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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, 2002 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: 000-23889
---------------
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 76-0553110
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4900 HOPYARD ROAD, SUITE 200, PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 251-0000
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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 [ ].
The number of shares of Common Stock of the Registrant, par value
$.001 per share, outstanding at August 13, 2002 was 15,264,288.
PART 1, ITEM 1. FINANCIAL STATEMENTS
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($000'S, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 274 $ 185
Trade accounts receivable, net
of allowance for doubtful accounts
of $290 and $300, respectively 1,042 1,947
Income tax receivable 43 105
Prepaid expenses and other 190 286
------------- -------------
Total current assets 1,549 2,523
PROPERTY AND EQUIPMENT 427 427
Less - accumulated depreciation (321) (256)
------------- -------------
Property and equipment, net 106 171
GOODWILL 11,648 11,648
OTHER 44 44
------------- -------------
TOTAL ASSETS $ 13,347 $ 14,386
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 280 $ 419
Accounts payable 413 791
Accrued salaries and other expenses 693 1,151
Corporate legacy liabilities 465 871
Legacy liabilities of insolvent subsidiary -- 1,467
Deferred revenue 11 25
------------- -------------
Total current liabilities 1,862 4,724
CONVERTIBLE NOTES PAYABLE, NET 1,016 948
CORPORATE LEGACY LIABILITIES - LONG TERM 682 464
OTHER LIABILITIES 19 19
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 72,000,000 and
35,000,000 shares authorized in 2002 and 2001,
respectively; 15,264,288 and 13,264,288 shares
issued and outstanding in 2002 and 2001 (excluding
255,000 shares held in treasury), respectively 16 14
Additional paid-in capital 99,892 99,732
Unearned compensation (77) --
Treasury stock (118) (118)
Accumulated deficit (89,945) (91,397)
------------- -------------
Total stockholders' equity 9,768 8,231
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,347 $ 14,386
============= =============
See notes to condensed consolidated financial statements.
2
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUE $ 2,403 $ 5,357 $ 5,290 $ 12,050
COST OF REVENUE 1,623 3,554 3,570 8,138
------------ ------------ ------------ ------------
GROSS PROFIT 780 1,803 1,720 3,912
OPERATING EXPENSES:
Selling, general and administrative expenses 817 1,760 1,577 3,127
Goodwill amortization -- 88 -- 176
Depreciation and amortization 24 324 64 663
------------ ------------ ------------ ------------
Total operating expenses 841 2,172 1,641 3,966
INCOME (LOSS) FROM OPERATIONS (61) (369) 79 (54)
OTHER INCOME 1,467 -- 1,467 --
INTEREST EXPENSE, net (46) (57) (94) (128)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,360 (426) 1,452 (182)
INCOME TAX PROVISION -- -- -- --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,360 (426) 1,452 (182)
DISCONTINUED OPERATIONS:
Gain on disposal of discontinued operations, net of tax -- 17 -- 17
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,360 $ (409) $ 1,452 $ (165)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE: BASIC
Continuing operations $ 0.09 $ (0.03) $ 0.10 $ (0.01)
Discontinued operations -- 0.00 -- 0.00
------------ ------------ ------------ ------------
Net loss per share $ 0.09 $ (0.03) $ 0.10 $ (0.01)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE: DILUTED
Continuing operations $ 0.09 $ (0.03) $ 0.10 $ (0.01)
Discontinued operations -- 0.00 -- 0.00
------------ ------------ ------------ ------------
Net loss per share $ 0.09 $ (0.03) $ 0.10 $ (0.01)
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING: BASIC 15,264,288 13,423,117 14,756,001 13,075,687
------------ ------------ ------------ ------------
AVERAGE SHARES OUTSTANDING: DILUTED 15,919,837 13,423,117 15,209,360 13,075,687
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements.
