<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 17,
2001 was 2,811,865.
<Page>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ - $ 499
Trade accounts receivable, (less allowance for doubtful accounts of approximately $854
and $1,318, respectively)........................................................... 13,748 15,132
Prepaid expenses and other current assets.............................................. 568 356
Federal income taxes receivable........................................................ 261 261
Deferred income taxes.................................................................. 1,299 853
---------------- ----------------
Total current assets................................................................ 15,876 17,101
Property and equipment, net............................................................... 3,167 3,576
Other assets:
Intangibles, net....................................................................... 10,229 10,492
Receivables from related parties....................................................... 418 418
Other.................................................................................. 211 224
---------------- ----------------
$ 29,901 $ 31,811
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses............................................ $ 5,816 $ 7,242
Book overdraft......................................................................... 1,320 -
Current maturities of capital lease obligations........................................ 78 78
Current maturities of long-term debt................................................... 1,410 1,371
---------------- ----------------
Total current liabilities........................................................... 8,624 8,691
Deferred lease rents...................................................................... 39 45
Deferred income taxes..................................................................... 442 391
Borrowings under revolving credit agreement............................................... 5,812 6,676
Capital lease obligations, net of current maturities...................................... 187 230
Long-term debt, net of current maturities................................................. 826 949
---------------- ----------------
Total liabilities................................................................... 15,930 16,982
---------------- ----------------
Commitments and contingencies..
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized, none issued................. - -
Common stock, $.10 par value; 10,000 shares authorized, 3,397 shares issued............ 340 340
Additional paid-in capital............................................................. 12,639 12,639
Retained earnings...................................................................... 2,879 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.......................................................... 13,971 14,829
---------------- ----------------
$ 29,901 $ 31,811
================ ================
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
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DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<Table>
<Caption>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------- --------------- ------------
Net service revenues:
Permanent placement........................................ $ 5,304 $ 7,934 $ 11,709 $ 15,734
Contract placement and specialty services.................. 14,512 12,377 28,038 22,146
-------------- ------------- --------------- ------------
19,816 20,311 39,747 37,880
Cost of services:
Direct cost of contract placement and specialty services... 11,459 9,789 22,217 17,172
Sales salaries and commissions............................. 4,292 5,336 9,213 10,495
-------------- ------------- --------------- ------------
15,751 15,125 31,430 27,667
Gross margin.................................................... 4,065 5,186 8,317 10,213
Selling, general and administrative expenses:
Selling, general and administrative expenses............... 3,813 3,738 7,918 7,520
Severance expense.......................................... - - 439 -
Depreciation and amortization expense...................... 481 427 964 803
-------------- ------------- --------------- ------------
4,294 4,165 9,321 8,323
Other income and (expense) items:
Interest expense, net...................................... (178) (185) (363) (252)
Other net.................................................. 2 (2) 2 7
-------------- ------------- --------------- ------------
(176) (187) (361) (245)
Income / (loss) before income taxes............................. (405) 834 (1,365) 1,645
Income tax expense / (benefit).................................. (154) 335 (532) 657
-------------- ------------- --------------- ------------
Net income / (loss)............................................. $ (251) $ 499 $ (833) $ 988
============== ============= =============== ============
Basic and diluted earnings (loss) per share.................... $ (0.09) $ 0.18 $ (0.30) $ 0.36
============== ============= =============== ============
Weighted average common shares outstanding.................. 2,812 2,786 2,814 2,762
============== ============= =============== ============
Weighted average common and common
equivalent shares outstanding.............................. 2,812 2,787 2,814 2,762
============== ============= =============== ============
</Table>
See notes to consolidated financial statements.
