UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1565578
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12801 NORTH CENTRAL EXPRESSWAY
SUITE 350
DALLAS, TEXAS 75243
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 458-8500
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST
REPORT:
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. /X/ Yes / / No
Number of shares of common stock of the registrant outstanding on May 15,
2001 was 2,811,865.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
MARCH 31 DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 499
Trade accounts receivable, less allowance for doubtful
accounts of approximately $845 and $1,318, respectively ..... 12,942 15,132
Prepaid expenses and other current assets...................... 587 356
Federal income taxes receivable................................ 705 261
Deferred income taxes.......................................... 709 853
------------ ------------
Total current assets....................................... 14,943 17,101
Property and equipment, net...................................... 3,434 3,576
Other assets:
Intangibles, net............................................... 10,342 10,492
Receivables from related parties............................... 444 445
Other.......................................................... 240 224
------------ ------------
$ 29,403 $ 31,838
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses.................... $ 6,538 $ 7,269
Book overdraft................................................. 1,506 -
Current maturities of capital lease obligations................ 78 78
Current maturities of long-term debt........................... 1,384 1,371
------------ ------------
Total current liabilities.................................. 9,506 8,718
Deferred lease rents............................................. 41 45
Deferred income taxes............................................ 396 391
Borrowings under revolving credit agreement...................... 4,220 6,676
Capital lease obligations, net of current maturities............. 208 230
Long-term debt, net of current maturities........................ 810 949
------------ ------------
Total liabilities.......................................... 15,181 17,009
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized,
none issued.................................................. - -
Common stock, $.10 par value; 10,000 shares authorized,
3,397 shares issued.......................................... 340 340
Additional paid-in capital..................................... 12,639 12,639
Retained earnings.............................................. 3,130 3,712
Common stock held in treasury (586 and 579 shares,
respectively), at cost....................................... (1,649) (1,624)
Receivables from related parties............................... (238) (238)
------------ ------------
Total stockholders' equity................................. 14,222 14,829
------------ ------------
$ 29,403 $ 31,838
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except Per Share Data)
(Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
----------- -----------
Net service revenue:
Permanent placement............................................ $ 6,405 $ 7,800
Contract placement and specialty services...................... 13,526 9,769
----------- -----------
19,931 17,569
Cost of services.................................................. 15,679 12,542
----------- -----------
Gross margin...................................................... 4,252 5,027
Selling, general and administrative expenses:
Selling, general and administrative expenses................... 4,105 3,781
Severance expenses............................................. 439 -
Depreciation and amortization expense.......................... 483 377
----------- -----------
5,027 4,158
Other income and (expense) items:
Interest expense, net............................................. (185) (66)
Other, net........................................................ - 7
----------- -----------
(185) (59)
Income/(loss) before income taxes................................. (960) 810
Income tax expense/(benefit)...................................... (378) 321
----------- -----------
Net income/(loss)................................................. $ (582) $ 489
=========== ===========
Basic and diluted earnings per share.............................. $ (0.21) $ 0.18
=========== ===========
Weighted average common shares outstanding........................ 2,816 2,738
=========== ===========
Weighted average common and common equivalent shares outstanding.. 2,816 2,739
=========== ===========
See notes to consolidated financial statements.
