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, 1999
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, 1999,
was 2,726,397.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
ASSETS: (Unaudited)
- ---------------------------------------------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 3,165,952 $ 3,472,990
Trade accounts receivable, less allowance
for doubtful accounts of approximately
$688,000 and $734,000, respectively 7,379,357 6,780,639
Receivables from related parties 28,701 52,756
Prepaid expenses and other current assets 356,346 302,004
Federal income taxes receivable 133,974 48,094
Deferred income taxes 304,325 374,292
----------- -----------
TOTAL CURRENT ASSETS 11,368,655 11,030,775
PROPERTY AND EQUIPMENT, NET 3,303,924 3,114,908
OTHER ASSETS:
Intangibles, net 3,700,826 3,646,925
Investment in and advances to joint venture - 377,127
Deferred income taxes - 123,004
Other 323,642 149,439
----------- -----------
$18,697,047 $18,442,178
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -----------------------------------------------
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses $ 3,449,348 $ 3,853,681
Current maturities of capital lease
obligations 24,032 43,824
Current maturities of long-term debt 691,007 665,169
----------- -----------
TOTAL CURRENT LIABILITIES 4,164,387 4,562,674
DEFERRED LEASE RENTS 74,163 59,522
LONG-TERM DEBT:
Capital lease obligations, net of current
maturities 16,469 23,766
Long-term debt, net of current maturities 1,227,487 1,178,924
Deferred income taxes 2,413 -
----------- -----------
TOTAL LONG-TERM DEBT 1,246,369 1,202,690
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000
shares authorized, none issued - -
Common stock, $.10 par value; 10,000,000
shares authorized, 3,249,946 and 3,177,446
shares issued, respectively 324,995 317,745
Additional paid-in capital 12,125,034 11,927,899
Retained earnings 2,370,378 1,936,736
Common stock held in treasury (523,549 and
483,549 shares, respectively), at cost (1,369,890) (1,349,865)
Receivables from related parties (238,389) (215,223)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,212,128 12,617,292
----------- -----------
$18,697,047 $18,442,178
=========== ===========
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,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
Net Service Revenues:
Permanent placement $ 6,734,969 $ 5,751,129 $13,216,272 $10,533,741
Specialty services 1,761,251 1,648,013 3,636,229 3,290,188
Contract placement 3,207,591 2,988,941 6,528,440 5,476,949
Training 395,009 156,108 782,238 210,547
----------- ----------- ----------- -----------
12,098,820 10,544,191 24,163,179 19,511,425
Cost of Services 8,718,427 7,269,208 17,173,463 13,632,471
----------- ----------- ----------- -----------
Gross Margin 3,380,393 3,274,983 6,989,716 5,878,954
----------- ----------- ----------- -----------
Selling, General and
Administrative Expenses:
Selling, general and
administrative expenses,
exclusive of depreciation and
amortization expense (2,987,783) (2,345,002) (5,697,480) (4,395,239)
Depreciation and amortization
expense (300,741) (126,736) (571,667) (219,986)
----------- ----------- ----------- -----------
(3,288,524) (2,471,738) (6,269,147) (4,615,225)
----------- ----------- ----------- -----------
Other Income (Expenses):
Loss from joint venture
operations - (12,586) - (26,209)
Interest income (expense), net (5,773) 92,187 (9,681) 189,924
Other, net - 19 - 6,019
----------- ----------- ----------- -----------
(5,773) 79,620 (9,681) 169,734
----------- ----------- ----------- -----------
Income Before Income Taxes 86,096 882,865 710,888 1,433,463
Income Tax Expense (35,777) (331,861) (277,246) (505,705)
----------- ----------- ----------- -----------
Net Income $ 50,319 $ 551,004 $ 433,642 $ 927,758
=========== =========== =========== ===========
Basic Earnings Per Share $ .02 $ .20 $ .16 $ .34
=========== =========== =========== ===========
Weighted Average Common
Shares Outstanding 2,732,166 2,747,597 2,744,157 2,743,968
=========== =========== =========== ===========
Diluted Earnings Per Share $ .02 $ .19 $ .16 $ .32
=========== =========== =========== ===========
Weighted Average Common and
Common Equivalent Shares
Outstanding 2,764,763 2,912,200 2,777,399 2,885,346
=========== =========== =========== ===========
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,
------------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 433,642 $ 927,758
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 571,667 219,986
Provision for allowances (46,097) 45,719
Income tax effect of options exercised 22,744 28,874
Equity in loss of joint venture - 26,209
Deferred income taxes 195,384 67,482
Deferred lease rents 14,641 20,187
Accretion of interest on deferred payment obligations 73,611 -
Changes in operating assets and liabilities:
Accounts receivable (331,397) (1,184,825)
Refundable federal income taxes (85,880) 201,436
Prepaid expenses and other assets (231,723) (143,153)
Trade accounts payable and accrued expenses (418,750) 37,391
Federal income taxes payable - 156,981
---------- ----------
Cash provided by operating activities 197,842 404,045
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (638,335) (869,163)
Business acquisition costs - (58,873)
Deposits (2,751) (32,915)
Loans and advances to related parties (23,166) (20,000)
Repayment from related parties 24,055 5,024
Net advances to joint venture - (107,805)
---------- ----------
Cash used in investing activities (640,197) (1,083,732)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under stock options 181,641 22,500
Repurchase of treasury stock (20,025) -
Principal payments under long-term debt obligations (26,299) (6,656)
---------- ----------
Cash provided by financing activities 135,317 15,844
Decrease in cash and cash equivalents (307,038) (663,843)
Cash and cash equivalents at beginning of year 3,472,990 7,500,188
---------- ----------
Cash and cash equivalents at end of period $3,165,952 $6,836,345
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ - $ 3,915
========== ==========
Cash paid for taxes $ 257,077 $ 148,826
========== ==========
NON-CASH FINANCING ACTIVITY:
Receivable for exercise of stock options -
collected in April, 1998 $ - $ 22,500
========== ==========
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, 1999 and 1998, 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, 1998, 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,
1999, are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1999.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
June 30, December 31,
1999 1998
----------- -----------
Computer equipment and software $ 2,950,765 $ 2,466,334
Office equipment and furniture 1,525,859 1,457,109
Leasehold improvements 377,277 292,123
Less accumulated depreciation and amortization (1,549,977) (1,100,658)
----------- -----------
$ 3,303,924 $ 3,114,908
=========== ===========
Depreciation and amortization expense of property and equipment for the three
months ended June 30, 1999 and 1998 was $240,374 and $125,683, respectively.
