1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 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: 0-26208
BUSINESS RESOURCE GROUP
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0150337
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
2150 NORTH FIRST STREET, SUITE 101
SAN JOSE, CA 95131
(Address of principal executive offices)
(408) 441-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed 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.
__X__ Yes ____ No
At July 31, 1996 there were 4,858,864 shares of the Registrant's common stock
outstanding.
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BUSINESS RESOURCE GROUP
FORM 10-Q
QUARTER ENDED JULY 31, 1996
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1: Condensed Financial Statements
Condensed Balance Sheets at
July 31, 1996 and October 31, 1995 ......................... 3
Condensed Statements of Income for the Three
Months and Nine Months ended July 31, 1996
and 1995 ................................................... 4
Condensed Statements of Cash Flows for the
Nine Months ended July 31, 1996 and 1995 ................... 5
Notes to Condensed Financial Statements .................... 6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results
of Operations .............................................. 7
PART II: OTHER INFORMATION
Item 1: Legal Proceedings - none
Item 2: Changes in Securities - none
Item 3: Defaults Upon Senior Securities - none
Item 4: Submission of Matters to a Vote of
Security Holders - none
Item 5: Other Information - none
Item 6: Exhibits and Reports on Form 8-K ........................... 11
SIGNATURES ............................................................... 11
EXHIBITS ................................................................. 12
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BUSINESS RESOURCE GROUP
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JULY 31, OCTOBER 31,
1996 1995
------- -------
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents ...................... $ 668 $ 5,326
Accounts receivable, net .................. 13,559 7,168
Inventory ................................. 1,021 929
Prepaids and other current assets ......... 1,446 941
------- -------
Total current assets .................... 16,694 14,364
Property and equipment, net .................. 1,734 733
Other assets, net ............................ 1,015 956
------- -------
$19,443 $16,053
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft ............................ $ 662 $ 651
Accounts payable .......................... 2,849 2,096
Accrued liabilities ....................... 3,042 1,905
Income taxes payable ...................... 244 --
Current portion of notes payable and
capital lease obligations ................. 79 242
------- -------
Total current liabilities ............... 6,876 4,894
Notes payable and capital lease obligations .. 48 120
Deferred income tax liability ................ 19 19
Shareholders' equity:
Preferred stock ........................... -- --
Common stock .............................. 49 48
Additional paid-in capital ................ 10,685 10,558
Retained earnings ......................... 1,766 414
------- -------
Total shareholders' equity .............. 12,500 11,020
------- -------
$19,443 $16,053
======= =======
See notes to condensed financial statements.
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BUSINESS RESOURCE GROUP
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net revenues:
Workspace products .............. $ 18,495 $ 10,350 $ 49,623 $ 27,335
Workspace services .............. 2,766 1,732 6,580 4,824
Vendor commissions .............. 79 113 280 452
-------- -------- -------- --------
Total net revenues ............ 21,340 12,195 56,483 32,611
-------- -------- -------- --------
Cost of net revenues:
Workspace products .............. 15,039 8,192 40,504 21,485
Workspace services .............. 2,002 1,022 4,760 3,091
-------- -------- -------- --------
Total cost of net revenues .... 17,041 9,214 45,264 24,576
-------- -------- -------- --------
Gross profit ....................... 4,299 2,981 11,219 8,035
Selling, general and
administrative expenses ......... 3,597 2,067 9,006 5,896
-------- -------- -------- --------
Income from operations ............. 702 914 2,213 2,139
Interest income (expense) - net .... 13 (37) 94 (63)
-------- -------- -------- --------
Income before income taxes ......... 715 877 2,307 2,076
Provision for income taxes ......... 296 253 955 274
-------- -------- -------- --------
Net income ......................... $ 419 $ 624 $ 1,352 $ 1,802
======== ======== ======== ========
Net income per common and common
equivalent share .............. $ .09 $ .28
======== ========
Shares used in computation ......... 4,914 4,864
======== ========
Pro forma (Note 2):
Historical income before
income taxes .............. $ 877 $ 2,076
Pro forma income taxes .......... 364 861
-------- --------
Pro forma net income ............ $ 513 $ 1,215
======== ========
Pro forma net income per common
and common equivalent share ..... $ .13 $ .34
======== ========
Pro forma shares used in computation 3,950 3,559
======== ========
See notes to condensed financial statements.
