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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(State or other jurisdiction of (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
Former name, former address and former fiscal year if
changed since last report:
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. [X] Yes [ ] No
Number of shares of common stock of the registrant outstanding on August 13,
2002 was 2,811,865
1
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
JUNE 30, DECEMBER 31,
2002 2001
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 191 $ 159
Trade accounts receivable, less allowance for doubtful accounts of approximately
$361 and $340, respectively........................................................ 6,761 7,281
Prepaid expenses and other current assets........................................... 373 308
Federal income taxes receivable..................................................... 942 1,513
-------------- ------------
Total current assets.............................................................. 8,267 9,261
Property and equipment, net............................................................ 2,030 2,531
Other assets:
Intangibles, net.................................................................... 10,780 10,780
Receivables from related parties.................................................... 373 418
Other............................................................................... 211 223
-------------- ------------
$ 21,661 $ 23,213
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses......................................... $ 4,533 $ 4,440
Obligations not liquidated because of outstanding checks............................ 805 852
Borrowings under revolving credit agreement......................................... 3,006 3,584
Current maturities of capital lease obligations..................................... 99 99
Current maturities of long-term debt................................................ 2,701 2,805
-------------- ------------
Total current liabilities......................................................... 11,144 11,780
Deferred lease rents................................................................... 312 28
Capital lease obligations, net of current maturities................................... 72 120
Long-term debt, net of current maturities.............................................. 317 304
-------------- ------------
Total liabilities................................................................. 11,845 12,232
-------------- ------------
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 shares issued......... 340 340
Additional paid-in capital.......................................................... 12,794 12,794
Retained earnings (deficit)......................................................... (1,431) (266)
Common stock held in treasury (586 shares), at cost................................. (1,649) (1,649)
Receivables from related parties.................................................... (238) (238)
-------------- ------------
Total stockholders' equity........................................................ 9,816 10,981
-------------- ------------
$ 21,661 $ 23,213
============== ============
See notes to consolidated financial statements.
2
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net service revenues:
Permanent placement ............................................... $ 3,262 $ 5,304 $ 6,148 $ 11,709
Contract placement and specialty services ......................... 10,095 14,512 19,943 28,038
-------- -------- -------- --------
13,357 19,816 26,091 39,747
Cost of services:
Direct cost of contract placement and specialty services .......... 8,255 11,459 16,328 22,217
-------- -------- -------- --------
Gross margin ........................................................ 5,102 8,357 9,763 17,530
Operating expenses:
Variable selling expenses ......................................... 2,440 4,292 4,838 9,213
General and administrative expenses ............................... 2,557 3,813 5,147 7,918
Severance expense ................................................. 53 - 53 439
Depreciation and amortization expense ............................. 285 481 571 964
-------- -------- -------- --------
5,335 8,586 10,609 18,534
Other income and (expense) items:
Interest expense, net ............................................. (285) (178) (532) (363)
Other net ......................................................... 7 2 7 2
-------- -------- -------- --------
(278) (176) (525) (361)
Loss before income taxes ............................................ (511) (405) (1,371) (1,365)
Income tax (benefit) ................................................ - (154) (206) (532)
-------- -------- -------- --------
Net loss ............................................................ $ (511) $ (251) $ (1,165) $ (833)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted earnings (loss) per share ........................ $ (0.18) $ (0.09) $ (0.41) $ (0.30)
======== ======== ======== ========
Weighted average common shares outstanding .......................... 2,812 2,812 2,812 2,814
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding ...................................... 2,812 2,812 2,812 2,814
======== ======== ======== ========
See notes to consolidated financial statements.
