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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
.
COMMISSION FILE NUMBER 0-13984
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DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(STATE OR OTHER JURISDICTION OF (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)
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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. /X/
The aggregate market value of 1,900,937 shares of the registrant's common
stock held by nonaffiliates, based upon the closing price of the registrant's
common stock as reported by the American Stock Exchange on March 26, 1999, was
approximately $10.7 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 18, 1999, 2,761,397 shares of the registrant's common
stock, $.10 par value, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrants' definitive Proxy Statement pertaining to the 1999 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.
PART I
ITEM 1. BUSINESS
OVERVIEW
Diversified Corporate Resources, Inc. (such entity and its subsidiaries are
collectively referred to herein as the "Company") 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, Philadelphia,
Pennsylvania, Denver, Colorado, Reston, Virginia, Kansas City, Missouri and
Raleigh, North Carolina.
INDUSTRY OVERVIEW
The employment services industry has experienced significant growth.
According to a May 12, 1998 Staffing Industry Report, 1996 and 1997 revenues for
the U.S. staffing industry and its segments were estimated at $74.4 billion and
$87.9 billion, respectively, an 18% increase, and 1998 revenues were estimated
to be $103.8 billion, an 18% 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 12, 1998 Staffing Industry Report,
1996 and 1997 revenues for the IT services sector were estimated at $11.7
billion and $14.8 billion, respectively, a 26% increase, and 1998 revenues were
projected to be $18.5 billion, a 25% increase.
The growth of the IT services industry has been driven by: (i) businesses'
increasing reliance on IT 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 more traditional, temporary staffing placements. At the same time,
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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.
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 which generally provide higher margins
such as IT, engineering/technical, financial/accounting and
professional/technical sales. 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, the Company has implemented its Train International program, which
provides training to its applicants to provide its clients with personnel with
the most up-to-date technical skills possible.
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 markets 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) use of 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 and certification courses from twelve
classrooms at its three Dallas area 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
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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 offices in Reston,
Virginia in the first quarter of 1998, Denver, Colorado in the third quarter of
1998 and expanded into Philadelphia, Pennsylvania with the acquisition of
Texcel, Inc. and Texcel Technical Services, Inc. (collectively "Texcel") in the
fourth quarter of 1998. The Texcel companies are engaged in both permanent and
temporary placements of technical and professional specialist with a focus on IT
and engineering. This expansion complements the Company's 1996 opening of new
offices in Austin, Texas and Raleigh, North Carolina and allows 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 is actively pursuing opportunities to acquire
complementary employment services businesses through a disciplined acquisition
strategy in certain other geographic markets.
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 competitive
advantages to the Company.
PERMANENT PLACEMENT SERVICES
The Company is currently engaged in providing permanent placement services
in Dallas, Houston and Austin, Texas; Atlanta, Georgia; Chicago, Illinois;
Philadelphia, Pennsylvania; Denver, Colorado; 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, systems 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 provides permanent clerical and
administrative personnel to its existing clients, primarily to support
professional staff and executive management of those clients.
The Company usually enters into written contracts with clients specifying
its fee arrangements prior to undertaking any permanent placement services on
behalf of such clients. Fees range from 15% to 35% of the newly placed
employee's first year's annual salary. Although the client 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
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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 specialty contract and 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 specialty contract and temporary personnel for
periods generally ranging from one day to several weeks. The Company generally
receives notice of the assignments ranging from minutes to three days in
advance. The Company charges clients an hourly rate for temporary personnel.
Substantially all temporary personnel assigned by the Company are Company
employees and the Company pays all employment costs, including hourly wages,
unemployment taxes, social security taxes and fringe benefits. The Company
generally offers clients a guaranteed period during which the Company will
refund the client's fee 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, Reston, Virginia 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.
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CUSTOMERS
The Company has provided personnel and human resource solutions to several
Fortune 500 companies and several of the nation's largest companies, including:
Alcatel, Hitachi America, American Airlines, Compaq Computer Corp., Mobil Oil,
Dr. Pepper/7-Up, Texas Instruments, MCI Worldcom, 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, the
Internet, 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 provides paid vacations, holidays and other benefits for
temporary professional employees who work a specified minimum number of hours
for the Company.
SOFTWARE DEVELOPMENT
In August 1998, the Company entered into an agreement with Geier &
Associates, Inc., d/b/a/ Geier Learning Systems ("GLS") and John G. Geier, Ph.D.
to form Geier Assessment and Performance Systems, Inc. ("GAPS"), a wholly owned
subsidiary of the Company. GAPS is engaged in developing software based upon
written material initially developed by GLS and its agents and employees for use
by the Company in testing and improving the work performance of its agents and
employees or its clients' agents and employees. The Company began using the
software in the fourth quarter of 1998.
TRAINING
The Company has begun to expand and improve the 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
- Self-Paced Training for Support Personnel
- Internet/Intranet Network Training
Programs
- Manufacturing Processes and Systems Cer-
tification and Training
- E-mail and GroupWare
- Database/Spreadsheet
- Graphics and Desk Top Publishing
- Lotus Notes
- C++
- Visual Basic
- Word Processing
- Certified Network Engineering
- Certified Network Administrator
- Power Point Application
- Microsoft Programs
- Windows 95/98
- Cobol (Year 2000 Solutions)
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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 were completed in the second quarter of 1998 and the Company tripled
its training capacity by adding eight classrooms through the Alliance Training
Center acquisition in the second quarter of 1998. Its classroom facilities
feature state-of-the-art computer equipment.
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 Butler International, Inc.,
General Employment Enterprises, Inc., RCM Technologies, Inc., Professional
Staff, PLC, Lamalie Associate, Inc., Comforce Corp., National Technical Systems,
Inc., and National TechTeam, Inc. Local employment staffing entities are
typically operator-owned, and each market generally has one or more significant
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 and Olsten Corp.
In addition, national and regional accounting firms also offer certain
employment staffing services. Finally, the Company also faces the risk that
certain of its current and prospective clients will decide to provide similar
services internally. There can be no assurance that the Company will be able to
continue to compete effectively with existing or potential competitors.
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.
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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 417 full-time employees as of December 31, 1998. Of these
employees, approximately 341 were recruiters, personnel consultants and office
managers paid on a commission basis and approximately 76 were administrative and
executive salaried employees. The Company considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company currently leases approximately 73,000 square feet in Dallas,
Texas, 21,000 square feet in Houston, Texas, 5,200 square feet in Austin, Texas,
3,600 square feet in Kansas City, Missouri, 9,200 square feet in Atlanta,
Georgia, 5,200 square feet in Chicago, Illinois, 9,700 square feet in
Philadelphia, Pennsylvania, 6,500 square feet in Denver Colorado and 4,200
square feet in Raleigh, North Carolina. Such leases generally range from three
to seven years.
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
The Company is the plaintiff in a pending lawsuit in the District Court in
Dallas County, Texas, against Ditto Properties Company ("Ditto Properties").
Such lawsuit involves claims that the Company was damaged by Ditto Properties in
connection with its actions and relates to a lawsuit (the "Suit") filed in
September 1996 by Ditto Properties against DCRI L.P. No. 2, Inc., a significant
shareholder of the Company ("No. 2"), J. Michael Moore, Chairman and Chief
Executive Officer of the Company and controlling shareholder of No. 2 ("Mr.
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
of the Company 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. 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; such payment allows No. 2 unrestricted rights with
respect to the Shares. 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.
Until February, 1999, the Company, two of its subsidiaries, Mr. Moore, and
M. Ted Dillard, President of the Company, (the "Company Defendants"), were
defendants in a lawsuit in a District Court for Dallas County, Texas, initiated
by Billie Jean Tapp ("Ms. Tapp"), and by Gary K. Steeds ("Mr. Steeds"). In
February 1999, Ms. Tapp and Mr. Steeds (both of whom are former employees of the
Company) dismissed, without prejudice, all claims made against the Company
Defendants. Ms. Tapp and Mr. Steeds had alleged that, among other things, the
Company breached an agreement involving the right of both individuals to earn up
to 20% of the stock of two subsidiaries of the Company (Management Alliance
Corporation and Information Systems Consulting Corporation), subject to a
vesting schedule and the payment of certain obligations payable from such
subsidiaries to the Company. The Company contends that the claims of Ms. Tapp
and Mr. Steeds are without merit.
Prior to Ms. Tapp and Mr. Steeds dismissing their claims in this case, the
court involved had already dismissed several claims against the Company
Defendants and all of the claims against Donald A. Bailey, a former director of
the Company. Still pending in this lawsuit are the Company's claims for damages
against Ms. Tapp and Mr. Steeds.
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 pink sheets under the symbol "HIRE."
The following table sets forth, for the periods indicated after September 29,
1997, the range of high and low sales prices for the common stock as reported on
the American Stock Exchange. For the periods set forth below before September
30, 1997, the tables reflect the quarterly high/low bid price for the common
stock. Such inter-dealer quotations do not necessarily represent actual
transactions and do not include retail mark-ups, markdowns or commissions. Such
prices are as follows:
PERIOD HIGH LOW
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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
1998
1st Quarter................................................................ $ 14.69 $ 7.50
2nd Quarter................................................................ 14.75 11.25
3rd Quarter................................................................ 12.31 6.81
4th Quarter................................................................ 7.63 3.56
The Company had approximately 194 holders of record of common stock as of
December 31, 1998. 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.
On October 8, 1998, the Company issued 100,000 shares of its common stock to
the four shareholders of the Texcel entities in connection with the Company's
acquisition of the assets of such entities; such shares were valued by the
Company at $4.8125 per share under the terms of the purchase agreement involved.
None of these shares were registered under the Securities Act of 1933, as
amended (the "Act"). The issuance of such shares was exempt from registration
pursuant to Section 4(2) of the Act.
