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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-13984
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
----- -----
Number of shares of common stock of the registrant outstanding on June 30, 1998,
was 2,747,597.
Total Number of pages for
this 10-Q filing: 15
----
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, DECEMBER 31,
1998 1997
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 6,836,345 $ 7,500,188
Trade accounts receivable, less allowance for
doubtful accounts of approximately $582,000 and
$536,000, respectively . . . . . . . . . . . . . . . 6,021,894 4,882,788
Notes receivable-related party . . . . . . . . . . . . 30,922 10,387
Prepaid expenses and other current assets. . . . . . . 228,983 106,468
Federal income taxes receivable. . . . . . . . . . . . - 201,436
Deferred income taxes. . . . . . . . . . . . . . . . . 252,012 243,518
------------ ------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 13,370,156 12,944,785
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . 2,140,839 1,389,761
OTHER ASSETS:
Investment in and advances to joint venture. . . . . . 308,234 226,638
Notes receivable-related party . . . . . . . . . . . . 5,826 11,385
Deferred income taxes. . . . . . . . . . . . . . . . . 352,354 428,330
Other. . . . . . . . . . . . . . . . . . . . . . . . . 339,463 160,657
------------ ------------
$ 16,516,872 $ 15,161,556
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses. . . . . . $ 3,524,861 $ 3,487,470
Current maturities of long-term debt . . . . . . . . . 14,241 2,026
Current maturities of capital lease obligations. . . . 50,620 -
Federal income taxes payable . . . . . . . . . . . . . 156,981 -
------------ ------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . 3,746,703 3,489,496
DEFERRED LEASE RENTS . . . . . . . . . . . . . . . . . . 73,318 53,131
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . 120,361 66,134
CAPITAL LEASE OBLIGATIONS. . . . . . . . . . . . . . . . 44,563 -
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, 2,993,446 and 2,985,946 shares
issued, respectively . . . . . . . . . . . . . . . . 299,345 298,595
Additional paid-in capital . . . . . . . . . . . . . . 11,131,128 11,080,504
Retained earnings. . . . . . . . . . . . . . . . . . . 1,286,629 358,871
Common stock held in treasury (245,849 shares at
cost). . . . . . . . . . . . . . . . . . . . . . . . (185,175) (185,175)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . 12,531,927 11,552,795
------------ ------------
$ 16,516,872 $ 15,161,556
------------ ------------
------------ ------------
See notes to Consolidated Financial Statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET SERVICE REVENUES:
Permanent placement. . . . . . . . . . . . . $ 5,751,129 $ 4,300,835 $ 10,533,741 $ 7,981,243
Specialty services . . . . . . . . . . . . . 1,648,013 1,994,926 3,290,188 3,870,698
Contract placement . . . . . . . . . . . . . 2,988,941 2,078,175 5,476,949 3,800,593
Training . . . . . . . . . . . . . . . . . . 156,108 - 210,547 -
------------ ------------ ------------ ------------
Total Revenues . . . . . . . . . . . . . 10,544,191 8,373,936 19,511,425 15,652,534
COST OF SERVICES . . . . . . . . . . . . . . . 7,269,208 5,773,844 13,632,471 10,968,514
------------ ------------ ------------ ------------
GROSS MARGIN . . . . . . . . . . . . . . . . . 3,274,983 2,600,092 5,878,954 4,684,020
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . . . . . . . . . . . (2,471,738) (1,790,511) (4,615,225) (3,717,190)
OTHER INCOME (EXPENSES):
Loss from joint venture operations . . . . . (12,586) (8,277) (26,209) (19,488)
Interest income (expense), net . . . . . . . 92,187 (43,528) 189,924 (74,131)
Other, net . . . . . . . . . . . . . . . . . 19 21,187 6,019 53,943
------------ ------------ ------------ ------------
79,620 (30,618) 169,734 (39,676)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM . . . . . . . . . . . . . 882,865 778,963 1,433,463 927,154
INCOME TAXES . . . . . . . . . . . . . . . . . 331,861 136,039 505,705 93,358
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM. . . . . . 551,004 642,924 927,758 833,796
EXTRAORDINARY ITEM, gain on debt
restructuring, net of income tax . . . . . . - - - 43,083
------------ ------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . $ 551,004 $ 642,924 $ 927,758 $ 876,879
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE:
Income before extraordinary item . . . . . . $ 0.20 $ 0.37 $ 0.34 $ 0.49
Extraordinary item . . . . . . . . . . . . . - - - 0.03
------------ ------------ ------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.37 $ 0.34 $ 0.52
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . 2,747,597 1,747,812 2,743,968 1,691,562
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE:
Income before extraordinary item . . . . . . $ 0.19 $ 0.35 $ 0.32 $ 0.46
Extraordinary item . . . . . . . . . . . . . - - - 0.03
------------ ------------ ------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . $ 0.19 $ 0.35 $ 0.32 $ 0.49
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING. . . . . . . . 2,912,200 1,825,521 2,885,346 1,807,333
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to Consolidated Financial Statements.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 927,758 $ 876,879
Adjustments to reconcile net income to cash provided
by operating activities: . . . . . . . . . . . . . .
