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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 MARCH 31, 2003 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.)
6601 OWENS DRIVE, SUITE 115, 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 May 14, 2003 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)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash .................................................. $ 54 $ 160
Trade accounts receivable, net of allowance
for doubtful accounts of $140 ...................... 617 716
Unbilled revenue ...................................... -- 41
Prepaid expenses and other ............................ 122 154
--------- ------------
Total current assets ............................... 793 1,071
Property and equipment ................................... 437 435
Less - accumulated depreciation ....................... (374) (362)
--------- ------------
Property and equipment, net ........................... 63 73
Goodwill ................................................. 1,748 1,748
--------- ------------
Total assets ........................................... $ 2,604 $ 2,892
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ........................................ $ -- $ --
Accounts payable ...................................... 60 169
Accrued salaries and other expenses ................... 364 468
Corporate legacy liabilities .......................... -- 94
Deferred revenue ...................................... 2 --
--------- ------------
Total current liabilities .......................... 426 731
Convertible notes payable, net ........................... 1,131 1,086
Corporate legacy liabilities ............................. 11 11
Other liabilities ........................................ 26 25
Commitments and contingencies ............................ -- --
Stockholders' equity:
Common stock, $0.001 par value; 72,000,000 shares
authorized in 2003 and 2002, respectively; 15,284,288
(excluding 255,000 shares held in treasury) shares
issued and outstanding
in 2003 and 2002, respectively ........................... 16 16
Additional paid-in capital ............................ 99,903 99,902
Unearned compensation ................................. (38) (47)
Treasury stock ........................................ (118) (118)
Accumulated deficit ................................... (98,753) (98,714)
--------- ------------
Total stockholders' equity ......................... 1,010 1,039
--------- ------------
Total liabilities and stockholders' equity ......... $ 2,604 $ 2,892
========= ============
See notes to condensed consolidated financial statements.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2003 2002
------------ ------------
(AS RESTATED)
Revenue ............................................................ $ 1,410 $ 2,887
Cost of revenue .................................................... 1,002 1,947
------------ ------------
Gross profit ....................................................... 408 940
Operating expenses:
Selling, general and administrative expenses ..................... 422 760
Depreciation and amortization .................................... 12 40
------------ ------------
Total operating expenses ..................................... 434 800
Income (loss) from operations ...................................... (26) 140
Other income (expense) ............................................. 35 --
Interest expense, net .............................................. (48) (48)
------------ ------------
Income (loss) before income taxes ............................ (39) 92
Income tax provision ............................................... -- --
------------ ------------
Income (loss) before cumulative effect of change in
accounting change ............................................ (39) 92
Cumulative effect on prior years of retroactive application
of new goodwill methods, net of tax .............................. -- (9,945)
------------ ------------
Net loss ..................................................... $ (39) $ (9,853)
============ ============
Net loss per share: basic and diluted:
Before cumulative effect of change in accounting principle ... $ 0.00 $ 0.01
Cumulative effect of change in accounting principle .......... 0.00 (0.70)
------------ ------------
Net loss ..................................................... $ 0.00 $ (0.69)
============ ============
Weighted average shares outstanding
Basic ........................................................... 15,284,288 14,242,066
============ ============
Diluted ......................................................... 15,285,772 14,295,438
============ ============
See notes to condensed consolidated financial statements.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($000'S, EXCEPT PER SHARE DATA)
COMMON STOCK
-------------------------- ADDITIONAL UNEARNED
SHARES AMOUNT PAID-IN-CAPITAL COMPENSATION
----------- ---------- --------------- ------------
Balance, December 31, 2002 ................ 15,284,288 $ 16 $ 99,902 $ (47)
Warrants issued with convertible notes .... -- -- 1 --
Amortization of unearned compensation ..... -- -- -- 9
Net loss .................................. -- -- -- --
----------- ---------- ---------- ------------
Balance, March 31, 2003 ................... 15,284,288 $ 16 $ 99,903 $ (38)
=========== ========== ========== ============
TOTAL
TREASURY ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
STOCK DEFICIT EQUITY INCOME (LOSS)
-------- ----------- ------------- -------------
Balance, December 31, 2002 .................... $ (118) $ (98,714) $ 1,039
Warrants issued with convertible notes ..... -- -- 1
Amortization of unearned compensation ...... -- -- 9
Net loss ................................... -- (39) (39) $ (39)
-------- ----------- ------------- -------------
Balance, March 31, 2003 .................... $ (118) $ (98,753) $ 1,010 $ (39)
======== =========== ============= =============
