================================================================================
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, 2003
[ ] 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 Identification
organization) No.)
6601 Owens Drive, Suite 115
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 15, 2004, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $1,018,789 (based on the
$0.085 per share closing price for such shares on The OTC Bulletin Board Market
on March 15, 2004). 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.
As of March 26, 2004, there were 15,287,968 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
The Exhibit Index is located on Page 27 hereof.
================================================================================
2
PART I
ITEM 1: Business
The Company
BrightStar Information Technology Group, Inc. ("BrightStar" or "the
Company") provides information technology ("IT") services for its customers. We
help organizations maximize their competitive advantage through the
implementation and /or support of leading edge enterprise-level packaged-systems
applications and legacy software systems by focusing primarily on serving
clients in the healthcare and government markets. BrightStar also provides
software support and training services to major corporations. We have
approximately 40 employees and contractors. The Company has its headquarters in
the San Francisco Bay Area with field offices in Dallas, Texas, and Quincy,
Massachusetts. We also have service-delivery locations throughout the United
States, including Arkansas, California, Florida, Georgia, Maryland and Oregon.
For Enterprise Resource Planning ("ERP"), we implement and /or support SAP,
PeopleSoft and Lawson applications, covering a complete range of business
processes, including finance, human resources, payroll, procurement, customer
relationship management 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. BrightStar is
an `SAP Services Partner', the world's leading provider of ERP applications. An
SAP Services Partner is recognized by SAP as an independent third party services
firm that has the capability of providing implementation and support services to
SAP's customers.
To help companies provide universal access to their information resources,
we also provide training and other consulting services related to Actuate
software. Actuate provides an effective platform for retrieving business
information from corporate databases and delivering it as interactive web pages
and Excel spreadsheets.
In the legacy systems area, BrightStar consultants support the Medicare Part
A claims processing software programs known as the Arkansas Part A Standard
System ("APASS") and the Fiscal Intermediary Standard System ("FISS"). We
provide these services as a subcontractor, approved by the Centers for Medicare
and Medicaid Services ("CMS"), to one of the Blue Cross Blue Shield ("BCBS")
companies who is the prime contractor on the APASS and FISS maintainer contracts
for CMS. We also provide related data center and help desk support to BCBS with
both technical and functional consultants.
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 our solution offerings and our
ability to deliver these solutions in both the traditional consulting and
implementation model, are sources of differentiation for the Company in the
market for information technology services and critical factors in our success.
BrightStar was organized as a Delaware corporation in July 1997 and
completed its initial public offering ("IPO") on April 16, 1998. Since 1998,
BrightStar has been a quality IT service provider. During the course of the last
four years, the Company has made decisions to discontinue certain services and
launch others, based on market conditions and BrightStar's strategy and position
in various markets. BrightStar exited the Controls and Infrastructure Support
businesses in 1999 and 2000, (which in total accounted for revenues of
approximately $24 million for 1999) and also sold its web hosting business in
2001 (which accounted for revenues of approximately $0.1 million for 2000),
because we did not feel these services were core businesses for BrightStar. The
Company also sold its Australian subsidiary in 2000 (which accounted for
revenues of approximately $17 million for 2000) to generate needed cash as well
as to focus solely on the domestic US marketplace. On June 28, 2002, BRBA, Inc.
("BRBA"), one of the original roll-up subsidiaries of BrightStar, which was
formerly known as Brian R. Blackmarr and Associates, Inc., filed for liquidation
under Chapter 7 of the bankruptcy code and we no longer control BRBA. All of
these divested operations experienced losses for the Company in the years before
they were sold. From inception to today, BrightStar has emphasized its core ERP
practices in the SAP and PeopleSoft markets, as well as its application support
services for key major accounts. Through the restructuring actions of the last
few years, BrightStar has been able to reduce its fixed costs to the scale of
its recent business level. The Company is well positioned to focus on IT
opportunities in the healthcare and government sectors, vertical markets in
which it possesses strong reference accounts. BrightStar also continues to
explore all tactical and strategic options.
3
Information About Operating Segment
The Company operates primarily in the United States in the IT Services
Business segment. Financial information regarding our business can be found in
the consolidated financial statements and notes thereto attached as an Exhibit
to this Form 10-K as described in Item 15.
Among the leading positive factors affecting the demand for IT services are
the transition to packaged software solutions, the emergence of new technologies
and the increased bandwidth and usability of the Internet through the World Wide
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 on-going conditions affecting
demand in the Information Technology Services segment include the retrenchment
of venture capital investment in new internet business enterprises, which began
in 2000, the maturity of many packaged-software applications, especially ERP,
and restraint in corporate capital spending that began in 2001.
Customers and Markets
Our marketing efforts focus on mid-sized to large organizations who have a
need for high quality consulting services to improve their use of enterprise
applications and access to management information. We have developed expertise
in the healthcare and government vertical markets and are continuing to leverage
this knowledge throughout these sectors. Many of our key relationships have
existed for several years and have involved numerous activities and projects.
BrightStar has a long term and current relationship with BCBS that
represented approximately 60% of BrightStar's business in 2003 and 29% in 2002.
The Company has been informed by BCBS that positions for BrightStar consultants
representing approximately 57% of our revenues from this client in 2003 will be
eliminated during the period of March through May of 2004 as a result of project
completions and cost pressure from the federal government. There is no assurance
that the Company will find replacement opportunities for these consultants.
Notwithstanding, this loss of revenue, BCBS could account for at least a
majority of the Company's revenue for 2004. Most of the remaining revenue from
BCBS is received under a single contract, which may be extended annually at the
option of the client through 2007. All of our long-term contractual
relationships, including our contract with ABCBS, may be terminated for
convenience by our clients without penalty on relatively short notice.
For 2003, BCBS accounted for approximately 46% of the total outstanding
accounts receivable as of December 31, 2003. The Company also had one other
unrelated customer that accounted for approximately 13% of the total outstanding
accounts receivable balance.
For 2002, the Company had revenues from three unrelated customers, which
accounted for approximately 29%, 25% and 10%, respectively, of total revenues.
These same three customers accounted for approximately 34%, 9% and 15%,
respectively, of the total outstanding accounts receivable as of December 31,
2002.
Consulting Resources
Our success depends in large part upon our ability to attract, train,
motivate and retain highly skilled technical employees. Qualified technical
employees are periodically in great demand and could become a limited resource
in the future. We dedicate resources to recruiting professionals with IT
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. By selling consulting resources for today's sophisticated
enterprise applications, BrightStar is competing against a wide variety of
organizations in the market space. These may range from certain of the major
accounting firms (such as Deloitte & Touche) to small private and public
companies like BrightStar.
BrightStar strives to exercise competitive advantage in the market for IT
services primarily in two ways. First, the Company has excellent customer
references in our target markets. While the major systems integrators have these
references as well, many of our smaller competitors do not. Second, BrightStar
undertakes to provide high quality consultants at cost-effective billing rates,
which the Company can deliver as a result of our low overhead cost structure.
While the small services firms may have BrightStar's low overhead, our larger
competitors usually do not.
4
Directors and Executive Officers of BrightStar
The following table and notes thereto identify and set forth information
about the Company's current Directors and two executive officers:
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
---------------------- --------------------------------------- ---------
Joseph A. Wagda 60 Chairman of the Board of 2000
Directors, and Chief Executive
Officer
Paul C. Kosturos 38 Vice President and Chief NA
Financial Officer
W. Barry Zwahlen 59 Managing Partner of
Information Management Associates 2000
Jennifer T. Barrett 53 Chief Privacy Officer, Acxiom 1998
Corporation
Thomas A. Hudgins 63 Cofounder Polaris Group, Inc. 2001
Joseph A. Wagda has been a director of BrightStar since April 2000 and Chief
Executive Officer, effective October 2, 2000. Mr. Wagda was elected Chairman of
the Board of Directors on March 21, 2001. Since 1997, Mr. Wagda has been engaged
in a variety of investment related activities, including serving as President of
Altamont Capital Management, Inc. and in leadership positions with several
single-purpose investment entities. He also is currently a director of Abraxas
Petroleum Corporation (Amex: ABP), a public oil and gas company, and Zierer Visa
Service, Inc., a private company engaged in the international travel services
business. 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 was with the finance
staff of Chevron Corporation and in the general counsel's office at Ford Motor
Company. Mr. Wagda has a B.S. degree from Fordham College, an M.B.A., with
distinction, from the Johnson School of Management, Cornell University and a
J.D., with honors, from Rutgers Law School. Mr. Wagda also served on active duty
as a regular army officer during the period 1965-70, including tours of duty
with infantry units in Santo Domingo (82d Airborne) and Vietnam (MACV) and
engineer units in Thailand. He attained the rank of major in the Corps of
Engineers, prior to leaving the reserves in 1978.
Paul C. Kosturos joined BrightStar as Corporate Controller, effective July
30, 2001. He was also named Vice President - Finance, Principal Accounting
Officer and Corporate Secretary on November 1, 2002. On October 29, 2003 Mr.
Kosturos was elected Vice President and Chief Financial Officer. Before joining
BrightStar, Mr. Kosturos was Vice President, Finance and Operations of Quicknet
Technologies, Inc., a privately held high technology company. Prior to Quicknet,
Mr. Kosturos spent 8 years at the public accounting firm of Bregante + Company,
LLP, where he was an audit and tax principal. Mr. Kosturos has a B.S. degree,
with emphasis in accounting, from California State Polytechnic University,
Pomona and is also a licensed CPA in California.
W. Barry Zwahlen has been a director with BrightStar since July 2000. In
addition to other business interests, since 1986, Mr. Zwahlen has been the
Managing Partner of Information Management Associates, a retained executive
search firm, which recruits CIO and CTO candidates for technology clients and
executive level information technology consultants for systems integration
professional services firms. Mr. Zwahlen received a B.S. in mathematics from the
University of Pittsburgh and an M.B.A. from the Harvard Business School. He was
on the finance staff of both Ford Motor Company and Navistar and served for five
years as a data communications officer in the United States Air Force. Prior to
forming Information Management Associates, he served in a similar capacity with
KPMG Peat Marwick. Mr. Zwahlen is Chairman of the Board's Audit Committee and
serves as a member on the Compensation Committee.
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 Acxiom's
Chief Privacy Officer. Ms. Barrett serves on the Board's Audit and Compensation
Committees.
Thomas A. Hudgins became a director on April 20, 2001. He cofounded and,
until recently, served as Managing Director of Polaris Group, Inc., a corporate
finance and mergers and acquisitions advisory firm. Prior to forming Polaris he
was cofounder, Executive Vice President and Secretary of BrightStar until
January 1999. From 1967 to 1997, he was Executive Vice President and cofounder
of Delta-X Corp., a leading developer, manufacturer and marketer of software and
electronic automation equipment for the international oil and gas industry. He
is a past president of the Houston Chapter of the American Institute of
Industrial Engineers and a Registered Professional Engineer. Mr. Hudgins
received a B.S. in industrial engineering from Texas Tech University. He also
served in the U.S. Army and the U. S. Army Reserve from 1962 through 1968 and
was a member of the 79th ASA (Army Security Agency). Mr. Hudgins is Chairman of
the Board's Compensation Committee and serves as a member of the Audit
Committee.
5
There is no family relationship between any of the foregoing board members
or between any of such board members and any of the Company's executive officers
and there is no arrangement or understanding between any of the foregoing board
member or foregoing officers with any other person or persons pursuant to which
such board member or executive officer was selected or nominated. The Company's
executive officers serve at the discretion of the Board of Directors.
Recent Developments
In March of 2004, the Company acquired a 49% interest in BrightStar
Technology Services, LLC (LLC), a Delaware limited liability company formed and
51% owned by Mr. Wagda to pursue government contracts that have been designated
by the federal and certain state governments for award to businesses that are
51% owned and managed by veterans with at least a 10% service connected
disability. Overhead expenses of the LLC are to be initially borne by BrightStar
and charged to the LLC. Pursuant to the LLC's operating agreement, such amounts
borne by BrightStar are to be recovered by it prior to any distribution of the
LLC's profits. Either Mr. Wagda or BrightStar may terminate their participation
in the LLC and either party may buy out the other pursuant to procedures
described in the operating agreement, a copy of which is set forth as exhibit
10.42.
On March 25, 2004 the Company retained the services of a financial advisory
firm to help the Company explore its strategic alternatives. The Company paid an
initial fee of $7,500 at the signing of the agreement and will also be
responsible for making monthly payments of $7,500 starting on April 25, 2004 and
continuing through July 25, 2004, which is the end of the initial period of the
agreement. During the initial period, the Company may terminate this
relationship by written notice and only be responsible for a prorata share of
the monthly fee up until the date of termination.
ITEM 2: Properties
BrightStar's principal executive offices are located at 6601 Owens Drive,
Suite 115, Pleasanton, California 94588. The Company's sublease on these
premises covers approximately 1,600 square feet and expires on June 19, 2004.
The Company may terminate this sublease at anytime upon giving at least three
months written notice of termination.
The Company also operates through leased facilities in:
o Dallas, TX
o Quincy, MA
Substantially all of the Company's services are performed on-site at
customer locations. We may require additional space if our business expands
significantly; however, we also believe that our current infrastructure can
support a substantially larger revenue base due to the nature and location of
our services. We also believe that, if and when needed, we will be able to
obtain additional suitable space.
ITEM 3: Legal Proceedings
The Company is from time to time involved in litigation incidental to its
business. The Company believes that the results of such litigation 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
2003
(a) The Annual Meeting of Stockholders of the Company was held on December
17, 2003.
(b) The following directors were elected at the Annual Meeting of
Stockholders:
Joseph A. Wagda
W. Barry Zwahlen
Jennifer Barrett
Thomas A. Hudgins
6
(c) 1. Set forth below is the tabulation of the votes on each nominee for
election as a director:
Name For Against Votes Abstained
---- --- ------- ---------------
Joseph A. Wagda 13,813,890 210,883 --
W. Barry Zwahlen 13,763,818 260,955 --
Jennifer Barrett 13,802,218 222,555 --
Thomas A. Hudgins 13,847,290 177,483 --
2. Set forth below is the tabulation of the votes for the proposal to
ratify Stonefield Josephson, Inc. as the Company's independent
accountant for the fiscal year ending December 31, 2003:
For 13,934,840
Against 38,200
Abstained and unvoted 51,733
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently traded on The OTC Bulletin Board
Market under the symbol BTSR.OB. 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 2003 and 2002.
2003 2002
---------------- ----------
High Low High Low
------- ------- ------- ------
First Quarter. $ 0.08 $ 0.01 $ 0.09 $ 0.03
Second Quarter $ 0.06 $ 0.01 $ 0.13 $ 0.05
Third Quarter. $ 0.12 $ 0.04 $ 0.06 $ 0.03
Fourth Quarter $ 0.12 $ 0.09 $ 0.03 $ 0.01
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 March 15, 2004, there were 116 stockholders of record of the Company's
Common Stock and a total of approximately 2,200 stockholders, including
stockholders who held their shares in the names of certain financial
institutions.