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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and Item 7--"Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
YEAR ENDED DECEMBER 31,
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STATEMENT OF OPERATIONS DATA 1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net service revenues....................................... $ 42,233 $ 33,812 $ 27,430 $ 19,358 $ 15,233
Gross margin............................................... 12,726 10,133 7,755 5,026 4,101
Income before income taxes and extraordinary item.......... 2,476 2,480 1,764 346 16
Income before extraordinary item........................... 1,578 2,603 1,539 286 16
Net income................................................. 1,578 2,660 1,785 461 224
Basic earnings per share:
Before extraordinary item................................ 0.57 1.33 .90 .16 .01
Net income............................................... 0.57 1.36 1.05 .26 .13
Diluted earnings per share:
Before extraordinary item................................ 0.55 1.25 .87 .16 .01
Net income............................................... 0.55 1.28 1.01 .26 .13
AS OF DECEMBER 31,
-----------------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Working capital (deficit).................................. $ 6,468 $ 9,455 $ 95 $ (1,060) $ (1,142)
Total assets............................................... 18,442 15,162 5,204 3,007 2,563
Short-term debt and current maturities..................... 709 2 520 669 102
Long-term debt............................................. 1,203 66 68 90 113
Stockholders' equity (capital deficiency).................. 12,617 11,553 1,188 (452) (913)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1998 COMPARED WITH 1997
Net service revenues increased approximately $8.4 million or 24.9% to $42.2
million in 1998, compared to $33.8 million in 1997. The increase in net service
revenues was primarily attributable to the Company's continued focus on
high-margin, specialty niche employment markets such as the information
technology and engineering/technical disciplines. Net service revenues for the
staffing services segment of the business increased approximately $7.8 million
or 22.9% to $41.6 million in 1998, compared to $33.8 million in 1997.
Approximately $1.8 million or 5.2% of this increase was the result of the
Company's October 1998 acquisition of the Texcel companies. This slower than
expected revenue growth is primarily the result of client imposed restrictions
on the hiring of personnel resulting in part from economic conditions abroad
where several of the Company's clients have extensive operations. It also
reflects a general hiring slowdown in certain industries most affected by recent
market conditions. Permanent placement revenues increased approximately $4.9
million or 27.7% to $22.5 million in 1998 compared to $17.6 million in 1997. The
demand for permanent placement personnel has resulted in a decrease in specialty
service revenues of approximately $1.1 million or 14.9% to $6.5 million in 1998,
compared to $7.6 million in 1997. Contract placement revenues increased
approximately $4.0 million or 46.7% to $12.6 million in 1998, compared to $8.6
million in 1997. Training segment revenues were approximately $674,000 in 1998.
The Company reported no training revenues in 1997. There were intersegment
revenues (training to staffing services) of approximately $7,000 in 1998.
Gross margin increased approximately $2.6 million or 25.6% to $12.7 million
in 1998, compared to $10.1 million in 1997. Gross margin as a percentage of net
service revenues increased slightly to approximately 30.1% in 1998 compared to
approximately 30.0% in 1997. Gross margin for the staffing services segment of
the business increased
9
approximately $2.4 million or 23.8% to $12.5 million in 1998, compared to $10.1
million in 1997. Gross margin as a percentage of net service revenues for the
staffing services segment increased slightly to approximately 30.2% in 1998
compared to approximately 30.0% in 1997. Gross margin for the training segment
of the business was approximately $182,000 or approximately 27.1% of net service
revenues for the training segment. The Company reported no training revenues in
1997.
Selling, general and administrative expenses increased approximately $2.7
million or 35.3% to $10.3 million in 1998, compared to $7.6 million in 1997. The
increase was primarily the result of increased expenses associated with opening
new offices, the further development and expansion of the Company's training
operations, the expansion of the Company's back office to support the growth in
sales and increased professional fees associated with investor relations and
public reporting. Selling, general and administrative expenses as a percentage
of net service revenues increased to approximately 24.4% in 1998 compared to
approximately 22.6% in 1997. Selling general and administrative expenses for the
Staffing Services segment of the business increased approximately $1.8 million
or 23.1% to $9.4 million in 1998, compared to $7.6 million in 1997. Selling,
general and administrative expenses as a percentage of net service revenues for
the staffing services segment was approximately 22.6% in 1998 and 1997. Selling,
general and administrative expenses for the training segment of the business
were approximately $938,000 or 139% of net service revenues for the training
segment in 1998. The Company reported no training revenues in 1997.
Other income was approximately $69,000 in 1998, compared to an expense of
$25,000 in 1997. This was primarily due to interest earnings on the proceeds
from the Company's 1997 public offering and a current year reduction of interest
expense as a result of the retirement of all short-term debt during the fourth
quarter of 1997 offset by increased losses from joint venture operation and
interest expense on deferred payment obligations. The loss from joint venture
operation increased approximately $202,000 to $223,000 in 1998 compared to
$21,000 in 1997. The joint venture's initial concept of developing minority
placement opportunities has diminished in importance with the industry focus now
on the need for qualified applicants. As a result of the foregoing, the Company
terminated the joint venture in January, 1999.
Income before income tax and extraordinary item was approximately $2.5
million in 1998 and 1997. Income before income tax and extraordinary item for
the staffing services segment of the business increased approximately $744,000
or 30.0% to $3.2 million in 1998 compared to $2.5 million in 1997. Income before
income tax and extraordinary item for the training segment of the business
resulted in a loss of approximately $748,000 in 1998. This loss was primarily
the result of startup costs associated with the expansion of the Company's
training operation, the integration of the Alliance Training Center acquisition
and completion of the requisite certifications of the Company's training
schools. The Company reported no training revenues in 1997.
Income tax expense was approximately $898,000 in 1998, compared to benefit
of approximately $123,000 in 1997. The benefit in 1997 resulted from a reduction
in the valuation allowance on deferred tax assets in the fourth quarter of 1997,
primarily related to net operating loss carryforwards. The Company's effective
tax rate for 1998 was approximately 36%.
Net income decreased approximately $1.1 million or 40.7% to $1.6 million in
1998, compared to $2.7 million in 1997 as a result of the increase in the
effective tax rate described above.
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 an increase in permanent placement revenues.
10
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 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $6.5 million at December 31, 1998 compared
to $9.5 million at December 31, 1997. The decrease in working capital of
approximately $3.0 million was primarily attributable to the Texcel acquisition,
the Company's capital expenditures, and the repurchase of 237,700 shares of its
common stock.
In October 1998, the Company completed an acquisition of the Texcel
companies. The terms of the acquisition included the payment of $1.8 million at
closing, the issuance of 100,000 shares of the Company's common stock, and
maximum deferred payment obligations (subject to adjustment based upon the
combined earnings of the Texcel companies) of $880,000 on October 1 of each of
1999, 2000 and 2001, the net present value of which is approximately $1.8
million.
Cash flow provided by operating activities of approximately $1.6 million
resulted primarily from the profitable operations of the Company. The Company
made capital expenditures of approximately $1.8 million in 1998, primarily to
continue to improve its computer systems, database and to support its back
office operations. The Company repurchased 237,700 shares of its common stock
for an aggregate purchase price of approximately $1.1 million in 1998.
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
Management of the Company anticipates that funds from its 1997 public offering
and cash flows from operations will provide adequate liquidity to fund its
internal 1999 growth plans and operations for the foreseeable future. The
Company's internal 1999 growth plans include the expansion and improvement of
its applicant database and back office and the expansion and opening of new
profit centers in existing cities. In addition, the Company continues to explore
avenues for growth including but not limited to possible strategic acquisitions.
The Company will be required to obtain additional financing through either debt
or equity in order to consummate additional significant acquisitions.
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.
11
The Company has made an 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 has purchased new accounting and back office software, which
is Year 2000 compliant. The cost of the software was approximately $150,000, and
implementation costs are estimated to be an additional $60,000. 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 has also initiated communications
with its significant suppliers, landlords 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.
The Company has begun, but not yet completed, a comprehensive analysis of
the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by certain third parties to
complete efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Preliminary analysis of this new standard
by the Company indicates that the standard will not have a material impact on
the Company's financial statements. The standard will be effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999.
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 development expenses; the
level of litigation 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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is primarily exposed to market risks from fluctuations in
interest rates and the effects of those fluctuations on the market values of its
cash equivalent short-term investments. The cash equivalent short-term
investments consist of government backed money market funds which are not
significantly exposed to interest rate risk, except to the extent that changes
in interest rates will ultimately affect the amount of interest income earned on
these investments.
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.
THREE MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net services revenues........... $7,279 $8,374 $9,105 $9,053 $8,967 $ 10,544 $10,710 $ 12,012
Cost of services................ 5,195 5,774 6,288 6,421 6,363 7,269 7,492 8,383
--------- -------- --------- -------- --------- -------- --------- --------
Gross margin.................. 2,084 2,600 2,817 2,632 2,604 3,275 3,218 3,629
Selling, general and
administrative expenses....... 1,926 1,791 1,975 1,936 2,143 2,472 2,801 2,903
Other income (expenses)......... (10) (30) (41) 56 90 80 89 (190)
--------- -------- --------- -------- --------- -------- --------- --------
Income before income taxes and
extraordinary item............ 148 779 801 752 551 883 506 536
Income (taxes) benefit, net..... 43 (136) (304) 520 (174) (332) (192) (200)
--------- -------- --------- -------- --------- -------- --------- --------
Income before extraordinary
item.......................... 191 643 497 1,272 377 551 314 336
Extraordinary item.............. 43 -- -- 14 -- -- -- --
--------- -------- --------- -------- --------- -------- --------- --------
Net Income.................... $ 234 $ 643 $ 497 $1,286 $ 377 $ 551 $ 314 $ 336
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
Basic earnings per share:
Before extraordinary item..... $ 0.12 $ 0.37 $ 0.28 $ 0.47 $ 0.14 $ 0.20 $ 0.11 $ 0.12
Net income.................... 0.14 0.37 0.28 0.48 0.14 0.20 0.11 0.12
Diluted earnings per share:
Before extraordinary item..... $ 0.11 $ 0.35 $ 0.26 $ 0.45 $ 0.13 $ 0.19 $ 0.11 $ 0.12
Net income.................... 0.13 0.35 0.26 0.46 0.13 0.19 0.11 0.12
Weighted average shares
outstanding:
Basic......................... 1,635 1,748 1,789 2,678 2,740 2,748 2,809 2,712
Diluted....................... 1,789 1,826 1,885 2,785 2,858 2,912 2,891 2,769
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 Compensation" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Shareholder" in the Proxy
Statement is incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference in
response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (i) and (ii) Financial Statements and Financial Statement Schedule.
