<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1565578
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12801 NORTH CENTRAL EXPRESSWAY
SUITE 350
DALLAS, TEXAS 75243
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 458-8500
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT:
Indicate by check mark whether registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
Number of shares of common stock of the registrant outstanding on March 31,
1999, was 2,761,397.
Total Number of pages for
this 10-Q filing: 13
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 3,454,098 $ 3,472,990
Trade accounts receivable, less allowance for
doubtful accounts of approximately $784,000
and $734,000, respectively . . . . . . . . . . . . . . 7,523,120 6,780,639
Receivables from related party . . . . . . . . . . . . . . 8,727 52,756
Prepaid expenses and other current assets. . . . . . . . . 320,970 302,004
Federal income taxes receivable. . . . . . . . . . . . . . 55,729 48,094
Deferred income taxes. . . . . . . . . . . . . . . . . . . 324,013 374,292
----------- -----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . 11,686,657 11,030,775
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . . . . . 3,317,022 3,114,908
OTHER ASSETS:
Intangibles, net . . . . . . . . . . . . . . . . . . . . . 3,760,469 3,646,925
Investment in and advances to joint venture. . . . . . . . 377,127
Deferred income taxes. . . . . . . . . . . . . . . . . . . 62,023 123,004
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 214,687 149,439
----------- -----------
$19,040,858 $18,442,178
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses. . . . . . . . $ 3,858,880 $ 3,853,681
Current maturities of capital lease obligations. . . . . . 38,109 43,824
Current maturities of long-term debt . . . . . . . . . . . 678,088 665,169
----------- -----------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . 4,575,077 4,562,674
DEFERRED LEASE RENTS . . . . . . . . . . . . . . . . . . . . . . 65,196 59,522
LONG-TERM DEBT
Capital lease obligations, net of current maturities . . . 15,936 23,766
Long-term debt, net of current maturities. . . . . . . . . 1,203,205 1,178,924
----------- -----------
TOTAL LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 1,219,141 1,202,690
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued. . . . . . . . . . . . . . . . . - -
Common stock, $.10 par value; 10,000,000 shares
authorized, 3,249,946 and 3,177,446 shares
issued, respectively. . . . . . . . . . . . . . . . 324,995 317,745
Additional paid-in capital . . . . . . . . . . . . . . . . 12,124,643 11,927,899
Retained earnings. . . . . . . . . . . . . . . . . . . . . 2,320,060 1,936,736
Common stock held in treasury (488,549 and 483,549
shares, respectively), at cost . . . . . . . . . . . . . (1,349,865) (1,349,865)
Receivables from related parties . . . . . . . . . . . . . . (238,389) (215,223)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 13,181,444 12,617,292
----------- -----------
$19,040,858 $18,442,178
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SERVICE REVENUES:
Permanent placement . . . . . . . . . . . . . . . . . . . . $ 6,481,303 $ 4,782,612
Specialty services. . . . . . . . . . . . . . . . . . . . . 1,874,978 1,642,175
Contract placement. . . . . . . . . . . . . . . . . . . . . 3,320,849 2,488,008
Training. . . . . . . . . . . . . . . . . . . . . . . . . . 387,229 54,439
----------- -----------
12,064,359 8,967,234
COST OF SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 8,455,036 6,363,263
----------- -----------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . . . . . . 3,609,323 2,603,971
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . (2,980,622) (2,143,487)
OTHER INCOME (EXPENSES):
Loss from joint venture operations. . . . . . . . . . . . . (13,623)
Interest income (expense), net. . . . . . . . . . . . . . . (3,908) 97,737
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . 6,000
----------- ------------
(3,908) 90,114
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . 624,793 550,598
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . (241,469) (173,844)
----------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 383,324 $ 376,754
----------- ------------
----------- ------------
BASIC EARNINGS PER SHARE: . . . . . . . . . . . . . . . . . . . $ .14 $ .14
----------- ------------
----------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . 2,756,147 2,740,339
----------- ------------
----------- ------------
DILUTED EARNINGS PER SHARE: . . . . . . . . . . . . . . . . . . $ .14 $ .13
