<PAGE>
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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 SEPTEMBER 30, 1997
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 September 30,
1997, was 1,790,312.
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
SEPTEMBER 30, DECEMBER 31,
CURRENT ASSETS: 1997 1996
---------- ----------
Cash and cash equivalents.......................... $ 145,774 $ 612,512
Trade accounts receivable, less allowance
for doubtful accounts of approximately
$519,000 and $494,000, respectively............... 4,697,971 3,387,138
Notes receivable-related party..................... 10,133 9,326
Receivables from related party..................... 279,098 -
Prepaid expenses and other current assets.......... 159,192 34,443
---------- ----------
TOTAL CURRENT ASSETS............................. 5,292,168 4,043,419
EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, NET................................... 1,298,041 807,997
OTHER ASSETS:
Investment in and advances to joint venture........ 262,320 152,905
Notes receivable-related party..................... 14,059 21,690
Other.............................................. 1,234,726 177,879
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$8,101,314 $5,203,890
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses........ $4,389,107 $3,329,616
Book overdraft..................................... - 98,158
Borrowings under factoring and loan agreements..... 539,298 400,682
Other short-term debt.............................. 283,951 97,652
Current maturities of long-term debt............... 6,976 21,834
---------- ----------
TOTAL CURRENT LIABILITIES........................ 5,219,332 3,947,942
DEFERRED LEASE RENTS................................. 34,892 -
LONG-TERM DEBT....................................... 66,660 68,157
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000
shares Authorized, none issued.................... - -
Common stock, $.10 par value; 10,000,000 shares
Authorized, 2,036,161 and 1,881,161 shares
issued, respectively............................. 203,616 188,116
Additional paid-in capital......................... 3,689,651 3,615,151
Accumulated deficit................................ (927,662) (2,301,108)
Common stock held in treasury (245,849 shares
at cost).......................................... (185,175) (185,175)
Receivables from related party..................... - (129,193)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................... 2,780,430 1,187,791
---------- ----------
$8,101,314 $5,203,890
---------- ----------
---------- ----------
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SERVICE REVENUES
Permanent placement . . . . . . . . . . . . . $ 4,754,278 $ 3,291,353 $12,735,521 $ 9,252,817
Specialty services. . . . . . . . . . . . . . 1,959,330 2,022,069 5,830,028 5,386,569
Contract placement. . . . . . . . . . . . . . 2,392,110 1,914,430 6,192,703 5,615,915
----------- ----------- ----------- -----------
9,105,718 7,227,852 24,758,252 20,255,301
COST OF SERVICES . . . . . . . . . . . . . . . . 6,288,400 5,075,057 17,256,914 14,325,224
----------- ----------- ----------- -----------
GROSS MARGIN . . . . . . . . . . . . . . . . . . 2,817,318 2,152,795 7,501,338 5,930,077
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES . . . . . . . . . . . . . . . . . . . . (1,975,252) (1,676,245) (5,692,442) (4,382,920)
OTHER INCOME (EXPENSES):
Income (loss) from joint venture operations . 986 (14,171) (18,502) (74,256)
Interest expense, net . . . . . . . . . . . . (40,162) (58,937) (114,293) (190,626)
Other, net. . . . . . . . . . . . . . . . . . (2,295) 24 51,648 22,399
----------- ----------- ----------- -----------
(41,471) (73,084) (81,147) (242,483)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM. . . . . . . . . . . . 800,595 403,466 1,727,749 1,304,674
INCOME TAXES, current provision. . . . . . . . . (304,028) (66,885) (397,386) (178,767)
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM . . . . . . . . 496,567 336,581 1,330,363 1,125,907
EXTRAORDINARY ITEM, gain on debt
restructuring, net. . . . . . . . . . . . . - - 43,083 -
----------- ----------- ----------- -----------
NET INCOME . . . . . . . . . . . . . . . . $ 496,567 $ 336,581 $ 1,373,446 $ 1,125,907
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PRIMARY EARNINGS PER SHARE:
Income before extraordinary item . . . . . . $ .26 $ .18 $ .71 $ .60
Extraordinary item. . . . . . . . . . . . . . - - .02 -
----------- ----------- ----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . $ .26 $ .18 $ .73 $ .60