Extraordinary item . . . . . . . . . . . . . . . . . . - (43,083)
Depreciation and amortization. . . . . . . . . . . . . 219,986 136,960
Other. . . . . . . . . . . . . . . . . . . . . . . . . - 6,882
Provision for allowances . . . . . . . . . . . . . . . 45,719 (41,834)
Income tax effect of options exercised . . . . . . . . 28,874 -
Equity in loss of joint venture. . . . . . . . . . . . 26,209 19,488
Deferred income taxes. . . . . . . . . . . . . . . . . 67,482 -
Deferred lease rents . . . . . . . . . . . . . . . . . 20,187 24,946
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . (1,184,825) (933,723)
Federal income taxes receivable. . . . . . . . . . . . 201,436 -
Prepaid expenses and other assets. . . . . . . . . . . (143,153) (61,534)
Trade accounts payable and accrued expenses. . . . . . 37,391 518,075
Federal income taxes payable . . . . . . . . . . . . . 156,981 -
------------ ------------
Cash provided by operating activities. . . . . . . 404,045 503,056
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . (869,163) (509,061)
Business acquisition costs . . . . . . . . . . . . . . . (58,873) -
Deposits . . . . . . . . . . . . . . . . . . . . . . . . (32,915) 500
Loans and advances to related parties. . . . . . . . . . (20,000) (111,940)
Repayment from related parties . . . . . . . . . . . . . 5,024 4,464
Net advances to joint venture. . . . . . . . . . . . . . (107,805) (83,357)
------------ ------------
Cash used in investing activities. . . . . . . . . (1,083,732) (699,394)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock under option agreements. . . . . . . . 22,500 75,000
Borrowing under other short-term debt. . . . . . . . . . - 144,249
Decrease in borrowings under factoring and
loan arrangements. . . . . . . . . . . . . . . . . . . - (39,841)
Principal payments under long-term debt and capital
lease obligations. . . . . . . . . . . . . . . . . . . (6,656) (15,891)
Book overdraft . . . . . . . . . . . . . . . . . . . . . - (69,357)
Deferred offering costs. . . . . . . . . . . . . . . . . - (238,581)
------------ ------------
Cash provided by (used in) financing activities. . 15,844 (144,421)
------------ ------------
Decrease in cash and cash equivalents. . . . . . . . . . (663,843) (340,759)
Cash and cash equivalents at beginning of year . . . . . 7,500,188 612,512
------------ ------------
Cash and cash equivalents at end of period . . . . . . . $ 6,836,345 $ 271,753
------------ ------------
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest. . . . . . . . . . . . . . . . $ 3,915 $ 87,094
------------ ------------
------------ ------------
Cash paid for taxes . . . . . . . . . . . . . . . . . $ 148,826 $ 87,830
------------ ------------
------------ ------------
NON-CASH INVESTING AND FINANCING ACTIVITY:
In connection with the acquisition of certain assets of JCAP, Inc. (dba
Alliance Training Centers) effective June 1, 1998, the Company incurred
deferred payment obligations totaling $75,000, the present value of
which were approximately $67,000. Additionally, the Company assumed
certain capital lease obligations for the lease of computer equipment
with a gross commitment of approximately $110,000, the present value of
which were approximately $101,000.
