UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 0-16530
BRANDPARTNERS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3236325
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
777 Third Avenue, New York, New York 10017
(Address of Principal Executive Offices)
212-446-0200
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer.
Yes |_| No |X|
The number of shares of common stock outstanding on August 11, 2003 was
18,063,553
BRANDPARTNERS GROUP, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002................................1
Consolidated Statements of Operations for the Six and
Three Months Ended June 30, 2003 and 2002...........................3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002........................................4
Notes to Consolidated Financial Statements..............................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................23
Item 4. Controls and Procedures............................................23
Part II - Other Information
Item 5. Other Information..................................................24
Item 6. Exhibits and Reports on Form 8-K...................................25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of June 30, 2003 and December 31, 2002
ASSETS June 30, 2003 December 31, 2002
------------- -----------------
(unaudited) (See Note "L")
Current assets:
Cash and cash equivalents $ 447,453 $ 2,812,924
Accounts receivable, net 5,242,389 7,476,432
Costs and estimated earnings in excess of
billings 1,854,309 6,288,532
Inventories 2,305,079 2,102,909
Prepaid expenses and other current assets 591,257 878,700
Income tax receivable 690,136 690,136
----------- -----------
Total current assets 11,130,623 20,249,633
----------- -----------
Property and equipment, net of accumulated
depreciation 1,459,088 1,600,415
Goodwill, net of accumulated amortization 24,271,969 24,271,969
Deferred financing and acquisition costs 391,206 472,450
Other assets 161,171 270,349
----------- -----------
Total assets $37,414,057 $46,864,816
=========== ===========
The accompanying notes are an integral part of these statements.
BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of June 30, 2003 and December 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 2003 December 31, 2002
-------------- -----------------
(unaudited) (See Note "L")
Current liabilities:
Revolving credit facility $ 5,318,248 $ 4,000,000
Accounts payable and accrued expenses 7,730,901 14,837,277
Billings in excess of costs and estimated
earnings 1,646,841 1,116,360
Current maturities of long-term debt 3,874,711 4,568,083
Other current liabilities 1,376,277 1,175,494
------------ ------------
Total current liabilities 19,946,978 25,697,214
Notes and interest payable 12,616,411 12,465,008
Capital lease obligations 2,512 2,445
Put warrant liability 122,513 56,295
------------ ------------
Total liabilities 32,688,414 38,220,962
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value;
20,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock - 100,000,000 shares
authorized, $.01 par value;
18,163,553, shares issued as
of June 30, 2003 and
December 31, 2002, 18,063,553
shares outstanding as of June 30,
2003 and December 31, 2002 181,636 181,636
Additional paid-in capital 40,198,822 40,109,102
Accumulated deficit (35,342,315) (31,334,384)
Treasury stock (312,500) (312,500)
------------ ------------
Total stockholders' equity 4,725,643 8,643,854
------------ ------------
Total liabilities and
stockholders' equity $ 37,414,057 $ 46,864,816
============ ============
The accompanying notes are an integral part of these statements.
2
BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six and Three Months Ended June 30, 2003 and 2002
(unaudited)
Six Months Ended June 30, Three Months Ended June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 16,370,530 $ 15,433,828 $ 6,881,717 $ 9,581,229
------------ ------------ ------------ ------------
Costs and expenses
Cost of revenues 14,066,599 12,789,662 6,235,408 7,240,100
Selling, general and administrative 4,601,896 7,241,414 2,013,602 3,339,031
Depreciation and amortization 448,975 548,218 230,330 66,394
------------ ------------ ------------ ------------
Total expenses 19,117,470 20,579,294 8,479,340 10,645,525
------------ ------------ ------------ ------------
Operating loss (2,746,940) (5,145,466) (1,597,623) (1,064,296)
------------ ------------ ------------ ------------
Interest expense 950,129 1,228,453 482,657 623,764
------------ ------------ ------------ ------------
Other (income) expense
Interest income (20,394) (39,660) (4,539) (15,145)
Management fee income -- (312,895) -- (312,895)
Settlement of lawsuit 227,220 -- -- --
Loss on sale of assets 37,818 -- 37,818 --
Other
Total other (income) expense 66,218 (133,853) 66,218 (133,853)
------------ ------------ ------------ ------------
310,862 (486,408) 99,497 (461,893)
------------ ------------ ------------ ------------
Loss from continuing operations (4,007,931) (5,887,511) (2,179,777) (1,226,167)
Loss from discontinued operations -- 597,571 -- 213,151
------------ ------------ ------------ ------------
NET LOSS $ (4,007,931) $ (6,485,082) $ (2,179,777) $ (1,439,318)
============ ============ ============ ============
Basic and diluted (loss) per share
Continuing operations $ (0.22) $ (0.33) $ (0.12) $ (0.07)
Discontinued operations -- $ (0.03) -- $ (0.01)
------------ ------------ ------------ ------------
Basic and diluted $ (0.22) $ (0.36) $ (0.12) $ (0.08)
============ ============ ============ ============
Weighted -average shares outstanding 18,468,553 18,001,823 18,468,553 18,063,553
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
3
BrandPartners Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended June 30
(unaudited)
2003 2002
----------- -----------
Cash flows from operating activities
of continuing operations
Loss from continuing operations $(4,007,931) $(5,887,511)
Adjustments to reconcile loss from
continuing operations to cash used in
operating activities
Depreciation and amortization 448,975 548,218
Amortization of discount on notes payable 63,112 195,141
Settlement of lawsuit 77,220 --
Bad debt provision (53,033) 64,106
Non-cash compensation 12,500 310,000
Allowance for obsolete inventory 30,000 82,500
(Gain) loss on derivative Transaction 66,218 (133,853)
Loss on sale of assets 37,818 -0-
Changes in operating assets and liabilities
of continuing operations
Accounts receivable 2,287,076 747,213
Costs and estimated earnings in excess
of billings 4,434,223 (616,590)
Inventories (232,170) 338,787
Prepaid expenses and other current
assets 242,443 (406,607)
Other assets (2,867) 2,286
Accounts payable and accrued expenses (7,106,376) 1,376,215
Other liabilities 200,783 110,341
Billings in excess of costs and
estimated earnings 530,481 195,710
Interest payable - long term 106,052 225,482
Income taxes -- 104,489
----------- -----------
Net cash used in operating activities (2,865,476) (2,744,073)
----------- -----------
Cash flows from investing activities of
continuing operations
Acquisition of equipment (114,359) (331,173)
Proceeds from sale of assets 7,182 (4,000,000)
Loan to officers -- (78,000)
Repayment on loan to officer's -- 31,200
----------- -----------
Net cash used in investing activities
of continuing operations (107,177) (4,377,973)
----------- -----------
Cash flows from financing activities of
continuing operations
Net borrowings on credit facility 1,318,248 4,312,796
Proceeds from sale of common stock, net -- 250,508
Repayment of long-term debt (711,066) (733,548)
----------- -----------
Net cash provided by financing activities
of continuing operations 607,182 3,829,756
----------- -----------
NET DECREASE IN CASH (2,365,471) (3,292,290)
Cash and cash equivalents, beginning of period 2,812,924 4,225,756
----------- -----------
Cash and cash equivalents, end of period $ 447,453 $ 933,466
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 496,708 $ 573,103
=========== ===========
The accompanying notes are an integral part of these statements.
