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 March 31, 2004
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.)
10 Main Street, Rochester, New Hampshire 03839
(Address of Principal Executive Offices)
603-335-1400
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 X No ____
Indicate by check mark whether the registrant is an accelerated filer.
Yes ____ No X
The number of shares of common stock outstanding on May 6, 2004 was 31,513,554.
BRANDPARTNERS GROUP, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003................. 3
Consolidated Statements of Operations (unaudited) for
the Three Months Ended March 31, 2004 and 2003................... 5
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 2004 and 2003................... 6
Notes to Consolidated Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 15
Item 3. Qualitative and Quantitative Disclosures
About Market Risk............................................ 21
Item 4. Controls and Procedures........................................ 21
Part II - Other Information
Item 5. Other Information.............................................. 22
Item 6. Exhibits and Reports on Form 8-K............................... 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2004 December 31, 2003*
-------------- ------------------
(unaudited)
Cash $ 1,071,750 $ 413,946
Accounts receivable, net of allowance for
doubtful accounts of $213,470 and $186,330
respectively 6,877,380 5,956,610
Costs and estimated earnings in excess of billings 5,028,076 1,854,886
Inventories 541,443 969,020
Prepaid expenses and other current assets 236,462 541,635
----------- -----------
Total current assets 13,755,111 9,736,097
Property and equipment, net of accumulated
depreciation 1,493,278 1,486,551
Goodwill 24,271,969 24,271,969
Deferred financing costs 278,623 304,126
Other assets 29,046 34,911
----------- -----------
Total assets $39,828,027 $35,833,654
=========== ===========
* Reclassified for comparative purposes
The accompanying notes are an integral part of these statements.
3
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) March 31, 2004 December 31, 2003*
-------------- ------------------
(unaudited)
Current liabilities
Revolving credit facility $ -- $ 3,666,441
Accounts payable and accrued expenses 8,916,693 9,345,621
Billings in excess of cost and estimated earnings 7,867,441 6,333,235
Bank Term Loan 3,930,000 541,045
Current maturities, long term debt -- 2,000,000
Short term debt 1,754,596 350,000
Other current liabilities -- 1,600,848
------------ ------------
Total current liabilities 22,468,730 23,837,190
------------ ------------
Long term debt, net of current maturities 5,481,125 13,327,668
------------ ------------
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; issued 31,063,554 and 18,163,553 310,636 181,636
Additional paid in capital 43,675,822 40,634,822
Accumulated deficit (31,795,786) (41,835,162)
Treasury stock (312,500) (312,500)
------------ ------------
Total stockholders' equity (deficit) 11,878,172 (1,331,204)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 39,828,027 $ 35,833,654
============ ============
* Reclassified for comparative purposes
The accompanying notes are an integral part of these statements.
4
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
2004 2003*
------------ ------------
(unaudited) (unaudited)
Revenues $ 15,676,229 $ 9,488,813
------------ ------------
Costs and expenses
Cost of revenues 11,267,114 7,831,191
Selling, general and administrative 2,382,619 2,588,294
Depreciation and amortization 138,632 218,645
------------ ------------
Total expenses 13,788,365 10,638,130
------------ ------------
Operating income (loss) 1,887,864 (1,149,317)
Other income (expense)
Interest expense, net (174,539) (451,617)
Gain on forgiveness of debt 8,326,051 --
Settlement of lawsuit -- (227,220)
------------ ------------
Total other income (expense) 8,151,512 (678,837)
------------ ------------
NET INCOME (LOSS) $ 10,039,376 $ (1,828,154)
============ ============
Basic and diluted earnings (loss) per share
Basic $ 0.40 $ (0.10)
Diluted $ 0.33 $ (0.10)
Weighted - average shares outstanding
Basic 25,084,671 18,468,553
Diluted 30,370,405 18,468,553
* Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
5
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
2004 2003*
------------ -----------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $ 10,039,376 $(1,828,154)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities
Depreciation and amortization 138,630 218,645
Forgiveness of long term debt (7,500,000) --
Amortization of discount on notes payable -- 25,696
Settlement of lawsuit -- 227,220
Provision for doubtful accounts (27,140) 10,120
Non-cash compensation -- 12,500
