<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-43209 and 333-50455
4,250,000 SHARES
[BRIGHTSTAR LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by BrightStar Information Technology Group, Inc. ("BrightStar"). Prior to
the Offering, there has been no public market for the Common Stock. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Underwriters have reserved up to 200,000 of
the shares offered hereby for sale at the initial public offering price to
employees of the Company and other persons associated with the Company. The
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "BTSR."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $13.00 $0.91 $12.09
Total(3)......................... $55,250,000 $3,867,500 $51,382,500
=============================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering payable by BrightStar, estimated
at $3,600,000.
(3) BrightStar has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 637,500 additional shares of
Common Stock at the Price to Public per share, less the Underwriting
Discount, for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $63,537,500,
$4,447,625 and $59,089,875, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
will be made against payment on or about April 22, 1998 at the offices of CIBC
Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial Center, New York, New
York 10281.
------------------------
CIBC OPPENHEIMER DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
THE DATE OF THIS PROSPECTUS IS APRIL 16, 1998
<PAGE> 2
Description of Graphics:
Three concentric circles, with "ERP" at the center, with the middle ring
divided into four segments with "Application Development," "Consulting,"
"Outsourcing," and "Systems Integration" in each of the respective segments, and
the outer ring divided into two parts, with "Training" at the top and "Upgrades
and Support" at the bottom. Above the circles, in the top left corner, the
BrightStar logo, and below the circles, "ERPQPLUS(sm) Comprehensive ERP
Solutions and Support."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE COVERING
TRANSACTIONS AND THE IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
This Prospectus may contain trademarks and service marks of other companies.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information appearing elsewhere in this
Prospectus, including "Risk Factors" and the financial statements and the notes
thereto. Concurrently with and as a condition to the closing of the Offering,
BrightStar will (i) acquire, in separate transactions (collectively, the
"Acquisitions"), seven independent information technology ("IT") services
companies (each a "Founding Company") for a combination of cash and shares of
Common Stock, par value $0.001 per share, of BrightStar ("Common Stock") and
(ii) issue Common Stock in exchange for all outstanding shares of common stock
of BIT Group Services, Inc. ("BITG"), including the issuance of 739,007 shares
to BIT Investors, LLC ("BITI") and 346,800 shares to senior management of
BrightStar (the "Share Exchange"). BITG is currently the sole stockholder of
BrightStar. Unless otherwise indicated by the context, references herein to (i)
"BrightStar" mean BrightStar Information Technology Group, Inc. and BITG and
(ii) the "Company" mean BrightStar, together with all the Founding Companies. As
provided in the agreement relating to the Share Exchange (the "Share Exchange
Agreement"), the aggregate number of shares of Common Stock to be issued in
connection with the Acquisitions (excluding any shares that may become issuable
pursuant to post-closing adjustments to the purchase price for two of the
Acquisitions) and the Share Exchange will be 3,588,735 shares. See "The Company"
and "Certain Transactions -- Acquisitions of the Founding Companies." Unless
otherwise indicated, the information set forth in this Prospectus (i) gives
effect to the Acquisitions and the Share Exchange and (ii) does not give effect
to the Underwriters' over-allotment option.
THE COMPANY
BrightStar is a professional services firm providing implementation of
enterprise resource planning ("ERP") software systems and enterprise-wide
business and technology solutions to Fortune 1000 companies and other large
organizations. ERP*PLUS(SM), the Company's suite of services which cover the
full range of IT systems development, includes: ERP software implementation,
consulting, software application development, systems integration, outsourcing,
training, upgrades and support. The Company is a SAP AG Implementation Partner
in the U.S. and Australia and has preferred business partner relationships with
PeopleSoft, Inc., Oracle Corp., Microsoft Corp. and Novell, Inc. The Company's
goal is to become a leader in the fragmented IT services industry through
consolidation of complementary companies, expansion of its service and product
offerings and cross-selling to its combined customer base.
BrightStar was founded in July 1997 to acquire companies providing a
comprehensive range of IT services and business solutions and has entered into
agreements to acquire the Founding Companies concurrently with the closing of
the Offering. The Company employs more than 600 consultants in 14 U.S. cities
and seven international locations and provides its services and products to
clients across a broad spectrum of industries, including communications,
consumer products, energy, financial services, health care, industrial,
insurance, media, professional services, retail and technology. The Company has
maintained long-term relationships with many of these clients involving a large
number of projects. On a combined basis, the Founding Companies generated
revenues of $32.6 million and $59.5 million for the twelve months ended December
31, 1996 and 1997, respectively.
The worldwide IT market has expanded significantly in recent years, driven
by the trends toward open systems, greater affordability and improvements in
operating performance. The IT services market has expanded along with the IT
industry in general. Forrester Research, an independent research organization
that provides information concerning the IT services industry, has estimated
that the market for consulting, design, implementation, management and
outsourcing was $124 billion in 1996 and will increase to $303 billion by 2002,
representing an approximate compounded annual growth rate of 16%.
The Company believes that among the leading factors driving growth in the
IT services market is the transition from mainframe-based computing and custom
software applications to ERP software systems and to distributed computing
technologies, such as client/server architectures, local area networks ("LANs"),
wide area networks ("WANs"), the Internet and intranets. Such systems offer the
increased functionality and flexibility that is important to the competitive
needs of businesses. As an integral part of adopting client/server
architectures, many organizations are replacing their older mainframe-based
computing and custom software applications ("legacy systems") with fully
integrated, packaged ERP software applications developed and marketed by leading
vendors such as SAP AG, PeopleSoft, Inc. and Oracle Corp. These ERP software
applications enable organizations to redesign their business processes in such
areas as product development,
3
<PAGE> 4
service delivery, manufacturing, human resources, finance and accounting.
Gartner Group, Inc., an internationally recognized consulting and research
organization, has estimated that the global ERP software market, including
license fees, service and maintenance, totaled more than $7.9 billion in 1996
and $10.6 billion in 1997, an increase of more than 34%. The Company believes
that the cost to implement and integrate an ERP software system ranges from two
to ten times the cost of the software license fee. Although these services may
be offered by ERP software developers, in most cases ERP implementation and
systems integration services are provided by third party service providers, such
as the Company.
The Company believes that the challenge of managing the transition to ERP
software and client/server systems from legacy systems is placing a severe
strain on many corporate IT departments. Consequently, organizations are
increasingly using third party service providers to implement ERP software and
in the design and development of custom solutions in order to improve
efficiency, minimize the financial risks associated with implementing new
technologies and reduce their existing IT infrastructures. In addition,
organizations increasingly rely upon third party service providers as a
cost-effective solution for large IT projects such as software remediation for
legacy systems relating to the year 2000 ("Year 2000") problem, which Gartner
Group, Inc. has estimated will cost in excess of $300 billion to resolve
worldwide.
The Company's goal is to be a leading provider of IT solutions. The
Company's approach emphasizes: (i) ERP implementation expertise; (ii) access to
a comprehensive range of IT solutions; (iii) a nationwide presence with strong
local relationships in markets throughout the U.S. to enhance its responsiveness
and client service; (iv) experienced consultants that address complex, mission
critical issues; and (v) integrated but independently managed business units to
provide flexibility and responsiveness to client needs and an entrepreneurial
environment for its professionals.
The Company's growth strategy focuses on: (i) maximizing intrinsic growth
opportunities by centralizing certain administrative functions, thereby allowing
management of the Founding Companies to focus on operations; (ii) capitalizing
on cross-selling opportunities by implementing programs that enable each
Founding Company to offer its particular IT expertise to the combined client
base of the Founding Companies; (iii) attracting, training, motivating and
retaining highly skilled employees; (iv) cultivating and expanding alliances
with leading software vendors in order to enhance the Company's industry
recognition and increase its sales opportunities; and (v) continuing its
acquisition program to broaden the Company's service and product offerings and
expand its presence in existing geographic markets or enter into new geographic
markets.
BrightStar has entered into definitive agreements to acquire the Founding
Companies concurrently with and conditioned upon the closing of the Offering.
The aggregate consideration BrightStar will pay to acquire the Founding
Companies consists of (i) approximately $31.6 million in cash, (ii) 2,502,928
shares of Common Stock and (iii) the assumption of approximately $7.7 million of
indebtedness of the Founding Companies. Two of the Acquisitions are subject to
post-closing adjustments payable in shares of Common Stock, based on the 1998
financial performance of the subject Founding Companies (the "Post-Closing
Adjustments"). The Company currently estimates that no shares of Common Stock
will be issuable in connection with the Post-Closing Adjustments. Accordingly,
the disclosures in this Prospectus assume that no shares of Common Stock will be
issued in connection with the Post-Closing Adjustments. See "Certain
Transactions -- Acquisitions of the Founding Companies."
4
<PAGE> 5
THE OFFERING
Common Stock offered by the
Company.......................... 4,250,000 shares
Common Stock to be outstanding
after the Offering(1)............ 7,838,735 shares
Use of proceeds.................. To pay the cash portion of the purchase
price for the Acquisitions (estimated at
$31.6 million), to repay certain
indebtedness of BrightStar, to pay certain
transaction costs related to the Offering
and the Acquisitions and for general
corporate purposes, which may include
future acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol.... BTSR
- ---------------
(1) The number of shares to be outstanding when the Offering closes will consist
of (i) an aggregate of 346,800 shares issued to BrightStar management in
connection with the Share Exchange, (ii) an aggregate of 739,007 shares
issued to BITI in connection with the Share Exchange, (iii) an aggregate of
2,502,928 shares issued as consideration in the Acquisitions and (iv) the
4,250,000 shares offered hereby. Such number of shares does not include (a)
617,000 shares that will be subject to options granted under BrightStar's
1997 Long-Term Incentive Plan (the "1997 Long-Term Incentive Plan") on the
date the Offering closes, with an exercise price equal to the initial public
offering price per share, (b) 50,000 shares issuable pursuant to a warrant
(the "MG Warrant") issued by BrightStar to McFarland, Grossman & Company,
Inc. ("MGCO"), a financial advisory firm that assisted the Company in
connection with the Acquisitions, (c) 14,285 shares issuable pursuant to an
option (the "BGCA Option") issued by BrightStar to Brewer-Gruenert Capital
Advisors, LLC ("BGCA"), a consulting firm engaged by the Company to assist
in certain corporate development matters and (d) up to 100,000 shares
issuable to Banque Paribas pursuant to an option (the "Lender Option") to be
granted in connection with a proposed senior secured credit facility (the
"Credit Facility"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Pro Forma Combined," "Management -- 1997 Long-Term Incentive
Plan" and "Certain Transactions."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
5
<PAGE> 6
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO
FORMA(1)
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................... $59,450
Cost of revenue........................................... 44,183
Selling, general and administrative expenses.............. 13,395
Stock compensation expense................................ 305
Depreciation and amortization(2).......................... 1,886
-------
Loss from operations...................................... (319)
Interest expense.......................................... (43)
Other expense, net........................................ (69)
-------
Loss before income taxes.................................. (431)
Income tax provision(3)................................... 289
-------
Net loss.................................................. $ (720)
=======
Net loss per basic and diluted common share............... $ (0.09)
=======
Shares used in computing net loss per basic and diluted
common share........................................... 7,839
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
PRO
FORMA(1) AS ADJUSTED(4)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 1,942 $ 9,090
Working capital (deficit)................................. (33,208) 14,225
Total assets.............................................. 62,081 73,809
Long-term debt, net of current maturities................. 655 306
Stockholders' equity...................................... 11,795 64,159
</TABLE>
- ---------------
(1) The pro forma combined statement of operations data assumes the
Acquisitions, the Share Exchange and the Offering (and the application of
the net proceeds therefrom) all were closed on January 1, 1997. The pro
forma balance sheet data assumes the Acquisitions and the Share Exchange
occurred on December 31, 1997. The pro forma combined statement of
operations data for the year ended December 31, 1997 is presented on the
basis of a year ended December 31 for each Founding Company with the
financial results of Blackmarr, SCS Australia and SII (see "The Company" for
the complete names of each) being recast for these purposes to reflect those
results for the twelve-month period ended December 31, 1997. The pro forma
combined financial information (i) is not necessarily indicative of the
results the Company would have obtained had these events actually occurred
when assumed or of the Company's future results, (ii) is based on
preliminary estimates (primarily of the aggregate purchase price of the
Acquisitions) and certain assumptions management deems appropriate and (iii)
should be read in conjunction with the financial statements and notes
thereto included in this Prospectus. Excludes the following non-recurring
items: (a) a one-time write-off for in-process research and development of
$3.0 million; and (b) compensation expense of $4.6 million for Common Stock
issued to the members of BrightStar's management at a price below the
initial public offering price.
(2) Includes $1.2 million annual amortization of goodwill to be recorded as a
result of the Acquisitions, the Share Exchange and the Offering, calculated
using the straight line method over an amortization period of 40 years.
(3) Assumes an effective tax rate of 39.0% on certain pro forma adjustments.
(4) Reflects the closing of the Offering and application of the net proceeds
therefrom. Adjusted to reflect the sale of 4,250,000 shares of Common Stock,
deduction of the underwriting discount and estimated offering expenses
payable by the Company and the application of the net proceeds therefrom.
See "Use of Proceeds."
6
<PAGE> 7
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
in nature and involves a high degree of risk. In addition to the other
information contained in this Prospectus, the following factors should be
considered carefully in evaluating the Company and its business before
purchasing the shares of Common Stock offered hereby. This Prospectus contains
certain forward-looking statements. Any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
For example, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors, including the risk factors set forth
below, that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements.
ABSENCE OF COMBINED OPERATING HISTORY
BrightStar was organized in July 1997 and has conducted no operations to
date other than in connection with the Offering and the Acquisitions. The
Founding Companies have operated as separate, independent businesses and there
can be no assurance that the Company will be able to integrate these businesses
successfully or to institute the necessary systems and procedures, including
accounting and financial reporting systems, to manage the combined enterprises
on a profitable basis. BrightStar's executive management team has only recently
been assembled, and no assurance can be given that it will be able to manage
effectively the combined entity or implement the Company's business strategy.
Until the Company establishes centralized accounting and other administrative
systems, it will rely on the existing systems of the Founding Companies. The
success of the Company will depend, in part, on the extent to which it is able
to centralize these systems, eliminate the unnecessary duplication of other
functions and otherwise integrate the Founding Companies and such additional
businesses as the Company may acquire. The inability of the Company to integrate
the Founding Companies and any subsequently acquired businesses successfully
could have a material adverse effect on the Company. See "Business -- Growth
Strategy" and "Management."
RISKS RELATED TO INTERNAL GROWTH AND OPERATING STRATEGIES
There can be no assurance that the Company will be able to improve the
profitability and expand the net sales of the Founding Companies and any
subsequently acquired businesses. The Company's ability to increase the net
sales of the Founding Companies and any subsequently acquired businesses will be
affected by various factors, including demand for IT services, the Company's
ability to expand the range of services it offers and the Company's ability to
enter new markets successfully. Many of these factors are beyond the control of
the Company. In addition, the Company's ability to effectively manage growth
will require the Company to expand and improve its operational, financial and
other internal systems and to attract, train, motivate and retain qualified
employees. If the Company's management is unable to manage internal growth, or
if new employees are unable to achieve anticipated performance levels, there
could be a material adverse effect on the Company. See "Business -- Growth
Strategy."
ATTRACTION AND RETENTION OF QUALIFIED EMPLOYEES
The Company's success depends in large part on its ability to attract,
train, motivate and retain highly skilled and experienced technical employees.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. Other providers of technical
staffing services, systems integrators, providers of outsourcing services,
computer consulting firms and temporary personnel agencies provide intense
competition for IT professionals with the skills and experience required to
perform the services offered by the Company. Competition for these professionals
has increased in recent years and the Company expects such competition will
continue to increase for the foreseeable future. There can be no assurance that
the Company will be able to attract and retain sufficient numbers of highly
skilled technical employees in the future. The loss of technical personnel or
the Company's inability to hire or retain sufficient technical personnel could
impair the Company's ability to secure and complete client engagements and could
have a material adverse effect on the Company. See "Business -- Human
Resources."