3
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($000'S, EXCEPT PER SHARE DATA)
FOR THE SIX MONTHS ENDED JUNE 30, 2002
COMMON STOCK
---------------------------- ADDITIONAL COMMON UNEARNED
SHARES AMOUNT PAID-IN-CAPITAL STOCK PAYABLE COMPENSATION
------------- ------------- --------------- ------------- -------------
Balance, December 31, 2001 ............................ 13,264,288 $ 14 $ 99,732 $ -- $ --
Warrants issued with convertible notes ................ -- -- 7 -- --
Compensation expense associated with stock options .... -- -- 18 -- (17)
Common stock option repricing ......................... -- -- 17 -- (16)
Compensation expense associated with restricted stock . 1,000,000 1 59 -- (55)
Amortization of unearned compensation ................. -- -- -- -- 11
Common stock issued to executive officers ............. 1,000,000 1 59 -- --
Net income ............................................ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance, June 30, 2002 ................................ 15,264,288 $ 16 $ 99,892 $ -- $ (77)
============= ============= ============= ============= =============
Accumulated
Other Total
Treasury Comprehensive Accumulated Stockholders' Comprehensive
Stock Income (Loss) Deficit Equity Income (Loss)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 ............................ $ (118) $ -- $ (91,397) $ 8,231
Warrants issued with convertible notes ................ -- -- -- 7
Compensation expense associated with stock option ..... -- -- -- 1
Common stock option repricing ......................... -- -- -- 1
Compensation expense associated with restricted stock . -- -- -- 5
Amortization of unearned compensation ................. -- -- -- 11
Common stock issued to executive officers ............. -- -- -- 60
Net income ............................................ -- -- 1,452 1,452 $ 1,452
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 ................................ $ (118) $ -- $ (89,945) $ 9,768 $ 1,452
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
---------------------------
JUNE 30, JUNE 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,452 $ (165)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 88 839
Change in allowance for doubtful accounts (10) (80)
Compensation expense on issuance of common stock -- 74
Compensation expense on issuance of common stock
options and warrants 24 --
Non cash gains on settlement of liabilities and
deconsolidation of subsidiary (1,563) --
Changes in operating assets and liabilities:
Trade accounts receivable 915 3,168
Unbilled revenue -- (419)
Income tax receivable 62 --
Prepaid expenses and other assets 96 (118)
Accounts payable (378) (703)
Accrued salaries and other expenses (274) (611)
Deferred revenue (14) (45)
Corporate legacy liabilities (170) (161)
Discontinued operations -- 336
------------ ------------
Net cash provided by operating activities 228 2,115
INVESTING ACTIVITIES:
Additions of property and equipment, net of disposals -- (7)
------------ ------------
Net cash used in investing activities -- (7)
FINANCING ACTIVITIES:
Net payments under line of credit (139) (1,976)
------------ ------------
Net cash used in financing activities (139) (1,976)
NET INCREASE IN CASH 89 132
CASH:
Beginning of period 185 --
------------ ------------
End of period $ 274 $ 132
============ ============
SUPPLEMENTAL DISCLOSURE:
Interest Paid $ 10 $ 55
Issuance of common stock at fair value in satisfaction of:
Severance obligations $ -- $ 394
Prior acquisition $ -- $ 893
Litigation between the Company and various other entities $ -- $ 125
Obligations under various rights agreements $ -- $ 49
Accrued bonuses $ 60 $ --
Noncash issuance of convertible notes at fair value
associated with interest due on notes payable $ 45 $ --
Noncash issuance of convertible notes at fair value
associated with short-term corporate legacy liabilities $ 211 $ --
See notes to condensed consolidated financial statements.
5
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($000, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included in the financial
statements. Operating results for the three and six month periods ended June 30,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. The balance sheet at December 31, 2001, has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements. For additional information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2001.
The preparation of the condensed financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the condensed financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Basic income (loss) per share is based upon the weighted average number of
common shares outstanding during the period. Diluted income (loss) per share is
computed using the weighted average number of common shares and potentially
dilutive securities outstanding during the period. Potentially dilutive
securities include incremental common shares issuable upon the exercise of stock
options, warrants and conversion of notes payable. Potentially dilutive
securities are excluded from the computation if their effect is anti-dilutive.
Potentially dilutive securities excluded because of their anti-dilutive effect
are approximately 6.5 million shares and 2.6 million shares for the periods
ended June 30, 2002 and June 30, 2001, respectively.
In April 2002 Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections," was issued. SFAS No. 145 rescinds SFAS No. 4 and SFAS
No. 64 related to classification of gains and losses on debt extinguishments
such that most debt extinguishment gains and losses will no longer be classified
as extraordinary items. The Company adopted the provisions of SFAS No. 145
effective January 1, 2002, and accordingly, the $1,467 gain resulting from the
Chapter 7 liquidation filing and deconsolidation of the Company's former
subsidiary, BRBA, Inc. (See Note 6) is reported as Other Income for the three
and six months ended June 30, 2002.
