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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, 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 June 30, 2004 was
31,613,554.
BRANDPARTNERS GROUP, INC.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 (unaudited) and December 31, 2003...................3
Consolidated Statements of Operations (unaudited) for the
Six and Three Months Ended June 30, 2004 and 2003.................4
Consolidated Statements of Cash Flows (unaudited) for the Six Months
Ended June 30, 2004 and 2003......................................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................21
Item 4. Controls and Procedures.........................................21
Part II - Other Information
Item 5. Submission of Matters to a Vote of Security Holders.............21
Item 6. Other Information...............................................22
Item 7. Exhibits and Reports on Form 8-K................................24
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2004 December 31, 2003*
------ ------------- ------------------
(unaudited)
Cash $ -- $ 413,946
Accounts receivable,net of allowance for 8,936,381 5,956,610
doubtful accounts of $213,470 and $186,330
Costs and estimated earnings in excess of billings 2,352,959 1,854,886
Inventories 1,983,336 969,020
Prepaid expenses and other current assets 959,900 541,635
------------ ------------
Total current assets 14,232,576 9,736,097
Property and equipment, net 1,415,356 1,486,551
Goodwill 24,271,969 24,271,969
Deferred financing costs 253,101 304,126
Other assets 29,046 34,911
------------ ------------
Total assets $ 40,202,048 $ 35,833,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) June 30, 2004 December 31, 2003*
---------------------------------------------- ------------- ------------------
(unaudited)
Current liabilities
Accounts payable and accrued expenses $ 11,254,767 $ 9,345,621
Billings in excess of cost and estimated earnings 3,847,915 6,333,235
Current maturities, long term debt -- 2,000,000
Short term debt 6,339,393 4,557,486
Other current liabilities -- 1,600,848
------------ ------------
Total current liabilities 21,442,075 23,837,190
------------ ------------
Long term debt, net of current maturities 5,509,726 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 31,613,554 and 18,163,553 316,136 181,636
Additional paid in capital 44,013,792 40,634,822
Accumulated deficit (30,767,181) (41,835,162)
Treasury stock (312,500) (312,500)
------------ ------------
Total stockholders' equity (deficit) 13,250,247 (1,331,204)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 40,202,048 $ 35,833,654
============ ============
* RECLASSIFIED FOR COMPARATIVE PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-3-
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months and Three Months Ended June 30, 2004 and 2003
6 Months Ended 6 Months Ended 3 Months Ended 3 Months Ended
June 30 June 30 June 30 June 30
2004 2003* 2004 2003*
------------------ ---------------------------------------- ------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $ 26,970,476 $ 16,370,530 $ 11,294,246 $ 6,881,717
------------ ------------ ------------ ------------
Costs and expenses
Cost of revenues 18,949,880 14,066,599 7,682,761 6,235,408
Selling, general and administrative 4,889,761 5,154,907 2,366,423 2,305,611
------------ ------------ ------------ ------------
Total expenses 23,839,641 19,221,506 10,049,184 8,541,019
------------ ------------ ------------ ------------
Operating income (loss) 3,130,835 (2,850,976) 1,245,062 (1,659,302)
------------ ------------ ------------ ------------
Other income (expense)
Interest expense, net (388,903) (929,735) (214,364) (482,657)
Gain on forgiveness of debt 8,326,051 -- -- --
Loss on sale of assets (37,818)
Settlement of lawsuit -- (227,220) -- --
------------ ------------ ------------ ------------
Total other income (expense) 7,937,148 (1,156,955) (214,364) (520,475)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 11,067,983 $ (4,007,931) $ 1,030,698 $ (2,179,777)
============ ============ ============ ============
Basic and diluted earnings (loss) per share
Basic $ 0.39 $ (0.22) $ 0.03 $ (0.12)
Diluted $ 0.32 $ (0.22) $ 0.03 $ (0.12)
Weighted - average shares outstanding
Basic 28,455,733 18,468,553 31,826,796 18,468,553
Diluted 34,454,547 18,468,553 37,825,610 18,468,553
* RECLASSIFIED FOR COMPARATIVE PURPOSES.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-4-
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003
2004 2003*
-------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $ 11,067,983 $ (4,007,931)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities
Depreciation and amortization 294,694 448,975
Forgiveness of long term debt (7,500,000) --
Amortization of discount on notes payable -- 63,112