3
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
2002 2001
---------- ----------
Cash flow from operating activities:
Net loss ........................................................................ $ (1,165) $ (833)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization ............................................... 571 964
Provision for allowances .................................................... 21 (464)
Deferred income taxes ....................................................... - (395)
Accretion of interest on deferred payment obligations ....................... 34 87
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ......................................................... 499 1,848
Federal income taxes receivable ............................................. 571 -
Deferred lease rents ........................................................ 284 (6)
Prepaid expenses and other assets ........................................... (58) (183)
Trade accounts payable and accrued expenses ................................. 93 (1,427)
---------- ----------
Cash provided by (used in) operating activities ............................. 850 (409)
Cash flows from investing activities:
Capital expenditures ............................................................ (70) (255)
Deposits ........................................................................ - (16)
Business acquisition cost ....................................................... - (37)
Repayment from related parties .................................................. 50 1
---------- ----------
Cash (used in) investing activities ......................................... (20) (307)
Cash flows from financing activities:
Obligations not liquidated because of outstanding checks ........................ (47) 1,320
Advances on long-term line of credit borrowings ................................. 28,005 42,138
Repayments of long-term line of credit borrowings ............................... (28,583) (43,002)
Repurchase of treasury stock .................................................... - (25)
Principal payments under long-term debt obligations ............................. (125) (171)
Principal payments under capital lease obligations .............................. (48) (43)
---------- ----------
Cash (used in) provided by financing activities ................................. (798) 217
Change in cash and cash equivalents ................................................. 32 (499)
Cash and cash equivalents at beginning of year ...................................... 159 499
---------- ----------
Cash and cash equivalents at end of period .......................................... $ 191 $ -
========== ==========
Supplemental cash flow information:
Cash paid for interest .......................................................... $ 498 $ 284
========== ==========
Cash paid (refunded) for taxes .................................................. $ (777) $ 197
========== ==========
See notes to consolidated financial statements.
4
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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"). The financial information for the three and
six months ended June 30, 2002 and 2001, is unaudited but includes all
adjustments (consisting only of normal recurring accruals) which we consider
necessary for a fair presentation of the results for the periods. The financial
information should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2001, included in our Annual Report
on Form 10-K ("Form 10-K"). Operating results for the three and six months ended
June 30, 2002, are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2002.
All inter-company accounts and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior year balances to
conform to the current year presentation.
2. EARNINGS PER SHARE
Basic earnings (loss) per share ("EPS") was determined by dividing net
income (loss) 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 period for basic and diluted EPS:
For the Three Months For the Six Months Ended
Ended June 30, June 30,
------------------------------- -------------------------------
(In Thousands) 2002 2001 2002 2001
------------- -------------- -------------- -------------
Basic..................................................... 2,812 2,812 2,812 2,814
Net effect of dilutive stock options...................... - - - -
------------- -------------- -------------- -------------
Diluted................................................... 2,812 2,812 2,812 2,814
============= ============== ============== =============
Total options and warrants outstanding.................... 1,621 998 1,621 998
============= ============== ============== =============
Options and warrants not considered because effects of
inclusion would be anti-dilutive......................... 1,621 998 1,621 998
============= ============== ============== =============
3. LIQUIDITY AND MANAGEMENT PLANS
We reported a net loss for the six months ended June 30, 2002 and year
ended December 31, 2001 of $1,165,000 and $3,978,000, respectively. In addition,
at June 30, 2002 we had cash on hand of $191,000, and our current liabilities
exceeded our current assets by $2,877,000.
Also, as of June 30, 2002, 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, we have at all times been in default under the terms of this
obligation, and if our primary lender were to exercise its right to declare the
obligation to be due and payable, we would not be able to pay the obligation.
The Company has also failed to make the required acquisition agreement
payments of $1,178,000, $867,000 and $171,000 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, we believe the Company is in substantial
compliance with the terms of such agreements.
5
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. LIQUIDITY AND MANAGEMENT PLANS (CONTINUED)
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 (the "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. We have been 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 July 31,
2002 the amount payable to the Bank is approximately $270,000. 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 July 31, 2002, the unsecured balance of the liability to the
Bank by all parties involved is approximately $161,000. While there can be no
assurance that the purchase of the Notes by this new entity will be successful,
the Company does not have funds available to purchase the Notes if required to
do so under the terms of the Note Purchase Agreement. As the Notes are
guaranteed by Mr. Moore, 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.
Since November, 2001, the Company has been using the services of third
party advisors to assist us in evaluating our strategic options to maximize
shareholder value and to provide assistance to us in pursuing alternative
financing options in connection with our capital requirements and acquisition
debt obligations. At the present time, the Company is negotiating a lending
agreement with a prospective lender that would replace our primary lender and
would potentially provide additional liquidity to the Company. 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.