See notes to condensed consolidated financial statements.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
(AS RESTATED)
Operating activities:
Net loss ....................................................... $ (39) $ (9,853)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization .................................. 33 53
Compensation expense on previously issued common
stock and options .......................................... 9 --
Expense of issuances of stock and warrants ..................... 1 13
Non cash gains on settlement of liabilities .................... (35) (78)
Cumulative effect of change in accounting principle ............ -- 9,945
Changes in operating assets and liabilities:
Trade accounts receivable .................................. 99 496
Unbilled revenue ........................................... 41 --
Prepaid expenses and other assets .......................... 32 146
Accounts payable ........................................... (109) (216)
Accrued salaries and other expenses ........................ (79) (227)
Deferred revenue ........................................... 2 (14)
Corporate legacy liabilities ............................... (59) (157)
--------- ---------
Net cash provided (used) by operating activities ........... (104) 108
Investing activities:
Capital expenditures .......................................... (2) --
--------- ---------
Net cash used in investing activities ......................... (2) --
Financing activities:
Net payments under line of credit .............................. -- (181)
--------- ---------
Net cash used in financing activities ...................... -- (181)
Net decrease in cash .............................................. (106) (73)
Cash:
Beginning of period ............................................ 160 185
--------- ---------
End of period .................................................. $ 54 $ 112
========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid ..................................................... $ 3 $ 10
Issuance of common stock at fair value in satisfaction of:
Accrued bonuses .............................................. $ -- $ 60
Noncash issuance of convertible notes at fair value associated
with interest due on notes payable ............................. $ 24 $ 22
See notes to condensed consolidated financial statements.
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-month period ended March 31, 2003, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. The
balance sheet at December 31, 2002, 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, 2002.
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 7.9 million shares and 6.4
million shares at March 31, 2003 and March 31, 2002, respectively.
Pro forma disclosures required under SFAS 148 are presented below. The pro
forma compensation cost may not be representative of that expected in future
years.
3 Months Ended March 31,
2003 2002
-------- ----------
Net loss, as reported ........................................ $ (39) $ (9,853)
Add: Stock based employee compensation expense included in
reported income, net of related tax ......................... -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects ................. (8) (367)
-------- ----------
Pro forma net income ......................................... $ (47) $ (10,220)
======== ==========
Pro forma basic and diluted loss per share:
Basic reported as ......................................... $ (0.00) $ (0.69)
Basic pro forma ........................................... $ (0.00) $ (0.72)
Diluted reported .......................................... $ (0.00) $ (0.69)
Diluted pro forma ......................................... $ (0.00) $ (0.71)
Compensation cost for the quarter ended March 31, 2003 and 2002 was
calculated in accordance with the binomial model, using the following
weighted average assumptions: (i) expected volatility of 123%; (ii) expected
dividend yield of 0%; (iii) expected option term of 10 years; (iv) risk-free
rates of return of 1.74% and (v) expected forfeiture rates of 40% for both
quarters.
2. LIQUIDITY AND CREDIT FACILITY
On December 16, 2002, the Company entered into an agreement with 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
our existing credit facility with Comerica Bank. Under the BFI agreement,
available borrowings will be up to 85% of accounts receivable, after
reduction for ineligible accounts. The interest rate on outstanding balances
will be at prime plus 4% per annum, plus a 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.
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 experienced a significant
decline in available liquidity in 2001 and 2002, which had an adverse impact
on the ability of the Company to meet its immediate and future obligations.
The Company improved its liquidity by securing private placement financing
in July 2001, by generating positive cash flow from operations, by reaching
settlement agreements with all of its legacy creditors, and by replacing its
credit facility with Comerica Bank, which was scheduled to expire on
December 31, 2002, with the BFI facility in December 2002.
Under present circumstances, 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 into 2004.
On May 6, 2003, the Company retained the services of an investment banking
firm to help the Company explore its tactical and strategic business
alternatives. The agreement terminates on April 30, 2004. The Company paid
an initial fee of $20 at the signing of the agreement and will also be
responsible for making monthly payments of $5 starting on June 15, 2003.
Additionally the Company will issue warrants to purchase 250,000 shares of
common stock, exercisable for a period of five years at an exercise price of
$0.035 per share, which was the closing price of the Company's common stock
on May 6, 2003. One half of the warrants (125,000) will be earned
immediately and the balance of the 250,000 (125,000) will be earned on
November 1, 2003.
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 would be required.