3
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DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------------
2001 2000
-------------- -------------
Cash flow from operating activities:
Net income / (loss)....................................................................... $ (833) $ 988
Adjustments to reconcile net income / (loss) to cash (used in) provided
by operating activities:
Depreciation and amortization......................................................... 964 803
Provision for (reductions in) allowance for doubtful accounts......................... (464) (29)
Deferred income taxes................................................................. (395) 117
Accretion of interest on deferred payment obligations................................. 87 152
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable................................................................... 1,848 (1,664)
Federal income taxes receivable....................................................... - 18
Deferred lease rents.................................................................. (6) 18
Prepaid expenses and other assets..................................................... (183) (152)
Trade accounts payable and accrued expenses........................................... (1,427) 1,118
---------- ---------
Cash (used in) provided by operating activities....................................... (409) 1,369
Cash flows from investing activities:
Capital expenditures...................................................................... (255) (490)
Deposits.................................................................................. (16) (11)
Business acquisition costs................................................................ (37) (3,124)
Loans and advances to related parties..................................................... - (202)
Repayment from related parties............................................................ 1 -
---------- ---------
Cash used in investing activities......................................................... (307) (3,827)
Cash flows from financing activities:
Book overdraft............................................................................ 1,320 -
Net short-term borrowings................................................................. - (1,480)
Advances on long-term line of credit borrowings........................................... 42,138 11,372
Repayments of long-term line of credit borrowings......................................... (43,002) (7,908)
Repurchase of treasury stock.............................................................. (25) (83)
Principal payments under long-term debt obligations....................................... (171) -
Principal payments under capital lease obligations........................................ (43) (17)
---------- ---------
Cash provided by financing activities..................................................... 217 1,884
Change in cash and cash equivalents........................................................... (499) (574)
Cash and cash equivalents at beginning of year................................................. 499 847
---------- ---------
Cash and cash equivalents at end of period.................................................... $ - $ 273
========== =========
Supplemental cash flow information:
Cash paid for interest................................................................... $ 284 $ 155
========== =========
Cash paid for taxes...................................................................... $ 197 $ 465
========== =========
</Table>
See notes to consolidated financial statements.
4
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DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the operations of
Diversified Corporate Resources, Inc. and its wholly owned subsidiaries (the
"Company", "our", "we", or "us"). The financial information for the three and
six months ended June 30, 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 and
six months ended June 30, 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. LIQUIDITY
As of June 30, 2001, we were not in compliance with the amended
financial covenant under our three-year revolving line of credit agreement
(the "GE facility") with General Electric Capital Corporation ("GE"), which
required us to maintain fixed charge coverage, as defined in the agreement,
of 0.9 to 1. Effective August 17, 2001, the Company and GE entered into an
amendment (the "Amendment") to the GE facility. The Amendment waived the
covenant violation at June 30, 2001 and established amended fixed charge
coverage requirements of 0.6 to 1 for the quarter ended September 30, 2001,
0.67 to 1 for the quarter ended December 31, 2001, 0.8 to 1 for the quarter
ended March 31, 2002 and 1 to 1 for each quarter thereafter.
The GE facility permits borrowings of up to $15 million based on
availability criteria outlined in the agreement. At August 16, 2001, net
borrowing availability under the GE facility was approximately $1.8 million
after excluding defined reserves of $1.3 million.
Under the terms of the Mountain, LTD. ("Mountain") and Texcel, Inc.
("Texcel") acquisition agreements, on October 1, 2001, we are obligated to
make maximum payments of $1,178,000 and $930,000, to the previous owners of
Mountain and Texcel, respectively. At our discretion, the obligation to the
former owners of Mountain can be reduced to $589,000 in cash with the balance
paid in shares of the Company Class A Common Stock. The provisions of the
Amendment to the GE facility require us to maintain minimum availability, as
defined in the Amendment of approximately $1,000,000, after making payment
obligations to the former owners of Mountain and Texcel. Based on the
availability computation as of August 16, 2001, we would have approximately
$800,000 available to meet the payment obligations of approximately
$2,108,000 or $1,519,000, if the Company elects to reduce the cash payment to
the former owners of Mountain.
We have reported losses for the six months ended June 30, 2001. In
addition, given the current state of the economy, we may continue to report
losses for the foreseeable future. As a result, we may be required to obtain
additional financing and or renegotiate the payments terms and amounts due to
the previous owners of Mountain and Texcel.