Settlement of lawsuit -- 77,220
Provision for doubtful accounts (27,140) (53,033)
Non-cash compensation 73,470 12,500
(Gain) loss on derivative transaction 66,218
Loss on sale of assets 37,818
Changes in operating assets and liabilities
Accounts receivable (2,952,631) 2,287,076
Costs and estimated earnings in excess of billings (498,072) 4,434,223
Inventories (1,014,316) (202,170)
Prepaid expenses and other current assets (168,270) 249,625
Other assets 5,866 (2,867)
Accounts payable and accrued expenses 1,909,147 (7,000,324)
Other current liabilities (134,942) 200,783
Billings in excess of costs and estimated earnings (2,485,320) 530,481
------------ ------------
Net cash provided by (used in) operating activities (1,429,531) (2,858,294)
------------ ------------
Cash flows from investing activities
Acquisition of equipment (172,473) (114,359)
------------ ------------
Cash flows from financing activities
Net borrowings on credit facility -- 1,318,248
Repayment of short term debt (1,781,942) --
Repayment of long term debt -- (711,066)
Proceeds from exercise of options 75,000
Proceeds from private placement of equity, net of costs 2,895,000 --
------------ ------------
Net cash provided by financing activities 1,188,058 607,182
------------ ------------
NET INCREASE (DECREASE) IN CASH (413,946) (2,365,471)
Cash, beginning of period 413,946 2,812,924
------------ ------------
Cash, end of period $ -- $ 447,453
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 253,239 $ 496,708
============ ============
* RECLASSIFIED FOR COMPARATIVE PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
-5-
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. ("BrandPartners") 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 six months ended June 30, 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 six months ended June 30, 2004 and
2003 include the accounts of BrandPartners 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.
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 six months and three months
ended June 30, 2004 and 2003 no impairments were present and no indications of
impairment were identified.
-6-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 03-06, "Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings per
Share." EITF 03-06 addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities other than common
stock that contractually entitle the holder to participate in dividends and
earnings of the company when, and if, it declares dividends on its common stock.
The issue also provides further guidance in applying the two-class method of
calculating earnings per share, clarifying what constitutes a participating
security and how to apply the two-class method of computing earnings per share
once it is determined that a security if participating, including how to
allocate undistributed earnings to such a security. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004. The adoption of ETIF 03-06 is not
expected to have a material effect on the Company's financial position or
results of operations.
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 - SHORT-TERM DEBT
Short-Term Debt consists of the following:
June 30, 2004 December 31, 2003
------------- -----------------
(unaudited)
Revolving credit facility (1) $1,364,797 $3,666,441
Bank Term Loan (1) 3,720,000 541,045
Note to Former Shareholders (2) 1,254,596 --
Notes Payable (3) -- 350,000
---------- ----------
Total Short Term Debt $6,339,393 $4,557,486
========== ==========
-7-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) 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 June 30, 2004 was
6.25%. The Facility requires monthly principal payments of $70,000
commencing March 1, 2004. The Facility matures on December 31, 2004.
(2) On January 20, 2004, the Company entered into an agreement with the
former shareholders of Willey Brothers. Two new 24-Month Notes were
issued, each in the amount of $1,000,000 in the aggregate, paid
contemporaneously with the issuance of the new notes. The balance of the
notes was repaid in two equal installments of $500,000 each on April 15,
2004 and July 14, 2004. With payment in full of the 24-Month Notes, all
accrued, unpaid interest on the Seller Notes (approximately $755,000 at
June 30, 2004) was cancelled. This will be included as income from
forgiveness of debt for the quarter ended September 30, 2004. See Note E
(2).
(3) On November 7, 2003, the Company executed two promissory notes payable to
third parties for the aggregate amount of $350,000. The notes bore
interest at 5% per annum and were payable on demand. The proceeds from
the notes were used for working capital purposes. In January 2004 the
note holders converted their notes into subscriptions in the Company's
private placement and were subsequently issued 1,750,000 shares of the
Company's common stock.