The remainder of the information required by this item, and not set forth
below, is incorporated by reference to Part III, Item 12 of this From 10-K.
Sales of Unregistered Securities
Set forth below is certain information concerning all issuances of
securities by BrightStar within the past three years that were not registered
under the Securities Act.
1. On January 16, 2001, the prior owners of Cogent Technologies LLC
("Cogent") were issued 1,020,000 shares of our common stock in partial
settlement of a claim by them related to the unpaid balance of the purchase
price for the assets and business of Cogent and amounts due under employment
agreements with us.
2. 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.
3. On February 15, 2001, certain of our 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.
4. On February 15, 2001, Unaxis Trading Limited ("Unaxis") was issued
250,000 shares of our common stock in settlement of litigation between the
Company and certain affiliates of Unaxis. 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 had 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. During
December 2001, the Company bought the shares back from Unaxis for a $120,000
payment.
7
5. On May 4, 2001, 257,400 shares of our common stock were issued to the
owners of Cogent, Unaxis and various former employees in satisfaction of our
obligations to pay penalties to them under the terms of various registration
rights agreements.
6. On July 26, 2001, the Company issued and sold approximately $1.1
million of convertible notes to a group of investors, including members of
BrightStar senior management. The notes are convertible into common stock, at
the option of the investors, at a fixed price of $0.23 per share, subject to
anti-dilution provisions. In addition, the investors received approximately
718,000 warrants, exercisable at $0.50 per share. The notes are mandatorily
convertible, at the Company's option, into common stock at $0.23 per share,
subject to anti-dilution provisions, if: (i) the market price of the Company's
common stock, determined on a 20-day moving average basis, equals or exceeds
$0.50 per share; and (ii) the investors may lawfully sell all of the common
stock issuable upon conversion and the common stock issuable upon exercise of
Warrants held by the investor, either under an effective registration statement,
or under Rule 144; and (iii) at least $2.3 million of the our past due payables
have been restructured. In addition, 70,000 warrants are issuable to Brewer
Capital Group, LLC, which acted as placement agent for the transaction, at an
exercise price of $1.00 per share. The net proceeds of this transaction were
used for general corporate purposes.
7. In November 2001, the Company engaged a financial advisor to assist the
Company in obtaining additional long-term financing. As part of the financial
advisor's compensation for this engagement, and in addition to a $25,000
retainer fee paid to the advisor, the Company has agreed to the issuance of
warrants to purchase 100,000 shares of the Company's common stock at an exercise
price of $0.05 per share. These warrants will expire in November 2004.
8. On February 15, 2002, 1,500,000 shares and 500,000 shares of restricted
common stock were issued to Joseph A. Wagda and Kenneth A. Czaja, respectively,
in connection with their employment with the Company.
9. On August 1, 2002, 20,000 shares of our common stock were issued to a
vendor in full satisfaction of our obligation to pay them for services rendered.
10. On a quarterly basis, starting on October 1, 2001 and continuing on
January 1, 2002, April 1, 2002, July 1, 2002, October 1, 2002, January 1, 2003,
April 1, 2003 and July 1, 2003, the company issued additional convertible notes
of $16,103, $22,345, $22,792, $23,247, $23,712, $24,187, $24,670 and $25,164,
respectively, to the same group of investors as the issuances on July 26, 2001
for payment in kind of interest due on the original notes and subsequent
issuances of notes issued for interest due. In addition, the investors received
in total for all the quarterly issuances mentioned above approximately 119,000
warrants, exercisable at $0.50 per share. The notes have the same
characteristics as the notes issued on July 26, 2001.
11. On May 6, 2003, 125,000 warrants to purchase shares of the Company's
common stock at an exercise price of $0.035 were issued to Westminster
Securities as part of an investment-banking arrangement. The warrants will
expire on May 6, 2008.
All of the above sales and issuances of securities by the Company were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof as transactions not involving any public offering. The Company bases
this conclusion on an analysis of the facts in each instance, taking into
account such factors as the number of purchasers, whether each purchaser is an
accredited investor or appears to have such knowledge and experience in
financial and business matters so as to be capable of evaluating the merits and
risks of the prospective investment, or whether each purchaser is a senior
management employee of the Company or the Company otherwise has a pre-existing
relationship with the purchaser. In no case were any securities offered or sold
by any form of general solicitation or general advertising, nor is the Company
aware of any instance in which the securities were acquired with a view to the
resale or 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 notes related thereto. The following
selected consolidated financial data should be read in connection with
BrightStar's Financial Statements and notes related thereto and other financial
information included elsewhere in this Form 10-K report.
BrightStar was organized in July 1997 and completed its IPO on April 16,
1998. Concurrent with the IPO, BrightStar (a) acquired the outstanding capital
stock of BRBA, Integrated Controls, Inc. ("ICON"), Mindworks Professionals
Education Group, Inc. ("Mindworks"), Software Innovators, Inc. ("SII") and 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") (BRBA, ICON, Mindworks, SII, Zelo, SCS America and SCS Australia,
are 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 herein collectively referred to as the "Company." The
acquisitions were accounted for using the purchase method of accounting, with
BRBA being reflected as the "accounting acquirer."
8
Year Ended December 31
-----------------------------------------------------
Historical Operations Data 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------
Revenue $5,852 $9,407 $19,471 $61,612 $103,449
Cost of revenue 4,157 6,328 13,403 42,442 76,476
Selling, general and
administrative
expenses 1,685 2,939 6,119 27,369 26,797
Stock compensation expense -- -- -- -- 468
Restructuring charge -- -- 2,011 2,237 --
Settlements of accrued
liabilities -- (260) -- -- --
Write down of goodwill -- -- -- 42,479 --
Depreciation and
amortization 27 106 1,600 3,244 3,056
-----------------------------------------------------
Income (loss) from
operations (17) 294 (3,662) (56,159) (3,348)
Other income (expense), net 82 2,363 1,157 (19) (15)
Interest expense (203) (157) (249) (519) (518)
Income tax provision
(benefit) -- (128) -- 1,531 (1,313)
-----------------------------------------------------
Income (loss) form
continuing operations (138) 2,628 (2,754) (58,228) (2,568)
Income (loss) on
discontinued operations -- -- 17 (910) (7,447)
Change in accounting
principle -- (9,945) -- -- --
-----------------------------------------------------
Net loss $(138) $(7,317) $(2,737) $(59,138) $(10,015)
=====================================================
Net loss per share (basic
and diluted)
Income (loss) from
continuing operations $(0.01) $0.18 $(0.21) $(5.85) $(0.30)
Income (loss) from
discontinued
operations -- -- -- (0.09) (0.86)
Change in accounting
principle -- (0.66) -- -- --
-----------------------------------------------------
Net loss $(0.01) $(0.48) $(0.21) $(5.94) $(1.16)
=====================================================
Weighted average shares
outstanding:
Basic and diluted 15,286,788 15,020,562 13,291,625 9,959,995 8,642,034
December 31
------------------------------------------------
Historical Balance Sheet
Data: 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------
(In thousands)
Working capital $380 $340 $(2,179) $(4,489) $10,409
Total assets 2,615 2,892 14,386 21,797 85,008
Convertible notes
payable, net 1,241 1,086 948 -- --
Stockholders' equity 960 1,039 8,231 9,696 60,451
Total fully diluted shares consist of the following:
December 31, 2003
-----------------
Total common stock outstanding........... 15,286,788
Common stock associated with notes
convertible at $0.23 per share .......... 5,579,830
Common stock warrants associated with
notes exercisable at $0.50 per share..... 836,995
Other common stock warrants ............. 511,785
Employee/director stock options and stock 1,438,841
---------
grants...................................
Total fully diluted shares............... 23,654,239
==========
Common stock outstanding as of December 31, 2003 includes 1,820,000
restricted shares issued to the Company's executives in February 2002, related
to their employment. The original amounts of restricted shares were 2,000,000,
consisting of 1,500,000 granted to Mr. Wagda and 500,000 to Kenneth Czaja, the
Company's previous Chief Financial Officer. However, Mr. Czaja sold 182,000
shares during the 4th quarter of 2003.
Total fully diluted shares do not include the 255,000 treasury stock shares.
These treasury stock shares are considered issued but not outstanding.
9
Employee/director stock options as of December 31, 2003 consist of 1,168,772
shares priced at $0.05 per share with the remaining 270,069 shares having prices
that range from $0.06 to $6.00. Other common stock warrants totaling 511,785
shares are exercisable at prices ranging from $0.04 to $6.00 per share.
See Part 2, Item 7, Results of Operations, Goodwill, Discontinued Operations
and Restructuring Charges, for a discussion of accounting changes, discontinued
operations and restructuring charges that affected the previous years' results,
which would cause the results in the current period not to be comparable to the
results in previous periods. Also please see Part IV, Item 15: Exhibits and
Financials Statement Schedules for the notes to the financial statements.
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses BrightStar's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in preparation
of its consolidated financial statements.
Revenue recognition -- The Company provides services to customers for fees
that are based on time and materials or occasionally, fixed fee contracts.
Revenue for fixed fee contracts is recognized ratably over the contract term
based on the percentage-of-completion method. Costs incurred to date as a
percentage of total estimated costs are used to determine the percentage of the
contract that has been completed throughout the contract life. Costs reimbursed
by its customers are included in revenue for the periods in which the costs are
incurred.
Goodwill -- Goodwill is the cost in excess of amounts assigned to
identifiable assets acquired less liabilities assumed.
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Intangible Assets". Thus, effective
January 1, 2002, the Company ceased amortizing goodwill recorded in past
business combinations. The implementation of the goodwill impairment test under
SFAS No. 142 requires a two-step approach, which is performed at the reporting
unit level, as defined in SFAS No. 142. Step one identifies potential
impairments by comparing the fair value of the reporting unit to its carrying
amount. Step two, which is only performed if there is a potential impairment,
compares the carrying amount of the reporting unit's goodwill to its implied
value, as defined in SFAS No. 142. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized for an amount equal to that excess.
SFAS No. 142 also requires the Company to perform an annual impairment test
going forward after the implementation year. The Company has chosen a date of
October 1st as its annual testing date.
Up until December 31, 2001, goodwill recorded in conjunction with the
Founding Companies and all other acquisitions in 1998 was being amortized over
40 years on a straight-line basis. Goodwill associated with the acquisition of
ISC was being amortized over 20 years on a straight-line basis. Management
determined the twenty-year life for ISC goodwill based upon the nature of ISC's
SAP software consulting practice, along with the assembled workforce of highly
skilled consultants and the demand for information technology services. The
realizability and period of benefit of goodwill is evaluated periodically to
assess recoverability, and, if warranted, impairment or adjustments to the
period affected are recognized. The Company uses an estimate of the future
undiscounted net cash flows when testing for impairment.
Income taxes -- The Company accounts for income taxes under SFAS 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. Based
on the Company's net losses for the previous years, the Company has recorded a
valuation allowance for deferred taxes as of December 31, 2003. In the event
that the Company were to determine that it would be able to realize its deferred
tax assets in the future, an asset would be recorded, which in turn would
increase income in the period such determination was made. Income tax
receivables are recognized for the actual amounts refundable.
10
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 $0.01, $0.48 and $0.21 per basic and
diluted share for the years ended December 31, 2003, 2002 and 2001,
respectively. The results of operations for 2003, 2002 and 2001 reflect the
impact of the following items:
Goodwill
In July of 1996, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 97 relating to business combinations
immediately prior to an initial public offering. SAB No. 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, BRBA 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 BRBA 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, 2001. Goodwill associated with the purchase of ISC
was being amortized over a 20-year period through December 31, 2001.
On July 20, 2001 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of this Statement apply to
goodwill and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS No. 142. As of January 1, 2002, the Company adopted SFAS
No. 142. Thus effective January 1, 2002, the Company ceased amortizing goodwill
recorded in past business combinations.
The goodwill impairment test under SFAS No. 142 requires a two-step
approach, which is performed at the reporting unit level, as defined in SFAS No.
142. Step one identifies potential impairments by comparing the fair value of
the reporting unit to its carrying amount. Step two, which is only performed if
there is a potential impairment, compares the carrying amount of the reporting
unit's goodwill to its implied value, as defined in SFAS No. 142. If the
carrying amount of the reporting unit's goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized for an amount equal to that
excess.
The Company completed the first step of the transitional impairment test
required by SFAS No. 142 during the quarter ended June 30, 2002. The Company
consists of a single reporting unit. Therefore, this step required the Company
to assess the fair value of the Company and compare that value to its
shareholders' equity. In determining fair value, the Company considered the
guidance in SFAS No. 142, including the Company's market capitalization, control
premiums, discounted cash flows and other indicators of fair value. Based on
this analysis, goodwill recorded as of January 1, 2002 in the amount of $11.6
million was impaired. The Company then completed step two, impairment test,
pursuant to SFAS No. 142, under which we compared the value of our goodwill
based on the Company's stock price as of December 31, 2001 with the value of the
goodwill. As a result of the impairment test, a goodwill impairment loss of $9.9
million was recognized in the fourth quarter of 2002, which is when the test was
completed, and recorded as of the first quarter of 2002 as a change in
accounting principle.
The Company also performed its initial and subsequent year annual test as of
October 1, 2002 and 2003 as required by SFAS No. 142. After performing these
impairment tests, it was determined that there was no additional goodwill
impairment loss during the fourth quarter of 2002 and 2003. The quoted market
prices of the Company's stock price as of October 1, 2002 and 2003 were used as
the fair value to measure impairment.
Discontinued Operations
The Company discontinued its custom-application business in Lafayette,
Louisiana in the third quarter of 2001. The Company recorded no gain or loss on
the discontinuance of its custom-application business. The Company has made
necessary reclassifications to properly reflect the discontinued operations in
its consolidated financial statements.
Restructuring Charges
The Company started a restructuring plan in 2000 to realign its operations
and reduce expenses and it continued into 2001. The Company replaced the entire
11
senior management team and significantly reduced management overhead. Beginning
in the third quarter and continuing into the fourth quarter of 2001, the Company
continued with year-over-year reductions in selling, general and administrative
expenses, which were the result of the execution of the austerity plan adopted
in the third quarter of 2001. The restructuring included reductions in office
space, sales personnel and related costs, management overhead and discretionary
expenses. For the year 2001 the Company incurred approximately $2 million of
restructuring costs, consisting of approximately $0.4 million relating to
employee costs for approximately 30 employees, including severance obligations,
and $1.6 million relating to losses on the write down or disposal of
nonessential equipment, the write-offs of leasehold improvements and office
closure expenses (including accelerated expenses from lease terminations) as a
result of actions taken by the Company to reduce its expense base in response to
the general reduction in our level of business, as well as the specific loss of
a significant customer that filed for bankruptcy.
