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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 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 May 13, 2004 was 15,287,968.
The Exhibit Index is located on page 14 hereof.
1
PART 1, ITEM 1. FINANCIAL STATEMENTS
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($000'S, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2004 2003
----------- -------------
ASSETS
Current assets:
Cash.................................................................. $ 72 $ 125
Trade accounts receivable, net of allowance
for doubtful accounts of $30......................................... 524 537
Unbilled revenue...................................................... 32 40
Prepaid expenses and other............................................ 67 117
----------- -------------
Total current assets.............................................. 695 819
Property and equipment................................................ 446 437
Less - accumulated depreciation................................... (393) (389)
----------- -------------
Property and equipment, net....................................... 53 48
Goodwill.............................................................. 1,748 1,748
----------- -------------
Total assets...................................................... $ 2,496 $ 2,615
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit........................................................ $ 39 $ -
Accounts payable...................................................... 88 81
Accrued salaries and other expenses................................... 313 320
Deferred revenue...................................................... 6 -
Corporate legacy liabilities.......................................... 11 -
Convertible notes payable, short-term................................. 25 38
----------- -------------
Total current liabilities......................................... 482 439
Convertible notes payable, net........................................ 1,223 1,203
Corporate legacy liabilities.......................................... - 11
Other liabilities..................................................... 2 2
Commitments and contingencies......................................... - -
Stockholders' equity:
Common stock, $0.001 par value; 72,000,000 shares authorized;
15,287,968 and 15,286,788 (excluding 255,000 shares held in treasury)
shares issued and outstanding in 2004 and 2003, respectively......... 16 16
Additional paid-in capital............................................ 99,925 99,925
Unearned compensation................................................. (5) (11)
Treasury stock........................................................ (118) (118)
Accumulated deficit................................................... (99,029) (98,852)
----------- -------------
Total stockholders' equity........................................ 789 960
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,496 $ 2,615
=========== =============
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
MARCH 31,
----------------------------
2004 2003
------------ ------------
Revenue................................................................... $ 1,195 $ 1,410
Cost of revenue........................................................... 855 1,002
------------ ------------
Gross profit.............................................................. 340 408
Operating expenses:
Selling, general and administrative...................................... 460 422
Depreciation and amortization............................................ 4 12
------------ ------------
Total operating expenses............................................. 464 434
Income (loss) from operations............................................. (124) (26)
Other income............................................................. - 35
Interest expense, net.................................................... (53) (48)
------------ ------------
Income (loss) before tax provision........................................ (177) (39)
Income tax provision..................................................... - -
------------ ------------
Net income (loss)......................................................... $ (177) $ (39)
============ ============
Net income (loss) per share: basic and diluted
------------ ------------
Net income (loss) per share.......................................... $ (0.01) $ (0.00)
============ ============
Average shares outstanding: basic and diluted............................. 15,287,346 15,284,288
------------ ------------
See notes to condensed consolidated financial statements.
