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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, 1998
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 July 31, 1998 there were 5,023,778 shares of the Registrant's Common Stock
outstanding.
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PART I. FINANCIAL INFORMATION PAGE
<TABLE>
Item 1: Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of
July 31, 1998 and October 31, 1997 ........... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months ended
July 31, 1998 and 1997 ........................ 4
Condensed Consolidated Statements of Cash
Flows for the Nine Months ended July 31,
1998 and 1997.................................. 5
Notes to Condensed Consolidated Financial
Statements..................................... 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction ................................... 7
Results of Operations .......................... 8
Liquidity and Capital Resources................. 9
Item 3: Quantitative and Qualitative Disclosures
about Market Risks ............................. 10
PART II. OTHER INFORMATION
Item 1: Legal Proceedings .............................. 10
Item 2: Changes in Securities and Use of Proceeds....... 10
Item 3: Defaults Upon Senior Securities ................ 10
Item 4: Submission of Matters to a Vote of
Security Holders ............................... 10
Item 5: Other Information .............................. 10
Item 6: Exhibits and Reports on Form 8-K ............... 11
SIGNATURES............................................... 12
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
BUSINESS RESOURCE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 504 $ 274
Accounts receivable, net 9,482 13,764
Inventory 7,866 1,398
Prepaids and other current assets 2,713 2,076
--------------- ---------------
Total current assets 20,565 17,512
Property and equipment, net 2,977 2,346
Other assets 3,145 902
--------------- ---------------
$ 26,687 $ 20,760
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilties:
Line of credit $ 3,230 $' --
Accounts payable 3,939 3,997
Accrued liabilities 3,856 4,236
Current portion of note payable 336 -
Income taxes payable 678 --
--------------- ---------------
Total current liabilites 12,039 8,233
Note payable 733 --
Deferred income tax liability 75 75
Shareholders' equity:
Common stock 50 49
Additional paid in capital 11,317 10,897
Retained earnings 2,473 1,506
--------------- ---------------
Total shareholders' equity 13,840 12,452
--------------- ---------------
$ 26,687 $ 20,760
=============== ===============
</TABLE>
The balance sheet at October 31, 1997 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
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BUSINESS RESOURCE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
July 31, July 31,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues:
Workspace products $21,283 $ 9,541 $53,767 $46,540
Workspace services 4,985 3,301 12,548 11,045
Vendor commissions 13 42 59 137
------------- ------------- ------------- -------------
Total net revenues 26,281 12,884 66,374 57,722
------------- ------------- ------------- -------------
Cost of net revenues:
Workspace products 16,793 7,910 42,732 37,511
Workspace services 3,638 2,487 9,264 8,053
------------- ------------- ------------- -------------
Total cost of net revenue 20,431 10,397 51,996 45,564
------------- ------------- ------------- -------------
Gross profit 5,850 2,487 14,378 12,158
Selling, general and
administrative expenses 4,858 4,244 12,618 12,170
------------- ------------- ------------- -------------
Income (loss) from operations 992 (1,757) 1,760 (12)
------------- ------------- ------------- -------------
Other income (expense):
Interest income (expense) (110) 49 (162) 83
Gain on sale of assets - - 50 -
------------- ------------- ------------- -------------
Total other income (expense) (110) 49 (112) 83
------------- ------------- ------------- -------------
Earnings (loss) before income taxes 882 (1,708) 1,648 71
Income taxes 365 (707) 681 29
------------- ------------- ------------- -------------
Net earnings (loss) $ 517 $(1,001) $ 967 $ 42
============= ============= ============= =============
Net earnings / (loss) per share
Basic $ 0.10 $ (0.20) $ 0.20 $ 0.01
============= ============= ============= =============
Diluted $ 0.10 $ (0.20) $ 0.19 $ 0.01
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements
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BUSINESS RESOURCE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
------------------------
1998 1997
------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Earnings $ 967 $ 42
Adjustments to reconcile to net cash (used) provided by operating activities:
Depreciation and amortization 635 541
Gain on sale of property and equipment (50) -
Warrants issued for services 147 -
Changes in operating assets and liabilities:
Accounts receivable 4,735 5,819
Inventory (5,978) (273)
Prepaids and other current assets (610) (29)
Accounts payable (136) (3,356)
Accrued liabilities (494) (459)
Income tax payable 678 (31)
------- -------
Net cash (used) provided by operating activities (106) 2,254
INVESTING ACTIVITIES:
Purchase of property and equipment (1,071) (938)
Proceeds from sale of property and equipment 50 -
Cash paid for acquisition (1,926) -
Change in other assets 29 (21)
------- -------
Net cash used by investing activities (2,918) (959)
FINANCING ACTIVITIES:
Change in bank overdraft - (476)
Repayment of notes payable and capital lease obligations - (97)
Issuance of common stock, net of compensation 24 193
Borrowings against line of credit 3,230 -
------- -------
Net cash provided (used) by financing activities 3,254 (380)
Net increase in cash and equivalents 230 915
CASH AND EQUIVALENTS BALANCES:
Beginning of period 274 1,011
------- -------
End of period $ 504 $ 1,926
======= =======
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 162 $ 1
======= =======
Income taxes $ - $ 471
======= =======
Noncash investing and financing transactions:
Acquisition Cost $ 3,478 $ -
Note issued for acquisition (1,069) -
Stock issued for acquisition (250) -
Cash acquired (233) -
======= =======
Cash paid for acquisition $ 1,926 $ -
======= =======
</TABLE>
See notes to condensed financial statements
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BUSINESS RESOURCE GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial information as of July 31, 1998, and for the three and nine month
periods ended July 31, 1998 and 1997, respectively, 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, 1997. 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" (SFAS 128). The
Company has adopted SFAS 128 and has restated earnings per share (EPS) data for
prior periods to conform with SFAS 128.
