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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 SEPTEMBER 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 November 13, 2002 was 15,284,288.
PART 1, ITEM 1. FINANCIAL STATEMENTS
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($000'S, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash $ 254 $ 185
Trade accounts receivable, net
of allowance for doubtful accounts
of $160 and $300, respectively 950 1,947
Income tax receivable 130 105
Prepaid expenses and other 223 286
--------------- ---------------
Total current assets 1,557 2,523
PROPERTY AND EQUIPMENT 432 427
Less - accumulated depreciation (343) (256)
--------------- ---------------
Property and equipment, net 89 171
GOODWILL 11,648 11,648
OTHER 46 44
--------------- ---------------
TOTAL ASSETS $ 13,340 $ 14,386
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 137 $ 419
Accounts payable 341 791
Accrued salaries and other expenses 532 1,129
Corporate legacy liabilities 200 871
Legacy liabilities of insolvent subsidiary -- 1,467
Deferred revenue 11 25
--------------- ---------------
Total current liabilities 1,221 4,702
CONVERTIBLE NOTES PAYABLE, NET 1,051 948
CORPORATE LEGACY LIABILITIES - LONG TERM 682 464
OTHER LIABILITIES 59 41
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; 15,284,288 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 99,902 99,732
Unearned compensation (66) --
Treasury stock (118) (118)
Accumulated deficit (89,407) (91,397)
--------------- ---------------
Total stockholders' equity 10,327 8,231
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,340 $ 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 NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
REVENUE $ 2,221 $ 4,036 $ 7,511 $ 16,086
COST OF REVENUE 1,482 2,979 5,052 11,117
-------------- -------------- -------------- --------------
GROSS PROFIT 739 1,057 2,459 4,969
OPERATING EXPENSES:
Selling, general and administrative expenses 659 1,454 2,236 4,581
Settlements of accrued liabilities (128) -- (128) --
Restructuring charge -- 334 -- 334
Goodwill amortization -- 88 -- 264
Depreciation and amortization 22 314 86 977
-------------- -------------- -------------- --------------
Total operating expenses 553 2,190 2,194 6,156
INCOME (LOSS) FROM OPERATIONS 186 (1,133) 265 (1,187)
OTHER INCOME 267 -- 1,734 --
INTEREST EXPENSE, net (45) (62) (139) (190)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 408 (1,195) 1,860 (1,377)
INCOME TAX PROVISION (BENEFIT) (130) -- (130) --
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 538 (1,195) 1,990 (1,377)
DISCONTINUED OPERATIONS:
Gain on disposal of discontinued operations,
net of tax -- -- -- 17
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 538 $ (1,195) $ 1,990 $ (1,360)
============== ============== ============== ==============
NET INCOME (LOSS) PER SHARE: BASIC
Continuing operations $ 0.04 $ (0.09) $ 0.13 $ (0.10)
Discontinued operations -- -- -- --
-------------- -------------- -------------- --------------
Net income (loss) per share $ 0.04 $ (0.09) $ 0.13 $ (0.10)
============== ============== ============== ==============
NET INCOME (LOSS) PER SHARE: DILUTED
Continuing operations $ 0.04 $ (0.09) $ 0.13 $ (0.10)
Discontinued operations -- -- -- --
-------------- -------------- -------------- --------------
Net income (loss) per share $ 0.04 $ (0.09) $ 0.13 $ (0.10)
============== ============== ============== ==============
AVERAGE SHARES OUTSTANDING: BASIC 15,277,331 13,519,288 14,931,687 13,225,179
-------------- -------------- -------------- --------------
AVERAGE SHARES OUTSTANDING: DILUTED 15,277,331 13,519,288 15,138,965 13,225,179
-------------- -------------- -------------- --------------
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 NINE MONTHS ENDED SEPTEMBER 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 -- -- -- -- 22
Common stock issued to executive officers 1,000,000 1 59 -- --
Common stock issued in settlement of legacy
liabilities 20,000 -- 10 -- --
Net income -- -- -- -- --
---------- ------- --------------- ------------ ------------
Balance, September 30, 2002 15,284,288 $ 16 $ 99,902 $ -- $ (66)
========== ======= =============== ============ ============
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 -- -- -- 22
Common stock issued to executive officers -- -- -- 60
Common stock issued in settlement of legacy
liabilities -- -- -- 10
Net income -- -- 1,990 1,990 $ 1,990
--------- ------------- ------------ ------------ ------------
Balance, September 30, 2002 $ (118) $ -- $ (89,407) $ 10,327 $ 1,990
========= ============= ============ ============ ============
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)
NINE MONTHS ENDED
