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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 SEPTEMBER 30, 2000 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
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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 November 14, 2000, was 11,545,057.
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ITEM 1. FINANCIAL STATEMENTS
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 385 $ 973
Trade accounts receivable, net
of allowance for doubtful accounts
of $727 and $1,987 9,360 16,127
Unbilled revenue 274 1,591
Deferred tax asset -- 1,712
Income tax receivable 9 810
Prepaid expenses and other 967 1,166
Net assets of discontinued operations 850 4,000
-------- --------
Total current assets 11,845 26,379
PROPERTY AND EQUIPMENT 6,845 6,736
Less - accumulated depreciation (3,617) (2,720)
-------- --------
Property and equipment, net 3,228 4,016
GOODWILL 33,200 56,848
Less - accumulated amortization (1,988) (2,284)
-------- --------
Goodwill, net 31,212 54,564
OTHER 47 49
-------- --------
TOTAL ASSETS $ 46,332 $ 85,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 4,798 $ --
Accounts payable 2,967 4,063
Acquisition payable 2,078 2,000
Restructuring reserve 1,768 1,761
Accrued salaries and other expenses 4,918 8,105
Payable to stockholders 900 --
Deferred revenue 115 41
-------- --------
Total current liabilities 17,544 15,970
LINE OF CREDIT -- 8,579
OTHER LIABILITIES 72 8
COMMITMENTS AND CONTINGENCIES
TEMPORARY EQUITY 6,275 --
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 35,000,000
shares authorized; 11,545,057 and 8,642,034
shares issued and outstanding 11 9
Additional paid-in capital 92,031 89,693
Common stock warrants 100 100
Accumulated other comprehensive income (loss) (395) 171
Retained earnings (deficit) (69,306) (29,522)
-------- --------
Total stockholders' equity 22,441 60,451
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,332 $ 85,008
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 13,923 $ 26,830 $ 51,624 $ 81,841
COST OF REVENUE 9,269 20,072 35,013 60,604
------------ ------------ ------------ ------------
GROSS PROFIT 4,654 6,758 16,611 21,237
OPERATING EXPENSES:
Selling, general and administrative expenses 7,694 5,674 22,756 18,034
Restructuring charge -- -- 2,525 --
Stock compensation expense -- -- -- 468
Write down of goodwill 24,793 -- 24,793 --
Goodwill amortization 381 355 1,137 1,043
Depreciation and amortization 467 441 1,404 1,139
------------ ------------ ------------ ------------
Total operating expenses 33,335 6470 52,615 20,684
INCOME (LOSS) FROM OPERATIONS (28,681) 288 (36,004) 553
OTHER INCOME (EXPENSE) -- 1 (4) (31)
INTEREST EXPENSE, net (151) (234) (419) (312)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (28,832) 55 (36,427) 210
INCOME TAX PROVISION (CREDIT) 4,825 (433) 2,174 125
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (33,657) 488 (38,601) 85
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations,
net of tax -- (123) -- 26
Loss on disposal of discontinued operations,
net of tax (960) -- (1,183) --
------------ ------------ ------------ ------------
Total discontinued operations (960) (123) (1,183) 26
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (34,617) $ 365 $ (39,784) $ 111
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE: BASIC AND DILUTED
Continuing operations $ (3.34) $ 0.05 $ (4.02) $ 0.01
Discontinued operations (.10) (0.01) (0.12) 0.00
------------ ------------ ------------ ------------
Net income (loss) $ (3.44) $ 0.04 $ (4.14) $ 0.01
============ ============ ============ ============
SHARES OUTSTANDING: BASIC AND DILUTED 10,053,209 8,642,034 9,619,823 8,755,448
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(39,784) $ 111
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 1,183 26
Depreciation and amortization 2,541 2,182
Write down of goodwill 24,793 --
Change in allowance for doubtful accounts (1,260) 376
Compensation expense on issuance of common stock -- 468
Deferred taxes 1,712 (206)
Cash provided by (used in) operating activities:
Trade accounts receivable 8,027 (4,814)
Unbilled revenue 1,317 (1,185)
Prepaid expenses and other 201 (279)
Accounts payable (1,096) 1,695
Restructuring reserve 7 (1,620)
Accrued salaries and other expenses (2,899) 3,988
Income taxes receivable/payable 801 (1,496)
Deferred revenue 74 (1,575)
-------- --------
Net cash used in operating activities (4,383) (2,329)
INVESTING ACTIVITIES:
Payments for acquisitions -- (4,896)
Additions of property and equipment, net of
disposals (1,406) (2,428)