3
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
----------- -----------
Cash flow from operating activities:
Net income/(loss)................................................... $ (582) $ 489
Adjustments to reconcile net income/(loss) to cash provided
by operating activities:
Depreciation and amortization................................... 483 377
Provision for allowances........................................ (473) 159
Deferred income taxes........................................... 149 (23)
Accretion of interest on deferred payment obligations........... 45 67
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable............................................. 2,663 (2,014)
Federal income taxes receivable................................. (444) 148
Deferred lease rents............................................ (4) 9
Prepaid expenses and other assets............................... (231) (109)
Trade accounts payable and accrued expenses..................... (731) 1,553
Federal income taxes payable.................................... - 127
----------- -----------
Cash provided by operating activities........................... 875 783
Cash flows from investing activities:
Capital expenditures............................................... (191) (159)
Deposits........................................................... (16) (11)
Business acquisition costs......................................... - (3,124)
Loans and advances to related parties.............................. - (109)
Repayment from related parties..................................... 1 -
----------- -----------
Cash used in investing activities.................................. (206) (3,403)
Cash flows from financing activities:
Book overdraft..................................................... 1,506 -
Net short-term borrowings.......................................... - 2,270
Advances on long-term line of credit borrowings.................... 20,944 -
Repayments of long-term line of credit borrowings.................. (23,400) -
Repurchase of treasury stock....................................... (25) (83)
Principal payments under long-term debt obligations................ (171) -
Principal payments under capital lease obligations................. (22) (13)
----------- -----------
Cash provided by financing activities.............................. (1,168) 2,174
Change in cash and cash equivalents................................... (499) (446)
Cash and cash equivalents at beginning of year........................ 499 847
----------- -----------
Cash and cash equivalents at end of period............................ $ - $ 401
=========== ===========
Supplemental cash flow information:
Cash paid for interest............................................. $ 142 $ 28
=========== ===========
Cash paid for taxes................................................ $ 169 $ 17
=========== ===========
See notes to consolidated financial statements.
4
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the operations of
Diversified Corporate Resources, Inc. and its wholly owned subsidiaries (the
"Company", "our", "we", or "us"). The financial information for the three
months ended March 31, 2001 and 2000, is unaudited but includes all
adjustments (consisting only of normal recurring accruals) which we consider
necessary for a fair presentation of the results for the periods. The
financial information should be read in conjunction with the consolidated
financial statements for the year ended December 31, 2000, included in our
Annual Report on Form 10-K ("Form 10-K"). Operating results for the three
months ended March 31, 2001, are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 2001.
All inter-company accounts and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior year balances to
conform to the current year presentation.
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") was determined by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted EPS includes these shares plus common stock
equivalents outstanding during the year. (Common stock equivalents are
excluded if the effects of inclusion are anti-dilutive.)
Following is a reconciliation of the weighted average number of shares
outstanding during the period for basic and diluted EPS:
(In Thousands) For the Three Months Ended March 31,
------------------------------------
2001 2000
---------------- ---------------
Basic...................................................... 2,816 2,738
Net effect of dilutive stock options....................... - 1
---------------- ---------------
Diluted.................................................... 2,816 2,739
================ ===============
Total options and warrants outstanding..................... 718 669
================ ===============
Options and warrants not considered because effects of
inclusion would be anti-dilutive........................... 718 631
================ ===============
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
(In Thousands) March 31, December 31,
2001 2000
---------------- ---------------
---------------- ---------------
Computer equipment and software............................ $ 4,416 $ 4,294
Equipment and furniture.................................... 1,706 1,660
Leasehold improvements..................................... 417 412
---------------- ---------------
Gross property........................................... 6,539 6,366
Less accumulated depreciation and amortization............. (3,105) (2,790)
---------------- ---------------
Net property and equipment............................... $ 3,434 $ 3,576
================ ===============
Depreciation and amortization expense of property and equipment for
the three months ended March 31, 2001 and 2000 was approximately $333 and
$265, respectively.
5
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. INTANGIBLES
Intangibles consist of:
(In Thousands) Amortization March 31, December 31,
Period 2001 2000
------------- ---------- ------------
Non-compete agreements........... 3 - 5 years $ 150 $ 150
Goodwill......................... 20 years 11,197 11,197
--------- ---------
11,347 11,347
Accumulated amortization......... (1,005) (855)
--------- ---------
$ 10,342 $ 10,492
========= =========
Amortization of intangibles for the three months ended March 31, 2001 and
2000 was approximately $150 and $112, respectively.
5. LINE OF CREDIT AND LONG-TERM DEBT:
On May 18, 2000, we entered into a three-year revolving line of
credit agreement (the "GE facility") with General Electric Capital
Corporation ("GE"). The agreement permits borrowings up to $15 million.
