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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Mark one
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ]
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 0-6920
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0553110
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification No.)
4900 HOPYARD ROAD, SUITE 200
PLEASANTON, CALIFORNIA 94588
(925) 251-0000
(Address, including zip code, area code with phone number
of the registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at April 12, 2001, based on the $0.29 per share
closing price for the registrant's common stock on the NASDAQ National Market
was approximately $3,760,427. For purposes of this computation, all officers,
directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
registrant.
The number of shares of the registrant's common stock outstanding as of
April 12, 2001 was 13,261,888.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual Meeting
of Stockholders to be held in June 21, 2001, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
Report.
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PART I
ITEM 1: BUSINESS
THE COMPANY
We are a provider of application outsourcing and systems integration
services to Global 2000 companies and public sector organizations. Our rapidly
deployed solutions for application outsourcing, enterprise resource planning
(ERP), supply chain management (SCM), customer relationship management (CRM),
corporate portal and e-commerce help companies achieve a competitive advantage
by delivering superior service to their customers while improving operational
efficiencies. We have approximately 140 employees and full-time contractors in
offices located in Pleasanton, CA, Dallas, TX, Lafayette, LA, Little Rock AR
and Quincy, MA.
We offer a comprehensive suite of application outsourcing services, from
remote production support to hosting and application management. Outsourcing
lets companies focus on their core business objectives and gives them a viable
alternative to building the infrastructure and trying to hire and retain all of
the skilled professionals required to implement and maintain the sophisticated
applications that they've come to rely on to run their operations. BrightStar is
able to provide other companies with an "Applications Team" that is flexible and
agile in terms of expanding and contracting on demand, both in terms of team
size and team skills.
For Enterprise Resource Planning (ERP), we implement SAP and PeopleSoft
applications, covering a complete range of business processes, from
manufacturing and finance to human resources, procurement and supply chain
planning. Our ERP solutions are tailored to fit the specific needs of individual
organizations, helping them to automate business processes across the enterprise
through the creation of a single data environment that spans departments and
job functions.
Our Customer Relationship Management (CRM) practice assists companies in
attaining competitive advantage by improving their visibility into all the
varied contacts made with their customers. To accomplish this, we implement from
Siebel Systems applications enabling organizations to optimize their resources
and offer superior service to their customers through the integrated management
of traditional, as well as Web-based, channels for sales, marketing, and
customer service.
Our Supply Chain Management (SCM) practice utilizes applications from
various software vendors to automate and optimize the numerous interactions,
such as forecasting, procurement, manufacturing, distribution and delivery that
take place between an enterprise and the members of its trading communities.
This not only increases opportunities for conducting business through a myriad
of affinity relationships but also extends the cost savings and operational
efficiencies of business-to-business commerce to all members of a company's
supply chain.
To help companies provide universal access to their information resources,
our Corporate Portal practice implements Actuate Software's market-leading
enterprise Web-based report server and provides the necessary enterprise
application integration required to provide employees with personalized, secure
Web-based access to the knowledge and information systems necessary to make
faster, more informed decisions.
Our E-Commerce practice leverages our extensive experience in implementing
enterprise applications to help companies develop, rapidly deploy and support
business-to-business and business-to-consumer commerce sites, as well as
traditional Internet information publishing sites, that are tightly integrated
with existing information systems. Our partnerships with Microsoft and other
technology companies, combined with our expertise in enterprise application
integration, Web site design and Internet information security issues enable us
to put in place comprehensive e-commerce solutions tailored to the specific
needs of our clients.
To provide our services, we recruit and employ project managers, skilled
senior-level consultants, engineers and other technical personnel with both
business as well as technical expertise. We believe this combination of business
and technical expertise, the breadth and depth of its solution offerings and its
ability to deliver these solutions in both the traditional consulting and
implementation model, as well as the application outsourcing model, are sources
of differentiation for the Company in the market for information technology
services and critical factors in its success.
INFORMATION ABOUT OPERATING SEGMENT
We operate in the Information Technology Services Business segment which
includes the Internet Services category.
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Among the leading positive factors affecting the demand for Internet
Services is the transition to packaged software solutions, the emergence of new
technologies and the increased bandwidth and usability of the Internet through
the Web. These new technologies enable the creation and utilization of more
functional and flexible applications that can increase productivity, reduce
costs and improve customer service. Negative conditions affecting demand in the
Internet Services segment include the retrenchment of venture capital investment
in new Internet business enterprises, which began in 2000.
Managing the transition to a new generation of e-business applications is
placing a significant burden on many corporate IT departments. Many
organizations do not have the expertise to implement the new technologies and
they are reluctant or unable to expand their IT departments and re-deploy their
in-house personnel. Consequently, many organizations are outsourcing the design,
implementation and hosting of their new applications to acquire the necessary
expertise and accelerate deployment.
CUSTOMERS AND MARKETS
Our marketing efforts focus on mid-sized to large companies who have a need
for rapid deployment of e-business applications as well as a wide range of other
technology consulting services. We serve customers in the public sector and in
a broad range of industries, including communications, consumer products,
energy, healthcare, industrial, retail and technology. Many of these
relationships have existed over several years and involved numerous projects.
CONSULTING
Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled technical employees. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. We dedicate significant resources to recruiting
professionals with both IT and Internet consulting and industry experience. None
of our employees are subject to a collective bargaining arrangement. The Company
considers its relationships with its employees to be good.
COMPETITION
Market share in the IT industry was initially concentrated among large
computer manufacturers but the industry has become increasingly competitive and
fragmented. IT services are provided by numerous firms including multinational
accounting firms, systems consulting and implementation firms, software
application vendors, general management consulting firms and data processing
outsourcing companies.
DIRECTORS AND EXECUTIVE OFFICERS OF BRIGHTSTAR
The following table and notes thereto identify and set forth information about
the Company's four executive officers:
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
------------------ ---- ------------------------------------ --------
Joseph A. Wagda 57 Chairman of the Board of Directors, 2000
Chief Executive Officer of Brightstar
and President of Altamont Capital
Management
Kevin J. Murphy 40 President and Chief Operating Officer 2001
of BrightStar
Chris V. Turner 40 Senior Vice President and Chief Sales
Officer of BrightStar
David L. Christeson 36 Vice President of Finance and
Administration and Secretary of
BrightStar
W. Barry Zwahlen 55 Managing Partner of Information 2000
Management Associates
Jennifer T. Barrett 50 Group Leader, Data Products Division, 1998
Acxiom Corporation
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4
Joseph A. Wagda became interim Chief Executive Officer, effective
October 2, 2000, and has been a director of BrightStar since April 2000.
Mr. Wagda was elected Chairman of the Board of Directors on March 21, 2001.
President of Altamont Capital Management, Inc., and a practicing attorney,
Mr. Wagda's business emphasizes special situation consulting and investing,
including involvement in distressed investments and venture capital
opportunities. Mr. Wagda also is a director of Abraxas Petroleum Corporation,
an independent oil and gas company with operations in Texas and Canada.
Previously, Mr. Wagda was President and CEO of American Heritage Group,
a modular homebuilder, and a Senior Managing Director and co-founder of the
Price Waterhouse corporate finance practice. He also served with the finance
staff of Chevron Corporation and in the general counsel's office at Ford Motor
Company.
Kevin J. Murphy became President, Chief Operating Officer and a director of
BrightStar on January 16, 2001. He recently was Western Region Vice President
for EDS where he had P&L and executive responsibility for numerous large clients
in the San Francisco Bay Area. An IT Services industry veteran of more than
20 years, Mr. Murphy has a degree in computer science, and had been with EDS for
the last 15 years in positions of increasing responsibility in both sales and
service delivery.
Chris V. Turner became Senior Vice President and Chief Sales Officer on
January 16, 2001. An electronics engineer and recently Vice President of
Business Development at Perot Systems, Mr. Turner has over 20 years of
experience in the IT systems and services business with other prominent
technology companies such as EDS, where he was Director of Outsourcing Business
Development and a senior sales executive.
David L. Christeson became Vice President of Finance and Administration
effective December 1, 2000. Mr. Christeson joined BrightStar in April 1999 when
he was appointed our Controller and Assistant Secretary. From 1994 to 1997,
Mr. Christeson held senior financial positions at Norand Corporation and
APAC Teleservices, Inc., both high technology publicly held companies. From 1987
to 1994, Mr. Christeson worked in the Audit Practice of Deloitte and Touche LLP.
W. Barry Zwahlen has been a director with BrightStar since July 2000.
Mr. Zwahlen presently is the Managing Partner of Information Management
Associates, a retained executive search firm, which he founded in 1986.
Mr. Zwahlen focuses his practice on the recruitment of CIO and CTO candidates
for technology clients and the recruitment of executive level Information
technology consultants for systems integration professional services firms.
Mr. Zwahlen serves on the Board's Audit and Compensation Committees.
Jennifer T. Barrett became a director of BrightStar at the closing of our
initial public offering in 1998. Since 1974, she has served in various
capacities with Acxiom Corporation, a leading data processing and related
computer-based services and software products company. She is currently a Group
Leader in the Data Products Division. Ms. Barrett serves on the Board's Audit
and Compensation Committees.
RECENT DEVELOPMENTS
On December 13, 2000, we completed the sale of our Australian subsidiary,
BrightStar Information Technology Group, Ltd., for A$10.0 million
(US $5.5 million). Of the total purchase price, A$2.5 million (US $1.4 million)
was paid upon closing, with the remainder due upon completion of a contingent
earnout for the twelve month period ended December 31, 2001.
Effective January 16, 2001, Kevin J. Murphy was appointed President and
Chief Operating Officer, and elected to the board of directors, and Chris V.
Turner was appointed Senior Vice President and Chief Sales Officer.
On January 12, 2001, we received a letter from the Nasdaq staff stating
that because the bid price of our stock had been below $1.00 per share for
thirty consecutive trading days, our securities could be delisted from the
Nasdaq National Marketplace unless, during the 90 days ended April 12, 2001,
the bid price of our stock closed above $1.00 for at least 10 consecutive
trading days, which it did not. In addition, on January 22, 2001, we received
a determination letter from the Nasdaq staff advising us that the Company's
securities were subject to being delisted from the Nasdaq National Marketplace
for failure to maintain compliance with the $4 million net tangible asset
requirement of Marketplace Rule 4450(a)(3). On March 8, 2001, the Company
received a letter from Nasdaq informing it that the Company's common stock had
failed to maintain a minimum market value of public float ("MVPF") of $5 million
over the last 30 consecutive trading days as required by the Nasdaq National
Market under Marketplace Rule 4450(a)(2) (the "Rule"). Therefore, in accordance
with Marketplace Rule 4310(c)(8)(B), the Company will be provided 90 calendar
days, or until June 6, 2001, to regain compliance with this Rule. If at anytime
before June 6, 2001, the MVPF of the Company's common stock is at least
$5 million for a minimum of 10 consecutive trading days, the Nasdaq Staff will
make a determination as to whether the Company complies with this Rule. However,
if the Company is unable to demonstrate compliance with this Rule on or before
June 6,
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2001, the Nasdaq Staff will provide the Company with written notification that
it did not regain compliance. On January 29, 2001, the Company requested
a hearing before the Nasdaq Listing Qualifications Panel (the "Panel")
to discuss the Company's plan to achieve and sustain compliance with all Nasdaq
listing requirements. The hearing was held on March 9, 2001. The Nasdaq listing
status of our securities will remain unchanged pending a final determination
of that status by the Panel.
Effective March 21, 2001, George Siegel, Chairman, resigned from the Board
of Directors, and Joseph A. Wagda, interim Chief Executive Officer, was elected
Chairman of the Board of Directors.
ITEM 2: PROPERTIES
Brightstar's principal executive offices are located at 4900 Hopyard Road,
Suite 200, Pleasanton, California 94588. The Company's lease on these premises
covers approximately 5,600 square feet and expires December 31, 2003.
The Company also operates through leased facilities in:
(bullet) Dallas, TX
(bullet) Lafayette, LA
(bullet) Quincy, MA
(bullet) Little Rock, AR
Substantially all of the Company's services are performed on-site at
customer locations. BrightStar anticipates that additional space will be
required as its business expands, and believes that it will be able to obtain
suitable space as needed.
ITEM 3: LEGAL PROCEEDINGS
The Company has accrued $0.6 million relating to its litigation expense.
This amount includes estimated costs to settle legal claims originating during
2000 related primarily to two separate lawsuits brought against the Company in
California and Texas for damages related to software development and
implementation services provided by the Company. The amounts accrued primarily
represents 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, filed in Arizona in 2001, 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 covenant 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 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 negotiations to settle with the plaintiffs,
that the liability recorded as of December 31, 2000, combined with coverage
under the Company's errors and omissions and directors and officers 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER
OF 2000
None.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "BTSR." The following table sets forth for the quarterly periods
indicating the range of high and low sales prices for the Company's Common Stock
for 1999 and 2000.
1999 2000
--------------- -----------------
HIGH LOW HIGH LOW
------ ------- ------- -------
First Quarter......... $11.00 $3.688 $11.625 $6.0625
Second Quarter........ $ 5.844 $3.12 $ 8.625 $2.75
Third Quarter......... $ 5.00 $2.875 $ 4.00 $2.063
Fourth Quarter........ $10.50 $3.00 $ 2.25 $0.281
The Company has never declared nor paid cash dividends on its Common Stock.
The Company's credit facility contains restrictions on the Company's ability to
pay cash dividends. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
As of April 12, 2001, there were 93 shareholders of record of the Company's
Common Stock.
SALES OF UNREGISTERED SECURITIES.
Set forth below is certain information concerning all sales of securities
by BrightStar that were not registered under the Securities Act.
1. Effective October 17, 1997, BrightStar issued and sold 1,000 shares of
common stock to BIT Group Services, Inc. ("BITG") for $1,000.
2. Concurrently with the closing of its initial public offering and
pursuant to the Agreement and Plan of Exchange (the "Share Exchange") dated as
of December 15, 1997, among BrightStar, BITG, BIT Investors, LLC ("BITI"), and
the holders of the outstanding capital stock of BITG, (i) BrightStar issued to
BITI an aggregate of 739,007 shares of common stock in exchange for all the
shares of common stock of BITG held by BITI, and (ii) BrightStar issued up to an
aggregate of 346,800 shares of common stock in exchange for all the shares of
common stock of BITG held by members of BrightStar's management, as follows:
42,900 shares to George M. Siegel; 70,000 shares to Marshall G. Webb;
60,000 shares to Thomas A. Hudgins; 60,000 shares to Daniel M. Cofall;
60,000 shares to Michael A. Sooley; 33,900 shares to Tarrant Hancock; and
20,000 shares to Mark D. Diggs.
3. In connection with the Share Exchange, BrightStar assumed all
obligations of the issuer pursuant to an option issued by BrightStar to
Brewer-Gruenert Capital Advisors, LLC, which provides for the purchase of up
to 14,285 shares of common stock at an exercise price of $6.00 per share.
4. Effective April 20, 1998, BrightStar issued 33,008 shares of common
stock upon the exercise of a warrant held by McFaland, Grossman & Company.
5. Pursuant to the Share Exchange, on January 11, 1999, the Company issued
11,575 shares of common stock to the holder of the Series A-1 Class A Units
of BITI.
6. Concurrently with the closing of its initial public offering, BrightStar
issued to Software Consulting Services America, LLC ("SCS America") and the
stockholder's of the other companies acquired concurrently with the closing of
BrightStar's initial public offering (the "Founding Companies") an aggregate
of 1,982,645 shares of common stock in connection with the acquisition of
the Founding Companies.
7. On January 11, 1999, BrightStar issued to the beneficiaries of the
SCS Unit Trust an aggregate of 441,400 shares of common stock in consideration
of substantially all the assets of the SCS Unit Trust.
8. 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"). In connection with the purchase of the Shares, the Company
issued two warrants to the Purchasers. One warrant had a five-year term during
which the Purchasers could purchase up to 157,500 shares of the Company's common
stock at a price of $12.00 per share. The second warrant covered an adjustable
amount of shares of the Company's common stock. Pursuant to the terms of the
adjustable warrants, the holders thereof elected to fix the number of common
shares issuable under
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such warrants at 1,525,000 shares in the aggregate. Such shares were issued on
September 29, 2000 at an exercise price of $0.001 per share. The Company also
issued to Wharton Capital Partners Ltd. ("Wharton"), as compensation for
Wharton's services in completing the Transaction, a warrant with 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.
9. 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.
10. On January, 16, 2001, the prior owners of Cogent Technologies LLC 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.
11. On February 15, 2001, Kevin J. Murphy was issued 100,000 shares of our
common stock in connection with the commencement of his employment with the
Company.
12. On February 15, 2001, certain former employees were issued
346,831 shares of our common stock in satisfaction of remaining severance
payment obligations under prior employment agreements with the Company.
13. On February 15, 2001, Unaxis Trading Limited was issued 250,000 shares
of our common stock in settlement of litigation between the Company and certain
affiliates of Unaxis. Pursuant to the settlement agreement (which was agreed
upon in principle, on November 3, 2000), if, prior to a sale of these shares by
Unaxis, the Company has not exercised its right, between January 1, 2002 and
February 1, 2002, 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.
The sales and issuances of the securities by BrightStar, by BITG to BITI
and to BrightStar's management and by BITI to its members, referenced above were
or will be, as applicable, exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as transactions not involving any public
offerings, with the recipients representing their intentions to acquire the
securities for their own accounts and not with a view to the distribution
thereof.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for BrightStar is
derived from the Company's Financial Statements and related notes thereto. The
following selected consolidated financial data should be read in connection with
BrightStar's Financial Statements and related notes thereto and other financial
information included elsewhere in this Form 10-K report.
BrightStar was organized in July 1997 and completed its initial public
offering (IPO) on April 16, 1998. Concurrent with the IPO, Brightstar
(a) acquired the outstanding capital stock of Brian R. Blackmarr and Associates,
Inc. ("Blackmarr"), Integrated Controls, Inc. ("ICON"), Mindworks Professionals
Education Group, Inc. ("Mindworks"), Software Innovators, Inc. ("SII"), Zelo
Group, Inc. ("ZELO") (b) acquired substantially all the net assets of Software
Consulting Services America, LLC ("SCS America") and SCS Unit Trust
("SCS Australia") and together with Blackmarr, ICON, Mindworks, SII, Zelo,
SCS America and SCS Australia , (collectively the "Founding Companies") and
(c) executed a share exchange with BIT Investors, LLC ("BITI") and senior
management of BrightStar for all outstanding common stock of BIT Group Services,
Inc. ("BITG"). BrightStar and the Founding Companies are hereinafter
collectively referred to as the "Company." The acquisitions were accounted for
using the purchase method of accounting, with Blackmarr being reflected as
the "accounting acquirer."
The following tables present selected historical data for Blackmarr, the
accounting acquirer, for the years 1994 through 1997. The 1998 data presented in
the following table for the Company is comprised of (i) the results of operation
of Blackmarr for the year ending December 31, 1998, (ii) the results of
operations of the Founding Companies for the periods subsequent to their
acquisitions and (iii) the results of the operations of companies acquired by
BrightStar after the initial public offering.
The Blackmarr results have been derived from (i) the audited financial
statements of Blackmarr for the years ended as of September 30, 1995, 1996 and
1997 and the year ended as of December 31, 1998.
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YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------------
HISTORICAL OPERATIONS DATA: 1996 1997 1998 1999 2000
- --------------------------- ------ -------- ---------- ---------- ----------
Revenue........................... $9,227 $12,190 $ 63,584 $ 103,449 $ 61,612
Cost of revenue................... 7,659 10,063 45,409 76,476 42,442
Selling, general and
administrative expenses.......... 1,555 1,668 15,445 26,797 27,251
Stock compensation expense........ -- 305 6,766 468 --
In process research &
development...................... -- -- 3,000 -- --
Restructuring charge.............. -- -- 7,614 -- 2,237
Write down of goodwill............ -- -- -- -- 42,479
Depreciation and amortization..... 101 135 1,652 3,056 3,244
------ -------- ---------- ---------- -----------
Income (loss) from operations..... (88) 19 (16,302) (3,348) (56,041)
Other income (expense), net....... 124 33 158 (15) (19)
Interest expense.................. (67) (96) (66) (518) (519)
Income tax provision (benefit).... -- 6 612 (1,313) 2,174
Income (loss) on discontinued
operations...................... -- -- 278 (7,447) (910)
------ -------- ---------- ---------- -----------
Net income (loss)................. $ (31) $ (50) $ (16,544) $ (10,015) $ (59,663)
====== ======== ========== ========== ===========
Average common shares:
Basic and diluted............... -- -- 6,275,031 8,642,034 9,959,995
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SEPTEMBER 30, DECEMBER 31,
-------------------- ------------------------------
HISTORICAL BALANCE SHEET DATA: 1996 1997 1998 1999 2000
- ------------------------------ ---- ---- ---- ---- ----
Working capital..................... $ 233 $ 337 $14,348 $10,409 $(5,132)
Total assets........................ 1,926 3,501 92,401 85,008 21,154
Stockholders' equity................ 423 682 70,074 60,451 9,053
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in connection with BrightStar's
Consolidated Financial Statements and related notes thereto and other financial
information included elsewhere in the Form 10-K report.
RESULTS OF OPERATIONS
The Company reported net losses of $5.91 and $1.16 per basic and diluted
share for the years ended December 31, 2000 and 1999. The results of operations
for 2000 and 1999 reflect the impact of the following items:
Goodwill
In July of 1996, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of accounting and
requires that one of the companies be designated as the accounting acquirer.
Accordingly, for financial statement purposes, Blackmarr was designated as the
acquiring company because its shareholders, in the aggregate, acquired more
common stock than the former shareholders of any of the other Founding Companies
in conjunction with the acquisitions. The excess of the aggregate purchase price
paid for the Founding Companies other than Blackmarr over the fair value of the
net assets acquired by BrightStar was recorded as goodwill. In addition,
goodwill of $4.6 million was recorded attributable to the issuance of
437,681 shares of Common Stock to BITI unit holders. The goodwill was amortized
over a 40-year period through December 31, 2000. Goodwill associated with
the purchase of ISC was being amortized over a 20-year period through
December 31, 2000.
As a result of the sale of its Australian subsidiary, the Company recorded
a write down of related goodwill of $22.6 million. Additionally, the Company
recorded a $1.4 million write down of goodwill associated with its Cogent
Technology, LLC Subsidiary. Cogent's operations were discontinued in the
third quarter of 2000. In the fourth quarter, as part of its assessment of the
recoverability of remaining goodwill, the Company reduced the carrying amount to
$12.0 million. The components of the goodwill write-down are summarized below:
GOODWILL
CHARGED TO
EARNINGS IN
2000
--------------
(IN THOUSANDS)
Australia............................................. $22,622
Cogent Technologies, LLC.............................. 1,433
Continuing U.S. operations............................ 18,424
-------
$42,479
=======
Discontinued Operations
During the fourth quarter of 1999, the Company recorded losses related to
the discontinuance of its Training, Controls, and Infrastructure Support
businesses. The loss on discontinued operations of $7.4 million includes:
1) $5.8 million (including $0.7 million of taxes) recorded to write down the
Company's net investment in its Controls business and to record $0.8 million
of estimated operating losses to be incurred after the decision to dispose of
the business; 2) $1.0 million (including $0.1 million of taxes) recorded upon
the sale of the Mindworks division of the Company's training business, and
3) $0.6 million (net of $0.3 million of tax benefits) of operating losses from
discontinued operations incurred during 1999. Additionally, as a result of the
sale of its controls division in September 2000, the Company recorded a charge
of $0.9 million. The Company recorded no gain or loss on the discontinuance of
its Texas training business or its infrastructure support business. The Company
has made necessary reclassifications to properly reflect the discontinued
operations in its consolidated financial statements.
Restructuring Charges
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During the fourth quarter of 1998, the Company completed a review of each
of its businesses and the services it provides. At the completion of this
review, the Company developed and the Board approved a reorganization plan (the
"Plan") with strategic actions to:
(bullet) Consolidate the sales, finance, and administrative functions
at the BrightStar level, forming a consolidated sales force and
consolidated finance group; and
(bullet) Realign the operations of each of the individual wholly owned
subsidiaries into operating divisions consistent with the
Company's lines of businesses.
The Plan included relocating the Company's corporate offices from Houston,
Texas to Pleasanton, California, eliminating certain positions and personnel,
closing certain businesses and writing-off related assets, and terminating and
consolidating leased facilities. In the fourth quarter of 1998, the Company
recorded a $7.6 million charge for these restructuring actions.
On June 20, 2000, the Company announced that revenue and earnings for the
second quarter and the remainder of the calendar year would be lower than
expected and that the Company was 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 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 $1.7 million of the charge
applied to obligations funded by cash disbursements, of which approximately
$1.0 million was disbursed for severance and $0.3 million was disbursed for
rents during 2000. The remaining charge relates to longer-term severance
obligations and related costs amounting to $0.2 million and $0.7 million of
rents, net of sublease income to be paid related to leases which expire through
April 2003. During the fourth quarter of 2000, the Company reduced the
restructuring reserve by $0.3 million as a result of favorable lease
settlements.
Remaining amounts recorded as accrued restructuring costs at December 31,
2000, relate to ongoing severance and lease obligations which have extended
payment terms.
The categories of the 2000 and 1998 restructuring charges and the
subsequent utilization are summarized below:
AMOUNTS AMOUNTS AMOUNTS TO
CHARGED TO CHARGED TO BE PAID
EARNINGS IN EARNINGS IN BEYOND
2000 1998 2000
----------- ----------- ----------
(IN THOUSANDS)
Workforce severance...................... $1,000 $4,960 $161
Asset impairment......................... 500 1,171 --
Lease and other contract obligations..... 737 1,483 692
------ ------ ----
$2,237 $7,614 $853
====== ====== ====
Stock Compensation Expense
In connection with the offering and acquisition of the Founding Companies,
certain directors and members of management received 648,126 shares of common
stock. These shares, valued at $11.70, were recorded as deferred compensation
and were charged to stock compensation expense over a one-year period based upon
the terms of a stock repurchase agreement between the Company and related
shareholders. Total stock compensation expense recorded during 1999 and 1998 in
connection with the above was $468,000 and $6.8 million, respectively. At
December 31, 1998, certain members of management were terminated in connection
with the 1998 restructuring plan described above. As a result, the remaining
deferred compensation totaling $2.1 million, attributable to the shares held by
these terminated employees, was charged to expense and is included in the 1998
restructuring charge.
Revenue
The Company provides services to its customers for fees that are based on
time and materials 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.
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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 customers' budgetary constraints, the
timing of customers' budget cycles, customers' internal approval processes and
general economic conditions. In addition, as is customary in the industry, the
Company's engagements are generally terminable without a customer penalty.
The Company's revenue and results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including,
but not limited to, changes in the demand for IT services, the rate of hiring
and the productivity of revenue generating personnel; the availability of
qualified IT professionals; the significance of customer engagements commenced
and completed during a quarter; the number of business days in the quarter;
changes in the relative mix of the Company's services; changes in the pricing of
the Company's services; the timing and the rate of entrance into new geographic
or IT specialty markets; departures or temporary absences of key
revenue-generating personnel; the structure and timing of acquisitions; and
general economic factors.
Revenue decreased $41.8 million or 40% in 2000 compared to 1999 as a result
of a reduction in the demand for ERP and e-commerce consulting services.
Revenue increased $39.9 million or 63% in 1999 compared to 1998 as a result
of (i) a full year's operations of the Founding Companies acquired on April 16,
1998 at the time of the initial public offering, (ii) four additional companies
acquired subsequent to the initial public offering and (iii) new customer
contracts for implementation of ERP systems and development of e-commerce
applications. The increase in revenues attributed to the factors described above
was partially offset by a reduced revenue stream from all existing businesses
during the second half of 1999 attributable to executing the Company's plan for
reorganizing and the impact of reduced demand for services offered by the
Company in the year 2000.
Revenue increased for the twelve months ended December 31, 1998, compared
to the prior periods primarily as a result of (i) the acquisition of the
Founding Companies on April 16, 1998, at the time of the initial public
offering; (ii) the acquisition of three additional companies subsequent to the
initial public offering and (iii) new customer contracts for implementation of
ERP systems and development of custom applications.
Cost of Revenue
Cost of revenue primarily consists 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.
Cost of revenue decreased in 2000 compared to 1999 due to the related
reduction in revenues. Gross margins improved to 31% in 2000 compared to 26% in
1999 due to improved utilization of billable consultants combined with the
completion of two low margin fixed price engagements in 1999.
Cost of revenue increased in 1999 and 1998, compared to the respective
prior periods, due to an increase in variable costs associated with the
increased revenue described above. Cost of revenue for 1999 reflects costs
associated with two fixed fee contracts which exceeded related revenues by
$3.2 million in 1999 ($1.6 million in the fourth quarter of 1999) compared
to gross margins recorded on the same contracts in 1998.
Operating Expenses
Selling, general and administrative expenses (SG&A) primarily consist of
costs associated with (i) corporate overhead, (ii) sales and account management,
(iii) telecommunications, (iv) human resources, (v) recruiting and training, and
(vi) other administrative expenses.
SG&A expenses increased $0.5 million, or 2%, in 2000 compared to 1999. The
increase represents continued investments in the Company's sales force and
corporate infrastructure through the third quarter of 2000, offset by
significant reductions in expenses in the fourth quarter of 2000 resulting from
the initiation of a turnaround plan designed to restore profitability and
positive cash flows.
SG&A expenses increased $11.4 million, or 74%, in 1999 compared to 1998 as
a result of personnel added to support the increased volume of business
described in the revenue discussion above.
MARKET RISK
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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 former operations in Australia. Since the A$7.5 million contingent
earnout resulting from the sale of our Australian subsidiary is denominated in
Australian dollars, the Company's financial position, results of operations, and
cash flows are potentially affected by 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.
The Company's debt bears interest at variable rates; therefore, the
Company's results of operations would only be affected by interest rate changes
to the debt outstanding. 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.
LIQUIDITY AND CAPITAL RESOURCES
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. Borrowings outstanding under the Company's
credit facility with Comerica Bank amounted to $3.6 million at December 31, 2000
and $2.4 million at March 31, 2001. Comerica Bank did not renew the credit
facility upon its expiration on March 31, 2001 but has agreed to provide up to
$3.0 million of working capital financing on a demand note basis pending the
Company obtaining a replacement credit facility. As a result of the sale of our
Australian Subsidiary, the Company no longer maintains an Australian credit
facility.
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
$7.0 million after related issuance costs.
The Company has accrued for payments in 2001 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 has issued 1,020,000 shares of the Company's
common stock to the prior owners of Cogent. Additional shares of common stock
are expected to be issuable to the prior owners of Cogent under the terms of
their registration rights agreement. The Company may be required to make
payments to certain stockholders, pursuant 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 (resulting in $5.1 million of negative working
capital at December 31, 2000), 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 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 at
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
profitability and cash flows from operations. The Company is actively seeking
additional sources of capital. Without additional sources of capital, the
Company's existing capital may be inadequate 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, or that the Company will be able to secure additional capital on
favorable terms, or at all.
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;
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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.
RISK FACTORS
OUR FAILURE TO MATERIALLY IMPROVE OUR LIQUIDITY IN THE IMMEDIATE FUTURE WOULD
SUBSTANTIALLY HARM OUR OPERATIONS AND MAY RENDER US UNABLE TO CONTINUE AS A
GOING CONCERN.
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 without continued cooperation from our creditors,
including Comerica Bank. 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.
We are attempting to arrange new equity and debt financing, but there is no
certainty that additional financing will be available on favorable terms, or at
all. 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 are considering our
strategic alternatives. Transactions that we may consider include an investment
in our company by one or more investors (including another company), a merger,
a sale of the company or a sale of 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. The raising of additional capital may result in
limitations on the tax benefits relating to the utilization of net operating
loss carry forwards.
OUR LIMITED OPERATING HISTORY, INCLUDING THE UNCERTAINTY OF OUR FUTURE
PERFORMANCE AND ABILITY TO MAINTAIN OR IMPROVE OUR FINANCIAL AND OPERATING
SYSTEMS, MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS.
Our company was organized in July 1997 and we completed our initial public
offering in April 1998. Our limited operating history, which includes the
roll-up of multiple businesses and related financial and operating systems,
makes it difficult to evaluate our business. The uncertainty of our future
performance and ability to maintain or improve our financial and operating
systems, procedures and controls increase the risk that the value of our common
stock may decline.
OUR INCREMENTAL REVENUE WILL DECLINE IF WE ARE UNABLE TO MAINTAIN OR IMPROVE OUR
PROFITABILITY BY INCREASING NET SALES, EXPANDING THE RANGE OF OUR SERVICES OR
ENTERING NEW MARKETS.
There can be no assurance that we will be able to maintain or improve the
profitability and expand the net sales of our business and any subsequently
acquired businesses. Various factors, including demand for e-commerce and
enterprise resource planning implementation services, and our ability to expand
the range of our services and to successfully enter new markets, may affect our
ability to maintain or increase the net sales of our business or any
subsequently acquired businesses. Many of these factors are beyond the control
of our company. In addition, in order to effectively manage growth, we must
expand and improve our operational, financial and other internal systems and
attract, train, motivate and retain qualified employees. In many cases, we may
be required to fund substantial expenditures related to growth and client
acquisition initiatives in advance of potential revenue streams generated from
such initiatives. Expenditures related to our growth and client acquisition
initiatives may negatively affect our operating results, and we may not realize
any incremental revenue from our growth and client acquisition efforts.
IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN HIGHLY QUALIFIED PERSONNEL, THE
QUALITY OF OUR SERVICES MAY DECLINE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR
INTERNAL GROWTH STRATEGIES.
Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled and experienced technical employees.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. Other providers of technical
staffing services, systems integrators, providers of outsourcing services,
computer consulting firms and temporary personnel agencies provide intense
competition for IT professionals with the skills and experience required to
perform the services offered by our company. Competition for these professionals
has increased in recent years, and we expect such competition
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will continue to increase in the foreseeable future. There can be no assurance
that we will be able to attract and retain sufficient numbers of highly skilled
technical employees in the future. The loss of technical personnel or our
inability to hire or retain sufficient technical personnel could impair our
ability to secure and complete client engagements and could harm our business.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
OUR COMMON STOCK TO DECLINE.
Our revenue and results of operations will fluctuate significantly from
quarter to quarter, or year to year, because of a number of factors which may
lead to reduced prices for our common stock, including but not limited to:
(bullet) the utilization of billable consultants;
(bullet) changes in the demand for IT services;
(bullet) the rate of hiring and the productivity of revenue-generating
personnel;
(bullet) the availability of qualified e-commerce professionals;
(bullet) the significance of client engagements commenced and completed
during a quarter;
(bullet) the ability to complete fixed fee engagements in a timely and
profitable manner;
(bullet) the decision of our clients to retain us for expanded or
ongoing services;
(bullet) the number of business days in a quarter;
(bullet) changes in the relative mix of our services;
(bullet) changes in the pricing of our services;
(bullet) the timing and rate of entrance into new geographic or
e-commerce markets;
(bullet) departures or temporary absences of key revenue-generating
personnel;
(bullet) the structure and timing of acquisitions; and
(bullet) general economic factors.
The timing of revenue is difficult to forecast because our sales cycle for
some of our 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, our engagements
generally are terminable without client penalty. An unanticipated termination of
a major project could result in a higher than expected number of unassigned
persons or higher severance expenses as a result of the termination of the
under-utilized employees. Due to all of the foregoing factors, we believe
period-to-period comparisons of our revenue and operating results should not be
relied on as indicators of future performance, and the results of any quarterly
period may not be indicative of results to be expected for a full year.
ANY ACQUISITIONS WE MAKE COULD RESULT IN DIFFICULTIES IN SUCCESSFULLY MANAGING
OUR BUSINESS AND CONSEQUENTLY HARM OUR FINANCIAL CONDITION.
As an integral part of our business strategy, we will seek to expand by
acquiring additional information technology related businesses. We cannot
accurately predict the timing, size and success of our acquisition efforts and
the associated capital commitments. We expect to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
available to us and may lead to higher acquisition prices. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or successfully integrate acquired businesses, if any,
into our company, without substantial costs, delays or other operational or
financial difficulties. In addition, acquisitions involve a number of other
risks, including:
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(bullet) failure of the acquired businesses to achieve expected results;
(bullet) diversion of management's attention and resources to
acquisitions;
(bullet) failure to retain key customers or personnel of the acquired
businesses; and
(bullet) risks associated with unanticipated events, liabilities or
contingencies.
Client dissatisfaction or performance problems at a single acquired firm
could negatively affect the reputation of our company. Acquisitions accounted
for as purchases may result in substantial annual noncash amortization charges
for goodwill and other intangible assets in our statements of operations. The
inability to acquire complementary e-commerce service businesses on reasonable
terms or successfully integrate and manage acquired companies, or the occurrence
of performance problems at acquired companies could result in dilution,
unfavorable accounting charges and difficulties in successfully managing our
business.
OUR INABILITY TO OBTAIN CAPITAL, USE INTERNALLY GENERATED CASH OR DEBT, OR USE
SHARES OF OUR COMMON STOCK TO FINANCE FUTURE ACQUISITIONS OR SETTLE CURRENT
OBLIGATIONS COULD IMPAIR THE GROWTH AND EXPANSION OF OUR BUSINESS.
Reliance on internally generated cash or debt to complete acquisitions
could substantially limit our operational and financial flexibility. The extent
to which we will be able or willing to use shares of our common stock to
consummate acquisitions will depend on our market value from time to time and
the willingness of potential sellers to accept it as full or partial payment.
Additionally, to facilitate raising additional equity or debt financing, we may
be required to settle existing material financial obligations through the
issuance of our common stock. Using shares of our common stock for this purpose
may result in significant dilution to then existing stockholders. To the extent
that we are unable to use our common stock to make future acquisitions, our
ability to grow through acquisitions may be limited by the extent to which we
are able to raise capital for this purpose through debt or additional equity
financings. No assurance can be given that we will be able to obtain the
necessary capital to finance a successful acquisition program or our other cash
needs. If we are unable to obtain additional capital on acceptable terms, we may
be required to reduce the scope of expansion. In addition to requiring funding
for acquisitions, we may need additional funds to implement our internal growth
and operating strategies or to finance other aspects of our operations. Our
failure to (i) obtain additional capital on acceptable terms, (ii) to use
internally generated cash or debt to complete acquisitions because it
significantly limits our operational or financial flexibility, or (iii) to use
shares of our common stock to make future acquisitions may hinder our ability to
actively pursue our acquisition program.
BECAUSE THE E-COMMERCE SERVICE MARKET IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS
TO ENTRY, WE MAY LOSE MARKET SHARE TO LARGER COMPANIES THAT ARE BETTER EQUIPPED
TO WEATHER A DETERIORATION IN MARKET CONDITIONS DUE TO INCREASED COMPETITION.
The market for e-commerce services is highly competitive and fragmented, is
subject to rapid change and has low barriers to entry. We compete for potential
clients with systems consulting and implementation firms, multinational
accounting firms, software application firms, service groups of computer
equipment companies, facilities management companies, general management
consulting firms, programming companies and technical personnel and data
processing outsourcing companies. Many of these competitors have significantly
greater financial, technical and marketing resources and greater name
recognition than our company. In addition, we compete with our clients' internal
management information systems departments. We believe the principal competitive
factors in the e-commerce services industry include:
(bullet) responsiveness to client needs;
(bullet) availability of technical personnel;
(bullet) speed of applications development;
(bullet) quality of service;
(bullet) price;
(bullet) project management capabilities;
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(bullet) technical expertise; and
(bullet) ability to provide a wide variety of e-commerce services.
We believe that our ability to compete also depends in part on a number of
factors outside of our control, including:
(bullet) the ability of our competitors to hire, retain and motivate
qualified technical personnel;
(bullet) the ownership by competitors of software used by potential
clients;
(bullet) the development of software that would reduce or eliminate
the need for certain of our services;
(bullet) the price at which others offer comparable services; and
(bullet) the extent of our competitors' responsiveness to client needs.
We expect that competition in the e-commerce services industry could
increase in the future, partly due to low barriers to entry. Increased
competition could result in price reductions, reduced margins or loss of market
share for us and greater competition for qualified technical personnel. There
can be no assurance that we will be able to compete successfully against current
and future competitors. If we are unable to compete effectively, or if
competition among e-commerce services companies results in a deterioration of
market conditions for e-commerce services companies, we could lose market share
to our competitors.
IF OUR RELATIONSHIP WITH SAP DETERIORATES OR IS DISCONTINUED, WE MAY LOSE A
SUBSTANTIAL PORTION OF OUR CLIENT AND SUBCONTRACTING REVENUE.
Our company has a significant relationship with SAP AG from which we derive
substantial client and subcontracting revenues and business referrals. We are
authorized to implement and service SAP's technology under terms of our SAP
Implementation Partner Agreement with SAP. We subcontract projects from SAP;
however, SAP is not obligated to refer business to or subcontract our company.
Deterioration or discontinuation of this relationship, or termination of our
status as an SAP implementation partner, could harm our revenue growth.
OUR FAILURE TO MEET A CLIENT'S EXPECTATIONS IN THE PERFORMANCE OF OUR SERVICES,
AND THE RISKS AND LIABILITIES ASSOCIATED WITH PLACING OUR EMPLOYEES AND
CONSULTANTS IN THE WORKPLACES OF OTHERS COULD GIVE RISE TO NUMEROUS CLAIMS
AGAINST US.
Many of our engagements involve projects that are critical to the
operations of our clients' businesses and provide benefits that may be difficult
to quantify. Our failure or inability to meet a client's expectations in the
performance of our services could result in a material adverse change to the
client's operations and therefore could give rise to claims against us or damage
our reputation. In addition, we are exposed to various risks and liabilities
associated with placing our employees and consultants in the workplaces of
others, including possible claims of errors and omissions, misuse of client
proprietary information, misappropriation of funds, discrimination and
harassment, theft of client property, other criminal activity or torts and other
claims. Our company has experienced a number of material claims of these types
and there can be no assurance that we will not experience such claims in the
future.
In addition, a percentage of our projects are billed on a fixed-fee basis.
As a result of competitive factors or other reasons, we could increase the
number and size of projects billed on a fixed-fee basis. Our failure to estimate
accurately the resources and related expenses required for a fixed-fee project,
or failure to complete contractual obligations in a manner consistent with the
project plan upon which a fixed-fee contract is based, could give rise to
additional claims.
OUR FAILURE TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES IN THE E-COMMERCE
INDUSTRY OR NEW INDUSTRY STANDARDS MAY RENDER OUR SERVICE OFFERINGS OBSOLETE.
Our success will depend in part on our ability to enhance our existing
products and services, to develop and introduce new products and services and to
train our consultants in order to keep pace with continuing changes in
e-commerce, evolving industry standards and changing client preferences. There
can be no assurance that we will be successful in addressing these issues or
that, even if these issues are addressed, we will be successful in the
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marketplace. In addition, products or technologies developed by others may
render our services noncompetitive or obsolete. Our failure to address these
issues successfully could cause our revenues to decrease and impede our growth.
OUR FAILURE TO RETAIN ANY OF OUR KEY MANAGEMENT PERSONNEL, TO HIRE COMPARABLE
REPLACEMENTS OR TO ENFORCE NON-COMPETE AGREEMENTS AGAINST FORMER MANAGEMENT
MEMBERS COULD HARM THE IMPLEMENTATION OF OUR GROWTH STRATEGIES.
Our success will depend on the continuing efforts of our executive officers
and will likely depend on the senior management of any significant businesses we
acquire in the future. Each of our employment agreements with our senior
management and other key personnel provides that the employee will not compete
with us during the term of the agreement and following the termination of the
agreement for a specified term (ranging from one to three years) in a specified
geographical area. In most states, however, a covenant not to compete will be
enforced only to the extent it is necessary to protect a legitimate business
interest of the party seeking enforcement, does not unreasonably restrain the
party against whom enforcement is sought and is not contrary to the public
interest. This determination is made based on all the facts and circumstances of
the specific case at the time enforcement is sought. Thus, there can be no
assurance that a court will enforce such a covenant in a given situation.
Failure to retain any of our key management personnel and to attract and retain
qualified replacements could harm the implementation of our growth strategies.
OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW CONTAIN ANTI-TAKEOVER
PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS, EVEN IF A TRANSACTION WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Our certificate of incorporation, as amended, and provisions of Delaware
law, could make it difficult for a third party to acquire us, even though an
acquisition might be beneficial to our stockholders. Our certificate of
incorporation authorizes our board of directors to issue, without stockholder
approval, one or more series of preferred stock having such preferences, powers
and relative, participating, optional and other rights (including preferences
over the common stock with respect to dividends, distributions and voting
rights) as our board of directors may determine. The issuance of this
"blank-check" preferred stock could render more difficult or discourage an
attempt to obtain control of our company by means of a tender offer, merger,
proxy contest or otherwise. In addition, our certificate of incorporation
contains a prohibition of stockholder action without a meeting by less than
unanimous written consent. This provision may also have the effect of inhibiting
or delaying a change in control of our company. See "Description of Capital
Stock."
INFLATION
Due to the relatively low levels of inflation experienced in the last three
years, inflation did not have a significant effect on the results of operations
of any of the Founding Companies in those periods.
UNCERTAINTIES
Nature of Projects
Periodically, the Company enters into contracts which are billed on a fixed
fee basis. The Company's failure to estimate accurately the resources and
related expenses required for a fixed fee project or failure to complete
contractual obligations in a manner consistent with the project plan upon which
the fixed fee contract is based could have a material adverse effect on the
Company.
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation. In addition, the Company is exposed
to various risks and liabilities associated with placing its employees and
consultants in the workplaces of others, including possible claims of errors and
omissions, misuse of client proprietary information, misappropriation of funds,
discrimination and harassment, theft of client property, other criminal activity
or torts and other claims. Although BrightStar has not experienced any material
claims of these types, there can be no assurance that the Company will not
experience such claims in the future. If claims are successfully brought against
the Company as a result of the Company's performance on a project, or if the
Company's reputation is damaged, there could be a material adverse effect on the
Company. Additionally, the Company could continue to experience adverse effects
resulting from the integration of acquired companies.
Reorganization
17
18
We have undergone significant managerial and operational change in
connection with our recent corporate reorganization. Although we believe the
reorganization will provide long-term benefits, there can be no assurance that
these efforts will be successful. In addition, although the Company believes it
has recognized substantially all of the costs of the reorganization, additional
costs may be incurred as the reorganization proceeds.
UNAUDITED QUARTERLY DATA
2000 1999
------------------------------------------ -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
--------- -------- -------- -------- --------- -------- -------- -------
Revenue...................... $ 9,988 $ 13,923 $18,096 $19,605 $ 21,608 $26,830 $29,511 $25,500
Gross profit................. 2,559 4,654 5,604 6,353 5,736 6,758 8,715 $ 5,764
Income (loss) from continuing
operations................. (20,152) (33,657) (4,271) (673) (2,653) 488 429 (832)
Income (loss) from
discontinued operations.... 273 (960) (223) -- (7,473) (123) (93) 242
Net income (loss)............ (19,879) (34,617) (4,494) (673) (10,126) 365 336 (590)
Per share basis: basic and
diluted
Continuing operations........ $ (1.75) $ (3.34) $ (0.46) $ (.08) $ (0.31) $ 0.05 $ 0.05 $ (0.10)
Discontinued operations...... .02 (0.10) (0.02) -- (0.86) (0.01) (0.01) 0.03
--------- -------- -------- -------- --------- -------- -------- -------
$ (1.73) $ (3.44) $ (0.48) $ (.08) $ (1.17) $ 0.04 $ 0.04 $ (0.07)
========= ======== ======= ======= ======== ======= ======= =======
ITEM 7A: 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 was 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 prior operations in
Australia. This risk is associated only with the contingent realization of an
earnout provision associated with the sale in 2000 of our Australian subsidiary.
The Company's debt bears interest at variable rates; therefore, the
Company's results of operations would only be affected by interest rate changes
to the long-term debt outstanding. 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements are included as an exhibit as
described in Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 2000 Annual Meeting of Stockholders ("the Proxy
Statement").
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a) For information with respect to Directors and Executive Officers, see
Part I of this Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference in the proxy statement for the 2001 Annual
Meeting of Stockholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
18
19
Incorporated by reference in the proxy statement for the 2001 Annual
Meeting of Stockholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in the proxy statement for the 2001 Annual
Meeting of Stockholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Consolidated Financial Statements
The following financial statements and notes thereto, and related
Independent Auditors Report, are filed as part of this Form 10-K as follows:
Independent Auditors' Reports
Consolidated Balance Sheets at December 31, 2000 and 1999.
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.
Consolidated Statement of Stockholders' Equity for the Years Ended December
31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following financial statement schedule of the Company and the related
Independent Auditors Report are filed as part of this Form 10-K.
[X] Schedule II -- Valuation And Qualifying Accounts
All other financial statement schedules have been omitted because such
schedules are not required or the information required has been presented in the
aforementioned financial statements.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
19
20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 10-K and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Pleasanton, State of California, on the 13th day of April 2001.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
By: /s/ Joseph A. Wagda
-----------------------------------------
Joseph A. Wagda
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on April 13, 2001:
SIGNATURE TITLE DATE
------------------------- ---------------------------------------- --------------
/s/ Joseph A. Wagda Chief Executive Officer and Chairman April 13, 2001
--------------------- of the Board of Directors
Joseph A. Wagda (Principal Executive Officer)
/s/ Kevin J. Murphy President and Chief Operating Officer April 13, 2001
---------------------
Kevin J. Murphy
/s/ David L. Christeson Principal Financial and Accounting April 13, 2001
------------------------- Officer
David L. Christeson
/s/ Jennifer T. Barrett Director April 13, 2001
-------------------------
Jennifer T. Bartlett
/s/ W. Barry Zwahlen Director April 13, 2001
----------------------
W. Barry Zwahlen
20
21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.
We have audited the accompanying consolidated balance sheet of BrightStar
Information Technology Group, Inc. (the "Company"), a Delaware corporation, as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
of the Company, for the year ended December 31, 1998, were audited by other
auditors whose report dated March 30, 1999, expressed an unqualified opinion on
those statements. As discussed in Note 3, the Company has restated its 1998
consolidated financial statements to reflect its discontinued operations. The
other auditors reported on the 1998 financial statements before the restatement.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BrightStar
Information Technology Group, Inc. as of December 31, 2000 and 1999, and the
consolidated results of its operations and its consolidated cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
We also audited the adjustments described in Note 3 to the consolidated
financial statements that were applied to restate the 1998 consolidated
financial statements. In our opinion, such adjustments are appropriate and have
been properly applied.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 to
the financial statements, the Company's recurring losses from operations and
resulting continued dependence on external sources of financing, the
availability of which is uncertain, raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
San Jose, California
March 23, 2001, except for the information in Note 7 as to which the date
is April 12, 2001.
21
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of BrightStar Information Technology Group, Inc.,
Pleasanton, California
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of BrightStar Information Technology Group,
Inc. ("the Company") for the year ended December 31, 1998 (which have been
restated and are no longer presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations of BrightStar Information Technology Group,
Inc., and its cash flows for the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 30, 1999
22
23
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash...................................................... $ -- $ 973
Trade accounts receivables, net of allowance for doubtful
accounts of $320 in 2000 and $1,987 in 1999............. 6,249 16,127
Unbilled revenue.......................................... -- 1,591
Deferred tax asset........................................ -- 1,712
Income tax receivable..................................... -- 810
Prepaid expenses and other................................ 365 1,166
Net assets of discontinued operations..................... 336 4,000
-------- --------
Total current assets.................................. 6,950 26,379
Property and equipment...................................... 5,281 6,736
Less-accumulated depreciation............................. (3,123) (2,720)
-------- --------
Property and equipment, net............................... 2,158 4,016
Goodwill.................................................... 14,224 56,848
Less-accumulated amortization............................. (2,224) (2,284)
-------- --------
Goodwill, net............................................. 12,000 54,564
Other....................................................... 46 49
-------- --------
Total................................................. $ 21,154 $ 85,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 3,597 $ --
Accounts payable.......................................... 2,195 4,063
Acquisition payables...................................... 1,693 2,000
Restructuring reserve..................................... 853 1,761
Accrued salaries and other expenses....................... 2,520 8,105
Payable to stockholders................................... 900 --
Deferred revenue.......................................... 324 41
-------- --------
Total current liabilities............................... 12,082 15,970
Line of credit.............................................. -- 8,579
Other liabilities........................................... 19 8
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, $0.001 par value; 35,000,000 shares
authorized; 11,545,057 and 8,642,034 shares issued and
outstanding in 2000 and 1999, respectively............... 12 9
Additional paid-in capital.................................. 98,244 89,693
Common stock warrant and option............................. 100 100
Deferred stock compensation................................. -- --
Accumulated other comprehensive income (loss)............... (118) 171
Accumulated deficit......................................... (89,185) (29,522)
-------- --------
Total stockholders' equity.............................. 9,053 60,451
-------- --------
Total................................................... $ 21,154 $ 85,008
======== ========
See notes to consolidated financial statements.
23
24
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- ---------- ---------
Revenue............................................ $ 61,612 $ 103,449 $ 63,584
Cost of revenue.................................... 42,442 76,476 45,409
---------- ---------- ---------
Gross profit....................................... 19,170 26,973 18,175
Operating expenses:
Selling, general and administrative.............. 27,251 26,797 15,445
Stock compensation............................... -- 468 6,766
In process research & development................ -- -- 3,000
Restructuring charge............................. 2,237 -- 7,614
Impairment of goodwill........................... 42,479 -- --
Goodwill amortization............................ 1,376 1,423 883
Depreciation and amortization.................... 1,868 1,633 769
---------- ---------- ----------
Total operating expenses...................... 75,211 30,321 34,477
Loss from operations............................. (56,041) (3,348) (16,302)
Other income (expense)........................... (19) (15) 158
Interest expense, net............................ (519) (518) (66)
---------- ---------- ----------
Loss from continuing operations
before income taxes............................ (56,579) (3,881) (16,210)
Income tax provision (benefit)..................... 2,174 (1,313) 612
---------- ---------- ----------
Loss from continuing operations.................... (58,753) (2,568) (16,822)
Discontinued operations:
Income (loss) from discontinued
operations, net of tax......................... (910) (648) 278
Loss on disposal of discontinued
operations, net of tax......................... -- (6,799) --
---------- ---------- ----------
Total discontinued operations.................... (910) (7,447) 278
---------- ---------- ----------
Net loss...................................... $ (59,663) $ (10,015) $ (16,544)
========== ========== ==========
Net income (loss) per share
(basic and diluted):
Loss from continuing operations.................. $ (5.90) $ (0.30) $ (2.68)
Income (loss) from discontinued operations....... (0.09) (0.86) 0.04
---------- ---------- ----------
Net loss......................................... $ (5.99) $ (1.16) $ (2.64)
========== ========== ==========
Weighted average shares outstanding
(basic and diluted):............................... 9,959,995 8,642,034 6,275,031
========== ========== ==========
See notes to consolidated financial statements
24
25
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK
------------ COMMON
ADDITIONAL COMMON STOCK WARRANT
SHARES AMOUNT PAID-IN-CAPITAL STOCK PAYABLE AND OPTION
Balance, January 1, 1998...................... 13,068 $ 318 -- -- --
Issuance of common stock in public offering.. 4,887,500 5 $58,635 $ 450
Stock used for acquisition of Founding
Companies................................... 1,408,120 1 15,934 $ 5,300
Common stock issued to management and
promoters................................... 648,126 1 7,582
Stock split to conform Blackmarr............. 999,238 (317) 317
Exercise of stock warrants................... 33,007 -- 350 (350)
Common stock granted to employees............ 1,575
Amortization of deferred compensation........
Write-off of deferred compensation of
terminated Employees........................
Net loss.....................................
Other comprehensive income...................
----------- ----- ------- ------- -----
Balance, December 31, 1998.................... 7,989,059 8 82,818 6,875 100
Stock issued to owners of Founding Company... 441,400 1 5,300 (5,300)
Common stock issued to directors and
management.................................. 11,575
Common stock issued to employees............. 200,000 1,575 (1,575)
Amortization of deferred compensation........
Net loss.....................................
Other comprehensive income (loss)............
----------- ----- ------- ------- -----
Balance, December 31, 1999.................... 8,642,034 9 89,693 -- 100
Stock issued in private placement............ 709,555 1 6,103 -- --
Exercise of stock warrants................... 1,525,000 1 -- -- --
Stock issued in connection with acquisition
of ISC...................................... 668,468 1 2,448 -- --
Net loss.....................................
Other comprehensive income (loss)............
----------- ----- ------- ------- -----
Balance, December 31, 2000.................... 11,545,057 $ 12 $98,244 $ -- $ 100
=========== ===== ======= ======= =====
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED TOTAL
UNEARNED INCOME EARNINGS STOCKHOLDERS' COMPREHENSIVE
COMPENSATION (LOSS) (DEFICIT) EQUITY INCOME (LOSS)
------------ ------------- --------- ------------ --------------
Balance, January 1, 1998....................... -- -- $ 327 $ 645
Issuance of common stock in public
offering..................................... 59,090
Stock used for acquisition of Founding
Companies.................................... (3,290) 17,945
Common stock issued to management and
promoters.................................... $(7,583) --
Stock split to conform Blackmarr.............. --
Exercise of stock warrants....................
Common stock granted to employees............. 1,575
Amortization of deferred compensation......... 5,055 5,055
Write-off of deferred compensation of
terminated employees......................... 2,060 2,060
Net loss...................................... (16,544) (16,544) $(16,544)
Other comprehensive income.................... $ 248 248 248
------- ---- -------- -------- --------
Balance, December 31, 1998..................... (468) 248 (19,507) 70,074 $(16,296)
========
Stock issued to owners of Founding Company.... 1
Common stock issued to directors and
management............................ --
Common stock issued to employees........ --
Amortization of deferred compensation......... 468 468
Net loss...................................... (10,015) (10,015) $(10,015)
Other comprehensive income (loss)............. (77) (77) (77)
------- ----- -------- -------- --------
Balance, December 31, 1999..................... -- 171 (29,522) 60,451 $(10,092)
--------
Stock issued in private placement............. 6,104 --
Exercise of stock warrants.................... 1 --
Stock issued in connection with acquisition
of ISC....................................... 2,449 --
Net loss...................................... (59,663) (59,663) (59,663)
Other comprehensive income (loss)............. (289) (289) (289)
------- ----- -------- -------- --------
Balance, December 31, 2000..................... $ -- $(118) $ (89,185) $ 9,053 $(59,952)
======= ===== ========= ========= ========
25
See notes to consolidated financial statements
26
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------- ------------- ------------
Operating activities:
Net loss................................................ $(59,663) $(10,015) $(16,544)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Restructuring charge.................................... -- -- 6,443
Write down of certain intangible and other assets....... -- -- 841
In process research and development expense............. -- -- 3,000
(Income) loss from discontinued operations.............. 910 7,447 (278)
Depreciation and amortization........................... 3,244 3,056 1,652
Impairment of goodwill.................................. 42,479 -- --
Effect of exchange rate changes on cash................. (289) (77) 248
Changes to allowance for doubtful accounts.............. (1,540) 691 857
Deferred income taxes................................... 1,712 (1,944) (1,311)
Compensation expense on issuance of common stock........ -- 468 6,766
Changes in operating working capital:
Trade accounts receivable............................. 9,817 322 (4,137)
Income tax refund receivable.......................... 950 (810) 38
Unbilled revenue...................................... 1,188 647 (672)
Prepaid expenses and other assets..................... 616 268 (167)
Accounts payable...................................... (581) 521 (299)
Restructuring reserve................................. (908) (2,622)
Accrued salaries other accrued expenses............... (3,393) 2,340 (3,061)
Income taxes payable.................................. -- (1,791) 1,509
Deferred revenue...................................... 283 (1,790) 1,210
Discontinued operations............................... 2,754 813 (149)
-------- -------- --------
Net cash used in operating activities............... (2,421) (2,476) (4,054)
Investing activities:
Cash paid to acquire founding companies................. -- -- (32,576)
Cash paid to retire debt of founding companies.......... -- -- (9,865)
Cash paid for acquisitions.............................. -- (4,898) (6,106)
Proceeds from sale of Australian subsidiary,
net of cash sold...................................... 701 -- --
Capital expenditures.................................... (1,224) (3,354) (997)
--------- -------- --------
Net cash used in investing activities................. (523) (8,252) (49,544)
Financing activities:
Net borrowings (payments) under line of credit.......... (4,982) 8,579 --
Payments on note payable and capital lease
obligations........................................... -- -- (2,373)
Net proceeds from issuance of common stock.............. 6,953 -- 59,090
-------- -------- --------
Net cash provided by financing activities............. 1,971 8,579 56,717
-------- -------- --------
Net increase (decrease) in cash........................... (973) (2,149) 3,119
Cash:
Beginning of period..................................... 973 3,122 3
-------- -------- --------
End of period........................................... $ -- $ 973 $ 3,122
======== ======== ========
Supplemental information:
Interest paid........................................... $ 519 $ 518 $ 73
======== ======== ========
Income taxes paid....................................... $ -- $ 2,747 --
======== ======== ========
See notes to consolidated financial statements
26
27
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation -- BrightStar Information Technology Group, Inc.,
(the "Company" or "BrightStar") is a provider of application outsourcing and
system integration services. BrightStar conducted no operations prior to April
16, 1998, when it completed its initial public offering ("IPO"). The
accompanying historical consolidated financial statements for the years ended
December 31, 2000 and 1999, and the period from the IPO to December 31, 1998,
includes the accounts of all BrightStar subsidiaries. The accompanying financial
statements of January 1, 1998, through April 15, 1998, include only the
historical financial information for Blackmarr, the "accounting acquirer."
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For the years
ended December 31, 2000, 1999 and 1998, the Company incurred losses from
continuing operations of $58,753, $2,568 and $16,822. Additionally, at December
31, 2000, the Company has an accumulated deficit of $89,185 and negative working
capital of $5,132. The Company believes that its continuing focus on aligning
its cost structure with its existing revenue base will result in the attainment
of profitable operations and positive cash flows. In addition, the Company
currently is negotiating with financial institutions to replace its line of
credit with Comerica Bank, which matured on March 31, 2001. The Company believes
that it will obtain a credit facility sufficient to fund its working capital
needs (see Note 7). 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.
Revenue recognition -- The Company provides services to customers for fees
that are based on time and materials 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. Revenue related to the sale of hardware is recognized when the
hardware is shipped. Deferred revenue primarily represents the excess of amounts
billed over contract costs and expenses incurred.
Concentration of credit risk is limited to trade receivables and unbilled
revenue and is subject to the financial conditions of certain major clients. The
Company does not require collateral or other security to support client's
receivables. The Company conducts periodic reviews of its clients' financial
conditions and vendor payment practices to minimize collection risk on trade
receivables.
Property and equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of 3
years for computer equipment and software and 5 years for furniture and
fixtures. Leasehold improvements are amortized over the shorter of the lease
term or the assets' useful life. Expenditures for repairs and maintenance that
do not improve or extend the life of assets are expensed as incurred.
Goodwill -- Goodwill is the cost in excess of amounts assigned to
identifiable assets acquired less liabilities assumed. Goodwill recorded in
conjunction with the Founding Companies and all other acquisitions in 1998 is
being amortized over 40 years on a straight-line basis. Goodwill associated with
the acquisition of ISC is being amortized over 20 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. Total amortization of
goodwill from continuing operations for 2000, 1999 and 1998 amounted to $1,376,
$1,423 and $883, respectively.
Cumulative translation adjustment -- Cumulative translation adjustment in
stockholders' equity reflects the unrealized adjustments resulting from
translating the financial statements of foreign subsidiaries. The functional
currency of the Company's foreign
27
28
subsidiaries is the local currency of that country. Accordingly, assets and
liabilities of the foreign subsidiaries are translated to U.S. dollars at
year-end exchange rates. Income and expense items are translated at the average
rates prevailing during the year. Changes in exchange rates that affect cash
flows and the related receivables or payables are recognized as transaction
gains and losses in the determination of net income.
Income taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No.
109 requires an asset and liability approach to accounting for income taxes. The
Company provides deferred income taxes for temporary differences that will
result in taxable or deductible amounts in future years. A valuation allowance
is recognized if it is anticipated that some or all of a deferred tax asset may
not be realized.
Earnings per share (EPS) -- EPS is based on SFAS No. 128, "Earnings per
Share." Accordingly, Basic EPS is calculated using income available to common
shareholders divided by the weighted average number of common shares outstanding
during the year. Diluted EPS is similar to Basic EPS except that it is based on
the weighted average number of common and potentially dilutive shares, from
dilutive stock options and warrants and convertible securities outstanding
during each year. Common shares issuable upon exercise of common stock
options and warrants (see Note 8) are anti-dilutive (decreases net loss per
share) for the periods presented.
Stock based compensation -- The Company applies Accounting Principles Board
Opinion No. 25 in its accounting for stock options issued to employees. No
compensation expense is recognized for stock options issued to employees under
the Company's stock option plan as the option price equals or exceeds the quoted
market price of the Company's Common Shares at the date of grant. In October
1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation." The accounting method as provided in the
pronouncement is not required to be adopted; however, it is encouraged. The
Company has adopted the disclosure-only provisions of SFAS No. 123 with respect
to options issued to employees. Compensation expense associated with stock
options and warrants issued to non-employees and non-directors is recognized in
accordance with SFAS No. 123.
Reclassifications -- Certain reclassifications have been made to conform
the prior years' financial statement amounts to the current year
classifications.
(2) ACQUISITION
On May 28, 1999, the Company purchased Integrated Systems Consultants, LLC
("ISC") pursuant to an Asset Purchase Agreement (the "Agreement"), dated as of
April 1, 1999. ISC is a provider of SAP consulting services based in Phoenix,
Arizona. The aggregate consideration for this transaction was $3,000, of which
$500 was paid in cash upon closing and $2.5 million was paid through the
issuance of 668,468 shares of common stock in June 2000. The Company has
allocated the entire purchase price and other acquisition costs to goodwill. The
pro forma results of operations, assuming the acquisition occurred on January 1,
1999, would not be materially different from the operating results reported.
(3) DISCONTINUED OPERATIONS
In October 1999, the Company's management approved a plan to discontinue the
operations of its Training, Controls and Infrastructure Support businesses. Each
of the underlying businesses were acquired by BrightStar as part of its IPO in
April 1998. The Company believes that the continued investment in the Training,
Controls, and Infrastructure Support businesses is not consistent with its
long-term strategic objectives. Accordingly, these businesses are reported as
discontinued operations and the consolidated financial statements have been
reclassified to segregate operating results and net assets of the businesses.
Managements' plan to discontinue the operations of each of the businesses
includes the following:
Training Business
In completing the sale and closure of the training business -- the Company:
(bullet) Sold Mindworks Professional Education Group, Inc. (Mindworks),
to its former owners. The sale of Mindworks was completed in
December 1999 for approximately $1.1 million. The Company
recorded a pre-tax loss on the sale of Mindworks of $0.9 million
($1.0 million, or $0.12 per share including taxes). The loss
includes the associated write-off of net goodwill totaling
$1.6 million.
(bullet) Closed its training business in Texas in October 1999. The
Company recorded no gain or loss upon closing the Texas training
operations.
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Controls Business
The sale of the Controls Business within Integrated Controls, Inc. -- the
Company sold its Controls Business in September 2000. In 1999, the Company
recorded an estimated loss on the disposal of the Controls business of $5.1
million ($5.8 million including taxes, or $0.67 per share) including a provision
of $800 for estimated operating losses until disposal. In 2000, the Company
recorded a charge of $0.9 million associated with the sale.
Infrastructure Support Business
The Infrastructure Support Business was engaged in hardware sales and
consulting services relative to systems infrastructure and security. The Company
recorded no gain or loss on the discontinuance of the business in December 1999.
Summary operating results and financial data for the discontinued
operations for 2000, 1999 and 1998 are as follows:
2000 1999 1998
-------- -------------------------------------------- --------------------------------------------
INFRASTRUCTURE INFRASTRUCTURE
CONTROLS TRAINING CONTROLS SUPPORT TOTAL TRAINING CONTROLS SUPPORT TOTAL
-------- -------- -------- -------------- ----- -------- -------- -------------- -----
Net revenue................ $6,095 $ 4,477 $11,064 $ 8,635 $24,176 $4,465 $ 9,795 $3,084 $17,344
Cost of revenue............ 4,384 3,156 8,145 8,678 19,979 3,288 6,971 2,501 12,760
Operating expenses......... 1,801 1,582 3,303 70 4,955 1,208 2,908 -- 4,116
------ ------ ------- ------- ------- ------ ------- ------ -------
Operating income (loss).... (90) (261) (384) (113) (758) (31) (84) 583 468
Loss on discontinued
operations, net of tax... $ (910) $(1,173) $(6,206) $ (68) $(7,447) $ (22) $ (50) $ 350 $ 278
====== ======= ======= ======= ======= ====== ======= ====== =======
Current assets............. $ 336 $ 1,542 $ 1,542 $ 263 $ 3,122 $ 3,385
Property and equipment,
net...................... -- 720 720 244 996 1,240
Deferred income taxes...... -- 320 320 -- --
Goodwill, net.............. -- 3,234 3,234 1,667 7,046 8,713
Other assets............... -- 19 19 36 49 85
------ ------ ------- ------ ------- -------
Total assets........... 336 5,835 5,835 2,210 11,213 13,423
Provision for loss until
disposal................. -- 800 800 -- -- --
Other current liabilities.. -- 1,035 1,035 214 949 1,163
------ ------ ------- ------ ------- -------
Total liabilities...... -- 1,835 1,835 214 949 1,163
------ ------ ------- ------ ------- -------
Net assets of discontinued
operations............... $ 336 $ 4,000 $ 4,000 $1,996 $10,264 $12,260
====== ======= ======= ====== ======= =======
(4) BUSINESS RESTRUCTURING
During the fourth quarter of 1998, the Company completed a review of each
of its businesses and the services it provides. At the completion of this
review, the Company developed and the Board approved a reorganization plan (the
"Plan") with strategic actions to:
(bullet) Consolidate the sales, finance, and administrative functions at
the BrightStar level forming a consolidated sales force and
consolidated finance group; and
(bullet) Realign the operations of each of the individual wholly owned
subsidiaries into operating divisions consistent with the
Company's lines of businesses:
The Plan included relocating the Company's corporate offices from Houston,
Texas to Pleasanton, California, eliminating certain positions and personnel,
closing certain businesses and writing-off related assets, and terminating and
consolidating leased facilities. In the fourth quarter of 1998, the Company
recorded a $7.6 million charge for these restructuring actions.
On June 20, 2000, the Company announced that revenue and earnings for the
second quarter and the remainder of the calendar year would be lower than
expected and that the Company was 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 recorded to write-down related fixed assets. The
remainder of the charge relates to the severance of approximately 90 employees,
or
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15% of the Company's workforce. Approximately $1.7 million of the charge
applies to obligations funded by cash disbursements, of which approximately $1.0
million was disbursed for severance and $0.3 million was disbursed for rents
during 2000. The remaining charge relates to longer term severance obligations
and related costs amounting to $0.2 million and $0.7 million of rents, net of
sublease income to be paid related to leases which expire through April 2003.
During the fourth quarter of 2000, the Company reduced the restructuring reserve
by $0.3 million resulting from favorable lease settlements.
On December 13, 2000, we completed the sale of our Australian subsidiary,
BrightStar Information Technology, Ltd., for A$10.0 million (US $5.5 million).
Of the total purchase price, A$2.5 million (US $1.4 million) was paid upon
closing, with the remainder due upon completion of a contingent earnout for the
twelve month period ended December 31, 2001.
The categories of the 2000 and 1998 restructuring charges and the remaining
payments are summarized below:
AMOUNTS AMOUNTS AMOUNTS TO
CHARGED TO CHARGED TO BE PAID
EARNINGS IN EARNINGS IN BEYOND
2000 1998 2000
----------- ----------- ----------
(IN THOUSANDS)
Workforce severance............. $1,000 $4,960 $161
Asset impairment................ 500 1,171 --
Lease and other contract
obligations................... 737 1,483 692
------ ------ ----
$2,237 $7,614 $853
====== ====== ====
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
Computer equipment and software.............. $ 3,998 $ 5,099
Furniture, fixtures and office equipment..... 790 1,294
Leasehold improvements................ 493 343
------- -------
Total.................................... 5,281 6,736
Accumulated depreciation and amortization.... (3,123) (2,720)
------- -------
Property and equipment, net.................. $ 2,158 $ 4,016
======= =======
(6) ACCRUED SALARIES AND OTHER EXPENSES
Accrued salary and other expenses consist of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
Accrued payroll and payroll taxes............ $ 922 $3,901
Accrued operating losses on discontinued
operations................................. -- 800
Accrued losses on fixed fee contract......... -- 1,263
Accrued legal fees and settlements........... 595 550
Other accrued expenses....................... 1,003 1,591
------- ------
Total accrued expenses................... $ 2,520 $8,105
======= ======
(7) CREDIT FACILITY
Effective March 29, 1999, the Company established a $15 million credit
facility (the "Credit Facility") with Comerica Bank. Under the terms of the
agreement, the Credit Facility would be used for working capital needs,
including issuance of letters of credit, and for general corporate purposes.
Borrowings under the Credit Facility bore an interest rate of prime (8% at
December 31, 2000) plus 0.25%. The Company paid a commitment fee on unused
amounts of the Credit Facility amounting to 0.375% per annum based on the
average daily amount by which the commitment amount exceeded the principal
amount outstanding during the preceding month. Interest was 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 was secured by liens on substantially of 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 required that the Company comply with various loan
covenants, including (i) maintenance of certain financial ratios, (ii)
restrictions on additional
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indebtedness and (iii) restrictions on liens, guarantees and payments of
dividends. As of, and during the years ended December 31, 2000 and 1999, the
Company was not in compliance with certain financial covenants. Comerica Bank
has agreed to waive the defaults for both periods.
Borrowings outstanding under the Credit Facility amounted to $3.6 million
at December 31, 2000. As of April 11, 2001 the Company had reduced amounts
borrowed under the Credit Facility to approximately $2.0 million. The Credit
Facility expired on March 31, 2001. Upon expiration of the Credit Facility,
Comerica Bank agreed to continue lending to the Company under the terms of a
$3.0 million Demand Note, 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 Demand Note
carries interest at the Bank's prime rate, plus 4%. Available borrowings under
the Demand Note are reduced monthly by 2% of eligible accounts receivable. The
Demand Note does not have a maturity date, however, it is callable at any time.
(8) STOCKHOLDERS' EQUITY AND OTHER STOCK RELATED INFORMATION
Capital Stock
Authorized capital shares of the company include 3,000,000 shares of
preferred stock, 2,000,000 shares of restricted stock and 35,000,000 shares of
common stock. Rights, preferences and other terms of the preferred stock will be
determined by the board of directors at the time of issuance. No preferred stock
was issued at December 31, 2000.
Other Common Stock Warrants and Options
In addition, in 1997, the Company entered into an advisory agreement with
an investment banking firm, pursuant to which the firm was issued a warrant for
$100. The warrant provides for the purchase of 50,000 shares of common stock at
an exercise price of $6 per share, and is exercisable at any time prior to
August 14, 2004.
In 1997, the Company entered into an agreement for corporate
development services and issued a common stock option to the consulting firm.
The option grants the holder the option to purchase 14,285 shares.
The Company has an additional 299,710 non-qualified stock options
outstanding at December 31, 2000. Of the non-qualified options outstanding,
162,210 were issued in 2000 at an exercise price of $1.00 per share for
services provided by our interim CEO, and 137,500 were issued in prior years, at
prices ranging from $6.00 - $13.00 per share, in connection with severance
agreement with prior employees of the Company. The exercise periods for the
options range from 2004-2010.
Stock Options -- During 1998 and 2000, stock option plans (The 1997 and
2000 Plans) were established, which provide for the issuance of incentive and
non-qualified stock options, restricted stock awards, stock appreciation rights
or performance stock awards. The total number of shares that may be issued under
the Plans is 3,000,000 shares. Options, which constitute the only issuance under
the incentive plans, have been generally granted at fair value of the Company's
common stock on the date of grant. The following table summarizes the plan's
stock option activity:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE REMAINING
SHARES PRICE LIFE
-------- --------- ----------
Options outstanding at January 31, 1998...... --
Granted in 1998.............................. 603,402 $13.00 5.07 years
Exercised.................................... --
Cancelled.................................... --
---------
Options outstanding at December 31,
1998 ...................................... 603,402 $13.00 9.75 years
=========
Granted in 1999.............................. 1,428,750 $ 6.88
Exercised............................ -- --
Cancelled.................................... (218,664) $ 9.96
Options outstanding at December 31,
1999....................................... 1,813,448 $ 8.50 8.41 years
---------
Exercisable at December 31, 1999............. 413,929
=========
Granted in 2000.............................. 1,740,880 $ 1.00
Exercised............................ -- --
Cancelled.................................... (1,630,422) $ 5.90
Options outstanding at December 31,
2000....................................... 1,923,946 $ 2.94 9.50 years
---------
Exercisable at December 31, 2000............. 737,642(a)
=========
[FN]
(a) 15,128 and 722,424 options are exercisable at $13.00 and $1.00 - $7.00 per
share, respectively.
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Pro forma disclosures as if the Company had applied the cost recognition
requirements under SFAS No. 123 in 1998 are presented below. The pro forma
compensation cost may not be representative of that expected in future years.
2000 1999 1998
--------- -------- -------
Net loss (in thousands)
As reported...................................... $(59,663) $(10,015) $(16,544)
Pro Forma........................................ $(62,910) $(12,048) $(17,622)
Loss per share-- basic and diluted
As reported....................................... $ (5.99) $ (1.16) $ (2.64)
Pro Forma......................................... $ (6.32) $ (1.39) $ (2.81)
Weighted average fair value of options granted.... $ 1.00 $ 4.39 $ 9.71
Compensation cost for 2000 and 1999 was calculated in accordance with the
binomial model, using the following weighted average assumptions: (i) expected
volatility of 192% and 110%; (ii) expected dividend yield of 0% in both years;
(iii) expected option term of 10 years in both years; (iv) risk-free rate of
return of 6.00% and 5.86%; and (v) expected forfeiture rate of 11%.
Recent Sales of Unregistered Securities.
Set forth below is certain information concerning all sales of securities
by BrightStar that were not registered under the Securities Act.
1. Effective October 17, 1997, BrightStar issued and sold 1,000 shares of
common stock to BIT Group Services, Inc. ("BITG") for $1,000.
2. Concurrently with the closing of its initial public offering and
pursuant to the Agreement and Plan of Exchange (the "Share Exchange") dated as
of December 15, 1997, among BrightStar, BITG, BIT Investors, LLC ("BITI"), and
the holders of the outstanding capital stock of BITG, (i) BrightStar issued to
BITI an aggregate of 739,007 shares of common stock in exchange for all the
shares of common stock of BITG held by BITI and (ii) BrightStar issued up to an
aggregate of 346,800 shares of common stock in exchange for all the shares of
common stock of BITG held by members of BrightStar's management as follows:
42,900 shares to George M. Siegel; 70,000 shares to Marshall G. Webb;
60,000 shares to Thomas A. Hudgins; 60,000 shares to Daniel M. Cofall;
60,000 shares to Michael A. Sooley; 33,900 shares to Tarrant Hancock; and
20,000 shares to Mark D. Diggs.
3. In connection with the Share Exchange, BrightStar assumed all
obligations of the issuer pursuant to an option issued by BrightStar to
Brewer-Gruenert Capital Advisors, LLC, which provides for the purchase of up to
14,285 shares of common stock at an exercise price of $6.00 per share.
4. Effective April 20, 1998, BrightStar issued 33,008 shares of common
stock upon the exercise of a warrant held by McFaland, Grossman & Company.
5. Pursuant to the Share Exchange, on January 11, 1999, the Company issued
11,575 shares of common stock to the holder of the Series A-1 Class A Units
of BITI.
6. Concurrently with the closing of its initial public offering, BrightStar
issued to Software Consulting Services America, LLC ("SCS America") and the
stockholders of the other companies acquired concurrently with the closing of
BrightStar's initial public offering (the "Founding Companies"), an aggregate of
1,982,645 shares of common stock in connection with the acquisition of the
Founding Companies.
7. On January 11, 1999, BrightStar issued to the beneficiaries of the
SCS Unit Trust an aggregate of 441,400 shares of common stock in consideration
of substantially all the assets of the SCS Unit Trust.
8. 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"). In connection with the purchase of the Shares, the Company
issued two warrants to the Purchasers. One warrant had a five-year term during
which the Purchasers could purchase up to 157,500 shares of the Company's common
stock at a price of $12.00 per share. The second warrant covered an adjustable
amount of shares of the Company's common stock. Pursuant to the terms of the
adjustable warrants, the holders thereof elected to fix the number of common
shares issuable under such warrants at 1,525,000 shares in the aggregate.
Such shares were issued on September 29, 2000, at an exercise price of
$0.001 per share. The Company also issued to Wharton Capital Partners Ltd.
("Wharton"), as compensation for Wharton's services in completing
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the Transaction, a warrant with 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.
9. 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 of $2.5 million due in connection with the 1999 acquisition of
ISC.
10. On January 16, 2001, the prior owners of Cogent Technologies LLC 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.
11. On February 15, 2001, Kevin J. Murphy was issued 100,000 shares of our
common stock in connection with the commencement of his employment with the
Company.
12. On February 15, 2001, certain former employees were issued
346,831 shares of our common stock in satisfaction of remaining severance
payment obligations under prior employment agreements with the Company.
13. On February 15, 2001, Unaxis Trading Limited was issued 250,000 shares
of our common stock in settlement of litigation between the Company and certain
affiliates of Unaxis. Pursuant to the settlement agreement (which was agreed
upon in principle, on November 3, 2000), 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.
The liabilities associated with items 10, 12 and 13 were accrued at
December 31, 2000.
The sales and issuances of the securities by BrightStar to BITI and to
BrightStar's management and by BITI to its members, referenced above were or
will be, as applicable, exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as transactions not involving any public
offerings, with the recipients representing their intentions to acquire the
securities for their own accounts and not with a view to the distribution
thereof.
(9) STOCK COMPENSATION EXPENSE
In connection with the offering and acquisition of the Founding Companies,
certain directors and members of management received 648,126 shares of common
stock. These shares, valued at $11.70, were recorded as deferred compensation
and were amortized to stock compensation expense over a one-year period based
upon the terms of a stock repurchase agreement between the Company and related
shareholders. Total stock compensation expense recorded during 1999 and 1998 in
connection with the above was $468 and $5,055, respectively. At December 31,
1998, certain members of management that had received substantially all of these
shares were terminated in connection with the Company's restructuring. As
a result, the remaining deferred compensation, totaling $2,060, attributable to
the shares held by these terminated employees, was charged to expense and
included in the restructuring charge in 1998.
In connection with the terms of the acquisition of SCS Unit Trust, certain
key employees were granted 200,000 shares of common stocks under an incentive
stock bonus plan. Based on the share price of $7.88 per share on the date of the
grant, the Company recorded stock compensation expense of $1.575 million. At
December 31, 1998, these common shares had not been formally issued, and
accordingly, were recorded in common stock payable. The shares were issued
in 1999.
(10) INCOME TAXES
The components of income (loss) before income taxes from continuing
operations and the related income taxes provided for the years ended December
31, 2000, 1999 and 1998, are presented below:
2000 1999 1998
------ ------ ------
Income (loss) before income taxes:
Domestic............................ $(49,739) $(5,803) $(17,916)
Foreign:............................ (6,840) 1,922 1,706
-------- ------- --------
$(56,579) $(3,881) $(16,210)
======== ======= ========
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2000 1999 1998
------ ------- ----
Provision (benefit) for income taxes:
Current:
Domestic............................ $ 993 $ (156) $707
Foreign............................. (531) 787 528
Deferred:
Domestic............................ 1,489 (1,721) (623)
Foreign............................. 223 (223) --
------ ------- ----
Total............................. $2,174 $(1,313) $612
====== ======= ====
The Company's deferred tax assets are reflected below as of December 31,
2000 and 1999, respectively:
2000 1999
------- -------
Net operating losses.................... $ 5,751 $ --
Bad debt reserves....................... 131 628
Restructure reserve..................... 348 669
Accrued compensation.................... -- 422
Losses on discontinued operations....... -- 304
Foreign tax assets...................... 522 223
Change in accounting method............. (211) (398)
Other................................... 233 401
------- -------
Net deferred tax asset.................. 6,774 2,249
Valuation allowance..................... (6,774) (537)
-------- -------
$ -- $ 1,712
======= =======
The table below reconciles the expected U.S. federal statutory tax to the
recorded income tax:
2000 1999 1998
-------- -------- ------
Provision (benefit) at statutory
tax rate............................. $(20,043) $(2,031) $(6,270)
State income taxes, net of federal
benefit................................ -- 103 (111)
Goodwill amortization.................. 482 498 361
Foreign tax............................ -- 564 527
Deferred compensation.................. -- 164 3,041
Goodwill writeoff...................... 15,348 -- 1,506
Valuation allowance.................... 6,237 (850) 1,386
Other, net............................. 150 239 172
-------- ------- -------
Total................................ $ 2,174 $(1,313) $ 612
======== ======= =======
(11) Employee Benefit Plans
The Company has a 401(k) plan that covers substantially all of its U.S.
employees. If applicable, employees would vest in Company contributions evenly
over five years from their date of employment. The Company may provide matching
contributions of up to 6% of the employees base salary. Employer matching and
profit sharing contributions are discretionary, and, to date, no matching or
profit sharing contributions have been made.
(12) Litigation
The Company has accrued $0.6 million relating to its litigation expense.
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 covenant
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 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 negotiations to settle with the plaintiffs,
that the liability recorded as of December 31, 2000, combined with coverage
under the Company's errors and omissions and directors and officers insurance
policies, is adequate to cover the estimated exposure.
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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.