2. LIQUIDITY AND CREDIT FACILITY
The Company's liabilities as of June 30, 2002, reflect approximately $1,147 of
past-due liabilities, which have been reported as legacy liabilities in the
financial statements. Due to our current and foreseeable liquidity issues, we
may be unable to make any of these payments in cash. Of the $1,147, the Company
has entered into agreements, which will further reduce this total by $1,012 or
convert it to stock or long-term notes due in 2005. This leaves approximately
$135 of past-due and un-restructured legacy liabilities to be resolved with 6
creditors.
The Company relies primarily on the timeliness and amount of accounts receivable
collections to fund cash disbursements. As a result of prior losses and prior
negative cash flows, the Company has experienced a significant decline in
available liquidity, which has had an adverse impact on the ability of the
Company to meet its immediate and future obligations and could impact the
ability of the Company to continue as a going concern. The Company has improved
its liquidity by securing private placement financing, by reaching settlement
agreements with most of its legacy creditors, and by restructuring its credit
facility with Comerica Bank, which matured on January 25, 2002. Since there was
an outstanding balance on the line as of January 25, 2002, Comerica declared the
Company to be in default under the terms of the agreement. However, Comerica has
subsequently agreed to forebear on any actions to collect the outstanding
balances and to allow the Company to borrow under the loan until June 30, 2002,
which was subsequently extended to September 30, 2002. Under the extended
arrangement that started on January 25, 2002, available borrowings began at 60%
of eligible accounts receivables, after reduction for ineligible accounts, with
subsequent reductions of
6
2% each month starting in May 2002. The total borrowing base after reductions
for ineligible accounts and the borrowing base percentage is limited to a
maximum of $850 as of June 30, 2002 and subsequently reduced to $550 during the
extension period after June 30, 2002. Total eligible accounts receivable, after
reductions for ineligible accounts, as of June 30, 2002 amounted to $706.
Comerica retains the right to decline to make advances at any time during this
period. The interest rate on outstanding balances is at Comerica's prime rate
(4.75% at June 30, 2002) plus 9% as of June 30, 2002, and continues to increase
1% per month.
Under present circumstances, including the continued forbearance of Comerica
Bank, the Company believes it has sufficient cash resources to meet its
operating requirements at least through the end of the third quarter of 2002.
For the remainder of 2002, the Company believes that the planned results from
operations when combined with proceeds from additional structured financing, if
obtained, restructuring of its remaining past-due liabilities or continued
forbearance of its creditors, including Comerica, and replacement of its
Comerica credit facility, would be adequate to fund its operations. However,
there can be no assurance that the Company's efforts to increase revenue and
reduce operating costs will result in operating profits or positive cash flows
from operations, that the Company's collection efforts with respect to its
accounts receivable will be successful, that the Company will be able to obtain
new financing on terms acceptable to the Company or at all, that the Company's
remaining creditors, including Comerica, will continue to forbear or will accept
restructuring of the amounts owed to them, or that the Comerica Bank credit
facility can be replaced on a timely basis or at all.
3. ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivables are due from Global 2000,
mid-market and public sector clients. Credit is extended based on evaluation of
the customers' financial condition and, generally, collateral is not required.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
Management regularly evaluates the allowance for doubtful accounts. The
estimated losses are based on the aging of our receivable balances, a review of
significant past due accounts, and our historical write-off experience, net of
recoveries. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances might be required.
4. ACCRUED SALARIES AND OTHER EXPENSES
Accrued salaries and other expenses consist of the following:
June 30, December 31
2002 2001
------------- -------------
Accrued payroll and payroll taxes . $ 222 $ 292
Accrued professional fees ......... 168 270
Restructuring reserve ............. -- 233
Other accrued expenses ............ 303 356
------------- -------------
Total accrued expenses .. $ 693 $ 1,151
============= =============
5. CORPORATE LEGACY LIABILITIES
Corporate Legacy Liabilities consist of non-operating accounts payable that
were incurred when the Company had a substantially higher volume of revenue and
expense activity and mostly relate to liabilities for contracts that were
entered into in years prior to 2001. Due to the Company's financial situation,
the Company is currently in the process of restructuring these payables by
offering a restructuring plan to the creditors. Corporate legacy liabilities are
split between the long-term and short-term classifications depending on which
option the creditor has accepted.
Corporate legacy liabilities consist of the following:
June 30, December 31,
------------- -------------
2002 2001
------------- -------------
Short-term:
Restructuring reserve ........ $ 270 $ 486
Acquisition payable .......... -- 155
Other non-operating payables . 195 230
------------- -------------
Total short-term ......... $ 465 $ 871
------------- -------------
7
Long-term:
Severance agreement, converted to promissory notes . $ 175 $ 175
Promissory notes ................................... 507 175
Other non-operating payables ....................... -- 114
------------- -------------
Total long-term .................................... $ 682 $ 464
------------- -------------
Promissory notes were issued in conjunction with the Company's restructuring of
the legacy liabilities. The notes are unsecured long-term notes that accrue
interest at 6.5% per annum. Principal and interest are due on January 3, 2005.