7
<PAGE> 8
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenue and results of operations may fluctuate significantly
from quarter to quarter or year to year because of a number of factors,
including but not limited to: the rate of hiring and the productivity of
revenue-generating personnel; the availability of qualified IT professionals;
the significance of client engagements commenced and completed during a quarter;
the number of business days in a quarter; changes in the relative mix of the
Company's services; changes in the pricing of the Company's services; the timing
and rate of entrance into new geographic or IT speciality markets; departures or
temporary absences of key revenue-generating personnel; the structure and timing
of acquisitions; changes in the demand for IT services; and general economic
factors. The timing of revenue is difficult to forecast because the Company's
sales cycle for certain of its services can be relatively long and is subject to
a number of uncertainties, including clients' budgetary constraints, the timing
of clients' budget cycles, clients' internal approval processes and general
economic conditions. In addition, as is customary in the industry, the Company's
engagements generally are terminable without 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 the foregoing factors, the Company
believes period-to-period comparisons of its 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
As an integral part of its business strategy, the Company will seek to
expand by acquiring additional IT businesses. The timing, size and success of
the Company's acquisition efforts and the associated capital commitments cannot
be predicted. The Company expects to face competition for acquisition
candidates, which may limit the number of acquisition opportunities available to
the Company and may lead to higher acquisition prices. There can be no assurance
that the Company will be able to identify, acquire or profitably manage
additional businesses or successfully integrate acquired businesses, if any,
into the Company without substantial costs, delays or other operational or
financial difficulties. In addition, acquisitions involve a number of other
risks, including failure of the acquired businesses to achieve expected results,
diversion of management's attention and resources to acquisitions, failure to
retain key customers or personnel of the acquired businesses and risks
associated with unanticipated events, liabilities or contingencies. Client
dissatisfaction or performance problems at a single acquired firm could
negatively affect the reputation of the Company. Acquisitions accounted for as
purchases may result in substantial annual noncash amortization charges for
goodwill and other intangible assets in the Company's statements of operations.
If the Company is unable to acquire complementary IT service businesses on
reasonable terms or successfully integrate and manage acquired companies, or if
performance problems occur at acquired companies, there could be a material
adverse effect on the Company. See "Use of Proceeds" and "Business -- Growth
Strategy."
NEED FOR ADDITIONAL FINANCING
The Company's acquisition strategy will require substantial capital. The
Company intends to finance future acquisitions with cash flow from operations,
through issuances of shares of Common Stock or debt securities, including
convertible debt securities, and through borrowings under credit facilities.
Although the Company has received a commitment from Banque Paribas to provide
the Credit Facility under which the Company would have available to it an
aggregate of up to $30.0 million in borrowings for acquisitions, capital
expenditures, working capital, refinancing of Founding Company indebtedness, if
necessary, and for general corporate purposes, the Company has not yet entered
into definitive agreements with respect to the Credit Facility. The Company
expects that borrowings under the Credit Facility, if any, will be secured by
liens on substantially all of the Company's assets (including accounts
receivable) and a pledge of the Company's equity interest in each of its
subsidiaries and that the Credit Facility will require the Company to comply
with various loan covenants including (i) maintenance of certain financial
ratios, (ii) restrictions on additional indebtedness and (iii) restrictions on
liens, guarantees and the payment of dividends. There can be no assurance that
the Company will enter into the Credit Facility on the terms described or that
the Company
8
<PAGE> 9
will enter into any credit facility at all. In the event that the Company does
not obtain the Credit Facility pursuant to the commitment received from Banque
Paribas and does not otherwise obtain a line of credit acceptable to the
Company, it is possible that the Company's operations and strategies could be
adversely affected.
Reliance on internally generated cash or debt to complete acquisitions
could substantially limit the Company's operational and financial flexibility.
The extent to which the Company will be able or willing to use shares of Common
Stock to consummate acquisitions will depend on its market value from time to
time and the willingness of potential sellers to accept it as full or partial
payment. Using shares of Common Stock for this purpose may result in significant
dilution to then existing stockholders. To the extent the Company is unable to
use Common Stock to make future acquisitions, its ability to grow through
acquisitions may be limited by the extent to which it is able to raise capital
for this purpose through debt or additional equity financings. No assurance can
be given the Company will be able to obtain the necessary capital to finance a
successful acquisition program or its other cash needs. If the Company is unable
to obtain additional capital on acceptable terms, it may be required to reduce
the scope of its presently anticipated expansion. In addition to requiring
funding for acquisitions, the Company may need additional funds to implement its
internal growth and operating strategies or to finance other aspects of its
operations. If the Company is unable to obtain additional capital on acceptable
terms, or if the use of internally generated cash or debt to complete
acquisitions significantly limits the Company's operational or financial
flexibility, or if the Company is unable to use shares of Common Stock to make
future acquisitions, there could be a material adverse effect on the Company.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- Pro
Forma Combined."
COMPETITION
The market for IT services is highly competitive and fragmented, is subject
to rapid change and has low barriers to entry. The Company competes 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 the Company. In addition, the Company competes with its
clients' internal management information systems ("MIS") departments. The
Company believes the principal competitive factors in the IT services industry
include responsiveness to client needs, availability of technical personnel,
speed of applications development, quality of service, price, project management
capabilities, technical expertise and ability to provide a wide variety of IT
services. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside of its control, including the ability
of its competitors to hire, retain and motivate qualified technical personnel,
the ownership by competitors of software used by potential clients, the
development of software that would reduce or eliminate the need for certain of
the Company's services, the price at which others offer comparable services and
the extent of its competitors' responsiveness to client needs. The Company
expects 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 the Company and
greater competition for qualified technical personnel. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors. If the Company is unable to compete effectively, or if competition
among IT services companies results in a deterioration of market conditions for
IT services companies, there could be a material adverse effect on the Company.
See "Business -- Competition."
SIGNIFICANCE OF RELATIONSHIPS WITH SAP AND KPMG PEAT MARWICK
The Company, through two Founding Companies, SCS America and SCS Australia
(see "The Company" for the complete names of each), has significant
relationships with SAP AG ("SAP") and a member firm of KPMG Peat Marwick
("KPMG"), from which substantial subcontracting revenue and business referrals
are derived. SCS America and SCS Australia are authorized to implement and
service SAP's technology under terms of their respective SAP Implementation
Partner Agreements with SAP. Each
9
<PAGE> 10
of SCS America and SCS Australia subcontracts projects from SAP; however, SAP is
not obligated to refer business to or subcontract with either company. SCS
Australia also generates significant revenue from subcontracting arrangements
with KPMG, which is a minority interest holder in SCS Australia (which minority
interest is being acquired by BrightStar in connection with its acquisition of
SCS Australia); however, other than the agreement concerning such acquisition,
neither BrightStar nor SCS Australia has any contractual relationship with KPMG.
If these relationships were to deteriorate or be discontinued or if the
Company's status as an SAP Implementation Partner in the U.S. or Australia was
to be terminated, it could have a material adverse effect on the Company. See
"Business -- Growth Strategy."
NATURE OF PROJECTS
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation. In addition, the Company is exposed
to various risks and liabilities associated with placing its employees and
consultants in the workplaces of others, including possible claims of errors and
omissions, misuse of client proprietary information, misappropriation of funds,
discrimination and harassment, theft of client property, other criminal activity
or torts and other claims. Although the Founding Companies have not experienced
any material claims of these types, there can be no assurance that the Company
will not experience such claims in the future. If claims are successfully
brought against the Company as a result of the Company's performance on a
project, or if the Company's reputation is damaged, there could be a material
adverse effect on the Company.
In addition, a small percentage of the Company's projects are billed on a
fixed-fee basis. As a result of competitive factors or other reasons, the
Company could increase the number and size of projects 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 a fixed-fee
contract is based could have a material adverse effect on the Company.
RAPID TECHNOLOGICAL CHANGE
The Company's success will depend in part on its ability to enhance its
existing products and services, to develop and introduce new services and
products and train its consultants in order to keep pace with continuing changes
in IT, evolving industry standards and changing client preferences. There can be
no assurance that the Company will be successful in addressing these issues or
that, even if these issues are addressed, the Company will be successful in the
marketplace. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's services
noncompetitive or obsolete. The Company's failure to address these issues
successfully could have a material adverse effect on the Company.
POTENTIAL DECREASE IN SERVICES AFTER ADDRESSING THE YEAR 2000 PROBLEM
The purchasing patterns of clients may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase services offered by the Company, which could have a material adverse
effect on the Company.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends on certain methodologies it utilizes in
designing, installing and integrating computer software and systems and on other
proprietary intellectual property rights it has developed to serve its clients.
The Company's business includes the development of custom software in connection
with specific client engagements. Ownership of such software is generally
assigned to the client.
10
<PAGE> 11
The Company also develops certain application software products, or software
"tools," which remain the property of the Company.
The Company relies on a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company generally enters into
confidentiality agreements with its employees and consultants and limits access
to, and distribution of, its proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights. In addition, the laws of some foreign countries may not protect
the Company's proprietary rights as fully or in the same manner as do the laws
of the U.S. Also, despite the steps taken by the Company to protect its
proprietary rights, there can be no assurance that others will not develop
technologies similar or superior to the Company's technology or design around
the proprietary rights owned by the Company.
Although the Company believes that its services and products do not
infringe on the intellectual property rights of others and that it has all
rights necessary to use the intellectual property employed in its business, the
Company is subject to the risk of litigation alleging infringement of
third-party intellectual property rights. Any such claims could require the
Company to spend significant sums in litigation, pay damages, develop non-
infringing intellectual property or acquire licenses to the intellectual
property which is the subject of the asserted infringement. If the Company is
unable to successfully enforce its intellectual property rights, or if claims
are successfully brought against the Company for infringing the intellectual
property rights of others, there could be a material adverse effect on the
Company. See "Business -- Intellectual Property Rights."
INTERNATIONAL OPERATIONS
During the years ended December 31, 1996 and 1997, the percentage of the
Company's revenues generated outside the U.S. was 25% and 28%, respectively. The
current and planned international operations of the Company are subject to
certain political, economic and other uncertainties not typically encountered in
domestic operations, including, among others, risks of war, expropriation or
nationalization of assets, renegotiation or nullification of existing contracts,
changing political conditions, changing laws and policies affecting trade and
investment, overlap of different tax structures, the general hazards associated
with the assertion of foreign sovereignty over certain areas in which operations
are conducted, costs of localizing services and products for foreign countries,
lack of acceptance of localized services and products in foreign countries,
longer accounts receivable payment cycles and logistical difficulties in
managing international operations. Additionally, various foreign jurisdictions
have laws limiting the right and ability of foreign subsidiaries and joint
ventures to pay dividends and remit earnings to affiliated companies, unless
specified conditions precedent are met. The Company's inability to successfully
manage the risks of international operations could have a material adverse
effect on the Company. Foreign operations also face the additional risks of
fluctuating currency values, hard currency shortages and controls of foreign
currency exchange. The Company currently does not engage in hedging
transactions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Exposure to Currency Fluctuations."
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
The Company's success will depend on the continuing efforts of its
executive officers and the senior management of the Founding Companies, and
likely will depend on the senior management of any significant businesses the
Company acquires in the future. Each of the Company's employment agreements with
its senior management and other key personnel provides that the employee will
not compete with the Company during the term of the agreement and following the
termination of the agreement for a specified term (ranging from one to three
years) in a specified geographical area. In most states, however, a covenant not
to compete will be enforced only to the extent it is necessary to protect a
legitimate business interest of the party seeking enforcement, does not
unreasonably restrain the party against whom enforcement is sought and is not
contrary to the public interest. This determination is made based on all the
facts and circumstances of the specific case at the time enforcement is sought.
Thus, there can be no assurance that a court will enforce such a covenant in
11
<PAGE> 12
a given situation. If any of the Company's key management personnel do not
continue their management role after joining the Company and the Company is
unable to attract and retain qualified replacements, there could be a material
adverse effect on the Company. See "Management."
CONTROL BY EXISTING MANAGEMENT
Following the closing of the Acquisitions, the Share Exchange and the
Offering, executive officers and directors of BrightStar will beneficially own
approximately 1,827,574 shares of Common Stock (or approximately 23% of the
outstanding shares of Common Stock). These stockholders will control in the
aggregate approximately 23% of the votes of all shares of Common Stock, and, if
acting in concert, may be able to exercise substantial influence over the
Company's affairs. See "Security Ownership of Certain Beneficial Owners and
Management."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Acquisitions and the Offering, 7,838,735 shares of Common
Stock will be outstanding. The 4,250,000 shares of Common Stock offered hereby
will be freely tradable, unless acquired by affiliates of the Company and except
for up to 200,000 shares of Common Stock reserved by the Underwriters for sale
to certain employees and other persons associated with the Company which shares
will be subject to a 180 day holding period. All of the remaining shares of
Common Stock to be outstanding on the closing of the Acquisitions and the
Offering (as well as all shares issuable pursuant to the Post-Closing
Adjustments, the MG Warrant, the BGCA Option and the Lender Option) may be
resold publicly only following their effective registration under the Securities
Act of 1933, as amended (the "Securities Act"), or pursuant to an exemption from
the registration requirements of that act, such as Rule 144 thereunder.
When the Offering closes, options to purchase up to a total of
approximately 617,000 shares of Common Stock pursuant to the 1997 Long-Term
Incentive Plan will be outstanding. BrightStar intends to file a registration
statement on Form S-8 to register the shares issuable pursuant to the 1997
Long-Term Incentive Plan. After that registration statement becomes effective,
the shares registered thereby generally will on issuance be freely tradable by
holders who are not affiliates of BrightStar and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates of BrightStar. See
"Management -- 1997 Long-Term Incentive Plan."
BrightStar and its directors and executive officers, BITI and all persons
who will receive shares of Common Stock in connection with the Acquisitions have
agreed not to offer or sell any shares of Common Stock for a period of one year
from the date of this Prospectus without the prior written consent of CIBC
Oppenheimer Corp., except that BrightStar may issue Common Stock in connection
with the Acquisitions and in connection with future acquisitions and on exercise
of the MG Warrant, the BGCA Option and the Lender Option (if the Company enters
into the Credit Facility), provided that the recipients of those shares agree
not to offer or sell any of those shares during the Lockup Period, and pursuant
to awards under the 1997 Long-Term Incentive Plan. In addition, each person who
will receive shares of Common Stock in connection with the Acquisitions will
enter into a stock transfer restriction agreement which prohibits any sale or
transfer of Common Stock for a period of 365 days from the closing of the
Offering, except for certain permitted transfers which require that the
recipient agree to be bound by all provisions of such agreement. Each employee
or other person associated with the Company who acquires any of the up to
200,000 shares of Common Stock reserved by the Underwriters for sale to such
persons will agree not to offer or sell any shares of Common Stock for a period
of 180 days from the date of this Prospectus without the prior written consent
of CIBC Oppenheimer Corp. See "Underwriting."
The availability for sale, or sale, of the shares of Common Stock eligible
for future sale could adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."
12
<PAGE> 13
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which BrightStar and representatives of
the Underwriters negotiated, may not be indicative of the price at which the
Common Stock will trade after the Offering. See "Underwriting" for the factors
considered in determining the initial public offering price. Although the Common
Stock has been approved for quotation on the Nasdaq National Market, no
assurance can be given that an active trading market will develop or be
maintained for the Common Stock. The market price of the Common Stock after the
Offering may fluctuate significantly from time to time in response to numerous
factors, including the timing of any acquisitions by the Company, variations in
the reported financial results of the Company or those of its competitors,
changes by financial research analysts in their estimates of future earnings of
the Company, and changing conditions in the economy in general or in the
Company's industry in particular, unfavorable publicity or changes in applicable
laws and regulations (or judicial or administrative interpretations thereof)
affecting the Company or its business. In addition, the stock markets experience
significant price and volume volatility from time to time, which may affect the
market price of the Common Stock for reasons unrelated to the Company's
performance.
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
BrightStar's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), authorizes the Board of Directors of BrightStar (the "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
respecting dividends and distributions and voting rights) as the 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 the
Company by means of a tender offer, merger, proxy contest or otherwise. In
addition, the 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 the
Company. Certain provisions of the Delaware General Corporation Law (the "DGCL")
may also discourage takeover attempts that have not been approved by the Board
of Directors. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION; BENEFITS OF OFFERING TO EXISTING
STOCKHOLDERS
Purchasers of Common Stock in the Offering will experience immediate,
substantial dilution in the net tangible book value of their stock of $10.90 per
share and may experience further dilution in that value from issuances of Common
Stock in the future. Benefits of the Offering to current security holders
include, but are not limited to, the creation of a public market for the Common
Stock, the Company's receipt of proceeds of the sale of 4,250,000 shares plus
shares sold, if any, pursuant to the Underwriters over-allotment option, and
unrealized gain to current security holders upon consummation of the Offering
equal to the difference between the value of the currently outstanding Common
Stock and securities convertible into shares of Common Stock based on the
initial public offering price, and the effective acquisition cost of such
securities. See "Dilution." In addition, certain persons who will receive shares
of Common Stock in connection with the Acquisitions will be released from an
aggregate of $3.7 million of indebtedness for which they are a maker or
guarantor. See "Certain Transactions."
DIVIDEND POLICY
The Company intends to retain earnings, if any, to finance the expansion of
its business and for general corporate purposes, including future acquisitions,
and it does not anticipate paying any cash dividends on the Common Stock for the
foreseeable future. In addition, the Company expects that any credit facility
obtained by the Company will contain restrictions on the ability of the Company
to pay dividends without the consent of the lender.
13
<PAGE> 14
THE COMPANY
GENERAL
BrightStar was organized in July 1997 to combine selected businesses to
provide enterprise-wide business and technology solutions to Fortune 1000
companies and other large organizations. The Company's goal is to become a
leader in the fragmented IT services industry through consolidation of
complementary companies, expansion of its service and product offerings and
cross-selling to its combined customer base. BrightStar has entered into
definitive agreements to acquire the Founding Companies concurrently with and
conditioned upon the closing of the Offering.
