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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes X No
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NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING ON MARCH 31,
1997, WAS 1,635,312.
TOTAL NUMBER OF PAGES FOR
THIS 10-Q FILING: 11
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
CURRENT ASSETS: 1997 1996
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Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 489,430 $ 514,354
Trade accounts receivable, less allowances of
approximately $486,000 and $494,000, respectively 3,643,828 3,387,138
Notes receivable-related party . . . . . . . . . . . . 9,645 114,009
Prepaid expenses and other current assets. . . . . . . 237,523 88,953
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TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 4,380,426 4,104,454
EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, NET. . . . . . . . . . . . . . . . . . . 1,032,178 701,944
OTHER ASSETS:
Investment in and advances to joint venture. . . . . . 210,305 152,905
Notes receivable-related party . . . . . . . . . . . . 19,210 21,690
Other. . . . . . . . . . . . . . . . . . . . . . . . . 210,232 147,879
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$ 5,852,351 $ 5,128,872
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses. . . . . . . . . $ 3,641,145 $ 3,321,215
Borrowing under factoring and loan agreements. . . . . 526,056 400,682
Other short-term debt. . . . . . . . . . . . . . . . . 182,459 -
Current maturities of long-term debt . . . . . . . . . 16,880 21,834
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TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . 4,366,540 3,743,731
DEFERRED LEASE LIABILITIES . . . . . . . . . . . . . . . . 12,064 -
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . 67,669 68,157
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued. . . . . . . . . . . . . . . - -
Common stock, $.10 par value; 10,000,000 shares
authorized, 1,881,161 shares issued. . . . . . . . . 188,116 188,116
Additional paid-in capital . . . . . . . . . . . . . . 3,615,151 3,615,151
Accumulated deficit. . . . . . . . . . . . . . . . . . (2,067,153) (2,301,108)
Common stock held in treasury (245,849 and
122,950 shares, respectively) at cost. . . . . . . . (185,175) (185,175)
Receivables from related party . . . . . . . . . . . . (144,861) -
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TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 1,406,078 1,316,984
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$ 5,852,351 $ 5,128,872
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See notes to consolidated financial statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
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NET SERVICE REVENUES
Permanent placement. . . . . . . . . . . . . $3,680,408 $2,777,261
Specialty services . . . . . . . . . . . . . 1,875,772 1,557,402
Contract placement . . . . . . . . . . . . . 1,722,418 1,879,336
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7,278,598 6,213,999
COST OF SERVICES . . . . . . . . . . . . . . . . . 5,537,829 4,510,925
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GROSS MARGIN . . . . . . . . . . . . . . . . . . . 1,740,769 1,703,074
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. . . . . . . . . . . . . . . . . . . . . (1,543,599) (1,221,772)
OTHER INCOME (EXPENSES):
Loss from joint venture operations . . . . . (11,212) (34,368)
Interest expense, net. . . . . . . . . . . . (70,525) (69,017)
Other, net . . . . . . . . . . . . . . . . . 32,758 10,179
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(48,979) (93,206)
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INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM. . . . . . . . . . . . . . 148,191 388,096
INCOME TAXES-current benefit (provision) . . . . . 42,681 (50,021)
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INCOME BEFORE EXTRAORDINARY ITEM . . . . . . . . . 190,872 338,075
EXTRAORDINARY ITEM - gain on debt restructuring. . 43,083 -
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NET INCOME . . . . . . . . . . . . . . . . . $ 233,955 $ 338,075
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PRIMARY INCOME PER SHARE:
Income before extraordinary item . . . . . . $ .11 $ .19
Extraordinary item . . . . . . . . . . . . . .02 -
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PRIMARY INCOME PER SHARE . . . . . . . . . . . . . $ .13 $ .19
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FULLY DILUTED INCOME PER SHARE:
Income before extraordinary item . . . . . . $ .11 $ .19
Extraordinary item . . . . . . . . . . . . . .02 -
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FULLY DILUTED INCOME PER SHARE . . . . . . . . . . $ .13 $ .19
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PRIMARY WEIGHTED AVERAGE COMMON AND COMMON
SHARES OUTSTANDING. . . . . . . . . . . . . . . . 1,844,741 1,758,211
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FULLY DILUTED AVERAGE COMMON AND COMMON SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . 1,850,800 1,758,211
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See notes to consolidated financial statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 1996
CASH FLOW FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . .. $ 233,955 $ 338,075
Extraordinary item. . . . . . . . . . . . . . . (43,083) -
Depreciation and amortization . . . . . . . . . 61,911 44,652
Provision for allowances. . . . . . . . . . . . 554,246 117,307
Equity loss in joint venture. . . . . . . . . . 11,212 34,368
Changes in current operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . (810,936) (864,928)
Prepaid expenses and other assets. . . . . (173,080) 2,085
Other assets . . . . . . . . . . . . . . . (62,854) 37,963
Accounts payable and accrued expenses. . . 363,012 395,646
Deferred lease rents . . . . . . . . . . . 12,064 (15,760)
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Net cash provided by operating activities 146,447 89,408
CASH FLOWS FROM INVESTING ACTIVITIES: . . . . .