In the chart above, these notes are considered to be long-term liabilities. In
addition, as of June 30, 2002, 70% of the amount due legacy liability creditors
who elected to receive such a promissory note under certain conditions is also
classified as a long-term liability. All other amounts due legacy liability
creditors, including, as of June 30, 2002, 30% of the amount due those legacy
liability creditors who elected to receive promissory notes under certain
conditions, are classified as short-term liabilities.
6. LEGACY LIABILITIES OF INSOLVENT SUBSIDIARY AND DECONSOLIDATION
Legacy liabilities of insolvent subsidiary relate to amounts owed by one of the
Company's subsidiaries, BRBA, Inc ("BRBA"). BRBA ceased operations in the fourth
quarter of 2001 and is insolvent. All of BRBA's assets are collateral for
obligations owed to Comerica under the Company's credit facility.
On June 28, 2002 BRBA filed for liquidation under Chapter 7 of the bankruptcy
code and we no longer control BRBA. As a result we have not consolidated BRBA
since the bankruptcy filing date. This resulted in the Company recording a gain
of $1,467 during the three months ended June 30, 2002, which is included in
Other Income on the Statement of Operations, representing the elimination of the
net liabilities of BRBA at the filing date.
7. INCOME TAXES
As a result of historical losses, the Company has recorded a valuation allowance
to offset all of its net deferred tax assets recorded at June 30, 2002. The
valuation allowance relates to deferred tax assets established for net operating
loss carryforwards generated through June 30, 2002 and other temporary
differences. The Company does not expect to recognize tax benefits on prior or
future losses or other temporary differences until such time that it is more
likely than not that tax benefits will be realized by the Company.
8. STOCK OPTIONS AND STOCK AWARDS
On February 12, 2002, the compensation committee of the board of directors voted
to take actions that resulted in the repricing of approximately 840,000 existing
stock options to current employees to a new exercise price of $0.05 per share,
which was determined to be the fair market value by the Board of Directors based
upon the prior 20-day average closing price. The market close price on February
12, 2002 was $0.07. Since the market closing price was greater than the exercise
price of the newly granted options, the difference of $0.02 per share,
approximately $17, is recorded as unearned compensation and will be recognized
over the remaining vesting period of the repriced options. These repriced stock
options are accounted for as variable awards, and accordingly, the Company will
record any increase of the fair market value of the underlying stock over the
market closing price of $0.07 on the day of the repricing as compensation
expense in the appropriate quarter. For the quarter ended June 30, 2002, the
closing stock price was $0.07, and therefore no compensation expense was
recorded in the second quarter for these variable awards.
The Company also awarded on February 12, 2002 approximately 910,000 new options
with respect to active participants under the Company's long-term incentive
plans. The exercise price of all affected options is $0.05 per share, which was
the fair market value as determined by the Board of Directors based upon the
prior 20-day average closing price. The market closing price on February 12,
2002 was $0.07. Since the market closing market price was greater than the
exercise price of the newly granted options, the Company recorded compensation
expense of $18, which will be amortized monthly over 3 years, the vesting period
of the grants. The unamortized portion is recorded as unearned compensation on
the balance sheet as of June 30, 2002. For the quarter ended June 30, 2002, the
Company recorded a total of $4 as an expense for the repricing and granting of
new stock options.
On February 15, 2002, the compensation committee voted to take actions that
resulted in restricted stock awards to Mr. Wagda, the Company's Chief Executive
Officer, and Mr. Czaja, the Company's Chief Financial Officer, of 750,000 and
250,000 shares, respectively. In return for the granting of these shares, the
stock options previously granted to Mr. Wagda and Mr. Czaja totaling
8
780,060 and 500,000 options (including 300,000 options granted to Mr. Czaja on
February 12, 2002), respectively, were cancelled. The restricted stock grants
were issued inside the Company's 1997 and 2000 Long Term Incentive Plans ("the
Plans") and vest monthly over a 2-year period. The Company recorded a
compensation expense of $60, which is being amortized monthly over 2 years. For
the quarter ended June 30, 2002, the Company recorded an expense of $7 for this
transaction.