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BUSINESS RESOURCE GROUP
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JULY 31,
---------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 1,352 $ 1,802
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ....................... 257 117
Stock compensation .................................. -- 67
Changes in operating assets and liabilities:
Accounts receivable ............................... (5,895) (3,290)
Inventory ......................................... (99) 729
Prepaids and other current assets ................. (498) (164)
Accounts payable .................................. 496 1,769
Accrued liabilities ............................... 1,094 462
Income taxes payable .............................. 245 261
-------- --------
Net cash provided (used) by operating activities ...... (3,048) 1,753
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (1,166) (282)
Cash paid for acquisitions ............................ (300) (150)
Other assets .......................................... (47) 2
-------- --------
Net cash used by investing activities ................. (1,513) (430)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft .............................. 11 --
Distributions to shareholders ......................... -- (4,163)
Repayments on line of credit - net .................... -- (1,175)
Repayment of notes payable & capital lease obligations (236) (231)
Issuance of common stock, employee stock purchase plan 128 --
Issuance of common stock, net of compensation ......... -- 9
Issuance of common stock in initial public offering ... -- 10,149
-------- --------
Net cash provided (used) by financing activities ...... (97) 4,589
-------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .......... (4,658) 5,912
CASH AND EQUIVALENTS:
Beginning of period ................................... 5,326 192
-------- --------
End of period ......................................... $ 668 $ 6,104
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 29 $ 133
======== ========
Income taxes .......................................... $ 670 $ 300
======== ========
Noncash investing transactions:
Sale of distribution rights for note receivable ....... $ 177 $ --
======== ========
Cash flow for acquisitions:
Tangible assets acquired .............................. $ 333 $ 64
Intangible assets acquired ............................ 255 363
Liabilities assumed ................................... (288) (32)
Notes payable issued .................................. -- (245)
-------- --------
Cash paid for acquisitions ............................ $ 300 $ 150
======== ========
See notes to condensed financial statements.
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BUSINESS RESOURCE GROUP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial information as of July 31, 1996 and for the three and nine
month periods ended July 31, 1996 and 1995 is unaudited. In the opinion of
management, such information reflects all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of the
results of such periods. The accompanying condensed financial statements should
be read together with the audited financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended October
31, 1995. The financial statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosure necessary to present the statements in
accordance with generally accepted accounting principles.
Certain reclassifications have been made in fiscal 1995 financial
information to conform to the 1996 presentation.
NOTE 2. PRO FORMA INFORMATION
The condensed statements of income for the three month and nine month
periods ended July 31, 1995 included a pro forma provision for income taxes. At
the close of business on June 25, 1995, the election to treat the Company as an
S Corporation for tax purposes was revoked. The pro forma provision reflects
income taxes as if the Company had operated as a C Corporation for each of the
periods.
Pro forma net income per common and common equivalent share is computed by
dividing the pro forma net income by the weighted average number of common and
common equivalent shares outstanding during the period. Common stock equivalents
are calculated using the treasury stock method.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION:
Except for the historical information contained in this Quarterly Report on
Form 10-Q, the matters discussed herein are forward-looking statements that are
subject to certain risks and uncertainties that could cause the actual results
to differ materially from those projected. Factors that could cause actual
results to differ materially include the timely availability, delivery and
acceptance of new products and services, the impact of competitive products and
pricing, the management of growth and acquisitions, and other risks detailed
below and included from time to time in the Company's other SEC reports and
press releases, copies of which are available from the Company upon request.
Additionally, the results of operations for the three and nine month periods
ended July 31, 1996 are not necessarily indicative of the results to be expected
for the full fiscal year. Operating results are subject to the successful close
of large project business and related vendor lead times. The Company's revenues
are generally the result of a consultative selling process and the precise
timing of the issuance of customer purchase orders is often contingent upon
customer site development and move-in schedules. In order to minimize risk of
procurement errors and obsolete inventory, the Company generally does not issue
vendor purchase orders until final product configurations are documented in a
formal customer purchase order. As a result, the short-term timing of product
delivery can be impacted, which in turn may affect the specific quarter in which
revenue is recognized on particular projects. Vendor delivery lead times also
affect product availability and the resulting time at which the Company delivers
product and recognizes revenue; lead times for many of the products sold by the
Company average 4 to 12 weeks. Consequently, these factors can affect quarter to
quarter results. The Company assumes no obligation to update any forward-looking
statements contained herein.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1995.
Net revenues were $21.3 million for the three months ended July 31, 1996, an
increase of 75% from $12.2 million for the three months ended July 31, 1995.
