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, 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 November 1, 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)
September 30, December 31,
2004 2003
--------- -------
ASSETS
Current assets:
Cash ................................................................ $ 19 $ 125
Trade accounts receivable, net of allowance
for doubtful accounts of $30 ...................................... 452 537
Unbilled revenue .................................................... 32 40
Prepaid expenses and other .......................................... 70 117
-------- --------
Total current assets .............................................. 573 819
Property and equipment .............................................. 446 437
Less - accumulated depreciation ................................... (403) (389)
-------- --------
Property and equipment, net ....................................... 43 48
Goodwill ............................................................ 1,748 1,748
-------- --------
Total assets ...................................................... $ 2,364 $ 2,615
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ...................................................... $ 220 $ --
Accounts payable .................................................... 75 81
Accrued salaries and other expenses ................................. 314 320
Deferred revenue .................................................... -- --
Corporate legacy liabilities ........................................ 11 --
Convertible notes payable, short-term ............................... -- 38
-------- --------
Total current liabilities ......................................... 620 439
Convertible notes payable, net ...................................... 1,258 1,203
Corporate legacy liabilities ........................................ -- 11
Other liabilities ................................................... 50 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 ............................................... (2) (11)
Treasury stock ...................................................... (118) (118)
Accumulated deficit ................................................. (99,385) (98,852)
-------- --------
Total stockholders' equity ........................................ 436 960
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 2,364 $ 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 Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------ ------------ ------------
Revenue .............................. $ 781 $ 1,586 $ 2,818 $ 4,430
Cost of revenue ...................... 576 1,120 2,032 3,138
------------ ------------ ------------ ------------
Gross profit ......................... 205 466 786 1,292
Operating expenses:
Selling, general and administrative 318 425 1,165 1,220
Depreciation and amortization ..... 5 5 14 23
------------ ------------ ------------ ------------
Total operating expenses ........ 323 430 1,179 1,243
Income (loss) from operations ........ (118) 36 (393) 49
Other income ...................... -- -- -- 44
Interest expense, net ............. (34) (53) (140) (150)
------------ ------------ ------------ ------------
Loss before tax provision ............ (152) (17) (533) (57)
Income tax provision .............. -- --
------------ ------------ ------------ ------------
Net loss ............................. $ (152) $ (17) $ (533) $ (57)
============ ============ ============ ============
Net loss per share: basic and diluted
Net loss per share .............. $ (0.01) $ (0.00) $ (0.03) $ (0.00)
============ ============ ============ ============
Average shares outstanding:
basic and diluted ................. 15,287,968 15,284,668 15,287,968 15,284,416
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements.
3
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($000'S, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 -- -- -- 9
Net loss ............................. -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 2004 .......... 15,287,968 $ 16 $ 99,925 $ (2)
============ ============ ============ ============
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 -- -- 9
Net loss ............................. -- (533) (533) $ (177)
------------ ------------ ------------ ------------
Balance, September 30, 2004 .......... $ (118) $ (99,385) $ 436 $ (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)
Nine Months Ended
-----------------------------
September 30, September 30,
2004 2003
------- --------
Operating activities:
Net loss .......................................... $(533) $ (57)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization ..................... 57 85
Change in allowance for doubtful accounts ......... -- 102
Non cash compensation expense on issuance of
common stock options and warrants .............. -- 49
Expense of issuances of stock and warrants ........ 9
Non cash gains on settlement of liabilities ....... -- (35)
Changes in operating assets and liabilities
Trade accounts receivable ...................... 85 (130)
Unbilled revenue ............................... 8 (3)
Prepaid expenses and other assets .............. 47 11
Accounts payable ............................... (6) (26)
Accrued salaries and other expenses ............ 42 (48)
Deferred revenue ............................... -- 25
Corporate legacy liabilities ................... -- (59)
----- -----
Net cash provided (used) by operating activities (291) (86)
Investing activities:
Capital expenditures .............................. (9) (2)
----- -----
Net cash used in investing activities .......... (9) (2)
Financing activities:
Net borrowings (payments) under line of credit .... 220 19
Repayments of convertible notes payable ........... (26) --
----- -----
Net cash provided (used) by financing activities 194 19
Net increase (decrease) in cash ...................... (106) (69)
Cash:
Beginning of period ............................... 125 160
----- -----
End of period ..................................... $ 19 $ 91
===== =====
Supplemental disclosure:
Interest paid ........................................ $ 72 $ 13
Noncash issuance of convertible notes at fair value
associated with interest due on notes payable ..... $ 74
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
nine-month period ended September 30, 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 7.9 million shares and 6.5
million shares at September 30, 2004 and September 30, 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 9 Months Ended
September 30, September 30,
2004 2003 2004 2003
------ -------- -------- --------
Net income (loss), as reported ................................. $ (152) $ (17)$ (533) $ (57)
Add: Stock based employee compensation expense included in
reported income, net of related tax ................. -- -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects ............. -- (8) -- (23)
------ -------- -------- ------
Pro forma net income (loss) .................................... $ (152) $ (25) $ (533) $ (80)
====== ========= ======== ======
Pro forma basic and diluted income (loss) per share:
Basic - as reported ......................................... $ (0.0) $ (0.00) $ (0.0) $ (0.00)
Basic - pro forma ........................................... $ (0.0) $ (0.00) $ (0.0) $ (0.00)
Diluted - as reported ....................................... $ (0.0) $ (0.00) $ (0.0) $ (0.00)
Diluted - pro forma ......................................... $ (0.0) $ (0.00) $ (0.0) $ (0.00)
Compensation cost for the quarter ended September 30, 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. Borrowings are secured on a senior basis by
substantially all of the assets of the Company and its operating
subsidiaries. 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 level from this customer through the end of
this year will be similar to the revenue level realized in the past quarter.
