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 APRIL 30, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-26208
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) 325-3200
(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 April 30, 1997 there were 4,895,646 shares of the
Registrant's Common Stock outstanding.
2
BUSINESS RESOURCE GROUP
FORM 10-Q
QUARTER ENDED APRIL 30, 1997
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1: Condensed Financial Statements
Condensed Balance Sheets at
April 30, 1997 and October 31, 1996................ 3
Condensed Statements of Income for the Three
Months and Six Months ended April 30, 1997
and 1996........................................... 4
Condensed Statements of Cash Flows for the
Six Months ended April 30, 1997 and 1996........... 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 ........................................ 11
Item 2: Changes in Securities .................................... 11
Item 3: Defaults Upon Senior Securities - none
Item 4: Submission of Matters to a Vote of
Security Holders ................................. 11
Item 5: Other Information - none
Item 6: Exhibits and Reports on Form 8-K ......................... 12
SIGNATURES ............................................................... 13
EXHIBITS ................................................................. 14
3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BUSINESS RESOURCE GROUP
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
APRIL 30, OCTOBER 31,
1997 1996
------- -------
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents....................... $ 1,614 $ 1,011
Accounts receivable, net .................. 14,281 16,122
Inventory ................................. 951 974
Prepaids and other current assets ......... 1,170 1,387
------- -------
Total current assets ................... 18,016 19,494
Property and equipment, net ................... 2,552 2,017
Other assets .................................. 986 1,049
------- -------
$21,554 $22,560
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft ............................ $ -- $ 476
Accounts payable .......................... 3,300 5,935
Accrued liabilities ....................... 3,465 2,877
Income taxes payable ...................... 427 31
Current portion of notes payable and
capital lease obligations ................. 42 112
------- -------
Total current liabilities .............. 7,234 9,431
Deferred income tax liability ................. 127 127
Shareholders' equity:
Preferred stock ........................... -- --
Common stock .............................. 49 49
Additional paid-in capital ................ 10,834 10,685
Retained earnings ......................... 3,310 2,268
------- -------
Total shareholders' equity ............. 14,193 13,002
------- -------
$21,554 $22,560
======= =======
See notes to condensed financial statements.
4
BUSINESS RESOURCE GROUP
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
Net revenues:
Workspace products ................... $18,551 $18,293 $36,999 $31,128
Workspace services ................... 3,931 2,265 7,744 3,814
Vendor commission .................... 44 82 95 201
------- ------- ------- -------
Total net revenues ................ 22,526 20,640 44,838 $35,143
------- ------- ------- -------
Cost of net revenues:
Workspace products ................... 14,771 15,103 29,601 25,465
Workspace services ................... 2,833 1,685 5,566 2,758
------- ------- ------- -------
Total cost of net revenues ........ 17,604 16,788 35,167 28,223
------- ------- ------- -------
Gross profit ............................. 4,922 3,852 9,671 6,920
Selling, general and
administrative expenses .............. 4,022 2,978 7,926 5,409
------- ------- ------- -------
Income from operations ................... 900 874 1,745 1,511
Interest income .......................... 11 26 34 81
------- ------- ------- -------
Income before income taxes ............... 911 900 1,779 1,592
Provision for income taxes ............... 377 373 736 659
------- ------- ------- -------
Net income ............................... $ 534 $ 527 $ 1,043 $ 933
------- ------- ------- -------
Net income per common and common
equivalent share ...................... $ .11 $ .11 $ .21 $ .19
------- ------- ------- -------
Shares used in computation ............... 4,984 4,919 4,945 4,889
------- ------- ------- -------
See notes to condensed financial statements.