In January 2002, we filed a claim for refundable income taxes with the
Internal Revenue Service for $777,000 resulting from the carry back of our
operating loss to 1999 and 2000. This amount was received in February 2002. In
March, 2002, the federal government enacted the "Job Creation and Workers
Assistance Act of 2002" which permits the Company to carry its 2001 net loss
back to 1996. Accordingly, on May 6, 2002, we filed an additional claim for
refundable income taxes of $942,000 resulting from the carry back of our net
loss to tax years 2000 through 1996. This amount was received in July 2002.
4. 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 ( "GE"). The agreement
permits borrowings up to $15,000,000. Upon the closing of this facility, we
borrowed $3,800,000 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
June 30, 2002, we were not in compliance with the amended terms and conditions
of the GE financing agreement. Since February 28, 2002, the date of expiration
of a forbearance agreement related to this obligation, we have not been in
compliance with the terms of this obligation. If GE were to exercise its right
to declare the obligation to be due and payable, we could not pay the
obligation.
Under the terms of the agreement with GE, the outstanding loan balances
bear interest at the bank 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 7.625%
for the six months ended June 30, 2002. The interest rate at June 30, 2002 was
7.625%. As of June30, 2002, the amounts outstanding under the revolving line of
credit amounted to $3,006,000.
6
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. 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:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
(In Thousands) 2002 2001 2002 2001
-------------- ------------ ------------- ------------
Tax provision at statutory rate............................. $ (179) $ (141) $ (480) $ (477)
Other....................................................... - 16 - 20
Increase in valuation allowance for deferred taxes 179 - 274 -
State income taxes (benefit) net of federal income
tax effect................................................. - (29) - (75)
-------------- ------------ ------------- ------------
$ - $ (154) $ (206) $ (532)
============== ============ ============= ============
As at June 30, 2002, we have a federal net operating loss carryforward of
approximately $2,385,000, which if unused, expires in 2021. In addition, we have
various state net operating loss carryforward totaling approximately $5,825,000
as of December 31, 2001, which, if unused, expire in varying amounts over the
next 20 years.
As of June 30, 2002, because of the factors discussed in Footnote No. 3,
"Liquidity and Management Plans," we recorded a net valuation allowance of
$1,024,000 against the entire amount of the net deferred tax asset.
6. CONTINGENCIES
In 1996, Ditto Properties Company ("DPC") filed a suit 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 899,200 shares (the "LP Shares") of common stock of
the Company which were the subject matter of a series of transactions in 1993
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 and the
Company were added as defendants 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"). Due to the recently granted
motions for summary judgment in favor of L.P. No. 2, Mr. Moore and us, neither
Otey nor Loadman remain as parties to the Ditto Litigation. There is currently
no trial date pending, but we expect that the trial date will be set for some
time in early 2003. For a more detailed discussion of the Ditto Litigation,
please see Item 1, Part II of our Form 10-Q for the first quarter ended March
31, 2002 (such disclosures are hereby incorporated by reference). In the past,
we have incurred legal fees and have funded certain of the legal fees and
expenses of Mr. Moore and/or L.P. No. 2 in connection with the Ditto Litigation.
As a 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 $250,000 (herein referred to as the
"JMM Cap") 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 was
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 us 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. July, 2002, the Board of Directors of the Company determined that
approximately $101,000 of legal services rendered by counsel for Mr. Moore and
L.P. No. 2 benefited the Company, directly or indirectly, and the amounts
previously allocated to the JMM Cap were reduced by such amount. Through June
30, 2002, the Company has expended approximately $165,000(in connection with the
JMM Cap) on behalf of Mr. Moore in the defense of the Ditto matter. 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.