4
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
BrandPartners Group, Inc. and Subsidiaries (the "Company") have been
prepared by the Company pursuant to the rules of the Securities and
Exchange Commission ("SEC") for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by accounting
principles generally accepted in the United States of America for annual
financial statements, and should be read in conjunction with our
consolidated financial statements and notes thereto for the fiscal year
ended December 31, 2002 filed with the SEC on Form 10-KSB. The
accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America and include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of financial position, results of operations and
cash flows. The consolidated statements of operations for the six months
ended June 30, 2003 are not necessarily indicative of the results expected
for the full year.
A summary of significant accounting policies followed by the Company is
set forth in Note C to the Company's restated consolidated financial
statements in Amendment No. 2 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2002, which is incorporated herein
by reference.
The consolidated financial statements include the accounts of
BrandPartners Group, Inc. and its 100% owned subsidiary, Willey Brothers,
Inc. ("Willey Brothers") for the six months ended June 30, 2003, and the
accounts of BrandPartners Group, Willey Brothers and BrandPartners Group's
discontinued operation, iMapData.com, Inc., for the six months ended June
30, 2002. All significant inter-company accounts and transactions have
been eliminated in consolidation.
Certain amounts in the prior year have been reclassified to conform to the
classifications used in 2003.
The Company currently operates through its sole subsidiary, Willey
Brothers, acquired on January 16, 2001. Through Willey Brothers, the
Company provides services and products to the financial services industry
consisting of strategic retail positioning and branding, environmental
design and store construction services, retail merchandising analysis,
display systems and signage, and point-of-sale communications and
marketing programs.
Our ability to satisfy our working capital requirements depends on, among
other things, whether we are successful in generating revenues and income
from Willey Brothers and the cost and availability of third party
financing. We have been impacted by limitations and restrictions placed
upon Willey Brothers by its lender with respect to availability under its
revolving credit facility (see Note "D"). Willey Brothers' revolving
credit facility and term loan (together, the "Facility") are currently due
to expire on September 29, 2003. The Company has guaranteed 100% of the
Facility. Willey Brothers and its lender are in the process of negotiating
an extension of the Facility on terms and conditions acceptable to the
parties, but no assurances can be given that Willey Brothers will be
successful in concluding such an extension at all or on terms favorable to
Willey Brothers. If for any reason Willey Brothers is unable to extend or
refinance the Facility upon maturity, and the amount outstanding under the
Facility becomes due and
5
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A - NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)
payable, the lender has the right to proceed against the collateral
granted to it to secure the indebtedness under the Facility, including
substantially all of the assets of Willey Brothers and the Company's
ownership interest in Willey Brothers. Should that foreclosure occur the
Company would have no further operations. In addition, in the event that
Willey Brothers is unable to pay the amount due under the Facility upon
maturity, such a default would trigger a default under and acceleration of
the Willey Subordinated Note Payable (as defined in Note "E" below), and
would trigger the right of the holder of the Put Warrant (as defined in
Note "E" below) to put such Put Warrant to Willey Brothers (see Note "E").
In response to current market conditions and as a part of its ongoing
corporate strategy, the Company is pursuing several initiatives intended
to increase liquidity and better position the Company in the marketplace.
These initiatives include vigorously pursuing new sales and customers,
continually reviewing costs and expenses and aggressively collecting
accounts receivable. In addition, the Company is pursuing various debt and
equity financing arrangements to permit payment of the Company's
short-term debt, support the Company's operations and allow the execution
of its business plan. While no assurances can be given, management
believes that implementation of these initiatives and the anticipated
extension of the Facility will provide sufficient cash flow for the next
twelve months.
We may in the future continue to experience fluctuations in quarterly
operating results. Factors that may cause our quarterly operating results
to vary include the number of active customer projects, the requirements
of customer projects, the termination of major customer projects, the loss
of major customers and the timing of new engagements.
NOTE B - INVENTORY
Inventory consists of the following at June 30, 2003 and December 31,
2002.
June 30, 2003 December 31, 2002
------------- -----------------
Finished Goods $1,658,813 $1,560,943
Raw Materials 587,243 534,619
Work-in-Process 59,023 7,347
---------- ----------
$2,305,079 $2,102,909
========== ==========
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value
of the net asset acquired and has been amortized on the straight-line
basis over a ten year period through December 31, 2001. On January 1,
2002, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" and accordingly
ceased amortizing its goodwill. In conformance with the standard the
Company conducts periodic reviews of the value of its goodwill for
potential impairment.
6
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D - LOAN PAYABLE TO BANK AND REVOLVING CREDIT FACILITY
On January 11, 2001, Willey Brothers entered into a credit agreement with
a commercial lender, consisting of an $8 million term loan and a $6
million revolving credit facility (together, the "Facility"). All
borrowings are repayable with interest, which accrues, at the borrower's
option, at the bank's base rate plus the applicable margin or LIBOR plus
the applicable margin. The weighted average interest rate in effect on
June 30, 2003 was 5.3834% for the term loan and 4.8633% for the revolving
credit facility. As of June 30, 2003, the outstanding balances under the
term loan and the revolving credit facility were $1,839,045 and
$5,318,248, respectively. The Facility has been amended by Amendment and
Waiver Agreements dated May 21, 2001, October 22, 2001 and March 29, 2002,
by Amendment Agreements dated September 25, 2002, December 20, 2002, March
18, 2003 and August 21, 2003, and by a letter agreement dated February 12,
2003. The August 21, 2003 and March 18, 2003 Amendments extended the
expiration of the Facility to September 29, 2003 and August 22, 2003,
respectively, extended the payment terms for the amendment fee and
required additional pre-payments of principal. The September 25, 2002
Amendment increased the availability under the revolving credit facility
and extended the payment terms for the amendment fee. The December 20,
2002 Amendment permanently applied $4,000,000 of cash, restricted by the
March 29, 2002 Amendment and Waiver Agreement, to the term loan and
extended the payment terms for the amendment fee. The various other
Amendments and Amendment and Waiver Agreements waive certain financial
covenants for the remainder of the term, require the payment of amendment
fees, limit the availability under the credit facility and restrict the
payments of certain other obligations. The February 12, 2003 letter
agreement extended the payment terms for the amendment fee. Willey
Brothers and its lender are in the process of negotiating an extension of
the Facility on terms and conditions acceptable to the parties, but no
assurances can be given that Willey Brothers will be successful in
concluding such an extension at all or on terms favorable to Willey
Brothers. Borrowings under the Facility are secured by substantially all
of the assets of Willey Brothers and a pledge by the Company of its stock
in Willey Brothers. The Facility is guaranteed by the Company. If for any
reason Willey Brothers is unable to extend or refinance the Facility upon
maturity, and the amount outstanding under the Facility becomes due and
payable, the lender has the right to proceed against the collateral
granted to it to secure the indebtedness under the Facility, including
substantially all of the assets of Willey Brothers and the Company's
ownership interest in Willey Brothers. Should that foreclosure occur the
Company would have no further operations. In addition, in the event that
Willey Brothers is unable to pay the amount due under the Facility upon
maturity, such a default would trigger a default under and acceleration of
the Willey Subordinated Note Payable, and would trigger the right of the
holder of the Put Warrant to put such Put Warrant to Willey Brothers (see
Note "E"). At June 30, 2003 the Company had a liability for amendment fees
of $580,000.
