Value of stock and warrants issued 152 17 -
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 8,829 (3,866) (1,119)
Federal income taxes receivable (1,252) (112) 51
Prepaid expenses and other current assets 116 (91) (37)
Other assets - (99) (154)
Trade accounts payable and accrued expenses (2,802) 1,098 (376)
------- ------- -------
Cash provided by operating activities 2,696 1,187 1,062
------- ------- -------
Cash flows from investing activities:
Capital expenditures (357) (996) (1,213)
Business acquisition costs, net of cash acquired (80) (3,908) (3,114)
Other assets (67) (9) (6)
Loans and advances to related parties - (370) (77)
Repayment from related parties - - 31
Cash used in investing activities (504) (5,283) (4,379)
------- ------- -------
Cash flows from financing activities:
Obligations not liquidated because of outstanding checks 852 - -
Issuance of common stock 3 - 182
Net repayments on line of credit - (1,480) -
Net short-term borrowings - - 1,480
Advances on long-term line of credit borrowings 80,214 58,998 -
Repayments of long-term line of credit borrowings (83,306) (52,322) -
Repurchase of treasury stock (25) (83) (212)
Principal payments under long-term debt obligations (181) (1,303) (759)
Principal payments under capital lease obligations (89) (62)
------- ------- -------
Cash provided by (used in) financing activities (2,532) 3,748 691
------- ------- -------
Change in cash and cash equivalents (340) (348) (2,626)
Cash and cash equivalents at beginning of year 499 847 3,473
------- ------- -------
Cash and cash equivalents at end of year $ 159 $ 499 $ 847
======= ======= =======
Supplemental cash flow information:
Cash paid for interest $ 679 $ 392 $ 31
======= ======= =======
Cash paid (refunded) for taxes $(261) $1,003 $ 322
======= ======= =======
See notes to consolidated financial statements.
24
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Data)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the operations of
Diversified Corporate Resources, Inc. and its wholly owned subsidiaries (the
"Company", "our", "we" or "us"). All inter-company accounts and transactions
have been eliminated in consolidation.
Nature of Operations
The Company is a Texas corporation and is engaged, through our
subsidiaries, in the permanent, specialty and contract placement of personnel in
various industries. We currently operate offices in the following locations:
Arizona Phoenix
Colorado Denver
Georgia Atlanta
Idaho Meridian
Illinois Chicago
Maine Portland
Missouri Kansas City
North Carolina Raleigh
Pennsylvania Philadelphia
Texas Dallas/Fort Worth, Houston and Austin
The offices are responsible for marketing to clients, recruitment of
personnel, operations, local advertising, initial customer credit evaluation and
customer cash collection follow-up. Our executive offices, located in Dallas,
Texas, provide corporate governess, and risk management, as well as certain
other accounting and administrative services for our 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 upon performance
of services. Direct cost of contract placement and specialty services consists
of direct wages and related payroll taxes paid to non-permanent personnel.
Accounts receivable at December 31, 2001 and 2000 include approximately $80 and
$459, respectively, of unbilled receivables that were billed in 2002 and 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides guidelines on revenue
recognition. Management has considered the provisions of SAB 101 and does not
believe SAB 101 has any impact on our consolidated financial statements.
Cash and Cash Equivalents
We consider all highly liquid investment instruments purchased with
remaining maturities of three months or less to be cash equivalents.
Fair Value of Financial Instruments
At December 31, 2001 and 2000, our financial instruments consisted of
cash and cash equivalents, notes receivable from related parties, line of credit
borrowings and long-term debt. We believe that the recorded values of cash and
cash equivalents approximate fair value due to the short term nature of these
instruments. We believe that the recorded values of notes receivable from
related parties approximate fair value due to the value of the collateral for
those receivables. We believe that the recorded value of the line of credit
borrowings and long-term debt approximate fair value due to our ability to
obtain such borrowings at comparable interest rates.
25
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
Obligations not liquidated because of outstanding checks
Under the terms and conditions of our revolving credit facility, all
cash receipts deposited in our lock boxes are swept by our lender daily. This
procedure, combined with our policy of maintaining a zero balance in the
operating account results in the Company reporting a balance of obligations not
liquidated because of outstanding checks.
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 life of each class of asset is 5 years.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended
December 31, 2001, 2000 and 1999, advertising expenses amounted to approximately
$519, $707 and $919, 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:
2001 2000 1999
---- ---- ----
Basic 2,813 2,791 2,760
Net effect of dilutive stock options - 6 17
----- ----- -----
Diluted 2,813 2,797 2,777
===== ===== =====
Options and warrants not considered because effects of inclusion would be anti-dilutive 1,621 577 185
Income Taxes
We present income taxes pursuant to Statement of Financial Accounting
Standards No. 109. "Accounting for Income Taxes" ("FAS 109"). FAS 109 uses an
asset and liability approach to account for income taxes, wherein, deferred
taxes are provided for book and tax basis differences for assets and
liabilities. In the event differences between the financial reporting basis and
the tax basis of our assets and liabilities result in deferred tax assets, an
evaluation of the profitability of being able to realize the future benefits
indicated by such assets is required. A valuation allowance is provided for a
portion or all of the deferred tax assets when there is sufficient uncertainty
regarding our ability to recognize the benefits of the assets in future years.
Our Company and its subsidiaries file a consolidated federal income tax return.
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 of America 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.
26
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain reclassifications have been made to prior year balances to
conform to the current year presentation, the most significant of which is that
in prior years, variable selling expenses were included in cost of services.
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.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. It also specifies the types of
acquired intangible assets that are required to be recognized and reported
separately from goodwill. SFAS 142 will require that goodwill and certain
intangibles no longer be amortized, but instead tested for impairment at least
annually. SFAS 142 is required to be applied starting with fiscal years
beginning after December 15, 2001, with early application permitted in certain
circumstances. The Company plans to adopt SFAS 142 in 2002, but to date, has not
evaluated the potential impact, if any, on the Company's consolidated financial
position or results of operations. Intangibles amortization was approximately
$604, $541, and $301, in fiscal 2001, 2000 and 1999, respectively.
2. Liquidity and Management Plans
We reported a loss for the year ended December 31, 2001 of $3,978. In
addition, we had cash on hand of $159, and our current liabilities exceeded our
current assets by $2,519.
Also, as of December 31, 2001, we were not in compliance with the
amended terms and conditions of our financing agreement with our primary lender.
Through February 28, 2002, we operated under the terms and conditions of the
Fourth Amendment and Forbearance Agreement. Subsequent to the expiration of this
agreement, our primary lender has verbally expressed to the Company that it may
exercise its right to declare the obligations to be due and payable. They have
also indicated in the same conversations that they will assist the Company, to
the extent feasible , in its efforts to secure a new lending agreement with a
new lender.
The Company has also failed to make the required acquisition agreement
payments of $1.2 million, $0.9 million and $0.2 million to the former owners of
Mountain, Texcel, and Datatek respectively, which were due on October 1, 2001,
October 8, 2001, and January 1, 2002, respectively. The Company has entered into
agreements with the former owners of each of Mountain, Texcel and Datatek
pursuant to which our payment obligations have been deferred for varying periods
of time subject to the Company timely funding the installment obligations
payable to each of these former owners. At this time, the Company is in
compliance with the terms of such agreements.
