-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T0ajuEcKIfO7/EWrFMxi3TGPnJdCB+MoP10TzAC6vBbiy0ftw3U9zqewavLIWU2x E+2VLucxMHUQXbZiHkM0EA== 0000891618-98-000271.txt : 19980130 0000891618-98-000271.hdr.sgml : 19980130 ACCESSION NUMBER: 0000891618-98-000271 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUSINESS RESOURCE GROUP CENTRAL INDEX KEY: 0000945028 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FURNITURE & HOME FURNISHINGS [5020] IRS NUMBER: 770150337 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26208 FILM NUMBER: 98516402 BUSINESS ADDRESS: STREET 1: 2150 N FIRST ST STREET 2: STE 101 CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084413700 MAIL ADDRESS: STREET 1: 2150 NORTH FIRST STREET SUITE 101 CITY: SAN JOSE STATE: CA ZIP: 95131 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended October 31, 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 of (I.R.S. Employer incorporation or organization) Identification No.) 2150 NORTH FIRST STREET, SUITE 101 SAN JOSE, CALIFORNIA 95131 (408) 325-3200 (Address and telephone number of principal executive offices) ---------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value ---------------------------------- 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 than 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 __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6,258,836 as of January 9, 1998, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 4,914,249 shares of Registrant's Common Stock issued and outstanding as of January 9, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the annual meeting of shareholders to be held on March 2, 1998 are incorporated by reference into Part III of this report on Form 10-K. -1- 2 INTRODUCTORY STATEMENT Except for the historical information contained in this Annual Report on Form 10-K, the matters discussed herein are 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 SEC reports 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. The Company undertakes no obligation to publicly release 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 Annual Report on Form 10-K to "BRG," the "Company" or the "Registrant" refer to Business Resource Group. PART I ITEM 1. BUSINESS Business Resource Group is a leading provider of workspace services and products to businesses, primarily in the western United States. Since commencement of operations in 1986 as an office furniture dealer, the Company has added related services such as computerized space planning and design, project management, product specification, order management, move management, installation, computer-aided facilities management (CAFM) services and ongoing facilities management outsourcing services. The Company believes that its broad scope of services allow it to offer a customer-oriented integrated solution well suited for the needs of both large, mature companies as well as rapidly growing businesses that want economic, comprehensive solutions for their workspace requirements, while minimizing involvement of their in-house staff through outsourcing to the most efficient and responsive suppliers. The Company markets its services and products through a direct sales force, focusing to date primarily on rapidly growing companies and on companies in the process of significantly changing their facilities arrangements. INDUSTRY BACKGROUND According to trade association estimates, manufacturers' sales of business furnishings in the United States in 1997 were approximately $11 billion. The Company believes that a key trend in the workspace products and services market is the shift to open area configurations which commenced in the early 1980's. Open area configurations employ standard partitions and components to form individual cubicle workspaces for employees in a layout customized for the needs of each business. The emergence of the personal computer as a business productivity tool in combination with the emphasis on competitiveness and efficiency in business in the United States has contributed to the trend toward these configurations. Open area configurations accomplish the following: -2- 3 o Economize by placing more workers in a specified floor area than a segregated office layout; o Facilitate individual ergonomic design of employees' work areas, increasing worker productivity and reducing injuries in the workplace and related costs; o Promote worker communication and cooperation within the office workforce; o Permit quicker adjustment to workspace arrangements in response to changes in the business environment; and o Minimize the need for expensive and permanent hard wall tenant improvements. Demand for open office systems has also increased as a result of the flattening of the business organization. Increased individual requirements for both data and communications equipment and connectivity as well as group-oriented work practices such as consensus decision making are driving changes in workspace configuration requirements. Rapidly growing businesses additionally benefit from open office systems because they allow companies to expand with less disruption and downtime. Large companies also benefit from flexible office arrangements that make it easier for them to restructure or downsize as they anticipate and respond to changes in their business. Relocations to new facilities drive demand for new office furniture because customers find it more effective to replace furniture than to incur the costs and work disruptions associated with moving it. The Company believes that with or without relocation, a significant portion of the large installed base of office furniture is replaced by new furniture every five to seven years. Recycling old furniture through refurbishment and sale to smaller companies with modest budgets presents a related business opportunity for providers of new workspace products. Traditional Players. The Company believes that the three largest manufacturers, Steelcase, Inc., Herman Miller, Inc. and Haworth, Inc. account for approximately half of the manufacturers' annual sales to dealers in the United States. The "big three" manufacturers depend on their own sales personnel as well as captive dealer relationships to sell their products in any given geographic area. The "big three," which have built strong brand name recognition, are in a position to place territorial, price, sourcing and delivery limitations on their dealers. The business of these dealers is primarily to serve as the manufacturer representative of one of the "big three" manufacturers whose products they sell in a limited geographic area specified by the manufacturer. The Company believes that the geographic limitations imposed by the "big three" manufacturers on their dealers are a primary reason for the highly fragmented nature of the workspace products distribution industry. The annual revenues of each of the next eight largest office furniture manufacturers range between approximately $180 million and $800 million. Lacking the brand name identity of the "big three," however, these manufacturers rely upon design intermediaries or smaller, regional multi-line dealers for their sales. These smaller dealers have historically lacked the capital or breadth of services to compete on large orders or to achieve significant revenue levels. Workspace specification in larger corporations has traditionally involved a facilities manager and other members of senior management, influenced by service providers such as designers, architects, real estate professionals or other outsourced facilities management providers. Small, rapidly growing -3- 4 businesses lacking in-house facilities management and unfamiliar with or reluctant to spend money on design intermediaries have historically handled workspace specifications in a more ad-hoc manner. In either case, the traditional furniture dealer is often left in a passive order taking and fulfillment role. Changing Customer Requirements. The Company believes, based on its experience with customers, that the desire to minimize in-house facilities management headcount, reduce overhead and improve coordination has lead many companies to outsource facilities related tasks where feasible, including space planning, design and project management and fulfillment services. Furthermore, customers' use of modular office systems has reduced the importance of manufacturers' brand names in the purchasing decision and increased the importance of other factors such as product functionality and layout, which have become increasingly complex due to the need to integrate rapidly changing office technology requirements. Together, these trends have led to the demand for a proactive workspace services and products solution. CUSTOMER ORIENTED INTEGRATED SOLUTION Business Resource Group believes that traditional approaches to the business furnishings industry are not well suited to meet the current requirements of growing and changing businesses. In response, the Company has positioned itself as the representative of the customer rather than the manufacturer and as a provider of integrated workspace solutions. Business Resource Group has grown rapidly due to management's early recognition and response to customer requirements for a single source solution for facilities needs. By foregoing the captive dealer agreements required by the largest office furniture manufacturers, the Company believes it is able to offer the customer a much broader range of value-added services and product choices than its major competitors, all at a competitive price. The benefits to customers of the Company's integrated solution approach include: o Reduced overhead and improved coordination by having a single point of contact; o Improved pricing, product selection and delivery available from a multi-line representative; o Accelerated design and installation through early coordination with a service provider; and o Superior customer communications, response and project control through the implementation of highly automated systems. Key elements of the customer oriented integrated solution approach are: Services and Products Integration. Business Resource Group determined that both large, mature companies as well as rapidly growing companies want economic, comprehensive solutions for their workspace requirements while minimizing involvement of their in-house staff. The Company has leveraged its knowledge of the office furniture industry, including suppliers and business methods, to develop an integrated approach which offers a "single source" point of contact for modern interior workspaces. This begins with the Company's consultative selling approach in which its sales representatives listen to the customer's problem. A team of Business Resource Group professionals, chosen for each account for their relevant functional capabilities, then meets with the customer to build a partnership and reach consensus on the solution which best suits the customer's needs. The Company is able to fashion an integrated solution because of the wide array of services and products it can provide. Among the Company's services that may be included in this solution are project management, layout and -4- 5 design, furniture specification and selection, purchasing, move management, installation, asset management and maintenance. The Company has the flexibility to offer customers any of its services and products in any combination to form the ideal integrated solution. Customer Representation. Unlike traditional furniture dealers, Business Resource Group represents the customer, not the manufacturer. Since providing only one of the "big three" contract furniture lines would restrict the customer in variety and pricing options, the Company has formed relationships with multiple suppliers (including seven of the remaining top ten in sales volume) for each product segment. Using multiple suppliers, the Company is able to obtain the best features and value for its customers. This approach also provides for supply alternatives if a major line manufacturer cannot meet a customer's delivery requirements. Business Resource Group purchases significant annual volumes from over a dozen suppliers of system lines, casegoods, seating and specialty goods. Advanced Support Technology. Business Resource Group has developed a technology leadership position within its industry by utilizing computer based design and specification software to provide space planning and product selection tools for the customer in real time, even before the Company has been selected as a provider by the customer. The Company uses customized software and systems for product specification, order management, job costing and variance analysis, and has integrated these packages with its computer aided design tools, allowing the Company to track the profitability of every order. The Company also supports electronic ordering for certain products. EXPANSION STRATEGY The Company's objective is to be a leading provider of workspace services and products. Principal elements of the Company's strategy to achieve this objective are as follows: Expand Through Acquisition. The Company has in the past expanded and plans to continue to expand its business through acquisition of dealers in target markets similar to Northern California's Silicon Valley, which are characterized by a large number of technology driven, high growth companies. Because these prospective customers need comprehensive advice and quick turnaround in addressing rapid facilities expansion, the Company believes its methods of operation can be successfully applied in these new markets. In addition, many of the Company's larger customers have operations in multiple markets, including markets the Company has targeted for expansion and as such, represent attractive business opportunities in those markets. Since many contract furniture dealers and facilities management firms are small and lack the breadth of services and capital necessary to respond to the facilities outsourcing requirements of medium and large growth-oriented corporations, the Company believes that certain of these dealers will be available and attractive acquisition candidates. Continue to Broaden Its Range of Services and Products. The Company believes that a growing number of companies want to deal with fewer vendors for the procurement of workspace services and products. As such, the Company has a long term strategy which includes the acquisition of service providers and product distributors, and distribution rights for additional product lines that complement its existing offerings, where available on reasonable terms. Form Strategic Alliances With Complementary Service Providers. A number of facilities-related businesses offer services and products that are complementary to those provided by the Company. Such services include real estate and property management, architectural design, network cabling, and operations and maintenance services such as janitorial and security. The market leaders in these facilities related businesses are large and national in scope, providing services and products to both large and small -5- 6 customers in many industries. The Company believes that a long-term opportunity exists to form strategic alliances with some of these companies on a selective basis to offer a broad facilities-related solution to large corporate customers which desire to outsource these services. While the Company has not entered into nor is it currently in the process of negotiating any such strategic alliances, such alliances could involve the formation of a joint venture by the Company and its joint venture partner for the purpose of servicing a target customer account, contractual arrangements whereby the Company acts as a service provider on behalf of its joint venture partner, or contractual arrangements or other relationships whereby the Company is deemed a preferred vendor or service provider by its joint venture partner in connection with competition for target accounts. SERVICES AND PRODUCTS Business Resource Group provides integrated workspace solutions for customers from the suite of services and products it offers. A substantial portion of these services are initiated prior to delivery of workspace products, including overall project management, computerized space planning and design, product specification and order management. These services are key differentiators which contribute significantly to the Company's ability to win initial orders. The Company's pre-installation services build a close and efficient partnership with customers, moving them from needs identification and analysis through to the development and selection of the solutions which best fit their needs. The Company generally bundles these services into overall product pricing. Once the customer has identified the workspace products best suited to its needs, the Company often provides additional services at specified prices to implement setup and maintenance of these products in the customer's facility and provides coordination and management services both during and after the move. These services, covering all stages of a project from planning through execution, enable the Company to provide comprehensive, turnkey solutions