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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM________TO_______.
COMMISSION FILE NUMBER 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12801 N. CENTRAL EXPRESSWAY
SUITE 350
DALLAS, TEXAS 75243
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(972) 458-8500
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on Which Registered:
COMMON STOCK, PAR VALUE AMERICAN STOCK EXCHANGE
$.10 PER SHARE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
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 2,020,897 shares of the registrant's
common stock held by nonaffilitates, based upon the closing price of the
registrant's common stock as reported by the American Stock Exchange on March
27, 1998, was approximately $28.8 million. For purpose of this computation,
all officers, directors and 10% beneficial owners of the registrant are
deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in
fact, affiliates of the registrant. As of March 27, 1998, 2,740,097 shares
of the registrant's common stock, $.10 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrants' definitive Proxy Statement pertaining to the 1998
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.
1
PART I
ITEM 1. BUSINESS
OVERVIEW
Diversified Corporate Resources, Inc. is an employment services firm
that provides professional and technical personnel on a permanent, temporary
and contract placement basis to high-end niche employment markets with a
primary emphasis on the information technology ("IT") market. While the
majority of the Company's revenues are derived from providing IT staffing
solutions, the Company also fills other high value-added employment positions
in the engineering/technical, accounting/finance and professional/technical
sales disciplines. The Company offers permanent placement, temporary and
contract staffing services in this broad variety of disciplines in order to
position itself as a single source provider of solutions that meets all the
high-end staffing needs of its clients. In addition to maintaining this
competitively balanced business model, the Company focuses on recruiting
qualified applicants for placement and enhancing its training capabilities.
The Company manages its operations as a group of profit centers, each of
which is incentivized to share leads and draw from each other's information
resources, as well as to achieve strong independent performance. The Company
serves its clients, including several Fortune 500 companies, through its
network of offices located in Dallas, Houston and Austin, Texas, Atlanta,
Georgia, Chicago, Illinois, Kansas City, Missouri and Raleigh, North Carolina.
INDUSTRY OVERVIEW
The employment services industry has experienced significant growth.
According to a May 16, 1997 Staffing Industry Report, 1995 and 1996 revenues
for the U.S. staffing industry and its segments were estimated at $63.7
billion and $74.4 billion, respectively, a 17% increase, and 1997 revenues
are estimated to be $86.6 billion, a 16% increase. Such growth reflects
fundamental changes in the employer-employee relationship, which have caused
employers to impose heightened hiring criteria for permanent employees and
have increased the demand for project-oriented contract hiring. These
employers require the ability to outsource their staffing needs and the use
of permanent, temporary or contract personnel to help them keep personnel
costs variable, achieve maximum flexibility and avoid the negative effects of
layoffs. These trends have been compounded by the ever increasing rate at
which companies must respond to, and take advantage of, advances in IT,
particularly because these advances create a significant corresponding need
for access to professionals with up-to-date IT skills.
The IT services industry has undergone and continues to undergo rapid
evolution and growth. "IT" is a term that now encompasses not only computer
and communications systems hardware, but also the personnel who design,
manage and maintain those systems. According to a May 16, 1997 Staffing
Industry Report, 1995 and 1996 revenues for the IT services sector were
estimated at $8.9 billion and $11.7 billion, respectively, a 31% increase,
and 1997 revenues are projected to be $14.9 billion, a 27% increase.
The growth of the IT services industry has been driven by: (i)
businesses' increasing reliance on information technology as a strategic
tool; (ii) the shift to distributed computing with the movement from
mainframe to client/server environments; (iii) the fact that these computer
networks are comprised of interdependent hardware and software products
produced by a wide variety of independent vendors; and (iv) the integration
of telecommunications and computers. As businesses struggle to integrate
multiple processing platforms and software applications, which serve an
increasing number of end-users, systems and applications development has
become increasingly challenging. Furthermore, as businesses continue to
focus on their core competencies, but at the same time strive to operate more
efficiently with fewer people, managing and planning staffing requirements to
meet IT needs becomes more difficult. To keep up with these changes,
companies are increasingly seeking employment services firms like the Company
to provide IT professionals who can manage the integration of computers,
operating systems, networks and voice and data systems, as well as
programming, hardware and software system design and development, LAN
management, Internet Web site development and management or project staffing.
IT and engineering/technical projects tend to be significantly longer
and more rigorously defined and require longer-term, more highly-skilled
personnel services than traditional temporary staffing placements. At the
same time, these IT and engineering/technical services offer the opportunity
for higher profitability than clerical and light industrial staffing because
of the high value-added nature of IT and engineering/technical personnel, the
expanding demand for such qualified personnel and the limited number of
sufficiently skilled personnel to fill these positions. The recruiting and
retention of qualified IT and engineering/technical professionals is,
therefore, a challenge common to all companies in the IT and
engineering/technical employment services industries. Competitive companies
have increased advertising and recruiting efforts and are implementing
strategies that utilize recruiting teams, the Internet, full employment
benefits, referral bonuses and specialized training programs.
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As a result of the continued growth and acceptance of using contract
personnel, including IT and engineering/technical personnel, management
believes that clients will demand expanded services from their staffing
providers. Management believes that a key characteristic of outsourcing is
providing convenience, flexibility and efficiency to clients and, in that
regard, clients will increasingly prefer to have their permanent, temporary
and contract staffing needs all satisfied by the same provider.
BUSINESS STRATEGY
The Company's objective is to become a nationally recognized leader in
permanent and contract specific personnel solutions for high margin, high-end
niche employment markets. The key elements of the Company's business
strategy are:
MAINTAIN HIGH MARGIN NICHE FOCUS. The Company serves its clients by
delivering services across disciplines, such as: IT, engineering/technical,
financial/accounting and professional/technical sales, which generally
provide higher margins. The Company plans to continue to build on its
existing strengths by focusing management time and resources on higher margin
services in markets where the demand for the Company's services is strong.
For example, in 1996, the Company opened an office in Austin, Texas which
focuses exclusively on the IT and engineering/technical disciplines.
Furthermore, to provide its clients with personnel with the most up-to-date
technical skills possible, the Company has implemented its Train
International program, which provides training to it applicants.
SINGLE SOURCE PROVIDER STRATEGY. The Company has endeavored to offer
services in many of the employment disciplines required by its clients. By
responding to its clients' needs, the Company maintains strong client
relationships and leverages its existing operating overhead to expand its
service offerings to existing clients. The Company plans to continue to
build and expand on its core disciplines of IT, engineering/technical,
financial/accounting and professional/technical sales services by providing
trained professionals in evolving areas within these disciplines. At the
same time, the Company believes that offering the full range of contract,
permanent and temporary professional personnel across all of its disciplines
is as important as offering a variety of disciplines. The Company believes
that this approach will position it as a single source provider of staffing
services and will give the Company the ability to respond to changes in its
market and, to a limited extent, fluctuations in the demand for staffing
services.
FOCUS ON RECRUITING MANAGEMENT AND RETENTION OF APPLICANTS. The
recruiting, management and retention of skilled professionals in the IT,
engineering/technical, financial/accounting and professional/technical sales
disciplines are one of the main challenges for all companies in the
employment service industry. The Company plans on meeting this challenge
with an approach which includes: (i) aggressive direct marketing to targeted
groups, such as professional associations and industry trade groups; (ii)
building its SearchNet database system to enhance the Company's ability to
track applicants and to internally share applicant information across the
Company's profit centers; (iii) the use of the Internet to attract
applicants; (iv) offering competitive wage and benefit packages; (v)
developing a proprietary aptitude testing software program to better match
applicants with job assignments; and (vi) improving and expanding its
training programs.
ENHANCEMENT OF TRAINING PROGRAMS. Clients are demanding better trained
applicants to fill their staffing needs as well as continued training for
their own employees in order to keep pace with technological change. The
Company currently offers training programs at its corporate offices and plans
to further fill these needs by offering training and certification courses at
Company operated training centers in its other locations. Management
believes that through the Company's Train International programs the Company
can: (i) increase its ability to provide more qualified high margin
applicants to meet its clients' needs; (ii) offer training to its clients'
existing employees on developments in their respective fields of interest;
and (iii) further enhance its recruiting and retention of professionals by
offering programs that allow them to update their marketable skills.
Training is anticipated to encompass a full range of skill enhancements from
basic orientations through formal certification processes.
BROADEN GEOGRAPHIC COVERAGE. Currently the Company serves its clients
in selected markets. While the Company continues to expand its service
offerings in these markets, management believes that further growth can be
achieved through expansion into certain additional markets. The Company
opened an office in Reston, Virginia in the first quarter of 1998, and plans
to open an office in Denver, Colorado in the second quarter and other
additional offices throughout the year to grow its core permanent placement
and contract placement business. This will complement the Company's 1996
opening of new offices in Austin, Texas and Raleigh, North Carolina and allow
better servicing of those clients with geographically dispersed operations
but which desire single source consistency in fulfilling their staffing
requirements. As another part of this strategy, the Company will continue to
examine opportunities to acquire complementary employment services businesses
in certain other geographic markets.
3
CURRENT BUSINESS ACTIVITIES
The Company operates along functional lines of permanent and contract
placement of professional personnel. Specialty services, consisting of
temporary placements, are offered to the Company's permanent placement
clients as part of the Company's single source provider strategy. Specified
search parameters and goals generally characterize the permanent placement of
professional personnel. The contract placement of IT and
engineering/technical personnel is generally a more project specific
business, with IT and engineering/technical personnel of the Company
undertaking well defined projects for time periods generally ranging from
four weeks to a year or more. The Company believes that its focus on high
margin, high-end niche employment markets, its single source provider
strategy, its emphasis on recruiting and retention of qualified applicants
and its plan to pursue improved and expanded training programs will provide
it with certain competitive advantages.
PERMANENT PLACEMENT SERVICES
The Company is currently engaged in providing permanent placement
services in Dallas, Houston and Austin, Texas, Atlanta, Georgia, Chicago,
Illinois and Raleigh, North Carolina. The Company offers these services in
the following selected core disciplines:
- Information Technologies-Services include systems design, programming
and network analysis, as well as consulting, conversions, software
development and information systems disaster control.