Pursuant to the Note Purchase Agreement entered into in January 1999,
by and between DCRI LP No. 2 ("LP No. 2"), Mr. J. Michael Moore, our Chairman
and Chief Executive Officer, Compass Bank and the Company, the Company is
obligated to purchase from the Bank the promissory notes (the "Notes") issued by
LP No. 2 to the Bank. In March 2002, the Company was notified that an entity
affiliated with Mr. Moore has entered into a purchase agreement with the Bank
which upon completion would eliminate the Company's obligation to the Bank. As
of April 21, 2002 the amount payable to the Bank is approximately $300. The Bank
obligation is currently secured by 168.5 shares of our common stock pledged to
the Bank by LP. No. 2 and or Mr. Moore. Based on the current market price of our
common stock on April 21, 2002, the unsecured balance of the liability to the
bank by all parties involved is approximately $211. While there can be no
assurance that the purchase of the Notes by this new entity will be successful,
the Company has previously notified the Bank that under the terms of our lending
agreement, the Company does not have funds available to purchase this liability.
Additionally, the Notes are guaranteed by Mr. Moore and we believe, based upon
financial information provided by Mr. Moore that Mr. Moore has the financial
ability to satisfy the Notes.
These factors, among others, indicate that the Company may be unable to
continue as a going concern.
27
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
2. Liquidity and Management Plans (continued)
We are currently evaluating various financing and restructuring
strategies to be utilized to meet the working capital requirements of the
Company as well as satisfy our acquisition obligations.
In January 2002, we filed a claim for refundable income taxes with the
Internal Revenue Service for $777 resulting from the carry back of our operating
loss to 1999 and 2000. This amount was received in February 2002. As a result of
a change to federal tax laws in March 2002 which will allow us to carry our
operating loss back five years rather than two, we will file an additional claim
for refundable income taxes of $736 resulting from the carry back of our
operating loss to 1996, 1997 and 1998.
We have engaged Roth Capital Partners, LLC, to act as our financial
advisors in assisting us in evaluating our strategic options to maximize
shareholder value and to provide ongoing assistance in pursuing those options.
We can provide no assurance that we will be successful in implementing the
changes necessary to accomplish these objectives, or if we are successful, that
the changes will improve our cash flow and liquidity.
3. Property and Equipment
Property and equipment consists of:
December 31,
-------------------------------
2001 2000
---- ----
Computer equipment and software $ 4,182 $ 4,294
Equipment and furniture 1,453 1,660
Leasehold improvements 161 412
------- -------
5,796 6,366
Less accumulated depreciation and amortization (3,265) (2,790)
------- -------
Property and equipment, net $ 2,531 $ 3,576
======= =======
Depreciation and amortization of property and equipment was
approximately $1,309, $1,196 and $971 for the years ended December 31, 2001,
2000 and 1999, respectively. Amortization of assets under capital leases in
2001, 2000 and 1999 was approximately $68, $68 and $39 and the unamortized
balance was approximately $267 at December 31, 2001. These assets are included
in equipment and furniture and computer equipment.
4. Intangibles
Intangibles consist of:
December 31,
-------------------------------
Amortization
Period 2001 2000
------ ---- ----
Non-compete agreements 3-5 years $ 150 $ 150
Goodwill 20 years 12,094 11,197
------- -------
12,244 11,347
Accumulated amortization (1,464) (855)
------- -------
$10,780 $10,492
======= =======
Amortization of intangibles was approximately $609, $541 and $301 for
the years ended December 31, 2001, 2000 and 1999, respectively. The cost
assigned to the non-compete agreements is the amount stated in the purchase
agreements.
28
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
5. Trade Accounts Payable and Accrued Expenses
Trade accounts payable and accrued expenses consist of:
December 31,
-----------------------
2001 2000
---- ----
Trade accounts payable $ 461 $ 182
Accrued expenses 1,116 834
Accrued compensation 2,444 5,334
Accrued payroll expense 419 577
Provision for loss on disposal of
discontinued training operation - 315
------ ------
$4,440 $7,242
====== ======
Included in accrued compensation are accrued commissions, contractors'
payroll and in 2000 only, executive management bonuses.
6. Line of Credit and Long-Term Debt:
On May 18, 2000, we entered into a three-year revolving line of credit
agreement with General Electric Capital Corporation (the "GE facility"). The
agreement permits borrowings up to $15,000. Upon the closing of this facility,
we borrowed $3,800 and repaid, in its entirety, the outstanding borrowings under
our previous revolving credit facility. The borrowings are collateralized by our
accounts receivable and other assets and are based upon a borrowing base as
defined in the agreement.
As noted above in footnote No. 2, Liquidity and Management Plans, as of
December 31, 2001, we were not in compliance with the amended terms and
conditions of our financing agreement. In addition, through February 28, 2002,
we operated under the terms and conditions of the Fourth Amendment and
Forbearance Agreement. Subsequent to the expiration of this agreement, our
primary lender has verbally expressed to the Company that it may exercise its
right to declare the obligations to be due and payable. They have also indicated
in the same conversations that they will assist the Company, to the extent
feasible , in its efforts to secure a new lending agreement with a new lender.
Under the terms of the agreement with GE, outstanding loan balances bear
interest at the bank's index rate, which is defined as the latest prime rate
quoted on the last business day of each calendar month plus 2.875%. Interest is
payable monthly. The weighted average interest rate on the borrowings was 7.57%
for the year ended December 31, 2001. The interest rate at December 31, 2001 was
7.875%. As of December 31, 2001, the amounts outstanding under the revolving
line of credit amounted to $3,584.
Long-term debt consists of:
December 31,
---------------------
2001 2000
---- ----
Present value of minimum deferred payment
obligations (discounted at 8%):
Texcel acquisition $ 867 $ 645
Datatek acquisition 475 606
Mountain acquisition 1,767 1,069
------ -----
3,109 2,320
Less current maturities 2,805 1,371
------ ------
Total long-term debt $ 304 $ 949
====== ======
Scheduled maturities of long-term debt as of December 31, 2001 are as
follows:
2002 $2,805
2003 171
2004 133
2005 -
------
$3,109
======
29
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
7. Business Acquisitions
Texcel, Inc. and Texcel Technical Services, Inc.:
On October 8, 1998, we 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
in cash; 100 shares of our common stock valued at $4.8125 per share (which was
the market value of the stock at the date the acquisition was announced less a
discount for the restrictive nature of the stock); and three annual deferred
payments of $930, two of which were paid October 1, 1999 and 2000. As noted
above in Footnote No. 2, Liquidity and Management Plans, the Company did not
make the required minimum payment which was due on October 1, 2001. The Company
has entered into agreements with the former owners of Texcel pursuant to which
our payment obligations have been deferred subject to the Company timely funding
the installment obligations payable to them. At this time, the Company is in
compliance with the terms of such agreements with the former owners of Texcel.
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. The contingent portion of the deferred payments, as defined in the
purchase agreement for 1999, 2000 and 2001 were $250, $246, and $297,
respectively, and were recorded as additions to goodwill.
