UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER: 000-23889
_______________
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 76-0553110
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6601 OWENS DRIVE, SUITE 115, PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 251-0000
_______________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares of Common Stock of the Registrant, par value $.001 per
share, outstanding at November 10, 2003 was 15,286,788.
1
PART 1, ITEM 1. FINANCIAL STATEMENTS
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($000'S, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash........................................................................ $ 91 $ 160
Trade accounts receivable, net of allowance
for doubtful accounts of $38 and $140, respectively....................... 744 716
Unbilled revenue............................................................ 44 41
Prepaid expenses and other.................................................. 143 154
-------- --------
Total current assets...................................................... 1,022 1,071
Property and equipment...................................................... 437 435
Less - accumulated depreciation........................................... (385) (362)
-------- --------
Property and equipment, net............................................... 52 73
Goodwill.................................................................... 1,748 1,748
-------- --------
Total assets.............................................................. $ 2,822 $ 2,892
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.............................................................. $ 19 $ -
Accounts payable............................................................ 143 169
Accrued salaries and other expenses......................................... 371 468
Corporate legacy liabilities................................................ - 94
Deferred revenue............................................................ 25 -
Convertible notes payable, short-term....................................... 38 -
-------- --------
Total current liabilities................................................. 596 731
Convertible notes payable, net.............................................. 1,183 1,086
Corporate legacy liabilities................................................ 11 11
Other liabilities........................................................... 1 25
Commitments and contingencies............................................... - -
Stockholders' equity:
Common stock, $0.001 par value; 72,000,000 shares authorized;
15,286,788 and 15,284,288 (excluding 255,000 shares held in treasury)
shares issued and outstanding in 2003 and 2002, respectively................ 16 16
Additional paid-in capital.................................................. 99,924 99,902
Unearned compensation....................................................... (20) (47)
Treasury stock.............................................................. (118) (118)
Accumulated deficit......................................................... (98,771) (98,714)
======== ========
Total stockholders' equity................................................ 1,031 1,039
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,822 $ 2,892
======== ========
See notes to condensed consolidated financial statements.
2
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
(as restated)
Revenue............................................................... $ 1,586 $ 2,221 $ 4,430 $ 7,511
Cost of revenue....................................................... 1,120 1,482 3,138 5,052
------- ------- ------- -------
Gross profit.......................................................... 466 739 1,292 2,459
Operating expenses:
Selling, general and administrative................................ 425 659 1,220 2,236
Settlements of accrued liabilities................................. - (128) - (128)
Depreciation and amortization...................................... 5 22 23 86
------- ------- ------- -------
Total operating expenses......................................... 430 553 1,243 2,194
Income (loss) from operations......................................... 36 186 49 265
Other income....................................................... - 267 44 1,734
Interest expense, net.............................................. (53) (45) (150) (139)
------- ------- ------- -------
Income (loss) before tax provision.................................... (17) 408 (57) 1,860
Income tax provision (benefit)..................................... - (130) - (130)
------- ------- ------- -------
Income (loss) before cumulative effect of
change in accounting principle..................................... (17) 538 (57) 1,990
Cumulative effect on prior years of retroactive
application of new goodwill methods, net of tax.................. - - - (9,945)
------- ------- ------- -------
Net income (loss)..................................................... $ (17) $ 538 $ (57) $(7,955)
======= ======= ======= =======
Net income (loss) per share: basic and diluted
Before cumulative effect of change in accounting principle......... $ - $ 0.04 $ - $ 0.13
Cumulative effect of change in accounting principle................ - - - (0.68)
------- ------- ------- -------
Net income (loss) per share...................................... $ - $ 0.04 $ - $ (0.53)
======= ======= ======= =======
Average shares outstanding: basic and diluted........................ 15,284,668 15,277,331 15,284,416 14,931,687
========== ========== ========== ==========
3
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($000'S, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Common Stock Additional Unearned
Shares Amount Paid-In-Capital Compensation
-------- -------- --------------- ------------
Balance, December 31, 2002........................ 15,284,288 $ 16 $ 99,902 $ (47)
Variable stock options............................ - 17 -
Warrants issued with convertible notes............ - - 2 -
Exercise of stock options......................... 2,500 - - -
Amortization of unearned compensation............. - - 3 27
Net loss.......................................... - - - -
---------- -------- -------- --------
Balance, September 30, 2003....................... 15,286,788 $ 16 $ 99,924 $ (20)
========== ======== ======== ========
Total
Treasury Accumulated Stockholders' Comprehensive
Stock Deficit Equity Loss
--------- ----------- ------------- --------------
Balance, December 31, 2002........................ $ (118) $ (98,714) $ 1,039
Variable stock options............................ - - 17
Warrants issued with convertible notes............ - - 2
Exercise of stock options......................... - - -
Amortization of unearned compensation............. - - 30
Net loss.......................................... - (57) (57) $ -
-------- ---------- -------- -------
Balance, September 30, 2003....................... $ (118) $ (98,771) $ 1,031 $ -
======== ========== ======== =======
See notes to condensed consolidated financial statements.
