<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number 0-13984
DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1565578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12801 NORTH CENTRAL EXPRESSWAY
SUITE 350
DALLAS, TEXAS 75243
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 458-8500
Former name, former address and former fiscal year if changed since last report:
Indicate by check mark whether registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __X__ No _____
Number of shares of common stock of the registrant outstanding on November 10,
1999, was 2,788,419.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS: (Unaudited)
- ---------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,142,654 $ 3,472,990
Trade accounts receivable, less allowance
for doubtful accounts of approximately
$769,000 and $734,000, respectively 10,015,974 6,780,639
Receivables from related parties 36,350 52,756
Prepaid expenses and other current assets 354,618 302,004
Federal income taxes receivable 73,788 48,094
Deferred income taxes 415,107 374,292
----------- -----------
TOTAL CURRENT ASSETS 12,038,491 11,030,775
PROPERTY AND EQUIPMENT, NET 3,513,958 3,114,908
OTHER ASSETS:
Intangibles, net 6,930,266 3,646,925
Investment in and advances to joint venture - 377,127
Deferred income taxes - 123,004
Other 217,188 149,439
----------- -----------
$22,699,903 $18,442,178
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -----------------------------------------------
CURRENT LIABILITIES:
Trade accounts payable and accrued expenses $ 4,789,445 $ 3,853,681
Short-term borrowing under line of credit 600,000 -
Current maturities of capital lease
obligations 16,049 43,824
Current maturities of long-term debt 703,926 665,169
----------- -----------
TOTAL CURRENT LIABILITIES 6,109,420 4,562,674
DEFERRED LEASE RENTS 84,038 59,522
LONG-TERM DEBT:
Capital lease obligations, net of current
maturities 15,423 23,766
Long-term debt, net of current maturities 2,755,909 1,178,924
Deferred income taxes 66,495 -
----------- -----------
TOTAL LONG-TERM DEBT 2,837,827 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, 3,324,946 and 3,177,446
shares issued, respectively 332,495 317,745
Additional paid-in capital 12,395,409 11,927,899
Retained earnings 2,555,098 1,936,736
Common stock held in treasury (525,193 and
483,549 shares, respectively), at cost (1,375,995) (1,349,865)
Receivables from related parties (238,389) (215,223)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,668,618 12,617,292
----------- -----------
$22,699,903 $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 For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Service Revenues:
Permanent placement $ 6,797,445 $ 5,414,696 $20,013,717 $15,948,436
Specialty services 2,118,417 1,433,193 5,754,646 4,723,381
Contract placement 5,445,198 3,619,285 11,973,638 9,096,234
Training 489,409 242,456 1,271,647 453,003
----------- ----------- ----------- -----------
14,850,469 10,709,630 39,013,648 30,221,054
Cost of Services 10,577,909 7,491,827 27,751,372 21,124,298
----------- ----------- ----------- -----------
Gross Margin 4,272,560 3,217,803 11,262,276 9,096,756
----------- ----------- ----------- -----------
Selling, General and
Administrative Expenses:
Selling, general and
administrative expenses,
exclusive of depreciation and
amortization expense (3,609,987) (2,637,743) (9,307,467) (7,032,982)
Depreciation and amortization
expense (334,318) (163,583) (905,985) (383,569)
----------- ----------- ----------- -----------
(3,944,305) (2,801,326) (10,213,452) (7,416,551)
----------- ----------- ----------- -----------
Other Income (Expenses):
Loss from joint venture
operations - - - (26,209)
Interest income (expense), net (40,414) 86,565 (50,095) 276,489
Other, net (9,607) 3,000 (9,607) 9,019
----------- ----------- ----------- -----------
(50,021) 89,565 (59,702) 259,299
----------- ----------- ----------- -----------
Income Before Income Taxes 278,234 506,042 989,122 1,939,504
Income Tax Expense (93,514) (192,345) (370,760) (698,050)
----------- ----------- ----------- -----------
Net Income $ 184,720 $ 313,697 $ 618,362 $ 1,241,454
=========== =========== =========== ===========
Basic Earnings Per Share $ .07 $ .11 $ .22 $ .45
=========== =========== =========== ===========
Weighted Average Common
Shares Outstanding 2,771,987 2,808,896 2,753,434 2,765,611
=========== =========== =========== ===========
Diluted Earnings Per Share $ .07 $ .11 $ .22 $ .43
=========== =========== =========== ===========
Weighted Average Common and
Common Equivalent Shares
Outstanding 2,774,257 2,891,112 2,776,352 2,887,268
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 618,362 $1,241,454
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 905,985 383,569
Provision for allowances 14,552 (21,677)
Income tax effect of options exercised 22,744 160,125
Equity in loss of joint venture - 26,209