Collectively, the Founding Companies provide implementation of ERP software
systems and comprehensive IT services to improve an organization's productivity.
ERPQPLUS(SM), the Company's suite of services which cover the full range of IT
systems development, includes: ERP package software implementation, consulting,
software application development, systems integration, outsourcing, training,
upgrades and support. The Company is a SAP Implementation Partner in the U.S.
and Australia and has preferred business partner relationships with PeopleSoft,
Inc. ("PeopleSoft"), Oracle Corp. ("Oracle"), Microsoft Corp. ("Microsoft") and
Novell, Inc. ("Novell"). The following is a brief description of each of the
Founding Companies (the information regarding the number of employees for each
of the Founding Companies is given as of February 1, 1998):
Brian R. Blackmarr and Associates, Inc. ("Blackmarr"), founded in 1979, is
based in Dallas, Texas and has operations throughout the U.S. and in Caracas,
Venezuela and London, England. Blackmarr designs, develops and implements IT
solutions for complex business problems. Blackmarr's core business involves
application development, systems integration and consulting for distributed
computer systems and client/server systems. Blackmarr typically designs IT
solutions that are implemented in cooperation with a variety of vendors,
including PeopleSoft, Oracle, Microsoft, Sybase Inc. and Symantec Corp.
Blackmarr also provides custom software development to its clients and conducts
scheduled training for PeopleSoft, Oracle and Microsoft products, as well as
Internet training, in its certified Microsoft Level Three training facility
located in Dallas.
Blackmarr employs 180 consultants, supported by a staff of 16. Blackmarr
had revenues of $9.3 million and $16.7 million for the years ended December 31,
1996 and 1997, respectively.
Integrated Controls, Inc. ("ICON"), founded in 1991, is based in Lafayette,
Louisiana, with four regional offices along the U.S. Gulf Coast. Its primary
focus is the design and implementation of industrial control and automation
systems, principally for clients in the energy industry. As a systems
integrator, ICON provides IT solutions from the production, process and
manufacturing level through a professional staff which includes computer science
specialists and engineers experienced in implementing information and control
systems. ICON designs and implements software applications for real-time
management information systems and provides maintenance and support services.
ICON has recently expanded its services to provide telecommunications and
networking solutions, including services for implementing and managing web
sites, intranets and LAN and WAN systems. ICON is a Microsoft Partner and a
Novell Partner and has obtained ISO 9001 certification covering its services for
electronic control services, computer systems and digital communications
systems. ISO 9001 is an internationally recognized verification system for
quality-assurance in design, development, production, installation and servicing
that has been established by the International Organization for Standardization,
Geneva, Switzerland.
ICON employs 160 consultants, supported by a staff of 20. ICON had revenues
of $6.1 million and $11.5 million for the years ended December 31, 1996 and
1997, respectively.
Mindworks Professional Education Group, Inc. ("Mindworks"), founded in
1995, is based in Scottsdale, Arizona. Its primary business is developing and
providing advanced training and certification for computer support staff and
network professionals. Its principal training focus is on the Microsoft
Certified Professional and Microsoft Certified System Engineer ("MCSE")
programs. Mindworks also provides training for the Computing Technology Industry
Association's A+ certification and the Novell Certified Network Adminis-
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<PAGE> 15
trator and Certified Network Engineer programs. Mindworks has developed computer
training products, which it distributes directly and through a non-exclusive
royalty agreement with a major publishing company throughout the U.S. and
internationally. Its products include the Mindworks MCSE Self-Study Kit and the
Mindworks A+ Certification Course.
Mindworks employs ten consultants, supported by a staff of six. Mindworks
had revenues of $808,192 and $1.4 million for the years ended December 31, 1996
and 1997, respectively.
Software Consulting Services America, LLC ("SCS America"), founded in 1995,
is based in the San Francisco Bay area and has offices in Chicago, Illinois and
Los Angeles, California. SCS America is one of approximately 35 Implementation
Partners in the U.S. for SAP. SAP's R/3 client-server software is a standard for
companies seeking to coordinate manufacturing, purchasing, accounting, finance
and personnel data. SCS America provides a full range of SAP consulting services
directly to clients and indirectly through global "logo" partners, such as
multinational accounting and consulting firms, or through SAP itself. Other
services provided by SCS America include project management, enterprise resource
planning and data warehouse and web site development.
SCS America employs 48 consultants, supported by a staff of three. SCS
America had revenues of $4.7 million and $8.4 million for the years ended
December 31, 1996 and 1997, respectively.
SCS Unit Trust ("SCS Australia"), founded in 1994, is headquartered in
Melbourne, Australia, with offices in Sydney, Perth, Canberra and Adelaide,
Australia. SCS Australia specializes in providing SAP implementation and support
to its clients. SCS Australia has been a National Implementation Partner with
SAP since 1995.
SCS Australia employs 172 consultants, supported by a staff of 13. SCS
Australia had revenues of $8.3 million and $16.7 million for the years ended
December 31, 1996 and 1997, respectively.
Software Innovators, Inc. ("SII"), founded in 1989, is located in Little
Rock, Arkansas and Boston, Massachusetts. Its primary business is providing
custom software development and IT project outsourcing. SII provides business
process reengineering and technology support services, Internet commerce
software development, web-site design services and Year 2000 compliance
services. SII also offers computer-aided instruction, computer-based education
and knowledge transfer via corporate intranets.
SII employs 58 consultants, supplemented and supported by a staff of six.
SII had revenues of $2.4 million and $3.6 million for the years ended December
31, 1996 and 1997, respectively.
Zelo Group, Inc. ("Zelo"), founded in 1992, is located in Ventura,
California. Zelo provides computer-based litigation support services, document
archive services and business process reengineering services to clients engaged
in legal services, health care and other industries. Its litigation support
services include in-court trial support systems, document scanning and indexing
and full-text searching using its proprietary SmartCopy(TM) software. In
connection with its archive services, Zelo scans paper documents and stores the
digital images on compact discs for rapid retrieval using its proprietary
software. Zelo also provides IT integration services in connection with its
document archive services through the design and implementation of turn-key
systems, including LAN and WAN systems, office workflow automation and Internet
systems development and implementation.
Zelo employs eight consultants, supported by a staff of nine. Zelo had
revenues of $1.1 million and $1.0 million for the years ended December 31, 1996
and 1997, respectively.
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<PAGE> 16
SUMMARY INDIVIDUAL FOUNDING COMPANY REVENUE DATA
(IN THOUSANDS)
The following table presents revenue data for each of the Founding
Companies for the three most recent fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
BLACKMARR (Fiscal Year Ended September 30)
Revenue................................................... $7,043 $9,227 $12,190
ICON (Fiscal Year Ended December 31)
Revenue................................................... $3,745 $6,127 $11,504
MINDWORKS (Fiscal Year Ended December 31)
Revenue(1)................................................ $ -- $ 808 $ 1,444
SCS AMERICA (Fiscal Year Ended December 31)
Revenue................................................... $1,001 $4,672 $ 8,401
SCS AUSTRALIA (Fiscal Year Ended June 30)
Revenue(2)(3)............................................. $1,806 $5,062 $ 9,685
SII (Fiscal Year Ended July 31)
Revenue(1)................................................ $ -- $1,953 $ 2,982
ZELO (Fiscal Year Ended December 31)
Revenue(1)................................................ $ -- $1,082 $ 1,049
</TABLE>
- ---------------
(1) Audited financial data is not available for the 1995 fiscal year.
(2) Amounts have been derived by translating Australian dollars into U.S.
dollars at a rate of A$ = US$0.651, the approximate rate of exchange at
December 31, 1997.
(3) Fiscal year 1995 data is from October 1, 1994 (inception) to June 30, 1995.
SUMMARY OF TERMS OF THE ACQUISITIONS
The aggregate consideration BrightStar will pay to acquire the Founding
Companies consists of (i) approximately $31.6 million in cash, (ii) 2,502,928
shares of Common Stock and (iii) the assumption of approximately $7.7 million of
indebtedness of the Founding Companies. Two of the Acquisitions are subject to
Post-Closing Adjustments payable in shares of Common Stock, based on the 1998
financial performance of the subject Founding Companies. The Company currently
estimates that no shares of Common Stock will be issuable in connection with the
Post-Closing Adjustments. The Post-Closing Adjustments will be determined based
on the (i) actual revenues of SCS Australia for the 12 months ended December 31,
1998 and (ii) actual pre-tax income of SII for the 12 months ended December 31,
1998. The consideration being paid by BrightStar for each Founding Company was
determined by arm's-length negotiations between BrightStar and representatives
of that Founding Company.
In addition to being conditioned upon the closing of the Offering, the
closing of each Acquisition is subject to certain other customary conditions,
including, among others: the continuing accuracy of the representations and
warranties made by the parties thereto; the performance of their respective
covenants included in the agreements relating to the Acquisitions; and the
nonexistence of a material adverse change in the results of operations,
financial condition or business of each Founding Company prior to the closing
date.
Any Founding Company's acquisition agreement may be terminated prior to the
closing of the Offering under certain circumstances, including: (i) by the
mutual consent of the boards of directors of BrightStar and the Founding
Company; (ii) if the Offering and the acquisition of that Founding Company are
not closed by April 30, 1998; (iii) by BrightStar if the disclosure schedules to
the acquisition agreement are amended to reflect a material adverse change with
respect to that Founding Company; or (iv) if a material breach or
16
<PAGE> 17
default under the agreement by one party occurs and is not waived by the other
party. See "Certain Transactions -- Acquisitions of the Founding Companies."
Concurrently with the closing of the Acquisitions, BrightStar will enter
into employment agreements with each of the executives and certain key
management personnel of the Founding Companies. These agreements will generally
be for an initial term of from one to three years, with automatic renewals of
one year thereafter. See "Management."
BrightStar is a Delaware corporation. Its corporate offices are located at
10375 Richmond Avenue, Suite 1620, Houston, Texas 77042, and its telephone
number is (713) 361-2500.
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<PAGE> 18
USE OF PROCEEDS
The net proceeds to BrightStar from the Offering are estimated to be
approximately $47.8 million (approximately $55.5 million if the Underwriters
exercise their overallotment option in full), after deducting the underwriting
discount and estimated expenses of the Offering payable by the Company
(including the repayment of $1.8 million of expenses paid prior to closing
through advances from BITI under a loan agreement between BrightStar and BITI
(the "BITI Loan Agreement") to fund a portion of the Offering expenses). Of the
net proceeds, (i) $31.6 million will be used to pay the cash portion of the
purchase prices for the Acquisitions and (ii) $7.3 million will be used
concurrently for the repayment of certain outstanding indebtedness of the
Founding Companies (estimated as of the closing of the Offering and excluding
the repayment of $1.8 million of expenses paid prior to closing through advances
from BITI referred to above). The remaining net proceeds will be used for
working capital and general corporate purposes, which may include future
acquisitions. Pending such use, the Company intends to invest those remaining
net proceeds in short-term, interest-bearing investment grade securities. See
"Certain Transactions."
The indebtedness of the Founding Companies to be repaid from the proceeds
of the Offering bears interest at rates ranging from 8.0% to 15.0% per annum and
would otherwise mature at various dates through 2001. Advances under the BITI
Loan Agreement bear interest at a rate of 10% per annum and are due 30 days
after the closing of the Offering.
DIVIDEND POLICY
The Company intends to retain earnings, if any, to finance the expansion of
its business and for general corporate purposes, including future acquisitions,
and it does not anticipate paying any cash dividends on the Common Stock for the
foreseeable future. The payment of cash dividends on the Common Stock will be
within the sole discretion of the Board of Directors, and will depend on several
factors, including the Company's financial condition, results of operations,
cash flows from operations, current and anticipated cash needs and expansion
plans, the income tax laws then in effect and the requirements of Delaware law.
In addition, the Company expects that any credit facility obtained by the
Company will contain restrictions on the ability of the Company to pay dividends
without the consent of the lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Pro Forma Combined."
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<PAGE> 19
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of December 31, 1997 (i) on a pro forma combined basis to give
effect to the Acquisitions and the Share Exchange and (ii) on a pro forma
combined basis as adjusted to reflect the Offering and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Unaudited Pro Forma Combined Financial Statements of the Company and the
notes thereto included in this Prospectus. See "Use of Proceeds" and "Certain
Transactions -- Acquisitions of the Founding Companies."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Notes payable, current maturities of long-term debt and
capital leases(1)...................................... $ 8,132 $ 119
Cash consideration payable to Founding Company
stockholders........................................... 31,599 --
------- -------
Total short-term debt............................. $39,731 $ 119
======= =======
Long-term debt and capital leases, net of current
maturities(1)............................................. $ 655 $ 306
Stockholders' equity:
Preferred Stock: $0.001 par value, 3,000,000 shares
authorized; none issued and outstanding................ -- --
Common Stock: $0.001 par value, 35,000,000 shares
authorized; 3,588,735 issued and outstanding, pro
forma; and 7,838,735 shares issued and outstanding, as
adjusted(2)............................................ 321 8
Restricted Common Stock, $0.001 par value, 2,000,000
shares authorized; none issued and outstanding......... -- --
Common Stock warrants..................................... -- 450
Additional paid-in capital................................ 17,437 69,664
Accumulated deficit....................................... (5,963) (5,963)
------- -------
Total stockholders' equity........................ 11,795 64,159
------- -------
Total capitalization........................................ $12,450 $64,465
======= =======
</TABLE>
- ---------------
(1) See the notes to Unaudited Pro Forma Combined Financial Statements and notes
to the Founding Companies' Financial Statements for a description of the
Company's debt.
(2) Excludes: (i) 617,000 shares that will be subject to options granted under
the 1997 Long-Term Incentive Plan on the date the Offering closes, with an
exercise price equal to the initial public offering price per share; (ii)
50,000 shares issuable pursuant to the MG Warrant and (iii) 14,285 shares
issuable pursuant to the BGCA Option.
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<PAGE> 20
DILUTION
The deficit in pro forma combined net tangible book value of the Company as
of December 31, 1997 was approximately $31.4 million, or approximately $8.74 per
share of Common Stock, after giving effect to the Acquisitions, the Share
Exchange and the net incurrence of indebtedness by the Company since December
31, 1997. The deficit in pro forma combined net tangible book value per share
represents the amount by which the Company's pro forma combined total
liabilities exceed its pro forma combined tangible assets at December 31, 1997,
divided by the number of shares of Common Stock to be outstanding after giving
effect to the Acquisitions (not including the Post-Closing Adjustments, which,
based on current estimates, are not expected to result in the issuance of
additional shares of Common Stock) and the Share Exchange. After giving effect
to the Offering and the application of the estimated net proceeds therefrom, as
described in "Use of Proceeds," the Company's pro forma combined net tangible
book value as of December 31, 1997 would have been approximately $16.4 million,
or approximately $2.10 per share. This represents an immediate increase in pro
forma combined net tangible book value of approximately $10.84 per share to
existing stockholders and an immediate dilution of approximately $10.90 per
share to investors purchasing shares in the Offering.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $13.00
Pro forma combined net tangible book value (deficit) per
share before the Offering................................. $(8.74)
Increase in pro forma combined net tangible book value per
share attributable to new investors....................... 10.84
------
Pro forma combined net tangible book value per share after
the Offering.............................................. 2.10
------
Dilution per share to new investors(1)...................... $10.90
======
</TABLE>
- ---------------
(1) Does not include (a) 617,000 shares that will be subject to options granted
under the 1997 Long-Term Incentive Plan on the date the Offering closes,
with an exercise price equal to the initial public offering price per share,
(b) 50,000 shares issuable pursuant to the MG Warrant and (c) 14,285 shares
issuable pursuant to the BGCA Option. Using the treasury stock method, the
effect of the issuance of such shares to new investors would result in
additional dilution per share to new investors of $0.08.
The following table summarizes, on a pro forma basis to give effect to the
Acquisitions and the Share Exchange as of December 31, 1997, the number of
shares of Common Stock purchased from BrightStar, the total consideration paid
and the average price per share paid by existing stockholders (including persons
who will acquire Common Stock in the Acquisitions and the Share Exchange) and
the new investors purchasing shares of Common Stock in the Offering (before
deducting the underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 3,588,735 45.8% $ 221,103 0.4% $ 0.06
New investors.................. 4,250,000 54.2% 55,250,000 99.6% 13.00
--------- ------ ----------- ------
Total................ 7,838,735 100.0% $55,471,103 100.0%
========= ====== =========== ======
</TABLE>
- ---------------
(1) Total consideration paid by existing stockholders includes only cash
consideration paid for capital stock of the Founding Companies.