Depreciation and amortization expense of property and equipment for the six
months ended June 30, 1999 and 1998 was $449,319 and $218,933, respectively.
3. 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 For the Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Tax provision (at statutory rate) $ 30,134 $ 309,003 $ 248,811 $ 501,712
Other, principally change of estimate - - - (31,467)
State income tax (net of federal benefit) 5,643 22,858 28,435 35,460
--------- --------- --------- ---------
Total $ 35,777 $ 331,861 $ 277,246 $ 505,705
========= ========= ========= =========
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. EARNINGS PER SHARE
Basic Earnings Per Share was determined by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
Earnings Per Share included 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 earnings per share.
For the Three Months For the Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Basic 2,732,166 2,747,597 2,744,157 2,743,968
Net effect of dilutive stock options 32,597 164,603 33,242 141,378
--------- --------- --------- ---------
Total 2,764,763 2,912,200 2,777,399 2,885,346
========= ========= ========= =========
Total options and warrants outstanding 667,257 826,257 667,257 826,257
Options and warrants not considered
because effects of inclusion would
be anti-dilutive 277,590 82,590 277,590 82,590
5. CONTINGENCIES
In 1996, the Company was named as a garnishee in a lawsuit against its largest
shareholder. As the result of an Agreed Temporary Order dated October 24, 1996,
the Company was non-suited in this matter. The Company has filed a separate
lawsuit against the plaintiff seeking damages and reimbursement of expenses.
Additionally, the Company was named in a lawsuit filed by two former employees
(the "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 had
filed a third party petition against one of these plaintiffs and a counterclaim
against the other plaintiff. All parties involved entered into a settlement on
April 15, 1999. Key terms of the settlement included, among other things, (a)
the former employees transferring 35,000 shares of the Company's common stock to
the Company, (b) the Company paying $20,000 to the former employees and their
attorney, (c) the Company obtaining a $5,000,000 judgment against one of the
former employees which will not be enforced and will expire on January 15, 2000
provided that the former employees abide by the terms of the settlement
agreement, (d) the former employees agreeing not to solicit any of the Company's
employees or customers for a period of two years, and (e) the parties executing
mutual releases of all claims against each of the parties involved. The Company
is also involved in certain other litigation and disputes. With respect to all
the aforementioned matters, management believes the claims 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. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statements of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Preliminary analysis of this new standard by the
Company indicates that the standard will not have a material impact on the
Company's financial statements. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters and fiscal years beginning after June 15,
2000.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. INTANGIBLES
Amortization June 30, December 31,
Period 1999 1998
------------ ----------- -----------
Non-compete agreements 3 years $ 50,000 $ 50,000
Goodwill 5-20 years 3,824,345 3,648,096
----------- -----------
3,874,345 3,698,096
Accumulated amortization (173,519) (51,171)
----------- -----------
$ 3,700,826 $ 3,646,925
=========== ===========
Amortization of intangibles for the three months ended June 30, 1999 and 1998
was $60,367 and $1,053, respectively. Amortization of intangibles for the six
months ended June 30, 1999 and 1998 was $122,348 and $1,053, respectively.
8. BUSINESS ACQUISITION
On August 6, 1999, the Company completed the acquisition of all of the
outstanding stock of MOUNTAIN, LTD.-TM- ("Mountain"). The purchase price
consists of approximately $2,430,000 in cash, 75,000 shares of the Company's
Common Stock (subject to a lock-up agreement) and three annual deferred
payments of approximately $1,180,000 each, beginning October 1, 2000. The
deferred payments will be reduced up to 50% each if certain levels of
profitability are not maintained. Mountain is based in the Portland, Maine
area and is engaged in contract placements of technical and professional
specialists, primarily in the telecommunications industry. Mountain had
revenues (unaudited) of approximately $12,700,000 for the twelve months ended
June 30, 1999.
9. LINE OF CREDIT
On July 8, 1999, the Company entered into a revolving line of credit agreement
with Compass Bank. The agreement calls for borrowings of up to $4,500,000. The
borrowings will be collateralized by the Company's accounts receivable and other
assets and will be based upon a borrowing base as defined in the agreement.
Outstanding balances will bear interest at the bank's index rate unless the
Company elects the LIBOR base rate plus 2 1/4% for specific advances under the
agreement. Interest is payable quarterly and all outstanding principal and
interest is due June 30, 2000.
10. SEGMENT INFORMATION
The Company's segment information has been presented in two reportable segments;
staffing services and training. The staffing services segment consists of three
functional lines; permanent placement, specialty services and contract
placement. The training segment provides principally information technology
training to its clients' employees and the Company's applicant pool on a fee
basis. The Company is organized primarily on the basis of these segments with
three operating subsidiaries engaged in the staffing services segment and two
operating subsidiaries engaged in the training segment.
The table on the following page presents information about reported segments for
the quarters ending June 30.
