1
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 September 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 ST., 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 November 9, 2004 was
32,395,554.
1
BRANDPARTNERS GROUP, INC.
TABLE OF CONTENTS
Part I Financial Statements
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 2004 (unaudited) and December 21, 2003 3
Consolidated Statements of Operations (unaudited) for the
Nine and Three Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended September 30, 2004 5
Notes of Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 25
Item 4 Controls and Procedures 25
Part II Other Information
Item 5 Other Information 25
Item 6 Exhibits
2
Part I Financial Statements
Item 1 Financial Information
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2004 December 31, 2003*
------ ------------------ ------------------
(unaudited)
Cash $ 483,489 $ 413,946
Accounts receivable,net of allowance for
doubtful accounts of $230,000 and $186,000 5,787,226 5,956,610
Costs and estimated earnings in excess of billings 1,468,102 1,854,886
Inventories 1,902,464 969,020
Prepaid expenses and other current assets 445,409 541,635
------------ ------------
Total current assets 10,086,690 9,736,097
Property and equipment, net 1,438,309 1,486,551
Goodwill 24,271,969 24,271,969
Deferred financing costs 227,579 304,126
Other assets 286,635 34,911
------------ ------------
Total assets $ 36,311,182 $ 35,833,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 8,046,601 $ 9,345,621
Billings in excess of cost and estimated earnings 2,786,256 6,333,235
Current maturities, long term debt -- 2,000,000
Short term debt 4,135,000 4,557,486
Other current liabilities 28,750 1,600,848
------------ ------------
Total current liabilities 14,996,607 23,837,190
------------ ------------
Long term debt, net of current maturities 5,538,787 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 32,395,554 and 18,163,553 323,966 181,636
Additional paid in capital 44,463,322 40,634,822
Accumulated deficit (28,699,000) (41,835,162)
Treasury stock (312,500) (312,500)
------------ ------------
Total stockholders' equity (deficit) 15,775,788 (1,331,204)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 36,311,182 $ 35,833,654
============ ============
* Reclassified for comparative purposes
The accompanying notes are an integral part of these financial statements.
3
BrandPartners Group, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
9 Months Ended 9 Months Ended 3 Months Ended 3 Months Ended
September 30 September 30 September 30 September 30
2004 2003* 2004* 2003*
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenues $ 38,674,988 $ 24,125,178 $ 11,704,512 $ 7,754,648
------------ ------------- ------------ -----------
Costs and expenses
Cost of revenues 27,415,352 21,733,399 8,432,334 7,666,800
Selling, general and administrative 6,410,400 7,766,727 1,598,532 2,632,214
------------ ------------ ------------ ------------
Total expenses 33,825,752 29,500,126 10,030,866 10,299,014
------------ ------------ ------------ ------------
Operating income (loss) 4,849,236 (5,374,948) 1,673,646 (2,544,366)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense, net (793,721) (1,396,041) (360,075) (445,912)
Gain on forgiveness of debt 9,080,647 -- 754,596 --
Settlement of lawsuit -- (227,220) -- --
------------ ------------ ------------ ------------
Total other income (expense) 8,286,926 (1,623,261) 394,521 (445,912)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 13,136,162 $ (6,998,209) $ 2,068,167 $ (2,990,278)
============ ============ ============ ============
Basic and diluted earnings (loss) per share
Basic $ 0.45 $ (0.38) $ 0.07 $ (0.16)
Diluted $ 0.37 $ (0.38) $ 0.06 $ (0.16)
Weighted - average shares outstanding
Basic 29,489,899 18,468,553 31,634,663 18,468,553
Diluted 35,299,757 18,468,553 36,990,736 18,468,553
* RECLASSIFIED FOR COMPARATIVE PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
2004 2003*
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $ 13,136,162 $ (6,998,209)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities
Depreciation and amortization 442,047 673,017
Forgiveness of long term debt (9,080,647) --
Amortization of discount on notes payable -- 63,112
Settlement of lawsuit -- 77,220
Provision for doubtful accounts (219,528) --
Non-cash compensation 81,300 12,500
Allowance for obsolete inventory 890,000
Warrant interest 105,000
(Gain) loss on derivative transaction (202)
Loss on sale of assets 37,818
Changes in operating assets and liabilities