4
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30 SEPTEMBER 30
2003 2002
------------- -------------
(as restated)
Operating activities:
Net loss..................................................................... $ (57) $ (7,955)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization................................................ 85 122
Change in allowance for doubtful accounts.................................... 102 (140)
Non cash ompensation expense on issuance of
common stock options and warrants......................................... 49 36
Non cash gains on settlement of liabilities and
deconsolidation of subsidiary............................................. (35) (1,771)
Cumulative effect of change in accounting principle.......................... - 9,945
Changes in operating assets and liabilities
Trade accounts receivable................................................. (130) 1,137
Unbilled revenue.......................................................... (3) -
Income tax receivable..................................................... - (25)
Prepaid expenses and other assets......................................... 11 61
Accounts payable.......................................................... (26) (450)
Accrued salaries and other expenses....................................... (48) (373)
Deferred revenue.......................................................... 25 (14)
Corporate legacy liabilities.............................................. (59) (217)
-------- --------
Net cash provided (used) by operating activities.......................... (86) 356
Investing activities:
Capital expenditures......................................................... (2) (5)
-------- --------
Net cash used in investing activities..................................... (2) (5)
Financing activities:
Net borrowings (payments) under line of credit............................... 19 (282)
-------- --------
Net cash provided (used) by financing activities.......................... 19 (282)
Net increase (decrease) in cash................................................. (69) 69
Cash:
Beginning of period.......................................................... 160 185
-------- --------
End of period................................................................ $ 91 $ 254
======== ========
Supplemental disclosure:
Interest paid................................................................... $ 13 $ 15
Issuance of common stock at fair value in satisfaction of:
Accrued bonus and Corporate legacy liabilities............................... $ - $ 70
Noncash issuance of convertible notes at fair value
associated with interest due on notes payable................................ $ 74 $ 68
Noncash issuance of convertible notes at fair value
associated with short-term corporate legacy liabilities0..................... $ - $ 211
5
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($000'S, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included in the financial
statements. Operating results for the nine-month period ended September 30,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. The balance sheet at December 31, 2002, has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements. For additional information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2002.
The preparation of the condensed financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the condensed financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Basic income (loss) per share is based upon the weighted average number of
common shares outstanding during the period. Diluted income (loss) per share is
computed using the weighted average number of common shares and potentially
dilutive securities outstanding during the period. Potentially dilutive
securities include incremental common shares issuable upon the exercise of stock
options, warrants and conversion of notes payable. Potentially dilutive
securities are excluded from the computation if their effect is anti-dilutive.
Potentially dilutive securities excluded because of their anti-dilutive effect
are approximately 6.7 million shares and 6.5 million shares at September 30,
2003 and September 30, 2002, respectively.
Pro forma disclosures required under SFAS 148 are presented below. The pro forma
compensation cost may not be representative of that expected in future years.
3 Months Ended September 30, 9 Months Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported................................. $ (17) $ 538 $ (57) $ (7,955)
Add: Stock based employee compensation expense
included in reported income, net of related tax......... -- -- -- --
Deduct: Total stock-based employee compensation
expenses determined under fair value based
method for all awards, net of related tax effects... (8) (367) (23) (1,102)
-------- ------- -------- ---------
Pro forma net income (loss).................................... $ (25) $ 171 $ (80) $ (9,057)
======== ======== ======== =========
Pro forma basic and diluted income (loss) per share:
Basic - as reported......................................... $ (0.00) $ 0.04 $ (0.00) $ (0.54)
Basic - pro forma........................................... $ (0.00) $ 0.01 $ (0.00) $ (0.61)
Diluted - as reported....................................... $ (0.00) $ 0.03 $ (0.00) $ (0.52)
Diluted - pro forma......................................... $ (0.00) $ 0.01 $ (0.00) $ (0.60)
Compensation cost for the quarter ended September 30, 2003 and 2002 was
calculated in accordance with the binomial model, using the following weighted
average assumptions: (i) expected volatility of 123%; (ii) expected dividend
yield of 0%; (iii) expected option term of 10 years; (iv) risk-free rates of
return of 1.74% and (v) expected forfeiture rates of 40% for both periods.