We are currently evaluating various financing and restructuring
strategies to be utilized to meet the working capital requirements of the
company as well as satisfy our acquisition obligations. We can provide no
assurance that we will be successful in implementing the changes necessary to
accomplish these objectives, or if we are successful, that the changes will
improve our cash flow and liquidity.
5
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DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. 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:
<Table>
<Caption>
(In Thousands) For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- ----------------------------------
2001 2000 2001 2000
------------- -------------- -------------- ----------------
Basic...................................................... 2,812 2,786 2,814 2,762
Net effect of dilative stock options....................... - 1 - 1
------------- -------------- -------------- ----------------
Diluted.................................................... 2,812 2,787 2,814 2,763
============= ============== ============== ================
Total options and warrants outstanding..................... 998 669 998 669
============= ============== ============== ================
Options and warrants not considered because effects of
inclusion would be anti-dilative........................... 998 631 998 631
============= ============== ============== ================
</Table>
4. LINE OF CREDIT
On May 18, 2000, we entered into the GE facility. The agreement
permits borrowings up to $15 million. 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, as amended, 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 0.9 to 1 as of June 30, 2001 and to 1 to 1 each
quarter thereafter. As noted above in footnote No. 2, Liquidity, at June 30,
2001, we were not in compliance with the amended financial covenant which
required us to maintain fixed charge coverage, as defined in the agreement,
of 0.9 to 1. Effective August 17, 2001, the Company and GE entered into the
Amendment to the GE facility. The Amendment waived the covenant violation at
June 30, 2001and established amended fixed charge coverage requirements of
0.6 to 1 for the quarter ended September 30, 2001, 0.67 to 1 for the quarter
ended December 31, 2001, 0.8 to 1 for the quarter ended March 31, 2002 and 1
to 1 for 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%. Effective August 17,
2001, the interest rate on outstanding borrowings is expected to increase to
a rate, to be determined based on borrowing and availability levels, of
between prime plus 0.125% and prime plus 0.875%. Interest is payable monthly
and all outstanding principal and interest is due May 17, 2003. The weighted
average interest rate on the borrowings was 7.7% for the six months ended
June 30, 2001. The interest rate at June 30, 2001 was 6.8%. As of June 30,
2001, the amounts outstanding under the revolving line of credit amounted to
$5.8 million and we had approximately $2.7 million of net borrowing
availability, before defined reserves of $1.9 million.
5. INCOME TAXES
The income tax provision (benefit) and the amount computed by
applying the federal statutory income tax rate to income before income taxes
differs as follows:
<Table>
<Caption>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
(In Thousands) 2001 2000 2001 2000
-------------- ------------ ------------- ------------
Tax provision at statutory rate................................. $ (141) $ 292 $ (477) $ 575
Other........................................................... 16 5 20 1
State income taxes (benefit) net of federal income tax effect... (29) 38 (75) 81
-------------- ------------ ------------- ------------
$ (154) $ 335 $ (532) $ 657
============== ============ ============= ============
</Table>
6
<Page>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. 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
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.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets. SFAS No 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001 and will require 1) intangible assets (as defined in SFAS
141) to be reclassified into goodwill, 2) the ceasing amortization of
goodwill, and 3) the testing of goodwill for impairment for transaction and
at interim periods (if an event or circumstance would result in an
impairment). We expect to adopt SFAS 142 on January 1, 2002. We have not yet
determined what the impact of SFAS 142 will be on our results of operations
and financial position.
8. RELATED PARTY TRANSACTIONS
During 2000, 1999 and 1998, we paid various expenses on behalf of
our Chairman and Chief Executive Officer, J. Michael Moore, ("Mr. Moore") or
various entities that he controls in the amount of approximately $345,000,
$72,000, and $77,000, respectively. Amounts advanced in fiscal 2000 and 1999
bear interest at prime plus 0.125%. The majority of these amounts are related
to litigation associated with a lawsuit with Ditto Properties, Inc. The
balance outstanding at June 30, 2001 of $418,000 was collateralized by a
first lien on 25,000 shares and a subordinated lien position on 694,200
shares of our common stock held by Mr. Moore or various entities that he
controls. The aggregate principle balance of the loans to Mr. Moore or
various entities that he controls that are collateralized by the senior liens
on those 694,200 shares exceeded the market value of the shares at June 30,
2001. The 25,000 shares of our common stock are also pledged to our Company
as collateral for a note purchase agreement with Compass Bank. While the
market value of the collateral pledged is less than the outstanding balance
owed to us, we believe, based upon financial information provided by Mr.