7
6. CONTINGENCIES - CONTINUED
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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Service Revenue Summary:
For the Three Months Ended Increase /
(US $ in millions) June 30, (decrease)
--------------------------------- ----------------
2002 2001 2002 vs. 2001
-------------- -------------- ----------------
Permanent placement................................................... $ 3.3 $ 5.3 $ (2.0)
Contract placement and specialty services............................ 10.1 14.5 (4.4)
-------------- -------------- ----------------
Net service revenue................................................... $ 13.4 $ 19.8 $ (6.4)
============== ============== ================
For the quarter ended June 30, 2002, net service revenue decreased $6.4
million, or 33%, to $13.4 million as compared to $19.8 million for the previous
year period. As noted in the table above, revenue derived from contract and
specialty placements decreased $4.4 million or 30%, and permanent placement
revenue decreased $2.0 million, or 39% as a result of the continuing effect of
hiring freezes and staff reductions implemented by our customers due to the
recession in the economy. We continue to experience a change in our business mix
as revenue derived from contract placement and specialty services comprised 76%
of total revenue for the quarter ended June 30, 2002, as compared to 73% of
total revenue in the previous year period.
For the quarter ended June 30, 2002, our total gross margin decreased by
$3.3 million, or 39%, to $5.1 million as compared to $8.4 million in the
previous year period. The decline in permanent placement revenues accounted for
$2.0 million, or 61% of the absolute decrease in total gross margin. The decline
in revenue derived from contract and specialty placements accounted for the
balance of the absolute decrease in total gross margin. Overall gross margin, as
a percentage of net service revenue declined to 38%, as compared with 42% in the
previous year period, partially due to the change in business mix noted above.
As a percentage of contract and specialty placement revenue, the gross margin
derived from contract and specialty placements for the quarter ended June 30,
2002 was 18%, down 3% as compared to the previous year period.
Operating expenses amounted to $5.3 million for the quarter ended June
30, 2002; a decrease of $3.3 million, or 38%, as compared to the previous year
period. Included in operating expenses for the quarter ended June 30, 2002 was
$2.4 million of variable sales expenses, which declined $1.9 million as compared
to the previous year period due primarily to the reduction in commissions
associated with the decline in revenue from permanent placements. In addition,
for the quarter ended June 30, 2002, general and administrative expenses
amounted to $2.6 million, a decline of $1.3 million, or 33%, as compared to the
previous year period. Business initiatives implemented throughout 2001 and 2002
including a review of our business processes, our organizational structure and
the level of our permanent workforce, accounted for the decrease in general and
administrative expenses. Depreciation and amortization expense amounted to $0.3
million as compared to $0.5 million in the previous year period. The decrease is
due to the adoption of the Financial Accounting Standards Board, SFAS 142,
Goodwill and Other Intangible Assets, which provides that certain goodwill and
intangibles no longer be amortized. As part of the adoption of SFAS 142, during
the fourth quarter of 2002, the Company intends to complete its evaluation of
the carrying value of its intangible assets and will record the adjustment, if
any required in the fourth quarter. Also, during the quarter ended June 30,
2002,the Company recorded a charge for restructuring and severance of $0.1
million.
For the quarter ended June 30, 2002, net interest expense was $0.3
million, up slightly as compared to the previous year period due to the increase
in the interest rate being charged to the Company by its lender while the
Company is in default of its lending agreement.
For the quarter ended June 30, 2002, we reported a net loss before taxes
of $0.5 million, as compared to a net loss before taxes of $0.4 million in the
previous year period.
Because of a valuation allowance provided for deferred income taxes, we
reported no income tax benefit in the quarter ended June 30, 2002 compared to an
income tax benefit of $0.1 million in the previous year period. In addition, at
June 30, 2002, the Company has a net operating loss carry forward of $2.4
million which it will use to offset future periods taxable income.
As a result of the items discussed above, we reported a $0.5 million net
loss for the quarter ended June 30, 2002 as compared to a net loss of $0.3
million for the previous year period.
9
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Service Revenue Summary:
For the Six Months Ended Increase /
(US $ in millions) June 30, (decrease)
--------------------------------- ----------------
2002 2001 2002 vs. 2001
-------------- -------------- ----------------
Permanent placement................................................... $ 6.1 $ 11.7 $ (5.6)
Contract placement and specialty services............................ 20.0 28.0 (8.0)
-------------- -------------- ----------------
Net service revenue................................................... $ 26.1 $ 39.7 $ (13.6)
============== ============== ================
For the six months ended June 30, 2002, net service revenue decreased
$13.6 million, or 34%, to $26.1 million as compared to $39.7 million for the
previous year period. As noted in the table above, revenue derived from contract
and specialty placements decreased $8.0 million or 29%, and permanent placement
revenue decreased $5.6 million, or 48% as a result of the continuing effect of
hiring freezes and staff reductions implemented by our customers due to the
recession in the economy. We continue to experience a change in our business mix
as revenue derived from contract placement and specialty services comprised 76%
of total revenue for the six months ended June 30, 2002, as compared to 70% of
total revenue in the previous year period.
