10-Q 1 d87290e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 1 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, 2001 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.) 4900 HOPYARD ROAD, SUITE 200 PLEASANTON, CALIFORNIA 94566 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 251-0000 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. The number of shares of Common Stock of the Registrant, par value $.001 per share, outstanding at May 15, 2001 was 13,519,288. 2 ITEM 1. FINANCIAL STATEMENTS BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS ($000'S, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31, 2001 2000 ------------- ------------- ASSETS CURRENT ASSETS: Cash $ 210 $ -- Trade accounts receivable, net of allowance for doubtful accounts of $227 and $320 4,225 6,249 Unbilled revenue 286 -- Prepaid expenses and other 339 365 Net assets of discontinued operations 116 336 ------------- ------------- Total current assets 5,176 6950 PROPERTY AND EQUIPMENT 5,285 5,281 Less - accumulated depreciation (3,462) (3,123) ------------- ------------- Property and equipment, net 1,823 2,158 GOODWILL 14,224 14,224 Less - accumulated amortization (2,312) (2,224) ------------- ------------- Goodwill, net 11,912 12,000 OTHER 45 46 ------------- ------------- TOTAL ASSETS $ 18,956 $ 21,154 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 2,337 $ 3,597 Accounts payable 1,529 2,195 Acquisition payable 589 1,693 Restructuring reserve 642 853 Accrued salaries and other expenses 2,083 2,520 Payable to stockholders 900 900 Deferred revenue 373 324 ------------- ------------- Total current liabilities 8,453 12,082 OTHER LIABILITIES 19 19 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY: Common stock, $0.001 par value; 35,000,000 shares authorized; 13,261,888 and 11,545,057 shares issued and outstanding 13 12 Additional paid-in capital 99,430 98,244 Common stock warrants 100 100 Accumulated other comprehensive income (loss) (118) (118) Retained earnings (deficit) (88,941) (89,185) ------------- ------------- Total stockholders' equity 10,484 9,053 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,956 $ 21,154 ============= =============
See notes to condensed consolidated financial statements. 3 BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ($000'S, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED ------------------------------ MARCH 31, MARCH 31, 2001 2000 ------------- ------------- REVENUE $ 6,693 $ 19,605 COST OF REVENUE 4,584 13,252 ------------- ------------- GROSS PROFIT 2,109 6,353 OPERATING EXPENSES: Selling, general and administrative expenses 1,367 6,433 Goodwill amortization 88 368 Depreciation and amortization 339 473 ------------- ------------- Total operating expenses 1,794 7,274 INCOME (LOSS) FROM OPERATIONS 315 (921) OTHER INCOME (EXPENSE) -- (2) INTEREST EXPENSE, net (71) (130) ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 244 (1,053) INCOME TAX PROVISION (CREDIT) -- (380) ------------- ------------- NET INCOME (LOSS) $ 244 $ (673) ============= ============= NET INCOME (LOSS) PER SHARE: BASIC AND DILUTED $ 0.02 $ (0.08) ============= ============= AVERAGE SHARES OUTSTANDING: BASIC AND DILUTED 12,724,397 8,807,597 ============= =============
See notes to condensed consolidated financial statements. 2 4 BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($000'S)
THREE MONTHS ENDED ------------------------------ MARCH 31, MARCH 31, 2001 2000 ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ 244 $ (673) Adjustments to reconcile net income (loss) to net Cash provided by (used in) operating activities: Depreciation and amortization 427 841 Change in allowance for doubtful accounts (93) (220) Compensation expense on issuance of common stock 44 -- Deferred taxes -- 354 Cash provided by (used in) operating activities: Trade accounts receivable 2,117 3,058 Unbilled revenue (286) (545) Prepaid expenses and other 27 (256) Accounts payable (666) (799) Restructuring reserve (139) (516) Accrued salaries and other expenses (385) (3,198) Income taxes receivable/payable -- (672) Deferred revenue 49 216 Discontinued operations 220 -- ------------- ------------- Net cash provided by (used in) operating activities 1,559 (2,410) INVESTING ACTIVITIES: Payments for acquisitions (56) -- Additions of property and equipment, net of disposals (4) (434) ------------- ------------- Net cash used in investing activities (60) (434) FINANCING ACTIVITIES: Net proceeds (expense) from issuance of common stock (29) 7,175 Repayments on line of credit (1,260) (4,377) ------------- ------------- Net cash provided by (used in) financing activities (1,289) 2,798 Effect of exchange rate on cash -- (20) ------------- ------------- NET INCREASE (DECREASE) IN CASH 210 (66) CASH: Beginning of period -- 973 ------------- ------------- End of period $ 210 $ 907 ============= ============= SUPPLEMENTAL DISCLOSURE: Noncash issuance of common stock in satisfaction of severance obligations $ 394 $ -- ============= ============= Noncash settlement in connection with prior acquisition $ 893 $ -- ============= ============= Noncash settlement in connection with litigation between the Company and affiliates of Unaxis $ 125 $ -- ============= =============