Accounts receivable 169,384 2,301,341
Costs and estimated earnings in excess of billings 386,784 4,959,926
Inventories (933,444) 18,367
Prepaid expenses and other current assets 96,226 493,811
Other assets (1,724) 8,616
Accounts payable and accrued expenses (1,842,215) (8,352,497)
Other current liabilities 235,902 1,687,915
Billings in excess of costs and estimated earnings (3,546,979) 3,471,711
------------ ------------
Net cash provided by (used in) operating activities ( 971,732) (655,554)
------------ ------------
Cash flows from investing activities
Purchase of Membership Interest (250,000)
Acquisition of equipment (317,258) (219,464)
------------ ------------
Net cash provided by (used in) investing activities (567,258) (219,464)
------------ ------------
Cash flows from financing activities
Net borrowings on short term debt (72,486) 440,965
Net borrowings on long term debt (1,913,881) (1,182,766)
Proceeds from short term debt 625,000
Proceeds from exercise of options 75,000
Proceeds from private placement of equity, net of costs 2,895,000 --
------------ ------------
Net cash provided by (used in) financing activities 1,608,633 (741,801)
------------ ------------
NET INCREASE (DECREASE) IN CASH 69,643 (1,616,819)
Cash, beginning of period 413,946 2,167,924
------------ ------------
Cash, end of period $ 483,589 $ 551,105
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 328,565 $ 792,786
============ ============
* Reclassified for comparative purposes
The accompanying notes are an integral part of the financial 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 for the fiscal year ended December 31, 2003 and 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 nine months ended September 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 nine months ended September 30,
2004 and 2003 include the accounts of BrandPartners and its wholly owned
subsidiary, Willey Brothers. All significant intercompany 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 nine months and three
months ended September 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 hot to apply the two-class method of 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, 2003. The adoption of EITF 03-06 is not
expected to have a material effect on the Company's financial position or
results of operations.
In December 2003, 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:
September 30, 2004 December 31, 2003
------------------ -----------------
(unaudited)
Revolving credit facility (1) $ - $ 3,666,441
Bank Term Loan (1) 3,510,000 541,045
Note Payable (2) 625,000 -
Notes Payable (3) - 350,000
---------------- ---------------
Total Short Term Debt $ 4,135,000 $ 4,557,486
============================================
7
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D - SHORT TERM DEBT (continued)
(1) On November 28, 2003, the Company renegotiated its agreement with its
commercial lender for a new credit facility ("Facility"), which
includes a term loan and a revolving credit 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 of $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 September 30, 2004
was 6.50%. The Facility requires monthly principal payments of $70,000,
which commenced March 1, 2004. The Facility matures on December 31,
2004.
(2) On July 6, 2004, the Company negotiated an unsecured subordinated
promissory note for $1,000,000. The note was payable on October 4,
2004; however, 50% of the note could be extended to January 3, 2005.
The stated interest rate was 12% per annum. With the issuance of the
note, a three (3) year Common Stock Purchase Warrant (Purchase Warrant)
was issued to purchase up to 500,000 shares of the Company's common
stock. The exercise price of the Warrant Shares was $.68, the closing
price of the stock on the date of the issuance of the Note. Based on a
Black-Scholes valuation of the warrants, $105,000 of interest expense
was expensed during this period. On September 29, 2004, the
Note and the Purchase Warrant were cancelled. In consideration of the
cancellation of the Original Note, a new unsecured subordinated
promissory note in the amount of $625,000 was issued, with interest
accruing at a rate of 12% per annum. The Company also issued 750,000
restricted shares of common stock for the sum of $375,000, which was
applied as partial payment to the Original Note. The stock was issued
on September 29, 2004. The price of the stock on the date of issuance
was $0.63 per share. The New Note matures on January 6, 2005. The
proceeds from the note were used for working capital purposes.