Deferred income taxes 148,684 146,834
Deferred lease rents 24,516 15,077
Accretion of interest on deferred payment obligations 132,674 -
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (911,435) (1,129,515)
Refundable federal income taxes (25,694) (53,041)
Prepaid expenses and other assets (84,834) (165,301)
Trade accounts payable and accrued expenses (222,364) (290,544)
---------- ----------
Cash provided by operating activities 623,190 313,190
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (895,465) (1,534,878)
Business acquisition costs, net of cash acquired (2,765,986) (279,518)
Deposits (6,287) (27,621)
Loans and advances to related parties (23,166) (171,671)
Repayment from related parties 16,406 7,631
Net advances to joint venture - (89,730)
---------- ----------
Cash used in investing activities (3,674,498) (2,095,787)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under stock options 181,641 190,219
Repurchase of treasury stock (26,130) (114,944)
Principal payments under long-term debt obligations (34,539) (21,218)
Net short-term borrowings 600,000 -
---------- ----------
Cash provided by financing activities 720,972 54,057
---------- ----------
Decrease in cash and cash equivalents (2,330,336) (1,728,540)
Cash and cash equivalents at beginning of year 3,472,990 7,500,188
---------- ----------
Cash and cash equivalents at end of period $1,142,654 $5,771,648
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 11,415 $ 6,588
========== ==========
Cash paid for taxes $ 261,302 $ 530,862
========== ==========
</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 and nine months ended
September 30, 1999 and 1998, is unaudited, but, in management's opinion,
includes all adjustments (consisting only of normal recurring accruals) which
the Company considers necessary for a fair presentation of the results for the
periods. The financial information should be read in conjunction with the
consolidated financial statements for the year ended December 31, 1998, included
in the Company's Annual Report on Form 10-K ("Form 10-K"). Operating results for
the three and nine months ended September 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
September 30, December 31,
1999 1998
----------- -----------
Computer equipment and software $ 3,181,358 $ 2,466,334
Equipment and furniture 1,755,536 1,457,109
Leasehold improvements 381,434 292,123
Less accumulated depreciation and amortization (1,804,370) (1,100,658)
----------- -----------
$ 3,513,958 $ 3,114,908
=========== ===========
Depreciation and amortization expense of property and equipment for the three
months ended September 30, 1999 and 1998 was $254,393 and $160,240,
respectively. Depreciation and amortization expense of property and equipment
for the nine months ended September 30, 1999 and 1998 was $703,712 and $379,173,
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 For the Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tax provision (at statutory rate) $ 97,382 $ 177,115 $ 346,193 $ 678,826
Other, principally change of estimate (14,997) - (14,997 (31,467)
State income tax (net of federal benefit) 11,129 15,230 39,564 50,691
--------- --------- --------- ---------
Total $ 93,514 $ 192,345 $ 370,760 $ 698,050
========= ========= ========= =========
</TABLE>
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. EARNINGS PER SHARE
Basic Earnings Per Share was determined by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
Earnings Per Share included these shares plus common stock equivalents
outstanding during the year. (Common stock equivalents are excluded if the
effects of inclusion are anti-dilutive.) Following is a reconciliation of the
weighted average number of shares outstanding during the period for basic and
diluted earnings per share.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic 2,771,987 2,808,896 2,753,434 2,765,611
Net effect of dilutive stock options 2,270 82,216 22,918 121,657
--------- --------- --------- ---------
Total 2,774,257 2,891,112 2,776,352 2,887,268
========= ========= ========= =========
Total options and warrants outstanding 604,757 729,757 604,757 729,757
Options and warrants not considered
because effects of inclusion would
be anti-dilutive 553,257 478,757 277,590 82,590
</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 on January 15, 2000
provided that the former employees abide by the terms of the settlement
agreement, (d) the former employees agreeing not to solicit any of the Company's
employees or customers for a period of two years, and (e) the parties executing
mutual releases of all claims against each of the parties involved. The Company
is also involved in certain other litigation and disputes. With respect to all
the aforementioned matters, management believes the claims are without merit and
has concluded that the ultimate resolution of such will not have a material
effect on the Company's consolidated financial statements.