to its customers. Customers' recognition of the value of this suite of services and products is evident in the high level of repeat business which the Company receives from its client base. Services provided by the Company are as follows: Pre Installation Services Space Planning and Design. Space planning is the first task for a workspace project. The Company's use of automated tools, such as the AutoCAD computer software program used in space planning, provide it substantial productivity gains while offering easily modifiable space configurations. Product Specification. After completing the space planning phase, the Company works with the customer to choose specific products. Using information generated from the computerized space plan, product specification can be executed quickly and accurately with applications software programs such as AutoCAD or CAP Spex. Order Management. Order management is necessary to fulfill the customer's specific requirements for workspace products on a timely basis. Order management includes product procurement, product tracking, updating the customer about order status and coordinating the ultimate delivery. The Company makes purchases of workspace products based solely on customer orders and generally coordinates the direct shipment of such products to the customer's facilities. The Company's inventory consists primarily of inventory in transit. Project Management Services. Focusing on product specification, installation management, change order management and quality control, the Company's project managers add significant value in managing the customer's entire workspace project. -6- 7 Products Modular Systems. The Company's modular system products, which include office partitions and modular furniture, provide a flexible solution for defining work environments within an open interior building space without the need for costly tenant improvements to the building interior. Modular systems provide the ability to define individual employee workspaces and functional relationships while integrating electrical, voice and data requirements for the individual workstation. While requiring value added installation services to be functional, modular systems allow for different arrangements of components (overhead shelves, cabinets, lateral files, work surfaces and pedestals) to meet varying needs of customers. With many fabric and finish selections, modular system lines provide visual appeal as well as effective workspace utilization and productivity. The leading providers of these products to the Company include Knoll Inc., Teknion Inc., Kimball Office Furniture Co. ("Kimball"), Allsteel, and The Hon Company. A typical modular system installation at a customer facility ranges from $1,500 to $4,000 per workspace, depending on the number of workspaces as well as the products and features specified. Casegoods. Casegoods include desks, bookcases, filing cabinets, credenzas and tables. Available in both wood and metal, casegoods are generally used in private offices, conference rooms and other interior spaces divided by physical walls. Casegoods complement the solution for most work environments that include both open and private space. The leading providers of these products to the Company include Kimball, Creative Wood Products, Inc. and National Office Furniture Company. A casegoods installation at a customer facility can range from $800 to $10,000 per office. Seating. Variations in seating have proliferated to satisfy a diversity of settings and ergonomic requirements. These variations include adjustable seating used at a standard workstation or desk, which allows the user to adjust the configuration for personal preference. Non-adjustable seating is a less expensive alternative that can be used in cafeterias, conference rooms and lobbies. The leading providers of these products to the Company include Office Master, Inc., United Chair Company and HAG, Inc. Customer pricing typically ranges from $50 to $600 per chair. Specialty Furniture Products. The Company's specialty products include white boards, ergonomic devices used in conjunction with other furniture products (such as wrist rests, foot rests and adjustable keyboards) and custom manufactured products. Refurbished Furniture. The Company's customer-oriented integrated solution approach to its business frequently leads its customers to rely on the Company for most aspects of a facilities relocation including disposition of the existing furniture in the customer's prior facility. The Company purchases selected products on favorable terms which it considers both standard and reusable, refurbishes them when necessary and resells them to smaller businesses with modest workspace budgets. Product Implementation Services Once a workspace has been planned and products have been specified and ordered, Business Resource Group provides separately-billed services to implement the customer's plan. Installation and Maintenance. Installation is a process by which a modular system is converted from unconnected and unconfigured pieces to a true workspace solution. The Company's product installers normally follow a specific process which begins with a field study to verify space-related issues that affect installation, such as the location and size of doors, elevators, stairwells and other -7- 8 building specifications. Upon verification of installation drawings and receipt of workspace products at the customer's facility either directly from the manufacturer or from a Company-rented warehouse, the installation is completed. The Company provides substantial training to its installation staff concerning applicable safety procedures in order to minimize the risk of injury or property damage as well as general business education on subjects pertinent to these employees. As the final step in meeting a customer's relocation or move requirement, installation plays a very important role. The cost of typical installation services ranges from $120 to $300 per modular station, or approximately eight percent of the sales price. Workspace Management Services The Company, through its Workspace Management Services ("WMS") group provides the following service offerings to help companies manage their facilities' resources more effectively without adding headcount: Workspace Planning. The Company provides a systematic needs analysis based on a customer's current facility and their future growth plans. The resulting analysis will often yield a strategic facility plan which allows for facility programming, site selection, and lease reviews. The plan may also call for the use of other WMS services in order to optimize the customer's facilities alternatives. Design Management. The Company manages a design team on behalf of its customer, ensuring that the customer's design requirements are met while staying within timeframe commitments and budget constraints. Construction Management. The Company coordinates, on behalf of its customer, the activities of the landowner, real estate broker, architect, and construction trades to meet the customer's building construction requirements. This service also offers bid process management, permit process coordination, build-to-suit project management and overall cost and schedule control. Move Management. The Company coordinates all components of a customer's move to a new location including the development of a master move plan, communication to employees, the coordination of all vendor activities, and the management of building activation. This service is provided with minimal involvement or downtime to the customer's employees or disruption to ongoing business activities. Workspace Outsourcing. The Company fulfills a customer's short or long term staffing requirements by providing experienced facility professionals for specific temporary assignments. This service offers the customer operational and financial flexibility in meeting staffing requirements by allowing the customer to focus fixed resources on its core competencies. Computer-Aided Facility Management. The Company provides "system-solutions" for a customer's facilities department. Many of the solutions offer an efficient mechanism to capture and verify facility and asset information and then provides reporting and financial planning tools by incorporating this information in a visually-oriented database software program offered by the Company. This service offers current business process mapping, business process re-engineering, software selection, and system implementation. The Company bills its customers on an hourly basis for such services, with typical projects ranging from $5,000 to $50,000 in aggregate billings. -8- 9 SALES AND MARKETING Sales Organization. Business Resource Group markets its products and services through a direct sales force which consisted of 42 individuals as of October 31, 1997, operating out of the Company's offices in San Jose and San Francisco, California; Phoenix, Arizona; Dallas and San Antonio, Texas and Denver, Colorado. As of October 31, 1997, the Company also employed 20 customer service representatives to support the direct sales force. The Company's sales resources are targeted at various management levels within target accounts. The Company's customer service representatives are account focused, and teams generally consisting of the sales representative, customer service representative, project manager and installers are created around each new account that the Company obtains. Sales Approach. The Company's sales strategy and approach begins with the identification of target accounts by its direct sales staff. The Company's salespersons maintain a contact network of real estate brokers, venture capitalists, attorneys, bankers, phone system resellers, independent facilities managers and other persons in a position to influence office furniture and facilities management outsourcing decisions. After identifying target accounts, the Company's sales personnel contact the appropriate decision-makers at various management levels (such as in-house facilities managers, purchasing agents or chief financial officers) seeking to position the Company as the service provider of choice by showcasing its account team and often preparing a space plan at no charge to the prospective customer. The final stage in the sales process is the preparation of a price quotation, over which each of the Company's sales representatives has considerable pricing discretion within guidelines set by the Company's management. Sales and Sales Support Compensation: The Company recognizes that its long term growth and profitability is based upon three critical elements; the expansion of its customer base, the retention of its existing customers and the effective management of key strategic relationships within its customer base. The growth of the customer base is directly attributable to the talent, size, and motivation of the Company's sales force. To accomplish this the Company offers compensation which can be exclusively commission-based or a combination of base salary plus commissions, either of which are intended to offer a better than industry standard compensation package and a market advantage in attracting and retaining top sales personnel. The retention of existing customers and the management of key strategic relationships is a function of the Company's ability to provide responsive, innovative high quality support to its customers. The Company has significantly expanded its professional staff in Project Management, Installation, and Customer Service, to ensure a qualified team is available to provide such support. The Company offers competitive salaries to its sales support personnel, often coupled with incentive programs based on the attainment of functional performance objectives. Marketing. In addition to its networking efforts with persons in a position to influence workspace products and facilities management purchase decisions, the Company markets its services and products over the Internet and through industry conferences and trade shows, cooperative and stand-alone advertising, educational seminars (including space planning and asset management seminars coordinated through the Company's WMS group), direct mail and other customary public relations methods. The Company's San Jose corporate headquarters, the San Francisco office, the Company's office in Phoenix, the Company's offices in Dallas and San Antonio also function as working showrooms. -9- 10 CUSTOMERS Business Resource Group has developed a diverse and extensive client base, including companies in the networking and communications, software, electronics, financial services, life sciences and health care industries, as well as service providers of various types. The Company's customers also vary widely in size, ranging from large enterprises with over $1 billion in sales, to emerging companies, which are often thinly staffed and are therefore receptive to comprehensive solution providers such as the Company. The Company provided services and sold products to approximately 1,200 customers during the fiscal year ended October 31, 1997. Fifty customers accounted for approximately 72% of the Company's net revenues during fiscal 1997. Cisco Systems accounted for approximately 30% of net revenues for the fiscal year ended October 31, 1997. Historically, the Company has had substantial recurring sales from current customers. Over 57% of the Company's net revenues during the fiscal year ended October 31, 1997 were derived from customers which were also customers during fiscal 1996. VENDORS Business Resource Group purchases its workspace products from a variety of suppliers. The table below summarizes principal product lines the Company purchases from its suppliers.
Product Lines -------------------------------------------- Modular Vendor Systems Casegoods Seating Specialty ------ ------- --------- ------- --------- Arcadia Furniture Corporation X X Creative Wood Products, Inc. X X Eagan Visual West, Inc. X Eck Adams Corp. X Global Wholesalers West, Inc. X The Gunlocke Company X X X Hag, Inc. X Harpers Furniture X X X The Hon Company/Allsteel X X X Kimball Office Furniture Co. X X X X Knoll, Inc. X X X Krueger International, Inc. X National Office Furniture Co. X X Office Master, Inc. X Office Specialty X X X SIS Human Factors Technology, Inc. X TAB Products Co. X X Teknion, Inc. X X X Trendway, Inc. X United Chair Co. X
-10- 11 None of the products currently offered by the Company is obtained on a sole-source basis from any vendor or dealer. During the fiscal year ended October 31, 1997, the Company purchased approximately $16.0 million, $7.2 million and $6.9 million, respectively, from Teknion Inc., Knoll, Inc., and The Hon Company. The Company also subcontracts for delivery, freight services and a small percentage of its installation services. While the Company's strategy is to maintain multiple sources of supply for each of its workspace product lines, the Company is dependent upon these suppliers for timely delivery and product quality once orders are placed. The Company has, from time to time, experienced delays in product delivery from a number of suppliers. These delays have adversely affected the timing of customer deliveries and installations. Delays by suppliers have also resulted in increased costs to the Company and in certain cases lost revenues. Almost all of the Company's purchases from its vendors are made on a purchase order basis, and liabilities of such vendors to the Company for late deliveries are therefore principally based on the terms and conditions set forth in the applicable purchase order and the supplier's confirming document (if any). The Company customarily enters into negotiations with its vendors for price adjustments and late fees as may be appropriate in the event of late deliveries. Future delays in delivery by suppliers or poor product quality could have a material adverse effect on the Company's ability to meet customer requirements and thereby adversely affect revenues or increase costs. OPERATIONS The Company's operations include ongoing order processing and coordination with its vendors through a software system developed by principals of the Company through an entity controlled by them at that time, but which is now independently owned. Order processing is performed in each of the Company's regional offices and such personnel are also responsible for customer service support to the sales representatives. The Company carries out its accounting and credit & collection function from its San Jose headquarters. Accounting functions include general ledger, accounts payable, accounts receivable and payroll. Responsibility for the Company's technology hardware and software upgrades and purchases is shared by Directors of System Administration and Applications Development. Training in sales, project management, customer service and installation services is carried out in both the Company's regional offices and its San Jose headquarters. COMPETITION Workspace products and services are provided by a large number of companies. The office workspace products marketplace is highly fragmented in the metropolitan areas of the United States. For example, at least 25 traditional furniture