- Engineering/Technical-Services include process engineering, industrial
engineering and manufacturing services, as well as software design and
maintenance and related information technology services. Technical
areas serviced include environmental, construction, plastics, chemical,
telecommunications, computer hardware, food and metals.
- Financial/Accounting-Services include recruitment and placement of
financial managers.
- Professional/Technical Sales-Services range from placement of technical
sales/marketing personnel to recruitment and placement of management
personnel.
As part of the Company's strategy to be a single source provider of
employment services to its clients, the Company recently began providing
permanent clerical and administrative personnel to its existing clients,
primarily to support professional staff and executive management of those
clients.
The Company usually enters into written contracts with clients
specifying its fee arrangements prior to undertaking any permanent placement
services on behalf of such clients. Fees range from 15% to 35% of the newly
placed employee's first year's annual salary. Although the employer usually
pays these fees, in certain instances the newly placed employee pays such
fees. The Company often offers its clients a 30-day guarantee of permanent
professional placements during which the Company agrees to replace, without
additional charge to the client, any newly placed employee who leaves such
job. If the Company is unable to replace the employee, it will generally
refund the client's fee or a prorated portion thereof depending upon the
circumstances.
SPECIALTY SERVICES
As part of its single source provider strategy, the Company also
provides specialty services to its clients consisting of the placement of
specialty contract and temporary personnel in all of the Company's
disciplines. These services have grown out of demand from the Company's
permanent placement clients to fill temporary employment needs without
incurring the associated costs of hiring, training or providing employee
benefits or to fill specialty contract and permanent employment needs with
applicants only after having had that applicant work for the client prior to
committing to a permanent hire. Personnel needs that can be filled by
temporary or temporary-to-permanent employees are primarily caused by
vacation, illness, resignation, increases in work volume, the need to staff
special projects and desire for pre-screening of permanent hires.
An order for the Company's specialty services is typically generated as
a result of a referral from the Company's existing permanent placement
clients or as a result of the Company's marketing efforts. The Company
obtains from the client a description of the order and uses this information
to select an appropriate individual from the Company's database of available
temporary personnel. Clients request temporary personnel for periods
generally ranging from one day to several weeks. The Company generally
receives notice of the assignments from 20 minutes to three days in advance.
The Company charges clients an hourly rate for temporary personnel.
Specialty contract job assignments are usually longer in duration and tend to
be more project oriented. Substantially all specialty contract and temporary
personnel assigned by the Company are Company employees and the Company pays
all employment costs, including hourly wages, unemployment taxes, social
security taxes and fringe
4
benefits. The Company generally offers clients a guaranteed period during
which the Company will refund the client's payment if the client notifies the
Company that it was dissatisfied with the employee's performance, and the
Company is unable to replace the employee.
CONTRACT PLACEMENT SERVICES
Substantially all of the Company's contract placement services relate to
IT. The Company provides these services primarily in the Dallas, Texas,
Kansas City and St. Louis, Missouri and Denver, Colorado markets. The
Company's IT personnel provide services in the following areas:
- project management
- systems analysis, development and design
- product implementation
- systems migration and conversions
- technical writing
- documentation support
- functional support
- company educational and project planning
- testing
- systems and network administration
- hardware, network and software evaluation services
Contract engagements are generally project oriented and typically last
from four weeks to one year or more. The Company usually enters into written
contracts with clients after becoming an approved vendor. Services are then
provided on a time and materials or purchase order basis. The Company
provides individualized attention to each of its clients and develops and
designs tailored service programs based on its clients' unique needs. All
contract personnel assigned by the Company are Company employees. To assure
that its recruits provide clients with the highest degree of value-add
possible, the Company provides training programs to its applicants.
CUSTOMERS
The Company has provided personnel and human resource solutions to
several Fortune 500 companies and many of the nation's largest companies,
including: DSC Communications, Hitachi America, American Airlines, Compaq
Computer Corp., Mobil Oil, Dr. Pepper/7-Up, Texas Instruments, MCI, Fidelity
Investments, Blockbuster, DST Systems, MBNA, Informix and TU Electric.
RECRUITING
The Company recruits qualified applicants primarily through referrals
from other applicants, through newspaper advertising, its applicant database,
job fairs and various other media advertisements. The Company maintains
extensive records on qualified applicants. In order to attract permanent,
temporary and contract assignment candidates, the Company places emphasis
upon its ability to provide attractive placement opportunities, competitive
compensations, quality and varied assignments and scheduling flexibility.
The recruiting of skilled IT, engineering/technical, financial/accounting and
professional/technical sales professionals is a central challenge for
participants in the industry and management believes that it has positioned
the Company to address this challenge in the future with an approach which
includes: (i) aggressive direct marketing to targeted groups, such as
professional associations and industry trade groups; (ii) building its
SearchNet database system to enhance the Company's ability to track
applicants and to internally share applicant information across the Company's
profit centers; (iii) the use of the Internet to attract applicants; (iv)
offering competitive wage and benefit packages; and (v) improving and
expanding its training programs.
The Company's professional personnel qualifying procedures include
interviewing, testing and reference checking. These procedures also enable
the Company to categorize its professional personnel by preference for job
location, hours and work environment. In order to attract high quality
professional employees, the Company grants paid vacations, holidays and other
benefits for temporary professional employees who work a specified minimum
number of hours for the Company.
SOFTWARE DEVELOPMENT
The Company is in the process of developing proprietary aptitude testing
software, which it believes, will better enable it to match qualified
applicants to job assignments. The Company plans to begin using the software
in the second or third quarter of 1998.
5
TRAINING
The Company has begun to expand and improve its training of its
applicant pool. Train International programs currently offered or
contemplated to be offered in the near future include but are not limited to:
- Training in Various Software Applications - C++
- Self-Paced Training for Support Personnel - Visual Basic
- Internet/Intranet Network Training Programs - Word Processing
- Manufacturing Processes and Systems Certification - Certified Network Engineering
and Training - Certified Network Administrator
- E-mail and GroupWare - Power Point Application
- Database/SpreadSheet - Microsoft Programs
- Graphics and Desk Top Publishing - Windows 95
- Lotus Notes - Cobol (Year 2000 Solutions)
The Company offers these services to its clients' employees and the
Company's applicant pool on a fee basis. Train International's first
classroom facility was completed during the second quarter of 1997. Three
additional classrooms are scheduled to be completed in the second quarter of
1998. Its classroom facilities feature state-of-the-art computer equipment.
Eventually, the Company plans to have Train International training facilities
in several locations.
MARKETING
The Company's marketing efforts are largely implemented at the local
office level and are focused on high margin, high-end niche employment
markets. Historically, the Company's permanent placement, temporary and
contract services marketing efforts have relied primarily on telephone
solicitation, referrals from other Company offices (each of which is
incentivized to share leads and draw from each other's information resources)
and, to a lesser extent, on direct mail, yellow pages and newspaper
advertising. Increasingly, however, client visits have begun to play a more
important role in the Company's permanent placement, temporary and contract
services marketing efforts. The Company's contract placement marketing
efforts have largely involved the Company's effort to become an approved
vendor to prospective clients. This process generally involves a rigorous
review of the Company's fitness to meet the staffing demands of prospective
clients and, management believes, creates a marketing advantage for the
Company.
COMPETITION
The Company believes that the availability of qualified candidates, the
quality of service, the scope of geographic service and the price of service
are the principal elements of competition. The Company believes that
availability of qualified applicants is an especially important facet of
competition. Because many candidates pursue other employment opportunities
on a regular basis, it is important that the Company respond to market
conditions affecting applicants. Although the Company believes it competes
favorably with respect to these factors, it expects competition to increase,
and there can be no assurance that the Company will remain competitive.
The employment services industry is very competitive and fragmented.
There are limited barriers to entry and new competitors frequently enter the
market. A number of the Company's competitors possess substantially greater
resources than the Company. The Company faces substantial competition for
potential clients and for technical and professional personnel from providers
of outsourcing services, system integrations, computer systems consultants,
other providers of staffing services, temporary personnel agencies and search
firms, ranging from large national companies to local employment staffing
entities. Large national companies that offer employment staffing services
include Robert Half International, Computer Horizons, Inc. and Alternative
Resources Corporation. Other firms that the Company competes with include
RCM Technologies, Professional Staff, Personnel Management, Joulet, ROMAC
International, Inc., Source Services Corp., Data Processing Corp. and General
Employment Enterprises. Local employment staffing entities are typically
operator-owned, and each market generally has one or more significant
competitors. In addition, the Company competes with national clerical and
light industrial staffing firms that also offer temporary staffing services.
These companies include Interim Services, Inc., Norrell Corporation,
AccuStaff Incorporated and Olsten Corp. In addition, national and regional
accounting firms also offer certain employment staffing services. Finally,
the Company also faces the risk that certain of its current and prospective
clients will decide to provide similar
6
services internally. There can be no assurance that the Company will be able
to continue to compete effectively with existing or potential competitors.
REGULATION
Most states require permanent placement firms to be licensed in order to
conduct business. Such licenses may be revoked upon material noncompliance
with state regulations. Any such revocations would have a material adverse
effect on the business of the Company. The Company believes that it is in
substantial compliance with all such regulations and possesses all licenses
necessary to engage in the placement of permanent personnel in the
jurisdictions in which it does business. Various government agencies have
advocated proposals from time to time to license or regulate the placement of
temporary personnel. The Company does not believe that such proposals, if
enacted, would have a material adverse effect on its business.
EMPLOYEES
In addition to the non-permanent and contract personnel from time to
time employed by the Company for placement with clients, the Company had
approximately 343 full-time employees as of December 31, 1997. Of these
employees, approximately 306 were personnel consultants and office managers
paid on a commission basis and approximately 37 were administrative and
executive salaried employees. The Company considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company and its wholly-owned subsidiaries currently lease
approximately 48,000 square feet in one building in Dallas, Texas; the terms
of such leases and its amendments range from four years to seven years. The
Company also leases approximately 17,000 square feet in Houston, Texas, 5,200
square feet in Austin, Texas, 2,000 square feet in Kansas City, Missouri,
9,200 square feet in Atlanta, Georgia, 4,000 square feet in Chicago, Illinois
and 6,200 square feet in Raleigh, North Carolina. Such leases generally range
from three to seven years. The current cost of all of the Company's office
leases is approximately $1,355,000 per annum.