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. SEGMENT INFORMATION (Continued)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net Service Revenues:
Staffing Services $ 11,704,761 $ 10,388,083 $ 23,381,891 $ 19,300,878
Training 397,097 155,928 795,553 211,627
------------ ------------ ------------ ------------
Total Segment 12,101,858 10,544,011 24,177,444 19,512,505
Inter-Segment (3,038) 180 (14,265) (1,080)
------------ ------------ ------------ ------------
$ 12,098,820 $ 10,544,191 $ 24,163,179 $ 19,511,425
============ ============ ============ ============
Gross Margin:
Staffing Services $ 3,271,627 $ 3,212,857 $ 6,754,147 $ 5,808,191
Training 111,804 61,946 249,834 71,843
------------ ------------ ------------ ------------
Total Segment 3,383,431 3,274,803 7,003,981 5,880,034
Inter-Segment (3,038) 180 (14,265) (1,080)
------------ ------------ ------------ ------------
$ 3,380,393 $ 3,274,983 $ 6,989,716 $ 5,878,954
============ ============ ============ ============
Selling, General and
Administrative Expenses:
Staffing Services $ 2,945,233 $ 2,356,656 $ 5,597,174 $ 4,433,730
Training 346,329 114,902 686,237 182,575
------------ ------------ ------------ ------------
Total Segment 3,291,562 2,471,558 6,283,411 4,616,305
Inter-Segment (3,038) 180 (14,265) (1,080)
------------ ------------ ------------ ------------
$ 3,288,524 $ 2,471,738 $ 6,269,146 $ 4,615,225
============ ============ ============ ============
Income Before Income Taxes:
Staffing Services $ 319,608 $ 931,796 $ 1,142,735 $ 1,539,792
Training (233,512) (48,931) (431,846) (106,329)
------------ ------------ ------------ ------------
$ 86,096 $ 882,865 $ 710,889 $ 1,433,463
============ ============ ============ ============
Loss from Joint Venture Operations:
Staffing Services $ - $ (12,586) $ - $ (26,209)
Training - - - -
------------ ------------ ------------ ------------
$ - $ (12,586) $ - $ (26,209)
============ ============ ============ ============
Investment In and Advances to
Joint Venture:
Staffing Services $ - $ 308,234 $ - $ 308,234
Training - - - -
------------ ------------ ------------ ------------
$ - $ 308,234 $ - $ 308,234
============ ============ ============ ============
Total Assets:
Staffing Services $ 11,657,522 $ 10,517,515 $ 11,657,522 $ 10,517,515
Training 933,292 70,030 933,292 70,030
------------ ------------ ------------ ------------
Total Segment 12,590,814 10,587,545 12,590,814 10,587,545
Not Allocated to Segments 6,106,233 5,929,327 6,106,233 5,929,327
------------ ------------ ------------ ------------
$ 18,697,047 $ 16,516,872 $ 18,697,047 $ 16,516,872
============ ============ ============ ============
Corporate expenses (those not directly related to segment operations) are
allocated to the segments based upon net service revenues. Depreciation expense
and interest income and expense are not allocated directly to the segments, but
are included in the allocation of corporate expenses. Property and equipment are
included in the assets not allocated to segments. Net Service Revenues from one
customer represented approximately 12% and 11% of total staffing services
revenues in the second quarter of 1999 and 1998, respectively. Revenues from
that same customer represented approximately 13% of total staffing services
revenues in the six months ended June 30, 1999 and 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net service revenues increased approximately $1.6 million, or 14.7%, to $12.1
million in the second quarter of 1999, compared to $10.5 million for the
comparable 1998 quarter, reflecting the positive contribution of the October
1998 acquisition of Texcel, Inc. and Texcel Technical Services, Inc.
(collectively, "Texcel"). Excluding the operations of Texcel, net service
revenues decreased approximately $448,000, or 4.2%, in the second quarter of
1999. This decrease reflects a softness in certain markets of the Company's
permanent and specialty placement businesses. Net service revenues for the
staffing services segment of the business increased approximately $1.3 million,
or 12.7%, to $11.7 million in the second quarter of 1999, compared to $10.4
million in the second quarter of 1998. Permanent placement revenues increased
approximately $984,000, or 17.1%, to $6.7 million in the second quarter of 1999
compared to $5.8 million in the second quarter of 1998. Specialty service
revenues increased approximately $113,000, or 6.9%, to $1.8 million in the
second quarter of 1999, compared to $1.6 million in the second quarter of 1998.
Contract placement revenues increased approximately $219,000, or 7.3%, to $3.2
million in the second quarter of 1999, compared to $3.0 million in the second
quarter of 1998. Texcel contributed $2.0 million, or 16.5%, of net service
revenues and 17.1% of net staffing services revenues. Additionally, Texcel
contributed $1.6 million, or 24.1%, of permanent placement revenues and
$380,000, or 21.6%, of specialty service revenues. Contract placement and
training revenues were not affected by the Texcel acquisition. Training segment
revenues increased approximately $241,000, or 155%, to approximately $397,000 in
the second quarter of 1999 compared to $156,000 for the comparable 1998 quarter.
In June of 1998, the Company expanded its training operations at its corporate
headquarters and acquired Alliance Training Center. There were inter-segment
revenues (training to staffing services) of approximately $3,000 in the second
quarter of 1999 and were minimal in the second quarter of 1998.
Gross margin increased approximately $105,000, or 3.2%, to $3.4 million in the
second quarter of 1999, compared to $3.3 million in the second quarter of 1998.
Gross margin as a percentage of net service revenues decreased to approximately
27.9% in the second quarter of 1999 compared to approximately 31.1% in the
second quarter of 1998. The decrease in gross margin percentage is primarily the
result of a softening in permanent and specialty placements in some of the
Company's highest margin locations. Gross margin for the staffing services
segment of the business increased approximately $59,000, or 1.8%, to $3.3
million in the second quarter of 1999, compared to $3.2 million in the second
quarter of 1998. A contribution of approximately $600,000, or 18.3%, was the
result of the operations of Texcel. Gross margin as a percentage of net service
revenues for the staffing services segment decreased to approximately 28.0% in
the second quarter of 1999 compared to approximately 30.9% in the comparable
1998 quarter. Gross margin for the training segment of the business was
approximately $112,000 in the second quarter of 1999 compared to approximately
$62,000 in the comparable 1998 quarter. Gross margin as a percentage of net
service revenues for the training segment was 28.2% in the second quarter of
1999 compared to 39.7% in the comparable 1998 quarter.