3
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($000'S, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Common Stock Additional Unearned
--------------------------------
Shares Amount Paid-In-Capital Compensation
-------------- --------------- ---------------- --------------
Balance, December 31, 2003.............. 15,286,788 $ 16 $ 99,925 $ (11)
Variable stock options.................. - - -
Warrants issued with convertible notes.. - - - -
Exercise of stock options............... 1,180 - - -
Amortization of unearned compensation... - - - 6
Net loss................................ - - - -
-------------- --------------- ---------------- --------------
Balance, March 31, 2004................. 15,287,968 $ 16 $ 99,925 $ (5)
============== =============== ================ ==============
Total
Treasury Accumulated Stockholders' Comprehensive
Stock Deficit Equity Loss
-------------- --------------- ---------------- --------------
Balance, December 31, 2003..............$ (118) $ (98,852) $ 960
Variable stock options.................. - - -
Warrants issued with convertible notes.. - - -
Exercise of stock options............... - - -
Amortization of unearned compensation... - - 6
Net loss................................ - (177) (177) $ (177)
-------------- --------------- ---------------- --------------
Balance, March 31, 2004.................$ (118) $ (99,029) $ 789 $ (177)
============== =============== ================ ==============
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)
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Operating activities:
Net loss................................................................. $ (177) $ (39)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization............................................ 24 33
Non cash ompensation expense on issuance of
common stock options and warrants....................................... 6 9
Expense of issuances of stock and warrants............................... - 1
Non cash gains on settlement of liabilities.............................. - (35)
Changes in operating assets and liabilities
Trade accounts receivable............................................ 13 99
Unbilled revenue..................................................... 8 41
Prepaid expenses and other assets.................................... 50 32
Accounts payable..................................................... 7 (109)
Accrued salaries and other expenses.................................. (7) (79)
Deferred revenue..................................................... 6 2
Corporate legacy liabilities......................................... - (59)
------------ ------------
Net cash provided (used) by operating activities..................... (70) (104)
Investing activities:
Capital expenditures..................................................... (9) (2)
------------ ------------
Net cash used in investing activities................................ (9) (2)
Financing activities:
Net borrowings (payments) under line of credit........................... 39 -
Repayments of convertible notes payable.................................. (13) -
------------ ------------
Net cash provided (used) by financing activities..................... 26 -
Net increase (decrease) in cash........................................... (53) (106)
Cash:
Beginning of period...................................................... 125 160
------------ ------------
End of period............................................................ $ 72 $ 54
============ ============
Supplemental disclosure:
Interest paid............................................................. $ 6 $ 3
Noncash issuance of convertible notes at fair value
associated with interest due on notes payable............................ $ - $ 24
See notes to condensed consolidated financial statements.
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 three-month period ended March 31, 2004,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. The balance sheet at December 31, 2003, 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, 2003.
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 6.8 million shares and 7.9 million shares at March 31, 2004
and March 31, 2003, respectively.
Pro forma disclosures required under SFAS 148 are presented below. The pro forma
compensation cost may not be representative of that expected in future years.
3 Months Ended March 31,
2004 2003
-------- --------
Net income (loss), as reported......................... $ (177) $ (39)
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)
-------- --------
Pro forma net income (loss)............................ $ (177) $ (47)
Pro forma basic and diluted income (loss) per share:
Basic - as reported.................................. $ (0.01) $ 0.00
Basic - pro forma.................................... $ (0.01) $ 0.00
Diluted - as reported................................ $ (0.01) $ 0.00
Diluted - pro forma.................................. $ (0.01) $ 0.00
Compensation cost for the quarter ended March 31, 2004 and 2003 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 term of the agreement
is stated to be two years and the two year term renews automatically unless
terminated by the Company upon 30 days notice prior to the end of the term.
However, BFI has the right to cancel the agreement at any time on 30 days' prior
notice.
The Company's liquidity declined during the past quarter primarily as the result
of the fall off of revenue from the Company's largest customer. The Company
expects that the revenue from this customer will continue to decline through the
end of the second quarter of this year. As a result, unless the Company
experiences other improvements in its operating performance or is able to find
sources of new capital, the Company expects that its net working capital will
continue to decrease. Under present circumstances, the Company believes that its
planned results from operations, when combined with the proceeds available from
the BFI credit facility, will be adequate to fund its operations at least
through the end of 2004. However, our operating results could be worse than we
are expecting, or the BFI credit facility could be canceled. Under such
circumstances, there can be no assurance that the Company would have sufficient
cash available to meet our obligations as they come due in order to continue as
a going concern.
On March 25, 2004, the Company retained the services of a financial advisory
firm to help the Company explore its strategic alternatives. The Company paid an
initial fee of $8 at the signing of the agreement and will also be responsible
for making monthly payments of $8 starting on April 25, 2004 and continuing
through July 25, 2004, which is the end of the initial period of the agreement.
During the initial period, the Company may terminate this relationship by
written notice and only be responsible for a prorata share of the monthly fee up
until the date of termination.