(13) COMMITMENTS AND CONTINGENCIES
The Company leases office space and computer and office equipment under
various operating lease agreements that expire at various dates through
December 31, 2005. Minimum future commitments under these agreements for the
years ending December 31 are; 2001, $1,799; 2002, $1,267; 2003, $569, 2004, $11;
and 2005, $7.
Rent expense was $2,464, $4,048 and $1,636 during the periods ended
December 31, 2000, 1999 and 1998, respectively.
Employment Agreements -- As of December 31, 2000, the Company had entered
into employment agreements with certain key management personnel which provided
for minimum compensation levels and incentive bonuses, along with provisions for
termination of benefits in certain circumstances and for certain severance
payments in the event of a change in control.
(14) SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company did not have any customer, individually or considered as a
group under common ownership that accounted for 10% of revenues or accounts
receivable for the periods presented.
The Company operates in a single segment as a provider of IT services.
Since April 16, 1998, and until the sale of our Australian operations in
December 2000, the Company has primarily operated in two geographic regions.
Prior to April 16, 1998, the Company primarily operated in the United States.
Specific information related to the Company's geographic areas are found in the
following table:
YEAR ENDED DECEMBER 31
--------------------------------------
2000
--------------------------------------
UNITED STATES AUSTRALIA CONSOLIDATED
------------- --------- ------------
Revenue........................... $ 44,294 $17,318 $ 61,612
Loss from continuing
operations before income taxes... (49,739) (6,840) (56,579)
Long-lived assets................. 14,204 -- 14,204
Total assets...................... 21,154 -- 21,154
YEAR ENDED DECEMBER 31
--------------------------------------
1999
--------------------------------------
UNITED STATES AUSTRALIA CONSOLIDATED
------------- --------- ------------
Revenue........................... $ 69,119 $34,250 $103,449
Income (loss) from continuing
operations before income taxes... (5,803) 1,922 (3,881)
Long-lived assets................. 33,606 25,023 58,629
Total assets...................... 53,138 31,870 85,008
YEAR ENDED DECEMBER 31
--------------------------------------
1998
--------------------------------------
UNITED STATES AUSTRALIA CONSOLIDATED
------------- --------- ------------
Revenue........................... $ 45,607 $17,977 $ 63,584
Income (loss) from continuing
operations before income taxes... (18,146) 1,936 (16,210)
Long-lived assets................. 30,956 24,830 55,786
Total assets...................... 81,889 10,512 92,401
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------- ---------- ---------- ---------- --------------
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
-------------------------------------- ---------- ---------- ---------- --------------
Allowance deducted from assets to
which it applies:
Allowance for doubtful accounts:
Year ended December 31, 1998.......... $ 439 -- $ 857 $ 1,296
Year ended December 31, 1999.......... 1,296 $ 1,926 1,235 1,987
Year ended December 31, 2000.......... 1,987 1,705 3,372 320
Accrued restructuring charge:
Year ended December 31, 1998.......... -- 7,614 3,231 4,383
Year ended December 31, 1999.......... 4,383 -- 2,622 1,761
Year ended December 31, 2000.......... 1,761 2,500 3,408 853
Tax valuation allowance:
Year ended December 31, 1998.......... -- 1,387 -- 1,387
Year ended December 31, 1999.......... 1,387 -- 850 537
Year ended December 31, 2000.......... 537 6,237 -- 6,774
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.
In connection with our audit of the consolidated financial statements of
BrightStar Information Technology Group, Inc., referred to in our report dated
March 23, 2001, which is included in the annual report on Form 10-K, we have
also audited Schedule II for the years ended December 31, 2000, 1999 and 1998.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
San Jose, California
March 23, 2001
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INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K:
(a) The following documents are filed as part of this report:
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------
3.1 -- Certificate of Incorporation, as amended (Incorporated by
reference from Exhibit 3.1 to Amendment No. 1 to BrightStar's
Registration Statement on Form S-1 filed February 27, 1998 (File
No. 333-43209)).
3.2 -- Bylaws, as amended (Incorporated by reference from Exhibit 3.2
to Amendment No. 3.2 to BrightStar's Registration Statement on
Form S-1 filed April 14, 1998 (File No. 333-43209)).
4.1 -- Specimen Common Stock Certificates (Incorporated by reference
from Exhibit 4.1 to Amendment No. 1 to BrightStar's Registration
Statement on Form S-1 filed February 27, 1998 (File No.
333-43209)).
4.2 -- Agreement and Plan of Exchange dated December 15, 1997,
among BrightStar, BITG, BITI and the holders of the outstanding
capital stock of BITG (Incorporated by reference from Exhibit 4.2
to Amendment No. 1 to BrightStar's Registration Statement on Form
S-1 filed February 27, 1998 (File No. 333-43209)).
4.3 -- Option Agreement dated as of December 16, 1997, between
BrightStar and Brewer-Gruenert Capital Advisors, LLC
(Incorporated by reference from Exhibit 4.4 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed February
27, 1998 (File No. 333-43209)).
10.1 -- BrightStar 1997 Long-Term Incentive Plan (Incorporated by
reference from Exhibit 10.1 to Amendment No. 1 to BrightStar's
Registration Statement on Form S-1 filed February 27, 1998 (File
No. 333-43209)).
10.2 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Brian R.
Blackmarr and Associates, Inc. (Incorporated by reference from
Exhibit 10.2 to BrightStar's Registration Statement on Form S-1
filed December 24, 1997 (File No. 333-43209)).
10.3 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Integrated
Controls, Inc. (Incorporated by reference from Exhibit 10.3 to
BrightStar's Registration Statement on Form S-1 filed December
24, 1997 (File No. 333-43209)).
10.4 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Mindworks
Professional Education Group, Inc. (Incorporated by reference
from Exhibit 10.4 to BrightStar's Registration Statement on Form
S-1 filed December 24, 1997 (File No. 333-43209)).
10.5 -- Agreement and Plan of Exchange by and among BrightStar,
Software Consulting Services America, LLC and the holders of the
outstanding ownership interests of Software Consulting Services
America, LLC (Incorporated by reference from Exhibit 10.5 to
BrightStar's Registration Statement on Form S-1 filed December
24, 1997 (File No. 333-43209)).
10.6 -- Agreement and Plan of Exchange by and among BrightStar and
Software Consulting Services Pty. Ltd., in its capacity as
Trustee of the Software Consulting Services Unit Trust and the
holders of all of the outstanding ownership interests in the
Software Consultants Unit Trust (Incorporated by reference from
Exhibit 10.6 to BrightStar's Registration Statement on Form S-1
filed December 24, 1997 (File No. 333-43209)).
10.7 -- Agreement and Plan of Exchange by and among BrightStar and
the holders of the outstanding capital stock of Software
Innovators, Inc. (Incorporated by reference from Exhibit 10.7 to
BrightStar's Registration Statement on Form S-1 filed
December 24, 1997 (File No. 333-43209)).
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10.8 -- Agreement and Plan of Exchange by and among
BrightStar and the holder of the outstanding capital stock of
Zelo Group, Inc., and Joel Rayden (Incorporated by
reference from Exhibit 10.8 to BrightStar's Registration Statement
on Form S-1 filed December 24, 1997 (File No. 333-43209)).
10.9 -- Form of Employment Agreement between BrightStar and
Marshall G. Webb, Thomas A. Hudgins and Daniel M. Cofall
(Incorporated by reference from Exhibit 10.9 to
Amendment No. 1 to BrightStar's Registration Statement on Form
S-1 filed February 27, 1998 (File No. 333-43209)).
10.10 -- Employment Agreement between Software Consulting
Services America, Inc., and Michael A. Ober.
10.11 -- Office Lease dated November 11, 1998, between
Principal Life Insurance Company and BrightStar.
10.12 -- Employment Agreement dated January 31, 1999, between
BrightStar and Donald Rowley.
10.13 -- Employment Agreement between Brian R. Blackmarr and
Associates, Inc. and Brian R. Blackmarr (Incorporated by
reference from Exhibit 10.10 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).
10.14 -- Letter Agreement dated August 14, 1997, between
BITG and McFarland, Grossman and Company, Inc., and amended
as of March 17, 1998 (Incorporated by reference from
Exhibit 10.11 to Amendment No. 2 to BrightStar's Registration
Statement on Form S-1 filed March 24, 1998 (File No.
333-43209)).
10.15 -- Letter Agreement dated September 26, 1997, between BITG
and Brewer-Gruenert Capital Advisors, LLC, and
amended as of December 15, 1997 (Incorporated by reference from
Exhibit 10.12 to BrightStar's Registration Statement
on Form S-1 filed December 24, 1997 (File No. 333-43209)).
10.16 -- Loan Agreement dated October 16, 1997, between BITI and BITG
(Incorporated by reference from Exhibit 10.13 to Amendment No. 1
to BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).
10.17 -- Stock Repurchase Agreement between BrightStar and Marshall
G. Webb, Daniel M. Cofall, and Thomas A. Hudgins.
10.18 -- Agreement Regarding Repurchase of Stock by and among
BrightStar, George M. Siegel, Marshall G. Webb, Thomas
A. Hudgins, Daniel M. Cofall, Mark D. Diggs, Michael A.
Sooley, Michael B. Miller, and Tarrant Hancock.
10.19 -- Amendment to Agreement and Plan of Exchange dated as of
June 5, 1998, and BrightStar and the holder of the outstanding
capital stock of Zelo Group, Inc., and Joel Rayden.
10.20 -- Deed of Variation dated as of April 17, 1998, by and among
BrightStar and Software Consulting Services Pty. Ltd., and
Kentcom Pty. Ltd., Salvatore Fazio, Pepper Tree Pty. Ltd.,
Christopher Richard Banks, Cedarman Pty. Ltd, Stephen Donald
Caswell, Quicktrend Pty. Ltd., Desmond John Lock, Kullamurra Pty.
Ltd., Robert Stephen Langford, KPMG Information Solutions Pty.
Ltd., and Data Collection Systems Integration Pty. Ltd.
10.21 -- Asset Purchase Agreement dated as of June 30, 1998,
among BrightStar, Cogent Acquisition Corp., Cogent Technologies,
LLC and the holders of all the outstanding membership interest of
Cogent Technologies, LLC.
10.22 -- Asset Purchase Agreement dated as of August 31, 1998,
among BrightStar, Software Consulting Services America,
Inc., TBQ Associates, Inc., and the holders of all the
outstanding capital stock of TBQ Associates, Inc.
10.23 -- Stock Purchase Agreement dated as of September 30, 1998,
among BrightStar, BrightStar Group International, Inc., and the
holders of the outstanding capital stock of PROSAP AG
(Incorporated by reference from Exhibit 2.1 to the Current Report
on Form 8-K of BrightStar dated November 10, 1998.
10.24 -- Factoring Agreement and Security Agreement dated January 22,
1999, among Metro Factors, Inc., dba Metro Financial Services,
Inc., Brian R. Blackmarr and Associates, Inc., Software
Consulting Services America, Inc., Software Innovators, Inc., and
Integrated Controls, Inc.
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10.25 -- Guaranty dated January 22, 1999, by BrightStar for the
benefit of Metro Factors, Inc., dba Metro Financial
Services, Inc.
10.26 -- Severance Agreement and Release effective November 20,
1998, between BrightStar and Thomas A. Hudgins.
10.27 -- Severance Agreement and Release effective January 31,
1999, between BrightStar and Daniel M. Cofall.
10.28 -- Severance Agreement and Release effective January 31,
1999, between BrightStar and Marshall G. Webb.
10.29 -- Revolving Credit Agreement dated March 29,1999, between
BrightStar and Comerica Bank.
10.30 -- Form of subsidiaries guaranty dated March 29,1999, between
BrightStar subsidiaries and Comerica Bank.
10.31 -- Security Agreement (Negotiable collateral) dated March 29,
1999, between BrightStar and Comerica Bank.
10.32 -- Security Agreement (all assets) dated March 29, 1999,
between BrightStar and Comerica Bank.
10.33 -- $15,000,000 Revolving Note dated March 29, 1999, from
BrightStar to Comerica Bank
10.34 -- Asset Purchase Agreement Among BrightStar Information
Technology Group, Inc., Software Consulting Services
America, Inc., Integrated Systems Consulting, LLC and the
individuals owning all of the membership interests of
Integrated Systems Consulting, LLC dated as of April 1, 1999.
10.35 -- Securities Purchase Agreement among BrightStar Information
Technology Group, Inc., Strong River Investments, Inc., and
Montrose Investments LTD.
21.1 -- List of Subsidiaries of the Company.
Exhibits above have been previously filed.
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