The Company believes that all of its present facilities are adequate for
its current needs and that additional space is available for future expansion
upon acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
In September 1996 a lawsuit (the "Suit") was filed by Ditto Properties
Company ("Ditto Properties"), whose manager was a business associate of J.
Michael Moore, Chairman of the Board and Chief Executive Officer of the Company,
against DCRI L.P. No. 2, Inc. ("No. 2"), which is an entity controlled by Mr.
Moore, J. Michael Moore individually and USFG/DHRG L.P. No.1 (collectively,
the "Defendants").
The Suit alleges, among other things, that the Defendants fraudulently
induced Ditto Properties to sell 899,200 shares (the "Shares") of Common
Stock to No. 2 and failed to perform under the related Stock Purchase
Agreement dated March 26, 1993 (the "Stock Purchase Agreement"). The Suit
asks for injunctive relief and damages but also had sought to rescind the
Stock Purchase Agreement. However, summary judgment on the issue of
rescission was granted in favor of No. 2 and Ditto Properties' rescission
claim was therefore dismissed on June 2, 1997.
Because the Company believes that the Suit has interfered with certain
of the Company's business activities, the Company filed a separate lawsuit
against Ditto Properties on October 7, 1996. This lawsuit seeks in excess of
$100,000,000 in damages and the reimbursement of certain expenses.
The Company had incurred legal expenses on its own behalf and on behalf
of the Defendants in an effort to prevent potential adverse impact of the
Suit on the Company. No. 2 and Mr. Moore entered into an agreement with the
Company pursuant to which Mr. Moore agreed to reimburse any legal fees and
expenses deemed personal in nature by the Board of Directors. The Board of
Directors determined that No. 2 should reimburse approximately 50% of such
legal fees paid through October 24, 1996 and that all of such fees after that
date should be reimbursed to the Company. These fees were reimbursed in
October 1997. See "Notes to the Company's Consolidated Financial Statements.
Pursuant to the terms of an agreed order entered by the court in the
Suit, No. 2 has deposited $1.5 million with the special master appointed by
the court.
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In September 1996, a lawsuit was filed in Texas State Court, in Dallas
County, by Billie Jean Tapp ("Ms. Tapp"), since joined by her then husband
Gary K. Steeds ("Mr. Steeds"), against the Company, two of the Company's
subsidiaries, Management Alliance Corporation ("MAC") and Information Systems
Consulting Corp. ("ISCC") and three of the Company's then officers and
directors (J. Michael Moore, M. Ted Dillard and Donald A. Bailey).
In their lawsuit, Ms. Tapp and Mr. Steeds (former employees of the
Company) each allege that the Company breached an agreement purporting to
convey up to 20% of the issued and outstanding shares of the MAC and ISCC
subsidiaries to each of Ms. Tapp and Mr. Steeds, pursuant to a vesting
schedule set forth in such agreement, and certain other alleged agreements.
They allege damages for the fair market value of such shares in which they
were vested and other damages for breach of contract, conspiracy and tortious
conduct, as well as mismanagement, misappropriation of corporate assets and
self-dealing by Company officers and directors. The Company has asserted
that a final contract never existed and that an agreement was never reached,
believes that Ms. Tapp's and Mr. Steed's claims are without merit, has filed
an answer and counterclaim against Ms. Tapp and a third party petition
against Mr. Steeds and is vigorously defending the lawsuit. In addition, the
Company believes that even if such alleged agreements had been reached, based
upon the proposed vesting schedule, any potential damages of Ms. Tapp and Mr.
Steeds would not have a material adverse effect on the Company. The Company
has currently moved to dismiss certain of Ms. Tapp's and Mr. Steed's claims
on summary judgment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the American Stock
Exchange under the symbol "HIR" since September 30, 1997. Prior to then it
was traded in the over-the-counter market and listed in the pink sheets under
the symbol "HIRE." The following table sets forth, for the fourth quarter of
1997, the range of high and low closing sales prices for the Common Stock as
reported on the American Stock Exchange. For all other periods set forth
below, the table reflects the quarterly high/low bid price for the Common
Stock; and such inter-dealer quotations do not necessarily represent actual
transactions and do not include retail mark-ups, mark-downs or commissions.
Such prices are as follows:
Period High Low
------ ---- ---
1996
1st Quarter $ .62 $ .25
2nd Quarter 1.75 .50
3rd Quarter 3.75 2.00
4th Quarter 4.00 3.00
1997
1st Quarter $ 8.00 $2.50
2nd Quarter 6.00 3.50
3rd Quarter 11.50 4.50
4th Quarter 10.50 7.38
The Company had approximately 170 holders of record of Common Stock as
of December 31, 1997. While the Company knows that a number of beneficial
owners of its Common Stock hold shares in street name, no estimate has been
made as to the number of shareholders owning stock of the Company in street
name.
The Company has not paid any cash dividends on its Common Stock since
its inception. The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business
and does not anticipate paying any cash dividends in the foreseeable future.
Any future determination as to dividend policy will be made at the discretion
of the Board of Directors of the Company and will depend on a number of
factors, including the future earnings, capital requirements, financial
condition and future prospects of the Company and such other factors as the
Board of Directors may deem relevant.
Except as described below, the Company has not sold any securities
during 1997 that were not registered under the Securities Act of 1933, as
amended (the "Securities Act"). As previously described by the Company in its
Form 10-Q, filed with the Securities and Exchange Commission on November 14,
1997, in connection with the Company's public offering, the Company granted a
total of 82,590 stock warrants (the "Warrants") with an initial exercise price
of $13.50 to the managing underwriter for service rendered, subject to certain
adjustments. The Warrants remain outstanding as of December 31, 1997, and are
not exercisable until September 30, 1998. In selling the Warrants, the Company
relied upon the exemption provided by Section 4(2) of the Securities Act in
that such sale was not a public offering. The managing underwriter was granted
certain registration rights in connection with the Warrants.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Effective July 31, 1991, the Company sold substantially all of its
assets. In 1993, the Company repossessed certain of those assets. Because no
audited financial statements with respect to such assets are available for
1993, and because such assets represented a substantial portion of the assets
of the Company in 1993, no financial information for 1993 has been provided.
9
Year Ended December 31,
---------------------------------------------------
STATEMENT OF OPERATIONS DATA 1997 1996 1995 1994
------ ------ ------ ------
(in Thousands, except per share data)
Net service revenues $33,812 $27,430 $19,358 $15,233
Gross margin 10,133 7,755 5,026 4,101
Income before income taxes and
extraordinary item 2,480 1,764 346 16
Income before extraordinary item 2,603 1,539 286 16
Net income 2,660 1,785 461 224
Basic earnings per share:
Before extraordinary item 1.33 .90 .16 .01
Net income 1.36 1.05 .26 .13
Diluted earnings per share:
Before extraordinary item 1.25 .87 .16 .01
Net income 1.28 1.01 .26 .13
As of December 31,
---------------------------------------------------
BALANCE SHEET DATA 1997 1996 1995 1994
------ ------ ------ ------
(in Thousands)
Working capital $ 9,455 $ 95 $(1,060) $(1,142)
Total assets 15,162 5,204 3,007 2,563
Short-term debt and current maturities 2 520 669 102
Long-term debt 66 68 90 113
Stockholders' equity (capital deficiency) 11,553 1,188 (452) (913)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Net service revenues increased 23.3% to $33.8 million in 1997, compared
to $27.4 million in 1996. Permanent placement revenues increased
approximately 39.9% to $17.6 million in 1997, compared to $12.6 million in
1996. Specialty service revenues increased approximately 2.1% to $7.6
million in 1997, compared to $7.4 million in 1996. Contract placement
revenues increased approximately 16.3% to $8.6 million in 1997, compared to
$7.4 million in 1996. The increases in revenues in 1997 were primarily
attributable to the Company's continued focus on high margin, high-end niche
employment markets such as the information technology and
engineering/technical disciplines.
Gross margin increased approximately 30.7% to $10.1 million in 1997,
compared to $7.8 million in 1996. Gross margin as a percentage of net
service revenues increased to 30.0% in 1997, from 28.3% in 1996. The
increase in gross margin was primarily due to the increase in permanent
placement revenues where the Company achieves higher gross margins.
Selling, general and administrative expenses increased approximately
33.8% to $7.6 million in 1997, compared to $5.7 million in 1996; representing
22.6% of 1997 revenues. The increase in selling, general and administrative
expenses were primarily the result of increased expenses on the Company's
back office to support the growth in sales. Included in this increase were
increases in provisions for uncollectible accounts of approximately $226,000,
legal expenses of approximately $168,000, and approximately $218,000 for the
establishment and development of the Company's training facilities.
Other expenses decreased approximately $263,000 to $25,000 in 1997,
compared to $288,000 in 1996. The reduction in other expenses was primarily
the result of lower interest expense for the year, and interest income earned
on the balance of the proceeds of the Company's public offering which was
completed in the fourth quarter of 1997. Interest expense was lower due to
paying off all short-term debt with proceeds from the Company's public
offering.
10
Provisions for income tax resulted in a benefit of approximately
$123,000 in 1997, compared to an expense of $225,000 in 1996. The positive
change in 1997 was the result of a reduction in the valuation allowance on
deferred tax assets in the fourth quarter of 1997, primarily related to net
operating loss carryforwards.
For the year, net income increased approximately $875,000 to $2.7
million in 1997, compared to $1.8 million in 1996. Net income as a
percentage of net service revenue increased to 7.9% in 1997, from 6.5% in
1996.
