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Thursday, July 14, 2005

BrandPartners Group (BPTR)

BrandPartners Group (website)

Going through the 8-Ks:

call good.
meeting, authorized more shares (from 5 million to 8 million for stock incentive plan). Ugh.
transaction. They are involved in branding efforts for sub-prime lenders.
loan and revolver, conference call talks about this. LIBOR+2.5, unknown covenants, expires May 5, 2008.
terminated letter of engagement with Trilogy for marketing, PR, IR. No penalty. Was payable in warrants. Trilogy totally stopped supporting all BPTR information such as here and here.
agreement with Bristol IR, $5K/month.

Anthony Cataldo, Chairman, 54, gets $30,000 a month! and huge options!
Mr. Cataldo has held management positions with a number of emerging growth and publicly traded companies. In February 2005 he was appointed Non-Executive Co-Chairman of the Board of MultiCell Technologies, Inc. (OTC BB: MUCL) a supplier of functional, non-tumorigenic immortalized human hepatocytes. He served as Executive Chairman of Calypte Biomedical Corporation (AMEX: HIV), a publicly traded biotechnology company, involved in development and sale of urine based HIV-1 screening test from May 2002 through November 2004. Mr. Cataldo has also served as the Chief Executive Officer and Chairman of the Board of Directors of Miracle Entertainment, Inc., a Canadian film production company, from May 1999 through May 2002 where he was the executive producer or producer of several motion pictures. From August 1995 to December 1998, Mr. Cataldo served as President and Chairman of the Board of Senetek, PLC (OTC BB:SNTKY), a publicly traded biotechnology company involved in age-related therapies. From 1990 to 1995, Mr. Cataldo held various positions including Chairman and Chief Executive Officer with Management Technologies, Inc., a manufacturer and seller of trading system and banking software systems. He has also held the position of Executive Vice President of Hogan Systems, a banking software manufacturer and retailer. Mr. Cataldo has also served as President of Internet Systems, a pioneer in the Internet banking arena. Mr. Cataldo served in the United States Air Force from 1969 to 1973.
Richard Levy, Dir, 70, real estate guy.
J. Weldon Chitwood, 40, investment guy.
James F. Brooks, 42, CEO, was COO of Willey Brothers (subsid). Fairly good background.
Changed auditors, no adverse opinion or disclaimer.
compensation is ok, except lots of options, sheeesh the options are extreme!
Robert S. Trump (Trump Management) owns 13.4% of the company. United Way donor, wife is ballet trustee, $100K donation to a charity, some lawsuit with Financial Performance Corporation
Longview Fund owns 9.8% [apparently
not anymore]
Cataldo owns 13.5% (with options) [4.1 million shares based on latest 4/A]
Brooks own 10.1% (with options)
Suzanne M. Verril, CFO, came from Willey Brothers. DEC, WPI Termiflex. 3rd tier education.
Willey Brothers transaction could use some checking.

Latest 10-Q (March 31, 2005):
much of the assets are in AR and costs+estimated earnings in excess of billings
extreme amount of goodwill
significant, but not extreme long term debt.
weak balance sheet
there had been some unusual income items in 2004 (I figured earnings roughly 20 cents)
quarter earnings 5 cents (diluted, but not counting overhang, see below)
about 40 million shares "diluted" (see below for actual diluted share count)
operating cash flow is ugly due to increases in noncash assets, blamed on timing.
Three BIG customers: 32%, 17%, 10%.
Stock based compensation using BS pricing would have wiped out nearly all earnings!
Brand Partners Europe just started in January.
$9.3 million NOLs
Feb 2004 private equity placement (12.4 million shares). Also $7.5 million
Willey seller notes cancelled and forgiven including late interest, promissory notes replaced ($2 million) which were paid off in Apr and Jul of 2004. Also a landlord payoff of cash and shares.
Need crisp details on capital structure.

Dec 31, 2004
Delaware inc, office in Rochester NH
check marks normal
Aug 2001, increased shares to 100 million common + 20 million blank check pf.
purchased all of Willey Br common on Jan 16, 2001.
mostly branding program mgmt, doing the footwork, logistics, light production, and design
also office furniture dealer
mostly banks of all sizes, and other finance companies
backlog is signed orders, no revenue ($31 million at 2004 end, $21 million at 2003 end)
signficiant customers: varies from year to year, in 2004 two 11% customers, in 2003 one 16% customer, in 2002 one 14% customer.
145 employees, no unions.
small clients don't have RFP cycles, large ones do
other competitors also focus on same customer base, but haven't been as holistic
73K sq ft office, 36K sq ft warehouse. leases expire 2006 have 5 yr optionnew design center in NY 3K sq ft, exp 2007.
Inventory: they claimed they didn't have any, now they say they do
no legal proceedings (stuff in the past)
they sometimes pay for services with shares
conference call has good info on what's going on with the business
revenue recognized using %-of-completion (conf call has some duration info on projects, generally fairly short). Anticipated losses recognized immediately without %-of-completion
merchandising recognizes rev when shipped or service rendered.
G&A are period charges, not associated with projects
not much detail on AR
apparently 2003 and 2002 were restated but the original auditors are gone.
Restated 2003 and 2002 have not been audited
Revenues from continuing operations increased 50% or approximately $16,946,000 for the twelve months ended December 31, 2004. The improvement was due to strength in the industry, an increase in merger activity, and improved visibility to the variety of Willey Brothers' offerings offset by project delays because of permitting issues, weather conditions and property availability. These delays resulted in shifting revenues to a future fiscal period. [this could explain some or all of the $10 million increase in backlog]
Obsolete inventory charge of $987,000 in 2003 (I thought they didn't have inventory???)
SG&A decreased due to headcount drop, lease settlement, fulfillment of agreement with former Willey Bro shareholders, sales growth (operational leverage)
Interest expense dropped due to (see conf call for better details)
2003 results look sane except: unrealized loss on put warrant? settlement of lawsuit?
Jan 2004 subordinated note payable: covenants waived, reduction of interest (from 16% to 8% cash, 2% PIK), warrants issued
July 6, 2004: Company negotiated $1 million prom note payable Oct 2004,
50% extendable to Jan, 12% plus warrants. etc. etc. (page 16)
[Man, they really did some serious tap dancing]
The risks all look expected (unstated number of outstanding warrants), previous warrant holders want repriced options (like 4 million)
A single auditor ("I have audited...")
6,846,764 anti-dilutive shares on Dec 31, 2004.
43,321,427 shares total on Dec 31, 2004.
Therefore, the 5 cents earnings in Q1 are really 4.2 cents, call it 4 cents for safety
Annualizing Q1 results in $2.40 value.
Balance Sheet:
Assets are goodwill, AR, cash, inventories (I thought they didn't have inventories), costs+est earnings in excess of billings, etc.
Liabilities are debt, AP, billings in excess of cost+est earnings
current ratio is less than one, always a sign of balance sheet weakness
Income Statement:
gross margin is 31%
operating margin is 12%
There's a $9 million gain on forgiveness of debt [covered earlier]
Equity Statement:
The shares really jumped during 2003 due to using equity for toilet paper.
Cash Flow:
$3.3 million flow from ops
$0.8 million used in investing
financing was a wash, but over $2 million went from debt to equity
revenue recognition is the same as what I wrote earlier
inventory is lower of cost or market, nearly all finished goods, $1.3 million total inv.
Deprec 3-7 years on prop+equip, usual for leasehold improv, website and stuff is capitalized as required: computer equip+SW=$3.1 million, furn etc. $1.5 million, leasehold impr $678K, construction $388K, mostly depreciated.
Not much said about goodwill impairment, just stated the rules, seems kind of odd with goodwill being the largest asset
warranty costs: $138K in 2004, $71K in 2003
nothing in derivatives anymore (was in interest rate cap)
AR due in 30 days.
On Sept 21, 2004, they purchased a 15% Membership Interest in some 3rd party entity for $250K.
Lots of debt details showing the various conversion of debt to equity and varying terms.
19 million stock options outstanding, average strike $1.69.
Under the terms of the warrant agreements entered into as part of our private placement completed in February 2002, the Company was obligated to reset the exercise price of the warrants issued, if during the two-year period immediately following the closing of the sale of common stock and warrants to a subscriber were issued, other than pursuant to a stock grant or stock options to employees or consultants on or in connection with merger or acquisition activities, any shares of common stock or equivalents at a price or exercise price per share that was less than the market price as defined in the warrant agreements. The Company subsequently issued securities in a private placement that closed January 20, 2004, which as a result of the prior warrant agreements, resulted in the ratcheting down of the exercise price of certain warrants issued in the placement completed in February 2002, provided the warrants were issued in a closing that occurred less than two years prior to January 2004. Specifically, a total of 681,985 warrants issued in closings that occurred in the final two traunches of the placement completed in February 2002 were eligible for an adjustment of the exercise price to $0.537 per share as the January 20, 2004 share issuance occurred within two years of the closing for those warrants. Certain holders of 4,232,421 warrants that were issued in closings more than two years prior to the January 20, 2004, date have also requested that their warrants be reset or ratcheted down. The Company contends that these warrants should not be reset by virtue of the terms of their warrant agreements.
Related Party stuff:
2002 advance of $78K to 2 officers, both repaid in full, one after an extension
BrandPartners Europe started with 1 employee, no lease (i.e. some guy in his home)
end of 10-K