20
<PAGE> 21
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected historical financial data of Blackmarr (the
accounting acquiror) has been derived from (i) the audited financial statements
of Blackmarr for the years ended September 30, 1995, 1996 and 1997 and as of
September 30, 1995, 1996 and 1997, and (ii) from the unaudited financial
statements of Blackmarr for the years ended September 30, 1993 and 1994 and for
the three months ended December 31, 1997 and as of September 30, 1993 and 1994
and December 31, 1997, which have been prepared on the same basis as the audited
statements and, in the opinion of Blackmarr and BrightStar management, reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of that information. See the combined historical financial
statements of Blackmarr and the notes thereto included herein. The following
summary unaudited pro forma financial data represents historical information of
the Company, as adjusted to give effect to (i) the Acquisitions, (ii) the Share
Exchange, (iii) the closing of the Offering and the application of the estimated
net proceeds therefrom and (iv) the other pro forma adjustments described below.
See the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included herein.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
----------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Historical Operations Data for Blackmarr:
Revenue.............................................. $4,688 $7,451 $7,043 $9,227 $12,190 $6,623
Cost of revenue...................................... 3,768 5,917 5,592 7,659 10,063 5,810
Selling, general and administrative expenses......... 728 1,325 1,413 1,555 1,668 817
Stock compensation expense........................... -- -- -- -- 305 --
Depreciation and amortization........................ 91 87 78 101 135 31
------ ------ ------ ------ ------- ------
Income (loss) from operations........................ 101 122 (40) (88) 19 (35)
Interest expense..................................... (10) (45) (66) (67) (96) (31)
Other income, net.................................... -- -- 186 124 33 7
Income tax provision (benefit)....................... 22 19 40 -- 6 (22)
------ ------ ------ ------ ------- ------
Net income (loss).................................... $ 69 $ 58 $ 40 $ (31) $ (50) $ (37)
====== ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Pro Forma Combined Operations Data(1):
Revenue................................................... $59,450
Cost of revenue........................................... 44,183
Selling, general and administrative expenses.............. 13,395
Stock compensation expense................................ 305
Depreciation and amortization(2).......................... 1,886
-------
Loss from operations...................................... (319)
Interest expense.......................................... (43)
Other expense, net........................................ (69)
-------
Loss before income taxes.................................. (431)
Income tax provision (3).................................. 289
-------
Net loss.................................................. $ (720)
=======
Net loss per basic and diluted common share............... $ (0.09)
=======
Shares used in computing net loss per basic and diluted
common share............................................ 7,839
=======
</TABLE>
<TABLE>
<CAPTION>
BLACKMARR
------------------------------------------ DECEMBER 31, 1997
SEPTEMBER 30, -----------------------------------------
------------------------------------------ BLACKMARR PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 HISTORICAL COMBINED(1) AS ADJUSTED(4)
------ ------ ------ ------ ------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit).... $ 80 $ 134 $ 284 $ 233 $ 337 $ 280 $(33,208) $14,225
Total assets................. 1,156 1,923 1,609 1,926 3,501 5,425 62,081 73,809
Long-term debt, net of
current maturities......... 5 497 42 42 17 -- 655 306
Stockholders' equity......... 284 342 396 423 682 645 11,795 64,159
</TABLE>
- ---------------
(1) The pro forma combined statement of operations data assumes the
Acquisitions, the Share Exchange and the Offering (and the application of
the net proceeds therefrom) all were closed on January 1, 1997. The pro
forma balance sheet data assumes the Acquisitions and the Share Exchange
occurred on December 31, 1997. The pro forma combined statement of
operations data for the year ended December 31, 1997 is presented on the
basis of a year ended December 31 for each Founding Company, with the
financial results of Blackmarr, SCS Australia and SII being recast for these
purposes to reflect those results for the twelve-month period ended December
31, 1997. The pro forma combined financial information (i) is not
necessarily indicative of the results the Company would have obtained had
these events actually occurred when assumed or of the Company's future
results, (ii) is based on preliminary estimates (primarily of the aggregate
purchase price of the Acquisitions) and certain assumptions management deems
appropriate and (iii) should be read in conjunction with the financial
statements and notes thereto included in this Prospectus. Excludes the
following non-recurring items: (a) a one-time write-off for in-process
research and development of $3.0 million; and (b) compensation expense of
$4.6 million for Common Stock issued to the members of BrightStar's
management at a price below the initial public offering price.
(2) Includes $1.2 million annual amortization of goodwill to be recorded as a
result of the Acquisitions, the Share Exchange and the Offering, calculated
using the straight line method over an amortization period of 40 years.
(3) Assumes an effective tax rate of 39.0% on certain pro forma adjustments.
(4) Reflects the closing of the Offering and application of the net proceeds
therefrom. Adjusted to reflect the sale of 4,250,000 shares of Common Stock
issued by the Company, deduction of the underwriting discount and estimated
offering expenses payable by the Company and the application of the net
proceeds therefrom. See "Use of Proceeds."
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the financial statements and the notes thereto included in
this Prospectus. The following information contains forward-looking statements.
For a discussion of certain limitations inherent in such statements, see "Risk
Factors."
INTRODUCTION
BrightStar was organized in July 1997 to combine selected complementary
businesses to provide enterprise-wide business and technology solutions to
Fortune 1000 companies and other large organizations. BrightStar has entered
into definitive agreements to acquire the Founding Companies concurrently with
and as a condition to the closing of the Offering. Collectively, the Founding
Companies provide comprehensive IT services to a diverse client base. Each of
the Founding Companies is specialized and generally provides its IT services to
clients primarily based on daily rates (or time and materials charges). The
Founding Companies have historically operated as independent, privately owned
entities, and their results of operations reflect varying tax structures
(subchapter S corporations or C corporations) which have influenced the
historical level of owners' compensation. In addition, cost of revenue and
selling, general and administrative expense as a percentage of revenue may not
be comparable among the individual Founding Companies because of differences in
their operations.
The Company's services and products include ERP software implementation,
consulting, software application development, systems integration, outsourcing,
training, upgrade and support and related software products. The Company's
services are performed at clients' locations and at the Company's facilities. In
providing ERP implementation and other IT services, the Company generally
assumes responsibility for project management and bills the client on a time and
materials basis, although a small percentage of projects are billed on a
fixed-price basis.
Revenue is primarily recognized as services are rendered for time and
materials charges or, to a lesser extent, using the percentage-of-completion
method for fixed-price contracts. The timing of revenue is difficult to forecast
because the Company's sales cycle for certain of its services can be relatively
long and is subject to a number of uncertainties, including clients' budgetary
constraints, the timing of clients' budget cycles, clients' internal approval
processes and general economic conditions. In addition, as is customary in the
industry, the Company's engagements generally are terminable without client
penalty. The Company's revenue and results of operations may fluctuate
significantly from quarter to quarter or year to year because of a number of
factors, including but not limited to: the rate of hiring and the productivity
of revenue-generating personnel; the availability of qualified IT professionals;
the significance of client engagements commenced and completed during a quarter;
the number of business days in a quarter; changes in the relative mix of the
Company's services; changes in the pricing of the Company's services; the timing
and rate of entrance into new geographic or IT speciality markets; departures or
temporary absences of key revenue-generating personnel; the structure and timing
of acquisitions; changes in the demand for IT services; and general economic
factors.
Although the Company believes it will be able to achieve operating
efficiencies by consolidating certain administrative functions, the pro forma
financial information herein reflects neither expected savings nor margin
improvements. The Company is unable to accurately determine the costs associated
with consolidation of the Founding Companies, but it does not expect such costs
to be material and, accordingly, its pro forma financial information does not
reflect such incremental costs.
Cost of revenue primarily consists of salaries (including non-billable and
training time) and benefits for consultants. The Company generally strives to
maintain its gross profit margins by offsetting increases in salaries and
benefits with increases in billing rates.
Selling, general and administrative expenses primarily consist of costs
associated with (i) corporate overhead, (ii) sales and account management, (iii)
telecommunications, (iv) human resources, (v) recruiting and training and (vi)
other administrative expenditures.
22
<PAGE> 23
In July 1996, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of accounting and
requires that one of the companies be designated as the accounting acquiror.
Accordingly, for financial statement presentation purposes, Blackmarr has been
designated as the acquiring company because its current shareholders, in the
aggregate, will acquire more Common Stock than will the current shareholders of
any of the other Founding Companies in connection with the Acquisitions. The
excess of the aggregate purchase price to be paid for the Founding Companies
other than Blackmarr over the fair value of the net assets to be acquired by
BrightStar will be recorded as goodwill of $43.1 million (giving effect to a
$3.0 million one-time charge for acquired in-process research and development
and including $1.9 million of deferred offering costs). In addition, goodwill of
$4.6 million will be recorded attributable to the issuance of 437,681 shares of
Common Stock to BITI Class A unit holders. Together this goodwill, totaling
$47.7 million pro forma as of December 31, 1997, will be amortized as a non-cash
charge to the income statement of BrightStar over a 40-year period and is
expected to result in an amortization expense of approximately $1.2 million per
year. For purposes of the Acquisitions and the Share Exchange, the Company used
a value of $11.70 per share, a 10% discount from the initial offering price,
based on the one-year lock up agreements with the Underwriters applicable to all
such shares, restrictions on resale applicable to all unregistered securities
under the Securities Act and the stock repurchase agreements which BrightStar
will enter into with certain executive officers and directors at the closing of
the Offering. See "Shares Eligible for Future Sale" and "Certain Transactions."
The following pro forma combined financial information was derived from the
unaudited pro forma combined financial statements and gives effect to the
Acquisitions, the Share Exchange, the Offering and the application of the
estimated net proceeds therefrom and the effects of certain pro forma
adjustments to the historical financial statements, as if all those events had
taken place on January 1 of each period presented.
The pro forma combined statement of operations data presented below does
not purport to be comparable to and may not be indicative of the Company's
post-combination results of operations because (i) the Founding Companies were
not under common control or management and (ii) the Company established a new
basis of accounting to record the purchase of the Founding Companies (other than
Blackmarr) under the purchase method of accounting. See "Selected Financial
Data" and the Unaudited Pro Forma Combined Financial Statements and the notes
thereto included herein.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31,
1997(1)
----------------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $59,450 100.0%
Costs and expenses:
Cost of revenue........................................... 44,183 74.3%
Selling, general and administrative....................... 13,395 22.5%
Stock compensation expense................................ 305 0.5%
Depreciation and amortization............................. 1,886 3.2%
------- -----
Loss from operations........................................ $ (319) (0.5)%
======= =====
</TABLE>
- ---------------
(1) The pro forma combined statement of operations data for the year ended
December 31, 1997 is presented on the basis of a year ended December 31 for
each Founding Company, with the financial results of Blackmarr, SCS
Australia and SII being recast for these purposes to reflect those results
for the twelve-month period ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES -- PRO FORMA COMBINED
The Company is a holding company that will conduct all of its operations
through its subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, cash available from lines of
credit it may establish and the unallocated net proceeds of the Offering. At
December 31, 1997,
23
<PAGE> 24
on a pro forma combined basis, after giving effect to (i) the Acquisitions, (ii)
the closing of the Offering and BrightStar's application of the net proceeds
therefrom to pay the cash portion of the aggregate consideration for the
Acquisitions and concurrently to repay certain indebtedness of the Founding
Companies (approximately $7.3 million) and (iii) the repayment by BrightStar of
advances from BITI under the BITI Loan Agreement, which have been used to fund
payment of a part of the expenses of the Offering, the Company would have had an
aggregate of $9.1 million of cash and cash equivalents and $14.2 million of
working capital.
On a combined basis, the Founding Companies made capital expenditures of
approximately $1.0 million in the year ended December 31, 1997, primarily for
office equipment and computers. The Company expects to install or upgrade its
accounting and management information systems and to install an internal network
and communications system to facilitate exchange of information among the
Founding Companies. Management presently anticipates that expenditures for these
items will total approximately $3.0 million over the next two years; however, no
assurance can be made with respect to the actual timing and amount of such
expenditures.
The Company has received a commitment from Banque Paribas to provide the
Credit Facility. The Company expects that under the Credit Facility the Company
will have available to it an aggregate of up to $30.0 million in borrowings,
which will be divided into two tranches: (i) a revolving credit facility (the
"Revolving Credit Facility"), providing for borrowings of up to $10.0 million,
and (ii) an acquisition facility (the "Acquisition Facility"), providing for
borrowings of up to $20.0 million. Under terms of the Banque Paribas commitment,
the Revolving Credit Facility will be available to support working capital
needs, to issue letters of credit, to refinance Founding Company indebtedness,
if necessary, and for general corporate purposes, and the Acquisition Facility
will be available to provide financing for acquisitions and capital
expenditures. The Company expects that borrowings under both the Revolving
Credit Facility and the Acquisition Facility will bear interest according to the
following alternatives, at the option of the Company: (i) the Banque Paribas
base rate, as announced from time to time (8.5% at April 9, 1998), plus up to
1.00%, as determined by the ratio of the funded debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"), payable quarterly
(the "Base Rate Option"), or (ii) the London Interbank Offered Rate ("LIBOR")
(5.6525% at April 9, 1998), plus from 1.50% to 2.50%, as determined by the ratio
of the funded debt to EBITDA, payable quarterly or at the end of each LIBOR rate
period, whichever is earlier. If the Company draws funds prior to the earlier of
60 days following the Offering or the close of syndication of the Credit
Facility, only the Base Rate Option will be available. The Credit Facility will
be secured by liens on substantially all of the Company's assets (including
accounts receivable) and a pledge of the Company's equity interest in each of
its subsidiaries. The Company expects that the Credit Facility will require the
Company to comply with various loan covenants, including (i) maintenance of
certain financial ratios, (ii) restrictions on additional indebtedness and (iii)
restrictions on liens, guarantees and payment of dividends. The Company
anticipates that the Revolving Credit Facility will be available for advances
and repayments through April 2001 and that, unless such facility is extended or
renewed, all outstanding principal and accrued and unpaid interest under the
Revolving Credit Facility will be due on such date. The Company anticipates that
the Acquisition Facility will be available for advances and repayments through
April 2000 and that the outstanding principal balance will then convert into a
term loan payable over three years, with all remaining outstanding principal and
accrued and unpaid interest due in April 2003. The Credit Facility will contain
provisions requiring mandatory prepayment of outstanding borrowings from the
issuance of debt or equity securities for cash, excluding certain equity issued
in connection with future acquisitions, and cash realized in connection with
permitted asset sales outside of the ordinary course of business. In connection
with the Credit Facility, the Company shall issue to Banque Paribas an option to
purchase up to 100,000 shares of Common Stock at a per share exercise price
equal to 80% of the initial public offering price of the Common Stock. There can
be no assurance that the Company will enter into the Credit Facility on the
terms described or that the Company will enter into any credit facility at all.
24
<PAGE> 25
The Company intends to pursue acquisition opportunities. The timing, size
or success of any acquisition effort and the associated potential capital
commitments are unpredictable. The Company expects to fund future acquisitions
through the issuance of additional equity, as well as through a combination of
working capital, cash flow from operations and borrowings, including borrowings
under the Credit Facility.
The Company believes that cash flow from operations, borrowings under the
Credit Facility and the unallocated net proceeds of the Offering will be
sufficient to fund its capital requirements for the forseeable future.
INFLATION
Due to the relatively low levels of inflation experienced in the last three
years, inflation did not have a significant effect on the results of operations
of any of the Founding Companies in those periods.
EXPOSURE TO CURRENCY FLUCTUATIONS
During the years ended December 31, 1996 and 1997, the only significant
revenue generated by the Company outside the U.S. was in Australia. The
percentage of the Company's revenue generated during such years in Australia was
25% and 28%, respectively. Except for arrangements involving SCS Australia, the
Company's service contracts and sales agreements provide for payment in U.S.
dollars. SCS Australia's sales are payable in Australian dollars. The exchange
rate of Australian dollars to U.S. dollars ranged from A$ = US$0.734 to US$0.816
during 1996, with a daily average of A$ = US$0.783 for the year, and from A$ =
US$0.650 to US$0.798 during 1997, with a daily average of A$ = US$0.744 for that
period. As of April 16, 1998, the exchange rate was A$ = US$0.654. There can be
no assurance that all of the Company's future contracts will be payable in U.S.
or Australian dollars. To the extent that any of the Company's future contracts
are payable in foreign currencies, the Company could be exposed to fluctuations
in currency exchange rates. To hedge a portion of the risks associated with such
fluctuations, the Company may, from time to time, engage in hedging
transactions. As of the date hereof, however, the Company has no plans to
repatriate cash from operations of SCS Australia and it is not currently engaged
in hedging transactions.
YEAR 2000 COMPLIANCE
All of the Company's management information and other date-referenced
systems, including computer software and hardware, are Year 2000 compliant.
There are no internal matters, therefore, that will affect the Company's ability
to process systems date-referenced information when the Year 2000 arrives. The
Company does not know the extent to which the current preparedness of its
external business associates could adversely affect the Company's business
transactions. There can be no assurance that such associates will be compliant.