Reference is made to the listing on page 16 of all financial statements and
schedule 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 40 for a list
of all exhibits filed as part of this report.
(b) Reports on Form 8-K.
On October 21, 1998, the Company filed with the Securities and Exchange
Commission (the "SEC") a report on Form 8-K with respect to the Texcel
acquisition, dated October 7, 1998. On December 22, 1998, the Company filed with
the SEC an amendment to such Form 8-K to report certain historical and pro-forma
financial information.
On January 28, 1999, the Company filed with the SEC a report on Form 8-K
with respect to a Note Purchase Agreement with Compass Bank and DCRI L.P. No. 2,
Inc., which is principally owned by J. Michael Moore, the Chairman of the Board
and Chief Executive Officer of the Company.
14
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.
By: /s/ J. MICHAEL MOORE
-----------------------------------------
J. Michael Moore
Date: March 30, 1999 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, Chief Executive
- ------------------------------ Officer and Principal
J. Michael Moore Executive Officer
/s/ M. TED DILLARD
- ------------------------------ President, Secretary and
M. Ted Dillard Director
Chief Financial Officer,
/s/ DOUGLAS G. FURRA Principal Financial
- ------------------------------ Officer and Principal
Douglas G. Furra Accounting Officer
/s/ DEBORAH A. FARRINGTON
- ------------------------------ Director
Deborah A. Farrington
/s/ SAMUEL E. HUNTER
- ------------------------------ Director
Samuel E. Hunter
/s/ A. CLINTON ALLEN
- ------------------------------ Director
A. Clinton Allen
15
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE NO.
-------------
Report of Independent Accountants....................................................................... 17
Consolidated Balance Sheets--December 31, 1998, and 1997................................................ 18
Consolidated Statements of Operations--Years Ended December 31, 1998, 1997, and 1996.................... 19
Consolidated Statements of Stockholders' Equity (Capital Deficiency)--Years Ended December 31, 1998,
1997, and 1996........................................................................................ 20
Consolidated Statements of Cash Flows--Years Ended December 31, 1998, 1997, and 1996.................... 21
Notes to Consolidated Financial Statements.............................................................. 22
Report of Independent Accountants....................................................................... 39
Schedule II--Valuation and Qualifying Accounts--Years Ended December 31, 1998, 1997, and 1996........... 40
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.
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (capital deficiency)
and cash flows present fairly, in all material respects, the consolidated
financial position of Diversified Corporate Resources, Inc. and Subsidiaries as
of December 31, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, 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 expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 18, 1999
17
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 3,472,990 $ 7,500,188
Trade accounts receivable, less allowances of approximately $734,000 and
$536,000, respectively.......................................................... 6,780,639 4,882,788
Receivables from related parties.................................................. 52,756 10,387
Prepaid expenses and other current assets......................................... 302,004 106,468
Federal income taxes receivable................................................... 48,094 201,436
Deferred income taxes............................................................. 374,292 243,518
------------- -------------
TOTAL CURRENT ASSETS............................................................ 11,030,775 12,944,785
PROPERTY AND EQUIPMENT, NET......................................................... 3,114,908 1,389,761
OTHER ASSETS:
Intangibles, net.................................................................. 3,646,925
Investment in and advances to joint venture....................................... 377,127 226,638
Notes receivable-related party.................................................... 11,385
Deferred income taxes............................................................. 123,004 428,330
Other............................................................................. 149,439 160,657
------------- -------------
$ 18,442,178 $ 15,161,556
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses....................................... $ 3,853,681 $ 3,487,470
Current maturities of capital lease obligations................................... 43,824
Current maturities of long-term debt.............................................. 665,169 2,026
------------- -------------
TOTAL CURRENT LIABILITIES....................................................... 4,562,674 3,489,496
DEFERRED LEASE RENTS................................................................ 59,522 53,131
LONG-TERM DEBT
Capital lease obligations, net of current maturities.............................. 23,766
Long term debt, net of current maturities......................................... 1,178,924 66,134
------------- -------------
TOTAL LONG-TERM DEBT............................................................ 1,202,690 66,134
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none issued........
Common stock, $.10 par value; 10,000,000 shares authorized, 3,177,446 and
2,985,946 shares issued, respectively........................................... 317,745 298,595
Additional paid-in capital........................................................ 11,927,899 11,080,504
Retained earnings................................................................. 1,936,736 358,871
Common stock held in treasury (483,549 and 245,849 shares, respectively), at
cost............................................................................ (1,349,865) (185,175)
Receivables from related party.................................................... (215,223) --
------------- -------------
TOTAL STOCKHOLDERS' EQUITY...................................................... 12,617,292 11,552,795
------------- -------------
$ 18,442,178 $ 15,161,556
------------- -------------
------------- -------------
See notes to consolidated financial statements.
18
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
NET SERVICE REVENUES:
Permanent placement............................................... $ 22,463,649 $ 17,592,923 $ 12,573,995
Specialty services................................................ 6,472,457 7,609,008 7,451,563
Contract placement................................................ 12,630,072 8,609,602 7,404,730
Training.......................................................... 666,556 -- --
------------- ------------- -------------
42,232,734 33,811,533 27,430,288
COST OF SERVICES.................................................... 29,506,534 23,678,331 19,675,352
------------- ------------- -------------
GROSS MARGIN........................................................ 12,726,200 10,133,202 7,754,936
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ (10,319,936) (7,628,234) (5,702,992)
OTHER INCOME (EXPENSE):
Loss from joint venture operations................................ (223,362) (21,072) (90,313)
Interest income (expense), net.................................... 283,773 (35,468) (235,327)
Other, net........................................................ 9,019 31,729 37,282
------------- ------------- -------------
69,430 (24,811) (288,358)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................... 2,475,694 2,480,157 1,763,586
INCOME TAX (EXPENSE) BENEFIT........................................ (897,829) 123,195 (224,774)
------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM.................................... 1,577,865 2,603,352 1,538,812
EXTRAORDINARY ITEM--gain on debt restructuring, net of income tax... -- 56,627 246,125
------------- ------------- -------------
NET INCOME.......................................................... $ 1,577,865 $ 2,659,979 $ 1,784,937
------------- ------------- -------------
------------- ------------- -------------
BASIC EARNINGS PER SHARE:
Income before extraordinary item.................................. $ 0.57 $ 1.33 $ .90
Extraordinary item................................................ -- .03 .15
------------- ------------- -------------
Total............................................................. $ 0.57 $ 1.36 $ 1.05
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding.......................... 2,752,154 1,951,117 1,701,823
------------- ------------- -------------
------------- ------------- -------------
DILUTED EARNINGS PER SHARE:
Income before extraordinary item.................................. $ 0.55 $ 1.25 $ .87
Extraordinary item................................................ -- .03 .14
------------- ------------- -------------
Total............................................................. $ 0.55 $ 1.28 $ 1.01
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and common equivalent shares outstanding.... 2,857,577 2,071,223 1,763,069
------------- ------------- -------------
------------- ------------- -------------
See notes to consolidated financial statements.
19
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
RECEIVABLES
ADDITIONAL RETAINED FROM
COMMON PAID-IN EARNINGS TREASURY RELATED
STOCK CAPITAL (DEFICIT) STOCK PARTY TOTAL
---------- ------------- ------------ ------------ ---------- -------------
BALANCE, January 1, 1996................ $ 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
Advances to related party............... -- -- -- -- (215,223) (215,223)
Tax effect of stock options exercised... -- 105,545 -- -- -- 105,545
Issuance of common stock................ 19,150 741,850 -- -- -- 761,000
Treasury stock purchase................. -- -- -- (1,164,690) -- (1,164,690)
Net income.............................. -- -- 1,577,865 -- -- 1,577,865
---------- ------------- ------------ ------------ ---------- -------------
BALANCE, December 31, 1998.............. $ 317,745 $ 11,927,899 $ 1,936,736 $ (1,349,865) $ (215,223) $ 12,617,292
---------- ------------- ------------ ------------ ---------- -------------
---------- ------------- ------------ ------------ ---------- -------------
See notes to consolidated financial statements.