(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.
8
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E - LONG TERM DEBT
Long-Term Debt consists of the following:
September 30, 2004 December 31, 2003
------------------ -----------------
(unaudited)
Subordinated Note, net of discount (1) $ 5,318,439 $ 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
----------- ------------
5,538,787 15,327,668
Less current maturities - 2,000,000
----------- ------------
$ 5,538,787 $ 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, 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 September 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 11, 2011 and can be put to
the Company after the fifth year. The transaction has been treated as a debt
discount and is being amortized to interest expense over the term of the
note. 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,
9
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E - LONG TERM DEBT (continued)
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, 2002, 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 an amended
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 promissory 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. The balance of
the promissory 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 promissory notes, the $2.0 Seller Notes and all accrued, unpaid interest
on the Seller Notes (approximately $755,000 at September 30, 2004) was
cancelled and forgiven and the accrued unpaid earn-out of $500,000 was
forgiven. No further earn-out will accrue. Total gain on forgiveness of debt
was approximately $9.1 Million. Recovery of the earn-out expense was part of
the general and administrative expense.
NOTE F - FORGIVENESS OF LONG TERM DEBT
The Company recorded a gain on the forgiveness of debt. See Note E (2).
NOTE G - SIGNIFICANT CUSTOMERS
Since Willey Brothers is a contract driven company, significant customers change
period to period. For the nine months ended September 30, 2004, one customer
accounted for approximately 18% of the Company's revenues. For the three months
ended September 30, 2004, three customers accounted for approximately 38%, 17%
and 14% of the Company's revenues, respectively.
For the nine months ended September 30, 2003, one customer accounted for
approximately 21% of the Company's revenues. For the three months ended
September 30, 2003, six customers accounted for approximately 17%, 17%, 16%,
15%, 15% and 12% of the Company's revenues, respectively.
10
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H - SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
On September 29, 2004 and August 2, 2004, 20,000 and 12,000 shares of common
stock of the Company, respectively, were issued to an unrelated party for
services rendered. The shares were accounted for at the share price on the date
of issuance by charging expense and increasing additional paid in capital.
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 accounting 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 the signing of
the agreement. $200,000 of the balance was paid on March 1, 2004, September 1,
2004 with an additional $100,000 due on March 1, 2005. The shares were valued at
$0.55 per share. 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.
11
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 exceeded certain targeted levels through the
year 2005 (the "Earn-Out"). The aggregate maximum amount of contingent
consideration was $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 to be expensed. As of June 30, 2004, the Company
had a liability related to the year 2001. 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 E (2)]. As part of that Agreement, the Earn-Out
was forgiven with the satisfaction of the promissory notes, which were paid on
January 20, 2004, April 15, 2004 and in full on July 14, 2004, with no
additional Earn-Out accruing.
On September 21, 2004, the Company purchased a 15% Membership Interest in an
unrelated third party for $250,000. The purchase price was based on a "Per Unit
Price" equal to $16,666.66 for each one percent (1%) of the purchased interest.
Under the agreement, the Company delivered 50% of the purchase price at closing,
with the balance to be paid within forty-five (45) days after closing. The
payment was made on November 5, 2004. No further capitalization is required.
NOTE J - STOCK BASED COMPENSATION
On June 28, 2004, the Chairman of the Board and the Chief Executive Officer were
granted 1,000,000 options each to purchase the Company's common stock for a
total of 2,000,000 options at $0.53 per share, which was the share price at the
time of the grant. The options vested immediately and expire five years from the
date of issuance.
On September 10, 2004, an employee of the Company was granted 500,000 options to
purchase the Company's common stock at $0.54 per share, which was the share
price at the time of the grant. The options invested immediately and expire five
years from the date of issuance.