For the six months ended June 30, 2002, our total gross margin decreased
by $7.7 million, or 44%, to $9.8 million as compared to $17.5 million in the
previous year period. The decline in permanent placement revenues accounted for
$5.6 million, or 72% of the absolute decrease in total gross margin. The decline
in revenue derived from contract and specialty placements accounted for the
balance of the absolute decrease in total gross margin. Overall gross margin, as
a percentage of net service revenue declined to 37%, as compared with 44% in the
previous year period, primarily due to the change in business mix noted above.
As a percentage of contract and specialty placement revenue, the gross margin
derived from contract and specialty placements for the six months ended June 30,
2002 was 18%, down 3% as compared to the previous year period.
Operating expenses amounted to $10.6 million for the six months ended
June 30, 2002; a decrease of $7.9 million, or 43%, as compared to the previous
year period. Included in operating expenses for the six months ended June 30,
2002 was $4.8 million of variable sales expenses, which declined $4.4 million as
compared to the previous year period due primarily to the reduction in
commissions associated with the decline in revenue from permanent placements. In
addition, for the six months ended June 30, 2002, general and administrative
expenses amounted to $5.1 million, a decline of $2.8 million, or 35%, as
compared to the previous year period. Business initiatives implemented
throughout 2001 and 2002 including a review of our business processes, our
organizational structure and the level of our permanent workforce, accounted for
the decrease in general and administrative expenses. Depreciation and
amortization expense amounted to $0.6 million as compared to $1.0 million in the
previous year period. The decrease is due to the adoption of the Financial
Accounting Standards Board, SFAS 142, Goodwill and Other Intangible Assets,
which provides that certain goodwill and intangibles no longer be amortized. As
part of the adoption of SFAS 142, during the fourth quarter of 2002, the Company
intends to complete its evaluation of the carrying value of its intangible
assets and will record the adjustment, if any required in the fourth quarter.
Also, during the six months ended June 30, 2002, the Company recorded a charge
for restructuring and severance of $0.1 million as compared to $0.4 million in
the previous year period, of which approximately $0.3 million was related to the
resignation of our former president.
For the six months ended June 30, 2002, net interest expense was $0.5
million, up $0.2 million as compared to the previous year period due to the
increase in the interest rate being charged to the Company by its lender while
the Company is in default of its lending agreement.
For the six months ended June 30, 2002, we reported a net loss before
taxes of $1.4 million, the same as in the previous year period.
Because of a valuation allowance provided for deferred income taxes, we
reported an income tax benefit in the six months ended June 30, 2002 of only
$0.2 million as compared to an income tax benefit of $0.5 million in the
previous year period. In addition, at June 30, 2002, the Company has a net
operating loss carry forward of $2.4 million which it will use to offset future
periods taxable income.
As a result of the items discussed above, we reported a $1.2 million net
loss for the six months ended June 30, 2002 as compared to a net loss of $0.8
million for the previous year period.
10
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2002, cash provided by operating
activities approximated $0.8 million, principally from the receipt of our
initial 2001 Federal Income Tax refund and a reduction in accounts receivable.
Most of the cash generated was used to reduce our debt obligations.
As of June 30, 2002, we were not in compliance with the amended terms and
conditions of our financing agreement with GE, our primary lender. Through
February 28, 2002, we operated under the terms and conditions of the Fourth
Amendment and Forbearance Agreement with GE. Subsequent to the expiration of
this agreement, we have been in default of this debt obligation at all times,
and we would not be able to pay this obligation if GE were to elect to exercise
its right to declare the obligation to be due and payable. .