SFAS 128 replaces previous 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1998 1997 1998 1997
------ -------- ------ ------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net earnings..................................... $ 517 $ (1,001) $ 967 $ 42
====== ======== ====== ======
Weighted average common shares outstanding....... 4,996 4,904 4,942 4,894
Common equivalent shares:
Stock options.................................... -- -- 26 69
------ -------- ------ ------
Total common stock and common
stock equivalents............................. 4,996 4,904 4,968 4,963
====== ======== ====== ======
</TABLE>
Options to purchase 232,170 and 190,607 shares of common stock were outstanding
during the third quarters of the Company's fiscal year 1998 and 1997,
respectively, but were not included in the computation of diluted EPS for such
quarter because the exercise price of outstanding options was greater than the
average fair market value of the common shares.
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NOTE 3. On May 22, 1998, the Company acquired OFN, Inc., a San Diego based
refurbisher of office workstations, in exchange for $2,093,000 in cash, the
Company's promissory note in the aggregate principal amount of $1,069,205, and
100,000 shares of Company's Common Stock. In connection with this purchase, the
Company borrowed an additional $2,093,000 against the Company's $15.0 million
credit facility. The Company also acquired $2,341,000 of goodwill from the OFN,
Inc., acquisition. The annual amortization resulting from the recognition of the
goodwill will be approximately $117,000 and is being amortized on a straight
line basis over a useful life of 20 years.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION:
The matters discussed herein include forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Such forward-looking
statements include, without limitation, statements relating to the Company's
future revenue, gross margins, operating expenses, management's plans and
objectives for the Company's future operations and the sufficiency of financial
resources to support future operations and expenditures. Factors that could
cause actual results to differ materially include, but are not limited to, the
timely availability, delivery and acceptance of new products and services, the
continued strength of sales to Cisco Systems, Inc. (one of the Company's
principal customers), 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 reports filed with the
Securities and Exchange Commission and press releases, copies of which are
available from the Company upon request. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Additionally, the results of operations for the three and nine
month periods ended July 31, 1998 are not necessarily indicative of the results
to be expected for the full fiscal year. In addition, operating results are
subject to the successful close of large project business and related vendor
lead times.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date field. Beginning in the year 2000,
these date fields need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, in approximately one and a half
years, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with such compliance. Any
Year 2000 compliance problem of the Company, its suppliers, its service
providers or its customers could result in a material adverse effect on the
Company's financial condition and operating results. The Company undertakes no
obligation to release publicly the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
References made in this Quarterly Report on Form 10-Q to the "Company" or
the "Registrant" refer to Business Resource Group.
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RESULTS OF OPERATIONS (THREE MONTHS ENDED JULY 31, 1998):
NET REVENUES were $26.3 million for the three months ended July 31, 1998 as
compared to $12.9 million reported for the three months ended July 31, 1997, an
increase of 104%. Product revenues for the three months ended July 31, 1998 were
$21.3 million, an increase of $11.7 million, or 123%, from product revenues of
$9.5 million reported for the three months ended July 31, 1997. The higher
product revenues in the third quarter of fiscal 1998 were primarily due to
increased revenues from Cisco Systems, Inc. over the third quarter of 1997.
Service revenues for the second quarter of fiscal 1998 were $5.0 million, an
increase of $1.7 million, or 51%, from service revenues of $3.3 million reported
in the same quarter of fiscal 1997.
GROSS PROFIT for the third quarter of fiscal 1998 was $5.9 million, or
22.3% of revenues, as compared to $2.5 million, or 19.3% of revenues, for the
comparable quarter of fiscal 1997. As a percentage of net revenues, gross
profits from product revenues were 21.1% for the quarter ended July 31, 1998 as
compared to 17.1% for the third quarter ended July 31, 1997. Gross profits for
the third quarter of fiscal 1998 from service revenues were 27.0% as compared to
24.9% for the third quarter ended July 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE expenses were $4.9 million, or 18.5% of
revenues, for the third quarter of fiscal 1998 as compared to $4.3 million, or
32.9% of revenues, for the third quarter of fiscal 1997. Selling, general and
administrative expenses increased over the third quarter of fiscal 1997 due to
selling, general and administrative expenses of $293,000 associated with the
acquisition of OFN, Inc. during the quarter, in addition to increased labor
costs as a result of additional headcount to support the Company's revenue and
service objectives.
