THIS FILING INCLUDES A COPY OF A PREVIOUSLY ISSUED REPORT BY GOLDSTEIN AND
MORRIS CERTIFIED PUBLIC ACCOUNTANTS, PC, THE COMPANY'S PRIOR AUDITOR. AS A
RESULT OF GOLDSTEIN AND MORRIS, PC'S DEMISE, USERS OF THIS ANNUAL REPORT SHOULD
BE AWARE OF CERTAIN RELATED RISKS.
(See Discussion of Prior Year's Financial Statements Disclosed in
Management's Discussion and Analysis)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-16530
BRANDPARTNERS GROUP, INC.
(Name of Small Business Issuer in its Charter)
Delaware 13-3236325
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 Main Street
Rochester, New Hampshire 03839
(Address of Principal Executive Offices, Including Zip Code)
(603) 335-1400
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
1
Indicate by checkmark 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definite proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of common stock held by non-affiliates of the
registrant as of June 30, 2004 was $17,652,786.
As of March 14, 2005, there were issued and outstanding 33,147,597 shares
of the registrant's Common Stock.
2
BRANDPARTNERS GROUP, INC.
TABLE OF CONTENTS
Page
PART I
Item 1 Business 4
Item 2 Property 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A Quantitative and Qualitative Disclosures about Market Risk 27
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 29
Item 9A Controls and Procedures 29
Item 9B Other Information 29
PART III
Item 10 Directors and Executive Officers of the Registrant 31
Item 11 Executive Compensation 31
Item 12 Securities Ownership of Certain Beneficial Owners, Management
and Related Stockholder Matters 32
Item 13 Certain Relationships and Related Transactions 32
Item 14 Principal Accountant Fees and Services 32
PART IV
Item 15 Exhibits, Financial Statement Schedules 33
Signatures 35
Certifications
3
PART I
Item 1. Description of Business
BrandPartners Group, Inc., through its wholly-owned subsidiary, Willey Brothers,
Inc., creates next generation retail environments for financial services
companies and other retail organizations.
We were originally incorporated in 1984 in New York under the name "Performance
Services Group, Inc." We changed our name to "Financial Performance Corporation"
in 1986, prior to our initial public offering. In 2001 the stockholders approved
a proposal to reincorporate in Delaware by merging into a newly formed,
wholly-owned subsidiary.
The reincorporation, which was effected on August 20, 2001, changed our legal
domicile from New York to Delaware but did not result in a change in our
business, management, assets or liabilities. In connection with the
reincorporation, the stockholders also approved proposals increasing our
authorized capital stock from 50,000,000 shares of common stock and 10,000,000
shares of "blank check" preferred stock to 100,000,000 shares of common stock
and 20,000,000 shares of "blank check" preferred stock, classifying our board of
directors, and again changing our name to our current name "BrandPartners Group,
Inc."
We continue to seek acquisitions/partnerships, expand and diversify our customer
base in our core industry and pursue new growth opportunities in other vertical
markets. We may fund such acquisitions or other transactions through the
issuance of equity or debt securities, with indebtedness or cash, through other
forms of compensation and incentives, or any combination thereof. If we identify
an appropriate acquisition candidate or other business transaction, we may need
to seek additional financing, although no assurances can be given that
additional financing will be available to us on favorable terms or at all.
Willey Brothers
We purchased 100% of Willey Brothers' common stock on January 16, 2001. Willey
Brothers, founded in 1983, provides marketing and environmental solutions to the
financial services industry (including both banks and non-bank financial
services companies) and other service retailers.
Willey Brothers offers a full range of products and services including:
o Strategic market intelligence and branch network analysis
o Environmental design, construction, and store project management
services
o Traditional and digital merchandising systems, logistics,
distribution and inventory management
o Point-of-sale communications, brand strategy, sales training and
marketing programs
o Contract furniture
Willey Brothers seeks to develop unique and creative solutions to help its
clients build brands through environments, maximize sales and create strong
platforms for sustained growth.
Willey Brothers Business Platform
Because of Willey Brothers' position in the retail financial services
marketplace, we are able to service the needs of clients ranging from credit
unions and community banks to the largest financial institutions. Our sales
force markets our products and services to targeted companies through trade
shows, direct mail and other direct marketing methods, speaking engagements, and
company sponsored events. When a client requires the full services that we
offer, a multi-disciplinary project team from our creative, merchandising and
design/build business units works to ensure that deliverables are consistent
throughout the project. Our program management team works in conjunction with
the Information Technology (IT) department (via client specific web sites) to
communicate daily with the client from the design and planning stages through
the implementation of the project.
4
Willey Brothers offers the following services independently or as a holistic
package, each with well-defined phases, as follows:
o Brand Strategy, Creative and Point-of Sale Services
o Corporate Reconnaissance. Through interviews and discussions with
client and market research, we work with the client to understand
its history of retail development, current corporate culture,
customer demographics, product strategy, overall image, and future
brand and branch objectives.
o Brand Blueprint. We then develop a singular thematic brand concept
that seeks to embody the character of the client, which will guide
the design, product and environment, and implementation efforts that
follow.
o Point-Of-Sale Communications. We translate a client's branding
strategy into a well-coordinated written, verbal and physical
merchandising message, which is refined and promoted to a targeted
market through in-store communication vehicles, including
point-of-sale communications, digital merchandising, marketing
materials and advertising campaigns. Digital merchandising, which is
the confluence of high-definition plasma and LCD screens with either
fixed or constantly changing content (i.e. cable or satellite
television combined with company-specific marketing and advertising
content), is an evolving product line that is transforming
communications in every retail industry and offers tremendous growth
opportunities.
o Site Analysis, Environmental Design and Build
o Site Analysis/Market Intelligence. Using proprietary software
programs developed by Willey Brothers, we are able to identify site
locations for new facilities and measure the attractiveness of
potential new markets based on area demographics and deposit data at
competitor banks.
o Environmental Design. If the client is seeking a prototype branch,
we develop it based on concepts identified during the brand
blueprint phase. However, clients engage us to work on projects
ranging from basic interior reconfiguration and renovation to the
design and construction of new facilities. Where branch planning and
design is required, we analyze traffic patterns inside a
representative sample of facilities. With the help of a branch
fitness analysis, we develop a branch-typing matrix that reveals how
a model branch should be developed in conjunction with merchandising
and creative/point-of-sale systems to maximize profitability.
Willey Brothers' industry award-winning, in-house, architectural
design team creates a design template that translates the attributes
of the "model" branch into a master store design. Retail locations
are designed to support the brand, maximize the impact of
point-of-sales communications, and connect with the customer through
the appropriate brand experience. Included in the master design are
the branch floor plan and the layout identifying the location and
type of millwork and merchandising. Once a design has been approved,
construction documentation follows.
o Project Management/Build. After the designs are completed, in most
cases we are engaged to manage the branch construction process,
including overall pricing of all components of the branch, hiring
the general contractor, and ensuring that the project is finished on
time and on budget. Our experience in the financial service
marketplace allows us to offer clients fixture, millwork, furniture
and creative products and services to ensure that the branch
exterior and interior areas are well coordinated and designed to
maximize branch sales.
5
o Furniture. We are an office furniture dealership and represent
hundreds of manufacturers. This group allows us to supplement
"build" projects with office furniture systems and case goods, which
are often integrated in innovative ways into our merchandising
fixture programs.
o Merchandising Programs
o Network Analysis/Site Analysis/Branch Typing. We analyze the
client's current retail network. The analysis covers on-site audits
of branch locations for overall interior fitness, traffic flow,
selling zones, fixture placements and design, point-of-sale messages
and placements, and local demographic analysis. Branch typing helps
to determine what type of fixture system should be recommended for
the network (i.e. custom design, existing company fixture line, or
retrofit of existing company fixture line.)
o Retail Merchandising Roll-Outs. Fixtures are the delivery vehicles
for point-of-sale and branding communications. We provide strategic
assessments of branch layouts in conjunction with our network
analysis service. Following the strategic analysis, we recommend
either customized or generic fixture programs and manage roll-outs
to systems with the number of branches ranging from 25 to several
thousand. We develop fixture programs and corresponding signage
[general and Federal Deposit Insurance Corporation (FDIC) mandated]
that maximize the efficiency of the clients' messages to their
in-store customers. Products sold include, but are not limited to,
brochure displays, wall frames, digital merchandising (in
conjunction with point-of-sale), kiosks, regulatory displays,
interest rate boards, and directional signs that are located
throughout a branch office. Willey Brothers utilizes technology to
assist in program management supervision. Program managers and
coordinators communicate with clients through project specific web
sites created for sharing up-to-date information on all aspects of a
program's implementation.
o Logistics, Distribution and Inventory Management. In conjunction
with fixture roll-out programs and year round point-of-sale
campaigns, we provide logistics, distribution, warehousing, and
inventory management systems. In many cases, we warehouse
client-owned fixture inventory for future acquisitions or renovated
branches. Support facilities are located at our Rochester, New
Hampshire headquarters.
Target Markets
Willey Brothers' revenues have historically been primarily derived from
businesses in the financial services markets. Target markets and a
representative sample of clients are as follows:
o Tier One Banks - Retail banking organizations, bank holding
companies and thrifts with more than 250 branch locations.
o Regional and Community Banks - Banking organizations and bank
holding companies with between 25 and 250 branches.
o Credit Unions - Banking organizations with 1 to 25 branches.
o Non-bank financial services companies - Companies providing
financial service products to consumers and businesses that are not
licensed as banks. These organizations are primarily brokerage
houses, mutual fund companies, asset management companies, insurance
and mortgage companies, and tax services companies.
6
o Other - We are seeking to grow our business internationally and have
opened a small operation in Great Britain in January 2005. In
addition, we are seeking to transfer our capabilities and expertise
in the retail environment space to other retail industries and
service organizations. Though that space is unlimited, we are
focusing on industries that have more synergies and parallels to our
core industry such as wireless telecommunications retailers, auto
dealerships and health care facilities.
Suppliers/Working Capital
Willey Brothers outsources most of its manufacturing and fabrication services
from a variety of suppliers throughout the United States. Willey Brothers does
some light production work (i.e. engraving, painting, screen printing, etc.) but
does not own or operate manufacturing facilities. Most outsourcing is project
specific, based upon branch locations and the nature of the products and
services provided. Since the majority of the product produced for customers is
project specific and the turnaround from the suppliers is timely, Willey
Brothers is not required to maintain a large inventory.
Backlog
The Willey Brothers' backlog consists of signed orders to be delivered in future
periods, and does not include any revenue recognized in the current fiscal year.
As of December 31, 2004, the backlog was approximately $31 Million. For the year
ended December 31, 2003, the backlog was approximately $21 Million.
Significant Customers
Since Willey Brothers is a contract driven company, those clients designated as
"significant" varies from period to period. For the year ended December 31,
2004, two customers of Willey Brothers accounted for 11% each of our revenues.
For the year ended December 31, 2003, one customer accounted for approximately
16% of our revenues. For the year ended December 31, 2002, one customer
accounted for approximately 14% of revenues.
Employees
As of March 15, 2005, we had 145 full-time employees. Our employees are not
represented by a union or collective bargaining entity. We believe our relations
with our employees are good.
Intellectual Property
Willey Brothers owns the following registered trademarks:
o Willey Brothers(R)
o Willey Brothers Direct(R)
o Willey Brothers International(R)
Competition
The landscape for the products and services provided by Willey Brothers is
fragmented across many sectors and is competitive. We are often engaged by
clients without going through a request for proposal (RFP) process, but this is
typically required when we are competing for sizeable, multi-million dollar
contracts. There are selective competitors who focus solely on the retail
financial services marketplace. However, our competitive advantage is our
holistic approach and expertise across a range of products and services,
touching all aspects of the retail system. Many of our primary competitors focus
only on fixtures, design/build or creative services. Due to the nature of Willey
Brothers' business, we also compete with design houses, architectural firms,
consulting firms, fixture companies, and advertising agencies of varying sizes.
7
Where to Get More Information
Our website address is http:// www.bptr.com. We file annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission ("SEC"). These reports are available on our website free of
charge as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the SEC.
Risk Factors
See Item 6, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Item 2. Description of Property
Our principal administrative and sales office is located in Rochester, New
Hampshire, where we lease a facility of approximately 73,000 square feet. The
lease for this location expires in August of 2006 with an option for an
additional 5 year period. Annual rent for this location is approximately
$178,417. We also lease a warehouse in Rochester, New Hampshire of approximately
36,000 square feet. The annual rent for the warehouse is approximately $177,315.
This lease expires in March of 2006. The inventory located in the two previously
leased warehouses in Dover, New Hampshire and Phoenix, Arizona has been
consolidated into the new warehouse facility. The Phoenix, Arizona warehouse was
closed as of January 31, 2005, and all inventory was transferred to New
Hampshire. A Design Center of approximately 3,000 square feet has been opened in
New York, which is dedicated to design, brand strategy, and business
development. This lease expires in January 2007 and provides for annual rent of
approximately $74,000.
Approximate Square Lease
Location Annual Rent Footage Expiration
-------- ----------- ------- ----------
Administrative/sales office $ 178,417 73,000 August 2006
Warehouse 177,315 36,000 March 2006
Design Center 74,000 3,000 January 2007
Item 3. Legal Proceedings
None
Item 4. Submission of Matters of a Vote of Securities Holders
No matters were submitted to a vote of security-holders during the fourth
quarter of the year ended December 31, 2004.
8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock has been publicly quoted on The OTC Bulletin Board
under the symbol "BPTR.OB" since August 29, 2003. Prior thereto, the Company's
common stock was listed on the Nasdaq SmallCap Market under the trading symbol
"BPTR" from August 21, 2001 through August 29, 2003. From September 22, 2000 to
August 20, 2001, it was traded on the Nasdaq SmallCap Market under the symbol
"FPCX" . Prior thereto, it was traded on the OTC Bulletin Board under the same
symbol.
The following table sets for the periods indicated, the high and low reported
sales prices per share for the common stock of the Company as reported by the
Nasdaq SmallCap Market or the OTC Bulletin Board, as the case may be.
High Low
---- ---
Calendar Year 2003
First Quarter Ended March 31, 2003 $0.21 $0.09
Second Quarter Ended June 30, 2003 0.46 0.13
Third Quarter Ended September 30, 2003 0.26 0.01
Fourth Quarter Ended December 31, 2003 1.00 0.14
Calendar Year 2004
First Quarter Ended March 31, 2004 $0.79 $0.45
Second Quarter Ended June 30, 2004 1.08 0.48
Third Quarter Ended September 30, 2004 0.68 0.48
Fourth Quarter Ended December 31, 2004 0.96 0.65
Calendar Year 2005
First Quarter (through March 14, 2005) $1.15 $0.90
As of March 14, 2005, we had approximately 213 holders of record for our common
stock.
To date, we have not paid any dividends on our common stock. Any payment of
future cash dividends and the amount thereof will be dependent upon our
earnings, financial requirements, and other factors deemed relevant by our Board
of Directors.
The following table sets forth information as of March 15, 2005 related to
Company compensation plans as approved by shareholders. The BrandPartners 2004
Stock Incentive Plan was implemented and approved by shareholders to replace the
2001 Financial Performance Corporation Stock Incentive Plan.
9
Number of
securities remaining
available for future
issuance under
Number of equity
securities to be compensation plans
issued upon Weighted-average [excluding
exercise of exercise price of securities reflected
outstanding options outstanding options in column (a)]
Plan Category (a) (b) ( c)
BrandPartners 2004 Stock
Incentive Plan 4,698,500 $ 0.51 301,500
Financial Performance Corporation
2001 Stock Incentive Plan 1,741,872 $ 2.68 3,258,128
Total 6,440,372 3,559,628
On September 29, 2004 and August 2, 2004, 20,000 and 12,000 shares of common
stock of the Company, respectively, were issued for legal services rendered. The
shares were valued at $17,360 using the Black-Scholes model and were charged to
legal expense and additional paid in capital.
On May 12, 2004, the Company entered into an agreement with a consultant to
provide services. As part of the agreement, the consultant was issued a warrant
for the purchase of 100,000 shares of common stock. The warrant was valued at
$73,470 using the Black-Scholes model. Consulting expense and additional paid in
capital were charged in the accounting transaction.
On January 19, 2004, the Company entered into a surrender agreement with its
landlord for certain consideration including 500,000 shares of the Company's
common stock. The Company charged other expense $275,000, which was included in
long term liabilities at December 31, 2003. In 2004, the shares were issued to
the landlord.
10
Item 6. Selected Financial Data
Years Ended December 31, 2004, 2003, 2002, 2001 and 2000
(in thousands except per share data)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
For the Year
Revenues $ 50,613 $ 33,667 $ 38,879 $ 39,693 $ --
Income (Loss) from Continuing Operations $ 5,134 $ (10,964) $ (4,803) $ (5,304) $ (3,728)
Income (Loss) Per Share from Continuing Operations* $ 0.17 ($ 0.59) ($ 0.26) ($ 0.56) ($ 0.34)
At Year End
Total Assets $ 37,306 $ 35,834 $ 46,738 $ 56,687 $ 13,961
Long Term Debt $ 5,784 12,953 12,465 20,046 0.5
Dividends Declared Per Share None None None None None
* Income (loss) per share from continuing operations is based on basic number of
shares and does not include dilution.
2004 does not include gain on forgiveness of debt.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Overview
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand BrandPartners Group, Inc. MD&A is provided as a supplement
to, and should be read in conjunction with, our financial statements and the
accompanying notes ("Notes"). Management's discussion and analysis of its
financial condition and results of operations are based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
We generate revenues, income and cash flows through our wholly-owned subsidiary,
Willey Brothers, Inc. ("Willey Brothers"). In order to more appropriately track
revenues and the associated expenses, Willey Brothers is organized into three
separate business units - Merchandising (Fixtures), Creative (Point-of-Sale) and
Design/Build. While the Company's financial results are separated for internal
purposes into the business units, a customer may deal with one or more of the
business units at any time, as its needs determine.
Merchandising provides fixtures such as literature dispensers, wall frames,
kiosks, and signage. The unit includes Analysis, which is responsible for
developing the floor plans of the existing branches and making recommendations
as to location, number and type of fixtures necessary to present the customer's
marketing message; and Installation, which installs the product and provides
feedback to the customer as to the status of the project. The Merchandising
Business Unit is also responsible for providing after-the-sale fulfillment
services to our clients. If a customer desires to purchase an on-hand inventory
to be available upon short notice, Merchandising provides warehousing and
fulfillment services to bring the inventory to the customer's location as
needed.
The Creative Group has a wide vista of offerings from branding strategies to
advertising campaigns. Digital merchandising is also part of its product
offerings.
11
The Design/Build Group is involved in the construction of a new branch or the
refurbishment of an older branch. Strategic market intelligence is available to
help the customer decide where to build the proposed branch. Being a contract
furniture dealer and having interior designers on staff allows the customer to
"one-stop shop" to fulfill his furnishing needs.
Each business unit deals with similar customers but with a unique focus. With
the flexibility inherent in Willey Brothers' business model, a customer can have
a new branch designed and built with merchandising fixtures installed containing
a marketing message that fits the branding strategy of the financial
institution's message.
WILLEY BROTHERS, INC.
Merchandising Business Unit
Analysis
Installation
Industrial Design
Creative Business Unit
Graphic design
Collateral development and production
Branding
Digital merchandising
Design/Build Business Unit
Environmental design
Construction management
Strategic market intelligence
Contract Furniture
Significant Accounting Policies
Revenue Recognition
Willey Brothers records revenue for the Creative and Design/Build business units
using percentage-of-completion, based upon actual costs incurred to date on such
contracts. Contract costs include all direct materials, labor and subcontractor
costs. Anticipated losses are provided for in their entirety without reference
to percentage-of-completion. The Merchandising business unit recognizes revenue
on product as it is shipped or as the service is rendered. General and
administrative expenses are accounted for as period charges, and therefore, are
not included in the calculation of the estimates to complete.
12
Accounts Receivable
Periodically, the Company reviews accounts receivable to reassess its estimates
of collectibility. Willey Brothers provides valuation reserves for bad debts
based on specific identification of likely and probable losses. In addition,
Willey Brothers provides valuation reserves for estimates of aged receivables
that may be written off, based upon historical evidence. These valuation
reserves are periodically re-evaluated and adjusted as more information about
the ultimate collectibility of accounts receivable becomes available.
Circumstances that could cause the Company's valuation reserves to increase
include other factors negatively impacting clients' ability to pay their
obligations as they come due and the quality of the collection efforts.
Intangible Assets
The Company assesses the impairment of goodwill whenever changes in
circumstances, such as continuing losses, indicate that the fair value may be
less than the carrying value. In the event of such circumstances, or at least
annually, the Company estimates the recoverability of goodwill by obtaining
appraisals of fair value from outside specialists.
Results of Operations
Prior Years Financial Statements for the Years ended December 31, 2003 and 2002.
The auditors for the years ended December 31, 2003 and 2002 were Goldstein
and Morris, CPAs, PC, ("G&M"), the Company's former auditors. G&M has not
reissued its report for the years ended December 31, 2003 and 2002, and the
financial statements for the years ended December 31, 2003 and 2002 have not
been re-audited. Readers of the financial statements for the years ended
December 31, 2003 and 2002 are cautioned that there are certain inherent risks
in relying upon said results in that there is limited recourse available against
G&M should readers rely to their detriment upon the prior report of G&M.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues, Revenues from continuing operations increased 50% or approximately
$16,946,000 for the twelve months ended December 31, 2004. The improvement was
due to strength in the industry, an increase in merger activity, and improved
visibility to the variety of Willey Brothers' offerings offset by project delays
because of permitting issues, weather conditions and property availability.
These delays resulted in shifting revenues to a future fiscal period.
Cost of Revenues, Cost of revenues from continuing operations increased 19% or
approximately $5,621,000. Because the business units have different business
models, the expected Gross Margin percent varies. The increase in Gross Margin
was due to a charge for obsolete inventory of $987,000 in 2003, which was offset
by:
o Increased service offerings
o Greater control of costs
o Better budget projections and control
Selling, General and Administrative Expenses. Sales, general and administrative
expenses are accounted for as period charges and decreased approximately
$2,449,000 or 21% from 2003 to 2004. This decrease is primarily attributable to:
o Decreases in payroll
o Lease settlement (see Note "J-4" in the accompanying financial
statements)
o Fulfillment of agreement with former shareholders of Willey
Brothers. (See Note "H-1" in the accompanying financial statements.)
o Leveraging our cost structure relative to sales growth.
Interest Expense
Interest expense from continuing operations decreased approximately $837,000 or
46% for the twelve months ended December 31, 2004. This decrease is primarily
due to:
o Reduction in term loan
o Reduction in line of credit
o Restructuring of subordinated debt
13
Other Income (Expense) Other expense in 2004 consisted of a Gain on Forgiveness
of Debt (see Note "H-1") and the settlement of a lawsuit in 2003 (see Note
"I-4").
Income Taxes. For the year ended December 31, 2004, the Company and its
Subsidiary had previously unused Net Operating Losses of approximately $11
million (NOL's), and accordingly, made no accrual for Federal or State income
taxes.
Net Income. Net income increased approximately $25,184,000 for the twelve months
ended December 31, 2004 as compared to 2003. The increase is due to:
o Increase in Merchandising revenue with corresponding increase in
gross margin
o Increase in Design/Build's gross margin
o Above increases were offset by decrease in Creative gross margin
o Decrease in sales and general & administrative expenses due to
factors noted above
o Gain from forgiveness of debt by former shareholders of Willey
Brothers
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
The auditors for the years ended December 31, 2003 and 2002 were Goldstein and
Morris Certified Public Accountants, P.C., the Company's former auditors.
Goldstein and Morris has not reissued its report for the years ended December
31, 2003 and 2002, and the financial statements for those years have not been
re-audited. Readers of the financial statements for the years ended December 31,
2003 and 2002 are cautioned that there are certain inherent risks in relying
upon said results in that there is limited recourse available against Goldstein
and Morris should readers rely upon the prior report of Goldstein and Morris.
Revenues. Revenues from continuing operations decreased approximately $5,212,000
or 13% for the twelve months ended December 31, 2003. The decreases were related
to:
o Weakness in the industry
Cost of Revenues. Cost of revenues decreased approximately $999,000 or 3%.
Merchandising costs decreased approximately $450,000 or 56%. The decrease in
cost of revenues was due to:
o Charge for obsolete inventory of $987,000
o Higher than expected costs
o Shift in product mix
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $1,310,000 or 10%. This decrease
is primarily attributable to the following with offsets by increases as listed
below:
o Decreases in payroll and professional fees
o Decreases in sales and marketing expenses
o Decreases in amendment fees
o Increases in public relations and consulting fees
o Increases in directors' fees
o Increases in bad debt expense and insurance expense
Interest Expense. Interest expense from continuing operations decreased
approximately $636,000 or 26% for the twelve months ended December 31, 2003.
This decrease is primarily attributable to:
o Reduction in term loan
o Full amortization of beneficial conversion on preferred stock
Other Income (Expense). Other expense from continuing operations increased
approximately $2,239,000. This increase is primarily due to:
14
o Lease termination fee of $1,075,000
o Unrealized loss on Put Warrant
o Settlement of the Reiss lawsuit
o Absence of management fee income from MKP, a prior subsidiary
Income Taxes. For the year ended December 31, 2003, the Company and its
Subsidiary had taxable losses and accordingly made no accrual for Federal or
State income taxes. For the year ended December 31, 2002, the Company had an
income tax benefit of approximately $986,000, due primarily to an income tax
refund of $1.2 million, which did not occur in 2003. The benefit in 2002 was due
to a carryback of Willey Brothers' taxable loss for the tax year ended December
31, 2002. There are no further carrybacks available.
Net Loss. Net loss decreased approximately $1,009,000 or 8% for the twelve
months ended December 31, 2003. The decrease in the net loss is due to the
following with the offsets listed below:
o Absence in current year of loss from discontinued operations of
approximately $7,170,000
o Income tax benefit in 2002 of approximately $986,000
o Increase in operating loss of approximately $3,572,000
o Increase in other expense of approximately $2,239.000
o Decrease in interest expense of approximately $636,000
Liquidity and Capital Resources
As of December 31, 2004, the Company had negative working capital (current
assets less current liabilities) of approximately $3,640,000 and a working
capital ratio (current assets to current liabilities) of approximately .75:1. At
December 31, 2003, the Company had negative working capital of $14,500,000 and a
working capital ratio of .40:1. This change in working capital arises primarily
from:
o Increase in cash
o Increase in net income
o Proceeds from private placement of equity
On February 2, 2004, the Company completed a private placement of equity. The
Company received net proceeds from the private placement of approximately
$2,900,000 and issued 12,400,001 shares of common stock. The proceeds from the
private placement were used to reduce certain debt and obligations as described
below and to repay the balance of the term loan. The balance of the proceeds was
used for working capital.
On January 20, 2004, in conjunction with the closing of the first traunch of the
private placement, the Company entered into a new agreement with the former
shareholders of Willey Brothers (the "Agreement"). The Agreement provided for,
among other things:
o $7.5 Million Seller Notes were cancelled and forgiven
o All accrued unpaid interest on the Seller Notes of approximately
$844,000 was cancelled and forgiven.
o $2.0 Million 24-Month Notes were maintained in escrow and were
cancelled upon payment in full of the promissory notes.
o Two new promissory notes were issued, each in the amount of $1.0
Million, payable to the former shareholders of Willey Brothers.
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o Aggregate payments of $1.0 Million were made concurrently with the
issuance of the new promissory notes to the former shareholders of
Willey Brothers against one of the 24-Month Notes.
The balance of the new promissory notes was paid on April 15, 2004 and July 14,
2004. Upon payment in full of the promissory notes:
o All accrued, unpaid interest on the $2.0 Million 24-Month Notes
(approximately $755,000 at June 30, 2004) was cancelled and forgiven
o Accrued, unpaid earn-out of $500,000 was forgiven
o No additional earn-out would accrue
On January 20, 2004, in conjunction with the private placement, the Company
entered into a surrender agreement with its landlord for the termination of its
lease at 777 Third Ave., New York, New York. In exchange for the termination of
its rights and obligations under the lease, the Company agreed to:
o Pay the landlord an aggregate of $800,000
o Issue to the landlord 500,000 shares of restricted common stock of
the Company with cost free, piggyback registration rights.
Upon the signing of the agreement, $500,000 was paid. The balance of the fee was
to be paid in three equal installments of $100,000 each. Payments were made on
March 1, 2004, September 1, 2004 and February 24, 2005. The shares were valued
at $0.55 per share, the closing price of the stock on February 9, 2004, the date
the stock was issued. The terminated lease had an expiration date of December
31, 2009 with minimum lease rentals of approximately $637,000 in 2004 and
$671,000 annually through 2009.
On January 7, 2004, the Company amended and restructured its subordinated note
payable. In exchange for a waiver of certain covenants through December 31, 2004
and a reduction in the interest rate on the note, the Company issued to the
note-holder a common stock purchase warrant to purchase 250,000 shares of the
Company's common stock at $0.26 per share. The interest rate reduction is for a
period of two years, commencing January 1, 2004, and reduces the interest rate
from 16% per annum to 10% per annum - 8% payable in cash quarterly and 2% added
to the principal (the "PIK Amount").
On July 6, 2004, the Company negotiated an unsecured subordinated promissory
note for $1,000,000. The note was payable on October 4, 2004. However, 50% of
the note could be extended to January 3, 2005. The stated interest rate was 12%
per annum. With the issuance of the note, a three (3) year Common Stock Purchase
Warrant (Purchase Warrant) was issued to purchase up to 500,000 shares of the
Company's common stock. The exercise price of the Warrant Shares was $0.68, the
closing price of the stock on the date of the issuance of the Note. Based on a
Black-Scholes valuation of the warrants, $105,000 of interest expense was
expensed during this period. On September 29, 2004, the unsecured subordinated
promissory note and the Purchase Warrants were cancelled. In consideration of
the cancellation of the Original Note, a new unsecured subordinated promissory
note in the amount of $625,000 was issued, with interest accruing at a rate of
12% per annum. The Company also issued 750,000 restricted shares of common stock
for the sum of $375,000, which was applied as partial payment of the Original
Note. The stock was issued on September 29, 2004. The price of the stock on the
date of issuance was $0.63 per share. The New Note was to mature on January 6,
2005. However, on January 5, 2005, the Company entered into a modification
agreement with the holder of the Note. Under the terms of the modification
agreement, the maturity date of the note was extended to May 6, 2005 with the
Company having the right to prepay the note at any time. As consideration for
the modification and extension of the terms of the note, the Company agreed to
issue up to 200,000 warrants to purchase 200,000 warrant shares. The warrant
shares are exercisable at $0.85 per share and are to be issued in increments of
50,000 every 30 days from the modification date to maturity date of the note. In
the event the Company elects to prepay the note, the amount of the warrants to
be issued under the modification agreement will be pro-rated. The warrants have
a three (3) year term from date of issuance with cost-free, piggyback
registration rights.
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Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 123(R), Share-Based
Payment. FAS 123(R) is a revision of FAS 123, Accounting for Stock-Based
Compensation. This statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. The statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. FASB has required that FAS No.
123(R) be adopted by June 15, 2005, and the Company has decided to implement it
on that date. The Company believes that the adoption of FAS No. 123(R) will not
have a material effect on the Company's financial position or results of
operations.
Certain Risk Factors
The following risks, as well as other risks and uncertainties that are not yet
identified or that we currently think are immaterial, could materially and
adversely affect our business, financial condition and results of operations. In
that event, the trading price of our common stock could decline, and you could
lose part or all of your investment.
RISKS ASSOCIATED WITH THE RESIGNATION OF OUR FORMER INDEPENDENT PUBLIC
ACCOUNTANTS
OUR FORMER INDEPENDENT PUBLIC ACCOUNTANTS, GOLDSTEIN AND MORRIS, P.C., RESIGNED
EFFECTIVE OCTOBER 20, 2004, WHICH MAY LIMIT YOUR ABILITY TO SEEK RECOURSE
AGAINST THEM IN THE EVENT OF A CLAIM.
17
On October 20, 2004, Goldstein and Morris Certified Public Accountants informed
us that they were resigning as our independent, registered public accounting
firm as it was no longer able to service our audited needs as a public company.
The resignation was not sought or recommended by our audit committee or our
Board of Directors. Effective January 1, 2005, we learned that the firm of
Goldstein and Morris was no longer an active operating entity engaged in the
practice of public accounting and auditing work. Due to Goldstein and Morris's
resignation and discontinuation of its public practice, investors and
shareholders of our common stock may have limited recourse against Goldstein and
Morris in the event of any claims associated with prior work performed on behalf
of the Company by Goldstein and Morris as independent auditors.
Our consolidated financial statements as of December 31, 2003 and 2002 have been
audited by Goldstein and Morris Certified Public Accountants, PC. Their report
for the years ended December 31, 2003 and 2002, has not been reissued due to the
fact that Goldstein and Morris have discontinued operations. A copy of their
previously issued report has been included.
RISKS RELATED TO OUR BUSINESS
THE BUSINESS OF PROVIDING MERCHANDISING, DESIGN/BUILD, CREATIVE/POINT OF SALE,
FURNITURE AND MARKETING SERVICES TO FINANCIAL INSTITUTIONS AND TRADITIONAL
RETAILERS IS HIGHLY COMPETITIVE. IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY, OUR
REVENUES AND PROFIT MARGINS WILL BE ADVERSELY AFFECTED.
The consulting design services, merchandising markets and the store build-out
industry in which we operate include a large number of service providers and our
business is highly competitive. Some of our competitors have greater financial,
technical and marketing resources, larger customer bases, greater name
recognition, and more established relationships with their customers and
suppliers than we have. Larger and better capitalized competitors may be better
able to respond to the need for technical changes, price their services more
aggressively, compete for skilled professionals, finance acquisitions, fund
internal growth and compete for market share generally.
Our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
their abilities to address client needs. New competitors or alliances among
competitors could emerge and gain significant market share and some of our
competitors may have or may develop a lower cost structure, adopt more
aggressive pricing policies or provide superior services that gain greater
market acceptance than the services that we offer or develop. Furthermore, our
clients may establish either strategic sourcing or centralized purchasing
departments, which may aggressively pursue low cost producers at the expense of
value-add firms. In order to respond to increased competition and pricing
pressure, we may have to lower our prices, which would have an adverse effect on
our revenues, gross margins and net profits. In addition, financial institutions
and banks may choose not to outsource their design and merchandising needs,
which could have an adverse effect on our revenue growth. The merger and
acquisition of financial institutions may result in a temporary increase in our
business, but in the long term, a reduced number of branches of financial
institutions and banks will reduce our customer base and result in a decline in
resources.
A SIGNIFICANT OR PROLONGED ECONOMIC DOWNTURN COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR REVENUES AND PROFIT MARGIN.
Our results of operations are affected directly by the level of business
activity of our clients, which in turn is affected by economic activity in
general. If there is continued economic downturn, we may experience a reduction
in the growth of new business as well as a reduction in existing business, which
may have an adverse effect on our business, financial condition and results of
operations. We may also experience decreased demand for our services as a result
of postponed or terminated outsourcing, budget reductions for design and build
out work, reductions in the size of our clients' design and merchandising needs
or mergers and consolidation in the financial services industry. Reduced demand
for our services could increase price competition.
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THE FINANCIAL SERVICES AND BANKING INDUSTRY HAS CONSOLIDATED IN RECENT YEARS AND
IF IT CONTINUES TO CONSOLIDATE, WE MAY BE ADVERSELY AFFECTED BY A REDUCTION IN
AVAILABLE MARKET SHARE.
Our core market, the financial services and banking industry, has experienced an
unprecedented number of mergers and acquisitions in recent years which is
expected to continue. While the consolidation within the financial services
industry with banks and brokerage firms may have a positive effect on our
business short term, we may ultimately lose existing clients by way of
acquisition or merger, and we may have a reduction in available market share
which could adversely affect our revenues.
THE PROFITABILITY OF OUR ENGAGEMENTS WITH CLIENTS MAY NOT MEET OUR EXPECTATIONS.
Unexpected costs or delays encountered in our build out projects of bank
branches and financial institutions could make our outsourcing contracts or
consulting engagements less profitable than anticipated. When making proposals
for outsourcing or consulting contracts, we estimate the costs associated with
such engagements. Any increased or unexpected costs or unanticipated delays in
connection with the performance of these engagements, including delays caused by
factors outside our control, could have an adverse effect on our profit margin.
In the event that we are unable to meet construction completion schedules, we
may experience payment penalties in our agreements with our clients. However,
penalties are involved in very few of our contracts.
In our consulting and build out business, cost overruns or early contract
terminations could cause our business to be less profitable than anticipated. At
the beginning of each new arrangement, we undertake an implementation process
whereby we gather data and customize our analysis. We may experience delays in
receiving final certificates of occupancy that can result in payment delays by
our clients.
Our clients typically retain us on a contract engagement-by-contract engagement
basis, rather than under exclusive long-term contracts. Large client projects
involve multiple engagements or stages, and there is a risk that a client may
choose not to retain us for or may cancel or delay additional stages of a
project. These terminations, cancellations or delays could result from factors
unrelated to our work product or the progress of the project, such as the
business or financial condition of the client or general economic conditions.
When engagements are terminated, we lose the associated revenues, and we may not
be able to eliminate associated costs or redeploy the affected employees in a
timely manner to minimize the negative impact on profitability.
THE LOSS OF A SIGNIFICANTLY LARGE CLIENT OR SEVERAL CLIENTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR REVENUES.
Although our client relationships are often on a project by project basis, in
fiscal year 2004 we had two clients that each accounted for 11% of our net
revenues. The loss of a significantly large client or several clients could
adversely impact our revenues and profitability. Given the amount of time needed
to implement new design and build out clients, there is no assurance that we
would be able to promptly replace the revenues lost if a significantly large
client or several clients terminated our services.
WE MAY HAVE DIFFICULTY INTEGRATING OR MANAGING ACQUIRED BUSINESSES, WHICH MAY
HARM OUR FINANCIAL RESULTS OR REPUTATION IN THE MARKETPLACE.
Our expansion and growth may be dependent in part on our ability to make
acquisitions of similar companies or companies that provide synergy with our
business. The risks we face related to acquisitions include that we could
overpay for acquired businesses, face integration challenges and/or have
difficulty finding appropriate acquisition candidates.
We may pursue acquisitions in the future, which may subject us to a number of
risks, including:
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o Diversion of management attention;
o Amortization and potential impairment of intangible assets, which
could adversely affect our reported results;
o Inability to retain the management, key personnel and other
employees of the acquired business;
o Inability to establish uniform standards, controls, procedures and
policies;
o Inability to retain the acquired company's clients
o Exposure to legal claims for activities of the acquired business
prior to acquisition; and
o Inability to effectively integrate the acquired company and its
employees into our organization.
We may not be successful in identifying appropriate acquisition candidates or
consummating acquisitions on terms acceptable or favorable to us. We may not
succeed at integrating or managing acquired businesses or in managing the larger
company that result from these acquisitions. Client dissatisfaction or
performance problems, whether as a result of integration or management
difficulties or otherwise, could have an adverse impact on our reputation. In
addition, any acquired business could significantly under perform relative to
our expectations.
OUR BUSINESS WILL BE NEGATIVELY AFFECTED IF WE ARE NOT ABLE TO KEEP PACE WITH
MARKETING CHANGES AND THE NEEDS OF OUR CLIENTS.
Our future success depends, in part, on our ability to develop and implement
design and marketing plans that anticipate and keep pace with rapid and
continuing changes in industry standards and client preferences. We may not be
successful in anticipating or responding to these developments on a timely and
cost-effective basis, and our ideas may not be accepted in the marketplace.
Also, marketing plans developed by our competitors may make our service
noncompetitive or obsolete. Any one of these circumstances could have a material
adverse effect on our ability to obtain and complete important client
engagements.
Our business is also dependent, in part, upon continued growth in business by
our clients and prospective clients and our ability to deliver innovative design
and marketing concepts to our clients. The effort to gain new customers,
especially store build outs, requires us to incur significant expenses. If we
cannot offer innovative cost effective plans as compared to our competitors, we
could lose market share.
IF OUR CLIENTS OR THIRD PARTIES ARE NOT SATISFIED WITH OUR SERVICES, WE MAY FACE
DAMAGE TO OUR PROFESSIONAL REPUTATION OR LEGAL LIABILITY AND PAYMENT DELAYS.
We depend to a large extent on our relationships with our clients and our
reputation for high-quality outsourcing and consulting services. As a result, if
a client is not satisfied with our services or products, it may be more damaging
in our business than in other businesses. Moreover, if we fail to meet our
contractual obligations, we could be subject to legal liability or loss of
client relationships.
Clients and third parties who are dissatisfied with our services or who claim to
suffer damages caused by our services may bring lawsuits against us. Defending
lawsuits arising out of any of our services could require substantial amounts of
management attention, which could adversely affect our financial performance. In
addition to the risks of liability exposure and increased costs of defense and
insurance premiums, claims may produce publicity that could hurt our reputation
and business.
In the event that a construction or design of a job is delayed as a result of a
dispute with a subcontractor or client, payment may be delayed and cause a cash
flow deficit in our business. Additionally, subcontractors and vendors can file
liens for materials and services which can create client problems that can delay
payment.
20
The nature of our work, especially our store build-outs, involves the use of a
large number of sub-contractors. Our ability to schedule and rely upon these
sub-contractors for the timely and proper completion of a project is essential.
There is , therefore, a strict qualification process for all our vendors. The
failure of a sub-contractor to timely or properly perform a job on a
construction project could have a ripple effect that adversely affects our
revenue stream.
21
WE DEPEND ON OUR EMPLOYEES; THE LOSS OF KEY EMPLOYEES COULD DAMAGE OR RESULT IN
THE LOSS OF CLIENT RELATIONSHIPS AND ADVERSELY AFFECT OUR BUSINESS.
Our success and ability to grow is dependent, in part, on our ability to hire
and retain talented people. We compete against many traditional retailers to
attract our employees. The inability to attract qualified employees in
sufficient numbers to meet demand or the loss of a significant number of our
employees could have a serious negative effect on us, including our ability to
obtain and successfully complete important client engagements and thus maintain
or increase our revenues.
Our success largely depends upon the business generation capabilities and
project execution skills of our employees. In particular, our employees'
personal relationships with our clients are an important element of obtaining
and maintaining client engagements. Losing employees who manage substantial
client relationships or possess substantial experience or expertise could
adversely affect our ability to secure and complete engagements, which would
adversely affect our results of operations. We do have non-compete agreements
with certain employees. However the enforceability of same may be limited due to
the limitations on these agreements that have restricted their enforceability by
court decisions in various states.
In addition, if any of our key employees were to join an existing competitor or
form a competing company, some of our clients could choose to use the services
of that competitor instead of our services. Clients or other companies seeking
to develop in-house services similar to ours also could hire our key employees.
Such hiring would not only result in our loss of key employees but also could
result in the loss of a client relationship or a new business opportunity.
IF WE FAIL TO ESTABLISH AND MAINTAIN ALLIANCES FOR DEVELOPING, MARKETING AND
DELIVERING OUR SERVICES, OUR ABILITY TO INCREASE OUR REVENUES AND PROFITABILITY
MAY SUFFER.
Our business depends, in part, on our ability to develop and maintain alliances
with businesses such as banks and financial service firms and companies in order
to develop, market and deliver our services. If our strategic alliances are
discontinued or we have difficulty developing new alliances, our ability to
increase or maintain our client base may be substantially diminished.
INCREASE IN LABOR AND MATERIAL COSTS CAN RESULT IN A DECLINE IN PROFITABILITY.
We are subject to cost increases for both labor and materials, and while we have
a good relationship with our employees, we cannot be certain that we will not
face an increase in our labor costs, or an increase in the labor costs of our
vendors and subcontractors that perform services on our construction jobs.
Additionally, we are subject to material price increases that can be imposed on
us during or after we have submitted a bid price, and while we attempt to pass
along cost increases for labor and materials, there is no assurance that we will
be able to do so.
WE RELY ON THIRD PARTIES TO PROVIDE SERVICES AND THEIR FAILURE TO PERFORM THE
SERVICE COULD DO HARM TO OUR BUSINESS.
As part of providing services to clients, we rely on a number of third-party
service providers. These providers include construction contractors who are used
in connection with store build out projects. The failure of a third party to
properly or timely perform services can jeopardize our ability to maintain
certain business relationships and could adversely affect our revenues.
We face cost increases as a result of increases in business insurance and
related costs. We are required to carry business and professional liability
insurance in favor of our clients, and insurance companies have been subject to
rising premium rates for insurance coverage.
22
AN INCREASE IN BORROWING COSTS MAY HAVE AN ADVERSE IMPACT ON OUR CORE BUILDING
AND CONSULTING BUSINESS.
The prime interest rate and Federal funds borrowing rate is at a low point, and
has continued to be at a low ebb, to encourage and stimulate business
development and economic growth. In the event of any increase in the prime and
Federal funds rates, our clients may postpone or eliminate new build out and
construction jobs, as well as related consulting services which can have an
adverse effect on our resources and profit.
RISKS RELATED TO OUR FINANCIAL CONDITION
THE PRICE OF OUR SHARES MAY BE ADVERSELY AFFECTED BY THE PUBLIC SALE OF A
SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE.
A large number of our restricted shares may be subject to Rule 144 of the
Securities Act whereby they may currently be eligible for resale. Sales of a
large amount of our common stock in the public market could materially adversely
affect the market price of our common stock. Such sales also may inhibit our
ability to obtain future equity or equity-related financing on acceptable terms.
In the past, we have raised money through the sale of shares of our common stock
or derivative securities that may convert into shares of our common stock at a
discount to the current market price. Such arrangements have included the
private sale of shares to investors on the condition that we register such
shares for resale by the investors to the public. These arrangements have taken
various forms including private investments in public equities, or "PIPE"
transactions, and other transactions.
We will continue to seek financing on an as-needed basis on terms that are
negotiated in arms-length transactions. Moreover, the perceived risk of dilution
may cause our existing stockholders and other holders to sell their shares of
stock, which would contribute to a decrease in our stock price. In this regard,
significant downward pressure on the trading price of our stock may also cause
investors to engage in short sales, which would further contribute to
significant downward pressure on the trading price of our stock.
WE HAVE INCURRED LOSSES IN THE PAST AND WE MAY INCUR LOSSES IN THE FUTURE.
We have incurred losses in each year since our inception except for our most
recently completed fiscal year. Depending upon business cycles and other factors
beyond our control we may continue to experience losses, or in the case of
profits, same may not be sustainable.
WE MAY REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR BUSINESS OPERATIONS OR
IMPLEMENT BUSINESS INITIATIVES IN THE FUTURE
Although we believe that we currently have sufficient funding in place to
sustain our present business operations for the foreseeable future, we continue
to seek additional financing through the issuance of equity or debt.
Additionally, if we experience any changes in the revenues we derive from
merchandising, furniture, environmental design and build out, we may require
additional funding to maintain our current business operations. Unless we are
able to generate additional revenue from our current business, we will require
additional funds to implement any business initiatives we may seek to realize in
the future.
ALL OF OUR ASSETS ARE CURRENTLY PLEDGED AS SECURITY PURSUANT TO THE TERMS OF OUR
CREDIT FACILITY
We have recently completed a one year extension and restructuring of the senior
credit facility of our wholly-owned subsidiary, Willey Brothers, Inc., effective
December 29, 2004 with Bank of America Business Capital. All assets of our
wholly owned subsidiary are pledged to secure the credit facility. The
restructured facility provides for a $1,750,000 revolving credit facility
through March 31,2005 and thereafter $1,500,000, and a $3,300,000 term loan. The
original credit facility provided for a term loan of $8,000,000 and a revolving
credit facility of $6,000,000. Under the restructured facility, Willey Brothers
will pay a non-default rate of interest of the base rate plus 3.50%. As an
additional fully earned non-refundable amendment fee, Willey Brothers will pay
0.5% of the Obligations as of and on January 3, 2005; plus 1% of the Obligations
as of and on June 30, 2005 and 1.5% of the Obligations as of and on September
30, 2005. Under the terms of the tenth amendment to the facility, Willey
Brothers will make prepayments toward the balance due under the term loan of
$100,000 a month for the first six months, which will increase to $200,000 a
month for the remainder of the term. Additionally under the amendment, Willey
Brothers will pay $25,000 a month for the first six months of the term of the
amendment toward previously outstanding amendment fees of $580,000. The payments
toward previously outstanding amendment fees will increase to $50,000 a month
for the last six months of the amendment. The amended credit facility continues
to impose certain other loan covenants on Willey Brothers and the Company. The
facility expires on December 31, 2005. In the event we can not negotiate a
further extension, modification or obtain a new credit facility, our ability to
continue our business operations may be adversely affected.
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RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
WE ARE UNCERTAIN HOW TRADING ON THE OVER THE COUNTER BULLETIN BOARD WILL AFFECT
THE LIQUIDITY AND SHARE VALUE OF OUR STOCK.
Since August 29, 2003, our stock has traded on the Over-the-Counter Bulletin
Board. We are uncertain about the long-term impact, if any, on share value as a
result of trading on the Over-the-Counter Bulletin Board.
THE PRICE OF OUR COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL FACTORS
WHICH WILL CONTINUE TO AFFECT THE PRICE OF OUR STOCK.
Our common stock has traded as low as $0.45 per share and as high as $1.08 per
share in the twelve months ended December 31, 2004. We believe that some of the
factors leading to the volatility include:
o Price and volume fluctuations in the stock market at large which do
not relate to our operating performance;
o Fluctuations in our operating results;
o Concerns about our ability to finance our continuing operations;
o Financing arrangements, including the recent financings, which have
resulted in the issuance of a significant number of shares in
relation to the number of shares previously outstanding;
o Announcements of technological innovations or new products which we
or our competitors make;
o Changes in financial services and the banking industry in the united
States or abroad;
o Changes in stock market analysts' recommendations regarding
BrandPartners and other companies that may provide similar services;
o Fluctuations in market demand for our services and products; and
o Sudden change in our management and composition of our Board of
Directors.
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OUR ISSUANCE OF WARRANTS, OPTIONS AND STOCK GRANTS TO CONSULTANTS FOR SERVICES
MAY HAVE A NEGATIVE EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK AND OUR
FINANCIAL RESULTS.
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123R, Share-Based Payments ("FAS123R"). FAS123R requires that the
cost of all awards of equity instruments made to employees in exchange for
employment services be recorded at fair value on the grant date with the cost to
be charged to expense as the award vests. Additionally, we have issued
approximately 14 million options to purchase shares of our common stock as
compensation to consultants, certain employees and directors. Our recently
approved 2004 plan is intended to replace our 2001 option plan for prospective
grants. As we continue to look for ways to minimize our use of cash while
obtaining required services, we may issue additional options at or below the
current market price and make additional stock bonus grants. In addition to the
potential dilutive effect of a large number of shares and a low exercise price
for options, there is the potential that a large number of the underlying shares
may be sold on the open market at any given time, which could place downward
pressure on the trading price of our common stock.
SHAREHOLDERS OF OUR COMMON STOCK MAY FACE DILUTION OF THEIR HOLDINGS.
The exercise of some or all of our outstanding warrants and options, including
the exercise of our Class A Warrants and Class B Warrants (see "Description of
Securities"), would dilute the then-existing stockholders' ownership of common
stock, and any sales in the public market of the common stock issuable upon such
exercise could adversely affect prevailing market prices for our common stock.
In addition, the existence of a significant amount of outstanding options and
warrants may encourage short selling because the exercise of the outstanding
options and warrants could depress the price of our common stock. Moreover, the
terms upon which we would be able obtain additional equity capital could be
adversely affected, because the holders of such securities can be expected to
exercise them at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable than those provided by such securities.
CERTAIN HOLDERS OF OUR CLASS A AND B WARRANTS ISSUED IN OUR PRIVATE PLACEMENT
COMPLETED IN FEBRUARY 2002 HAVE CLAIMED THAT THE EXERCISE PRICE OF THEIR
WARRANTS SHOULD BE RESET.
Under the terms of warrant agreements entered into as a part of our private
placement completed in February 2002, we were obligated to reset the exercise
price of warrants issued, if during the two year period immediately following
the closing of the sale of common stock and warrants to a subscriber we issued,
other than pursuant to a stock grant or stock options to employees or
consultants on in connection with merger or acquisition activities, any shares
of common stock or equivalents at a price or exercise price per share that was
less that the market price as defined in the warrant agreements. We subsequently
issued securities in a private placement that closed January 20, 2004, which as
a result of the prior warrant agreements, resulted in the ratcheting down of the
exercise price of certain warrants issued in our placement completed in February
2002, provided the warrants were issued in a closing that occurred less than two
years prior to January 20, 2004. Specifically, a total of 681,985 warrants
issued in closings that occurred in the final two traunches of the placement
completed in February 2002 were eligible for an adjustment of the exercise price
as the January 20, 2004 share issuance occurred within two years of the closings
for those warrants. Certain holders of 4,232,421 warrants that were issued in
closings more than two years prior to the January 20, 2004 date have also
requested that their warrants be reset or ratcheted down, and we contend that
these warrants should not be reset by virtue of the terms of their warrant
agreements.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
Shares of our common stock are "penny stocks" as defined in the Exchange Act,
which are traded in the Over-The-Counter Market on the OTC Bulletin Board. As a
result, investors may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the common stock being registered
hereby. In addition, the "penny stock" rules adopted by the Commission under the
Exchange Act subject the sale of the shares of our common stock to certain
regulations which impose sales practice requirements on broker/dealers. For
example, brokers/dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in this document are the following:
25
o The bid and offer price quotes in and for the "penny stock" and the
number of shares to which the quoted prices apply.
o The brokerage firm's compensation for the trade.
o The compensation received by the brokerage firm's salesperson for
the trade.
In addition, the brokerage firm must send the investor:
o A monthly account statement that gives an estimate of the value of
each "penny stock" in the investor's account.
o A written statement of the investor's financial situation and
investment goals.
Legal remedies, which may be available to you as an investor in "penny stocks"
are as follows:
o If "penny stock" is sold to you in violation of your rights listed
above, or other Federal or states securities laws, you may be able
to cancel your purchase and get your money back.
o If the stocks are sold in a fraudulent manner, you may be able to
sue the persons and firms that caused the fraud for damages.
o If you have signed an arbitration agreement, however, you may have
to pursue your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker/dealer, the broker/dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker/dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of our common stock.
Resale restrictions on transferring "penny stocks" are sometimes imposed by some
states, which may make transactions in our stock more difficult and may reduce
the value of the investment. Various state securities laws pose restrictions on
transferring "penny stocks" and as a result, investors in our common stock may
have the ability to sell their shares of our common stock impaired.
OUR BOARD OF DIRECTORS HAS CERTAIN DISCRETIONARY RIGHTS WITH RESPECT TO OUR
PREFERRED SHARES THAT MAY ADVERSELY AFFECT THE RIGHTS OF OUR COMMON
STOCKHOLDERS.
Our Board may, without shareholder approval, designate and issue our preferred
stock in one or more series. Additionally, our Board may designate the rights
and preferences of each series of preferred stock it designates which may be
greater than the rights of our common stock. Potential effects on our common
stock may include among other things:
o Restricting dividends;
o Dilution of voting power;
o Impairment of liquidation rights; and
o Delay or prevent a change in the control of the Company.
26
OUR CERTIFICATE OF INCORPORATION PLACES LIMITATIONS ON THE LIABILITY OF
DIRECTORS
Our Certificate of Incorporation includes a provision to eliminate, to the
fullest extent permitted by the Delaware General Corporation Law as in effect
from time to time (the "DGCL"), the personal liability of our directors for
monetary damages arising from a breach of their fiduciary duties as directors.
In addition, our Certificate of Incorporation and By-laws include provisions
requiring us to indemnify, to the fullest extent permitted by the DGCL, any
persons made a party or threatened to be made a party to any action, suit or
proceeding by reason of the fact that such person is or was a director or
officer of the Company, or is or was serving at our request as a director or
officer of another corporation or entity, against all expense, liability or loss
incurred in connection therewith. Such provisions also permit us, to the extent
authorized by our Board of Directors, to indemnify and grant rights to
indemnification to our employees and agents to the fullest extent such
indemnification is available to officers and directors.
CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY MAKE IT
MORE DIFFICULT TO EFFECTUATE A CHANGE IN THE COMPOSITION OF OUR BOARD
Certain provisions in our Certificate of Incorporation and By-laws may make it
more difficult for holders of a majority of the outstanding shares of Common
Stock to change the composition of the Board of Directors and to remove existing
management where a majority of the stockholders may be dissatisfied with the
performance of the incumbent directors or otherwise desire to make changes.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
The Company's Facility with the $3,300,000 note and revolving line of credit
expose the company to the risk of earnings or cash flow loss due to changes in
market interest rates. The Facility accrues interest at the bank's base rate
plus an applicable margin. For 2003, the Facility accrued interest at either the
bank's base rate or LIBOR plus an applicable margin. On January 2, 2004, the
LIBOR interest rate was eliminated. On April 23, 2001 and in conjunction with
obtaining the Company's revolving credit facility, the Company entered into an
interest rate cap agreement, which limited the Company's exposure if the LIBOR
interest rate exceeded 6.5%. The notional amount under the cap is $4,000,000.
The fair value was immaterial at December 31, 2004 and 2003. The agreement
expired April 23, 2004.
The table below provides information on the Company's market sensitive financial
instruments as of December 31, 2004:
Weighted Average
Interest Rate
Principal Balance at December 31, 2004
Term Loan $3,300,000 6.50%
Revolving Credit Facility $ 0 6.50%
27
Holding Company and Operating Subsidiary
We conduct our business through our subsidiary, Willey Brothers, Inc. We have
relied and continue to rely on cash payments from our operating subsidiaries to,
among other things, pay creditors, maintain capital, and meet our operating
requirements. Currently, Willey Brothers is our sole operating subsidiary. The
March 29, 2002 Amendment and Waiver Agreement with our lender prohibits Willey
Brothers from paying management fees to the Company until the debt is repaid in
full to the lender. The debt is due and payable on December 31, 2005.
Regulations, legal restrictions and contractual agreements could restrict any
needed payments from Willey Brothers or any other operating subsidiaries we may
subsequently acquire. If we are unable to receive cash funds from Willey
Brothers, or from any operating subsidiary we may acquire in the future, our
operations and financial condition would be materially and adversely affected.
Stock Price Fluctuations
The market price of our common stock has fluctuated significantly and may be
affected by our operating results, changes in our business and management,
changes in the industries in which we conduct business, and general and market
conditions. In addition, the stock markets in general experience extreme price
and volume fluctuations. These fluctuations have affected stock prices of many
companies without regard to their specific operating performance. The price of
our common stock may fluctuate significantly in the future.
Inflation
We do not believe that inflation has had a material effect on the Company's
results of operations.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are not historical
facts but rather reflect the Company's current expectations concerning future
results and events. The words "believes," "anticipates," " expects," and similar
expressions, which identify forward-looking statements, are subject to certain
risks, uncertainties and factors, including those which are economic,
competitive, and technological, that could cause actual results to differ
materially from those forecast or anticipated. Such factors include, among
others:
o The continued services of James Brooks as Chief Executive Officer of
BrandPartners Group and Willey Brothers
o Our ability to refinance our existing short term debt at all or on
terms favorable to the Company
o Our ability to identify appropriate acquisition candidates, finance
and complete such acquisitions and successfully integrate the
acquired businesses
o Changes in our business strategies or development plans
o Competition
o Our ability to grow within the financial services industry
o Our ability to successfully penetrate other markets
o Our ability to obtain sufficient financing to continue operations
o General economic and business conditions, both nationally and in the
regions in which we operate
28
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of the
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company in this report, as well as the
Company's periodic reports on Forms 10-K and 10-Q and other filings with the
Securities and Exchange Commission.
Item 8. Financial Statements
The audited, consolidated financial statements of the Company for the years
ended December 31, 2004, 2003 and 2002 are set forth at the end of this Annual
Report on Form 10-K and begin on page 41.
The consolidated financial statements of BrandPartners Group, Inc. and
subsidiaries as of December 31, 2003 and 2002 have been audited by Goldstein and
Morris Certified Public Accountants, PC. Their report for the years ended
December 31, 2003 and 2002, has not been reissued due to their discontinuation
of public accounting and the cessation of operations. A copy of their previously
issued report has been included.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On October 20, 2004, our former auditors, Goldstein and Morris Certified Public
Accountants, P.C. resigned as they advised us that they no longer had the
resources available to service the account. Goldstein and Morris was previously
appointed as our certifying accountants on February 18, 2004, and had audited
our consolidated balance sheets as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders equity
(deficit) and cash flows fro the years ended December 31, 2003, 2002 and 2001.
Goldstein and Morris' reports on the financial statements for our fiscal years
ended December 31, 2003 and 2002 did not contain an adverse opinion or a
disclaimer of opinion or were such reports qualified or modified as to
uncertainty, audit scope or accounting principles. During the period in which
Goldstein and Morris audited our financial statements and the interim period in
which Goldstein and Morris served as our certifying accountants, there were no
disagreement(s) with Goldstein and Morris on any matter of accounting principles
or practices, financial statement disclosure or auditor scope or procedure,
which disagreement(s), if not resolved to the satisfaction of Goldstein and
Morris, would have caused Goldstein and Morris to make reference to the subject
matter of such disagreement(s) in connection with its audit report.
On November 2, 2004, upon the recommendation of our audit committee, our Board
of Directors engaged Michael F. Albanese, CPA, to audit our consolidated
financial statements. During the two most recent fiscal years and through
November 2, 2004, we had not consulted with Albanese regarding either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, and neither a written report nor oral advise was
provided that was an important factor considered in our reaching a decision as
to the accounting, auditing or financial reporting issue; or any matter that was
either the subject of a disagreement.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Under the supervision of and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures within 90
days of the filing date of this annual report. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are
effective in timely altering them to material information relating
to the Company required to be included in the Company's periodic SEC
filings. There were no significant changes in our internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
29
Disclosure controls and procedures are the controls and other
procedures that are designed to ensure that information required to
be disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the report
that we file under the Exchange Act is accumulated and communicated
to our management, including our Non-Executive Chairman, Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
(b) Changes in internal controls
Not applicable.
Item 9B. Other Information
On January 7, 2005, the Company incorporated BrandPartners Europe, Ltd., in
England as a wholly owned subsidiary. The Company is the sole shareholder of
BrandPartners Europe, Ltd.
On January 31, 2005, the lease of the warehouse located in Phoenix, Arizona was
terminated, and the remaining inventory was moved to Rochester, New Hampshire.
Effective February 1, 2005, the Company entered into a letter of engagement with
Trilogy Capital Partners, Inc. ("Trilogy") whereby Trilogy will provide
marketing, financial public relations and investor relations service to the
Company. The term of the agreement is for one year and thereafter will be month
to month. Under the terms of the letter of engagement, Trilogy will receive fees
of $10,000 a month and an aggregate of 600,000 three-year warrants with vesting
as follows:
o 200,000 warrants fully vested and exercisable at $1.00 per share
o 200,000 warrants exercisable at $1.50 per share vesting when the
Company's common stock trades at a per share price of $1.50 per
share or greater for five consecutive trading days prior to February
2, 2006
o 200,000 warrants exercisable at $2.00 per share vesting when the
Company's common stock trades at a per share price of $2.00 per
share or greater for five consecutive trading days prior to February
2, 2006
The warrants were issued to Trilogy in accord with the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended or Regulation D
promulgated there under. The warrants contain registration rights whereby the
Company has agreed to prepare and file a registration statement for the warrant
shares no later than June 10, 2005.
On March 16, 2005, the Company entered into amendments to agreements with
certain executive officers and directors. Specifically, the employment agreement
with James F. Brooks, the Company's Chief Executive Officer, was amended and
extended an additional three years from the date of the amended agreement. Under
the amended agreement, Mr. Brooks will continue to receive annual compensation
of $300,000, as well as remain eligible to participate and to receive customary
benefits offered by the Company to all employees. In addition to serving as
Chief Executive Officer under the amended agreement, Mr. Brooks also serves as
President and Corporate Secretary for the Company and its wholly owned
subsidiary, Willey Brothers, Inc. The agreement contains a change of control
provision, which, if invoked, entitles Mr. Brooks to receive all payments due to
him under the agreement at said time. The amended agreement further permits Mr.
Brooks to engage in outside consulting provided that the Company's Board of
Directors determines that said services will not conflict or interfere with Mr.
Brooks' responsibilities and obligations to the Company. In addition to the
amendment and extension of Mr. Brooks' agreement, the Company also entered into
an amended agreement with its chairman, Anthony J. Cataldo, whereby the term of
the agreement was extended an additional three years from the date of the
amended agreement. The agreement also contains a change of control provision
identical to that of the amended agreement for Mr. Brooks. Both agreements were
adopted by the Board of Directors upon recommendation of the Company's
Compensation Committee.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information required by Item 10 is incorporated herein by reference to the
information contained in our definitive proxy/information statement related to
the 2005 annual meeting of stockholders to be filed with the Securities and
Exchange Commission within 120 days following December 31, 2004.
Executive Officers
The information concerning our executive officers required by Item 10 is
incorporated herein by reference to the information contained in our definitive
proxy/information statement related to the 2005 annual meeting of stockholders
to be filed with the Securities and Exchange Commission within 120 days
following December 31, 2004.
Section 16(a) Beneficial Ownership Reporting Compliance
The information concerning Section 16(a) Beneficial Ownership Reporting
Compliance by our directors and executive officers is incorporated by reference
to the information contained in our definitive proxy/information statement
related to the 2005 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days following December 31, 2004.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to the
information contained in our definitive proxy/information statement related to
the 2005 annual meeting of stockholders to be filed with the Securities and
Exchange Commission within 120 days following December 31, 2004.
31
Item 12. Securities Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference to the
information contained in our definitive proxy/information statement related to
the 2005 annual meeting of stockholders to be filed with the Securities and
Exchange Commission within 120 days following December 31, 2004.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference to the
information contained in our definitive proxy/information statement related to
the 2005 annual meeting of stockholders to be filed with the Securities and
Exchange Commission within 120 days following December 31, 2004.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated herein by reference to the
information contained in our definitive proxy/information statement related to
the 2005 annual meeting of stockholders to be filed with the Securities and
Exchange Commission within 120 days following December 31, 2004.
32
PART IV
Index To Exhibits
10.1 Ninth Amendment, dated as of November 29, 2003, between Fleet Capital
Corporation, Willey Brothers and the Company (incorporated by reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K filed February 4,
2004).
10.2 Surrender Agreement for leasehold at 777 Third Avenue, New York, New York,
dated as of January 20, 2004 between the Company and Sage Realty Group as
agent (incorporated by reference to Exhibit 10.1 on the Company's Current
Report on Form 8-K filed February 4, 2004).
10.3 Settlement Agreement dated January 20, 2004, by and among the Company,
Willey Brothers, James M. Willey, individually and as trustee of the James
M. Willey Trust - 1995, Thomas P. Willey, individually and as trustee of
the Thomas P. Willey Revocable Trust of 1998, and McLane, Graf, Raulerson
& Middleton, PA as escrow agent, settling obligations under prior
agreements dated as of May 15, 2003 (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed February 4, 2004).
10.4 Amendment No. 3 and Waiver to Subordinated Note and Warrant Purchase
Agreement dated as of January 7, 2004 between Corporate Mezzanine II,
L.P., Willey Brothers and the Company (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-k filed February 4,
2004).
10.5 Amendment No. 1 to the Subordinated Note dated as of January 7, 2004 by
Willey Brothers, Inc. as maker and Corporate Mezzanine II, L.P. as holder
(incorporated by reference to Exhibit 10.4 to the Company's Current Report
filed on Form 8-k filed February 4, 2004).
10.6 Unsecured Subordinated Promissory Note between the Company and Longview
Fund L.P. dated July 6, 2004 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q filed August 16, 2004).
10.7 Common Stock Purchase Warrant, dated as of July 6, 2004, between the
Company and Longview Fund L.P. (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q filed August 16, 2004).
10.8 Amendment to Employment Agreement dated as of August 13, 2004 between the
Company and James F. Brooks (incorporated by reference to Exhibit 10.3 to
the Company's Quarterly report on Form 10-Q filed August 16, 2004).
10.9 Amendment to Agreement dated August 13, 2004 between the Company and
Anthony J. Cataldo (incorporated by reference to Exhibit 10.4 on the
Company's Quarterly Report on Form 10-Q filed August 16, 2004).
10.10 Purchase and Joinder Agreement with BancRealty Advisors, LLC, dated
September 21, 2004 (incorporated by reference to Exhibit 10.1 on the
Company's Quarterly Report on Form 10-Q filed November 16, 2004).
10.11 Modification Agreement, dated September 29, 2004, between the Company and
Longview Fund L.P. (incorporated by reference to Exhibit 10.1 to the
Company's Current Report Form 8-K, dated September 30, 2004).
10.12 Unsecured Subordinated $625,000 Promissory Note issued by the Company to
Longview Fund L.P. dated September 29, 2004 (incorporated by reference to
Exhibit 10.2 to the Company's Current Report filed on form 8-K filed
September 30, 2004).
33
10.13 Registration Rights Agreement entered into September 20, 2004 between the
Company and Longview Fund L.P. (incorporated by reference to Exhibit 10.3
to the Company's Current Report filed on Form 8-k field September 30,
2004).
10.14 Tenth Amendment dated December 28, 2004 between Bank of America Business
Capital, Willey Brothers and the Company.
10.15 Modification agreement to Unsecured Subordinated $625,000 Subordinated
Promissory Note dated January 5, 2005 between Longview Fund, L.P. and the
Company.
10.16 Form of Common Stock Purchase Warrant to be issued in accord with
Modification Agreement to Unsecured $625,000 Subordinated Note.
10.17 Letter of Engagement for marketing, financial public relations and
investor relations services dated as of February 1, 2005 between Trilogy
Capital Partners, Inc. and the Company.
10.18 Common Stock Purchase Warrant, exercisable at $1.00 issued to Trilogy
Capital Partners.
10.19 Common Stock Purchase Warrant, exercisable at $1.50 issued to Trilogy
Capital Partners.
10.20 Common Stock Purchase Warrant, exercisable at $2.00 issued to Trilogy
Capital Partners.
10.21 Amendment to Employment Agreement dated March 16, 2005 between James F.
Brooks and the Company.
10.22 Amendment to Agreement, dated March 16, 2005, between Anthony J. Cataldo
and the Company.
10.23 Agreement dated August 16, 2004 between the Company and James F. Brooks
(incorporated by reference to Exhibit 10.3 on the Company's Quarterly
Report on Form 10-Q filed August 16, 2004.
14.1 Code of Ethics adopted December 8, 2004 by the Company's Board of
Directors (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K, dated December 10, 2004).
16.1 Letter from Goldstein Golub Kessler LLP dated February 20, 2004 addressed
to the Securities and Exchange Commission in connection with Item
304(a)(3) of Regulation S-K (incorporated by reference to Exhibit 16.1 to
the Company's Current Report on Form 8-K filed February 23, 2004).
16.2 Resignation letter from Goldstein & Morris dated October 20, 2004
(incorporated by reference to Exhibit 16.1 to the Company's Current Report
filed on Form 8-K filed October 22, 2004).
16.3 Letter from Goldstein and Morris Certified Public Accountants P.C.
addressed to the Securities and Exchange Commission dated November 23,
2004 (incorporated by reference to Exhibit 16.1 to the Company's Current
Report filed on Form 8-K filed December 1, 2004).
21.1 List of Subsidiaries
31.1 Certification of Chief Executive Officer and President Pursuant to 17
C.F.R. 240.13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to 17 C.F.R.
240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRANDPARTNERS GROUP, INC.
/s/ JAMES F. BROOKS
- -------------------------
James F. Brooks
Chief Executive Officer and President
March 24, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Anthony J. Cataldo March 25, 2005
Anthony J. Cataldo, Chairman of the Board
/s/ James F. Brooks March 25, 2005
James F. Brooks, Chief Executive Officer and Secretary
/s/ J. Weldon Chitwood March 25, 2005
J. Weldon Chitwood, Director
/s/ Richard Levy March 25, 2005
Richard Levy, Director
/s/ Suzanne Verrill March 25, 2005
Suzanne Verrill, Chief Financial Officer
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accountant 40
Financial Statements
Consolidated Balance Sheets 41
Consolidated Statements of Operations 42
Consolidated Statements of Stockholders' Equity (Deficit) 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders of
BrandPartners Group, Inc.
I have audited the accompanying consolidated balance sheet of BrandPartners
Group, Inc. and Subsidiary as of December 31, 2004 and the related consolidated
statements of operations, stockholders equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. My responsibility is to express an opinion on these
consolidated financial statements based on my audit.
I conducted my audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform an audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BrandPartners Group, Inc. and Subsidiary as of December 31, 2004 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Michael F. Albanese, C.P.A.
Parsippany, New Jersey
February 25, 2005
40
THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED GOLDSTEIN AND MORRIS CERTIFIED
PUBLIC ACCOUNTANTS, PC, REPORT. THIS REPORT HAS NOT BEEN REISSUED BY GOLDSTEIN
AND MORRIS. THIS REPORT REFERS TO THE YEAR ENDED DECEMBER 31, 2001, WHICH, IN
ACCORDANCE WITH SEC REQUIREMENTS, IS NOT PRESENTED IN THIS FILING.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders' of
BrandPartners Group, Inc.
We have audited the accompanying consolidated balance sheets of BrandPartners
Group, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 2003, 2002 and 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BrandPartners Group, Inc. and Subsidiaries as of December 31, 2003 and 2002 and
the consolidated results of its operations and their consolidated cash flows for
the years ended December 31, 2003, 2002 and 2001 in accordance with accounting
principles generally accepted in the United States of America.
/s/ Goldstein and Morris CPA's, P.C.
New York, New York
March 26, 2004
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 2004 2003*
------------ ------------
Cash $ 2,845,573 $ 413,946
Accounts receivable,net of allowance for
doubtful accounts of $141,339 and $186,330 5,079,667 5,956,610
Costs and estimated earnings in excess of billings 1,079,515 1,854,886
Inventories 1,326,942 969,020
Prepaid expenses and other current assets 691,158 541,635
------------ ------------
Total current assets 11,022,855 9,736,097
Property and equipment, net 1,515,237 1,486,551
Goodwill 24,271,969 24,271,969
Deferred financing costs 202,057 304,126
Other assets 293,818 34,911
------------ ------------
Total assets $ 37,305,936 $ 35,833,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 5,959,252 $ 9,345,621
Billings in excess of cost and estimated earnings 4,729,661 6,333,235
Current maturities, long term debt -- 2,000,000
Short term debt 3,972,708 4,932,486
Other current liabilities -- 1,600,848
------------ ------------
Total current liabilities 14,661,621 24,212,190
------------ ------------
Long term debt, net of current maturities 5,784,193 12,952,668
------------ ------------
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; issued 32,497,597 and 18,163,553 324,976 181,636
Additional paid in capital 44,463,181 40,634,822
Accumulated deficit (27,615,535) (41,835,162)
Treasury stock (312,500) (312,500)
------------ ------------
Total stockholders' equity (deficit) 16,860,122 (1,331,204)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 37,305,936 $ 35,833,654
============ ============
* Reclassified for comparative purposes
The accompanying notes are an integral part of these financial statements.
41
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Revenues $ 50,612,819 $ 33,667,062 $ 38,879,500
------------ ------------ ------------
Costs and expenses
Cost of revenues 35,017,272 29,396,353 29,725,975
Selling, general and administrative 9,472,529 11,921,942 13,232,518
------------ ------------ ------------
Total expenses 44,489,801 41,318,295 42,958,493
------------ ------------ ------------
Operating income (loss) 6,123,018 (7,651,233) (4,078,993)
------------ ------------ ------------
Other income (expense)
Interest income 38,935 71,100
Manamgent fee income 332,160
Interest expense, net (988,676) (1,825,179) (2,461,632)
Gain on forgiveness of debt 9,085,285 -- --
Settlement of lawsuit -- (227,220) --
Lease termination fee (1,075,000)
Other -- (224,365) 348,138
------------ ------------ ------------
Total other income (expense) 8,096,609 (3,312,829) (1,710,234)
------------ ------------ ------------
Income taxes benefit 986,265
------------ ------------ ------------
Income (loss) from continuing operations 14,219,627 (10,964,062) (4,802,962)
------------ ------------ ------------
Loss from discontinued operations (7,169,585)
------------ ------------ ------------
NET INCOME (LOSS) $ 14,219,627 $(10,964,062) $(11,972,547)
============ ============ ============
Basic and diluted earnings (loss) per share
Basic $ 0.47 $ (0.59) $ (0.65)
Diluted $ 0.39 $ (0.59) $ (0.65)
Continuing operations $ 0.39 $ (0.59) $ (0.26)
Discontinued operations $ (0.39)
Net income (loss) - basic & diluted $ 0.39 $ (0.59) $ (0.65)
Weighted - average shares outstanding
Basic 30,390,636 18,468,553 18,437,942
Diluted 36,474,663 18,468,553 18,437,942
The accompanying notes are an integral part of these statements.
42
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Accumulated Treasury Stock
Shares Par Value Paid in Capital Deficit Shares $ Total
------ --------- --------------- ------- ------ - -----
Balance at December 31, 2001 17,857,462 $178,575 $39,841,655 $ (18,898,553) (100,000) $ (312,500) $ 20,809,177
Shares issued in private placement 285,258 2,853 242,655 -- -- -- 245,508
Shares issued for services 20,833 208 24,792 -- -- -- 25,000
Net loss -- -- -- (11,972,547) -- -- (11,972,547)
---------------------------------------------------------------------------------------------
Balance at December 31, 2002 18,163,553 $181,636 $40,109,102 $ (30,871,100) (100,000) $ (312,500) $ 9,107,138
Options to settle lawsuit -- -- 77,220 -- -- -- 77,220
Options issued for services -- -- 448,500 -- -- -- 448,500
Net loss -- -- -- (10,964,062) -- -- (10,964,062)
---------------------------------------------------------------------------------------------
Balance at December 31, 2003 18,163,553 $181,636 $40,634,822 $ (41,835,162) (100,000) $ (312,500) $ (1,331,204)
Shares issued in private placement 12,400,001 124,000 2,771,000 -- -- -- 2,865,000
Shares issued for debt 1,550,000 15,510 789,490 -- -- -- 805,000
Shares issued for services 32,000 1,330 16,029 -- -- -- 17,359
Options/warrants exercised 352,043 2,500 73,370 -- -- -- 75,870
Warrants issued in connection with
extension of debt maturity -- -- 105,000 -- -- -- 105,000
Options/warrants issued for services -- -- 73,470 -- -- -- 73,470
Net income -- -- -- 14,219,627 14,219,627
---------------------------------------------------------------------------------------------
Balance at December 31, 2004 32,497,597 $324,976 $44,463,181 $ (27,615,535) (100,000) $ (312,500) $ 16,860,122
=============================================================================================
The accompanying notes are an integral part of these statements.
43
BrandPartners Group, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ -----------
Cash flows from operating activities
Net income (loss) $ 14,219,627 $(10,964,062) $(4,802,962)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 620,269 919,919 889,875
Forgiveness of long term debt (9,085,285) -- --
Amortization of discount on notes payable -- 67,344 410,646
Provision for doubtful accounts (139,824) 72,370 17,194
Non-cash compensation 90,860 860,720 310,000
Allowance for obsolete inventory -- 317,849 (7,575)
Options issued for services -- 135,000 --
Non-cash interest expense 105,000 -- --
Put warrant (gain) loss -- 164,053 (384,143)
Loss on disposal of fixed assets -- 18,340 --
Loss on disposal of assets -- 41,972 36,005
Changes in operating assets and liabilities
Accounts receivable 1,016,767 1,447,452 (1,090,453)
Costs and estimated earnings in excess of billings 775,371 4,433,646 (2,853,785)
Inventories (357,922) 816,040 378,753
Prepaid expenses and other current assets (149,523) 265,032 (529,158)
Other assets -- (5,006) (164,092)
Accounts payable and accrued expenses (587,807) (5,145,900) 5,881,013
Other current liabilities (1,600,848) 525,354 741,370
Billings in excess of costs and estimated earnings (1,603,574) 5,216,875 723,062
Interest payable (long term) -- 217,729 --
Income taxes -- 1,208,420 (1,103,931)
------------ ------------ -----------
Net cash provided by (used in) operating activities 3,303,111 613,147 (1,548,181)
------------ ------------ -----------
Cash flows from investing activities
Purchase of Membership Interest (250,000) -- --
Acquisition of equipment (546,886) (415,627) (545,734)
Loan to officers (78,000)
Proceeds from disposition of discontinued operations and other assets -- 30,061 2,008,995
------------ ------------ -----------
Net cash provided by (used in) investing activities (796,886) (385,566) 1,385,261
------------ ------------ -----------
Cash flows from financing activities
Borrowings (repayments) on credit facility, net -- (333,559) --
Net borrowings on short term debt (959,778) -- 2,857,648
Net repayments on long term debt (2,083,190) (2,044,800) (5,029,268)
Repayment of loan to officers -- 46,800 31,200
Proceeds from short term debt -- 350,000 --
Proceeds from exercise of options 73,370 -- --
Proceeds from sale of common stock -- -- 245,508
Proceeds from private placement of equity, net of costs 2,895,000 -- --
------------ ------------ -----------
Net cash provided by (used in) financing activities (74,598) (1,981,559) (1,894,912)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH 2,431,627 (1,753,978) (2,057,832)
Cash, beginning of year 413,946 2,167,924 4,225,756
------------ ------------ -----------
Cash, end of year $ 2,845,573 $ 413,946 $ 2,167,924
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 328,565 $ 870,656 $ 1,251,352
============ ============ ===========
Cash paid during the period for taxes $ -- $ -- $ 263,888
============ ============ ===========
The accompanying notes are an integral part of the financial statements.
44
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE A - NATURE OF BUSINESS AND BASIS OF PRESENTATION
BrandPartners Group, Inc. operates through its wholly-owned subsidiary, Willey
Brothers, Inc. ("Willey Brothers"), which was acquired on January 16, 2001.
Through Willey Brothers, Inc., the Company provides services and products to the
financial services industry consisting of strategic retail positioning and
branding, environmental design and store construction services, retail
merchandising analysis, display systems and signage, and point-of-sale
communications and marketing programs, throughout the United States. The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of
BrandPartners Group, Inc., its wholly-owned subsidiary, Willey
Brothers, and iMapData through October 31, 2002. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
2. Revenue Recognition
Willey Brothers records sales on its long-term contracts on a
percentage-of-completion basis, based upon actual costs incurred to
date on such contracts. Contract costs include all direct materials,
labor and subcontractor costs. General and administrative expenses
are accounted for as period charges and, therefore, are not included
in the calculation of the estimates to complete. Anticipated losses
are provided for in their entirety without reference to
percentage-of-completion. Costs and estimated earnings in excess of
billings represent unbilled charges on long-term contracts
consisting of revenue recognized but not billed at December 31. Such
billings are generally made and collected in the subsequent year.
Billings in excess of cost and estimated earnings represent billed
charges, such as deposits, on long-term contracts consisting of
amounts not recognized but billed at December 31 (see Note "F").
Revenue from short-term contracts is recognized when the product is
shipped/and or the service is rendered.
3. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of
three months or less when purchased to be cash equivalents.
45
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
4. Inventories
Inventories are priced at the lower of cost (determined by the
weighted-average method, which approximates first-in, first-out) or
market. Inventories consist of the following at December 31, 2004
and 2003.
2004 2003
---------- --------
Finished goods $1,045,270 $628,832
Raw Material $ 278,584 $329,866
Work-in-Process $ 3,088 $ 10,322
---------- --------
$1,326,942 $969,020
========== ========
5. Property and Equipment
Property and equipment are recorded at cost. Depreciation is
computed principally on a straight-line basis over the estimated
useful lives of the applicable assets ranging from three to seven
years.
Leasehold improvements are amortized over the term of the related
lease, or the estimated useful life of the improvement, whichever is
less. Significant improvements extending the useful lives of assets
are capitalized. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in current
operating results. Maintenance and repairs are charged to expense,
while significant repairs and betterments are capitalized. When
property is sold or otherwise disposed of, the cost and related
depreciation are removed from the accounts, and any gain or loss is
reflected in operations for the period.
Included in property and equipment is the capitalized cost of
internal-use software and website development, including software
used to upgrade and enhance our websites and processes supporting
our business. In accordance with SOP 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," we
capitalize costs incurred during the application development stage
related to the development of internal-use software and will
amortize these costs over the estimated useful life of two years.
Costs incurred related to design or maintenance of internal-use
software are expensed as incurred.
6. Goodwill and Deferred Financing Costs
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired and has been amortized on the
straight-line basis over ten years through December 21, 2001.
Beginning January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" (See Note "C").
Deferred financing costs are being amortized on a straight-line
basis over five to seven years, the life of the related debt.
46
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
7. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of.
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of such assets or intangibles may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If such an asset is
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell. (See Note "B-17")
8. Warranty Costs
Estimated future warranty costs are provided for in the period of
sale for products under warranty based upon past experience. Accrued
warranty costs at December 31, 2004 and 2003 were approximately
$138,710 and $71,000, respectively, and are included in accounts
payable and accrued expenses.
9. Income Taxes
As part of the process of preparing the BrandPartners consolidated
financial statements, the Company is required to estimate its income
taxes in each of the jurisdictions in which it operates. This
process involves estimating the Company's actual current tax
exposure together with assessing temporary differences resulting
from different treatment of items. These differences result in
deferred tax assets and liabilities, which are included within the
Company's consolidated balance sheets. The Company must then look at
the likelihood that its deferred tax assets will be recovered from
future taxable income and to the extent it believes that recovery is
not likely, the Company must establish a valuation allowance. (See
Note "K")
10. Fair Value of Financial Instruments
The following methods and assumptions were used in estimated the
indicated fair values of financial instruments:
Cash, cash equivalents and short-term debt: The carrying value
approximates fair value due to the short maturity of these
instruments.
Long-term debt: The carrying value approximates fair value based on
current rates offered to the Company for similar debt.
Derivative financial instruments: The carrying value is re-measured
at each balance sheet date based on the fair value of these
instruments.
11. Income (Loss) Per Share
Basic and diluted income (loss) per share is computed using the
weighted-average number of shares of common stock outstanding during
the period. When applicable, diluted income per share is computed
using the weighted-average number of shares of common stock adjusted
for the dilutive effect of potential common shares issued or
issuable pursuant to stock options, stock appreciation rights and
warrants. Potential common shares issued are calculated using the
treasury stock method. All potential common shares have been
excluded from the computation of diluted loss per share as their
effect would be antidilutive.
47
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Potential common shares which are antidilutive and therefore
excluded from the computation of basic and diluted loss per share,
consisting of stock options, warrants and convertible debt, were
6,846,764 for the year ended December 31, 2004.
12. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance
sheet as either an asset or a liability at its fair value. Changes
in the fair value of those instruments are reported in earnings or
other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. The accounting for
gains and losses associated with changes in the fair value of a
derivative and the effect on the consolidated financial statements
will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash
flows of the instrument hedged.
On April 23, 2001, and in conjunction with obtaining the Company's
credit facility, the Company entered into an interest rate cap
agreement, which limits the Company's exposure if the LIBOR interest
rate exceeds 6.5%. Accordingly, the Company designated the interest
rate cap having an aggregate notional amount of $4 million as a cash
flow hedge as defined under SFAS No. 133. The contract matured on
January 22, 2004. As of December 31, 2004, 2003 and 2002, the fair
value of the agreement was immaterial.
13. Concentration of Credit Risk
Financial instruments that subject the Company to credit risk
primarily consist of accounts receivable and costs and estimated
earnings in excess of billings. (See Note "F"). Willey Brothers'
customer base primarily consists of U.S. financial institutions.
Management does not believe that significant credit risk exists in
connection with the Company's concentration of credit at December
31, 2004.
48
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
14. Stock-Based Compensation
The Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its
employee stock options. Under APB. No. 25, when the exercise price
of employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recorded. The
Company discloses information relating to the fair value of
stock-based compensation awards in accordance with Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123", Accounting
for Stock-Based Compensation.) The following table illustrates the
effect on net earnings (loss) and earnings (loss) per share as if
the Company had applied the fair value recognition provision of SFAS
No. 123, using the assumptions described in Note "M".
Years Ended December 31,
2004 2003 2002
-------------- -------------- --------------
Net income (loss) applicable to common stockholders
As reported $ 14,219,627 $ (10,964,062) $ (11,972,547)
Pro forma 12,868,579 (13,327,750) (12,769,250)
Weighted-average shares outstanding
Basic 30,390,636 18,468,553 18,437,942
Diluted 36,474,663 18,468,553 18,437,942
Net income (loss) per share
As reported
Basic $ 0.47 $ (0.59) $ (0.65)
Diluted $ 0.39 $ (0.59) $ (0.65)
Pro forma
Basic $ 0.42 $ (0.72) $ (0.69)
Diluted $ 0.35 $ (0.72) $ (0.69)
The Company has decided to adopt SFAS No. 123(R), Share-Based
Payment, effective Quarter 3 (July 1, 2005), the required compliance
date. The Company will apply the modified retrospective application
(MPA) method to effect the transition. The MPA method will be
applied to all prior years for which Statement 123 was effective
which will require the adjustment of the financial statements for
prior periods to give effect to the fair-value-based method of
accounting for awards granted, modified, or settled in cash in
fiscal years beginning after December 15, 1994, on a basis
consistent with the pro forma disclosures required for those periods
by Statement 123, as amended by FASB Statement No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure.
Accordingly, compensation cost and related tax effects will be
recognized in those financial statements as though they had been
accounted for under Statement 123. Changes to amounts originally
measured on a pro forma basis are precluded. Instead of presenting
all of those years in comparative financial statements, the Company
will adjust the beginning balances of paid-in capital, deferred
taxes and retained earnings for the earliest year presented to
reflect the results of the MPA to those prior years not presented.
The effects of any such adjustments shall be disclosed in the year
of adoption.
49
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Non-employee stock-based compensation arrangements are accounted for
in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force ("EITF") No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or
in Conjunction with Selling, Goods or Services. Under EITF No.
96-18, as amended by EITF No. 00-23, Issues Related to the
Accounting for Stock Compensation under APB No. 25 and FASB
Interpretation No. 44, where the fair value of the equity instrument
is more reliably measurable than the fair value of services
received, such services will be valued based on the fair value of
the equity instrument.
15. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make certain estimates and assumptions
that affect:
o reported amounts of assets and liabilities
o disclosure of contingent assets and liabilities at the date of
the financial statements
o revenues and expenses during the reporting period.
Actual results could differ from these estimates.
These estimates and assumptions relate to estimates of:
o collectibility of accounts receivable
o realizability of goodwill and other intangible assets
o costs to complete engagements
o accruals
o income taxes
o other factors
Management has used reasonable assumptions in deriving these
estimates. However, actual results could differ from these
estimates. Consequently, an adverse change in conditions could
affect the Company's estimates.
16. Long-Lived Assets
o The Company follows SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement
requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the
assets' carrying amounts may not be recoverable. In performing
the review for recoverability, if future undiscounted cash
flows (excluding interest charges) from the use and ultimate
disposition of the assets are less than their carrying values,
an impairment loss is recognized. Such losses are measured by
the excess of the carrying amount over the fair value. No
write-downs have been required for the years ended December
31, 2004, 2003 and 2002.
50
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
The adoption of SFAS No. 144 did not have a material effect on the
Company's consolidated financial statements.
17. Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No.
123(R), Share-Based Payment. FAS 123(R) is a revision of FAS 123,
Accounting for Stock-Based Compensation. This statement supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. This Statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. The
statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment
transactions. FASB has required that FAS No. 123(R) be adopted by
Quarter 3, (July 1, 2005) and the Company has decided to implement
it on that date. The Company believes that the adoption of FAS No.
123(R) will not have a material effect on the Company's financial
position or results of operations.
18. Accounts Receivable
The majority of the Company's accounts receivable is due from
companies in the financial services industry. Credit is extended
based on evaluation of a customer's financial condition. Accounts
receivable are due within 30 days and are stated at amounts due from
customers, net of an allowance for doubtful accounts. Periodically,
the Company reviews accounts receivable to reassess its estimates of
collectibility. The Company provides valuation reserves for bad
debts based on specific identification of likely and probable
losses. In addition, the Company provides valuation reserves for
estimates of aged receivables that may be written off, based upon
historical evidence. These valuation reserves are periodically
re-evaluated and adjusted as more information about the ultimate
collectibility of accounts receivable becomes available.
Circumstances that could cause the Company's valuation reserves to
increase includes factors negatively impacting clients' ability to
pay their obligations as they become due, and the quality of its
collection efforts. The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful
accounts. Interest income related to finance charges is subsequently
recognized only to the extent that cash is received.
NOTE C - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 is effective for all business combinations completed after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning December 15, 2001. However,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS No. 142.
Major provisions of these Statements and their effective dates for the Company
are as follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before
July 1, 2001;
51
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization;
o Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator; and,
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
On January 1, 2002, the Company adopted SFAS No. 142, and accordingly, stopped
amortizing goodwill. During the first quarter of 2002, 2003 and 2004, the
Company had an evaluation of its goodwill performed, under SFAS No. 142, and no
impairment was indicated.
NOTE D - ACQUISITIONS
Acquisitions are accounted for as purchases and, accordingly, are included in
the Company's consolidated results of operations from the date of acquisition.
The purchase price is allocated based on estimated fair values of assets
acquired and liabilities assumed. Purchase price allocations are subject to
refinement until all pertinent information regarding the acquisition is
obtained.
WILLEY BROTHERS, INC.
On January 16, 2001, the Company acquired the stock of Willey Brothers for a
combination of cash, common stock of the Company, options in the Company's stock
and notes payable. The total purchase price was $33,144,938. The acquisition was
made with cash of $17,069,938; 1,512,500 shares of common stock of the Company
valued at $6,050,000 ($4.00 per share); stock options issued with a fair market
value of $525,000; and notes payable of $9,500,000.