Changes in operating assets and liabilities
Accounts receivable (893,630) 1,955,452
Costs and estimated earnings in excess of billings (3,173,189) 1,308,882
Inventories 427,577 (280,734)
Prepaid expenses and other current assets 305,172 217,393
Other assets 31,372 (2,869)
Accounts payable and accrued expenses (428,932) (2,726,536)
Other liabilities -- 59,020
Billings in excess of costs and estimated earnings 1,534,206 (852,034)
------------ -----------
Net cash provided by (used in) operating activities 453,442 (1,655,399)
------------ -----------
Cash flows from investing activities
Acquisition of equipment (145,357) (38,325)
------------ -----------
Cash flows from financing activities
Net borrowings on credit facility -- 545,528
Repayment of short term debt (2,545,281) --
Repayment of long term debt -- (261,973)
Proceeds from private placement of equity, net of costs 2,895,000 --
------------ -----------
Net cash provided by financing activities 349,719 283,555
------------ -----------
NET INCREASE (DECREASE) IN CASH 657,804 (1,410,169)
Cash, beginning of period 413,946 2,167,924
------------ -----------
Cash, end of period $ 1,071,750 $ 757,755
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 71,417 $ 249,496
============ ===========
* Reclassified for comparative purposes
The accompanying notes are an integral part of these statements
6
BrandPartners Group, Inc. and Subsidiary
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 Subsidiary (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, 2003 filed with the SEC on Form 10-K. 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 three months ended March 31, 2004 are not
necessarily indicative of the results expected for the full year.
The Company currently operates through its sole subsidiary, Willey Brothers Inc.
("Willey Brothers"). 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.
The consolidated financial statements for the three months ended March 31, 2004
and 2003 include the accounts of BrandPartners Group, Inc. and its wholly owned
subsidiary, Willey Brothers. 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
current period presentation.
7
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE B - 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. For the three months ended March 31,
2004 and 2003 no impairments were present and no indications of impairment were
identified.
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Post
Retirement Benefits" ("SFAS 132R"). SFAS 132R revises the disclosures for
pension plans and other post retirement benefit plans. The adoption of this
statement does not impact the Company's historical or present financial
statements.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The adoption of SAB 104 did not have a material effect on the Company's result
of operations or financial position.
NOTE D - BANK TERM LOAN AND REVOLVING CREDIT FACILITY
On November 28, 2003, the Company renegotiated its agreement with its commercial
lender for a new credit facility ("Facility"). As part of this agreement, the
previous term loan balance was paid off on January 2, 2004 and the revolving
credit facility of $6,000,000 was divided into a New Term Loan for $4,000,000
and a revolving credit facility of $2,000,000. Interest is calculated at the
bank's base rate plus an applicable margin. The interest rate in effect on March
31, 2004 was 6.25%. The Facility calls for monthly prepayments of the term note
principal beginning March 1, 2004. The Facility matures on December 31, 2004.
8
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - SHORT TERM DEBT
For the quarter ended March 31, 2004, the detail of the Short Term Debt is as
follows:
March 31, 2004 December 31, 2003
-------------- -----------------
(unaudited)
Note to Former Shareholders (1) $1,754,596 $ --
Notes Payable (2) -- 350,000
---------- --------
Total Short Term Debt $1,754,596 $350,000
========== ========
(1) On January 20, 2004, the Company entered into an amended settlement
agreement with former shareholders of its wholly owned subsidiary Willey
Brothers. Pursuant to the terms of the agreement two new subordinated
promissory notes were issued each in the amount of $1,000,000, or
$2,000,000 in the aggregate. Concurrent with the Company entering into the
amended settlement agreement, the Company paid $1,000,000 in the aggregate
on the subordinated notes. The balance on the two subordinated notes of
$500,000 or $1,000,000 in the aggregate is to be repaid in two equal
installments of $500,000 on April 15, 2004 and July 15, 2004. The April
15, 2004 payment was timely made. Upon payment in full of the Subordinated
Notes, all accrued, unpaid interest on the Seller Notes (approximately
$755,000 at March 31, 2004) will be cancelled. See Note F (2).