Capital expenditures . . . . . . . . . . . (392,144) (102,281)
Deposits . . . . . . . . . . . . . . . . . 500 3,769
Loans to related parties . . . . . . . . . (15,668) (22,500)
Repayment from related parties . . . . . . 2,162 -
Net advances to joint venture. . . . . . . (68,612) 2,198
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Net cash used in investing activities. . . (473,762) (118,814)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under other short term debt. . . 182,459
Increase (decrease) in proceeds from factored
receivables 125,374 87,816
Principal payments under long-term debt obligations (5,442) (10,346)
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Net cash provided by financing activities 302,391 77,470
Net increase (decrease)in cash and cash
equivalents (24,924) 48,064
Cash and cash equivalents at beginning of year 514,354 69,627
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Cash and cash equivalents at end of period $ 489,430 $ 117,691
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See notes to consolidated financial statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the operations of
Diversified Corporate Resources, Inc. and its subsidiaries (the "Company"),
all of which are wholly owned. The financial information for the three
months ended March 31, 1997 and 1996, is unaudited but includes all
adjustments (consisting only of normal recurring accruals) which the Company
considers necessary for a fair presentation of the results for the period.
The financial information should be read in conjunction with the consolidated
financial statements for the year ended December 31, 1996, included in the
Company's annual report on Form 10-K. Operating results for the three months
ended March 31, 1997, are not necessarily indicative of the results that may
be expected for the entire year ended December 31, 1997.
RECLASSIFICATIONS
Certain amounts in the December 31 and March 31, 1996, Consolidated
Financial Statements have been reclassified to conform to the 1997
presentation.
2. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of:
March 31, December 31,
1997 1996
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Computer equipment . . . . . . . . . . . . $ 881,343 $ 567,646
Office equipment and furniture . . . . . . 761,529 697,947
Leasehold improvements . . . . . . . . . . 117,651 102,785
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1,760,523 1,368,378
Less accumulated depreciation and
amortization 728,345 666,434
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$1,032,178 $ 701,944
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3. ACCOUNTS RECEIVABLE FROM RELATED PARTY
During the first quarter of 1997 and during 1996, the Company paid
various expenses on behalf of J. Michael Moore or various entities which he
controls amounting to approximately $16,000 and $160,000, respectively. Mr.
Moore is the Chairman of the Board and Chief Executive Officer of the
Company. Of these amounts, approximately $10,000 and $105,000 are related to
the litigation defense associated with a lawsuit with Ditto Properties, Inc.,
in connection with the Company being named therein as garnishee. (See Part 1,
Item 3, Legal Proceedings, in the Company's Form 10-K for the year ended
December 31, 1996.) In addition, Mr. Moore and various entities that he
controls owe the Company other uncollateralized advances amounting to
approximately $30,000 and $25,000, respectively, at March 31, 1997 and
December 31, 1996. The balance of these uncollateralized receivables at
March 31, 1997, of approximately $145,000 is reflected as receivables from
related party in Stockholders' Equity in the Consolidated Balance Sheet. The
balance of the uncollateralized receivables at December 31, 1996, of
approximately $130,000 is reflected in notes receivable-related party and
prepaid expenses and other current assets in the Consolidated Balance Sheet.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
4. INCOME TAXES
The income tax provision and the amount computed by applying the federal
statutory income tax rate to income before income taxes differs as follows:
For the three months ended March 31,
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1997 1996
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Tax provision (benefit at statutory rate). . . $ 79,545 $ 114,946
Utilization of net operating loss
carryforwards (79,545) (114,946)
Alternative minimum tax. . . . . . . . . . . . - -
State income taxes . . . . . . . . . . . . . . (42,681) 50,021
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Total. . . . . . . . . . . . . . . . $(42,681) $ 50,021
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5. LONG-TERM DEBT
On August 26, 1996, the Company entered into a $300,000 line of credit
agreement for the purchase of fixed assets. Interest is payable monthly at
prime plus 2.5% and the fixed assets financed are pledged as collateral. The
line of credit of $182,000 at March 31, 1997, will convert into long-term
debt upon $300,000 being advanced. The long-term debt will have a five year
term and bear interest monthly at prime plus 2.5%.