1996 COMPARED WITH 1995
Net service revenues increased approximately 41.7% to $27.4 million in
1996, compared to $19.3 million for 1995. Permanent placement revenues
increased approximately 37.8% to $12.6 million in 1996, compared to $9.1
million in 1995. Specialty service revenues increased approximately 77.0% to
$7.4 million in 1996, compared to $4.2 million in 1995. Contract placement
revenues increased approximately 22.9% to $7.4 million in 1996 compared to
$6.0 million in 1995. The increases in revenues in 1996 were primarily
attributable to the Company's continued focus on high margin, high-end niche
markets as demonstrated by the redeployment of Company management and
marketing resources and the opening of two new local offices (Austin, Texas
and Raleigh, North Carolina) to service IT clients in those areas, further
implementation of the Company's single source provider strategy through the
continued training and development of the Company's local office management
staff which resulted in sales growth within existing offices and continued
demand for the Company's services.
Gross margin increased approximately 54.3% to $7.8 million in 1996,
compared to $5.0 million in 1995. Gross margin as a percentage of net service
revenues increased to 28.3% in 1996 from 26.0% in 1995, primarily as a result
of the Company's focus on higher margin business, particularly IT, and the
Company implementing cost reduction programs allowing fixed costs to be
spread over a larger revenue base.
Selling, general and administrative expenses increased approximately
26.8% to $5.7 million in 1996, compared to $4.5 million in 1995; representing
20.8% of 1996 revenues. The increase was primarily the result of increased
marketing and recruiting expenses, increased expenditures on the Company's
back office, including accounting, support staff and management information
systems to support the Company's growth strategies, as well as the overall
growth in the Company's business. Included in the increase in selling,
general and administrative expenses was an increase in selling expenses of
$261,000 in 1996 over the comparable period in 1995, an increase of $773,000
in general and administrative expenses primarily for back office
administration to support the Company's growth and an increase of $172,000
primarily related to the litigation described in Item 3 - Legal Proceedings.
Other expenses increased approximately $105,000 to $288,000 in 1996,
compared to $183,000 in 1995, primarily due to increased losses from joint
venture operations and a writedown of a long-lived asset.
Provisions for income taxes increased to approximately $225,000 in 1996
from approximately $60,000 in 1995, as a result of increases in the Company's
taxable income.
As a result of the above factors, net income increased approximately
287.5% to $1.8 million in 1996, as compared to $461,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $9.5 million at December 31, 1997,
compared to $95,000 at December 31, 1996. The increase in working capital of
approximately $9.4 million was the result of the recent public offering of
the Company's stock as well as the continued profitable operations of the
Company.
In the fourth quarter of 1997, the Company completed a public offering
of 949,785 shares of its common stock at $10.00 per share. An additional
314,100 shares were sold by certain selling shareholders in the offering.
After deducting the underwriting discounts and non-accountable expense
allowance, the net proceeds to the Company were approximately $8.5 million.
Cash flow provided by operating activities of approximately $822,000
resulted primarily from the profitable operations of the Company, which
supported increases in trade account receivables resulting from continued
revenue growth. The Company made capital expenditures of approximately
$895,000 in 1997, primarily to continue to improve its computer systems,
database and support its back office operations. The $8.5 million net
proceeds from the offering, after deducting approximately $1.1 million in
offering costs, were used to pay off certain factoring arrangements and other
short-term debt as well as strengthen the Company's financial position.
11
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth and
acquisitions. Management of the Company anticipates that funds from the
recent offering and cash flow from operations will provide adequate liquidity
to fund its internal 1998 growth plans and operations for the next twelve
months. The Company's internal 1998 growth plans include the enhancement and
expansion of its training operations, the expansion and improvement of its
applicant database and back office, the expansion and opening of new profit
centers in existing cities and the opening of new profit centers in new
geographic locations.
Inflation has not had a significant effect on the Company's operating
results.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
The Company has made a preliminary assessment of the Year 2000 Issue and
has concluded that it will have to modify or replace its accounting software
so that the Company's computer system will function properly with respect to
the Year 2000 Issue. The Company's accounting software can be brought into
compliance with the Year 2000 Issue through the purchase of an upgrade module
from the software vendor. However, the Company is currently considering the
purchase of new accounting and back office software. One of the requirements
of any software purchase will be compliance with the Year 2000 Issue.
Because the remainder of the Company's systems applications and hardware were
built on up-to-date client server architecture, they should require no
modifications with respect to the Year 2000 Issue. The Company will also
initiate formal communications with its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to those
third parties to minimize their own Year 2000 Issue. There can be no
assurance that the systems of other companies upon which the Company's
systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 "Disclosure
About Segments of an Enterprise and Related Information." During February
1998, the FASB issued Statement of Financial Accounting Standards No. 132
"Employers' Disclosure about Pensions and other Post Retirement Benefits."
Preliminary analysis of these new standards by the Company indicates that the
standards will not have a material impact on the Company. The standards are
effective for financial statements for fiscal years beginning after December
15, 1997.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that reflect projections
or expectations of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for future operations
are "forward-looking" statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated in
any such forward looking statements. Important factors (the "Cautionary
Disclosures") that could result in such differences include: general economic
conditions in the Company's markets, including inflation, recession, interest
rates and other economic factors; the availability of qualified personnel;
the level of competition experienced by the Company; the Company's ability to
implement its business strategies and to manage its growth; the level of
developmental expenses; those factors identified in the Company's Prospectus
dated September 30, 1997 as risk factors; and other factors that affect
businesses generally. Subsequent written and oral "forward-looking"
statements attributable to the Company or persons acting on its behalf are
expressly qualified by the Cautionary Disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
See Item 14(a).
12
QUARTERLY RESULTS
The Company's quarterly operating results have varied in the past and
can be expected to vary in the future. Fluctuations in operating results
generally are caused by a number of factors, including changes in the
Company's services mix, the degree to which the Company encounters
competition in its existing or target markets, general economic conditions,
the volume and timing of orders received during the period, sales and
marketing expenses related to entering new markets, the timing of new
services introductions by the Company or its competitors and changes in
prices for services offered by the Company or its competitors. In addition,
the Company generally experiences a certain amount of adverse seasonality in
its fourth and first quarters due to the number of holidays and vacations
taken in those periods.
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. The
quarterly information for the year ended December 31, 1996 has not been
reviewed by the Company's independent accountants.
Three Months Ended
--------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(In thousands except per share data)
Net services revenues $6,214 $6,813 $7,228 $7,175 $7,279 $8,374 $9,105 $9,053
Cost of services 4,506 4,842 5,153 5,174 5,195 5,774 6,288 6,421
------ ------ ------ ------ ------ ------ ------ ------
Gross margin 1,708 1,971 2,075 2,001 2,084 2,600 2,817 2,632
Selling, general and administrative
expenses 1,227 1,382 1,604 1,490 1,926 1,791 1,975 1,936
Other income (expenses) (93) (76) (57) (62) (10) (30) (41) 56
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes and
extraordinary item 388 513 414 449 148 779 801 752
Income (taxes) benefit, net (50) (62) (77) (36) 43 (136) (304) 520
------ ------ ------ ------ ------ ------ ------ ------
Income before extraordinary item 338 451 337 413 191 643 497 1,272
Extraordinary item - - - 246 43 - - 14
------ ------ ------ ------ ------ ------ ------ ------
Net Income $ 338 $ 451 $ 337 $ 659 $ 234 $ 643 $ 497 $1,286
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Basic earnings per share:
Before extraordinary item $ 0.19 $ 0.26 $ 0.20 $ 0.25 $ 0.12 $ 0.37 $ 0.28 $ 0.47
Net income 0.19 0.26 0.20 0.40 0.14 0.37 0.28 0.48
Diluted earnings per share:
Before extraordinary item $ 0.19 $ 0.25 $ 0.19 $ 0.24 $ 0.11 $ 0.35 $ 0.26 $ 0.45
Net income 0.19 0.25 0.19 0.38 0.13 0.35 0.26 0.46
Weighted average shares outstanding:
Basic 1,750 1,735 1,680 1,642 1,635 1,748 1,789 2,678
Diluted 1,750 1,789 1,761 1,752 1,789 1,826 1,885 2,785
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None Required.
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the
Proxy Statement is incorporated herein by reference in response to this Item
10.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "Executive Compensations" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Shareholder" in the
Proxy Statement is incorporated herein by reference in response to this Item
12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference in response to this Item 13.
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page 17 of all financial statements
and schedules filed as a part of this report.
All other schedules are omitted as they are not applicable or not
required, or because the required information is included in the financial
statements or notes thereto.
(iii) Exhibits
Reference is made to the Index to Exhibits on pages 37 through 38 for a
list of all exhibits filed as part of this report.
(b) Reports on Form 8-K.
Not Applicable.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Diversified Corporate Resources, Inc.
Date: March 30, 1998 By: /s/ J. Michael Moore
-----------------------------
J. Michael Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ J. Michael Moore Chairman of the Board, Chief Executive
- ----------------------------- Officer and Director
J. Michael Moore (Principal Executive Officer)
/s/ M. Ted Dillard President, Secretary and Director
- -----------------------------
M. Ted Dillard
/s/ Douglas G. Furra Chief Financial Officer (Principal Financial
- ----------------------------- Officer and Principal Accounting Officer)
Douglas G. Furra
/s/ Deborah A. Farrington Director
- -----------------------------
Deborah A. Farrington
/s/ Samuel E. Hunter Director
- -----------------------------
Samuel E. Hunter
16
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No.
Report of Independent Accountants
Coopers & Lybrand L.L.P. 18
Weaver and Tidwell, L.L.P. 19
Consolidated Balance Sheets - December 31, 1997, and 1996 20
Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996, and 1995 21
Consolidated Statements of Stockholders' Equity (Capital Deficiency) -
Years Ended December 31, 1997, 1996, and 1995 22
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996, and 1995 23
Notes to Consolidated Financial Statements 24
Report of Independent Accountants
Coopers & Lybrand L.L.P. 34
Weaver and Tidwell, L.L.P. 35
Schedule II - Valuation and Qualifying Accounts - Years Ended
December 31, 1997, 1996, and 1995 36
All other schedules have been omitted because they are either not
applicable or the information required by the schedule is included in the
financial statements or the notes thereto.
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
We have audited the accompanying consolidated balance sheets of
Diversified Corporate Resources, Inc. and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Diversified Corporate Resources, Inc. and Subsidiaries as of December 31,
1997 and 1996, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 23, 1998
18
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Diversified Corporate Resources, Inc.