20
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 1,577,865 $ 2,659,979 $ 1,784,937
Adjustments to reconcile net income to cash provided by operating
activities:
Extraordinary item...................................................... -- (87,118) (246,125)
Depreciation and amortization........................................... 636,107 307,652 188,760
Other................................................................... -- 5,103 --
Provision for allowances................................................ (38,531) 42,663 81,434
Equity in loss of joint venture......................................... 223,362 21,072 90,313
Write-down of long-lived assets......................................... -- -- 37,462
Income tax effect of options exercised.................................. 105,545 57,750 --
Deferred lease rents.................................................... 6,391 53,131 (52,531)
Deferred income taxes................................................... 174,552 (671,848) --
Changes in operating assets and liabilities, excluding operating assets
and
liabilities related to acquired businesses:
Accounts receivable..................................................... (743,561) (1,538,313) (1,327,949)
Refundable federal income taxes......................................... 153,342 (201,436) --
Prepaid expenses and other current assets............................... (195,538) (69,876) 62,363
Other assets............................................................ (4,820) (1,381) 9,379
Trade account payable and accrued expenses.............................. (325,220) 244,972 1,057,852
------------ ------------ ------------
Net cash provided by operating activities............................. 1,569,494 822,350 1,685,895
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (1,845,902) (894,519) (529,714)
Deposits.................................................................. (20,236) (11,397) (45,567)
Loans and advances to related parties..................................... (256,510) (172,956) (160,209)
Repayment from related parties............................................ 10,305 309,244 13,052
Business acquisitions, net of cash acquired............................... (2,198,440) -- --
Net advances to joint venture............................................. (373,851) ( 94,805) (139,380)
------------ ------------ ------------
Net cash used in investing activities................................... (4,684,634) (864,433) (861,818)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................................. 190,219 8,668,065 --
Public offering costs..................................................... -- (1,119,983) --
Increase (decrease) in borrowings under factoring and loan agreements..... -- (400,682) (246,968)
Net borrowing under short-term debt....................................... -- (97,652) 97,652
Purchase of treasury stock................................................ (1,075,159) -- (15,750)
Principal payments under long-term debt obligations....................... (27,118) (21,831) (21,660)
Book overdraft............................................................ -- (98,158) (31,078)
------------ ------------ ------------
Net cash provided by (used in) financing activities....................... (912,058) 6,929,759 (217,804)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents.......................... (4,027,198) 6,887,676 606,273
Cash and cash equivalents at beginning of year............................ 7,500,188 612,512 6,239
------------ ------------ ------------
Cash and cash equivalents at end of period................................ $ 3,472,990 $ 7,500,188 $ 612,512
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................................... $ 11,000 $ 159,000 $ 249,000
Cash paid for income taxes................................................ $ 538,000 $ 783,000 $ 14,000
See notes to consolidated financial statements.
21
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
BASIS OF PRESENTATION
The consolidated financial statements include the operations of Diversified
Corporate Resources, Inc. and its subsidiaries (the "Company"), all of which are
wholly owned. All intercompany accounts and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Company is a Texas corporation and is engaged, through its subsidiaries,
in the permanent, specialty and contract placement of personnel in various
industries and in information technology training services. The Company operates
offices in Dallas, Houston and Austin, Texas; Atlanta, Georgia; Kansas City,
Missouri; Chicago, Illinois; Philadelphia, Pennsylvania; Denver Colorado;
Reston, Virginia; 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, credit and collections and certain accounting and
administrative services for its offices.
REVENUE RECOGNITION AND COST OF SERVICES
Fees for placement of permanent personnel are recognized as income at the
time the applicant accepts employment. 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, contract placements and training services 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, 1998 and 1997 include approximately $491,000 and $233,000,
respectively, of unbilled receivables that were billed in 1999 and 1998,
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, 1998 and 1997, the Company's financial instruments consist
of notes receivable from related parties and long-term debt. The Company
believes that the recorded values approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the individual assets (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 and software............... 5 years
Office equipment and furniture................ 3-7 years
Leasehold improvements........................ 5-7 years
22
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER (CONTINUED)
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. For the years ended December 31,
1998, 1997 and 1996, advertising expenses amounted to approximately $411,000,
$343,000 and $341,000, respectively.
EARNINGS PER SHARE
Basic earnings per share ("EPS") was determined by dividing net income by
the weighted average number of shares of common stock outstanding during the
year 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.
1998 1997 1996
---------- ---------- ----------
Basic................................................... 2,752,154 1,951,117 1,701,823
Net effect of dilutive stock options.................... 105,423 120,106 61,246
---------- ---------- ----------
Diluted................................................. 2,857,577 2,071,223 1,763,069
---------- ---------- ----------
---------- ---------- ----------
Options and warrants not considered because effects of
inclusion would be antidilutive....................... 127,590 255,590 170,000
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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTANGIBLES
Intangibles consist of covenants not to compete and goodwill (excess of
purchase price over fair value of net assets acquired) arising from business
combinations and are being amortized on a straight-line basis over their
estimated useful lives or contract terms.
EMPLOYEE STOCK-BASED COMPENSATION
The Company uses the intrinsic value method under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" to account for employee stock-based
compensation.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Preliminary analysis of this new standard by the Company
indicates that the standard will not have a material impact on the Company's
financial statements. The standard will be effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999.
23
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
Computer equipment and software................................... $ 2,466,334 $ 1,281,305
Office equipment and furniture.................................... 1,457,109 536,518
Leasehold improvements............................................ 292,123 160,124
Less accumulated depreciation and amortization.................... (1,100,658) ( 588,186)
------------ ------------
$ 3,114,908 $ 1,389,761
------------ ------------
------------ ------------
Depreciation and amortization of property and equipment was approximately
$585,000, $308,000 and $189,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Included in computer equipment and software are software development costs
in progress of approximately $93,000 at December 31, 1997.
Amortization of assets under capital lease in 1998 was approximately $31,000
and the unamortized balance was approximately $86,000 at December 31, 1998.
These assets are included in office equipment and furniture.
3. INTANGIBLES
Intangibles consist of:
DECEMBER 31,
AMORTIZATION --------------------------
PERIOD 1998 1997
------------ ------------ ------------
Non-compete agreements.............................. 3 years $ 50,000 $ --
Goodwill............................................ 10-20 years 3,648,096 --
------------ ------------
3,698,096 --
Accumulated amortization............................ (51,171) --
------------ ------------
$ 3,646,925 $ --
------------ ------------
------------ ------------
Amortization of intangibles was approximately $51,000 for 1998. The cost
assigned to the non-compete agreement is the amount stated in the purchase
agreement.
24
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Trade accounts payable and accrued expenses consist of:
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
Trade accounts payable............................................ $ 262,097 $ 362,887
Accrued expenses.................................................. 269,940 587,686
Accrued compensation.............................................. 2,992,607 2,306,357
Accrued payroll expense........................................... 329,037 230,540
------------ ------------
$ 3,853,681 $ 3,487,470
------------ ------------
------------ ------------
Included in accrued compensation are accrued commissions, contractors
payroll and management bonuses.
5. BUSINESS ACQUISITIONS
ALLIANCE TRAINING CENTER:
Effective June 1, 1998, the Company acquired certain assets of JCAP, Inc.,
dba Alliance Training Centers ("Alliance"), a privately held information
technology-training center operating in Richardson and Irving, Texas, both
suburbs of Dallas, Texas. The Company paid approximately $138,000 in cash and
will pay an additional amount equal to eight percent of the annual after-tax net
income of Train International, Inc. ("Train"), a subsidiary of the Company, in
excess of certain base amounts through December, 2001, subject to certain
minimum payments aggregating $100,000 ($25,000 at closing and $75,000 deferred)
and overall maximum payments of $250,000. Additionally, the Company assumed the
real estate leases at the Richardson and Irving locations and certain computer
equipment capital leases. Acquisition costs amounted to $33,513.
Following is a summary of the transaction:
Net assets acquired:
Fair value of tangible net assets acquired...................... $ 213,833
Goodwill........................................................ 126,306
---------
$ 340,139
---------
---------
Source:
Cash, including acquisition costs............................... $ 171,858
Present value of minimum deferred payments...................... 67,433
Present value of future minimum lease payments.................. 100,848
---------
$ 340,139
---------
---------
The Alliance acquisition was accounted for under the purchase method. The
results of the former Alliance operations are included in the statement of
operations beginning June 1, 1998. Goodwill is being amortized over ten years
utilizing the straight-line method. The contingent earn-out payments will be
recorded as goodwill when earned. The unaudited revenues of Alliance for the
year ended December 31, 1997, and the five months ended May 31, 1998, were
approximately $850,000 and $427,000, respectively. Pro forma results of
operations have not been presented because they are not material in relation to
the consolidated operations of the Company.
25
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BUSINESS ACQUISITIONS (CONTINUED)
GEIER ASSESSMENT AND PERFORMANCE SYSTEMS, INC.:
Effective August 1, 1998, the Company entered into an agreement with Geier &
Associates, Inc., d/b/a Geier Learning Systems ("GLS") and John G. Geier, Ph.D.
("Geier") to form Geier Assessment and Performance Systems, Inc. ("GAPS"), a
wholly owned subsidiary of the Company. GAPS is engaged in developing software
based upon written material initially developed by GLS and its agents and
employees for use by the Company in testing and improving the work performance
of its agents and employees or its clients' agents and employees. As part of the
agreement, GLS contributed all rights to any software developed by the Company,
GLS or GAPS, subject to the payment of a royalty to GLS, as well as a license to
enhance and sell, subject to the payment of a royalty to GLS, the GLS written
materials. For each year that GAPS is profitable, GLS will earn an option to
purchase five percent, up to an aggregate of twenty five percent, of GAPS for
$0.01 per share. Acquisition costs associated with this transaction were
$30,628.
TEXCEL, INC. AND TEXCEL TECHNICAL SERVICES, INC.:
On October 8, 1998, the Company completed the acquisition of substantially
all of the assets and assumed certain liabilities of Texcel, Inc. and Texcel
Technical Services, Inc. (collectively "Texcel"). The purchase price consisted
of $1,800,000 in cash, 100,000 shares of the Company's common stock valued at
$4.8125 per share (which was the then market value at the date the acquisition
was announced less a discount for the restrictive nature of the stock) and three
annual deferred payments of $880,000 beginning October 1, 1999. The deferred
payments will be reduced up to $200,000 each if certain levels of profitability
are not maintained. Texcel is based in the Philadelphia area and is engaged in
both permanent and temporary placements of technical and professional specialist
primarily in Pennsylvania, Delaware and New Jersey. In connection with the
acquisition, the Company incurred acquisition costs amounting to approximately
$196,000, which includes $89,000 paid to Ms. Deborah A. Farrington, a
non-employee Director of the Company, pursuant to her consulting agreement with
the Company, for negotiating the transaction.