----------- ------------
----------- ------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . . . . . . . . . . . . . . . . . 2,790,035 2,858,491
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 383,324 $ 376,754
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 270,925 93,250
Provision for allowances . . . . . . . . . . . . . . . . 50,024 (48,786)
Income tax effect of options exercised . . . . . . . . . 22,744 28,875
Equity in loss of joint venture. . . . . . . . . . . . . 13,623
Deferred income taxes. . . . . . . . . . . . . . . . . . 111,260 35,979
Deferred lease rents . . . . . . . . . . . . . . . . . . 5,674 (26,332)
Accretion of interest on deferred payment obligations. . 37,200
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (571,281) (289,304)
Refundable federal income taxes. . . . . . . . . . . . . (7,635) 96,388
Prepaid expenses and other assets. . . . . . . . . . . . (18,965) (130,724)
Other assets . . . . . . . . . . . . . . . . . . . . . . (70,902)
Trade accounts payable and accrued expenses. . . . . . . (9,219) 201,352
---------- ----------
Cash provided by operating activities. . . . . . . . . 203,149 351,075
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . (411,058) (176,106)
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 450 (3,716)
Loans and advances to related parties. . . . . . . . . . (23,166) 2,480
Repayment from related parties . . . . . . . . . . . . . 44,028 (1,749)
Net advances to joint venture. . . . . . . . . . . . . . (31,545)
---------- ----------
Cash used in investing activities. . . . . . . . . . . (389,746) (210,636)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock under stock options . . . . . . 181,250 -
Principal payments under long-term debt obligations. . . (13,545) (491)
---------- ----------
Cash provided by (used in) financing activities. . . . 167,705 (491)
Increase (decrease) in cash and cash equivalents . . . . (18,892) 139,948
Cash and cash equivalents at beginning of year . . . . . 3,472,990 7,500,188
---------- ----------
Cash and cash equivalents at end of period . . . . . . . $3,454,098 $7,640,136
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . $ 1,507 $ 2,153
---------- ----------
---------- ----------
Cash paid for taxes. . . . . . . . . . . . . . . . . . . $ 148,067 $ 32,489
---------- ----------
---------- ----------
NON-CASH FINANCING ACTIVITY:
Receivable for exercise of stock options -
collected in April, 1998. . . . . . . . . . . . . . $ - $ 22,500
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the operations of Diversified
Corporate Resources, Inc. and its subsidiaries (the "Company"), all of which are
wholly owned. The financial information for the three months ended March 31,
1999 and 1998, is unaudited but includes all adjustments (consisting only of
normal recurring accruals) which the Company considers necessary for a fair
presentation of the results for the periods. The financial information should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 1998, included in the Company's Annual Report on Form 10-K
("Form 10-K"). Operating results for the three months ended March 31, 1999, are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Computer equipment and software . . $2,752,211 $2,466,334
Office equipment and furniture. . . 1,514,395 1,457,109
Leasehold improvements. . . . . . . 360,018 292,123
Less accumulated depreciation and
amortization . . . . . . . . . (1,309,602) (1,100,658)
---------- ----------
$3,317,022 $3,114,908
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense of property and equipment for the
three months ended March 31, 1999 and 1998 was $208,944 and $93,250,
respectively.
3. INCOME TAXES
The income tax provision and the amount computed by applying the federal
statutory income tax rate to income before income taxes differs as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
-------- --------
<S> <C> <C>
Tax provision (at statutory rate) . . . . . . $218,678 $192,709
Other, principally change of estimate . . . . 6,981 (31,467)
State income tax (net of federal benefit) . . 15,810 12,602
-------- --------
Total . . . . . . . . . . . . . . . . . $241,469 $173,844
-------- --------
-------- --------
</TABLE>
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. EARNINGS PER SHARE
Basic EPS was determined by dividing net income by the weighted average number
of shares of common stock outstanding during the year and diluted EPS included
these shares plus common stock equivalents outstanding during the year (common
stock equivalents are excluded if the effects of inclusion are anti-dilutive).