-----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
----------------- -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,990 $ (1,360)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 122 1,252
Change in allowance for doubtful accounts (140) (50)
Compensation expense on issuance of common stock -- 74
Compensation expense on issuance of common stock
options and warrants 36 --
Non cash gains on settlement of liabilities and
deconsolidation of subsidiary (1,771) (383)
Changes in operating assets and liabilities:
Trade accounts receivable 1,137 3,588
Unbilled revenue -- (12)
Income tax receivable (25) --
Prepaid expenses and other assets 61 (83)
Accounts payable (450) (644)
Accrued salaries and other expenses (373) (304)
Deferred revenue (14) (164)
Corporate legacy liabilities (217)
Discontinued operations -- 336
-------------- --------------
Net cash provided by operating activities 356 2,250
INVESTING ACTIVITIES:
Additions of property and equipment, net of disposals (5) (11)
-------------- --------------
Net cash used in investing activities (5) (11)
FINANCING ACTIVITIES:
Net proceeds from issuance of convertible notes -- 1,000
Costs associated with issuance of convertible notes -- (55)
Costs associated with common stock transaction -- (43)
Net payments under line of credit (282) (2,866)
-------------- --------------
Net cash used in financing activities (282) (1,964)
NET INCREASE IN CASH 69 275
CASH:
Beginning of period 185 --
-------------- --------------
End of period $ 254 $ 275
============== ==============
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 15 $ 151
Issuance of common stock at fair value in satisfaction of:
Severance obligations $ -- $ 162
Prior acquisition $ -- $ 893
Litigation between the Company and various
other entities $ -- $ 118
Obligations under various rights agreements $ -- $ 44
Corporate legacy liabilities $ 10 $ --
Accrued bonuses $ 60 $ --
Noncash issuance of convertible notes at face value
associated with interest due on notes payable $ 68 $ --
Noncash issuance of note at face value
associated with short-term corporate legacy
liabilities $ 211 $ --
Noncash settlement of liabilities with notes payable $ -- $ 278
Noncash issuance of common stock warrants
associated with notes payable $ -- $ 140
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 nine month periods ended
September 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 8.3 million shares for the periods
ended September 30, 2002 and September 30, 2001, respectively.
2. LIQUIDITY AND CREDIT FACILITY
On November 8, 2002, the Company obtained a commitment from BFI Business Finance
("BFI"), a Santa Clara, California-based business-credit company, for a two-year
working capital line of credit for $750, to replace the recently extended credit
facility with Comerica Bank, which is scheduled to expire on December 31, 2002.
Under the BFI commitment, which is expected to become active within the next 60
days, available borrowings will be up to 85% of eligible accounts receivable,
after reduction for ineligible accounts, similar to our Comerica arrangement.
The interest rate on outstanding balances will be at prime plus 4% per annum,
plus an additional monthly administrative fee of 0.50% per month calculated on
the average daily balance outstanding. The minimum monthly interest and
administrative fee charged to the Company will be not less than $1 per month for
the first six months, escalating to $2 per month for the next three months and
then finally to $4 per month for the remaining term of the agreement. BFI's
obligation to fund under the commitment is subject to various customary
conditions, which the Company expects it will be able to meet.
The Company's liabilities as of September 30, 2002 include $882 of liabilities,
which have been reported as legacy liabilities in the financial statements. Of
the $882, the Company has entered into agreements, which will further reduce
this total by $752 or convert it to stock or long-term notes due in 2005. As of
September 30, 2002, after giving effect to those agreements, there will remain
approximately $130 of past-due legacy liabilities to be resolved with 6
creditors. As of November 11, 2002, the Company's legacy liabilities consist of
$852, with $110 of past-due legacy liabilities to be resolved with 5 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. Without the expected
credit facility from BFI or other suitable replacement for the Comerica Bank
credit facility, the Company may be unable to continue as a
6
going concern. The Company improved its liquidity by securing private placement
financing in July 2001, by reaching settlement agreements with most of its
legacy creditors, and by restructuring its credit facility with Comerica Bank.