Following is a summary of the transaction:
Net assets acquired:
Fair value of tangible net assets acquired.................... $ 695,610
Covenants not to compete...................................... 50,000
Goodwill...................................................... 3,483,954
---------
$4,229,564
---------
---------
Source:
Cash, including acquisition costs............................. $1,995,954
Present value of minimum deferred payment obligations......... 1,752,360
Fair value of common stock issued............................. 481,250
---------
$4,229,564
---------
---------
The Texcel acquisition was accounted for under the purchase method. The
results of the former Texcel operations are included in the statement of
operations beginning October 1, 1998. Goodwill is being amortized over twenty
years utilizing the straight-line method. The contingent deferred payments will
be recorded as goodwill when earned.
The unaudited pro forma acquisition information for 1998 and 1997 presents
the results of operations as if the Texcel acquisition had occurred at the
beginning of 1997. The results of operations give effect to certain adjustments,
including amortization of intangible assets, interest effects of the
transaction, income taxes and the additional shares of
26
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BUSINESS ACQUISITIONS (CONTINUED)
common stock issued in the transaction. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisitions been made at the beginning of the applicable
years as described above or of the results which may occur in the future.
Unaudited Pro Forma Results of Operations
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
Net service revenues............................................ $ 48,072,296 $ 40,990,228
Income before extraordinary item................................ $ 1,739,751 $ 2,764,784
Net income...................................................... $ 1,739,751 $ 2,821,411
Basic EPS before extraordinary item............................. $ 0.62 $ 1.35
Diluted EPS before extraordinary item........................... $ 0.59 $ 1.27
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of:
DECEMBER 31,
-----------------------
1998 1997
------------ ---------
Present value of minimum deferred payment obligations assumed in the
Texcel and Alliance acquisitions, net of unamortized discount of
$258,407, imputed at 8%............................................ $ 1,844,093 $
Adjustable rate (approximately 10% at December 31, 1997) mortgage,
fully retired...................................................... 68,160
------------ ---------
1,844,093 68,160
Less current maturities of long-term debt............................ (665,169) (2,026)
------------ ---------
Long-term debt, net of current maturities............................ $ 1,178,924 $ 66,134
------------ ---------
------------ ---------
The aggregate maturities of long-term debt as of December 31, 1998, are as
follows:
1999............................................................ $ 665,169
2000............................................................ 616,857
2001............................................................ 562,067
---------
$1,844,093
---------
---------
27
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
The following is a schedule of future minimum payments under capital lease
obligations assumed in the Alliance acquisition together with the present value
of future minimum lease payments:
1999............................................................ $ 48,064
2000............................................................ 20,077
2001............................................................ 4,957
---------
73,098
Less amount representing interest............................... (5,508)
---------
Present value of future minimum lease payments.................. 67,590
Less current maturities......................................... (43,824)
---------
Capital lease obligations, net of current maturities............ $ 23,766
---------
---------
7. 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 1998 and 1996 Amended and Restated
Nonqualified Stock Option Plans (the "Plans"), options to purchase an aggregate
of 800,000 shares of the Company's common stock may be granted to key personnel
of the Company. Options may be granted for a term of up to ten years to purchase
common stock at a price or prices established by the Compensation Committee of
the Board of Directors of the Company or its appointee. The options granted in
1998, 1997 and 1996 vest in varying amounts over three to five years.
On October 23, 1998, the Board of Directors approved the repricing of
options to purchase 298,167 shares of the Company's common stock, which are held
by key employees of the Company. Such action reduced to $5 1/8 per share the
exercise price on the options involved, representing the market value of the
common stock. The options previously had exercise prices ranging from $8.00 per
share to $12.75 per share. The Board of Directors also has imposed a condition
that no such options may be exercised prior to October 23, 1999.
Effective as of December 9, 1998, a non-employee directors option plan was
approved, subject to shareholder approval, and the Company's three non-employee
directors were granted options to purchase 15,000 shares, each at $5.75 vesting
quarterly in 1999, representing the then market value of the common stock. Under
the plan, beginning January 1, 2000, each non-employee director will be granted
options to purchase 12,500 shares on January 1 of each year they continue to
serve. The option will be granted at the then market value of the common stock
and will vest quarterly. In connection with the implementation of this plan, all
non-employee directors forfeited all of their existing options which had not
vested at December 31, 1998.
28
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of the Company's stock options as of and for the
years ended December 31, 1996, 1997 and 1998.
WEIGHTED NUMBER OF
AVERAGE SHARES OF
EXERCISE UNDERLYING RANGE OF EXERCISE
PRICE OPTIONS PRICES
------------- ----------- -----------------
Outstanding at January 1, 1996.................. $ .50 150,000 $ .50 to $ .50
Granted at a premium............................ 4.04 290,000 2.50 to 8.00
-----------
Outstanding at December 31, 1996................ 2.84 440,000 .50 to 8.00
-----------
-----------
Exercisable at December 31, 1996................ 1.43 280,000 .50 to 2.50
-----------
-----------
Outstanding at January 1, 1997.................. $ 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 December 31, 1997................ 6.28 495,500 2.50 to 10.00
-----------
-----------
Exercisable at December 31, 1997................ 3.14 223,000 2.50 to 10.00
-----------
-----------
Outstanding at January 1, 1998.................. $ 6.28 495,500 $ 2.50 to $10.00
Granted at-the-money............................ 11.00 321,667 4.81 to 12.75
Exercised....................................... 3.06 (91,500) 2.50 to 4.00
Forfeited....................................... 10.54 (73,500) 5.00 to 12.75
-----------
Outstanding at December 31, 1998................ 6.30 652,167 2.50 to 12.75
-----------
-----------
Exercisable at December 31, 1998................ 5.93 214,000 2.50 to 12.75
-----------
-----------
The following table summarizes information about stock options outstanding
at December 31, 1998.
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVE. --------------------------
REMAINING WEIGHTED AVE. WEIGHTED AVE.
RANGE OF EXERCISE NUMBER CONTR. LIFE IN EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING YEARS PRICE EXERCISABLE PRICE
- ------------------ ----------- --------------- ------------- ----------- -------------
$ 2.50 to $ 5.75 512,167 3.56 $ 4.60 149,000 $ 3.19
$10.00 to $12.75 140,000 4.43 $ 12.50 65,000 $ 12.22
----------- -----------
652,167 3.81 $ 6.30 214,000 $ 5.93
----------- -----------
----------- -----------
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123")
establishes a fair value basis of accounting for stock based compensation plans.
Had the compensation cost for the Company's employee stock based
29
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY (CONTINUED)
compensation plans been determined consistent with SFAS 123, the Company's net
income would approximate the amounts below:
1998 1997 1996
-------------------------- -------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
SFAS 123 compensation cost.... $ -- $ 331,566 $ -- $ 273,145 $ -- $ 254,863
APB 25 compensation cost...... $ -- $ -- $ -- $ -- $ -- $ --
Net income.................... $ 1,577,865 $ 1,246,299 $ 2,659,979 $ 2,386,834 $ 1,784,937 $ 1,530,074
Basic earnings per share:
Income before extraordinary
item........................ $ .57 $ .45 $ 1.33 $ 1.19 $ .90 $ .75
Extraordinary item............ -- -- .03 .03 .15 .15
Basic earnings per share...... $ .57 $ .45 $ 1.36 $ 1.22 $ 1.05 $ .90
Diluted earnings per share:
Income before extraordinary
item........................ $ .55 $ .44 $ 1.25 $ 1.12 $ .87 $ .73
Extraordinary item............ -- -- .03 .03 .14 .14
Diluted earnings per share.... $ .55 $ .44 $ 1.28 $ 1.15 $ 1.01 $ .87
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 1998, 1997, and 1996 is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
1998 1997 1996
---------- ---------- ----------
Expected term.................................. 4.02 years 3.75 years 2.71 years
Expected dividend yield........................ 0.00% 0.00% 0.00%
Expected volatility............................ 60.33% 40.55% 184.11%
Risk-free interest rate........................ 5.51% 6.10% 5.93%
The weighted-average grant date fair value of options granted during the
years ended December 31, 1998, 1997 and 1996 was $5.71, $3.17, and $2.82,
respectively.
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 and exercisable as of December 31,
1998. The fair value of these stock warrants granted in 1997 was estimated on
the date of grant to be approximately $161,000 using the Black-Scholes
option-pricing model with the following assumptions: an expected term of 2.5
years, an expected dividend yield of 0.00%; an expected stock price volatility
of 40.55%; and a risk-free interest rate of 5.84%.
In October and November 1997, the Company completed a public offering of
949,785 shares, including 123,885 shares from the underwriters exercise of its
over allotment option, of its common stock at $10.00 per share. An additional,
314,100 shares were sold by certain selling shareholders in the offering. After
deducting the underwriting discounts and non-accountable expense allowance, the
net proceeds to the Company were approximately $8.5 million. The net increase
30
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY (CONTINUED)
to stockholders' equity was approximately $7.4 million after netting
approximately $1.1 million in offering costs. In addition to these shares,
during 1998 and 1997, 91,500 and 155,000 shares respectively, were issued in
connection with the exercise of stock options, and 100,000 shares were issued in
the Texcel acquisition. In 1998, pursuant to a share repurchase program
authorized by the Board of Directors, as a result of market conditions, the
Company reacquired 237,700 shares at an aggregate cost of approximately
$1,165,000.