The following is reconciliation of the weighted average number of shares
outstanding during the period for basic and diluted earnings per share.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Basic . . . . . . . . . . . . . . . 2,756,147 2,740,339
Net effect of dilutive stock
options . . . . . . . . . . . . . 33,888 118,152
--------- ---------
Diluted . . . . . . . . . . . . . . 2,790,035 2,858,491
--------- ---------
--------- ---------
Total options and warrants
outstanding. . . . . . . . . . 667,257 589,590
Options and warrants not
considered because effects
of inclusion would be
anti-dilutive . . . . . . . . . 277,590 267,090
</TABLE>
5. CONTINGENCIES
In 1996, the Company was named as a garnishee in a lawsuit against its
largest shareholder. As the result of an Agreed Temporary Order dated October
24, 1996, the Company was non-suited in this matter. The Company has filed a
separate lawsuit against the plaintiff seeking damages and reimbursement of
expenses. Additionally, the Company was named in a lawsuit filed by two
former employees (the "former employees") claiming damages for the fair
market value of certain shares of common stock of certain subsidiaries of the
Company, as well as other damages for breach of contract and various other
allegations. The Company had filed a third party petition against one of
these plaintiffs and a counterclaim against the other plaintiff. All parties
involved entered into a settlement on April 15, 1999. Key terms of the
settlement included, among other things, (a) the former employees
transferring 35,000 shares of the Company's common stock to the Company, (b)
the Company paying $20,000 to the former employees and their attorney, (c)
the Company obtaining a $5,000,000 judgment against one of the former
employees which will not be enforced and will expire in nine months provided
that the former employees abide by the terms of the settlement agreement, (d)
the former employees agreeing not to solicit any of the Company's employees
or customers for a period of two years, and (e) the parties executing mutual
releases of all claims against each of the parties involved. The Company is
also involved in certain other litigation and disputes. With respect to all
the aforementioned matters, management believes the claims are without merit
and has concluded that the ultimate resolution of such will not have a
material effect on the Company's consolidated financial statements.
6. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statements of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Preliminary analysis of this new
standard by the Company indicates that the standard will not have a material
impact on the Company's financial statements. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. INTANGIBLES
<TABLE>
<CAPTION>
AMORTIZATION MARCH 31, DECEMBER 31,
PERIOD 1999 1998
------------ ---------- ------------
<S> <C> <C> <C>
Non-compete agreements . . . . . . . . . . . 3 years $ 50,000 $ 50,000
Goodwill . . . . . . . . . . . . . . . . . . 5-20 years 3,823,621 3,648,096
---------- ----------
3,873,621 3,698,096
Accumulated amortization . . . . . . . . . . (113,152) (51,171)
---------- ----------
$3,760,469 $3,646,925
---------- ----------
---------- ----------
</TABLE>
Amortization of intangibles for the three months ended March 31,
1999 and 1998 was $61,981 and $0, respectively.
8. JOINT VENTURE OPERATIONS
During January 1995 the Company entered into a joint venture agreement
with Carter Financial Services, Inc., ("CFSI") for the purpose of primarily
providing personnel services to certain businesses requiring minority
suppliers. CFSI 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
provided CFSI with substantially all of its personnel and contract labor on a
subcontractor basis at cost. Through December 31, 1998, the Company had a 49%
ownership interest in the joint venture and was allocated 65% of the net
income or loss resulting from the joint venture operations. Effective January
20, 1999, the joint venture was terminated and the Company acquired
substantially all of the assets including an additional 35% income interest
in the Atlanta and Chicago operations and assumed certain liabilities of the
joint venture. The excess of the liabilities assumed over the assets
acquired, approximately $170,000, has been recorded as goodwill and will be
amortized over five years. Pro forma income statement information is not
provided as the effect of acquiring the 35% interest is not material in
relation to the consolidated operations of the Company.
