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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K/A-2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 NUMBER)
12801 N. CENTRAL EXPRESSWAY
SUITE 350
DALLAS, TEXAS 75243
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(972) 458-8500
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on Which Registered:
COMMON STOCK, PAR VALUE NONE
$.10 PER SHARE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the 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
The aggregate market value of the voting stock held by non-affiliates of
the registrant on May 30, 1997, was $2,442,048, based upon the market value of
the Registrant's common stock of $4.00 per share.
Number of shares of common stock of the registrant outstanding on May 30,
1997 was 1,785,312.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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This Annual Report on Form 10-K/A-2 is intended to amend and restate in its
entirety Diversified Corporate Resources, Inc.'s (the "Company") Annual Report
on Form 10-K, as amended by the Company's Annual Report on Form 10-K/A (the
"Original Report"), for the year ended December 31, 1996, in order to ensure
that the information contained in the Original Report is true, accurate and
complete as of the date of the filing of the Annual Report on Form 10-K/A-2,
June 18, 1997.
PART I
ITEM 1. BUSINESS
GENERAL
Diversified Corporate Resources, Inc. (the "Company") is a Texas
corporation which was incorporated in 1977 under the name of Diversified Human
Resources Group, Inc.; the Company changed its name in 1994. The Company is an
employment services firm that provides professional and technical personnel on a
contract and permanent placement basis to high-end specialty employment markets,
such as the information technology ("IT") market. While the majority of the
Company's revenues are derived from providing IT staffing solutions, the Company
also fills other high value-added employment positions in the engineering and
technical, accounting and finance, and professional and technical sales
disciplines. The Company offers both contract and permanent placement solutions
in a broad variety of disciplines in order to position itself as a single source
provider of solutions that meet all of a client's high-end staffing needs. The
Company manages its operations as a group of interrelated business units, each
of which is incentivized to share leads and draw from each other's information
resources, as well as to achieve strong independent performance. In addition to
maintaining this competitively balanced business model, the Company focuses on
aggressive recruiting and is enhancing its technical training capabilities. The
Company principally serves its clients, including several Fortune 500 companies,
through its network of offices located in Dallas, Houston and Austin, Texas,
Atlanta, Georgia, Chicago, Illinois, Kansas City, Missouri and Raleigh, North
Carolina.
All references in this Form 10-K to the Company include its wholly-owned
subsidiaries. A list of such subsidiaries is filed as an exhibit to this Form
10-K.
INDUSTRY OVERVIEW
The employment services industry has experienced significant growth in
response to both the changing work environment in the United States and
continued growth in the uses of information technology. Fundamental changes in
the employer-employee relationship continue to occur, with employers developing
heightened criteria for permanent employees and greater demand for
project-oriented contract hiring. This trend has been compounded by the ever
increasing rate of change caused by advances in IT and the corresponding need
for access to professionals with up to date IT skills.
The IT services industry has undergone rapid change and growth. IT services
is a term that now encompasses not only computer and communications systems
hardware but also the personnel who design, manage and maintain those systems.
IT projects tend to be significantly longer and more rigorously defined and
require longer-term, more highly-skilled personnel services than traditional
non-permanent staffing placements. At the same time, these services offer the
opportunity for higher profitability than clerical and light industrial staffing
because of the high value-added nature of professional and technical personnel,
the expanding demand for such qualified personnel and the limited number of
sufficiently skilled personnel to fill these positions. The recruiting and
retention of qualified IT professionals is, therefore, a challenge common to all
companies in the IT services industry. Competitive companies have increased
advertising and recruiting efforts and are implementing strategies such as the
use of recruiting teams, the Internet, and the offering of fully benefited
salaried positions, referral bonuses and specialized training programs.
The growth of the IT services industry has been driven by (i) the
interdependence of software applications, (ii) the integration of
telecommunications and computers, (iii) business' increasing reliance on
information technology as a strategic tool, (iv) the shift to distributed
computing and the movement from mainframe to client server environments, and (v)
the proliferation of computer networks, comprised of hardware and software
manufactured by various vendors. As businesses struggle to integrate multiple
processing platforms and software applications which serve an increasing number
of end-users, systems and applications development has become increasingly
challenging. Furthermore, as
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businesses continue to focus on their core competencies but at the same time
strive to operate more efficiently with fewer people, managing and planning
staffing requirements to meet IT needs becomes more difficult. To keep up
with these changes, companies require the services of IT professionals who
can manage the integration of computers, operating systems, networks, and
voice and data systems, as well as programming, hardware and software system
design and development, LAN management, Internet Web site development and
management or project staffing. For these employers, contract personnel offer
them the ability to keep personnel costs variable, to achieve maximum
flexibility, and to avoid the negative effects of layoffs.
As a result of technological changes and the continued growth and
acceptance of the use of contract personnel, including IT personnel, management
believes that clients will demand expanded services from their staffing
providers. Management believes that not only do clients desire specialized
project staffing but that clients want the flexibility to take on non-permanent
professionals to fill staffing needs. In addition, the Company believes that a
key characteristic of outsourcing is providing convenience and efficiency to a
client and that clients desire to have their permanent, contract and specialty
staffing needs filled by the same provider.
SALES OF SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS IN 1991 AND SUBSEQUENT
REPOSSESSION
During the period from September 3, 1991 to September 19, 1991, the Company
consummated four separate transactions (the "Purchase Agreements") relating to
the sale of its operating divisions. Taken as a whole, the Purchase Agreements
involved the sale of substantially all of the Company's assets.
As consideration for the Company's agreement to sell its divisions to the
various purchasers involved, the purchasers (a) executed various interest
bearing promissory notes which were payable to the Company over periods of three
to six years; (b) assumed various liabilities and obligations of the Company in
connection with the purchased operations; and (c) agreed to pay the Company a
monthly royalty fee for six years equal to specified percentages of the gross
revenues of the respective divisions purchased by each purchaser. Collection of
the royalty fees and notes receivable, and the discharge of liabilities assumed,
was dependent upon the successful operations of the businesses sold.
Due to the failure of the purchasers to fulfill their obligations, the
Company pursuant to the Purchase Agreements, effectuated foreclosure proceedings
to repossess many of the assets previously sold by the Company.
CURRENT BUSINESS ACTIVITIES
The Company operates along functional lines of contract and permanent
placement of professional personnel, with specialty services consisting of
non-permanent placements being offered to the Company's permanent placement
clients as part of the Company's single source provider strategy. The permanent
placement of professional personnel is generally a fee for placement business,
with specified search parameters and goals. The contract placement of IT and
engineering personnel is generally a more project specific business, with the IT
and engineering personnel of the Company undertaking well defined projects for
periods ranging from four weeks to a year or more. In addition to these
placement services, the Company plans on providing clients, employees and
applicants training and certification through its TrainUSA program. The Company
believes that its focus on high-end niche markets, single source provider
strategy, recruiting and retention of applicants and its future training
programs will provide it with certain competitive advantages.
PERMANENT PLACEMENT SERVICES
The Company is currently engaged in providing permanent placement services
in Dallas, Houston and Austin, Texas, Atlanta, Georgia, Chicago, Illinois and
Raleigh, North Carolina. The Company offers these services in the following
selected core disciplines:
- Information Technologies - Services include systems design,
consulting, conversions, software development, and information
systems disaster control.
- Engineering/Technical - Services include process engineering,
industrial engineering and manufacturing, software design and
maintenance and related information technology services.
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Technical areas serviced include environmental, construction,
plastics, chemical, telecommunications, computer hardware, food,
and metals.
- Financial/Accounting - Services range from project-based
accounting work to recruitment and placement of financial
managers.
- Professional/Technical Sales - Services range from technical
sales/marketing personnel to recruitment and placement of
management personnel.
The Company usually enters into written contracts with clients specifying
its fee arrangements prior to undertaking any permanent placement services on
behalf of such clients. Fees typically range from 15% to 35% of the first year's
annual salary. Although these fees are usually paid by the employer, in certain
instances such fees are paid by the newly placed employee. The Company sometimes
offers its clients a 30 day guarantee of permanent professional placements
during which the Company agrees to replace, without additional charge to the
client, any newly placed employee who leaves such job. If the Company is unable
to replace the employee, it may refund the client's fee or a prorated portion
thereof depending upon the circumstances.
The Company recently began providing permanent clerical and administrative
personnel to its existing clients, primarily to support professional staff and
executive management of those clients. The Company believes that permanent
clerical and administrative placement services will be an important offering as
part of its plan to be a single source provider of placement services to its
clients. The Company is also involved in the recruitment and placement of
medical personnel, including therapists, nurses and doctors.
SPECIALTY SERVICES
As part of its single source provider strategy, the Company also provides
specialty services to its clients consisting of the placement of non-permanent
personnel in all of the Company's disciplines. These services have grown out of
the Company's permanent placement services as clients have increasingly desired
to fill non-permanent employment needs without incurring the associated costs of
hiring, training or providing employee benefits or to fill permanent employment
needs with applicants only after having had that applicant work for the client
prior to committing to such hire. Personnel needs that can be filled by
non-permanent or non-permanent-to-permanent employees are primarily caused by
vacation, illness, resignation, increases in work volume, the need to staff
special projects and a desire for pre-screening of permanent hires.
The Company's specialty services are typically initiated by a client's
telephone call to the local Company office or as a result of marketing efforts
on the part of the Company. The Company obtains from the client a description of
the order and uses this information to select an appropriate individual from the
office's list of available non-permanent personnel. Clients request
non-permanent personnel for periods generally ranging from one day to several
weeks. The Company generally receives notice of the assignment from 30 minutes
to three days in advance. On the day of the assignment, the Company verifies
both the prompt arrival of the employee and the employee's performance. The
Company charges clients an hourly rate for non-permanent personnel and generally
absorbs all employment costs, including hourly wages, unemployment taxes, social
security taxes and fringe benefits. The Company generally offers clients a
guarantee period during which the Company will refund the client's payment if
the client notifies the Company that it is dissatisfied with the employee's
performance, and the Company is unable to replace the employee.
The Company screens its non-permanent personnel based on interviewing,
testing and reference checking procedures. These procedures also enable the
Company to categorize its non-permanent professional personnel by preference for
job location, hours and work environment. In order to attract high quality
non-permanent professional employees, the Company grants paid vacations,
holidays and other benefits for non-permanent employees who work a specified
minimum number of hours for the Company.
CONTRACT PLACEMENT SERVICES
The Company provides IT contract placement services primarily in the
Dallas, Texas, Kansas City and St. Louis, Missouri and Denver, Colorado markets.
The Company's IT personnel provide services in the following areas:
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- project management
- systems analysis, development and design
- product implementation
- systems migration and conversions
- technical writing
- documentation support
- functional support
- company educational and project planning
- testing
- systems and network administration
- hardware, network, and software evaluation services
Contract engagements are generally project oriented and typically last from
four weeks to one year or more. The Company usually enters into written
contracts with clients after becoming an approved vendor. Services are then
provided on a time and materials or purchase order basis. The Company provides
individualized attention to each of its clients and develops and designs
tailored service programs based on its clients' unique needs. All contract
personnel assigned by the Company are Company employees. The Company provides
each of its employees with full benefits plans and ensures that there is full
compliance with all federal, state, and local tax withholding and insurance
guidelines.
The Company has provided personnel and human resource solutions to many of
the nation's largest companies including: DSC Communications, Hitachi America,
American Airlines, Compaq Computer Corp., Mobil Oil, Dr. Pepper/7-UP, Texas
Instruments, MCI, Fidelity Investments, Blockbuster, DST Systems, and TU
Electric. The Company backs all service programs with a firm commitment to
excellence.
RECRUITING
The Company recruits qualified applicants primarily through referrals from
other applicants and through newspaper advertising, its data base, job fairs and
various media advertisements. The recruiting of skilled IT, engineering, and
financial and accounting professionals is one of the main challenges for the
Company. The Company plans on meeting this challenge in the future with a
broadened multi-faceted approach, including (i) the use of aggressive direct
marketing to targeted groups, such as professional associations and industry
trade schools, (ii) the building of its SearchNet data base system to both
enhance the Company's ability to track applicants and to provide applicants with
better work opportunities, (iii) the use of the Internet to attract applicants,
(iv) the continued offering of competitive wage and benefit packages, and (v) by
improving its training programs.
The Company maintains extensive files of qualified applicants based upon
advertising, recruitment referral and reference checking procedures. In order to
attract permanent and contract assignment candidates, the Company places
emphasis upon its ability to provide placement opportunities, competitive
compensation, quality and varied assignments, and scheduling flexibility.
During periods of low unemployment, the Company experiences greater
difficulty in obtaining applicants for permanent placement. On the other hand,
the number of persons seeking non-permanent employment has increased
irrespective of economic cycles because of changes in the demographics of the
work force and general increases in cost of living which have resulted in a need
for an increased number of two-income households. In addition, applicants for
permanent placement are frequently willing to accept temporary employment during
their search for permanent positions.
TRAINING
The Company provides training to its counselors and managers, both when
they are hired and on an on-going basis throughout their careers. The primary
focus of such training is on how to effectively market the Company's placement
services and how to screen and hire applicants.
The Company has begun to focus on the training of its applicant pool as
part of its single source provider strategy. Management intends to focus more
resources on this aspect of the business in the future.
MARKETING
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The Company's marketing efforts are largely implemented at the local office
level. In marketing its placement services to clients, the Company historically
has relied primarily on telephone solicitation, referrals from other Company
offices and, to a lesser extent, on direct mail, yellow pages and newspaper
advertising. Client visits also play an important role in the Company's
marketing efforts. The Company focuses its marketing efforts on the high-end,
specialized niche markets it serves.
Upon receiving an order from a client, the Company attempts to match the
specifications required by the client with qualified applicants and to arrange
interviews between the client and applicants. In certain cases, the Company
markets a highly qualified applicant to a client even when no specific order has
been received. If the client offers a position to the applicant and the
applicant accepts, the Company receives a fee for these services.