That credit facility matured on January 25, 2002. Since there was an outstanding
balance on the line on that date, Comerica declared the Company to be in
default. However, Comerica subsequently agreed to forebear on any action to
collect the outstanding balance and to allow the Company to borrow under the
credit facility until June 30, 2002, which was subsequently extended to
September 30, 2002 and most recently to December 31, 2002. Under the extended
arrangement that started on January 25, 2002, available borrowings began at 60%
of eligible accounts receivable, after reduction for ineligible accounts, with
subsequent reductions of 2% of eligible accounts receivable each month starting
in May 2002. Available borrowings are further limited to a maximum of $500
effective October 1, 2002; $400 effective November 1, 2002 and $300 effective
December 1, 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 September 30, 2002) plus 9% as of September 30,
2002, and continues to increase 1% per month. The outstanding balance on the
Comerica credit facility at September 30, 2002 was $137.
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 2002. For 2003, the Company
believes that the planned results from operations when combined with the
proceeds from the new BFI credit facility, will be adequate to fund its
operations. However, the Company's cash flow from operations could prove to be
substantially less than anticipated (due to revenues being lower than expected)
or subject to unanticipated delays in receipt by the Company. Under such
circumstances, there can be no assurance that the Company would continue to have
sufficient cash available in order to continue as a going concern.
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:
September 30, December 31,
2002 2001
------------- ------------
Accrued payroll and payroll taxes $ 221 $ 292
Accrued professional fees 121 270
Restructuring reserve -- 233
Other accrued expenses 190 334
------------ -----------
Total accrued expenses $ 532 $ 1,129
============ ===========
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.
7
Corporate legacy liabilities consist of the following:
September 30, December 31,
2002 2001
-------------- --------------
Short-term:
Restructuring reserve $ -- $ 486
Acquisition payable -- 155
Other non-operating payables 200 230
-------------- --------------
Total short-term $ 200 $ 871
-------------- --------------
Long-term:
Severance agreement, converted to promissory note $ 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 September 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 September 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 former subsidiaries, BRBA, Inc ("BRBA"). BRBA became insolvent and
ceased operations in the fourth quarter of 2001. 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 BRBA's financial position has
not been included in the Company's consolidated results since the bankruptcy
filing date. This resulted in the Company recording a gain of $1,467 during the
nine months ended September 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. On September 3, 2002 the Chapter 7 trustee filed a
no-asset report and application to close the BRBA bankruptcy case.
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 September 30, 2002. The
valuation allowance relates to deferred tax assets established for net operating
loss carryforwards generated through September 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.
As a result of a change in the Federal tax law enacted in 2002, the Company was
able to claim income tax refunds in the amount of $130 during the third quarter
of 2002, related to 1998 income and alternative minimum taxes paid. The claims
increase income tax refunds receivable and reduces income tax expense.
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 September 30, 2002,
the closing stock price was $0.03, and therefore no compensation expense was
recorded in the third 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
8
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 September 30, 2002.
For the quarter ended September 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 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 compensation expense of
$60, which is being amortized monthly over 2 years. For the quarter ended
September 30, 2002, the Company recorded an expense of $7 for this transaction.
On November 5, 2002, the Board of Directors approved the vesting of the
remaining 166,667 unvested shares of Mr. Czaja's restricted stock award, subject
to certain conditions. During the fourth quarter ending December 31, 2002, the
Company will record compensation expense of $10 for this transaction.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended Nine months ended
----------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Numerator:
Income (loss) from continuing operations $ 538 $ (1,195) $ 1,990 $ (1,377)
============ ============ ============ ============
Net income (loss) $ 538 $ (1,195) $ 1,990 $ (1,360)
============ ============ ============ ============
Numerator for basic earnings per share - income (loss)
available to common stockholders $ 538 $ (1,195) $ 1,990 $ (1,360)
Effect of dilutive securities:
Series 1 Convertible Subordinated Promissory Notes (1) -- -- -- --
------------ ------------ ------------ ------------
Numerator for diluted earnings per share - income (loss)
available to common stockholders after assumed conversions $ 538 $ (1,195) $ 1,990 $ (1,360)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share - weighted average 15,277,331 13,519,288 14,931,687 13,225,179
shares
Effect of dilutive securities:
Employee stock options (2) -- -- 207,278 --
Series 1 Convertible Subordinated Promissory Notes (1) -- -- -- --
------------ ------------ ------------ ------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 15,277,331 13,519,288 15,138,965 13,225,179
------------ ------------ ------------ ------------
(1) Diluted EPS for the three and nine-month periods ended September 30,
2002 excludes approximately 5.1 million "as converted" treatment of
Series 1 Convertible Subordinated Promissory Notes as their inclusion
would be anti-dilutive.