(2) On November 7, 2003, the Company executed two promissory notes payable to
third parties for the aggregate amount of $350,000. The notes bear
interest at 5% per annum and are payable on demand. The proceeds from the
notes were used for working capital purposes. In 2004 the Company issued
1,750,000 shares of the Company's common stock in settlement of the debt.
9
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F - LONG TERM DEBT
March 31, 2004 December 31, 2003
-------------- -----------------
(unaudited)
Subordinated Note, net of discount (1) $ 5,260,777 $ 5,232,320
Put Warrant Liability (1) 220,348 220,348
Note to Former Shareholders (2) -- 9,500,000
Lease settlement (See Note I) -- 375,000
----------- -----------
15,327,668
Less current maturities 2,000,000
$ 5,481,125 $13,327,668
=========== ===========
(1) A subordinated promissory note in the principal amount of $5,000,000 was
issued on October 22, 2001 to an unrelated third party. The note bears
interest at 16% per annum - 12% payable quarterly in cash and 4% added to
the unpaid principal ("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. On January 7, 2004, when the closing price of the Company's
Common Stock was $0.70, the Company amended and restructured its
subordinated note payable. In exchange for a waiver of certain covenants
through December 31, 2003 and a reduction in the interest rate on the
note, the Company issued to the note-holder a common stock purchase
warrant to purchase 250,000 shares of the Company's common stock at $0.26
per share. The interest rate reduction is for a period of two years
commencing January 1, 2004 and reduces the interest rate from 16% per
annum to 10% per annum - 8% payable in cash quarterly and 2% added to the
principal (PIK amount). At March 31, 2004 and 2003, the Company had a
liability of $220,248 related to the Put Warrant.
Concurrently and in connection with the 2001 issuance of the note, the
Company issued 405,000 warrants to purchase the common stock of the
Company at $0.01 per share. The warrants expire October 22, 2011 and can
be put to Willey Brothers after the fifth year, or earlier. 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 has been recorded. Changes to the future fair value of the put
warrants are recorded in accordance with SFAS No. 133 and charged to other
income or loss. At December 31, 2003 and 2001, the Company recorded put
warrant losses of $164,000 and $102,000 respectively and recorded a put
warrant gain of $384,000 at December 31, 2002. At December 31, 2003, 2002
and 2001, the Company had a liability of approximately $220,000, $56,000
and $440,000 respectively related to the Put Warrant. In consideration for
the extension of an interest payment date, on September 30, 2003, the
Company issued a common stock purchase warrant to purchase 10,000 shares
of common stock of the Company at $0.24 per share, the closing price of
the Company's common stock on the date of issue, on the same terms as the
Put Warrant.
10
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F - LONG TERM DEBT - continued
(2) On January 20, 2004, the Company entered into an amended settlement
agreement with the former shareholders of Willey Brothers. Under the terms
of the amended settlement agreement, the Company issued new subordinated
promissory notes totaling $2,000,000 in the aggregate, bearing an interest
rate of 5.75%. Upon execution of the amended settlement agreement, the
Company paid $1,000,000 in the aggregate on the subordinated notes. The
$7.5 Million Notes issued to the former shareholders of Willey Brothers
were cancelled and forgiven along with all accrued unpaid interest of
approximately $844,000. The balance of the subordinated notes is to be
repaid in two equal installments of $500,000 each on April 15, 2004 and
July 15, 2004. The April 15, 2004 payment was timely made leaving one
remaining payment of $500,000 in the aggregate to satisfy the subordinated
notes due July 15, 2004. Upon payment in full of the subordinated notes,
the 24 month notes and all accrued, unpaid interest on the 24 month notes
(approximately $755,000 at March 31, 2004) will be cancelled and the
accrued earn-out to the former shareholder of Willey Brothers will not
have to be paid.