Upon the closing of this facility, we borrowed $3.8 million and repaid, in
its entirety, the outstanding borrowings under our previous revolving credit
facility. The borrowings are collateralized by our accounts receivable and
other assets and are based upon a borrowing base as defined in the agreement.
The agreement also contains various financial and non-financial covenants,
the most restrictive of which requires us to maintain tangible net worth of
$3 million and fixed charge coverage, as defined in the agreement, of 1 to 1
as of December 31, 2000 and to 1.1 to 1 each quarter thereafter. As of March
31, 2001, we were not in compliance with the fixed charge covenant associated
with this credit facility. Effective May 10, 2001, the Company and GE entered
into the First Amendment and Waiver (the "Amendment") to the GE facility.
The Amendment waives the covenant violation at March 31, 2001 and establishes
amended fixed charge coverage requirements of 0.9 to 1 for the quarter ended
June 30, 2001, 1 to 1 for the quarters ended September 30, 2001 and December
31, 2001 and 1.1 to 1 for the quarter ended March 31, 2002 and each quarter
thereafter. Outstanding balances bear interest at the bank's index rate,
which is defined as the latest prime rate quoted on the last business day of
each calendar month plus 0.125%. Interest is payable monthly and all
outstanding principal and interest is due May 17, 2003. The weighted average
interest rate on the borrowings was 8.5% for the 3 months ended March 31,
2001. The interest rate at March 31, 2001 was 8.5%. As of March 31, 2001, the
amounts outstanding under the revolving line of credit amounted to $4.2
million and we had approximately $2.1 million of net borrowing availability.
6. 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:
(In Thousands) For the Three Months Ended
March 31,
---------------------------
2001 2000
----------- -----------
Tax provision (benefit) at statutory rate for continuing operations..... $ (336) $ 283
Other................................................................... 4 (6)
State income taxes (benefit) net of federal income tax effect........... (46) 44
----------- -----------
$ (378) $ 321
=========== ===========
7. SEVERANCE EXPENSES
On March 14, 2001, upon the resignation of our President, Mr. Ted
Dillard, the Company and Mr. Dillard entered into a Severance Agreement and
Mutual Release ("Severance Agreement"). The Severance Agreement, among other
things, calls for: (a) severance to Mr. Dillard of $210,000 payable in
twenty-four equal semi-monthly installments beginning March 15, 2001; (b)
accelerated vesting of options to purchase 5,556 shares of our Common Stock
that were due to vest on March 31, 2001; (c) extension of the time that Mr.
Dillard may exercise any of his vested stock options until December 31, 2002
(subject to the provisions of the plans under which such options were
granted); and (d) extension of the maturity date of a loan by the Company
6
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
from October 12, 2001 until July 17, 2003. The total cost of the Severance
Agreement (including legal and professional fees and a $10,000 consulting fee
paid to Samuel E. Hunter, a director of the Company) is approximately
$339,000 and was expensed in the first quarter of 2001. In addition, in 2001,
we incurred approximately $100,000 in severance expenses related to a
reduction in our workforce as a result of the downturn in the economy.
8. CONTINGENCIES
We are a party to a lawsuit (the "Suit") initially filed in 1996
involving Donald R. Ditto, Sr., Ditto Properties Company, J. Michael Moore
and others. For more information concerning the Suit, see Part II, Item 1.
Legal Proceedings of this Form 10-Q.