NOTE E - LONG-TERM DEBT
Long-Term Debt consists of the following:
June 30, 2004 December 31, 2003
------------- -----------------
(unaudited)
Subordinated Note, net of discount (1) $ 5,289,378 $ 5,232,320
Put Warrant Liability (1) 220,348 220,348
Note to Former Shareholders (2) -- 9,500,000
Lease settlement (See Note H) -- 375,000
----------- -----------
5,509,726 15,327,668
Less current maturities -- 2,000,000
----------- -----------
$ 5,509,726 $13,327,668
=========== ===========
-8-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, 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 June 30, 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 the
Company 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.
(2) The $7,500,000 notes payable were issued to the former
shareholders of Willey Brothers. On January 20, 2004, the Company entered into a
new agreement with the former shareholders of Willey Brothers providing for,
among other things, the cancellation and forgiveness of the $7.5 Million Notes.
Upon the signing of the Agreement, two 24-Month Notes were issued, each in the
amount of $1,000,000 payable to the former shareholders of Willey Brothers. The
$7.5 Million Notes were cancelled and forgiven along with all accrued unpaid
interest of approximately $844,000, which aggregates to a gain of forgiveness of
debt of approximately $8.3 Million. The balance of the 24-Month Notes was repaid
with the payment of $1.0 million in the aggregate upon issuance of the notes and
in two equal installments of $500,000 each on April 15, 2004 and July 14, 2004.
Upon payment in full of the 24-Month Notes, the $2.0 Seller Notes and all
accrued, unpaid interest on the Seller Notes (approximately $755,000 at June 30,
2004) was cancelled and forgiven and the accrued unpaid earn-put of $500,000 was
forgiven. No further earn-out will accrue.
NOTE F - FORGIVENESS OF LONG TERM DEBT
In January of 2004, the Company recorded a gain on the forgiveness of debt. See
Note E (2).
-9-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - SIGNIFICANT CUSTOMERS
For the six months ended June 30, 2004, one customer accounted for approximately
10% of the Company's revenues. For the three months ended June 30, 2004, one
customer accounted for approximately 10% of the Company's revenues.
For the six months ended June 30, 2003, five customers accounted for
approximately 30%, 12%, 11%, 10% and 10% of the Company's revenues,
respectively. For the three months ended June 30, 2003, two customers accounted
for approximately 16% and 10% of the Company's revenues, respectively.
NOTE H - SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
On May 12, 2004, the Company issued 100,000 options to a consultant in
consideration of services to be provided to the Company and its subsidiary
during 2004. The options have a Black-Scholes valuation of approximately
$73,000. The transaction was accounted for by charging consulting expense and
crediting additional paid in capital.
On January 20, 2004, the Company entered into a surrender 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 is to be paid in three equal installments of $100,000
each on March 1, 2004, September 1, 2004 and March 1, 2005. The shares were
valued at $0.55 per share. The payment due on March 1, 2004 was made. 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 payment to the landlord under the surrender
agreement. The terminated lease expires 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 November 7, 2003, the Company executed two promissory notes payable to third
parties for the aggregate amount of $350,000. The notes bore interest at 5% per
annum and were payable on demand. The proceeds from the notes were used for
working capital purposes. In January 2004 the note holders converted their notes
into subscriptions in the Company's private placement and were subsequently
issued 1,750,000 shares of the Company's common stock.
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.
-10-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS - CONTINUED
On January 30, 2003, the Company issued 125,000 warrants 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.
NOTE I - COMMITMENTS AND CONTINGENCIES
On January 16, 2001 the Company acquired 100% of the stock of Willey Brothers.
The terms of the acquisition provided 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 was 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 was be expensed. As of June 30, 2004 the Company had a liability
of $500,000 related to the year 2001 and 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 a new agreement with the former
shareholders (see Note E (2)). As part of that Agreement, the earn-out was
forgiven with the satisfaction of the 24-Month Notes, which were paid on January
20, 2004, April 15, 2004 and in full on July 14, 2004 with no additional
earn-out accruing.
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 then Chief Financial Officer to purchase 25,000 shares,
exercisable commencing March 25, 2004; (iii) option grant to the Company's
then 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 the then 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 options do not have registration rights.
-11-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - STOCK BASED COMPENSATION - CONTINUED
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 six and three
months of 2004 and 2003, respectively: (1) average expected volatility of
204.9% and 121.3%, (2) average risk-free interest rates of 2.97% and 2.97%,
and (3) expected lives of five years for the six months ended June 30,
2004.