OTHER OPERATIONS AND SERVICES
The Company formed Preferred Funding Corporation ("PFC"), a wholly-owned
subsidiary, in 1994 for the purpose of providing financing to its subsidiary
companies. To date, PFC has facilitated borrowings by the Company, recently
under an accounts receivable based revolving line of credit arrangement with an
unaffiliated third party lender at lower rates than standard factoring rates.
Management of the Company believes it can reduce the Company's overall cost of
funds (which are relatively high because of the Company's reliance on factoring)
thereby improving the Company's consolidated operating performance.
COMPETITION
The specialty staffing services industry is very competitive and
fragmented. There are relatively limited barriers to entry and new competitors
frequently enter the market. A number of the Company's competitors possess
substantially greater resources than the Company. The Company faces substantial
competition from large national firms and local specialty staffing firms. Large
national firms that offer specialty staffing services include Robert Half
International, Computer Horizons, Inc., and Alternative Resources Corporation.
Other firms that the Company competes with include RCM Technologies,
Professional Staff, Personnel Management, Joulet, ROMAC International, Inc.,
Source Services Corp., Data Processing Corp., Alternative Resources Corp. and
General Employment Enterprises. Local firms are typically operator-owned, and
each market generally has one or more significant competitors. In addition, the
Company competes with national clerical and light industrial staffing firms that
also offer specialty services. These companies include Interim Services, Inc.,
Norrell Corporation, AccuStaff Incorporated, and Olsten Corp. In addition.
national and regional accounting firms also offer certain specialty staffing
services.
The Company believes that the availability and quality of candidates, the
level of service, the effective monitoring of job performance, the scope of
geographic service and the price of service are the principal elements of
competition. The Company believes that availability of quality candidates is an
especially important facet of competition. Because many candidates pursue other
employment opportunities on a regular basis, it is important that the Company
respond to market conditions affecting candidates. Although the Company believes
it competes favorably with respect to these factors, it expects competition to
increase, and there can be no assurance that the Company will remain
competitive.
REGULATION
Most states require permanent placement firms to be licensed in order to
conduct business. Such licenses may be revoked upon material noncompliance with
state regulations. Any such revocations would have a material adverse effect on
the business of the Company. The Company believes that it is in substantial
compliance with all such regulations and possesses all licenses necessary to
engage in the placement of permanent personnel in the jurisdictions in which it
does business. Various government agencies have advocated proposals from time to
time to license or regulate the placement of non-permanent personnel. The
Company does not believe that such proposals, if enacted, would have a material
adverse effect on its business.
EMPLOYEES
In addition to the non-permanent and contract personnel from time to time
employed by the Company for placement with clients, the Company had
approximately 285 full-time employees as of December 31, 1996. Of these
employees, approximately 250 were personnel consultants and office managers paid
on a commission basis and
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approximately 35 were administrative and executive salaried employees. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company and its wholly-owned subsidiaries currently lease approximately
41,600 square feet in one building in Dallas, Texas; the terms of such leases
and its amendments range from four years to seven years. The Company also leases
approximately 17,000 square feet in Houston, Texas, 5,200 square feet in Austin,
Texas, 2,000 square feet in Kansas City, Missouri, 10,000 square feet in
Atlanta, Georgia, 3,000 square feet in Chicago, Illinois and 2,000 square feet
in Raleigh, North Carolina. Such leases generally range from three to five
years. The current cost of all of the Company's office leases is approximately
$1,185,000 per annum.
The Company believes that all of its present facilities are adequate for
its current needs and that additional space is available for future expansion
upon acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
On September 5, 1996, a lawsuit (the "Litigation") was filed in the 114th
Judicial District of the District Court of Wood County, Texas, by Ditto
Properties Company ("Ditto Properties") against USFG-DHRG L.P. No. 2, Inc. a/k/a
DCRI L.P. No. 2, Inc. ("USFG No. 2"). In addition, J. Michael Moore and the
Company were named as garnishees in the lawsuit. They were, however, non-suited
as a result of the Temporary Order (as defined below) and were therefore
dismissed from the case. The venue of the lawsuit was then transferred to the
District Court of Dallas County, Texas, 298th Judicial District. On May 30,
1997, Ditto Properties amended its petition to allege new claims (as discussed
below) against not only USFG No. 2, but U.S.F.G./DHRG L.P. No. 1 and J. Michael
Moore individually (collectively referred to as the "Defendants") as well.
In this lawsuit, Ditto Properties seeks to rescind a Stock Purchase
Agreement (the "Stock Purchase Agreement"), dated March 26, 1993, between Ditto
Properties and USFG No. 2, pursuant to which Ditto Properties had agreed to
transfer 899,200 shares (the "Shares") of common stock, par value $.10 per share
(the "Common Stock"), of the Company to USFG No. 2, alleging, INTER ALIA, that
the Defendants had fraudulently induced Ditto Properties to execute the Stock
Purchase Agreement and that the Defendants then failed to perform their
obligations under said agreement. In addition to rescission of the Stock
Purchase Agreement and the title, ownership and possession of the Shares, the
suit seeks a writ of garnishment and the imposition of a constructive trust upon
the Shares for Ditto Properties' benefit and, in the alternative, damages for
fraud, fraudulent inducement, breach of a fiduciary duty and breach of contract.
The damages sought include exemplary damages. The sole shareholder of USFG No.
2 is J. Michael Moore, Chairman of the Board and Chief Executive Officer of the
Company.
The Company was added to this lawsuit as a garnishee only because Ditto
Properties sought to garnish the Shares to the extent that the Shares were in
the hands of J. Michael Moore or the Company. In addition, Ditto Properties
seeks to obtain 250 shares (the "Pledged Shares") of USFG No. 2 that Ditto
Properties alleged were pledged to Ditto Properties pursuant to the Stock
Purchase Agreement. Moreover, Ditto Properties sought to foreclose on the
Pledged Shares and requested attorney's fees.
With respect to the Litigation, and based on the position taken by the
Controlling Shareholder in documents filed in the Litigation and after
consultation with its trial counsel, the Controlling Shareholder has informed
the Company that it believes that (i) the likelihood of rescission being granted
on DPC's rescission claims is remote, (ii) the Controlling Shareholder is
currently subject to a Temporary Restraining Order ("TRO") issued by the court
in the Litigation which enjoins the Controlling Shareholder from transferring
the Shares, (iii) under the terms of the TRO, the Controlling Shareholder
retains sole voting power over the Shares, subject to the rights of D&H (as
defined herein) set forth below, (iv) an agreement was reached by the parties
and approved by the court (the "Agreed Temporary Order"), which provides as
follows: (a) the Controlling Shareholder shall, at its option, either deposit
the certificates representing the Shares that it has in its possession (the
"Certificates") or the sum of $1,500,000 (the "Cash Deposit") with a Special
Master appointed by the court; (b) in the event that the Controlling Shareholder
elects to deposit and does deposit the Certificates, the Controlling Shareholder
may vote, sell or otherwise dispose of the Shares, subject only to the final
approval of the Special Master; (c) in the event that the Controlling
Shareholder elects to deposit and does deposit the Cash Deposit with the Special
Master, the Controlling Shareholder will be able to vote, sell or otherwise
transfer the Shares without the approval
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of the Special Master, subject to the rights of D&H set forth below; and (d)
upon the delivery of the Certificates or the Cash Deposit to the Special
Master, the TRO will automatically be dissolved. The D&H Shares (as defined
herein) are still registered in the name of D&H and are subject to purchase
price promissory notes (the "Promissory Notes") and security agreement
pursuant to which the D&H Shares are pledged as collateral. The Promissory
Notes are currently in default. D&H has filed suit against USFG No. 2 and
others seeking damages in connection with such default. D&H has now filed a
motion with the court seeking to amend its petition to include the remedy of
judicial foreclosure of the D&H Shares. At this time, however, although D&H
possesses voting power over the D&H Shares, D&H and USFG No. 2 jointly hold
investment power (subject to the TRO and the Agreed Temporary Order) over the
D&H Shares. D&H has transferred the voting power over the D&H Shares and has
appointed USFG No. 2 its proxy with respect to the D&H Shares until December 31,
1997.
The Company believes, based on discovery in the case, that the efforts of
Ditto Properties and Donald Ditto, Sr. were designed as an attempted hostile
takeover of the Company. In addition, the Company has filed a separate lawsuit
against Ditto Properties in Dallas, County, Texas, seeking over $100,000,000 in
damages and the reimbursement of expenses alleging that Ditto Properties and
Donald Ditto, Sr. interfered with Company business transactions and proposed
financings resulting in delays of certain transactions, lost opportunities, lost
profits and other significant losses.
In connection with the litigation proceedings, the Company has incurred
legal expenses on its own behalf and, in addition, has funded the legal expenses
of the Defendants incurred in connection with the suit. Management has caused
funds to be advanced on behalf of the Defendants to try to prevent the
Litigation from adversely impacting the Company's ability to pursue acquisitions
and related funding strategies. USFG No. 2 and Mr. Moore have entered into an
agreement with the Company pursuant to which Mr. Moore has agreed to reimburse
such legal fees and expenses deemed personal in nature by the Board. The Board
has determined that approximately 50% of the legal fees paid to the Company's
and Mr. Moore's counsel through October 24, 1996, the date of the Temporary
Order, should be reimbursed by USFG No. 2 to the Company and that all of such
fees and expenses after such date should be reimbursed to the Company. See Notes
to the Company's Consolidated Financial Statements.
On September 13, 1996, a lawsuit was filed in the 44th Judicial District of
the District Court of Dallas County, Texas, by Billie Jean Tapp ("Ms. Tapp")
(which has since been joined by Gary K. Steeds ("Mr. Steeds") as a third party
plaintiff) against the Company, two of the Company's subsidiaries, Management
Alliance Corporation ("MAC") and Information Systems Consulting Corp. ("ISCC")
and three of the Company's officers and directors (J. Michael Moore, M. Ted
Dillard and Donald A. Bailey). The lawsuit has since been administratively
transferred to the District Court of Dallas County, Texas, 160th Judicial
District.
In their lawsuit, Ms. Tapp and Mr. Steeds, (former employees of the
Company) each allege damages in excess of $29 million for breach of contract,
conspiracy and tortious conduct, as well as mismanagement, misappropriation of
corporate assets and self-dealing by Company officers and directors. Their
breach of contract claims include allegations that the Company breached an
agreement purporting to convey up to 20% of the issued and outstanding shares of
MAC and ISCC to each of Ms. Tapp and Mr. Steeds, and certain other alleged
agreements. The Company believes that all of Ms. Tapp's and Mr. Steeds' claims
are without merit and has filed an answer and counterclaim against Ms. Tapp and
a plea in abatement and is vigorously defending the lawsuit. In addition, the
Company has filed a third party petition against Mr. Steeds. The Company
maintains that there were no such contractual agreements with Ms. Tapp and Mr.
Steeds and that they are not owed anything by the Company or any of the other
defendants in this case. The Company further denies conspiring to injure either
Ms. Tapp or Mr. Steeds.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
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The Company's Common Stock is traded in the over-the-counter market and is
listed in the pink sheets under the symbol "HIRE." The following table sets
forth, for the periods indicated, the range of high and low sales prices for the
Common Stock, which were obtained from a market maker for the Common Stock.
Such prices are as follows:
Period High Low
- ------ ----- -----
1995
1st Quarter............................... $ .13 $ .13
2nd Quarter............................... .13 .13
3rd Quarter............................... .25 .25
4th Quarter............................... .25 .25
1996
1st Quarter............................... $ .62 $ .25
2nd Quarter............................... 1.75 .50
3rd Quarter............................... 3.75 2.00
4th Quarter............................... 4.00 3.00
The Company had approximately 180 holders of record of Common Stock as of
March 31, 1997. While the Company knows that a number of beneficial owners of
its Common Stock hold shares in street name, no estimate has been made as to the
number of shareholders owning stock of the Company in street name.
The Company has not paid any cash dividends on its Common Stock since its
inception. The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends in the foreseeable future. Any
future determination as to dividend policy will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of Directors
may deem relevant.
The Company has not sold any securities during 1996 that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
During 1996, the Company granted options to purchase 30,000 shares of Common
Stock to Mr. Donald Bailey, a member of the Board of Directors of the Company;
and subsequent to December 31, 1996, the Company granted options to purchase
30,000 shares of Common Stock to Samuel E. Hunter, a recently named member of
the Board of Directors of the Company. In addition, the Company granted stock
options to J. Michael Moore, Chairman of the Board and Chief Executive Officer
of the Company, and M. Ted Dillard, President of the Company, to purchase
155,000 and 105,000 shares of Common Stock, respectively. See Note 7 to the
Company's Consolidated Financial Statements for a discussion of the terms of
these options.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Effective July 31, 1991, the Company sold substantially all of its assets.
In 1993, the Company repossessed certain of those assets, see "Item 1 - Sale of
Substantially All of the Company's Assets and Subsequent Repossession." Because
no audited financial statements with respect to such assets are available for
1992 or 1993, and because such assets represented a substantial portion of the
assets of the Company in 1992 and 1993, no financial information for 1992 and
1993 has been provided.
YEAR ENDED DECEMBER 31,
----------------------------------
STATEMENT OF OPERATIONS DATA 1996 1995 1994
- ---------------------------- ------- ------- -------
(in Thousands, except per share data)
Net service revenues.............. $27,430 $19,358 $15,233
Gross margin...................... 7,755 5,026 4,101
Income before income taxes and
extraordinary item.............. 1,764 346 16
Income before extraordinary
item............................ 1,539 286 16
Net income........................ 1,785 461 224
Primary earnings per share:
Before extraordinary item...... .84 .16 .01
8
<PAGE>
Net income..................... .98 .26 .13
Fully diluted earnings per share:
Before extraordinary item...... .83 .16 .01
Net income..................... .96 .26 .13
AS OF DECEMBER 31,
----------------------------------
BALANCE SHEET DATA 1996 1995 1994
- ------------------ ------- ------- -------
(in Thousands)
(End of Period):
Working Capital................... $ 95 $(1,060) $(1,142)
Total assets...................... 5,204 3,007 2,563
Short-term debt and current
maturities...................... 520 669 102
Long-term debt.................... 68 90 113
Stockholders' equity (Capital
deficiency)..................... 1,188 (452) (913)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
Net service revenues increased approximately 41.7% to $27.4 million in
1996, compared to $19.3 million for 1995. Permanent placement revenues increased
approximately 37.8% to $12.6 million in 1996, compared to $9.1 million in 1995.