NET INTEREST EXPENSE was $110,000 for the three months ended July 31, 1998
as compared to net interest income of $49,000 for the same period of fiscal
1997. This change was primarily due to interest expense on an outstanding line
of credit balance during the quarter.
RESULTS OF OPERATIONS (NINE MONTHS ENDED JULY 31, 1998):
NET REVENUES were $66.4 million for the nine months ended July 31, 1998 as
compared to $57.7 million reported for the nine months ended July 31, 1997, an
increase of 15%. Product revenues on a year to date basis for fiscal 1998 were
$53.8 million as compared to $46.5 million for the same period of fiscal 1997,
an increase of 15%. The higher product revenues were primarily due to increased
revenues from Cisco Systems, Inc. Service revenues were $12.5 million for the
nine months ended July 31, 1998 as compared to $11.0 million for the nine months
ended July 31, 1997, an increase of 13%.
GROSS PROFIT for the first nine months of fiscal 1998 was $14.4 million, or
21.7% of revenues, as compared to $12.2 million, or 21.1% of revenues, for the
first nine months of fiscal 1997. Gross profits from product revenues were 20.5%
of revenues for the nine months ended July 31, 1998, up slightly from the 19.4%
reported for the comparable
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period of fiscal 1997. As a percentage of net revenues, gross profits from
service revenues were 26.2% for the nine months ended July 31, 1998 as compared
to 27.1% for the nine months ended July 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE expenses were $12.6 million, or 19.0%
of revenues, for the nine months ended July 31, 1998 as compared to $12.2
million, or 21.1% of revenues, for the nine months ended July 31, 1997. The
increase in selling, general and administrative expenses was primarily
attributable to costs associated with the OFN, Inc. acquisition. Selling,
general, and administrative expenses declined, as a percentage of revenues, due
to higher revenues in the nine months ended July 31, 1998 as compared to the
nine months ended July 31, 1997.
NET INTEREST EXPENSE was $162,000 for the nine months ended July 31, 1998
as compared to net interest income of $83,000 for the same period of fiscal
1997. This change was primarily due to interest expense on an outstanding line
of credit balance during the first nine months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at July 31, 1998 was $8.5 million, down slightly from $9.3
million at October 31, 1997. At July 31, 1998 the Company had net borrowings of
$3.1 million as compared to cash and equivalents of $274,000 reported October
31, 1997 primarily due to higher inventories and the acquisition of OFN, Inc.
made during the third fiscal quarter of 1998. Inventories at July 31, 1998 were
$7.9 million, an increase of $6.5 million from the $1.4 million reported at
October 31, 1997. The increase in inventories was primarily due to in- process
projects pending completion and in-transit inventory from suppliers pending
delivery to customers after the end of the quarter along with inventory obtained
with the OFN, Inc. acquisition. Other assets at July 31, 1998 were $3.1 million,
an increase of $2.2 million from the $900,000 reported at October 31, 1997. The
increase in other assets was primarily due to goodwill acquired with the
acquisition of OFN, Inc. These increases were offset by a decrease in accounts
receivable of $4.3 million from October 31, 1997 to July 31, 1998. The decreased
accounts receivable balance was primarily due to prompt payment of outstanding
accounts receivable by Cisco Systems, Inc.
Net cash used in investing activities in the nine months ended July 31,
1998 was $2.9 million and resulted primarily from the 1.9 million in cash paid
for the acquisition of OFN, Inc. In addition, investments in property and
equipment, which primarily related to management information systems hardware,
were $1.1 million in the nine months ended July 31, 1998. The Company has
implemented a plan to modify its information technology in response to changing
business requirements. The Company currently expects the total project to cost
approximately $1.3 to $1.6 million.
The Company has a $15.0 million credit facility with a bank which expires on
August 8, 1999 with an option on an additional $1.0 million term loan. However,
the Company maintains an irrevocable stand-by
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letter of credit in the amount of $3.0 million against this facility. As of July
31, 1998 the Company had bank borrowings of $3.2 million under the existing
credit facility.
The Company 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
for the forseeable future.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time be a party to various legal proceedings arising in
the normal course of its business. These actions could include products
liability, employee related issues and disputes with vendors or customers.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial data schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated June 8, 1998 and a related
report on Form 8-K/A dated July 31, 1998 related to the acquisition of
OFN, Inc.
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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: 9/11/98 /s/ John M. Palmer
-----------------------
John M. Palmer
Vice President and Chief
Financial Officer
(Principal Financial
and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Document Description
- ------- --------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 504
<SECURITIES> 0
<RECEIVABLES> 9,631
<ALLOWANCES> 148
<INVENTORY> 7,866
<CURRENT-ASSETS> 20,565
<PP&E> 4,777
<DEPRECIATION> 1,800
<TOTAL-ASSETS> 26,688
<CURRENT-LIABILITIES> 11,703
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 13,791
<TOTAL-LIABILITY-AND-EQUITY> 26,688
<SALES> 21,283
<TOTAL-REVENUES> 26,281
<CGS> 16,793
<TOTAL-COSTS> 20,431
<OTHER-EXPENSES> 4,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110
<INCOME-PRETAX> 882
<INCOME-TAX> 365
<INCOME-CONTINUING> 517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