Increases in product revenue ($8.1 million or 79%) and service revenue ($1.0
million or 60%) more than offset the decline in vendor commissions ($34,000 or
30%). The overall increase in revenue was primarily the result of new large
project business from both new and existing customers (including Cisco Systems,
National Semiconductor, the City & County of San Francisco and Silicon Valley
Group), the addition of fourteen new sales people (up 47% over the prior year to
44) and revenue generated by the Company's southwestern United States and Texas
regional business units acquired in September 1995 and January 1996,
respectively ($2.6 million, including large projects from Motorola, CompUSA and
ACS). Cisco Systems and National Semiconductor, which historically have been
significant customers of
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the Company, contributed $11.3 million or 53% of total revenue, up from $3.8
million or 26% of total revenue in the comparable period in 1995. Service
revenue increased due to increases in installation, delivery services and
workspace management services. Service revenue as a percentage of total revenue,
compared to the second quarter of 1995, declined to 13% from 14%, primarily
attributable to faster product sales growth, which resulted from the significant
year-on-year product revenue increase at Cisco coupled with the acquisition of
traditional dealers whose initial revenue contribution tends to be heavily
weighted toward product revenues rather than service revenues.
Commission revenue declined as most vendors have discontinued their policies
of billing customers directly and only paying a commission to the Company.
Gross profit increased to $4.3 million during the third fiscal quarter of
1996 from $3.0 million during the same period of fiscal 1995, a 44% increase,
while declining as a percentage of net revenues from 24% during the third fiscal
quarter of 1995 to 20% during the same fiscal quarter of 1996. The Company
experienced lower product margins as a percentage of net revenue, down 2% from
the comparable period in 1995. The decrease was primarily the result of a shift
in product mix from higher margin projects in the third quarter of 1995 to
higher volume, lower margin projects in the comparable quarter of 1996. Service
margins declined as a percentage of revenue, from 41% in the third quarter of
1995 to 28% in the third quarter of 1996. The decrease was due to a service mix
shift to lower margin volume-related delivery services, underabsorption of
overhead in the Company's developing regional installation businesses and the
use of outside contract installation companies in certain out-of-state
locations.
Selling, general and administrative expenses increased 74% to $3.6 million
for the three months ended July 31, 1996 from $2.1 million for the same period
of the prior year. As a percentage of net revenue, expenses remained constant at
17% in both fiscal 1996 and 1995. The increase in spending was primarily
attributable to higher revenue and related sales commissions, the addition of
two new businesses, RST & Associates and Corporate Source (acquired in September
1995 and January 1996, respectively), the continued building of the Company's
system and wide-area-network infrastructure, and the hiring of key management
personnel.
Interest income, net of interest and other expenses, totaled $13,000 for the
three months ended July 31, 1996 versus interest expense, net of interest
income, of $37,000 for the same period of fiscal 1995. The shift from net
interest expense to net interest income was due to higher cash balances as a
result of the Company's initial public offering of its common stock in June
1995.
During the Company's fiscal third quarter ended July 31, 1996, the Company
discontinued its Records Management business in order to streamline its
operations and focus on its core Workspace Products business and its new
Workspace Management Services business. The sale of the Company's exclusive TAB
Products distribution rights, including the write-off of related goodwill and
inventory, resulted in a net charge to earnings of approximately $10,000.
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The Company was treated as an S Corporation for tax purposes until the close
of business on June 25, 1995. As such, the Company was exempt from federal and
certain state taxes for the majority of the three month period ended July 31,
1995. The Company has used an effective tax rate of 41% for all pro forma
information.
NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY, 1995.
Net revenues were $56.5 million for the nine months ended July 31, 1996, an
increase of 73% from $32.6 million for the nine months ended July 31, 1995.
Increases were achieved in product revenue ($22.3 million or 82%) and service
revenue ($1.8 million or 36%), partially offset by a decrease in commission
revenue ($172,000 or 38%). The overall increase in revenue was primarily the
result of the continuing strength of sales to Cisco Systems and National
Semiconductor, the Company's two largest customers, with combined revenue of
$25.4 million for the nine months ended July, 1996, up from $13.1 million for
the same period of 1995, and large project business from the City and County of
San Francisco's Main Library, Bechtel, Silicon Valley Group, Atmel and Perkin
Elmer (which combined accounted for approximately $6.8 million in the period),
and first time revenue of $5.8 million generated by the Company's southwestern
United States and Texas regional business units. Cisco Systems and National
Semiconductor accounted for 45% of net revenue for the first nine months of
fiscal 1996, up from 40% during the same period a year ago. Service revenue
increased in the first nine months of fiscal 1996 as compared to the prior year
period primarily due to increases in delivery services, installation and first
time revenue of workspace management services.