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 disclosed information
12
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE J - STOCK BASED COMPENSATION - continued
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 nine and three months of 2004 and 2003, respectively: 1)
average expected volatility of 165.5% and 121.3%, 2) average risk-free interest
rates of 2.97% and 2.97% and 3) expected lives of five years for the nine months
ended September 30, 2004.
9 Months Ended 9 Months Ended 3 Months Ended 3 Months Ended
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
(unaudited) (unaudited)
Net income (loss)
As reported $ 13,136,162 $ (6,998,209) $ 2,173,167 $ (2,990,278)
Stock based compensation expense 1,260,100 1,095,696 253,900 163,420
Pro forma $ 11,876,062 $ (8,093,905) $ 1,919,267 $ (3,153,698)
============ ============ =========== ============
Weighted-average shares outstanding
Basic 29,489,899 18,468,553 31,634,663 18,468,553
Diluted 35,299,757 18,468,553 36,990,736 18,468,553
Net earnings (loss) per share
As reported
Basic $ 0.45 $ (0.38) $ 0.07 $ (0.16)
Diluted $ 0.37 $ (0.38) $ 0.06 $ (0.16)
Pro forma
Basic $ 0.40 $ (0.44) $ 0.06 $ (0.17)
Diluted $ 0.34 $ (0.44) $ 0.05 $ (0.17)
13
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K - INCOME TAXES
For the quarter ended September 30, 2004, income taxes of approximately
$5,320,000 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 consisted
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 a term loan, and for working capital.
NOTE N - SUBSEQUENT EVENTS
On October 20, 2004, Goldstein and Morris, Certified Public Accountants, P.C.,
resigned as auditors for the Company and were replaced by Michael F. Albanese,
CPA ("Albanese") to audit the consolidated financial statements of the Company.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had a working capital deficit (current
assets, less current liabilities) of $4,910,000, stockholders' equity of
$15,776,000 and a current ratio (current assets to current liabilities) of
approximately .673. At December 31, 2003, the Company had a working capital
deficit of $14,100,000, stockholders' deficit of $1,331,203 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. This includes the consequences of any failure to pay such debt
at maturity and 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. The
notes were due December 9, 2003 and were extended to February 9, 2004. The
proceeds from the notes was used for working capital. The notes were converted
to stock in January 2004.
As of September 30, 2004, the Company had cash of $483,489. As of December 31,
2003, the Company had cash of $413,946.
For the nine months ended September 30, 2004 and 2003, net cash (used in)
operating activities was $(971,732) and $(655,554), respectively. Net cash (used
in) investing activities was $(567,258) and $(219,464), respectively, and net
cash provided by (used in) financing activities was $1,608,633 and $(741,801),
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:
o $8,000,000 term loan (the "Term Loan")
o $6,000,000 revolving credit facility (the "Revolving Credit Facility").
The Facility 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
application margin. As amended on November 28, 2003, the (the "Ninth
Amendment"):
o Term Loan was paid off on January 2, 2004
16
o 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 September 30, 2004, there was:
o $3,510,000 outstanding under the Term Loan
o $0.00 outstanding under the Revolving Credit Facility
o Outstanding amendment fees in the amount of $580,000
o Interest rate of 6.50% for both the Term Loan and 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 21, 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:
o Extended the Facility to December 31, 2004
o Required that the term loan be paid off
o Divided the $6,000,000 revolving credit facility into a $4,000,000
New Term Loan and a $2,000,000 Revolving Credit Facility
o Placed no limitations as to availability
o Eliminated the LIBOR option
17
o Provided for interest at the bank's Base Rate plus an applicable margin.
o Required monthly prepayments of the principal commencing March 1, 2004.
o Allowed 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, the amount outstanding under the Facility becomes due
and payable, and the lender has the right to proceed against the collateral
granted 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 November 6, 2004, there were outstanding balances of approximately
$3,370,000 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"). On
January 20, 2004, the Company entered into a new agreement with the former
shareholders of Willey Brothers (the "Agreement"). The Agreement provided for:
o Cancellation and forgiveness of the $2 Million notes.