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:
March 31, December 31,
---------- ------------
2004 2003
---------- ------------
Accrued payroll and payroll taxes............ $ 167 $ 163
Accrued professional fees.................... 57 64
Other accrued expenses....................... 89 93
---------- ------------
Total accrued expenses................... $ 313 $ 320
========== ============
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.
7
Corporate legacy liabilities consist of the following:
March 31, December 31,
---------- ------------
2004 2003
---------- ------------
Short-term:
Promissory note.............................. $ 11 $ --
---------- ------------
Total short-term ........................ $ 11 $ --
---------- ------------
Long-term:
Promissory note.............................. $ -- $ 11
---------- ------------
Total long-term.............................. $ -- $ 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.
As of March 31, 2004, the classification on this promissory note has been
changed to short-term based on the maturity date of the promissory note.
6. CONVERTIBLE NOTES PAYABLE, NET
Convertible notes payable, net consists of the following:
March 31, December 31,
---------- ------------
2004 2003
---------- ------------
Series 1 Convertible Subordinated Promissory Notes... $ 1,271 $ 1,283
Less fundraising and warrant costs:
Fundraising costs, net of amortization............. 6 10
Warrant costs associated with convertible notes,
net of amortization 17 32
---------- ------------
Subtotal fundraising costs..................... 23 42
---------- ------------
Notes payable, net.................................. $ 1,248 $ 1,241
========== ============
Convertible notes payable - short-term $ 25 $ 38
========== ============
Convertible notes payable - long-term $ 1,223 $ 1,203
---------- ------------
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 totaling $182 and warrants
totaling 118,867. In October 2003, the Company started paying in cash the
quarterly interest due on the Notes and PIK Notes.
The Notes and the PIK Notes were originally due and payable on July 1, 2004. The
holders representing more than 75% of the aggregate principal amount of the
Notes and PIK Notes, however, agreed to amend the Notes and PIK Notes, effective
October 24, 2003, to extend their due date to December 31, 2005. 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.
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 March 31, 2004. The
valuation allowance, which was approximately $10,900 as of December 31, 2003,
relates to deferred tax assets established for net operating loss carryforwards
generated through March 31, 2004 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, 2003, the Company had
a net operating loss carryforward of approximately $15,600 for federal income
tax purposes, which will expire in years 2018 through 2023.
8
8. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended
March 31, March 31,
2004 2003
------------ ------------
Numerator:
Income (loss) from operations.............................................. $ (124) $ (26)
============ ============
Net income (loss).......................................................... $ (177) $ (39)
============ ============
Numerator for basic earnings per share - income (loss)
available to common stockholders.......................................... (177) (39)
============ ============
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... $ (177) $ (39)
============ ============
Denominator:
Denominator for basic earnings per share - weighted average shares 15,287,346 15,284,288
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.................................... 15,287,346 15,284,288
------------ ------------
(1) Diluted EPS for the three-month period ended March 31, 2004 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 5.5 million common shares.
(2) Diluted EPS for the three-month period ended March 31, 2004 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 March 31, 2004.
(3) Diluted EPS for the three-month period ended March 31, 2004 excludes the
effect of approximately 1.3 million common stock warrants as their
inclusion would be anti-dilutive. Of the 1.3 million common stock warrants,
approximately 0.2 million were in-the-money as of March 31, 2004.
9. LITIGATION
The Company is from time to time involved in litigation incidental to its
business. The Company believes that the results of such litigation will not have
a material adverse effect on the Company's financial condition.
10. SIGNIFICANT CUSTOMERS
For the first quarter of 2004, the Company had a single customer that accounted
for approximately 70% of total revenue. This customer also accounted for
approximately 58% of the Company's total outstanding accounts receivable balance
as of March 31, 2004.
For the first quarter of 2003, the Company had a single customer that accounted
for approximately 60% of total revenue. This customer also accounted for
approximately 38% of the Company's total outstanding accounts receivable balance
as of March 31, 2003.