6. INTANGIBLES
Amortization September 30, December 31,
Period 1999 1998
------------ ----------- -----------
Non-compete agreements 3-5 years $ 100,000 $ 50,000
Goodwill 5-20 years 7,083,710 3,648,096
----------- -----------
7,183,710 3,698,096
Accumulated amortization (253,444) (51,171)
----------- -----------
$ 6,930,266 $ 3,646,925
=========== ===========
Amortization of intangibles for the three months ended September 30, 1999 and
1998 was $79,925 and $3,343, respectively. Amortization of intangibles for the
nine months ended September 30, 1999 and 1998 was $202,273 and $4,396,
respectively.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. BUSINESS ACQUISITION
On August 6, 1999, the Company completed the acquisition of all of the
outstanding stock of MOUNTAIN, LTD. ("Mountain"). The purchase price consists of
approximately $2,430,000 in cash, 75,000 shares of the Company's common stock
(subject to a lock-up agreement) and three annual deferred payments of
approximately $1,180,000 each, beginning October 1, 2000. The deferred payments
will be reduced up to 50% each if certain levels of profitability are not
maintained. Mountain is based in the Portland, Maine area and is engaged in
contract placements of technical and professional specialists, primarily in the
telecommunications industry. In connection with the acquisition, the Company
incurred acquisition costs amounting to approximately $337,000.
Following is a summary of the transaction:
Net assets acquired:
Fair value of tangible net assets acquired $1,215,986
Covenants not to compete 50,000
Goodwill 3,259,364
----------
Total $4,525,350
==========
Source:
Cash, including acquisition costs $2,765,986
Present value of minimum deferred payment obligations 1,481,489
Fair value of common stock issued 277,875
----------
Total $4,525,350
==========
The Mountain acquisition was accounted for under the purchase method of
accounting in accordance with APB 16. The results of the former Mountain
operations are included in the statement of operations beginning August 6,
1999. Goodwill is being amortized over twenty years utilizing the
straight-line method. The contingent deferred payments (approximately
$590,000 each) will be recorded as goodwill when earned.
The following unaudited pro forma results of operations for 1999 have been
prepared assuming the Mountain acquisition had taken place at the beginning of
the period. The following unaudited pro forma results of operations for 1998
have been prepared assuming the Mountain acquisition and the 1998 acquisition of
the Texcel companies had taken place at the beginning of the period. The results
of operations give effect to certain adjustments, including amortization of
intangible assets, interest effects of the transaction, income taxes and the
additional shares of common stock issued in the transaction. The pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of results which may occur in the future.
For the Nine Months Ended
September 30,
1999 1998
----------- -----------
Net service revenues $47,310,616 $44,497,285
Net income before taxes 1,135,844 2,600,084
Net income 706,395 1,637,801
Basic earnings per share 0.25 0.56
Diluted earnings per share 0.25 0.54
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. LINE OF CREDIT
On July 8, 1999, the Company entered into a revolving line of credit agreement
with Compass Bank. The agreement permits borrowings of up to $4,500,000. The
borrowings are collateralized by the Company's accounts receivable and other
assets and are based upon a borrowing base as defined in the agreement. The
agreement also contains various financial and non-financial covenants.