9. EARNINGS PER SHARE
The following table sets forth the computation of basis and diluted earnings
per share:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator:
Income (loss) from continuing operations ............................. $ 1,360 $ (426) $ 1,452 $ (182)
============ ============ ============ ============
Net income (loss) .................................................... $ 1,360 $ (409) $ 1,452 $ (165)
============ ============ ============ ============
Numerator for basic earnings per share - income (loss)
available to common stockholders ................................... 1,360 (409) 1,452 (165)
Effect of dilutive securities:
Series 1 Convertible Subordinated Promissory Notes (1) ............... -- -- -- --
------------ ------------ ------------ ------------
Numerator for diluted earnings per share - income
available to common stockholders after assumed conversions ......... $ 1,360 $ (409) $ 1,452 $ (165)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share - weighted average shares ... 15,264,288 13,423,117 14,756,001 13,075,687
Effect of dilutive securities:
Employee stock options (2) ........................................... 655,549 -- 453,359 --
Series 1 Convertible Subordinated Promissory Notes (1) ............... -- -- -- --
------------ ------------ ------------ ------------
Denominator for diluted earnings per share - adjusted weighted-
average shares and assumed conversions ............................ 15,919,837 13,423,117 15,209,360 13,075,687
------------ ------------ ------------ ------------
(1) Diluted EPS for the three and six-month periods ended June 30, 2002
excludes "as converted" treatment of the Series 1 Convertible Subordinated
Promissory Notes as their inclusion would be anti-dilutive.
(2) Diluted EPS for the three and six-month periods ended June 30, 2002
excludes the effect of approximately 450,000 employee stock options as
their inclusion would be anti-dilutive.
10. LITIGATION AND OTHER SIGNIFICANT CLAIMS
As of March 31, 2002, two legal claims were pending, both filed in 2001. One
legal claim is against our insolvent subsidiary, BRBA, Inc., for facility rents
and related costs associated with the early termination of a facility lease. An
estimate of this liability of $144 was included in the Company's consolidated
balance sheet as Legacy Liabilities of Insolvent Subsidiary as of March 31,
2002. The legal claim was taken off the consolidated balance sheet as of June
30, 2002, based on the filing for liquidation of BRBA on June 28, 2002 resulting
in the removal of BRBA assets and liabilities from the Company's consolidated
financial statements, including the $144 accrual. The other legal claim was for
amounts received as a so-called preference payment from a former customer who
made a bankruptcy filing in 2000. This claim was settled on April 3, 2002 for a
cash payment of $5 and a waiver of certain claims whose value was not
determined.
During the second quarter of 2002, two new legal claims were filed against the
Company. One was a claim for approximately $400 for an office lease vacated by
BRBA. The Company and its subsidiary, BrightStar Information Technology
Services, Inc., were named in the lawsuit as alleged successors in interest to
BRBA. The Company and its subsidiary will defend vigorously against this claim,
believe this suit is without merit. The second claim was for non-payment of a
promissory note against BRBA for approximately $40. The Company was also named
as a defendant in this claim. This claim was a liability of BRBA and was
subsequently eliminated from the Company's consolidated balance sheet via the
deconsolidation of BRBA. The Company was able to settle with the Plaintiff to
remove itself from the lawsuit.
9
The Company received a letter in July 2002 demanding payment of $355 to the
bankruptcy estate of a former customer of BRBA on the grounds that the Company
received preference payments from the customer during the 90-day period prior to
customer's filing for bankruptcy in May 2001. The customer's bankruptcy estate
has been informed that any such claim, if appropriate, should be made against
the bankruptcy estate of BRBA. The Company believes it has no liability in
connection with this matter.
In addition to the matters noted above, the Company is from time to time
involved in litigation incidental to its business. The Company believes that the
results of such litigation, in addition to amounts discussed above, will not
have a materially adverse effect on the Company's financial condition.
11. GOODWILL
As of January 1, 2002, the Company has adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets." Thus, effective
January 1, 2002, the Company has ceased amortizing goodwill recorded in past
business combinations.
The following is the Company's disclosure of what reported net earnings and
earnings per share would have been in all periods presented, exclusive of
amortization expenses (including any related tax effects) recognized in those
periods related to goodwill, intangible assets that are no longer being
amortized and changes to amortization periods for intangible assets that will
continue to be amortized.