7
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following at June 30, 2003 and
December 31, 2002:
2003 2002
----------- -----------
Notes payable (1) (2) $14,500,000 $14,500,000
Discount on notes payable (236,592) (299,704)
Interest payable 353,003 246,951
Less current maturities (2,000,000) (1,982,239)
----------- -----------
$12,616,411 $12,465,008
=========== ===========
Notes payable of $14.5 million consist of the following at June 30, 2003:
(1) Two subordinated convertible promissory notes totaling $7,500,000
(the "$7.5 Million Notes"), and two convertible promissory notes
totaling $2,000,000 (the "$2.0 Million Notes," together with the
$7.5 Million Notes, the "Seller Notes"). The $7.5 Million Notes bear
interest at LIBOR plus 150 basis points and provide for quarterly
interest payments and quarterly interest reset dates. The notes are
convertible into common stock of the Company incrementally on the
first four anniversaries of the issuance date at $4.00 per share at
the option of the Company or the noteholder. The principal and any
accrued interest are due in one payment on October 11, 2007. The
interest rate in effect for these notes as of June 30, 2003 was
2.7888%. The $2.0 Million Notes bear interest at 11% per annum and
provide for quarterly principal payments. The remaining principal
and accrued interest are due in one payment on October 11, 2003. The
notes are convertible into common stock of the Company, at the
option of the noteholder, at $3.00 per share. The aggregate
beneficial conversion of the $2.0 Million Notes of $666,667 has been
accounted for as a debt discount and has been recorded as interest
expense over the term of the notes. Pursuant to an agreement with
the noteholders, all payments required to be made under each of the
Seller Notes for the first three quarters of 2001 were deferred
until the end of the term, the maturity date on the $2.0 Million
Notes was extended to October 11, 2003 from January 11, 2003 and the
maturity date on the $7.5 Million Notes was extended to October 11,
2007 from January 11, 2007. Pursuant to an Amendment and Waiver
Agreement dated March 29, 2002, with the commercial lender and
consented to by the noteholders, no payments in respect of the
Seller Notes can be made until all of the obligations are repaid, in
full, to the commercial lender (see Note "D"). Should the Company be
unable to secure the necessary financing to pay or refinance the
$2.0 Million Notes at or prior to their due date, or the earliest
date on which payment is permitted by Willey Brothers' lender, if
later, the existence of such a default in payment of the $2.0
Million Notes may result in litigation for enforcement of such $2.0
Million Notes and could compromise the Company's ability to obtain
additional financing to support its operations. In addition, such a
default in the payment of the $2 Million Notes would trigger a
default under and acceleration of each of the $7.5 Million Notes and
the Willey Subordinated Note Payable (as defined below), and would
trigger the right of the holder of the Put Warrant to put such Put
Warrant to Willey Brothers.
8
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - NOTES AND INTEREST PAYABLE (continued)
On May 15, 2003, the Company entered into an agreement with the former
shareholders of Willey Brothers (the "Willey Agreement") providing for,
among other things, the cancellation and forgiveness of certain debt upon
the occurrence of certain events. Under the agreement, as amended for
certain consideration on June 16, 2003, in the event that, at or
contemporaneously with the closing of a transaction not in the ordinary
course of business (including, without limitation, a debt or equity
investment in, or a refinancing of all or a portion of the indebtedness
of, either the Company or Willey Brothers), but in any event not later
than October 1, 2003, the Company makes payment to the former shareholders
of the principal balance due under the $2.0 Million Notes, the principal
and interest owed under the $2.0 Million Notes shall be deemed paid, the
principal and interest owed under the $7.5 Million Notes shall be canceled
and forgiven, the accrued and unpaid obligations under the Earn-Out shall
be forgiven and no further Earn-Out obligations shall accrue. The Company
has an option to extend the payment date under the Willey Agreement, under
certain circumstances and for payment of certain consideration, until
October 31, 2003. In the event that such option is exercised, the due date
of the $2.0 Million Notes will be automatically extended until October 31,
2003. The Company currently carries $9.5 million of notes payable, accrued
interest on the notes of approximately $1,354,000 (included in Other
Current Assets at June 30, 2003 and December 31, 2002) and accrued, unpaid
Earn-Out of $500,000 (included in accounts payable and accrued expenses at
June 30, 2003 and December 31, 2002), payable to the former shareholders.
In addition, the Company has a contingent liability, through 2005, to pay
an earn-out to the former shareholders, based upon certain targeted levels
(see Note "I" - Earn Out). The transaction, if it occurs, will be
accounted for as a Troubled Debt Restructuring. No gain or loss will be
recognized on the transaction as it is with a related party. As discussed
above, Willey Brothers' Facility with its commercial lender prohibits the
Company from making any payments in respect of the $2.0 Million Notes
until all of its obligations are repaid in full to such commercial lender.
No assurances can be given that the Company will have sufficient capital
or be permitted by its commercial lender to repay the $2.0 Million Notes
on or by the date required under the Willey Agreement. In the event that
the $2.0 Million Notes are not repaid on or by such required date, the
Willey Agreement will expire and no debt will be forgiven or cancelled.
Current maturities consist of the following at June 30, 2003 and December
31, 2002:
June 30, 2003 December 31, 2002
------------- -----------------
Seller Notes $2,000,000 $1,982,239
Term Loan 1,839,045 2,499,045
Capital Lease Liability 35,666 86,799
---------- ----------
$3,874,711 $4,568,083
========== ==========
(2) A subordinated promissory note in the principal amount of $5,000,000
issued on October 22, 2001 to a third party (the "Willey
Subordinated Note Payable"). The note bears interest at 16% per
annum, 12% payable quarterly in cash and 4% added to the unpaid
principal quarterly (PIK amount). The note matures on October 22,
2008, at which time the principal and all PIK amounts are due. Under
the terms of the note, the Company is required to maintain certain
financial covenants. The Company has received a waiver from such
9
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - NOTES AND INTEREST PAYABLE (continued)
financial covenants through June 30, 2003. Concurrently and in connection
with the issuance of the note, the Company issued a common stock purchase
warrant (the "Put Warrant") to purchase 405,000 shares of common stock of
the Company at $0.01 per share. The Put Warrant expires October 22, 2011
and can be put to Willey Brothers after the fifth year, or earlier under
certain conditions, based on certain criteria set forth in the warrant
agreement. The relative fair value of the Put Warrant totaling $338,000 on
the date of the transaction has been treated as a debt discount and is
being amortized to interest expense over the term of the note and a
liability for the Put Warrant was recorded. Changes to the future fair
value of the Put Warrant are recorded in accordance with SFAS No. 133 and
credited or charged to other income or loss, respectively. For the six and
three months ended June 30, 2003 the Company recorded an unrealized loss
of $66,218 and an unrealized gain of $133,853 for the six and three months
ended June 30, 2002.
NOTE F - SIGNIFICANT CUSTOMERS
For the six months ended June 30, 2003, five customers of Willey Brothers
accounted for approximately 30%, 12%, 11%, 10% and 10% of its revenues,
respectively. For the three months ended June 30, 2003, two customers of
Willey Brothers accounted for approximately 16% and 10% of its revenues,
respectively.
For the six months ended June 30, 2002, two customers of Willey Brothers
accounted for approximately 12% and 11% of its revenues, respectively. For
the three months ended June 30, 2002, two customers of Willey Brothers
accounted for approximately 12% and 12% of its revenues, respectively.