Selling, general and administrative expenses increased approximately $817,000,
or 33.0%, to $3.3 million in the second quarter of 1999, compared to $2.5
million in the second quarter of 1998. Selling, general and administrative
expenses as a percentage of net service revenues increased to approximately
27.2% in the second quarter of 1999 compared to approximately 23.4% in the
second quarter of 1998. Contributing to the increase in selling, general and
administrative expense, depreciation and amortization expense increased by
approximately $174,000,or 137.3%, to $301,000 in the second quarter of 1999,
compared to $127,000 in the second quarter of 1998. The increase was the result
of depreciation associated with increased capital expenditures to support the
Company's growth and amortization related to the Company's acquisition of Texcel
in October 1998. Selling, general and administrative expenses for the staffing
services segment of the business increased approximately $589,000, or 25.0%, to
$2.9 million in the second quarter of 1999, compared to $2.4 million in the
second quarter of 1998. Approximately $410,000, or 13.9%, was the result of the
operations of Texcel. Selling, general and administrative expenses as a
percentage of net service revenues for the staffing services segment was
approximately 25.2% in the second quarter of 1999 compared to 22.7% in the
comparable 1998 quarter. Selling general and administrative expenses for the
training services segment of the business increased approximately $231,000, or
201%, to $346,000 in the second quarter of 1999, compared to approximately
$115,000 in the second quarter of 1998, as a result of the increased training
capacity. Selling, general and administrative expenses as a percentage of net
service revenues for the training services segment was approximately 87.2% in
the second quarter of 1999 compared to 73.7% in the comparable 1998 quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other income (expense) resulted in expense of approximately $6,000 in the second
quarter of 1999 compared to income of $80,000 in the comparable 1998 quarter.
The expense in 1999 resulted primarily from interest expense of approximately
$36,000 on deferred payment obligations related to the Company's acquisition of
Texcel in October 1998 offset by interest income on the remaining proceeds from
the Company's October 1997 public offering. The income in 1998 resulted
primarily from interest on the public offering proceeds, partially offset by a
loss of approximately $13,000 from joint venture operations.
As a result of the above, income before income taxes decreased approximately
$797,000, or 90.2%, to approximately $86,000 in the second quarter of 1999
compared to approximately $883,000 in the second quarter of 1998. Income before
income tax for the staffing services segment of the business decreased
approximately $612,000, or 65.7%, to $320,000 in the second quarter of 1999
compared to $932,000 in the second quarter of 1998. As a result of the Company's
continued expansion of its training operation, including its application to
acquire proprietary school status at its Dallas location, income before income
taxes for the training segment of the business resulted in a loss of
approximately $234,000 in the second quarter of 1999 compared to a loss of
approximately $49,000 in the comparable 1998 quarter.
Income tax expense was approximately $36,000 in the second quarter of 1999,
compared to approximately $332,000 in the second quarter of 1998. The Company's
effective tax rate for the second quarter of 1999 and 1998 was approximately 42%
and 38%, respectively.
As a result, net income decreased approximately $501,000, or 90.9%, to $50,000
in the second quarter of 1999, compared to approximately $551,000 in the second
quarter of 1998.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net service revenues increased approximately $4.7 million, or 23.8%, to $24.2
million in the first six months of 1999, compared to $19.5 million for the
comparable 1998 period, reflecting the positive contribution of the October 1998
acquisition of Texcel. Excluding the operations of Texcel, net service revenues
increased approximately $761,000, or 3.9%, in the first six months of 1999. This
slower than expected revenue growth reflects a softness in certain markets of
the Company's permanent and specialty placement businesses. Net service revenues
for the staffing services segment of the business increased approximately $4.1
million, or 21.1%, to $23.4 million in the first six months of 1999, compared to
$19.3 million in the first six months of 1998. Permanent placement revenues
increased approximately $2.7 million, or 25.5%, to $13.2 million in the first
six months of 1999 compared to $10.5 million in the comparable 1998 period.
Specialty service revenues increased approximately $346,000, or 10.5%, to $3.6
million in the first six months of 1999, compared to $3.3 million in the first
six months of 1998. Contract placement revenues increased approximately $1.1
million, or 19.2%, to $6.5 million in the first six months of 1999, compared to
$5.5 million in the first six months of 1998. Texcel contributed $3.9 million,
or 16.1%, of net service revenues and 16.6% of net staffing services revenues.
Additionally, Texcel contributed $3.1 million, or 23.8%, of permanent placement
revenue and $749,000, or 20.6%, of specialty service revenues. Contract
placement and training revenues were not affected by the Texcel acquisition.
Training segment revenues increased approximately $584,000, or 276%, to
approximately $796,000 in the first six months of 1999 compared to $212,000 for
the comparable 1998 period. In June of 1998, the Company expanded its training
operations at its corporate headquarters and acquired Alliance Training Center.
There were inter-segment revenues (training to staffing services) of
approximately $14,000 in the first six months of 1999 compared to $1,000 in the
first six months of 1998.
Gross margin increased approximately $1.1 million, or 18.9%, to $7.0 million in
the first six months of 1999, compared to $5.9 million in the first six months
of 1998. Gross margin as a percentage of net service revenues decreased to
approximately 28.9% in the first six months of 1999 compared to approximately
30.1% in the first six months of 1998. The decrease in gross margin percentage
is primarily the result of a softening in permanent and specialty placements in
some of the Company's highest margin locations. Gross margin for the staffing
services
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
segment of the business increased approximately $946,000, or 16.3%, to $6.8
million in the first six months of 1999, compared to $5.8 million in the second
quarter of 1998. A contribution of approximately $1.1 million, or 16.7%, was the
result of operations of Texcel. Gross margin as a percentage of net service
revenues for the staffing services segment decreased to approximately 28.9% in
the first six months of 1999 compared to approximately 30.1% in the comparable
1998 period. Gross margin for the training segment of the business was
approximately $250,000 in the first six months of 1999 compared to approximately
$72,000 in the comparable 1998 period. Gross margin as a percentage of net
service revenues for the training segment was 31.4% in the first six months of
1999 compared to 33.9% in the comparable 1998 period.