Specialty service revenues increased approximately 77.0% to $7.4 million in
1996, compared to $4.2 million in 1995. Contract placement revenues increased
approximately 22.9% to $7.4 million in 1996 compared to $6.0 million in 1995.
The increases in revenues in 1996 were primarily attributable to the Company's
continued focus on high margin, high-end niche markets as demonstrated by the
redeployment of Company management and marketing resources and the opening of
two new local offices (Austin, Texas and Raleigh, North Carolina) to service IT
clients in those areas, further implementation of the Company's single source
provider strategy through the continued training and development of the
Company's local office management staff which resulted in sales growth within
existing offices and continued demand for the Company's services.
Gross margin increased approximately 54.3% to $7.8 million in 1996,
compared to $5.0 million in 1995. Gross margin as a percentage of net service
revenues increased to 28.3% in 1996 from 26.0% in 1995, primarily as a result of
the Company's focus on higher margin business, particularly IT, and the Company
implementing cost reduction programs allowing fixed costs to be spread over a
larger revenue base.
Selling, general and administrative expenses increased approximately 26.8%
to $5.7 million in 1996, compared to $4.5 million in 1995; representing 20.8% of
1996 revenues. The increase was primarily the result of increased marketing and
recruiting expenses, increased expenditures on the Company's back office,
including accounting, support staff and management information systems to
support the Company's growth strategies, as well as the overall growth in the
Company's business. Included in the increase in selling, general and
administrative expenses was an increase in selling expenses of $261,000 in 1996
over the comparable period in 1995, an increase of $773,000 in general and
administrative expenses primarily for back office administration to support the
Company's growth and an increase of $172,000 primarily related to the
litigations described in Item 3-Legal Proceedings.
Other expenses increased approximately $105,000 to $288,000 in 1996,
compared to $183,000 in 1995, primarily due to increased losses from joint
venture operations and a writedown of a long-lived asset.
Provisions for income taxes increased to approximately $225,000 in 1996
from approximately $60,000 in 1995, as a result of increases in the Company's
taxable income.
9
<PAGE>
As a result of the above factors, net income increased approximately 287.5%
to $1.8 million in 1996, as compared to $461,000 in 1995.
1995 COMPARED TO 1994
Net service revenues increased approximately 27.1% to $19.3 million in
1995, compared to $15.2 million in 1994. Permanent placement revenues increased
approximately 22.1% to $9.1 million in 1995, compared to $7.4 million in 1994.
Specialty service revenues increased approximately 46.2% to $4.2 million in
1995, compared to $2.9 million in 1994. Contract placement revenues increased
approximately 23.4% to $6.0 million in 1995, compared to $4.9 million in 1994.
The increases in revenues in 1995 were primarily attributable to the
implementation of the Company's strategy to focus on high-end niche markets, the
Company's expansion of its specialty service offerings in all of its offices as
part of the Company's strategy to become a single source provider of staffing
solutions and continued demand for the Company's services.
Gross margin increased approximately 22.6% to $5.0 million in 1995,
compared to $4.1 million in 1994. Gross margin as a percentage of net service
revenues decreased to 26.0% in 1995 from 26.9% in 1994, primarily as a result of
increases in employee payroll expenses, as well as specialty service and
contract labor compensation, to meet competitive pressures.
Selling, general and administrative expenses increased approximately 8.4%
in 1995 to $4.5 million, compared to $4.1 million in 1994. The increase was
primarily the result of increased expenditures on the Company's back office,
including accounting, support staff and management information systems, to
support the Company's growth strategies, as well as the overall growth in the
Company's business. Included in the increase in selling, general and
administrative expenses was an increase in selling expenses of $114,000 in 1995
over the comparable period in 1994, and an increase of $236,000 in general and
administrative expenses primarily for back office administration to support the
Company's growth.
Other expenses increased approximately $245,000 in 1995 to $183,000,
compared to other income of $62,000 in 1994, primarily due to decreased gains on
foreclosed assets, losses from joint venture operations and increased interest
expense resulting from an increase in factored accounts receivable.
Provision for income taxes increased to approximately $60,000 in 1995 from
zero in 1994, as a result of increases in the Company's taxable income.
As a result of the above factors, net income increased approximately 105.2%
to $461,000 in 1995, compared to $224,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $95,000 at December 31, 1996, compared with a working
capital deficit of $1.1 million at December 31, 1995. The increase in working
capital of approximately $1.2 million during 1996 was primarily due to the
Company's profitable operations.
Cash flow provided by operating activities of $1.7 million resulted
primarily from the profitable operation of the Company and an increase in trade
accounts payable and accrued expenses, which supported increases in trade
accounts receivable resulting from revenue growth. The Company made capital
expenditures of approximately $530,000 in 1996, primarily to improve its
facilities and back office. In addition, the Company made approximately $160,000
in loans and advances to related parties in 1996. Net reductions in debt
associated with financing activities approximated $218,000 in 1996.
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 1996, 1995 and 1994. 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 is for one
year but may be renewed if the subsidiary and lender so agree. Fees and
interest are
10
<PAGE>
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 $740,000 in accounts receivable at December 31, 1996. All
eligible receivables are pledged as collateral. Interest is payable monthly at
prime plus 2.5% (11% at December 31, 1996) plus an administrative fee of .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 December 31, 1996, borrowings under the line of credit amounted to
approximately $108,000. The loan agreement requires the Company 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% at December 31, 1996) and the fixed assets financed are
pledged as collateral. The line of credit will convert into long-term debt upon
$300,000 being advanced, depending upon the Company's continued relationship
with the lender. The long-term debt will 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 $98,000 under
this line of credit is reflected in other short-term debt in the Consolidated
Balance Sheet at December 31, 1996.
The Company is continually evaluating various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
Management of the Company anticipates that the cash flow from operations will
provide adequate liquidity to fund its operations for the foreseeable future.
Inflation has not had a significant effect on the Company's operating
results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
PRESENT
OFFICE(S) HELD DIRECTOR
DIRECTORS AND EXECUTIVE OFFICERS AGE IN THE COMPANY SINCE
- -------------------------------- --- -------------- --------
J. Michael Moore................ 50 Chairman and Chief 1991
Executive Officer
M. Ted Dillard.................. 44 President, Secretary 1991
and Treasurer
Douglas G. Furra................ 35 Chief Financial Officer -
Donald A. Bailey................ 54 None 1991
Samuel E. Hunter................ 62 None 1997
J. MICHAEL MOORE has served as the Chairman of the Board of Directors of
the Company since May 1991. Mr. Moore has served as Chief Executive Officer of
the Company since May 1993. He has been President and Chief Executive Officer
of United States Funding Group, Inc. a Texas corporation ("USFG"), since 1986.
USFG has been involved in acquiring, from the Resolution Trust Corporation and
the Federal Deposit Insurance Corporation, real estate and notes secured
primarily by real estate, located within the United States. Mr. Moore is the
sole shareholder of USFG-DHRG L.P. No. 2, Inc., a Texas corporation. See
"Principal Shareholders and Stock Ownership of Management."
M. TED DILLARD has served on the Board of Directors of the Company since
August 1991. Mr. Dillard has served as President of the Company since October
1996. Prior to that he was the Chief Financial Officer of the Company from
January 1994 to October 1996. He has been Secretary and Treasurer of the
Company since January 1994, and was Controller of the Company from June 1990 to
January 1994. Mr. Dillard is also President of Preferred Funding Corporation, a
wholly-owned subsidiary of the Company. Mr. Dillard is a Certified Public
Accountant, Certified Management Accountant and Certified Financial Planner.
DOUGLAS G. FURRA has served as the Chief Financial Officer of the Company
since June 1997. Prior to that, he was with Weaver and Tidwell, L.L.P., the
Company's previous independent auditors, from 1985 until June 1997. Mr. Furra
was the audit manager on the Company's audits by Weaver and Tidwell, L.L.P. from
January 1992 to May 1997. Mr. Furra is a Certified Public Accountant.
DONALD A. BAILEY has served on the Board of Directors of the Company since
May 1991. Since 1989 Mr. Bailey has been the President of Bailey Capital Group,
Ltd., an investment banking concern, and Diamond Bay Securities Corp., a
registered NASD broker dealer. From January 1993 until January 1994, Mr. Bailey
was acting President of the Company. Since September 1993, Mr. Bailey has been
President of Human Resources Corporation, an employee leasing concern. Mr.
Bailey is also engaged in various other business activities.
SAMUEL E. HUNTER was elected to the Board of Directors of the Company on
February 28, 1997, by unanimous vote of the Board of Directors. Since 1993, Mr.
Hunter has served as managing director for equities trading for Ormes Capital
Markets, Inc. in New York City. From 1989 to 1993 he served as managing
director of Invemed Associates in New York City. From 1986 to 1989 he served as
a senior vice president of Drexel Burnham Lambert, Inc. Mr. Hunter is also
engaged in various other business activities.
None of the directors or executive officers is related to any other
executive officer or director of the Company by blood, marriage or adoption
(except relationships, if any, more remote than first cousin).
12
<PAGE>
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with Messrs. Moore and
Dillard which provide that: (i) compensation payable to Mr. Moore and Mr.
Dillard be not less than $150,000 per annum and $125,000 per annum,
respectively; (ii) the term of employment for each shall be for three years
commencing January 1, 1997; (iii) Mr. Moore shall be the Chief Executive Officer
of the Company and shall report to the Board of Directors of the Company; (iv)
Mr. Dillard shall be the President of the Company and shall report to Mr. Moore;
and (v) both individuals shall have the right to participate in all of the
benefit, bonus and incentive compensation plans of the Company and its
subsidiaries.
The Company contemplates entering into an employment agreement with Mr.
Furra which it is anticipated will provide that: (i) compensation payable to
Mr. Furra will be $96,000 per annum; (ii) the term of employment shall be for
one year commencing June 1, 1997, and renewing for successive one year terms
unless either the Company or Mr. Furra determine not to renew; (iii) Mr.
Furra shall be the Chief Financial Officer of the Company; (iv) Mr. Furra
shall receive options for the purchase of 30,000 shares of Common Stock to be
exercisable on the following dates, in the following amounts, and for the
following exercise prices: (A) on May 31, 1998, 10,000 shares of Common Stock
at $4.00 per share and (B) on May 31, 1999 and 2000, 10,000 shares of Common
Stock at the lesser of $8.00 per share or the price per share at which the
Company first effectuates a public sale of its Common Stock in 1997 or 1998
using an investment banking firm chosen by the Board of Directors; and (v)
Mr. Furra shall have the right to participate in all of the benefit, bonus
and incentive compensation plans of the Company and its subsidiaries at the
discretion of the compensation commitee of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities (the
"10% Stockholders"), to file reports of ownership and changes of ownership with
the Securities and Exchange Commission and NASDAQ National Market. Officers,
directors and 10% Stockholders of the Company are required by Securities and
Exchange Commission regulation to furnish the Company with copies of all Section
16(a) forms so filed.
Based solely on review of copies of such forms received, the Company
believes that, during the last fiscal year, all filing requirements under
Section 16(a) applicable to its officers, directors and 10% Stockholders were
timely. However, Messrs. Moore, Dillard and Bailey did not file their
respective Form 3's in 1991; Messrs. Moore, Dillard and Bailey did not file
their respective Form 4's for the grant of certain options in 1995; Mr. Moore
did not file his Form 4 regarding the acquisition of beneficial ownership of
certain shares of common stock in 1993; Messrs. Moore, Dillard, Bailey and
Hunter did not file their respective Form 4's for the grant of certain options
in 1996; Messrs. Moore, Dillard, Bailey and Hunter have not filed any Form 5's
and Mr. Hunter filed his Form 3 late. The Company is presently attempting to
bring these filings current.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Non-employee members of the Board of Directors currently receive $1,000 for
each Directors' meeting attended. Members of the Board of Directors who are
also employees of the Company currently receive $500 for each Directors' meeting
attended. As of the year ended December 31, 1996, $5,500 of such Directors'
fees owed to Messrs. Moore ($1,000), Bailey ($2,500) and Dillard ($2,000),
respectively, had been accrued but not paid. Nonemployee directors are also
eligible for stock option grants under the Company's Amended and Restated 1996
Nonqualified Stock Option Plan.
The compensation of employee Directors of the Company is discussed at
"Executive Compensation" below.
13
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes certain information regarding compensation
paid or accrued during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and each of the Company's three other most
highly compensated executive officers (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS/SARS(#)(2) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Moore........... 1996 $117,000 $37,585 $ 1,500 155,000 $ -
Chairman and Chief 1995 87,000 7,996 1,000 50,000 -
Executive Officer 1994 61,500 - 1,500 - -
M. Ted Dillard............. 1996 $111,314 $27,216 $ 1,500 105,000 $ -
President, Secretary 1995 78,000 2,962 1,000 50,000 -
and Treasurer 1994 61,500 - 1,500 - -
Anthony J. Bruno(3)........ 1996 $ 56,625 $15,000 $50,500 - $ -
President Management 1995 - - 49,305 - -
Alliance Corporation 1994 - - - - -
James L. Woo(4)............ 1996 $ 96,000 $13,188 $ - - $ -
Executive Vice-President 1995 81,000 - - - -
Management Alliance 1994 59,340 10,961 - - -
Corporation
</TABLE>
- -------------------
(1) Includes perquisites and other personal benefits if value is greater
than the lesser of $50,000 or 10% of reported salary and bonus. Includes
directors fees for each of Mr. Moore and Mr. Dillard of $1,500, $1,000 and
$1,500 in 1996, 1995 and 1994, respectively.
(2) All options granted in 1996 were granted pursuant to the Company's
1996 Nonqualified Stock Option Plan.
(3) Mr. Bruno became a full-time consultant of the Company in June 1995.