NOTE G - FORGIVENESS OF LONG TERM DEBT
In January of 2004, the Company recorded a gain of $8,326,000 on the forgiveness
of debt. See Note F (2).
NOTE H - SIGNIFICANT CUSTOMERS
For the three months ended March 31, 2004, two customers accounted for
approximately 14% and 13% of the Company's revenues, respectively. For the three
months ended March 31, 2003, four customers accounted for approximately 34%,
18%, 13% and 13% of the Company's revenues, respectively.
11
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE I - SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
On January 20, 2004, the Company entered into a Surrender Agreement (the
"Agreement") with its Landlord for the termination of its lease at 777 Third
Ave., New York, New York. In exchange for the termination of its rights and
obligations under the lease, the Company agreed to pay to the Landlord an
aggregate of $800,000 and issue to the Landlord 500,000 shares of restricted
common stock of the Company with cost free piggyback registration rights.
$500,000 was paid upon signing the Agreement. The balance of the payments under
the Agreement are to be paid in three equal installments of $100,000 each on
March 1, 2004, September 1, 2004 and March 1, 2005. In the event the Company's
common stock maintains a closing price of $3.00 or more for any five consecutive
trading days prior to March 1, 2005, the Company will not be obligated to make
the final $100,000 payment. The shares were valued at $0.55 per share. The
payment due on March 1, 2004 was made. The terminated lease expired December 31,
2009 with minimum lease rentals of approximately $647,000 in 2004 and $671,000
annually thereafter, through 2009. At December 31, 2003, the Company recorded a
charge of $1,075,000 related to the terminated lease.
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. Consulting expense and additional paid in capital were increased for
the transaction.
On November 7, 2003, the Company executed two promissory notes payable to third
parties for the aggregate amount of $350,000. The notes bear interest at 5% per
annum and are payable on demand. The proceeds from the notes were used for
working capital purposes. In 2004 the Company issued 1,750,000 shares of the
Company's common stock under its private placement in settlement of the debt.
NOTE J - COMMITMENTS AND CONTINGENCIES
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' compliance with certain bank
reporting and covenant requirements. The amounts paid for contingent
consideration will be expensed. As of March 31, 2004 the Company had a liability
of $500,000 related to the year 2001 which has been included in Accounts Payable
and Accrued Expenses on the accompanying balance sheet. A liability for the
years ended December 31, 2003 and 2002 was not recorded as the terms of the
Earn-Out were not met.
On January 20, 2004, the Company entered into an amended agreement with the
former shareholders (see Note F (2)). As part of that Agreement, the earn-out
will not have to be paid when the balance of the subordinated promissory notes
is paid on April 15, 2004 and July 15, 2004 and no additional earn-out will
accrue. The April 15, 2004 payment was made.
12
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K - 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.
On February 20, 2004 by unanimous written consent, the Board of Directors
approved and implemented the Company's 2004 Stock Incentive Plan which has 5
million shares authorized, with 2,142,000 options granted under the plan at fair
market value as of date of grant at various vesting schedules. Included in the
options granted are 1,000,000 options granted to James F. Brooks, the Company's
Chief Executive Officer which vested upon grant.
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 income 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 three months of 2004 and 2003, 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 three months ended March
31, 2004.