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net earnings as reported ............ $ 1,360 $ (409) $ 1,452 $ (165)
Amortization, net of tax ............ -- 88 -- 176
--------- --------- --------- ---------
Adjusted net earnings ............... $ 1,360 $ (321) $1,452 $ 11
--------- --------- --------- ---------
Basic earnings per share:
As reported ......................... $ 0.09 $ (0.03) $ 0.10 $ (0.01)
Change in amortization expense ...... -- 0.01 -- 0.01
--------- --------- --------- ---------
Adjusted basic earnings per share ... $ 0.09 $ (0.02) $ 0.10 $ 0.00
--------- --------- --------- ---------
Diluted earnings per share:
As reported ......................... $ 0.09 $ (0.03) $ 0.10 $ (0.01)
Change in amortization expense ...... -- 0.01 -- 0.01
--------- --------- --------- ---------
Adjusted diluted earnings per share . $ 0.09 $ (0.02) $ 0.10 $ 0.00
--------- --------- --------- ---------
The Company completed the first step of the transitional impairment test
required by SFAS No. 142 during the quarter ended June 30, 2002. The Company
consists of a single reporting unit. Therefore, this step required the Company
to assess the fair value of the Company and compare that value to its
shareholders' equity. In determining fair value, the Company considered the
guidance in SFAS No. 142, including the Company's market capitalization, control
premiums, discounted cash flows and other indicators of fair value. Based on
this analysis, goodwill recorded as of January 1, 2002 in the amount of $11,648
is impaired.
The Company is in the process of completing the second step of the transitional
impairment analysis. This step requires the Company to compare, using January 1,
2002 amounts, the implied fair value of the recorded goodwill, determined in a
manner similar to a purchase price allocation in a business combination, to the
carrying amount of the goodwill. This second step is required to be completed as
soon as possible, but no later than December 31, 2002. Any transitional
impairment loss will be recognized as a cumulative effect of a change in
accounting principle in the Company's statements of operations. Based on the
carrying value of the goodwill at January 1, 2002, the transitional cumulative
effect adjustment could amount to a maximum of $11,648.
12. SIGNIFICANT CUSTOMERS
For the second quarter of 2002, the Company had three unrelated customers that
accounted for approximately 30%, 29% and 8%, respectively, of total revenue.
Also, for the first half of 2002, these three customers accounted for
approximately 27%, 22% and
10
10%, respectively, of the total revenue. These three customers also accounted
for approximately 17%, 24% and 13%, respectively, of the Company's total
outstanding accounts receivable balance as of June 30, 2002.
For the second quarter of 2001, the Company had two unrelated customers that
accounted for approximately 19% and 13%, respectively, of the total revenue.
Also, for the first half of 2001, the Company had two unrelated customers that
accounted for approximately 18% and 11%, respectively, of the total revenue.
These two customers also accounted for approximately 21% and 10%, respectively,
of the Company's total outstanding accounts receivable balance as of June 30,
2001.
13. RECLASSIFICATIONS
Certain reclassifications have been made to conform the 2001 financial statement
amounts to the 2002 classifications.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BrightStar Information Technology Group, Inc. (BrightStar or the Company)
provides information technology services for its customers. We help companies
maximize their competitive advantage through the implementation and /or
management of leading edge enterprise level applications, including enterprise
resource planning, customer relationship management, and business process
management, and, most recently, financial services software solutions.
BrightStar has established a vertical business presence in healthcare, energy,
technology, and state and local government. BrightStar has approximately 62
employees and contractors and has its headquarters in the San Francisco Bay Area
with field offices in Addison, Texas, and Quincy, Massachusetts.
The Company provides services to its customers for fees that are based on time
and material or occasionally, fixed fee contracts. Accordingly, revenue is
recognized as consulting services are performed. Deferred revenue primarily
represents the excess of amounts billed over the contract amount earned.
The timing of revenue is difficult to forecast because the Company's sales cycle
can be relatively long and is subject to a number of uncertainties, including
customers' budgetary constraints, the timing of customers' budget cycles,
customers' internal approval processes and general economic conditions. In
addition, as is customary in the industry, the Company's engagements are
generally terminable without a customer penalty. The Company's revenue and
results of operations may fluctuate significantly from quarter to quarter or
year to year because of a number of factors, including, but not limited to,
changes in demand of IT services, the effect of changes in estimates to complete
fixed fee contracts; the rate of hiring and the productivity of revenue
generating personnel; the availability of qualified IT professionals; the
significance of customer engagements commenced and completed during a quarter;
the number of business days in the quarter; changes in the relative mix of the
Company's services; changes in the pricing of the Company's services; the timing
and the rate of entrance into new geographic or IT specialty markets; departures
or temporary absences of key revenue-generating personnel; the structure and
timing of acquisitions; and general economic factors.