5
BUSINESS RESOURCE GROUP
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
APRIL 30,
---------------------
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 1,043 $ 933
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ........................... 342 184
Changes in operating assets and liabilities:
Accounts receivable .................................. 1,841 (4,822)
Inventory ............................................ 23 (507)
Prepaids and other Current Assets .................... 217 721
Accounts payable ..................................... (2,635) 2,917
Accrued liabilities .................................. 588 524
Income taxes payable ................................. 396 620
------- -------
Net cash provided (used) by operating activities ........... 1,815 (872)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (794) (627)
Cash paid for acquisitions ................................ -- (300)
Other assets ............................................... (21) (95)
------- -------
Net cash used by investing activities ...................... (815) (285)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft ................................... (476) 118
Repayment of notes payable & capital lease obligations ..... (70) (214)
Issuance of common stock ................................... 149 --
------- -------
Net cash used by financing activities ...................... (397) (96)
------- -------
NET INCREASE (DECREASE) IN CASH ................................ 603 (1,990)
CASH AND EQUIVALENTS:
Beginning of period ........................................ 1,011 5,326
------- -------
End of period .............................................. $ 1,614 $ 3,336
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................... $ 1 $ 19
======= =======
Income taxes ............................................... $ 340 $ --
======= =======
Cash flow for acquisitions:
Tangible assets acquired ................................... $ -- $ 333
Intangible assets acquired ................................. $ -- $ 255
Liabilities assumed ........................................ $ -- $ (288)
------- -------
Cash paid for acquisitions ................................. $ -- $ 300
======= =======
See notes to condensed financial statements.
6
BUSINESS RESOURCE GROUP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial information as of April 30, 1997 and for the three and six
month periods ended April 30, 1997 and 1996 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, 1996. 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.
NOTE 2. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS128). The
Company is required to adopt SFAS 128 in the first quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods, basic
EPS would have been $.11 for each of the quarters ended April 30, 1997 and 1996,
and $.21 and $.19 for the six-month periods ended April 1997 and 1996
respectively. Diluted EPS under SFAS 128 would not have been significantly
different than primary EPS currently reported for the periods.
7
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, business developments in
underlying businesses in which the company's customers compete that may thereby
affect demand for the Company's product and services 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 six month periods
ended April 30, 1997 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 APRIL 30, 1997 COMPARED TO THREE MONTHS ENDED APRIL 30, 1996.
Net revenues were $22.5 million for the three months ended April 30, 1997,
an increase of 9% from $20.6 million for the three months ended April 30, 1996.
Increases in product revenue ($258,000 or 1%) and service revenue ($1.6 million
or 74%) more than offset the decline in vendor commissions ($38,000 or 46%). The
overall increase in revenue was primarily the result of new large project
business from both new and existing customers (including Cisco Systems, S3,
National Semiconductor, HMT Technologies, Digital Square, Micro Bar and Legato),
the addition of five new sales people (up 10% over the prior year to 54) and
revenue generated by the Company's southwestern United States and Texas regional
business units acquired in September 1995
8
and January 1996, respectively (3.7 million, including projects from the
Department of Energy, Motorola, BARN Technologies and Gadzooks).
During the three months ended April 30, 1997 Cisco Systems and National
Semiconductor, which historically have been significant customers of the
Company, contributed $11.3 million or 50% of total revenue, up from $9.7 million
or 47% of total revenue in the comparable period in 1996. Cisco alone
represented approximately 46% of the Company's revenue for the quarter ended
April 30, 1997. While the Company maintains an excellent working relationship
with Cisco Systems, the Company has been advised that because of business
uncertainty in the computer networking market Cisco expects to reduce its rate
of orders for the Company's products in the third quarter of the current fiscal
year and possibly in future quarters. The Company currently believes that this
expected reduction in orders by Cisco will have a material effect on its third
quarter financial results. There can also be no assurance that the Company's
financial results for future expected quarters will not be materially and
adversely affected should such reduction in orders continue or increase.
Service revenue increased during the second fiscal quarter of 1997 due to
increases in installation, delivery services and workspace management services.
Such increases contributed to the increase in service revenue as a percentage of
total revenue, which rose to 17.5% from 11% in the second quarter of 1996.
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 $4.9 million during the second fiscal quarter of
1997 from $3.9 million during the same period of fiscal 1996, a 26% increase,
while increasing as a percentage of net revenues to 21.8 % during the second
fiscal quarter of 1997 from 18.7% during the same fiscal quarter of 1996. The
Company experienced a three percentage point increase in product margin as a
percentage of net revenue to 20.4% in second quarter 1997 from 17.4% in second
quarter 1996. This increase was primarily the result of a shift in product mix
to higher margin projects during the second fiscal quarter of 1997 from lower
margin projects in the second quarter of 1996. Service margins also increased as
a percentage of revenue, to 27.9% in the second quarter of 1997 from 25.5% in
the second quarter of 1996. The increase was due to the higher absorption and
utilization of the installation services group.