Dallas, Texas
We have audited the accompanying consolidated statements of operations,
stockholders' equity (capital deficiency) and cash flows of Diversified
Corporate Resources, Inc. and subsidiaries for the year ended December 31,
1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our 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 results of operations and cash
flows of Diversified Corporate Resources, Inc. and subsidiaries for year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 9, 1996
19
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
--------------------------
CURRENT ASSETS: 1997 1996
----------- -----------
Cash and cash equivalents $ 7,500,188 $ 612,512
Trade accounts receivable, less allowances
of approximately $536,000 and $494,000, respectively 4,882,788 3,387,138
Notes receivable-related party 10,387 9,326
Prepaid expenses and other current assets 106,468 34,443
Federal income taxes receivable 201,436 -
Deferred income taxes 243,518 -
----------- -----------
TOTAL CURRENT ASSETS 12,944,785 4,043,419
PROPERTY AND EQUIPMENT, NET 1,389,761 807,997
OTHER ASSETS:
Investment in and advances to joint venture 226,638 152,905
Notes receivable-related party 11,385 21,690
Deferred income taxes 428,330 -
Other 160,657 177,879
----------- -----------
$15,161,556 $ 5,203,890
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses $ 3,487,470 $ 3,329,616
Book overdraft - 98,158
Borrowings under factoring and loan agreements - 400,682
Other short-term debt - 97,652
Current maturities of long-term debt 2,026 21,834
----------- -----------
TOTAL CURRENT LIABILITIES 3,489,496 3,947,942
DEFERRED LEASE RENTS 53,131 -
LONG-TERM DEBT 66,134 68,157
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY :
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued - -
Common stock, $.10 par value; 10,000,000 shares
authorized, 2,985,946 and 1,881,161 shares issued
in 1997 and 1996, respectively 298,595 188,116
Additional paid-in capital 11,080,504 3,615,151
Retained earnings (deficit) 358,871 (2,301,108)
Common stock held in treasury (245,849 shares), at cost (185,175) (185,175)
Receivables from related party - (129,193)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,552,795 1,187,791
----------- -----------
$15,161,556 $ 5,203,890
----------- -----------
----------- -----------
See notes to consolidated financial statements.
20
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
NET SERVICE REVENUES:
Permanent placement $17,592,923 $12,573,995 $ 9,124,545
Specialty services 7,609,008 7,451,563 4,209,685
Contract placement 8,609,602 7,404,730 6,023,655
----------- ----------- -----------
33,811,533 27,430,288 19,357,885
COST OF SERVICES 23,678,331 19,675,352 14,332,011
----------- ----------- -----------
GROSS MARGIN 10,133,202 7,754,936 5,025,874
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (7,628,234) (5,702,992) (4,497,097)
OTHER INCOME (EXPENSES):
Loss from joint venture operations (21,072) (90,313) (47,826)
Interest expense, net (35,468) (235,327) (237,111)
Other, net 31,729 37,282 102,086
----------- ----------- -----------
(24,811) (288,358) (182,851)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 2,480,157 1,763,586 345,926
INCOME TAXES 123,195 (224,774) (60,054)
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 2,603,352 1,538,812 285,872
EXTRAORDINARY ITEM - gain on debt
restructuring, net of income tax 56,627 246,125 174,811
----------- ----------- -----------
NET INCOME $ 2,659,979 $ 1,784,937 $ 460,683
----------- ----------- -----------
----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 1.33 $ .90 $ .16
Extraordinary item .03 .15 .10
----------- ----------- -----------
Total $ 1.36 $ 1.05 $ .26
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 1,951,117 1,701,823 1,758,211
----------- ----------- -----------
----------- ----------- -----------
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 1.25 $ .87 $ .16
Extraordinary item .03 .14 .10
----------- ----------- -----------
Total $ 1.28 $ 1.01 $ .26
----------- ----------- -----------
----------- ----------- -----------
Weighted average common and common equivalent
shares outstanding 2,071,223 1,763,069 1,758,211
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
21
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Additional Retained Receivables
Common paid-in Earnings Treasury from
stock capital (deficit) stock Related party Total
-------- ----------- ----------- --------- ------------- ----------
BALANCE, December 31, 1994 $188,116 $ 3,615,151 $(4,546,728) $(169,425) $ - $ (912,886)
Net income - - 460,683 - - 460,683
-------- ----------- ----------- --------- --------- ----------
BALANCE, December 31, 1995 188,116 3,615,151 (4,086,045) (169,425) - (452,203)
Net income - - 1,784,937 - - 1,784,937
Treasury stock purchase - - - (15,750) - (15,750)
Advances to a related party - - - - (129,193) (129,193)
-------- ----------- ----------- --------- --------- ----------
BALANCE, December 31, 1996 188,116 3,615,151 (2,301,108) (185,175) (129,193) 1,187,791
Advances to related party - - - - (170,807) (170,807)
Repayments from related party - - - - 300,000 300,000
Tax effect of stock options exercised - 57,750 - - - 57,750
Issuance of common stock 110,479 7,407,603 - - - 7,518,082
Net income - - 2,659,979 - - 2,659,979
-------- ----------- ----------- --------- --------- ----------
BALANCE, December 31, 1997 $298,595 $11,080,504 $ 358,871 $(185,175) $ - $11,552,795
-------- ----------- ----------- --------- --------- ----------
-------- ----------- ----------- --------- --------- ----------
See notes to consolidated financial statements.
22
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,659,979 $ 1,784,937 $ 460,683
Adjustments to reconcile net income to cash
provided by operating activities:
Extraordinary item (87,118) (246,125) (174,811)
Depreciation and amortization 307,652 188,760 132,183
Other 5,103 - -
Provision for allowances 42,663 81,434 207,363
Equity in loss of joint venture 21,072 90,313 47,336
Write-down of long-lived assets - 37,462 -
Income tax effect of options exercised 57,750 - -
Deferred lease rents 53,131 (52,531) (65,067)
Deferred income taxes (671,848) - -
Changes in operating assets and liabilities:
Accounts receivable (1,538,313) (1,327,949) (473,232)
Refundable federal income taxes (201,436) - -
Prepaid expenses and other current assets (69,876) 62,363 60,573
Other assets (1,381) 9,379 17,697
Trade account payable and accrued expenses 244,972 1,057,852 463,735
----------- ----------- ---------
Net cash provided by operating activities 822,350 1,685,895 676,460
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (894,519) (529,714) (312,396)
Deposits (11,397) (45,567) (35,606)
Loans and advances to related parties (172,956) (160,209) -
Repayment from related parties 309,244 13,052 23,844
Other obligations - - (20,634)
Net advances to joint venture (94,805) (139,380) (151,175)
----------- ----------- ---------
Net cash used in investing activities (864,433) (861,818) (495,967)
----------- ----------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 8,668,065 - -
Public offering costs (1,119,983) - -
Increase (decrease) in borrowings under
factoring and loan agreements (400,682) (246,968) 110,637
Net borrowing under short-term debt (97,652) 97,652 (64,500)
Purchase of treasury stock - (15,750) -
Principal payments under long-term debt
obligations (21,831) (21,660) (18,277)
Book overdraft (98,158) (31,078) (246,329)
----------- ----------- ---------
Net cash provided by (used in) financing activities 6,929,759 (217,804) (218,469)
----------- ----------- ---------
Increase (decrease) in cash and cash equivalents 6,887,676 606,273 (37,976)
Cash and cash equivalents at beginning of year 612,512 6,239 44,215
----------- ----------- ---------
Cash and cash equivalents at end of period $ 7,500,188 $ 612,512 $ 6,239
----------- ----------- ---------
----------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 159,000 $ 249,000 $ 264,000
Cash paid during the year for income taxes $ 783,000 $ 14,000 $ -
See notes to consolidated financial statements.
23
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the operations of
Diversified Corporate Resources, Inc. and its subsidiaries (the "Company"),
all of which are wholly owned. All intercompany accounts and transactions
have been eliminated in consolidation.
NATURE OF OPERATIONS AND CONCENTRATION OF CREDIT RISK
The Company is a Texas corporation and is engaged, through its
subsidiaries, in the permanent and specialty placement of personnel in
various industries, and in contract placement services. The Company operates
offices in Dallas, Houston and Austin, Texas; Atlanta, Georgia; Kansas City,
Missouri; Chicago, Illinois; and Raleigh, North Carolina. The offices are
responsible for marketing to clients, recruitment of personnel, operations,
local advertising, credit and collections. The Company's executive offices
in Dallas, Texas provide centralized training, payroll, collections and
certain accounting and administrative services for its offices. The Company
maintains cash on deposit in interest bearing accounts, which, at times,
exceed federally insured limits. The Company has not experienced any losses
on such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents. The Company also invests its excess cash
in short-term highly liquid money market accounts. At December 31, 1997,
approximately $7,000,000 was invested in a cash management fund which invests
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements in respect of these securities.
REVENUE RECOGNITION AND COST OF SERVICES
Fees for placement of permanent personnel are recognized as income at
the time the applicant accepts employment. Provision is made for estimated
losses in realization (principally due to applicants not commencing
employment or not remaining in employment for the guaranteed period).
Revenue from specialty services and contract placements are recognized by the
Company upon performance of services. Cost of services consists of expenses
for the operation of the Company's offices, principally commissions, direct
wages paid to non-permanent personnel, and payroll taxes. Accounts
receivable at December 31, 1997 and 1996 include approximately $233,000 and
$185,000, respectively, of unbilled receivables that were billed in 1998 and
1997, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased
with remaining maturities of three months or less to be cash equivalents for
purposes of the consolidated statements of cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, the Company's financial instruments consist of
notes receivable from related party and long-term debt. The Company believes
that the recorded values approximate fair value.
DEPRECIATION AND AMORTIZATION
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the individual assets (which range from
three to seven years) or the related lease terms, if applicable, whichever is
shorter. Upon retirement or sale, the cost and related accumulated
depreciation and amortization are removed from the accounts and any resultant
gains or losses are included in the consolidated statement of operations.