We are also involved in certain other litigation and disputes not
noted. With respect to the aforementioned matters, management believes the
claims against us are without merit and has concluded that the ultimate
resolution of such will not have a material effect on our consolidated
financial position or results of operations.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Service Revenue Summary:
(US $ in millions) For the Three Months Increase/
Ended March 31, (decrease)
------------------------ -------------
2001 2000 2001 vs. 2000
---------- ---------- -------------
Permanent placement........................... $ 6.4 $ 7.8 $ (1.4)
Contract placement and specialty services..... 13.5 9.8 3.7
---------- ---------- ----------
Net service revenue........................... $ 19.9 $ 17.6 $ 2.3
========== ========== ==========
For the quarter ended March 31, 2001, net service revenue increased
$2.3 million, or 13%, to $19.9 million as compared to $17.6 million for the
previous year period. As noted in the table above, revenue derived from
contract and specialty placements increased $3.7 million. Approximately $2.2
million of this increase was attributable to the inclusion of the results of
Datatek Group Corporation ("Datatek"), which was acquired in March 2000.
Permanent placement revenue decreased $1.4 million, or 18%, as a result of
the effect of hiring freezes and staff reductions initiated by our customers,
primarily in the IT and technology sector, during the quarter ended March 31,
2001.
Contract placement and specialty services revenue accounted for 68%
of revenue for the quarter ended March 31, 2001, up from 56% for the previous
year period. As a percentage of net service revenue, revenue from contract
and specialty placements will continue to increase as management maintains
its focus on growth in reoccurring contract placement revenues.
For the quarter ended March 31, 2001, gross margin decreased by $0.7
million, or 15%, to $4.3 million as compared to $5.0 million in the previous
year period. The absolute decrease in gross margin dollars is due primarily
to two factors: (1) the decline in permanent placement revenues and (2) the
fact that the increase in gross margin dollars associated with the increase
in contract and specialty placement revenues was offset entirely by increased
start up salary costs associated with the hiring of additional contract
placement recruiters throughout the Company. As a percentage of net service
revenue, the gross margin percentage for the quarter ended March 31, 2001 was
21%, down eight percentage points as compared to the previous year period.
This decrease is due to the fact that a greater percentage of the fiscal 2001
revenue was generated from contract placements, which have lower margins than
permanent placements, combined with the negative effect of the start up
salary costs associated with the newly hired contract placement recruiters.
While we intend to continue to increase our contract placement customer base
and ultimately our contract placement revenues, we expect the gross margin
percentage in future quarters to return to more traditional levels as
revenues from permanent placements return to prior year levels.
Selling, general and administrative expenses ("SG&A"), increased
$0.3 million, or 9%, to $4.1 million for the quarter ended March 31, 2001, as
compared to the previous year period. Most of the increase in SG&A was
attributed to the inclusion of the operations of Datatek. For the quarter
ended March 31, 2001, depreciation and amortization expense amounted to $0.5
million as compared to $0.4 million in the previous year period. This
increase was due largely to amortization expense related to our acquisitions.
For the quarter ended March 31, 2001, we reported net interest
expense of $0.2 million, up $0.1 million, as compared to the previous year
period. Such expense is primarily associated with borrowings on our line of
credit and deferred payment obligations related to our acquisitions.
We reported $0.4 million in severance expense during the quarter
ended March 31, 2001. Approximately $0.3 million was related to the
resignation of our former president. No severance expenses were recorded in
fiscal 2000.
For the quarter ended March 31, 2001, we reported a net loss before
taxes of $1.0 million as compared to net income before taxes of $0.8 million
in the previous year period. The reduction in revenue from permanent
placements combined with increased start up salary costs and the severance
expenses discussed above, contributed to the change in net income before
taxes.
As a result of the losses noted above, during the quarter ended
March 31, 2001, we reported an income tax benefit of $0.4 million as compared
to income expense of $0.3 million for the quarter ended March 31, 2000.
As a result of the items discussed above, we reported a $0.6 million
net loss for the quarter ended March 31, 2001 as compared to net income of
$0.5 million for the previous year period.
8
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 31, 2001, net cash flow generated from
operations and the book overdraft was used for principal payments under
long-term debt and capital lease obligations, a net reduction of the GE
facility and capital expenditures.
As discussed more fully in the footnotes to the financial
statements, in May 2000, we entered into a three-year revolving line of
credit agreement with General Electric Capital Corporation. This agreement
permits borrowings of up to $15 million based on availability criteria
outlined in the agreement. At May 11, 2001, net borrowing availability under
the credit facility was approximately $1.2 million after excluding a reserve
of $1.3 million for a portion of deferred payment obligations to be paid in
the next year.
As of March 31, 2001, we were not in compliance with a financial
covenant under the GE facility, which required us to maintain fixed charge
coverage, as defined in the agreement, of 1.1 to 1. Effective May 10, 2001,
the Company and GE entered into the Amendment to the GE facility. The
Amendment waives the covenant violation at March 31, 2001 and establishes
amended fixed charge coverage requirements of 0.9 to 1 for the quarter ended
June 30, 2001, 1 to 1 for the quarters ended September 30, 2001 and December
31, 2001 and 1.1 to 1 for the quarter ended March 31, 2002 and each quarter
thereafter.
We are continually evaluating various financing strategies to be
utilized in expanding our business and to fund future growth or acquisitions.
Additionally, we expect that cash flow from operations and our line of credit
agreement will provide adequate liquidity to fund our internal 2001 growth
plans and operations for the foreseeable future.
Inflation has not had a significant effect on our operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 1998, the FASB issued SFAS No. 133. "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
financial statements and measure those instruments at fair value. In
September 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 133 was originally effective for all fiscal
quarters of years beginning after September 15, 1999. SFAS No. 137 deferred
the effective date of SFAS No. 133 to all fiscal quarters of all years
beginning after June 15, 2000. SFAS No. 133 has no impact upon us as we had
no derivative financial instruments.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not
historical facts, including, but not limited to, projections or expectations
of future financial or economic performance of the Company, and statements of
our plans and objectives for future operations are "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended ("the Exchange Act"), and involve a number of risks and
uncertainties. No assurance can be given that actual results or events will
not differ materially from those projected, estimated, assumed or anticipated
in any such "forward-looking" statements. Important factors (the "Cautionary
Disclosures") that could result in such differences include: general economic
conditions in our markets, including inflation, recession, interest rates and
other economic factors; the availability of qualified personnel; our ability
to successfully integrate acquisitions or joint ventures with our operations
(including the ability to successfully integrate businesses that may be
diverse as to their type, geographic area or customer base); the level of
competition experienced by us; our ability to implement our business
strategies and to manage our growth; the level of development revenues and
expenses; the level of litigation expenses; our ability to effectively
implement an e-commerce strategy; those factors identified in our Prospectus
dated September 30, 1997 as risk factors; and other factors that affect
businesses generally. Subsequent written and oral "forward-looking"
statements attributable to us, or persons acting on our behalf, are expressly
qualified by the Cautionary Disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from fluctuations in interest rates
and the effects of those fluctuations on the earnings of its cash equivalent
short-term investments; as well as interest expense on line of credit
borrowings. Assuming interest rates increased by 200 basis points (2%) above
the interest rate at March 31, 2001, on an annualized basis interest expense
would increase by approximately $0.1 million based on the outstanding line of
credit borrowings of $4.2 million at March 31, 2001.
9
PART II: OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
In 1996, a lawsuit was filed by Ditto Properties Company ("DPC")
against DCRI L.P. No. 2, Inc. ("LPNo.2") which is controlled by J. Michael
Moore ("Moore"). Moore, the Chairman of the Board and the Chief Executive
Officer of the Company, and the Company were also initially named as
garnishees in the lawsuit (the "Ditto Litigation") with respect to 899,200
shares (the "LP Shares") of common stock (the "Common Stock") of the Company
which were the subject matter of a series of transactions in 1993
(collectively referred to herein as the "1993 Transactions") which ultimately
resulted in the LP Shares being conveyed by DPC to LP No.2. Subsequent to
the initial filing of the litigation by DPC, Moore was added as a defendant
in such proceedings, and F. Scott Otey ("Otey") and Jeffery Loadman
("Loadman") intervened as parties to the Ditto Litigation.