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . . . . . . . . . 1,941,343 1,877,723 1,880,229 1,875,743
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FULLY DILUTED EARNINGS PER SHARE:
Income before extraordinary item. . . . . . . $ .25 $ .18 $ .67 $ .60
Extraordinary item. . . . . . . . . . . . . . - - .02 -
----------- ----------- ----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . $ .25 $ .18 $ .69 $ .60
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,976,137 1,877,723 1,979,062 1,875,743
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 1,373,446 $ 1,125,907
Adjustments to reconcile net income to cash
Provided by operating activities:
Extraordinary item. . . . . . . . . . . . . . . . . . . (43,083) -
Depreciation and amortization . . . . . . . . . . . . . 217,681 141,251
Other . . . . . . . . . . . . . . . . . . . . . . . . . 5,103 -
Provision for allowances. . . . . . . . . . . . . . . . 25,312 (30,864)
Equity in loss of joint venture . . . . . . . . . . . . 18,502 74,256
Write-down of long-lived assets . . . . . . . . . . . . - 37,462
Deferred lease rents. . . . . . . . . . . . . . . . . . 34,892 (47,278)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (1,336,145) (1,137,648)
Prepaid expenses and other current assets . . . . . . . (124,749) (109,590)
Other assets. . . . . . . . . . . . . . . . . . . . . . (199) 3,330
Trade accounts payable and accrued expenses . . . . . . 732,574 1,298,706
----------- -----------
Cash provided by operating activities . . . . . . . . 903,334 1,355,532
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . (712,828) (309,713)
Deposits. . . . . . . . . . . . . . . . . . . . . . . . (5,647) (20,667)
Loans and advances to related parties . . . . . . . . . (149,905) (25,000)
Repayment from related parties. . . . . . . . . . . . . 6,824 17,982
Net advances to joint venture . . . . . . . . . . . . . (127,917) (82,324)
----------- -----------
Cash used in investing activities . . . . . . . . . . (989,473) (419,722)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock under option agreements . . . . . . . 90,000 -
Proceeds from other short-term debt . . . . . . . . . . 186,299 -
(Decrease) increase in borrowings under factoring
and loan arrangements . . . . . . . . . . . . . . . . 138,616 (124,808)
Principal payments under long-term debt obligations . . (16,355) (16,230)
Book overdraft. . . . . . . . . . . . . . . . . . . . . (98,158) (129,235)
Deferred offering costs . . . . . . . . . . . . . . . . (681,001) -
----------- -----------
Cash used in financing activities . . . . . . . . . . (380,599) (270,273)
----------- -----------
(Decrease) increase in cash and cash equivalents. . (466,738) 665,537
Cash and cash equivalents at beginning of year. . . 612,512 6,239
----------- -----------
Cash and cash equivalents at end of period. . . . . $ 145,774 $ 671,776
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest. . . . . . . . . . . . . . . . . $ 133,438 $ 196,473
----------- -----------
----------- -----------
Cash paid for income taxes. . . . . . . . . . . . . . . $ 378,951 $ 13,071
----------- -----------
----------- -----------
Deferred offering costs in accounts payable . . . . . . $ 370,000 $ -
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed 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
nine months ended September 30, 1997 and 1996, is unaudited but includes all
adjustments (consisting only of normal recurring accruals) which the Company
considers necessary for a fair presentation of the results for the periods.
The financial information should be read in conjunction with the consolidated
financial statements for the year ended December 31, 1996, included in the
Company's Annual Report on Form 10-K as amended ("Form 10-K"). Operating
results for the three and nine months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the entire
year ending December 31, 1997.
RECLASSIFICATIONS
Certain amounts in the September 30, 1996 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
2. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Computer equipment $1,157,051 $ 673,699
Office equipment and furniture 488,746 697,947
Leasehold improvements 150,460 102,785
---------- ----------
1,796,257 1,474,431
Less accumulated depreciation and
amortization (498,216) (666,434)
---------- ----------
$1,298,041 $ 807,997
---------- ----------
---------- ----------
3. ACCOUNTS RECEIVABLE FROM RELATED PARTY
During the three and nine months ended September 30, 1997, the Company
paid various expenses on behalf of J. Michael Moore or various entities which
he controls amounting to approximately $38,000 and $141,000, respectively.