dealers compete with the Company in the San Francisco Bay Area marketplace alone. The Company believes that its largest local competitor is Lindsay Ferrari, formed as a result of the 1994 merger of Lindsay's and Rucker Fuller, both local Steelcase dealers. The Company believes its comprehensive range of products and services is a competitive advantage relative to these companies. Its recent addition of workspace management services further differentiates it from traditional furniture dealers. In the workspace management services market, the Company competes with numerous, primarily small companies, depending on the type of service or location. -11- 12 The workspace products manufacturing industry is dominated by Steelcase, Herman Miller, Inc. and Haworth, Inc., each of which distributes their products directly and through captive dealers. The Company is not an authorized dealer for these manufacturers. There can be no assurance that these manufacturers will not price their products or services or offer other terms to become more competitive or to allow their dealers to become more competitive or that such actions would not have a material adverse effect on the Company or its results of operations. The Company believes that the primary competitive factors in its targeted market are customer responsiveness, breadth of services and products offered, quality and price. To remain competitive, the Company must continue to offer a broad range of services and products to meet the needs of its customers, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis and compete favorably on the basis of price. FACTORS AFFECTING FINANCIAL RESULTS AND STOCK PRICE The Company's future results of operations may be adversely affected by various factors, including those discussed below. The Company's revenues and operating results may fluctuate substantially from period to period depending on such factors as the timing of significant customer orders, the timing of revenue and cost recognition, variations in contract service and product mix, changes in customer buying patterns, changes in vendor lead times and trends in the economy of the geographic region in which the Company operates. Any unfavorable changes in these or other factors could have a material adverse effect on the Company's business and results of operations. Given the variability of these factors, the Company expects that quarter to quarter performance may fluctuate for the foreseeable future and that results in any single quarter may therefore not be indicative of future results. A large portion of the Company's net revenues for any period are frequently dependent on a few large customer projects involving relocation, including a move to a new facility or an upgrade of an existing facility. At the conclusion of a major project, that customer may not have an immediate need for additional services or products on the same scale. The Company does not enter into long term or volume purchase contracts with its customers, and customers may discontinue further purchases of the Company's services or products at any time without notice. There can be no assurance that any of the Company's customers will expand their operations, relocate their offices or facilities or otherwise require the Company's services or products in the future. To maintain or increase existing levels of revenues and profits, the Company must identify and book major projects within its existing base of customers or with new customers. There can be no assurance that any of the Company's current customers will engage the Company for major projects in the future or that the Company will be able to obtain additional new customers. The market for workspace services and products is influenced by economic conditions, including consumer behavior and consumer confidence, the level of discretionary spending, interest rates and credit availability. Purchases of these services and products are often discretionary and tend to be deferred in times of economic stress. During economic downturns, the furniture industry tends to experience longer and deeper periods of recession than the general economy. Although the economy in the United States, and in particular that of the San Francisco Bay Area, the Southwest and Texas, has been expanding in recent years, there can be no assurance that it will continue to expand or that it will not decline in the future. -12- 13 The Company has made acquisitions during prior fiscal years and may continue to make acquisitions in the future. The expansion of corporate operations in addition to managing acquired operations in new geographic areas entails numerous operational and financial risks, including difficulties in assimilating acquired operations, diversion of management's attention to other business concerns, amortization of acquired intangible assets, potential loss of employees or customers of acquired operations and difficulties in developing a local market for the Company's services and products. There can be no assurance that the Company will be able to achieve growth, or effectively manage any such growth, and failure to do so could have a material adverse effect on the Company's operating results. The Company will require significant capital for the expansion of its existing business, expansion into other geographic markets and acquisition of other businesses, each of which are key elements of the Company's strategy. There are no assurances that this capital will be available or available on terms which will not have a material adverse effect on the Company or its financial results. The market price of the Company's common stock may be subject to significant fluctuations. These fluctuations may be due to factors specific to the Company, such as quarterly fluctuations in the Company's financial results, changes in analyst's estimates of future results, litigation, changes in investors' perceptions of the Company or the announcement of new products by the Company or its competitors. In addition, such fluctuations may be due to or exacerbated by conditions in the financial markets generally. EMPLOYEES As of October 31, 1997, Business Resource Group had 248 employees of whom 84 were in installation, 44 were in project management, 43 were in marketing and sales, 35 were in finance and administration, 30 were in design and customer service, and 12 were in other technical services. Of these employees, 164 were located in the Company's principal offices in San Jose, California, 47 were located in the Texas offices in Dallas and San Antonio, 19 were located in the Southwest regional office in Phoenix, Arizona, 12 were located in the San Francisco, California office, and 6 were located in Denver, Colorado. The Company believes its relationship with its employees is good. The success of the Company depends to a significant extent upon the continued services of the Company's management. The Company has benefited from important contributions made by Brian McNay, Jeffrey Tuttle, and others. Mr. McNay and Mr. Tuttle have each made significant contributions to the Company's sales to date, accounting for approximately 31% and 7% of the Company's sales in the fiscal year ended October 31, 1997. The loss of the services of either of these individuals could have a material adverse effect on the Company. None of the Company's employees is represented by a labor union. From time to time, installations of workspace products require the use of union labor to comply with the requirements of the customer or the work rules for the job location. In these situations, the Company subcontracts the installation to other parties that employ union labor. To date, the Company has not experienced difficulties obtaining subcontract installation services where required. ITEM 2. PROPERTIES Business Resource Group currently leases approximately 21,000 square feet of office space at 2150 North First Street in San Jose, California. The Company leases most of this space under an operating lease which runs through August 2001. The San Jose office serves as the Company's principal -13- 14 offices and also functions as a working showroom for products offered by the Company. The Company also leases approximately 5,500 square feet of office and showroom space in San Francisco, California on a month-to-month basis. In addition, the Company leases approximately 5,700 square feet of space in Phoenix, Arizona, under an operating lease which runs through February 2002. The Company also leases approximately 7,000 square feet of space in Dallas, Texas, where its Texas regional headquarters is located. The Company leases this space under an operating lease which runs through March 2002. In addition, within the Texas region, the Company leases approximately 3,400 square feet in San Antonio under an operating lease with a term running through November 2001. Also, within the Texas region, the Company maintains two distribution centers under operating leases for approximately 9,600 and 21,000 square feet of space running through September 1998 and October 2002 in Richardson, Texas and Dallas, Texas, respectively. The Company also leases approximately 1,400 square feet of office space in Denver, Colorado to support a sales office. The Company may expand its office space in San Jose and Dallas to accommodate its growing sales, sales support and Workspace Management Services organizations. Otherwise, the Company believes that its existing facilities will generally be sufficient for its operational purposes within the Company's existing regions through the end of fiscal year 1998. The Company believes that additional space sufficient to meet its anticipated needs is available on reasonable terms. ITEM 3. LEGAL PROCEEDINGS Business Resource Group is not currently subject to any significant legal proceedings. The Company may from time to time become a party to various legal proceedings arising in the normal course of its business. These actions could include product liability, employee related issues and disputes with vendors or customers. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's Common Stock has been traded on the Nasdaq National Market under the symbol BRGP since the effective date of the Company's initial public offering on June 27, 1995. The price per share reflected in the table below represents the range of low and high closing sale prices for the Company's Common Stock as reported in the Nasdaq National Market for the quarters indicated.
FISCAL 1997 HIGH LOW ---- --- Fourth Quarter ended October 31, 1997 4 3/4 3 5/8 Third Quarter ended July 31, 1997 5 1/8 3 3/8 Second Quarter ended April 30, 1997 5 1/2 4 11/16 First Quarter ended January 31, 1997 5 1/2 3 5/8
FISCAL 1996 HIGH LOW ---- --- Fourth Quarter ended October 31, 1996 4 5/8 3 5/8 Third Quarter ended July 31, 1996 6 1/4 4 Second Quarter ended April 30, 1996 5 5/8 3 1/2 First Quarter ended January 31, 1996 5 3/8 3 1/16
-14- 15 The Company estimates it had approximately 380 shareholders as of October 31, 1997, including beneficial owners included in securities position listings as described in Rule 17Ad-8. The Company has never paid a cash dividend on its capital stock. Covenants in the Company's revolving line of credit facility prohibit the Company from paying dividends without prior approval by the lender. The Company currently anticipates that it will retain all available funds for use in the operation and expansion of its business, and does not anticipate paying any cash dividends in the foreseeable future. -15- 16 ITEM 6. SELECTED FINANCIAL DATA
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF INCOME DATA: YEAR ENDED OCTOBER 31, ------------------------------------------------------ 1997 1996 1995 1994 1993 ------ ------- ------- ------- ------ Net revenues: Workspace products ........................ $58,303 $67,834 $33,940 $32,197 $18,604 Workspace services ........................ 14,127 10,155 6,119 4,258 2,453 Vendor commissions ........................ 271 291 569 657 32 ------ ------- ------- ------- ------ Total net revenues .................... 72,701 78,280 40,628 37,112 21,089 ------ ------- ------- ------- ------ Cost of net revenues: Workspace products ........................ 47,100 55,051 26,605 25,044 14,604 Workspace services ........................ 10,330 7,320 4,179 3,131 1,887 ------ ------- ------- ------- ------ Total cost of net revenues ............ 57,430 62,371 30,784 28,175 16,491 Gross profit ................................. 15,271 15,909 9,844 8,937 4,598 Selling, general and administrative expenses ................... 16,622 12,870 8,143 6,425 3,825 ------ ------- ------- ------- ------ Income / (loss) from operations .............. (1,351) 3,039 1,701 2,512 773 Interest income (expense) - net .............. 66 124 7 (77) 1 ------ ------- ------- ------- ------ Income / (loss) before income taxes .......... (1,285) 3,163 1,708 2,435 774 Income taxes ................................. (523) 1,309 122 70 20 ------ ------- ------- ------- ------ Net income / (loss) .......................... $ (762) $ 1,854 $ 1,586 $ 2,365 $ 754 ====== ======= ======= ======= ====== Net income / (loss) per common and common equivalent share ............... $(0.16) $ 0.38 ====== ======= Shares used in computation ................... 4,902 4,886 ====== ======= Pro forma (1): Historical income before income taxes .......................... 1,708 Pro forma income taxes .................... 709 ------- Pro forma net income ......................... $ 999 ======= Pro forma net income per common and common equivalent share ............... $ 0.26 ======= Pro forma shares used in computation ......... 3,834 =======
(1) See Note 2 to Financial Statements for a discussion of pro forma amounts. -16- 17 BALANCE SHEET DATA:
OCTOBER 31, ------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------ ------- ------ ------ (IN THOUSANDS) Working capital....................................... $ 9,279 $10,063 $ 9,470 $2,784 $1,160 Total assets.......................................... 20,760 22,560 16,053 7,640 4,496 Long-term obligations................................. -- -- 120 123 -- Shareholders' equity.................................. 12,452 13,002 11,020 3,296 1,444
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. OVERVIEW Business Resource Group is a provider of workspace services and products. Most of the Company's net revenues are derived from billings for workspace products, including modular systems, casegoods, seating, filing systems and specialty furniture products. The Company's experience is that its success in generating these revenues is dependent upon the provision of related services, such as project management, space planning and design, product specification and order management. The price of these services is frequently included in product billing to its customers as part of its integrated workspace solution. Approximately 19% of the Company's net revenues are derived from workspace services, including installation and maintenance, delivery and Workspace Management Services. Less than one percent of the Company's net revenues are derived from commissions on product sales which certain of the Company's vendors bill directly. The Company's net revenues and operating results fluctuate substantially from period to period depending on such factors as the timing of significant customer orders, the timing of revenue and cost recognition, variations in contract service and product mix, the ability of the Company's suppliers to manufacture and deliver products on a timely basis, changes in customer buying patterns and trends in the economy of the geographic region in which the Company operates. Any unfavorable changes in these or other factors could have a material adverse effect on the Company's business and results of operations. The Company is currently in the process of evaluating its computer software and databases to determine whether or not modifications will be required to prevent problems related to the year 2000. These problems could cause malfunctions in certain software and databases with respect to dates on or after January 1, 2000, unless corrected. At this time, the Company has not yet determined the cost of evaluating its computer software or databases or of making any modifications required to correct any potential problems related to the year 2000. Between July 1989 and June 25, 1995, the Company was an S Corporation pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), and therefore was not subject to federal and most state income taxes. In lieu of corporate income taxes, the shareholders of the Company were taxed on their proportionate share of the Company's taxable income. Subsequent to June 25, 1995, the -17- 18 Company terminated its S Corporation status and became subject to federal and state income taxes. See Note 2 to financial statements. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income statement data as a percentage of net revenues:
YEAR ENDED OCTOBER 31, ------------------------- 1997 1996 1995 ----- ----- ----- Net revenues: Workspace products ................ 80.2% 86.6% 83.5% Workspace services ................ 19.4 13.0 15.1 Vendor commissions ................ .4 .4 1.4 ----- ----- ----- Total net revenues ............ 100.0 100.0 100.0 ----- ----- ----- Cost of net revenues: Workspace products ................ 64.8 70.3 65.5 Workspace services ................ 14.2 9.4 10.3 ----- ----- ----- Total cost of net revenues .... 79.0 79.7 75.8 ----- ----- ----- Gross profit ......................... 21.0 20.3 24.2 Selling, general and administrative expenses ........... 22.9 16.4 20.0 ----- ----- ----- Income / (loss) from operations ...... (1.9) 3.9 4.2 Interest income (expense) - net ...... 0.1 0.1 0.0 ----- ----- ----- Income / (loss) before income taxes .. (1.8) 4.0 4.2 Income taxes ......................... (.7) 1.6 0.3 ----- ----- ----- Net income / (loss) .................. (1.1)% 2.4% 3.9% ===== ===== ===== Pro forma: Historical income before income taxes .................. 4.2% Pro forma income taxes ............ 1.7 ----- Pro forma net income ................. 2.5% =====
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995. Net Revenues Net revenues decreased 7% to $72.7 million in fiscal 1997 from $78.3 million in fiscal 1996. The decrease was attributable to a decrease in sales to Cisco Systems, with revenue of $21.9 million for the year ended October 31, 1997, down from $29.2 million for the same period of 1996. The Company maintains an excellent working relationship with Cisco Systems and expects Cisco Systems to continue -18- 19 to order product. However, there can be no assurance that the Company's financial results for future quarters will not be materially and adversely affected should there be any continued reduction in orders. Net revenues increased 93% to $78.3 million in fiscal 1996 from $40.6 million in fiscal 1995. The increase was primarily attributable to new large project business from both new and existing customers and revenues generated by the Company's southwestern United States and Texas regional business units acquired in September 1995 and January 1996, respectively. Service revenue increased 39% during fiscal 1997 to $14.1 million from $10.2 million in fiscal 1996 due to increases in delivery services, installation, and workspace and management services. Such increases along with the lower overall revenue base contributed to the increase in service revenue as a percentage of total revenue which rose to 19% for fiscal 1997, compared to 13% for fiscal 1996. The increase in service revenue during fiscal 1996 to $10.2 million from $6.1 million in fiscal 1995 was primarily attributable to increase in delivery services, installation, and workspace management services. Vendor commissions decreased $20,000 to $271,000 in fiscal 1997 from $291,000 in fiscal 1996. As was the case in the prior year, most vendors have discontinued their policies of billing customers directly and only paying a commission to the Company. Vendor commissions decreased $278,000 to $291,000 in fiscal 1996 from $569,000 in fiscal 1995 as most vendors discontinued their policies of billing customers directly and only paying a commission to the Company. Additionally, during the third quarter of fiscal 1996, the Company discontinued its Records Management business in order to streamline its operations and focus on its Workspace Products and Workspace Management Services businesses. Vendor commissions from TAB, for sales of records management products, totalled approximately $224,000 and $245,000 in fiscal 1996 and 1995, respectively. Gross Profit Gross profit as a percentage of net revenues increased to 21% in fiscal 1997 from 20% in fiscal 1996. This increase was mainly due to a slight increase in product margins, a shift in revenue mix to higher margin service revenue, partially offset by a slight decrease in service margins. The decrease in service margins is due to an underabsorption of overhead in the Company's installation businesses, and the use of outside contract installation companies in certain out-of-state locations. Gross profit as a percentage of net revenues decreased to 20% in fiscal 1996 from 24% in fiscal 1995. Product margins decreased to 19% in fiscal 1996 from 22% in fiscal 1995, the result of a shift in product mix from higher margin projects to higher volume, lower margin projects and the impact of the Company's decision to accept certain low margin projects which the Company felt were important to its competitive positioning and its ability to penetrate certain markets. Service margins also decreased as a percentage of revenue to 28% from 32% in fiscal 1995, the result of a service mix shift to lower margin volume-related services, start-up costs in the Company's Workspace Management Services business, underabsorption of overhead in the Company's installation businesses and the use of outside contract installation companies in certain out-of-state locations. Gross profit has varied and is expected to continue to vary as a result of such factors as the mix of workspace products and services sold, the percentage of sales to new customers relative to repeat -19- 20 customers and the percentage of total net revenues generated through large customer orders relative to small customer orders. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 29% to $16.6 million in fiscal 1997 from $12.9 million in fiscal 1996, while increasing as a percentage of net revenues to 23% in fiscal 1997 from 16% in fiscal 1996. The increase in selling, general and administrative expenses was primarily the result of the steps taken to restructure operations in Texas, Arizona, and San Jose. The Company has also incurred additional expenses related to the expansion of its sales and project management infrastructure and the Company's computer network. Selling, general and administrative expenses increased 58% to $12.9 million in fiscal 1996 from $8.1 million in fiscal 1995, while decreasing as a percentage of net revenues to 16% in fiscal 1996 from 20% in fiscal 1995. The increase in selling, general and administrative expenses was primarily the result of increased revenue and related commissions, expanded operations in Arizona, Nevada and Texas, and a continuing effort to build the infrastructure necessary to run a larger business. The decrease in these expenses as a percentage of net revenues reflected allocation of administrative costs over a larger sales volume. Interest Income - net Interest income, net of interest and other expense totaled $66,000 for the twelve months ended October 31, 1997 versus $124,000 for the same period of fiscal 1996. The decrease in net interest income was due to lower average cash balances during the twelve month period. Interest income, net of interest and other expense totaled $124,000 for the twelve months ended October 31, 1996 versus $7,000 for the same period of fiscal 1995. The increase in 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. Income Taxes The Company was a C Corporation for tax purposes for all of fiscal 1997 and 1996 and an S Corporation for approximately eight of the twelve months of fiscal 1995. As a result, the Company's effective tax rates were 41%, 41%, and 7% for the twelve month periods ended October 31, 1997, 1996 and 1995, respectively. The Company has used a tax rate of 41% for the 1995 pro forma information. LIQUIDITY AND CAPITAL RESOURCES Working capital at October 31, 1997 was $9.3 million, down from $10.1 million at October 31, 1996. In the twelve months ended October 31, 1997 the Company generated $572,000 in cash from operations compared to using $2.1 million in cash from operations in the twelve months ended October 31, 1996. In addition, positive cash flows from operations were due to a decrease in accounts receivable of $2.4 million and an increase in accrued liabilities of $1.3 million. These positive cash flows were offset primarily by a net loss of $762,000, a decrease in accounts payable of $1.9 million and increases in prepaids and other current assets and inventory of $689,000 and $424,000, respectively. -20- 21 Net cash used in investing activities was $948,000 in the twelve months ended October 31, 1997 primarily resulting from the purchase of property and equipment for $928,000. Net cash used in financing activities was $361,000 in the twelve months ended October 31, 1997. The primary financing activity during this period was the payback of the Company's bank overdraft of $476,000 offset by the issuance of common stock under the Company's 1995 Employee Stock Purchase Plan which provided $212,000 in cash. The Company's $8.0 million credit facility expired in September 1997 and was replaced with a new $15.0 million credit facility with an option on a $1.0 million term loan. As of October 31, 1997 the Company had no bank borrowings 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 foreseeable future. -21- 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report................................................................ 23 Financial Statements: Balance Sheets at October 31, 1997 and 1996.............................................. 24 Statements of Operations for the Years Ended October 31, 1997, 1996 and 1995............. 25 Statements of Shareholders' Equity for the Years Ended October 31, 1997, 1996 and 1995... 26 Statements of Cash Flows for the Years Ended October 31, 1997, 1996 and 1995............. 27 Notes to Financial Statements for the Years Ended October 31, 1997, 1996 and 1995........ 28
-22- 23 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Business Resource Group: We have audited the accompanying balance sheets of Business Resource Group (the Company) as of October 31, 1997 and 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1997. Our audits also included the financial statement schedule listed at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at October 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California Decenber 16, 1997 -23- 24
BUSINESS RESOURCE GROUP BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) OCTOBER 31, ------------------- 1997 1996 ------- ------- ASSETS Current assets: Cash and equivalents ......................................... $ 274 $ 1,011 Accounts receivable, less allowance for doubtful accounts of $90 in 1997 and $57 in 1996 ............................ 13,764 16,122 Inventory .................................................... 1,398 974 Prepaids and other current assets ............................ 2,076 1,387 ------- ------- Total current assets ...................................... 17,512 19,494 Property and equipment - net .................................... 2,346 2,017 Other assets .................................................... 902 1,049 ------- ------- $20,760 $22,560 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft ............................................... $ -- $ 476 Accounts payable ............................................. 3,997 5,935 Accrued liabilities .......................................... 4,236 3,020 ------- ------- Total current liabilities ................................. 8,233 9,431 Deferred income tax liability ................................... 75 127 Shareholders' equity: Preferred stock, par value $0.01 per share; 2,000,000 shares authorized; no shares outstanding ......................... -- -- Common stock, par value $0.01 per share; 50,000,000 shares authorized; outstanding: 4,913,712 shares in 1997 and 4,858,864 shares in 1996 ..... 49 49 Additional paid-in capital ................................... 10,897 10,685 Retained earnings ............................................ 1,506 2,268 ------- ------- Total shareholders' equity ................................ 12,452 13,002 ------- ------- $20,760 $22,560 ======= =======
See notes to financial statements -24- 25
BUSINESS RESOURCE GROUP STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED OCTOBER 31, -------------------------------- 1997 1996 1995 ------- ------- ------- Net revenues: Workspace products ................ $58,303 $67,834 $33,940 Workspace services ................ 14,127 10,155 6,119 Vendor commissions ................ 271 291 569 ------- ------- ------- Total net revenues ............... 72,701 78,280 40,628 ------- ------- ------- Cost of net revenues: Workspace products ................ 47,100 55,051 26,605 Workspace services ................ 10,330 7,320 4,179 ------- ------- ------- Total cost of net revenues .... 57,430 62,371 30,784 ------- ------- ------- Gross profit .......................... 15,271 15,909 9,844 Selling, general and administrative expenses ........... 16,622 12,870 8,143 ------- ------- ------- Income (loss) from operations ......... (1,351) 3,039 1,701 Interest income - net ................. 66 124 7 ------- ------- ------- Income (loss) before income taxes ...... (1,285) 3,163 1,708 Income taxes (Note 2) ................. (523) 1,309 122 ------- ------- ------- Net income (loss) ..................... $ (762) $ 1,854 $ 1,586 ======= ======= ======= Net income (loss) per common and common equivalent share .................. $ (0.16) $ 0.38 ======= ======= Shares used in computation ............ 4,902 4,886 ======= ======= Pro forma (Note 2): Historical income before income taxes .................. $ 1,708 Pro forma income taxes ............ 709 ------- Pro forma net income .................. $ 999 ======= Pro forma net income per common and common equivalent share ........ $ 0.26 ======= Pro forma shares used in computation .. 3,834 =======
See notes to financial statements -25- 26 BUSINESS RESOURCE GROUP STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL ---------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ------- ---------- -------- --------- Balances, October 31, 1994 ......................... 3,070,224 $ 31 $ 275 $ 2,990 $ 3,296 Distribution to S Corporation shareholders ................................... -- -- -- (4,162) (4,162) Issuance of common stock (including $67 recorded as stock compensation) ................ 15,244 -- 76 -- 76 Initial public offering, net of issuance costs of $1,926 ....................... 1,725,000 17 10,132 -- 10,149 Issuance of common stock in connection with acquisition .................... 10,275 -- 75 -- 75 Net income ....................................... -- -- -- 1,586 1,586 ----------- ------- ------- ------- -------- Balances, October 31, 1995.......................... 4,820,743 48 10,558 414 11,020 Employee stock purchase program .................. 38,121 1 127 -- 128 Net income ....................................... -- -- -- 1,854 1,854 ----------- ------- ------- ------- -------- Balances, October 31, 1996.......................... 4,858,864 49 10,685 2,268 13,002 Employee stock purchase program................... 54,848 -- 212 -- 212 Net loss ......................................... -- -- -- (762) (762) ----------- ------- ------- ------- -------- Balances, October 31, 1997.......................... 4,913,712 $ 49 $10,897 $ 1,506 $ 12,452 =========== ======= ======= ======= ========
See notes to financial statements. -26- 27 BUSINESS RESOURCE GROUP STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED OCTOBER 31, ------------------------------- 1997 1996 1995 ------- -------- -------- Cash flows from operating activities: Net income (loss)...................................................... $ (762) $ 1,854 $ 1,586 Adjustments to reconcile to net cash provided (used) by operating activities: Depreciation and amortization................................ 766 455 257 Loss on disposal of fixed assets............................. -- -- 11 Stock compensation........................................... -- -- 67 Deferred income taxes........................................ (292) (15) (132) Changes in operating assets and liabilities (net of effect of acquisitions): Accounts receivable - net................................ 2,358 (8,533) (1,197) Inventory................................................ (424) (52) 243 Prepaids and other current assets........................ (449) (318) (374) Accounts payable......................................... (1,938) 3,583 228 Accrued liabilities...................................... 1,216 958 81 ------- -------- -------- Net cash provided (used) by operating activities.... 476 (2,068) 770 ------- -------- -------- Cash flows from investing activities: Purchase of property and equipment..................................... (928) (1,549) (451) Cash paid for acquisitions............................................. -- (300) (375) Other assets........................................................... (20) (101) (14) ------- -------- -------- Net cash used by investing activities............... (948) (1,950) (840) ------- -------- -------- Cash flows from financing activities: Bank overdraft increase (decrease)..................................... (476) (175) 651 Repayment of notes payable and capital lease obligations............... -- (250) (268) Issuance of common stock............................................... 212 128 10,158 Distributions to shareholders.......................................... -- -- (4,162) Borrowings on line of credit - net..................................... -- -- (1,175) ------- -------- -------- Net cash provided (used) by financing activities.... (265) (297) 5,204 ------- -------- -------- Increase (decrease) in cash and equivalents.............................. (737) (4,315) 5,134 Cash and equivalents balances: Beginning of period.................................................... 1,011 5,326 192 ------- -------- -------- End of period.......................................................... $ 274 $ 1,011 $ 5,326 ======= ======== ======== Supplemental disclosures of cash flow information - cash paid during the period for: Interest............................................................ $ -- $ 39 $ 131 ======= ======== ======== Income taxes $ 470 $ 1,250 $ 340 ======= ======== ======== Noncash investing and financing transactions: Sale of distribution rights for note receivable (Note 10) $ -- $ 177 $ -- ======= ======== ======== Acquisitions: Tangible assets acquired............................................... $ -- $ 333 $ 820 Intangible assets acquired............................................. -- 255 781 Liabilities assumed.................................................... -- (288) (801) Notes payable issued................................................... -- -- (350) Common stock issued.................................................... -- -- (75) ------- -------- -------- Cash paid for acquisitions.......................... $ -- $ 300 $ 375 ======= ======== ========