Outstanding balances bear interest at the bank's index rate unless the Company
elects the LIBOR base rate plus 2 1/4% for specific advances under the
agreement. Interest is payable quarterly and all outstanding principal and
interest is due June 30, 2000. Borrowings at September 30, 1999 amounted to
$600,000, with a remaining balance of $3,900,000 available. The weighted average
interest rate on the borrowings was 8.18%.
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
four operating subsidiaries engaged in the staffing services segment and two
operating subsidiaries engaged in the training segment.
The table on the following page presents information about reported segments for
the periods ending September 30.
<PAGE>
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Service Revenues:
Staffing Services $ 14,361,060 $ 10,467,174 $ 37,742,951 $ 29,768,051
Training 490,159 245,656 1,285,712 457,283
------------ ------------ ------------ ------------
Total Segment 14,851,219 10,712,830 39,028,663 30,225,334
Inter-Segment (750) (3,200) (15,015) (4,280)
------------ ------------ ------------ ------------
$ 14,850,469 $ 10,709,630 $ 39,013,648 $ 30,221,054
============ ============ ============ ============
Gross Margin:
Staffing Services $ 4,127,572 $ 3,099,172 $ 10,881,719 $ 8,907,362
Training 145,738 121,831 395,572 193,674
------------ ------------ ------------ ------------
Total Segment 4,273,310 3,221,003 11,277,291 9,101,036
Inter-Segment (750) (3,200) (15,015) (4,280)
------------ ------------ ------------ ------------
$ 4,272,560 $ 3,217,803 $ 11,262,276 $ 9,096,756
============ ============ ============ ============
Selling, General and
Administrative Expenses:
Staffing Services $ 3,601,887 $ 2,364,885 $ 9,199,062 $ 6,799,109
Training 343,168 439,641 1,029,405 621,722
------------ ------------ ------------ ------------
Total Segment 3,945,055 2,804,526 10,228,467 7,420,831
Inter-Segment (750) (3,200) (15,015) (4,280)
------------ ------------ ------------ ------------
$ 3,944,305 $ 2,801,326 $ 10,213,452 $ 7,416,551
============ ============ ============ ============
Income Before Income Taxes:
Staffing Services $ 485,488 $ 821,587 $ 1,628,222 $ 2,362,555
Training (207,254) (315,545) (639,100) (423,051)
------------ ------------ ------------ ------------
$ 278,234 $ 506,042 $ 989,122 $ 1,939,504
============ ============ ============ ============
Loss from Joint Venture Operations:
Staffing Services $ - $ - $ - $ (26,209)
Training - - - -
------------ ------------ ------------ ------------
$ - $ - $ - $ (26,209)
============ ============ ============ ============
Total Assets:
Staffing Services $ 17,505,407 $ 11,582,938 $ 17,505,407 $ 11,582,938
Training 1,013,052 156,001 1,013,052 156,001
------------ ------------ ------------ ------------
Total Segment 18,518,459 11,738,939 18,518,459 11,738,939
Not Allocated to Segments 4,181,444 4,740,215 4,181,444 4,740,215
------------ ------------ ------------ ------------
$ 22,699,903 $ 16,479,154 $ 22,699,903 $ 16,479,154
============ ============ ============ ============
</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 10% and 17% of total staffing services
revenues in the third quarter of 1999 and 1998, respectively. Revenues from that
same customer represented approximately 12% and 14% of total staffing services
revenues in the nine months ended September 30, 1999 and 1998, respectively. Net
Service Revenues from another customer represented approximately 7% of total
staffing services revenues in the third quarter of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Service revenue: Quarter Ended September 30,
(U.S. $ in millions) 1999 1998 Increase
------ ------ ------
Permanent placement $ 6.8 $ 5.4 $ 1.4
Contract placement 5.5 3.7 1.8
Specialty services 2.1 1.4 0.7
------ ------ ------
Total staffing services 14.4 10.5 3.9
Training 0.5 0.2 0.3
------ ------ ------
Net service revenues $ 14.9 $ 10.7 $ 4.2
====== ====== ======
For the quarter ended September 30, 1999, net service revenues increased $4.2
million, or 39%, to $14.9 million as compared to $10.7 million in the third
quarter ended September 30, 1998. Substantially all of this increase was
attributable to the inclusion of the revenue of companies acquired.