March 31, 2004 March 31, 2003
-------------- --------------
Net income (loss) applicable to
common stockholders
As reported $10,039,376 $ (1,828,154)
Stock based compensation expense 479,727 768,856
----------- ------------
Pro forma $ 9,559,649 $ (2,597,010)
=========== ============
Weighted-average shares outstanding
Basic 25,084,671 18,468,553
Diluted 30,370,405 18,468,553
Net earnings (loss) per share
As reported
Basic $ 0.40 $ (0.10)
Diluted $ 0.33 $ (0.10)
Pro forma
Basic $ 0.38 $ (0.14)
Diluted $ 0.31 $ (0.14)
13
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L - INCOME TAXES
For the quarter ended March 31, 2004, income taxes of approximately $4,190,842
were offset by net operating loss carry-forwards. At December 31, 2003, the
Company had net operating loss carry-forwards of approximately $17.1 million,
which expire at various dates through 2023, available to offset future taxable
income. At December 31, 2003, the Company had a deferred tax asset amounting to
approximately $7.7 million. The deferred tax asset consists primarily of net
operating loss carry-forwards and has been fully offset by a valuation allowance
of the same amount. Certain provisions of the tax law may limit the net
operating loss carry-forwards available for use in any given year in the event
of a significant change in ownership interest. The balance of the deferred tax
asset at December 31, 2003 represents timing differences between book income and
taxable income. Approximately $834,000 of the estimated net operating loss
carry-forwards available at December 31, 2003 will expire in 2004.
NOTE M - STOCKHOLDERS' EQUITY
On February 2, 2004, the Company completed a private placement, pursuant to
Regulation D of the Securities Act of equity. The Company received net proceeds
from the private placement of approximately $2,900,000 and issued 12,400,001
shares of common stock of the Company. The proceeds from the private placement
were used to reduce certain debt and obligations and repay the balance of the
term loan. The balance of the proceeds will be used for working capital.
NOTE N - SUBSEQUENT EVENTS
On April 26, 2004, a new Chief Financial Officer was appointed. Our former Chief
Financial Officer did not have any disputes or disagreements with management or
the Company's business practices.
On May 12, 2004 the Company's S-1 Registration Statement for the re-sale of up
to 20,782,923 shares of common stock by selling shareholders, of which
19,167,923 shares of common stock were previously issued and outstanding was
declared effective by the Securities and Exchange Commission.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
As of March 31, 2004, the Company had a working capital deficit (current assets
less current liabilities) of $8,713,624, stockholders' equity of $11,878,162 and
a current ratio (current assets to current liabilities) of approximately .61:1.
At December 31, 2003, the Company had a working capital deficit of $14,100,000,
stockholders' deficit of $(1,331,204) and a current ratio of approximately
..41:1. The decrease in the working capital deficit was due to the restructuring
of the debt which is discussed in more detail in "Indebtedness". 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 carry-back
of Willey Brothers' 2002 income tax loss. The proceeds of the refund were used
for working capital purposes. On November 7, 2003, the Company executed two
promissory notes for the aggregate amount of $350,000. The notes were at a rate
of five percent (5%) interest and were due December 9, 2003 and were
subsequently extended through February 9, 2004. The proceeds from the notes are
being used for working capital. The notes were converted to stock in January
2004.
As of March 31, 2004 and December 31, 2003 the Company had unrestricted
cash of $1,071,750 and $413,946, respectively.
For the three months ended March 31, 2004 and 2003, net cash provided by
(used in) operating activities was $453,442 and $(1,655,399), respectively, net
cash (used in) investing activities was $(145,357) and $(38,325), respectively,
and net cash provided by financing activities was $349,719 and $283,555,
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 consisted 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 amended
on November 28, 2003, (the "Ninth Amendment"), the term loan was paid off on
January 2, 2004, and the revolving credit facility was divided into a $4,000,000
New Term Loan and a $2,000,000 Revolving Credit Facility. The Ninth Amendment
also included no limitations as to availability, eliminated the LIBOR option and
provided for interest at the bank's base rate plus an applicable margin. As of
March 31, 2004, there was $3,930,000 outstanding under the Term Loan, $0.00
outstanding under the Revolving Credit Facility, and outstanding amendment fees
in the amount of $580,000. The interest rate in effect on March 31, 2004 was
6.25% for the Term Loan and 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, August 21, 2003 and
September 29, 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 September 29, 2003 Amendment extended the
facility and payment of the amendment fees to December 1, 2003 and increased the
required pre-payments of principal. 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
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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 such date, and increased
the amount of the weekly pre-payments toward the balance of the Term Loan
mandated by the March 18, 2003 Amendment.