Mr. Bruno was named President of Management Alliance Corporation, a wholly-owned
subsidiary of the Company, in August 1996. Amounts shown under Other Annual
Compensation reflect amounts paid to Mr. Bruno in his capacity as a full-time
consultant, including a housing allowance of $3,000 in 1996.
(4) Mr. Woo became the Executive Vice-President of Management Alliance
Corporation, a wholly-owned subsidiary of the Company, in August 1996.
14
<PAGE>
STOCK OPTION GRANTS DURING 1996
The following table provides information with respect to the Named
Executive Officers concerning the grant of options to acquire Common Stock in
1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
------------------------------------------------------------ ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- ------------ ------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Moore....... 155,000 59.6% (3) 12-31-01 $53,475 $119,970
M. Ted Dillard......... 105,000 40.4% (4) 12-31-01 $36,225 $ 81,270
Anthony J. Bruno....... - - - - - -
James L. Woo........... - - - - - -
</TABLE>
- -------------------
(1) All of the options granted to Named Executive Officers in 1996 were
granted under the Company's 1996 Amended and Restated Nonqualified Stock Option
Plan.
(2) The dollar amounts under these columns represent the potential
realizable value of each grant of options assuming that the market price of the
Company's Common Stock appreciates in value from the date of grant at the 5% and
10% annual rates prescribed by the Securities and Exchange Commission ("SEC")
and therefore are not intended to forecast possible future appreciation, if any,
of the price of the Company's Common Stock. The Board of Directors determined
that the market price for the Common Stock on the date of grant was equal to
$2.50 per share, based on the limited liquidity of the Common Stock.
(3) The options are immediately exercisable for 77,500 shares of Common
Stock at an exercise price of $2.50 per share. Subject to Mr. Moore being an
officer or director of the Company on the relevant dates, the remaining options
will become exercisable on the following dates, in the following amounts, and
for the following exercise prices: (a) December 31, 1997, 46,500 shares of
Common Stock, $4.00 per share; and (b) December 31, 1998, 31,000 shares of
Common Stock, the lesser of $8.00 per share or the price per share at which the
Company first effectuates a public sale of its Common Stock in 1997 or 1998
using an investment banking firm chosen by the Board of Directors.
(4) The options are immediately exercisable for 52,500 shares of Common
Stock at an exercise price of $2.50 per share. Subject to Mr. Dillard being an
officer or director of the Company on the relevant dates, the remaining options
will become exercisable on the following dates, in the following amounts, and
for the following exercise prices: (a) December 31, 1997, 31,500 shares of
Common Stock, $4.00 per share; and (b) December 31, 1998, 21,000 shares of
Common Stock, the lesser of $8.00 per share or the price per share at which the
Company first effectuates a public sale of its Common Stock in 1997 or 1998
using an investment banking firm chosen by the Board of Directors.
15
<PAGE>
AGGREGATED STOCK OPTION/SAR EXERCISES DURING 1996 AND STOCK OPTION/SAR VALUES
AS OF DECEMBER 31, 1996
The following table sets forth information with respect to the Chief
Executive Officer and the Named Executive Officers concerning the exercise of
options during 1996 and unexercised options held as of December 31, 1996:
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
YEAR END (#)(1) AT FISCAL YEAR END ($)(1)(2)
SHARES ---------------------- ----------------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
J. Michael Moore....... - $ - 127,500/77,500 $100,000/$0
M. Ted Dillard......... - - 102,500/52,500 $100,000/$0
Anthony J. Bruno....... - - - -
James L. Woo........... - - - -
</TABLE>
- -------------------
(1) The amounts under the headings entitled "Exercisable" reflect vested
options as of December 31, 1996 and the amounts under the headings entitled
"Unexercisable" reflect options that have not vested as of December 31, 1996.
(2) Values stated are pre-tax and net of cost. The Board of Directors
determined that the market price for the Common Stock on December 31, 1996 was
equal to 2.50 per share, based on the limited liquidity of the Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, no executive officer of the Company served as a director, or
member of the Compensation Committee, of another entity whose executive officers
served as a director, or on the Compensation Committee, of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 20, 1997 by (i) each person known by
the Company to own beneficially five percent or more of the outstanding Common
Stock; (ii) each of the Company's directors; (iii) each of the executive
officers named in the Summary Compensation Table; and (iv) all directors and
executive officers of the Company as a group. The address of each person listed
below is 12801 N. Central Expressway, Suite 350, Dallas, Texas 75243, unless
otherwise indicated.
16
<PAGE>
SHARES BENEFICIALLY
OWNED(1)(2)
---------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ ------------- ---------
USFG-DHRG L.P. No. 2, Inc. .............. 899,200(3) 55.0%
12801 N. Central Expwy, Ste. 260
Dallas, TX 75243
J. Michael Moore......................... 1,026,700(4) 58.2%
Gary K. Steeds........................... 93,500(5) 5.7%
Donald R. Ditto, Sr. .................... 125,000(6) 7.6%
Donald A. Bailey......................... 84,600(7) 5.0%
D&H Partners, L.P.,
a Delaware limited partnership......... 255,700(8) 15.6%
M. Ted Dillard........................... 102,500(9) 5.9%
Samuel E. Hunter......................... 2,500(10) *
All directors and executive officers as a
group (6 persons)(1)(2)(4)(7)(9)(10).... 1,216,300 63.3%
- -------------------
* Represents less than 1% of outstanding Common Stock.
1. Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The persons and entities named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them, except as noted below and subject to applicable
community property laws.
2. Except for the percentages of certain parties that are based on
presently exercisable options which are indicated in the following footnotes to
the table, the percentages indicated are based on 1,635,312 shares of Common
Stock issued and outstanding on the Record Date. In the case of parties holding
presently exercisable options, the percentage ownership is calculated on the
assumption that the shares presently held or purchasable within the next 60 days
underlying such options are outstanding.
3. The 899,200 shares (the "Shares") were originally comprised of two
blocks of shares, including 255,700 shares (the "D&H Shares") previously owned
by D&H Partners, L.P., a Delaware limited partnership ("D&H"). Beneficial
ownership of the Shares was ultimately acquired by USFG-DHRG L.P. No. 2, Inc.
(the "Controlling Shareholder") from Ditto Properties Co. ("DPC") as a result of
a series of transactions culminating in March of 1993. DPC has since filed a
lawsuit against the Controlling Shareholder (the "Litigation") in which it is
claiming, among other things, that its sale of the Shares to the Controlling
Shareholder in March 1993 pursuant to a stock purchase agreement should be
rescinded. DPC has also filed a Schedule 13D (the "Schedule 13D") claiming that
it is the beneficial owner of the Shares based on a successful outcome of DPC's
rescission claim. See Item 3.
With respect to the Litigation, and based on the position taken by the
Controlling Shareholder in documents filed in the Litigation and after
consultation with its trial counsel, the Controlling Shareholder has informed
the Company that it believes that (i) the likelihood of rescission being granted
on DPC's rescission claims is remote, (ii) the Controlling Shareholder is
currently subject to a Temporary Restraining Order ("TRO") issued by the court
in the Litigation which enjoins the Controlling Shareholder from transferring
the Shares, (iii) under the terms of the TRO, the Controlling Shareholder
retains sole voting power over the Shares, subject to the rights of D&H set
forth below and in note 8, (iv) an agreement was reached by the parties and
approved by the court (the "Agreed Temporary Order"), which provides as follows:
(a) the Controlling Shareholder shall, at its option, either deposit the
certificates representing the Shares that
17
<PAGE>
it has in its possession (the "Certificates") or the sum of $1,500,000 (the
"Cash Deposit") with a Special Master appointed by the court; (b) in the event
that the Controlling Shareholder elects to deposit and does deposit the
Certificates, the Controlling Shareholder may vote, sell or otherwise dispose
of the Shares, subject only to the final approval of the Special Master; (c)
in the event that the Controlling Shareholder elects to deposit and does
deposit the Cash Deposit with the Special Master, the Controlling Shareholder
may vote, sell or otherwise transfer the Shares without the approval of the
Special Master, subject to the rights of D&H set forth below and in note 8;
and (d) upon the delivery of the Certificates or the Cash Deposit to the
Special Master, the TRO will automatically be dissolved. The D&H Shares are
still registered in the name of D&H and are subject to purchase price
promissory notes (the "Promissory Notes") and a security agreement (the
"Security Agreement") pursuant to which the D&H Shares are pledged as
collateral. The Promissory Notes are currently in default, and D&H has
instituted litigation with respect to the Promissory Notes and the Security
Agreement. See Note 8, below. With respect to the D&H Shares, therefore,
D&H now possesses voting power and D&H and the Controlling Shareholder
jointly hold investment power (subject to the TRO and the Agreed Temporary
Order). D&H has transferred the voting power over the D&H Shares and has
appointed the Controlling Shareholder its proxy with respect to the D&H
Shares until December 31, 1997.
4. Includes the Shares beneficially owned by the Controlling Shareholder
(as J. Michael Moore owns all of the capital stock of the Controlling
Shareholder) as described above in note 3, and 77,500 shares of Common Stock
issuable upon exercise of options within 60 days.
5. The last known address in the Company's records of Mr. Steeds is 5528
Inverrary, Dallas, Texas 75287. The Company is currently contesting Mr.
Steeds' ownership of these shares.
6. Does not include the alleged beneficial ownership of the Shares
discussed above in note 3. Although DPC has asserted in the Litigation and
in the Schedule 13D discussed above in note 3 that Donald R. Ditto, Sr. is
the beneficial owner of the Shares (as manager of DPC) by virtue of such
claim for rescission, the Controlling Shareholder has informed the Company
that it believes that the likelihood of rescission being granted on such
claim is remote. The Company is also currently contesting Mr. Ditto's
ownership of 100,000 of the shares listed in the above table. The address of
Mr. Ditto is Route 2, Box 21633, Winnsboro, Texas 75494.
7. Includes 2,500 shares of Common Stock issuable upon the exercise of
options within 60 days. Does not include the D&H Shares, which are
beneficially owned by the Controlling Shareholder and which are subject to
the Security Agreement granting D&H, of which Donald A. Bailey is a partner,
a security interest in such shares. See discussion below in note 8 for
further information as to the beneficial ownership of the D&H Shares. The
address of Mr. Bailey is 2351 W. Northwest Highway, Suite 3120, Dallas, Texas
75220.
8. As discussed above in note 3, the D&H Shares are registered in the
name of D&H. The Promissory Notes and the Security Agreement were originally
entered into between USFG/DHRG #1 Ltd. ("No. 1") and D&H when No. 1 purchased
such shares from D&H. Subsequent transactions (some of which are the subject
of the Litigation discussed above in note 3), including the signing of
"Renewal, Extension and Modification of Promissory Notes" (the "Renewal") by
the Controlling Shareholder have transferred beneficial ownership of the D&H
Shares, and the obligation to pay for them, to the Controlling Shareholder.
At this time both of the Promissory Notes and the Renewal are in default. D&H
has filed suit against the Controlling Shareholder and others seeking damages
in connection with such default. D&H has now filed a motion with the court
seeking to amend its petition to include the remedy of judicial foreclosure
of the D&H Shares. At this time, however, although D&H currently possesses
voting power with respect to the D&H Shares, D&H and the Controlling
Shareholder jointly hold investment power (subject to the TRO and the Agreed
Temporary Order discussed above in note 3). D&H has transferred the voting
power over the D&H Shares and has appointed the Controlling Shareholder its
proxy with respect to the D&H Shares until December 31, 1997.
9. Includes 52,500 shares of Common Stock issuable upon the exercise of
options within 60 days.
10. Includes 2,500 shares of Common Stock issuable upon the exercise of
options within 60 days. The address of Mr. Hunter is 55 Broadway, 10th Floor,
New York, NY 10006.
18
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996 and 1995, the Company paid various expenses on behalf of Mr.
Moore or various entities that he controls in the amount of approximately
$160,000 and $25,000, respectively. As these amounts are to be repaid by Mr.
Moore, they have been recorded as receivables. Of the $160,000 in 1996,
approximately $105,000 (which represents approximately 50% of the total legal
expense) relates to litigation defense associated with a lawsuit with Ditto
Properties, Inc., in connection with the Company being named therein as
garnishee. (See Part I, Item 3 Legal Proceedings.) With respect to the
$105,000, Mr. Moore has executed a noninterest bearing promissory note to the
Company which has a six month maturity and is expected to be repaid during 1997.
The balance of the $160,000 consists of approximately $24,000 of advances and
approximately $31,000 of interest bearing notes. These notes bear interest at
10% and require monthly principal and interest payments over 36 months. None
of these receivables are collaterized. The $105,000 note and the $24,000 of
advances are reported as receivables from related party in the Stockholders'
Equity section of the Consolidated Balance Sheet. The $31,000 of notes are
included in notes receivable - related party.
During January, 1995, the Company entered into a joint venture agreement
with CFS, Inc., for the purpose of providing personnel services to certain
businesses requiring minority suppliers and others. CFS, Inc. is a minority
operated corporation, which because of its status, supplies services to clients
requiring a certain portion of its business to be allocated to minority owned
and operated vendors. The Company provides CFS, Inc. with personnel and
contract labor on a subcontractor basis. Laurie Moore, the wife of J. Michael
Moore, the Chief Executive Officer and Chairman of the Board of the Company,
owned 49% of CFS, Inc. The majority shareholder of CFS, Inc. purchased the 49%
ownership interest of Ms. Moore, pursuant to a transaction which was made
effective retroactive to January 1, 1995. Ms. Moore received no monetary gain
on her investment in CFS, Inc. or on this transaction. The Company has a 49%
ownership interest in the joint venture and is allocated 65% of the net income
or loss resulting from the joint venture operations. The joint venture had
assets of approximately $150,000 and liabilities of approximately $361,000 at
December 31, 1996. The joint venture recorded net losses for the years ended
December 31, 1996 and 1995, respectively of approximately $139,000 and $74,000.
Accordingly, the Company recognized approximately $90,000 and $48,000,
respectively, in losses from joint venture operations in the Consolidated
Statement of Operations for the year ended December 31, 1996 and 1995.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (i) and (ii) Financial Statements and Schedules.
Reference is made to the listing on page 22 of all financial
statements and schedules filed as a part of this report.