Maintenance and repair costs are charged to expense as incurred. The
estimated useful lives of each class of assets are as follows:
Computer equipment 5 years
Office equipment and furniture 3-7 years
Leaseheld improvements 5-7 years
24
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. For the years ended
December 31, 1997, 1996 and 1995, advertising expenses amounted to
approximately $343,000, $341,000, and $410,000 respectively.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share" ("Statement 128"), which is effective for periods ending after
December 15, 1997. Statement 128 specifies the computations, presentation
and disclosure requirements for earnings per share ("EPS"). Some of the
changes made to EPS standards include: (i) eliminating the presentation of
primary EPS and replacing it with basic EPS, with the principal difference
being that common stock equivalents are not considered in computing basic
EPS, (ii) eliminating the modified treasury stock method and the three
percent materiality provision, and (iii) revising the contingent share
provision and the supplemental EPS data requirements. Statement 128 also
requires dual presentation of basic and diluted EPS on the face of the income
statement, as well as a reconciliation of the numerator and denominator used
in the two computations of EPS. Primary and fully diluted EPS as reported in
previous financial statements have been restated to reflect the
implementation of Statement 128 in 1997.
Basic EPS was determined by dividing net income by the weighted average
number of shares of common stock outstanding during the year and diluted EPS
included these shares plus common stock equivalents outstanding during the
year (common stock equivalents are excluded if the effects of inclusion are
antidilutive).
The following is a reconciliation of the weighted average number of
shares outstanding during the year for basic and diluted earnings per share.
1997 1996 1995
--------- --------- ---------
Basic 1,951,117 1,701,823 1,758,211
Net effect of dilutive stock options 120,106 61,246 -
--------- --------- ---------
Diluted 2,071,223 1,763,069 1,758,211
--------- --------- ---------
--------- --------- ---------
Total options and warrants outstanding 495,500 440,000 150,000
Options and warrants not considered because
effects of inclusion would be antidilutive 255,590 170,000 150,000
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, particularly deferred
tax assets, and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued.
The Company adopted the statement in the first quarter of 1996. Under
provisions of the statement, impairments, measured using fair market value,
are recognized whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than its carrying
value. Accordingly, the Company recognized a reduction in market value of a
certain long-lived asset. This write down resulted in a charge to 1996
earnings of approximately $37,000.
25
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK BASED COMPENSATION
In October 1995, SFAS No. 123, "Stock Based Compensation," was issued.
This statement requires the Company to choose between two different methods
of accounting for employee stock options. The statement defines a
fair-value-based method of accounting for employee stock options but allows
an entity to continue to measure compensation cost for employee stock options
using the accounting prescribed by APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Use of the APB 25 accounting method results
in no compensation cost being recognized if options are granted at an
exercise price equal to or greater than the current market value of the
stock. The Company will continue to use the intrinsic value method under APB
25 but is required by SFAS 123 to make pro forma disclosure of net income and
earnings per share as if the fair value method had been applied in its 1997
and 1996 financial statements. See Note 6 to the consolidated financial
statements for a more complete discussion of this matter.
NEW ACCOUNTING PRONOUNCEMENTS
During June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." During February 1998, the FASB issued SFAS No. 132
"Employers' Disclosures about Pensions and other Post Retirement Benefits".
Preliminary analysis of these new standards by the Company indicates that the
standards will not have a material impact on the Company's financial
statements. The standards are effective for financial statements for fiscal
years beginning after December 15, 1997.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of:
December 31,
-----------------------
1997 1996
---------- ----------
Computer equipment and software $1,281,305 $ 673,699
Office equipment and furniture 536,518 697,947
Leasehold improvements 160,124 102,785
Less accumulated depreciation and amortization (588,186) (666,434)
---------- ----------
$1,389,761 $ 807,997
---------- ----------
---------- ----------
Included in computer equipment and software are software development costs
in progress of approximately $93,000 at December 31, 1997.
3. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Trade accounts payable and accrued expenses consist of:
December 31,
-----------------------
1997 1996
---------- ----------
Trade accounts payable $ 362,887 $ 517,808
Accrued expenses 533,415 712,421
Accrued compensation 2,306,357 1,761,246
Self-insured medical reserve 49,621 159,233
Accrued payroll expense 230,540 136,194
Other 4,650 42,714
---------- ----------
$3,487,470 $3,329,616
---------- ----------
---------- ----------
Included in accrued compensation are accrued commissions, contractors
payroll and management bonuses.
26
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BORROWINGS UNDER FACTORING AND LOAN AGREEMENT AND OTHER SHORT-TERM DEBT:
During 1997 and 1996, wholly owned subsidiaries of the Company factored
certain trade accounts receivable pursuant to factoring agreements. Funds
advanced on the receivables were reported as borrowings. Interest charged on
the outstanding balance of the borrowings was based on the base-lending rate
as defined by the agreement plus 3%. The interest rate and outstanding
borrowing under the factoring agreement were 11.25% and approximately
$292,000 at December 31, 1996. In addition, the factoring company charged a
fee of .6% on the amount of accounts receivable factored. The factoring
agreement was paid in full in 1997.
On August 26, 1996, one of the Company's wholly owned subsidiaries
entered into an accounts receivable based revolving line of credit agreement
with a finance company, which replaced one of the Company's factoring
arrangements. Fees and interest were based on the monthly average outstanding
balance under the line of credit. Interest was payable monthly at prime plus
2.5% (11% at December 31, 1996) plus an administrative fee of .6% on the
average daily outstanding balance during the preceding month. At December 31,
1996, borrowings under the line amounted to approximately $108,000. The
loan was paid in full in 1997.
On August 26, 1996, the Company entered into a $300,000 line of credit
agreement for the purchase of fixed assets. Interest was payable monthly at
prime plus 2.5% (11% at December 31, 1996). The outstanding balance of
approximately $98,000 under this line was reflected in other short-term debt
in the Consolidated Balance Sheet at December 31, 1996. The loan was paid in
full in 1997.
5. LONG-TERM DEBT:
December 31,
-------------------
1997 1996
------- --------
Long-term debt consists of:
Noninterest bearing note due to the Federal
Deposit Insurance Corporation, quarterly
installments of $5,000, paid in full $ - $ 20,000
Adjustable rate (approximately 10% at
December 31, 1997 and 1996), mortgage note
due in monthly installments of $729 plus
interest, due 2013 68,160 69,991
------- --------
68,160 89,991
Less current maturities of long-term debt (2,026) (21,834)
------- --------
Total long-term debt $66,134 $ 68,157
------- --------
------- --------
The Company's mortgage note payable is collateralized by a first lien on
certain real estate included in other noncurrent assets.
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows:
1998 $ 2,026
1999 2,238
2000 2,473
2001 2,732
2002 3,018
2003 and thereafter 55,673
-------
$68,160
-------
-------
27
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCKHOLDERS' EQUITY:
In October 1995, options to purchase 150,000 shares of the Company's
Common Stock at $0.50 per share were granted to certain officers and
directors. In December 1996, the Board of Directors approved the immediate
vesting of these options effective December 31, 1996.
Under provisions of the Company's 1996 Amended and Restated Nonqualified
Stock Option Plan (the "Plan"), options to purchase an aggregate of 450,000
shares of the Company's common stock may be granted to key personnel of the
Company. Options may be granted for a term of up to ten years to purchase
common stock at a price or prices established by the Compensation Committee
of the Board of Directors of the Company or its appointee. The options
granted in 1997 and 1996 vest in varying amounts over three to five years.
On November 13, 1997, the Board of Directors approved an amendment to
the Plan increasing the number of shares subject to the Plan from 450,000
shares to 550,000 shares. This amendment is subject to shareholder approval.
On November 13, 1997, the Compensation Committee granted options to purchase
an aggregate of 145,500 shares of the Company's Common Stock at $10.00 per
share to certain executives, senior managers and other employees of the
Company and its subsidiaries, none of which were current option holders.
These options were granted under the Plan, as amended on November 13, 1997.
A portion of the shares subject to each option represents shares that were
added to the Plan by the Board of Directors subject to shareholder approval.
If shareholder approval is not obtained, that portion of the shares subject
to these options will be cancelled.
Subsequent to December 31, 1997, the Compensation Committee granted an
option to purchase 7,500 shares of the Company's Common Stock at $8.00 per
share to an executive (the Executive) of one of the Company's subsidiaries.
These options were granted in exchange for options previously granted to the
Executive to purchase up to 25% of the subsidiary. These options were
granted under the Plan and represent shares that have been added to the plan
by the Board of Directors subject to shareholder approval. If shareholder
approval is not obtained, these options and this transaction will be
cancelled.
The following is a summary of the Company's stock options as of and for
the year ended December 31, 1996.
Number of
Weighted Shares of Range
Average Underlying of
exercise Price Options Exercise Prices
-------------- ---------- ---------------
Outstanding at beginning of year $ .50 150,000 $ .50 to $ .50
Granted at a premium 4.04 290,000 2.50 to 8.00
-------
Outstanding at end of year 2.84 440,000 .50 to 8.00
-------
-------
Exercisable at December 31, 1996 1.43 280,000 .50 to 2.50
-------
-------
The following is a summary of the Company's stock options as of and for the
year ended December 31, 1997.
Number of
Weighted Shares of Range
Average Underlying of
exercise Price Options Exercise Prices
-------------- ---------- ---------------
Outstanding at beginning of year $ 2.84 440,000 $ .50 to $ 8.00
Granted at-the-money 3.50 20,000 3.00 to 4.00
Granted at a premium 9.30 215,500 4.00 to 10.00
Exercised .58 (155,000) .50 to 3.00
Forfeited 4.90 (25,000) 3.00 to 10.00
--------
Outstanding at end of year 6.28 495,500 2.50 to 10.00
--------
--------
Exercisable at December 31, 1997 3.14 223,000 2.50 to 10.00
--------
--------
28
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 31, 1997.
Options Outstanding Options Exercisable
------------------------------------ ----------------------------
Weighted
Ave. Weighted
Remaining Ave.
Range of Exercise Number Contr. Life Exercise Number Weighted Ave.