Specifically, revenue generated by the Texcel companies ("Texcel"), which were
acquired in October 1998 amounted to $2.0 million and an additional $2.0 million
of revenue was generated by the operations of Mountain, which were acquired in
August 1999. Revenue generated by the other operations of the Company's staffing
business were essentially the same as in the previous year period with gains in
some regions being offset by reductions in other regions. Revenue from training
operations doubled as compared to the previous year period and amounted to $0.5
million.
Net staffing services revenue increased $3.9 million, or 37%, to $14.4 million
in the third quarter of 1999, compared to $10.5 million in the third quarter of
1998. As a percentage of net revenue, revenue derived from permanent placements
comprised 46% of the revenue for the quarter ended September 30, 1999 as
compared to 51% of the revenue for the previous year period. The inclusion of
revenue for Texcel accounted for all of the increase in permanent placement
revenue. Contract placements revenue accounted for 37% of net service revenue
for the quarter ended September 30, 1999, as compared to 34% of the revenue for
the previous year period. The inclusion of revenue from Mountain accounted for
substantially all of the increase in contract placement revenue. Specialty
service revenue increased $0.7 million, or 48%, as compared to $1.4 million in
the third quarter of 1998.
As a result of the increase in revenue, total gross margin increased $1.1
million, or 33%, to $4.3 million in the third quarter of 1999, compared to $3.2
million in the third quarter of 1998. As a percentage of net service revenue,
the gross margin percentage for the quarter ended September 30, 1999 was 29%,
down 1% as compared to the previous year period. Gross margin for the staffing
services segment of the business increased $1.0 million, or 33%, to $4.1 million
in the third quarter of 1999, compared to $3.1 million in the third quarter of
1998. As a percentage of staffing services revenue, the gross margin percentage
for the quarter ended September 30, 1999 was 29%, down 1% as compared to the
previous year period. This decrease in margin is due largely to the fact that a
greater percentage of fiscal 1999 period revenue was generated from contract
placements, which are at lower margins than permanent placements, and the
inclusion of the results of the Mountain contract placement operations, which
generated a gross margin percentage of 18%. Gross margin for the training
segment of the business amounted to approximately $0.1 million in the third
quarter of 1999 and 1998. As a percentage of training revenue, the gross margin
percentage for the quarter ended September 30, 1999 was 30%, essentially the
same as experienced in the second quarter of fiscal 1999, but down from the 50%
gross margin achieved in the previous year period. Management believes, that as
the training segment expands its revenue base, it will continue to
achieve a gross margin at similar levels to that experienced in the quarter
ended September 30, 1999.
Selling, general and administrative expenses ("SG&A") increased $1.1 million, or
41%, to $3.9 million in the third quarter of 1999, as compared to $2.8 million
in the third quarter of 1998. A significant portion of the increase in SG&A was
attributed to the increase in revenue, as SG&A as a percentage of net service
revenue was essentially the same in both fiscal periods. In addition, the
Company incurred increased costs associated with the development of back office
support staffs and computer systems upgrades, as well as additional costs
associated with employee insurance escalation and increased rents. Management is
currently evaluating these increased costs and intends to achieve synergies in
fiscal year 2000 through consolidations and integration of back office functions
of its recent acquisitions. For the quarter ended September 30, 1999,
depreciation and amortization expense amounted to $0.3 million, an increase of
$0.2 million over the previous year period. This increase was due in part to
amortization expense related to the Company's acquisitions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company reported other expense, principally interest expense, of $0.1
million for the quarter ended September 30, 1999, which resulted from
borrowings and deferred payment obligations associated with the Company's
acquisitions of Texcel and Mountain. The Company reported interest income of
$0.1 million in the comparable 1998 quarter.