See notes to Consolidated Financial Statements.
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 subsidiaries (the "Company"), all of
which are wholly owned. The financial information for the three and six
months ended June 30, 1998 and 1997, 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
periods. The financial information should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1997,
included in the Company's Annual Report on Form 10-K ("Form 10-K").
Operating results for the three and six months ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the entire
year ending December 31, 1998.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
JUNE 30, DECEMBER 31,
1998 1997
---------- -----------
Computer equipment and software . . . . . . . . . $1,839,786 $1,281,305
Office equipment and furniture. . . . . . . . . . 897,532 536,518
Leasehold improvements. . . . . . . . . . . . . . 207,419 160,124
---------- ----------
2,944,737 1,977,947
Less accumulated depreciation and amortization. . (803,898) (588,186)
---------- ----------
$2,140,839 $1,389,761
---------- ----------
---------- ----------
Included in computer equipment and software are software development costs
in progress of approximately $207,000 and $93,000 at June 30, 1998 and
December 31, 1997, respectively.
3. 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:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1998 1997 1998 1997
-------- --------- -------- ---------
Tax provision (at statutory rate). . . . . . $309,003 $ 272,637 $501,712 $ 324,504
Utilization of net operating loss
carryforwards . . . . . . . . . . . . . . - (272,637) - (324,504)
Alternative minimum tax. . . . . . . . . . . - 10,850 - 10,850
Other, principally change of estimate. . . . - - (31,467) -
State income tax, net of federal
income tax benefit . . . . . . . . . . . 22,858 125,189 35,460 82,508
-------- --------- -------- ---------
Total. . . . . . . . . . . . . . . . . . . . $331,861 $ 136,039 $505,705 $ 93,358
-------- --------- -------- ---------
-------- --------- -------- ---------
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. EARNINGS PER SHARE
Basic EPS was determined by dividing net income by the weighted average
number of shares of common stock outstanding during the year and diluted
EPS included these shares plus common stock equivalents outstanding during
the year (common stock equivalents are excluded if the effects of inclusion
are antidilutive).
The following is reconciliation of the weighted average number of shares
outstanding during the period for basic and diluted earnings per share.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Basic. . . . . . . . . . . . . . . . . . . . 2,747,597 1,747,812 2,743,968 1,691,562
Net effect of dilutive stock options . . . . 164,603 77,709 141,378 115,771
--------- --------- --------- ---------
Diluted. . . . . . . . . . . . . . . . . . . 2,912,200 1,825,521 2,885,346 1,807,333
--------- --------- --------- ---------
--------- --------- --------- ---------
Total options and warrants outstanding . . . 826,257 500,000 826,257 500,000
Options and warrants not considered
because effects of inclusion would be
antidilutive. . . . . . . . . . . . . . . 82,590 92,000 82,590 72,000
5. CONTINGENCIES
The Company was named as a garnishee in a lawsuit against its largest
shareholder, which the Company believes, is without merit. As the
result of an Agreed Temporary Order dated October 24, 1996, the Company
was non-suited in this matter. The Company has filed a separate lawsuit
against the plaintiff seeking damages and reimbursement of expense,
alleging that plaintiffs interfered with Company business transactions
and proposed financing resulting in delays of certain transactions, lost
opportunities, lost profits and other significant losses. Additionally,
the Company has been named in a lawsuit filed by two former employees
claiming damages for the fair market value of certain shares of common
stock of certain subsidiaries of the Company as well as other damages
for breach of contract and various other allegations. The Company has
filed a third party petition against one of these plaintiffs and a
counterclaim against the other plaintiff. The Company is also involved
in certain other litigation and disputes not previously noted. With
respect to all the aforementioned matters, management believes they are
without merit and has concluded that the ultimate resolution of such
will not have a material effect on the Company's consolidated financial
statements.