6. CONTINGENCIES
The Company was named as a garnishee in a lawsuit against the majority
shareholder, which the Company believes is without merit. As the result of an
Agreed Temporary Order dated October 24,1996, the Company was non-suited in
this matter. Additionally, the Company has been named in a lawsuit filed by
two former employees claiming damages in excess of $29 million each for
breach of contract and various other allegations. Management believes these
claims to be without merit. (See Part I, Item 3. Legal Proceedings in the
Form 10-K for the year ended December 31, 1996.)
The Company is involved in certain other litigation and disputes not
previously noted. Management believes claims are adequately provided for in
accounts payable and accrued expenses in the Company's financial statements
at March 31, 1997 and December 31, 1996. Management believes that these
matters are without merit and has concluded that the ultimate resolution of
such will not have a material effect on the Company's consolidated financial
statements.
7. NEW ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128") which is effective for the Company's fiscal year beginning
January 1, 1997. Statement 128 specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS"). Some of the changes
made to current EPS standards include: (i) eliminating the presentation of
primary EPS and replacing it with basic EPS, with the principal difference
being that common stock equivalents are not considered in computing basic
EPS, (ii) eliminating the modified treasury stock method and the three
percent materiality provision, and (iii) revising the contingent share
provision and the supplemental EPS data requirements. Statement 128 also
requires dual presentation of basic and diluted EPS on the face of the income
statement, as well as a reconciliation of the numerator and denominator used
in the two computations of EPS. Basic EPS is defined by Statement 128 as net
income
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
from continuing operations divided by the average number of common shares
outstanding without the consideration of common stock equivalents which may
be dilutive to EPS. The Company's current methodology for computing its
fully diluted EPS will not change in future periods as a result of its
adoption of Statement 128. Implementation of Statement 128 is not expected
to have a material effect on the Company's EPS; however, the impact has not
yet been determined by management.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Net service revenues increased approximately $1.1 million or 17.1% to
$7.3 million in the first quarter of 1997, compared to $6.2 million for the
comparable 1996 quarter. First quarter 1997 net service revenues were
reduced by approximately $350,000 for a provision taken by the Company for
losses for applicants who accepted employment but did not start work or did
not remain in employment for the guaranteed period compared to $112,000 in
1996, which included an $81,000 credit for a change in estimates of the
December 1995 allowance. In spite of this provision, permanent placement
revenues increased approximately $903,000 or 32.5% to $3.7 million for the
quarter ended March 31, 1997, compared to $2.8 million for the comparable
1996 quarter. Specialty service revenues increased approximately $318,000 or
20.4% to $1.9 million for the first quarter of 1997, compared to $1.6 million
for the comparable 1996 quarter. The increases in permanent placement and
specialty services were primarily attributable to the Company's continued
focus on high-end niche employment markets, such as the information
technology and engineering/technical disciplines. New offices opened since
the end of the first quarter in 1996 also contributed $170,000 to revenues
during the first quarter of 1997. Contract placement revenues decreased
approximately $157,000 or 8.3% to $1.7 million in the first quarter of 1997,
compared to $1.9 million for the comparable 1996 quarter. Contract placement
revenues declined slightly as a result of a lower number of people on job
assignments than were anticipated for the first quarter of 1997. The
decrease in personnel on assignment was primarily attributable to certain
contracts coming to an end, the Company not replacing these contracts until
late in the quarter, and certain personnel being converted to permanent
positions. In addition, due to unusually high recruiter turnover at the end
of 1996, it took management longer to train new recruiters to assist in
finding qualified applicants for its job orders during the first quarter of
1997.
Gross margin increased approximately $38,000 or 2.2 % to $1.7 million in
the first quarter of 1997. Gross margin as a percentage of net service
revenues declined to 23.9% in the first quarter of 1997 compared to 27.4% in
the comparable period in 1996. The decrease in percentage was primarily the
result of an increase in the provision for uncollectible accounts of
approximately $204,000 for the first quarter of 1997, compared to $5,000 for
the comparable 1996 quarter. This increase was primarily the result of a
$56,000 reduction in the allowance during the first quarter of 1996,
resulting from a change in estimate of the December 31, 1995 allowance, and
an increase in the provision for uncollectible accounts receivable during the
first quarter of 1997 to increase the allowance for bad debt due to an
increase in non-performing accounts aging beyond 75 days at March 31, 1997.