For the quarter ended September 30, 1999, income before taxes amounted to
$0.3 million, down $0.2 million as compared to the third quarter of fiscal
1998. The reduction in income before taxes is the result of several factors
noted above: (1) greater percentage of the current period revenue being
generated from contract placements and specialty services versus higher
margin permanent placements, (2) increased SG&A costs, as noted above and (3)
the incursion of interest expense from acquisitions. The training segment of
the business reported a loss before taxes of $0.2 million during the period
ended September 30, 1999 as compared to a loss of $0.3 million for the
previous year period.
Income tax expense was $0.1 million in the third quarter of 1999, compared to
approximately $0.2 million in the third quarter of 1998.
For the quarter ended September 30, 1999, net income amount to $0.2 million,
as compared to $0.3 in the third quarter of 1998.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Service revenue: Nine Months Ended September 30,
(U.S. $ in millions) 1999 1998 Increase
------ ------ ------
<S> <C> <C> <C>
Permanent placement $ 20.0 $ 15.9 $ 4.1
Contract placement 12.0 9.1 2.9
Specialty services 5.7 4.7 1.0
------ ------ ------
Total staffing services 37.7 29.7 8.0
Training 1.3 0.5 0.8
------ ------ ------
Net service revenues $ 39.0 $ 30.2 $ 8.8
====== ====== ======
</TABLE>
For the nine months ended September 30, 1999, net service revenue increased
$8.8 million, or 29%, to $39.0 million as compared to $30.2 million for the
nine months ended September 30, 1998. Substantially all of this increase was
attributable to the inclusion of the revenue of companies acquired.
Specifically, revenue generated by Texcel, which amounted to $5.9 million and
an additional $2.0 million of revenue was generated by the operations of
Mountain. Revenue generated by the other operations of the Company's staffing
business was essentially the same as in the previous year period with gains
in some regions being offset by reductions in other regions. Revenue from
training operations more than doubled as compared to the previous year period
and amounted to $1.3 million.
Net staffing services revenue increased $8.0 million, or 27%, to $37.7
million during the nine months ended September 30, 1999 as compared to $29.7
million in the previous year period. As a percentage of net revenue, revenue
derived from permanent placements comprised 51% of the revenue for the nine
months ended September 30, 1999, as compared to 53% of the revenue for the
previous year period. The inclusion of revenue for Texcel accounted for all
of the increase in permanent placement revenue. Contract placement revenue
accounted for 31% of net service revenue for the nine months ended September
30, 1999, as compared to 30% of the revenue for the previous year period. The
inclusion of revenue from Mountain accounted for $2.0 million of the increase
in contract placement revenue, with the remainder coming from the Company's
other operations. Specialty service revenue increased $1.0 million, or 22%,
over the previous year period. All of this increase was contributed by the
Texcel operations. Revenue generated by the Training segment increased $0.8
million, or 181%, and amounted to $1.3 million for the nine months ended
September 30, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
As a result of the increase in revenue, total gross margin increased $2.2
million, or 24%, to $11.3 million for the nine months ended September 30,
1999 as compared to $9.1 million in the previous year period. As a percentage
of net service revenue, the gross margin percentage for the nine months ended
September 30, 1999 was 29%, down 1% as compared to the previous year period.
Gross margin for the staffing services segment of the business increased $2.0
million, or 22%, to $10.9 million in the nine months ended September 30,
1999, compared to $8.9 million in the previous year period. As a percentage
of staffing services revenue, the gross margin percentage for the nine months
ended September 30, 1999 was 29%, down 1% as compared to the previous year
period. This decrease is due largely to the fact that a larger percentage of
fiscal 1999 period revenue was generated from contract placements, which are
at lower margins than permanent placements, and the inclusion of the results
of the Mountain contract placement operations, which generated a gross margin
percentage of 18%. Gross margin for the training segment of the business
amounted to $0.4 million for the nine months ended September 30, 1999 as
compared to $0.2 million in the previous year period. As a percentage of
training revenue, the gross margin percentage for the nine months ended
September 30, 1999 was 31%, down from the 42% gross margin achieved in the
previous year period. The Company expects gross margin to continue at this
level as it increases its customer base and revenue stream.