4. ACCRUED SALARIES AND OTHER EXPENSES
Accrued salaries and other expenses consist of the following:
March 31, December 31
2003 2002
--------- -----------
Accrued payroll and payroll taxes ..................... $ 147 $ 146
Accrued professional fees ............................. 42 89
Other accrued expenses ................................ 175 233
--------- -----------
Total accrued expenses ...................... $ 364 $ 468
========= ===========
5. CORPORATE LEGACY LIABILITIES
Corporate legacy liabilities consist of obligations that were incurred in
years prior to 2001. During 2001 the Company entered into settlement
agreements or issued notes in satisfaction of certain of these payables
pursuant to a restructuring plan offered to substantially all of its
creditors. The following chart represents what is left from those settlement
agreements.
Corporate legacy liabilities consist of the following:
March 31, December 31,
2003 2002
--------- ------------
Short-term:
Other non-operating payables ......... $ -- $ 94
--------- ------------
Total short-term ................. $ -- $ 94
--------- ------------
Long-term:
Promissory note ...................... $ 11 $ 11
--------- ------------
Total long-term ...................... $ 11 11
--------- ------------
A promissory note was issued in conjunction with the Company's restructuring
of the legacy liabilities. The note is an unsecured long-term note that
accrues interest at 6.5% per annum. Principal and interest are due on
January 3, 2005. In the chart above, this note is considered a long-term
liability.
6. 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 March 31,
2003. The valuation allowance, which was approximately $10,500 as of
December 31, 2002, relates to deferred tax assets established for net
operating loss carryforwards generated through March 31, 2003 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. At December 31, 2002, the Company had a net operating loss
carryforward of approximately $12,700 for federal income tax purposes, which
will expire in years 2018 through 2022.
7. CHANGE IN ACCOUNTING PRINCIPLE
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Intangible Assets". Thus,
effective January 1, 2002, the Company ceased amortizing goodwill recorded
in past business combinations. The implementation of the goodwill impairment
test under SFAS No. 142 requires a two-step approach, which is performed at
the reporting unit level, as defined in SFAS No. 142. Step one identifies
potential impairments by comparing the fair value of the reporting unit to
its carrying amount. Step two, which is only performed if there is a
potential impairment, compares the carrying amount of the reporting unit's
goodwill to its implied value, as defined in SFAS No. 142. If the carrying
amount of the reporting unit's goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized for an amount equal to that
excess.
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 was impaired. The Company then completed step two,
impairment test, pursuant to SFAS No. 142, under which we compared the value
of our goodwill based on the Company's stock price as of December 31, 2001
with the value of the goodwill. As a result of the impairment test, a
goodwill impairment loss of $9,900 was recognized in the fourth quarter of
2002, which is when the test was completed, and recorded as of the first
quarter of 2002 as a change in accounting principle.
During 2002, as part of the Company's implementation of SFAS No. 142, the
Company also wrote off $45 related to an intangible asset. The reduction was
also included in the change in accounting principle amount.
The net effect of these restatements was a $9,945 decrease in the net income
for the quarter ended March 31, 2002.
8. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basis and diluted earnings
per share:
March 31, March 31,
2003 2002
------------ ------------
Numerator:
Income (loss) from operations ................................. $ (26) $ 140
============ ============
Net income (loss) ............................................. $ (39) $ (9,853)
============ ============
Numerator for basic earnings per share - income (loss)
available to common stockholders ............................ (39) (9,853)
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 .. $ (39) $ (9,853)
============ ============
Denominator:
Denominator for basic earnings per share - weighted average
shares ..................................................... 15,284,288 14,242,066
Effect of dilutive securities:
Employee stock options (2) .................................... 1,484 53,372
Series 1 Convertible Subordinated Promissory Notes (1) ........ -- --
------------ ------------
Denominator for diluted earnings per share - adjusted
weighted- average shares and assumed conversions ........... 15,285,772 14,295,438
------------ ------------
(1) Diluted EPS for the three-month period ended March 31, 2003 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-month period ended March 31, 2003 excludes the
effect of approximately 1.5 million employee stock options as their
inclusion would be anti-dilutive.
9. LITIGATION
The Company is from time to time involved in litigation incidental to its
business. The Company believes that the results of such litigation will not
have a material adverse effect on the Company's financial condition.
10. SIGNIFICANT CUSTOMERS
For the first quarter of 2003, the Company had a single customer that
accounted for approximately 60% of total revenue. This customer also
accounted for approximately 38% of the total outstanding accounts receivable
balance as of March 31, 2003.
For the first quarter of 2002, the Company had three (unrelated) customers
that accounted for approximately 22%, 13% and 12% of total revenue,
respectively. These three customers also accounted for approximately 18%, 5%
and 9%, respectively, of the total outstanding accounts receivable balance
as of March 31, 2002.