6 Months Ended 6 Months Ended 3 Months Ended 3 Months Ended
June 30 June 30 June 30 June 30
2004 2003* 2004 2003*
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss)
As reported $ 11,067,983 $ (4,007,931) $ 1,030,698 $ (2,179,777)
Stock based compensation expense 1,518,127 932,276 1,038,400 163,420
------------ ------------ ------------ ------------
Pro forma $ 9,549,856 $ (4,940,207) $ (7,702) $ (2,343,197)
============ ============ ============ ============
Weighted-average shares outstanding
Basic 28,455,733 18,468,553 31,826,796 18,468,553
Diluted 34,854,547 18,468,553 37,825,610 18,468,553
Net earnings (loss) per share
As reported
Basic $ 0.39 $ (0.22) $ 0.03 $ (0.12)
Diluted $ 0.32 $ (0.22) $ 0.03 $ (0.12)
Pro forma
Basic $ 0.34 $ (0.27) $ 0.00 $ (0.13)
Diluted $ 0.28 $ (0.27) $ 0.00 $ (0.13)
-12-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - INCOME TAXES
For the quarter ended June 30, 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 L - STOCKHOLDERS' EQUITY
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. The proceeds from the
private placement were used to reduce certain debt and obligations, repay the
balance of the term loan, and for working capital.
NOTE N - SUBSEQUENT EVENTS
On July 6, 2004, the Company issued a $1.0 Million unsecured subordinated
promissory note to an unaffiliated party. The note bears interest of 12% per
annum and is payable ninety days from date of issuance. The Company also issued
the note holder three year warrants to purchase 500,000 shares of common stock
exercisable at $0.68 per share, the fair market value of the Company's common
stock as of the date of grant. The Company may at its option extend the term of
repayment of up to $500,000 of the note for an additional ninety days. Should
the Company elect to extend the repayment of a portion of the note, it will be
required to issue an additional 250,000 three year warrants to the note holder
with an exercise price of the lesser of the exercise price of the original
warrant to purchase 500,000 shares or the closing price of the Company's common
stock as of the initial maturity date for the subordinated promissory note. The
Company has provided the note holders with registration rights for the warrant
shares.
On July 14, 2004 the final payment of $500,000 in the aggregate was made to the
former shareholders of Willey Brothers in accord with the January 20, 2004
amended settlement agreement. (See Note E-2) As part of that agreement upon
final payment of the two new subordinated notes, all promissory notes were
cancelled, and the previously recognized earn-out was forgiven, along with all
interest due. The gain of approximately $1.2 Million, consisting of the $500,000
earn-out and accrued interest of approximately $755,000, will be recognized in
the quarter ended September 30, 2004.
-13-
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - SUBSEQUENT EVENTS - CONTINUED
On August 13, 2004, the Company entered into amendments to the agreements with
certain executive officers and directors. Specifically, the employment agreement
with James F. Brooks, the Company's Chief Executive Officer was extended 3 years
from the date of the amended agreement. In addition to serving as Chief
Executive Officer, under the amended agreement, Mr. Brooks has also assumed the
roles of President and corporate Secretary for the Company and its wholly owned
subsidiary Willey Brothers, Inc. In addition to the amendment and extension of
Mr. Brooks agreement, the Company also entered into an amended agreement with
its chairman, Anthony J. Cataldo, whereby the term of the agreement was extended
3 years. Both agreements were adopted by the Board of Directors upon the
recommendation of the Company's Compensation Committee. Messrs. Brooks and
Cataldo recused themselves from all discussions related to their respective
amended agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Company had a working capital deficit (current
assets less current liabilities) of $7,209,000, stockholders' equity of
$13,250,000 and a current ratio (current assets to current liabilities) of
approximately .66:1. At December 31, 2003, the Company had a working capital
deficit of $14,100,000, stockholders' deficit of $1,331,204 and a working
capital ratio of approximately .41:1. The decrease in the working capital
deficit was due to the restructuring of the debt and 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 are at a rate of five percent
(5%) interest and were due December 9, 2003 and extended to 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 June 30, 2004, the Company had cash of $0.00. This is due to a
timing difference between the deposits received in the lockbox and the
application of the cash to the account. As of December 31, 2003, the Company had
cash of $413,946.