Mountain, Ltd.:
On August 6, 1999, we completed the acquisition of all of the outstanding
stock of Mountain Ltd. ("Mountain"). The purchase price consisted of
approximately $2,430 in cash; 75 shares of our common stock, valued at $3.705
per share (which was the market value of the stock at the date the acquisition
was announced less a discount for the restrictive nature of the stock); and
three deferred payments of approximately $1,178 each, the first of which was
paid September 30, 2000. The remaining payments are due October 1, 2001 and
2002, respectively. As noted above in Footnote No. 2, Liquidity and Management
Plans, the Company did not make the required minimum payment on October 1, 2001.
The Company has entered into agreements with the former owners of Mountain
pursuant to which our payment obligations have been deferred subject to the
Company timely funding the installment obligations payable to them. At this
time, the Company is in compliance with the terms of such agreements with the
former owners of Mountain.
Mountain is based in the Portland, Maine area and is engaged in contract
placements of technical and professional specialists, primarily in the
telecommunications industry. The Mountain acquisition was accounted for under
the purchase method. The results of Mountain are included in the statement of
operations beginning August 6, 1999. The contingent deferred payments
(approximately $589 each) are recorded as goodwill when earned. The contingent
portion of the deferred payments for fiscal 2001 and 2000 of approximately $589,
each, were earned and were recorded as additional goodwill.
During 2000, we issued 15 shares of our Common Stock at $2.50 per share as
additional acquisition cost related to the Mountain acquisition.
Datatek Corporation:
In March 2000, we completed the acquisition of substantially all of the
assets of Datatek Corporation ("Datatek"). The purchase price consisted of
$3,000 in cash, which was paid at closing; 75 shares of our common stock valued
at $2.50 per share (which was the market value of the stock at the date the
acquisition was announced less a discount for the restrictive nature of the
stock); and four installment payments, payable on January 1 of each of the years
2001 through 2004, in the anticipated amount of $171 each. As noted above in
Footnote No. 2, "Liquidity and Management Plans," the Company did not make the
required minimum payment which was due on January 1, 2002. The Company has
entered into agreements with the former owners of Datatek pursuant to which our
payment obligations have been deferred subject to the Company timely funding the
installment obligations payable to them.
In addition, contingent payments will be payable on April 15 of each of the
years 2001 through 2005, in an amount equal to twenty-five percent (25%) of the
increased profits, as defined, of the business acquired from Datatek.
We incurred acquisition costs totaling $320 in connection with the
acquisition, including the issuance of 12 shares of our common stock at $2.50
per share.
The Datatek acquisition was accounted for under the purchase method. The
results of Datatek are included in the statement of operations beginning March
6, 2000. The contingent payments, if any, will be recorded as goodwill when
paid.
30
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
8. 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 1,300 shares of our 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 2001,
2000 and 1999 vest in varying amounts over periods ranging from three to five
years.
Effective December 9, 1998, a non-employee directors' option plan was
approved. During the year ended December 31, 1999 our Company's three
non-employee directors were granted options to purchase 15 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 options will be granted at the then market value of the
common stock and will vest quarterly. The options granted on January 1, 2001
were granted at $2.875 per share. In connection with the implementation of this
plan, all non-employee directors forfeited all of their existing options which
had not vested as of December 31, 1998.
Following is a summary of our stock option activity as of and for the years
ended December 31, 2001, 2000 and 1999:
Weighted Number of
Average Shares of
Exercise Underlying Range of
Price Options Exercise Prices
--------- ---------- ---------------
Outstanding at December 31, 1998 6.30 652 2.50 to 12.75
Exercisable at December 31, 1998 5.93 214 2.50 to 12.75
Granted 4.58 48 3.00 to 5.88
Exercised 2.50 (72) 2.50 to 2.50
Forfeited 8.57 (79) 2.50 to 12.75
Outstanding at December 31, 1999 6.33 549 3.00 to 12.75
Exercisable at December 31, 1999 6.01 276 3.00 to 12.75
Granted 2.88 74 2.88 to 2.88
Exercised - - -
Forfeited 5.30 (40) 3.00 to 5.88
Outstanding at December 31, 2000 5.98 583 2.88 to 12.75
Exercisable at December 31, 2000 6.23 491 2.88 to 12.75
Granted 1.80 671 0.86 to 3.40
Exercised - - -
Forfeited 5.13 (11) 5.13 to 5.13
Outstanding at December 31, 2001 3.78 1,243 0.86 to 12.75
Exercisable at December 31, 2001 5.54 669 1.60 to 12.75
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options outstanding Options exercisable
------------------------------------------------- -----------------------------
Weighted Avg. Weighted Weighted
Number Remaining Avg. Exercise Number Avg. Exercise
Range of Exercise Prices Outstanding Contr. Life in Years Price Outstanding Price
- ------------------------ ----------- -------------------- ------------- ----------- -------------
$ 0.86 to $ 5.88 1,141 6.5 $3.00 567 $4.30
$10.00 to $12.75 102 1.4 $12.42 102 $12.42
--- ---
$ 0.86 to $12.75 1,243 6.4 $3.78 669 $5.54
===== ===
31
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
8. Stock Based Compensation (continued)
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 our stock based compensation plans been determined
consistent with SFAS 123, our net income (loss) would approximate the amounts
below:
2001 2000 1999
-------------------------- --------------------------- --------------------------
As Reported Pro forma As Reported Pro forma As Reported Pro forma
----------- --------- ----------- --------- ----------- --------
SFAS 123 compensation cost $ - $ 277 $ - $ 365 $ - $317
APB 25 compensation cost
Net income (loss) (3,978) (4,255) 1,712 1,348 63 (255)
Basic earnings per share:
Income (loss) from continuing
operations $ (1.41) $ (1.51) $ 0.64 $ 0.51 $ 0.49 $ 0.38
Loss from discontinued
operations - - (0.03) (0.03) (0.47) (0.47)
Net income (loss) (1.41) (1.51) 0.61 0.48 0.02 (0.09)
Diluted earnings per share:
Income (loss) from continuing
operations $ (1.41) $ (1.51) $ 0.64 $ 0.51 $ 0.49 $ 0.38
Loss from discontinued
operations - - (0.03) (0.03) (0.47) (0.47)
Net income (loss) (1.41) (1.51) 0.61 0.48 0.02 (0.09)
The effects of applying SFAS 123 as disclosed above are not indicative of
future amounts.
The fair value of each stock option granted in 2001, 2000 and 1999 is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
2001 2000 1999
---- ---- ----
Expected term 4.0 years 4.0 years 5.0 years
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 60.26% 57.28% 55.32%
Risk-free interest rate 5.10% 6.30% 5.33%
The weighted-average grant date fair value of options granted during the
years ended December 31, 2001, 2000 and 1999 was $0.85, $1.52 and $2.53,
respectively.
We granted a total of 82.59 stock warrants with an exercise price of $13.50
to an investment banker for service rendered in connection with our public
offering. These warrants are outstanding and exercisable as of December 31,
2001. The fair value of these stock warrants granted in 1997 was estimated on
the date of grant to be approximately $161 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%.
In November 2000, we entered into a contract for consulting and investor
relations. As part of the consideration for these services, we granted 15 stock
warrants with an exercise price of $4.00 per share. These warrants are
outstanding and exercisable as of December 31, 2001. The fair value of these
warrants was estimated on the date of grant to be $21 using the Black-Scholes
option-pricing model with the following assumptions: an expected term of 2
years; an expected dividend yield of 0.00%; an expected stock price volatility
of 57.28%; and a risk-free interest rate of 6.30%.