The Company has also failed to make the required acquisition agreement
payments of $1,178,000, $867,000 and $171,000 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, we believe the Company is in substantial
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 (the "Bank") and the Company, the Company is
obligated topurchase 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 July 31, 2002 the amount payable to the Bank is approximately $270,000. 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 July 31, 2002, the unsecured balance of the
liability to the Bank by all parties involved is approximately $161,000. While
there can be no assurance that the purchase of the Notes by this new entity will
be successful, the Company does not have funds available to purchase the Notes
if we became required to do so under the terms of the Note Purchase Agreement.
As the Notes are guaranteed by Mr. Moore, we believe, based upon financial
information provided by Mr. Moore, that Mr. Moore has the financial ability to
satisfy the Notes.
We have reported a net loss for the six months ended June 30, 2002 and
for the year ended December 31, 2001 of $1.2 million and $4.0 million,
respectively. 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.
Since November, 2001, we have been using the services of third party
advisors to assist us in evaluating our strategic options to maximize
shareholder value and to provide ongoing assistance in pursuing those options.
Additionally, we are 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. At the present time, the Company is
negotiating a lending agreement with a prospective lender that would replace GE
and would potentially provide additional liquidity to the Company. 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.
In January 2002, we filed a claim for refundable income taxes with the
Internal Revenue Service for $777,000 resulting from the carry back of our
operating loss to 1999 and 2000. This amount was received in February 2002. In
March, 2002, the federal government enacted the "Job Creation and Workers
Assistance Act of 2002" which permits the Company to carry its 2001 net loss
back to 1996. Accordingly, on May 6, 2002, we filed an additional claim for
refundable income taxes of $942,000 resulting from the carry back of our net
loss to tax years 2000 through 1996. This amount was received in July 2002.
Inflation has not had a significant effect on our operating results.
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RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted SFAS 142 on January 1, 2002. Due to
cost constraints, the Company has not completed the transitional goodwill
impairment test (which consists of determining and disclosing if the carry value
of a reporting unit, including assigned goodwill, exceeds the fair value of that
reporting unit), as required by SFAS 142 to be completed by June 30, 2002.
However, because of the Company's financial position at the initial adoption
date (January 1, 2002), it is at least reasonably possible that goodwill has
been impaired. The Company plans to perform the transitional goodwill impairment
test, as well as the initial annual goodwill impairment test in the fourth
quarter of 2002.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not historical
facts, including, but not limited to, projections or expectations of future
financial or economic performance of the 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 us;
our ability to implement our business strategies and to manage our 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 us, or persons acting on our
behalf, are expressly qualified by the Cautionary Disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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 June 30, 2002, on an annualized basis interest expense would
increase by approximately $0.1 million based on the outstanding line of credit
borrowings of $3.0 million at June 30, 2002.
12
PART II: OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
In 1996, Ditto Properties Company ("DPC") file suit 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 of the Company
which were the subject matter of a series of transactions in 1993 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 and the
Company were added as defendants 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"). Due to the recently granted
motions for summary judgement in favor of LP No.2, Mr. Moore and us, neither
Otey nor Loadman remain as parties to the Ditto Litigation. For more information
regarding the Ditto Litigation, please see Item 1, Part II of our Form 10-Q for
the first quarter ended March 31, 2002 (such disclosures are hereby incorporated
by reference.
For more information regarding the legal fees paid by the Company, on its
behalf and on behalf of LP No. 2 and Mr. Moore, please see footnote 6,
Contingencies, to our financial statements included as part of this Form 10=Q
(such disclosures are hereby incorporated by reference).
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 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
In June, 2002, Deborah A. Farrington resigned as a member of the Board of
Directors of the Company (the "Board"), and Anthony G. Schmeck resigned as an
employee of the Company and as the Secretary, Treasurer and Chief Financial
Officer of the Company.
In July, 2002, Mark E. Cline was elected as a member of the Board by vote of the
other members of the Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Director Option Agreement 2002 Re: Cline.
10.2 Indemnification Agreement dated as of July 9, 2002, between the
Company and Mark E. Cline.
99 Certification of officers
B. Reports on Form 8-K
Not Applicable.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSIFIED CORPORATE RESOURCES, INC.
Registrant
Date: August 14, 2002 By: /s/ J. Michael Moore
--------------------
J. Michael Moore
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: August 14, 2002 By: /s/ James E. Filarski
---------------------
James E. Filarski
President and Director
(Principal Financial Officer)
14