RESULTS OF OPERATIONS -- BLACKMARR
The following table presents certain selected data (and that data as a
percentage of revenue) of Blackmarr on a historical basis for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------------- -------------------------------
1995 1996 1997 1996 1997
-------------- -------------- --------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............................. $7,043 100.0% $9,227 100.0% $12,190 100.0% $2,099 100.0% $6,623 100.0%
Cost of revenue.................... 5,592 79.4% 7,659 83.0% 10,063 82.6% 2,030 96.7% 5,810 87.8%
Selling, general and administrative
expenses......................... 1,413 20.1% 1,555 16.9% 1,668 13.7% 503 23.9% 817 12.3%
Stock compensation expense......... 305 2.5%
Depreciation and amortization...... 78 1.1% 101 1.1% 135 1.1% 26 1.2% 31 0.5%
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Income (loss) from operations........ $ (40) (0.6)% $ (88) (1.0)% $ 19 0.2% $ (460) (21.8)% $ (35) (0.6)%
====== ===== ====== ===== ======= ===== ====== ===== ====== =====
</TABLE>
25
<PAGE> 26
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996
Revenue -- Revenue increased $4.5 million, or 215.5%, for the three months
ended December 31, 1997 compared to the three months ended December 31, 1996.
The increase primarily resulted from (i) the addition of new customer contracts
representing an increase of $2.1 million, (ii) increased sales of hardware and
software products of $2.0 million and (iii) an increase of approximately
$300,000 from the education division, which expanded its course offerings from
the previous period.
Cost of revenue -- Cost of revenue increased $3.8 million, or 186.2%, for
the three months ended December 31, 1997 compared to the three months ended
December 31, 1996. The increase primarily resulted from an increase in variable
costs associated with the increased revenue generated. As a percentage of
revenue, cost of revenue decreased from 96.7% to 87.8% for the three months
ended December 31, 1997 compared to the three months ended December 31, 1996.
The percentage decrease was primarily attributable to an increase in gross
revenue from consulting services without a proportional increase in the variable
costs (primarily consultants' salaries) associated with that increase.
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased approximately $300,000, or 62.4%, for the
three months ended December 31, 1997 compared to the three months ended December
31, 1996. As a percentage of revenue, selling, general and administrative
expenses decreased from 23.9% to 12.3% for the three months ended December 31,
1997 compared to the three months ended December 31, 1996. The percentage
decrease was attributable to the Company increasing revenue without substantial
additions in the number of support personnel. The increase in overall selling,
general and administrative expenses resulted primarily from higher bad debt
expense of $175,000 and legal expenses of $56,000 for the three months ended
December 31, 1997 as compared to bad debt expense of $15,000 and legal expenses
of $5,000 for the three months ended December 31, 1996.
Accounts Receivable -- As of December 31, 1997, accounts receivable were
$4.2 million. Revenue for the twelve months ended December 31, 1997 was $16.7
million. Therefore, days sales outstanding were 91.8 days. However,
approximately $1.9 million of non-recurring equipment sales occurred late in the
fourth quarter of 1997 and remained outstanding as of December 31, 1997. As
adjusted to exclude this one-time event, accounts receivable were $2.3 million
and days sales outstanding were 50.3 days, which was within historical operating
ranges. The Company does not believe that this temporary increase will have any
significance upon its future liquidity.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenue -- Revenue increased $2.9 million, or 32.1%, for the year ended
September 30, 1997 compared to the year ended September 30, 1996. The increase
primarily resulted from the addition of new customer contracts representing
revenue of approximately $2.0 million in the consulting division and an increase
of approximately $900,000 from the education division, which expanded its course
offerings from the previous year.
Cost of revenue -- Cost of revenue increased $2.4 million, or 31.4%, for
the year ended September 30, 1997 compared to the year ended September 30, 1996.
The increase was directly proportional to the increase in revenue and was
comprised of additional operational personnel added to support increased client
contracts.
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased approximately $100,000, or 7.3%, for the year
ended September 30, 1997 compared to the year ended September 30, 1996. As a
percentage of revenue, selling, general and administrative expenses decreased
from 16.9% to 13.7% for the year ended September 30, 1997 compared to the year
ended September 30, 1996. The percentage decrease was attributable to the
Company increasing revenue without substantial additions in the number of
support personnel.
Stock compensation expense -- During March 1997, Blackmarr issued 3,068
shares of its common stock to certain employees and, in connection with these
stock issuances, recognized compensation expense totaling $305,000 during the
year ended September 30, 1997, which is included in stock compensation expense.
26
<PAGE> 27
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenue -- Revenue increased $2.2 million, or 31.0%, for the year ended
September 30, 1996 compared to the year ended September 30, 1995. This increase
primarily resulted from additional consulting contracts with new customers and
increased sales of Blackmarr's proprietary software.
Cost of revenue -- Cost of revenue increased $2.1 million, or 37.0%, for
the year ended September 30, 1996 compared to year ended September 30, 1995. As
a percentage of revenue, cost of revenue increased from 79.4% to 83.0%, for the
year ended September 30, 1996 compared to the year ended September 30, 1995. The
increase was primarily attributable to a proportional increase in the number of
operational personnel to support new business and compensation increases for
professionals in response to market conditions.
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased approximately $100,000, or 10.0%, for the year
ended September 30, 1996 compared to the year ended September 30, 1995. As a
percentage of revenue, selling, general and administrative expenses decreased
from 20.1% to 16.9% for the year ended September 30, 1996 compared to the year
ended September 30, 1995. This percentage decrease was primarily attributable to
Blackmarr's revenue increasing without a corresponding increase in the number of
support staff.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from Blackmarr's
statement of cash flows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------ DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Cash Provided (Used) by Operating
Activities..................................... $ 4 $ (79) $(256) $ 24
Net Cash Provided (Used) by Investing
Activities..................................... 487 (211) (52) (15)
Net Cash Provided (Used) by Financing
Activities..................................... (521) 237 311 (26)
----- ----- ----- ----
Net Change in Cash............................... $ (30) $ (53) $ 3 $(17)
===== ===== ===== ====
</TABLE>
Accounts receivable increased $1.5 million and other accrued expenses
increased by $1.7 million at December 31, 1997 as compared to September 30, 1997
as a result of increased sales of hardware and software products.
At December 31, 1997, Blackmarr had $847,764 of borrowings outstanding
under a revolving line of credit provided by a commercial bank. The borrowing
capacity under the line of credit is $1.25 million, with interest payable
monthly at the bank's prime lending rate (8.5% at December 31, 1997) plus 1.0%.
Borrowings under the line of credit are due and payable on demand, are subject
to borrowing base requirements based on 80% of eligible accounts receivable (as
defined in a related financing and security agreement) and are secured by
Blackmarr's accounts receivable and guaranteed by Blackmarr's principal
stockholder.
On November 5, 1996, Blackmarr refinanced certain outstanding indebtedness
through borrowings under a new term loan provided by a commercial bank in the
principal amount of $261,557. The term loan is payable in 24 monthly
installments of $10,898, plus interest at the bank's prime lending rate (8.5% at
December 31, 1997) plus 0.5%. The term loan is secured by Blackmarr's accounts
receivable and a guarantee from Blackmarr's principal stockholder. At December
31, 1997, the outstanding balance under the term loan was $108,985 and matures
in October 1998.
At December 31, 1997, Blackmarr also had indebtedness outstanding under
another note payable in the principal amount of $104,200, which was issued to a
bank and is payable on demand, with interest at 10% per annum.
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<PAGE> 28
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128, which is effective for periods ending after December
15, 1997, simplifies the standards for computing earnings per share and replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share. In June 1997, the FASB issued SFAS No. 130 "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. In June
1997, the FASB also issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which establishes standards for the way
public companies disclose information about operating segments, products and
services, geographic areas and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 31, 1997. In October
1997, the AICPA issued Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition," which provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. SOP 97-2 is effective for financial statements for
periods beginning after December 15, 1997. The Company believes initial adoption
of these standards will not have a material impact on its financial position or
results of operations.
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<PAGE> 29
BUSINESS
SUMMARY
BrightStar is a professional services firm providing implementation of ERP
software systems and enterprise-wide business and technology solutions to
Fortune 1000 companies and other large organizations. ERP*PLUS(SM), the
Company's suite of services which cover the full range of IT systems
development, includes: ERP package software implementation, consulting, software
application development, systems integration, outsourcing, training, upgrades
and support. The Company is a SAP Implementation Partner in the U.S. and
Australia and has preferred business partner relationships with PeopleSoft,
Oracle, Microsoft and Novell. The Company's goal is to become a leader in the
fragmented IT services industry through consolidation of complementary
companies, expansion of its service and product offerings and cross-selling to
its combined customer base.
The Company employs more than 600 consultants in 14 U.S. cities and seven
international locations and provides its services and products to clients across
a broad spectrum of industries, including communications, consumer products,
energy, financial services, health care, industrial, insurance, media,
professional services, retail and technology. The Company has maintained
long-term relationships with many of these clients involving a large number of
projects.
INDUSTRY BACKGROUND
The worldwide IT market has expanded significantly in recent years, driven
by the trends toward open systems, greater affordability and improvements in
operating performance. The IT services market has expanded along with the IT
industry in general. Forrester Research, an independent research organization
that provides information concerning the IT services industry, has estimated
that the market for consulting, design, implementation, management and
outsourcing was $124 billion in 1996 and will increase to $303 billion by 2002,
representing an approximate compounded annual growth rate of 16%.
The Company believes that among the leading factors driving growth in the
IT services market is the transition from mainframe-based computing and custom
software applications to ERP software systems and to distributed computing
technologies, such as client/server architectures, LANs, WANs, the Internet and
intranets. Such systems offer the increased functionality and flexibility that
is important to the competitive needs of businesses. As an integral part of
adopting client/server architectures, many organizations are replacing their
legacy systems with fully integrated, packaged ERP software applications
developed and marketed by leading vendors such as SAP, PeopleSoft and Oracle.
These ERP software applications enable organizations to redesign their business
processes in such areas as product development, service delivery, manufacturing,
human resources, finance and accounting. Gartner Group, Inc., an internationally
recognized consulting and research organization, has estimated that the global
ERP software market, including license fees, service and maintenance, totaled
more than $7.9 billion in 1996 and $10.6 billion in 1997, an increase of more
than 34%.
The Company believes that the challenge of managing the transition to ERP
software and client/server systems from legacy systems is placing a severe
strain on many corporate IT departments. Many organizations do not have the
resources to keep pace with newer technologies and are having difficulty
expanding their IT departments and retraining and re-deploying their in-house
personnel. Organizations are increasingly using third party IT services
companies to reduce the learning curve associated with new technologies, shorten
implementation timeframes and lower implementation costs. In addition,
organizations increasingly rely upon third party service providers as a
cost-effective solution for large IT projects such as software remediation for
legacy systems relating to the Year 2000 problem, which Gartner Group, Inc. has
estimated will cost in excess of $300 billion to resolve worldwide. Although ERP
implementation services may be offered by ERP software vendors, in most cases
ERP implementation and systems integration services are provided by third party
consulting companies such as the Company. The Company believes that the cost to
implement and integrate an ERP software system ranges from two to ten times the
cost of the software license fee.
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<PAGE> 30
Although market share in the IT industry was initially concentrated among
large computer manufacturers, the industry has become increasingly competitive
and fragmented. IT outsourcing services are provided by numerous firms including
multinational accounting firms, systems consulting and implementation firms,
software application vendors, service groups of computer equipment companies,
facilities management companies, general management consulting firms,
programming companies and technical personnel and data processing outsourcing
companies. Given the complexity of managing these outside relationships, large
businesses and other organizations are seeking to reduce the number of IT
services firms that they deal with to a select few that they can trust to
complete projects successfully, on time and within budget.
THE BRIGHTSTAR APPROACH
The Company provides IT solutions based on its ERP*PLUS(SM) services
through experienced consultants located throughout the U.S. and worldwide. The
Company's approach emphasizes the following key advantages:
ERP Implementation Expertise. The Company's services are based on its
core ERP implementation expertise. Through its ERP*PLUS(SM) services, the
Company provides comprehensive solutions to improve an organization's
productivity through the implementation of ERP software systems,
consulting, software application development, systems integration,
outsourcing, training, upgrades and support.
Comprehensive IT Capabilities. The Company offers its clients (i)
access to a comprehensive range of solutions, allowing its clients to
outsource more of their IT service needs while reducing the number of
companies with which they must deal, and (ii) the support and resources of
a large firm, with the flexibility and responsiveness to changing client
needs of a smaller firm.
Nationwide Presence with Strong Local Relationships. The Company
believes that its strong local and regional presence enables it to be
responsive to its clients' needs and enhances its ability to establish and
maintain long-term relationships with its clients. The Company believes
that each of its local offices has developed name recognition and goodwill
and that, collectively, they create an opportunity to build a broad network
to provide enterprise-wide solutions to businesses and organizations on a
national basis.
Experienced Staff; Focus on Mission Critical Solutions. A critical
element of the Company's success has been its ability to provide senior
level consultants to its clients. The Company focuses on providing
comprehensive solutions that reengineer core business processes that are
critical to its clients' businesses. The Company believes its ability to
deliver such mission critical solutions fosters long-term relationships
with its existing clients and generates referrals of new clients. To
maintain this focus, the Company recruits and employs skilled, senior-level
consultants, project managers, engineers and other technical personnel with
experience in the vertical markets it serves.
Creativity; Entrepreneurial Spirit. The Company believes that a key
reason for its historical growth has been the entrepreneurial spirit of
managers and employees of the Founding Companies. The Company operates with
integrated but independently managed business units which provides a
motivating environment for its staff and encourages the continuation of
close client relationships. Local office management is responsible for
initiating client contacts and establishing business relationships as well
as the scheduling of assignments, the hiring of employees and the
development and implementation of marketing strategies.
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<PAGE> 31
GROWTH STRATEGY
The Company's goal is to be a leading provider of enterprise-wide solutions
by continuing its growth and focus on ERP implementation. The Company's growth
strategy emphasizes the following elements:
Maximize Intrinsic Growth Opportunities. The Company intends to build
on the Founding Companies' history of internal growth. For the twelve
months ended December 31, 1997, the Founding Companies had combined revenue
of $59.5 million, an 83% increase over the comparable period in 1996. The
Company will centralize certain administrative functions, enabling
management of the Founding Companies to focus on increasing sales and
project execution. In addition, the Company intends to leverage its client
base by providing additional services to meet more fully their
comprehensive IT needs.
Capitalize on Cross-selling Opportunities. The Company intends to
cross-sell its broad range of services to the combined client base of the
Founding Companies. The Company will continue the regional and local
marketing efforts of the Founding Companies, with the enhanced capability
to offer its clients a wider range of IT services and products. The Company
will implement programs enabling each Founding Company to offer its
particular expertise to the Company's combined client base. The Company
plans to coordinate teams consisting of consultants from the Founding
Companies to provide services to its major clients.
Attract, Train, Motivate and Retain Highly Skilled Employees. The
Company maintains programs and personnel, including eight full-time
recruiters, to seek out and employ the best available professionals and to
train these professionals in both legacy systems and emerging technologies.
To attract, train, motivate and retain its employees, the Company focuses
on and provides (i) a corporate culture which promotes creativity and an
entrepreneurial spirit, (ii) competitive compensation, incentive programs
and benefits, including a stock option grant program, and (iii) career and
advancement opportunities for its consultants, including interdisciplinary
training.
Expand Alliances With Leading Software Vendors. The Company is a SAP
Implementation Partner in the U.S. and Australia and the Company also has
preferred "business partner" relationships with PeopleSoft, Microsoft,
Novell and Oracle, among others. These relationships allow the Company to
use the business partner's name and the "business partner" designation in
marketing the Company's services. The Company believes these relationships
result in direct client referrals and enhanced industry recognition. The
Company also believes these relationships enable the Company to broaden its
customer base, increase its competitiveness and maintain its technological
leadership through access to the most current information and training on
leading software, hardware and information systems. The Company intends to
continue to cultivate these relationships and form alliances with other
leading software vendors in order to expand and increase its sales
opportunities.
Expand Through Strategic Acquisitions. The Company intends to continue
its acquisition program. The Company will seek potential acquisition
candidates to increase its expertise or further broaden its service
offerings and expand the Company's presence within its existing geographic
markets or enter into new geographic markets. The Company will seek to
acquire companies that have a strong history of growth and profitability,
strong employee retention, strong management and a reputation for providing
quality services. The Company believes that its ability to add value to
acquired operations by cross-selling its broad range of services, providing
an entrepreneurial environment and enhancing access to financial resources
will make it attractive to acquisition candidates.
ERP*PLUS(SM) SERVICES
ERP*PLUS(SM) is the Company's suite of services for implementing IT
solutions and extending packaged ERP software capabilities throughout the
enterprise or business unit. The Company's services include: ERP software
implementation, consulting, application development, systems integration,
outsourcing and training -- which, together with its methodologies, comprise its
ERP*PLUS(SM) solution. The Company is a SAP Implementation Partner in the U.S.
and Australia and has preferred business partner relationships with PeopleSoft,
Oracle, Microsoft and Novell.
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<PAGE> 32
ERP Software Implementation. The Company assists organizations in all
aspects of implementing packaged software solutions provided by SAP and
PeopleSoft. The Company's services include project scope planning, business
process definition, customization of software to meet client requirements,
integration of packaged software with existing systems, system support, database
integration, systems testing, end-user training, and maintenance and upgrade
support. A typical implementation includes the following:
Scenario/Process Workshops to define the project size, understand the
business processes employed by the client and establish an implementation
plan prior to commencement of the project. This is a dynamic process
involving the client's staff and end-users, leveraging their knowledge base
to identify the systems requirements, define business functions and goals,
and develop a systems prototype.
Infrastructure Analysis and Adaptation to develop the systems architecture
and specifications in conjunction with the client's technical staff. This
phase includes the specification of external system interfaces and the
development of bridging methodologies for legacy system components. Package
applications are installed and code is developed for custom application
interfaces.
Data Conversion Planning and Execution to commence detailed recasting of
data and develop bridges to and from existing applications, resulting in a
map of the conversion process.
Scenario/Use Case Testing to apply structured testing to confirm that
recast data and bridges perform as designed and meet the client's stated
objectives and organizational requirements.
Production Implementation and Support to provide ongoing support including
training, maintenance, enhancement and modification support, design and
development of custom applications, version upgrade support and system
documentation.
Consulting. The Company assists organizations in modernizing their
information systems and business processes in order to improve productivity and
business performance by defining strategic objectives, designing infrastructures
to support these objectives and managing implementation of projects. The
Company's consulting services include business process modeling and
reengineering, systems architecture design, project management and development
of migration plans from mainframe legacy systems to distributed computer
networks utilizing client/server architectures. The Company is capable of
providing these consulting solutions at either the enterprise-wide or the
business function level.
Application Development. The Company provides mission critical software
application design, development and maintenance across a broad spectrum of
computing environments including client/server, midrange and mainframe business
systems and real-time process control systems. The Company's consultants and
software developers are typically engaged for part or all of the lifecycle of
application development, from requirements analysis and systems planning through
coding, testing, deployment and maintenance. The Company uses rapid prototyping
techniques, commercially available database and groupware software and standard
application development tools. The Company has designed and developed
applications both independent of and as a follow-up to its consulting
engagements.
Systems Integration. The Company provides comprehensive systems integration
services including large-scale database integration, LAN and WAN systems design
and implementation, and the design and implementation of Internet applications
and intranets. The Company also develops and integrates turn-key control systems
for clients in the energy and process industries.
Outsourcing. The Company provides highly skilled consultants and
value-added services to augment the internal information systems staff of its
clients. The Company's consultants usually provide services at the client's
site, although services may be provided at the Company's facilities. As part of
its outsourcing services, the Company manages data resource centers and other IT
operations for its clients. Further, the Company provides electronic archival
and document management services, specialized litigation support and consultants
with Year 2000 remediation skills.
Training. The Company maintains training centers in Scottsdale, Arizona,
Dallas, Texas and Lafayette, Louisiana. The Company's training programs for IT
professionals cover the Microsoft Certified Professional and MCSE programs, the
Computer Technology Industry Association's A+ Certification program and the
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<PAGE> 33
Novell Certified Network Administrator and Certified Network Engineer programs.
Additionally, the Company provides these services in conjunction with a state
government agency and a major university. Through its preferred relationships
with PeopleSoft and Oracle, the Company provides end-user training to clients
implementing those software applications. The Company also provides training to
its clients' personnel related to ERP implementation and custom software
applications developed by the Company. The Company currently markets two
training products, a Microsoft MCSE self-study kit, designed to help students
master the various components of the Microsoft Certified System Engineer Program
in preparation for certification, and the Computing Technology Industry
Association's A+ Certification Course, designed to instruct students in personal
computer technical skills. The Company recently entered into a distribution
agreement with a major U.S. publishing company to distribute its A+
Certification suite of products domestically and internationally.
CLIENTS AND MARKETS
The Company provides services to a diverse group of clients, primarily
Fortune 1000 companies and other large organizations. Many of these clients have
substantial recurring requirements for IT services and products and have
maintained ongoing relationships with the Company over several years. The
Company sells its services to its clients either directly or through its
relationships with SAP, PeopleSoft, Oracle, Microsoft and KPMG. The Founding
Companies had no customers that represented more than 10% of the pro forma
combined revenue for the year ended December 31, 1997. While the Company is not
dependent on any single customer, the loss of one of its significant customers
could, at least on a short-term basis, have an adverse effect on the Company. A
partial list of clients served by the Company in 1997 is presented in the table
below:
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
COMMUNICATIONS/MEDIA CONSUMER PRODUCTS/RETAIL
- ----------------------------------------------------------------------------------------------------------------
ABC Radio Australia Post Mary Kay Cosmetics Tandy
Networks GTE Supply Pepsico TRICON (Pizza Hut)
ALLTEL Southwestern Bell
Long Distance
- ----------------------------------------------------------------------------------------------------------------
ENERGY FINANCIAL AND PROFESSIONAL SERVICES
- ----------------------------------------------------------------------------------------------------------------
Alinta Gas Shell Archon Group Ernst & Young
Amoco TransCanada Gas Australian Systems HD Vest Financial
Chevron Processing and People Resources
Conoco Union Pacific Engstron, Lipscomb Kelly Services
Marathon Oil Resources & Lack KPMG Peat Marwick
Ocean Energy Western Mining
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT/EDUCATION HEALTH CARE/INSURANCE
- ----------------------------------------------------------------------------------------------------------------
State of Arkansas U.S. Department of Arkansas Health Advantage
University of Agriculture Blue Cross/ Johnson & Johnson
Texas Blue Shield Medical
- ----------------------------------------------------------------------------------------------------------------
INDUSTRIAL TECHNOLOGY
- ----------------------------------------------------------------------------------------------------------------
General Electric Worsley Aluminum Yamaha Autodesk SAP
Kintetsu World Motor Guidant Tellabs
Express Corp., USA Merisel
Nissan Motor
Acceptance
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
The Company markets and provides its services directly through its
headquarters and branch offices. The Company intends to focus its sales and
marketing efforts on (i) cross-selling the Company's complementary service
capabilities across its combined client base, (ii) implementing a national
account program to secure larger clients, (iii) establishing the Company as a
provider of comprehensive IT services on a nationwide basis
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<PAGE> 34
and (iv) providing Company-wide marketing support to its sales staff through
production and distribution of marketing materials, telemarketing, and industry
association and trade shows and seminars. As of February 1, 1998, the Company
had approximately 20 full-time sales and marketing personnel.
HUMAN RESOURCES
The Company employs more than 600 consultants, supported by a staff of
approximately 90 sales, marketing and administrative personnel. The Company's
success depends in large part upon its ability to attract, train, motivate and
retain highly skilled technical employees. Qualified technical employees are in
great demand and are likely to remain a limited resource for the foreseeable
future. The Company dedicates significant resources to recruiting professionals
with both IT consulting and industry experience, and maintains a staff of eight
full-time recruiters to aid in this effort. The Company also provides numerous
training programs for its consultants, which it believes provides the Company
with an advantage in attracting and retaining such professionals.
None of the Company's employees are subject to a collective bargaining
arrangement. The Company considers its relationships with its employees to be
good.
COMPETITION
The market for IT services is highly competitive and fragmented, is subject
to rapid change and has low barriers to entry. The Company competes 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 the Company. In addition, the Company competes with its
clients' internal MIS departments. The Company believes the principal
competitive factors in the IT services industry include responsiveness to client
needs, availability of technical personnel, speed of applications development,
quality of service, price, project management capabilities, technical expertise
and ability to provide a wide variety of IT services. The Company believes that
its ability to compete also depends in part on a number of competitive factors
outside of its control, including the ability of its competitors to hire, retain
and motivate qualified technical personnel, the ownership by competitors of
software used by potential clients, the development of software that would
reduce or eliminate the need for the Company's services, the price at which
others offer comparable services and the extent of its competitors'
responsiveness to client needs. The Company expects that competition in the IT
services industry could increase in the future, partly due to low barriers to
entry. See "Risk Factors -- Competition."
FOREIGN OPERATIONS
The Company believes that opportunities exist to sell its products and
services in different geographic regions around the world. Through geographic
diversity, the Company believes it can mitigate its exposure to downturns in
local or regional economies. The Company's foreign operations accounted for
approximately 28% of the Company's revenue on a pro forma combined basis for the
year ended December 31, 1997, substantially all of which was generated by the
Company's operations in Australia.
SCS Australia, one of the Founding Companies, is an Australian company and
generates substantially all of its revenue in Australia. Blackmarr, another
Founding Company, has operations in Caracas, Venezuela and London, England. In
addition, several of the other Founding Companies have performed projects
outside the U.S., but maintain no permanent offices outside the U.S. Other than
engagements involving SCS Australia, substantially all of the Company's service
contracts and product sales arrangements have been payable in U.S. dollars.
The current and planned foreign operations of the Company are subject to
certain political, economic and other uncertainties not typically encountered in
domestic operations, including, among others, risks of war, expropriation or
nationalization of assets, renegotiation or nullification of existing contracts,
changing political
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<PAGE> 35
conditions, changing laws and policies affecting trade and investment, overlap
of different tax structures, the general hazards associated with the assertion
of foreign sovereignty over certain areas in which operations are conducted,
costs of localizing products and services for foreign countries, lack of
acceptance of localized products and services in foreign countries, longer
accounts receivable payment cycles and logistical difficulties in managing
foreign operations. Foreign operations sometimes also face the additional risks
of fluctuating currency values, hard currency shortages and controls of foreign
currency exchange. See "Risk Factors -- International Operations."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends on certain methodologies it utilizes in
designing, installing and integrating computer software and systems and on other
proprietary intellectual property rights it has developed to serve its clients.
The Company's business includes the development of custom software in connection
with specific client engagements. Ownership of such software is generally
assigned to the client. The Company also develops certain application software
products, or software "tools," which remain the property of the Company.
The Company relies on a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company generally enters into
confidentiality agreements with its employees and consultants and limits access
to, and distribution of, its proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights. In addition, the laws of some foreign countries may not protect
the Company's proprietary rights as fully or in the same manner as do the laws
of the U.S. Also, despite the steps taken by the Company to protect its
proprietary rights, there can be no assurance that others will not develop
technologies similar or superior to the Company's technology or design around
the proprietary rights owned by the Company. See "Risk Factors -- Intellectual
Property Rights."
PROPERTY
The Company's principal executive offices are located at 10375 Richmond
Avenue, Suite 1620, Houston, Texas 77042. Currently, the Company's lease on
these premises covers 3,687 square feet and expires on November 30, 2002. The
monthly rental rate for such premises is $5,418. The headquarters of the
Founding Companies are located in seven facilities and are leased at aggregate
current monthly rents of approximately $67,500. The Company believes that its
properties are adequate for its needs. Furthermore, the Company believes that
suitable additional or replacement space will be available when required on
terms acceptable to the Company.
LEGAL PROCEEDINGS
Neither BrightStar nor any of the Founding Companies is involved in any
legal proceedings which the Company believes could have a material adverse
effect on the Company.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and directors of BrightStar.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
---- ------ --------
<S> <C> <C>
George M. Siegel...... 60 Chairman of the Board of Directors(2)
Marshall G. Webb...... 55 President, Chief Executive Officer and Director(2)
Michael A. Sooley..... 48 Executive Vice President and Chief Operating Officer
Thomas A. Hudgins..... 57 Executive Vice President of Sales and Marketing and Secretary
Daniel M. Cofall...... 43 Executive Vice President, Chief Financial Officer and Treasurer
Mark D. Diggs......... 50 Senior Vice President, Chief Projects and Integration Officer(3)
Brian R. Blackmarr.... 55 President of Blackmarr; Director(2)(3)
Jennifer T. Barrett... 48 Director(3)(4)
David A. Reamer....... 46 Director(3)(4)(5)
William H. Sitter..... 58 Director(3)(5)
</TABLE>
- ---------------
(1) At December 31, 1997
(2) Member of the Board Executive Committee
(3) Appointment will become effective when the Offering closes
(4) Member of the Board Compensation Committee
(5) Member of the Board Audit Committee
Members of the Board of Directors hold office until the next annual meeting
of stockholders and the election and qualification of their successors. Officers
are elected annually by, and serve at the discretion of, BrightStar's Board of
Directors.
George M. Siegel has served as Chairman of the Board of Directors of
BrightStar since its inception. Mr. Siegel co-founded MindWorks, a Founding
Company, and has served as its Chairman since 1995. In 1990, he founded Dynamex
Inc. (formerly Parcelway Courier Systems, Inc.), a messenger and delivery
service company, and served as its President and Chief Executive Officer until
1995. Mr. Siegel co-founded Pentegra Dental Group, Inc., a public company
engaged in the consolidation and management of dental practices, and he is
currently a director and member of the Executive Committee and the Compensation
Committee of its board of directors. Mr. Siegel received his Bachelor of Science
in Business Administration and Marketing from Roosevelt University.
Marshall G. Webb has served as the President and Chief Executive Officer
and a director of BrightStar since its inception. He co-founded SkillMaster,
Inc., a physician and technologist professional staffing service company, in
1987, and served as its President and Chief Executive Officer from 1987 to 1994.
From 1994 to 1996, he was division president for Digital Solutions, Inc., a
public company engaged in professional staffing services for a wide range of
professions, including engineering, information technology, health care and
business administration, that purchased SkillMaster's health care division. He
returned to SkillMaster in 1996 to supervise the successful acquisition by
SkillMaster of a group of privately held staffing services companies. From 1979
to 1987, Mr. Webb served in the capacities of Chief Operating Officer, Senior
Vice President and Chief Financial Officer for Talent Tree, Inc. and Manpower,
Inc., each of which specializes in staffing services. Mr. Webb is an alumnus of
Southern Methodist University in Dallas, Texas, and is a certified public
accountant.
Michael A. Sooley has served as the Executive Vice President and Chief
Operating Officer of BrightStar since September 1997. From 1992 until September
1997, Mr. Sooley served as the Chief Information Officer ("CIO") for Vinson &
Elkins LLP, a major international law firm headquartered in Houston, Texas. He
served as the CIO for Bronson, Bronson & McKinnon, a law firm in San Francisco,
California, from 1990 until
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<PAGE> 37
1992. Mr. Sooley previously served as a management consultant with Peat,
Marwick, Mitchell & Co. (now KPMG Peat Marwick LLP, a multinational accounting
firm), and as a systems engineer and project manager with Electronic Data
Systems, Inc., a technology services company. Mr. Sooley earned his Bachelor of
Science degree in Electrical Engineering from Trinity College, and his Master of
Science degree in Management Science from Rensselaer Polytechnic Institute.
Thomas A. Hudgins has served as the Executive Vice President of Sales and
Marketing and Secretary of BrightStar since its inception. He was a co-founder
of Delta X Corporation in 1967, a company engaged in the design and manufacture
of electronic hardware and software for production automation systems, and
served as its Executive Vice President until February 1997. Mr. Hudgins is a
registered professional engineer licensed to practice in Texas, and received a
Bachelor of Science degree in Industrial Engineering from Texas Tech University.
Daniel M. Cofall has served as Executive Vice President, Chief Financial
Officer and Treasurer of BrightStar since its inception. From May 1995 to May
1997, Mr. Cofall served as Vice President of Finance and Chief Financial Officer
of Honor Management, Inc., a receivables management company. From April 1994 to
May 1995, he served in various capacities, including Vice President of Finance
and Administration, Chief Financial Officer, Chairman of the Board of Directors
and Chief Executive Officer, of Automated Telephone Management Systems, Inc.
("ATMS"), a public company headquartered in Dallas, Texas engaged in the
production of software for automated dialing systems. From May 1993 to May 1994,
he was Vice President of Finance for Affiliated Computer Services, Inc., a data
management company, and assisted in its initial public offering. From 1991 to
1993, Mr. Cofall served as Director of Finance for Maxum Health Care, a public
company providing mobile MRI and CT scanning services. Mr. Cofall graduated from
Notre Dame University with a Bachelor of Business Administration degree,
majoring in both Accounting and Finance. He received his Masters of Business
Administration degree from Southern Methodist University. Mr. Cofall has also
been a professor of corporate finance at the University of Dallas Graduate
School of Management in Dallas, Texas since 1985.
Mark D. Diggs will become BrightStar's Senior Vice President and Chief
Projects and Integration Officer at the closing of the Offering. In 1989, Mr.
Diggs co-founded SII, a Founding Company, and currently serves as its President
and Chief Executive Officer. In 1993, Mr. Diggs was named Entrepreneur of the
Year by the Association of Arkansas Entrepreneurs and served as the group's
President in 1994. Mr. Diggs served as Chairman of the Governor's Technology
Advisory Subcommittee to the Legislative Committee on Communications for the
State of Arkansas in 1996 and 1997. Mr. Diggs received a Bachelor of Science in
Mathematics from Arkansas State University and received a Masters of Science
degree in computer science from American Technological University. Since 1986,
Mr. Diggs has served as an Adjunct Faculty Department Head for Webster
University and as an adjunct professor for the Webster University Graduate
Center Master Degree Program for computer resources management.