o Issuance of two new promissory notes, each in the amount of $1,000,000
payable to the former shareholders of Willey Brothers.
o Cancellation and forgiveness of the $7.5 Million Notes
o Cancellation and forgiveness of the unpaid interest on the notes of
approximately $844,000
The balance of the new promissory notes was repaid in two equal installments of
$500,000 each on April 15, 2004 and July 14, 2004. Upon payment in full of the
promissory 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. The accrued unpaid earn-out of $500,000 was forgiven and no further
earn-out will 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:
18
o 12% on accreted principal amount, payable in cash quarterly.
o 4% on the accreted principal amount, added to principal ("PIK amount")
The balance of the note at September 30, 2004 was $5,714,958, including PIK
interest of $714,958. 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 on 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 note-holder and
Willey Brothers, the note-holder waived its rights to demand immediate payment
of the Willey Subordinated Note Payable and to put the Put Warrant to Willey
Brothers. These rights had been triggered by the change in control resulting
from the death of the Company's former Chairman and Chief Executive Officer.
On September 30, 2003, in consideration for the extension of an interest payment
due date, 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. The terms are similar to those on the Put
Warrant.
The Company has received waivers from certain financial covenants through
December 31, 2004. At September 30, 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. The proceeds from the
private placement were used to reduce certain debt and obligations as described
below and to repay the balance of the term loan. The balance of the proceeds was
used for working capital.
19
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"). The Agreement provided for,
among other things:
o $7.5 Million Seller Notes were cancelled and forgiven
o All accrued unpaid interest on the Seller Notes of approximately $844,000
was cancelled and forgiven
o $2.0 Million 24-Month Notes were maintained in escrow and were cancelled
upon payment in full of the promissory notes.
o Two new promissory notes were issued, each in the amount of $1.0 million,
payable to the former shareholders of Willey Brothers.
o Payment of $1.0 million was made to the former shareholders of Willey
Brothers against one of the 24-Month Notes.
The balance of the new promissory notes was paid on April 15, 2004 and July 14,
2004. Upon payment in full of the promissory notes:
o All accrued, unpaid interest on the $2.0 Million 24-Month Notes
(approximately $755,000 at June 30, 2004) was cancelled and forgiven
o Accrued, unpaid earn-out of $500,000 was forgiven
o No additional 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:
o Pay the landlord an aggregate of $800,000
o 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 the signing of the agreement. The balance of the fee is
to be paid in three equal installments of $100,000 each. Payments were made on
March 1, 2004 and September 1, 2004. The remaining payment is due on 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, 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
20
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 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.
COMMITMENTS AND CONTINGENCIES
As of September 30, 2004, booked orders consisting of signed contracts, for the
Company totaled approximately $21,752,000.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
REVENUES: Revenue from operations increased approximately 60% for the nine
months ended September 30, 2004. This increase is due to:
o Increased merger/acquisition activity in financial services market
o Additional investment in capital improvements in financial services market
o Better penetration of financial services market
COST OF REVENUES: Cost of revenues from operations increased approximately 26%
for the nine months ended September 30, 2004.
The Cost of Revenues as a percentage of Revenues for the nine months ended
September 30, 2004 was 71% as compared to 90% for 2003.
This increase in cost of revenues was due to:
o Increase in sales
o Cost of revenues as percentage of net revenues decreased due to change in
product mix.
o The Design/Build Business Unit of Willey Brothers has higher cost of
revenues due to the nature of its business. The Merchandising Business Unit
has a lower cost of revenues.
21
o In 2004 the Merchandising Business Unit was responsible for 64% of total
revenues with Design/Build having 30% of revenues. In 2003 the
Merchandising Business Unit had 33% of total revenues and Design/Build had
59%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses from operations decreased approximately 17% for the nine
months ended September 30, 2004. This decrease is attributable to:
o Lease settlement (see Note H of accompanying financial statements, Part 1,
Item 1)
o Leveraging our cost structure relative to sales growth
o Fulfillment of agreement with former shareholders of Willey Brothers. See
Note E (2).