Cost of revenue consists primarily of salaries (including non-billable and
training time) and benefits for consultants. The Company generally strives to
maintain its gross profit margins by offsetting increases in salaries and
benefits with increases in billing rates, although this is subject to the market
conditions at the time. In addition, the Company tries to increase or decrease
the number of consultants used by the Company to provide its services, including
third party contractors, as the amount of billable work (and resultant revenue)
changes. In other words, the Company continually strives to minimize the amount
of unbillable consulting resources or bench. As revenues declined over the past
couple of years, the Company reduced its consulting resources accordingly.
Selling, general and administrative expenses (SG&A) primarily consist of costs
associated with (i) corporate overhead, (ii) sales and account management, (iii)
telecommunications, (iv) human resources, (v) recruiting and training, and (vi)
other administrative expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses BrightStar's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at
11
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in preparation of its
consolidated financial statements.
Revenue recognition -- The Company provides services to customers for fees that
are based on time and materials or occasionally, fixed fee contracts. Revenue
for fixed fee contracts is recognized ratably over the contract term based on
the percentage-of-completion method. Costs incurred to date as a percentage of
total estimated costs are used to determine the percentage of the contract that
has been completed throughout the contract life.
Goodwill -- Goodwill is the cost in excess of amounts assigned to identifiable
assets acquired less liabilities assumed. Goodwill is no longer being amortized
due to the Company adopting SFAS 142 on January 1, 2002. See note 11 to the
condensed financial statements for a detailed explanation on the effect this new
pronouncement could have on the Company.
Income taxes -- The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach to accounting for income taxes. The Company provides deferred income
taxes for temporary differences that will result in taxable or deductible
amounts in future years. A valuation allowance is recognized if it is
anticipated that some or all of a deferred tax asset may not be realized. Based
on the Company's net losses for the previous years, the Company has recorded a
valuation allowance for deferred taxes as of June 30, 2002. In the event that
the Company were to determine that it would be able to realize its deferred tax
assets in the future, an asset would be recorded, which in turn would increase
income in the period such determination was made.
RESULTS OF OPERATIONS
Revenue for the second quarter and the first half of 2002 decreased from $5.4
million to $2.4 million and from $12.1 million to $5.3 million or 55.6% and
56.2%, respectively, compared to the second quarter and first half of 2001 as a
result of continued reduction in the demand for ERP and CRM consulting and
implementation services.
Gross profit as a percentage of revenue for the second quarter and the first
half of 2002 decreased from 33.7% to 32.5% and remained consistent at 32.5%,
respectively, compared to second quarter and first half of 2001. The quarterly
year over year decline can be attributable to pricing pressures and project mix.
The Company's reductions in selling, general and administrative expenses are the
result of the execution of the turnaround plan, which included reductions in
office space, sales personnel and related costs, management overhead and
discretionary expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on the timeliness and amount of accounts receivable
collections to fund cash disbursements. As a result of prior losses and prior
negative cash flows, the Company has experienced a significant decline in
available liquidity, which has had an adverse impact on the ability of the
Company to meet its immediate and future obligations and could impact the
ability of the Company to continue as a going concern. The Company has improved
its liquidity by securing private placement financing, by reaching settlement
agreements with most of its legacy creditors, and by restructuring its credit
facility with Comerica Bank, which matured on January 25, 2002. Since there was
an outstanding balance on the line as of January 25, 2002, Comerica declared the
Company to be in default under the terms of the agreement. However, Comerica has
subsequently agreed to forebear on any actions to collect the outstanding
balances and to allow the Company to borrow under the loan until June 30, 2002,
which was subsequently extended to September 30, 2002. Under the extended
arrangement that started on January 25, 2002, available borrowings began at 60%
of eligible accounts receivables, after reduction for ineligible accounts, with
subsequent reductions of 2% each month starting in May 2002. The total borrowing
base after reductions for ineligible accounts and the borrowing base percentage
is limited to a maximum of $0.85 million as of June 30, 2002 and subsequently
reduced to $0.55 million during the extension period after June 30, 2002.
Comerica retains the right to decline to make advances at any time during this
period. The interest rate on outstanding balances is at Comerica's prime rate
(4.75% at June 30, 2002) plus 9% as of June 30, 2002, and
12
continues to increase 1% per month. Total eligible accounts receivable,
after reductions for ineligible accounts, as of June 30, 2002 amounted to
$0.7 million.