32
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
8. Stock Based Compensation (continued)
Effective as of October 2001, we entered into agreements with the
former owners of Mountain and Texcel in connection with restructuring the
repayment terms of the debt obligations payable by the Company to such persons.
In connection with such agreements, we have agreed to issue warrants to
purchase, for $1.09 per share, an aggregate of 117.8 and 86.68 shares of our
Company's Common Stock to the former owners of Mountain and Texcel,
respectively. The fair value of these warrants was estimated on the date of
grant to be $99 using the Black-Scholes option-pricing model with the following
assumptions: an expected term of 4 years; an expected dividend yield of 0.00%;
an expected stock price volatility of 60.26%; and a risk-free interest rate of
5.10%.
In November 2001, we entered into an agreement with Roth Capital
Partners, LLC, , pursuant to which Roth Capital Partners, LLC, has committed to
provide certain investment banking services for the benefit of the Company. As
part of the consideration for these services, we have agreed to issue warrants
to purchase 76 shares of the Company's Common Stock with an exercise price of
$1.03 per share and an expected expiration date of November 15, 2006. The fair
value of these warrants was estimated on the date of grant to be $53 using the
Black-Scholes option-pricing model with the following assumptions: an expected
term of 4 years; an expected dividend yield of 0.00%; an expected stock price
volatility of 60.26%; and a risk-free interest rate of 5.10%.
9. Share Repurchase Program
In 2001, 2000 and 1999, pursuant to share repurchase programs
authorized by the Board of Directors, as a result of market conditions, we
reacquired approximately 7, 29 and 103 shares, respectively at an aggregate cost
of approximately $25, $83 and $211, respectively. As of March 23, 2002, there
were approximately 144 additional shares authorized for repurchase.
10. 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,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Tax provision (benefit) at statutory rate for continuing
operations $(1,649) $ 1,044 $ 778
Loss from discontinued operations (54) (816)
Other 5 (5) 4
State income taxes, net of federal income tax benefits - 151 73
Increase in valuation allowance for deferred taxes 750 - -
------- ------- -----
$ (894) $ 1,136 $ 39
======= ======= =====
The allocation of income taxes (benefit) is:
Continuing operations $ (894) $ 1,189 $ 855
Discontinued operations - (53) (816)
------- ------- -----
$ (894) $ 1,136 $ 39
======= ======= =====
Current, continuing operations $(1,356) $ 977 $ 751
Deferred, continuing operations 462 212 104
------- ------- -----
$ (894) $ 1,189 $ 855
======= ======= =====
33
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
10. Federal Income Taxes (continued)
Temporary differences, which give rise to deferred tax assets and
liabilities, at December 31, 2001 and 2000, are as follows:
2001 2000
--------------------------------- ---------------------------------
Deferred Tax Deferred Tax
------------ ------------
Deferred Tax Asset Liabilities Deferred Tax Asset Liabilities
------------------ ----------- ------------------ -----------
Current:
Net operating loss carryforward $ 882 $ - $149 $ -
Reserves and accruals 289 - 704 -
------- ----- ---- -----
Subtotal-current 1,171 - 853 -
Non - current:
Other basis differences principally related to
property and equipment and intangibles - 432 - 409
Reserves and accruals 11 - 18 -
------- ----- ---- -----
Subtotal non-current 11 18 409
------- ----- ---- -----
Valuation allowance (1,182) (432)
======= =====
Total $ - $ - $871 $ 409
======= ===== ==== ======
Net current $853
====
Net non-current $ 391
======
Federal $765 $ 342
State 88 49
---- ------
Net current $853
====
Net non-current $ 391
======
We have a federal net operating loss carryforward of approximately
$1,157 as of December 31, 2001, which, if unused, expires in 2021. We have a
various state net operating loss carryforwards totaling approximately $5,825 as
of December 31, 2001, which, if unused, expire in varying amounts over the next
20 years.
As of December 31, 2001, because of the factors discussed in Footnote
No. 2, "Liquidity and Management Plans," we recorded a $750 valuation allowance
against the entire amount of the net deferred tax benefit in accordance with the
provisions of Statement of Financial Accounting Standards Board No. 109,
"Accounting for Income Taxes."
11. Concentration of Credit Risk
The majority of our revenue is generated from staffing services
provided to the following industries; Telecommunications (primarily regional
Bell operating companies, local exchange carriers, competitive local exchange
carriers and wireless communications), High Technology, Manufacturing, State
Governmental Agencies, Financial Services and Health Care. Of these,
Telecommunications represents the largest, accounting for approximately 45% of
all 2001 revenue earned.
We maintain cash on deposit in interest bearing accounts, which, at
times, exceed federally insured limits. We have not experienced any losses on
such accounts and believe we are not exposed to any significant credit risk on
cash and cash equivalents.
Net service revenues from one customer represented approximately 12%,
13% and 12% of total staffing services revenues in 2001, 2000 and 1999,
respectively. Accounts receivable from this customer and one other represented
approximately 17% and 11%, respectively, of total accounts receivable at
December 31, 2001.
12. Related Party Transactions
On April 21, 2002, we entered into an agreement with our Chairman
and Chief Executive Officer, J. Michael Moore, ("Mr. Moore") and with DCRI L.P.
No. 2, Inc., a Texas corporation ("LP No. 2") which is controlled by Mr. Moore,
pursuant to which Moore and LP No. 2 both executed promissory notes to the
Company in the amount of $105 and $289, respectively. Such notes relate to
advances previously made by the Company in 2001, 2000 and 1999 in the amounts if
$0, $345, and $72, respectively. These notes bear interest at prime plus 0.125%
The majority of these advances amounts were related to litigation associated
with a lawsuit with Ditto Properties Company. The Moore note is secured by a
first lien on twenty five thousand (25) shares of our common stock and shares of
34
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
12. Related Party Transactions (continued)
common stock in a private corporate in which Mr. Moore is a large shareholder
and a director. The LP No. 2 note is secured by the personal guarantee of Mr.
Moore and involves the commitment of LP No. 2 to deliver to the Company a lien
on four hundred forty six thousand (446) shares of our common stock at such time
as such shares have become unencumbered by other liens. At this time, these
shares are encumbered by secured liens of two banks which have made loans to LP
No. 2 which Mr. Moore has also personally guaranteed. Prior to the Company
entering into the April 21, 2002 agreement, the Company had a second lien on
such shares and Mr. Moore had an agreement with the Company whereby he would
repay us the amount of the advances made to LP No. 2 and interest. The aggregate
principal balance of the bank loans to LP No. 2 exceeded the market value of the
shares of stock pledged to secure such loans. In addition, as discussed more
fully in footnote No. 2, "Liquidity and Management Plans," the shares of stock
pledge by Mr. Moore against the Moore note are also pledged by Mr. Moore for a
note purchase agreement with Compass Bank. We believe, based upon financial
information provided by Mr. Moore, that Mr. Moore has the available resources to
satisfy the obligations to us.
As of April 21, 2002, Mr. Moore and LP No. 2 were current with the
repayment provisions of their agreements with us related to the loans made to
Mr. Moore and LP No. 2. In addition, pursuant to the aforesaid agreements, Mr.