Prices Outstanding in Years Price Exercisable Exercise Price
- ----------------- ----------- ----------- -------- ----------- --------------
$2.50 to $5.00 250,500 4.02 $3.21 220,500 $ 3.06
$8.00 to $10.00 245,000 4.69 9.41 2,500 10.00
------- -------
495,500 4.40 $6.28 223,000 $ 3.14
------- -------
------- -------
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123") establishes a fair value basis of
accounting for stock based compensation plans. Had the compensation cost for
the Company's employee stock based compensation plans been determined
consistent with SFAS 123, the Company's net income would approximate the
amounts below:
1997 1996 1995
------------------------- ------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- ---------- ----------- ---------- ----------- ---------
SFAS 123 compensation cost $ - $ 273,145 $ - $ 254,863 $ - $ 11,730
APB 25 compensation cost $ - $ - $ - $ - $ - $ -
Net Income $2,659,979 $2,386,834 $1,784,937 $1,530,074 $460,683 $448,953
Basic earnings per share:
Income before extraordinary item $ 1.33 $ 1.19 $ .90 $ .75 $ .16 $ .16
Extraordinary item .03 .03 .15 .15 .10 .10
Basic earnings per share $ 1.36 $ 1.22 $ 1.05 $ .90 $ .26 $ .26
Diluted earnings per share:
Income before extraordinary item $ 1.25 $ 1.12 $ .87 $ .73 $ .16 $ .16
Extraordinary item .03 .03 .14 .14 .10 .10
Diluted earnings per share $ 1.28 $ 1.15 $ 1.01 $ .87 $ .26 $ .26
The effects of applying SFAS 123 as disclosed above are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995, and the
Company anticipates making awards in the future under its stock based
employee compensation plan.
The fair value of each stock option granted in 1997, 1996, and 1995 is
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
ASSUMPTIONS: 1997 1996 1995
----- ------ ------
Expected term 3.75 2.71 2.50
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 40.55% 184.11% 184.11%
Risk-free interest rate 6.10% 5.93% 5.71%
The weighted-average grant date fair value of options granted during the
years ended December 31, 1997, 1996 and 1995 was $3.17, $2.82 and $.20,
respectively.
29
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the employee stock options described above, the Company
granted a total of 82,590 stock warrants with an exercise price of $13.50 to
an investment banker for service rendered in connection with the Company's
public offering. These warrants are outstanding as of December 31, 1997, and
are not exercisable until September 30, 1998. The fair value of these stock
warrants granted in 1997 is estimated on the date of grant to be
approximately $161,000 using the Black-Scholes option-pricing model with the
following assumptions: an expected term of 2.5 years, an expected dividend
yield of 0.00%; an expected stock price volatility of 40.55%; and a risk-free
interest rate of 5.84%.
During the fourth quarter of 1997, the Company completed a public
offering of 949,785 shares, including 123,885 shares from the underwriters
exercise of its overallotment option, of its common stock at $10.00 per
share. An additional, 314,100 shares were sold by certain selling
shareholders in the offering. After deducting the underwriting discounts and
non-accountable expense allowance, the net proceeds to the Company were
approximately $8.5 million. The net increase to stockholders' equity was
approximately $7.4 million after netting approximately $1.1 million in
deferred offering costs. In addition to these shares, during 1997, 155,000
shares were issued in connection with the exercise of stock options.
7. 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,
----------------------------------------
1997 1996 1995
----------- ---------- ---------
Tax provision at statutory rate $ 898,546 $ 684,619 $ 156,632
Utilization of net operating loss carryforwards (163,312) (589,200) (156,632)
Change in valuation allowance exclusive of
utilization of net operating loss carryforward (892,388) (19,400) -
Other 19,658 (7,834) -
Alternative minimum tax (credits) (39,889) 28,105 -
State income taxes net of federal income
tax benefit 84,681 132,359 60,054
----------- ---------- ---------
Total $ (92,704) $ 228,649 $ 60,054
----------- ---------- ---------
----------- ---------- ---------
The allocation of income taxes (benefit) is:
December 31,
----------------------------------------
1997 1996 1995
----------- ---------- ---------
Operations $ (123,195) $ 224,774 $ 60,054
Extraordinary item 30,491 3,875 -
----------- ---------- ---------
Total $ (92,704) $ 228,649 $ 60,054
----------- ---------- ---------
----------- ---------- ---------
Current $ 579,144 $ 228,649 $ 60,054
Deferred 173,747 19,400 35,700
Realization of net operating loss
carryforwards 210,105 589,200 76,300
Change in valuation allowance (1,055,700) (608,600) (112,000)
----------- ---------- ---------
Total $ (92,704) $ 228,649 $ 60,054
----------- ---------- ---------
----------- ---------- ---------
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by the tax laws. In the fourth quarter of 1997,
the Company determined that it was more likely than not that it would realize
its deferred tax assets and, accordingly, reduced the related valuation
allowance $845,595. This change of estimate increased basic and diluted
earnings per share $0.43 and $0.41, respectively.
30
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
------------------------- ---------------------------
Deferred Deferred Tax Deferred Deferred
Tax Assets Liabilities Tax Assets Tax Liabilities
---------- ------------ ---------- ---------------
Current:
Net operating loss carryforwards $163,312 $ - $ 158,646 $ -
Reserves and accruals 80,206 - 222,000 -
-------- ------- --------- -------
243,518 - 380,646 -
Less valuation allowance - - (380,646) -
-------- ------- --------- -------
Subtotal-current 243,518 - - -
-------- ------- --------- -------
Non-current:
Net operating loss carryforwards 475,883 - 690,654 -
Other basis differences principally
related to property and equipment - 61,200 - 34,680
Other 13,647 - 19,080 -
-------- ------- --------- -------
489,530 61,200 709,734 34,680
Less valuation allowance - - (675,054) -
-------- ------- --------- -------
Subtotal-non-current 489,530 61,200 34,680 34,680
-------- ------- --------- -------
Total $733,048 $61,200 $ 34,680 $34,680
-------- ------- --------- -------
-------- ------- --------- -------
Net current asset $243,518 $ -
-------- ---------
-------- ---------
Net non-current asset $428,330 $ -
-------- ---------
-------- ---------
The Company has a net operating loss carryforward of approximately
$1,826,000 as of December 31, 1997, which, if unused, expires in 2006 through
2008. In addition, due to a more than 50% change in ownership beginning with
an April 1991 transaction, the Company's net operating loss carryforward is
subject to certain limitations pursuant to provisions of the Internal Revenue
Code. The amount of the Company's net operating loss available for use for
the year ended December 31, 1997, was approximately $467,000. An additional
$467,000 will become available annually through 2001.
8. DEBT RESTRUCTURING:
During the years ended December 31, 1997, 1996 and 1995, the Company
settled certain obligations on a discounted basis as follows:
December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
Gain on debt restructuring, net of income taxes $56,627 $246,125 $174,811
-------- -------- --------
-------- -------- --------
9. RELATED PARTY TRANSACTIONS:
The Company leased approximately 2,000 square feet for approximately
$2,000 per month from United States Funding Group, Inc. ("USFG") through
January 1996, which was used as its principal offices. USFG is wholly owned
by J. Michael Moore, Chairman of the Board and Chief Executive Officer of the
Company. Rent expenses were approximately $1,300 and $19,900 in 1996 and
1995, respectively, on this lease.
In January of 1996, the Company loaned $25,000 to United States Funding
Group Oil and Gas, Inc., an entity wholly owned by Mr. Moore, Chairman of the
Board and Chief Executive Officer of the Company. Such loan was evidenced by
a promissory note bearing interest at the rate of 1% per month on the unpaid
balance due in monthly installments. In addition, a 10% loan origination and
administration fee was charged. As of March 31, 1997, this note has been paid
in full.
31
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, the Company advanced a total of $37,000 to former officers
of its wholly owned subsidiary companies. During 1996, an additional advance
of $4,000 was made. The balance of $41,000 was written off when the former
officer left the Company 1996.
During 1995, the Company repaid $14,500 on a loan from a related party.
During January 1995, the Company entered into a joint venture agreement
with CFS, Inc. for the purpose of providing personnel services to certain
businesses requiring minority suppliers and to others. Laurie Moore, the
wife of J. Michael Moore, the Chief Executive Officer and Chairman of the
Board of the Company, was a minority shareholder of CFS, Inc. until her
interest was purchased by the majority shareholder of CFS, Inc. in 1996,
which was made effective retroactive to January 1, 1995. (See Note 12 Joint
Venture Operations, for more information.)
The Company had approximately $7,000 and $41,000 payable to related
parties, including certain former directors and officers, included in trade
accounts payable and accrued expenses at December 31, 1997 and 1996,
respectively.
During 1997 and 1996, the Company paid various expenses on behalf of Mr.
Moore or various entities that he controls in the amount of approximately
$173,000 and $129,000, respectively. In October 1997, Mr. Moore repaid these
amounts. The majority of these amounts are related to litigation defense
associated with a lawsuit with Ditto Properties, Inc., in connection with the
Company being named therein as garnishee. During, 1996, the Company advanced
Mr. Moore $31,000 which was represented by notes bearing interest at 10%.
The unmatured balance of these notes (approximately $22,000 at December 31,
1997) is included in notes receivable related party in the Company's
Consolidated Balance Sheet.
Interest income from related parties amounted to approximately $5,100 in
1997, $5,500 in 1996, and $1,300 in 1995. Interest expense incurred on
related parties borrowings amounted to approximately $10,700 in 1995.
10. EMPLOYEE BENEFIT PLANS:
During the year ended December 31, 1991, the Company adopted the
Diversified Human Resources Group, Inc. Employees' Stock Ownership Plan
("ESOP"). Due to the financial difficulties incurred by the Company during
the year ended December 31, 1991, an initial contribution was not made to the
ESOP, and to date, no contributions have been made. Management currently has
no plans to initiate the ESOP. In 1993, the Company implemented a 401(K)
plan for the benefit of its employees. Company contributions to the plan in
1997 totaled approximately $20,000. Beginning in January 1998, the Company
began funding the employee match with Company stock.