Mr. Moore is the Chairman of the Board and Chief Executive Officer of the
Company. These amounts are included in receivables from related party in the
consolidated balance sheet. Of these amounts, approximately $33,000 and
$132,000, respectively, is related to the litigation defense associated with
a lawsuit with Ditto Properties, Inc., in connection with the Company being
named therein as garnishee. (See Part 1, Item 3, Legal Proceedings, in the
Company's Form 10-K for the year ended December 31, 1996.) These amounts
were paid in full subsequent to September 30, 1997.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. INCOME TAXES
The income tax provision and the amount computed by applying the federal
statutory income tax rate to income before income taxes differs as follows:
<TABLE>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax provision (at statutory rate) ($281,334) ($137,178) ($605,838) ($443,589)
Tax benefits derived from the utilization of
net operating loss carryforwards - 137,178 338,727 443,589
Alternative minimum tax - (2,027) (20,682)
State income tax expense (22,694) (64,858) (130,275) (158,085)
---------- ---------- ---------- ----------
Total ($304,028) ($66,885) ($397,386) ($178,767)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The utilization of the net operating loss carryforward during the nine
months ended September 30, 1997, was limited to $338,727 because of
limitations under Internal Revenue Code Section 382.
5. OTHER SHORT-TERM DEBT
On August 26, 1996, the Company entered into a $300,000 line of credit
agreement for the purchase of fixed assets. Interest is payable monthly at
prime plus 2.5% and the fixed assets financed and certain subsidiary accounts
receivable are pledged as collateral. Borrowings under the line of credit
were approximately $284,000 at September 30, 1997, and can be converted into
long-term debt upon $300,000 being advanced, depending on the Company's
continued relationship with the lender. The long-term debt would have a five
year term and bear interest monthly at prime plus 2.5%.
6. CONTINGENCIES
The Company was named as a garnishee in a lawsuit against the majority
shareholder, which the Company believes is without merit. As the result of
an Agreed Temporary Order dated October 24, 1996, the Company was non-suited
in this matter. The Company has filed a separate lawsuit against the
plaintiff seeking damages and reimbursement of expenses, alleging that
plaintiffs interfered with Company business transactions and financings
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.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128"), which is effective for periods ending after December 15,
1997. Statement 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). Some of the changes made to
current EPS standards include: (i) eliminating the presentation of primary
EPS and replacing it with basic EPS, with the principal difference being that
common stock equivalents are not considered in computing basic EPS, (ii)
eliminating the modified treasury stock method and the three percent
materiality provision, and (iii) revising the contingent share provision and
the supplemental EPS data requirements. Statement 128 also requires dual
presentation of basic and diluted EPS on the face of the income statement, as
well as a reconciliation of the numerator and denominator used in the two
computations of EPS. Basic EPS is defined by Statement 128 as net income
from continuing operations divided by the average number of common shares
outstanding without the consideration of common stock equivalents which may
be dilutive to EPS. The Company's current methodology for computing its fully
diluted EPS will not change in future periods as a result of its adoption of
Statement 128.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Preliminary
analysis of these new standards by the Company indicates that the standards
will not have a material impact on the Company. The standards are effective
for financial statements for fiscal years beginning after December 15, 1997.
8. SUBSEQUENT EVENT-COMMON STOCK OFFERING
On October 3, 1997, the Company completed a public offering (the
"Offering") of 825,900 shares of its common stock at $10.00 per share. An
additional 314,100 shares were sold by certain selling shareholders in the
offering. After deducting the underwriting discounts and non-accountable
expense allowance, the net proceeds to the Company were approximately $7.4
million. The net increase to stockholders' equity was approximately $6.3
million after netting approximately $1.1 million in deferred offering costs.
The underwriters have a 45 day option to purchase up to an additional
123,885 shares solely to cover over-allotments. The underwriters have
exercised this option and the additional net proceeds to the Company will be
approximately $1.1 million. The Company has issued to the underwriters
warrants to purchase up to 82,590 shares at $13.50 per share. These warrants
are exercisable for a period of four years, beginning in October 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET SERVICE REVENUES. Net service revenues increased approximately $1.9
million or 26.0% to $9.1 million in the third quarter of 1997, compared to
$7.2 million for the comparable 1996 quarter. Permanent placement revenues
increased approximately $1.5 million or 44.4% to $4.8 million for the quarter
ended September 30, 1997, compared to $3.3 million for the comparable 1996
quarter. Specialty service revenues decreased approximately $63,000 or 3.1%
to $1.9 million for the third quarter of 1997, compared to $2.0 million for
the comparable 1996 quarter. Contract placement revenues increased
approximately $478,000 or 25.0% to $2.4 million in the third quarter of 1997,
compared to $1.9 million for the comparable 1996 quarter. The increase in net
service revenues was primarily attributable to the Company's continued focus
on high-end niche employment markets such as the information technology and
engineering/technical disciplines.