Proceeds from sale of subsidiary and realization
of net assets retained 1,967 --
-------- --------
Net cash provided by (used in) investing activities 561 (7,324)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 7,175 --
Costs associated with common stock transactions (160) --
Borrowings (repayments) under line of credit (3,781) 10,910
Net payments on capital lease obligations -- (100)
-------- --------
Net cash provided by financing activities 3,234 10,810
NET (DECREASE) INCREASE IN CASH (588) 1,157
CASH:
Beginning of period 973 3,672
-------- --------
End of period $ 385 $ 4,829
======== ========
SUPPLEMENTAL DISCLOSURE:
Noncash issuance of common stock at fair value
in connection with prior acquisition $ 2,500 $ 1,575
======== ========
Noncash settlement in connection with
prior acquisition $ 1,578 $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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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 generally
accepted accounting principles 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 and nine month periods ended September 30, 2000, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. The balance sheet at December 31, 1999, 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,
1999.
The preparation of the condensed financial statements in conformity with
generally accepted accounting principles 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 (using the if-converted method). Potentially
dilutive securities are excluded from the computation if their effect is
anti-dilutive. At September 30, 2000, the Company had no potentially dilutive
securities, as the underlying value of the Company's common stock was less
than the strike price of outstanding options and warrants.
2. LIQUIDITY
Our operations require material amounts of additional capital in the
immediate future. Although we are attempting to reduce operating losses (and
generate operating profits) through cost reductions, cash generated by
operations and available credit facilities will not be sufficient in the near
term to meet our cash needs. We are continuing negotiations to sell our
Australian subsidiary, BrightStar Information Technology Group Ltd., to a
potential buyer with whom we had entered into a Letter of Intent that has
expired. There can be no assurance that the sale will close, and the timing
of a closing is uncertain. We are also attempting to arrange additional
financing, but there is no certainty that additional financing will be
available. If a sale of our Australian subsidiary and the realization of a
significant amount of cash proceeds are substantially delayed or do not
occur, and if we are unable to arrange additional financing, our operations
will likely be substantially harmed and we may be unable to continue as a
going concern.
As a result of our need for additional capital, we have engaged Cherry Tree &
Co. as our financial adviser to assist us in considering our strategic
alternatives. Transactions that we may consider include an investment in our
company by another company, a merger, and a sale of all or a portion of our
operations. There is no assurance that any such transaction could be carried
out before we become unable to continue as a going concern.
3. RESTRUCTURING
On June 20, 2000, the Company announced that revenue and earnings for the
second quarter and the remainder of the calendar year will be lower than
expected and that the Company is realigning its operations to improve
operating margins by reducing expenses associated with underutilized office
space and personnel.
As a result of the realignment, the Company recorded a restructuring charge
of $2.5 million in the second quarter. Of the total charge, approximately
$1.0 million was reserved for ongoing lease obligations for facilities that
were closed and $0.5 million was
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recorded to write-down related fixed assets. The remainder of the charge
relates to the severance of approximately 90 employees, or 15% of the
Company's workforce. Approximately $2.0 million of the charge applies to
obligations funded by cash disbursements, of which approximately $475,000 was
disbursed for severance and $150,000 was disbursed for rents during the
second and third quarters of 2000. The remaining charge relates to longer
term severance obligations and related costs amounting to $0.4 million to be
paid over the next nine months and $0.7 million of rents, net of sublease
income, to be paid related to leases which expire through April 2003.