Selling, general and administrative expenses increased approximately $1.7
million, or 35.8%, to $6.3 million in the first six months of 1999, compared to
$4.6 million in the first six months of 1998. Selling, general and
administrative expenses as a percentage of net service revenues increased to
approximately 25.9% in the first six months of 1999 compared to approximately
23.7% in the comparable 1998 period. Contributing to the increase in selling,
general and administrative expense, depreciation and amortization expense
increased by approximately $352,000, or 160%, to $572,000 in the first six
months of 1999, compared to $220,000 in the first six months of 1998. The
increase was the result of depreciation associated with increased capital
expenditures to support the Company's growth and amortization related to the
Company's acquisition of Texcel in October, 1998. Selling, general and
administrative expenses for the staffing services segment of the business
increased approximately $1.2 million, or 26.2%, to $5.6 million in the first six
months of 1999, compared to $4.4 million in the first six months of 1998.
Approximately $774,000, or 13.8%, was the result of the operations of Texcel.
Selling, general and administrative expenses as a percentage of net service
revenues for the staffing services segment was approximately 23.9% in the first
six months of 1999 compared to 23.0% in the comparable 1998 quarter. Selling,
general and administrative expenses for the training services segment of the
business increased approximately $504,000, or 276%, to $686,000 in the first six
months of 1999, compared to approximately $183,000 in the first six months of
1998 as a result of the increased training capacity. Selling, general and
administrative expenses as a percentage of net service revenues for the training
services segment was approximately 86.3% in the first six months of both 1999
and 1998.
Other income (expense) resulted in expense of $10,000 in the first six months of
1999 compared to income of $170,000 in the comparable 1998 period. The expense
in 1999 resulted primarily from interest expense of approximately $74,000 on
deferred payment obligations related to the Company's acquisition of Texcel in
October 1998 offset by interest income on the remaining proceeds from the
Company's October 1997 public offering. The income in 1998 resulted primarily
from interest on the public offering proceeds, partially offset by a loss of
approximately $26,000 from joint venture operations.
As a result of the above, income before income taxes decreased approximately
$723,000, or 50.4%, to approximately $711,000 in the first six months of 1999
compared to approximately $1.4 million in the first six months of 1998. Income
before income tax for the staffing services segment of the business decreased
approximately $397,000, or 25.8%, to $1.1 million in the first six months of
1999 compared to $1.5 million in the first six months of 1998. As a result of
the Company's continued expansion of its training operation, including its
application to acquire proprietary school status at its Dallas location, income
before income taxes for the training segment of the business resulted in a loss
of approximately $432,000 in the first six months of 1999 compared to a loss of
approximately $106,000 in the comparable 1998 period.
Income tax expense was approximately $277,000 in the first six months of 1999,
compared to approximately $506,000 in the first six months of 1998. The
Company's effective tax rate for the first six months of 1999 and 1998 was
approximately 39% and 35%, respectively.
As a result, net income decreased approximately $494,000, or 53.3%, to $434,000
in the first six months of 1999, compared to approximately $928,000 in the first
six months of 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $7.2 million at June 30, 1999, compared to
$6.5 million at December 31, 1998. The increase in working capital of
approximately $736,000 was primarily attributable to the profitable operations
of the staffing services segment of the Company.
Cash flow provided by operating activities of approximately $198,000 resulted
primarily from the profitable operations of the Company. The Company made
capital expenditures of approximately $638,000 in the first six months of 1999,
primarily to continue to improve its computer systems, its applicant database,
its training operations, and to support its back office operations.
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 its line of credit and cash flows
from operations will provide adequate liquidity to fund its internal 1999
growth plans and operations for the foreseeable future. The Company's
internal 1999 growth plans include the expansion and improvement of its
applicant database and back office, and the expansion and opening of new
profit centers in cities in which the Company has existing offices. In
addition, the Company continues to pursue avenues for growth including, but
not limited to, possible strategic acquisitions. The Mountain acquisition
(described in Note 8 to the consolidated financial statements) is part of the
Company's strategic acquisition program and planned transition to a business
model more focused on contract placement. The Company will be required to
obtain additional financing through either debt or equity in order to
consummate additional significant acquisitions.
Inflation has not had a significant effect on the Company's operating results.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits rather
than four to define the applicable year, any of the Company's computer programs
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000 (the "Year 2000 Issue"). This could result in a
system failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities.
The Company has made an assessment of the Year 2000 Issue and has concluded that
it will have to modify or replace its accounting software so that the Company's
computer system will function properly with respect to the Year 2000 Issue. The
Company has purchased new accounting and back office software, which is Year
2000 compliant. The cost of the software and implementation to date was
approximately $180,000. Additional implementation costs are estimated to be
$20,000. Because the remainder of the Company's systems applications and
hardware were built on up-to-date client server architecture, they should
require no modifications with respect to the Year 2000 Issue. In addition, the
Company has communicated with the majority of its significant suppliers,
landlords and large customers to determine the extent to which the Company is
vulnerable to those third parties to minimize their own Year 2000 Issue. There
can be no assurance that the systems of other companies upon which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse affect on the Company.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by certain third parties to
complete efforts necessary to achieve Year 2000 compliance on a timely basis.