GROSS MARGIN. Gross margin increased approximately $665,000 or 30.9% to
$2.8 million in the third quarter of 1997, compared to $2.2 million for the
comparable 1996 quarter. Gross margin as a percentage of net service
revenues increased to approximately 30.9% in the third quarter of 1997
compared to approximately 29.8% in the comparable period in 1996. The
increase in gross margin was primarily due to an increase in permanent
placement revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $299,000 or 17.8% to $2.0
million in the third quarter of 1997, compared to $1.7 million for the
comparable 1996 quarter. Selling, general and administrative expenses as a
percentage of net service revenues decreased to approximately 21.7% in the
third quarter of 1997 from approximately 23.2% in the comparable 1996
quarter. The increase in selling, general and administrative expenses was
primarily the result of increased expenses on the Company's back office to
support the growth in sales. Included in this increase was approximately
$126,000 for the establishment and development of the Company's training
facilities and other development projects.
OTHER EXPENSES. Other expenses declined approximately $32,000 to $41,000
in the third quarter of 1997, compared to approximately $73,000 in the
comparable 1996 quarter. The decrease in expenses was the result of the
joint venture operations being profitable during the third quarter of 1997,
and a decrease in interest expense as a result of the lower cost of funds.
INCOME TAXES. Income tax expense increased approximately $237,000 to
$304,000 for the third quarter of 1997, compared to approximately $67,000 for
the comparable 1996 quarter. The increase was primarily due to the
limitation on utilization of net operating losses pursuant to Section 382 of
the Internal Revenue Code.
NET INCOME. Net income increased approximately $160,000 or 47.5% to
approximately $497,000 in the third quarter of 1997 as compared to
approximately $337,000 in 1996.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET SERVICE REVENUES. Net service revenues increased approximately $4.5
million or 22.2% to $24.7 million in the first nine months of 1997, compared
to $20.3 million for the comparable 1996 period. Permanent placement
revenues increased approximately $3.5 million or 37.6% to $12.7 million for
the nine months ended September 30, 1997, compared to $9.3 million for the
comparable 1996 period. Specialty service revenues increased approximately
$444,000 or 8.2%
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
to $5.8 million for the first nine months of 1997, compared to $5.4 million
for the comparable 1996 period. Contract placement revenues increased
approximately $577,000 or 10.3% to $6.2 million in the first nine months of
1997, compared to $5.6 million for the comparable 1996 period. The increase
in net service revenues was primarily attributable to the Company's continued
focus on high margin, high-end niche employment markets, such as the
information technology and engineering/technical disciplines.
GROSS MARGIN. Gross margin increased approximately $1.6 million or 26.5%
to $7.5 million in the first nine months of 1997, compared to $5.9 million
for the comparable 1996 period. Gross margin as a percentage of net service
revenues increased to approximately 30.3% in the first nine months of 1997
compared to approximately 29.3% in the comparable period in 1996, primarily
due to an increase in permanent placement revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $1.3 million or 29.9% to $5.7
million in the first nine months of 1997, compared to $4.4 million for the
comparable 1996 period. Selling, general and administrative expenses as a
percentage of net service revenues increased to approximately 23.0% in the
first nine months of 1997 from approximately 21.6% in the comparable 1996
period. The increase was primarily the result of increased expenses on the
Company's back office to support the growth in sales, legal expenses and an
increase in the provision for uncollectible accounts. Included in this
increase were increases in legal expenses of approximately $208,000,
provision for uncollectible accounts of approximately $184,000 and
approximately $220,000 for the establishment and development of the Company's
training facilities and other development projects.