See notes to financial statements. -27- 28 BUSINESS RESOURCE GROUP NOTES TO FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Business Resource Group, a California corporation (the Company), provides workspace products and services. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include the allowance for doubtful accounts receivable, inventory reserves, certain accruals and the valuation allowance for deferred tax assets. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Management believes the credit risk associated with cash and cash equivalents is minimal. Substantially all of the Company's business activities are located in Northern California, Arizona, Nevada and Texas. The Company performs on-going credit evaluations of its customers and requires deposits for sales on credit when deemed necessary. The Company maintains reserves for estimated discounts and potential credit losses. FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of amounts have been determined by the Company using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair values due to the short term nature of these instruments. CASH EQUIVALENTS are highly liquid debt investments purchased with a maturity of three months or less. INVENTORY consists primarily of goods in transit shipped directly to customers by suppliers and is valued at the lower of cost (specific identification) or market value. PROPERTY AND EQUIPMENT are stated at cost and are depreciated and amortized using the straight-line method over useful lives of three to seven years for equipment and over the lesser of the useful life or the lease term for leasehold improvements. OTHER ASSETS - Goodwill and customer list intangibles purchased in acquisitions are included in other assets and are amortized using the straight-line method over estimated useful lives of three to ten years. The Company evaluates the recoverability of goodwill on a quarterly basis based on estimated undiscounted future cash flows. Amortization of intangibles amounted to $167,000, $187,000, and $84,000 in fiscal 1997, 1996 and 1995, respectively. -28- 29 REVENUE RECOGNITION - Revenues from workspace product sales and vendor commissions are recognized upon receipt of products by the customer. Service revenues are recognized upon customer acceptance of the project. STOCK BASED COMPENSATION - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. STOCK COMPENSATION - In connection with the issuance of 15,244 shares of common stock during the year ended October 31, 1995, the Company has recorded the difference between the deemed fair value for accounting purposes and amounts paid by the acquiring shareholders, as specified in the stock purchase agreements, as compensation expense in the periods which services were performed. INCOME TAXES - Income taxes are provided for using the asset and liability approach. SHAREHOLDER DISTRIBUTIONS - The Company made distributions to its S Corporation shareholders to allow payment of their federal and state income taxes and to distribute previously undistributed S Corporation earnings as of the date the Company terminated its status as an S Corporation. NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting Standards Board issued SFAS No. 123, "Earnings per Share". The Company is required to adopt SFAS 128 in December 1997. 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 available to common stockholders by the weighted average number 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. Pro forma amounts for basic and diluted EPS, assuming SFAS 128 had been in effect, are as follows:
FISCAL YEAR ENDED OCTOBER 31, ----------------------------- 1997 1996 1995 ------ ---- ---- Net income per share: Basic................................................ $(0.16) $0.38 $0.26 Diluted.............................................. $(0.16) $0.38 $0.26
In June 1997, the Financial Accounting Standards Board adopted SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprises operating segments. It also establishes standards for related disclosures about products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. -29- 30 2. PRO FORMA NET INCOME AND NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES Through June 1995, the Company was not subject to federal and most state income taxes since its shareholders elected that the Company be taxed as an S Corporation pursuant to the Internal Revenue Code. In lieu of corporate income taxes, the shareholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision for federal income taxes has been included in these financial statements for fiscal 1994 and the portion of fiscal 1995 during which the Company was an S Corporation. Although the S Corporation election is recognized for California income tax purposes, the State of California requires S Corporations to pay a tax of 1.5% of taxable income. Effective June 1995, in conjunction with the Company's initial public offering of its common stock, the Company's status as an S Corporation was terminated and the Company became subject to federal and state income taxes. The pro forma information presented on the statements of income and in the Selected Quarterly Data (Unaudited) in Note 15 reflect a provision for income taxes at an effective rate of 41% for fiscal 1995. Pro forma financial information is provided to show what the significant effects on the historical financial information might have been had the Company been treated as a C Corporation for income tax purposes prior to June 1995. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
1997 1996 ------- ------- Computer equipment ...................... 2,251 $ 1,596 Office furniture and equipment .......... 1,177 935 Leasehold improvement .................. 146 115 ------- ------- 3,574 2,646 Accumulated depreciation and amortization (1,228) (629) ------- ------- Total property and equipment - net ...... $ 2,346 $ 2,017 ======= =======
4. LINE OF CREDIT The Company has a $15,000,000 revolving line of credit with a bank, which expires in August 1999. The line bears interest at prime (8.50% at October 31, 1997) and is collateralized by substantially all of the Company's assets. Among other conditions and restrictions, the Company has agreed to certain financial covenants including maintenance of (1) a current ratio of at least 1.00 to 1; (2) total debt to tangible net worth ratio, as defined, of no more than 1.25 to 1; (3) net worth, as defined, of at least $11,750,000; and (4) a cash flow coverage ratio, as defined, of not less than 1.5 to 1; and (5) profitability in the current year and no loss in consecutive quarters. In addition, the Company is prohibited from paying dividends on its common stock without prior approval of the lender. At October 31, 1997, the Company received waivers from the bank for covenants with which they were not in compliance. -30- 31 5. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
OCTOBER 31, ----------------- 1997 1996 ------ ------- Accrued commissions payable: Shareholders...................................... $ 179 $ 515 Others............................................ 333 758 Sales taxes payable.................................. 546 693 Customer deposits.................................... 2,201 327 Other accrued liabilities............................ 998 727 ------ ------- Total accrued liabilities........................... $4,236 $ 3,020 ====== =======
6. NOTES PAYABLE AND LEASE OBLIGATIONS As of October 31, 1996, the cost of equipment acquired under capital leases was $70,000 and accumulated amortization was $61,000. The capital leases expired during the year ended October 31, 1997. The Company also leases operating facilities under noncancelable operating leases which contain various renewal options. Future minimum lease payments under noncancelable operating leases are as follows (in thousands):
YEARS ENDING OCTOBER 31, ------------ 1998............................................... $ 999 1999............................................... 936 2000............................................... 936 2001............................................... 936 2002............................................... 724 ------ Total future minimum payments......................... $4,531 ======
Total rent expense for the years ended October 31, 1997, 1996 and 1995 under operating leases was approximately $803,000, $636,000 and $324,000, respectively. 7. EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan which covers substantially all full-time employees. The plan operates on a calendar year. All eligible employees are permitted to make tax deferred contributions of up to 20% of their annual compensation, subject to certain Internal Revenue Service limitations. The Company provides matching contributions of 25% of employees' contributions (up to 6% of employees' cash compensation). Employee contributions and earnings thereon are vested immediately; Company contributions vest over five years. In fiscal 1997, 1996 and 1995, the Company contributed $93,000, $71,000 and $22,000 to the plan. -31- 32 8. INCOME TAXES The provision for income taxes consisted of the following (in thousands):
YEAR ENDED OCTOBER 31, ------- ------- ------- 1997 1996 1995 ------- ------- ------- Current: Federal.................................... $ (229) $ 1,043 $ 183 State...................................... (2) 281 71 ------- ------- ------- (231) 1,324 254 ------- ------- ------- Deferred: Federal.................................... (207) (25) (106) State...................................... (85) 10 (26) ------- ------- ------- (292) (15) (132) ------- ------- ------- Total......................................... $ (523) $ 1,309 $ 122 ======= ======= =======
The pro forma provision for income taxes for the year ended October 31, 1995 consists of the following: Current: Federal.............................................. $ 618 State................................................ 191 ------ 809 ------ Deferred: Federal.............................................. (75) State................................................ (25) ------ (100) ------ Total pro forma......................................... $ 709 ======
The components of the actual deferred tax assets and liabilities at October 31, 1997 and 1996 were as follows (in thousands):
OCTOBER 31, -------------- 1997 1996 ----- ------ Deferred tax assets: Accruals recognized in different periods for tax purposes............................................... $ 477 $ 274 Amortization of intangibles.............................. 138 46 Deferred tax liabilities - accelerated depreciation.... (176) (173) ----- ------ Net deferred tax assets ................................ $ 439 $ 147 ===== ======
-32- 33 Current deferred income tax assets of $514,000 and $274,000 at October 31, 1997 and 1996, respectively, are included in prepaids and other current assets. The provision for income taxes for the year ended October 31, 1996 and the pro forma provision for income taxes for the fiscal years ended October 31, 1995 and 1994, differs from the amount computed by applying the federal statutory income tax rate to income before income taxes as follows:
YEAR ENDED OCTOBER 31, ---------------------------- 1997 1996 1995 ------- ------- ------ Tax computed at federal statutory rate............ (35.0)% 35.0% 35.0% State income taxes, net of federal effect......... (6.1) 6.1 6.1 Other............................................. (0.4) 0.3 0.4 ------ ----- ----- Effective income tax rate......................... (40.7)% 41.4% 41.5% ====== ===== =====
9. RELATED PARTY TRANSACTIONS The Company purchased products from a vendor (affiliate) during fiscal 1995. This affiliate was owned by certain shareholders of the Company. Purchases from affiliate were $277,000 in fiscal 1995. There were no accounts payable to the affiliate as of October 31, 1997, 1996 and 1995, respectively. The assets of the affiliate were acquired by the Company in April 1995 for $95,000 and no further purchases were made from the affiliate following the acquisition. In fiscal 1994, the Company entered into a direct sales representative agreement for certain vendor products within a specified territory. In June 1995, an officer of the vendor was elected to the Board of Directors of the Company. In the year ended October 31, 1996, the Company purchased $1.0 million of product and earned $224,000 in commissions from the vendor. In the year ended October 31, 1995, the Company purchased $2.7 million of product and earned $245,000 in commissions from the vendor. At October 31, 1996, the Company had no accounts receivable due from the vendor. In July 1996, the Company entered into an agreement with the vendor to relinquish its exclusive distribution rights, in exchange for a $177,000 note receivable, payable to the Company over twelve months, bearing interest at 4.625%. The note has been paid in full as of October 31, 1997. 10. MAJOR CUSTOMERS AND VENDORS Two customers represented 30% and 5%, 37% and 5%, and 18% and 18% of net revenues for the years ended October 31, 1997, 1996 and 1995, respectively. Two vendors represented 24% and 7%, 35% and 7%, and 13% and 7% of total purchases for the years ended October 31, 1997, 1996 and 1995, respectively. 11. WARRANTS The Company issued warrants in fiscal year 1995 to purchase 110,000 shares of common stock, at an exercise price per share of 120% of the initial offering price ($8.40 per share), to the underwriters who managed the initial public offering of the Company's common stock. The -33- 34 warrants are exercisable over a period of five years beginning from the date of the initial public offering (June 1995). The Company also issued a warrant in fiscal 1997 to purchase 60,000 shares of common stock, at an exercise price per share of $5.50 per share, to an advisor. Such warrant is exercisable at any time from April 1997 until it expires in April 2002. As of October 31, 1997, no warrants have been exercised. 12. STOCK PLANS At October 31, 1997, the Company had two stock-based compensation plans (described below). Business Resource Group uses the intrinsic method in accordance with APB 25 to account for its plans. Accordingly, no compensation cost has been recognized for its stock purchase plan. Compensation cost applicable to the Company's fixed stock plans was immaterial for each of the three years presented. Pro forma information regarding net income (loss) and net income (loss) per share is required by Statement of Financial Accounting Standard No. 123 ("FAS 123"), which requires that the information be determined as if BRG had used the fair value method to account for its stock-based compensation awards granted subsequent to October 31, 1995. Had compensation cost for the Company stock-based compensation awards been determined at the grant date (subsequent to October 31, 1995) using the fair value method in accordance with FAS 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below. For purposes of calculating such pro forma amounts, the fair value of each option grant is estimated on the date of grant using the Black-Scholes multiple option-pricing model. The following weighted average assumptions were used for grants in fiscal 1996 and 1997: risk-free interest rates of 6.0 percent, and expected option life of 1.0 years beyond each respective vesting period, expected volatility of 88% and dividend yield of zero. The Black-Scholes model used by the Company to calculate option values for purposes of this note, as well as other currently accepted option valuation models (as called for in accordance with FAS 123), were developed to estimate the fair value of stock options that are freely tradable and fully transferable and that have no vesting restrictions. These models also require highly subjective assumptions, including future stock price volatility and expected term until exercise, which greatly affect the calculated values. Accordingly, management believes that this model does not necessarily provide a reliable measure of the fair value of the Company's option awards.