Commission revenue declined as most vendors have discontinued their policies
of billing customers directly and only paying a commission to the Company.
Gross profit increased to $11.2 million for the first nine months of fiscal
1996 from $8.0 million during the same period a year ago, a 40% increase. As a
percentage of net revenues gross profits decreased from 25% for the first nine
months of fiscal 1995 to 20% during the same period of fiscal 1996. Lower
service margins, resulting from underutilization of labor, underabsorption of
overhead on installation revenues and increased volume of lower margin delivery
services, and, in particular, lower product margins, accounted for the decrease
in gross profit as a percentage of net revenues. The Company experienced lower
product margins as a percentage of revenue due in part to the Company's decision
to accept certain low margin business which the Company felt was important to
its competitive positioning and its ability to penetrate certain markets. In
addition, lower product margins resulted from an increase in high volume sales
transactions which were aggressively priced based on such volumes.
Selling, general and administrative expenses increased 53% to $9.0 million
for the nine months ended July 31, 1996 from $5.9 million for the same period of
the prior year. Selling, general and administrative expenses, as a percentage of
net revenues, were 16% in the first nine months of fiscal 1996, down from 18% in
the comparable period in fiscal 1995. The increase in absolute spending levels
was primarily
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the result of higher revenues and related commissions, expanded operations in
existing Northern California regions, two acquisitions outside of California and
an overall effort to build infrastructure to support the growth of the company.
Interest income, net of interest and other expenses, totaled $94,000 for the
nine months ended July 31, 1996 versus interest expense, net of interest income
of $63,000 for the same period of fiscal 1995. The shift from net interest
expense to net interest income was due to cash received as a result of the
Company's initial public offering of its common stock in June 1995.
The Company was treated as an S Corporation for tax purposes until the close
of business on June 25, 1995. As such, the Company was exempt from federal and
certain state taxes for eight of the nine month period ended July 31, 1995. The
Company has used a tax rate of 41% for all pro forma information.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at July 31, 1996 was $9.8 million, up slightly from $9.5
million at October 31, 1995.
During the nine months ended July 31, 1996, net cash used by operating
activities was $3.0 million, representing net income of $1.4 million and
increases in accounts payable of $496,000, accrued liabilities of $1.1 million
and income taxes payable of $245,000, offset by increases in accounts receivable
of $5.9 million, inventory of $99,000 and prepaids and other current assets of
$498,000. Accounts receivable increased as a result of increased revenue and the
timing of such revenue during the quarter ended July 31, 1996, reflecting in
particular a relatively large percentage of sales during the final month of this
most recent fiscal quarter. Accrued liabilities increased primarily as a result
of increased customer deposits and accruals for sales commissions and sales tax.
Net cash used in investing activities was $1.5 million, primarily representing
the purchase of property and equipment for $1.2 million and a payment of
$300,000 in connection with the acquisition of certain assets of Corporate
Source. Net cash used by financing activities was $97,000, representing the
change in bank overdraft of $11,000, the issuance of common stock for the
Company's employee stock purchase plan of $128,000, offset by repayments of
capital lease obligations and notes payable of $236,000.
The Company's $4 million revolving line of credit with a bank expired in July
1996 and was replaced with a new $8 million credit facility, including an option
to convert up to $3 million of the total facility into term loans.
The Company presently believes existing cash, together with cash generated
from operations and the Company's available borrowing capacity will provide
sufficient funds to meet the Company's anticipated working capital requirements
and its planned expansion/acquisition strategy for the foreseeable future.
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PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.25 Master Lease Agreement between the Company and Southwestern Bell
Telephone Company Inc., dated May 2, 1996, for facilities located at 105
Auditorium Circle, San Antonio, Texas 78209.
10.26 Third Amendment to Lease between the Company and Wells Fargo
Bank, NA, dated August 5, 1996, with respect to premises at 2150 N. First
Street, San Jose, CA 95131.
10.27 Amended and Restated Loan and Security Agreement, dated July 3,
1996, between the Company and Silicon Valley Bank.
11.1 Computation of Net Income Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the three months ended July 31, 1996.
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.
BUSINESS RESOURCE GROUP
--------------------------------------
Registrant
Date: 9/13/96 /s/P. Steven Melman
------------------------------ --------------------------------------
P. Steven Melman
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)