All other schedules are omitted as they are not applicable or not
required, or because the required information is included in the financial
statements or notes thereto.
(iii) Exhibits
Reference is made to the Index to Exhibits on pages 45 through 48 for
a list of all exhibits filed as part of this report.
(b) Reports on Form 8-K.
Not Applicable.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 18, 1997 By: /s/ J. Michael Moore
--------------------------------
J. Michael Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ J. Michael Moore Chairman and Chief Executive Officer
- -----------------------------------
J. Michael Moore
/s/ M. Ted Dillard President, Secretary and Director
- -----------------------------------
M. Ted Dillard
/s/ Douglas G. Furra Chief Financial Officer and Principal
- ----------------------------------- Financial Officer
Douglas G. Furra
/s/ Donald A. Bailey Director
- -----------------------------------
Donald A. Bailey
/s/ Samuel E. Hunter Director
- -----------------------------------
Samuel E. Hunter
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No.
Report of Independent Accountants
Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . . . . . . . . 23
Weaver and Tidwell, L.L.P. . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Balance Sheets - December 31, 1996, and 1995 . . . . . . . . 25
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995, and 1994. . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Stockholders' Equity
(Capital Deficiency) - Years Ended
December 31, 1996, 1995, and 1994. . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995, and 1994. . . . . . . . . . . . . . . . . . 28
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . 29
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . 43
Schedule II - Valuation and Qualifying Accounts -
Years Ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . 44
All other schedules have been omitted because they are either not
applicable or the information required by the schedule is included in the
financial statements or the notes thereto.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
We have audited the accompanying consolidated balance sheet of Diversified
Corporate Resources, Inc. and Subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity (capital
deficiency) and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Diversified Corporate Resources, Inc. and Subsidiaries as of December 31, 1996
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1, the previously issued consolidated financial
statements of Diversified Corporate Resources, Inc. and Subsidiaries as of and
for the year ended December 31, 1996, have been restated.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
May 30, 1997
23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Diversified Corporate Resources, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Diversified
Corporate Resources, Inc. and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity (capital
deficiency), and cash flows for each of the two years in the period ended
December 31, 1995. Our audits also included the financial statement schedule
for the years ended December 31, 1995 and 1994 listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the consolidated financial position of
Diversified Corporate Resources, Inc. and subsidiaries as of December 31, 1995,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 9, 1996
24
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 612,512 $ 6,239
Trade accounts receivable, less allowances
of approximately $494,000 and $412,000, respectively... 3,387,138 2,140,623
Notes receivable-related party........................... 9,326 13,052
Prepaid expenses and other current assets ............... 34,443 96,805
----------- -----------
TOTAL CURRENT ASSETS ................................ 4,043,419 2,256,719
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, NET ...... 807,997 467,043
OTHER ASSETS:
Investment in and advances to joint venture ............. 152,905 103,838
Notes receivable-related party .......................... 21,690 -
Other ................................................... 177,879 179,153
----------- -----------
$ 5,203,890 $ 3,006,753
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses ............. $ 3,329,616 $ 2,517,889
Book overdraft .......................................... 98,158 129,235
Borrowings under factoring and loan agreements .......... 400,682 647,650
Other short-term debt ................................... 97,652 -
Current maturities of long-term debt .................... 21,834 21,603
----------- -----------
TOTAL CURRENT LIABILITIES ........................... 3,947,942 3,316,377
DEFERRED LEASE RENTS ...................................... - 52,531
LONG-TERM DEBT ............................................ 68,157 90,048
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued ............................... - -
Common stock, $.10 par value; 10,000,000 shares
authorized, 1,881,161 shares issued ................... 188,116 188,116
Additional paid-in capital .............................. 3,615,151 3,615,151
Accumulated deficit ..................................... (2,301,108) (4,086,045)
Common stock held in treasury (245,849 and 122,950
shares, respectively), at cost ........................ (185,175) (169,425)
----------- -----------
Receivables from related party .......................... (129,193) -
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) ..... 1,187,791 (452,203)
----------- -----------
$ 5,203,890 $ 3,006,753
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET SERVICE REVENUES:
Permanent placement .......................... $12,573,995 $ 9,124,545 $ 7,471,318
Specialty services ........................... 7,451,563 4,209,685 2,879,143
Contract placement ........................... 7,404,730 6,023,655 4,882,253
----------- ----------- -----------
27,430,288 19,357,885 15,232,714
COST OF SERVICES ............................... 19,675,352 14,332,011 11,131,682
----------- ----------- -----------
GROSS MARGIN ................................... 7,754,936 5,025,874 4,101,032
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ..................................... (5,702,992) (4,497,097) (4,146,979)
OTHER INCOME (EXPENSES):
Gain on foreclosure of division assets ....... - 22,815 133,000
Loss from joint venture operations ........... (90,313) (47,826) -
Interest expense, net ........................ (235,327) (237,111) (140,916)
Other, net ................................... 37,282 79,271 70,127
----------- ----------- -----------
(288,358) (182,851) 62,211
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ....................... 1,763,586 345,926 16,264
INCOME TAXES-current expense ................... (224,774) (60,054) -
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM ............... 1,538,812 285,872 16,264
EXTRAORDINARY ITEM - gain on debt
restructuring, net of income tax ............. 246,125 174,811 208,212
----------- ----------- -----------
NET INCOME ..................................... $ 1,784,937 $ 460,683 $ 224,476
=========== =========== ===========
PRIMARY EARNINGS PER SHARE:
Income before extraordinary item ............. $ .84 $ .16 $ .01
Extraordinary item ........................... .14 .10 .12
----------- ----------- -----------
Total .................................... $ .98 $ .26 $ .13
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding ........................... 1,814,016 1,758,211 1,758,211
=========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE:
Income before extraordinary item ............. $ .83 $ .16 $ .01
Extraordinary item ........................... .13 .10 .12
----------- ----------- -----------
Total .................................... $ .96 $ .26 $ .13
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding ........................... 1,860,284 1,758,211 1,758,211
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
Receivables
Additional from
Common paid-in Accumulated Treasury related
stock capital deficit stock party Total
-------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994 ....................... $188,116 $3,615,151 $(4,771,204) $(169,425) $ - $(1,137,362)
Net income ................... - - 224,476 - - 224,476
-------- ---------- ----------- --------- --------- -----------
BALANCE, December 31,
1994 ....................... $188,116 3,615,151 (4,546,728) (169,425) - (912,886)
Net income ................... - - 460,683 - - 460,683
-------- ---------- ----------- --------- --------- -----------
BALANCE, December 31,
1995 ....................... $188,116 3,615,151 (4,086,045) (169,425) - (452,203)
Net income ................... - - 1,784,937 - - 1,784,937
Treasury stock purchase ...... - - - (15,750) - (15,750)
Advances to a related party... - - - - (129,193) (129,193)
-------- ---------- ----------- --------- --------- -----------
BALANCE, December 31,
1996 ....................... $188,116 $3,615,151 $(2,301,108) $(185,175) $(129,193) $ 1,187,791
======== ========== =========== ========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................ $ 1,784,937 $ 460,683 $ 224,476
Adjustments to reconcile net
income to cash provided by
operating activities:
Extraordinary item.................. (246,125) (174,811) (208,212)
Depreciation and amortization....... 188,760 132,183 86,026
Provision for allowances............ 81,434 207,363 41,266
Equity in loss of joint venture..... 90,313 47,336 --
Fixed assets from foreclosure....... -- -- (177,884)
Write-down of long-lived assets..... 37,462 -- --
Deferred lease rents................ (52,531) (65,067) (80,273)
Changes in operating assets and
liabilities:
Accounts receivable................. (1,327,949) (473,232) (897,748)
Receivable from net assets
foreclosed......................... -- -- 236,973
Refundable federal income taxes..... -- -- 30,779
Prepaid expenses and other
current assets..................... 62,363 60,573 (150,919)
Other assets........................ 9,379 17,697 (112,945)
Trade account payable and
accrued expenses................... 1,057,852 463,735 731,677
----------- --------- ---------
Cash provided by (used in)
operating activities............. 1,685,895 676,460 (276,784)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (529,714) (312,396) (157,014)
Deposits.............................. (45,567) (35,606) (22,442)
Loans and advances to related parties. (160,209) -- --
Repayment from related parties........ 13,052 23,844 18,104
Obligations resulting from
restructuring/settlement
agreements........................... -- (20,634) (217,150)
Net advances to joint venture......... (139,380) (151,175) --
----------- --------- ---------
Cash used in investing activities... (861,818) (495,967) (378,502)
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing under short-term debt....... 97,652 -- 10,000
Issuance of notes payable............. -- -- 50,000
Repayment of short-term debt.......... -- (64,500) (110,000)
Increase (decrease) in borrowing
under factoring and loan agreements.. (246,968) 110,637 396,931
Purchase of treasury stock............ (15,750) -- --
Principal payments under long-term
debt obligations..................... (21,660) (18,277) (30,397)
Book overdraft........................ (31,078) (246,329) 265,118
----------- --------- ---------
Cash provided by (used in)
financing activities............... (217,804) (218,469) 581,652
----------- --------- ---------
Increase (decrease) in cash
and cash equivalents............... 606,273 (37,976) (73,634)
Cash and cash equivalents at
beginning of year.................... 6,239 44,215 117,849
----------- --------- ---------
Cash and cash equivalents at
end of period........................ $ 612,512 $ 6,239 $ 44,215
=========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for
interest ............................ $ 249,000 $ 264,000 $ 163,000
Cash paid during the year for
income tax........................... $ 13,601 $ -- $ --
See notes to consolidated financial statements.
28
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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. All intercompany accounts and transactions have been eliminated
in consolidation.
NATURE OF OPERATIONS AND CONCENTRATION OF CREDIT RISK
The Company is a Texas corporation and is engaged, through its
subsidiaries, in the permanent and specialty placement of personnel in various
industries, and in contract placement services. The Company operates offices in
Dallas, Houston and Austin, Texas; Atlanta, Georgia; Kansas City, Missouri;
Chicago, Illinois; and Raleigh, North Carolina. The offices are responsible for
marketing to clients, recruitment of personnel, operations, local advertising,
credit and collections. The Company's executive offices provide centralized
training, payroll, collections and certain accounting and administrative
services for its offices. The Company maintains cash on deposit in interest
bearing accounts which, at times, exceed federally insured limits. The Company
has not experienced any losses on such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
REVENUE RECOGNITION AND COST OF SERVICES
Fees for placement of permanent personnel are recognized as income at the
time the applicants accept employment. Provision is made for estimated losses in
realization (principally due to applicants not commencing employment or not
remaining in employment for the guaranteed period). Revenue from specialty
services and contract placements are recognized upon performance of services by
the Company. Cost of services consists of expenses for the operation of the
Company's offices, principally commissions, direct wages paid to non-permanent
personnel, and payroll taxes. Accounts receivable at December 31, 1996 and
1995, includes approximately $185,000 and $36,000, respectively, of unbilled
receivables that were billed in 1997 and 1996, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased
with remaining maturities of three months or less to be cash equivalents for
purposes of the consolidated statements of cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, the Company's financial instruments consist of notes
receivable from related party and long-term debt. The Company believes that the
recorded values approximate fair value.
DEPRECIATION AND AMORTIZATION
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the individual assets (which range from three to
seven years) or the related lease terms, if applicable, whichever is shorter.
Upon retirement or sale, the cost and related accumulated depreciation and
amortization are removed from the accounts and any resultant gains or losses are
included in the Consolidated Statement of Operations. Maintenance and repair
costs are charged to expense as incurred.
29
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. For the years ended December
31, 1996, 1995 and 1994, advertising expenses amounted to approximately
$341,000, $410,000 and $384,000, respectively.
EARNINGS PER SHARE
Earnings per share was determined by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year (common stock equivalents are excluded if the
effects of inclusion are antidilutive).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, particularly deferred
tax assets, and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," was issued. The statement was adopted by the Company in the
first quarter of 1996. Under provisions of the statement, impairments, measured
using fair market value, are recognized whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable and the future undiscounted cash flows attributable to the asset are
less than its carrying value. Accordingly, the Company recognized a reduction
in market value of a certain long-lived asset. This write down resulted in a
charge to 1996 earnings of approximately $37,000.
STOCK BASED COMPENSATION
In October 1995, SFAS No. 123, "Stock Based Compensation," was issued.
This statement requires the Company to choose between two different methods of
accounting for employee stock options. The statement defines a fair-value-based
method of accounting for employee stock options but allows an entity to continue
to measure compensation cost for employee stock options using the accounting
prescribed by APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Use of the APB 25 accounting method results in no compensation cost
being recognized if options are granted at an exercise price equal to or greater
than the current market value of the stock. The Company will continue to use
the intrinsic value method under APB 25 but is required by SFAS 123 to make pro
forma disclosure of net income and earnings per share as if the fair value
method had been applied in its 1996 and 1995 financial statements. See Note 7
to the consolidated financial statements for a more complete discussion of this
matter.
NEW ACCOUNTING PRONOUNCEMENT
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
30
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
RECLASSIFICATION AND RESTATEMENT
Certain amounts in the 1995 and 1994 Consolidated Financial Statements have
been reclassified to conform to the 1996 presentation. The previously filed
December 31, 1996 consolidated financial statements included in the Company's
Annual Report on Form 10-K have been restated to (1) reduce stockholders' equity
for certain receivables from a related party amounting to approximately
$129,000; (2) increase cash flows from operating activities by approximately
$533,000; increase cash flows used in investing activities by approximately
$438,000; and decrease cash flows used in financing activities by approximately
$67,000 in order to properly reflect the nature of the related transactions; (3)
increase cash and book overdrafts by approximately $98,000; and (4) increase
equipment and the total of short-term debt and trade accounts payable by
approximately $106,000. Additionally, certain reclassifications have been made
to the previously filed December 31, 1996 consolidated financial statements.