The November 28, 2003 amendment extended the Facility to December 31,
2004, required that the term loan be paid off, divided the $6,000,000 revolving
credit facility into a $4,000,000 New Term Loan and a $2,000,000 Revolving
Credit Facility. The Amendment also included no limitations as to availability,
eliminated the LIBOR option and provided for interest at the bank's Base Rate
plus an applicable margin. Commencing March 1, 2004, the Amendment mandated
monthly prepayments of the principal on the New Term Loan. The Amendment also
allowed the prepayment of the Subordinated Promissory Notes with cash infused as
equity. 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. 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 May 10, 2004 there were outstanding balances
of approximately $3,790,000 under the Term Loan and $0.00 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 "24 Month Notes"). On January 20,
2004, the Company entered into an amended agreement with the former shareholders
of Willey Brothers (the "Agreement"). The Agreement provides for, among other
things, the cancellation and forgiveness of certain debt including the $7.5
Million Notes and the $2.0 Million Notes. Concurrent with the signing of the
Agreement, two new Subordinated Promissory Notes were issued, each in the amount
of $1,000,000 payable to the former shareholders of Willey Brothers. Concurrent
with the issuance of the New Subordinated Promissory Notes, $500,000 was paid
toward each note or $1,000,000 in the aggregate. The $7.5 Million Seller Notes
were cancelled and forgiven along with all accrued unpaid interest on the notes
of approximately $844,000. The balance of the Subordinated Notes is to be repaid
in two equal installments of $500,000 each on April 15, 2004 and July 15, 2004.
Upon payment in full of the Subordinated Notes, the $2.0 Million Notes and all
accrued, unpaid interest on the 24 Month Notes (approximately $755,000 at March
31, 2004) will be cancelled, the accrued unpaid earn-out of $500,000 will not
have to be paid and no further earn-out will accrue. The $500,000 payment due on
April 15, 2004 was made. Should the Company be unable to pay the balance of the
Subordinated Notes at their due date, the $2 Million Notes would remain in
effect along with the accrued interest and unpaid earn-out.
The Willey Subordinated Note Payable
On October 22, 2001, Willey Brothers issued a subordinated promissory note
in the principal
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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 March 31,
2004 was $5,493,000 including PIK interest of $657,000 and less the aggregate
discount on notes payable of $232,000. On January 7, 2004, when the price of the
Company's Common Stock closed at $0.70, the Company amended and restructured its
subordinated note payable. In exchange for a waiver of certain covenants through
December 31, 2004 and a reduction in the interest rate on the note, the Company
issued to the note-holder a common stock purchase warrant to purchase 250,000
shares of the Company's common stock at $0.26 per share. The interest rate
reduction is for a period of two years commencing January 1, 2004 and reduces
the interest rate from 16% per annum to 10% per annum - 8% payable in cash
quarterly and 2% added to the principal (the "PIK Amount").
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. In consideration for
the extension of an interest payment due date, on September 30, 2003 the Company
issued a common stock purchase warrant to purchase 10,000 shares of common stock
of the Company at an exercise price of $0.24, the closing price on the date of
issuance, on terms similar to the Put Warrant. The Company has received waivers
from certain financial covenants through December 31, 2004. At March 31, 2004
the Company had a long-term liability of approximately $220,000 related to the
Put Warrant.
Liquidity Issues
On February 2, 2004, the Company completed a private placement of equity.
The Company received net proceeds from the private placement of approximately
$2,900,000 and issued 12,400,001 shares of common stock of the Company. The
proceeds from the private placement were used to reduce certain debt and
obligations as described below and repay the balance of the term loan. The
balance of the proceeds will be used for working capital.