6. NEW ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures
about Pensions and other Post Retirement Benefits," and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Preliminary
analysis of these new standards by the Company indicates that they will not
have a material effect on the Company's financial statements. SFAS No. 131
and 132, are effective for financial statements for fiscal years beginning
after December 15, 1997, and SFAS No. 133 will be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. ALLIANCE TRAINING CENTER ACQUISITION
Effective June 1, 1998, the Company acquired certain assets of JCAP, Inc.,
dba Alliance Training Centers ("Alliance"), a privately-held information
technology-training center operating in Richardson and Irving, Texas, both
suburbs of Dallas, Texas. The Company paid a purchase price equal to the
fair value of all of Alliance's furniture, computer equipment and software
and certain deposits and other assets, plus an earn-out (goodwill) of eight
percent (8%) of the annual after-tax net income of Train International,
Inc. ("Train"), a subsidiary of the Company, in excess of certain base
amounts through December, 2001, subject to certain minimum annual earn-out
payments aggregating $100,000 ($25,000 at closing and $75,000 deferred) and
overall maximum earn-out payments of $250,000. Additionally, the Company
assumed the real estate leases at the Richardson and Irving locations and
certain computer equipment capital leases. The gross future commitment
under these equipment leases was approximately $110,000 and the present
value of the future minimum lease payments was approximately $101,000.
Following is a summary of the acquisition cost:
Costs:
Furniture, computer equipment and software . . . . . . . $192,898
Deposits and other assets. . . . . . . . . . . . . . . . 20,935
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 126,306
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . $340,139
--------
--------
Source:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $171,858
Present value of minimum deferred earn-out . . . . . . . 67,433
Present value of future minimum lease payments . . . . . 100,848
--------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $340,139
--------
--------
The Alliance acquisition was accounted for under the purchase method. The
results of the former Alliance operations are included in the Statement of
Operations beginning June 1, 1998. Goodwill is being amortized over ten
years utilizing the straight-line method. The contingent earn-out payments
will be recorded as goodwill when earned. The unaudited revenues of
Alliance for the year ended December 31, 1997, and the five months ended
May 31, 1998 were approximately $850,000 and $427,000, respectively. Pro
forma results of operations have not been presented because they are not
material in relation to the consolidated operations of the Company.
8. RELATED PARTY TRANSACTION
During June 1998, $20,000 was advanced to J. Michael Moore, the Company's
Chairman and Chief Executive Officer. The advance was towards a 1998 bonus
and was evidenced by a note bearing interest at 8% and is due the earlier
of when 1998 executive bonuses are paid or April 1999.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. STOCKHOLDERS EQUITY
On April 29, 1998, the Board of Directors approved the granting of options
to purchase an aggregate of 236,667 shares at $12.75 to certain officers
and directors of the Company. The options vest quarterly in varying
amounts over a three-year period.
On July 17, 1998, the Company's President, M. Ted Dillard (Dillard),
exercised options to purchase 84,000 shares of the Company's Common Stock
for an aggregate purchase price of $257,250. The purchase price was paid
with 7,500 shares of Company common stock valued at $89,500 (based upon
closing price on July 16, 1998, on the American Stock Exchange) and the
remainder in cash. In connection with this transaction the Company loaned
Dillard $148,600 to cover his income tax liability on the transaction.
This loan was approved by the Compensation Committee of the Board of
Directors and was ratified by the Board of Directors. The loan bears
interest at the applicable federal rate, the interest is payable
quarterly, is collateralized by 20,000 shares of the Company's Common
Stock and is due on a pro-rata basis as Dillard sells the stock
collateral, but with a maximum repayment term of five years. The Company
will receive an income tax deduction related to this transaction.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET SERVICE REVENUES. Net service revenues increased approximately $2.2 million
or 25.9% to $10.5 million in the second quarter of 1998, compared to $8.4
million for the comparable 1997 quarter. Permanent placement revenues increased
approximately $1.5 million or 33.7% to $5.8 million for the quarter ended June
30, 1998, compared to $4.3 million for the comparable 1997 quarter. As part of
its single-source provider strategy, the Company provides specialty services to
its permanent placement clients. As a result of the increased demand for
permanent placement personnel, specialty service revenues decreased
approximately $347,000 or 17.4% to $1.6 million for the second quarter of 1998,
compared to $2.0 million for the comparable 1997 quarter. Contract placement
revenues increased approximately $911,000 or 43.8% to $3.0 million in the second
quarter of 1998, compared to $2.1 million for the comparable 1997 quarter.