For the six months ended June 30, 2004 and 2003, net cash provided by
(used in) operating activities was $(1,429,531) and $(2,858,294), respectively,
net cash (used in) investing activities was $(172,473) and $(114,359),
respectively, and net cash provided by financing activities was $1,188,058 and
$607,182, respectively.
-14-
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 bore 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 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
June 30, 2004, there was $3,720,000 outstanding under the Term Loan, $1,364,797
outstanding under the Revolving Credit Facility, and outstanding amendment fees
in the amount of $580,000. The interest rate in effect on June 30, 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 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 Seller 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 August 6, 2004 there were outstanding balances of
approximately $3,580,000 under the Term Loan and $160,830 under the Revolving
Credit Facility.
-15-
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"). On January 20, 2004,
the Company entered into a new agreement with the former shareholders of Willey
Brothers (the "Agreement"). The Agreement provided 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 24-Month Notes were issued, each in the amount of $1,000,000 payable to the
former shareholders of Willey Brothers, with the Company paying $1.0 Million
toward satisfying the new notes simultaneously with the issuance of same. 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
24-Month Notes was repaid in two equal installments of $500,000 each on April
15, 2004 and July 15, 2004. Upon payment in full of the 24-Month Notes, the $2.0
Million Notes and all accrued, unpaid interest on the Seller Notes
(approximately $755,000 at June 30, 2004) were cancelled and forgiven and the
accrued unpaid earn-out of $500,000 was forgiven and no further earn-out would
accrue.
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, 2004 was $5,521,738 including PIK interest of $6858,897
and less the aggregate discount on notes payable of $232,000. 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, 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 the Company 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 June 30, 2004 the Company had a long-term liability of approximately $220,000
related to the Put Warrant.
-16-
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. 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 were used for working capital.
On January 20, 2004, in conjunction with the closing of the first
traunch of the private placement, the Company entered into a new agreement with
the former shareholders of Willey Brothers (the "Agreement") providing for,
among other things, the cancellation and forgiveness of certain debt. Two new
24-Month 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
notes, payment of $1.0 Million was made toward same. 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
were maintained in escrow and were cancelled upon payment in full of the
24-Month Notes. The balance of the 24-Month Notes were repaid in two equal
installments of $500,000 each on April 15, 2004 and July 14, 2004. Upon payment
in full of the 24-Month Notes, all accrued, unpaid interest on the $2.0 Seller
Notes (approximately $755,000 at June 30, 2004) was cancelled and forgiven and
the accrued unpaid earn-out of $500,000 was forgiven and no further earn-out
will accrue.
On January 20, 2004, in conjunction with the private placement, the
Company entered into a Surrender 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 fee is to be paid in three equal installments of $100,000 each. The first
payment was made on March 1, 2004, with the remaining payments being due on
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
payment to the landlord under the surrender agreement. 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 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. 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, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
REVENUES. Revenues from operations increased approximately $10,600,000,
or 65%, to $26,970,000 for the six months ended June 30, 2004 from $16,371,000
for the six months ended June 30, 2003. This increase is due to an increase in
orders for the current year.
-17-
COST OF REVENUES. Cost of revenues from operations increased
approximately $4,883,000 or 35%, to $18,950,000 (70% of net revenues), for the
six months ended June 30, 2004 from $14,067,000 (86% of net revenues) for the
six months ended June 30, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses from operations decreased approximately $265,000, to
$5,155,000 for the six months ended June 30, 2004 from $4,890,000 for the six
months ended June 30, 2003. This decrease is primarily attributable to the lease
settlement (See Note "H" in the accompanying financial statements, Part 1, Item
1) and leveraging our cost structure relative to sales growth.
OPERATING INCOME. Operating income from operations increased
approximately $5,982,000 to $3,131,000 for the six months ended June 30, 2004,
from a loss of $2,851,000 for the six months ended June 30, 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/(Expense) consisted of interest
expense, gain on the forgiveness of debt, and the settlement of a lawsuit.
Interest expense decreased approximately $541,000 to $389,000 for the
six months ended June 30, 2004 from $930,000 for the six months ended June 30,
2003. This decrease is attributable to a reduction in the term loan, the line of
credit and the restructuring of the subordinate debt.
Due to an agreement with the former Willey Brothers shareholders (See
Note E(2)) debt was forgiven and a gain was recognized of approximately
$8,326,000 for the six months ended June 30, 2004. Due to the settlement of a
lawsuit, additional expense of approximately $227,000 was recognized in June
2003.