8. FEDERAL INCOME TAXES
The income tax provision (benefit) and the amount computed by applying the
federal statutory income tax rate to income before income taxes differs as
follows:
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ------------ ----------
Tax provision at statutory rate........................................... $ 866,493 $ 898,546 $ 684,619
Utilization of net operating loss carryforwards........................... -- (163,312) (589,200)
Change in valuation allowance exclusive of utilization of net operating
loss carryforward....................................................... -- (892,388) (19,400)
Other, principally change of estimate..................................... (53,139) 19,658 (7,834)
Alternative minimum tax (credits)......................................... -- (39,889) 28,105
State income taxes net of federal income tax benefit...................... 84,475 84,681 132,359
---------- ------------ ----------
$ 897,829 $ (92,704) $ 228,649
---------- ------------ ----------
---------- ------------ ----------
The allocation of income taxes (benefit) is:
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ------------ ----------
Operations................................................................ $ 897,829 $ (123,195) $ 224,774
Extraordinary item........................................................ -- 30,491 3,875
---------- ------------ ----------
$ 897,829 $ (92,704) $ 228,649
---------- ------------ ----------
---------- ------------ ----------
Current................................................................... $ 723,277 $ 579,144 $ 228,649
Deferred.................................................................. 174,552 173,747 19,400
Realization of net operating loss carryforwards........................... -- 210,105 589,200
Change in valuation allowance............................................. -- (1,055,700) (608,600)
---------- ------------ ----------
$ 897,829 $ (92,704) $ 228,649
---------- ------------ ----------
---------- ------------ ----------
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 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
approximately $846,000. This change of estimate increased basic and diluted
earnings per share $0.43 and $0.41, respectively.
31
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FEDERAL INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1998 and 1997 are as follows:
1998 1997
---------------------- ---------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ---------- ---------- ---------
Current:
Net operating loss carryforwards................................. $ 163,312 $ -- $ 163,312 $ --
Reserves and accruals............................................ 210,980 -- 80,206 --
---------- ---------- ---------- ---------
Subtotal-current............................................... 374,292 -- 243,518 --
Non-current:
Net operating loss carryforwards................................. 312,570 -- 475,883 --
Other basis differences principally related to property and
equipment and intangibles...................................... -- 213,375 -- 61,200
Reserves and accruals............................................ 23,809 -- 13,647 --
---------- ---------- ---------- ---------
Subtotal-non-current........................................... 336,379 213,375 489,530 61,200
---------- ---------- ---------- ---------
Total.............................................................. $ 710,761 $ 213,375 $ 733,048 $ 61,200
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net current asset.................................................. $ 374,292 $ 243,518
---------- ----------
---------- ----------
Net non-current asset.............................................. $ 123,004 $ 428,330
---------- ----------
---------- ----------
The Company has a net operating loss carryforward of approximately
$1,360,000 as of December 31, 1998, which, if unused, expires in 2006 through
2008. Additionally, due to a more than 50% change in ownership beginning with an
April 1991 transaction, the Company's net operating loss 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, 1998, was approximately $467,000. An additional $467,000 will
become available annually through 2001.
9. CONCENTRATION OF CREDIT RISK
The Company maintains cash on deposit in interest bearing accounts, which,
at times, exceed federally insured limits. The Company has not experienced any
losses on such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents. The Company also invests its excess cash in
short-term highly liquid money market accounts. At December 31, 1998,
approximately $2.2 million 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.
10. 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
expense was approximately $1,300 in 1996 on this lease.
32
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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 officers
left the Company 1996.
The Company had approximately $4,000 and $7,000 payable to related parties,
including certain former directors and officers, included in trade accounts
payable and accrued expenses at December 31, 1998 and 1997, respectively.
During 1998, 1997 and 1996, the Company paid various expenses on behalf of
Mr. Moore or various entities that he controls in the amount of approximately
$77,000, $173,000 and $129,000, respectively. Approximately $56,000 of the 1998
amount was applied to Mr. Moore's 1998 accrued bonus which has been deducted
from accrued compensation. The remaining $21,000 is included in receivables from
related party in the Company's consolidated balance sheet and was repaid in
January 1999. The 1997 and 1996 amounts were repaid in October 1997. The
majority of these amounts are related to litigation associated with a lawsuit
with Ditto Properties, Inc., in connection with the Company initially being
involved therein as garnishee and rent for office space.
During, 1996, the Company advanced Mr. Moore $31,000 which was represented
by notes bearing interest at 10%. During 1998, the Company advanced Mr. Moore
$20,000 which was represented by a note bearing interest at 8%. The unmatured
balance of these notes (approximately $31,000 at December 31, 1998) is included
in receivables from related parties in the Company's consolidated balance sheet.
On July 17, 1998, M. Ted Dillard ("Dillard"), the Company's President,
exercised options to purchase 84,000 shares of the Company's common stock for an
aggregate purchase price of $257,250. The purchase price was paid with 7,500
shares (acquired in 1997) of the Company's common stock valued at $89,500 (based
upon the closing price of the Company's common stock on July 16, 1998, on the
American Stock Exchange) and the remainder was paid in cash. In connection with
this transaction the Company loaned Dillard approximately $149,000, which was
subsequently reduced to approximately $90,000 (the "Tax Loan") to cover his
income tax liability associated with the transaction. The Tax Loan was approved
by the Compensation Committee of the Board of Directors and ratified by the
Board of Directors. The Tax Loan bears interest at the applicable federal rate,
the interest is payable quarterly, is collateralized by 20,000 shares of the
Company's common stock and is due July 17, 2003. The Company will receive an
income tax deduction related to this transaction. On October 1, 1998, the
Company advanced Dillard approximately $39,000 against his 1998 bonus which has
been deducted from accrued compensation. In addition, on October 12, 1998, the
Board of Directors approved a loan to Dillard of approximately $125,000 (the
"Company Loan"). The Company Loan bears interest at 8%, is payable quarterly, is
collateralized by 35,400 shares of the Company's common stock, and is due
October 12, 2001.
The collateral for the Company Loan will be increased if the market value of
the Company's common stock declines to the point where the market value of all
stock pledged is less than the stated amount of the Company Loan. The Tax Loan
and the Company Loan are classified as receivables from related party in the
Company's consolidated balance sheet and have been deducted from stockholders'
equity.
Interest income from related parties amounted to approximately $7,200 in
1998, $5,100 in 1997 and $5,500 in 1996.
33
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTY TRANSACTIONS (CONTINUED)
On January 12, 1999, the Company entered into (a) a note purchase agreement
(the "Agreement") with Compass Bank (the "Bank"), and DCRI L.P. No. 2, Inc., a
Texas corporation (the "Borrower"), which is principally owned by Mr. Moore
pursuant to which the Company agreed to purchase from the Bank, in the event of
a default by the Borrower and Mr. Moore (as guarantor), the following: (i) two
promissory notes (collectively the "Notes") executed by the Borrower payable to
the Bank in the principal amount of $500,000 and (ii) all instruments
collateralizing repaying of the Notes, including without limitation, a pledge
agreement related to 165,000 shares of the Company's common stock which are
owned by the Borrower and which have been pledged by the Borrower as collateral
for the Notes, and (b) a bank transaction agreement (the "Related Agreement")
with the Borrower and Mr. Moore, which obligated the Borrower and/ or Mr. Moore
to (i) pledge to the Company an additional 50,000 shares of the common stock to
collateralize the Company under the terms of both the Agreement and the Related
Agreement, (ii) pay the Company for entering into the Agreement by conveying to
the Company 5,000 shares of common stock which are owned by the Borrower, and
(iii) waive the right of Mr. Moore to exercise options to purchase, at $2.50 per
share, 5,000 shares of common stock pursuant to options previously granted to
Mr. Moore by the Company. The proceeds from the loans evidenced by the Notes
have been partially advanced by the Bank and have been used in part to fund Mr.
Moore's purchase, at $2.50 per share (for an aggregate amount of $181,250), of
72,500 shares of common stock pursuant to exercising stock options previously
granted to him by the Company. The aforementioned transactions have been
approved by both the Board of Directors of the Company and the Audit Committee
of the Board of Directors of the Company. In connection with the exercise of the
options, the Company loaned Mr. Moore approximately $23,000 to cover his income
tax liability associated with this transaction.
11. EMPLOYEE BENEFIT PLAN
In 1993, the Company implemented a 401(K) plan for the benefit of its
employees. Company contributions to the plan in 1998 and 1997 totaled
approximately $72,000 and $20,000, respectively. Beginning in January 1998, the
Company's contribution was used to purchase Company common stock.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company rents office space under various operating leases. Certain of
the leases have escalating rent payments. The Company is liable for the future
minimum lease payments for the periods subsequent to December 31, 1998, as
follows:
1999............................................................ $1,962,502
2000............................................................ 1,828,920
2001............................................................ 813,033
2002............................................................ 616,146
2003............................................................ 372,377
---------
$5,592,978
---------
---------
Rent expense was approximately $1,637,000, $1,298,000 and $1,027,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
34
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES
In 1996, the Company was named as a garnishee in a lawsuit against its
largest shareholder. As the result of an Agreed Temporary Order dated October
24, 1996, the Company was non-suited in this matter. The Company has filed a
separate lawsuit against the plaintiff seeking damages and reimbursement of
expense, alleging that plaintiffs interfered with Company business transactions
and proposed financing resulting in delays of certain transactions, lost
opportunities, lost profits and other significant losses. 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. In
February, 1999, the Company was non-suited in this matter. The Company is also
involved in certain other litigation and disputes not previously noted. With
respect to the aforementioned matters, management believes the claims against
the Company are without merit and has concluded that the ultimate resolution of
such will not have a material negative effect on the Company's consolidated
financial statements.
13. JOINT VENTURE OPERATIONS
During January, 1995, the Company entered into a joint venture agreement
with Carter Financial Services, Inc., ("CFSI") for the purpose of primarily
providing personnel services to certain businesses requiring minority suppliers.
CFSI is a minority operated corporation, which because of its status, supplies
services to clients requiring a certain portion of its business to be allocated
to minority owned and operated vendors. The Company provided CFSI with
substantially all of its personnel and contract labor on a subcontractor basis
at cost. Laurie Moore, the wife of J. Michael Moore, the Chief Executive Officer
and Chairman of the Board of the Company, owned 49% of CFSI. On August 15, 1996,
the majority shareholder of CFSI purchased the 49% ownership interest of Ms.