Remaining amounts accrued of $0.6 million related to the restructuring charge
recorded in the fourth quarter of 1998 relate primarily to ongoing severance
obligations to be paid through April 2001.
4. CREDIT FACILITIES
Effective March 31, 2000, the Company established an AU$3 million ($1.8
million U.S. dollars) credit facility (the "Australian Credit Facility") with
Macquarie Bank Limited (the "Bank"). Under the terms of the agreement, the
Australian Credit Facility will be used for working capital needs and other
general corporate purposes. Borrowings under the Australian Credit Facility
bear an interest rate calculated as the aggregate of the 30 day Macquarie
Bank Bill Rate plus 3.0%. The Company's Australian subsidiary will pay a
commitment fee on unused amounts of the Australian Credit Facility amounting
to 1.0% per annum calculated daily and payable monthly based on the
difference between AU$3.0 million and borrowings outstanding.
The Australian Credit Facility is secured by liens on substantially all of
the assets of the Company's Australian subsidiary and guaranteed by the
Company. Borrowings under the Australian Credit Facility are limited to 60%
of outstanding customer accounts receivable less than 90 days old plus 40% of
unbilled revenue. The Australian Credit Facility requires that both the
Company and its Australian subsidiary comply with various financial covenants
and reporting requirements. This Australian Credit Facility matures on
December 31, 2004. As of September 30, 2000 and November 10, 2000, the
Company had AU$0.5 million outstanding under the Australian Credit Facility.
Borrowings outstanding under the Company's Credit Facility with Comerica Bank
amounted to $4.5 million at September 30, 2000, and $3.8 million on November
14, 2000, which approximated total availability under the facility at these
dates. As of, and during the quarter ended September 30, 2000, the Company
was not in compliance with a certain financial covenants. Comerica Bank has
agreed to waive the default. The Company's Credit Facility expires on March
31, 2001 and Comerica Bank has advised the Company that it does not intend
to renew the facility.
5. INCOME TAXES
As a result of continued losses, the Company has recorded a valuation
allowance to offset all of its deferred tax assets recorded at September 30,
2000. The valuation allowance relates to deferred tax assets established for
net operating loss carryforwards generated through September 30, 2000 and
other temporary differences. The Company does not expect to record tax
benefits on prior or future losses or other temporary differences until such
time that it can be estimated that tax benefits may be realized by the
Company.
6. 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. Comprehensive income (loss) is approximately ($0.4 million) higher
than the net loss recorded for the nine months ended September 30, 2000, and
approximates net income reported for the nine months ended September 30,
1999.
7. ACQUISITION PAYABLES
On June 23, 2000, the Company issued 668,468 shares of common stock to the
prior owners of Integrated Systems Consulting (ISC) as payment for the
remaining amount due of $2.5 million in connection with the 1999 acquisition
of ISC.
On October 19, 2000, we agreed in principle to a settlement of claims
presented by the prior owners of Cogent Technologies, LLC ("Cogent") for (1)
the unpaid balance of the purchase price for our purchase of the business of
Cogent from them in June 1999; and (2) breach of employment agreements with
us. Pursuant to the proposed settlement, in exchange for a mutual release
from the agreement by which we acquired Cogent and the employment agreements
with the prior owners, they will receive 1,000,000
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shares of our common stock, up to $75,000 in legal fee reimbursement and
monthly compensation due under the terms of their employment agreements until
June 30, 2001. The Company has recorded additional goodwill and an
acquisition payable of $1.6 million related to the settlement, of which $0.2
million will be paid in cash. In the third quarter, Cogent's operations were
discontinued resulting in a charge of $1.8 million.
An acquisition payable of $0.5 million is due in connection with the 1998
acquisition of PROSAP Australia Pty.