On April 12, 2001, DPC and Donald R. Ditto Sr. ("Ditto") filed an
amended petition in the Ditto Litigation and specifically named the Company
as a defendant in such lawsuit. The venue for the Ditto Litigation is the
District Court of Dallas County, Texas, 298th Judicial District (the "Court").
In the Ditto Litigation, DPC, Ditto, Otey and Loadman are seeking,
among other things, each of the following: (a) a rescission of the 1993
Transactions thereby entitling DPC to title, ownership and possession of the
LP Shares, (b) the imposition of a constructive trust upon the LP Shares for
the benefit of DPC, (c) a declaratory judgement declaring, among other
things, (i) that DPC is entitled to title, ownership and possession in and to
the LP Shares and to 250 shares of common stock of LPNo.2 (the "Collateral
Shares"), and (ii) that any transfers of the LP Shares by LPNo.2 was
improper and void ab initio, (d) a judicial foreclosure order transferring
ownership of the LP Shares and the Collateral Shares to DPC, (e) garnishment
of the LP Shares and the Collateral Shares, (f) a temporary restraining order
and permanent injunction related to the LP Shares and the Collateral Shares,
(g) an accounting with respect to the LP Shares, and (h) damages as below
summarized based upon numerous claims including breach of contract, breach of
fiduciary duty, statutory fraud, and fraud in the inducement. In connection
with these claims, DPC, Ditto, Otey and Loadman contend, among other things,
that (i) the Company, Mr. Moore, LPNo.2, U.S.F.G./DHRG L.P. No. 1, a
partnership that previously owned the LP Shares and that is a party to the
Ditto Litigation (the "Partnership"), and others committed acts constituting
fraud upon DPC, Ditto, Otey and Loadman, in connection with the LP Shares,
the 1993 Transactions, and in other respects, and (ii) DPC, Ditto, Otey and
Loadman are entitled to recover from the Company, Moore, LPNo.2, and the
Partnership, jointly and severally, compensatory damages in the amount of at
least $6,519,200, punitive and exemplary damages totaling at least
$26,076,800, interest on the amount of damages incurred, legal costs and
attorney fees.
In connection with the Ditto Litigation, the following actions have
occurred: (a) on October 24, 1996, certain of the parties to the Ditto
Litigation entered into an Agreed Temporary Order pursuant to which LPNo.2
agreed to deliver to a Special Master, to be designated pursuant to the
Agreed Temporary Order, the LP Shares or $1,500,000 in cash (the "Cash Escrow
Amount"), (b) in October, 1996, the Company, LPNo.2 and Moore filed a lawsuit
against DPC and Ditto seeking damages and reimbursement of expenses alleging,
among other things, that DPC and Ditto interfered with Company transactions
and proposed financing resulting in lost opportunities, lost profits and
significant damages (ultimately the lawsuits filed by all parties were
combined into one proceeding in the Court), (c) on June 25, 1997, the Court
granted a summary judgment to LPNo.2 with respect to the claim that DPC is
entitled to a rescission of the 1993 Transactions, (d) in July, 1997 LPNo.2
delivered to the Special Master the Cash Escrow Amount, (e) subsequent to
June, 1997, certain of the LP Shares have been sold by or for the benefit of
LPNo.2, (f) all of the LP Shares owned by LPNo.2 have been pledged to secure
indebtedness obligations of LPNo.2, including indebtedness owed to the
Company, and (g) pursuant to agreements involving LPNo.2 and DPC, the Cash
Escrow Amount has been reduced from the original amount of $1,500,000 to
approximately $625,000.