However, as a result of our current general and administrative expense
level, 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 March 2005. 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. Furthermore, even without the occurrence of
such circumstances, there is substantial doubt about our ability to continue
as a going concern after March 31, 2005 without a strategic transaction or
(i) additional forbearance by the holders of the Series 1 Convertible
Subordinated Promissory Notes (see Note 6), (ii) further reductions in
executive overhead expense, and (iii) the termination of our status as a
public reporting company under the Securities Exchange Act of 1934.
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 paid monthly
payments of $8 up through June 25, 2004, when the Company terminated the
relationship. However, the Company is continuing to explore its strategic
alternatives, including the possibility of separating its operating business
from its public shell in order to preserve for the public stockholders the
value of the public shell on a stand alone basis. In this connection, on
November 15, 2004, the Company executed an agreement (the "Omnibus
Agreement") with all of the Holders of the Notes and PIK Notes (see Note 6)
whereby the Company agreed to transfer to an entity to be formed
substantially all of the assets of the Company (the "Asset Transfer"),
including all of the issued and outstanding stock of its principal operating
subsidiary, BrightStar Information Technology Services, Inc., in exchange
for (i) a release of the lien and security interest encumbering the assets
of the Company created pursuant to the security agreement dated as of July
26, 2001 entered into by the Company, the Holders and others, (ii) a release
of any and all claims of any nature that the Holders may have against the
Company, (iii) a surrender of all of the warrants issued to the Holders in
connection with the Notes and the PIK Notes, and (iv) the deletion from the
Notes and PIK notes of any rights of conversion into the common stock of the
Company, all subject to the Asset Transfer having been approved by the
stockholders of the Company on or before February 28, 2005 (unless
extended). Upon completion of the Asset Transfer, the Company will have
certain contingent liabilities, which are not believed to be material, and
no assets.
In order for the strategy described above to achieve its goal, a third party
will have to agree to fund the Company's operating costs after the
completion of the Asset Transfer and to cause the Company to acquire a new
operating business. Such a transaction, if consummated, is likely to result
in a change in control of the Company and in a very large dilution in the
stock held by the Company's current stockholders. There is no assurance that
the Company will be successful in its effort to consummate such a
transaction with a third party or, if it does consummate such a transaction,
that the Company after the change in control will succeed in preserving for
the public stockholders the value of the public shell on a stand alone basis
or acquiring a business that will allow the company to continue as a going
concern.
7
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
2004 2003
------- ----------
Accrued payroll and payroll taxes............ $ 137 $ 163
Accrued professional fees.................... 75 64
Other accrued expenses....................... 102 93
------- ----------
Total accrued expenses............. $ 314 $ 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.
Corporate legacy liabilities consist of the following:
September 30, 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 September 30, 2004, the classification on this
promissory note was changed to short-term based on the maturity date of the
promissory note. However, on October 18, 2004 the Company settled this
entire liability for a cash payment of $1.
6. CONVERTIBLE NOTES PAYABLE, NET
Convertible notes payable, net consists of the following:
September 30, December 31,
2004 2003
------ -----
Series 1 Convertible Subordinated Promissory Notes $1,258 $1,283
Less fundraising and warrant costs:
Fundraising costs, net of amortization ....... -- 10
Warrant costs associated with convertible
notes, net of amortization .............. -- 32
------ ------
Subtotal fundraising costs .............. -- 42
------ ------
Notes payable, net .............................. $1,258 $1,241
====== ======
Convertible notes payable - short-term .......... $ -- $ 38
------ ------
Convertible notes payable - long-term ........... $1,258 $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 (the
"Holders"), 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.
8
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.