1997 1996 ------- ------ (in thousands, except per share data) Net income / (loss) As reported $ (762) $1,854 Pro forma (1) $(1,241) $1,536 Net income / (loss) per share: As reported (0.16) 0.38 Pro forma (1) (0.25) 0.31
1995 Stock Option Plan During fiscal 1997, the Company increased the number of shares of common stock reserved for issuance under the 1995 Stock Option Plan (the 1995 Plan) from 1,200,000 to 1,700,000. The 1995 -34- 35 Plan provides for the granting of incentive stock options at an exercise price of not less than 100% of fair market value on the date of the grant and nonstatutory stock options at not less than 85% of the fair market value on the date of the grant. Stock options granted under the 1995 Plan for new employees generally become exercisable at the rate of 1/8 of the total shares granted six months after the date of the grant and 1/48 of the total number of shares granted each month thereafter. Generally, stock options granted for existing employees become exercisable at a rate of 1/48 of the toal shares granted each month after the date of the grant. Directors' Stock Option Plan A total of 175,000 shares of common stock have been reserved for issuance under the 1995 Directors' Stock Option Plan (the Directors' Plan). The Directors' Plan provides for an initial grant of nonstatutory stock options to all nonemployee directors of the Company on the date on which they join the Board and automatic annual grants of nonstatutory stock options issued on the first day of each fiscal year to all nonemployee directors of the Company who have served at least three months as of such grant date. Options are granted under the Directors' Plan at an exercise price equal to the fair market value on the grant date. Initial grants become exercisable ratably over four years and automatic grants become exercisable four years after the grants. Additional information relative to the Company's fixed stock option plans is as follows:
1997 1996 1995 ---------------------------------------------------------------------------------- Weighted Weighted Weighted Options Average Options Average Options Average ------- Exercise Price ------- Exercise Price ------- Exercise Price -------------- -------------- -------------- Outstanding - beginning of year 865,844 $ 5.12 546,805 $ 5.98 -- -- Granted 295,742 $ 4.24 475,250 $ 4.24 569,000 $ 5.98 Exercised (34,051) $ 4.00 -- -- -- -- Cancelled (389,672) $ 5.43 (156,211) $ 5.47 (22,195) $ 5.92 Outstanding - end of year 737,863 $ 4.65 865,844 $ 5.12 546,805 $ 5.98 Exercisable at end of year 243,315 $ 4.89 249,732 $ 5.57 82,859 $ 6.03
Weighted-average fair value of options granted during the year was $3.06 per share in 1997 and $3.07 per share in 1996. Outstanding and Exercisable By Price Range as of October 31, 1997
Options Outstanding Options Exercisable ---------------------------------------------------------------------------------------------- Number Weighted-Average Weighted Number Weighted Range of Outstanding As of Remaining Average Exercisable As of Average Exercise Prices October 31, 1997 Contractual Life Exercise Price October 31, 1997 Exercise Price --------------- ----------------- ----------------- -------------- ----------------- -------------- $ 3.010 -- $ 5.000 510,509 4.2 $ 4.088 145,129 $ 4.033 $ 5.010 -- $10.000 227,354 6.0 $ 5.916 98,185 $ 6.146 ------------------- ------- --- ------- ------- ------- $ 3.010 -- $10.000 737,863 4.8 $ 4.651 243,315 $ 4.885
-35- 36 Employee Stock Purchase Plan A total of 200,000 shares of common stock have been reserved for issuance under the 1995 Employee Stock Purchase Plan. Eligible employees may purchase common stock through payroll deductions of up to 10% of their compensation at a purchase price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning or end of each six-month offering period. There were 54,848 and 38,121 shares issued under the Employee Stock Purchase Plan in fiscal 1997 and 1996, respectively. 13. ACQUISITIONS In January 1996, the Company acquired, in a purchase transaction, certain assets and assumed certain liabilities of Corporate Source for a purchase price of $300,000 in cash. The acquisition agreement also provides for the payment of certain cash amounts if specific performance milestones are met. Corporate Source provided workspace products and services in Texas. In September 1995, the Company acquired, in a purchase transaction, certain assets and assumed certain liabilities of RST & Associates (RST) for a purchase price of $400,000 including $225,000 paid in cash, 10,275 shares of common stock (valued at $75,000), and two contingent payments of $100,000 each coupled to specific performance milestones, due in the first fiscal quarter of 1997 and 1998, if earned. No payment was made in fiscal 1997. RST provided workspace products and services in the southwestern United States. In April 1995, the Company acquired, in a purchase transaction, certain assets and assumed certain liabilities of Landmark-Pacific Group, Inc. (Landmark) for a purchase price of $300,000, including $150,000 paid in cash and issuance of a note payable in two equal payments due April 1996 and 1997. Approximately $21,000 of the April 1996 amount was paid in July 1995. Landmark provides facilities management services. In April 1995, the Company acquired, in a purchase transaction, the net assets of RPS (see Note 9) for a note payable in the amount of $95,000, which was paid in full during fiscal 1995. Results of operations include those operations relating to the acquired companies' assets and liabilities from the date of acquisition. In connection with these acquisitions, the Company recorded intangible assets consisting primarily of goodwill and customer lists, totaling $278,000 for Landmark, $85,000 for RPS, $416,000 for RST and $335,000 for Corporate Source which will be amortized over periods ranging from three to 10 years. Had these acquisitions taken place at the beginning of fiscal 1996 and 1995, unaudited pro forma net revenues would have been approximately $79.3 million and $44.5 million, respectively, and pro forma net income and net income per common and common equivalent share would not have changed significantly. -36- 37 14. SELECTED QUARTERLY DATA (UNAUDITED) The following presents unaudited quarterly operating results for fiscal years ended October 31, 1997 and 1996: (In thousands, except per share data)
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, FISCAL 1997 ----------- ----------- ---------- ----------- Net revenues.............................. $ 22,312 $ 22,526 $ 12,884 $ 14,979 Gross profit.............................. 4,749 4,922 2,487 3,113 Net income (loss) ........................ 509 534 (1,001) (804) Net income (loss) per common and common equivalent share ............. $ .10 $ .11 $ (.20) $ (.16) FISCAL 1996 Net revenues.............................. $ 14,503 $ 20,640 $ 21,340 $ 21,797 Gross profit.............................. 3,068 3,852 4,299 4,690 Net income ............................. 406 527 419 502 Net income per common and common equivalent share ................. $ .08 $ .11 $ .09 $ .10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -37- 38 PART III Certain information required by Part III is omitted from this report because the Registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its annual meeting of shareholders to be held March 2, 1998 and the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to directors of the Company is incorporated by reference from the information under the caption "Election of Directors--Nominees" in the Registrant's Proxy Statement. The executive officers of the Company, and their ages as of October 31, 1997, are as follows:
NAME AGE POSITION ---- --- -------- John W. Peth 49 President, Chief Executive Officer, Chief Financial Officer and Director Brian D. McNay 41 Executive Vice President of Sales and Director Jeffrey Tuttle 40 Executive Vice President of Marketing and Director
Mr. Peth has served as President, Chief Executive Officer and Chief Financial Officer since December 1997 and as a director of the Company since April 1995. From July 1997 to December 1997, Mr. Peth was a consultant to the Company. From June 1996 to March 1997, Mr. Peth served as Acting President and Chief Executive Officer of Tab Products Co. ("TAB"), an office filing and furniture systems manufacturer and distributor. From April 1991 until June 1997, Mr. Peth served as Executive Vice President and Chief Operating Officer of TAB. From August 1984 to April 1991, Mr. Peth served as the managing partner of the San Jose office of Deloitte & Touche LLP and one of its predecessor accounting firms. Mr. Peth is also a director of Aspect Telecommunications, Inc., a manufacturer of call transaction processing systems. Mr. Peth received his BA degree in Economics in 1970 from the University of Califonia at Santa Barbara, and an MBA from the University of California at Los Angeles in 1972. Mr. McNay has served as Executive Vice President of Sales since April 1995, and as a member of the Board of Directors since its inception in April 1987. Mr. McNay also served as President between April 1987 and April 1995. Mr. McNay was also the founder and owner of Business Interiors, a sole proprietorship sold to the Company in April 1987. In addition, Mr. McNay served as a sales executive at various office furniture dealerships from 1979 to 1986, including the Contract Source Center, the Contract Office Group and Design Performance. Mr. Tuttle has served as Executive Vice President of Marketing since April 1995, and as a member of the Board of Directors since its inception in 1987. Mr. Tuttle also served as Vice President of Sales between April 1987 and April 1995. From 1978 to 1987, Mr. Tuttle served as a sales executive with KBM Office Furniture, an office furniture dealership. He received his BS degree in Marketing in 1980 from Santa Clara University. -38- 39 ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the information under the captions "Compensation of Executive Officers" and "Transactions with Management and Others" in the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the information under the caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the information under the captions "Compensation of Executive Officers" and "Transactions with Management and Others" in the Registrant's Proxy Statement. -39- 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: (1) FINANCIAL STATEMENTS See index to Financial Statements at Item 8 of this report. (2) FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts (see page 45). (3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
Exhibit Number Description - ------- ----------- 3.1 Amended and Restated Articles of Incorporation of Registrant. (1) 3.2 Bylaws of Registrant. (1) 4.1 Buy and Sell Agreement dated October 31, 1987, as amended on March 15, 1988, August 17, 1994, October 27, 1994 and April 22, 1995 among the Registrant, Brian McNay, Charles Winter, Jeffrey Tuttle, Alison Lazarus and Jeffrey Bernstein. (1) 10.1 1995 Stock Option Plan, as amended and forms of agreements thereunder. (2) 10.2 1995 Directors' Stock Option Plan and form of option agreement thereunder. (1) 10.3 1995 Employee Stock Purchase Plan and form of subscription agreement thereunder. (1) 10.4 Form of Directors' and Officers' Indemnification Agreement. (1) 10.5 Form of Common Stock Purchase Warrant. (1) 10.6 North First Street Plaza Lease Agreement dated May 28, 1991, as amended on December 21, 1993, between the Registrant and Wells Fargo Bank, N.A. (1) 10.6A Second Amendment to Lease between the Registrant and Wells Fargo Bank, NA, dated November 30, 1995 with respect to premises at 2150 N. First Street, San Jose, CA 95131. (3) 10.7 Sublease Agreement dated January 15, 1995, as amended on April 20, 1995, by and between the Registrant and First Franklin Financial Corporation. (1) 10.8 Lease Agreement dated June 10, 1994 between the Registrant and Alexander M. Maisin, Trustee of the Alexander M. and June L. Maisin Revocable Trust. (1)
-40- 41 10.9 Business Loan Agreements between the Registrant and Silicon Valley Bank, including related promissory notes and amendments thereto. (1) 10.9A Business Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated January 16, 1996. (3) 10.9B Business Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated March 6, 1996. (3) 10.9C Business Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated March 13, 1996. (3) 10.10 Commercial Security Agreement dated March 15, 1988, as amended on February 25, 1993, between the Registrant and Silicon Valley Bank. (1) 10.11 Direct Sales Representative Agreement dated October 5, 1994 between the Registrant and TAB Products Co. (1) 10.12 Letter Agreement dated April 28, 1995 between the Registrant and Landmark Pacific Group, Inc. (1) 10.13 Letter Agreement dated April 30, 1995 between the Registrant and Refurbished Panel Systems. (1) 10.14 Asset Purchase Agreement dated September 27, 1995 between the Registrant and RST & Associates, Inc. (4) 10.15 Assignment and Assumption of Lease between RST & Associates, Inc. and the Registrant dated September 1, 1995 with respect to premises at 2010 East University, Tempe, Arizona. (4) 10.16 Assignment and Assumption of Lease between RST & Associates Inc. and the Registrant dated September 27, 1995 with respect to premises at 3957 East Speedway, Tucson, Arizona. (4) 10.17 Assignment and Assumption of Lease between RST & Associates Inc. and the Registrant dated September 27, 1995 with respect to premises at 5140 South Rogers, Las Vegas, Nevada. (4) 10.18 Purchase Agreement between Cisco Systems, Inc., Teknion, Inc., Teknion International and the Registrant effective as of September 1, 1995. (4) 10.19 Master Lease and Lease Renewal Agreement between the Registrant and OMI Properties Inc., dated July 21, 1995 and February 1, 1996, respectively, for facilities located at 130 Andover Park East, Suite 204, Tukwila, WA 98188. (3) 10.20 Master Lease Agreement between the Registrant and IM Joint Venture, dated June 23, 1995, for facilities located at Infomart Suite 5001, 1950 Stemmons Freeway, Dallas, Texas 75207. (3)
-41- 42 10.21 Asset Purchase Agreement dated January 25, 1996 between the Registrant and Darthmouth Group, Inc. d/b/a Corporate Source. (3) 10.22 Assignment and Assumption of Lease between the Registrant and Corporate Source, dated January 25, 1996 with respect to premises at 2811 McKinney Avenue, Suite 18, Dallas, Texas 75204. (3) 10.23 Assignment and Assumption of Lease between the Registrant and Corporate Source, dated January 25, 1996 with respect to premises at 1367 & 1369 Glenville Drive, Richardson, Texas 75081. (3) 10.24 Vehicle Lease Service Agreement between the Company and Penske Truck Leasing Co., L.P., dated January 23, 1996. (3) 10.25 Master Lease Agreement between the Registrant and Southwestern Bell Telephone Company Inc., dated May 2, 1996 for facilities located at 105 Auditorium Circle, San Antonio, Texas 78209. (5) 10.26 Third Amendment to Lease between the Registrant and Wells Fargo Bank, NA, dated August 5, 1996 with respect to premises at 2150 N. First Street, San Jose, CA 95131. (5) 10.27 Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated July 3, 1996. (5) 10.28 Master Lease Agreement between the Registrant and Centennial Plaza, LLC, dated October 4, 1996 for facilities located at Centennial Airport Plaza Building, 12200 E. Briarwood Avenue, Suite 199, Englewood, Colorado 80112. (4) 10.29 Master Lease Agreement between the Registrant and Amberjack Ltd., dated December 16, 1996 for facilities located at 1515 E. Missouri, Phoenix, AZ 85014. (4) 10.30 Common Stock Purchase Warrant Agreement between the Company and Gateway Advisors dated April 21, 1997. (6) 10.31 Revolving Credit Loan and Security Agreement between the Company and Comerica Bank dated August 8, 1997. (7) 10.32 Severance and Mutual Release Agreement between the Company and Charles J. Winter dated December 17, 1997. (2) 11.1 Computation of Pro Forma Net Income Per Common and Common Equivalent Share (see page 46). (2) 23.1 Independent Auditor's Consent. (2) 24.1 Power of Attorney (see page 44). (2)