A contingency plan has not been completed for dealing with the most
reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by October 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net service revenues increased approximately $1.6 million, or 14.7%, to $12.1
million in the second quarter of 1999, compared to $10.5 million for the
comparable 1998 quarter, as a result of $2.0 million revenues generated from
the operations of the Texcel companies ("Texcel") acquired in October, 1998.
Excluding Texcel, the core operations of the Company's staffing business
decreased as a result of challenging market conditions. In particular, one of
the Company's regions experienced a reduction in the number of permanent and
speciality opportunities in certain industries.
Net service revenues for the staffing services segment of the business
increased approximately $1.3 million, or 12.7%, to $11.7 million in the
second quarter of 1999, compared to $10.4 million in the second quarter of
1998. Permanent placement revenues increased approximately $984,000, or
17.1%, to $6.7 million in the second quarter of 1999 compared to $5.8 million
in the second quarter of 1998. Specialty service revenues increased
approximately $113,000, or 6.9%, to $1.8 million in the second quarter of
1999, compared to $1.6 million in the second quarter of 1998. Contract
placement revenues increased approximately $219,000, or 7.3%, to $3.2 million
in the second quarter of 1999, compared to $3.0 million in the second quarter
of 1998. Texcel contributed $1.6 million, or 24.1%, of permanent placement
revenues and $380,000, or 21.6%, of specialty service revenues. Training
segment revenues increased approximately $241,000, or 155%, to approximately
$397,000 in the second quarter of 1999 compared to $156,000 for the
comparable 1998 quarter. In June of 1998, the Company expanded its training
operations at its corporate headquarters and acquired Alliance Training
Center.
Gross margin increased approximately $105,0000, or 3.2%, to $3.4 million in
the second quarter of 1999, compared to $3.3 million in the second quarter of
1998. Gross margin as a percentage of net service revenues decreased to
approximately 27.9% in the second quarter of 1999 compared to approximately
31.1% in the second quarter of 1998. Gross margin for the staffing services
segment of the business increased approximately $59,000, or 1.8%, to $3.3
million in the second quarter of 1999, compared to $3.2 million in the second
quarter of 1998. Gross margin as a percentage of net service revenues for the
staffing services segment decreased to approximately 28.0% in the second
quarter of 1999 compared to approximately 30.9% in the comparable 1998
quarter. Such decrease was attributable to a reduction in higher margin
permanent and specialty placements in certain of the Company's locations,
offset by a $600,000 contribution to gross margin by the Texcel operations.
Gross margin for the training segment of the business was approximately
$112,000 in the second quarter of 1999 compared to approximately $62,000 in
the comparable 1998 quarter. Gross margin as a percentage of net service
revenues for the training segment was 28.2% in the second quarter of 1999
compared to 39.7% in the comparable 1998 quarter.
Selling, general and administrative expenses ("SG&A") increased approximately
$817,000, or 33.0%, to $3.3 million in the second quarter of 1999, compared
to $2.5 million in the second quarter of 1998. SG&A as a percentage of net
service revenues increased to approximately 27.2% in the second quarter of
1999 compared to approximately 23.4% in the second quarter of 1998.
Contributing to the increase in SG&A was approximately $410,000 related to
the Texcel operations, an increase of approximately $174,000 in depreciation
and amortization expense, and approximately $100,000 of legal expenses
related to the resolution of a litigation matter. SG&A for the staffing
services segment of the business increased approximately $589,000, or 25.0%,
to $2.9 million in the second quarter of 1999, compared to $2.4 million in
the second quarter of 1998. SG&A as a percentage of net service revenues for
the staffing services segment was approximately 25.2% in the second quarter
of 1999 compared to 22.7% in the comparable 1998 quarter. SG&A for the
training services segment of the business increased approximately $231,000,
or 201%, to $346,000 in the second quarter of 1999, compared to approximately
$115,000 in the second quarter of 1998, as a result of increased training
operations. SG&A as a percentage of net service revenues for the training
services segment was approximately 87.2% in the second quarter of 1999
compared to 73.7% in the comparable 1998 quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other income (expense) resulted in expense of approximately $6,000 in the
second quarter of 1999 compared to income of $80,000 in the comparable 1998
quarter. The expense in 1999 resulted primarily from interest expense of
approximately $36,000 on deferred payment obligations related to the
Company's acquisition of Texcel, offset by interest income on the remaining
proceeds from the Company's October 1997 public offering. The income in 1998
resulted primarily from interest income on the public offering proceeds,
partially offset by a loss of approximately $13,000 from joint venture
operations.
As a result of the factors above, income before income taxes decreased
approximately $797,000, or 90.2%, to approximately $86,000 in the second
quarter of 1999 compared to approximately $883,000 in the second quarter of
1998. Income before income tax for the staffing services segment of the
business decreased approximately $612,000, or 65.7%, to $320,000 in the
second quarter of 1999 compared to $932,000 in the second quarter of 1998. As
a result of the Company's continued expansion of its training operation,
including obtaining proprietary school status at its Dallas location in
April, 1999, income before income taxes for the training segment of the
business resulted in a loss of approximately $234,000 in the second quarter
of 1999 compared to a loss of approximately $49,000 in the comparable 1998
quarter.
Income tax expense was approximately $36,000 in the second quarter of 1999,
compared to approximately $332,000 in the second quarter of 1998. The
Company's effective tax rate for the second quarter of 1999 and 1998 was
approximately 42% and 38%, respectively.
As a result, net income decreased approximately $501,000, or 90.9%, to
$50,000 in the second quarter of 1999, compared to approximately $551,000 in
the second quarter of 1998.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net service revenues increased approximately $4.7 million, or 23.8%, to $24.2
million in the first six months of 1999, compared to $19.5 million for the
comparable 1998 period. Excluding Texcel, the core operations of the
Company's staffing business experienced a modest increase as a result of
challenging market conditions. In particular, one of the Company's regions
experienced a significant second quarter reduction in the number of permanent
and specialty opportunities in certain industries.