See notes to condensed consolidated financial statements. 3 5 BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 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 accounting principles generally accepted in the United States of America ("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, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000, 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 financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. 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 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 and warrants. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. At March 31, 2001, the Company excluded potentially dilutive securities from the diluted earnings per share calculation, because their effect was anti-dilutive. Potentially dilutive securities excluded because of their anti-dilutive effect are 2.6 million shares and 1.9 million shares at March 31, 2001 and March 31, 2000, respectively. 2. LIQUIDITY The Company is required to make payments in 2001 amounting to $0.5 million related to the PROSAP acquisition. In addition, the Company expects to make payments of up to $89,000 and has issued 1,270,000 shares of the Company's common stock to the prior owners of Cogent. The Company may be required to make payments to certain stockholders, subject to a registration rights agreement, of approximately $0.9 million. Due to our current and foreseeable liquidity issues, we may be unable to make any of these payments in cash. The Company relies primarily on the timeliness and amount of accounts receivable collections to fund cash disbursements. As a result of prior losses and negative cash flows, the Company has experienced a significant decline in available liquidity, which has had an adverse impact on the ability of the Company to meet its immediate obligations and in the future and to continue as a going concern. The Company intends to improve its liquidity by securing equity financing and replacing its credit facility with Comerica Bank, which matured on March 31, 2001. Comerica Bank has provided the Company with short-term interim financing in the form of a $3.0 million Demand Note. The Demand Note carries interest of Comerica's prime rate plus 4%. Available borrowings will be reduced by 2% of eligible accounts receivable each month until the Demand Note is called. The Company believes that it is taking the actions necessary to restore cash flows from operations, which the Company believes, will be adequate to fund its operations over the next year, combined with proceeds from a new equity financing and the replacement of its Comerica credit facility. There can be no assurance that the Company's efforts to increase revenue and reduce operating costs will result in operating profits or positive cash flows from operations, that the Company's collection efforts with respect to its accounts receivable will be sufficient to fund cash disbursements, or that the Company will be able to secure new equity or debt financing. If such equity or debt financing is obtained there can be no assurance as to the cost or other terms, or dilutive effect of any additional financing which may be available. 3. RESTRUCTURING Remaining amounts recorded as accrued restructuring costs at March 31, 2001, relate to ongoing severance and lease obligations, which have extended payment terms. 4 6 4. CREDIT FACILITIES Our operating line of credit facility with Comerica Bank matured on March 31, 2001. Comerica Bank has informed us that they will continue to extend credit on a demand note basis for a limited period of time. Comerica Bank has provided the Company with short-term interim financing in the form of a $3.0 million Demand Note, secured by liens on substantially all of the Company's operating subsidiaries. The Demand Note carries interest of Comerica's prime rate plus 4%. Available borrowings will be reduced monthly by 2% of eligible accounts receivable. The Demand Note does not have a maturity date; however, it is callable at any time. 5. INCOME TAXES As a result of continued losses, the Company has recorded a valuation allowance to offset all of its net deferred tax assets recorded at March 31, 2001. The valuation allowance relates to deferred tax assets established for net operating loss carryforwards generated through March 31, 2001 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 may be realized by the Company. 6. RECENT SALES OF UNREGISTERED SECURITIES On January 16, 2001, the prior owners of Cogent Technologies LLC ("Cogent") were issued 1,020,000 shares of our common stock in partial settlement of a claim by them related to the unpaid balance of our purchase price of the business of Cogent and amounts due under employment agreements with us. The Company accrued $1.2 million at December 31, 2000 for the settlement. On February 15, 2001, Kevin J. Murphy, BrightStar's President and Chief Operating Officer was issued 100,000 shares of our common stock in connection with the commencement of his employment with the Company. On February 15, 2001, certain former employees were issued 346,831 shares of our common stock in satisfaction of $346,831 of remaining severance payment obligations under prior employment agreements with the Company. On February 15, 2001, Unaxis Trading Limited ("Unaxis") was issued 250,000 shares of our common stock in settlement of litigation between the Company and certain affiliates of Unaxis. If, prior to a sale of these shares by Unaxis, the Company has not exercised its right to call the shares for $1.60 per share, Unaxis may exercise its right to put the shares to the Company for a price of $2.00 per share during the 15 day period commencing on February 1, 2002. On May 4, 2001, 257,400 shares of our common stock were issued in satisfaction of our obligations under various registration rights agreements. 