Selling, general and administrative expenses increased 35% to $4.0 million
for the three months ended April 30, 1997 from $3.0 million for the same period
of the prior year. As a percentage of net revenue, expenses increased to 17.9%
in the second quarter of fiscal 1997 from 14.4% in the second quarter of fiscal
1996. The increase in spending was primarily attributable to higher revenue and
related sales commissions, the continued expansion of the Company's Texas,
Arizona and San Jose operations, particularly in the areas of sales and project
management personnel, the continued building of the Company's system
9
and wide-area-network infrastructure, and the hiring of key management
personnel.
Interest income, net of interest expense and the Company's other expenses,
totaled $11,000 for the three months ended April 30, 1997 versus interest
income, net of interest expense, of $26,000 for the same period of fiscal 1996.
The Company's effective tax rate was 41.4%.
SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO SIX MONTHS ENDED APRIL 30, 1996.
Net revenues were $44.8 million for the six months ended April 30, 1997, an
increase of 28% from $35.1 million for the six months ended April 30, 1996.
Increases were achieved in product revenue ($5.9 million or 19%) and service
revenue ($3.9 million or 103%), partially offset by a decrease in commission
revenue ($106,000 or 53%). The overall increase in revenue was primarily the
result of the continuing strength of sales to Cisco Systems and National
Semiconductor, with combined revenue of $19.2 million for the six months ended
April 30, 1997, up from $13.9 million for the same period of 1996, and large
project business from S3, HMT Technologies and Legato (which combined accounted
for approximately $5.0 million in net revenues), and revenue generated by the
Company's southwestern United States and Texas regional business units ($7.7
million, including large projects from Comp USA, Department of Energy, Motorola,
BABN Technologies and Gadzooks). As a percentage of total net revenue, sales to
Cisco Systems and National Semiconductor accounted for 43% for the first six
months of fiscal 1997, up from 40% during the same period a year ago. As noted
above, the Company has been advised that because of business uncertainty in the
computer networking market Cisco expects to reduce its rate of orders for the
Company's products in the third quarter of the current fiscal year and possibly
in future quarters. The Company currently believes that this reduction in orders
by Cisco will have a material effect on its third quarter financial results.
There can also be no assurance that the Company's financial results for future
expected quarters will not be materially and adversely affected should such
reduction in orders continue or increase.
The increase in service revenue in the first six months of fiscal 1997 as
compared to the year earlier period was primarily attributable to increases in
delivery services, installation and 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 $9.7 million for the first six months of fiscal
1997 from $6.9 million during the same period a year ago, a 41% increase. As a
percentage of net revenues, gross profits increased from 20% for the first six
months of fiscal 1996 to 22% during the same period of fiscal 1997. The impact
of higher product margin (20%
10
in the first six months of fiscal 1997 versus 18% in the same period of fiscal
1996) and higher service margin (28.1% in the first six months of fiscal 1997
versus 27.7% in the same period of fiscal 1996) offset by the reduction in
commission revenue ($95,000 in the first six months of 1997 versus $201,000 in
the same period of fiscal 1996) accounted for the increase in gross profit.
Selling, general and administrative expenses increased 46% to $7.9 million
for the six months ended April 30, 1997 from $5.4 million for the same period of
the prior year. As a percentage of net revenue selling, general and
administrative expenses increased from 15% for the first six months of fiscal
1996 to 18% for the first six months of fiscal 1997. The increase in spending is
primarily attributable to increased sales commissions relating to higher revenue
levels, the addition and expansion of operations in the Company's Texas business
unit, the expansion of operations in Arizona and San Jose, the continued
building of the Company's business system infrastructure, and the hiring of key
management personnel.
Interest income, net of interest expense totaled $34,000 for the six months
ended April 30, 1997 versus interest income, net of interest expense of $81,000
for the same period of fiscal 1996. The decrease was due to lower average cash
balances experienced during the six month period.
The Company has used a tax rate of 41.4% for both periods reported.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at April 30, 1997 was $10.8 million, up slightly from $10.1
million at October 31, 1996.
During the six months ended April 30, 1997, net cash provided by operating
activities was $1.8 million, representing net income of $1.0 million, decreases
of $1.8 million in accounts receivable and $217,000 in prepaids and other
current assets and increases of $588,000 in accrued liabilities and $396,000 in
income taxes payable, offset by a decrease of $2.6 million in accounts payable.