In the past, the Company has incurred legal fees on its own behalf
and has funded certain of the legal fees and expenses of Moore and/or LPNo.2
in connection with the Ditto Litigation. As the result of the Company being
named as a defendant in such case, the Company, Moore and LPNo.2 have decided
that the Company should have separate counsel from Moore and LPNo.2. The
Board of Directors of the Company (a) has approved the payment to Moore of up
to $250,000 to fund legal fees and expenses anticipated to be incurred by
Moore and LPNo.2 in the Ditto Litigation, (b) has authorized the Company to
enter into an Indemnification Agreement with each of the officers and
directors of the Company pursuant to which these individuals will be
indemnified in connection with matters related to the Ditto Litigation; the
form of Indemnification Agreement is filed as Exhibit 10.2 to this Form 10Q,
and (c) has approved an amendment to the Bylaws of the Company to require the
Company to indemnify its' present and former officers and directors to the
full extent permitted by the laws of the state of Texas, in connection with
any litigation in which such persons became a party subsequent to March 29,
2001 and in which such persons are involved in connection with performing
their duties as an officer or director of the Company.
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At this time, the trial date for the Ditto Litigation is October 22,
2001. No amount of loss reserves has been established by the Company with
respect to the Ditto Litigation because management of the Company does not
believe that the Ditto Litigation will adversely impact the Company's
financial condition.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On March 14, 2001, upon the resignation of our President, Mr. Ted
Dillard, the Company and Mr. Dillard entered into a Severance Agreement and
Mutual Release ("Severance Agreement"). The Severance Agreement, among other
things, calls for: (a) severance to Mr. Dillard of $210,000 payable in
twenty-four equal semi-monthly installments beginning March 15, 2001; (b)
accelerated vesting of options to purchase 5,556 shares of our Common Stock
that were due to vest on March 31, 2001; (c) extension of the time that Mr.
Dillard may exercise any of his vested stock options until December 31, 2002
(subject to the provisions of the plans under which such options were
granted); and (d) extension of the maturity date of a loan by the Company
from October 12, 2001 until July 17, 2003.
On March 29, 2001, the Board of Directors approved the amendment to
Article VII of the Bylaws of the Company. A copy of the Bylaws as amended by
this amended Article VII, is made a part of this Form 10-Q as Exhibits 3.1
through 3.5. The effect of such amendment is to basically obligate the
Company to (a) indemnify and hold harmless, to the fullest extent permitted
by applicable law, as it presently exists or may be hereafter amended, any
person who becomes involved with any pending or threatened legal proceeding,
by reason of the fact that such person is or was an officer or director of
the Company, and (b) to pay the reasonable expenses (including attorneys'
fees) incurred by the person to be indemnified in defending any such legal
proceeding.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Bylaws of the Company (Incorporated by reference from Exhibit 3(b)
to the Company's Registration Statement on Form S-18 (Reg. No.
33-760 FW))
3.2 Amendment No. 1 to Bylaws of the Company (Incorporated by reference
to Exhibit 3.4 of the Company's Form 10Q filed on May 15, 1998)
3.3 Amendment No. 2 to Bylaws of the Company (Incorporated by reference
to Exhibit 3.1 of the Company's Form 10Q filed on November 16, 1998)
3.4 Amendment No. 3 to Bylaws of the Company (Incorporated by reference
to Exhibit 3.4 of the Company's Form 10K filed on March 30, 1999)
3.5 Amendment No. 4 to Bylaws of the Company (Incorporated by reference
to Exhibit 3.6 of the Company's Form 10K filed on April 2, 2000)
10.1 First Amendment and Waiver to the GE facility. *
10.2 Indemnification Agreement. *
*Filed herewith
B. Reports on Form 8-K
On March 27, 2001, we filed with the Securities and Exchange Commission,
a report on Form 8-K, with respect to the resignation of our former
President, M. Ted Dillard and the severance agreement between the Company and
Mr. Dillard in connection therewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSIFIED CORPORATE RESOURCES, INC.
Registrant
DATE: May 15, 2001 By: /s/ J. Michael Moore
----------------------------------
J. Michael Moore
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
DATE: May 15, 2001 By: /s/ Anthony G. Schmeck
----------------------------------
Anthony G. Schmeck
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
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