9. SEGMENT INFORMATION
The Company's segment information has been presented in two reportable
segments--staffing services and training. The staffing services segment
consists of three functional lines--permanent placement, specialty services
and contract placement. The training segment provides principally information
technology training to its clients' employees and the Company's applicant
pool on a fee basis. The Company is organized primarily on the basis of these
segments with three operating subsidiaries engaged in the staffing services
segment and two operating subsidiaries engaged in the training segment.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SEGMENT INFORMATION (CONTINUED)
The table below presents information about reported segments for the
quarters ending March 31:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net service revenues
Staffing services................................................. $ 11,677,130 $ 8,912,794
Training.......................................................... 398,456 55,699
------------- -------------
Total segment..................................................... 12,075,586 8,968,493
Inter-segment..................................................... (11,227) (1,260)
------------- -------------
$ 12,064,359 $ 8,967,233
------------- -------------
------------- -------------
Gross margin
Staffing services................................................. $ 3,482,520 $ 2,595,334
Training.......................................................... 138,030 9,897
------------- -------------
$ 3,620,550 $ 2,605,231
------------- -------------
------------- -------------
Selling, general and administrative expenses
Staffing services................................................. $ 2,651,984 $ 2,076,077
Training.......................................................... 339,865 68,670
------------- -------------
$ 2,991,849 $ 2,144,747
------------- -------------
------------- -------------
Income before income taxes
Staffing services................................................. $ 823,078 $ 608,491
Training.......................................................... (198,285) (57,893)
------------- -------------
$ 624,793 $ 550,598
------------- -------------
------------- -------------
Loss from joint venture operations
Staffing services................................................. $ -- $ (13,623)
Training.......................................................... -- --
------------- -------------
$ -- $ (13,623)
------------- -------------
------------- -------------
Investment in and advances to joint venture
Staffing services................................................. $ -- $ 244,560
Training.......................................................... -- --
------------- -------------
$ -- $ 244,560
------------- -------------
------------- -------------
Total assets
Staffing services................................................. $ 12,062,158 $ 8,062,895
Training.......................................................... 941,467 49,306
------------- -------------
Total segment..................................................... 13,003,625 8,112,201
Not allocated to segments......................................... 6,037,233 7,652,012
------------- -------------
$ 19,040,858 $ 15,764,213
------------- -------------
------------- -------------
</TABLE>
Corporate expenses (those not directly related to segment operations) are
allocated to the segments based upon net service revenues. Depreciation
expense and interest income and expense are not allocated directly to the
segments, but are included in the allocation of corporate expenses. Property
and equipment are included in the assets not allocated to segments. Net
Service Revenues from one customer represented approximately 14% and 15% of
total staffing services revenues in the first quarter of 1999 and 1998,
respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net service revenues increased approximately $3.1 million or 34.5% to
$12.1 million in the first quarter of 1999, compared to $9.0 million for the
comparable 1998 quarter. The increase in net service revenues was
attributable to the Company's continued focus on high-margin, specialty niche
employment markets such as the information technology and
engineering/technical disciplines. Net service revenues for the staffing
services segment of the business increased approximately $2.8 million or
31.0% to $11.7 million in the first quarter of 1999, compared to $8.9 million
in the first quarter of 1998. Approximately $1.9 million or 21.2% of this
increase was the result of the Company's October 1998 acquisition of the
Texcel companies. Permanent placement revenues increased approximately $1.7
million or 35.5% to $6.5 million in the first quarter of 1999 compared to
$4.8 million in the first quarter of 1998. Specialty service revenues
increased approximately $233,000 or 14.2% to $1.9 million in the first
quarter of 1999, compared to $1.6 million in the first quarter of 1998.
Contract placement revenues increased approximately $833,000 or 33.5% to $3.3
million in the first quarter of 1999, compared to $2.5 million in the first
quarter of 1998. Training segment revenues increased approximately $343,000
or 615% to approximately $398,000 in the first quarter of 1999 compared to
$56,000 for the comparable 1998 quarter. The Company significantly increased
its training capacity in the second quarter of 1998. There were inter-segment
revenues (training to staffing services) of approximately $11,000 in the
first quarter of 1999 and approximately $1,000 in the first quarter of 1998.
Gross margin increased approximately $1.0 million or 38.6% to $3.6
million in the first quarter of 1999, compared to $2.6 million in the first
quarter of 1998. Gross margin as a percentage of net service revenues
increased to approximately 29.9% in the first quarter of 1999 compared to
approximately 29.0% in the first quarter of 1998. Gross margin for the
staffing services segment of the business increased approximately $887,000 or
34.2% to $3.5 million in the first quarter of 1999, compared to $2.6 million
in the first quarter of 1998. Approximately $610,000 or 23.5% of this
increase was the result of the Company's October 1998 acquisition of the
Texcel companies. Gross margin as a percentage of net service revenues for
the staffing services segment increased to approximately 29.8% in the first
quarter of 1999 compared to approximately 29.1% in the comparable 1998
quarter. Gross margin for the training segment of the business was
approximately $138,000 in the first quarter of 1999 compared to approximately
$10,000 in the comparable 1998 quarter. Gross margin as a percentage of net
service revenues for the training segment was 34.6% in the first quarter of
1999 compared to 17.8% in the comparable 1998 quarter.