Training revenues were approximately $156,000 for the quarter ended June 30,
1998. The Company reported no training revenues in the comparable 1997 quarter.
The increase in net service revenues was primarily attributable to the Company's
continued focus on high-margin, specialty niche employment markets such as the
information technology and engineering/technical disciplines.
GROSS MARGIN. Gross margin increased approximately $675,000 or 26.0% to $3.3
million in the second quarter of 1998, compared to $2.6 million for the
comparable 1997 quarter. Gross margin as a percentage of net service revenues
increased to approximately 31.1% in the second quarter of 1998 compared to
approximately 31.0% in the comparable period in 1997. The increase in gross
margin was consistent with the increase in net service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $681,000 or 38.0% to $2.5
million in the second quarter of 1998, compared to $1.8 million for the
comparable 1997 quarter. Selling, general and administrative expenses as a
percentage of net service revenues increased to approximately 23.4% in the
second quarter of 1998 from approximately 21.4% in the comparable 1997 quarter.
The increase was the result of increased expenses associated with opening new
offices, the further development of the Company's training programs, the
expansion of the Company's back office to support the growth in sales and
increased professional fees associated with investor relations and public
reporting.
OTHER INCOME AND EXPENSES. Other income was approximately $80,000 in the
second quarter of 1998 compared to expense of approximately $31,000 in the
comparable 1997 quarter. This was primarily due to interest earnings during the
second quarter of 1998 on the proceeds from the Company's 1997 public offering,
as well as a decrease in interest expense resulting from the retirement of all
short-term debt of the Company during the fourth quarter of 1997.
INCOME TAXES. Income tax expense increased approximately $196,000 to $332,000
for the second quarter of 1998, compared to $136,000 for the comparable 1997
quarter. The Company's effective tax rate increased to 38% in the second
quarter of 1998, compared to 17% in the comparable 1997 quarter. The second
quarter 1997 lower effective tax rate was primarily due to the utilization of
net operating losses to offset taxable income.
NET INCOME. Net income decreased approximately $92,000 or 14.3% to
approximately $551,000 in the second quarter of 1998 as compared to
approximately $643,000 in the comparable 1997 quarter. The decrease was
primarily due to the increase in the Company's effective tax rate as
described above. A more meaningful comparison is income before income tax
and extraordinary item which increased approximately $104,000 or 13.3% to
approximately $883,000 in the second quarter of 1998 as compared to
approximately $779,000 in the comparable 1997 quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET SERVICE REVENUES. Net service revenues increased approximately $3.9 million
or 24.7% to $19.5 million for the first six months of 1998, compared to $15.7
million for the comparable period in 1997. Permanent placement revenues
increased approximately $2.6 million or 32.0% to $10.5 million for the first six
months of 1998 compared to $8.0 million for the comparable period in 1997. The
continued increased demand for permanent placement personnel has resulted in a
decrease in specialty service revenues of approximately $581,000 or 15.0% to
$3.3 million for the first six months of 1998, compared to $3.9 million for the
comparable period in 1997. Contract placement revenues increased approximately
$1.7 million or 44.1% to $5.5 million for the first six months of 1998, compared
to $3.8 million for the comparable period in 1997. Training revenues were
approximately $211,000 for the first six months of 1998. The Company reported
no training revenues in the comparable 1997 period. The increase in net service
revenues was primarily attributable to the Company's continued focus on
high-margin, specialty niche employment markets such as the information
technology and engineering/technical disciplines.
GROSS MARGIN. Gross margin increased approximately $1.2 million or 25.5% to
$5.9 million in the first six months of 1998, compared to $4.7 million for the
comparable 1997 period. Gross margin as a percentage of net service revenues
increased to approximately 30.1% in the first six months of 1998 compared to
approximately 29.9% for the comparable 1997 period. The increase in gross
margin was consistent with the increase in net service revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $898,000 or 24.2% to $4.6
million for the first six months of 1998, compared to $3.7 million for the
comparable 1997 period. The increase was the result of increased expenses
associated with opening new offices, the further development of the Company's
training programs, the expansion of the Company's back office to support the
growth in sales and increased professional fees associated with investor
relations and public reporting. Selling, general and administrative expenses as
a percentage of net service revenues was unchanged at approximately 23.7% for
the first six months of 1998 and 1997.