OPERATING INCOME: Operating income from operations increased approximately
$10,224,000 for the nine months ended September 30, 2004. This increase in the
operating income was due to:
o Increase in revenue in Merchandising Division
o Higher profit margin in Merchandising Division
o Leveraging of our cost structure relative to sales to reduce our selling,
general and administrative costs.
o Cost cutting controls in place
OTHER INCOME (EXPENSE): Other Income/(Expense) consisted of interest expense,
gain on forgiveness of debt, and the settlement of a lawsuit.
Interest expense decreased approximately 43% for the nine months ended September
30, 2004. The decrease is attributable to:
o Reduction in the term loan
o Reduction in line of credit
o Restructuring of the subordinated debt
The gain on forgiveness of debt is discussed in detail in Note E (2).
We may in the future continue to experience fluctuations in quarterly operating
results. Factors that may cause our quarterly operating results to vary include:
o Active number of customer projects
o Requirements of customer projects
o Termination of major customer projects
o Loss of major customers
o Timing of new engagements
22
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
REVENUES: Revenue from operations increased approximately 51% for the three
months ended September 30, 2004. This increase is due to:
o Increased merger/acquisition activity in financial services market
o Additional investment in capital improvements in financial services
market
o Better penetration of financial services market
COST OF REVENUES: Cost of revenues from operations increased approximately 10%
for the three months ended September 30, 2004.
The Cost of Revenues as a percentage of Revenues for the three months ended
September 30, 2004 was 72% as compared to 99% for 2003.
This increase in cost of revenues was due to:
o Increase in sales
o Cost of revenues as percentage of net revenues decreased due to change
in product mix.
o The Design/Build Business Unit of Willey Brothers has higher cost of
revenues due to the nature of its business. The Merchandising Business
Unit has a lower cost of revenues.
o In 2004 the Merchandising Business Unit was responsible for 64% of
total revenues with Design/Build having 30% of revenues. In 2003 the
Merchandising Business Unit had 41% of total revenues and Design/Build
had 54%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses from operations decreased approximately 41% for the
three months ended September 30, 2004. This decrease is attributable to:
o Leveraging our cost structure relative to sales growth
o Fulfillment of agreement with former shareholders of Willey Brothers.
See Note E (2).
OPERATING INCOME: Operating income from operations increased approximately
$4,282,000 for the three months ended September 30, 2004. This increase in the
operating income was due to:
o Increase in revenue in Merchandising Division
o Higher profit margin in Merchandising Division
o Leveraging of our cost structure relative to sales to reduce our
selling, general and administrative costs.
o Cost cutting controls in place
OTHER INCOME (EXPENSE): Other Income/(Expense) consisted of interest expense
and gain on forgiveness of debt.
Interest expense decreased approximately 20% for the three months ended
September 30, 2004. The decrease is attributable to:
o Reduction in the term loan
o Reduction in line of credit
o Restructuring of the subordinated debt
The gain on forgiveness of debt is discussed in detail in Note E (2).
We may in the future continue to experience fluctuations in quarterly operating
results. Factors that may cause our quarterly operating results to vary include:
o Active number of customer projects
o Requirements of customer projects
o Termination of major customer projects
o Loss of major customers
o Timing of new engagements
HOLDING COMPANY AND OPERATING SUBSIDIARY
We conduct our operations through our subsidiaries. At present, Willey Brothers,
Inc. is our only operating subsidiary. We have relied and continue to reply upon
cash payments from our operating subsidiary 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. Regulations, legal restrictions and contractual agreements could
restrict any needed payments from our subsidiary. If we are unable to receive
cash from our subsidiary, or from any operating subsidiaries which we may
acquire in the future, our operations and financial condition would be
materially and adversely affected.