Selling, general and administrative expenses increased approximately
$837,000 or 39.1% to $3.0 million in the first quarter of 1999, compared to
$2.1 million in the first quarter of 1998. Selling, general and
administrative expenses as a percentage of net service revenues increased to
approximately 24.7% in the first quarter of 1999 compared to approximately
23.9% in the first quarter of 1998. Selling general and administrative
expenses for the Staffing Services segment of the business increased
approximately $576,000 or 27.7% to $2.7 million in the first quarter of 1999,
compared to $2.1 million in the first quarter of 1998. Approximately $494,000
or 23.8% of this increase was the result of the Company's acquisition of the
Texcel companies in October 1998. Selling, general and administrative
expenses as a percentage of net service revenues for the staffing services
segment was approximately 22.7% in the first quarter of 1999 compared to
23.3% in the comparable 1998 quarter. Selling, general and administrative
expenses for the training segment of the business were approximately $340,000
or 85.3% of net service revenues for the training segment in the first
quarter of 1999. The Company reported minimal training segment revenues in
the first quarter of 1998.
Other income (expense) resulted in expense of $4,000 in the first quarter
of 1999 compared to income of $90,000 in the comparable 1998 quarter. The
income in 1998 resulted primarily from interest on proceeds from the
Company's October 1997 public offering partially offset by a loss of
approximately $14,000 from joint venture operations. The expense in 1999
resulted primarily from interest expense of approximately $37,000 on deferred
payment obligations related to the Company's October 1998 acquisition of the
Texcel companies offset by reduced interest income on the remaining public
offering proceeds.
Income before income tax and extraordinary item increased approximately
$74,000 or 13.5% to approximately $625,000 in the first quarter of 1999
compared to approximately $551,000 in the first quarter of 1998. Income
before income tax and extraordinary item for the staffing services segment of
the business increased approximately $215,000 or 35.3% to $823,000 in the
first quarter of 1999 compared to $608,000 in the first quarter of 1998.
Income before income tax and extraordinary item for the training segment of
the business resulted in a loss of approximately $198,000 in the first
quarter of 1999 compared to a loss of approximately $58,000 in the comparable
1998 quarter. The Company reported minimal training segment revenues in the
first quarter of 1998 and significantly increased its training capacity in
the second quarter of 1998.
Income tax expense was approximately $241,000 in the first quarter of
1999, compared to approximately $174,000 in the first quarter of 1998. The
Company's effective tax rate for the first quarter of 1999 and 1998 was
approximately 39% and 32%, respectively.
<PAGE>
Net income increased approximately $7,000 or 1.7% to $383,000 in the
first quarter of 1999, compared to approximately $377,000 in the first
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately $7.1 million at March 31, 1999 compared
to $6.5 million at December 31, 1998. The increase in working capital of
approximately $643,000 was primarily attributable to the profitable
operations of the Company.
Cash flow provided by operating activities of approximately $203,000
resulted primarily from the profitable operations of the Company. The Company
made capital expenditures of approximately $411,000 in the first quarter of
1999, primarily to continue to improve its computer systems, its applicant
database and to support its back office operations.
The Company continues to evaluate various financing strategies to be
utilized in expanding its business and to fund future growth or acquisitions.
Management of the Company anticipates that funds remaining from its 1997
public offering and cash flows from operations will provide adequate
liquidity to fund its internal 1999 growth plans and operations for the
foreseeable future. The Company's internal 1999 growth plans include the
expansion and improvement of its applicant database and back office and the
expansion and opening of new profit centers in cities in which the Company
has existing offices. In addition, the Company continues to pursue avenues
for growth including but not limited to possible strategic acquisitions. The
Company will be required to obtain additional financing through either debt
or equity in order to consummate additional significant acquisitions.