Subsequent to March 31, 1997, approximately $48,000 has been collected on
these accounts. As discussed above, contract placement revenues were down as
a result of the above mentioned lower number of personnel on assignment. As
the result of lower contract placement revenues to cover certain field
payroll and related costs, contract placement gross margins were lower than
anticipated during the first quarter of 1997. The above mentioned increase
in the provision for uncollectible accounts receivable and the decrease in
contract margins for the first quarter of 1997, resulted in an approximately
3.5% decrease in gross margins in the first quarter of 1997 compared to the
first quarter of 1996.
Selling, general and administrative expenses increased approximately
$322,000 or 26.3% to $1.5 million in the first quarter of 1997 compared to
$1.2 million in the comparable quarter in 1996. Selling, general and
administrative expenses as a percentage of net service revenues increased to
21.2% in the first quarter of 1997 from 19.7% in the comparable quarter in
1996. The dollar increase was primarily the result of increased marketing
and recruiting expenses for the Company's back office to support the growth
in sales and litigation expenses. Included in the increase in selling,
general and administrative expenses were increases in selling expenses of
approximately $150,000, general and administrative expenses of approximately
$44,000 and litigation expenses of approximately $128,000 for the first
quarter of 1997 compared to the comparable quarter in 1996. (See Part 1.
Item 3. Legal Proceedings, in the Company's Form 10-K for the year ended
December 31, 1996.) During the first quarter of 1997, the Company also
lowered its provision for estimated outstanding medical insurance claims
associated with its self-insured medical insurance program, which reduced
general and administrative expenses by $50,000.
Other expenses declined approximately $44,000 to $49,000 in the first
quarter of 1997 compared to approximately $93,000 in the comparable quarter
in 1996. The decrease in expenses was the result of a decrease in the loss
from joint venture operations and the collection of a receivable previously
written off associated with a prior year sale of assets.
The income tax benefit was approximately $43,000 for the first quarter
of 1997, compared to an income tax expense of approximately $50,000 for the
first quarter of 1996. This decrease of approximately $93,000 resulted
primarily from a first quarter 1997 credit of approximately $68,000 relating
to an estimated prior year provision taken by the Company for state income
tax expense.
The extraordinary item-gain on debt restructuring, net of income taxes,
of approximately $43,000 during the first quarter of 1997 resulted from the
Company settling certain prior year delinquent accounts payable on a
discounted basis.
As a result of the above factors, net income decreased approximately
$104,000 or 30.8% to approximately $234,000 in the first quarter of 1997 as
compared to $338,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $14,000 at March 31, 1997, compared to
working capital of approximately $361,000 at December 31, 1996. The decrease
in working capital of approximately $347,000 during the first quarter of 1997
was primarily due to an increase in the Company's current maturities of
long-term debt associated with borrowing on an equipment line of credit for
the purchase of computer equipment and other fixed assets of $182,000 during
the first quarter of 1997, a reclassification made as of March 31, 1997, of
receivables from a related party of approximately $155,000 to stockholders'
equity from current assets (notes receivable-related party and prepaid
expenses and other current assets) at December 31, 1996.
Cash flow provided by operating activities of approximately $146,000
resulted primarily from the profitable operations of the Company during the
first quarter of 1997. The Company made capital expenditures of
approximately $392,000 in the first quarter of 1997, primarily to improve its
computer systems, data base operations, and back office operations. In
addition, the Company borrowed approximately $182,000 on a line of credit to
purchase computer equipment to support its back office operations, and
increased its factored accounts receivable borrowings by $125,000 to fund its
operations during the first quarter of 1997.
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
Management of the Company anticipates that the cash flow from operations
will provide adequate liquidity to fund its operations for the foreseeable
future.
Inflation has not had a significant effect on the Company's operating
results.
PART II OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
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
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
10.1* Amended and Restated 1996 Nonqualified Stock Option Plan
* Management Compensation Plan
b. REPORTS ON FORM 8-K
On April 25, 1997, the Company filed a Form 8-K announcing the
termination of Weaver & Tidwell L.L.P. as the Company's independent
accounting firm as of April 17, 1997, and the engagement of Coopers
& Lybrand L.L.P. as the Company's independent accounting firm as of
April 22, 1997.
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 20, 1997 By: /s/ J. MICHAEL MOORE
---------------------------------
J. Michael Moore,
CHIEF EXECUTIVE OFFICER
DATE: May 20, 1997 By: /s/ M. Ted Dillard
---------------------------------
M. Ted Dillard
PRESIDENT AND PRINCIPAL FINANCIAL OFFICER
INDEX TO EXHIBITS
No. Description
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10.1 Amended and Restated 1996 Nonqualified Stock
Option Plan
27 Financial Data Schedule