On January 20, 2004, the Company entered into an amended agreement with
the former shareholders of Willey Brothers (the "Agreement") providing for,
among other things, the cancellation and forgiveness of certain debt. With the
signing of the Agreement, two new $1 million Subordinated Notes were issued,
payable to the former shareholders of Willey Brothers. Concurrent with the
amended agreement and issuance of the subordinated notes, a payment of $1
million in the aggregate was made toward the subordinated notes. The $7.5
Million Seller Notes were cancelled and forgiven along with all accrued unpaid
interest on the notes of approximately $844,000. The $2.0 Million Seller Notes
previously issued are maintained in escrow and will be cancelled upon payment in
full of the Subordinated Notes. The balance of the Subordinated Notes are to be
repaid in two equal installments of $500,000 each on April 15, 2004 and July 15,
2004. Upon payment in full of the Subordinated Notes, all accrued, unpaid
interest on the $2.0 24 month Notes (approximately $755,000 at March 31, 2004)
will be cancelled and the accrued unpaid earn-out of $500,000 will be forgiven
and no further earn-out will accrue.
On January 20, 2004, the Company entered into a Surrender Agreement (the
"Agreement") with its Landlord for the termination of its lease at 777 Third
Ave., New York, New York. In exchange for the termination of its rights and
obligations under the lease, the Company
17
agreed to pay to the Landlord an aggregate of $800,000 and issue to the Landlord
500,000 shares of restricted common stock of the Company with cost free
piggyback registration rights. $500,000 was paid upon signing the Agreement. The
balance of the fee is to be paid in three equal installments of $100,000 each on
March 1, 2004, September 1, 2004 and March 1, 2005. In the event the Company's
common stock maintains a closing price of $3.00 or more for any five consecutive
trading days prior to March 1, 2005, the Company will not be obligated to make
the final $100,000 payment. The shares were valued at $0.55 per share, the
closing price of the stock on February 9, 2004, the date the stock was issued.
The payment due on March 1, 2004 was made. The terminated lease had an
expiration date of December 31, 2009 with minimum lease rentals of approximately
$637,000 in 2004 and $671,000 annually through 2009.
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
may also seek additional capital through debt or equity financing arrangements
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.
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
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Revenues. Revenues from continuing operations increased approximately
$6,187,000, or 65%, to $15,676,000 for the three months ended March 31, 2004
from $9,489,000 for the three months ended March 31, 2003. This increase is due
to an increase in orders for the current year.
Cost of Revenues. Cost of revenues from continuing operations increased
approximately $3,436,000, or 44%, to $11,267,000 (72% of net revenues), for the
three months ended March 31, 2004 from $7,831,000 (83% of net revenues) for the
three months ended March 31, 2003. This increase in cost of revenues was
primarily due to the increase in sales. The decrease in costs as a percentage of
revenue is primarily attributable to the product mix in the first quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses from continuing operations decreased approximately
$206,000, or 8%, to $2,383,000 for the three months ended March 31, 2004 from
$2,588,000 for the three months ended March 31, 2003. This decrease is primarily
attributable to the surrender agreement of the 777 Third Avenue New York lease,
the decreased use of consultants and leveraging our cost structure relative to
sales growth.
Depreciation and Amortization. Depreciation and amortization from
continuing operations decreased approximately $80,000, or 37%, to $139,000 for
the three months ended March 31, 2004 from $219,000 for the three months ended
March 31, 2003. This decrease is primarily attributable to the 2003 accelerated
amortization of financing fees in anticipation of the expiration of Willey's
credit facility and the fully realized depreciation of some assets.
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Operating Income. Operating income from continuing operations increased
approximately $3,037,000 or 264%, to $1,888,000 for the three months ended March
31, 2004, from a loss of $(1,828,000) for the three months ended March 31, 2003.
This increase in the operating income is primarily due to the increase in
revenue in the Merchandising division with its corresponding higher profit
margin and the leveraging of our cost structure relative to sales to reduce our
selling, general and administrative expenses.