OTHER EXPENSES. Other expenses declined approximately $161,000 to $81,000
in the first nine months of 1997, compared to approximately $242,000 in the
comparable 1996 period. The decrease in expenses was the result of a
decrease in the loss from joint venture operations, a decrease in interest
expense as a result of the lower cost of funds and the collection of a
receivable, previously written off, associated with a prior year sale of
assets.
INCOME TAXES. Income tax expense increased approximately $218,000 to
$397,000 in the first nine months of 1997, compared to approximately $179,000
for the comparable 1996 period. This increase was primarily due to the
limitation on utilization of net operating losses pursuant to Section 382 of
the Internal Revenue Code.
EXTRAORDINARY ITEMS. The extraordinary item-gain on debt restructuring,
net of income taxes, of approximately $43,000 during the first nine months of
1997 resulted from the Company settling certain prior year accounts payable
on a discounted basis.
NET INCOME. Net income increased approximately $248,000 or 22.0% to
approximately $1.4 million in the first nine months of 1997, compared to
approximately $1.1 million in the comparable 1996 period.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $73,000 at September 30, 1997, compared
to working capital of approximately $95,000 at December 31, 1996. The
decrease in working capital of approximately $22,000 during the first nine
months of 1997 was primarily the result of expenditures associated with the
Company's stock offering offset by the profitable operations of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - CONTINUED
Cash flow provided by operating activities of approximately $903,000
resulted primarily from the profitable operations of the Company during the
first nine months of 1997. The Company made capital expenditures of
approximately $713,000 during the first nine months of 1997, of which
approximately $186,000 was financed on a line of credit, primarily to improve
its computer systems, database operations, and back office operations. The
Company increased its factored accounts receivable borrowings by $139,000
during the first nine months of 1997.
The Company has entered into factoring arrangements involving advances on
its outstanding accounts receivable for fees ranging from 2% to 7% of
factored receivables, based on the number of days the receivable is
outstanding. The proceeds from factored accounts receivable were used to
fund the operations of the Company's business during the first nine months of
1997. In addition, in 1996 a subsidiary of the Company entered into an
accounts receivable based revolving line of credit agreement with a finance
company, which replaced one of the Company's factoring arrangements. The
term of the credit agreement was for one year but was extended and may be
renewed if the subsidiary and lender so agree. Fees and interest are based
on the monthly average outstanding balance under the line of credit. The
amount available under the line of credit is based upon eligible accounts
receivable up to a maximum aggregate amount not to exceed the lesser of 85%
of the aggregate amount of eligible receivables or $1.0 million. The
subsidiary had approximately $1.3 million in accounts receivable at September
30, 1997. All eligible receivables are pledged as collateral. Interest is
payable monthly at prime plus 2.5% (11.0% at September 30, 1997) plus an
administrative fee of 0.6% on the average daily outstanding balance during
the preceding month. The loan requires that the monthly interest and
administrative fees be at least $7,500. At September 30, 1997, borrowings
under the line of credit amounted to approximately $370,000. The loan
agreement requires such subsidiary to maintain positive cash flow (as
defined) and net income of no less than $50,000 per quarter and restricts
dividend payments and certain transactions of such subsidiary with its
affiliates.
In August 1996, the Company entered into a $300,000 line of credit
agreement for the purchase of fixed assets. Interest is payable monthly at
prime plus 2.5% (11.0% at September 30, 1997) and the fixed assets financed
are pledged as collateral. The line of credit can be converted into
long-term debt upon $300,000 being advanced, depending on the Company's
continued relationship with the lender. The long-term debt would have a five
year term and bear interest monthly at prime plus 2.5%. In addition, the
Company has pledged as collateral on this line of credit $450,000 of one of
its subsidiary company's accounts receivable. The outstanding balance of
approximately $284,000 under this line of credit is reflected in other
short-term debt in the Consolidated Balance Sheet at September 30, 1997.
On October 3, 1997, the Company completed a public offering of 825,900
shares of common stock. The net proceeds of approximately $6.3 million, after
deducting the underwriting discount, the non-accountable expense allowance and
approximately $1.1 million in deferred offering costs, will be utilized in
developing the Company's database and training operations, as well as
expanding its business by opening new profit centers in existing cities and
new geographic locations and possible acquisitions. The net proceeds were
invested in short-term investment grade securities. In addition, Mr. Moore
and various entities which he controls paid the Company approximately $300,000
in October 1997 to settle outstanding receivables. Management of the Company
anticipates that cash flow from operations, as well as the recent offering,
will provide adequate liquidity to fund its operations for at least the next
12 months.