8. RECENT SALES OF UNREGISTERED SECURITIES
On March 10, 2000, pursuant to an agreement with Strong River Investments,
Inc. and Montrose Investments Ltd. (collectively, the "Purchasers"), the
Company sold to the Purchasers 709,555 shares of the Company's common stock
(the "Shares") for $7.5 million, or $10.57 per share (the "Transaction"). Net
proceeds to the Company amounted to $7.175 million after related issuance
costs. Proceeds were applied to the Company's borrowings under its Credit
Facility. In connection with the purchase of the Shares, the Company issued
two warrants to the Purchasers. One warrant has a five-year term during which
the Purchasers may purchase up to 157,500 shares of the Company's common
stock. at a price of $12.00 per share. The second warrant covers an
adjustable amount of shares of the Company's common stock. Pursuant to the
terms of the adjustable warrants, the holders thereof have elected to fix the
number of common shares issuable under such warrants upon exercise thereof,
which has been determined to be 1,525,000 shares in the aggregate. Such
shares were issued on September 29, 2000 at an exercise price of $0.001 per
share. Proceeds from the private placements have been classified as temporary
equity, subject to registration becoming effective.
Pursuant to the terms of the registration rights agreement between
BrightStar, Strong River Investment, Inc. and Montrose Investments Ltd.,
BrightStar agreed to file a registration statement with the SEC covering the
shares held by the selling stockholders on or prior to April 15, 2000, and to
cause such registration statement to be declared effective prior to June 8,
2000. Because we did not meet these obligations, these selling stockholders
have certain rights to receive payment from us. We are presently negotiating
the terms of these rights with these selling stockholders, but we have not
proposed a settlement. A settlement payment to these selling stockholders, if
any, will not affect their registration rights. The settlement amount, as
described by the registration rights agreement if paid, would amount to $0.9
million at September 30, 2000. The Company has recorded the settlement amount
as a payable to stockholders and corresponding reduction of temporary equity.
The Company also issued to Wharton Capital Partners Ltd. ("Wharton"), as
compensation for Wharton's services in completing the Transaction, a warrant,
which has a five-year term during which Wharton may purchase up to 45,000
shares of the Company's common stock at a price of $12.00 per share. The
Company anticipates registering the Shares sold to the Purchaser in December
2000.
9. SALE OF SUBSIDIARIES
On September 8, 2000, we entered into an asset purchase agreement with
Integrated Controls Systems, Inc., a Delaware corporation, and Integrated
Controls, Inc., a Louisiana corporation and our wholly-owned subsidiary
("ICON"). Pursuant to the asset purchase agreement, we sold to Integrated
Control Systems substantially all of the assets, except for accounts
receivable, and transferred certain liabilities of ICON's business of systems
integration for the energy industry, which ICON ran through its controls
division. The aggregate purchase price was $2.1 million subject to certain
adjustments. The Company recorded a third quarter charge of $1.0 million as a
result of the sale.
On September 15, 2000, we entered into a Heads of Agreement to sell our
Australian subsidiary, BrightStar Information Technology Group LTD. The Heads
of Agreement, which is essentially a letter of intent, terminated on October
31, 2000. Negotiations are continuing to carry out the transaction
contemplated by the Heads of Agreement on different terms, although there can
be no assurance that a transaction will occur. The closing of any transaction
would be subject to a number of significant conditions, including
satisfactory completion of due diligence, negotiation of a mutually agreeable
acquisition agreement, and the obtaining of necessary consents and approvals.
Assuming that all such conditions have been satisfied, the closing of any
transaction would not be expected to occur until the latter part of the
fourth quarter or later. The value of the possible transaction does not
provide for the recovery of $23 million of goodwill associated with our
Australian subsidiary. As such, the Company has recorded a $23 million charge
to write down Australian goodwill in the third quarter.
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10. LITIGATION
The Company has accrued $1.2 million to settle legal claims related
primarily to three separate lawsuits brought against the Company for damages
related to software development and implementation services provided by the
Company. The aggregate amount of the claims filed against the Company is
$7.2 million. While any litigation contains an element of uncertainty, the
Company believes, based upon its assessment of the claims and negotiations
to settle with the plaintiffs, that the liability recorded as of September
30, 2000, combined with possible coverage under the Company's errors and
omissions insurance policy, 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
INTRODUCTION - BrightStar Information Technology Group, Inc. ("BrightStar"
or the "Company") is a leading e-business solutions and application service
provider (ASP) to Global 2000 companies and public sector organizations.