Moore, that Mr. Moore or various entities that he controls have the available
financial resources to satisfy the obligation to us.
The Company and Mr. Moore have agreed to, among other things, that
no additional uncollateralized advances to Mr. Moore will be made.
Additionally, the Company and Mr. Moore have agreed to minimum payment terms
of the principle and interest due associated with such advances.
On January 12, 1999, we entered into (a) a note purchase agreement
(the "Agreement") with Compass Bank (the "Bank"), and DCRI LP No. 2, Inc., a
Texas corporation (the "Borrower"), which is principally owned by Mr. Moore,
pursuant to which we agreed to purchase from the Bank, in the event of a
default by the Borrower and Mr. Moore (as guarantor), the following: (i) two
promissory notes (collectively the "Notes") executed by the Borrower payable
to the Bank in the principal amount of $500,000 and (ii) all instruments
collateralizing repayment of the Notes, including without limitation, a
pledge agreement related to 165,000 shares of our common stock which are
owned by the Borrower as collateral for the Notes, and (b) a bank transaction
agreement (the "Related Agreement") with the Borrower and Mr. Moore, which
obligated the Borrower and/ or Mr. Moore to (i) pledge to us an additional
50,000 shares (subsequently reduced to 25,000 shares) of the common stock to
collateralize us under the terms of both the Agreement and the Related
Agreement, (ii) pay us for entering into the Agreement by conveying to us
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
7
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DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
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
and the Audit Committee of the Board of Directors of the Company. In
connection with the exercise of the options, we loaned Mr. Moore
approximately $23,000 to cover his income tax liability associated with this
transaction. Such amounts are classified as receivable from related parties
in our consolidated balance sheet and have been deducted from stockholders'
equity.
9. CONTINGENCIES
In 1996, a lawsuit was filed by Ditto Properties Company ("DPC")
against DCRI L.P. No. 2, Inc. ("LPNo.2") which is controlled by Mr. Moore.
Mr. Moore and the Company were also initially named as garnishees in the
lawsuit (the "Ditto Litigation") with respect to 899,200 shares (the " LP
Shares") of common stock (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, Mr. 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, Mr. 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 fees 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 Mr. Moore filed a
lawsuit against DPC and Ditto seeking damages and reimbursement of expenses
alleging, among other things, that DPC and Ditto interfered with Company
transactions and proposed financing resulting in lost opportunities, lost
profits and significant damages (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 $600,000.
In the past, the Company has incurred legal fees on its own behalf
and has funded certain of the legal fees and expenses of Mr. 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, Mr. Moore and LPNo.2
have decided that the Company should have separate counsel from Mr. Moore
8
<Page>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. CONTINGENCIES (CONTINUED)
and LPNo.2. The Board of Directors of the Company (a) has approved the
payment to Mr. Moore of up to $250,000 to fund legal fees and expenses
anticipated to be incurred by Mr. Moore, LPNo.2 and No. 1 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 our Form 10Q for the first quarter ended March 31,
2001 (such exhibit is hereby incorporated by reference), 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.
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.
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.