STOCK PRICE FLUCTUATIONS
The market price of our common stock has fluctuated significantly and may be
affected by:
o Our operating results
o Changes in our business and management
o General and market 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 requirements for continued listing. It is impossible to
predict the effect of these or other factors on the market price of our common
stock. 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, which could cause actual results to
differ materially from those forecast or anticipated. Such factors include:
23
o Continued services of James Brooks as Chief Executive Officer and President
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 industry
o Our ability to penetrate new markets
o Our ability to obtain sufficient financing to continue operations
o General economic and business conditions
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligations
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 Form 8-K, and other filings with the
Securities and Exchange Commission.
ITEM 3. QUALITATIVE AND QUANTATIVE 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 accrued 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 September 30, 2004.
Principal Balance Interest Rate at
September 30, 2004
------------------- -------------------
Term Loan $ 3,510,000 6.50%
Revolving Credit Facility $ - 6.50%
24
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this Quarterly
Report on From 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
September 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. OTHER INFORMATION
On July 6, 2004, the Company issued a $1.0 Million unsecured subordinated
promissory note with 500,000 common stock purchase warrants. The note and
warrants were cancelled on September 29, 2004 and were replaced with a $625,000
unsecured subordinated promissory note. The note bears interest at 12% per
annum. The note and all accrued interest are due and payable on January 6, 2005.
At the time that the note was issued, the Company issued 750,000 shares of its
common stock to the note holder for the sum of $375,000, which was applied as
partial payment of the Original Note. The shares were issued on September 29,
2004. The price of the stock on the date of issuance was $0.63 per share. The
Company filed a registration for these securities on October 15, 2004 as part of
an S-2 registration statement, registering an aggregate of 1,382,000 shares of
stock.
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 new promissory 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 promissory
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 promissory notes
on July 14, 2004, the $2.0 Million 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 to receive customary
benefits offered by the Company to all employees. In addition to serving as
25
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, which, if invoked, entitles 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 amended 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 did not participate in any of the
discussions related to their respective amended agreements.
On September 21, 2004, the Company purchased a 15% Membership Interest in an
unrelated third party for $250,000. The purchase price was based on a "Per Unit
Price" equal to $16,666.66 for each one percent (1%) of the purchased interest.
Under the agreement, the Company delivered 50% of the purchase price at closing,
with the balance to be paid within forty-five (45) days after closing. The
payment was made on November 5, 2004.
On October 20, 2004, Goldstein and Morris, Certified Public Accountants, P.C.,
resigned as auditors for the Company as they no longer had the resources
available to service a public company. Goldstein and Morris was previously
appointed as the Company's certifying accountants on February 18, 2004, and had
audited the Company's consolidated balance sheets as of December 31, 2003 and
2002, and the related consolidated statements of operations, changes in
stockholders equity (deficit) and cash flows for the years ended December 31,
2003, 2002 and 2001. Goldstein and Morris' reports on the financial statements
of the Company for its fiscal years ended December 31, 2003 and 2002 did not
contain an adverse opinion or a disclaimer of opinion not were such reports
qualified or modified as to uncertainty, audit scope or accounting principles.
During the period in which Goldstein and Morris audited the Company's financial
statements and the interim period in which Goldstein and Morris served as the
Company's certifying accountants, there were no disagreement(s) with Goldstein
and Morris on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Goldstein and Morris, would have caused
Goldstein and Morris to make reference to the subject matter of such
disagreement(s) in connection with its audit report.
On November 2, 2004, upon recommendation of the Company's audit committee, the
Board of Directors engaged Michael F. Albanese, CPA ("Albanese") to audit the
consolidated financial statements of the Company. During the Company's two most
recent fiscal years and through November 2, 2004, the Company has not consulted
with Albanese regarding either the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report nor oral advice was provided that was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue.
ITEM 6. EXHIBITS
10.1 Purchase and Joinder Agreement with BancRealty Advisors, LLC, dated
September 21, 2004.
31.1 Certification of Chief Executive Officer and President 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.
26
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: November 15, 2004
BRANDPARTNERS GROUP, INC.
By:/S/ JAMES F. BROOKS
-------------------------
James F. Brooks
Chief Executive Officer and President