BrightStar's rapidly deployed solutions for e-commerce, supply chain
management (SCM), customer relationship management (CRM), enterprise
resource planning (ERP), corporate portal and application outsourcing help
companies transform themselves into successful e-businesses and achieve a
competitive advantage by delivering superior service to their customers
while improving operational efficiencies.
Services are generally performed at clients' locations and also at the
Company's facilities. 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
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.
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 third quarter of 2000 decreased $12.9 million or 48.1% from
the third quarter of 1999. Revenue for the nine months ended September 30,
2000 decreased $30.2 million or 36.9% compared to the nine months ended
September 30, 1999. The decrease in revenue for the three and nine month
periods is a result of the Company's efforts to reorganize its service
offerings consistent with its focus on becoming an e-business and
application service provider, transition of, and turnover within its sales
force in the fourth quarter of 1999 and continuing through the third quarter
of 2000 and the ongoing effect of reduced demand for IT services in the ERP
segment of the Company's business. Due to the completion of several large
engagements during the second quarter and early in the third quarter, a
substantial reduction in revenue, compared to the third quarter of 2000, is
expected through the fourth quarter of 2000 and first quarter 2001.
Gross profit as a percentage of revenue for the three months ended September
30, 2000 and 1999, was 33.4% and 25.2%, respectively. Gross profit for the
nine months ended September 30, 2000 and 1999, was 32.2% and 25.9%,
respectively. The improvement in gross profit percentage resulted from the
1999 completion of two fixed fee on price engagements which had an
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adverse effect on margins in 1999, combined with improved utilization of
revenue generating personnel and slightly higher average billing rates in
2000.
The increase in selling, general and administrative expenses reflect the
Company's ongoing investment in building its internal infrastructure and
field sales force, which continued through September 2000. During the first
nine months of 2000, the Company has continued to incur substantial expense
associated with higher than normal turnover in its field sales force and
administrative and support staffs. Also, during the second and third
quarters of 2000, the Company recorded $0.7 million and $0.5 million of bad
debt expense associated primarily with two major clients. Additionally,
during the third quarter the Company recorded $1.7 million of charges for
severance and expected legal settlements with clients.
During the second quarter, the Company recorded a restructuring charge of
$2.5 million associated with the realignment of its business. The
restructuring included the closing of both sales and operations facilities
and the termination of approximately 90 employees or 15% of the Company's
workforce. The restructuring effort is expected to continue to increase
utilization and operating margins in the second half of 2000.
Stock compensation is a non-cash expense item related to the issuance of
stock to certain Founders as a part of the Company's IPO in 1998. This
amount was amortized over a period of 12 months through April 1999.
Goodwill amortization relates to goodwill acquired in conjunction with the
IPO and subsequent acquisitions.
As a result of continued losses, the Company has recorded a valuation
allowance to offset all of its deferred tax assets recorded at September 30,
2000. The valuation allowance relates to deferred tax assets established for
net operating loss carryforwards generated through September 30, 2000 and
other temporary differences. The Company does not expect to record tax
benefits on prior or future losses or other temporary differences until such
time that it can be estimated that tax benefits may be realized by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Effective March 31, 2000, the Company established a AU$3 million ($1.8
million U.S. dollars) credit facility (the "Australian Credit Facility")
with Macquarie Bank Limited. Under the terms of the agreement, the
Australian Credit Facility will be used for working capital needs and other
general corporate purposes. Borrowings under the Australian Credit Facility
bear an interest rate calculated as the aggregate of the 30 day Macquarie
Bank Bill Rate (the "Rate") plus 3.00 percent. The Company's Australian
subsidiary will pay a commitment fee on unused amounts of the Australian
Credit Facility amounting to 1.0% per annum calculated daily and payable
monthly based on the difference between the AU$3.0 million and borrowings
outstanding.