Inflation has not had a significant effect on the Company's operating
results.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128"), which is effective for periods ending after December 15,
1997. Statement 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). Some of the changes made to
current EPS standards include: (i) eliminating the presentation of primary
EPS and replacing it with basic EPS, with the principal difference being that
common stock equivalents are not considered in computing basic EPS, (ii)
eliminating the modified treasury stock method and the three percent
materiality provision, and (iii) revising the contingent share provision and
the supplemental EPS data requirements. Statement 128 also requires dual
presentation of basic and diluted EPS on the face of the income statement, as
well as a reconciliation of the numerator and denominator used in the two
computations of EPS. Basic EPS is defined by Statement 128 as net income
from continuing operations divided by the average number of common shares
outstanding without the consideration of common stock equivalents which may
be dilutive to EPS. The Company's current methodology for computing its fully
diluted EPS will not change in future periods as a result of its adoption of
Statement 128.
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Preliminary
analysis of these new standards by the Company indicates that the standards
will not have a material impact on the Company. The standards are effective
for financial statements for fiscal years beginning after December 15, 1997.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this 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 Exchange Act of 1933, as amended, 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; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
<PAGE>
PART II OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
No changes.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) On October 3, 1997, the Company completed a public offering (the
"Offering") of 825,900 shares of its common stock (the "Common Stock") at
$10.00 per share. In consideration of serving as managing underwriter of the
Offering, Cruttenden Roth Incorporated (the "Representative") was granted by
the Company warrants (the "Warrants") to purchase up to 82,950 shares of
Common Stock at $13.50 (the "Exercise Price") per share. The Representative
may also exercise the Warrants by a "net issuance" whereby the Representative
would return to the Company those warrants representing shares, the aggregate
market value of which would equal the aggregate exercise price of the
Warrants at the Exercise Price. These Warrants are exercisable for a period
of four years, beginning after September 30, 1998. In selling the Warrants,
the Company relied upon exemption provided by Section 4(2) of the Securities
Act of 1933 in that such sale was not a public offering. The Warrants
contain certain registration rights.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In addition to the shares sold by the Company in the Offering, an
additional 314,100 shares were sold by certain selling shareholders in the
offering, including 175,000 shares by the Company's Chairman of the Board and
Chief Executive Officer, J. Michael Moore. After deducting the underwriting
discounts and non-accountable expense allowance, the net proceeds to the
Company were approximately $7.4 million. The net increase to stockholders'
equity was approximately $6.3 million after netting approximately $1.1
million in deferred offering costs.
In connection with the Offering, the Company has granted the
Representative a 45 day option (expiring November 17, 1997) to purchase up to
an additional 123,885 shares solely to cover over-allotments. The
Representative has exercised this option and the additional net proceeds to
the Company will be approximately $1.1 million. The Company has issued to the
Representative the Warrants described in Item 2 above.
The Company's application to have its Common Stock listed on the American
Stock Exchange was approved and the stock began trading on September 30,
1997, under the symbol "HIR".
Effective as of September 30, 1997, Donald A. Bailey resigned as a
director of the Company. In his place, the Company's Board of Directors (the
"Board") has appointed Deborah
<PAGE>
PART II OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES - CONTINUED
A. Farrington, formerly the Chairman of the Board of Staffing Resources, Inc.
as a new independent director, effective November 12, 1997. Ms. Farrington
will be granted options to purchase up to 30,000 shares of the Company's
Common Stock at $10.00 per share. These options will vest at the rate of
2,500 shares per quarter, for each calendar quarter served as a director,
beginning October 1, 1997. These options will be granted under the Company's
Amended and Restated 1996 Nonqualified Stock Option Plan.
On October 9, 1997, the Compensation Committee formally approved the
Company's executive bonus plan.