-42- 43 (b) Reports on Form 8-K: None - ----------------- (1) Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto (File No. 33-46527), which became effective on June 27, 1995. (2) Filed herewith. (3) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated March 14, 1996. (4) Incorporated by reference to exhibits filed in response to Item 14, "Exhibits," of the Registrant's Form 10-K dated January 22, 1996. (5) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated September 13, 1996. (6) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated June 13, 1997. (7) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated September 13, 1997. -43- 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Date: January 26, 1998 By: /s/ John W. Peth ------------------------- John W. Peth President, Chief Executive Officer, Chief Financial Officer and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John W. Peth and Jeffrey Tuttle, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John W. Peth President, Chief Executive January 26, 1998 - ----------------------------------- Officer, Chief Financial (John W. Peth) Officer and Director /s/ Brian D. McNay Executive Vice President of January 26, 1998 - ----------------------------------- Sales and Director (Brian D. McNay) /s/ Jeffrey Tuttle Executive Vice President of January 26, 1998 - ----------------------------------- Marketing, Secretary and (Jeffrey Tuttle) Director /s/ Charles J. Winter Director January 26, 1998 - ----------------------------------- (Charles J. Winter) /s/ Harry S. Robbins Director January 26, 1998 - ----------------------------------- (Harry S. Robbins) /s/ Jack A. Bradley Director January 26, 1998 - ----------------------------------- (Jack A. Bradley)
-44- 45 BUSINESS RESOURCE GROUP SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS )
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts: Fiscal 1995............ 50 -- 75(1) -- 125 Fiscal 1996............ 125 -- -- (68)(2) 57 Fiscal 1997............ 57 33 -- -- 90
- ----------------- (1) Purchase business combination. (2) Charge off of accounts, net of recoveries. -45- 46 EXHIBIT INDEX
Exhibit Number Description Page No. - ------- ----------- -------- 3.1 Amended and Restated Articles of Incorporation of Registrant. (1) 3.2 Bylaws of Registrant. (1) 4.1 Buy and Sell Agreement dated October 31, 1987, as amended on March 15, 1988, August 17, 1994, October 27, 1994 and April 22, 1995 among the Registrant, Brian McNay, Charles Winter, Jeffrey Tuttle, Alison Lazarus and Jeffrey Bernstein. (1) 10.1 1995 Stock Option Plan, as amended and forms of agreements thereunder. (2) 10.2 1995 Directors' Stock Option Plan and form of option agreement thereunder. (1) 10.3 1995 Employee Stock Purchase Plan and form of subscription agreement thereunder. (1) 10.4 Form of Directors' and Officers' Indemnification Agreement. (1) 10.5 Form of Common Stock Purchase Warrant. (1) 10.6 North First Street Plaza Lease Agreement dated May 28, 1991, as amended on December 21, 1993, between the Registrant and Wells Fargo Bank, N.A. (1) 10.6A Second Amendment to Lease between the Registrant and Wells Fargo Bank, NA, dated November 30, 1995 with respect to premises at 2150 N. First Street, San Jose, CA 95131. (3) 10.7 Sublease Agreement dated January 15, 1995, as amended on April 20, 1995, by and between the Registrant and First Franklin Financial Corporation. (1) 10.8 Lease Agreement dated June 10, 1994 between the Registrant and Alexander M. Maisin, Trustee of the Alexander M. and June L. Maisin Revocable Trust. (1)
47 10.9 Business Loan Agreements between the Registrant and Silicon Valley Bank, including related promissory notes and amendments thereto. (1) 10.9A Business Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated January 16, 1996. (3) 10.9B Business Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated March 6, 1996. (3) 10.9C Business Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated March 13, 1996. (3) 10.10 Commercial Security Agreement dated March 15, 1988, as amended on February 25, 1993, between the Registrant and Silicon Valley Bank. (1) 10.11 Direct Sales Representative Agreement dated October 5, 1994 between the Registrant and TAB Products Co. (1) 10.12 Letter Agreement dated April 28, 1995 between the Registrant and Landmark Pacific Group, Inc. (1) 10.13 Letter Agreement dated April 30, 1995 between the Registrant and Refurbished Panel Systems. (1) 10.14 Asset Purchase Agreement dated September 27, 1995 between the Registrant and RST & Associates, Inc. (4) 10.15 Assignment and Assumption of Lease between RST & Associates, Inc. and the Registrant dated September 1, 1995 with respect to premises at 2010 East University, Tempe, Arizona. (4) 10.16 Assignment and Assumption of Lease between RST & Associates Inc. and the Registrant dated September 27, 1995 with respect to premises at 3957 East Speedway, Tucson, Arizona. (4) 10.17 Assignment and Assumption of Lease between RST & Associates Inc. and the Registrant dated September 27, 1995 with respect to premises at 5140 South Rogers, Las Vegas, Nevada. (4) 10.18 Purchase Agreement between Cisco Systems, Inc., Teknion, Inc., Teknion International and the Registrant effective as of September 1, 1995. (4) 10.19 Master Lease and Lease Renewal Agreement between the Registrant and OMI Properties Inc., dated July 21, 1995 and February 1, 1996, respectively, for facilities located at 130 Andover Park East, Suite 204, Tukwila, WA 98188. (3) 10.20 Master Lease Agreement between the Registrant and IM Joint Venture, dated June 23, 1995, for facilities located at Infomart Suite 5001, 1950 Stemmons Freeway, Dallas, Texas 75207. (3)
48 10.21 Asset Purchase Agreement dated January 25, 1996 between the Registrant and Darthmouth Group, Inc. d/b/a Corporate Source. (3) 10.22 Assignment and Assumption of Lease between the Registrant and Corporate Source, dated January 25, 1996 with respect to premises at 2811 McKinney Avenue, Suite 18, Dallas, Texas 75204. (3) 10.23 Assignment and Assumption of Lease between the Registrant and Corporate Source, dated January 25, 1996 with respect to premises at 1367 & 1369 Glenville Drive, Richardson, Texas 75081. (3) 10.24 Vehicle Lease Service Agreement between the Company and Penske Truck Leasing Co., L.P., dated January 23, 1996. (3) 10.25 Master Lease Agreement between the Registrant and Southwestern Bell Telephone Company Inc., dated May 2, 1996 for facilities located at 105 Auditorium Circle, San Antonio, Texas 78209. (5) 10.26 Third Amendment to Lease between the Registrant and Wells Fargo Bank, NA, dated August 5, 1996 with respect to premises at 2150 N. First Street, San Jose, CA 95131. (5) 10.27 Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated July 3, 1996. (5) 10.28 Master Lease Agreement between the Registrant and Centennial Plaza, LLC, dated October 4, 1996 for facilities located at Centennial Airport Plaza Building, 12200 E. Briarwood Avenue, Suite 199, Englewood, Colorado 80112. (4) 10.29 Master Lease Agreement between the Registrant and Amberjack Ltd., dated December 16, 1996 for facilities located at 1515 E. Missouri, Phoenix, AZ 85014. (4) 10.30 Common Stock Purchase Warrant Agreement between the Company and Gateway Advisors dated April 21, 1997. (6) 10.31 Revolving Credit Loan and Security Agreement between the Company and Comerica Bank dated August 8, 1997. (7) 10.32 Severance and Mutual Release Agreement between the Company and Charles J. Winter dated December 17, 1997. (2) 11.1 Computation of Pro Forma Net Income Per Common and Common Equivalent Share (see page 46). (2) 23.1 Independent Auditor's Consent. (2) 24.1 Power of Attorney (see page 44). (2)
49 (b) Reports on Form 8-K: None - ----------------- (1) Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto (File No. 33-46527), which became effective on June 27, 1995. (2) Filed herewith. (3) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated March 14, 1996. (4) Incorporated by reference to exhibits filed in response to Item 14, "Exhibits," of the Registrant's Form 10-K dated January 22, 1996. (5) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated September 13, 1996. (6) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated June 13, 1997. (7) Incorporated by reference to exhibits filed in response to Item 6, "Exhibits," of the Registrant's Form 10-Q dated September 13, 1997. EX-10.1 2 1995 STOCK OPTION PLAN, AS AMENDED 1 Exhibit 10.1 BUSINESS RESOURCE GROUP 1995 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to give Employees and Consultants of the Company a greater personal stake in the success of the Company's business, to provide additional incentive to the Employees and Consultants of the Company to continue and advance in their employment and service to the Company and to promote the success of the Company's business. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written option agreement. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" shall mean the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "Applicable Laws" shall have the meaning set forth in Section 4(a) below. (c) "Board" shall mean the Board of Directors of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with Section 4(a) of the Plan, if one is appointed. (f) "Common Stock" shall mean the Common Stock of the Company. (g) "Company" shall mean Business Resource Group, a California corporation. (h) "Consultant" shall mean any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not; provided that if and in the event the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. (i) "Continuous Status as an Employee or Consultant" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Administrator; provided that such leave is 2 for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. Notwithstanding the foregoing, a leave of absence shall not be considered as interrupting the Continuous Status of an Employee or Consultant if the leave has been designated by the Company as (or required by law to be) a leave for which such status shall continue. For purposes of this Plan, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute a termination of employment. (j) "Director" shall mean a member of the Board. (k) "Employee" shall mean any person, including officers, Named Executives and those Directors who are also employees of the Company, who are, employed by the Company or any Parent or Subsidiary of the Company. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock as quoted on such system on the date of determination (if for a given day no sales were reported, the closing bid on that day shall be used), as such price is reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the bid and asked prices for the Common Stock or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable written option agreement. (o) "Named Executive" shall mean any individual who, on the last day of the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four highest compensated officers of the Company (other than the chief -2- 3 executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (p) "Nonstatutory Stock Option" shall mean an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable written option agreement. (q) "Officer" shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" shall mean a stock option granted pursuant to the Plan. (s) "Optioned Stock" shall mean the Common Stock subject to an Option. (t) "Optionee" shall mean an Employee or Consultant who receives an Option. (u) "Parent" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (v) "Plan" shall mean this 1995 Stock Option Plan. (w) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act as the same may be amended from time to time, or any successor provision. (x) "S Corporation" shall mean a corporation that meets the requirements of Sections 1361 and 1362 of the Code. (y) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan. (z) "Subsidiary" shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Plan is 2,200,000 Shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, Shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. -3- 4 4. Administration of the Plan. (a) Composition of Administrator. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, and by the legal requirements relating to the administration of incentive stock option plans, if any, of applicable securities laws and the Code (collectively, the "Applicable Laws"), the Plan may (but need not) be administered by different administrative bodies with respect to directors, officers who are not directors and Employees who are neither directors nor officers. (ii) Administration with respect to Directors and Officers. With respect to grants of Options to Employees or Consultants who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan and Section 162(m) of the Code as it applies so as to qualify grants of Options to Named Executives as performance-based compensation, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan, to qualify grants of Options to Named Executives as performance-based compensation under Section 162(m) of the Code, and otherwise so as to satisfy the Applicable Laws. (iii) Administration with respect to Other Persons. With respect to grants of Options to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. (iv) General. If a Committee has been appointed pursuant to subsection (ii) or (iii) of this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee appointed under subsection (ii), to the extent permitted by Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan, and to the extent required under Section 162(m) of the Code to qualify grants of Options to Named Executives as performance-based compensation. (b) Powers of the Administrator. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; -4- 5 (ii) to select the Employees and Consultants to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount, if any, of any deemed earnings on any deferred amount during any deferral period); and (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Shares covered by such Option shall have declined since the date the Option was granted; (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. Eligibility. (a) Recipients of Grants. Nonstatutory Stock Options may be granted only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. (b) Type of Option. Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they -5- 6 were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) No Employment Rights. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 20 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 16 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement, and provided further that, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. Limitation on Grants to Employees. Subject to adjustment as provided in this Plan, the maximum number of Shares which may be subject to Options granted to any one Employee under this Plan for any fiscal year of the Company shall be 400,000. 9. Option Exercise Price and Consideration. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option -6- 7 (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant; (B) granted to a person who, at the time of the grant of such Option, is a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant; (C) granted to any person other than a Named Executive, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant (and no less than 90% prior to the termination of the Company's status as an S Corporation). (iii) In the case of an Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, (7) delivery of an irrevocable subscription agreement for the Shares that irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (8) any combination of the foregoing methods of payment, or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the -7- 8 Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 14 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Conditions upon Exercise. Notwithstanding Section 10(a) above, if the Company is an S Corporation at the time when an Optionee intends to exercise an Option: (i) the Option will not be exercisable if the purchase of the Option Shares would cause the 35 shareholder limit of Section 1361 of the Code to be exceeded; and (ii) if the exercise is not prohibited by paragraph (i) above, the Optionee shall be required, as a condition to such exercise, to sign the Buy - Sell Agreement dated October 31, 1987, as amended, among the shareholders of the Company. (c) Termination of Status as an Employee or Consultant. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant, such Optionee may, but only within thirty (30) days (or such other period of time, not exceeding three (3) months in the case of an Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the optionee does not exercise such Option within the time specified herein, the Option shall terminate. -8- 9 (d) Disability of Optionee. Notwithstanding Section 10(c) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option within the time specified herein, the Option shall terminate. (e) Death of Optionee. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within six (6) months (or such other period of time, not exceeding six (6) months, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant three (3) months (or such other period of time as is determined by the Administrator as provided above) after the date of death, subject to the limitation set forth in Section 5(b); or (ii) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. (f) Rule 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Withholding Taxes. As a condition to the exercise of Options granted hereunder, the Optionee shall make such arrangements as the Administrator may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection -9- 10 with the exercise, receipt or vesting of such Option. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. 12. Stock Withholding to Satisfy Withholding Tax Obligations. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (a) by cash payment, or (b) out of Optionee's current compensation, (c) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (ii) have a fair market value on the date of surrender equal to or less than Optionee's marginal tax rate times the ordinary income recognized, or (d) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). Any surrender by an Officer or Director of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Administrator; (d) if the Optionee is an Officer or Director, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to -10- 11 which the Option is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 13. Non-Transferability of Options. No Option may be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution. The designation of a beneficiary by an Optionee will not constitute a transfer. An Option may be exercised, during the lifetime of the Optionee, only by the Optionee or a transferee permitted by this Section 13. 14. Adjustments Upon Changes in Capitalization or Merger. (a) Adjustments. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares that have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, the maximum number of Shares for which Options may be granted to any Employee under Section 8 of the Plan, and the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Corporate Transactions. In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to some or all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Administrator makes an Option exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be -11- 12 exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. 15. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 16. Amendment and Termination of the Plan. (a) Authority to Amend or Terminate. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 20 of the Plan: (i) any increase in the number of Shares subject to the Plan, other than in connection with an adjustment under Section 14 of the Plan; (ii) any change in the designation of the class of persons eligible to be granted Options; (iii) any change in the limitation on grants to employees as described in Section 8 of the Plan or other changes which would require shareholder approval to qualify options granted hereunder as performance-based compensation under Section 162(m) of the Code; or (iv) if the Company has a class of equity securities registered under Section 12 of the Exchange Act at the time of such revision or amendment, any material increase in the benefits accruing to participants under the Plan. (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 16(a) of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 20 of the Plan. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 17. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of Applicable Laws, including, -12- 13 without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Option Agreement. Options shall be evidenced by written option agreements in such forms as the Administrator shall approve. 20. Shareholder Approval. (a) Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under applicable federal and state law. (b) In the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If any required approval by the shareholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 20(b) hereof, then the Company shall, at or prior to the first annual meeting of shareholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an officer or director after such registration, do the following: (i) furnish in writing to the holders entitled to vote for the Plan substantially the same information that would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and -13- 14 (ii) file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (i) hereof not later than the date on which such information is first sent or given to shareholders. 21. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. -14- EX-10.32 3 SEVERENCE AND MUTUAL RELEASE AGREEMENT 1 Exhibit 10.32 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release (the "Agreement") is entered as of December 17, 1997 by and between Business Resource Group (the "Company") and Charles J. Winter (the "Employee"). WHEREAS, Employee has been employed by the Company; WHEREAS, the Company and Employee have mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship; NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as the "Parties") hereby agree as follows: 1. Termination. The Company and Employee acknowledge and agree that Employee will resign as President and Chief Executive Officer (and from all other offices) of the Company effective December 17, 1997. Employee will remain employed with the Company as an adviser to the Company's newly appointed Chief Executive Officer until December 31, 1997 (the "Termination Date"), on which date Employee's employment with the Company shall terminate. Employee will continue to be a member of the Company's Board of Directors after the Termination Date, serving in such capacity at the discretion of the Company's shareholders. 2. Consideration. In consideration for the release of claims set forth below and other obligations under this Agreement and after the Termination Date, the Company agrees to pay Employee, as severance, (a) his regular salary of $10,000 per month (less applicable tax withholding), for a twelve month period from December 31, 1997 through December 31, 1998, in accordance with the Company's normal payroll practices, and (b) his automobile expense allowance of $1,325 per month for a 12 month period from December 31, 1997 through December 31, 1998, in accordance with the Company's normal practices and policies therefor. 3. Benefits. (a) Employee shall continue to receive the Company's standard medical insurance benefits through the Termination Date. After such date, Employee shall have the right to continue coverage under the Company's medical insurance program as provided by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). If Employee properly and timely elects such continuation coverage, the Company shall pay the premiums therefor for the period from December 1997 through and including December 1998. (b) Employee's eligibility or coverage under all other Company benefit programs shall end on the Termination Date, in accordance with the terms and conditions of such programs. 2 4. No Other Payments Due. Employee acknowledges and agrees that he has received all payments due to Employee of any kind, other than his final paycheck as an Employee of the Company and amounts to be paid and benefits provided pursuant to Sections 2 and 3 of this Agreement. Employee further acknowledges and agrees that he shall not be entitled to any additional compensation of any kind from the Company in connection with his service as a member of the Company's Board of Directors after the Termination Date, other than reimbursements for out-of-pocket expenses incurred in connection with such service as a director. In light of the payment by the Company of all wages due, or to become due to the Employee, the Parties further acknowledge and agree that California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provides in pertinent part as follows: No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made. 5. Release of Claims. In consideration for the obligations of the Parties set forth in this Agreement, Employee and the Company, on behalf of themselves, and their respective heirs, executors, officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations and assigns, hereby fully and forever release each other and their respective heirs, executors, officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations and assigns from any claim, duty, obligation or cause of action relating to any matters of any kind, whether known or unknown, suspected or unsuspected, that either of them may possess arising from any omissions, acts or facts that have occurred up until and including the Termination Date including, without limitation: (a) any and all claims relating to or arising from Employee's employment relationship with the Company and termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company; (c) any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and the California Fair Employment and Housing Act; (e) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and 3 (f) any and all claims for attorney's fees and costs. The Company and Employee agree that the release set forth in this section shall be and remain in effect in all respects as a complete and general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. 6. Civil Code Section 1542. The parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Employee and the Company acknowledge that they are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee and the Company, being aware of such code section, agree to waive any rights they may have thereunder, as well as under any other stature or common law principles of similar effect. 7. Confidentiality. The Parties each agree to use their best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Settlement Information"). Each Party hereto agrees to take every reasonable precaution to prevent disclosure of any Settlement Information to third parties, and each agrees that there will be no publicity, directly or indirectly, concerning any Settlement Information. The Parties hereto agree to take every precaution to disclose Settlement Information only to those employees, officers, directors, attorneys, accountants and governmental entities who have a reasonable need to know of such Settlement Information. Notwithstanding the foregoing, either party may disclose the Settlement Information as may be required under applicable law. 8. Nondisclosure of Confidential and Proprietary Information. Employee agrees that he shall continue to maintain the confidentiality of all confidential and propriety information of the Company. Employee agrees that at all times hereafter for a period of five years, Employee shall not intentionally divulge, furnish or make available to any party any of the trade secrets, patents, patent applications, price decisions or determinations, inventions, customers, proprietary information or other intellectual property rights of the Company, until after such time as such information has become publicly known otherwise than by act of collusion of Employee. Employee further agrees that he will return all the Company's property and confidential and proprietary information in his possession to the Company within five business days after the Termination Date. 9. Breach of this Agreement. Employee acknowledges that upon breach of Sections 8 or 10 of this Agreement, the Company would sustain irreparable harm from such 4 breach, and, therefore, Employee agrees that in addition to any other remedies which the Company may have for any breach of this Agreement or otherwise, the Company shall be entitled to obtain equitable relief, including specific performance and injunctions, restraining Employee from committing or continuing any such violation of this Agreement. The Company acknowledges that upon breach of Section 10 of this Agreement, the Employee would sustain irreparable harm from such breach, and, therefore, the Company agrees that in addition to any other remedies which the Employee may have for any breach of this Agreement or otherwise, the Employee shall be entitled to obtain equitable relief, including specific performance and injunctions, restraining the Company from committing or continuing any such violation of Section 10 of this Agreement. 10. Non-Disparagement. Each party agrees to refrain from any disparagement, criticism, defamation, slander or libel of the other, whether written or oral, or tortious interference with the contracts and relationships of the other. 11. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 12. No Representations. Each party represents that it has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party which are not specifically set forth in this Agreement. 13. Costs. The Parties shall each bear their own costs, attorneys' fees and other fees incurred in connection with this Agreement. 14. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 15. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Employee concerning Employee's separation from the Company and supersedes and replaces any and all prior agreements and understandings concerning Employee's relationship with the Company and his compensation by the Company. 16. No Oral Modification. This Agreement may only be amended in writing signed by Employee and the Company. 17. Governing Law. This Agreement shall be governed by the laws of the State of California. 5 18. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 19. Assignment. This Agreement may not be assigned by Employee or the Company without the prior written consent of the other party. Notwithstanding the foregoing, this Agreement may be assigned by the Company to a corporation controlling, controlled by or under common control with the Company without the consent of Employee. 20. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the parties hereto, with the full intent of releasing all claims. The parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; and (d) They are fully aware of the legal and binding effect of this Agreement. [Signature Page Follows] 6 IN WITNESS WHEREOF, the parties have executed this Agreement on the respective dates set forth below. BUSINESS RESOURCE GROUP By: __________________________ Title: _________________________ Dated: December 17, 1997 CHARLES J. WINTER ----------------------------- Charles J. Winter Dated: December 17, 1997 EX-11.1 4 COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 BUSINESS RESOURCE GROUP STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE (IN THOUSANDS EXCEPT PER SHARE AND PER SHARE DATA)
YEAR ENDED OCTOBER 31, -------------------------------------- 1997 1996 1995 --------- ---------- -------- FULLY DILUTED Net income/(loss)........................ $ (762) $ 1,854 ========= ========= Pro forma net income..................... $ 999 ======= Weighted average common shares outstanding............................ 4,902 4,844 3,662 Common equivalent shares: Stock options......................... -- 42 -- Supplemental shares (1)............... -- -- 172 ---------- --------- ------- Total common stock and common stock equivalents..................... 4,902 4,886 3,834 ========== ========= ======= Net income / (loss) per common share..... $ (0.16) $ 0.38 ========== ========= Pro forma net income per common share...................... $ 0.26 =======
(1) Represents the approximate number of shares that would have to have been sold to fund the distribution of undistributed S Corporation earnings. See Note 2 to Financial Statements. -46- EX-23.1 5 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 33-95144, 333-02388 and 333-23495) of Business Resource Group of our report dated December 16, 1997, appearing in this Annual Report on Form 10-K of Business Resource Group for the year ended October 31, 1997. /s/ Deloitte & Touche LLP ------------------------------ Deloitte & Touche LLP San Jose, California January 28, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR OCT-31-1997 NOV-01-1996 OCT-31-1997 1 274 0 13,854 90 1,398 17,512 3,546 1,200 20,760 8,233 0 0 0 49 12,403 20,760 58,303 72,701 47,100 57,430 16,622 0 0 (1,285) (523) (762) 0 0 0 (762) (.16) (.16)
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