Inflation has not had a significant effect on the Company's operating
results.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue".) This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
The Company has made an assessment of the Year 2000 Issue and has
concluded that it will have to modify or replace its accounting software so
that the Company's computer system will function properly with respect to the
Year 2000 Issue. The Company has purchased new accounting and back office
software, which is Year 2000 compliant. The cost of the software was
approximately $150,000, and implementation costs are estimated to be an
additional $60,000. Because the remainder of the Company's systems
applications and hardware were built on up-to-date client server
architecture, they should require no modifications with respect to the Year
2000 Issue. The Company has also initiated communications with its
significant suppliers, landlords and large customers to determine the extent
to which the Company is vulnerable to those third parties to minimize their
own Year 2000 Issue. There can be no assurance that the systems of other
companies upon which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
affect on the Company.
The Company has begun, but not yet completed, a comprehensive analysis of
the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by certain third parties to
complete efforts necessary to achieve Year 2000 compliance on a timely basis.
A contingency plan has not been developed for dealing with the most
reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statements of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Preliminary analysis of this new
standard by the Company indicates that the standard will not have a material
impact on the Company's financial statements. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
<PAGE>
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that reflect projections
or expectations of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for future operations
are "forward-looking" statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated in
any such forward looking statements. Important factors (the "Cautionary
Disclosures") that could result in such differences include: general economic
conditions in the Company's markets, including inflation, recession, interest
rates and other economic factors; the availability of qualified personnel;
the level of competition experienced by the Company; the Company's ability to
implement its business strategies and to manage its growth; the level of
litigation expenses; the level of developmental expenses; the effects of the
Year 2000 issue; those factors identified in the Company's Prospectus dated
September 30, 1997 as risk factors; and other factors that affect businesses
generally. Subsequent written and oral "forward-looking" statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the Cautionary Disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
<PAGE>
PART II OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
The Company was named in a lawsuit filed by two former employees (the "former
employees") claiming damages for the fair market value of certain shares of
common stock of certain subsidiaries of the Company, as well as other damages
for breach of contract and various other allegations. The Company had filed a
third party petition against one of these plaintiffs and a counterclaim
against the other plaintiff. All parties involved entered into a settlement
on April 15, 1999. Key terms of the settlement included, among other things,
(a) the former employees transferring 35,000 shares of the Company's common
stock to the Company, (b) the Company paying $20,000 to the former employees
and their attorney, (c) the Company obtaining a $5,000,000 judgment against
one of the former employees which will not be enforced and will expire in
nine months provided that the former employees abide by the terms of the
settlement agreement, (d) the former employees agree not to solicit any of
the Company's employees or customers for a period of two years, and (e) the
parties executing mutual releases of all claims against each of the parties
involved.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Note purchase Agreement dated as of January 12, 1999, by and
among the Company, Compass Bank and DCRI L.P. No. 2, Inc.
(Incorporated by reference from the Company's Form 8-K filed
with the SEC on January 28, 1999.)
10.2 Bank Transaction Agreement dated as of January 12, 1999 by and
among the Company, DCRI L.P. No. 2, Inc. and J. Michael Moore.
(Incorporated by reference from the Company's Form 8-K filed
with the SEC on January 28, 1999.)
27 Financial Data Schedule
B. Reports on Form 8-K
On January 28, 1999, the Company filed with the SEC a report on
Form 8-K with respect to a Note Purchase Agreement with Compass Bank
and DCRI L.P. No. 2, Inc., which is principally owned by J. Michael
Moore, the Chairman of the Board and Chief Executive Officer of the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSIFIED CORPORATE RESOURCES, INC.
Registrant
DATE: May 14, 1999 By: /s/ J. Michael Moore
--------------------
J. Michael Moore
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
DATE: May 14, 1999 By: /s/ M. Ted Dillard
------------------
M. Ted Dillard
PRESIDENT AND SECRETARY
DATE: May 14, 1999 By: /s/ Douglas G. Furra
--------------------
Douglas G. Furra
CHIEF FINANCIAL OFFICER
(Principal Financial Officer
and Principal Accounting Officer)
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