NOTE G - SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
On May 12, 2003, the Company issued 300,000 options to Rebot Corporation
in settlement of a lawsuit against the Company. The options have a
Black-Scholes valuation of approximately $77,220. The transaction was
accounted for by charging other expense and increasing
additional-paid-in-capital.
On January 30, 2003, the Company issued 125,000 options to a consultant in
consideration of services to be provided to the Company and its subsidiary
during 2003. The options have a Black-Scholes valuation of approximately
$12,500. The transaction was accounted for by charging consulting expense
and crediting additional-paid-in-capital.
On January 17, 2002 the Company issued 20,833 shares of common stock to an
officer of the Company in accordance with the terms of his employment
agreement with the Company. The shares were valued at $25,000, the value
of the compensation. The transaction was accounted for by charging salary
expense and crediting common stock and additional-paid-in-capital.
10
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H - RELATED PARTY TRANSACTIONS
On February 1, 2002, a subsidiary of the Company advanced $78,000 to two
officers of the subsidiary. The original terms of the note called for
payment in two installments on September 30, 2002 and December 31, 2002.
The notes bear interest at the rate for federal short-term debt
instruments.
On April 3, 2002, the note of one of the officers was repaid in full with
interest. The due date on the remaining note was extended to December 31,
2003.
NOTE I - COMMITMENTS AND CONTINGENCIES
Earn-Out
On January 16, 2001 the Company acquired 100% of the stock of Willey
Brothers. The terms of the acquisition provide for additional
consideration to be paid if the earnings of Willey Brothers exceed certain
targeted levels through the year 2005 (the "Earn-Out"). The aggregate
maximum amount of contingent consideration is $1,800,000. The additional
consideration is payable in cash at the end of each fiscal year subject to
Willey Brothers's compliance with certain bank reporting and covenant
requirements. The amounts paid for contingent consideration will increase
expense rather than goodwill, in the years earned, since payments are
automatically forfeited if employment of the former shareholders of Willey
Brothers terminates. As of June 30, 2003 and 2002 the Company had a
liability of $500,000 related to the year 2001. As of June 30, 2003 the
Company has not recorded a provision for the current year since Willey
Brothers has not reached the level of profitability which is required for
the payment of the Earn-Out. A liability for the year ended December 31,
2002 was not recorded as the terms of the Earn-Out were not met. A
liability for the remaining contingent consideration has not been recorded
as the outcome of the contingency is not determinable beyond a reasonable
doubt.
Pursuant to an Amendment and Waiver Agreement, dated March 29, 2002, with
the commercial lender, and consented to by the former shareholders, no
payments in respect of the Earn-Out can be made until all of the
obligations are repaid, in full, to the lender (See Note "D").
The Company has entered into an agreement with the former shareholders,
whereby, if certain conditions are met all accrued and unpaid obligations
under the Earn-Out shall be forgiven and no further Earn-Out obligation
shall accrue (see Note "E")
11
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J- STOCK BASED COMPENSATION
On March 25, 2003 the Company granted five-year options to certain
employees, officers and directors, as an incentive, to purchase an
aggregate of 1,545,000 shares of common stock of the Company at an
exercise price of $0.15 per share, as follows: (i) option grants to three
employees of the Company and its subsidiaries to purchase an aggregate of
120,000 shares, exercisable commencing March 25, 2004; (ii) option grant
to the Company's Chief Financial Officer to purchase 25,000 shares,
exercisable commencing March 25, 2004; (iii) option grant to the Company's
Chief Executive Officer to purchase 400,000 shares, exercisable on the
date of grant as to 200,000 shares and commencing January 1, 2004 as to
200,000 shares; and (iv) option grant to each of five outside directors of
the Company to purchase 200,000 shares, exercisable on the date of grant
as to 100,000 shares and commencing January 1, 2004 as to 100,000 shares.
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB
No. 25, when the exercise price of employee stock options equals the
market price of the underlying stock on the date of grant no compensation
expense is recorded. The Company discloses information relating to the
fair value of stock-based compensation awards in accordance with Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting
for Stock-Based Compensation." The following table illustrates the effect
on net loss and loss per share as if the Company had applied the fair
value recognition provision of SFAS No. 123. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in the
six and three months of 2003 and 2002, respectively: (1) average expected
volatility of 121.3% and 125.88%, (2) average risk-free interest rates of
2.97% and 4.69%, and (3) expected lives of five years for the six and
three months ended June 30, 2003 and expected lives of five and eight
years for the year ended December 31, 2002.
Six Months Ended June 30, Three Months Ended June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss applicable to common stockholders
As reported $ (4,007,931) $ (6,485,082) $ (2,179,777) $ (1,439,318)
Stock based compensation expense 932,276 720,703 163,420 40,161
------------ ------------ ------------ ------------
Pro forma $ (4,940,207) $ (7,205,785) $ (2,343,197) $ (1,479,479
============ ============ ============ ============
Weighted-average shares outstanding
Basic and diluted 18,468,553 18,001,823 18,468,553 18,063,553
============ ============ ============ ============
Net loss per share
As reported $ (0.22) $ (0.36) $ (0.12) $ (0.08)
============ ============ ============ ============
Pro forma $ (0.27) $ (0.40) $ (0.13) $ (0.08)
============ ============ ============ ============
12
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K - DISCONTINUED OPERATIONS
On October 31, 2002, the Company disposed of its majority interest in its
subsidiary, iMapData.com, Inc., for $2,000,000, through a sale to iMapData.
A summary of operating results for iMapData, for the six and three months
ended June 30, 2002 is as follows:
Six Months Three Months
Ended Ended
June 30, June 30,
2002 2002
---------- ----------
Revenues $ 998,997 $ 489,104
---------- ----------
Cost and expenses:
Cost of revenues 920,622 486,602
Selling, general and administrative expenses 687,338 335,886
Depreciation and amortization 43,597 22,151
---------- ----------
Total expenses 1,651,557 844,639
---------- ----------
Operating loss 652,560 355,535
---------- ----------
Other income:
Interest income 5,924 2,516
Minority interest 234,618 139,868
---------- ----------
Total other income 240,542 142,384
---------- ----------
Loss before change in accounting principle 412,018 213,151
Change in accounting principle 185,553 --
---------- ----------
Net loss from discontinued operations $ 597,571 $ 213,151
========== ==========
13
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L - PRIOR PERIOD RESTATEMENT
At December 31, 2002 the Company was eligible for a federal income tax
refund, the effect of which was not reflected in the financial statements
contained in its Annual Report on Form 10-KSB for the year ended December
31, 2002. The error was discovered during the second quarter of 2003 in
the course of preparing federal income tax returns for the year ended
December 31, 2002, when the Company learned that its wholly-owned
subsidiary, Willey Brothers, Inc. could take advantage of a five-year
carryback rule effective for the tax years ending December 31, 2001 and
December 31, 2002. Simultaneously with the filing of this Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003, the Company is filing an
Amendment No. 2 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2002, which amended report contains restated financial
statements reflecting the effect of the federal tax refund. The tables
below show the effect of the correction on the Consolidated Balance
Sheets, Consolidated Statements of Operations, Consolidated Statement of
Stockholders' Equity and Consolidated Statements of Cash Flows for the
year ended December 31, 2002.