6
2. LIQUIDITY AND CREDIT FACILITY
On December 16, 2002, the Company entered into an agreement with BFI Business
Finance ("BFI"), a Santa Clara, California-based business-credit company, for a
two-year working capital line of credit for $750, to replace our existing credit
facility with Comerica Bank. Under the BFI agreement, available borrowings are
up to 85% of accounts receivable, after reduction for ineligible accounts. The
interest rate on outstanding balances is at prime plus 4% per annum, plus a
monthly administrative fee of 0.50% per month calculated on the average daily
balance outstanding. The minimum monthly interest and administrative fee charged
to the Company was at least $1 per month for the first six months, escalating to
$2 per month for the remaining term of the agreement.
The Company relies primarily on the timeliness and amount of accounts receivable
collections to fund cash disbursements. As a result of prior losses and prior
negative cash flows, the Company experienced a significant decline in available
liquidity in 2001 and 2002. The Company improved its liquidity by securing
private placement financing in July 2001, by generating positive cash flow from
operations, by reaching settlement agreements with all of its legacy creditors,
and in December 2002 by replacing its credit facility with Comerica Bank, which
was scheduled to expire on December 31, 2002, with the BFI facility.
Under present circumstances, the Company believes that its estimated results
from operations when combined with the proceeds from the BFI credit facility
will be adequate to fund its obligations for the next 12 months.
On May 6, 2003, the Company retained the services of an investment-banking firm
to help the Company explore its strategic alternatives. The Company paid an
initial fee of $20 at the signing of the agreement and commenced making monthly
payments of $5 starting on June 15, 2003 and which, under the agreement, were
scheduled to continue through October 15, 2003. Additionally the Company issued
warrants to purchase 125,000 shares of common stock, exercisable for a period of
five years at an exercise price of $0.035 per share, which was the closing price
of the Company's common stock on May 6, 2003. These warrants were valued at $4
under the provisions of APB No. 14 and EITF 00-27 and were expensed in the
second quarter of 2003. The services of the investment-banking firm were
terminated, effective August 21, 2003. The Company recorded an expense of $25 in
the third quarter of 2003 for the remaining payments due pursuant to the
contract and the remaining amortization relating to the initial engagement fee
that was being amortized over the life of the agreement. The Company will
continue to explore its tactical and strategic alternatives.
3. ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivables are due from Global 2000,
mid-market and public sector clients. Credit is extended based on an evaluation
of the customers' financial condition and, generally, collateral is not
required. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Management regularly evaluates the allowance for doubtful accounts. The
estimated losses are based on the aging of our receivable balances, a review of
significant past due accounts, and our historical write-off experience, net of
recoveries. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required.
4. ACCRUED SALARIES AND OTHER EXPENSES
Accrued salaries and other expenses consist of the following:
September 30, December 31
2003 2002
---- ----
Accrued payroll and payroll taxes............ $ 147 $ 146
Accrued professional fees.................... 61 89
Other accrued expenses....................... 163 233
------- ------
Total accrued expenses............. $ 371 $ 468
======= ======
7
5. CORPORATE LEGACY LIABILITIES
Corporate legacy liabilities consist of obligations that were incurred in years
prior to 2001. During 2001 the Company entered into settlement agreements or
issued notes in satisfaction of certain of these payables pursuant to a
restructuring plan offered to substantially all of its creditors. The following
chart represents what is left from those settlement agreements.
Corporate legacy liabilities consist of the following:
September 30, December 31,
2003 2002
---- ----
Short-term:
Other non-operating payables.................... $ -- $ 94
------ ------
Total short-term ........................... $ -- $ 94
------ ------
Long-term:
Promissory note................................. $ 11 $ 11
------ ------
Total long-term................................. $ 11 $ 11
------ ------
A promissory note was issued in conjunction with the Company's restructuring of
the legacy liabilities. The note is an unsecured long-term note that accrues
interest at 6.5% per annum. Principal and interest are due on January 3, 2005.
In the chart above, this note is considered a long-term liability.
6. CONVERTIBLE NOTES PAYABLE, NET
Convertible notes payable, net consists of the following:
September 30, December 31,
2003 2002
---- -----
Series 1 Convertible Subordinated Promissory Notes............. $ 1,283 $ 1,209
Less fundraising and warrant costs:
Fundraising costs, net of amortization..................... 15 29
Warrant costs associated with
convertible notes, net of amortization.................... 47 94
-------- --------
Subtotal fundraising costs........................... 62 123
-------- --------
Notes payable, net............................................ $ 1,221 $ 1,086
======== ========
Convertible notes payable - short-term $ 38 $ -
-------- --------
Convertible notes payable - long-term $ 1,183 $ 1,086
-------- --------
On July 26, 2001, the Company completed a private placement through the issuance
of approximately $1,100 of Series 1 Convertible Subordinated Promissory Notes
(the "Notes") with warrants to a group of investors, including members of
BrightStar's senior management. The Notes are secured on a junior basis by
substantially all of the assets of the Company and its operating subsidiaries,
and are convertible into common stock, at the option of the investors, at a
fixed price of $0.23 per share, subject to anti-dilution provisions. The Notes
are entitled to simple interest calculated at a rate per annum equal to 8%. The
Company had the option to pay interest for the first year from the date of the
Notes (subsequently extended for another year during the second quarter of 2002)
by issuing additional Notes (the "PIK Notes") and warrants with the same terms
as above. The Company elected to pay the interest due on the Notes from
inception through June 30, 2003 by issuing PIK Notes and warrants. In October
2003, the Company paid in cash the quarterly interest due on the Notes and PIK
Notes for the quarter ended September 30, 2003.
The Notes and the PIK Notes were originally due and payable on July 1, 2004.
However, the Notes and PIK Notes were amended effective October 24, 2003 to
extend their due date to December 31, 2005 when holders representing more than
75% of the aggregate principal amount of the Notes and PIK Notes agreed to the
extension. As consideration for this amendment the Company agreed to a partial
pay down schedule for the PIK Notes, commencing January 2004. The Company agreed
to pay in cash each quarter an amount equal to 50% of the interest then due on
the Notes and PIK Notes and the amounts so paid will be applied sequentially to
retire the PIK Notes in the order issued until December 31, 2005.
8
7. INCOME TAXES
As a result of historical losses, the Company has recorded a valuation allowance
to offset all of its net deferred tax assets recorded at September 30, 2003. The
valuation allowance, which was approximately $10,500 as of December 31, 2002,
relates to deferred tax assets established for net operating loss carryforwards
generated through June 30, 2003 and other temporary differences. The Company
does not expect to recognize tax benefits on prior or future losses or other
temporary differences until such time that it is more likely than not that tax
benefits will be realized by the Company. At December 31, 2002, the Company had
a net operating loss carryforward of approximately $13,800 for federal income
tax purposes, which will expire in years 2018 through 2022.
8. CHANGE IN ACCOUNTING PRINCIPLE
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Intangible Assets". Thus, effective
January 1, 2002, the Company ceased amortizing goodwill recorded in past
business combinations. The implementation of the goodwill impairment test under
SFAS No. 142 requires a two-step approach, which is performed at the reporting
unit level, as defined in SFAS No. 142. Step one identifies potential
impairments by comparing the fair value of the reporting unit to its carrying
amount. Step two, which is only performed if there is a potential impairment,
compares the carrying amount of the reporting unit's goodwill to its implied
value, as defined in SFAS No. 142. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized for an amount equal to that excess.
The Company completed the first step of the transitional impairment test
required by SFAS No. 142 during the quarter ended June 30, 2002. The Company
consists of a single reporting unit. Therefore, this step required the Company
to assess the fair value of the Company and compare that value to its
shareholders' equity. In determining fair value, the Company considered the
guidance in SFAS No. 142, including the Company's market capitalization, control
premiums, discounted cash flows and other indicators of fair value. Based on
this analysis, goodwill recorded as of January 1, 2002 in the amount of $11,648
was impaired. The Company then completed step two, impairment test, pursuant to
SFAS No. 142, under which we compared the value of our goodwill based on the
Company's stock price as of December 31, 2001 with the value of the goodwill. As
a result of the impairment test, a goodwill impairment loss of $9,900 was
recognized in the fourth quarter of 2002, which is when the test was completed,
and recorded as of the first quarter of 2002 as a change in accounting
principle.
During 2002, as part of the Company's implementation of SFAS No. 142, the
Company also wrote off $45 related to an intangible asset. The reduction was
also included in the change in accounting principle amount.
The net effect of these restatements was a $9,945 decrease in the net income for
the quarter ended March 31, 2002.
The Company will perform its annual impairment test during the 4th quarter based
on an annual test date of October 1, 2003 as required by SFAS No. 142. Based on
initial tests, the company does not anticipate recording any impairment loss for
2003.
9. STOCK OPTION REPRICING
On February 12, 2002 the compensation committee of the board of directors voted
to take actions that resulted in the repricing of approximately 835,000 existing
options to active participants under the Company's long-term incentive plans to
a new exercise price of $0.05 per share, which was determined to be the fair
market value by the board of directors based upon the 20-day average closing
price. The market closing price on February 12, 2002 was $0.07. Since the market
closing price was greater than the exercise price of the newly granted options,
the difference of $0.02 per share, approximately $17, was recorded as unearned
compensation and will be recognized over the remaining vesting period of the
repriced options. These repriced stock options are accounted for as variable
awards, and accordingly, the Company will record any increase of the fair market
value of the underlying stock over the market closing price of $0.07 on the day
of the repricing as compensation expense in the appropriate quarter. Since the
closing price of the company's stock was at $0.10 per share on September 30,
2003, the company recorded a compensation expense of $17 in the third quarter of
2003.
9
10. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(as restated)
Numerator:
Income (loss) before cumulative effect of change in accounting
principle................................................. $ (17) $ 538 $ (57) $ 1,990
========== ========== ========== ==========
Net income (loss).............................................. $ (17) $ 538 $ (57) $(7,955)
========== ========== ========== ==========
Numerator for basic earnings per share - income (loss)
available to common stockholders............................. (17) 538 (57) (7,955)
Effect of dilutive securities:
Series 1 Convertible Subordinated Promissory Notes (1) ........ -- -- -- --
---------- ---------- ---------- ----------
Numerator for diluted earnings per share - income
available to common stockholders after assumed conversions... $ (17) $ 538 $ (57) $(7,955)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
- - weighted average shares...................................... 15,284,668 15,277,331 15,284,416 14,931,687
Effect of dilutive securities:
Series 1 Convertible Subordinated Promissory Notes (1) ........ -- -- -- --
Employee stock options (2) .................................... -- -- -- --
Common stock warrants (3) ..................................... -- -- -- --
---------- ---------- ---------- ----------
Denominator for diluted earnings per share - adjusted weighted-
average shares and assumed conversions...................... 15,284,668 15,277,331 15,284,416 14,931,687
---------- ---------- ---------- ----------
(1) Diluted EPS for the three and nine-month period ended September 30, 2003
excludes "as converted" treatment of the Series 1 Convertible Subordinated
Promissory Notes as their inclusion would be anti-dilutive. The Notes are
convertible at a price of $0.23 per share into approximately 5.6 million
common shares.
(2) Diluted EPS for the three and nine-month period ended September 30, 2003
excludes the effect of approximately 1.4 million employee stock options as
their inclusion would be anti-dilutive. Of the 1.4 million employee stock
options, approximately 1.2 million were in-the-money as of September 30,
2003.
(3) Diluted EPS for the three and nine-month period ended September 30, 2003
excludes the effect of approximately 0.5 million common stock warrants as
their inclusion would be anti-dilutive. Of the 0.5 million common stock
warrants, approximately 0.2 million were in-the-money as of September 30,
2003.
11. LITIGATION
The Company is from time to time involved in litigation incidental to its
business. The Company believes that the results of such litigation will not have
a material adverse effect on the Company's financial condition.
12. SIGNIFICANT CUSTOMERS
For the third quarter of 2003, the Company had a single customer that accounted
for approximately 60% of total revenue. For the first nine months of 2003, this
customer accounted for approximately 60% of total revenue. This customer also
accounted for approximately 55% of the Company's total outstanding accounts
receivable balance as of September 30, 2003.
For the third quarter of 2002, the Company had four unrelated customers that
accounted for approximately 35%, 28%, 11% and 10% of total revenue,
respectively. Also, for the first nine months of 2002, these four customers
accounted for approximately 26%, 27%, 9% and 10% of total revenue, respectively.
These four customers also accounted for approximately 19%, 26%, 7% and 12%,
respectively, of the Company's total outstanding accounts receivable balance as
of September 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BrightStar Information Technology Group, Inc. ("BrightStar" or "the Company")
provides information technology ("IT") services for its customers. We help
organizations maximize their competitive advantage through the implementation
and/or support of leading edge enterprise level applications from SAP,
PeopleSoft and Actuate and the maintenance of legacy application software by
focusing primarily on serving clients in the healthcare and government markets.
BrightStar has approximately 46 employees and full-time contractors and has its
headquarters in the San Francisco Bay Area with field offices in Addison, Texas,
and Quincy, Massachusetts.
The timing of revenue is difficult to forecast because the Company's sales cycle
can be relatively long and is subject to a number of uncertainties, including
customers' budgetary constraints, the timing of customers' budget cycles,
customers' internal approval processes and general economic conditions. In
addition, as is customary in the industry, the Company's engagements generally
can be changed or terminated without a significant customer penalty. The
Company's revenue and results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including,
but not limited to, changes in demand for IT services, the effect of changes in
estimates to complete fixed fee contracts, the rate of hiring and the
productivity of revenue generating personnel, the availability of qualified IT
professionals, the significance of customer engagements commenced and completed
during a quarter, the number of business days in the quarter, changes in the
relative mix of the Company's services, changes in the pricing of the Company's
services, the timing and the rate of entrance into new geographic or IT
specialty markets, departures or temporary absences of key revenue-generating
personnel, the structure and timing of acquisitions, and general economic
factors.
Cost of revenue consists primarily of salaries (including non-billable and
training time) and benefits for consultants. The Company generally strives to
maintain its gross profit margins by offsetting increases in salaries and
benefits with increases in billing rates, although this is subject to the market
conditions at the time. In addition, the Company tries to increase or decrease
the number of consultants used by the Company to provide its services, including
third party contractors, as the amount of billable work (and resultant revenue)
changes. In other words, the Company continually strives to minimize the amount
of unbillable consulting resources or bench. As revenues declined over the past
couple of years, the Company reduced its consulting resources accordingly.
Selling, general and administrative expenses (SG&A) primarily consist of costs
associated with (i) corporate overhead, (ii) sales and account management, (iii)
telecommunications, (iv) human resources, (v) recruiting and training, and (vi)
other administrative expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses BrightStar's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in preparation of its
consolidated financial statements.
Revenue recognition -- The Company provides services to customers for fees that
are based on time and materials or occasionally, fixed fee contracts. Revenue
for fixed fee contracts is recognized ratably over the contract term based on
the percentage-of-completion method. Costs incurred to date as a percentage of
total estimated costs are used to determine the percentage of the contract that
has been completed throughout the contract life. Costs reimbursed by its
customers are included in revenue for the periods in which costs are incurred.
Goodwill -- Goodwill is the cost in excess of amounts assigned to identifiable
assets acquired less liabilities assumed. Goodwill recorded in conjunction with
the Founding Companies and all other acquisitions in 1998 is no longer being
amortized due to the Company adopting Statement of Financials Accounting
Standards (SFAS) No. 142 as of January 1, 2002.
Income taxes -- The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach to accounting for income taxes. The Company provides deferred income
taxes for temporary differences that will result in taxable or deductible
amounts in future years. A valuation allowance is recognized if it is
anticipated that some or all of a deferred tax asset may not be realized. Based
on the Company's net losses for the previous years, the Company has recorded a
valuation allowance for deferred taxes as of September 30, 2003. In the event
that the Company were to determine that it would be able to realize its deferred
tax assets in the future, an asset would be recorded, which in turn would
increase income in the period such determination was made.
RESULTS OF OPERATIONS
Revenue for the third quarter and first nine months of 2003 decreased from $2.2
million to $1.6 million and from $7.5 million to $4.4 million or 27% and 41%,
respectively, compared to the third quarter and first nine months of 2002 as a
result of a continued reduction in the demand for enterprise software consulting
services, offset in part by an increase in legacy software services provided to
the Company's largest account. Revenue for the third quarter of 2003 was
approximately 10% higher than the prior sequential quarter ended June 30, 2003.
Gross profit as a percentage of revenue for the third quarter and first nine
months of 2003 decreased from 33% to 29% and from 32% to 29%, respectively,
compared to third quarter and first nine months of 2002 as a result of a
reduction in consultant billing rates and a change in the mix of services
provided to our clients. The 2003 third quarter gross profit as a percentage of
revenue was approximately even with that of the prior sequential quarter ended
June 30, 2003.
The Company's reductions in selling, general and administrative expenses are the
result of the execution of the turnaround plan, which included reductions in
office space, sales personnel and related costs, management overhead and
discretionary expenses.
LIQUIDITY AND CAPITAL RESOURCES
On December 16, 2002, the Company entered into an agreement with BFI Business
Finance ("BFI"), a Santa Clara, California-based business-credit company, for a
two-year working capital line of credit for $0.75 million, to replace our
existing credit facility with Comerica Bank. Under the BFI agreement, available
borrowings are up to 85% of accounts receivable, after reduction for ineligible
accounts. The interest rate on outstanding balances is at prime plus 4% per
annum, plus a monthly administrative fee of 0.50% per month calculated on the
average daily balance outstanding. The minimum monthly interest and
administrative fee charged to the Company was at least $1,000 per month for the
first six months, escalating to $2,375 per month for the remaining term of the
agreement.
The Company relies primarily on the timeliness and amount of accounts receivable
collections to fund cash disbursements. As a result of prior losses and prior
negative cash flows, the Company experienced a significant decline in available
liquidity in 2001 and 2002. The Company improved its liquidity by securing
private placement financing in July 2001, by generating positive cash flow from
operations, by reaching settlement agreements with all of its legacy creditors,
and in December 2002 by replacing its credit facility with Comerica Bank, which
was scheduled to expire on December 31, 2002, with the BFI facility.
Under present circumstances, the Company believes that its estimated results
from operations when combined with the proceeds from the BFI credit facility
will be adequate to fund its obligations for the next 12 months.
On May 6, 2003, the Company retained the services of an investment banking firm
to help the Company explore its strategic alternatives. The Company paid an
initial fee of $20,000 at the signing of the agreement and commenced making
monthly payments of $5,000 starting on June 15, 2003 and which, under the
agreement, were scheduled to continue through October 15, 2003. Additionally the
Company issued warrants to purchase 125,000 shares of common stock, exercisable
for a period of five years at an exercise price of $0.035 per share, which was
the closing price of the Company's common stock on May 6, 2003. These warrants
were valued at $4,000 under the provisions of APB No. 14 and EITF 00-27 and were
expensed in the second quarter of 2003. The services of the investment banking
firm were terminated, effective August 21, 2003. The Company recorded an expense
of $25,000 in the third quarter of 2003 for the remaining payments due pursuant
to the contract and the remaining amortization relating to the initial
engagement fee that was being amortized over the life of the agreement. The
Company will continue to explore its tactical and strategic alternatives.
FORWARD-LOOKING INFORMATION - Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than
statements of historical facts, included in this MD&A regarding the Company's
financial position, business strategy and plans and objectives of management of
the Company for future operations are forward-looking statements. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside of the Company's control, that could cause actual results to
materially differ from such statements. While the Company believes that the
assumptions concerning future events are reasonable, it cautions that there are
inherent difficulties in predicting certain important factors, especially the
timing and magnitude of technological advances; the prospects for future
acquisitions; the possibility that a current customer could be acquired or
otherwise be affected by a future event that would diminish their information
technology requirements; the competition in the information technology industry
and the impact of such competition on pricing, revenues and margins; the degree
to which business entities continue to outsource information technology and
business processes; uncertainties surrounding budget reductions or changes in
funding priorities of existing government programs and the cost of attracting
and retaining highly skilled personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously reported
under Item 7A of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our principal accounting officer, after evaluating the effectiveness
of the company's "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date
(the "Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to them by
others within those entities.
(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect our disclosure controls and procedures subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings
There have been no material changes from the information previously reported
under Item 3 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibits
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 - Certification Pursuant to 18 U.S.C. Section 1360, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8K
On July 23, 2003 the Company furnished a Current Report on Form 8-K dated July
22, 2003 reporting its preliminary earnings for the second quarter ended June
30, 2003.
On September 19, 2003, the Company furnished a Current Report on Form 8-K dated
September 17, 2003 which updated its guidance for the third quarter ending
September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned there
unto duly authorized.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
Date: November 13, 2003. BY: /s/ Joseph A. Wagda
-------------------------------------
Joseph A. Wagda
Chairman and Chief Executive Officer
BY: /s/ Paul C. Kosturos
--------------------------------------
Paul C. Kosturos
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 - Certification Pursuant to 18 U.S.C. Section 1360, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002