NET INCOME (LOSS). Income increased approximately $15,076,000 to
$11,068,000 for the six months ended June 30, 2004 from a loss of $4,008,000 for
the six months ended June 30, 2003. This improvement is due to the increase in
revenue, leveraging our cost structure relative to sales growth and gain on
forgiveness of debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
REVENUES. Revenues from operations increased approximately $4,413,000,
or 64%, to $11,294,000 for the three months ended June 30, 2004 from $6,882,000
for the three months ended June 30, 2003. This increase is due to an increase in
orders for the current year.
COST OF REVENUES. Cost of revenues from operations increased
approximately $1,448,000 or 23%, to $7,683,000 (68% of net revenues), for the
three months ended June 30, 2004 from $6,235,000 (91% of net revenues) for the
three months ended June 30, 2003. This increase was due primarily to increased
revenues. While there was an increase in overall cost of revenues, the actual
percentage as related to revenue decreased due to the change in product mix.
-18-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses from operations increased approximately $61,000, or
3%, to $2,366,000 for the three months ended June 30, 2004 from $2,305,000 for
the three months ended June 30, 2003. This increase is primarily attributable to
increased trade show activity and the use of consultants.
OPERATING INCOME. Operating income from operations increased
approximately $2,904,000 to $1,245,000 for the three months ended June 30, 2004,
from a loss of $1,659,000 for the three months ended June 30, 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/(Expense) consisted of interest
expense and the loss on the sale of assets of approximately $38,000 during the
three months ended June 30, 2003.
Interest expense decreased approximately $269,000 or 56%, to $214,000
for the three months ended June 30, 2004 from $483,000 for the three months
ended June 30, 2003. This decrease is attributable to a reduction in the term
loan, the line of credit and the restructuring of the subordinate debt.
NET INCOME (LOSS). Income increased approximately $3,211,000 to
$1,031,000 for the three months ended June 30, 2004 from a loss of $2,180,000
for the three months ended June 30, 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.
-19-
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 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 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 June 30, 2004.
Interest Rate at
Principal Balance June 30, 2004
----------------- -------------
Term Loan $ 3,720,000 6.25%
Revolving Credit Facility 1,364,797 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
June 30, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 5 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its 2004 Annual Meeting of Stockholders by Information
Statement on June 28, 2004 with the following proposals being submitted:
1. To elect three directors of the Company to hold office under the
Company's staggered terms for directors and until their successors are
elected and have been qualified.
2. To ratify the adoption of the 2004 Incentive Plan and to authorized
5,000,000 shares of Common Stock to be issued thereunder.
-21-
3. To ratify the Audit Committee and the Board of Directors appointment of
Goldstein and Morris, Certified Public Accountants, as independent
auditors for the fiscal year ending December 31, 2004.
The record date for determining stockholders eligible to vote at the
meeting was May 20, 2004. On the record date, there were 31,613,554 shares of
the Company's common stock outstanding and eligible to vote. There were present
at the meeting 16,984,089 shares, representing 53.72% of the common stock
outstanding.
Each nominee for the Board of Directors was re-elected at the 2004
Annual Meeting. The following number of votes was cast for and against each
nominee.
For Against
Anthony J. Cataldo - three year term 16,984,089 0
James F. Brooks - two year term 16,984,089 0
F. Weldon Chitwood - one year term 16,984,089 0
The stockholders also approved the two remaining proposals. The
following votes were tabulated.
For Against Abstain
Proposal 2 16,984,089 0 0
Proposal 3 16,984,089 0 0
ITEM 6. OTHER INFORMATION.
On April 26, 2004, Chief Financial Officer Sharon Burd resigned and
Suzanne Verrill was appointed the new Chief Financial Officer.
On May 12, 2004, the Securities and Exchange Commission declared the
Company's Form S-1 Registration Statement (File No. 333-114774) registering an
aggregate of 20,782,923 shares of common stock for resale effective.
On June 28, 2004, an aggregate of 2,000,000 options to purchase common
stock at $0.53 per share were granted to two directors. All options vested
immediately upon grant and are exercisable for five years.