Moore and LP No. 2 are to pay the Company interest quarterly and at least $50 in
principal each March 31 beginning in 2003. The $50 principal payment for 2001
was paid in March 2002.
In January 1999, we 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 we 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 and (ii) all instruments collateralizing repayment of
the Notes, including without limitation, a pledge agreement related to 168.5
shares of our 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 our Company an additional 50 shares (subsequently reduced to 25
shares) of the common stock to collateralize our Company under the terms of both
the Agreement and the Related Agreement, (ii) pay our Company for entering into
the Agreement by conveying to our Company 5 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 shares of common stock pursuant to
options previously granted to Mr. Moore by our Company. See Footnote No. 2,
"Liquidity and Management Plans" for the current status of these Notes. 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), of 72.5 shares of common stock pursuant
to exercising stock options previously granted to him by our Company. The
aforementioned transactions have been approved by both the Board of Directors
and the Audit Committee of the Board of Directors of our Company. In connection
with the exercise of the options, we loaned Mr. Moore approximately $23 to cover
his income tax liability associated with this transaction. Such amounts are
classified as receivable from related parties and have been deducted from
stockholders' equity.
Pursuant Technologies Inc., previously More-O Corporation ("Pursuant"),
of which Mr. Moore and Samuel E. Hunter, a director of our Company, are minority
shareholders and directors, paid us $0, $20 and $15 for the sub-lease of office
space in 2001, 2000 and 1999, respectively. In addition, in 2001, we paid to
Pursuant, $92, for web site development and Pursuant front office software user
license fees.
On July 17, 1998, M. Ted Dillard ("Mr. Dillard"), our Company's
President until March 14, 2001, exercised options to purchase 84 shares of our
Company's common stock for an aggregate purchase price of $257. The purchase
price was paid with 7.5 shares (acquired in 1997) of our common stock valued at
$90 (based upon the closing price of our common stock on July 16, 1998), and the
remainder was paid in cash. In connection with this transaction we loaned Mr.
Dillard approximately $149, which was subsequently reduced to approximately $90
(the "Tax Loan") to cover his income tax liability associated with the
transaction. The Tax Loan bears interest at the applicable federal rate, the
interest is payable quarterly, is collateralized by 20,000 shares of our common
stock and is due July 17, 2003. In addition, on October 12, 1998, our Board of
Directors approved a loan to Mr. Dillard of approximately $125 (the "Company
Loan"). The Company Loan bears interest at 8%, which interest is payable
quarterly, is collateralized by 43.4 shares of our common stock and is due July
17, 2003. The Tax Loan and the Company loan are classified as receivables from
related party in our consolidated balance sheet and have been deducted from
stockholders' equity.
Ms. Deborah Farrington, a non-employee director of our Company was paid
a monthly fee of $4 pursuant to a consultant agreement with our Company.
Pursuant to this agreement, Ms. Farrington is compensated for identifying
potential acquisition candidates on behalf of our Company.
Interest income from related parties amounted to approximately $48,
$18, and $16 in fiscal 2001, 2000 and 1999, respectively.
35
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
13. Employee Benefit Plan
In 1993, we implemented a 401(K) plan for the benefit of its employees.
Company contributions to the plan in 2001, 2000 and 1999 totaled approximately
$113, $119, and $119, respectively. Beginning in January 1998 our matching
contributions are used to purchase our common stock. In March 2002, the Company
amended the plan to permit participants in the plan to have the right, at any
time or times, to request that the plan sell all or any of the shares of DCRI
stock which have been allocated to such participant.
14. Commitments and Contingencies
Operating and Capital Leases
We rent office space under various operating leases. We also lease certain
furniture and equipment under capital leases. Certain of the operating leases
have escalating rent payments. We are liable for the future minimum lease
payments for the periods subsequent to December 31, 2001 as follows:
Year Operating Leases Capital Leases
- ---- ---------------- --------------
2002 $1,514 $ 99
2003 1,478 120
2004 923 -
2005 635 -
2006 608 -
There after 3,346 -
------ -----
Total $8,504 $ 219
====== =====
Rent expense was approximately $2,495, $2,368 and $2,267 for the years
ended December 31, 2001, 2000 and 1999, respectively.
In 1996, a lawsuit was filed by Ditto Properties Company ("DPC") against
DCRI L.P. No. 2 ("L.P. No. 2"), which is controlled by Mr. Moore. Mr. Moore and
the Company were also initially named as garnishees in the lawsuit (the "Ditto
Litigation") with respect to 899.2 shares (the " LP Shares") of common stock
(the "Common Stock") of the Company which were the subject matter of a series of
transactions in 1993 (collectively referred to herein as the "1993
Transactions") which ultimately resulted in the LP Shares being conveyed by DPC
to L.P. No. 2. Subsequent to the initial filing of the litigation by DPC, Mr.
Moore was added as a defendant in such proceedings, and F. Scott Otey ("Otey")
and Jeffery Loadman ("Loadman") intervened as parties to the litigation involved
(herein referred to as the "Ditto Litigation").
On April 12, 2001, DPC and Donald R. Ditto Sr. ("Ditto") filed an amended
petition in the Ditto Litigation and specifically named the Company as a
defendant in such lawsuit. The venue for the Ditto Litigation is the District
Court of Dallas County, Texas, 298th Judicial District (the "Court").
In the Ditto Litigation, DPC, Ditto, Otey and Loadman are seeking, among
other things, each of the following: (a) a rescission of the 1993 Transactions
thereby entitling DPC to title, ownership and possession of the LP Shares, (b)
the imposition of a constructive trust upon the LP Shares for the benefit of
DPC, (c) a declaratory judgement declaring, among other things, (i) that DPC is
entitled to title, ownership and possession in and to the LP Shares and to 0.25
shares of common stock of L.P. No. 2 (the "Collateral Shares"), and (ii) that
any transfers of the LP Shares by L.P. No. 2 was improper and void ab initio,
(d) a judicial foreclosure order transferring ownership of the LP Shares and the
Collateral Shares to DPC, (e) garnishment of the LP Shares and the Collateral
Shares, (f) a temporary restraining order and permanent injunction related to
the LP Shares and the Collateral Shares, (g) an accounting with respect to the
LP Shares, and (h) damages as below summarized based upon numerous claims
including breach of contract, tortious interference with contractual relations,
breach of fiduciary duty, statutory fraud, common law fraud and fraud in the
inducement. In connection with these claims, DPC, Ditto, Otey and Loadman
contend, among other things, that (i) the Company, Mr. Moore, L.P. No. 2,
U.S.F.G./DHRG L.P. No. 1, a partnership that previously owned the LP Shares and
that is a party to the Ditto Litigation (the "Partnership"), and others
committed acts constituting fraud upon DPC, Ditto, Otey and Loadman, in
connection with the LP Shares, the 1993 Transactions, and in other respects, and
(ii) DPC, Ditto, Otey and Loadman are entitled to recover from the Company, Mr.
Moore, L.P. No. 2, and the Partnership, jointly and severally, compensatory
damages in the amount of at least $6.5 million punitive and exemplary damages
totaling at least $26.1 million interest on the amount of damages incurred,
legal fees and attorney fees. At this time, the trial date for the Ditto
Litigation is now scheduled for August 19, 2002.