7. LITIGATION The Company has accrued $0.6 million relating to its litigation exposure. This amount includes estimated costs to settle legal claims related primarily to two separate lawsuits brought against the Company for damages related to software development and implementation services provided by the Company. The amounts accrued primarily represent defense costs to be paid by the Company up to its deductible under its errors and omissions insurance policy. The aggregate amount of the claims filed against the Company is $5.4 million. Additionally, the Company has received a lawsuit from the prior owners of Integrated Systems Consulting LLC ("ISC"), alleging violations of federal and state securities laws, fraud, negligent misrepresentation, breach of contract, breach of good faith and fair dealing and unjust enrichment related to purchase consideration surrounding the Company's acquisition of ISC in 1999. The plaintiffs are seeking compensatory damages in excess of $2 million, court costs, attorney's fees and punitive damages. The Company denies any wrongdoing and intends to vigorously defend the case. The Company has 5 7 accrued an amount, which represents estimated defense costs to be paid by the Company, subject to the deductible under its directors and officers insurance policy. While any litigation contains an element of uncertainty, the Company believes, based upon its assessment of the claims and negotiation to settle with the plaintiffs, that the liability recorded as of March 31, 2001, combined with coverage under the Company's errors and omissions and directors and officer's insurance policies, is adequate to cover the estimated exposure. In addition to the litigation noted above, the Company is from time to time involved in litigation incidental to its business. The Company believes that the results of such litigation, in addition to amounts discussed above, will not have a materially adverse effect on the Company's financial condition. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BrightStar is an information technology company that emphasizes Application Team Outsourcing services for Global 2000, mid-market and public sector clients, including packaged and custom application management, custom application development, integration of comprehensive enterprise and e-business solutions and staff augmentation. Application Team Outsourcing services generally generate recurring revenues based on long-term contracts for application support or development projects or from sustainable client relationships. Originally centered on Enterprise Resource Planning (ERP) solutions, the Company also implements and manages Customer Relationship Management (CRM), E-commerce, Supply Chain Management (SCM) and corporate portal solutions. We call our business strategy "Application Team Outsourcing," because we team with our clients' organizations to deliver the required application outsourcing solution. Application Team Outsourcing enables BrightStar to leverage its excellent reputation for rapid-hiring and client satisfaction to provide agile units of highly skilled applications engineers in an outsourcing environment. We focus on redirecting a client's current IT budget from a fixed expense, to a flexible budget, by utilizing BrightStar's ability to expand and contract resources both in numbers and skill sets. In doing so, we strive to become part of the "fabric" of our clients' organizations, thereby generating ongoing business from satisfied clients. We have approximately 140 employees and full-time contractors in client locations around the United States and in the Company's offices located in Pleasanton, California, Dallas, Texas and Lafayette, Louisiana. The Company provides services to its customers for fees that are based on time and material or fixed fee contracts. Accordingly, revenue is recognized as consulting services are performed. Unbilled revenue is recorded for contract services provided for which a billing has not been rendered. Deferred revenue represents the excess of amounts billed over contract costs and expenses incurred. The timing of revenue is difficult to forecast because the Company's sales cycle for certain of its services can be relatively long and is subject to a number of uncertainties, including clients' budgetary constraints, the timing of clients' budget cycles, clients' internal approval processes and general economic conditions. In addition, as is customary in the industry, the Company's engagements, generally, are terminable without a client 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, 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 client 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; changes in the demand for IT services; 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. 