Accounts receivable decreased as a result of intensified collection activities
and the timing of payments for revenue generated during the quarter. Accounts
payable decreased due to the acceleration of vendor payments to take advantage
of vendor discounts. Net cash used in investing activities was $815,000
primarily representing the purchase of property and equipment for $794,000. Net
cash used by financing activities was $397,000, representing the change in bank
overdraft of $476,000 and the repayments of capital lease obligations and notes
payable of $70,000, offset by the issuance of common stock for the Company's
employee stock purchase plan of $149,000.
The Company has an $8 million credit facility, including an option to
convert up to $3 million of the total facility into term loans. As of April 30,
1997 the Company had no borrowings under this credit facility
11
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.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On January 24,1997 Neil A. Armstrong filed a complaint against the Company,
one of its vendors and another third party in the United States District Court
for the Northern District of California. In general, this complaint asserts
claims for the alleged unauthorized use of the name and images of Mr. Armstrong.
Although no assurances can be given as to the results of this case, based on its
present status, management does not believe that such results will have a
material adverse effect on the Company's financial condition or results of
operations.
ITEM 2: CHANGES IN SECURITIES
On April 21, 1997, the Company issued a warrant (the "Warrant") to purchase
up to 60,000 shares of its Common Stock to Gateway Advisors (the "Warrant
Holder"). The Warrant is exercisable at any time on or before April 21, 2002 at
an initial exercise price of $5.50 per share, subject to adjustments for any
stock splits, stock dividends, recapitalizations, reorganizations or the like.
The issuance of the Warrant was deemed exempt from registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) of such Act as a
transaction by an issuer not involving any public offering. The Warrant Holder
represented its intention to acquire the Warrant (and the shares of Common Stock
issuable upon exercise thereof) for investment only and not with a view to or
for sale in connection with any distribution thereof. The Warrant Holder also
had adequate access, through its relationship with the Company, to information
about the Company. An appropriate legend was affixed to the Warrant.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on March 3, 1997.
(b) The first matter voted upon at the meeting was the election of
directors and the results of that vote were as follows:
Shares Present
For Withheld Abstained but not Voting
--- -------- --------- --------------
Brian D. McNay 4,559,848 19,089 0 0
John W. Peth 4,560,036 18,901 0 0
Harry S. Robbins 4,424,868 154,069 0 0
12
Jeffrey Tuttle 4,560,036 18,901
Charles J. Winter 4,560,036 18,901
(c) The second matter voted upon at the meeting was to authorize an
amendment to the Company's 1995 Stock Option Plan to increase the
number of shares of Common Stock reserved for the issuance thereunder
by 500,000 shares to an aggregate of 1,700,000 shares.
The results of that vote were as follows:
Shares Present
In Favor Opposed Abstained but Not Voting
-------- ------- --------- --------------
3,761,216 176,269 7,200 634,252
(d) The third matter voted upon at the meeting was to authorize an
amendment to the Company's 1995 Director's Stock Option Plan to
increase the number of shares of Common Stock reserved for the
issuance thereunder by 75,000 shares to an aggregate of 175,000
shares. The results of that vote were as follows:
Shares Present
In Favor Opposed Abstained but Not Voting
-------- ------- --------- -------------
3,777,982 184,819 7,882 608,254
(e) The fourth matter voted upon at the meeting was to ratify the
appointment of Deloitte and Touche as independent auditors for
the Company for the fiscal year ending October 31, 1997.The
results of that vote were as follows:
Shares Present
In Favor Opposed Abstained but Not Voting
-------- ------- --------- --------------
4,572,048 4,189 2,700 0
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.28 Common Stock Purchase Warrant issued to Gateway Advisors
dated April 21, 1997.
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
13
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the three months ended April 30, 1997.
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: 6/13/97 /s/ Charles J. Winter
--------------------- -----------------------------
Charles J. Winter
President and
Chief Executive Officer
(Principal Financial and
Accounting Officer)
14
INDEX TO EXHIBITS
No. Description
--- -----------
10.28 Common Stock Purchase Warrant issued to Gateway Advisors
dated April 21, 1997.
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule