<PAGE> 1
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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, 1999
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 preceeding 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 12, 1999, was 8,189,059.
*The Registrant became subject to the reporting requirements of Section 13 of
the Securities Exchange Act of 1934 on April 16, 1998.
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ITEM 1. FINANCIAL STATEMENTS
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,923 $ 3,672
Trade accounts receivable, net of allowance for doubtful accounts
of $1,568 and $1,316 23,305 20,297
Unbilled revenue 4,993 2,238
Deferred tax asset 608 785
Prepaid expenses and other 1,689 1,298
-------- --------
Total current assets 33,518 28,290
PROPERTY AND EQUIPMENT 5,541 5,051
Less-accumulated depreciation (1,842) (1,505)
-------- --------
Property and equipment, net 3,699 3,546
GOODWILL 62,319 62,260
Less-accumulated amortization (1,424) (1,030)
-------- --------
Goodwill, net 60,895 61,230
OTHER 610 498
-------- --------
TOTAL $ 98,722 $ 93,564
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,351 $ 3,920
Acquisition payable 3,250 4,784
Line of credit 5,724 --
Current maturities of capital lease obligations 119 167
Restructuring reserve 3,677 4,383
Accrued salaries and other expenses 8,517 6,328
Income taxes payable 1,393 1,791
Deferred revenue 1,727 1,936
-------- --------
Total current liabilities 28,758 23,309
LONG-TERM CAPITAL LEASES, NET 166 129
OTHER 33 52
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 35,000,000 shares authorized; 8,189,059 and
7,989,059 shares issued and outstanding 8 8
Additional paid-in capital 84,393 82,818
Common stock payable 5,300 6,875
Common stock warrants 100 100
Deferred stock compensation (67) (468)
Accumulated other comprehensive income 128 248
Retained earnings (deficit) (20,097) (19,507)
-------- --------
Total stockholders' equity 69,765 70,074
-------- --------
TOTAL $ 98,722 $ 93,564
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 3
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
REVENUE $ 32,479 $ 5,109
COST OF REVENUE 24,953 4,005
----------- -----------
GROSS PROFIT 7,526 1,104
OPERATING EXPENSES:
Selling, general and administrative expenses 6,775 667
Stock compensation expense 401 --
Goodwill amortization 394 --
Depreciation and amortization 337 31
----------- -----------
Total operating expenses 7,907 698
INCOME (LOSS) FROM OPERATIONS (381) 406
OTHER INCOME (EXPENSE) (35) 1
INTEREST INCOME (EXPENSE) 21 (32)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (395) 375
INCOME TAX PROVISION 195 96
----------- -----------
NET INCOME (LOSS) $ (590) $ 279
=========== ===========
Net income (loss) per share -
Basic and Diluted $ (0.07) $ 0.28
=========== ===========
Weighted average shares outstanding -
Basic and Diluted 8,642,035 1,012,306
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
OPERATING ACTIVITIES: 1999 1998
------- -------
<S> <C> <C>
Net income (loss) $ (590) $ 279
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative translation adjustment (120) --
Depreciation and amortization 731 31
Additions (reductions) to allowance for doubtful accounts 252 (227)
Compensation expense on issuance of common stock 401 --
Deferred taxes 177 --
Cash provided by (used in) operating working capital:
Trade accounts receivable (3,260) (334)
Unbilled revenue (2,755) (85)
Prepaid expenses and other (503) (3)
Accounts payable 431 1,061
Restructuring reserve (706) --
Accrued salaries and other expenses 2,825 (1,280)
Income taxes payable (1,053) 96
Deferred revenue (209) 731
------- -------
Net cash provided by (used in) in operating activities (4,379) 269
INVESTING ACTIVITIES:
Payments for acquisitions (1,593) --
Additions of property and equipment, net of disposals (490) 7
------- -------
Net cash provided by (used in) investing activities (2,083) 7
FINANCING ACTIVITIES:
Borrowings under line of credit 5,724 --
Net payments on capital lease obligations (11) (40)
------- -------
Net cash provided by (used in) financing activities 5,713 (40)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (749) 236
CASH AND CASH EQUIVALENTS:
Beginning of period 3,672 3
------- -------
End of period $ 2,923 $ 239
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting
principles for complete financial statements. The consolidated financial
statements for the three month period ended March 31, 1999 and the balance
sheet at December 31, 1998 include the accounts of all BrightStar
subsidiaries. The statement of operations and cash flows for the three
month period ended March 31, 1998 include only the accounts of Brian R.
Blackmarr and Associates, Inc, the accounting acquirer. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999. The balance sheet at December 31, 1998, has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles 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, 1998.
2. CREDIT FACILITY
Effective March 29, 1999, the Company established a $15 million credit
facility (the "Credit Facility") with Comerica Bank. Under terms of the
agreement, the Credit Facility will be used for working capital needs,
including issuance of letters of credit, and for general corporate
purposes. Borrowings under the Credit Facility bear an interest rate of
prime plus .25%, or the Eurodollar rate plus 2.5%. The Company will pay a
commitment fee on unused amounts of the Credit Facility amounting to .375%
per annum based on the average daily amount by which the commitment amount
exceeds the principal amount outstanding during the preceding month.
Interest is payable monthly on prime rate borrowings and quarterly or at
the end of the applicable interest period for the Eurodollar rate
borrowings.
The Credit Facility is secured by liens on substantially all the Company's
assets (including accounts receivable) and a pledge of all of the
outstanding capital stock of the Company's domestic operating
subsidiaries. The Credit Facility also requires 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. The Credit
Facility expires on March 30, 2001. The Credit Facility contains
provisions requiring mandatory prepayment of outstanding borrowings from
the issuance of debt or equity securities for cash, excluding certain
equity issued in connection with future acquisitions, and cash realized in
connection with permitted asset sales outside of the ordinary course of
business. Borrowings outstanding under the Credit Facility amounted to
$5.7 million at March 31, 1999.
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3. RESTRUCTURING
During the fourth quarter of 1998, the Company announced a plan to
restructure its operations and recorded a charge of $7.6 million. The plan
included a reorganization of operations, relocation of the Company's
corporate office, reduction in workforce, and termination of leases and
other contractual obligations.
The major categories of the restructuring charge are summarized
below (000's):
<TABLE>
<CAPTION>
Remaining
Amounts Charged Amounts Accrued
to Earnings in 1998 at March 31, 1999
------ ------
<S> <C> <C>
Workforce severance obligations $4,960 $2,250
Asset writedowns 1,171 --
Lease and other contract obligations 1,483 1,427
------ ------
Total $7,614 $3,677
====== ======
</TABLE>
The balance of the restructuring charge will be utilized through the first
quarter of 2001.
4. INCOME TAXES
A reconciliation of the statutory Federal tax to the recorded tax for the
three month periods ended March 31, 1999 and March 31, 1998, is as
follows (000's):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Provisional statutory tax rate $(138) $ 131
State taxes, net of Federal benefit (16) --
Goodwill amortization 154 --
Stock compensation 155 --
Other 40 (35)
----- -----
Total $ 195 $ 96
===== =====
</TABLE>
Components of deferred tax assets of $0.6 million at March 31, 1999
principally relate to the Company's accounts receivable and restructuring
reserves.
5. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires companies to
report and display comprehensive income and its components in the
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investment by owners and
distributions to owners. The comprehensive loss was $0.7 million for the
three months ended in March 31, 1999, due to the effect of the cumulative
foreign currency translation adjustment. Comprehensive income is the same
as net income reported in the 1998 period reported.
6. ACQUISITION
In May 1999, under the terms of the acquisition of Cogent Technologies,
LLC, the Company is required to pay an additional $0.2 million in cash and
issue an additional 352,085 of the Company's common shares, valued at
approximately $1.5 million, to the prior owners based upon an earn-out
calculation (contingent at December 31, 1998). The additional purchase
consideration will be recorded as goodwill in the second quarter of 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION - BrightStar provides enterprise-wide business and technology
solutions to Global 2000 companies and other large organizations.
BrightStar provides these services to a diverse client base including but
not limited to retail, industrial, petrochemical, manufacturing and
distribution companies.
The Company's services and products include Enterprise Resource Planning
(ERP) software implementation, consulting, software and Web application
development, systems integration and outsourcing, and training as well as
upgrades and support related to software products. The services are
generally performed at clients' locations and also at the Company's
facilities. In providing ERP implementation and other IT services, the
Company may assume responsibility for project management and bill the
client on a time and material or fixed fee basis.
Revenue is recognized as services are rendered. 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 Companies' 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.
Selling, general and administrative expenses primarily consist of costs
associated with (i) corporate overhead, (ii) sales and account management,
(iii) telecommunications, (iv) human resources, (v) recruiting and
training.
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<PAGE> 8
RESULTS OF OPERATIONS
Financial results for the quarter ended March 31, 1999 include the
operations of all BrightStar companies acquired in conjunction with, or
subsequent to the date of the IPO. Financial results for the three months
ended March 31, 1998 contain only the operations of Blackmarr, the
accounting acquirer. Consequently, the primary reason for variances
between periods is the combined operations of the BrightStar companies
from April 17, 1998, which was the date BrightStar commenced operations,
or later dates for companies subsequently acquired. The information herein
should be read in conjunction with financial and pro forma information
contained in the Company's 1998 annual report on Form 10-K.
Revenue increased primarily due to new ERP contracts and additional
custom and web application development projects.
Cost of revenues increased in proportion to the additional ERP and custom
application development revenue. Cost of revenues as a percentage of
revenues for the three months ended March 31, 1999 was higher than normal
as a result of consultant salaries and related costs attributable to
certain fixed fee contracts that are not billable at normal rates. The
Company expects to continue to incur costs that are not fully billable on
certain fixed fee projects through the third quarter of 1999.
Selling, general and administrative expenses reflect the Company's
investment in building its internal infrastructure and field sales force
during the first quarter of 1999.
Stock compensation expense is a non-cash expense item related to the
issuance of stock to certain Founders as a part of the IPO. This amount is
being amortized over a period of 12 months.
Goodwill amortization relates to goodwill acquired in conjunction with the
IPO and subsequent acquisitions.
Income taxes are based on the Company's estimated annual tax rate of 39%,
adjusted for non-deductible goodwill amortization and stock compensation
expense.
LIQUIDITY AND CAPITAL RESOURCES
Effective March 29, 1999, the Company established a $15 million credit
facility (the "Credit Facility") with Comerica Bank. Under terms of the
agreement, the Credit Facility will be used for working capital needs,
including issuance of letters of credit, and for general corporate
purposes. Borrowings under the Credit Facility bear an interest rate of
prime plus .25%, or the Eurodollar rate plus 2.5%. The Company will pay a
commitment fee on unused amounts of the Credit Facility amounting to a
.375% per annum based on the average daily amount by which the commitment
amount exceeds the principal amount outstanding during the preceding
month. Interest is payable monthly on prime rate borrowings and quarterly
or at the end of the applicable interest period for the Eurodollar rate
borrowings.
The Credit Facility is secured by liens on substantially all the Company's
assets (including accounts receivable) and a pledge of all of the
outstanding capital stock of the Company's domestic operating
subsidiaries. The Credit Family also requires 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. The Credit
Facility expires on March 30, 2001. The Credit Facility contains
provisions requiring mandatory prepayment of outstanding borrowings from
the issuance of debt or equity securities for cash, excluding certain
equity issued in
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connection with future acquisitions, and cash realized in connection with
permitted asset sales outside of the ordinary course of business.
During the first quarter of 1999, the Company borrowed $5.7 million under
its Credit Facility to finance $3.9 million of additional working capital
requirements, $0.5 million of equipment additions and $1.6 million of
payments related to prior acquisitions.
The Company expects to install or upgrade its accounting and management
information systems and to install an internal network and communications
system to facilitate exchange of information among the BrightStar
companies. Management presently anticipates that expenditures for these
items will total approximately $500,000.
The Company intends to continue to pursue acquisition opportunities. The
timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable. The Company expects to
fund future acquisitions through the issuance of additional equity, as
well as through a combination of working capital, cash flow from
operations and borrowings, under the Credit Facility.
The Company believes that cash flow from operations and borrowings under
the Credit Facility will be sufficient to fund its requirements over the
next twelve months.
YEAR 2000 COMPLIANCE - The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process data
fields containing a two-digit year is commonly referred to as the Year
2000 problem. The Year 2000 problem arises from the way dates are recorded
and computed in most applications, operating systems, hardware and
embedded chips. If the problem is not corrected a system that uses a date
in its prescribed function may fail or produce erroneous results before,
on and after the Year 2000.
The Company is completing an extensive review of its businesses to
determine whether or not purchased and internally developed computer
programs are Year 2000 compliant, as well as determine the extent of any
remedial action and associated costs for such programs which are not
compliant. Management believes it has completed its review of the
Company's internal computer systems and has modified the Company's
internal computer systems Year 2000 compliant. The Company is now involved
in the testing phase of modifications.
The Company plans to complete all remediation efforts for its critical
systems prior to Year 2000. The Company is also contacting its key
suppliers and customers to determine their Year 2000 readiness in order to
ensure a steady flow of goods and services to the Company and continuity
with respect to customer service.
The costs of the readiness program for the Company's products are
primarily costs of existing internal resources largely absorbed within
existing spending levels. The costs of the readiness program for internal
systems are a combination of incremental external spending and use of
existing internal resources and expertise. The financial impact of the
Year 2000 reviews, modifications, testing, replacements or related
purchases are not expected to be material to the Company's business or its
consolidated financial position, results of operations or cash flows.
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
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<PAGE> 10
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 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 or existing government programs and the
cost of attracting and retaining highly skilled personnel.
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<PAGE> 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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.
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<PAGE> 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 thereunto
duly authorized.
BRIGHTSTAR INFORMATION
TECHNOLOGY GROUP, INC.
By: /s/ Michael A. Ober
-----------------------------------
Michael A. Ober
Chief Executive Officer
By: /s/ Donald W. Rowley
-----------------------------------
Donald W. Rowley
Chief Financial Officer
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<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,923
<SECURITIES> 0
<RECEIVABLES> 23,305
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,518
<PP&E> 5,541
<DEPRECIATION> 1,842
<TOTAL-ASSETS> 98,772
<CURRENT-LIABILITIES> 28,758
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 69,757
<TOTAL-LIABILITY-AND-EQUITY> 98,722
<SALES> 32,479
<TOTAL-REVENUES> 32,479
<CGS> 24,953
<TOTAL-COSTS> 24,953
<OTHER-EXPENSES> 7,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (395)
<INCOME-TAX> 195
<INCOME-CONTINUING> (590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (590)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