6 8 Selling, general and administrative expenses primarily consist of costs associated with (i) corporate overhead, (ii) sales and account management, (iii) telecommunications, (iv) human resources, and (v) recruiting. RESULTS OF OPERATIONS Revenue for the first quarter of 2001 decreased $12.9 million or 65.9% from the first quarter of 2000 as a result of a continued reduction in the demand for ERP and e-commerce consulting services and the sale of our Australian subsidiary. Gross profit as a percentage of revenue for the three months ended March 31, 2001 and 2000, was 32% for both years. 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. 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 being amortized over 40 years on a straight-line basis. The realizability and period of benefit of goodwill is evaluated periodically to assess recoverability, and, if warranted, impairment or adjustments to the period benefited would be recognized. As a result of its evaluation of market conditions, the Company reduced the carrying value of its remaining goodwill to $12 million at December 31, 2000. As a result of continued losses, the Company has recorded a valuation allowance to offset all of its net deferred tax assets recorded at March 31, 2001. The valuation allowance relates to deferred tax assets established for net operating loss carryforwards generated through March 31, 2001 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 may be realized by the Company. LIQUIDITY AND CAPITAL RESOURCES The Company is required to make payments in 2001 amounting to $0.5 million related to the PROSAP acquisition. In addition, the Company expects to make payments of up to $89,000 and has issued 1,270,000 shares of the Company's common stock to the prior owners of Cogent. The Company may be required to make payments to certain stockholders, subject to a registration rights agreement, of approximately $0.9 million. Due to our current and foreseeable liquidity issues, we may be unable to make any of these payments in cash. The Company relies primarily on the timeliness and amount of accounts receivable collections to fund cash disbursements. As a result of prior losses and negative cash flows, the Company has experienced a significant decline in available liquidity, which has had an adverse impact on the ability of the Company to meet its immediate obligations and in the future and to continue as a going concern. The Company intends to improve its liquidity by securing equity financing and replacing its credit facility with Comerica Bank, which matured on March 31, 2001. Comerica Bank has provided the Company with short-term, interim financing in the form of a $3.0 million Demand Note. The Demand Note carries interest of Comerica's prime rate plus 4%. Available borrowings will be reduced by 2% of eligible accounts receivable each month until the Demand Note is called. The Company believes that it is taking the actions necessary to restore cash flows from operations, which the Company believes, will be adequate to fund its operations over the next year, combined with proceeds from a new equity financing and the replacement of its Comerica credit facility. There can be no assurance that the Company's efforts to increase revenue and reduce operating costs will result in operating profits or positive cash flows from operations, that the Company's collection efforts with respect to its accounts receivable will be sufficient to fund cash disbursements, or that the Company will be able to secure new equity or debt financing. If such equity or debt financing is obtained there can be no assurance as to the cost or other terms, or dilutive effect of any additional financing which may be available. 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 7 9 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 performance of recently acquired businesses; 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 The Company's demand note from Comerica Bank bears interest at variable rates; therefore, the Company's results of operations would be affected by interest rate changes. An immediate 10 percent change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year. PART II - OTHER INFORMATION ITEM 1. Legal proceedings Information related to Item 1 is disclosed in Part I Item I (Note 8 to the Consolidated Financial Statement) and is by the reference incorporated herein. ITEM 3. Defaults upon Senior Securities The Credit Facility was secured by liens on substantially all of the Company's assets (including accounts receivable) and a pledge of all outstanding capital stock of the Company's domestic operating subsidiaries. The Credit Facility also required that the Company Comply with various loan covenants, including (i) maintenance of certain financial ratios, (ii) restrictions on additional indebtedness and (iii) restrictions on liens, guarantees and payments of dividends. As of, and during the three months ended March 31, 2001 and the year ended December 31, 2000, the Company was not in compliance with certain financial covenants. Comerica Bank has agreed to waive the defaults for both periods. ITEM 4. Submission of matters to a vote of Stockholders None ITEM 6. Exhibits and reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 8 10 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 15, 2001. BY: /s/ Joseph A. Wagda ------------------------------------ Joseph A. Wagda Chairman and Chief Executive Officer BY: /s/ Ken Czaja ------------------------------------ Kenneth A. Czaja Vice President - Finance and Chief Financial Officer 9