9
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Service Revenue Summary:
<Table>
<Caption>
(US $ in millions) For the Three Months Ended Increase /
June 30, (decrease)
--------------------------------- ----------------
2001 2000 2001 vs. 2000
-------------- -------------- ----------------
Permanent placements............................... $ 5.3 $ 7.9 $ (2.6)
Contract and specialty placements.................. 14.5 12.4 2.1
-------------- -------------- ----------------
Net service revenue................................ $ 19.8 $ 20.3 $ (0.5)
============== ============== ================
</Table>
For the quarter ended June 30, 2001, net service revenue decreased
$0.5 million, or 2%, to $19.8 million as compared to $20.3 million for the
previous year period. As noted in the table above, revenue derived from
contract and specialty placements increased $2.1 million, or 17%, as a result
of increased contract placements with existing customers and the addition of
new customers. Permanent placement revenue decreased $2.6 million, or 33% as
a result of the continuing effect of hiring freezes and staff reductions
implemented by our customers due to the softening of the economy. Contract
placement and specialty services revenue accounted for 73% of revenue for the
quarter ended June 30, 2001, up from 61% for the previous year period.
For the quarter ended June 30, 2001, the total gross margin
decreased by $1.1 million, or 21%, to $4.1 million as compared to $5.2
million in the previous year period. All of the absolute decrease in gross
margin dollars is due to the decline in revenue from permanent placements. As
a percentage of contract and specialty placement revenue, the gross margin
derived from contract and specialty placements for the three months ended
June 30, 2001 remained constant at 21%, as compared to the previous year
period. Recruiter commissions and sales salary expense declined four
percentage points to 22% of net service revenue, as compared to 26% for the
previous year period. This decrease is due solely to the reduction in revenue
from permanent placements, which have higher commission rates than contract
and specialty placements.
Selling, general and administrative expenses ("SG&A") were $3.8
million for the quarter ended June 30, 2001, up slightly as compared to the
previous year period. Reductions in staff made during the quarter ended June
30, 2001 have essentially offset increased costs for legal and rent as
compared to the previous year period.
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 June 30, 2001, net interest expense amounted
to $0.2 million, the same as in the previous year period. This expense is
primarily associated with borrowings on line of credit and deferred payment
obligations related to our acquisitions.
For the quarter ended June 30, 2001, we incurred a net loss before
taxes of $0.4 million, as compared to net income before taxes of $0.8 million
in the previous year period. The reduction in revenue from permanent
placements contributed to the change in net income before taxes.
As a result of the loss noted above, for the quarter ended June 30,
2001, we recorded an income tax benefit of $0.2 million as compared to income
tax expense of $0.3 million for the quarter ended June 30, 2000.
As a result of the items discussed above, we reported a net loss of
$0.3 million for the quarter ended June 30, 2001 as compared to net income of
$0.5 million for the previous year period.
10
<Page>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Service Revenue Summary:
<Table>
<Caption>
For the Six Months Ended Increase /
(US $ in millions) June 30, (decrease)
--------------------------------- ----------------
2001 2000 2001 vs. 2000
-------------- -------------- ----------------
Permanent placement.......................................... $ 11.7 $ 15.7 $ (4.0)
Contract and specialty placements............................ 28.0 22.2 5.8
-------------- -------------- ----------------
Net service revenue.......................................... $ 39.7 $ 37.9 $ 1.8
============== ============== ================
</Table>
For the six months ended June 30, 2001, net service revenue
increased $1.8 million, or 5%, to $39.7 million as compared to $37.9 million
for the previous year period. As noted in the table above, revenue derived
from contract and specialty placements increased $5.8 million. Approximately
$2.2 million of the increase in revenue derived from contract and specialty
placements was attributable to the inclusion of the results of Datatek, which
was acquired in March 2000. The balance of the growth in revenue from
contract and specialty placements of $3.6 million, or 16%, was attributable
to increased contract placements with existing customers and the addition of
new customers. Permanent placement revenue decreased $4.0 million, or 25% as
a result of the continuing effect of hiring freezes and staff reductions
implemented by our customers due to the softening of the economy. Contract
placement and specialty services revenue accounted for 71% of revenue for the
six months ended June 30, 2001, up from 59% for the previous year period.