The following table provides an analysis of the purchase of Willey Brothers. The
excess of the purchase price over the book value of the net assets acquired has
been allocated to goodwill as follows:
Total purchase cost $33,144,938
Fair value of net assets acquired 6,134,704
-----------
Excess of cost over fair value of net assets
acquired allocated to goodwill $27,010,234
===========
Accumulated amortization at December 31, 2001 was $2,738,265. See Note "C".
The terms of the acquisition also provided for additional consideration (the
"earn-out") to be paid if the earnings of Willey Brothers exceeded certain
targeted levels through the year 2005. The aggregate maximum amount of
contingent consideration was $1,200,000. The Company recorded a liability of
$500,000 as of December 31, 2001. A liability for 2002 and 2003 was not recorded
as the requirements of the earn-out were not met.
52
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
On January 20, 2004, the Company entered into an agreement with the former
shareholders of Willey Brothers (the "Agreement"), whereby if certain conditions
were met, all accrued and unpaid obligations under the earn-out were forgiven
and no further earn-out obligation would accrue. (See Note "H-1")
INVESTMENT IN UNRELATED THIRD PARTY
On September 21, 2004, the Company purchased a 15% Membership Interest in an
unrelated third party for $250,000. As of December 31, 2004, no dividends or
returns on equity were recorded on the investment. This investment is being
accounted for using the cost method.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation are as follows:
2004 2003*
----------- -----------
Computer equipment and software $ 3,123,090 $ 3,055,596
Furniture, fixtures and other equipment $ 1,548,459 1,236,389
Leasehold improvements $ 678,323 677,234
Construction in Progress $ 388,361 222,128
----------- -----------
5,738,233 5,191,347
Less accumulated depreciation ($4,222,996) (3,704,796)
----------- -----------
$ 1,515,237 $ 1,486,551
=========== ===========
* Reclassified for comparative purposes
Depreciation expense was $518,200, $511,151 and $515,546 for the years ended
December 31, 2004, 2003 and 2002, respectively.
NOTE F - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
The Costs in Excess and Billings in Excess accounts on the balance sheet reflect
the revenue recognition and invoicing activity on large contracts. Due to the
nature of the project accounting used in the Creative and Design/Build business
units, all vendor and labor costs are put on the balance sheet until the
associated revenue is recognized. At this point, revenue, costs and profit are
transferred to the income statement. For Merchandising, the activity reflected
in these accounts is the difference between the revenue recognized (product
shipped/services delivered) and invoices issued. Due to the size of the
contracts, these accounts can fluctuate considerably between and during the
course of the fiscal years.
53
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
The following is a summary of costs and estimated earnings on uncompleted
contracts in comparison to billings at December 31, 2004 and 2003:
2004 2003
----------- -----------
Merchandising and Creative sales and installation contracts
Costs and estimated earnings to date $ 784,426 $ 1,063,982
Billings to date (4,048,055) (5,960,693)
----------- -----------
(3,263,629) (4,896,711)
----------- -----------
Design/Build design and construction contracts
Costs and estimated earnings to date 295,089 790,904
Billings to date (681,589) (372,542)
----------- -----------
(386,500) 418,362
----------- -----------
$(3,650,129) $(4,478,349)
=========== ===========
The accompanying consolidated balance sheets include the following captions at
December 31:
2004 2003
----------- -----------
Costs and estimated earnings in excess of billings $ 1,079,515 $ 1,854,886
Billings in excess of costs and estimated earnings (4,729,661) (6,333,235)
----------- -----------
$(3,650,146) $(4,478,349)
=========== ===========
54
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE G - SHORT TERM DEBT
Short term debt consists of the following:
2004 2003*
---------- ----------
Note payable (1) $3,300,000 $ 541,045
Line of credit (1) -- 3,666,441
Note payable (2) 672,708 --
Note payable (3) -- 350,000
Lease termination fee (4) -- 375,000
---------- ----------
$3,972,708 $4,932,486
========== ==========
* Reclassified for comparative purposes
(1) On January 11, 2001, Willey Brothers entered into a credit agreement with a
commercial lender, consisting of an $8 million term loan and a $6 million
revolving credit facility. All borrowings are repayable with interest, which
accrued, at the borrower's option, at the bank's base rate plus the applicable
margin or LIBOR plus the applicable margin. On January 2, 2004, the balance of
the term loan was paid, and the $6 million revolving credit facility was divided
into a $4 million New Term Loan and a $2 million Revolving Credit Facility. At
December 31, 2004, the balance of the New Term Loan was $3,300,000 and there
were no draw downs on the revolving credit facility.
The Tenth Amendment, which was dated December 28, 2004, provided for the
following:
o Reduction of the Revolving Credit Facility to $1,750,000 through
March 31, 2005
o Permanent Reduction of Revolving Credit Facility to $1,500,000 as of
April 1, 2005
o Adjustment of the interest rate to the bank's base rate plus 3.50%
o Monthly payments on term loan principal of $100,000 through June
2005
o Monthly payments on term loan principal of $200,000 beginning July
2005
o Monthly payments on amendment fee of $25,000 through June 2005
o Monthly payments on amendment fee of $50,000 beginning July 2005
o Non-refundable amendment fee
o 0.5% of obligations as of and on January 3, 2005
o 1.0% of obligations as of and on June 30, 2005
o 1.5% of obligations as of and on September 30, 2005
o Facility matures on December 31, 2005. The prior amendment matured
on December 31, 2004.
55
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Borrowings under the credit facility are secured by substantially all of the
assets of Willey Brothers and a pledge by the Company of its stock in Willey
Brothers. The facility is guaranteed by the Company. Total amendment fees and
expenses of approximately $857,000 have been expensed in the year ended December
31, 2002. At December 31, 2004 and 2003, the Company had a liability for such
fees of $580,000.
(2) On July 6, 2004, the Company negotiated an unsecured subordinated promissory
note for $1,000,000. The note was payable on October 4, 2004. However, 50% of
the note could be extended to January 3, 2005. The stated interest rate was 12%
per annum. With the issuance of the note a three year Common Stock Purchase
Warrant (Purchase Warrant) was issued to purchase up to 500,000 shares of the
Company's common stock. The exercise price of the Warrant Shares was $0.68, the
closing price of the stock on the date of the issuance of the Note. Based on a
Black-Scholes valuation of the warrants, $105,000 of interest expense was
recognized during this period.
56
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
On September 29, 2004, the Note and the Purchase Warrants were cancelled. In
consideration of the cancellation of the Original Note, a new unsecured
subordinated promissory note in the amount of $625,000 was issued, with interest
accruing at a rate of 12% per annum. The Company also issued 750,000 restricted
shares of common stock for the sum of $375,000, which was applied as partial
payment to the Original Note. The stock was issued on September 29, 2004. The
price of the stock on the date of issuance was $0.63 per share. The New Note
matured on January 6, 2005.
On January 5, 2005, the maturity date of the New Note was extended to May 6,
2005. In consideration of the extension, a total of 200,000 common stock
warrants could be issued at an exercise price of $0.85 per share subject to a
pro-rata percentage adjustment reducing the number of warrants to be issued if
the Company elects to make prepayment(s) of all or a portion of the Promissory
Note. 50,000 warrants were issued on February 7, 2005, with an additional 50,000
issued as of March 7, 2005. Interest expense of $85,000 will be recorded in
Quarter 1, 2005. Warrants are due to be issued April 7 and May 6 if Note is not
repaid in full before maturity date.
(3) On November 7, 2003, the Company executed two promissory notes payable to
third parties for the aggregate amount of $350,000. The notes bore interest at
5% per annum and were payable on demand. The proceeds from the notes were used
for working capital purposes. In January 2004, the note holders converted their
notes into subscriptions in the Company's private placement and were
subsequently issued 1,750,000 shares of the Company's common stock.
(4) On January 20, 2004, the Company entered into a surrender agreement with its
landlord for the termination of its lease to 777 Third Ave, New York, New York.
In exchange for the termination of its rights and obligations under the lease,
the Company agreed to pay to the landlord an aggregate of $800,000 and to issue
to the landlord 500,000 shares of restricted common stock of the Company with
cost-free piggyback registration rights. The shares were valued at $0.55 per
share. $500,000 was paid upon the signing of the agreement. $200,000 of the
balance was paid on March 1, 2004 and on September 1, 2004. An additional
$100,000 was due on March 1, 2005 and was paid on February 24, 2005. The
terminated lease expired December 31, 2009 with minimum lease rentals of
approximately $647,000 in 2004 and $671,000 annually thereafter, through 2009.
At December 31, 2003, the Company recorded a charge of $1,075,000 related to the
terminated lease.
57
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE H - LONG TERM DEBT
As of December 31, 2004, long term debt consisted of the following:
2004 2003*
------------ ------------
Note payable (1) $ -- $ 9,500,000
Note payable (2) 5,000,000 5,000,000
Discount on note payable (2) (232,360) (232,360)
Put warrant liability (2) 272,385 220,348
Interest payable (2) 744,168 464,680
------------ ------------
5,784,193 14,952,668
Less current maturities (1) 2,000,000
------------ ------------
$ 5,784,193 $ 12,952,668
============ ============
* Reclassified for comparative purposes
(1) Two subordinated convertible promissory notes totaling $7,500,000
were issued to the former shareholders of Willey Brothers. On
January 20, 2004, the Company entered into an amended agreement with
the former shareholders of Willey Brothers providing for, among
other things, the cancellation and forgiveness of the $7.5 Million
Notes. Upon the signing of the Agreement, two promissory notes were
issued, each in the amount of $1,000,000, payable to the former
shareholders of Willey Brothers. The $7.5 Million Notes were
cancelled and forgiven along with all accrued unpaid interest of
approximately $844,000. The balance of the promissory notes was
repaid with the payment of $1.0 Million in the aggregate upon
issuance of the notes and in two equal installments of $500,000 each
on April 15, 2004 and July 14, 2004. Upon payment in full of the
promissory notes, the $2.0 Seller Notes and all accrued, unpaid
interest on the Seller Notes (approximately $755,000 at September
30, 2004) was cancelled and forgiven and the accrued unpaid earn-out
of $500,000 was forgiven. No further earn-out accrues. Total gain on
forgiveness of debt was approximately $9.1 Million.
(2) A subordinated promissory note in the principal amount of $5,000,000
was issued on October 22, 2001 to an unrelated third party. The note
bears interest at 16% per annum - 12% payable quarterly in cash and
4% added to the unpaid principal ("PIK amount"). The note matures on
October 22, 2008, at which time the principal and all PIK amounts
are due. Under the terms of the note, the Company is required to
maintain certain financial covenants. As part of the original Note,
405,000 Put Warrants were issued at $0.01 per share and are being
treated as a discount over the term of the Note. On January 7, 2004,
the Company amended and restructured its subordinated note payable.
In exchange for the waiver of certain covenants through December 31,
2003 and a reduction in the interest rate on the note, the Company
issued to the note-holder a common stock purchase warrant to
purchase 250,000 shares of the Company's common stock at $0.26 per
share. The interest rate reduction is for a period of two years
commencing January 1, 2004 and reduces the interest rate from 16%
per annum to 10% per annum - 8% payable in cash quarterly and 2% as
the PIK amount. At December 31, 2004 and 2003, the Company had a
liability of $272,385 and $220,348 related to the Put Warrant,
respectively.
58
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE I - INCOME TAXES (BENEFIT)
For the year ended December 31, 2004, income taxes of approximately $2,566,000
were offset by net operating loss carryforwards. As of December 31, 2004, the
Company had net operating loss ("NOL") carryforwards of approximately $9.3
million, which expire at various years through 2024, available to offset future
taxable income. At December 31, 2004 and 2003, the Company had deferred tax
assets of approximately $2,579,000 and $7,851,700, respectively. The deferred
tax asset consists primarily of net operating loss carryforwards and accrued
expenses. Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which is uncertain. Accordingly, the deferred tax
asset has been fully offset by a valuation allowance of the same amount. For the
year ended December 31, 2002, the Company carried back approximately $3.6
million of Willey Brothers taxable loss, receiving an income tax refund in 2003
of approximately $1.2 million.
Pursuant to Section 382 of the Internal Revenue Code, NOL carryforwards may be
limited in use in any given year in the event of a significant change in
ownership.
NOTE J - CONCENTRATIONS
Significant Customers
For the year ended December 31, 2004, two customers accounted for approximately
11% each of the Company's revenues, with a third customer accounting for
approximately 9%. For the year ended December 31, 2003, one customer accounted
for approximately 16% of the Company's revenues. For the year ended December 31,
2002, one customer accounted for approximately 14% of the Company's revenues.
59
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Concentration of Credit Risk
The Company maintains its cash and cash equivalents with major financial
institutions. The balances at December 31, 2004 exceed Federally insured limits.
The Company performs periodic evaluations of the relevant credit standings of
these financial institutions in order to limit the amount of credit exposure.
NOTE K - STOCKHOLDERS' EQUITY
The Company is authorized to issue a maximum of 20,000,000 shares of preferred
stock, par value $0.01, and 100,000,000 shares of common stock, par value $0.01.
Class A Convertible Preferred Stock
On August 1, 2001, the shareholders ratified the conversion of 1,650,000 shares
of Class A Convertible Preferred Stock of the Company into common stock.
Accordingly, the shares were converted into common stock on a one-to-one basis.
The Company recorded a beneficial conversion of $2,475,000 for the difference
between the carrying value of the preferred stock and the fair value of the
shares of common stock at the time of the issuance of the preferred stock.
Private Placement of Equity
On February 2, 2004, the Company completed a private placement of equity. The
Company received net proceeds from the private placement of approximately
$2,900,000 and issued 12,400,001 shares of common stock. The proceeds from the
private placement were used to reduce certain debt and obligations, repay the
balance of a term loan and for working capital.
During the fourth quarter of 2001 and the first quarter of 2002, the Company
issued shares and warrants in a private placement offering. The offering was
completed on February 5, 2002. During the year ended December 31, 2001, the
Company received net proceeds of $2,976,250 and issued 2,702,268 shares of
common stock and common stock purchase warrants to acquire an additional
4,728,959 shares of the Company's common stock at various prices ranging from
$1.0556 to $3.00 per share. During 2002, the Company received additional net
proceeds from the offering of $311,800 and issued 285,258 shares of common stock
and common stock purchase warrants to acquire an additional 474,198 shares of
the Company's common stock at various prices ranging from $1.152 to $3.00 per
share. The warrants are exercisable until November 30, 2006. The proceeds were
used for working capital purposes.
Under the terms of the warrant agreements entered into as part of our private
placement completed in February 2002, the Company was obligated to reset the
exercise price of the warrants issued, if during the two-year period immediately
following the closing of the sale of common stock and warrants to a subscriber
were issued, other than pursuant to a stock grant or stock options to employees
or consultants on or in connection with merger or acquisition activities, any
shares of common stock or equivalents at a price or exercise price per share
that was less than the market price as defined in the warrant agreements. The
Company subsequently issued securities in a private placement that closed
January 20, 2004, which as a result of the prior warrant agreements, resulted in
the ratcheting down of the exercise price of certain warrants issued in the
placement completed in February 2002, provided the warrants were issued in a
closing that occurred less than two years prior to January 2004. Specifically, a
total of 681,985 warrants issued in closings that occurred in the final two
traunches of the placement completed in February 2002 were eligible for an
adjustment of the exercise price to $0.537 per share as the January 20, 2004
share issuance occurred within two years of the closing for those warrants.
Certain holders of 4,232,421 warrants that were issued in closings more than two
years prior to the January 20, 2004, date have also requested that their
warrants be reset or ratcheted down. The Company contends that these warrants
should not be reset by virtue of the terms of their warrant agreements.
60
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Stock Options
During 2004, the shareholders approved the Company's 2004 Stock Incentive Plan.