Other Income (Expense). Other Income increased by approximately $8,830,000
or 398% to $8,151,512 for the three months ended March 31, 2004 from an expense
of $(678,837) for the three months ended March 31, 2003.
Interest expense decreased approximately $277,000 or 61%, to $175,000 for
the three months ended March 31, 2004 from $452,000 for the three months ended
March 31, 2003. This decrease is attributable to a reduction in the term loan,
the line of credit and the restructuring of the subordinate debt.
Other income increased by approximately $8,553,000 or 376% due to an
amended agreement with the former shareholders whereby debt was forgiven and a
gain was recognized of approximately $8,325,000 for the three months ended March
31, 2004, as compared to an expense of approximately $227,000 for the three
months ended March 31, 2003 due to the settlement of a lawsuit.
Net Income (Loss). Income increased approximately $11,868,000 or 649%, to
$10,039,000 for the three months ended March 31, 2004 from a loss of
$(1,828,000) for the three months ended March 31, 2003. This improvement is due
to the increase in revenue and leveraging our cost structure relative to sales
growth.
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, at the opening of business on August 29, 2003, our common stock was
delisted from the Nasdaq SmallCap Market and became eligible for quotation on
the Over-the-Counter Bulletin Board. The
19
delisting was the result of our failure to satisfy Nasdaq's minimum bid price
requirement for continued listing. It is impossible to predict the effect of
these or other factors on the market price of our common stock, and the price
may continue to fluctuate significantly in the future.
Inflation
We believe that inflation has not had a material effect on our 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, identify forward-looking statements, which
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 James Brooks as Chief Executive
Office of the Company and Willey Brothers.
o our ability to refinance our existing short term debt at all
or on terms favorable to the Company.
o our ability to repay the balance of the $1,000,000 note to the
former shareholders of Willey Brothers.
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. We undertake 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 in this report, as well as in our periodic reports
on Forms 10-K and 10-Q, current reports on 8-K, and other filings with the
Securities and Exchange Commission.
20
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Our Term Loan and Revolving Credit Facility expose us 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 the bank's base rate plus
an applicable margin. For a description of the terms of the 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 our market sensitive financial
instruments as of March 31, 2004.
Interest Rate at
Principal Balance March 31, 2004
----------------- --------------
Term Loan $3,930,000 6.25%
Revolving Credit Facility -- 6.25%
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, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that we file
or submit 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 our 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 our fiscal quarter ended
March 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
21
PART II - OTHER INFORMATION
Item 5. Other Information.
On April 26, 2004, Ms. Suzanne Verrill was appointed the new Chief
Financial Officer of the Company replacing Ms. Sharon Burd. Ms. Burd did not
have any disputes or disagreements with management or the Company's business
practices.
On May 12, 2004 the Company's S-1 Registration Statement for the re-sale
of up to 20,782,923 shares of common stock by selling shareholders, of which
19,167,923 shares of common stock were previously issued and outstanding was
declared effective by the Securities and Exchange Commission.
22
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herewith unless otherwise
indicated:
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 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 March 31, 2004:
(i) The Company's Current Report on Form 8-K dated January 20,
2004 (filed February 5, 2004) reporting: the Surrender
Agreement with the Company's landlord at 777 Third Avenue; the
amended settlement agreement with the former shareholders of
Willey Brothers; the Amendment to the subordinated note and
warrant purchase agreement with Corporate Mezzanine II LP; the
extension and restructuring of the senior credit facility of
the Company's wholly owned subsidiary Willey Brothers Inc.
with Fleet Capital Corporation.
(ii) The Company's Current Report on Form 8-K dated February 18,
2004 (filed February 23, 2004) reporting a change in the
Company's Certifying Accountant.
23
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 April 14, 2004
BRANDPARTNERS GROUP, INC.
By: /s/ James F. Brooks
-------------------------
James F. Brooks
Chief Executive Officer
By: /s/ Suzanne Verrill
-------------------------
Suzanne Verrill
Chief Financial Officer
24