For the six months ended June 30, 2001, gross margin decreased by
$1.9 million, or 19%, to $8.3 million as compared to $10.2 million in the
previous year period. All of the absolute decrease in gross margin dollars is
due to the decline in permanent placement revenues. As a percentage of
contract and specialty placement revenue, the gross margin derived from
contract and specialty placements for the six months ended June 30, 2001 was
21%, as compared 23% for the previous year period. The decrease in margin
percentage is due primarily to the inclusion of the operations of Datatek,
which had a gross margin percentage of 16%, for six months in 2001 compared
to four months in 2000. Recruiter commissions and sales salary expense
declined five percentage points to 23% of net service revenue, as compared
28% for the previous year period. This decrease is due solely to the
reduction in revenue from permanent placements, which have higher commission
rates than contract and specialty placements.
Selling, general and administrative expenses ("SG&A"), were $7.9
million for the six months ended June 30, 2001, an increase of $0.4 million
as compared to the previous year period. $0.3 million of the increase in SG&A
was attributed to the inclusion of the operations of Datatek. Depreciation
and amortization expense amounted to $1.0 million as compared to $0.8 million
in the previous year period. This increase is due to amortization expense
related to our acquisitions.
For the six months ended June 30, 2001, net interest expense was
$0.4 million, an increase of $0.2 million as compared to the previous year
period. Such expense is primarily associated with borrowings on line of
credit and deferred payment obligations related to our acquisitions.
For the six months ended June 30, 2001, we recorded a charge for
severance expense of $0.4 million, of which approximately $0.3 million was
related to the resignation of our former president. No severance expenses
were reported in the previous year period.
For the six months ended June 30, 2001, we reported a net loss
before taxes of $1.4 million, as compared to net income before taxes of $1.6
million in the previous year period. The reduction in revenue from permanent
placements and the severance costs noted above, contributed to the change in
net income before taxes.
As a result of the loss noted above, during the six months ended
June 30, 2001, we reported an income tax benefit of $0.5 million as compared
to income expense of $0.7 million for the six months ended June 30, 2000.
As a result of the items discussed above, we reported a $0.8 million
net loss for the six months ended June 30, 2001 as compared to net income of
$1.0 million for the previous year period.
11
<Page>
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2001, our net cash flow used in
operations, principal payments under long-term debt and capital lease
obligations, a net reduction of the GE facility and capital expenditures were
provided by the book overdraft.
As of June 30, 2001, we were not in compliance with the amended
financial covenant under the GE facility, which required us to maintain fixed
charge coverage, as defined in the agreement, of 0.9 to 1. Effective August
17, 2001, the Company and GE entered into the Amendment to the GE facility.
The Amendment waived the covenant violation at June 30, 2001 and established
amended fixed charge coverage requirements of 0.6 to 1 for the quarter ended
September 30, 2001, 0.67 to 1 for the quarter ended December 31, 2001, 0.8 to
1 for the quarter ended March 31, 2002 and 1 to 1 for each quarter thereafter.
The GE facility permits borrowings of up to $15 million based on
availability criteria outlined in the agreement. At August 16, 2001, net
borrowing availability under the GE facility was approximately $1.8 million
after excluding defined reserves of $1.3 million.
Under the terms of the Mountain and Texcel acquisition agreements, on
October 1, 2001, we are obligated to make maximum payments of $1,178,000 and
up to $930,000, to the previous owners of Mountain and Texcel, respectively.
At our discretion, the obligation to the former owners of Mountain can be
reduced to $589,000 in cash with the balance paid in shares of the Company
Class A Common Stock. The provisions of the Amendment to the GE facility
require us to maintain minimum availability, as defined in the Amendment of
approximately $1,000,000, after making payment obligations to the former
owners of Mountain and Texcel. Based on the availability computation as of
August 16, 2001, we would have approximately $800,000 available to meet the
payment obligations of approximately $2,108,000 or $1,519,000, if the Company
elects to reduce the cash payment to the former owners of Mountain.
As previously disclosed above, we have reported losses for the six
months ended June 30, 2001. In addition, given the current state of the
economy, we may continue to report losses in the foreseeable future. As a
result, we may be required to obtain additional financing and or renegotiate
the payments terms and amounts due to the previous owners of Mountain and
Texcel.