Brian R. Blackmarr will become a director of BrightStar at the closing of
the Offering. Mr. Blackmarr has served as President of Blackmarr, a Founding
Company, since its inception in 1979. He is a registered professional engineer
and is a member of the Board of Trustees of the Texas A&M University Research
Foundation. Mr. Blackmarr received a Bachelor of Science degree in
Mechanical/Industrial Engineering from the University of Texas at Arlington and
a Masters of Science degree in Operations Research and Mechanical/Industrial
Engineering from the University of Texas at Austin.
Jennifer T. Barrett will become a director of BrightStar at the closing of
the Offering. Since 1974, Ms. Barrett has served in various capacities with
Acxiom Corporation, a leading data processing and related computer-based
services and software products company with international operations. She served
as Vice President of Marketing from 1986 to 1988 and Vice President of Business
Development from 1988 to 1991. She is currently a Group Leader in the Data
Products Division and is focused on business development, reporting directly to
the Division Leader. Ms. Barrett received a Bachelor of Science degree in
Mathematics and Computer Science from the University of Texas at Austin.
David A. Reamer will become a director of BrightStar at the closing of the
Offering. Mr. Reamer is Senior Vice President, Global Delivery of Products,
Services and Solutions, of Halliburton Energy Services
37
<PAGE> 38
("HES"), a company which provides products, services and integrated solutions
for oil and gas exploration, development and production. From 1995 to 1997, Mr.
Reamer served as Vice President of HES responsible for various information
technology matters, and from 1993 to 1995, Mr. Reamer served as Region Vice
President of HES. Mr. Reamer received a Bachelor of Science degree in Industrial
Engineering from the University of Texas at Arlington.
William H. Sitter will become a director of BrightStar at the closing of
the Offering. From 1989 to 1995, Mr. Sitter was employed by Allstate Insurance
Company as Senior Vice President -- Information Technology and Chief Information
Officer, and from 1989 to 1993 he also served as a member of its board of
directors. Mr. Sitter received a Bachelor of Science degree in Business
Administration from Oklahoma State University and is a graduate of the Harvard
Graduate School of Business Advanced Management Program.
In addition to these persons, the Company intends to continue to employ
substantially all the members of senior management of each of the Founding
Companies following the closing of the Acquisitions. The Company also intends to
nominate and elect one additional independent director in 1998.
The following table sets forth certain information concerning certain
principals of the Founding Companies who will continue as employees of their
respective Founding Company following the consummation of the Acquisitions and
the Offering:
<TABLE>
<S> <C> <C>
Stephen D. Caswell........................... 45 Managing Director of SCS Australia
Thomas F. Hagen.............................. 51 President of Mindworks
Michael A. Johnson........................... 42 President of ICON
Michael A. Ober.............................. 41 President of SCS America
Joel M. Rayden............................... 42 President of Zelo
</TABLE>
Stephen D. Caswell has served as Managing Director of SCS Australia, one of
the Founding Companies, since 1994.
Thomas F. Hagen co-founded Mindworks, one of the Founding Companies, and
has served as its president since 1995.
Michael A. Johnson co-founded ICON, one of the Founding Companies, and has
served as its president since 1991.
Michael A. Ober co-founded SCS America, one of the Founding Companies, and
has served as its president since 1995.
Joel M. Rayden founded Zelo, one of the Founding Companies, and has served
as its president since 1992.
COMMITTEES OF THE BOARD
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee advises the
Board of Directors on matters relating to the senior management of BrightStar.
The Audit Committee recommends the appointment of auditors and oversees the
accounting and audit functions of the Company. The Compensation Committee
determines executive officers' and key employees' salaries and bonuses and
administers the 1997 Long-Term Incentive Plan. Messrs. Siegel, Webb and
Blackmarr will serve as members of the Executive Committee. Messrs. Reamer and
Sitter will serve as members of the Audit Committee and Ms. Barrett and Mr.
Reamer will serve as members of the Compensation Committee.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Directors who are not employees of the
Company ("Non-Employee Directors") receive no cash compensation for serving as
directors, except for reimbursement of expenses incurred in connection with
their
38
<PAGE> 39
attendance at Board of Directors and committee meetings or otherwise incurred in
their capacity as directors. Under the 1997 Long-Term Incentive Plan, each
Non-Employee Director will receive options to acquire 5,000 shares of Common
Stock at the beginning of his or her first year of service as a director and
options to acquire 5,000 shares of Common Stock at the beginning of each year of
service thereafter. See "-- 1997 Long-Term Incentive Plan."
EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
BrightStar was organized in July 1997 and, prior to the Offering, has not
conducted any operations other than activities related to the Acquisitions and
the Offering. BrightStar entered into employment agreements with Messrs. Cofall
and Sooley effective August 16, 1997 and October 1, 1997, respectively.
BrightStar entered into employment agreements with each of Messrs. Webb and
Hudgins effective January 1, 1998. Mr. Blackmarr will enter into an employment
agreement with Brian R. Blackmarr and Associates, Inc. effective on the closing
of the Offering. Mr. Diggs will enter into an employment agreement with Software
Innovators, Inc. effective on the closing of the Offering. Mr. Webb and Mr.
Blackmarr will receive an annualized base salary of $175,000 and $225,000,
respectively. Messrs. Sooley, Hudgins, Cofall and Diggs will receive an
annualized base salary of $150,000.
The employment agreements entered into by Messrs. Cofall, Sooley, Webb and
Hudgins, and to be entered into by Messrs. Blackmarr and Diggs effective on the
closing of the Offering (the "Executive Employment Agreements"), are similar in
terms to those employment agreements to be entered into between each of the
Founding Companies (or, in the case of SCS America and SCS Australia, successor
corporations being formed by BrightStar) and its chief executive officer as part
of the Acquisitions. The following summary of the Executive Employment
Agreements does not purport to be complete and is qualified by reference to
them, copies of which have been filed as exhibits to the Registration Statement
of which this Prospectus is a part. Each such Executive Employment Agreement
provides for an annual base salary in an amount not less than the initial
specified amount and entitles the employee to participate in all employee
benefit plans sponsored by BrightStar in which all other executive officers of
BrightStar participate. Each of these agreements has an initial three-year term
and continues thereafter on a year-to-year basis on the same terms and
conditions existing at the time of renewal, subject to the right of BrightStar
or the employee to terminate the employee's employment at any time. If the
employee's employment is terminated by BrightStar without cause (as defined)
during the initial three-year term, then that employee will be entitled to (i)
receive his current base salary for the period ending the later of (a) the end
of the initial three-year term of the agreement or (b) 12 months after
termination of employment, (ii) any other earned and unpaid compensation,
vacation time accrued prior to termination and an amount equal to the amount of
any earned bonuses and commissions payable to the employee with respect to the
12 calendar months preceding termination ("Severance Payments"), and (iii)
continued participation in BrightStar's employee benefit plans (other than the
granting of new awards under the 1997 Long-Term Incentive Plan or any other
performance-based plan) for a period of 12 months following the date of
termination. If an employee is terminated without cause during any one-year
extension of the initial term of the Agreement, then that employee shall
continue to receive Severance Payments for a period of 12 months after
termination of such employment and shall continue to participate for such period
in BrightStar's employee benefit plans (other than the granting of new awards
under the 1997 Long-Term Incentive Plan or any other performance-based plan). If
a change of control of BrightStar occurs, and the terms of the employment
agreement are not adopted, the employee will be entitled to receive an amount
equal to 36 months of his then-current base salary under the agreement, payable
on a monthly basis. Under the Executive Employment Agreements, a "change of
control" is defined as (A) the sale of substantially all assets of the Company
or (B) a merger, consolidation, liquidation or reorganization of the Company in
which the Company or an affiliate of the Company is not the surviving entity, or
which results, in any event, in a change of control of the Company. The
Executive Employment Agreements contain covenants limiting competition with the
Company during the term of the Executive Employment Agreement and for an
additional period to be the longer of four years from inception of the
agreement, or one year after termination of employment for cause.
39
<PAGE> 40
1997 LONG-TERM INCENTIVE PLAN
The Board of Directors and the stockholders of BrightStar have adopted the
1997 Long-Term Incentive Plan which provides for the granting of stock-based
awards ("Awards") to directors, officers, management and other key employees of
the Company. Pursuant to the 1997 Long-Term Incentive Plan, the Board of
Directors is authorized to award (i) stock options, (ii) stock appreciation
rights, (iii) restricted stock awards, (iv) performance awards and (v) other
stock-based incentive awards. Stock options granted under the 1997 Long-Term
Incentive Plan may be either options that qualify as "incentive stock options"
("Incentive Options"), within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or options that do not qualify as
"incentive stock options" ("Non-qualified Options"). The 1997 Long-Term
Incentive Plan, which permits up to 1,000,000 shares of Common Stock to be
issued, terminates on December 31, 2007.
The 1997 Long-Term Incentive Plan may be administered by the Board of
Directors or by any committee of the Board of Directors designated by the Board
of Directors, which consists of at least two non-employee directors, to the
extent required to qualify for certain exemptions under Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and to satisfy
the requirements of Section 162(m) of the Code. Subject to the terms of the 1997
Long-Term Incentive Plan, the Board of Directors or the committee determines the
persons to whom Awards are granted and the terms and the number of shares
covered by each Award.
The term of each option may not exceed ten years from the date the option
is granted, or five years in the case of an Incentive Option granted to a holder
of more than 10% of the fully-diluted capital stock of BrightStar. Non-qualified
Options and Incentive Options may become exercisable immediately after the date
of grant and may continue to be exercisable, in whole or in part, up to ten
years after the date of grant, as determined by the Board of Directors or the
committee.
The 1997 Long-Term Incentive Plan provides that the Board of Directors or
the committee may provide for termination of an option in the case of
termination of employment or directorship or any other reason. No Award, other
than Non-qualified Options, may be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee Awards may be
exercised only by the optionee.
The 1997 Long-Term Incentive Plan contains a provision accelerating the
receipt of benefits pursuant to Awards upon the occurrence of specified events,
including a merger or consolidation of BrightStar. The acceleration of vesting
of Awards in the event of a merger or other similar event may have the effect of
discouraging a proposal for merger, a takeover attempt or other efforts to gain
control of the Company.
Pursuant to the 1997 Long-Term Incentive Plan, Incentive Options to
purchase shares of Common Stock have been granted to George M. Siegel and the
persons named in "-- Executive Compensation and Employment Agreements" above as
follows: 74,900 shares to George M. Siegel, 76,000 shares to Mr. Webb, 68,000
shares to Mr. Cofall, 58,000 shares to Mr. Sooley, 68,000 shares to Mr. Hudgins,
68,000 shares to Mr. Diggs and 7,500 shares to Mr. Blackmarr. Each of those
Incentive Options will have an exercise price per share equal to the initial
price to the public set forth on the cover of this Prospectus. Other than the
Incentive Option to Mr. Blackmarr, the Incentive Options will vest at the rate
of 50% per year, commencing on the date the initial public offering price is
determined. Mr. Blackmarr's Incentive Option will vest at the rate of 33 1/3%
per year, commencing on the anniversary of the date the initial public offering
price is determined. The Incentive Options will expire at the earlier of ten
years from the date of grant or three months following termination of
employment.
Pursuant to action of the Board of Directors and under the terms of the
1997 Long-Term Incentive Plan, BrightStar has approved Non-qualified Options for
each of the initial Non-Employee Directors as follows (the "Non-Employee
Director Awards"): (i) the automatic grant to each of the initial Non-Employee
Directors (including those elected to begin service at the closing of the
Offering) of options to purchase 5,000 shares of Common Stock, effective as of
the date the initial public offering price is determined, at an exercise price
per share equal to the initial per share public offering price, (ii) the
automatic grant to each Non-Employee Director elected after the closing of the
Offering of options to purchase 5,000 shares of Common Stock,
40
<PAGE> 41
effective on the date of that person's initial election as a director, at an
exercise price per share equal to the per share fair market value of the Common
Stock on the date of that grant, and (iii) the automatic grant to each
Non-Employee Director of options to purchase 5,000 shares of Common Stock at
each annual meeting of stockholders thereafter at which that director is
re-elected or remains a director, unless such annual meeting is held within
three months following that person's election as a director, at an exercise
price per share equal to the per share fair market value of the Common Stock on
the date of grant. BrightStar has reserved 70,000 shares of Common Stock for
issuance pursuant to the Non-Employee Director Awards; however, the Board of
Directors may revoke at any time the next automatic grant of options otherwise
provided for pursuant to the Non-Employee Director Awards. Each option granted
pursuant to the Non-Employee Director Awards shall be exercisable immediately
and shall expire ten years after the date of grant, unless sooner exercised or
canceled due to termination of service or death.
Payment on the exercise of an option may be in cash or, at the discretion
of the Board of Directors, by delivery of shares of Common Stock.
41
<PAGE> 42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 16, 1998 (giving effect to the Share
Exchange and the dissolution and liquidation of BITI), and as adjusted to give
effect to the closing of the Acquisitions and the Offering, as to (i) all
persons who will then be the "beneficial owners", as defined by the SEC, of 5%
or more of the Common Stock, (ii) each director and person nominated to become a
director of BrightStar on closing of the Offering, (iii) each executive officer
of BrightStar and (iv) all executive officers, directors and persons nominated
to become executive officers and directors of BrightStar as a group. All persons
listed have an address at the Company's principal executive offices and have
sole voting and investment power with respect to their shares, unless otherwise
indicated.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(2) OFFERING(2)(3)
------------------- -------------------
NUMBER OF NUMBER OF
BENEFICIAL OWNER(1) SHARES PERCENT SHARES PERCENT
------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Brian R. Blackmarr............................. -- -- 774,646 9.9%
Mark D. Diggs(4)............................... 110,673 9.9% 249,898 3.2%
George M. Siegel(4)............................ 148,307 13.2% 203,005 2.6%
Marshall G. Webb(4)............................ 175,957 15.7% 175,957 2.2%
Thomas A. Hudgins(4)........................... 165,803 14.8% 165,803 2.1%
Daniel M. Cofall(4)............................ 154,265 13.8% 154,265 2.0%
Michael A. Sooley(4)........................... 89,000 8.0% 89,000 1.1%
Jennifer T. Barrett............................ 5,000 * 5,000 *
David A. Reamer................................ 5,000 * 5,000 *
William H. Sitter.............................. 5,000 * 5,000 *
All executive officers, directors and director
nominees as a group (ten persons)............ 859,005 65.7% 1,827,574 22.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares subject to options which vest upon the completion of the
Offering held by various members of management, as follows: Mark D.
Diggs -- 34,000 shares; George M. Siegel -- 37,450 shares; Marshall G.
Webb -- 38,000 shares; Thomas A. Hudgins -- 34,000 shares; Daniel M.
Cofall -- 34,000 shares; Michael A. Sooley -- 29,000 shares; Jennifer T.
Barrett -- 5,000 shares; David A. Reamer -- 5,000 shares; and William H.
Sitter -- 5,000 shares.
(2) Giving effect to the Share Exchange and the dissolution and liquidation of
BITI immediately following the closing of the Offering.
(3) Giving effect to the Offering and the issuance of 2,502,928 shares of Common
Stock in connection with the Acquisitions.
(4) The holders have agreed to exchange an aggregate of 242,760 shares of Common
Stock for an equal number of shares of Restricted Common Stock
contemporaneously with the closing of the Offering. See "Certain
Transactions -- Acquisitions of the Founding Companies" and "Description of
Capital Stock -- Common Stock and Restricted Common Stock."
42
<PAGE> 43
CERTAIN TRANSACTIONS
ORGANIZATION OF BRIGHTSTAR
In connection with the formation of BrightStar, BITG issued 100,000 shares
of its common stock to BITI in consideration for a cash payment in the amount of
$10,000. George M. Siegel, Marshall G. Webb, Thomas A. Hudgins, Daniel M. Cofall
and Mark D. Diggs, each of whom is an executive officer or director of
BrightStar, together with Michael Miller, chief financial officer of SII,
purchased all the outstanding Class B units of BITI, the only units authorized
to vote for the election of BITI managers, for aggregate consideration of
$10,000. Messrs. Siegel, Webb, Hudgins, Diggs and Miller also own all the
outstanding Series A-1 Class A units of BITI. Effective December 15, 1997, BITI
executed a share exchange agreement with BrightStar to effect the Share Exchange
concurrently with the closing of the Offering. The governing regulations of BITI
provide that BITI is to be dissolved and liquidated effective upon the closing
of the Offering. Upon dissolution and liquidation of BITI following the closing
of the Share Exchange and the Offering, (i) the holders of the Series A-1 Class
A units will receive in cash their original purchase price ("Purchase Price") of
$490,000 for the units, plus shares of Common Stock having an aggregate value
equal to the holder's Purchase Price, based on the initial public offering price
of the Common Stock (the "IPO Price"), (ii) the holders of the Series A-2 Class
A units will receive in cash their Purchase Price of $1.3 million for the units,
plus shares of Common Stock having an aggregate value equal to four times the
holder's Purchase Price (based on the IPO Price), and (iii) the holders of the
Class B units are entitled to receive the remaining shares of Common Stock
received by BITI in the Share Exchange and the remaining cash, if any.