Net service revenues for the staffing services segment of the business
increased approximately $4.1 million, or 21.1%, to $23.4 million in the first
six months of 1999, compared to $19.3 million in the first six months of
1998. Permanent placement revenues increased approximately $2.7 million, or
25.5%, to $13.2 million in the first six months of 1999 compared to $10.5
million in the comparable 1998 period. Specialty service revenues increased
approximately $346,000, or 10.5%, to $3.6 million in the first six months of
1999, compared to $3.3 million in the first six months of 1998. Contract
placement revenues increased approximately $1.1 million, or 19.2%, to $6.5
million in the first six months of 1999, compared to $5.5 million in the
first six months of 1998. Texcel contributed $3.9 million, or 16.1%, of net
service revenues and 16.6% of net staffing services revenues. Additionally,
Texcel contributed $3.1 million, or 23.8%, of permanent placement revenue and
$749,000, or 20.6%, of specialty service revenues. Training segment revenues
increased approximately $584,000, or 276%, to approximately $796,000 in the
first six months of 1999 compared to $212,000 for the comparable 1998 period.
In June of 1998, the Company expanded its training operations at its
corporate headquarters and acquired Alliance Training Center.
Gross margin increased approximately $1.1 million, or 18.9%, to $7.0 million
in the first six months of 1999, compared to $5.9 million in the first six
months of 1998. Gross margin as a percentage of net service revenues
decreased to approximately 28.9% in the first six months of 1999 compared to
approximately 30.1% in the first six months of 1998. Gross margin for the
staffing services segment of the business increased approximately $946,000,
or 16.3%, to $6.8 million in the first six months of 1999, compared to $5.8
million in the second quarter of 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross margin as a percentage of net service revenues for the staffing
services segment decreased to approximately 28.9% in the first six months of
1999 compared to approximately 30.1% in the comparable 1998 period. Such
decrease was attributable to a reduction in higher margin permanent and
specialty placements in certain of the Company's locations, offset by a $1.1
million contribution to gross margin by the Texcel operations. Gross margin
for the training segment of the business was approximately $250,000 in the
first six months of 1999 compared to approximately $72,000 in the comparable
1998 period. Gross margin as a percentage of net service revenues for the
training segment was 31.4% in the first six months of 1999 compared to 33.9%
in the comparable 1998 period.
SG&A increased approximately $1.7 million, or 35.8%, to $6.3 million in the
first six months of 1999, compared to $4.6 million in the first six months of
1998. SG&A as a percentage of net service revenues increased to
approximately 25.9% in the first six months of 1999 compared to approximately
23.7% in the comparable 1998 period. Contributing to the increase in SG&A,
was approximately $774,000 related to the Texcel operations, an increase of
approximately $352,000 in depreciation and amortization expense, and
approximately $70,000 of legal expenses related to the resolution of a
litigation matter. SG&A for the staffing services segment of the business
increased approximately $1.2 million, or 26.2% to $5.6 million in the first
six months of 1999, compared to $4.4 million in the first six months of 1998.
SG&A as a percentage of net service revenues for the staffing services
segment was approximately 23.9% in the first six months of 1999 compared to
23.0% in the comparable 1998 quarter. SG&A for the training services segment
of the business increased approximately $504,000, or 276%, to $686,000 in the
first six months of 1999, compared to approximately $183,000 in the first six
months of 1998 as a result of the increased training operations. SG&A as a
percentage of net service revenues for the training services segment was
approximately 86.3% in the first six months of both 1999 and 1998.
Other income (expense) resulted in expense of $10,000 in the first six months
of 1999 compared to income of $170,000 in the comparable 1998 period. The
expense in 1999 resulted primarily from interest expense of approximately
$74,000 on deferred payment obligations related to the Company's acquisition
of Texcel, offset by interest income on the remaining proceeds from the
Company's October 1997 public offering. The income in 1998 resulted primarily
from interest income on the public offering proceeds, partially offset by a
loss of approximately $26,000 from joining venture operations.
As a result of the factors above, income before income taxes decreased
approximately $723,000, or 50.4%, to approximately $711,000 in the first six
months of 1999 compared to approximately $1.4 million in the first six months
of 1998. Income before income tax for the staffing services segment of the
business decreased approximately $397,000, or 25.8%, to $1.1 million in the
first six months of 1999 compared to $1.5 million in the first six months of
1998. As a result of the Company's continued expansion of its training
operation, including obtaining proprietary school status at its Dallas
location in April, 1999, income before income taxes for the training segment
of the business resulted in a loss of approximately $432,000 in the first six
months of 1999 compared to a loss of approximately $106,000 in the comparable
1998 period.
Income tax expense was approximately $277,000 in the first six months of
1999, compared to approximately $506,000 in the first six months of 1998.
The Company's effective tax rate for the first six months of 1999 and 1998
was approximately 39% and 35%, respectively.
As a result, net income decreased approximately $494,000, or 53.3%, to
$434,000 in the first six months of 1999, compared to approximately $928,000
in the first six months of 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statements of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Preliminary analysis of this new standard by the
Company indicates that the standard will not have a material impact on the
Company's financial statements. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters and fiscal years beginning after June 15,
2000.
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, including the ability to effectively
integrate new acquisitions; the level of litigation expenses; the level of
developmental expenses; the ability of the Company to adequately and
cost-effectively address the Year 2000 issue; 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
PART II: OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
The Company was named in a lawsuit filed by two former employees (the "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 had filed a
third party petition against one of these plaintiffs and a counterclaim against
the other plaintiff. All parties involved entered into a settlement on April 15,
1999. Key terms of the settlement included, among other things, (a) the former
employees transferring 35,000 shares of the Company's common stock to the
Company, (b) the Company paying $20,000 to the former employees and their
attorney, (c) the Company obtaining a $5,000,000 judgment against one of the
former employees which will not be enforced and will expire on January 15, 2000
provided that the former employees abide by the terms of the settlement
agreement, (d) the former employees agreeing not to solicit any of the Company's
employees or customers for a period of two years, and (e) the parties executing
mutual releases of all claims against each of the parties involved.