On November 13, 1997, the Board of Directors approved an amendment to the
Company's Amended and Restated 1996 Stock Option Plan (the "Plan") increasing
the number of shares subject to the Plan from 450,000 shares to 550,000
shares. This amendment is subject to shareholder approval. On November 13,
1997, the Compensation Committee granted options to purchase an aggregate of
145,500 shares of the Company's Common Stock at $10.00 per share to certain
executives, senior managers and other employees (none of whom are current
option holders) of the Company and its subsidiaries. These options were
granted under the Plan, as amended on November 13, 1997. A portion of the
shares subject to each option represents shares that were added to the Plan
by the Board of Directors. If shareholder approval is not obtained, that
portion of the shares subject to these options will be cancelled.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
4. Warrant Agreement (incorporated by reference from Exhibit 1.2 to the
Registrants' Amendment Number 1 to Form S-1 (Reg. No. 333-31825), filed on
September 2, 1997.)
10. Amended and Restated 1996 Nonqualified Stock Option Plan, effective as
of December 27, 1996 (incorporated by reference from Exhibit 10(z)(xii) to
the Registrant's Form 10-K for the year ended December 31, 1996).
11.1 Statement Regarding Computation of Per Share Earnings included herein.
27. Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSIFIED CORPORATE RESOURCES, INC.
Registrant
DATE: November 14, 1997 By: /s/ J. MICHAEL MOORE
---------------------------------
J. Michael Moore
CHIEF EXECUTIVE OFFICER
DATE: November 14, 1997 By: /s/ M. TED DILLARD
---------------------------------
M. Ted Dillard
PRESIDENT AND SECRETARY
DATE: November 14, 1997 By: /s/ DOUGLAS G. FURRA
---------------------------------
Douglas G. Furra
CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT 11.1
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
STATEMENT REGARDING EARNINGS PER SHARE
<TABLE>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
PRIMARY ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHARES OUTSTANDING:
Weighted average number of
Shares outstanding 1,789,062 1,758,211 1,726,812 1,758,211
Net effect of dilutive stock
Options (1) 152,281 119,512 153,417 117,532
---------- ---------- ---------- ----------
1,941,343 1,877,723 1,880,229 1,875,743
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income before extraordinary item $ 496,567 $ 336,581 $1,330,363 $1,125,907
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share
Before extraordinary item $ 0.26 $ 0.18 $ 0.71 $ 0.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income from extraordinary item $ - $ - $ 43,083 $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share
from extraordinary item $ - $ - $ 0.02 $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $ 496,567 $ 336,581 $1,373,446 $1,125,907
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common share $ 0.26 $ 0.18 $ 0.73 $ 0.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED
SHARES OUTSTANDING:
Weighted average number of
Shares outstanding 1,789,062 1,758,211 1,726,812 1,758,211
Net effect of dilutive stock
Options (1) 187,075 119,512 252,250 117,532
---------- ---------- ---------- ----------
1,976,137 1,877,723 1,979,062 1,875,743
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income before extraordinary item $ 496,567 $ 336,581 $1,330,363 $1,125,907
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share
Before extraordinary item $ 0.25 $ 0.18 $ 0.67 $ 0.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income from extraordinary item $ - $ - $ 43,083 $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share
from extraordinary item $ - $ - $ 0.02 $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $ 496,567 $ 336,581 $1,373,446 $1,125,907
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common share $ 0.25 $ 0.18 $ 0.69 $ 0.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) The effects of dilutive stock options are based upon the treasury stock
method using average market price during the period for primary amounts,
and the higher of average market price or the market price at the end of
the period for fully diluted amounts.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DIVERSIFIED CORPORATE RESOURCES, INC. AND
SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 145,774
<SECURITIES> 0
<RECEIVABLES> 5,216,971
<ALLOWANCES> 519,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,292,168
<PP&E> 1,796,257
<DEPRECIATION> 498,216
<TOTAL-ASSETS> 8,101,314
<CURRENT-LIABILITIES> 5,219,332
<BONDS> 66,660
0
0
<COMMON> 203,616
<OTHER-SE> 2,576,814
<TOTAL-LIABILITY-AND-EQUITY> 8,101,314
<SALES> 24,758,252
<TOTAL-REVENUES> 24,758,252
<CGS> 17,256,914
<TOTAL-COSTS> 22,949,356
<OTHER-EXPENSES> (33,146)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,293
<INCOME-PRETAX> 1,727,749
<INCOME-TAX> 397,386
<INCOME-CONTINUING> 1,330,363
<DISCONTINUED> 0
<EXTRAORDINARY> 43,083
<CHANGES> 0
<NET-INCOME> 1,373,446
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.69
</TABLE>