Under present circumstances including the continued forbearance of Comerica
Bank, the Company believes it has sufficient cash resources to meet its
operating requirements at least through the end of the third quarter of
2002. For the remainder of 2002, the Company believes that the planned
results from operations when combined with proceeds from additional
structured financing, if obtained, restructuring of its remaining past-due
liabilities or continued forbearance of its creditors, including Comerica,
and replacement of its Comerica credit facility, would be adequate to fund
its operations. However, there can be no assurance that the Company's
efforts to increase revenue and reduce operating costs will result in
operating profits or positive cash flows from operations, that the Company's
collection efforts with respect to its accounts receivable will be
successful, that the Company will be able to obtain new financing on terms
acceptable to the Company or at all, that the Company's remaining creditors,
including Comerica, will continue to forbear or will accept restructuring of
the amounts owed to them, or that the Comerica Bank credit facility can be
replaced on a timely basis or at all.
FORWARD-LOOKING INFORMATION - Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") includes
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements, other than statements of historical facts, included in
this MD&A regarding the Company's financial position, business strategy and
plans and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements rely on a
number of assumptions concerning future events and are subject to a number
of uncertainties and other factors, many of which are outside of the
Company's control, that could cause actual results to materially differ from
such statements. While the Company believes that the assumptions concerning
future events are reasonable, it cautions that there are inherent
difficulties in predicting certain important factors, especially the timing
and magnitude of technological advances; the prospects for future
acquisitions; the possibility that a current customer could be acquired or
otherwise be affected by a future event that would diminish their
information technology requirements; the competition in the information
technology industry and the impact of such competition on pricing, revenues
and margins; the degree to which business entities continue to outsource
information technology and business processes; uncertainties surrounding
budget reductions or changes in funding priorities of existing government
programs and the cost of attracting and retaining highly skilled personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's credit facility with Comerica Bank bears interest at variable
rates; therefore, the Company's results of operations would only be affected
by interest rate changes to the bank debt outstanding. An immediate 10
percent change in interest rates would not have a material effect on the
Company's results of operations over the next fiscal year.
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings
Information related to Item 1 is disclosed in Part I Item I (Note 10 to the
Condensed Consolidated Financial Statements) and is by the reference
incorporated herein.
ITEM 3. Defaults upon Senior Securities
Information related to Item 3 is disclosed in Part I Item I (Note 2 to the
Condensed Consolidated Financial Statements) and is by the reference
incorporated herein.
ITEM 4. Submission of matters to a vote of Stockholders
(a) The Annual Meeting of Stockholders of the Company was held on June 18,
2002.
(b) The following directors were elected at the Annual Meeting of
Stockholders:
Joseph A. Wagda
W. Barry Zwahlen
Jennifer Barrett
Thomas A. Hudgins
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(c) 1. Set forth below is the tabulation of the votes on each nominee for
election as a director:
Name For Against Votes Abstained
---- --- ------- ---------------
Joseph A. Wagda 11,149,982 640,950 --
W. Barry Zwahlen 11,154,982 635,950 --
Jennifer Barrett 11,154,982 635,950 --
Thomas A. Hudgins 11,154,982 635,950 --
2. Set forth below is the tabulation of the votes for the proposal to
ratify Grant Thornton LLP as the Company's independent accountant for
the fiscal year ending December 31, 2002:
For 11,645,552
Against 120,035
Abstained and unvoted 25,345
3. Set forth below is the tabulation of the votes for the proposal to
approve an amendment of the Company's 2000 Long-Term Incentive Plan to
increase the number of shares issuable thereunder by 2,000,000:
For 3,936,289
Against 822,162
Abstained 29,245
Unvoted 7,003,236
4. Set forth below is the tabulation of the votes for the proposal to
amend the Company's 2000 Long-Term Incentive Plan to increase the
maximum limit that any Grantee in any calendar year can receive under
the plan from no more than 200,000 to 1,000,000 options:
For 10,947,652
Against 821,135
Abstained 22,145
5. Set forth below is the tabulation of the votes for the proposal to
amend the Company's Certificate of Incorporation to (i) increase the
number of shares of all classes of stock that the Company is authorized
to issue from 38,000,000 to 75,000,000 and (ii) to designate all
37,000,000 of additional authorized shares as Common Stock:
For 10,978,077
Against 790,560
Abstained 22,295
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibits
99.1 - Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned there
unto duly authorized.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
Date: August 14, 2002. BY: /s/ Joseph A. Wagda
-----------------------------------------
Joseph A. Wagda
Chairman and Chief
Executive Officer
BY: /s/ Kenneth A. Czaja
-----------------------------------------
Kenneth A. Czaja
Executive Vice President, Chief
Financial Officer and Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.1 - Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350