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company rents office space under various operating leases. Certain
of the leases have escalating rent payments. The Company is liable for the
future minimum lease payments for the periods subsequent to December 31,
1997, as follows:
1998 $1,354,551
1999 1,196,097
2000 1,066,038
2001 1,008,842
2002 1,005,842
2003 and thereafter 212,204
----------
Future minimum lease payments $5,843,574
----------
----------
The aggregate amount of past due rental payments owed by the Company to
one of its landlords was approximately $31,000 as of December 31, 1997, which
is included in accrued expenses. The Company negotiated a settlement of
this obligation subsequent
32
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to year-end. Such amount is reflected in the 1998 future minimum lease
payments set forth in the table above. Rent expense was approximately
$1,298,000, $1,027,000, and $894,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
CONTINGENCIES
The Company was named as a garnishee in a lawsuit against its largest
shareholder, which the Company believes, is without merit. As the result of
an Agreed Temporary Order dated October 24, 1996, the Company was non-suited
in this matter. The Company has filed a separate lawsuit against the
plaintiff seeking damages and reimbursement of expense, alleging that
plaintiffs interfered with Company business transactions and proposed
financing resulting in delays of certain transactions, lost opportunities,
lost profits and other significant losses. Additionally, the Company has
been named in a lawsuit filed by two former employees claiming damages for
the fair market value of certain shares of common stock of certain
subsidiaries of the Company as well as other damages for breach of contract
and various other allegations. The Company has filed a third party petition
against one of these plaintiffs and a counterclaim against the other
plaintiff. The Company is also involved in certain other litigation and
disputes not previously noted. With respect to all the aforementioned
matters, management believes they are without merit and has concluded that
the ultimate resolution of such will not have a material effect on the
Company's consolidated financial statements.
12. JOINT VENTURE OPERATIONS:
During January, 1995, the Company entered into a joint venture agreement
with CFS, Inc., for the purpose of primarily providing personnel services to
certain businesses requiring minority suppliers. CFS, Inc. is a minority
operated corporation, which because of its status, supplies services to
clients requiring a certain portion of its business to be allocated to
minority owned and operated vendors. The Company provides CFS, Inc. with
substantially all of its personnel and contract labor on a subcontractor
basis at cost. Laurie Moore, the wife of J. Michael Moore, the Chief
Executive Officer and Chairman of the Board of the Company, owned 49% of CFS,
Inc. On August 15,1996, the majority shareholder of CFS, Inc. purchased the
49% ownership interest of Ms. Moore, pursuant to a transaction which was made
effective retroactive to January 1, 1995. Ms. Moore received no monetary
gain on her investment in CFS, Inc. or on this transaction. The Company has
a 49% ownership interest in the joint venture and is allocated 65% of the net
income or loss resulting from the joint venture operations.
The following is summarized unaudited financial information on the
joint venture:
As of and for the year ended December 31,
-----------------------------------------
1997 1996
---------- ----------
Current assets $ 197,952 $ 112,539
Non-current assets 2,729 3,315
Current liabilities 67,364 36,822
Non-current liabilities 377,275 290,554
Net sales 1,025,925 288,087
Gross margin (loss) 161,254 (23,617)
Net loss (32,418) (138,943)
33
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 and for the years ended
December 31, 1997 and 1996 is included on page 18 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule for the year ended December 31, 1997
and 1996 listed in the index on page 17 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 23, 1998
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
Dallas, Texas
Our report on the consolidated financial statements of Diversified
Corporate Resources, Inc. and subsidiaries for the year ended December 31,
1995 is included on page 19 of this Form 10-K. In connection with our audit
of such financial statements, we have also audited the related financial
statement schedule for the year ended December 31, 1995 listed in the index
on page 17 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic 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 9, 1996
35
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Bad Debt
Provisions
Balance at Charged to Provisions Balance at
Beginning Costs & Charged to End of
Description of Period Expenses Revenues Deductions Period
- ------------------------------------ --------- -------- -------- ---------- ------
For the Year Ended December 31,
1995:
Trade accounts receivable
allowances $ 205,000 $116,000 $1,028,000(1) $ 937,000 $ 412,000
Valuation allowance for deferred
tax assets $1,776,140 $ - $ - $ 111,840 $1,664,300
For the year Ended December 31,
1996:
Trade accounts receivable
allowances $ 412,000 $165,000 $1,256,000(1) $1,339,000 $ 494,000
Valuation allowance for deferred
tax assets $1,664,300 $ - $ - $ 608,600 $1,055,700
For the Year Ended December 31,
1997:
Trade accounts receivable
allowances $ 494,000 $391,000 $1,881,000(1) $2,230,000 $ 536,000
Valuation allowance for deferred
tax assets $1,055,700 $ - $ - $1,055,700 $ -
FOOTNOTES
(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.
36
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBITS
3.1 Articles of Incorporation of the Company as amended (incorporated by
reference from Exhibit 3(a) to the Company's Registration Statement on
Form S-18 (Reg. No. 33-760 FW))
3.1 Bylaws of the Company (incorporated by reference from Exhibit 3(b) to
the Company's Registration Statement on Form S-18 (Reg. No. 33-760 FW))
10.1 Employment Contract Agreement entered into June 9, 1995, between
Management Alliance Corporation, a wholly owned subsidiary of the
Company and Anthony J. Bruno, Chicago, Illinois, an employee
(incorporated by reference from Exhibit 10(z)(iii) to the Company's Form
10-K for the year ended December 31, 1994)
10.2 Form of Underwriting Agreement (incorporated by reference from Exhibit
1.1 to the Company's Amendment No.1 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-31825))
10.3 Form of Common Stock Warrant (incorporated by reference from Exhibit 1.2
to the Company's Amendment No.1 to the Company's Registration Statement
on Form S-1 (Reg. No. 333-31825))
10.4 Loan Agreement by and between Information Systems Consulting Corp. (a
wholly-owned subsidiary of the Company) and Concord Growth Corp.
executed August 26, 1996 (incorporated by reference from Exhibit
10(z)(vii) to the Company's Form 10-K for the year ended December 31,
1996)
10.5 Amendment to Loan Agreement by and between Information Systems
Consulting Corp. and Concord growth Corp. (incorporated by reference
from Exhibit 10(z)(viii) to the Company's Form 10-K for the year ended
December 31, 1996)
10.6 General Continuing Guaranty of Preferred Funding Corporation in favor of
Concord Growth Corporation (incorporated by reference from Exhibit
10(z)(ix) to the Company's Form 10-K for the year ended December 31,
1996)
10.7 General Continuing Guaranty of the Company in favor of Concord Growth
Corporation (incorporated by reference from Exhibit 10(z)(x) to the
Company's Form 10-K for the year ended December 31, 1996)
10.8 General Continuing Guaranty of Management Alliance Corporation in favor
of Concord Growth Corporation (incorporated by reference from Exhibit
10(z)(xi) to the Company's Form 10-K for the year ended December 31,
1996)
10.9 The Company's Amended and Restated 1996 Nonqualified Stock Option Plan,
effective as of December 27, 1996 (incorporated by reference from
Exhibit 10(z)(xii) to the Company's Form 10-K for the year ended
December 31, 1996)
10.10 Stock Option Agreement by and between Diversified Corporate Resources,
Inc. and J. Michael Moore, executed May 15, 1997 (incorporated by
reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-
27867) filed on May 27, 1997)
10.11 Stock Option Agreement by and between Diversified Corporate Resources,
Inc. and M. Ted Dillard, executed May 15, 1997 (incorporated by
reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-
27867) filed on May 27, 1997)
10.12 Stock Option Agreement by and between Diversified Corporate Resources,
Inc. and Donald A. Bailey, executed May 15, 1997 (incorporated by
reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-
27867) filed on May 27, 1997)
37
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
10.13 Stock Option Agreement by and between Diversified Corporate Resources,
Inc. and Samuel E. Hunter, executed May 15, 1997 (incorporated by
reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-
27867) filed on May 27, 1997)
10.14 Employment Contract by and between Diversified Corporate Resources, Inc.
and J. Michael Moore, executed April 10, 1997 (incorporated by reference
from Exhibit 10(z)(xviii) to the Company's Form 10-K for the year ended
December 31, 1996)
10.15 Employment Contract by and between Diversified Corporate Resources, Inc.
and M. Ted Dillard, executed April 10, 1997 (incorporated by reference
from Exhibit 10(z)(xviii) to the Company's Form 10-K for the year ended
December 31, 1996)
10.16 Standard Form Office Lease between Zell/Merrill Lynch Real Estate
Opportunity Partners Limited and Lafarge Corporation dated February 26,
1993 (incorporated by reference from Exhibit 10.17 to the Company's
Amendment No. 1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-31825))
10.17 First Amendment to the Office Lease between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited and Lafarge Corporation dated
February 20, 1995 (incorporated by reference from Exhibit 10.18 to the
Company's Amendment No.1 to the Company's Registration Statement on Form
S-1(Reg. No.333-31825))
10.18 Second Amendment to the Office Lease between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited and Lafarge Corporation dated
February 22, 1995 (incorporated by reference from Exhibit 10.19 to the
Company's Amendment No.1 to the Company's Registration Statement on Form
S-1(Reg. No.333-31825))
10.19 Third Amendment to the Office Lease between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited and Lafarge Corporation dated
November 3, 1995 (incorporated by reference from Exhibit 10.20 to the
Company's Amendment No.1 to the Company's Registration Statement on Form
S-1(Reg. No.333-31825))
10.20 Fourth Amendment to the Office Lease between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited and Lafarge Corporation dated
October 24, 1996 (incorporated by reference from Exhibit 10.21 to the
Company's Amendment No.1 to the Company's Registration Statement on Form
S-1(Reg. No.333-31825))
10.21 Fifth Amendment to the Office Lease between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited and Lafarge Corporation dated
January 7, 1997 (incorporated by reference from Exhibit 10.22 to the
Company's Amendment No.1 to the Company's Registration Statement on Form
S-1 (Reg. No.333-31825))
21 List of Subsidiaries *
23.1 Consent of Coopers & Lybrand, L.L.P. *
23.2 Consent of Weaver and Tidwell, L.L.P. *
27 Financial Data Schedule *
(*Filed herewith)
38