36
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
14. Commitments and Contingencies (continued)
In connection with the Ditto Litigation, the following actions have
occurred: (a) on October 24, 1996, certain of the parties to the Ditto
Litigation entered into an Agreed Temporary Order pursuant to which L.P. No. 2
agreed to deliver to a Special Master, to be designated pursuant to the Agreed
Temporary Order, the LP Shares or $1.5 million in cash (the "Cash Escrow
Amount"), (b) in October, 1996, the Company, L.P. No. 2 and Mr. Moore filed a
lawsuit against DPC and Ditto seeking damages and reimbursement of expenses
alleging, among other things, that DPC and Ditto interfered with Company
transactions and proposed financing resulting in lost opportunities, lost
profits and significant damages, (c) Ditto has previously filed a third lawsuit
against Moore and one of the entities controlled by Moore in connection with
certain oil and gas activities involving the parties to the litigation, (d)
ultimately all of the foregoing lawsuits were combined into one proceeding in
the Court), (e) on June 25, 1997, the Court granted a summary judgment to L.P.
No. 2 with respect to the claim that DPC is entitled to a rescission of the 1993
Transactions, (f) in July, 1997 L.P. No. 2 delivered to the Special Master the
Cash Escrow Amount, (g) subsequent to June, 1997, certain of the LP Shares have
been sold by or for the benefit of L.P. No. 2 (h) all of the LP Shares owned by
L.P. No. 2 have been pledged to secure indebtedness obligations of L.P. No. 2,
including indebtedness owed to the Company, and (i) pursuant to agreements
involving L.P. No. 2 and DPC, the Cash Escrow Amount has been reduced from the
original amount of $1.5 million to approximately $0.6 million.
In the past, the Company has incurred legal fees on its own behalf and has
funded certain of the legal fees and expenses of Mr. Moore and/or L.P. No. 2 in
connection with the Ditto Litigation. As the result of the Company being named
as a defendant in such case, in 2001 the Company, Mr. Moore and L.P. No. 2
decided that the Company should have separate counsel from Mr. Moore and L.P.
No. 2. The Board of Directors of the Company (a) approved the payment to Mr.
Moore of up to $0.25 million to fund legal fees and expenses anticipated to be
incurred by Mr. Moore, L.P. No. 2 and No. 1 in the Ditto Litigation, (b)
authorized the Company to enter into an Indemnification Agreement with each of
the officers and directors of the Company pursuant to which these individuals
will be indemnified in connection with matters related to the Ditto Litigation;
the form of these Indemnification Agreements, including the Moore
Indemnification Agreement is filed as Exhibit 10.2 to our Form 10Q for the first
quarter ended March 31, 2001 (such exhibit is hereby incorporated by reference),
and (c) approved an amendment to the Bylaws of the Company to require the
Company to indemnify its present and former officers and directors to the full
extent permitted by the laws of the state of Texas, in connection with any
litigation in which such persons became a party subsequent to March 29, 2001 and
in which such persons are involved in connection with performing their duties as
an officer or director of the Company. Through March 31, 2002, the Company has
expended approximately $0.2 million (in connection with the aforesaid $0.25
million to be paid to or for the benefit of Mr. Moore) on behalf of Mr. Moore in
the defense of the Ditto matter. Since engaging its own counsel in connection
with the Ditto Litigation, the Company has paid for the legal fees and expenses
of our counsel. No amount of loss reserves has been established by the Company
in connection with the Ditto Litigation because management of the Company does
not believe that the amount of any damage claims against the Company in
connection with the Ditto Litigation should adversely impact our financial
position or results of operation.
We are also involved in certain other litigation and disputes not noted.
With respect to these matters, management believes the claims against us are
without merit and has concluded that the ultimate resolution of such will not
have a material effect on our consolidated financial position or results of
operations.
15. Non-Cash Investing and Financing Activities
In connection with the Mountain acquisition in 1999, we incurred deferred
payment obligations of $1,770, the present value of which was approximately
$1,481, and issued 75 shares of common stock valued at $278.
In connection with the Datatek acquisition in 2000, we incurred deferred
payment obligations of $683, the present value of which was approximately $570
and issued 75 shares of common stock valued at $188.
In 2000, we incurred capital lease obligations totaling approximately $355
to finance the purchase of computer equipment.
Additionally, in 2000, we issued 26.662 shares of common stock valued at
$67 as acquisition costs related to the Mountain and Datatek acquisitions
37
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Per Share Data)
16. Discontinued Operations
In December 1999, we sold all of the 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 our employees, and clients' employees. The
sales price was in the form of a $200 promissory note, payable over a ten year
time period, and a royalty of four percent from the sale of certain GAPS
proprietary software. We recognized a loss on disposal of $394 (before income
tax benefits of $152), including an allowance for the full amount of the
promissory note, on the sale of GAPS in December 1999.
On December 31, 1999, our Board of Directors approved a plan whereby we
would place our remaining training business assets (Train) for sale. Train has
historically provided information technology training to our clients' employees
and our applicant pool on a fee basis. In connection with the plan to dispose of
Train, we recorded, in 1999, a loss of $589 (before income tax benefits of
$226), which included a provision for estimated operating losses through the
date of disposal. In 2000, we recorded an additional loss of $135 (before income
tax benefits of $54) for additional estimated losses. The loss before income
taxes for the year ended December 31, 2000 of approximately $287 was recorded
against these estimated loss reserves.
Effective February 1, 2001, we sold the operations of Train to a company
owned by the former manager of Train. The sale price is in the form of a royalty
of four and one-half percent of all training services performed by such company
for three years following the close. No gain or loss was recognized on the sale.
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:
2000 1999
---- ----
Net service revenue $ 1,869 $ 1,499
Cost of sales 1,571 1,295
------- -------
Gross margin 298 204
Selling, general and administrative expenses 559 1,328
Other income and (expenses) (26) (14)
------- -------
Loss before income taxes (287) (1,138)
Income tax benefit 106 438
------- -------
Net loss $ (181) $ (700)
======= =======
Accounts receivable and other $ 319 $ 260
======= =======
Accounts payable and accrued expenses $ 140 $ 241
======= =======
17. Restructuring and Severance Expenses
On March 14, 2001, upon the resignation of our former President, Mr. Ted
Dillard, the Company and Mr. Dillard entered into a Severance Agreement and
Mutual Release ("Severance Agreement"). The Severance Agreement, among other
things, calls for: (a) severance to Mr. Dillard of $210 payable in twenty-four
equal semi-monthly installments beginning March 15, 2001; (b) accelerated
vesting of options to purchase 5,556 shares of our Common Stock that were due to
vest on March 31, 2001; (c) extension of the time that Mr. Dillard may exercise
any of his vested stock options until December 31, 2002 (subject to the
provisions of the plans under which such options were granted); and (d)
extension of the maturity date of a loan by the Company from October 12, 2001
until July 17, 2003. The total cost of the Severance Agreement (including legal
and professional fees and a $10 consulting fee paid to Samuel E. Hunter, a
director of the Company) is approximately $339 and was expensed in the first
quarter of 2001. In addition, through March 31, 2001, we incurred approximately
$100 in severance expenses related to a reduction in our workforce as a result
of the downturn in the economy.