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 ("IT") services for its customers.
We help organizations maximize their competitive advantage through the
implementation and /or management of leading edge enterprise level
applications from SAP and PeopleSoft by focusing primarily on serving
clients in the healthcare and government markets. BrightStar has
approximately 45 employees and full-time contractors and has its
headquarters in the San Francisco Bay Area with field offices in Addison,
Texas, and Quincy, Massachusetts.
The Company also offers arrangements for companies to outsource their
software application support and management requirements. Outsourcing lets
companies focus on their core business competencies and gives them a viable
alternative to building the internal team required to implement, maintain
and enhance today's sophisticated business applications.
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 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 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. Costs
reimbursed by its customers are included in revenue for the periods in which
costs are incurred.
Goodwill -- Goodwill is the cost in excess of amounts assigned to
identifiable assets acquired less liabilities assumed. Goodwill recorded in
conjunction with the Founding Companies and all other acquisitions in 1998
is no longer being amortized due to the Company adopting Statement of
Financials Accounting Standards (SFAS) No. 142 as of January 1, 2002.
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 March
31, 2003. 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 first quarter ended March 31, 2003 decreased from $2.9
million to $1.4 million compared to the first quarter ended March 31, 2002
as a result of a continued reduction in the demand for enterprise software
consulting services.
Gross profit as a percentage of revenue for the first quarter ended March
31, 2003 decreased from 33% to 29% compared to first quarter ended March 31,
2002 as a result of a reduction in consultant utilization and a change in
the mix of services provided to our clients.
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
On December 16, 2002, the Company entered into an agreement with BFI
Business Finance ("BFI"), a Santa Clara, California-based business-credit
company, for a two-year working capital line of credit for $0.75 million, to
replace our existing credit facility with Comerica Bank. Under the BFI
agreement, available borrowings will be up to 85% of accounts receivable,
after reduction for ineligible accounts. The interest rate on outstanding
balances will be at prime plus 4% per annum, plus an additional monthly
administrative fee of 0.50% calculated on the average daily balance
outstanding. The minimum monthly interest and administrative fee charged to
the Company will be not less than $1,000 per month for the first six months,
escalating to $2,375 per month for the next three months and then finally to
$3,750 per month for the remaining term of the agreement.
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 experienced a significant
decline in available liquidity in 2001 and 2002, which had an adverse impact
on the ability of the Company to meet its immediate and future obligations.
The Company improved its liquidity by securing private placement financing
in July 2001, by generating positive cash flow from operations, by reaching
settlement agreements with all of its legacy creditors, and by replacing its
credit facility with Comerica Bank, which was scheduled to expire on
December 31, 2002, with the BFI facility in December 2002.
Under present circumstances, 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 into 2004.
On May 6, 2003, the Company retained the services of an investment banking
firm to help the Company explore its tactical and strategic business
alternatives. The agreement terminates on April 30, 2004. The Company paid
an initial fee of $20,000 at the signing of the agreement and will also be
responsible for making monthly payments of $5,000 starting on June 15, 2003.
Additionally the Company will issue warrants to purchase 250,000 shares of
common stock, exercisable for a period of five years at an exercise price of
$0.035 per share, which was the closing price of the Company's common stock
on May 6, 2003. One half of the warrants (125,000) will be earned
immediately and the balance of the 250,000 (125,000) will be earned on
November 1, 2003.
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
There have been no material changes from the information previously reported
under Item 7A of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our principal accounting officer, after evaluating the
effectiveness of the company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this quarterly report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within those
entities.
(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to
the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings
There have been no material changes from the information previously reported
under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
ITEM 6. Exhibits and reports on Form 8-K
99.1 - Certification of Principal Officers to Sec. 1350
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: May 14, 2003. BY: /s/ Joseph A. Wagda
------------------------------------------
Joseph A. Wagda
Chairman, Chief Executive Officer and
Interim Chief Financial Officer
BY: /s/ Paul C. Kosturos
------------------------------------------
Paul C. Kosturos
Vice President Finance, Principal
Accounting Officer and Secretary
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: May 14, 2003
BY: /s/ Joseph A. Wagda
- -----------------------
Joseph A. Wagda
Chairman and Chief Executive Officer
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):
b) 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: May 14, 2003
BY: /s/ Paul C. Kosturos
- ------------------------
Paul C. Kosturos
Principal Accounting Officer and Secretary
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.1 - Certification of Principal Officers to SEC. 1350