(2) Diluted EPS for the three and nine-month periods ended September 30,
2002 excludes the effect of approximately 480,000 employee stock
options, 40,000 consultant stock options and approximately 868,000
common stock warrants as their inclusion would be anti-dilutive.
10. LITIGATION AND OTHER SIGNIFICANT CLAIMS
During the second quarter of 2002, a legal action was filed against the Company,
evidencing a potential claim of 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
and believe this suit is without merit.
9
In addition, 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 adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets." Thus, effective
January 1, 2002, the Company 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 Nine months ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net earnings as reported $ 538 $ (1,195) $ 1,990 $ (1,360)
Amortization, net of tax -- 88 -- 264
-------------- -------------- -------------- --------------
Adjusted net earnings $ 538 $ (1,107) $ 1,990 $ (1,096)
-------------- -------------- -------------- --------------
Basic earnings per share:
As reported $ 0.04 $ (0.09) $ 0.13 $ (0.10)
Change in amortization expense -- 0.01 -- 0.02
-------------- -------------- -------------- --------------
Adjusted basic earnings per share $ 0.04 $ (0.08) $ 0.13 $ (0.08)
-------------- -------------- -------------- --------------
Diluted earnings per share:
As reported $ 0.04 $ (0.09) $ 0.13 $ (0.10)
Change in amortization expense
-- 0.01 -- 0.02
-------------- -------------- -------------- --------------
Adjusted diluted earnings per share $ 0.04 $ (0.08) $ 0.13 $ (0.08)
-------------- -------------- -------------- --------------
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 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 third quarter of 2002, the Company had four unrelated customers that
accounted for approximately 35%, 28%, 11% and 10%, respectively, of total
revenue. Also, for the first nine months of 2002, these four customers accounted
for approximately 26%, 27%, 9% and 10%, respectively, of the total revenue.
These four customers also accounted for approximately 19%, 26%, 7% and 12%,
respectively, of the Company's total outstanding accounts receivable balance as
of September 30, 2002.
10
For the third quarter of 2001, the Company had three unrelated customers that
accounted for approximately 25%, 14% and 12%, respectively, of the total
revenue. Also, for the first nine months of 2001, the same three unrelated
customers accounted for approximately 23%, 12% and 10%, respectively, of the
total revenue. The customer that represented 28% and 25% of revenues and 12% and
14% of accounts receivable in the third quarter of 2002 and 2001, respectively,
is expected to represent less than 5% of revenue in 2003, based on the
customer's current budget.
13. RECLASSIFICATIONS
Certain reclassifications have been made to conform the 2001 financial statement
amounts to the 2002 classifications.
14. MANAGEMENT CHANGE
Kenneth A. Czaja resigned as Chief Financial Officer and Secretary, effective
October 31, 2002. Effective November 1, 2002, Joseph A. Wagda, the Company's
Chief Executive Officer, was elected to hold the additional office of Chief
Financial Officer and Paul C. Kosturos, the Company's Controller, was elected
Vice President Finance, Principal Accounting Officer, Controller and Secretary.
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. BrightStar has established a vertical business presence in
healthcare, energy, technology, and government. At November 1, 2002, BrightStar
had approximately 55 employees and contractors. The Company 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 for 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.
11
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 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 material 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 September 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 third quarter and the first nine months of 2002 decreased from
$4.0 million to $2.2 million and from $16.1 million to $7.5 million or 44.9% and
53.3%, respectively, compared to the third quarter and first nine months 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 third quarter and the first nine
months of 2002 increased from 26.2% to 33.2% and increased from 30.9% to 32.7%,
respectively, compared to third quarter and first nine months of 2001. The
quarterly year over year improvement is attributable to a reduction in
non-billable consultant costs 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. Also included in the reduction is approximately $128
related to the settlement of miscellaneous accrued liabilities.