Selling, general and administrative expenses ("SG&A") increased $2.8 million,
or 38%, to $10.2 million for the nine months ended September 30, 1999 as
compared to $7.4 million in the previous year period. A significant portion
of the increase in SG&A was attributed to the increase in revenue. In
addition, the Company also incurred increased costs associated with the
development of back office support staffs and computer systems upgrades as
well as additional costs associated with employee insurance escalation and
increased rents. Management is currently evaluating these increased costs and
intends to achieve synergies in fiscal year 2000 through consolidations and
integration of back office functions of its recent acquisitions. For the nine
months ended September 30, 1999, depreciation and amortization expense
amounted to $0.9 million as compared to $0.4 million in the previous year
period. This increase was due in part to amortization expense related to the
Company's acquisitions.
For the nine months ended September 30, 1999, the Company reported interest
expenses of $0.1 million, primarily associated with borrowings and deferred
payment obligations related to the Company's acquisitions of Texcel and
Mountain. The Company reported interest income of $0.3 million in the
previous year period.
For the nine months ended September 30, 1999, income before taxes amounted to
$1.0 million, down $1.0 million as compared to the previous year period. The
reduction in income before taxes is the result of several factors: (1)
greater percentage of the current period revenue being generated from
contract placements and specialty services versus higher margin permanent
placements, (2) increased SG&A costs, as noted above, (3) increased losses
from training operations, and (4) the incursion of interest expense from
acquisitions.
Income tax expense was approximately $0.4 million for the nine months ended
September 30, 1999 as compared to $0.7 million in the previous year period.
For the nine months ended September 30, 1999, net income amounted to $0.6
million, down $0.6 million from the previous year period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net cash flow from operating
activities of $0.6 million resulted primarily from the profitable operations
of the Company. This cash, combined with $2.3 million of existing cash on
hand (the net decrease in cash), $0.2 million of proceeds from the issuance
of capital stock and $0.6 million of net short-term borrowings under the
Company's new line of credit facility were used primarily to fund the
Mountain acquisition, which amounted to $2.8 million and capital expenditures
of $0.9 million, primarily for additional equipment associated with the
upgrade of the Company's computer systems.
After consideration of the above items, net working capital at September 30,
1999 amounted to $5.9 million as compared to $6.5 million at December 31,
1998.
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 cash flows from operations and its line
of credit 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 of profit centers in cities in which the
Company has existing offices. In addition, the Company continues to pursue
avenues for growth including, but not limited to, possible strategic
acquisitions. The Mountain acquisition (described in Note 7 to the
consolidated financial statements) is part of the Company's strategic
acquisition program and planned transition to a business model more focused
on contract placement. The Company will be required to obtain additional
financing through either debt or equity in order to consummate additional
significant acquisitions.
Inflation has not had a significant effect on the Company's operating results.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
The Company has made an assessment of the Year 2000 Issue and, as a result,
has replaced its accounting software so that the Company's computer system
will function properly with respect to the Year 2000 Issue. The cost of the
software and implementation to date was approximately $0.2 million. Because
the remainder of the Company's systems applications and hardware were built
on up-to-date client server architecture, they should require no
modifications with respect to the Year 2000 Issue. In addition, the Company
is communicating with key third party vendors to understand their ability to
minimize their own Year 2000 Issues. The Company intends to continue to
communicate with these vendors to avoid any business interruptions. The
Company is dependent upon its customers for revenues and cash flows. The
Company currently does not believe that it is subject to significant business
risks related to its customers' or vendors' Year 2000 Issues, although, if
the Company's customers and vendors experience Year 2000 Issue problems, the
Company's results of operations could be materially adversely affected.