On August 3, 2004, the Company repriced the exercise price of the 70,000
stock warrants previously awarded to Brewer Capital Group LLC from $1.00 to
$0.02 per share, the closing price on August 3, 2004, in connection with
services performed for the Company. While these repriced stock warrants are
subject to variable accounting treatment, no material amount was expensed in
the quarter ended September 30, 2004.
The Holders representing more than 75% of the aggregate principal amount of
the Notes and PIK Notes agreed to amend the Notes and the PIK Notes,
effective September 1, 2004, to extend to December 31, 2005 the due date of
the amount otherwise currently payable for the period ended September 30,
2004 and the amount that would otherwise be payable for the period ending
December 31, 2004.
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, 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 September 30, 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. 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
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Income (loss) before cumulative effect of
change in accounting principle ............................ $ (152) $ (17) $ (533) $ (57)
============ ============ ============ ============
Net income (loss) ............................................. $ (152) $ (17) $ (533) $ (57)
============ ============ ============ ============
Numerator for basic earnings per share - income (loss)
available to common stockholders ............................ (152) (17) (533) (57)
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 .. $ (152) $ (17) $ (533) $ (57)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share - weighted
average shares ........................................... 15,289,968 15,284,668 15,287,783 15,284,416
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 ..................... 15,289,968 15,284,668 15,287,783 15,284,416
------------ ------------ ------------ ------------
9
(1) Diluted EPS for the nine-month period ended September 30, 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 nine-month period ended September 30, 2004 excludes
the effect of approximately 1.2 million employee stock options as their
inclusion would be anti-dilutive. Of the 1.2 million employee stock
options, approximately zero were in-the-money as of September 30, 2004.
(3) Diluted EPS for the nine-month period ended September 30, 2004 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 .1 million were in-the-money as of September 30,
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 third quarter of 2004, the Company had four unrelated customers that
accounted for approximately 44%, 17%, 12% and 11% of total revenue,
respectively. Also, for the first nine months of 2004, these four customers
accounted for approximately 64%, 5%, 4% and 10% of total revenue,
respectively. These four customers also accounted for approximately 18%,
21%, 24% and 9% of the Company's total outstanding accounts receivable
balance as of September 30, 2004.
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.
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 and Actuate and the maintenance of legacy application software by
focusing primarily on serving clients in the healthcare and government
markets. BrightStar had approximately 21 full time equivalent employees and
contractors at October 31, 2004 and has its headquarters in the San
Francisco Bay Area with a field office in Addison, Texas.
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.
10
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. In
accordance with SFAS No. 142, the Company annually reviews its Goodwill
valuation on October 1st.
The Company believes that as of October 1, 2004, the value of Goodwill is
impaired in the amount of $0.1 million. If the Company completes a strategic
alternative as described in Note 2, it believes the value of Goodwill is
likely to be substantially further impaired.
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, 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 third quarter and first nine months of 2004 decreased from
$1.6 million to $0.8 million and from $4.4 million to $2.8 million or 51%
and 36%, respectively, compared to the third quarter and first nine months
of 2003 as a result of a reduction in the demand for our services.
11
Gross profit as a percentage of revenue for the third quarter ended
September 30, 2004 decreased from 29% to 26% compared to third quarter ended
September 30, 2003 as a result of underutilized resources and a change in
the mix of services provided to our clients.
Total assets decreased $0.2 million from $2.6 million to $2.4 million for
the first nine months of 2004 primarily due to the decreases in Accounts
Receivable and Cash. These decreases are attributable to the decrease in
revenues that the Company experienced in 2004 and the resulting losses
caused by the reduction of revenues. In addition, as a result of the
operating losses experienced in the current quarter, the balance outstanding
on the Company's line of credit increased from $0.1 million at the end of
the prior quarter to $0.2 million at September 30, 2004.
The Company's selling, general and administrative expenses decreased for the
third quarter and first nine months of 2004 compared with the same periods
in 2003 principally due to a reduction in the number of management
personnel.
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. Borrowings are secured on a senior basis
by substantially all of the assets of the Company and its operating
subsidiaries. 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 level from this customer through the end of
this year will be similar to the revenue level realized in the past quarter.
However, as a result of our current general and administrative expense
level, 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 March 2005. 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. Furthermore, even without the occurrence of
such circumstances, there is substantial doubt about our ability to continue
as a going concern after March 31, 2005 without a strategic transaction or
(i) additional forbearance by the holders of the Series 1 Convertible
Subordinated Promissory Notes (see Note 6), (ii) further reductions in
executive overhead expense, and (iii) the termination of our status as a
public reporting company under the Securities Exchange Act of 1934.
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 $8,000 at the signing of the agreement and paid
monthly payments of $8,000 up through June 25, 2004 when the Company
terminated the relationship. However, the Company is continuing to explore
its strategic alternatives, including the possibility of separating its
operating business from its public shell in order to preserve for the public
stockholders the value of the public shell on a stand alone basis. In this
connection, on November 15, 2004, the Company executed an agreement (the
"Omnibus Agreement") with all of the Holders of the Notes and PIK Notes (see
Note 6) whereby the Company agreed to transfer to an entity to be formed
substantially all of the assets of the Company (the "Asset Transfer"),
including all of the issued and outstanding stock of its principal operating
subsidiary, BrightStar Information Technology Services, Inc., in exchange
for (i) a release of the lien and security interest encumbering the assets
of the Company created pursuant to the security agreement dated as of July
26, 2001 entered into by the Company, the Holders and others, (ii) a release
of any and all claims of any nature that the Holders may have against the
Company, (iii) a surrender of all of the warrants issued to the Holders in
connection with the Notes and the PIK Notes, and (iv) the deletion from the
Notes and PIK Notes of any rights of conversion into the common stock of the
Company, all subject to the Asset Transfer having been approved by the
stockholders of the Company on or before February 28, 2005 (unless
extended). Upon completion of the Asset Transfer, the Company will have
certain contingent liabilities, which are not believed to be material, and
no assets.
12
In order for the strategy described above to achieve its goal, a third party
will have to agree to fund the Company's operating costs after the
completion of the Asset Transfer and to cause the Company to acquire a new
operating business. Such a transaction, if consummated, is likely to result
in a change in control of the Company and in a very large dilution in the
stock held by the Company's current stockholders. There is no assurance that
the Company will be successful in its effort to consummate such a
transaction with a third party or, if it does consummate such a transaction,
that the Company after the change in control will succeed in preserving for
the public stockholders the value of the public shell on a stand alone basis
or acquiring a business that will allow the company to continue as a going
concern.
FORWARD-LOOKING INFORMATION - Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") includes
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements, other than statements of historical facts, included in
this MD&A regarding the Company's financial position, business strategy and
plans and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements rely on a
number of assumptions concerning future events and are subject to a number
of uncertainties and other factors, many of which are outside of the
Company's control, that could cause actual results to materially differ from
such statements. While the Company believes that the assumptions concerning
future events are reasonable, it cautions that there are inherent
difficulties in predicting certain important factors, especially the timing
and magnitude of technological advances; the prospects for future
acquisitions; the possibility that a current customer could be acquired or
otherwise be affected by a future event that would diminish their
information technology requirements; the competition in the information
technology industry and the impact of such competition on pricing, revenues
and margins; the degree to which business entities continue to outsource
information technology and business processes; uncertainties surrounding
budget reductions or changes in funding priorities of existing government
programs and the cost of attracting and retaining highly skilled personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 controller, 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 5. Other Information
Effective August 9, 2004, Mr. Wagda's employment agreement was amended to extend
its term to December 31, 2005 (with automatic one year renewals unless 6 months
notice is given), limit any severance to $150,000 paid over 6 months and reduce
his salary to $250,000 per annum starting November 1, 2004 (but paid at a rate
of $350,000 per annum until any unused accrued vacation has been paid).
Commencing July 1, 2005, Mr. Wagda's salary will be reduced to $150,000 per
annum when Mr. Wagda may, in his discretion, engage in other activities not
inconsistent with his obligations under the agreement. The amendment reaffirmed
that the agreement also is an obligation of the Company's principal operating
subsidiary, BrightStar Information Technology Services, Inc. (of which he is
CEO), and that the potential transaction to separate the public shell from the
operating subsidiary described in Note 2, with his consent, would not result in
a qualifying termination.
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ITEM 6. Exhibits
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Director of Finance and Controller 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 Director of Finance and Controller pursuant to 18
U.S.C. Section 1360.
10.1 - Omnibus Agreement regarding Series 1 Convertible Subordinated
Promissory Notes entered into as of September 1, 2004.
10.2 - Amended and restated employment agreement of chief executive officer
entered into as of August 9, 2004.
14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned there
unto duly authorized.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
Date: November 15, 2004. BY: /s/ Joseph A. Wagda
------------------------------------------
Joseph A. Wagda
Chairman and Chief Executive Officer
BY: /s/ Noel M. Tripod
------------------------------------------
Noel M. Tripod
Director of Finance and Controller
15
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 Director of Finance and Controller 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 1350.
32.2 - Certification of Director of Finance and Controller pursuant to 18
U.S.C. Section 1350.
10.1 - Omnibus Agreement regarding Series 1 Convertible Subordinated
Promissory Notes entered into as of September 1, 2004.
10.2 - Amended and restated employment agreement of chief executive officer
entered into as of August 9, 2004.