LIQUIDITY AND CAPITAL RESOURCES
On November 8, 2002, the Company obtained a commitment from BFI Business Finance
("BFI"), a Santa Clara, California-based business-credit company, for a two-year
working capital line of credit for $750, to replace the recently extended credit
facility with Comerica Bank, which is scheduled to expire on December 31, 2002.
Under the BFI commitment, which is expected to become active within the next 60
days, available borrowings will be up to 85% of eligible accounts receivable,
after reduction for ineligible accounts, similar to our Comerica arrangement.
The interest rate on outstanding balances will be at prime plus 4% per annum,
plus an additional monthly administrative fee of 0.50% per month calculated on
the average daily balance outstanding. The minimum monthly interest and
administrative fee charged to the Company will be not less than $1 per month for
the first six months, escalating to $2 per month for the next three months and
then finally to $4 per month for the remaining term of the agreement. BFI's
obligation to fund under the commitment is subject to various customary
conditions, which the Company expects it will be able to meet.
12
The Company's liabilities as of September 30, 2002 include $882 of liabilities,
which have been reported as legacy liabilities in the financial statements. Of
the $882, the Company has entered into agreements, which will further reduce
this total by $752 or convert it to stock or long-term notes due in 2005. As of
September 30, 2002, after giving effect to those agreements, there will remain
approximately $130 of past-due legacy liabilities to be resolved with 6
creditors. As of November 11, 2002, the Company's legacy liabilities consist of
$852, with $110 of past-due legacy liabilities to be resolved with 5 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. Without the expected
credit facility from BFI or other suitable replacement for the Comerica Bank
credit facility, the Company may be unable to continue as a going concern. The
Company improved its liquidity by securing private placement financing in July
2001, by reaching settlement agreements with most of its legacy creditors, and
by restructuring its credit facility with Comerica Bank. That credit facility
matured on January 25, 2002. Since there was an outstanding balance on the line
on that date, Comerica declared the Company to be in default. However, Comerica
subsequently agreed to forebear on any action to collect the outstanding balance
and to allow the Company to borrow under the credit facility until June 30,
2002, which was subsequently extended to September 30, 2002 and most recently to
December 31, 2002. Under the extended arrangement that started on January 25,
2002, available borrowings began at 60% of eligible accounts receivable, after
reduction for ineligible accounts, with subsequent reductions of 2% of eligible
accounts receivable each month starting in May 2002. Available borrowings are
further limited to a maximum of $500 effective October 1, 2002; $400 effective
November 1, 2002 and $300 effective December 1, 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 September 30, 2002)
plus 9% as of September 30, 2002, and continues to increase 1% per month. The
outstanding balance on the Comerica credit facility at September 30, 2002 was
$137.
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 2002. For 2003, the Company
believes that the planned results from operations when combined with the
proceeds from the new BFI credit facility, will be adequate to fund its
operations. However, the Company's cash flow from operations could prove to be
substantially less than anticipated (due to revenues being lower than expected)
or subject to unanticipated delays in receipt by the Company. Under such
circumstances, there can be no assurance that the Company would continue to have
sufficient cash available in order to continue as a going concern.
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.
13
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
None
ITEM 5. Other events
None
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibits
99.1 - Certification of Principal Officers to Sec. 1350
(b) Reports on Form 8-K
None
14
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: November 14, 2002. BY: /s/ Joseph A. Wagda
---------------------------------------------
Joseph A. Wagda
Chairman, Chief Executive Officer and
Chief Financial Officer
BY: /s/ Paul C. Kosturos
---------------------------------------------
Paul C. Kosturos
Principal Accounting Officer and
Secretary
15
I, Joseph A. Wagda, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
BrightStar Information Technology Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
BY: /s/ Joseph A. Wagda
- -----------------------
Joseph A. Wagda
Chairman and Chief Executive Officer
16
I, Paul C. Kosturos, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
BrightStar Information Technology Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
BY: /s/ Paul C. Kosturos
- ------------------------
Paul C. Kosturos
Principal Accounting Officer and Secretary
17
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
99.1 - Certification of Principal Officers to Sec. 1350