The effect of the Year 2000 Issue on the Company is difficult to predict
because the Company's customers may utilize contract staffing as a way of
addressing their Year 2000 Issues. The Company will continue to monitor the
status of its key third party vendors as a means of determining risks and
alternatives. The Company is also in the process of completing a contingency
plan for dealing with the most reasonably likely worst case scenario.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. No assurance can be given that actual
results or events will not differ materially from those projected, estimated,
assumed or anticipated in any such forward looking statements. Important
factors (the "Cautionary Disclosures") that could result in such differences
include: general economic conditions in the Company's markets, including
inflation, recession, interest rates and other economic factors; the
availability of qualified personnel; the level of competition experienced by
the Company; the Company's ability to implement its business strategies and
to manage its growth, including the ability to effectively integrate new
acquisitions; the level of litigation expenses; the level of developmental
expenses; the ability of the Company to adequately and cost-effectively
address the Year 2000 issue; those factors identified in the Company's
Prospectus dated September 30, 1997 as risk factors; and other factors that
affect businesses generally. Subsequent written and oral "forward-looking"
statements attributable to the Company or persons acting on its behalf are
expressly qualified by the Cautionary Disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
<PAGE>
PART II: OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
In connection with the acquisition of Mountain on August 6, 1999, the Company
issued 75,000 shares of its Common Stock to the shareholders of Mountain. See
Item 5 below. These shares were issued in a private placement exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2).
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Business Acquisition
On August 6, 1999, the Company, MAGIC Northeast ("MNE"), a Delaware
corporation and wholly owned subsidiary of the Company, and Joseph H. Hosmer
and Sandra Hosmer, shareholders of MOUNTAIN, LTD. ("Mountain"), entered into
a purchase agreement (the "Purchase Agreement") whereby MNE acquired all of
the outstanding capital stock of Mountain. The purchase price consisted of
approximately $2,430,000 in cash, 75,000 of the Company's Common Stock and
three annual deferred payments of approximately $1,180,000 each beginning
October 1, 2000. The deferred payments will be reduced if the level of 1998
adjusted earnings before interest, taxes, depreciation and amortization,
approximately $1,100,000, is not maintained. The reduction will be on a
pro-rata basis up to a maximum of 25% unless a service contract with a
specific customer is not renewed or cancelled, in which case the maximum
reduction will be 50%. Mountain is based in the Portland, Maine area and is
engaged in contract placements of technical and professional specialists,
primarily in the telecommunications industry.
<PAGE>
PART II: OTHER INFORMATION
DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Purchase Agreement by and between the Company and the Shareholders
of MOUNTAIN, LTD., dated August 6, 1999. (Incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.)
10.2 Employment Agreement, by and between the Company and Joseph H.
Hosmer, dated August 6, 1999. (Incorporated by reference to Exhibit
10.4 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.)
27 Financial Data Schedule (Filed herewith.)
B. Reports on Form 8-K
On September 30, 1999, the Company filed with the Securities and Exchange
Commission, a report on Form 8-K to provide certain historical and pro
forma financial information with respect to the acquisition of Mountain.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSIFIED CORPORATE RESOURCES, INC.
Registrant
Date: November 15, 1999 By: /s/ J. Michael Moore
J. Michael Moore
CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ M. Ted Dillard
M. Ted Dillard
PRESIDENT AND SECRETARY
Date: November 15, 1999 By: /s/ Douglas G. Furra
Douglas G. Furra
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 1,142,654 1,142,654
<SECURITIES> 0 0
<RECEIVABLES> 10,784,974 10,784,974
<ALLOWANCES> 769,000 769,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,038,491 12,038,491
<PP&E> 3,513,958 3,513,958
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 22,699,903 22,699,903
<CURRENT-LIABILITIES> 6,109,420 6,109,420
<BONDS> 2,837,827 2,837,827
0 0
0 0
<COMMON> 332,495 332,495
<OTHER-SE> 13,336,123 13,336,123
<TOTAL-LIABILITY-AND-EQUITY> 22,699,903 22,699,903
<SALES> 0 0
<TOTAL-REVENUES> 39,013,648 14,850,469
<CGS> 0 0
<TOTAL-COSTS> 37,964,824 14,522,214
<OTHER-EXPENSES> 59,702 50,021
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 989,122 278,234
<INCOME-TAX> 370,760 93,514
<INCOME-CONTINUING> 618,362 184,720
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 618,362 184,720
<EPS-BASIC> .22 .07
<EPS-DILUTED> .22 .07
</TABLE>