The plan provides for the reservation and issuance of up to 5,000,000 options
for shares of common stock, subject to future stock splits, stock dividends,
reorganizations and similar events. The exercise price of incentive stock
options may not be less than the fair market value on the date of grant. The
plan provides for options to be granted to officers, directors, and employees of
the Company. During the year ended December 31, 2004, the Company granted
4,469,812 options.
The Company's 2001 Incentive Stock Plan was approved during 2001. The
reservation and issuance of 5,000,000 options for shares of common stock subject
to similar conditions listed above was provided. During the years ended December
31, 2003, 2002 and 2001, the Company granted 1,720,000, 2,017,815 and 50,000
stock options, respectively, to officers, directors and employees under the
plan. On January 14, 2005, the former directors of the Company agreed to a
reduction in the number of options issued in consideration for registration
rights from 1,400,000 options to 350,000 options. Total active options in the
2001 Incentive Stock Plan as of March 26, 2005 was 839,119.
The Company has also issued stock options to certain individuals and companies
under letter agreements. During the years ended December 31, 2004 and 2003,
options to purchase 100,000 at $.075 share/stock price at time of issuance and
6,425,000 shares, respectively, of the Company's common stock were issued under
such agreements.
The options granted have an exercise price at least equal to the fair value of
the Company's stock (except for options issued to two directors and to a
consultant below fair market value) and expire at various times through 2010.
The options granted vest immediately, after one year or over a two or five year
period.
61
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
A summary of the activity at December 31 is as follows:
Weighted-Average
Warrants/Options Exercise Price
Outstanding at December 31, 2002 14,081,173 $2.68
Granted 8,145,000 $0.25
Exercised or Forfeited (176,897) ($2.06)
------------- -----
Outstanding at December 31, 2003 22,049,276 $2.06
Granted 4,469,812 $0.54
Exercised (501,650) $0.47
Forfeited (7,016,111) $2.17
------------- -----
Outstanding at December 31, 2004 19,001,327 $1.69
============= =====
Weighted-average fair value of options
and warrants granted during the year:
December 31, 2002 $3.81
December 31, 2003 $0.57
December 31, 2004 $1.28
62
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 2004, 2003, and 2002, respectively: (1) average expected volatility of
348%, 194.89% and 125.88%; (2) average risk-free interest rates of 3.70%, 3.04%
and 4.69%; and (3) expected lives of five years for the years ended December 31,
2004 and 2003 and five and eight years for the year ended December 31, 2002.
The following table summarizes information concerning outstanding and
exercisable options and warrants for common stock at December 31, 2004.
Outstanding Outstanding
Exercise Price Outstanding as of Weighted Average Weighted Average Exercisable as of
Range December 31, 2004 Remaining Life (years) Exercise Price December 31, 2004
$0.00 to $0.50 8,111,000 3.71 $0.27 7,875,000
$0.51 to $0.99 3,744,812 4.28 $0.59 2,666,312
$1.00 to $1.99 905,546 2.13 $1.07 866,475
$2.00 to $2.99 3,706,752 1.25 $2.25 3,677,352
$3.00 to $8.00 2,533,217 1.14 $5.68 2,534,867
----------- -----------
19,001,327 17,620,006
=========== ===========
Common stock and options to purchase common stock of the Company issued for
services during the years ended December 31, 2004, 2003 and 2002 are as follows:
On September 29, 2004 and August 2, 2004, 20,000 and 12,000 shares of common
stock of the Company, respectively, were issued for legal services to the
Company. The shares were valued at $16,029 using the Black-Scholes model and
were charged to legal expense and additional paid in capital was credited.
On May 12, 2004, the Company entered into an agreement with a consultant to
provide services. As part of the agreement, the consultant was issued a warrant
for the purchase of 100,000 shares of common stock. The warrant was valued at
$73,470 using he Black-Scholes model. Consulting expense was charged and
additional paid in capital was credited in the accounting transaction.
On January 19, 2004, the Company entered into a surrender agreement with its
landlord for certain consideration including 500,000 shares of the Company's
common stock. The Company charged other expense $275,000, which is included in
long term liabilities at December 31, 2003. In 2004, the shares were issued to
the landlord to satisfy the debt.
On December 19, 2003, the Company issued an option to purchase 250,000 shares of
the Company's common stock to a consultant who provides services to the Company.
The option was valued at $185,000. The transaction was accounted for by charging
consulting expense and crediting additional paid in capital.
63
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
On October 23, 2003, the Company issued 300,000 shares of its common stock to a
consultant for services to be rendered. The shares were valued at $0.65 per
share, the market price on the date of the agreement. The transaction was
accounted for by charging consulting expense and crediting additional paid in
capital.
On October 15, 2003, the Company issued options to purchase an aggregate of
800,000 shares of the Company's common stock to two directors of the Company
below the market value of the Company's stock on that date. The transaction was
accounted for by charging directors fees $80,000 and crediting additional paid
in capital.
On October 8, 2003, the Company issued an option to purchase 200,000 shares of
the Company's common stock to a law firm that provides legal services to the
Company. The option has a Black-Scholes valuation of approximately $36,000. The
transaction was accounted for by charging legal expense and crediting additional
paid in capital.
On October 8, 2003, the Company issued options to purchase an aggregate of
750,000 shares of the Company's common stock to two consultants in consideration
for services provided to the Company. The options have a Black-Scholes valuation
of approximately $135,000. The transaction was accounted for by charging
consulting expense and crediting additional paid in capital.
On May 12, 2003, the Company issued an option to purchase 300,000 shares of the
Company's common stock to Rebot Corporation in settlement of a lawsuit against
the Company. The options have a Black-Scholes valuation of approximately
$77,220. The transaction was accounted for by charging other expense and
crediting additional paid in capital.
On January 30, 2003, the Company issued an option to purchase 125,000 shares of
the Company's common stock to a consultant in consideration for services to be
provided to the Company and its subsidiary during 2003. The options have a
Black-Scholes valuation of approximately $12,500. The transaction was accounted
for by charging consulting expense and crediting additional paid in capital.
On January 17, 2002, the Company issued 20,833 shares of common stock to an
officer of the Company in accordance with the terms of his employment agreement
with the Company. The shares were valued at $25,000. The transaction was
accounted for by charging officers salary and crediting common stock and
additional paid in capital.
NOTE L - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit sharing plan for all eligible employees.
Through a salary reduction program, the plan allows employee contributions on a
pretax basis. There are no minimum corporate contributions required under the
plan. The Company may make discretionary matching contributions based on the
participants' contributions. The Company may also make a discretionary
profit-sharing contribution for the benefit of all eligible employees.
Participants in the plan vest in Company contributions on a graduated scale over
a five year period. For the year ended December 31, 2004 and 2003, the Company
paid or accrued matching contributions of approximately $77,000 and $73,000,
respectively. No matching contribution was made in 2002.
64
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE M - COMMITMENTS AND CONTINGENCIES
Employment Agreements
On March 16, 2005 The Company amended its agreement with its non-executive
chairman and the Chief Executive Officer. These agreements expire on March 15,
2008.The agreement with its Non-Executive Chairman of the Board provides monthly
payments of $30,000 and severance payments, as defined in the agreement. The
Chief Executive Officer's agreement provides for an annual salary of $300,000
subject to annual reviews by the Board of Directors and severance payments, as
defined in the agreement.
Request for Warrant Price Adjustment
Under the terms of the warrant agreements entered into as part of our private
placement completed in February 2002, the Company was obligated to reset the
exercise price of the warrants issued, if during the two-year period immediately
following the closing of the sale of common stock and warrants to a subscriber
were issued, other than pursuant to a stock grant or stock options to employees
or consultants on or in connection with merger or acquisition activities, any
shares of common stock or equivalents at a price or exercise price per share
that was less than the market price as defined in the warrant agreements. The
Company subsequently issued securities in a private placement that closed
January 20, 2004, which as a result of the prior warrant agreements, resulted in
the ratcheting down of the exercise price of certain warrants issued in the
placement completed in February 2002, provided the warrants were issued in a
closing that occurred less than two years prior to January 2004. Specifically, a
total of 681,985 warrants issued in closings that occurred in the final two
traunches of the placement completed in February 2002 were eligible for an
adjustment of the exercise price to $0.537 per share as the January 20, 2004
share issuance occurred within two years of the closing for those warrants.
Certain holders of 4,232,421 warrants that were issued in closings more than two
years prior to the January 20, 2004, date have also requested that their
warrants be reset or ratcheted down. The Company contends that these warrants
should not be reset by virtue of the terms of their warrant agreements.
65
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Leases
The Company is committed under non-cancelable opearting leases for equipment and
office and warehouse space, expiring at various dates through May 2010. The
leases include provisions requiring the Company to pay a proportionate share of
increases in real estate taxes and operating expenses over base period amounts.
Future minimum rental commitments under all non-cancelable operating leases are
as follows:
Commitments
Years Ending December 31, ------------
2005 $ 605,725
2006 375,910
2007 134,505
2008 56,460
2009 55,718
2010 2,061
----------
$1,230,379
==========
Rent and equipment leasing expense for the years ended December 31, 2004, 2003
and 2002 was $669,270, $1,227,090 and $1,394,952, respectively.
NOTE N - REDUCTION IN WORK FORCE
During the twelve months ended December 31, 2002, the Company's Willey Brothers
subsidiary recorded a charge, primarily for severance and termination benefits,
of approximately $430,000 relating to a reduction in work force of 53 employees,
which was the result of aligning Willey Brothers' work force with market demands
for its services and products. All of the affected employees were terminated and
are no longer employed by Willey Brothers. The charge of $430,000 is included in
selling, general and administrative expense at December 31, 2002. There is no
remaining liability.
66
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE O - DISCONTINUED OPERATIONS
On October 31, 2002, the Company disposed of its majority interest in its
subsidiary iMapData.com, Inc. for $2,000,000, through a sale to iMapData's
minority shareholders A summary of operating results for iMapData from the
period January 1, 2002 through October 31, 2002.
2002
--------------
Revenues $ 2,091,000
Costs and expenses
Cost of revenues 1,467,000
Selling, general and admininstrative expenses 1,336,000
--------------
2,803,000
Operating loss (712,000)
Interest income 8,000
--------------
Loss before change in accounting principle (704,000)
Change in accounting principle 186,000
--------------
Loss from operations before minority interest (890,000)
Minority interest 323,000
--------------
Loss from operations (567,000)
Loss on disposal of discontinued operations (6,603,000)
--------------
Net loss from discontinued operations $ (7,170,000)
==============
NOTE P - RELATED PARTY TRANSACTIONS
On February 1, 2002, a subsidiary of the Company advanced $78,000 to two
officers of the subsidiary. The original terms of the note called for payment in
two installments on September 30, 2002 and December 31, 2002. The notes bear
interest at the rate for Federal short-term debt instruments.
On April 3, 2002, the note of one of the officers was repaid in full with
interest. The due date on the remaining note was extended to December 31, 2003
and on that date, the note was repaid in full with interest.
67
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE Q - SUPPLEMENTAL CASH FLOW INFORMATION
Non cash financing activity.
During fiscal 2004, the Company issued 1,550,000 shares of the Company's common
stock valued at $805,000 in payment of debt.
NOTE R - SUBSEQUENT EVENTS
On January 5, 2005, the maturity date of the New Note (See Note "G-2") was
extended to May 6, 2005. In consideration of the extension, a total of 200,000
common stock warrants could be issued at an exercise price of $0.85 per share
subject to a pro-rata percentage adjustment reducing the number of warrants to
be issued if the Company elects to make prepayment(s) of all or a portion of the
Promissory Note.
On January 7, 2005, BrandPartners Europe, Ltd., was incorporated in England and
currently has one employee and no lease obligations.
On January 31, 2005, the lease on the warehouse located in Phoenix, Arizona was
terminated, and the remaining inventory was moved to Rochester, New Hampshire.
Effective February 1, 2005, the Company entered into a letter of engagement with
Trilogy Capital Partners, Inc. ("Trilogy") whereby Trilogy will provide
marketing, financial public relations and investor relations service to the
Company. The term of the agreement is for one year and thereafter will be month
to month. Under the terms of the letter of engagement, Trilogy will receive fees
of $10,000 a month and an aggregate of 600,000 three-year warrants with vesting
as follows:
o 200,000 warrants fully vested and exercisable at $1.00 per share
o 200,000 warrants exercisable at $1.50 per share vesting when the
Company's common stock trades at a per share price of $1.50 per
share or greater for five consecutive trading days prior to February
2, 2006
o 200,000 warrants exercisable at $2.00 per share vesting when the
Company's common stock trades at a per share price of $2.00 per
share or greater for five consecutive trading days prior to February
2, 2006
The warrants were issued to Trilogy in accord with the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended or Regulation D
promulgated there under. The warrants contain registration rights whereby the
Company has agreed to prepare and file a registration statement for the warrant
shares no later than June 10, 1005.
On March 16, 2005 the Company amended its agreements with the Non-Executive
Chairman of the Board and the Chief Executive Officer, see Note M.
68
BrandPartners Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
FINANCIAL INFORMATION BY QUARTER
NOTE S - QUARTERLY RESULTS (Unaudited)
The following tables contain selected unaudited statement of operations
information for each quarter of 2004 and 2003. The following information
reflects all normal, recurring adjustments necessary for a fair presentation of
the information for the periods presented. The operating results for any quarter
are not necessarily indicative of results for any future period. Unaudited
results were as follows:
2004 By Quarter
March 31 June 30 September 30 December 31
----------- ------------ ----------- ------------
Revenue $15,676,229 $ 11,294,246 $11,704,512 $ 11,937,832
----------- ------------ ----------- ------------
Cost of Goods 11,267,114 7,682,761 8,432,334 $ 7,635,063
Selling, general & administrative expense 2,521,251 2,366,423 1,598,532 $ 2,986,323
----------- ------------ ----------- ------------
Total expenses 13,788,365 10,049,184 10,030,866 10,621,386
----------- ------------ ----------- ------------
Operating income (loss) 1,887,864 1,245,062 1,673,646 1,316,446
Other income (expense) 8,151,512 (214,364) 394,521 $ (235,060)
----------- ------------ ----------- ------------
Net Income (Loss) $10,039,376 $ 1,030,698 $ 2,068,167 $ 1,081,386
=========== ============ =========== ============
Per share income
Basic $ 0.40 $ 0.03 $ 0.07 $ 0.03
Diluted $ 0.33 $ 0.03 $ 0.06 $ 0.03
Shares used in computation of income per share
Basic 25,084,671 31,826,796 31,634,663 32,753,786
Diluted 30,370,405 37,825,610 36,990,736 39,924,404
2003 By Quarter
March 31 June 30 September 30 December 31
------------ ----------- ------------ ------------
Revenue $ 9,488,813 $ 6,881,717 $ 7,754,648 $ 9,541,884
------------ ----------- ------------ ------------
Cost of Goods 7,831,191 6,235,408 7,666,800 $ 7,662,954
Selling, general & administrative expense 2,806,939 2,305,611 2,632,214 $ 4,177,178
------------ ----------- ------------ ------------
Total expenses 10,638,130 8,541,019 10,299,014 11,840,132
------------ ----------- ------------ ------------
Operating income (loss) (1,149,317) (1,659,302) (2,544,366) (2,298,248)
Other income (expense) (678,837) (520,475) (445,912) $ (1,667,605)
------------ ----------- ------------ ------------
Net Income (Loss) $ (1,828,154) $(2,179,777) $ (2,990,278) $ (3,965,853)
============ =========== ============ ============
Per share (loss)
Basic $ (0.10) $ (0.12) $ (0.16) $ (0.21)
Diluted $ (0.10) $ (0.12) $ (0.16) $ (0.21)
Shares used in computation of (loss)per share
Basic 18,468,553 18,468,553 18,468,553 18,468,553
Diluted 18,468,553 18,468,553 18,468,553 18,468,553
69