Consolidated Balance Sheets
- ---------------------------
Previously
Reported As Restated
------------- -------------
Income tax receivable -- $ 690,136
Total current assets $ 19,559,497 20,249,633
Total assets 46,174,680 46,864,816
Accumulated deficit (32,024,520) (31,334,384)
Total stockholders' equity 7,953,718 8,643,854
Total liabilities and stockholders' equity 46,174,680 46,864,816
Consolidated Statements of Operations
- -------------------------------------
Previously
Reported As Restated
------------- -------------
Income tax expense [Benefit] $ 167,155 $ (522,981)
Loss from continuing operations 5,956,382 5,266,246
Net Loss 13,125,967 12,435,831
Net loss applicable to common
stockholders (13,125,967) (12,435,831)
Basic and diluted loss per share from
Continuing operations (0.32) (0.28)
Basic and diluted loss per share (0.71) (0.67)
Consolidated Statements of Cash Flows
- -------------------------------------
Previously
Reported As Restated
------------- -------------
Net loss from continuing operations $ (5,956,382) $ (5,266,246)
Changes in operating assets, net of
effects from acquisitions
Income taxes 104,489 (585,647)
14
BrandPartners Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L - PRIOR PERIOD RESTATEMENT (continued)
Consolidated Statement of Stockholders' Equity
- ----------------------------------------------
Accumulated Deficit Total
-------------------------------- --------------------------------
Previously Previously
Reported As Restated Reported As Restated
------------ ------------ ------------ ------------
Net loss (13,125,967) (12,435,831) (13,125,967) (12,435,831)
Balance at December 31, 2002 $(32,024,520) $(31,334,384) $ 7,953,718 $ 8,643,854
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
As of June 30, 2003, the Company had negative working capital (current
assets less current liabilities) of $8,816,000, stockholders' equity of
$4,726,000 and a working capital ratio (current assets to current liabilities)
of approximately .56:1. At December 31, 2002, the Company had negative working
capital of $5,448,000, stockholders' equity of $8,644,000 and a working capital
ratio of approximately .79:1. The balances of the Term Loan and Revolving Credit
Facility (as each of such terms is defined below) of approximately $1,839,000
and $5,318,000, respectively, as of June 30, 2003, are currently due to be
repaid on September 29, 2003. Willey Brothers and its lender are in the process
of negotiating an extension of the Facility (as such term is defined below) on
terms and conditions acceptable to the parties, but no assurances can be given
that Willey Brothers will be successful in concluding such an extension at all
or on terms favorable to Willey Brothers. In addition, the $2.0 Million Notes
(as defined below) with accrued interest of approximately $690,000 are due to be
repaid October 11, 2003. The Company is actively seeking financing to repay the
$2.0 Million Notes. The terms of the Company's debt instruments, including the
consequences of any failure to pay such debt at maturity, is discussed in more
detail in "Indebtedness" and "Liquidity Issues" below. In August 2003 Willey
Brothers received a federal tax refund in the amount of approximately $1.2
million arising from the carryback of Willey Brothers 2002 income tax loss. The
proceeds of the refund were used for working capital purposes. As of June 30,
2003 and December 31, 2002 the Company had unrestricted cash and cash
equivalents of $447,000 and $2,813,000, respectively.
For the six months ended June 30, 2003 and 2002, net cash used in
operating activities of continuing operations was $2,865,000 and $2,744,000,
respectively, net cash used in investing activities of continuing operations was
$107,000 and $4,378,000, respectively, and net cash provided by financing
activities of continuing operations was $607,000 and $3,830,000, respectively.
Indebtedness
The Willey Brothers Facility
On January 11, 2001, the Company's wholly owned subsidiary, Willey
Brothers, established a loan facility (the "Facility") with a third party. The
Facility consists of an $8,000,000 term loan (the "Term Loan") and a $6,000,000
revolving credit facility (the "Revolving Credit Facility") and bears interest,
at the borrower's option, at a rate per annum equal to either the bank's base
rate plus the applicable margin or LIBOR plus the applicable margin. As of June
30, 2003, there was $1,839,000 outstanding under the Term Loan and $5,318,000
outstanding under the Revolving Credit Facility, and outstanding amendment fees
in the amount of $580,000. The weighted average interest rate in effect on June
30, 2003 was 5.3834% for the Term Loan and 4.8633% for the Revolving Credit
Facility. The Facility has been amended by Amendment and Waiver Agreements dated
May 21, 2001, October 22, 2001 and March 29, 2002, by Amendment Agreements dated
September 25, 2002, December 20, 2002, March 18, 2003 and August 21, 2003, and
by a letter agreement dated February 12, 2003. The various Amendments and
Amendment and Waiver Agreements waive certain financial covenants for the
remainder of the term, require the payment of amendment fees, limit the
availability under the Revolving Credit Facility, place restrictions on the use
of $4,000,000 of Willey Brothers' cash and restrict the payment of certain other
obligations. The December 20, 2002 Amendment permanently applied the $4,000,000
of cash restricted by the March 29, 2002 Amendment to the Term Loan. The
February 12, 2003 letter agreement extended the payment date of the amendment
fee until March 28, 2003. The March 18, 2003 Amendment extended the expiration
of the Facility from March 31, 2003 until August 22, 2003, extended the payment
of the amendment fee until such date, and mandated weekly pre-payments toward
the balance of the Term Loan. The August 21, 2003 Amendment extended the
expiration of the Facility from August 22, 2003 until September 29, 2003,
extended the payment of the amendment fee until that date, and increased the
amount of the weekly pre-payments toward the balance of the Term Loan mandated
by the March 18, 2003 Amendment. Willey Brothers and its lender are in the
process of negotiating an extension of the Facility on terms and conditions
acceptable to the parties, but no assurances can be given that Willey Brothers
will be successful in concluding such an extension at all or on terms favorable
to Willey Brothers. If for any reason Willey Brothers is unable to extend or
refinance the
16
Facility upon maturity, and the amount outstanding under the Facility becomes
due and payable, the lender has the right to proceed against the collateral
granted to it to secure the indebtedness under the Facility, including
substantially all of the assets of Willey Brothers and the Company's ownership
interest in Willey Brothers. The Company has guaranteed 100% of the loan. Should
that foreclosure occur the Company would have no further operations. For further
discussion of the consequences of a failure to pay the Facility upon maturity,
see "Liquidity Issues" below. As of August 19, 2003 there were outstanding
balances of approximately $1,509,000 under the Term Loan and $5,009,000 under
the Revolving Credit Facility.
The Seller Notes
In connection with the purchase of Willey Brothers in January 2001, the
Company issued two convertible promissory notes, each in the principal amount of
$1,000,000 (the "$2 Million Notes"), and two subordinated convertible promissory
notes, each in the principal amount of $3,750,000 (the "$7.5 Million Notes,"
together with the $2.0 Million Notes, the "Seller Notes"). The $2.0 Million
Notes bear interest at 11% per annum and provide for quarterly principal
payments. The remaining principal and accrued interest under the $2.0 Million
Notes are due in one payment on October 11, 2003. Subject to certain conditions,
the $2.0 Million Notes are convertible into common stock of the Company at the
option of the noteholder at a rate of $3.00 per share. The $7.5 Million Notes
bear interest at LIBOR plus 150 basis points and provide for quarterly interest
payments and quarterly interest reset dates. The interest rate in effect on June
30, 2003 was 2.7888%. The principal and any accrued interest under the $7.5
Million Notes are due in one payment on October 11, 2007. Subject to certain
conditions, the $7.5 Million Notes are convertible into common stock of the
Company at the option of the Company or the noteholder at a rate of $4.00 per
share. Pursuant to an agreement made with the noteholders in October 2001, all
payments required to be made under the Seller Notes for the first three quarters
of 2001 were deferred until the end of the term, the maturity date of the $2
Million Notes was extended to October 11, 2003 from January 11, 2003 and the
maturity date of the $7.5 Million Notes was extended to October 11, 2007 from
January 11, 2007. Pursuant to the Amendment and Waiver Agreement, dated March
29, 2002, among the Company, Willey Brothers and Willey Brothers' lender for the
Facility, and consented to by the noteholders, no payments in respect of the
Seller Notes can be made until all of the obligations are paid, in full, to the
lender. No payments have been made under the Seller Notes to date. Should the
Company be unable to secure the necessary financing to pay or refinance the $2.0
Million Notes at or prior to their due date, or the earliest date on which
payment is permitted by Willey Brothers' lender, if later, the Company will be
in default under the terms of such $2.0 Million Notes, and the existence of such
a default may result in litigation for enforcement of such $2.0 Million Notes
and could compromise the Company's ability to obtain additional financing to
support its operations. For further discussion of the consequences of a failure
to pay the $2.0 Million Notes upon maturity, see "Liquidity Issues" below.