The Australian Credit Facility is secured by liens on substantially all of
the assets of the Company's Australian subsidiary and is guaranteed by the
Company. Borrowings under the Australian Credit Facility are limited to 60%
of outstanding customer accounts receivable less than 90 days old plus 40%
of unbilled revenue. The Australian Credit Facility requires that both the
Company and its Australian subsidiary comply with various financial
covenants and reporting requirements. This Australian Credit Facility
matures on December 31, 2004. As of September 30 and November 10, 2000 the
Company had AU$0.5 million outstanding under the Australian Credit Facility.
Borrowings outstanding under the Company's credit facility with Comerica
Bank amounted to $4.5 million at September 30, 2000 and $3.8 million at
November 14, 2000.
On March 10, 2000, pursuant to an agreement with Strong River Investments,
Inc. and Montrose Investments Ltd. (collectively the "Purchasers"), the
Company sold to the Purchasers 709,555 shares of the Company's common stock
for $7.5 million or $10.57 per share. Net proceeds to the Company amounted
to $7.2 million after related issuance costs. During the first quarter of
2000, the Company repaid $4.4 million of amounts due under its Credit
Facility, financed $2.4 million of additional working capital requirements
and $0.4 million of equipment additions using proceeds from the issuance of
stock.
The Company is required to make payments in 2000 amounting to $0.5 million
related to the PROSAP acquisition. In addition, the Company expects to make
payments of up to $0.2 million and issue additional shares of the Company's
common stock to the prior owners of Cogent. Additionally, the Company may be
required to make payments to certain stockholders, subject to a registration
rights agreement, of approximately $0.9 million.
The Company relies primarily on the timeliness and amount of accounts
receivable collections to fund cash disbursements. As a result of continued
losses and negative cash flows, the Company has experienced a significant
decline in available liquidity, which
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could have an adverse impact on the ability of the Company to meet its
immediate obligations and to continue as a going concern. The Company
intends to improve its liquidity as follows:
o Proceeds from the prospective sale of our Australian subsidiary.
o Additionally, the Company believes that it can secure financing in
addition to its current credit facility with Comerica Bank.
The Company believes that it is taking the actions necessary to restore cash
flows from operations by the second quarter of 2001, which, combined with
anticipated proceeds from the sale of its Australian subsidiary and financing in
addition to its current credit facility will be adequate to fund its operations
over the next year. There can be no assurance that the Company's efforts to
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, that the
Company will successfully complete the sale of its Australian subsidiary, or
that the Company will be able to secure additional financing, or 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 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
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company is exposed to market risk
because of changes in foreign currency exchange rates as measured against
the U.S. dollar and currencies of the Company's subsidiaries and operations
in Australia.
Foreign Currency Exchange Rate Risk. The Company has a wholly owned
subsidiary in Australia. Revenues from these operations are denominated in
Australian Dollars, thereby potentially affecting the Company's financial
position, results of operations and cash flows due to fluctuations in
exchange rates. The Company does not anticipate that near-term changes in
exchange rates will have a material impact on future earnings, fair values
or cash flows of the Company. There can be no assurance that a sudden and
significant decline in the value of the Australian Dollar will not have a
material adverse effect on the Company's financial condition and results of
operations.
The Company's lines of credit bears interest at variable rates; therefore,
the Company's results of operations would only be affected by interest rate
changes to the lines of credit. 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
See Note 10 to the Condensed Consolidated Financial Statements.
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ITEM 3. Defaults upon Senior Securities
See Note 2 to the Condensed Consolidated Financial Statements.
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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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 20, 2000. BY: /s/ Joseph A. Wagda
-----------------------------------------
Joseph A. Wagda
Chief Executive Officer
BY: /s/ Donald W. Rowley
-----------------------------------------
Donald W. Rowley
Chief Financial Officer
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 Financial Data Schedule
</TABLE>