Cataldo exercised 400,000 stock options at $0.20 on 6/30/05.

Jan 3:
$2.6 million signed contracts.

Jan 11: $1.7 million more.
Most notably, a Northeastern-based credit union has engaged Willey Brothers in a two-phase project to design and build a new 3,000 square foot full service retail branch office. The project is scheduled to begin in early March and includes two drive-up lanes, ATM and a financial library/cafe housed within the branch facility.
Was it Washington Mutual who started this whole trend?

$4 million more in Feb, and $3.6 million in March. In May, they announced $3.2 million in new contracts. for a total of $16 million in signed new contracts so far for the year. In general, when a company is announcing every little thing like this, it does NOT give me a warm fuzzy feeling at all, like the thing I said in a previous post about announcing that "today, most of our employees showed up for work."
This latest build contract marks the fifth such project that this particular financial services company has engaged BrandPartners to complete, and we are excited to continue to support their latest expansion initiative.
Watts Wacker whacks 'em at the recent company sponsored symposium on retail banking trends, "We are entering the Age of Uncertainty, where the only constancy is uncertainty." Is he certain about that? Wacker (I'll bet he wrote that bio himself) left SRI to create the FirstMatter coven, I mean company, specifically on Halloween 1997.

One day after their tupperware party (see previous paragraph), the company announces what is apparently 30 contracts for about $83K each. Wacker must have gotten to them. This just seems odd. 30? all at once? There were 40 attendees, so I guess it's possible. Perhaps most of them were some sort of nominal service peddled at the symposium. Grand total signed new contracts for the year so far: $18.5 million (plus there's presumably most of the $31 million in backlog from last year). $14.6 million were recorded as revenue in Q1 2005.
The latest round of contracts includes a dozen new clients and a solid mix of repeat business, which is a key component of our business strategy. As a result of our integrated platform and marketing efforts, we believe that most of our clients see BrandPartners Retail as a one-stop shop for all of their retail environment needs. Consequently, our objective is to establish long-term relationships with our clients and help them with new challenges every year.
It would be my luck that
some newsletter highlights this stock just a few days before I find it. Oh well.

It should be fairly obvious that the more I write and the more details you see here, the more interested I am in the investment. Obviously this one is very interesting.

UPDATE: Stop following

Oddly enough, the "Tupperware party" red flag was the one that really caught my attention. I started going through the individual people like I usually do and ran into some odd things with Cataldo. Then I found the fraud accusation and it make some of the other red flags show a pattern. One big red flag that I believe I missed (I don't think I flagged it) was the huge payment being made to Cataldo who wasn't an executive of the company, just the chairman. When I saw the details in the previous company he bailed out (MultiCell?), that particular point became more important. I'll do a post mortem, hopefully.
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