The Company has entered into an agreement with the former shareholders of
Willey Brothers (the "Willey Agreement") whereby, in the event that at or
contemporaneously with the closing of a transaction not in the ordinary course
of business (including, without limitation, a debt or equity investment in, or a
refinancing of all or a portion of the indebtedness of, either the Company or
Willey Brothers), but in any event not later than October 1, 2003, the Company
makes payment to the former shareholders of the principal balance due under the
$2.0 Million Notes, the principal and interest owed under the $2.0 Million Notes
shall be deemed paid, the principal and interest owed under the $7.5 Million
Notes shall be canceled and forgiven, the accrued and unpaid obligations under
the earn-out entered into in connection with the purchase of Willey Brothers
shall be forgiven and no further earn-out obligations shall accrue. As of June
30, 2003 such debt cancellation and forgiveness would total approximately
$9,354,000. The Company has an option to extend the payment date under the
agreement, under certain circumstances and for payment of certain consideration,
until October 31, 2003. If such option is exercised, the due date of the $2.0
Million Notes will be automatically extended until October 31, 2003. As
discussed above, Willey Brothers' Facility with its commercial lender prohibits
the Company from making any payments in respect of the $2.0 Million Notes until
all of its obligations are repaid in full to such commercial lender. No
assurances can be given that
17
the Company will have sufficient capital or be permitted by its commercial
lender to repay the $2.0 Million Notes in the time frame required by the Willey
Agreement, in which case the Company will derive no benefit from the Willey
Agreement. In the event that the Company does not make payment of the $2.0
Million Notes as set forth in the Willey Agreement, the Company's obligations to
pay principal and interest under the $2.0 Million, $7.5 Million Notes and
earn-out will remain in full force and effect. The consequences of a failure to
pay the $2.0 Million Notes upon maturity are discussed above.
The Willey Subordinated Note Payable
On October 22, 2001, Willey Brothers issued a subordinated promissory note
in the principal amount of $5,000,000 (the "Willey Subordinated Note Payable")
to a third party. The note bears interest at 16% per annum payable as follows:
12% on the accreted principal amount, payable in cash quarterly, and 4% on the
accreted principal amount, added to principal (PIK amount). The balance of the
note at June 30, 2003 was $5,116,000 including PIK interest of $353,000 and less
the aggregate discount on notes payable of $237,000. The note matures on October
22, 2008, at which time the principal and all PIK amounts are due. The funds
were used for working capital and to reduce the balance of the Term Loan.
Concurrently, and in connection with the issuance of the Willey Subordinated
Note Payable, the Company issued a common stock purchase warrant (the "Put
Warrant") to purchase 405,000 shares of common stock of the Company at an
exercise price of $0.01. The Put Warrant expires October 22, 2011 and can be put
to Willey Brothers after the fifth year, or earlier under certain conditions,
based on certain criteria. The Company is also required to maintain compliance
with certain financial and other covenants. Pursuant to a letter agreement dated
October 9, 2002 between the noteholder and Willey Brothers, the noteholder
waived its rights to demand immediate payment of the Willey Subordinated Note
Payable and to put the Put Warrant to Willey Brothers, which rights had been
triggered by the change in control resulting from the death of the Company's
former Chairman and Chief Executive Officer. The Company has received waivers
from certain financial covenants through June 30, 2003. At June 30, 2003 the
Company had a long-term liability of approximately $122,500 related to the Put
Warrant.
Liquidity Issues
As discussed above, the outstanding balance under the Willey Brothers'
Facility, consisting of $1,509,000 under the Term Loan and $5,009,000 under the
Revolving Credit Facility at August 19, 2003, and outstanding amendment fees of
$580,000, are due and payable on September 29, 2003. Although Willey Brothers
and its commercial lender are in the process of negotiating an extension of the
Facility on terms and conditions acceptable to the parties, no assurances can be
given that Willey Brothers will be successful in concluding such an extension at
all or on terms favorable to Willey Brothers. If for any reason Willey Brothers
is unable to extend or refinance the Facility upon maturity, and the amount
outstanding under the Facility becomes due and payable, the lender has the right
to proceed against the collateral granted to it to secure the indebtedness under
the Facility, including substantially all of the assets of Willey Brothers and
the Company's ownership interest in Willey Brothers. Should that foreclosure
occur the Company would have no further operations. In addition, in the event
that Willey Brothers is unable to pay the amount due under the Facility upon
maturity, such a default would trigger a default under and acceleration of the
Willey Subordinated Note Payable, and would trigger the right of the holder of
the Put Warrant to put such Put Warrant to Willey Brothers.
In addition, the $2 Million Notes will mature and become payable on
October 11, 2003. As discussed above, the Willey Agreement provides an
opportunity to extend the due date of the $2 Million Notes to October 31, 2003,
and, if the principal balance of the $2 Million Notes is paid pursuant to the
terms of the Willey Agreement, to obtain cancellation and forgiveness of the
interest due under the $2 Million Notes, the principal and interest due under
the $7.5 Million Notes, and certain earn-out obligations. There can be no
assurance that the Company will be able to avail itself of such extension or
obtain any benefit from the Willey Agreement. In the event that the $2 Million
Notes are not paid upon maturity, or at the earliest date on which payment is
permitted by Willey Brothers' lender, if later, such a default of payment may
result
18
in litigation for enforcement of such $2.0 Million Notes and could compromise
the Company's ability to obtain additional financing to support its operations.
In addition, such a default in the payment of the $2 Million Notes would trigger
a default under and acceleration of each of the $7.5 Million Notes and the
Willey Subordinated Note Payable, and would trigger the right of the holder of
the Put Warrant to put such Put Warrant to Willey Brothers.
Our ability to satisfy our working capital requirements depends on, among
other things, whether we are able to extend or refinance our short-term debt at
all or on terms favorable to the Company, as discussed above, and whether we are
successful in generating revenues and income from Willey Brothers. The Company
is also actively seeking additional capital through debt or equity financing
arrangements to permit payment of the Company's obligations under the $2.0
Million Notes, which are due October 11, 2003, to support the Company's
operations, and to allow the execution of the Company's business plan. No
assurances can be given that the Company will be successful in obtaining such
additional capital at all or on terms favorable to the Company. We continue to
be impacted by limitations placed upon Willey Brothers by its lender with
respect to funds available under its Facility. In response to our current
financial condition and current market conditions, and as a part of our ongoing
corporate strategy, we are pursuing several initiatives intended to increase
liquidity and better position the Company in the marketplace. These initiatives
include vigorously pursuing new sales and customers, continually reviewing costs
and expenses and aggressively collecting accounts receivable.