Moore, pursuant to a transaction which was made effective retroactive to January
1, 1995. Ms. Moore received no monetary gain on her investment in CFSI or on
this transaction. Through December 31, 1998, the Company 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,
--------------------------
1998 1997
------------ ------------
Current assets.............................................. $ 270,528 $ 197,952
Non-current assets.......................................... 2,189 2,729
Current liabilities......................................... 14,352 67,346
Non-current liabilities..................................... 758,951 377,275
Net sales................................................... 1,265,961 1,025,925
Gross margin................................................ 337,166 161,254
Net loss.................................................... (249,068) (32,418)
Effective January 20, 1999, the joint venture was terminated and the Company
acquired substantially all of the assets including an additional 35% income
interest in the Atlanta and Chicago operations and assumed certain liabilities
of the joint venture. No gain or loss was recognized on the termination.
35
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the Alliance acquisition, the Company incurred deferred
payment obligations totaling $75,000, the present value of which was
approximately $67,000. Additionally, the Company assumed certain capital lease
obligations for the lease of computer equipment with a gross commitment of
approximately $110,000, the present value of which were approximately $101,000.
In connection with the Texcel acquisition, the Company incurred deferred
payment obligations of $2,040,000, the present value of which was approximately
$1,752,000, and issued 100,000 shares of common stock valued at $481,250.
In connection with the exercising of stock options on July 17, 1998, the
Company received 7,500 shares of its common stock valued at $89,500.
15. SEGMENT INFORMATION
The Company's segment information has been presented in two reportable
segments--staffing services and training. The staffing services segment consists
of three functional lines--permanent placement, specialty services and contract
placement. The training segment provides principally information technology
training to its client's employees and the Company's applicant pool on a fee
basis. The Company is organized primarily on the basis of these segments with
three operating subsidiaries engaged in the staffing services segment and two
operating subsidiaries engaged in the training segment.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes
intersegment revenues, as well as a charge allocating all corporate-overhead
costs to each of its operating segments. The Company evaluates the performance
of its segments and allocates resources to them based on earnings before income
taxes.
36
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT INFORMATION (CONTINUED)
The table below presents information about reported segments for the years
ending December 31:
1998 1997 1996
------------- ------------- -------------
Net service revenues
Staffing services................................................. $ 41,566,178 $ 33,811,533 $ 27,430,288
Training.......................................................... 673,796 -- --
------------- ------------- -------------
Total segment..................................................... 42,239,974 33,811,533 27,430,288
------------- ------------- -------------
Inter-segment..................................................... (7,240) -- --
------------- ------------- -------------
$ 42,232,734 $ 33,811,533 $ 27,430,288
------------- ------------- -------------
------------- ------------- -------------
Gross margin
Staffing services................................................. $ 12,543,799 $ 10,133,202 $ 7,754,936
Training.......................................................... 182,401 -- --
------------- ------------- -------------
$ 12,726,200 $ 10,133,202 $ 7,754,936
------------- ------------- -------------
------------- ------------- -------------
Selling, general and administrative expenses
Staffing services................................................. $ 9,382,218 $ 7,628,234 $ 5,702,992
Training.......................................................... 937,718 -- --
------------- ------------- -------------
$ 10,319,936 $ 7,628,234 $ 5,702,992
------------- ------------- -------------
------------- ------------- -------------
Income before income taxes and extraordinary item
Staffing services................................................. $ 3,224,087 $ 2,480,157 $ 1,763,586
Training.......................................................... (748,393) -- --
------------- ------------- -------------
$ 2,475,694 $ 2,480,157 $ 1,763,586
------------- ------------- -------------
------------- ------------- -------------
Loss from joint venture operations
Staffing services................................................. $ (223,362) $ (21,072) $ (90,313)
Training.......................................................... -- -- --
------------- ------------- -------------
$ (223,362) $ (21,072) $ (90,313)
------------- ------------- -------------
------------- ------------- -------------
Investment in and advances to joint venture
Staffing services................................................. $ 377,127 $ 226,638 $ 152,905
Training.......................................................... -- -- --
------------- ------------- -------------
$ 377,127 $ 226,638 $ 152,905
------------- ------------- -------------
------------- ------------- -------------
Total assets
Staffing services................................................. $ 11,518,624 $ 7,009,226 $ 4,783,057
Training.......................................................... 738,680 -- --
------------- ------------- -------------
Total segment..................................................... 12,257,304 7,009,226 4,783,057
Not allocated to segments......................................... 6,184,874 8,152,330 420,833
------------- ------------- -------------
$ 18,442,178 $ 15,161,556 $ 5,203,890
------------- ------------- -------------
------------- ------------- -------------
Net service revenues from one customer represented approximately 14%, 13%
and 8% of total staffing services revenues in 1998, 1997 and 1996, respectively.
Corporate expenses (those not directly related to segment operations) are
37
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT INFORMATION (CONTINUED)
allocated to the segments based upon net service revenues. Depreciation expense
and interest income and expense are not allocated directly to the segments, but
are included in the allocation of corporate expenses. Property and equipment are
included in the assets not allocated to segments.
38
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 18, 1999, appearing on page 17 of this Annual Report on Form 10-K of
Diversified Corporate Resources, Inc., also included an audit of the financial
statement schedule. In our opinion, the financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 18, 1999
39
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BAD DEBT
BALANCE PROVISIONS
BALANCE AT ACQUIRED CHARGED TO PROVISIONS BALANCE AT
BEGINNING THROUGH COSTS & CHARGED TO END OF
OF PERIOD ACQUISITION EXPENSES REVENUES DEDUCTIONS PERIOD
------------ ----------- ----------- -------------- ------------ ------------
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 $ --
For the Year Ended
December 31, 1998:
Trade accounts receivable
allowances......................... $ 536,000 $ 236,000 $ 111,000 $ 2,390,000(1) $ 2,539,000 $ 734,000
- ------------------------
(1) Estimated reduction in revenues for applicants who accepted employment, but
did not start work or did not remain in employment for the guaranteed
period.
40
BOARD OF DIRECTORS SHAREHOLDER INFORMATION
- ----------------------------------------- -----------------------------------------
J. MICHAEL MOORE CORPORATE OFFICE
Chairman and Chief Executive Officer 12801 N. Central Expressway
M. TED DILLARD Suite 350
President and Secretary Dallas, Texas 75243
Telephone No. 972-458-8500
Fax No. 972-458-2317
DEBORAH A. FARRINGTON COMMON STOCK LISTING
Founder and Co-Chairman American Stock Exchange
StarVest Management, Inc. Symbol: HIR
New York, New York
SAMUEL E. HUNTER LEGAL COUNSEL
VP--OptiMark Technologies Jenkens & Gilchrist, a Professional
New York, New York Corporation
Dallas, Texas
A. CLINTON ALLEN INDEPENDENT AUDITORS
CEO--A.C. Allen & Co., Inc. PricewaterhouseCoopers LLP
Cambridge, Massachusetts Dallas, Texas
REGISTRAR & TRANSFER AGENT
Harris Trust and Savings Bank
Dallas, Texas
OFFICERS FORM 10-K
- -----------------------------------------
J. MICHAEL MOORE ADDITIONAL COPIES OF THIS FORM 10-K
Chief Executive Officer WITHOUT
EXHIBITS MAY BE OBTAINED WITHOUT CHARGE
(COPIES OF EXHIBITS WILL INVOLVE A
NOMINAL
CHARGE) UPON WRITTEN REQUEST TO:
M. TED DILLARD Chief Financial Officer
President and Secretary Diversified Corporate Resources, Inc.
12801 North Central Expressway
Suite 350
Chief Financial Officer and Treasurer
DOUGLAS G. FURRA
Dallas, Texas 75243
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBITS
1.1 Form of Underwriting Agreement (Incorporated by reference from Exhibit 1.1 to the Company's Amendment
No. 1 to the Company's Registration Statement on Form S-1 (Reg. No. 333-31825))
2.1 Asset Purchase Agreement, dated as of October 7, 1998, between the Company, DCRI Acquisition
Corporation, Texcel, Inc., Texcel Technical Services, Inc., Thomas W. Rinaldi, Gary E. Kane, Paul J.
Cornely and Deborah A. Janfrancisco; (schedules have been omitted pursuant to Regulation S-K
601(b)(2)). (Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on October 21,
1998.)
2.2 Asset Purchase Agreement between the Company and JCAP, Inc., effective June 1, 1998 (Incorporated by
reference to Exhibit 10.1 of the Company's Form 10Q filed on August 13, 1998)
3.1 Articles of Incorporation of the Company as amended (Incorporated by reference from Exhibit 3(a) to
the Company's Registration Statement on Form S-18 (Reg. No. 33-760 FW))
3.1 Bylaws of the Company (Incorporated by reference from Exhibit 3(b) to the Company's Registration
Statement on Form S-18 (Reg. No. 33-760 FW))
3.2 Amendment No. 1 to Bylaws of the Company (Incorporated by reference to Exhibit 3.4 of the Company's
Form 10Q filed on May 15, 1998)
3.3 Amendment No. 2 to Bylaws of the Company (Incorporated by reference to Exhibit 3.1 of the Company's
Form 10Q filed on November 16, 1998)
3.4 Amendment No. 3 to Bylaws of the Company*
4.1 Form of Certificate of Designation for Designating Series A Junior Participating Preferred Stock, $.10
par value (Incorporated by reference to Exhibit A of Exhibit 4.1 of the Company's Form 8-K filed on
May 8, 1998)
4.2 Rights Agreement dated as of May 1, 1998 between the Company and Harris Trust and Savings Bank which
includes the form of Certificate of Designation for Designating Series A Junior Participating
Preferred Stock, $.10 par value, as Exhibit A, the form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Series A Junior Participating Preferred Stock as Exhibit C.
(Incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed on May 8, 1998)
4.3 Form of Common Stock Warrant (Incorporated by reference from Exhibit 1.2 to the Company's Amendment
No. 1 to the Company's Registration Statement on Form S-1 (Reg. No. 333-31825))
4.4 Amended and Restated 1996 Nonqualified Stock Option Plan of the Company, effective as of December 28,
1996 (Incorporated by reference from Exhibit 10(z)(21) to the Company's Form 10-K for the year ended
December 31, 1996)+
4.5 Amendment No. 1 to the Company's Amended and Restated 1996 Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.5 of the Company's Form 10Q filed on May 15, 1998)+
4.6 1998 Nonqualified Stock Option Plan, effective as of January 1, 1998 (Incorporated by reference to
Exhibit 10.14 of the Company's Form 10Q filed on May 15, 1998)+
4.7 1998 Non-employee Director Stock Option Plan, effective as of December 9, 1998*+
10.1 Stock Option Agreement between the Company and J. Michael Moore, executed May 15, 1997 (Incorporated
by reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.2 Stock Option Agreement between the Company and M. Ted Dillard, executed May 15, 1997 (Incorporated by
reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.3 Stock Option Agreement between the Company and Douglas G. Furra, effective June 1, 1997 (Incorporated
by reference to Exhibit 10.11 of the Company's Form 10Q filed on May 15, 1998)+
EXHIBITS
10.4 First Amendment to Amended and Restated Stock Option Agreement between the Company and J. Michael
Moore effective September 30, 1998*+
10.5 First Amendment to Amended and Restated Stock Option Agreement between the Company and M. Ted Dillard
effective September 30, 1998*+
10.6 Stock Option Agreement between the Company and J. Michael Moore effective as of April 29, 1998*+
10.7 Stock Option Agreement between the Company and M. Ted Dillard effective as of April 29, 1998*+
10.8 Stock Option Agreement between the Company and Douglas G. Furra effective as of April 29, 1998*+
10.9 Amendment to Stock Option Agreement (Pricing Amendment) for J. Michael Moore effective as of October
23, 1998*+
10.10 Amendment to Stock Option Agreement (Pricing Amendment) for M. Ted Dillard effective as of October 23,
1998*+
10.11 Amendment to Stock Option Agreement (Pricing Amendment) for Douglas G. Furra effective as of October
23, 1998*+
10.12 Form of Amendment to Stock Option Agreement (Pricing Amendment) for certain employees of the Company
including Anthony J. Bruno and James Woo, effective as of October 23, 1998*+
10.13 Stock Option Agreement between the Company and Samuel E. Hunter, executed May 15, 1997 (Incorporated
by reference from Exhibit 4.10 to the Company's Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.14 First Amendment to Stock Option Agreement between the Company and Samuel E. Hunter, effective March
20, 1998 (Incorporated by reference to Exhibit 10.13 of the Company's Form 10Q filed on May 15, 1998)+
10.15 Stock Option Agreement between the Company and Deborah A. Farrington, effective November 13, 1997
(Incorporated by reference to Exhibit 10.12 of the Company's Form 10Q filed on May 15, 1998)+
10.16 Stock Option Agreement (1998) Re: Hunter between the Company and Samuel E. Hunter effective as of
April 29, 1998*+
10.17 Stock Option Agreement (1998) Re: Farrington between the Company and Deborah A. Farrington effective
as of April 29, 1998*+
10.18 Stock Option Agreement (1998) Re: Allen between the Company and A. Clinton Allen effective as of April
29, 1998*+
10.19 Partial Option Termination Agreement Re: Hunter between the Company and Samuel E. Hunter effective
December 9, 1998*+
10.20 Partial Option Termination Agreement Re: Farrington between the Company and Deborah A. Farrington
effective December 9, 1998*+
10.21 Partial Option Termination Agreement Re: Allen between the Company and A. Clinton Allen effective
December 9, 1998*+
10.22 Directors Option Agreement Re: Hunter between the Company and Samuel E. Hunter effective as of
December 9, 1998*+
10.23 Directors Option Agreement Re: Farrington between the Company and Deborah A. Farrington effective as
of December 9, 1998*+
10.24 Directors Option Agreement Re: Allen between the Company and A. Clinton Allen effective as of December
9, 1998*+
10.25 Stock Option granted to Anthony J. Bruno, effective November 13, 1997 (Incorporated by reference to
Exhibit 10.6 of the Company's Form 10Q filed on May 15, 1998)+
10.26 Stock Option granted to James Woo, effective November 13, 1997 (Incorporated by reference to Exhibit
10.7 of the Company's Form 10Q filed on May 15, 1998)+
EXHIBITS
10.27 Stock Option granted to Scott Higby, effective January 14, 1998 (Incorporated by reference to Exhibit
10.8 of the Company's Form 10Q filed on May 15, 1998)+
10.28 Stock Option granted to John Wilson, effective April 23, 1998 (Incorporated by reference to Exhibit
10.9 of the Company's Form 10Q filed on May 15, 1998)+
10.29 Form of Stock Option granted to certain employees of the Company, effective November 13, 1997
(Incorporated by reference to Exhibit 10.10 of the Company's Form 10Q filed on May 15, 1998)+
10.30 Form of Stock Option Agreements, dated as of October 8, 1998, between the Company and certain
non-shareholder employees of DCRI Acquisition Corporation (Incorporated by reference to Exhibit 10.2
of the Company's Form 8-K filed on October 21, 1998)+
10.31 Employment Contract between the Company and J. Michael Moore, executed April 10, 1997 (Incorporated by
reference from Exhibit 10(z)(xviii) to the Company's Form 10-K for the year ended December 31, 1996)+
10.32 Employment Contract between the Company and M. Ted Dillard, executed April 10, 1997 (Incorporated by
reference from Exhibit 10(z)(xviii) to the Company's Form 10-K for the year ended December 31, 1996)+
10.33 First Amendment to Employment Agreement between the Company and J. Michael Moore effective September
30, 1998*+
10.34 First Amendment to Employment Agreement between the Company and M. Ted Dillard effective September 30,
1998*+
10.35 Employment Agreement entered into as of June 1, 1997 between the Company and Douglas G. Furra
(Incorporated by reference to Exhibit 10.2 of the Company's Form 10Q filed on May 15, 1998)+
10.36 Employment Agreement entered into as of January 1, 1998 between Management Alliance Corporation, a
wholly-owned subsidiary of the Company, and Anthony J. Bruno (Incorporated by reference to Exhibit
10.1 of the Company's Form 10Q filed on May 15, 1998)+
10.37 Employment Agreement entered into as of January 1, 1998 between Management Alliance Corporation and
James Woo (Incorporated by reference to Exhibit 10.3 of the Company's Form 10Q filed on May 15, 1998)+
10.38 Employment Agreement, effective as of October 1, 1998, between DCRI Acquisition Corporation, Thomas W.
Rinaldi and the Company (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on
October 21, 1998)+
10.39 Standard Form Office Lease between Zell/Merrill Lynch Real Estate Opportunity Partners Limited and
Lafarge Corporation dated February 26, 1993 (Incorporated by reference from Exhibit 10.17 to the
Company's Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No. 333-31825))
10.40 First Amendment to the Office Lease between Zell/Merrill Lynch Real Estate Opportunity Partners
Limited and Lafarge Corporation dated February 20, 1995 (Incorporated by reference from Exhibit 10.18
to the Company's Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-31825))
10.41 Second Amendment to the Office Lease between Zell/Merrill Lynch Real Estate Opportunity Partners
Limited and Lafarge Corporation dated February 22, 1995 (Incorporated by reference from Exhibit 10.19
to the Company's Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-31825))
10.42 Third Amendment to the Office Lease between Zell/Merrill Lynch Real Estate Opportunity Partners
Limited and Lafarge Corporation dated November 3, 1995 (Incorporated by reference from Exhibit 10.20
to the Company's Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-31825))
EXHIBITS
10.43 Fourth Amendment to the Office Lease between Zell/Merrill Lynch Real Estate Opportunity Partners
Limited and Lafarge Corporation dated October 24, 1996 (Incorporated by reference from Exhibit 10.21
to the Company's Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-31825))
10.44 Fifth Amendment to the Office Lease between Zell/Merrill Lynch Real Estate Opportunity Partners
Limited and Lafarge Corporation dated January 7, 1997 (Incorporated by reference from Exhibit 10.22 to
the Company's Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No.
333-31825))
10.45 Note Receivable dated June 22, 1998, between the Company and J. Michael Moore (Incorporated by
reference to Exhibit 10.2 of the Company's Form 10Q filed on August 13, 1998)
10.46 Note Receivable effective July 17, 1998, between the Company and M. Ted Dillard (Incorporated by
reference to Exhibit 10.3 of the Company's Form 10Q filed on November 16, 1998)
10.47 Note Receivable effective July 17, 1998, between the Company and M. Ted Dillard (Incorporated by
reference to Exhibit 10.4 of the Company's Form 10Q filed on November 16, 1998)
10.48 Security Agreement effective July 17, 1998, between the Company and M. Ted Dillard (Incorporated by
reference to Exhibit 10.5 of the Company's Form 10Q filed on November 16, 1998)
10.49 Security Agreement effective October 12, 1998, between the Company and M. Ted Dillard (Incorporated by
reference to Exhibit 10.6 of the Company's Form 10Q filed on November 16, 1998)
10.50 Consulting Agreement effective May 12, 1998 between the Company and Deborah A. Farrington
(Incorporated by reference to exhibit 10.7 of the Company's Form 10Q filed on November 16, 1998)
10.51 Note Purchase Agreement dated as of January 12, 1999 among the Company, Compass Bank and DCRI L.P. No.
2 Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on January 28, 1999)
10.52 Pledge Agreement dated as of January 12, 1999 between Compass Bank and DCRI L.P. No. 2, Inc.
(Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed on January 28, 1999)
10.53 Bank Transaction Agreement dated as of January 12, 1999 among the Company, DCRI L.P. No. 2, Inc. and
J. Michael Moore (Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed on January
28, 1999)
21 List of Subsidiaries*
23.1 Consent of PricewaterhouseCoopers LLP*
27 Financial Data Schedule*
- ------------------------
(*Filed herewith)
(+Compensation plan, benefit plan or employment contract or arrangement)