For 2002, the Company undertook no new restructuring plan but continued with
the restructuring plans from 2001.
For 2003 no additional restructuring was necessary.
Revenue
The Company provides services to its customers for fees that are based on
time and materials or occasionally, fixed fee contracts. Accordingly, revenue is
recognized as consulting services are performed. Unbilled revenue is recorded
for contract services provided for which billing has not been rendered. Costs
reimbursed by its customers are included in revenue for the periods in which the
costs are incurred.
The timing of revenue is difficult to forecast because the Company's sales
cycle 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 effect of changes in estimates to
complete fixed fee contracts, the rate of hiring and the productivity of revenue
generating personnel; the availability of qualified IT professionals; the
significance of 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 from $9.4 million to $5.9 million or 37% in 2003 compared
to 2002 and decreased from $19.5 million to $9.4 million or 52% in 2002 compared
to 2001 as a result of a number of factors, including primarily a general
reduction in the market demand for ERP and e-commerce consulting services. The
IT services market experienced a surge in demand for ERP services through the
end of 1999 as a result of the need to ensure that mission critical operations
would not be disrupted by time-sensitive functions embedded in existing software
systems, as calendars changed to the year 2000 ("Y2K"). Management believes that
Y2K-related spending represented an acceleration of ERP investment by major
companies that otherwise would have been made in the following years. As a
result, the demand for ERP applications appeared to reach relative maturity by
2000, causing excess capacity in the industry for the delivery of ERP services.
A similar condition was experienced in the custom application development area,
as companies rushed to create web sites, corporate portals and e-commerce
capabilities in the late 1990s and in 2000-01 in order to communicate with
customers, suppliers, employees and other constituents over the world wide web.
Beginning in 2001, the demand for internet-related IT services fell dramatically
as the initial requirement for these services in the marketplace was largely
filled. The general economic down turn, which commenced around March of 2001 and
was exacerbated by the September 11, 2001 terrorist incidents, also caused many
companies to cancel or postpone planned IT spending, beginning in 2001. As the
overall market for IT services delivered by the company was contracting, our
ability to win new business was severely constrained by new-customer concerns
about our deteriorating financial condition. In addition to these adverse market
conditions, the sale of our Controls business in 2000 (representing $6.1 million
of revenues in 2000) and our Australian operations at the end of 2000
(representing $17 million of revenues in 2000), the loss of a major long-term
customer in 2001 as a result of its bankruptcy, the discontinuation of our
custom application development business in 2001, a severe cut-back in the need
for our services by two long-term customers by the end of 2002 and strong rate
pressures from new and existing clients beginning in 2002, together have
combined to cause a severe contraction of our revenues beginning in 2000 and
continuing through the first quarter of 2004.
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
12
benefits with increases in billing rates, although this is subject to the market
conditions at the time. In addition, the Company tries to increase or decrease
the number of consultants used by the Company to provide its services, including
third party contractors, as the amount of billable work (and resultant revenue)
changes. In other words, the Company continually strives to minimize the amount
of unbillable consulting resources or bench. As revenues declined over the past
couple of years, the Company reduced its consulting resources accordingly.
Gross profit as a percentage of revenue for 2003 decreased from 33% to 29%
compared to 2002. The decrease is primarily due to pricing pressure in the
industry from new and existing accounts and project mix.
Gross profit as a percentage of revenue increased for 2002 from 31% to 33%
compared to 2001. The improvement is attributable to a reduction in non-billable
consultant costs and project mix.
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 decreased from $2.9 million to $1.7 million or 41% in 2003
compared to 2002 and decreased from $6.1 million to $2.9 million or 53% in 2002
compared to 2001. The decreases were due to the Company's year-over-year
reductions in selling, general and administrative expenses, as revenues
decreased and as a result of the execution of our turnaround plan, including
reductions in office space, sales personnel and related costs, management
overhead and discretionary expenses.
Other Income
For the year ended December 31, 2003, the Company completed its plans to
settle remaining legacy liabilities and the Company also recognized other
miscellaneous gains which resulted in Other Income of approximately $0.1
million.
For the year ended December 31, 2002, the company settled $1.1 million of
corporate legacy liabilities for less than $0.4 million in cash and $10,000 in
common stock, resulting in gains on settlements of $0.8 million. Also during
2002, BRBA filed for liquidation under Chapter 7 of the bankruptcy code, and the
Company no longer controls BRBA. As a result, BRBA's financial position has not
been included in the Company's consolidated results since the bankruptcy date.
This resulted in the Company recording a gain of $1.4 million during the year.
These two gains, along with other miscellaneous gains of approximately $0.2
million, totaling $2.4 million, are included in Other Income for 2002.
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 during the 2003 year-end and previous years was potentially
exposed to market risk due to 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 earn-out resulting
from the sale of our Australian subsidiary in 2000 was denominated in Australian
dollars, the Company's financial position, results of operations, and cash flows
were potentially affected by fluctuations in exchange rates. The Company was not
entitled to receive any payments under this earn-out provision in 2001, 2002 or
2003, however, and therefore realized no market risk associated with the
earn-out provision in those years. The Company believes that near-term changes
in exchange rates will have no 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 could be affected by interest rate changes to
the debt outstanding. An immediate 10 percent change in interest rates, however,
would not likely have a material effect on the Company's results of operations
over the next fiscal year.
Liquidity and Capital Resources
On December 16, 2002, the Company entered into an agreement with BFI
Business Finance ("BFI"), a Santa Clara, California-based business-credit
company, for a two-year working capital line of credit for $0.75 million, to
replace our existing credit facility with Comerica Bank. Under the BFI
agreement, available borrowings will be up to 85% of accounts receivable, after
reduction for ineligible accounts. The interest rate on outstanding balances
will be at prime plus 4% per annum, plus an additional monthly administrative
fee of 0.50% calculated on the average daily balance outstanding. The minimum
monthly interest and administrative fee charged to the Company will be not less
than $1,000 per month for the first six months, escalating to $2,375 per month
for the next three months and then finally to $3,750 per month for the remaining
term of the agreement. In November 2003, the agreement was modified to change
the minimum monthly payment to $2,375 for the remaining term of the agreement.
13
The Company's liabilities as of December 31, 2002 include $105,000 of
liabilities, which have been reported as legacy liabilities in the financial
statements. Of the $105,000, the Company satisfied $95,000 in the first quarter
of 2003, leaving only a $11,000 note payable due in January 2005.
On July 26, 2001, the Company completed a private placement through the
issuance of approximately $1.1 million of Series 1 Convertible Subordinated
Promissory Notes (the "Notes") with warrants to a group of investors, including
members of BrightStar's then senior management. The notes are secured on a
junior basis by substantially all of the assets of the Company and its operating
subsidiaries, and are convertible into common stock, at the option of the
investors, at a fixed price of $0.23 per share, subject to anti-dilution
provisions. In addition, the investors received approximately 718,000 warrants,
exercisable at $0.50 per share. The Notes are entitled to simple interest
calculated at a rate per annum equal to 8%. The Company had the option to pay
interest for the first year from the date of the Notes (subsequently extended
for another year during the second quarter of 2002) by issuing additional Notes
(the "PIK Notes") and warrants with the same terms as above. The Company elected
to pay the interest due on the Notes from inception through June 30, 2003 by
issuing PIK Notes and warrants. In addition, 70,000 warrants were issued to the
placement agent for the transaction at an exercise price of $1.00 per share.
Total warrants issued to investors were valued at $142,000 under the provisions
of APB No.14 and EITF 00-27, and will be amortized as additional interest
expense over the life of the debt. Amortization expense for the year ended
December 31, 2002 and 2003 amounted to $63,000 and $48,000, respectively.
The Notes and PIK Notes were originally due and payable on July 1, 2004.
However, the Notes and PIK Notes were amended effective October 24, 2003 to
extend their due date to December 31, 2005 when holders representing more than
75% of the aggregate principal amount of the Notes and PIK Notes agreed to the
extension. As consideration for this amendment the Company agreed to a partial
pay down schedule for the PIK notes, commencing January 2004. The Company agreed
to pay in cash each quarter an amount equal to 50% of the interest then due on
the Notes and PIK Notes and the amounts so paid will be applied sequentially to
retire the PIK Notes in the order issued until December 31, 2005.
The table below summarizes the Company's major commitments as of December
31, 2003:
Payments due by period
Less than More than 5
Contractual Total 1 year 1 - 3 years 3 - 5 years years
Obligations
Long-term debt $1,294,349 -- $1,294,349 -- --
Operating leases 37,290 $25,240 8,050 -- --
---------------------------------------------------------
Total $1,327,639 $25,240 $1,302,399 -- --
=========================================================
The Company relies primarily on the timeliness and amount of accounts
receivable collections to fund these obligations. As a result of prior losses
and prior negative cash flows, the Company experienced a significant decline in
available liquidity in 2001 and 2002. The Company improved its liquidity by
securing private placement financing in July 2001, by generating positive cash
flow from operations, by reaching settlement agreements with virtually all of
its legacy creditors, and in December 2002 by replacing its credit facility with
Comerica Bank, which was scheduled to expire on December 31, 2002, with the BFI
facility.
As a result of the scale back of positions at BCBS described in Item 1
(Customers and Markets), the Company may incur substantial losses for the
remainder of 2004. However, the Company believes that the planned results from
operations when combined with the proceeds from the BFI credit facility, which
will expire on December 31, 2004 unless extended pursuant to the loan agreement
terms, will be adequate to fund its operations at least through the end of 2004.
On May 6, 2003, the Company retained the services of an investment banking
firm to help the Company explore its strategic alternatives. The Company paid an
initial fee of $20,000 at the signing of the agreement and commenced making
monthly payments of $5,000 starting on June 15, 2003 and which, under the
agreement, were scheduled to continue through October 15, 2003. Additionally the
Company issued warrants to purchase 125,000 shares of common stock, exercisable
for a period of five years at an exercise price of $0.035 per share, which was
the closing price of the Company's common stock on May 6, 2003. These warrants
were valued at $4,000 under the provisions of APB No. 14 and EITF 00-27 and were
expensed in the second quarter of 2003. The services of the investment banking
firm were terminated, effective August 1, 2003. The Company recorded an expense
of $25,000 in the third quarter of 2003 for the remaining payments due pursuant
to the contract and the remaining amortization relating to the initial
engagement fee that was being amortized over the life of the agreement. The
Company will continue to explore its tactical and strategic alternatives.
14
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical facts,
included in this MD&A regarding the Company's financial position, business
strategy and plans, and objectives of management of the Company for future
operations, are forward-looking statements. These forward-looking statements
rely on a number of assumptions concerning future events and are subject to a
number of uncertainties and other factors, many of which are outside of the
Company's control, that could cause actual results to materially differ from
such statements. While the Company believes that the assumptions concerning
future events are reasonable, it cautions that there are inherent difficulties
in predicting certain important factors, especially the timing and magnitude of
technological advances; the 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 REVENUE IS CURRENTLY HIGHLY CONCENTRATED WITH ONE CUSTOMER AND A SIGNIFICANT
REDUCTION IN THEIR BUSINESS COULD HAVE A MATERIALLY ADVERSE FINANCIAL
CONSEQUENCE.
The Company has a very high concentration of revenues from a single
customer. The customer recently notified the Company of a significant reduction
in its need for the Company's consultants. See Item 1 (Customers and Markets).
If the Company were unable to substantially replace the lost revenues from this
customer, or the customer were to significantly reduce its level of business
with the Company further, or the customer were to change the terms under which
it is willing to do business with the Company or substantially delay payments
due to the Company, the Company's business could be adversely affected and there
can be no assurance that the Company would be able to continue as a going
concern.
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, and
a number of restructuring actions, makes it difficult to evaluate our business.
In addition, beginning in the fourth quarter of 2000, the Company recruited a
completely new executive management team and replaced virtually the entire sales
force. Four senior members of the new management team were separated from the
Company in late 2001 through late 2002 and we dramatically reduced our sales
resources. The limited history of the performance of the remaining management
and sales team and the uncertainty of our future performance and ability to
maintain or improve our financial, sales and operating systems, procedures and
controls increase the risk that the value of our common stock may decline.
WE MAY BE 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/or expand the net sales of our business or any subsequently
acquired businesses. Various factors, including demand for our services and
enterprise-level software application 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.
FAILURE OF OUR MANAGEMENT TO SUCCESSFULLY MANAGE INTERNAL GROWTH COULD
NEGATIVELY IMPACT OUR ABILITY TO MAINTAIN OR INCREASE OUR REVENUES.
If our management does not effectively handle internal growth or our new
employees do not achieve anticipated performance levels, we may fail to maintain
or increase our revenues.
15
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.
BrightStar has not had and does not expect to have in the foreseeable future
the financial resources to retain on our payroll significant consulting
resources that are not regularly billable. However, our success depends in large
part upon our ability to continue to attract, train, motivate and retain highly
skilled and experienced technical employees. Qualified technical employees
periodically are in great demand and may be unavailable in the time frame
required to satisfy our clients' requirements. Other providers of technical
staffing services, systems integrators, 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. While consulting resources are reasonably
available currently, competition for these professionals periodically has been
high in recent years, and we expect such competition to resume at some point in
the 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:
o the utilization of billable consultants;
o changes in the demand for IT services;
o the rate of hiring and the productivity of revenue-generating
personnel;
o the availability of qualified IT professionals;
o the significance of client engagements commenced and completed during
a quarter;
o the ability to complete fixed fee engagements, if any, in a timely and
profitable manner;
o the decision of our clients to retain us for expanded or ongoing
services;
o the number of business days in a quarter;
o changes in the relative mix of our services;
o changes in the pricing of our services;
o the timing and rate of entrance into new geographic or vertical
industry markets;
o departures or temporary absences of key revenue-generating personnel;
o the structure and timing of acquisitions; and
o 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.
16
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 may seek to expand by
acquiring additional information technology related businesses or unrelated
lines of business. 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:
o failure of the acquired businesses to achieve expected results;
o diversion of management's attention and resources to acquisitions;
o failure to retain key customers or personnel of the acquired
businesses; and
o 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. The inability to acquire
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 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. Using
shares of our common stock for this purpose also 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 IT SERVICES 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 IT 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 IT
services industry include:
o responsiveness to client needs;
o availability of technical personnel;
o speed of applications development;
o quality of service;
17
o price;
o project management capabilities;
o technical expertise; and
o ability to provide a wide variety of IT services.
We believe that our ability to compete also depends in part on a number of
factors outside of our control, including:
o the ability of our competitors to hire, retain and motivate qualified
technical personnel;
o the ownership by competitors of software used by potential clients;
o the development of software that would reduce or eliminate the need
for certain of our services;
o the price at which others offer comparable services; and
o the extent of our competitors' responsiveness to client needs.
It is possible that competition in the IT 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 IT
services companies results in a deterioration of market conditions for IT
services companies, we could lose market share to our competitors.
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 small percentage of our projects are billed on a fixed-fee
basis. While very small at present, 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 INFORMATION
TECHNOLOGY INDUSTRY OR NEW INDUSTRY STANDARDS MAY RENDER OUR SERVICE OFFERINGS
OBSOLETE.
Our success will depend in part on our ability to enhance our existing
service offerings, to develop and introduce new service offerings and to train
our consultants in order to keep pace with continuing changes in IT, 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 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.
18
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 certain of our
present and former 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 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.
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 or BrightStar 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. While BrightStar has no outstanding claims of this
type at this time, 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 experience adverse effects resulting
from the integration of acquired companies.
Restructuring
In 2002 and during the preceding years, the Company underwent significant
managerial and operational changes in connection with our past corporate
restructurings. Although we believe the restructurings will provide long-term
benefits, there can be no assurance that these efforts will be successful.
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 in the year ended 2003 and
previous years was exposed to market risk due to competitive pressures on our
19
billing rates. An immediate 10 percent reduction in all of our billing rates
could have a material effect on the Company's results of operations over the
next fiscal year. However, our contract with ABCBS, our largest customer, calls
for rates that are set for a one-year period and thus the likelihood of the
rates at ABCBS being reduced by 10 percent is remote. A 10 percent change in our
billing rates for our remaining customers, without a corresponding reduction in
related costs, could have a material effect on the Company's results of
operations over the next fiscal year.
The Company's credit facility with BFI bears interest at variable rates;
therefore, the Company's results of operations could also be affected by
interest rate changes to the bank debt outstanding. An immediate 10 percent
change in interest rates, however, would not likely have a material effect on
the Company's results of operations over the next fiscal year.
Finally, the Company was exposed to foreign currency exchange rate
fluctuations due to the contingent realization of an earn-out provision
associated with the sale in 2000 of the Company's Australian subsidiary. The
Company did not realize any market risk associated with the earn-out provision
in 2001, 2002 or 2003, however, because the Company was not entitled to receive
any payments under that provision.
ITEM 8: Financial Statements and Supplementary Data
The consolidated financial statements are included as an exhibit as
described in Item 15.
ITEM 9: Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with our accountants during the
2003 year.
PART III
ITEM 9A: Controls and Procedures
a) Evaluation of disclosure controls and procedures. Our chief executive officer
and our chief financial officer, after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Rules 13a-15e or 15d-15e
as of the end of the period covered by this report (the "Evaluation Date"), have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate based on the evaluation of these controls and
procedures required by paragraph (b) of the Exchange Act Rules 13a-15 or 13d-15.
b) Changes in internal controls. During our last fiscal quarter, there was no
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 10: Directors and Executive Officers of the Registrant
For information with respect to Directors and Executive Officers, see Part
I of this Annual Report on Form 10-K.
The Audit Committee is comprised of Ms. Barrett, Mr. Zwahlen and Mr.
Hudgins. All members are non-employee directors, except that pursuant to the
Company's bylaws, the Chief Executive Officer is an ex-officio member of all
standing committees. Ms. Barrett, Mr. Zwahlen and Mr. Hudgins are "independent"
as defined under Rule 4200(a)(14) of the NASD's listing standards and Section
10(m)(3) of the Exchange Act. The of Board of Directors has determined that Mr.
Hudgins, the previous chair of the Audit Committee, is an "audit committee
financial expert," as that term is defined in Item 401(h) of Regulation S-K of
the Exchange Act.
The Nominating Committee is comprised of Ms. Barrett and Mr. Wagda. The
Nominating Committee's mission is to seek and consider qualified candidates to
serve on the Board. The Nominating Committee will consider nominees recommended
in writing by the Company's stockholders. Such recommendations should be
submitted to the Nominating Committee at the Company's principal executive
office.
The Company has adopted a Code of Ethics for all directors and employees of
the Company, including the principal executive officer and the principal
financial officer. The Code of Ethics is available on the Company's website
(www.brightstar.com). The Company intends to post amendments to or waivers from
its Code of Ethics on the website. Also, the Company has implemented a
whistleblower hotline (888-883-1499) to receive anonymous calls regarding any
accounting complaints, or reporting of illegal or unethical behavior.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and holders of more
20
than 10% of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Such
officers, directors and 10% stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
Based on its review of such forms that it received, or written
representations from reporting persons that no other Forms 5 were required for
such persons, the Company believes that, during fiscal 2003, all Section 16(a)
filing requirements were satisfied on a timely basis, except for Mr. Hudgins,
Mr. Zwahlen and Ms. Barrett whose statements of changes in beneficial ownership
(reflecting the receipt of 10,000 stock options approved at the annual meeting
in December 2003 were due on December 20, 2003, but were filed in January 2004.
ITEM 11: Executive Compensation
The following table contains information concerning compensation earned by
the Chief Executive Officer and our Vice President and Chief Financial Officer
of BrightStar as of the end of 2003.
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
-----------------------------------
Securities
Underlying All Other
Name Title Salary(s) Bonus(s) Options Compensation
- ---------------------------------- ---------------------------------------------------
Joseph A. Chairman and Chief
Wagda Executive Officer
(4) 2003 $333,333 $29,167 (3) -- --
2002 291,664 25,000 (3) 750,000 (1) $36,750 (2)
Paul C. Vice President and
Kosturos Chief Financial
Officer (4) 2003 125,000 5,500 -- --
2002 113,667 5,000 60,000 --
(1) On February 15, 2002, the compensation committee voted to take actions that
resulted in restricted stock awards to Mr. Wagda of 750,000 shares. In
return for the granting of these shares, all stock options previously
granted to Mr. Wagda totaling 780,060 were cancelled. The restricted stock
grant was issued inside the 1997 and 2000 Long-Term Incentive Plans (the
"Plans") and vest monthly over a 2-year period.
(2) Included in Mr. Wagda's other compensation for 2002 is $36,750, which
represents the value of the restricted stock grant on February 15, 2002,
which was reported as income during 2002.
(3) Mr. Wagda was awarded, as a bonus for 2003 and 2002, an additional month of
paid vacation. The cash value of the award is included in the chart based
on his salary at the time of the award.
(4) Mr. Wagda and Mr. Kosturos are the Named Executive Officers of the Company
(the "Named Executive Officers").
STOCK OPTIONS
The following table contains information concerning the grant of stock
options and restricted stock awards to each of our named executive officers
included in the Summary Compensation Table during 2003 (inside and outside the
Plans).
21
STOCK OPTION GRANTS IN 2003 FISCAL YEAR
Individual Grants
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted Fiscal Year ($/sh) Date Value
--------------------- --------------- ---------------- --------------- --------------- -----------------
Joseph A. Wagda --- --- --- --- ---
Paul C. Kosturos --- --- --- --- ---
AGGREGATED OPTION EXERCISES IN 2003 AND YEAR-END OPTION VALUES
The following table sets forth information for each of our named executive
officers included in the Summary Compensation Table with respect to options to
purchase our Common stock held as of December 31, 2003.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/AWARDS
SHARES ACQUIRED VALUE OPTIONS AT 12/31/03(#)(1) AT 12/31/03($)(2)
ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
Name
Joseph A. Wagda... -- -- -- --
Paul C. Kosturos... -- -- 60,833/29,167 6,083/2,917
- ----------
(1) No stock appreciation rights (SARs) were outstanding during 2003.
(2) The closing price of our common stock at December 31, 2003 was $0.10 per
share.
COMPENSATION OF DIRECTORS
Directors who do not perform service substantially full-time to the Company
receive a quarterly retainer of $4,000 and a fee for each Board or committee
meeting of $1,000, or $500 for each committee meeting held the same day as a
Board meeting. The Company reimburses directors for their reasonable
out-of-pocket expenses with respect to board meetings and other BrightStar
business.
Directors who are not officers of BrightStar also participate in the 1997
and 2000 Plans. Under the 1997 and 2000 Plans, options to purchase 10,000 shares
of our common stock are automatically granted to each non-employee director on
the date such director is for the first time elected or appointed to the Board
of Directors. Thereafter, each such director is automatically granted options to
purchase 10,000 shares on the date of each annual stockholders meeting provided
that such options shall be reduced by that portion of the prior twelve-month
period in which a director was not a director of the Company. The exercise price
for all non-employee director options granted under the 1997 and 2000 Plans is
100% of the fair market value of the shares as of the grant date. All such
options are immediately exercisable and expire no later than ten years after the
date of grant, unless sooner exercised. All outstanding director options as of
February 12, 2002 were repriced to $0.05 per share (see Item #6: Selected
Consolidated Financial Data).
EMPLOYMENT AGREEMENTS
On February 15, 2002 the Company and Mr. Wagda entered into an agreement
covering the terms of his employment by the Company. The terms of the agreement
include annual salary compensation of $300,000 beginning May 1, 2002 increasing
to $350,000 beginning May 1, 2003, the immediate vesting of stock and options
upon a qualifying termination or a change of control and continuation of base
salary for a period of 12 months in the event of a qualifying termination. The
agreement also calls for an annual bonus of up to 200% of base salary based upon
performance objectives to be agreed upon by the Company and Mr. Wagda. For the
years ended December 31, 2003 and 2002, Mr. Wagda was given as a bonus an
additional month of paid vacation, having an approximate value of $29,000 and
$25,000, respectively. On October 21, 2003 the agreement between the Company and
Mr. Wagda was amended to reflect the following changes: (i) an extension of its
fixed term from April 30, 2004 to October 31, 2004, (ii) adding to the
definition of a "qualifying termination" a resignation occurring between 90 and
180 days after a change in control and (iii) providing for incentive
compensation upon the completion of certain strategic transactions involving the
Company, the amount of which would be determined in part based on the increase
in the price of the Company's common stock or securities received in exchange
for its common stock above a specified base amount. Mr. Wagda is eligible to
participate in all of the Company's employee benefit plans.
22
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2003, non-employee directors Ms. Barrett, Mr. Zwahlen and Mr.
Hudgins served as members of the Compensation Committee. None of the
Compensation Committee members or Named Executive Officers have any relationship
that must be disclosed under this caption.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Notwithstanding any statement to the contrary in any of our previous or
future filings with the Securities and Exchange Commission, the following report
shall not be incorporated by reference into any such filings.
Compensation Philosophy. In developing our executive compensation policies,
the Compensation Committee has two principal objectives: (1) attracting,
rewarding and retaining officers who possess outstanding talent, and (2)
motivating officers to achieve BrightStar performance consistent with
stockholder objectives. Accordingly, the Compensation Committee adopted the
following policies:
o BrightStar will pay compensation that is competitive with the
practices of other leading technology companies in the same or
similar businesses;
o A significant portion of the officers' compensation will depend
upon the achievement of challenging performance goals for
BrightStar and our various business units and officers; and
o BrightStar will align the interests of its officers with those of
our stockholders - therefore, stock-based compensation will
constitute a significant portion of compensation.
Total Annual Compensation. Each officer's target total annual compensation
(that is, salary plus bonus) is determined by the Compensation Committee upon
review of all applicable factors.
Bonuses. Pursuant to an employment agreement, Mr. Wagda is eligible to
receive a bonus of up to 200% of base salary based upon the achievement of
agreed-upon performance goals. The actual bonus (that is, the percentage of the
target bonus) that any officer (other than the Senior Executive Officer, as
defined below) actually receives depends on the achievement of both corporate
and individual objectives and financial performance goals. Typical business unit
objectives include, for example, revenue and profitability objectives.
Mr. Wagda is the only Senior Executive Officer of the Company.
Stock-Based Compensation. The Compensation Committee strongly believes that
stock-based compensation (options and/or restricted stock) motivates the
officers to maximize stockholder value and to remain with BrightStar despite a
very competitive marketplace. Generally, all BrightStar stock options and shares
of restricted stock have a per share exercise or purchase price approximating
the fair market value of our stock as of the grant date, except for certain
identified re-pricing actions. The number of options or shares of restricted
stock granted to each officer and related vesting schedule are determined based
on the officer's position at BrightStar, his or her individual performance, the
number of options or restricted shares the executive already holds and other
factors, including an estimate of the potential value of the options or
restricted shares.
In fiscal 2003, the Compensation Committee made these determinations for the
Named Executive Officers of the Company. For all other grants, the Chief
Executive Officer (Mr. Wagda) made these determinations, in consultation with
the Compensation Committee.
Compensation of Chief Executive Officer. The Compensation Committee believes
the Chief Executive Officer's compensation should be tied directly to the
performance of BrightStar and in line with stockholder objectives. As a result,
Mr. Wagda's compensation may include a significant restricted stock and/or stock
option component.
Tax Deductibility of Executive Compensation. Under section 162(m) of the
Internal Revenue Code, BrightStar generally receives a federal income tax
deduction for compensation paid to any of its Named Executive Officers only if
the compensation is less than $1 million during any fiscal year or is
"performance-based" under section 162(m). Our management-incentive plans permit
the Company to pay compensation that is "performance-based" and thus is fully
tax-deductible by BrightStar. The Compensation Committee currently intends to
continue seeking a tax deduction for all of our executive compensation, to the
extent consistent with the best interests of BrightStar.
23
Compensation Committee
Thomas Hudgins, Chairman
W. Barry Zwahlen
Jennifer Barrett
COMPANY STOCK PERFORMANCE
The following graph sets forth a comparison of the cumulative total share
owner return on the Company's Common Shares for the period beginning on December
31, 1998 and ending December 31, 2003, the last trading day in fiscal 2003, as
compared with the cumulative total return of the S&P 500 Index and a Peer Group
Index. The Peer Group consists of the Nasdaq Computer & Data Processing Index.
This graph assumes an investment of $100 on December 31, 1998 in each of Common
Shares, the S&P 500 Index and the Peer Group Index, and assumes reinvestment of
dividends, if any. The Company was subsequently transferred to the OTC Bulletin
Board on July 23, 2001 (see Item #5: Market for Registrant's Common Equity and
Related Stock Matters). The stock price performance shown on the graph below is
not necessarily indicative of future stock price performance.
Cumulative Total Return
12/98 12/99 12/00 12/01 12/02 12/03
BrightStar Information Technology Group 100.00 104.76 4.76 0.73 0.13 1.27
S&P 500 100.00 121.04 110.02 95.95 75.52 97.18
NASDAQ Computer & Data Processing 100.00 216.79 113.10 88.84 61.04 80.89
24
ITEM 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information with respect to all of
the Company's Equity Compensation Plans at December 31, 2003.
Issued restricted shares
and number of Weighted-average exercise Number of securities
securities to be issued or stated price of remaining available
Plan category upon exercise of outstanding options, for future issuance
outstanding options, warrants, rights and under equity
warrants and rights restricted stock compensation plans
- --------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders:
Price $0.01 - $0.10 1,239,813 $0.05
Price $0.29 - $1.00 5,000 $0.29
Price $6.00 120,000 $6.00
------------------------
Subtotal 1,364,813 $0.58 3,632,687
Equity compensation
plans not approved by
security holders
Price $0.05 34,028 $0.05
Price $1.00 40,000 $1.00
------------------------
Subtotal 74,028 $0.56 N/A
------------------------
Total 1,438,841 (1)
(1) This total does not include 2,000,000 shares of restricted common stock
that are already included in the Company's total outstanding shares as of
December 31, 2003. Of the 2,000,000 shares, 1,000,000 restricted common
stock shares were issued inside of the Plans in 2002 and 1,000,000
restricted common stock shares were issued outside of the Plans in 2002.
As of December 31, 2003, equity compensation plans not approved by security
holders consist of 40,000 options with an exercise price of $1.00 per share to
the son of Mr. Wagda, the Company's CEO, who worked as an independent contractor
for the Company on special projects during the fourth quarter of 2000 and the
first quarter of 2001. His compensation consisted of cash payments of $18,600
for 2001 and the 40,000 options. Also included are 34,028 stock options issued
to a former employee who converted to a subcontractor in 2003.
The following table contains certain information regarding beneficial
ownership of our common stock as of March 15, 2004 by (i) persons known to us to
be the beneficial owner of more than 5% of our common stock, and their
respective addresses (ii) each of our current directors, (iii) the Chief
Executive Officer and our other executive officer, and (iv) all directors and
executive officers as a group.
SHARES BENEFICIALLY OWNED
-----------------
NUMBER(1) PERCENT
-----------------
5% BENEFICIAL OWNERS:
None
NON-EMPLOYEE DIRECTORS: (2)
Jennifer T. Barrett 170,000 1.1%
W. Barry Zwahlen 170,000 1.1%
Thomas A. Hudgins 304,343 2.0 %
EXECUTIVE OFFICERS: (3)
Joseph A. Wagda 2,589,309 16.0%
Paul C. Kosturos 67,500 0.4%
All directors and executive officers as a
group (5 persons) 3,301,152 19.7%
(1) Represents shares held directly and indirectly and with sole voting and
investment power, except as noted, or with voting and investment power
shared with a spouse.
(2) Includes immediately exercisable options to purchase 170,000 shares of
common stock, for Ms. Barrett, Mr. Zwahlen and Mr. Hudgins.
(3) Includes options that will be exercisable immediately or within 60 days
to purchase 5,000 shares of common stock for Mr. Kosturos. It includes
765,561 shares of common stock issuable on conversion of convertible
notes beneficially owned by Mr. Wagda and 114,879 shares issuable on
exercise of warrants related to the convertible notes.
25
ITEM 13: Certain Relationships and Related Transactions
The Company was obligated to pay Altamont Capital Management, Inc.
("Altamont"), a company wholly owned by Joseph A. Wagda and his spouse, $101,130
for services performed by Mr. Wagda as a consultant to the Company prior to Mr.
Wagda joining the Company as Chief Executive Officer. This debt was satisfied in
July 2001 by converting it into a convertible note payable, as part of the
Company's private placement offering completed on July 26, 2001.
As part of the private placement completed on July 26, 2001 members of the
then senior management, including Mr. Wagda participated in the offering. Notes
issued to Mr. Wagda and Altamont totaled $151,130 at the initial offering and
currently total $174,379 after giving effect to notes currently held that were
issued in lieu of interest.
In March of 2004, the Company acquired a 49% interest in BrightStar
Technology Services, LLC (LLC), a Delaware limited liability company formed and
51% owned by Mr. Wagda to pursue government contracts that have been designated
by the federal and certain state governments for award to businesses that are
51% owned and managed by veterans with at least a 10% service connected
disability. Overhead expenses of the LLC are to be initially borne by BrightStar
and charged to the LLC. Pursuant to the LLC's operating agreement, such amounts
borne by BrightStar are to be recovered by it prior to any distribution of the
LLC's profits. Either Mr. Wagda or BrightStar may terminate their participation
in the LLC and either party may buy out the other pursuant to procedures
described in the operating agreement, a copy of which is set forth as exhibit
10.42.
ITEM 14: Principal Accountant Fees and Services
Audit Fees
It is estimated that the total fees that will be billed to the Company by
Stonefield Jospehson, Inc. ("Stonefield") for auditing the Company's 2003 fiscal
year financial statements will be approximately $35,000. Fees billed to the
Company by Stonefield for auditing the Company's 2002 financial statements
totaled $42,834. Fees billed to the Company by Stonefield for performing the
quarterly reviews of the financial statements that were included in the
Company's quarterly reports on Form 10-Q for the year 2003 was $16,647. Fees
billed to the Company by Grant Thornton, LLP ("Grant"), the Company's previous
auditors, for performing the quarterly reviews for 2002 and their consent
relating to the change in auditors was $32,973.
Audit-Related Fees
The Company did not engage Stonefield or Grant to provide any additional
audit-related advice.
Tax Fees
Fees billed to the Company by Grant for tax services provided during the
Company's 2003 and 2002 fiscal years for income tax services relating to the
2002 and 2001 income tax years totaled $32,930 and $17,586, respectively. The
Company did not engage Stonefield for any income tax services. The Audit
Committee believes that the income tax services provided and the fees charged
are compatible with maintaining Grant's independence.
All Other Fees
The Company engaged Stonefield to provide the audit of the employee benefit
plan for the Company's 2003 and 2002 fiscal years. It is estimated that the
total fees that will be billed for 2003 will be $5,000. The total fees billed
for 2002 were $2,588. Stonefield also performed some internal controls review
procedures for the Company during early 2003 for $4,725. The Audit Committee
believes that the other services provided and the fees charged are compatible
with maintaining Stonefield's independence.
All audit related services, tax services and other services were
pre-approved by the Audit Committee, which concluded that the provisions of such
services by Stonefield and Grant were compatible with the maintenance of that
firm's independence in the conduct of its auditing functions.
26
PART IV
ITEM 16: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements, schedules and exhibits
are filed as part of this report or are incorporated herein as
indicated.
(1) 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, 2003 and 2002.
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001.
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.
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.
Schedule II -- Valuation And Qualifying Accounts
(3) Exhibits: Incorporated herein by reference is a list of the
Exhibits contained in the Exhibit Index which begins on
sequentially numbered page 50 of this Annual Report on Form 10-K..
(b) The following reports were filed or required to be filed for the last
quarter of the fiscal year:
(1) The Company filed a current report on Form 8-K on October 29, 2003,
which announced the extension of the Company's Long-Term Notes.
(c) 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.
27
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 26th day of March, 2004.
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 Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
------------------------- ---------------------------------------- -----------
/s/ Joseph A. Wagda Chief Executive Officer and Chairman of March 26, 2004
----------------------- the Board of Directors
Joseph A. Wagda (Principal Executive Officer)
/s/ Paul C. Kosturos Vice President, Chief Financial Officer March 26, 2004
------------------------ and Secretary
Paul C. Kosturos (Principal Financial Officer)
/s/ Jennifer T. Barrett Director March 26, 2004
---------------------------
Jennifer T. Bartlett
/s/ W. Barry Zwahlen Director March 26, 2004
------------------------
W. Barry Zwahlen
/s/ Thomas A. Hudgins Director March 26, 2004
-------------------------
Thomas A. Hudgins
28
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 as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years then ended. These 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.
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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the two years
then ended in conformity with accounting principals generally accepted in the
United States of America.
/s/ STONEFIELD JOSEPHSON, INC.
Walnut Creek, California
February 12, 2004
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.
We have audited the accompanying consolidated statements of operations and
stockholders' equity and cash flows of BrightStar Information Technology Group,
Inc., a Delaware corporation, for the year ended December 31, 2001. 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.
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 results of operations and cash flows
of BrightStar Information Technology Group, Inc. for the year ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. 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. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
San Jose, California
February 15, 2002
30
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
2003 2002
----------------------
ASSETS
Current assets:
Cash $125 $160
Trade accounts receivable, net of allowance for
doubtful
accounts of $30 in 2003 and $140 in 2002 537 716
Unbilled revenue 40 41
Prepaid expenses and other 117 154
----------------------
Total current assets 819 1,071
Property and equipment 437 435
Less-accumulated depreciation (389) (362)
----------------------
Property and equipment, net 48 73
Goodwill 1,748 1,748
----------------------
Total assets $2,615 $2,892
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $-- $--
Accounts payable 81 169
Accrued salaries and other expenses 320 468
Corporate legacy liabilities -- 94
Convertible notes payable, current portion 38 --
----------------------
Total current liabilities 439 731
Convertible notes payable, net 1,203 1,086
Corporate legacy liabilities - long term 11 11
Other liabilities 2 25
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.001 par value; 72,000,000
shares authorized;
15,286,788 and 15,284,288 shares issued and
outstanding in 2003
and 2002 (excluding 255,000 shares held in
treasury), respectively 16 16
Additional paid-in capital 99,925 99,902
Unearned compensation (11) (47)
Treasury stock (118) (118)
Accumulated deficit (98,852) (98,714)
----------------------
Total stockholders' equity 960 1,039
----------------------
Total liabilities and stockholders'
equity $2,615 $2,892
======================
See notes to consolidated financial statements.
31
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------
2003 2002 2001
---------------------------------------
Revenue $5,852 $9,407 $19,471
Cost of revenue 4,157 6,328 13,403
---------------------------------------
Gross profit 1,695 3,079 6,068
Operating expenses:
Selling, general and
administrative 1,685 2,939 6,119
Restructuring charge -- -- 2,011
Settlements of accrued
liabilities -- (260) --
Goodwill amortization -- -- 352
Depreciation and
amortization 27 106 1,248
---------------------------------------
Total operating
expenses 1,712 2,785 9,730
Income (loss) from
operations (17) 294 (3,662)
Settlements of legacy
liabilities and other
income (expense) 82 2,363 1,157
Interest expense, net (203) (157) (249)
---------------------------------------
Income (loss) from
continuing operations
before income taxes (138) 2,500 (2,754)
Income tax provision (benefit) -- (128) --
---------------------------------------
Income (loss) from continuing
operations (138) 2,628 (2,754)
Discontinued operations:
Income on disposal of
discontinued
operations, net of tax -- -- 17
---------------------------------------
Total discontinued
operations -- -- 17
---------------------------------------
Income (loss) before
cumulative effect of change
in accounting principle (138) 2,628 (2,737)
Cumulative effect on prior
years of retroactive
application of new goodwill
methods, net of tax -- (9,945) --
---------------------------------------
Net loss $(138) $(7,317) $(2,737)
=======================================
Net income (loss) per share
(basic and diluted):
Continuing operations $(0.01) $0.18 $(0.21)
Change in accounting
principle -- (0.66) --
---------------------------------------
Net loss $(0.01) $(0.48) $(0.21)
=======================================
Weighted average shares
outstanding (basic and
diluted): 15,286,788 15,020,562 13,291,625
=======================================
See notes to consolidated financial statements.
32
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
---------------------- Additional Unearned Treasury
Shares Amount Paid-In- Compensation Stock
Capital
-------------------------------------------------------------
Balance, January 1, 2001 11,545,057 $12 $98,344 $-- $--
Common stock issued in settlement of
debt 1,874,231 2 1,172 -- --
Stock/options issued to
employees/board members 100,000 -- 74 -- --
Warrants issued with convertible
notes -- -- 142 -- --
Treasury stock (255,000) -- -- -- (118)
Net loss -- -- -- -- --
-------------------------------------------------------------
Balance, December 31, 2001 13,264,288 14 99,732 -- (118)
Warrants issued with convertible
notes -- -- 7 -- --
Compensation expense associated with
stock options -- -- 18 (17) --
Common stock option repricing -- -- 17 (16) --
Compensation expense associated with
restricted stock 1,000,000 1 59 (55) --
Amortization of unearned
compensation -- -- -- 41 --
Common stock issued to executive
officers 1,000,000 1 59 -- --
Common stock issued for settlement
of legacy liabilities 20,000 -- 10 -- --
Net income -- -- -- -- --
-------------------------------------------------------------
Balance, December 31, 2002 15,284,288 16 99,902 (47) (118)
Warrants issued with convertible
notes -- -- 1 -- --
Amortization of unearned
compensation -- -- -- 36 --
Variable stock option expense -- -- 17 -- --
Stock option and warrant expense -- -- 5 -- --
Stock options exercised 2,500 -- -- -- --
Net Income -- -- -- -- --
-------------------------------------------------------------
Balance, December 31, 2003 15,286,788 16 $99,925 $(11) $(118)
=============================================================
Total
Accumulated Stockholders' Comprehensive
Deficit Equity Income (Loss)
------------------------------------------
Balance, January 1, 2001 $(88,660) $9,696
Common stock issued in settlement
of debt -- 1,174
Stock/options issued to
employees/board members -- 74
Warrants issued with convertible
notes -- 142
Treasury stock -- (118)
Net loss (2,737) (2,737) $(2,737)
------------------------------------------
Balance, December 31, 2001 (91,397) 8,231 $(2,737)
================
Warrants issued with convertible
notes -- 7
Compensation expense associated
with stock options -- 1
Common stock option repricing -- 1
Compensation expense associated
with restricted stock -- 5
Amortization of unearned
compensation -- 41
Common stock issued to executive
officers -- 60
Common stock issued for settlement
of legacy liabilities -- 10
Net income (7,317) (7,317) $(7,317)
------------------------------------------
Balance, December 31, 2002 (98,714) 1,039 $(7,317)
================
Warrants issued with convertible
notes -- 1
Amortization of unearned
compensation -- 36
Variable stock option expense -- 17
Stock option and warrant expense -- 5
Stock options exercised -- --
Net Income (138) (138) $(138)
------------------------------------------
Balance, December 31, 2003 $(98,852) $960 $(138)
================
See notes to consolidated financial statements
33
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended Year Ended Year Ended
December December December
31, 31, 31,
2003 2002 2001
---------------------------------
Operating activities:
Net loss $(138) $(7,317) $(2,737)
Adjustments to reconcile net loss
to net cash
provided by (used in) operating
activities:
(Income) loss from discontinued
operations -- -- (17)
Noncash gains on settlement of
liabilities and deconsolidation
of subsidiary (35) (2,345) (1,699)
Depreciation and amortization 109 151 1,630
Changes to allowance for doubtful
accounts 110 (160) (20)
Compensation expense on issuance
of common stock -- -- 74
Compensation expense on issuance
of common stock
options and warrants 59 47 --
Loss on retirement of property
and equipment -- -- 740
Cumulative effect of change in
accounting principle -- 9,945 --
Changes in operating working
capital:
Trade accounts receivable 69 1,380 4,322
Income tax refund receivable -- 105 538
Unbilled revenue 1 (41) --
Prepaid expenses and other 37 131 79
Accounts payable (88) (590) (881)
Accrued salaries and other
accrued expenses (98) (438) (300)
Deferred revenue -- (14) (299)
Corporate legacy liabilities (59) (452) (501)
Legacy liabilities of insolvent
subsidiary -- -- 1,138
Discontinued operations -- -- 353
---------------------------------
Net cash provided by (used
in) operating activities (33) 402 2,420
Investing activities:
Proceeds from sale of property and
equipment -- -- 9
Capital expenditures (2) (8) (11)
---------------------------------
Net cash used in investing
activities (2) (8) (2)
Financing activities:
Net payments under line of credit -- (419) (3,178)
Net proceeds from issuance of
convertible notes payable -- -- 945
---------------------------------
Net cash used in financing activities -- (419) (2,233)
---------------------------------
Net increase (decrease) in cash (35) (25) 185
Cash:
Beginning of period 160 185 --
---------------------------------
End of period $125 $160 $185
=================================
Supplemental information:
Interest paid $20 $27 $183
=================================
Income taxes paid $-- $8 $--
=================================
See notes to consolidated financial statements
34
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental disclosures of noncash investing and financing activities:
Year Ended Year Ended Year Ended
December December December
31, 31, 31,
2003 2002 2001
---------------------------------
Issuance of common stock at fair value in
satisfaction of:
Severance obligations -- -- 162
Prior acquisition -- -- $892
Litigation between the Company and
various other entities -- -- $118
Obligations under various rights
agreements -- -- $74
Corporate legacy liabilities -- $10 --
Accrued bonuses -- $60 --
Liabilities restructured with notes
payable -- -- $473
Noncash issuance of common stock warrants
at fair value associated with notes
payable $1 $2 $142
Noncash issuance of convertible notes at
face value associated $74 $91 $16
with interest due on notes payable
Noncash issuance of notes at face value
associated with short- -- $211 --
term corporate legacy liabilities
See notes to consolidated financial statements
35
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
(1) Summary of Significant Accounting Policies
Basis of presentation -- BrightStar Information Technology Group, Inc.
("BrightStar" or "the Company") provides information technology services for its
customers. We help organizations maximize their competitive advantage through
the implementation and /or support of leading edge enterprise-level
packaged-systems applications and legacy software systems by focusing primarily
on serving clients in the healthcare and government markets. BrightStar also
provides software support and training services to major corporations. We have
approximately 40 employees and contractors. The Company has its headquarters in
the San Francisco Bay Area with field offices in Dallas, Texas, and Quincy,
Massachusetts. We also have service-delivery locations throughout the United
States, including Arkansas, California, Florida, Georgia, Maryland and Oregon.
Principles of consolidation - The consolidated financial statements for the
years ended December 31, 2003, 2002 and 2001 include the accounts of the Company
and its wholly-owned subsidiaries. On June 28, 2002, one of the Companies
subsidiaries, BRBA, Inc. ("BRBA") (formerly Brian R. Blackmarr & Associates,
Inc.) filed for liquidation under Chapter 7 of the bankruptcy code and the
Company no longer controls BRBA. As a result, BRBA's financial position has not
been included in the Company's consolidated results since the bankruptcy filing
date. All significant inter-company accounts and transactions are eliminated in
the consolidation.
Use of estimates - 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.
Property and equipment -- Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over their estimated useful lives
ranging from three to ten years. 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.
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Intangible Assets". Thus, effective
January 1, 2002, the Company ceased amortizing goodwill recorded in past
business combinations. The implementation of the goodwill impairment test under
SFAS No. 142 requires a two-step approach, which is performed at the reporting
unit level, as defined in SFAS No. 142. Step one identifies potential
impairments by comparing the fair value of the reporting unit to its carrying
amount. Step two, which is only performed if there is a potential impairment,
compares the carrying amount of the reporting unit's goodwill to its implied
value, as defined in SFAS No. 142. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized for an amount equal to that excess.
SFAS No. 142 also requires the Company to perform an annual impairment test.
The Company has chosen a date of October 1st as its annual testing date.
Up until December 31, 2001, goodwill recorded in conjunction with the
Founding Companies (Companies acquired concurrently with the closing of
BrightStar's initial public offering) and all other acquisitions in 1998 was
being amortized over 40 years on a straight-line basis. Goodwill associated with
the acquisition of ISC in 1999 was being amortized over 20 years on a
straight-line basis. Management determined the twenty-year life for Integrated
Systems Consulting ("ISC") goodwill based upon the nature of ISC's SAP software
consulting practice, along with the assembled workforce of highly skilled
consultants and the demand for information technology services. The
realizability and period of benefit of goodwill is evaluated periodically to
assess recoverability, and, if warranted, impairment or adjustments to the
period affected is recognized. Total amortization of goodwill from continuing
operations for 2003, 2002 and 2001 amounted to $0, $0 and $352, respectively.
See the "Recent pronouncements" paragraph in Note (1) for the treatment of
goodwill for the years beginning on January 1, 2002; also see Note (5).
Income taxes -- The Company accounts for income taxes under SFAS 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. Based
on the Company's net losses for the previous years, the Company has recorded a
36
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
valuation allowance for deferred taxes as of December 31, 2003 and 2002. In the
event that the Company were to determine that it would be able to realize its
deferred tax assets in the future, an asset would be recorded, which in turn
would increase income in the period such determination was made. Income tax
receivables are recognized for the actual amounts refundable.
Revenue recognition -- The Company provides services to customers for fees
that are based on time and materials or occasionally, fixed fee contracts.
Accordingly, revenue is recognized as consulting services are performed.
Unbilled revenue is recorded for contract services provided for which billing
has not been rendered. Deferred revenue primarily represents the excess of
amounts billed over contract amounts earned. Costs reimbursed by its customers
are included in revenue for the periods in which the costs are incurred.
Concentration of credit risk - Concentration of credit risk is limited to
trade receivables and is subject to the financial conditions of 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
condition and customer payment practices to minimize collection risk on trade
receivables.
Earnings per share (EPS) --Basic EPS is calculated using income available to
common stockholders divided by the weighted average number of common shares
outstanding during the year. Diluted EPS is computed using the weighted average
number of common shares and potentially dilutive securities outstanding during
the period. Potentially dilutive securities include incremental common shares
issuable upon the exercise of stock options, warrants and conversion of notes
payable. Potentially dilutive securities, consisting of 5,579,830 shares
issuable upon conversion of notes, 1,348,780 shares issuable upon exercise of
warrants, and 1,438,841 shares issuable upon exercise of stock options as of
December 31, 2003, are excluded from the computation as their effect is
anti-dilutive. Treasury shares of 255,000 at December 31, 2003 and 2002 have
also been excluded from the computation from the date of reacquisition.
Potentially dilutive securities totaling 8,040,172 and 8,074,965 at December 31,
2002 and 2001, respectively, are excluded from their respective computations, as
their effect is antidilutive.
Pro forma disclosures required under SFAS 148 are presented below. The pro
forma compensation cost may not be representative of that expected in future
years.
For years ended
------------------------------------------
2003 2002 2001
------------------------------------------
Net income (loss), as reported $(138) $(7,317) $(2,737)
Add: Stock based employee compensation expense
included in reported income, net of
related tax -- -- --
Deduct: Total stock-based employee compensation
expenses determined under fair
value based
method for all awards, net of
related tax effects (34) (1,469) (2,068)
------------------------------------------
Pro forma net income (loss) $(172) $(8,786) $(4,805)
==========================================
Pro forma basic and diluted income (loss) per
share:
Basic - as reported $(0.01) $(0.49) $(0.21)
Basic - pro forma $(0.01) $(0.58) $(0.36)
Diluted - as reported $(0.01) $(0.49) $(0.21)
Diluted - pro forma $(0.01) $(0.58) $(0.36)
Compensation cost for the years ended December 31, 2003, 2002 and 2001 was
calculated in accordance with the binomial model, using the following weighted
average assumptions: (i) expected volatility of 123%, 123% and 114%; (ii)
expected dividend yield of 0% in all three years; (iii) expected option term of
10 years in all three years; (iv) risk-free rates of return of 1.74%, 1.745 and
5.50% and (v) expected forfeiture rates of 40%, 40% and 38%, respectively.
Stock based compensation -- The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", in its accounting
for stock options issued to employees and board members. No compensation expense
is recognized for stock options issued to employees under the Company's stock
option plans when the option price for grants equals or exceeds the quoted
market price of the Company's Common Shares at the date of grant. 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 is recognized in accordance with SFAS No.
123.
Options that are modified are treated as variable awards and accounted for
under Financial Accounting Standards Board Interpretation ("FIN") No. 44. The
Company records any increase of the fair market value of the underlying stock at
the end of each quarter over the repriced stock option price as compensation
expense in the appropriate quarter.
37
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
Fair value of financial instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, accounts payable,
and accrued expenses approximate fair value due to the short-term nature of
these items. The fair value is not readily determinable for the bank credit
facility, convertible notes payable and legacy liabilities because of the past
due nature of the legacy liabilities and the lack of comparable credit
facilities readily available to the Company. As of December 31, 2003 and 2002,
respectively, the bank credit facility and convertible notes payable were
collectively carried at $1,203 and $1,086 and the legacy liabilities were
carried at $11 and $105, respectively.
Recent pronouncements -- In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No.145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," and SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers". This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
Company has implemented this pronouncement and has concluded that the adoption
has no material impact to the financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan, as previously
required under Emerging Issues Task Force ("EITF") Issue 94-3. A fundamental
conclusion reached by the FASB in this statement is that an entity's commitment
to a plan, by itself, does not create a present obligation to others that meets
the definition of a liability. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company has implemented this pronouncement and has
concluded that the adoption has no material impact to the financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". In
addition, this Statement amends SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The requirements relating to acquisitions of financial
institutions are effective for acquisitions for which the date of acquisition is
on or after October 1, 2002. The provisions related to accounting for the
impairment or disposal of certain long-term customer-relationship intangible
assets are effective on October 1, 2002. The adoption of this Statement did not
have a material impact to the Company's financial position or results of
operations as the Company has not engaged in either of these activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amends SFAS No. 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations as the Company has not elected to change to the fair value
based method of accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation No. 46 changes the criteria by which
one company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation No. 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company has implemented this
pronouncement and has concluded that the adoption has no material impact to the
financial statements.
38
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities", effective for contracts
entered into or modified after June 30, 2003, except as stated below and for
hedging relationships designated after June 30, 2003. In addition, except as
stated below, all provisions of this Statement should be applied prospectively.
The provisions of this Statement that relate to Statement 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective
effective dates. In addition, paragraphs 7(a) and 23(a), which relate to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to both existing contracts and new contracts entered
into after June 30, 2003. The adoption of this Statement did not have a material
impact to the Company's financial position or results of operations as the
Company has not engaged in such transactions.
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, "Elements of Financial Statements". The Company has implemented this
pronouncement and has concluded that the adoption has no material impact to the
financial statements.
In December 2003 the FASB concluded to revise certain elements of FIN 46, which
will be issued shortly. The FASB also modified the effective date of FIN 46. For
all entities that were previously considered special purpose entities, FIN 46
should be applied in periods ending after December 15, 2003. Otherwise, FIN 46
is to be applied for registrants who file under Regulation SX in periods ending
after March 15, 2004, and for registrants who file under Regulation SB, in
periods ending after December 15, 2004. The Company does not expect the adoption
to have a material impact on the Company's financial position or results of
operations.
(2) Property and Equipment
Property and equipment consist of the following:
December 31,
------------
2003 2002
---- ----
Computer equipment and software $ 337 $ 335
Furniture, fixtures and office equipment 100 100
------- -------
Total 437 435
Accumulated depreciation and amortization (389) (362)
-------- -------
Property and equipment, net $ 48 $ 73
======= =======
(3) Goodwill
Goodwill consists of the cost in excess of amounts assigned to identifiable
assets acquired, less liabilities assumed. The realizability and period of
benefit of goodwill is evaluated periodically to assess recoverability, and, if
warranted, impairment or adjustments to the period benefited are recognized.
As of January 1, 2002, the Company adopted SFAS No. 142. Thus effective
January 1, 2002, the Company ceased amortizing goodwill recorded in past
business combinations.
The implementation of the goodwill impairment test under SFAS No. 142
requires a two-step approach, which is performed at the reporting unit level, as
defined in SFAS No. 142. Step one identifies potential impairments by comparing
the fair value of the reporting unit to its carrying amount. Step two, which is
only performed if there is a potential impairment, compares the carrying amount
of the reporting unit's goodwill to its implied value, as defined in SFAS No.
142. If the carrying amount of the reporting unit's goodwill exceeds the implied
fair value of that goodwill, an impairment loss is recognized for an amount
equal to that excess.
39
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
The Company completed the first step of the transitional impairment test
required by SFAS No. 142 during the quarter ended June 30, 2002. The Company
consists of a single reporting unit. Therefore, this step required the Company
to assess the fair value of the Company and compare that value to its
shareholders' equity. In determining fair value, the Company considered the
guidance in SFAS No. 142, including the Company's market capitalization, control
premiums, discounted cash flows and other indicators of fair value. Based on
this analysis, goodwill recorded as of January 1, 2002 in the amount of $11,648
was impaired. The Company then completed step two, impairment test, pursuant to
SFAS No. 142, under which we compared the value of our goodwill based on the
Company's stock price as of December 31, 2001 with the value of the goodwill. As
a result of the impairment test, a goodwill impairment loss of $9,900 was
recognized in the fourth quarter of 2002, which is when the test was completed,
and recorded as of the first quarter of 2002 as a change in accounting
principle.
The Company also performed annual test as of October 1, 2003 and 2002 as
required by SFAS No. 142. After performing this impairment test, it was
determined that there was no additional goodwill impairment loss to be recorded
in the fourth quarter of 2003 or 2002. The quoted market price of the Company's
stock price as of October 1, 2003 and 2002 was used as the fair value to measure
the impairment.
During 2002, as part of the Company's implementation of SFAS No. 142, the
Company also wrote off $45 related to an intangible asset. The reduction was
also included in the change in accounting principle amount.
The following is the Company's disclosure of what reported net earnings and
earnings per share would have been in all periods presented, exclusive of
amortization expenses (including any related tax effects) recognized in those
periods related to goodwill, intangible assets that are no longer being
amortized and changes to amortization periods for intangible assets that will
continue to be amortized.
For the years ended December 31
2003 2002 2001
-------------------------------------
Net income (loss) as reported: $(138) $(7,317) $(2,737)
Amortization, net of tax -- -- 352
-------------------------------------
Adjusted net earnings $(138) $(7,317) $(2,385)
-------------------------------------
Basic and diluted earnings per
share:
As reported $(0.01) $(0.48) $(0.21)
Change in amortization expense -- -- 0.03
-------------------------------------
Adjusted basic earnings per share $(0.01) $(0.48) $(0.18)
-------------------------------------
The changes in the carrying amount of goodwill, net of accumulated
amortization for the year ended December 31, are as follows:
2003 2002
----------------------
Balance at January 1 $1,748 $11,648
Goodwill acquired during the year -- --
Change in accounting principle, goodwill
impairment loss -- (9,900)
Impairment loss, current year -- --
----------------------
Balance as of December 31 $1,748 $1,748
======================
(4) Credit Facility
On December 16, 2002, the Company entered into an agreement with BFI
Business Finance ("BFI"), a Santa Clara, California-based business-credit
company, for a two-year working capital line of credit for $750, to replace the
recently extended credit facility with Comerica Bank, which was scheduled to
expire on December 31, 2002. Under the BFI agreement, available borrowings will
be up to 85% of accounts receivable, after reduction for ineligible accounts,
similar to our Comerica arrangement. The interest rate on outstanding balances
will be at prime plus 4% per annum, plus a monthly administrative fee of 0.50%
per month calculated on the average daily balance outstanding. The minimum
monthly interest and administrative fee charged to the Company will be not less
than $1 per month for the first six months, escalating to $2 per month for the
remaining term of the agreement.
(5) Accrued Salaries and Other Expenses
Accrued salaries and other expenses consist of the following:
40
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
December 31,
2003 2002
Accrued payroll and payroll taxes............ $ 163 $ 146
Accrued professional fees.................... 64 89
Other accrued expenses....................... 93 233
------- -------
Total accrued expenses............. $ 320 $ 468
======= =======
(6) Corporate Legacy Liabilities
Corporate Legacy Liabilities consist of obligations that were incurred
principally in years prior to 2001. During 2001 the Company entered into
settlement agreements or issued notes in satisfaction of certain of these
payables pursuant to a restructuring plan offered to substantially all of its
creditors.
The notes are unsecured, accrue interest at 6.5% per annum, and are due on
January 3, 2005. In the chart below, these notes are considered to be long-term
liabilities.
During 2002, the Company was able to decrease total legacy liabilities by
$1,230. The company settled $1,179 for $393 in cash and $10 in common stock in
2002, resulting in gains on settlements of $823. These gains on settlements are
recorded on the statement of operations as Other Income (See note (8)). During
the 1st quarter of 2003, the Company was able to settle the remaining short term
obligation of $94 resulting in a gain of $35.
Corporate legacy liabilities are classified as long-term or short-term
obligations below, depending on which option under the restructuring plan the
creditor accepted and consisted of the following as of December 31;
2003 2002
------------------
Short-term:
Restructuring reserve $-- $--
Acquisition payable -- --
Other non-operating payables -- 94
------------------
Total Short-term $-- $94
------------------
Long-term:
Severance agreement, converted to
promissory notes $-- $--
Promissory notes 11 11
Other non-operating payables -- --
------------------
Total long-term $11 $11
------------------
(7) Convertible Notes Payable, net
Convertible notes payable, net consists of the following as of December 31:
2003 2002
----------------
Series 1 Convertible Subordinated Promissory
Notes $1,283 $1,209
Less fundraising and warrant costs:
Fundraising costs, net of amortization 10 29
Warrant costs associated with convertible
notes, net of amortization 32 94
----------------
Subtotal fundraising costs 42 123
----------------
Notes payable, net $1,241 $1,086
================
Convertible notes payable - short term $38 $--
================
Convertible notes payable - long term $1,203 $1,086
================
On July 26, 2001, the Company completed a private placement through the
issuance of approximately $1,100 of Series 1 Convertible Subordinated Promissory
Notes (the "Notes") with warrants to a group of investors, including members of
BrightStar's senior management. The Notes are secured on a junior basis by
substantially all of the assets of the Company and its operating subsidiaries,
and are convertible into common stock, at the option of the investors, at a
fixed price of $0.23 per share, subject to anti-dilution provisions. The Notes
are entitled to simple interest calculated at a rate per annum equal to 8%. The
Company had the option to pay interest for the first year from the date of the
Notes (subsequently extended for another year during the second quarter of 2002)
by issuing additional Notes (the "PIK Notes") and warrants with the same terms
as above. The Company elected to pay the interest due on the Notes from
inception through June 30, 2003 by issuing PIK Notes totaling $182 and warrants
totaling 118,867. In October 2003, the Company paid in cash the quarterly
41
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
interest due on the Notes and PIK Notes for the quarter ended September 30,
2003. In addition, 70,000 warrants were issued to the placement agent for the
transaction at an exercise price of $1.00 per share. Total warrants issued to
investors have been valued at $144 under the provisions of APB No. 14 and EITF
00-27, and will be amortized as additional interest expense over the life of the
debt. Amortization expense for the year ended December 31, 2003 and 2002
amounted to $63 and $48, respectively.
The Notes and the PIK Notes were originally due and payable on July 1, 2004.
However, the Notes and PIK Notes were amended effective October 24, 2003 to
extend their due date to December 31, 2005 when holders representing more than
75% of the aggregate principal amount of the Notes and PIK Notes agreed to the
extension. As consideration for this amendment the Company agreed to a partial
pay down schedule for the PIK Notes, commencing January 2004. The Company agreed
to pay in cash each quarter an amount equal to 50% of the interest then due on
the Notes and PIK Notes and the amounts so paid will be applied sequentially to
retire the PIK Notes in the order issued until December 31, 2005.
(8) Settlements of Legacy Liabilities and Other Income
Settlements of legacy liabilities and other income consisted of the
following for the years ended December 31:
2003 2002
------------------
Settlement of legacy liabilities $35 $823
Legacy liabilities of insolvent
subsidiary -- 1,467
Other 47 73
------------------
Total $82 $2,363
==================
See note (6) for a discussion of legacy liabilities and the resulting gain
on settlements of legacy liabilities of $35 and $823, respectively.
The gain relating to the legacy liabilities of insolvent subsidiary relate
to amounts owed by BRBA. BRBA became insolvent and ceased operations in the
fourth quarter of 2001. On June 28, 2002, BRBA filed for liquidation under
Chapter 7 of the bankruptcy code, and the Company no longer controls BRBA. As a
result, BRBA's financial position has not been included in the Company's
consolidated results since the bankruptcy date. This resulted in the Company
recording a gain of $1,467 during the year ended December 31, 2002, representing
the elimination of the net liabilities of BRBA at the filing date. On September
3, 2002, the Chapter 7 trustee filed a no-asset report and application to close
the bankruptcy case.
(9) Stockholders' Equity
Capital Stock
On June 18, 2002 at the Annual Meeting of Stockholders, the stockholders
approved an amendment to the Company's Certificate of Incorporation to (i)
increase the number of shares of all classes of stock that the Company is
authorized to issue from 38,000,000 to 75,000,000 and (ii) to designate all
37,000,000 of the additional authorized shares as Common Stock. After this
amendment the total authorized stock of 75,000,000 shares consisted of
72,000,000 shares of common stock and 3,000,000 shares of preferred stock.
On June 21, 2001 at the Annual Meeting of Stockholders, the stockholders
authorized the Board of Directors, at its discretion, to effect a reverse stock
split of up to 20 shares for 1 share of the Company's common stock. As of March
26, 2004, the reverse stock split, which is subject to approval by the
convertible note holders, had not been authorized by the Board of Directors.
Common Stock Warrants, Stock Options and Stock Awards
Stock Options -- During 1998 and 2000, the 1997 and 2000 Long-Term Incentive
Plans (the "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. As of December 31, 2001, the
total number of shares that could be issued under the Plans was 4,000,000
shares, of which only 3,930,000 shares could be granted for incentive stock
options and 70,000 for nonqualified stock options. On June 28, 2002 at the
Annual Meeting of Stockholders, the stockholders approved an amendment of the
Company's 2000 Long-Term Incentive Plan to increase the number of shares
issuable thereunder by 2,000,000. Therefore, as of December 31, 2002, the total
number of shares that may be issued under the Plans is 6,000,000, of which
5,930,000 shares may be granted for incentive stock options and 70,000 for
42
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
nonqualified stock options. Options and restricted stock awards, which
constitute the only issuance under the incentive plans as of December 31, 2002,
have been generally granted at or above the fair value of the Company's common
stock on the date of grant. The Company also granted restricted common stock to
individuals during 2002 as part of their employment agreements that are
considered grants outside of the Plans. The Plans do not allow the granting of
stock options to independent consultants and therefore any such grants are
considered outside of the Plans. The Plans also previously limited the amount of
stock options granted to any one individual in any one year to 200,000 shares.
This limit was increased to 1,000,000 shares at the Annual Meeting of
Stockholders on June 18, 2002. Any grants of stock options over the 1,000,000
share limit to any individual are considered grants outside of the Plans as
well. The following table summarizes the Plans' stock option and stock award
activity:
Shares or Weighted Weighted
Shares or Options Total Shares Average Average
Options Issued
Issued Inside Outside Or Options Exercise Remaining
the Plans the Plans Issued Price Life
--------------------------------------------------------
Options outstanding at January
1, 2001 1,923,946 -- 1,923,946 $2.94 9.50 years
Granted in 2001 1,673,470 945,060 2,618,530 $0.56
Exercised -- -- --
Cancelled (1,912,969) (325,000) (2,237,969) $2.65
---------------------------------------
Options outstanding at December
31, 2001 1,684,447 620,060 2,304,507 $0.98 8.53 years
Exercisable at December 31, 2001 1,021,780 620,060 1,641,840
=======================================
Granted in 2002 2,495,357 1,000,000 3,495,357 $0.05
Exercised -- -- -- --
Cancelled (1,410,603) (580,060) (1,990,663) $0.38
---------------------------------------
Options outstanding at December
31, 2002 2,769,201 1,040,000 3,809,201 $0.56 8.48 years
Exercisable at December 31, 2002 2,179,383 1,040,000 3,219,383
=======================================
Granted in 2003 57,500 34,028 91,528 $0.08
Exercised (2,500) -- (2,500) $0.05
Cancelled (459,388) -- (459,388) $0.39
Vesting and sale of restricted
stock awards (180,000) -- (180,000) --
---------------------------------------
Options outstanding at December
31, 2003 2,184,813 1,074,028 3,258,841 (a) $0.62 7.78 years
=======================================
Exercisable at December 31, 2003 1,994,604 1,052,918 2,227,522 (b)
(a) 1,874,604,and 120,000 options and restricted stock awards are outstanding
at $0.01 - $0.10 and $6.00, respectively
(b) 1,012,918 and 40,000 options and restricted stock awards are outstanding at
$0.01 - $0.10 and $1.00 respectively
As of December 31, 2001, grants outside the Plans consist of 40,000 options
with an exercise price of $1.00 per share to the son of Mr. Wagda, the Company's
CEO, who worked as an independent contractor for the Company on special projects
during the fourth quarter of 2000 and the first quarter of 2001. His
compensation consisted of cash payments of $19 for 2001 and the 40,000 options.
The remaining options of 580,060 belong to Mr. Wagda, as part of his
compensation package. All of Mr. Wagda's options were cancelled in connection
with the restricted stock issuance made to him in February 2002.
As of December 31, 2003 and 2002, grants outside the Plans also include
stock issued in lieu of the cash bonuses awarded in 2001 to Mr. Wagda and Mr.
Czaja. On February 15, 2002, the compensation committee of the Board of
Directors voted to issue fully-vested stock outside the Plans to Mr. Wagda and
Mr. Czaja of 750,000 and 250,000 shares, respectively, in full satisfaction of
cash bonuses awarded for 2001.
On February 12, 2002, the compensation committee of the board of directors
voted to take actions that resulted in the repricing of approximately 835,000
existing stock options to active participants under the Company's long-term
incentive plans to a new exercise price of $0.05 per share, which was determined
to be the fair market value by the Board of Directors based upon the prior
20-day average closing price. The market close price on February 12, 2002 was
$0.07. Since the market closing price was greater than the exercise price of the
newly granted options, the difference of $0.02 per share, approximately $17, was
recorded as unearned compensation and will be recognized over the remaining
vesting period of the repriced options. These repriced stock options are
accounted for as variable awards, and accordingly, the Company will record any
increase of the fair market value of the underlying stock over the market
closing price of $0.07 on the day of the repricing as compensation expense in
the appropriate quarter. Since the closing price of the Company's stock was at
$0.10 per share on September 30, 2003, the Company recorded a compensation
expense of $17 in the third quarter of 2003. The third quarter of 2003 was the
first quarter that the Company was required to record any compensation expense
since the closing price at the end of each of the previous quarters of 2003 and
2002 was lower than $0.07. On December 31, 2003, the Company's closing stock
price was $0.10 per share and therefore no compensation expense was recorded.
43
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
The Company also awarded on February 12, 2002 approximately 910,000 new
options with respect to active participants under the Company's long-term
incentive plans. The exercise price of all affected options was $0.05 per share,
which was the fair market value as determined by the Board of Directors based
upon the prior 20-day average closing price. The market closing price on
February 12, 2002 was $0.07. Since the market closing price was greater than the
exercise price of the newly granted options, the Company recorded compensation
expense of $18, which will be amortized monthly over 3 years, the vesting period
of the grants. The unamortized portion is recorded as unearned compensation on
the balance sheet as of December 31, 2002. For the years ended December 31, 2003
and 2002, the Company recorded a total of $14 and 13 as an expense for the
repricing and granting of new stock options, respectively.
Also on February 15, 2002, the compensation committee voted to take actions
that resulted in restricted stock awards to Mr. Wagda, the Company's Chief
Executive Officer, and Mr. Czaja, the Company's Chief Financial Officer, of
750,000 and 250,000 shares, respectively. In return for granting of these
shares, the stock options previously granted to Mr. Wagda and Mr. Czaja totaling
780,060 and 500,000 options (including 300,000 options granted to Mr. Czaja on
February 12, 2002), respectively, were cancelled. The restricted stock grants
were issued inside the Plans and vest monthly over a 2-year period. The Company
recorded compensation expense of $60, which is being amortized monthly over 2
years. For the years ended December 31, 2003 and 2002, the Company recorded a
total compensation expense of $22 and $34 for restricted stock grants,
respectively.
On November 5, 2002, the Board of Directors approved the vesting of the
remaining 166,667 unvested shares of Mr. Czaja's restricted stock award, subject
to certain conditions. During the fourth quarter ending December 31, 2002, the
Company recorded an additional compensation expense of $10 for this transaction.
Recent Sales of Unregistered Securities.
Set forth below is certain information concerning all issuances of
securities by BrightStar within the past three years that were not registered
under the Securities Act of 1933, as amended (the "Securities Act").
1. On January 16, 2001, the prior owners of Cogent Technologies LLC
("Cogent") were issued 1,020,000 shares of our common stock in partial
settlement of a claim by them related to the unpaid balance of the purchase
price for the assets and business of Cogent and amounts due under employment
agreements with us.