Results of Operations
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Revenues. Revenues from continuing operations increased approximately
$937,000, or 6%, to $16,371,000 for the six months ended June 30, 2003 from
$15,434,000 for the six months ended June 30, 2002. This increase is due to an
increase in orders in the current year.
Cost of Revenues. Cost of revenues from continuing operations increased
approximately $1,277,000, or 10%, to $14,067,000 (86% of net revenues), for the
six months ended June 30, 2003 from $12,790,000 (83% of net revenues) for the
six months ended June 30, 2002. This increase is primarily attributable to an
increase in revenues. The increase in the percentage of net revenues is due to a
product shift to lower margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses from continuing operations decreased approximately
$2,639,000, or 36%, to $4,602,000 for the six months ended June 30, 2003 from
$7,241,000 for the six months ended June 30, 2002. This decrease is primarily
attributable to a decrease in professional fees, consulting fees and salary
expense at the parent company and to the benefits being realized from the
restructuring of Willey Brothers in the first quarter of 2002.
Depreciation and Amortization. Depreciation and amortization from
continuing operations decreased approximately $99,000, or 18%, to $449,000 for
the six months ended June 30, 2003 from $548,000 for the six months ended June
30, 2002. This decrease is primarily attributable to a change in the method of
estimating depreciation expense from budget to actual in the second quarter of
2002.
Operating Loss. Operating loss from continuing operations decreased
approximately $2,398,000, or 47%, to $2,747,000 for the six months ended June
30, 2003, from $5,145,000 for the six months ended June 30, 2002. This decrease
is primarily due to the factors referred to above.
Interest Expense. Interest expense from continuing operations decreased
approximately $278,000, or 23%, to $950,000 for the six months ended June 30,
2003 from $1,228,000 for the six months ended June 30, 2002. This decrease is
attributable to a reduction in the term loan, of $4,000,000, in December 2002
and
19
reductions of $660,000 in the current period, offset by higher balances on the
line of credit and to the amortization in full in January 2003 of the beneficial
conversion on preferred stock.
Other Income (Expense). Other expense from continuing operations increased
approximately $797,000, or 164%, to expense of $311,000 for the six months ended
June 30, 2003 from income of $486,000 for the six months ended June 30, 2002.
This increase is primarily attributable to the absence of management fee income
in the current period received in the prior year period from a former
subsidiary, the provision recorded for the settlement of the action entitled
Marvin A. Reiss and Rebot Corporation v. BrandPartners Group, Inc., and to an
unrealized loss resulting from the valuation of a put feature on a warrant
issued in conjunction with a note payable.
Loss from Continuing Operations. Loss from continuing operations decreased
approximately $1,879,000, or 32%, to $4,008,000 for the six months ended June
30, 2003 from $5,887,000 for the six months ended June 30, 2002. This decrease
is due to the factors referred to above.
Net Loss. Net loss decreased approximately $2,447,000, or 38%, to
$4,008,000 for the six months ended June 30, 2003 from $6,485,000 for the six
months ended June 30, 2002. The decrease in the net loss is primarily due to the
factors referred to above and to the absence in the current period of a loss
from discontinued operations of $598,000.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Revenues. Revenues from continuing operations decreased approximately
$2,699,000, or 28%, to $6,882,000 for the three months ended June 30, 2003 from
$9,581,000 for the three months ended June 30, 2002. This decrease is due to a
decrease in orders in the current quarter.
Cost of Revenues. Cost of revenues from continuing operations decreased
approximately $1,004,000, or 14%, to $6,236,000 (91% of net revenues), for the
three months ended June 30, 2003 from $7,240,000 (or 76% of net revenues) for
the three months ended June 30, 2002. This decrease is primarily attributable to
the decrease in revenues. The increase in the percentage of net revenues is due
to a shift in the product mix to lower margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses from continuing operations decreased approximately
$1,325,000, or 40%, to $2,014,000 for the three months ended June 30, 2003 from
$3,339,000 for the three months ended June 30, 2002. This decrease is primarily
attributable to a decrease in professional fees, consulting fees and salary
expense at the parent company and to the benefits being realized from the
restructuring of Willey Brothers in the first quarter of 2002.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased approximately $164,000, or 248%, to $230,000 for
the three months ended June 30, 2003 from $66,000 for the three months ended
June 30, 2002. This increase is primarily attributable to a change in the method
of estimating depreciation expense from budget to actual in the second quarter
of 2002 which, resulted in less depreciation expense for that quarter.
Operating Loss. Operating loss from continuing operations increased
approximately $534,000, or 50%, to $1,598,000 for the three months ended June
30, 2003, from $1,064,000 for the three months ended June 30, 2002. This
increase is primarily due to the factors referred to above.
20
Interest Expense. Interest expense from continuing operations decreased
approximately $141,000, or 23%, to $483,000 for the three months ended June 30,
2003 from $624,000 for the three months ended June 30, 2002. This decrease is
attributable to a reduction in the term loan, of $4,000,000, in December 2002
and reductions of $370,000 in the three months ended June 30, 2003, offset by
higher balances on the line of credit and to the amortization in full in January
2003 of the beneficial conversion on preferred stock.
Other Income (Expense). Other expense from continuing operations increased
approximately $561,000, to expense of $99,000 for the three months ended June
30, 2003 from income of $462,000 for the three months ended June 30, 2002. This
increase is primarily attributable to the absence of management fee income in
the current quarter received in the prior year quarter from a former subsidiary
and to an unrealized loss resulting from the valuation of a put feature on a
warrant issued in conjunction with a note payable.
Loss from Continuing Operations. Loss from continuing operations increased
approximately $954,000, or 78%, to $2,180,000 for the three months ended June
30, 2003 from $1,226,000 for the three months ended June 30, 2002. This increase
is due to the factors referred to above.
Net Loss. Net loss increased approximately $741,000, or 51%, to $2,180,000
for the three months ended June 30, 2003 from $1,439,000 for the three months
ended June 30, 2002. The increase in the net loss is primarily due to the
factors referred to above, offset by the absence in the current quarter of a
loss from discontinued operations of $213,000.
We may in the future continue to experience fluctuations in quarterly
operating results. Factors that may cause our quarterly operating results to
vary include the number of active customer projects, the requirements of
customer projects, the termination of major customer projects, the loss of major
customers and the timing of new engagements.
Holding Company and Operating Subsidiaries
We conduct our operations through our subsidiaries. At present Willey
Brothers, Inc. is our only operating subsidiary. We have relied, and continue to
rely, on cash payments from our operating subsidiaries to, among other things,
pay creditors, maintain capital and meet our operating requirements. The March
29, 2002 Amendment and Waiver Agreement with Willey Brothers' lender prohibits
Willey Brothers from paying management fees to the Company until the debt is
repaid in full to the lender. Regulations, legal restrictions and contractual
agreements could restrict any needed payments from our subsidiaries. If we are
unable to receive cash funds from our subsidiaries, or from any operating
subsidiaries we may acquire in the future, our operations and financial
condition will be materially and adversely affected.