OTHER INCOME AND EXPENSES. Other income was approximately $170,000 for the
first six months of 1998, compared to an expense of $40,000 for the comparable
period in 1997. This was primarily due to interest earnings on the proceeds
from the Company's 1997 public offering and a current year reduction of interest
expense as a result of the retirement of all short-term debt during the fourth
quarter of 1997.
INCOME TAXES. Income tax expense increased approximately $413,000 to $506,000
for the first six months of 1998, compared to $93,000 for the comparable period
in 1997. The Company's effective tax rate increased to 35% in the first six
months of 1998 compared to 10% in the comparable 1997 period. The increase was
primarily due to the utilization of net operating losses in the 1997 period to
offset taxable income.
NET INCOME. Net income increased approximately $51,000 or 5.8% to $928,000 for
the first six months of 1998, compared to $877,000 for the comparable period in
1997. Because of the increase in the effective tax rate described above, a more
meaningful comparison is income before income tax and extraordinary item which
increased approximately $506,000 or 54.6% to approximately $1.4 million in the
first six months of 1998 compared to approximately $927,000 in the comparable
1997 period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $9.6 million at June 30, 1998, compared
to working capital of approximately $9.5 million at December 31, 1997. The
increase in working capital of approximately $168,000 during the first six
months of 1998 was primarily due to the profitable operations of the Company.
Cash flow provided by operating activities of approximately $404,000
resulted primarily from the profitable operations of the Company during the
first six months of 1998. The Company made capital expenditures of
approximately $869,000 during the first six months of 1998 associated with
opening new offices, developing its training programs and enhancing its back
office to support its growth.
The Company continues to evaluate various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
Management of the Company anticipates that funds from the fourth quarter 1997
public offering and cash flow from operations will provide adequate liquidity to
fund its internal growth plans and operations for the next twelve months. The
Company's 1998 internal growth plans include the enhancement and expansion of
its training facilities, the development and expansion of its applicant database
and back office, the opening of new profit centers in existing locations and the
opening of offices in new geographic locations. In addition, the Company
continues to explore avenues for growth, including but not limited to, possible
strategic acquisitions.
Inflation has not had a significant effect on the Company's operating
results.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company has made a preliminary assessment of the Year 2000 Issue and
has concluded that it will have to modify or replace its accounting software so
that the Company's computer system will function properly with respect to the
Year 2000 Issue. The Company's accounting software can be brought into
compliance with the Year 2000 Issue through the purchase of an upgrade module
from the software vendor. However, the Company is currently considering the
purchase of new accounting and back office software. One of the requirements of
any software purchase will be compliance with the Year 2000 Issue. Because the
remainder of the Company's systems applications and hardware were built on
up-to-date client server architecture, they should require no modifications
with respect to the Year 2000 Issue. The Company will also initiate
communications with its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to those third
parties to minimize their own Year 2000 Issue. There can be no assurance
that the systems of other companies upon which the Company's systems rely
will be timely converted, or that a failure to convert by another company, or
a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures about
Pensions and other Post Retirement Benefits," and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Preliminary analysis of these
new standards by the Company indicates that they will not have a material effect
on the Company's financial statements. SFAS No. 131 and 132, are effective for
financial statements for fiscal years beginning after December 15, 1997, and
SFAS No. 133 will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that reflect projections
or expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such forward
looking statements. Important factors (the "Cautionary Disclosures") that could
result in such differences include: general economic conditions in the Company's
markets, including inflation, recession, interest rates and other economic
factors; the availability of qualified personnel; the level of competition
experienced by the Company; the Company's ability to implement its business
strategies and to manage its growth; the level of developmental expenses; those
factors identified in the Company's Prospectus dated September 30, 1997 as risk
factors; and other factors that affect businesses generally. Subsequent written
and oral "forward-looking" statements attributable to the Company or persons
acting on its behalf are expressly qualified by the Cautionary Disclosures.
PART II OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Effective May 1, 1998, the Company adopted a shareholder rights plan.
See Item 5.
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 10, 1998. 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.