2. SALE AND REPOSSESSION OF ASSETS:
In May, 1993, the Company repossessed from one of the purchasers of Company
assets most of the assets ("Power Placement Assets") previously sold by the
Company to such purchaser. Pursuant to an agreement dated December 16, 1993
and after operating the Power Placement Assets since May, 1993, the Company sold
the capital stock of Recruiters Network Group, Inc. ("RNG"), a wholly-owned
subsidiary of the Company formed to operate these assets, to Donald A. Bailey
("Bailey"), then acting President of and a Director of the Company. As part of
the purchase agreement, Bailey provided funding to enable RNG to reimburse the
Company for RNG payroll costs; RNG issued a $40,000 promissory note payable to
the Company (collateralized by RNG stock, RNG assets and personally guaranteed
by Bailey); RNG issued a $15,000 promissory note payable to a former landlord of
the Company and guaranteed by Bailey; and one or more affiliates of Bailey
released the Company from certain obligations and liabilities totaling
approximately $57,000 payable by the Company to Bailey. These promissory notes
are reflected as notes receivable-related party in the balance sheet at December
31, 1995. Prior to the sale, the Company had considered closing RNG due to
recurring operating losses during 1993. As of December 31, 1996, all promissory
notes have been paid in full.
In December of 1992, another purchaser of Company assets caused both
Management Alliance Group Corp., formerly named Financial Recruiters, Inc.
("MAGC"), and Gary K. Steeds, Inc. ("GKS") to seek protection from their
respective creditors under the federal bankruptcy laws. In 1993, the Company
was able to obtain the necessary court approval to allow the Company to
foreclose upon the accounts receivable and certain other assets of MAGC and GKS.
The Company foreclosed upon MAGC and GKS assets on January 3, 1994. During
December, 1993, the Company formed Management Alliance Corporation ("MAC") and
Information Systems Consulting Corp. ("ISC"), two wholly owned subsidiary
corporations, to operate the employment placement service businesses which MAGC
and GKS operated prior to the foreclosure action taken by the Company. The
Company's Consolidated Statements of Operations include the operations of these
businesses from the date of repossession.
During the years ended December 31, 1995 and 1994, and due to the various
foreclosure transactions described above, the Company has recognized gains of
approximately $23,000 and $133,000, respectively, on the foreclosure of
divisional assets.
31
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the net book value, which approximates fair
value, of the MAGC and GKS assets foreclosed upon and repossessed by the Company
on January 3, 1994:
<TABLE>
Information
Management Systems
Alliance Consulting Consolidated
Corporation Corp. Corporate TOTAL
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Accounts receivable.................... $ 267,186 $ 228,510 $ 1,505 $ 497,201
Receivables from affiliates............ 143,955 183,273 -- 327,228
Equipment, furniture and leasehold
improvements, net..................... 99,839 62,386 15,659 177,884
Other assets........................... 26,282 -- 87,462 113,744
Accounts payable, office reserves,
accrued rents and expenses, notes
and capital lease obligations......... (387,780) (311,101) (128,250) (827,131)
--------- --------- --------- ---------
$ 149,482 $ 163,068 $ (23,624) $ 288,926
========= ========= ========= =========
</TABLE>
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consist of:
December 31,
---------------------
1996 1995
--------- ---------
Computer equipment...................... $ 673,699 $ 397,258
Office equipment and furniture.......... 697,947 511,272
Leasehold improvements ................. 102,785 36,187
Less accumulated depreciation and
amortization........................... (666,434) (477,674)
--------- ---------
$ 807,997 $ 467,043
========= =========
32
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Trade accounts payable and accrued expenses consist of:
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
Trade accounts payable ........... $ 517,808 $ 739,366
Accrued expenses ................. 712,421 372,850
Accrued compensation ............. 1,761,246 1,031,434
Self-insured medical reserve ..... 159,233 131,053
Accrued payroll expense .......... 136,194 183,647
Other ............................ 42,714 59,539
----------- -----------
$ 3,329,616 $ 2,517,889
=========== ===========
5. BORROWINGS UNDER FACTORING AND LOAN AGREEMENT AND OTHER SHORT-TERM DEBT:
During 1996 and 1995, wholly owned subsidiaries of the Company factored
certain trade accounts receivable pursuant to factoring agreements. Currently,
one of the Company's wholly owned subsidiaries factors its trade accounts
receivable with a factoring company that provides for advances up to $1.2
million. The subsidiary had approximately $3.1 million in accounts receivable
at December 31, 1996. Funds advanced on the receivables are reported as
borrowings. Interest charged on the outstanding balance of the borrowings is
based on the base lending rate as defined by the agreement plus 3%. The
interest rate and outstanding borrowings under the factoring agreement were
11.25% and approximately $292,000 at December 31, 1996, and 21.16% and
approximately $648,000 at December 31, 1995. In addition, the factoring company
charges a fee of .6% on the amount of accounts receivable factored.
On August 26, 1996, one of the Company's wholly owned subsidiaries 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 loan agreement is for one year but 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 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 $740,000
in accounts receivable at December 31, 1996. All eligible receivables are
pledged as collateral. Interest is payable monthly at prime plus 2.5% (11% at
December 31, 1996) plus an administrative fee of .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 December 31,
1996, borrowings under the line amounted to approximately $108,000. The loan
agreement requires the Company 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.
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% (11% at December 31, 1996) and the fixed assets financed are
pledged as collateral. The line of credit will convert into long-term debt upon
$300,000 being advanced, depending on the Company's continued relationship with
the lender. The long-term debt will 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
33
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of its subsidiary company's accounts receivable. The outstanding balance of
approximately $98,000 under this line is reflected in other short-term debt
in the Consolidated Balance Sheet at December 31, 1996.
6. LONG-TERM DEBT:
DECEMBER 31,
--------------------
1996 1995
-------- --------
Long-term debt consists of:
Noninterest bearing note due to the Federal
Deposit Insurance Corporation, quarterly
installments of $5,000, due October 1997 ........... $ 20,000 $ 40,000
Adjustable rate (approximately 10%) at December 31,
1996, mortgage note monthly installments of $729
plus interest, due 2013 ............................ 69,991 71,651
-------- --------
89,991 111,651
Less current maturities of long-term debt ............ (21,834) (21,603)
-------- --------
Total long-term debt ................................. $ 68,157 $ 90,048
======== ========
During the year ended December 31, 1994, the Company settled a 9%
adjustable rate note payable to the FDIC and a 10% promissory note also due to
the FDIC in November, 1993, for $5,000 down and a non-interest bearing note for
$60,000 payable in $5,000 quarterly installments.
Approximately $95,000 in obligations assumed by third party purchasers
during 1991 were recorded by the Company as part of the foreclosure upon and
repossession of assets previously owned by the Company. The obligations included
a $70,000 mortgage note payable that is collateralized by a first lien on
certain real estate included in other noncurrent assets.
The aggregate maturities of long-term debt as of December 31, 1996, are as
follows:
1997 ..................................... $21,834
1998 ..................................... 2,026
1999 ..................................... 2,238
2000 ..................................... 2,473
2001 ..................................... 2,732
2002 and thereafter ...................... 58,688
-------
$89,991
=======
7. STOCKHOLDERS' EQUITY:
Pursuant to the terms of two purchase agreements, the Company was to
receive 27,499 and 278,352 shares, respectively, of the Company's common stock
from two former officers and directors of the Company in connection with these
agreements. A former officer and director had pledged a portion of these shares
to various lenders to collateralize certain debts. As a result of a breach of
certain pledge agreements operating in favor of the Federal Deposit Insurance
Corporation ("FDIC"), the FDIC foreclosed on a total of 100,000 shares. At
December 31, 1996, 112,349 shares of common stock of the former officers and
directors has been conveyed to the Company.
34
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October, 1995, options to purchase 50,000 shares of common stock
(150,000 shares in the aggregate) were granted to each of the following: J.
Michael Moore, the Chairman of the Board and Chief Executive Officer of the
Company, M. Ted Dillard, President, Secretary, Treasurer, and director of the
Company, and Donald A. Bailey, a director of the Company. The terms and
conditions of each of these options are as follows:(a) each of the optionees (i)
were immediately vested as to 15,000 shares (45,000 shares in the aggregate);
(ii) became vested as to an additional 3,000 shares (9,000 shares in the
aggregate) each quarter commencing November, 1995 (the balance became fully
vested at December 31, 1996 as described below); (b) vesting was contingent
upon the optionee's continued involvement as an officer or director of the
Company; (c) at such time as an optionee becomes vested with respect to shares
of Common Stock, such optionee may thereafter purchase the number of shares to
which the optionee is vested, subject to certain conditions; (d) the option
price for options exercised is $.50 per share; (e) subject to earlier
termination as herein provided, vested options (i) may be exercised at any time
or times within five years from the date of vesting, and (ii) must be exercised
prior to the expiration of five years from the date of vesting; and (f) if an
optionee ceases to be an officer or director of the Company, the options then
vested as to such optionee must be exercised within the earlier of (i) six
calendar months from the date on which optionee's continuous involvement with
the Company is terminated for any reason other than as provided in subsections
(ii) and (iii) below; (ii) twelve calendar months from the date on which
optionee's continuous involvement with the Company is terminated due to death,
total disability or retirement at age 65; (iii) three months from the date of
termination of employment of optionee by the Company for cause; or (iv) October
31, 2000 (five years from the date of authorization of these options). Pursuant
to a Board of Directors meeting on December 27, 1996, the Board of Directors
unanimously approved the immediate vesting of all of the aforementioned options
effective December 31, 1996. Subsequent to December 31, 1996, J. Michael Moore,
M. Ted Dillard and Donald A. Bailey exercised their stock options.
Under provisions of the Company's 1996 Amended and Restated Nonqualified
Stock Option Plan (the "Plan"), options to purchase an aggregate of 450,000
shares of the Company's common stock may be granted to key personnel of the
Company. Options may be granted for a term of up to ten years to purchase
common stock at a price or prices established by the Compensation Committee of
the Board of Directors of the Company or its appointee.
In December 1996, options to purchase 30,000 shares of common stock were
granted under the Plan to Mr. Bailey. Subsequent to December 31, 1996, Samuel
E. Hunter, an individual recently named as a member of the Board of Directors of
the Company, was also granted options under the Plan to purchase 30,000 shares
of Common Stock. The terms and conditions of these options are as follows: (a)
each of the optionees will become vested as to their option shares on a prorata
quarterly basis commencing January 1, 1997 and ending on December 31, 1999; (b)
prior to such options becoming vested, vesting is contingent upon the optionee's
continued involvement as a director of the Company; (c) at such time as an
optionee becomes vested with respect to shares of Common Stock, such optionee
may thereafter purchase the number of shares to which the optionee is vested,
subject to certain conditions; (d) the option price for options exercised is
$3.00, $4.00 and $5.00 per share for options vesting in 1997, 1998 and 1999,
respectively; (e) subject to earlier termination as herein provided, vested
options (i) may be exercised at any time prior to termination, and (ii) must be
exercised prior to December 31, 2001; and (f) if an optionee ceases to be a
director of the Company, the options then vested as to such optionee must be
exercised within the earlier of (i) six calendar months from the date on which
optionee's continuous involvement with the Company is terminated for any reason
other than death or disability, (ii) twelve calendar months from the date on
which optionee's continuous involvement with the Company is terminated due to
death or disability, or (iii) December 31, 2001.
In December 1996, the Board of Directors of the Company approved the
issuance of stock options to Messrs. Moore and Dillard pursuant to the Plan
under which Messrs. Moore and Dillard have the right to purchase, respectively,
155,000 and 105,000 shares of common stock at varying prices subject to the
following conditions: (a) effective as of December 31, 1996, Mr. Moore became
vested as to 77,500 shares and Mr. Dillard became vested as to 52,500 shares;
(b) Mr. Moore will become vested as to an additional 46,500 shares and 31,000
shares, respectively, on December 31,
35
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 and 1998; (c) Mr. Dillard will become vested as to an additional 31,500
shares and 21,000 shares, respectively, on December 31, 1997 and 1998; (d)
prior to the options becoming vested, vesting is contingent upon the
optionee's continued involvement as an officer or director of the Company;
(e) the per share exercise price for options becoming vested in 1996, 1997
and 1998 are, respectively, $2.50, $4.00 and the lesser of $8.00 or the price
per share if the Company effectuates a public offering of its Common Stock
subsequent to the date hereof and prior to December 31, 1998; (f) subject to
earlier termination as herein provided, vested options (i) may be exercised
at any time or times prior to termination, and (ii) must be exercised prior
to December 31, 2001; and (g) if an optionee ceases to be an officer and
director of the Company, the options then vested as to such optionee must be
exercised within the earlier of (i) six calendar months from the date on
which optionee's continuous involvement with the Company is terminated for
any reason other than due to death or disability, (ii) twelve calendar months
from the date on which optionee's continuous involvement with the Company is
terminated due to death or disability, or (iii) December 31, 2001.
The following is a summary of the Company's stock options as of December
31, 1995.
<TABLE>
Weighted Number of Range
Average Shares of of
Exercise Price Underlying Exercise
Options Prices
-------------- ---------- --------
<S> <C> <C> <C>
Outstanding at beginning of year ........... $ - $ - $ -
Granted at a premium ....................... .50 150,000 .50
==========
Outstanding at end of year ................. .50 150,000 .50
==========
Exercisable at December 31, 1995 ........... .50 45,000 .50
==========
</TABLE>
The following is a summary of the Company's stock options as of December
31, 1996.
<TABLE>
Weighted Number of Range
Average Shares of of
Exercise Price Underlying Exercise
Options Prices
-------------- ---------- --------------
<S> <C> <C> <C>
Outstanding at beginning of year ........... $ .50 150,000 $ .50 to $ .50
Granted at a premium ....................... 4.04 290,000 2.50 to 8.00
-------
Outstanding at end of year ................. 2.84 440,000 .50 to 8.00
=======
Exercisable at December 31, 1996 ........... 1.43 280,000 .50 to 2.50
=======
</TABLE>
No options were forfeited, expired or exercised in 1995 or 1996.