During the first quarter of 2004, the Company's largest customer informed the
Company that the services of our consultants representing approximately 57% of
our revenues from this customer in 2003 would be eliminated during the period
March through May of 2004 as a result of project completions and cost pressure
from the federal government. Management considered the impact of this reduction
and whether it could give rise to the Company's ability to continue its
operations for a reasonable period of time, and whether the going concern basis
of accounting continued to be appropriate.
9
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 had approximately 28 employees and full-time contractors at April 30,
2004 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.
10
Goodwill -- Goodwill is the cost in excess of amounts assigned to identifiable
assets acquired less liabilities assumed. Goodwill recorded in conjunction with
the Founding Companies and all other acquisitions in 1998 is no longer being
amortized due to the Company adopting Statement of Financials Accounting
Standards (SFAS) No. 142 as of January 1, 2002.
Income taxes -- The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
approach to accounting for income taxes. The Company provides deferred income
taxes for temporary differences that will result in taxable or deductible
amounts in future years. A valuation allowance is recognized if it is
anticipated that some or all of a deferred tax asset may not be realized. Based
on the Company's net losses for the previous years, the Company has recorded a
valuation allowance for deferred taxes as of March 31, 2004. In the event that
the Company were to determine that it would be able to realize its deferred tax
assets in the future, an asset would be recorded, which in turn would increase
income in the period such determination was made.
RESULTS OF OPERATIONS
Revenue for the first quarter ended March 31, 2004 decreased from $1.4 million
to $1.2 million or 14% compared to the first quarter ended March 31, 2003 as a
result of a reduction in the demand for our services.
Gross profit as a percentage of revenue for the first quarter ended March 31,
2004 decreased from 29% to 28% compared to first quarter ended March 31, 2003 as
a result of consultant cost increases, which were not passed on to our customers
and a change in the mix of services provided to our clients.
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 term of the agreement is stated to be two years and the two year
term renews automatically unless terminated by the Company upon 30 days notice
prior to the end of the term. However, BFI has the right to cancel the agreement
at any time on 30 days' prior notice.
The Company's liquidity declined during the past quarter primarily as the result
of the fall off of revenue from the Company's largest customer. The Company
expects that the revenue from this customer will continue to decline through the
end of the second quarter of this year. As a result, unless the Company
experiences other improvements in its operating performance or is able to find
sources of new capital, the Company expects that its net working capital will
continue to decrease. Under present circumstances, the Company believes that its
planned results from operations, when combined with the proceeds available from
the BFI credit facility, will be adequate to fund its operations at least
through the end of 2004. However, our operating results could be worse than we
are expecting, or the BFI credit facility could be canceled. Under such
circumstances, there can be no assurance that the Company would have sufficient
cash available to meet our obligations as they come due in order to continue as
a going concern.
On March 25, 2004, the Company retained the services of a financial advisory
firm to help the Company explore its strategic alternatives. The Company paid an
initial fee of $7,500 at the signing of the agreement and will also be
responsible for making monthly payments of $7,500 starting on April 25, 2004 and
continuing through July 25, 2004, which is the end of the initial period of the
agreement. During the initial period, the Company may terminate this
relationship by written notice and only be responsible for a prorata share of
the monthly fee up until the date of termination.
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.
11
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, 2003. Refer to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003 for more details.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
the company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Rules 13a-15e and
15d-15e) as of the end of the period covered by this report (the "Evaluation
Date"), have concluded that, as of the Evaluation Date, our disclosure controls
and procedures were adequate based on the evaluation of these controls and
procedures required by paragraph (b) of the Exchange Act Rules 13a-15 or 13d-15.
(b) Changes in internal controls. During our last fiscal quarter, there was no
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect our internal control over
financial reporting.
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, 2003. Refer to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003 for more details.
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 of Chief Executive Officer pursuant to 18 U.S.C.
Section 1360.
32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1360.
(b) Reports on Form 8K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned there
unto duly authorized.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
Date: May 13, 2004. 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
13
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 of Chief Executive Officer pursuant to 18 U.S.C.
Section 1360
32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1360
14