-22-
On July 6, 2004, the Company issued a $1.0 Million unsecured
subordinated promissory note to an unaffiliated party. The note bears interest
at 12% per annum and is payable ninety days from date of issuance. The Company
also issued the note holder three year warrants to purchase 500,000 shares of
common stock exercisable at $0.68 per share, the fair market value of the
Company's common stock as of the date of grant. The Company may at its option
extend the term of up to $500,000 of the note for an additional ninety days.
Should the Company elect to extend the repayment of a portion of the note, it
will be required to issue an additional 250,000 three year warrants to the note
holder with an exercise price of the lesser of the exercise price of the
original warrant to purchase 500,000 shares or the closing price of the
Company's Common Stock as of the initial maturity date for the subordinated
promissory note. The Company has provided the note holders registration rights
for the warrant shares.
On July 14, 2004, the Company made the final payment of $500,000 under
its amended agreement with the former shareholders of Willey Brothers previously
entered into on January 20, 2004 (See Note E(2)). The amended agreement required
the Company to make payment of $2 Million in the aggregate to the former
shareholders of Willey Brothers in satisfaction of two 24-month notes that were
issued concurrently with the Company's entering into the amended agreement. Upon
entering into the amended agreement and the issuance of the new 24-month notes,
among other things, the previously issued $7.5 Million Notes and accrued unpaid
interest of approximately $844,000 was cancelled and forgiven. The $7.5 Million
Notes were previously issued to the former shareholders of Willey Brothers in
conjunction with $2.0 Million Seller Notes in the Company's January 2001
purchase of Willey Brothers. Upon payment in full of the 24-Month Notes on July
14, 2004, the $2.0 Million previously issued Seller Notes and all accrued,
unpaid interest on the Seller Notes (approximately $755,000 at June 30, 2004)
was cancelled and forgiven and the accrued unpaid earn-out of $500,000 under the
purchase agreement with the former shareholders of Willey Brothers was forgiven
and no further earn-out will accrue.
On August 13, 2004, the Company entered into amendments to agreements
with certain executive officers and directors. Specifically, the employment
agreement with James F. Brooks, the Company's Chief Executive Officer, was
amended and extended an additional 3 years from the date of the amended
agreement. Under the amended agreement, Mr. Brooks will continue to receive
annual compensation of $300,000 as well as remain eligible to participate and
receive customary benefits offered by the Company to all employees. In addition
to serving as Chief Executive Officer, under the amended agreement, Mr. Brooks
has also assumed the roles of President and Corporate Secretary for the Company
and its wholly owned subsidiary Willey Brothers, Inc. The agreement contains a
change of control provision if invoked entitle Mr. Brooks to receive all
payments due to him under the agreement at said time. In addition to the
amendment and extension of Mr. Brooks agreement, the Company also entered into
an emended agreement with its chairman, Anthony J. Cataldo, whereby the term of
the agreement was extended an additional 3 years from the date of the amended
agreement. The agreement also contains a change of control provision identical
to that of the amended agreement for Mr. Brooks. Both agreements were adopted by
the Board of Directors upon recommendation of the Company's Compensation
Committee. Messrs. Brooks and Cataldo recused themselves from all discussions
related to their respective amended agreements.
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ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith unless otherwise
indicated:
10.1 Unsecured Subordinated Promissory Note between the Company and
Longview Fund L.P. dated July 6, 2004
10.2 Common Stock Purchase Warrant, dated asd of July 6, 2004, between the
Company and Longview Fund L.P.
10.3 Employment Agreement dated as of August 13, 2004 between the Company
and James F. Brooks.
10.4 Agreement dated as of August 13, 2004 between the Company
and Anthony J. Cataldo.
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.
(I) The Company's Current Report on Form 8-K dated April 28, 2004 (filed
April 28, 2004), reporting the issuance of a press release announcing
the unaudited financial results for the first quarter ended March 31,
2004.
(b) The Company filed the following Current Reports on Form 8-K during the
quarter ended June 30, 2004:
The Company's Current Report on Form 8-K dated April 28, 2004 (filed
(l) April 28, 2004), reporting the issuance of a press release announcing
the undated financial results for the first quarter ended March 31,
2004.
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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 16, 2004
BRANDPARTNERS GROUP, INC.
By: /S/ JAMES F. BROOKS
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James F. Brooks
Chief Executive Officer
By: /S/ SUZANNE VERRILL
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Suzanne Verrill
Chief Financial Officer