2. 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.
3. On February 15, 2001, certain of our 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.
4. On February 15, 2001, Unaxis Trading Limited ("Unaxis") was issued
250,000 shares of our common stock in settlement of litigation between the
Company and certain affiliates of Unaxis. 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 had 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. During
December 2001, the Company purchased the shares back from Unaxis for a $120
payment.
5. On May 4, 2001, 257,400 shares of our common stock were issued to the
owners of Cogent, Unaxis and various former employees in satisfaction of our
obligations to pay penalties to them under the terms of various registration
rights agreements.
6. On July 26, 2001, the Company issued and sold approximately $1,100 of
convertible notes to a group of investors, including members of BrightStar
senior management. The notes are convertible into common stock, at the option of
the investors, at a fixed price of $0.23 per share, subject to anti-dilution
provisions. In addition, the investors received approximately 718,000 warrants,
exercisable at $0.50 per share. The notes are mandatorily convertible, at the
Company's option, into common stock at $0.23 per share, subject to anti-dilution
provisions, if: (i) the market price of the Company's common stock, determined
on a 20-day moving average basis, equals or exceeds $0.50; and (ii) the
investors may lawfully sell all of the common stock issuable upon conversion and
the common stock issuable upon exercise of Warrants held by the investor, either
under an effective registration statement, or under Rule 144; and (iii) at least
$2,300 of the past due payables have been restructured. In addition, 70,000
warrants were issued to Brewer Capital Group, LLC, which acted as placement
agent for the transaction, at an exercise price of $1.00 per share. The net
proceeds of this transaction were used for general corporate purposes.
44
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
7. In November 2001, the Company engaged a financial advisor to assist the
Company in obtaining additional long-term financing. As part of the financial
advisor's compensation for this engagement, and in addition to a $25 retainer
fee paid to the advisor, the Company has agreed to the issuance of warrants to
purchase 100,000 shares of the Company's common stock at an exercise price of
$0.05 per share. These warrants will expire in November 2004. These warrants
were recorded at fair value according to Generally Accepted Accounting
Principles ("GAAP") at the date of issue.
8. On February 15, 2002, 1,500,000 shares and 500,000 shares of restricted
common stock were issued to Joseph A. Wagda and Kenneth A. Czaja, respectively,
in connection with their employment with the Company.
9. On August 1, 2002, 20,000 shares of our common stock were issued to a
vendor in full satisfaction of our obligation to pay them for services rendered.
10. On a quarterly basis, starting on October 1, 2001 and continuing on
January 1, 2002, April 1, 2002, July 1, 2002, October 1, 2002, January 1, 2003,
April 1, 2003 and July 1, 2003, the Company issued additional convertible notes
of $16, $22, $23, $23, $24, $24, $24 and $25 respectively, to the same group of
investors as the issuances of July 26, 2001 for payment in kind of interest due
on the original issuance of notes and subsequent issuances of notes as payment
in kind for interest due. In addition, the investors received in total for all
the quarterly issuances mentioned above approximately 119,000 warrants,
exercisable at $0.50 per share. The notes carry the same characteristics as the
notes issued on July 26, 2001. These warrants were recorded at fair value
according to GAAP at the date of issue.
11. On May 6, 2003, 125,000 warrants to purchase shares of the Company's
common stock at an exercise price of $0.035 were issued to Westminster
Securities as part of an investment-banking arrangement. The warrants will
expire on May 6, 2008. These warrants were recorded at fair value according to
GAAP at the date of issue.
(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, are presented below:
2003 2002 2001
-------------------------
Income (loss) before
income taxes:
Domestic $(138) $2,500 $(2,754)
Foreign: -- -- --
-------------------------
$(138) $2,500 $(2,754)
=========================
2002 2001 2000
-----------------------
Provision (benefit) for
income taxes:
Current:
Domestic $-- $(128) $--
Foreign -- -- --
Deferred:
Domestic -- -- --
Foreign -- -- --
-----------------------
Total $-- $(128) $--
=======================
The Company's deferred tax assets, at an effective tax rate of 38.5%, are
reflected below as of December 31:
2003 2002
----------------
Net operating losses $5,987 $4,885
Bad debt reserves 12 54
Accrued expenses 33 77
Goodwill 4,914 5,502
Other -- --
----------------
Net deferred tax asset 10,946 10,518
Valuation allowance (10,946)(10,518)
----------------
$-- $--
================
45
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
At December 31, 2003, the Company has a net operating loss carryforward
("NOL") of approximately $15,552 for federal income tax purposes, which will
expire in years 2018 through 2023. Utilization of the federal NOL's and credits
may be subject to a substantial annual limitation in the future if there were a
"change in ownership" as defined by the Internal Revenue Code of 1986. Such a
change in ownership would likely result in the expiration of the great majority
of the NOL's before utilization.
The table below reconciles the expected U.S. federal statutory tax to the
recorded income tax as of December 31:
2002 2002 2001
------------------------
Provision (benefit) at statutory tax
rate $(29)$(2,488)$(1,330)
Valuation allowance (428) 551 1,495
NOL reduction due to BRBA Chapter 7
filing -- 2,161 --
Other, net 457 (352) (165)
------------------------
Total $-- $(128) $--
========================
(11) Employee Benefit Plans
The Company has a 401(k) plan that covers substantially all of its U.S.
employees. The Company may provide matching contributions of up to 6% of the
employee's base salary. Employees would vest in Company contributions evenly
over five years from their date of employment. Employer matching and profit
sharing contributions are discretionary, and, to date, no matching or profit
sharing contributions have been made.
(12) Litigation
The Company is from time to time involved in litigation incidental to its
business. The Company believes that the results of such litigation 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
2006. Minimum future commitments under these agreements for the years ending
December 31 are: 2004, $9; 2005, $8; and 2006, $0.
Rent expense was $68, $223 and $1,444 during the periods ended December 31,
2003, 2002, and 2001, respectively.
Employment Agreements -- On February 15, 2002 the Company and Mr. Wagda
entered into an agreement covering the terms of his employment by the Company.
The terms of the agreement include annual base salary of $300 beginning May 1,
2002 increasing to $350 beginning May 1, 2003, the immediate vesting of stock
and options upon a qualifying termination or a change of control and
continuation of base salary for a period of 12 months in the event of a
qualifying termination. The agreement also calls for an annual bonus of up to
200% of base salary based upon performance objectives to be agreed upon by the
Company and Mr. Wagda. For the years ended December 31, 2003 and 2002, Mr. Wagda
was given as a bonus an additional month of paid vacation, having an approximate
value of $29 and $25, respectively. On October 21, 2003, the agreement between
the Company and Mr. Wagda was amended to reflect the following changes: (i) an
extension of its fixed term from April 30, 2004 to October 31, 2004, (ii) adding
to the definition of a "qualifying termination" a resignation occurring between
90 and 180 days after a change in control and (iii) providing for incentive
compensation upon the completion of certain strategic transactions involving the
Company, the amount of which would be determined in part based on the increase
in the price of the Company's common stock or securities received in exchange
for its common stock above a specified base amount. Mr. Wagda is eligible to
participate in all of the Company's employee benefit plans.
(14) Significant Customers and Geographic Information
For 2003, the Company had revenues from one of our customers which accounted
for approximately 60% of total revenues. This same customer and one other
unrelated customer accounted for approximately 46% and 13%, respectively, of the
total outstanding accounts receivable as of December 31, 2003.
46
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for share and per share amounts)
For 2002, the Company had revenues from three unrelated customers, which
accounted for approximately 29%, 25% and 10%, respectively, of total revenues.
These same three customers accounted for approximately 34%, 9% and 15%,
respectively, of the total outstanding accounts receivable as of December 31,
2002.
For 2001, revenues form three unrelated customers accounted for
approximately 17%, 12% and 10%, respectively, of total revenues. Two of the
customers accounted for approximately 20% and 13%, respectively, of the total
outstanding accounts receivable balance as of December 31, 2001. Another
customer accounted for approximately 14% of the total outstanding accounts
receivable balance as of December 31, 2001.
The Company operates in a single segment as a provider of IT services and
the Company primarily operates in the United States.
Subsequent to year end, the Company's largest customer informed the Company
that consultants representing approximately 57% of our revenues from this
customer in 2003 will be eliminated during the period of March through May of
2004 as a result of project completions and cost pressure from the federal
government. Management considered the impact of this reduction and whether it
could give rise to the Company's ability to continue for a reasonable period of
time, and whether the going concern basis of accounting continued to be
appropriate. However, based upon cash on hand and availability under the
Company's line of credit agreement (see Note (4)), the Company projected that it
had sufficient liquidity resources for at least the remainder of 2004, thereby
making the going concern basis of accounting, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business, the
appropriate basis of accounting.
(15) Quarterly Consolidated Results of Operations (unaudited)
Quarterly consolidated results of operations consist of the following as of
December 31;
2003 2002
---------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
---------------------------------------------------------------------
Revenue $1,410 $1,434 $1,586 $1,422 $2,887 $2,403 $2,221 $1,896
Gross profit 408 418 466 403 940 780 739 620
Income (loss) from
continuing
operations (39) (1) (17) (81) 92 1,360 538 638
Change in accounting
principle -- -- -- -- (9,945) -- -- --
Net income (loss) $(39) $(1) $(17) $(81)$(9,853) $1,360 $538 $638
=====================================================================
Per share basis: basic
and diluted
Continuing operations $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.01 $ 0.09 $ 0.04 $ 0.04
Discontinued operations -- -- -- -- -- -- -- --
Change in accounting
principle -- -- -- -- (0.70) -- -- --
---------------------------------------------------------------------
$0.00 $0.00 $0.00 $0.00 $(0.69) $0.09 $0.04 $0.04
=====================================================================
As a result of the Company implementing SFAS No. 142 and performing the
impairment test as SFAS No. 142 requires, a goodwill impairment loss of $9,900
was recognized in the fourth quarter of 2002, which is when the test was
completed, and recorded as of the first quarter of 2002 as a change in
accounting principle. Also as part of SFAS No. 142 and included in the change in
accounting principle amount, the Company wrote off $45 related to an intangible
asset during 2002.
47
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------
Additions
Balance Charged
at to Balance at
Description BeginningCosts andDeductions End
of PeriodExpenses of Period
- -----------------------------------------------------------------------
Allowance deducted from assets
to which it
applies:
Allowance for doubtful accounts:
Year ended December 31, 2001 $320 $390 $410 $300
Year ended December 31, 2002 300 35 195 140
Year ended December 31, 2003 140 -- 110 30
Accrued restructuring charge:
Year ended December 31, 2001 853 2,011 1,423 1441
Year ended December 31, 2002 1,441 -- 1,441 --
Year ended December 31, 2003 -- -- -- --
48
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Board of Directors
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
February 12, 2004, which is included in the annual report on Form 10-K, we have
also audited Schedule II for the years ended December 31, 2003 and 2002. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Stonefield Josephson, Inc.
Walnut Creek, California
February 12, 2004
49
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
February 15, 2002 which is included in the Annual Report on Form 10-K, we have
also audited Schedule II for the years ended December 31, 2001. 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
February 15, 2002
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)).
4.4 -- Securities Purchase Agreement dated March 10, 2000 among BrightStar
Information Technology Group, Inc. and Strong River Investments, Inc. and
Montrose Investments LTD (Incorporated by reference to Exhibit 10.36 to
Amendment No.1 to BrightStar's Registration Statement on Form S-1).
4.5 -- Adjustable Warrant issued to Strong River Investments, Inc. on March 10,
2000 (Incorporated by reference to Exhibit 4.5 to BrightStar's Registration
Statement on Form S-3, filed October 23, 2001).
4.6 -- Adjustable Warrant issued to Montrose Investments LTD on March 10, 2000
(Incorporated by reference to Exhibit 4.6 to BrightStar's Registration
Statement on Form S-3, filed October 23, 2001).
4.7 -- Warrant issued to Strong River Investments, Inc. on March 10, 2000
(Incorporated by reference to Exhibit 4.7 to BrightStar's Registration
Statement on Form S-3, filed October 23, 2001).
4.8 -- Warrant issued to Montrose Investments LTD on March 10, 2000
(Incorporated by reference to Exhibit 4.8 to BrightStar's Registration
Statement on Form S-3, filed October 23, 2001).
4.9 -- Warrant issued to Wharton Capital Partners Ltd. on March 10, 2000
(Incorporated by reference to Exhibit 4.9 to BrightStar's Registration
Statement on Form S-3, filed October 23, 2001).
4.10 -- Form of Series 1 Convertible Subordinated Promissory Note Agreement
issued to the holders of the July 26, 2001 private placement offering.
(Incorporated by reference to Exhibit 4.10 to BrightStar's Registration
Statement on Form S-3, filed October 23, 2001).
4.11 -- Form of Subscription Agreement for the holders of the Series 1
Convertible Subordinated Promissory Note Agreement issued to the holders of
the July 26, 2001 private placement offering. (Incorporated by reference to
Exhibit 4.11 to BrightStar's Registration Statement on Form S-3, filed
October 23, 2001).
4.12 -- Form of Common Stock Purchase Warrants for the holders of the Series 1
Convertible Subordinated Promissory Note Agreement issued to the holders of
the July 26, 2001 private placement offering. (Incorporated by reference to
Exhibit 4.11 to BrightStar's Registration Statement on Form S-3, filed
October 23, 2001).
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)).
50
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)).
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.
51
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.
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.
10.36* -- Employment Agreement between BrightStar Information Technology Group,
Inc. and Kenneth A. Czaja
10.37* -- Employment Agreement between BrightStar Information Technology Group,
Inc. and Joseph A. Wagda
10.38* -- $750,000 Line of Credit dated December 16, 2002, from BrightStar and
BFI Business Finance.
10.39* -- Office Lease dated December 19, 2002 between Olympic Funding and
BrightStar.
10.40 -- First Amendment to Security Agreement between BrightStar and BFI
Business Finance
10.41 -- Updated Employment Agreement Between BrightStar and Joseph A. Wagda
10.42 -- BrightStar Technology Services LLC's operating agreement
10.43 -- Second Amendment to Security Agreement between BrightStar and BFI
Business Finance
10.44 -- BrightStar's Code of Ethics
10.45 -- Financial services agreement between Sheridan Road Capital and
BrightStar
16.1* -- Letter from Grant Thornton LLP to the Securities and Exchange
Commission.
52
21.1* -- List of Subsidiaries of the Company.
23.1 -- Consent of Stonefield Josephson, Inc.
23.2 -- Consent of Grant Thornton LLP.
31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14 under
the Securities and Exchange Act of 1934.
31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14 under
the Securities and Exchange Act of 1934.
32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. section
1350
32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. section
1350
* Exhibits have been previously filed.
53