36
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123") establishes a fair value basis of accounting
for stock based compensation plans. Had the compensation cost for the Company's
employee stock based compensation plans been determined consistent with SFAS
123, the Company's net income would approximate the amounts below:
<TABLE>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
SFAS 123 compensation cost ............. $ - $ 254,863 $ - $ 11,730
APB 25 compensation cost ............... $ - $ - $ - $ -
Net income ............................. $1,784,937 $1,530,074 $ 460,683 $ 448,953
Primary earnings per share:
Income before extraordinary item ..... $ .84 $ .70 $ .16 $ .16
Extraordinary item ................... .14 .14 .10 .10
---------- ---------- ---------- ----------
Primary earnings per share ............. $ .98 $ .84 $ .26 $ .26
========== ========== ========== ==========
Fully diluted earnings per share:
Income before extraordinary item ..... $ .83 $ .69 $ .16 $ .16
Extraordinary item ................... .13 .13 .10 .10
---------- ---------- ---------- ----------
Fully diluted earnings per share ....... $ .96 $ .82 $ .26 $ .26
========== ========== ========== ==========
</TABLE>
The effects of applying SFAS 123 as disclosed above are not indicative of
future amounts. SFAS 123 does not apply to awards prior to 1995, and the
Company anticipates making awards in the future under its stock based employee
compensation plan.
The fair value of each stock option granted and the resultant compensation
cost is estimated on the date of grant using the minimum value method of option
pricing with the following weighted-average assumptions for grants in 1996;
dividend yield of 0.0%; expected volatility of 184.11%; risk-free interest rates
are different for each grant and range from 5.71% to 6.09%; and the expected
lives of 2.5 to 4 years based on the vesting schedules of the options for the
1996 options.
The weighted-average grant date fair value of options granted during the
year ended December 31, 1996 was $2.82 and $.20 during the year ended December
31, 1995.
37
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 31, 1996.
<TABLE>
Options Outstanding Options exercisable
----------------------------------- --------------------------
Weighted
Ave. Weighted
Remaining Ave.
Range of Exercise Number Contr. Life Exercise Number Weighted Ave.
Prices Outstanding in Years Price Exercisable Exercise Price
- ----------------- ----------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .50 - $2.50 280,000 4.37 $1.43 280,000 $1.43
$2.51 - $5.00 108,000 5.00 4.00 -- --
$5.01 - $8.00 52,000 5.00 8.00 -- --
------- -------
$ .50 - $8.00 440,000 4.60 $2.84 280,000 $1.43
======= =======
</TABLE>
In 1996, the Company entered into an agreement with a consultant (who is
not otherwise affiliated with the Company) which provides for payment to the
consultant of (a) a placement fee of 0.1% of the amount of all long-term debt
(other than collateralized, bank indebtedness) or equity capital raised by the
Company during the period of the agreement and (b) an acquisition fee of 0.5% of
the purchase price of any business acquired by the Company during the period of
the agreement, provided that the consultant supplies the lead or provides due
diligence relating to such acquisition. This agreement includes provisions
related to the grant of stock options to the consultant, but no options have
been granted because the Board of Directors of the Company did not approve the
grant of such options. This agreement may be canceled by either party upon 30
days notice.
8. FEDERAL 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:
December 31,
--------------------------------
1996 1995 1994
--------- --------- --------
Tax provision at statutory rate........ $ 684,619 $ 156,632 $ 76,322
Utilization of net operating loss
carryforward ......................... (589,200) (156,632) (76,322)
Change in valuation allowance
exclusive of utilization of
net operating loss carryforward ...... (19,400) -- --
Other.................................. (7,834) -- --
Alternative minimum tax................ 28,105 -- --
State income taxes of $200,544, net
of federal income tax benefit
of $68,185............................ 132,359 60,054 --
--------- --------- - ------
Total................................ $ 228,649 $ 60,054 $ --
========= ========= ========
38
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allocation of income taxes is:
December 31,
----------------------------
1996 1995 1994
-------- ------- -------
Operations............................... $224,774 $60,054 $ --
Extraordinary item....................... 3,875 -- --
-------- ------- -------
Total.................................. $228,649 $60,054 $ --
======== ======= =======
The components of the Company's deferred tax asset are as follows:
December 31,
-------------------------
1996 1995
----------- -----------
Net operating loss carryforward............ $ 849,300 $ 1,438,500
Allowance for doubtful accounts............ 167,900 142,000
Self insured medical reserve............... 54,100 44,600
Other...................................... (15,600) 39,200
----------- -----------
Gross deferred tax asset................... 1,055,700 1,664,300
Valuation allowance........................ $(1,055,700) $(1,664,300)
----------- -----------
$ -- $ --
=========== ===========
The Company's valuation allowance decreased approximately $609,000,
$112,000 and $75,000 during the years ended December 31, 1996, 1995 and 1994,
respectively. The Company has a net operating loss carryforward of
approximately $2,498,000 as of December 31, 1996, which, if unused, expires in
2006 through 2008. However, due to a more than 50% change in ownership
beginning with an April 1991 transaction, the Company's net operating loss
carryforward is subject to certain limitations pursuant to provisions of the
Internal Revenue Code. The amount of the Company's net operating loss available
for use as of December 31, 1996, was approximately $336,000. An additional
$467,000 will become available annually through 2001.
9. DEBT RESTRUCTURING:
During the years ended December 31, 1996, 1995 and 1994, the Company
settled certain delinquent trade accounts payable on a discounted basis as
follows:
December 31,
------------------------------
1996 1995 1994
-------- -------- --------
Gain on debt restructuring,
net of income taxes..................... $246,125 $174,811 $208,212
======== ======== ========
10. RELATED PARTY TRANSACTIONS:
The Company leased approximately 2,000 square feet for approximately $2,000
per month from United States Funding Group, Inc. ("USFG") through January 1996,
which was used as its principal offices. USFG is wholly owned
39
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by J. Michael Moore, Chairman of the Board and Chief Executive Officer of the
Company. Rent expense was approximately $1,300 and $19,900 in 1996 and 1995,
respectively, on this lease.
During 1991, USFG-DHRG #1, Ltd. ("USFG Ltd."), then the controlling
stockholder of the Company, loaned the Company $175,000 on a one-year, 10% note,
due November 3, 1992, to be used in the operations of the business. USFG was
the managing partner in USFG Ltd. The Company made principal payments of
$75,500 during 1992, and borrowed from USFG Ltd. an additional $50,000 during
the year. During 1993, the Company borrowed from USFG Ltd. an additional
$100,000, and repaid $135,000. During 1994 and 1995, the Company repaid
$100,000 and $14,500, respectively, of such loan. As of December 31, 1995,
these loans were repaid in full.
See Note 2 regarding the sale of RNG capital stock and Note 7 regarding
purchase agreements with two former officers and directors of the Company.
In January of 1996, the Company loaned $25,000 to United States Funding
Group Oil and Gas, Inc., an entity wholly owned by Mr. Moore, Chairman of the
Board and Chief Executive Officer of the Company. Such loan was evidenced by a
promissory note bearing interest at the rate of 1% per month on the unpaid
balance due in monthly installments. In addition, a 10% loan origination and
administration fee was charged. As of March 31, 1997, this note has been paid in
full.
During 1995, the Company advanced a total of $37,000 to former officers of
its wholly owned subsidiary companies. During 1996, an additional advance of
$4,000 was made. These advances are reflected in prepaid expenses and other
current assets in the balance sheet at December 31, 1995. The balance of
$41,000 was written off when the former officer left the Company during 1996.
During January, 1995, the Company entered into a joint venture agreement
with CFS, Inc. for the purpose of providing personnel services to certain
businesses requiring minority suppliers and to others. Laurie Moore, the wife
of J. Michael Moore, the Chief Executive Officer and Chairman of the Board of
the Company, was a minority shareholder of CFS, Inc. until her interest was
purchased by the majority shareholder of CFS, Inc. in 1996, which was made
effective retroactive to January 1, 1995. (See Note 13 Joint Venture
Operations, for more information.)
The Company had approximately $41,000 payable to related parties, including
certain former directors and officers, included in trade accounts payable and
accrued expenses at December 31, 1996.
During 1996 and 1995, the Company paid various expenses on behalf of Mr.
Moore or various entities that he controls in the amount of approximately
$160,000 and $25,000, respectively. As these amounts are to be repaid by Mr.
Moore, they have been recorded as receivables. Of the $160,000 in 1996,
approximately $105,000 (which represents approximately 50% of the total legal
expense) relates to litigation defense associated with a lawsuit with Ditto
Properties, Inc., in connection with the Company being named therein as
garnishee. (See Part I, Item 3 Legal Proceedings.) With respect to the
$105,000, Mr. Moore has executed a noninterest bearing promissory note to the
Company which has a six month maturity and is expected to be repaid during 1997.
The balance of the $160,000 consists of approximately $24,000 of advances and
approximately $31,000 of interest bearing notes. These notes bear interest at
10% and require monthly principal and interest payments over 36 months. None
of these receivables are collaterized. The $105,000 note and the $24,000 of
advances are reported as receivables from related party in the Stockholders'
Equity section of the Consolidated Balance Sheet. The $31,000 of notes are
included in notes receivable - related party.
Interest income from related parties amounted to approximately $5,500 in
1996, approximately $1,300 in 1995 and approximately $2,600 in 1994. Interest
expense incurred on related parties borrowings amounted to approximately $10,700
in 1995 and approximately $7,200 in 1994.
40
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS:
During the year ended December 31, 1991, the Company adopted the
Diversified Human Resources Group, Inc. Employees' Stock Ownership Plan
("ESOP"). Due to the financial difficulties incurred by the Company during the
year ended December 31, 1991, an initial contribution was not made to the ESOP,
and to date, no contributions have been made. Management is currently
evaluating the possibility of initiating the ESOP or some other form of stock
ownership plan for certain of its employees.
12. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company rents office space under various operating leases. Certain of
the leases have escalating rent payments. The Company is liable for the future
minimum lease payments for the periods subsequent to December 31, 1996, as
follows:
1997................................... $1,185,027
1998................................... 1,170,877
1999................................... 1,017,465
2000................................... 872,759
2001................................... 825,537
2002 and thereafter.................... 907,660
----------
Future minimum lease payments.......... $5,979,325
==========
The aggregate amount of past due rental payments owed by the Company to one
of its landlords was approximately $31,000 as of December 31, 1996, which is
included in accrued expenses. The Company has previously negotiated with this
landlord and plans to settle this obligation during renegotiation of the lease
when it expires. Such amount is reflected in the 1997 future minimum lease
payments set forth in the table above. Rent expense was approximately
$1,027,000, $894,000 and $897,000 for the years ended December 31, 1996, 1995,
and 1994, respectively.
EMPLOYMENT AGREEMENTS
As of December 31, 1996, the Company had entered into employment contracts
with certain key employees.
The Board of Directors of the Company approved employment agreements with
both J. Michael Moore, Chairman of the Board and Chief Executive Officer of the
Company, and M. Ted Dillard, President, Secretary and Treasurer of the Company,
the terms of which are as follows: (a) annual compensation of $150,000 for Mr.
Moore and $125,000 for Mr. Dillard; (b) a term of three years with the
possibility of renewal unless terminated; (c) the right to participate in any
and all retirement plans and fringe benefit programs which the Company now has
in effect or may hereafter adopt.
Subsequent to December 31, 1996, the Company formed EMSR, Inc. (formerly a
branch of the Company) as a wholly-owned subsidiary of the Company. Management
has entered into a preliminary agreement with Scott Higby, the President of
EMSR, Inc., for an equity arrangement pursuant to which Mr. Higby will be
granted stock options that will vest over a four year period. The option calls
for a nominal exercise price whereby Mr. Higby may exercise options granting him
up to 25% of the stock of EMSR, Inc. on a prorata basis over a four year period.
41
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES
The Company is 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 expense, alleging that plaintiffs interfered with
Company business transactions and proposed 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 in excess of $29 million each 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.
13. JOINT VENTURE OPERATIONS:
During January, 1995, the Company entered into a joint venture agreement
with CFS, Inc., for the purpose of primarily providing personnel services to
certain businesses requiring minority suppliers. CFS, Inc. is a minority
operated corporation, which because of its status, supplies services to clients
requiring a certain portion of its business to be allocated to minority owned
and operated vendors. The Company provides CFS, Inc. with substantially all of
its personnel and contract labor on a subcontractor basis at cost. Laurie Moore,
the wife of J. Michael Moore, the Chief Executive Officer and Chairman of the
Board of the Company, owned 49% of CFS, Inc. On August 15,1996, the majority
shareholder of CFS, Inc. purchased the 49% ownership interest of Ms. Moore,
pursuant to a transaction which was made effective retroactive to January 1,
1995. Ms. Moore received no monetary gain on her investment in CFS, Inc. or on
this transaction. The Company has a 49% ownership interest in the joint venture
and is allocated 65% of the net income or loss resulting from the joint venture
operations.
The following is summarized audited financial information on the joint
venture:
December 31,
--------------------
1996 1995
--------- --------
Current assets............................ $ 112,539 $ 77,596
Non-current assets........................ 36,965 1,000
Current liabilities....................... 36,822 --
Non-current liabilities................... 324,203 151,174
Net sales................................. 288,087 317,367
Gross margin (loss)....................... (23,617) 10,858
Net loss.................................. (138,943) (73,577)
42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Diversified Corporate Resources, Inc.:
Our report on the consolidated financial statements of Diversified
Corporate Resources, Inc. and Subsidiaries as of and for the year ended December
31, 1996 is included on page 23 of this Form 10-K/A-2. In connection with our
audit of such financial statements, we have also audited the related financial
statement schedule for the year ended December 31, 1996 listed in the index on
page 22 of this Form 10-K/A-2.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
May 30, 1997
43
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
Bad Debt
Provisions
Balance at Charged to Provisions Balance at
Beginning of Costs & Charged to End of
Description Period Expenses Revenues Deductions Period
- ----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1994:
Trade accounts receivable allowances..... $ 164,000 $116,000 $ 803,000(1) $ 878,000 $ 205,000
========== ======== ========== ========== ==========
Valuation allowance for deferred
tax assets.............................. $1,851,494 $ - $ - $ 75,354 $1,776,140
========== ======== ========== ========== ==========
For the year Ended December 31, 1995:
Trade accounts receivable allowances..... $ 205,000 $116,000 $1,028,000(1) $ 937,000 $ 412,000
========== ======== ========== ========== ==========
Valuation allowance for deferred
tax assets.............................. $1,776,140 $ - $ - $ 111,840 $1,664,300
========== ======== ========== ========== ==========
For the Year Ended December 31, 1996:
Trade accounts receivable allowances..... $ 412,000 $165,000 $1,256,000(1) $1,339,000 $ 494,000
========== ======== ========== ========== ==========
Valuation allowance for deferred
tax assets.............................. $1,664,300 $ - $ - $ 608,600 $1,055,700
========== ======== ========== ========== ==========
</TABLE>
FOOTNOTES
- ---------
(1) Estimated reduction in revenues for applicants who accepted employment, but
did not start work or did not remain in employment for the guaranteed
period.