In addition in the fourth quarter of 2001, we recorded an accrual for an
additional $50 in severance expenses related to another reduction in our
workforce and expensed approximately $213 related to real estate leases in space
we no longer occupy. We also incurred approximately $89 (including $53 for the
value of warrants issued to Roth Capital) in legal and professional fees related
to the evaluation of financing and restructuring strategies.
The aggregate effect of these significant fourth quarter adjustments along
with the provision for an allowance for deferred income taxes was approximately
$1,100.
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
Our report on the consolidated financial statements of Diversified
Corporate Resources, Inc. and subsidiaries as of December 31, 2001 and for the
year then ended, which contains an explanatory paragraph on the Company's
ability to continue as a going concern, is included on page 19. In connection
with our audit of such consolidated financial statements, we have also audited
the accompanying financial statement schedule for the year ended December 31,
2001 on page 41.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 22, 2002
39
REPORT OF INDEPENDENT ACCOUNTANTS
Report of Independent Accountants on the Financial Statement Schedule
To the Board of Directors
of Diversified Corporate Resources, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 30, 2001 appearing in the 2001 Annual Report on Form 10-K of
Diversified Corporate Resources, Inc. also included an audit of the financial
statement schedule listed in the accompany 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 30, 2001
40
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
Schedule II: Valuation and Qualifying Accounts for the Three Years Ended
December 31, 2001, 2000 and 1999
Balance Provisions Provisions
Balance at Acquired Charged Charged to Balance at
Beginning Through to Costs & Revenues End of
Of Period Acquisitions Expenses (1) Deductions Period
--------- ------------ -------- -------- ---------- -------
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
For the Year Ended December 31, 2000:
Trade accounts receivable allowances $1,005,000 $ 8,000 $ 567,000 $ 3,930,000 $ 4,192,000 $1,318,000
Reserve for estimated losses from
discontinued operations $ 450,000 $ - $ 135,000 $ - $ 270,000 $ 315,000
For the Year Ended December 31, 2001:
Trade accounts receivable allowances $1,318,000 $ - $ 138,000 $ 1,829,000 $ 2,945,000 $ 340,000
Reserve for estimated losses from
discontinued operations $ 315,000 $ - $ - $ - $ 315,000 $ -
Valuation allowance for net deferred tax asset $ - $ - $ 750,000 $ - $ - $ 750,000
(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.
41
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Asset Purchase Agreement, dated as of October 7, 1998, between our
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 our Form 8-K filed on October 21, 1998.)
2.2 Purchase Agreement, by and between our 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 our Form 10Q filed on August 16, 1999)
2.3 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 our
Form 8-K filed on March 7, 2000)
3.1 Articles of Incorporation of our Company as amended (Incorporated by
reference from Exhibit 3(a) to our Registration Statement on Form S-18
(Reg. No. 33-760 FW))
3.2 Bylaws of our Company (Incorporated by reference from Exhibit 3(b) to
our Registration Statement on Form S-18 (Reg. No. 33-760 FW))
3.3 Amendment No. 1 to Bylaws of our Company (Incorporated by reference to
Exhibit 3.4 of our Form 10Q filed on May 15, 1998)
3.4 Amendment No. 2 to Bylaws of our Company (Incorporated by reference to
Exhibit 3.1 of our Form 10Q filed on November 16, 1998)
3.5 Amendment No. 3 to Bylaws of our Company (Incorporated by reference to
Exhibit 3.4 of our Form 10K filed on March 30, 1999)
3.6 Amendment No. 4 to Bylaws of our Company (Incorporated by reference to
Exhibit 3.6 of our Form 10K filed on March 30, 2001)
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 our Form 8-K filed on May 8,
1998)
4.2 Rights Agreement, dated as of May 1, 1998, between our 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 our Form 8-K filed on May 8, 1998)
4.3 Form of Common Stock Warrant (Incorporated by reference from
Exhibit 1.2 to our Amendment No. 1 to our Registration Statement on
Form S-1 (Reg. No. 333-31825))
4.4 Amended and Restated 1996 Nonqualified Stock Option Plan of our
Company, effective as of December 28, 1996 (Incorporated by reference
from Exhibit 10(z)(21) to our Form 10-K for the year ended
December 31, 1996)
4.5 Amendment No. 1 to our Amended and Restated 1996 Nonqualified Stock
Option Plan (Incorporated by reference to Exhibit 10.5 of our 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 our 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 our Form
10K filed on March 30, 1999)+
4.8 First Amendment to Rights Agreement (Incorporated by reference from
Exhibit 10.5 to our Form 10Q filed on August 16, 1999)
10.1 Stock Option Agreement between our Company and J. Michael Moore,
executed May 15, 1997 (Incorporated by reference from Exhibit 4.10 to
our Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.2 Stock Option Agreement between our Company and M. Ted Dillard,
executed May 15, 1997 (Incorporated by reference from Exhibit 4.10 to
our Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.3 First Amendment to Amended and Restated Stock Option Agreement between
our Company and J. Michael Moore effective September 30, 1998
(Incorporated by reference to Exhibit 10.4 of our Form 10K filed on
March 30, 1999)+
10.4 First Amendment to Amended and Restated Stock Option Agreement between
our Company and M. Ted Dillard effective September 30, 1998
(Incorporated by reference to Exhibit 10.5 of our Form 10K filed on
March 30, 1999)+
10.5 Stock Option Agreement between our Company and J. Michael Moore
effective as of April 29, 1998 (Incorporated by reference to
Exhibit 10.6 of our Form 10K filed on March 30, 1999)+
10.6 Stock Option Agreement between our Company and M. Ted Dillard
effective as of April 29, 1998 (Incorporated by reference to Exhibit
10.7 of our Form 10K filed on March 30, 1999)+
42
10.7 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 our Form 10K filed on March 30, 1999)++
10.8 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 our Form 10K filed on March 30, 1999)+
10.9 Stock Option Agreement between our Company and Samuel E. Hunter,
executed May 15, 1997 (Incorporated by reference from Exhibit 4.10 to
our Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.10 First Amendment to Stock Option Agreement between our Company and
Samuel E. Hunter, effective March 20, 1998 (Incorporated by reference
to Exhibit 10.13 of our Form 10Q filed on May 15, 1998)+
10.11 Stock Option Agreement between our Company and Deborah A. Farrington,
effective November 13, 1997 (Incorporated by reference to
Exhibit 10.12 of our Form 10Q filed on May 15, 1998)+
10.12 Stock Option Agreement (1998) Re: Hunter between our Company and
Samuel E. Hunter effective as of April 29, 1998 (Incorporated by
reference to Exhibit 10.16 of our Form 10K filed on March 30, 1999)+