We are currently evaluating various financing and restructuring
strategies to be utilized to meet the working capital requirements of the
company as well as satisfy our acquisition obligations. We can provide no
assurance that we will be successful in implementing the changes necessary to
accomplish these objectives, or if we are successful, that the changes will
improve our cash flow and liquidity.
Inflation has not had a significant effect on our operating results.
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. In June 2001, the Financial Accounting
Standards Board approved SFAS No. 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets. SFAS No 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001 and will require 1) intangible assets (as
defined in SFAS 141) to be reclassified into goodwill, 2) the ceasing
amortization of goodwill, and 3) the testing of goodwill for impairment for
transaction and at interim periods (if an event or circumstance would result
in an impairment). We expect to adopt SFAS 142 on January 1, 2002. We have
not yet determined what the impact of SFAS 142 will be on our results of
operations and financial position.
12
<Page>
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not
historical facts, including, but not limited to, projections or expectations
of future financial or economic performance of the Company, and statements of
our plans and objectives for future operations are "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1993,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended ("the Exchange act") and involve a number of risks and uncertainties.
No assurance can be given that actual results or events will not differ
materially from those projected, estimated, assumed or anticipated in any
such "forward-looking" statements. Important factors (the "Cautionary
Disclosures") that could result in such differences include: general economic
conditions in our markets, including inflation, recession, interest rates and
other economic factors; the availability of qualified personnel; our ability
to successfully integrate acquisitions or joint ventures with our operations
(including the ability to successfully integrate businesses that may be
diverse as to their type, geographic area or customer base); the level of
competition experienced by us; our ability to implement our business
strategies and to manage our growth; the level of development revenues and
expenses; the level of litigation expenses; our ability to effectively
implement an e-commerce strategy; those factors identified in our Prospectus
dated September 30, 1997 as risk factors; and other factors that affect
businesses generally. Subsequent written and oral "forward-looking"
statements attributable to us, or persons acting on our behalf, are expressly
qualified by the Cautionary Disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from fluctuations in interest rates
and the effects of those fluctuations on the earnings of our cash equivalent
short-term investments; as well as interest expense on line of credit
borrowings. Assuming interest rates increased by 200 basis points (2%) above
the interest rate at June 30, 2001, on an annualized basis interest expense
would increase by approximately $0.1 million based on the outstanding line of
credit borrowings of $6.0 million at June 30, 2001.
13
<Page>
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 fees 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 $600,000.
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, LPNo.2 and No. 1 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 our Form 10Q
for the first quarter ended March 31, 2001 (such exhibit is hereby
incorporated by reference), 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.
14
<Page>
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
The annual meeting of shareholders of the Company (the "Annual Meeting")
was held on June 12, 2001. At this meeting, the shareholders voted to elect
the following to serve as directors of the Company to hold office until the
next annual meeting of shareholders or until their respective successors are
duly elected and qualified.
<Table>
<Caption>
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
Abstain / Broker
For Against Withheld Non-Votes
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
J. Michael Moore............................. 2,403,487 - 228,460 -
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
Samuel E. Hunter............................. 2,403,522 - 228,425 -
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
Deborah A. Farrington........................ 2,399,020 - 232,927 -
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
A. Clinton Allen............................. 2,399,022 - 232,925 -
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
</Table>
The shareholders voted to approve certain amendments to the
Company's 1998 Nonqualified Stock Option Plan. The results of the vote were
as follows:
<Table>
<Caption>
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
Abstain / Broker
For Against Withheld Non-Votes
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
1,275,681 291,937 9,540 -
- --------------------------------------------- -------------------- ------------------- --------------------- -------------------
</Table>
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Second Amendment and Waiver to the GE facility. *
10.2 Employment Agreement, effective July 9, 2001, between the
Company and James E. Filarski. *
* Filed herewith
B. Reports on Form 8-K
Not Applicable.
15
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSIFIED CORPORATE RESOURCES, INC.
Registrant
DATE: August 17, 2001 By: /s/ J. Michael Moore
-----------------------------------
J. Michael Moore
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
DATE: August 17, 2001 By: /s/ Anthony G. Schmeck
-----------------------------------
Anthony G. Schmeck
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
16