ITEM 2. CHANGES IN SECURITIES
In connection with the acquisition of Mountain on August 6, 1999, the Company
issued 75,000 shares of its Common Stock to the shareholders of Mountain. See
Item 5 below. These shares were issued in a private placement exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2).
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 was held on June 17, 1999. 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.
Abstain / Broker
For Against Withheld Non-Votes
--------- --------- --------- ---------
J. Michael Moore 2,344,790 - 261,852 -
M. Ted Dillard 2,345,290 - 264,652 -
Samuel E. Hunter 2,329,942 - 280,000 -
Deborah A. Farrington 2,326,442 - 283,500 -
A. Clinton Allen 2,326,440 - 283,502 -
The shareholders voted to adopt and approve the Company's 1998 Non-employee
Directors Option Plan. The results of the vote were as follows:
Abstain / Broker
For Against Withheld Non-Votes
--------- --------- --------- ---------
1,713,052 22,067 - -
PART II: OTHER INFORMATION (Continued)
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 5. OTHER INFORMATION
Business Acquisition
- --------------------
On August 6, 1999, the Company, MAGIC Northeast ("MNE"), a Delaware corporation
and wholly owned subsidiary of the Company, and Joseph H. Hosmer and Sandra
Hosmer (collectively, the "Shareholders"), shareholders of MOUNTAIN, LTD.-TM-
("Mountain"), entered into a purchase agreement (the "Purchase Agreement")
whereby MNE acquired (the "Acquisition") all of the outstanding capital stock of
Mountain. Mountain is based in the Portland, Maine area and is engaged in
contract placements of technical and professional specialists, primarily in the
telecommunications industry. Mountain had revenues (unaudited) of approximately
$12,700,000 for the twelve months ended June 30, 1999.
The purchase price consisted of approximately $2,430,000 in cash, 75,000 shares
("the Shares") of the Company's Common Stock and three annual deferred payments
of approximately $1,180,000 each beginning October 1, 2000. The deferred
payments will be reduced if the level of 1998 adjusted earnings before interest,
taxes, depreciation and amortization, approximately $1,100,000, is not
maintained. The reduction will be on a pro-rata basis up to a maximum of 25%
unless a service contract with a specific customer is not renewed or cancelled;
in which case the maximum reduction will be 50%. Additionally, if Mountain's
net working capital (as defined in the Purchase Agreement) exceeds $1,000,000
as of the closing date of the Acquisition, such excess will be paid to the
Shareholders the later of 45 days after the closing date or when the working
capital is received by Mountain.
The Shares were issued to the Shareholders in a transaction that was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and are, therefore, restricted securities within the meaning of the
Securities Act. In addition, the Shares are subject to a lock-up agreement
restricting their sale without the consent of the Company as follows: all of the
Shares for one year from the effective date of the acquisition, 50,000 of the
Shares for two years from the effective date of the acquisition, and 25,000 of
the Shares for three years from the effective date of the acquisition.
The Company used proceeds from its 1997 public offering to fund the cash portion
of the purchase price. The Acquisition shall be effective as of August 6, 1999
for accounting purposes and is expected to be accretive to earnings on a
prospective basis beginning in the third quarter of 1999.
In connection with the Acquisition, Mountain entered into an employment
agreement (the "Employment Agreement"), dated August 6, 1999, with Joseph H.
Hosmer. Pursuant to the Employment Agreement, Mr. Hosmer is entitled to annual
compensation during the three-year term of the Employment Agreement based upon
the revenues and net profits of Mountain (subject to specific formulas and
definitions set forth in the Employment Agreement) and to certain fringe
benefits. The Employment Agreement also contains certain noncompetition,
nondisclosure and nonsolicitation provisions.
The description set forth above of the Purchase Agreement and the Employment
Agreement is qualified in its entirety by reference to the exhibits to this Form
10-Q, which contain the full text of these documents.
The information set forth above is intended to satisfy the reporting
requirements set forth in Item 2 of Form 8-K. It is impracticable to provide all
of the financial statements of Mountain and the pro forma financial information
required by Form 8-K at this time. The Company will provide such financial
information as soon as practicable, but no later than October 20, 1999, 60 days
after the Form 8-K describing the Acquisition would have been due.
Amendment to Rights Agreement
- -----------------------------
On March 26, 1999, the Board of Directors approved an amendment (the
"Amendment") to the Company's Rights Agreement to, among other things, grant the
Company greater flexibility with respect to an inadvertent triggering of the
dilutive provisions of the Rights Agreement by permitting the Company to
consider the intentions of an Acquiring Person (as defined in the Amendment)
that acquires less than 25% of the Common Stock of the Company.
The Amendment is attached hereto as Exhibit 10.5.
PART II: OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Revolving Loan and Security Agreement, by and between the Company and
Compass Bank
10.2 Revolving Promissory Note, by and between the Company and Compass Bank
10.3 Purchase Agreement, by and between the Company and the Shareholders of
MOUNTAIN, LTD.-TM- (The schedules have been omitted pursuant to
Regulation S-K 601(b)(2).)
10.4 Employment Agreement, by and between the Company and Joseph H. Hosmer
10.5 First Amendment to Rights Agreement
27 Financial Data Schedule
B. Reports on Form 8-K
Not Applicable.
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 16, 1999 By: /s/ J. Michael Moore
J. Michael Moore
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Date: August 16, 1999 By: /s/ M. Ted Dillard
M. Ted Dillard
PRESIDENT AND SECRETARY
Date: August 16, 1999 By: /s/ Douglas G. Furra
Douglas G. Furra
CHIEF FINANCIAL OFFICER
(Principal Financial Officer
and Principal Accounting Officer)