Stock Price Fluctuations
The market price of our common stock has fluctuated significantly and may
be affected by our operating results, changes in our business and management,
changes in the industries in which we conduct business, and general market and
economic conditions. The stock markets in general have recently experienced
extreme price and volume fluctuations. These fluctuations have affected stock
prices of many companies without regard to their specific operating performance.
In addition, unless we become subject to earlier delisting as described in "Item
5 -- Other Information" below, we expect that our common stock will be delisted
from the Nasdaq SmallCap Market following market close on or about September 3,
2003, and, although no assurance can be given, we expect that our common stock
will be quoted on the Over-the-Counter Bulletin Board ("OTCBB") beginning on the
trading day following the delisting. If, however, for any reason our common
stock is deemed ineligible to trade on the OTCBB, depending on our
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ability to meet the listing requirements of the "pink sheets" or some other
quotation system, we expect that our common stock will trade through one of such
quotation systems. It is impossible to predict the effect of these or other
factors on the market price of our common stock, and the price may fluctuate
significantly in the future. See "Item 5. Other Information" below.
Inflation
We believe that inflation has not had a material effect on the Company's
results of operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are not
historical facts but rather reflect the Company's current expectations
concerning future results and events. The words "believes," "anticipates,"
"expects," and similar expressions, which identify forward-looking statements,
are subject to certain risks, uncertainties and factors, including those which
are economic, competitive and technological, that could cause actual results to
differ materially from those forecast or anticipated. Such factors include,
among others:
o the continued services of Edward T. Stolarski as Chief Executive
Officer of BrandPartners Group and Willey Brothers, and of James
Brooks as Chief Operating Officer of Willey Brothers;
o our ability to refinance or obtain an extension of our existing
short term debt at all or on terms favorable to the Company;
o our ability to repay the two $1,000,000 Notes on the terms required
by the Willey Agreement with the former shareholders of Willey
Brothers, thereby entitling the Company to certain debt cancellation
and forgiveness;
o our ability to continue to obtain waivers of covenants and other
defaults under our debt instruments and credit facilities;
o our ability to identify appropriate acquisition candidates, finance
and complete such acquisitions and successfully integrate acquired
businesses;
o changes in our business strategies or development plans;
o competition;
o our ability to grow within the financial services industries;
o our ability to obtain sufficient financing to continue operations;
and
o general economic and business conditions, both nationally and in the
regions in which we operate.
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 republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company in this report, as well as the
Company's periodic reports on Forms 10-K and 10-Q, current reports on 8-K, and
other filings with the Securities and Exchange Commission.
22
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company's $7.5 Million Notes, Term Loan and Revolving Credit Facility
expose the Company to the risk of earnings or cash flow loss due to changes in
market interest rates. The Term Loan and Revolving Credit Facility accrue
interest at LIBOR plus an applicable margin or the bank's base rate plus an
applicable margin. The $7.5 Million Notes accrue interest at LIBOR plus 150
basis points. On April 23, 2001, and in conjunction with obtaining the Company's
Revolving Credit Facility, the Company entered into an interest rate cap
agreement, which limits the Company's exposure if the LIBOR interest rate
exceeds 6.5%. The notional amount under the cap is $4,000,000. The fair value of
the agreement was immaterial at June 30, 2003. For a description of the terms of
the $7.5 Million Notes, Term Loan and Revolving Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" above.
The table below provides information on the Company's market sensitive
financial instruments as of June 30, 2003.
Weighted Average Interest
Principal Balance Rate at June 30, 2003
----------------- -------------------------
Term Loan $1,839,000 5.3834%
Revolving Credit Facility 5,318,000 4.8633%
$7.5 Million Notes 7,500,000 2.7888%
Item 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There has been no change in the Company's internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 promulgated under the Exchange Act that
occurred during the Company's fiscal quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 5. Other Information.
We have been notified by the Nasdaq Stock Market that, unless the bid
price of our common stock closes at $1.00 per share or more for a minimum of ten
(10) consecutive trading days prior to August 26, 2003, on such date we will be
notified that our common stock will be delisted from the Nasdaq SmallCap Market.
The Nasdaq Marketplace Rules provide for a seven day period following receipt of
such notice during which we may appeal the delisting. In the event that no
appeal is made, our common stock will be delisted on the eighth day following
receipt of the notice. As we announced in our press release issued August 12,
2003, it is certain that we will be unable to meet such minimum bid price
requirement for continued listing. Accordingly, we expect that our common stock
will be delisted from the Nasdaq SmallCap Market at market close on or about
September 3, 2003. Although no assurances can be given, we expect that our
common stock will be quoted on the Over-the-Counter Bulletin Board ("OTCBB")
beginning on the trading day following the delisting. If, however, for any
reason our common stock is deemed ineligible to trade on the OTCBB, depending on
our ability to meet the listing requirements of the "pink sheets" or some other
quotation system, we expect that our common stock will trade through one of such
quotation systems. As a result, investors may find it more difficult to dispose
of, or to obtain accurate price quotations for, our common stock. It is
impossible to predict the effect of these or other factors on the market price
of our common stock, and the price may fluctuate significantly in the future.
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Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herewith unless otherwise
indicated:
10.1 Amendment Agreement, dated June 16, 2003, by and among the Company,
Willey Brothers, James M. Willey, individually and as trustee of the
James M. Willey Trust - 1995, Thomas P. Willey, individually and as
trustee of the Thomas P. Willey Revocable Trust of 1998 and Nixon
Peabody LLP as Escrow Agent, amending Agreement, dated as of May 15,
2003, by and among the parties.
10.2 Waiver, dated as of June 30, 2003, by and among the Company, Willey
Brothers and Corporate Mezzanine II, L.P.
10.3 Seventh Amendment, dated as of August 21, 2003, between Fleet
Capital Corporation, Willey Brothers, Inc. and the Company.
31.1 Certification of Chief Executive Officer Pursuant to 17 C.F.R.
240.13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to 17 C.F.R.
240.13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The Company filed the following Current Reports on Form 8-K during the
quarter ended June 30, 2003:
(i) The Company's Current Report on Form 8-K dated March 31, 2003 (filed
April 1, 2003) reporting the issuance of a press release announcing
the Company's financial and operational results for the quarter and
year ended December 31, 2002 and the election of Chet Borgida and
Anthony van Daalen to the Company's Board of Directors.
(ii) The Company's Current Report on Form 8-K dated April 16, 2003 (filed
April 17, 2003) reporting the dismissal of Grant Thornton LLP and
the appointment of Goldstein Golub Kessler LLP as the Company's
certifying accountants for the year ending December 31, 2003.
(ii) The Company's Current Report on Form 8-K dated May 15, 2003 (filed
May 16, 2003) reporting the Company's entry into an agreement with
the former shareholders of Willey Brothers providing for the
cancellation and forgiveness of certain outstanding indebtedness by
the Company to the former shareholders upon certain payments and
under certain circumstances.
(iv) The Company's Current Report on Form 8-K dated June 10, 2003 (filed
June 13, 2003) reporting the issuance of a press release announcing
the resignation of Jeffrey Adam Lipsitz from the Company's Board of
Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated August 25, 2003
BRANDPARTNERS GROUP, INC.
By: /s/ Edward T. Stolarski
-------------------------------------
Edward T. Stolarski
Chairman and Chief Executive Officer
By: /s/ Sharon Burd
-------------------------------------
Sharon Burd
Chief Financial Officer
26