FOR AGAINST ABSTAIN/ BROKER
WITHHELD NON-VOTES
J. Michael Moore 2,369,315 0 11,624 0
M. Ted Dillard 2,369,315 0 11,624 0
Samuel E. Hunter 2,369,315 0 11,624 0
Deborah A. Farrington 2,369,315 0 11,624 0
A. Clinton Allen 2,365,815 0 15,124 0
The shareholders voted to approve certain amendments to the Company's
Amended and Restated 1996 Nonqualified Stock Option Plan. The results of the
vote were as follows:
FOR AGAINST ABSTAIN/ BROKER
WITHHELD NON-VOTES
1,357,383 169,026 0 854,530
The shareholders voted to adopt and approve the Company's 1998 Nonqualified
Stock Option Plan. The results of the vote were as follows:
FOR AGAINST ABSTAIN/ BROKER
WITHHELD NON-VOTES
1,334,677 186,226 0 860,036
ITEM 5. OTHER INFORMATION
SHAREHOLDER RIGHTS PLAN
Effective May 1, 1998, the Company adopted a Shareholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, Rights to purchase one one-thousandth
(1/1000th) of a share of a new Series A Junior Participating Preferred Stock of
the Company at a price of $70 per one one-thousandth of a Preferred Share was
distributed as a dividend at the rate of one Right for each share of the
Company's Common Stock held of record on May 11, 1998. The value of each one
one-thousandth of a share of Preferred Stock purchasable upon exercise of each
Right should approximate the value of one (1) share of the Company's Common
Stock.
PART II OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES - CONTINUED
A description of the Rights Plan (and a copy of the Rights Agreement) is
set forth in the Company's Form 8-K, which was filed with the Securities and
Exchange Commission on May 8, 1998.
The Rights contain provisions that are intended to protect shareholders
from abusive takeover tactics that may be used by an acquirer that the Company's
Board of Directors believes are not in the best interests of the shareholders.
Examples of such transactions include a gradual accumulation of shares in the
open market or a partial or two-tier tender offer that does not treat all
shareholders equally and other acquisition attempts that may unfairly pressure
shareholders by coercing them to relinquish their investment and depriving the
Company's Board and shareholders of any real opportunity to determine the future
of the Company and to realize the full value of the shareholders' investment in
the Company. The Rights are not intended to prevent all takeovers of the
Company and will not do so. The Rights Plan increases the Board's ability to
effectively represent the interests of shareholders and other constituencies of
the Company upon the occurrence of an unfair acquisition proposal. While the
Board is not aware of any present effort to acquire control of the Company, it
believes these Rights represent a sound and reasonable means of safeguarding the
interests of its shareholders.
A summary of the Rights Plan was mailed to each shareholder of record as of
the record date, May 11, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
3.2 Form of Certificate of Designation for Designating Series A Junior
Participating Preferred Stock, $.10 par value. (Incorporated by reference
to Exhibit A of Exhibit 4.1 of the Company's Form 8-K filed on May 8,
1998.)
4.1 Rights Agreement dated as of May 1, 1998, between Diversified Corporate
Resources, Inc., and Harris Trust and Savings Bank which includes the form
of Certificate of Designation for Designating Series A Junior Participating
Preferred Stock, $.10 par value, as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to Purchase Series A
Junior Participating Preferred Stock as Exhibit C. (Incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on May 8, 1998.)
10.1 Asset Purchase Agreement by and between Diversified Corporate Resources,
Inc., and JCAP, Inc., effective June 1, 1998.*
10.2 Note Receivable dated June 22, 1998, by and between Diversified Corporate
Resources, Inc., and J. Michael Moore.*
27 Financial Data Schedule*
(*Filed herewith)
b. REPORTS ON FORM 8-K
On May 8, 1998, the Company filed with the Securities and Exchange
Commission a Form 8-K with respect to the Shareholder Rights Plan adopted by the
Company, effective May 1, 1998. See "Item 5. Other Information" herein.
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 13, 1998 By: /s/ J. Michael Moore
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J. Michael Moore
CHIEF EXECUTIVE OFFICER
DATE: August 13, 1998 By: /s/ M. Ted Dillard
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M. Ted Dillard
PRESIDENT AND SECRETARY
DATE: August 13, 1998 By: /s/ Douglas G. Furra
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Douglas G. Furra
CHIEF FINANCIAL OFFICER