10.13 Stock Option Agreement (1998) Re: Farrington between our Company and
Deborah A. Farrington effective as of April 29, 1998 (Incorporated by
reference to Exhibit 10.17 of our Form 10K filed on March 30, 1999)+
10.14 Stock Option Agreement (1998) Re: Allen between our Company and
A. Clinton Allen effective as of April 29, 1998 (Incorporated by
reference to Exhibit 10.18 of our Form 10K filed on March 30, 1999)+
10.15 Partial Option Termination Agreement Re: Hunter between our Company
and Samuel E. Hunter effective December 9, 1998 (Incorporated by
reference to Exhibit 10.19 of our Form 10K filed on March 30, 1999)+
10.16 Partial Option Termination Agreement Re: Farrington between our
Company and Deborah A. Farrington effective December 9, 1998
(Incorporated by reference to Exhibit 10.20 of our Form 10K filed on
March 30, 1999)+
10.17 Partial Option Termination Agreement Re: Allen between our Company and
A. Clinton Allen effective December 9, 1998 (Incorporated by reference
to Exhibit 10.21 of our Form 10K filed on March 30, 1999)+
10.18 Directors Option Agreement Re: Hunter between our Company and Samuel
E. Hunter effective as of December 9, 1998 (Incorporated by reference
to Exhibit 10.22 of our Form 10K filed on March 30, 1999)+
10.19 Directors Option Agreement Re: Farrington between our Company and
Deborah A. Farrington effective as of December 9, 1998 (Incorporated
by reference to Exhibit 10.23 of our Form 10K filed on March 30,
1999)+
10.20 Directors Option Agreement Re: Allen between our Company and
A. Clinton Allen effective as of December 9, 1998 (Incorporated by
reference to Exhibit 10.24 of our Form 10K filed on March 30, 1999)+
10.21 Form of Stock Option granted to certain employees of our Company,
effective November 13, 1997 (Incorporated by reference to
Exhibit 10.10 of our Form 10Q filed on May 15, 1998)+
10.22 Form of Stock Option Agreements, dated as of October 8, 1998, between
our Company and certain non-shareholder employees of DCRI Acquisition
Corporation (Incorporated by reference to Exhibit 10.2 of our Form 8-K
filed on October 21, 1998)+
10.23 Indemnification Agreement (Incorporated by reference to Exhibit 10.2
of our Form 10Q filed on May 15, 2001)
10.24 Employment Agreement, effective July 9, 2001, between the Company and
James E. Filarski (Incorporated by reference to Exhibit 10.2 of our
Form 10Q filed on August 17, 2001)+
10.25 Amended and Restated Employment Agreement dated as of November 1, 2001
between the Company and J. Michael Moore (Incorporated by reference to
Exhibit 10.1 of our Form 10Q filed on November 14, 2001)+
10.26 Amended and Restated Employment Agreement dated as of November 1, 2001
between the Company and Anthony G. Schmeck (Incorporated by reference
to Exhibit 10.2 of our Form 10Q filed on November 14, 2001)+
10.27 Stock Option Agreement between the Company and J. Michael Moore, dated
April 26, 2001 *+
10.28 Stock Option Agreement between the Company and Anthony G. Schmeck,
dated April 26, 2001 *+
10.29 Stock Option Agreement between the Company and J. Michael Moore, dated
December 31, 2001 *+
10.30 Stock Option Agreement between the Company and Anthony G. Schmeck,
dated December 31, 2001 *+
10.31 Stock Option Agreement between the Company and James E. Filarski,
dated December 31, 2001 *+
10.32 Note Receivable dated June 22, 1998, between our Company and J.
Michael Moore (Incorporated by reference to Exhibit 10.2 of our
Form 10Q filed on August 13, 1998)
10.33 Note Receivable effective July 17, 1998, between our Company and
M. Ted Dillard (Incorporated by reference to Exhibit 10.3 of our Form
10-Q filed on November 16, 1998)
10.34 Note Receivable effective July 17, 1998, between our Company and
M. Ted Dillard (Incorporated by reference to Exhibit 10.4 of our Form
10-Q filed on November 16, 1998)
10.35 Security Agreement effective July 17, 1998, between our Company and
M. Ted Dillard (Incorporated by reference to Exhibit 10.5 of our Form
10-Q filed on November 16, 1998)
10.36 Security Agreement effective October 12, 1998, between our Company and
M. Ted Dillard (Incorporated by reference to Exhibit 10.6 of our
Form 10-Q filed on November 16, 1998)
10.37 Consulting Agreement effective May 12, 1998 between our Company and
Deborah A. Farrington (Incorporated by reference to exhibit 10.7 of
our Form 10-Q filed on November 16, 1998)
10.38 Note Purchase Agreement dated as of January 12, 1999 among our
Company, Compass Bank and DCRI LP No. 2 Inc. (Incorporated by
reference to Exhibit 10.1 of our Form 8-K filed on January 28, 1999)
10.39 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 our
Form 8-K filed on January 28, 1999)
43
10.40 Bank Transaction Agreement dated as of January 12, 1999 among our
Company, DCRI LP No. 2, Inc. and J. Michael Moore (Incorporated by
reference to Exhibit 10.3 of our Form 8-K filed on January 28, 1999)
10.41 Loan and Security Agreement, by and between Management Alliance
Corporation, Information Systems Consulting Corporation, Datatek
Consulting Group Corporation, Texcel Services Inc. and Mountain Ltd.
and General Electric Capital Corporation (Incorporated by reference
from Exhibit 10.1 to our Form 10Q filed on August 10, 2000).
10.42 Severance and Mutual Release, by and between our Company and M. Ted
Dillard (Incorporated by reference to Exhibit 10.1 of our Form 8-K
filed on March 27, 2001)+
10.43 Security Agreement effective September 18, 2000, between our Company
and J. Michael Moore (Incorporated by reference to Exhibit 10.43 of
our Form 10-K filed on March 30, 2001)
10.44 Amendment No. 1 to Security Agreement effective March 30, 2001,
between our Company, J. Michael Moore and DCRI L.P. No. 2, Inc.
(Incorporated by reference to Exhibit 10.44 of our Form 10-K filed on
March 30, 2001)
10.45 Agreement effective March 30, 2001 between our Company, J. Michael
Moore and DCRI L.P. No. 2, Inc. (Incorporated by reference to Exhibit
10.45 of our Form 10-K filed on March 30, 2001)
10.46 Stock Option Agreement between the Company and James E. Filarski,
dated August 9, 2001 *+
10.47 Amendment to Stock Option Agreement for Samuel E. Hunter dated
August 9, 2001 *+
10.48 Amendment to Stock Option Agreement for J. Michael Moore dated
August 9, 2001 *+
10.49 Directors Option Agreement (2000) between the Company and A. Clinton
Allen effective as of January 1, 2000 *+
10.50 Directors Option Agreement (2001) between the Company and A. Clinton
Allen effective as of January 1, 2001 *+
10.51 Directors Option Agreement (2000) between the Company and Deborah A.
Farrington effective as of January 1, 2000 *+
10.52 Directors Option Agreement (2001) between the Company and Deborah A.
Farrington effective as of January 1, 2001 *+
10.53 Directors Option Agreement (2000) between the Company and Samuel E.
Hunter effective as of January 1, 2000 *+
10.54 Directors Option Agreement (2001) between the Company and Samuel E.
Hunter effective as of January 1, 2001 *+
10.55 Office Lease Agreement *
10.56 Agreement between the Company, DCRI L.P. No. 2, Inc. and J. Michael
Moore effective as of April 21, 2002 *
21 List of Subsidiaries*
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of Weaver and Tidwell, LLP*
(* Filed herewith)
(+ Compensation plan, benefit plan or employment contract or arrangement)
44