44
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
2(a) Agreement and Plan of Merger. (1)
3(a) Articles of Incorporation of the Registrant as amended. (1)
3(b) Amended and Restated By-laws of the Registrant. (1)
10(a) Agreement dated December 14, 1992 between the Registrant and
Veritas, Inc., a Texas corporation. (2)
10(b) Agreement dated March 11, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and First In Temporaries, Inc., a
Florida corporation. (2)
10(c) Agreement dated March 12, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and Nesco Service Company, a
Delaware general partnership. (2)
10(d) Agreement dated as of April 5, 1993 between TNI, Inc., a wholly
owned subsidiary of the Registrant, and Shear Healthcare
Resources, Inc., a Florida corporation. (2)
10(e) Agreement dated April 1, 1993 between TNI, Inc., a wholly owned
subsidiary of the Registrant, and Management Alliance Group
Corp., a Texas corporation. (2)
10(f) Foreclosure Agreement dated May 3, 1993 between the Company,
Power Placement Corporation, a Texas corporation, P&E Group,
Inc., a Texas corporation, and Cary Tobolka, an individual. (2)
10(g) Employment Contract Agreement executed April 21, 1994 between
Management Alliance Corporation and Information Systems
Consulting Corp., wholly-owned Texas subsidiaries of the
Registrant, and Gary K. Steeds, Dallas, Texas, an employee.
(6)(11)
10(h) Employment Contract Agreement effective December 1, 1993 between
Management Alliance Corporation and Information Systems
Consulting Corp, wholly-owned Texas subsidiaries of the
Registrant, and Billie J. Tapp, Dallas, Texas, an employee.
(6)(11)
10(i) Interim Employment Contract Agreement effective December 1, 1993
between Management Alliance Corporation and Information Systems
Consulting Corp., wholly-owned Texas subsidiaries of the
Registrant, and Gary K. Steeds, Dallas, Texas, an employee.
(6)(11)
10(j) Item not used.
10(k) Settlement Agreement by and between the Registrant and
Bailey/Appel/DH Group. (3)
10(l) Option Agreement by and between the Registrant and
Bailey/Appel/DH Group. (3)
10(m) Joint and Mutual Release by and between the Registrant and
Bailey/Appel/DH Group. (3)
10(n) The Diversified Human Resources Group, Inc. Employees' Stock
Ownership Plan. (3)
45
<PAGE>
10(o) Settlement and Sale of Stock by and between Registrant and D. Joy
Perkins. (3)
o Stock Option, Consulting And Release Agreement by and between
Registrant and D. Joy Perkins, dated December 4, 1990.
o Resignation Agreement by and between Registrant and Perkins,
dated December 4, 1990.
o Option Agreement by and between Registrant and Perkins, dated
December 4, 1990.
o Stock Pledge Agreement by Registrant in favor of Perkins,
dated December 4, 1990.
o $35,000 Promissory Note made payable to Registrant from
Perkins, dated December 4, 1990, paid in full by transfer of
Registrant's Common Stock pursuant to Option Agreement.
o $104,425 Promissory Note made payable to Perkins from
Registrant, dated January 3, 1991.
o Stock Pledge Agreement by and between Registrant and Perkins,
dated January 3, 1991.
o Consulting Agreement by and between Registrant and Perkins,
dated December 4, 1990.
o Joint And Mutual Release by and between Registrant and
Perkins, dated December 4, 1990.
o Nonsolicitation and Nondisclosure Agreement by and between
Registrant and Perkins, dated December 4, 1990. (1)
10(p) Amendment No. 1 to the Diversified Human Resources Group, Inc.
nonqualified Stock Option Agreement. (3)(11)
10(q) Settlement Agreement and Joint and Mutual Release entered into by
the Registrant, the Directors of the Registrant, William M.
Brothers, an individual, and Southwest Securities
Incorporated, a Texas Corporation, dated May 1, 1991. (4)
10(r) Option Agreement and Amendment to Option Agreement by and between
the Registrant and three former directors, dated April 30, 1991
and June 5, 1991, respectively. (4)(11)
10(s) Agreement for transfer of medical insurance plan sponsorship and
plan assets dated February 1, 1992. (4)
10(t) Agreement for transfer of 401(k) plan sponsorship and plan assets
dated April 27, 1992. (4)
10(u) First Asset Purchase Agreement dated August 29, 1991, entered
into by the Registrant and Veritas, Inc., a Texas corporation.
(4)
10(v) Second Asset Purchase Agreement dated September 3, 1991, entered
into by the Registrant and P&E Group, Inc., a Texas Corporation.
(4)
10(w) Third Asset Purchase Agreement dated August 28, 1991, entered
into by the Registrant and Financial Recruiters, Inc., a Texas
corporation. (4)
10(x) Fourth Asset Purchase Agreement dated September 19, 1991, entered
into by the Registrant and Gary K. Steeds, Inc., a Texas
corporation. (4)
46
<PAGE>
10(y) Tri-Party Agreement dated January 4, 1994, entered into by the
Registrant and Management Alliance Corporation and Information
Systems Consulting Corp., Texas corporations, that are
wholly-owned subsidiaries of the Registrant. (5)
10(z) Agreement dated December 29, 1993, entered into by the
Registrant, Recruiters Network Group, Inc., a Texas corporation,
and Donald A. Bailey, acting President and director of the
Registrant (5).
10(z)(i) Joint Venture Agreement dated April 20, 1995, entered into by
Management Alliance Corporation, Texas corporation that is a
wholly-owned subsidiary of the Registrant, and CFS, Inc., a
minority owned business. (7)
10(z)(ii) Contract Agreement for Franchise Packaging and Market Plan dated
April 21, 1995, entered into by Management Alliance Corporation,
a Texas corporation that is a wholly-owned subsidiary of the
Registrant, and the Research Market Center, owned by an
individual. (7)
10(z)(iii) Employment Contract Agreement entered into June 9, 1995, between
Management Alliance Corporation, a wholly-owned subsidiary of the
Registrant, and Anthony J. Bruno, Chicago, Illinois, an
employee.(7)(11)
10(z)(iv) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and J. Michael Moore, executed December 1,
1995.(8)(11)
10(z)(v) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and M. Ted Dillard, executed December 1,
1995.(8)(11)
10(z)(vi) Stock Option Agreement by and between Diversified Corporate
Resources, Inc. and Donald A. Bailey, executed December 1,
1995.(8)(11)
10(z)(vii) Loan Agreement by and between Information Systems Consulting
Corp. (a wholly-owned subsidiary of the Company) and Concord
Growth Corp. executed August 26, 1996.(9)
10(z)(viii) Amendment to Loan Agreement by and between Information Systems
Consulting Corp. and Concord Growth Corp. (9)
10(z)(ix) General Continuing Guaranty of Preferred Funding Corporation in
favor of Concord Growth Corporation (9)
10(z)(x) General Continuing Guaranty of the Company in favor of Concord
Growth Corporation (9)
10(z)(xi) General Continuing Guaranty of Management Alliance Corporation in
favor of Concord Growth Corporation (9)
10(z)(xii) The Registrant's 1996 Amended and Restated Nonqualified Stock
Option Plan, effective as of December 27, 1996 (10)(11)
10(z)(xiii) Amended and Restated Stock Option Agreement by and between
Diversified Corporate Resources, Inc. and J. Michael Moore,
executed May 15, 1997 (10)(11)
10(z)(xiv) Amended and Restated Stock Option Agreement by and between
Diversified Corporate Resources, Inc. and M. Ted Dillard,
executed May 15, 1997 (10)(11)
47
<PAGE>
10(z)(xv) Amended and Restated Stock Option Agreement by and between
Diversified Corporate Resources, Inc. and Donald A. Bailey,
executed May 15, 1997 (10)(11)
10(z)(xvi) Amended and Restated Stock Option Agreement by and between
Diversified Corporate Resources, Inc. and Samuel E. Hunter,
executed May 15, 1997 (10)(11)
10(z)(xvii) Employment Contract by and between Diversified Corporate
Resources, Inc. and J. Michael Moore, executed April 10, 1997
(9)(11)
10(z)(xviii) Employment Contract by and between Diversified Corporate
Resources, Inc. and M. Ted Dillard, executed April 10, 1997
(9)(11)
11.1 Statement Re Computation of Per Share Earnings (12)
17(a) Resignation of Director-Employment Termination Agreement by and
between Registrant and D. Joy Perkins, dated December 4, 1990.
(3)
21 List of Subsidiaries. (12)
- -------------------
(1) Filed as an exhibit of corresponding number to Registration Statement No.
33-760 FW on Form S-18 and incorporated herein by reference.
(2) Filed as an exhibit to Form 8-K dated March 26, 1993, and incorporated
herein by reference.
(3) Filed as an exhibit of corresponding number in Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference.
(4) Filed as an exhibit of corresponding number in Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference.
(5) Filed as an exhibit to Form 8K for January 4, 1994, and incorporated herein
by reference.
(6) Filed as an exhibit of corresponding number in Form 10-K for the year ended
December 31, 1993, and incorporated herein by reference.
(7) Filed as an exhibit of corresponding number in Form 10-K for the year ended
December 31,1994, and incorporated herein by reference.
(8) Filed as an exhibit of corresponding number in Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
(9) Filed as an exhibit of corresponding number on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
(10) Filed as an exhibit to Form S-8 filed on May 27, 1997.
(11) Stock option plans, management contracts or compensatory arrangements.
(12) Filed herewith.
48
<PAGE>
EXHIBIT 11.1
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
STATEMENT REGARDING EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
PRIMARY 1996 1995 1994
- ------- ---------- ---------- ----------
SHARES OUTSTANDING:
Weighted average number of shares
outstanding 1,701,823 1,758,211 1,758,211
Net effect of dilutive stock options (1) 112,193 -- --
---------- ---------- ----------
Total 1,814,016 1,758,211 1,758,211
========== ========== ==========
Income before extraordinary item $1,538,812 $ 285,872 $ 16,264
========== ========== ==========
Earnings per common share before
extraordinary item $ 0.84 $ 0.16 $ 0.01
========== ========== ==========
Income from extraordinary item $ 246,125 $ 174,811 $ 208,212
========== ========== ==========
Earnings per common share from
extraordinary item $ 0.14 $ 0.10 $ 0.12
========== ========== ==========
Net income $1,784,937 $ 460,683 $ 224,476
========== ========== ==========
Net income per common share $ 0.98 $ 0.26 $ 0.13
========== ========== ==========
FULLY DILUTED
SHARES OUTSTANDING:
Weighted average number of shares
outstanding 1,701,823 1,758,211 1,758,211
Net effect of dilutive stock
options (1) 158,461 -- --
---------- ---------- ----------
Total 1,860,284 1,758,211 1,758,211
========== ========== ==========
Income before extraordinary item $1,538,812 $ 285,872 $ 16,264
========== ========== ==========
Earnings per common share before
extraordinary item $ 0.83 $ 0.16 $ 0.01
========== ========== ==========
Income from extraordinary item $ 246,125 $ 174,811 $ 208,212
========== ========== ==========
Earnings per common share from
extraordinary item $ 0.13 $ 0.10 $ 0.12
========== ========== ==========
Net income $1,784,937 $ 460,683 $ 224,476
========== ========== ==========
Net income per common share $ 0.96 $ 0.26 $ 0.13
========== ========== ==========
(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.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 21
SUBSIDIARIES
Diversified Human Resources Group, Inc. Texas
DHRG Northeast, Inc. Texas
DHRG of California, Inc. Texas
EMSR, Inc. Texas
Information Systems Consulting Corp. Texas
Management Alliance Corporation Texas
Management Alliance Group
of Independent Companies, Inc. Texas
Preferred Funding Corporation Texas
Recruiters Network Group, Inc. Texas
TNI, Inc. Texas
Healthcare Resources, Inc. Texas
Power Industry Personnel, Inc. Connecticut
Power & Electronics Personnel, Inc. Delaware
Power Services, Inc. South Carolina
Pacific Power Services, Inc. Washington
Western Power Services Washington
Northeast Power & Electronics New York
Mid-Atlantic Power Services Virginia
Technical Careers of Pennsylvania Pennsylvania
Western Technical Careers, Inc. Arizona
All of the above listed companies are wholly owned subsidiaries.
<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 YEAR ENDED DECEMEBER 31, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 612,502
<SECURITIES> 0
<RECEIVABLES> 3,881,138
<ALLOWANCES> 494,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,043,419
<PP&E> 1,474,431
<DEPRECIATION> 666,434
<TOTAL-ASSETS> 5,203,890
<CURRENT-LIABILITIES> 3,947,942
<BONDS> 68,157
0
0
<COMMON> 188,116
<OTHER-SE> 999,675
<TOTAL-LIABILITY-AND-EQUITY> 5,203,890
<SALES> 27,430,288
<TOTAL-REVENUES> 27,430,288
<CGS> 19,675,352
<TOTAL-COSTS> 25,378,344
<OTHER-EXPENSES> 53,031
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235,327
<INCOME-PRETAX> 1,763,586
<INCOME-TAX> 224,774
<INCOME-CONTINUING> 1,538,812
<DISCONTINUED> 0
<EXTRAORDINARY> 246,125
<CHANGES> 0
<NET-INCOME> 1,784,937
<EPS-PRIMARY> .98
<EPS-DILUTED> .96
</TABLE>