Under the terms of the Share Exchange Agreement, BrightStar will exchange
shares of its newly issued Common Stock for all of the outstanding capital stock
of BITG held by BITI (on a 7.3901-for-one basis) concurrently with the closing
of the Offering. BITI will receive 739,007 shares of Common Stock in connection
with the Share Exchange, of which an aggregate of 301,326 shares will then be
distributed to the holders of Class B units of BITI (as described above), and an
aggregate of 437,681 shares will then be distributed to the holders of the
Series A-1 and Series A-2 Class A units of BITI (as described above). In
addition, BrightStar will issue an aggregate of 346,800 shares of Common Stock
(the "Management Compensation Shares") to its officers and directors (each of
whom is also an officer or director of BITG) in exchange for an aggregate of
41,958 shares of BITG common stock acquired by such persons at a purchase price
of $0.10 per share.
BrightStar will enter into stock repurchase agreements with each of Messrs.
Webb, Hudgins, Cofall, Sooley, Siegel and Diggs, pursuant to which BrightStar is
entitled to repurchase, for $0.10 per share, the shares issued to each of them,
in the event such individual (i) is terminated from employment by, or as a
director of, BrightStar for cause (as defined in the agreements) or (ii)
voluntarily resigns from his employment with BrightStar, or service as a
director, as applicable, within 12 months following the closing of the Offering.
All shares held by such persons will initially be subject to the repurchase
rights and that number will be reduced pro rata each month thereafter until the
end of that 12-month period. Messrs. Webb, Hudgins, Cofall, Sooley, Siegel and
Diggs may not sell any of their shares which remain subject to the repurchase
agreements.
Pursuant to the BITI Loan Agreement, BITI has made cash advances to enable
BrightStar to pay various professional and administrative expenses in connection
with the formation of BrightStar, the acquisition of the Founding Companies and
the Offering. As of April 16, 1998, there were outstanding advances under the
BITI Loan Agreement totaling $1.8 million, which advances bear interest at 10%
per annum and are to be repaid within 30 days following the closing of the
Offering. All advances under the BITI Loan Agreement, together with accrued
interest thereon, will be repaid from the net proceeds of the Offering. See "Use
of Proceeds."
ACQUISITIONS OF THE FOUNDING COMPANIES
Concurrently with the closing of the Offering, BrightStar will acquire all
of the issued and outstanding capital stock or substantially all of the assets
of the Founding Companies, at which time, each Founding Company will become a
wholly owned subsidiary of BrightStar. The aggregate consideration BrightStar
will pay to acquire the Founding Companies (before the Post-Closing Adjustments)
consists of (i) approximately
43
<PAGE> 44
$31.6 million in cash, (ii) 2,502,928 shares of Common Stock and (iii)
approximately $7.7 million of indebtedness of the Founding Companies to be
assumed by BrightStar. Brian R. Blackmarr, Thomas F. Hagen, Michael A. Johnson,
Joel M. Rayden and George M. Siegel, who are stockholders of certain of the
Founding Companies and directors, executive officers or key employees of
BrightStar, are makers or guarantors with regard to approximately $1.2 million,
$449,000, $1.6 million, $492,000 and $449,000, respectively, of indebtedness of
the Founding Companies. In connection with the Acquisitions, BrightStar has made
arrangements to release such persons from such indebtedness. In addition, the
purchase price for each of SCS Australia and SII may be increased by a
Post-Closing Adjustment, which, for SCS Australia, may be up to 200,000 shares
of Common Stock based on actual fiscal 1998 revenues exceeding a certain
threshold, and for SII will be equal to one-third of the amount of SII's actual
fiscal 1998 pre-tax net income in excess of $1.2 million, and which, in each
case, is to be payable in shares of Common Stock valued at the IPO Price. The
Company currently estimates, however, that no shares of Common Stock will be
issuable in connection with the Post-Closing Adjustments. The consideration
being paid in the Acquisitions was determined by arm's-length negotiations
between the Company and the respective Founding Companies.
In addition to being conditioned upon the closing of the Offering, the
closing of each Acquisition is subject to certain other customary conditions
including, among others: the continuing accuracy of the representations and
warranties made by the parties thereto, the performance of their respective
covenants included in the agreements relating to the Acquisitions; and the
nonexistence of a material adverse change in the results of operations,
financial condition or business of each Founding Company prior to the closing
date. There can be no assurance that the conditions to closing of the
Acquisitions will be satisfied or waived or that the acquisition agreements will
not be terminated prior to consummation.
The following table sets forth the consideration to be paid and debt
assumed for each of the Founding Companies.
<TABLE>
<CAPTION>
SHARES OF DEBT
CASH COMMON STOCK ASSUMED
------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Blackmarr(1).............................. $ 3,290 1,012,306 $1,125
ICON...................................... 6,224 319,197 1,925
Mindworks................................. 445 80,894 509
SCS America............................... 11,000 384,615 565
SCS Australia(2).......................... 9,815 452,976 2,440
SII(3).................................... 450 185,633 568
Zelo...................................... 375 67,307 523
------- --------- ------
Totals.......................... $31,599 2,502,928 $7,655
======= ========= ======
</TABLE>
- ---------------
(1) George M. Siegel, Marshall G. Webb, Thomas A. Hudgins, Daniel M. Cofall,
Mark D. Diggs, Michael A. Sooley and an employee of the Company have each
agreed to exchange up to an aggregate of 242,760 of their shares of Common
Stock for an equal number of shares of Restricted Common Stock
contemporaneously with the closing of the Offering to ensure that the
shareholders of Blackmarr will become, collectively, the largest holder of
Common Stock entitled to vote immediately following the Acquisitions. See
"Description of Capital Stock -- Common Stock and Restricted Common Stock."
(2) Does not include shares of Common Stock issuable in connection with a
Post-Closing Adjustment to be based upon 1998 revenue.
(3) Does not include shares of Common Stock issuable in connection with a
Post-Closing Adjustment to be based upon 1998 pre-tax net income. The cash
consideration includes the assumed repayment of a $550,000 promissory note
(which is not included in the amount shown for debt assumed) issued in
December 1997 to a former stockholder of SII in exchange for his equity
interest in SII in anticipation of BrightStar's acquisition of SII.
44
<PAGE> 45
As consideration for their interests in the Founding Companies, certain
officers, directors and beneficial owners of more than 5% of the outstanding
shares of Common Stock will receive cash and shares of Common Stock as set forth
in the table below.
<TABLE>
<CAPTION>
SHARES OF
NAME CASH COMMON STOCK
---- ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
George M. Siegel...................................... $ -- 54,698
Brian R. Blackmarr.................................... 2,518 774,646
Mark D. Diggs......................................... 338 139,225
------ ---------
Total....................................... $2,856 968,569
====== =========
</TABLE>
In connection with the Acquisitions, the Company will enter into employment
agreements with certain key employees of the Founding Companies. Total annual
compensation pursuant to such agreements ranges from approximately $100,000 to
approximately $225,000 depending on the duties of such employees and their
positions with the Founding Companies. These employment agreements have initial
terms of three years and generally provide, among other things, that the
employee will not compete with the Company during the term of the employment
agreement and for additional periods of up to the greater of one year after the
termination of their employment thereunder for cause or the termination date set
forth in the agreement. For a discussion of the employment agreements between
the Company and its executive officers, see "Management -- Executive
Compensation and Employment Agreements."
FINANCIAL ADVISORY SERVICES
In August 1997, BITG engaged McFarland, Grossman & Company, Inc. ("MGCO")
to provide financial advisory services for a period of six months in connection
with the Acquisitions and related financings. Under the terms of the engagement
letter between BrightStar and MGCO (the "MGCO Engagement Letter"), BrightStar
paid MGCO an initial advisory fee of $15,500, plus monthly fees aggregating
$75,000 through December 1997, and reimbursed MGCO for its out-of-pocket
expenses relating to the services provided. In connection with the MGCO
Engagement Letter, BITG issued the MG Warrant to MGCO for $100 in cash. Pursuant
to the Share Exchange Agreement, BrightStar has assumed all obligations of BITG
under the MG Warrant. As adopted by BrightStar, the MG Warrant provides for the
purchase of up to 50,000 shares of Common Stock, at a per share exercise price
equal to the lesser of $6.00 or 60% of the IPO Price. The MG Warrant may be
exercised in whole or, from time to time, in part, at any time during the five-
year period beginning on the issuance date of the MG Warrant. BrightStar granted
certain registration rights to MGCO with respect to the shares of Common Stock
issuable upon exercise of the MG Warrant.
Pursuant to the MGCO Engagement Letter, MGCO will be entitled to receive
the following fees in the future: (i) a fee of $1.6 million payable upon the
closing of the Acquisitions; and (ii) a private placement fee equal to 6% of the
amount of any private placement made by BrightStar within two years of March 2,
1998 with any capital source introduced to BrightStar by MGCO during the term of
the MGCO Engagement Letter, together with a warrant to purchase an amount equal
to 10% of the securities issued in any such private placement at the issue price
in that private placement.
In September 1997, BITG engaged Brewer-Gruenert Capital Advisors, LLC
("BGCA") to provide consulting services regarding corporate development matters
for a period of one year in connection with future acquisitions of IT companies
by BrightStar and any private investors introduced to BrightStar by BGCA. Under
the terms of the consulting agreement (the "BGCA Agreement") between BITG and
BGCA, as assumed by BrightStar, BrightStar will pay BGCA, at the closing of the
Offering, an executive search fee of $60,000 for services rendered thereunder
and thereafter will reimburse BGCA from time to time for its out-of-pocket
expenses relating to the services provided. In connection with the BGCA
Agreement, BrightStar also issued the BGCA Option giving BGCA the option to
purchase 14,285 shares of Common Stock (which is the number equal to $100,000
divided by the difference between the per share IPO Price and the exercise price
of $6.00 per share).
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<PAGE> 46
Pursuant to the BGCA Agreement, BGCA will be entitled to receive the
following fees in the future: (i) a graduated success fee, payable on the
closing of an acquisition by the Company of a company presented to the Company
by BGCA, and (ii) a cash fee equal to 10% of the amount of the gross investment
proceeds received by the Company from any investor identified by BGCA during the
term of the BGCA Agreement.
COMPANY POLICY
In the future, any material transactions between the Company and directors,
officers, employees or other affiliates of the Company are anticipated to be
minimal and will, in any case, be approved in advance by a majority of the
Board, including a majority of disinterested members of the Board.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Certificate of Incorporation authorizes the issuance of 40,000,000
shares of capital stock, consisting of 35,000,000 shares of Common Stock,
2,000,000 Shares of Restricted Common Stock and 3,000,000 shares of Preferred
Stock ("Preferred Stock"). At April 16, 1998, 1,000 shares of Common Stock were
outstanding (all of which were held by BITG), and no shares of Restricted Common
Stock or Preferred Stock were outstanding. On closing of the Acquisitions, the
Share Exchange and the Offering, BrightStar will have outstanding 7,838,735
shares of Common Stock, and no shares of Restricted Common Stock or Preferred
Stock will be outstanding. The following summary describes certain terms of
BrightStar's capital stock that the Company considers to be material to
prospective investors. Reference is made to the more detailed provisions of the
Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus is a part. All capitalized terms
used and not defined below have the respective meanings given to them in the
Certificate of Incorporation.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock have no voting rights.
After the closing of the Offering, the Board of Directors will be elected
annually and will serve one-year terms. Cumulative voting for the election of
directors is not permitted. Any director, or the entire Board of Directors, may
be removed at any time, with cause, by a majority of the aggregate number of
votes which may be cast by the holders of outstanding shares of Common Stock.
Any shares of Restricted Common Stock that may be issued will automatically
convert into Common Stock on a share-for-share basis (i) in the event of a
disposition of such shares of Restricted Common Stock by the holder thereof
(other than a disposition which is a distribution by a holder to its partners or
beneficial owners or a transfer to a related party of such holder), (ii) in the
event any person acquires beneficial ownership of 25% or more of the outstanding
shares of Common Stock of BrightStar at any time after consummation of the
Offering, (iii) 18 months after the closing of the Offering or (iv) in the event
a majority of the aggregate number of votes which may be cast by the holders of
outstanding shares of Common Stock approve such conversion.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock (and Restricted Common Stock if any are issued) are
entitled to participate pro rata in such dividends as may be declared in the
discretion of the Board of Directors out of the funds legally available
therefor. Holders of Common Stock (and Restricted Common Stock if any are
issued) are entitled to share ratably in the net assets of BrightStar on
liquidation after payment or provision for all liabilities and any preferential
liquidation rights of any Preferred Stock then outstanding. Holders of Common
Stock and holders of Restricted Common Stock will have no preemptive rights to
purchase shares of stock of BrightStar. Shares of Common Stock are not subject
to any redemption provisions and are not convertible into any other securities
of BrightStar. Shares of Restricted Common Stock, if issued, will not be subject
to any redemption provisions, but will be convertible into Common Stock on the
occurrence of certain events as described above. All outstanding shares of
Common Stock are, and the shares of Common Stock to be issued pursuant to the
Offering and the Acquisitions will be, on payment therefor, fully paid and
non-assessable.
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<PAGE> 47
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board in one or
more classes or series. Subject to the provisions of the Certificate of
Incorporation and limitations prescribed by law, the Board is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any class or series and to
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any series of the Preferred Stock, in each case without
any further action or vote by the stockholders. BrightStar has no current plans
to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board to render more difficult or to discourage an attempt to obtain control of
BrightStar by means of a tender offer, proxy contest, merger or otherwise, and
thereby to protect the continuity of BrightStar's management. The issuance of
shares of the Preferred Stock pursuant to the Board's authority described above
may adversely affect the rights of the holders of Common Stock and Restricted
Common Stock. For example, Preferred Stock issued by BrightStar may rank prior
to the Common Stock and Restricted Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
BrightStar is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period of
three years following the date that stockholder became an interested
stockholder, unless: (i) prior to that date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) on closing
of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(a) by persons who are directors and also officers of the corporation and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or after that date, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock not owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors who
were directors prior to that person becoming an interested stockholder during
the previous three years or were recommended for election or elected to succeed
those directors by a majority of those directors. An "interested stockholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date it is sought to be determined whether that person was an interested
stockholder.
The foregoing provisions of Section 203 could delay or frustrate the
removal of incumbent directors or the assumption of control by the holder of a
large block of Common Stock even if such removal or assumption would be
beneficial, in the short term, to stockholders of the Company. The provisions
could also discourage or make more difficult a merger, tender offer or proxy
contest even if such event would be favorable to the interests of the
stockholders of the Company.
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<PAGE> 48
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Certificate of Incorporation and as permitted by Delaware
law, a director of BrightStar is not liable to BrightStar or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability in connection with a breach of duty of loyalty to BrightStar or its
stockholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments,
stock repurchases or redemptions illegal under Delaware law or any transaction
in which that director derived an improper personal benefit.
Additionally, the Certificate of Incorporation provides that directors and
officers of BrightStar will be indemnified by BrightStar to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities actually and reasonably incurred in
connection with service for or on behalf of BrightStar, and further permits the
advancing of expenses incurred in defense of claims.
The inclusion in the Certificate of Incorporation of the provisions
described in the two preceding paragraphs may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management of the Company from bringing a lawsuit against
its directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of BrightStar must be effected at a
duly called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof. The Certificate of Incorporation provides that a
special meeting of stockholders may be called only by the President, the Board
or by such other person or persons as may be authorized in BrightStar's Bylaws.
The Certificate of Incorporation provides that the Board may adopt, amend or
repeal BrightStar's Bylaws by the affirmative vote of a majority of the Board
without the consent or vote of BrightStar's stockholders; provided, however,
that the stockholders of BrightStar may adopt, amend or repeal BrightStar's
Bylaws by the affirmative vote of the holders of at least a majority of the
shares entitled to vote in the election of directors which are present in person
or represented by proxy at a duly constituted meeting of BrightStar's
stockholders at which a quorum is present.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Acquisitions, the Share Exchange and the Offering,
7,838,735 shares of Common Stock will be outstanding. See "Certain
Transactions -- Acquisitions of the Founding Companies." The 4,250,000 shares of
Common Stock offered hereby will be freely tradeable unless acquired by
affiliates of BrightStar. All the remaining shares of Common Stock to be
outstanding on the closing of the Acquisitions (including shares to be issued in
connection with the Post-Closing Adjustments), the Share Exchange and the
Offering (as well as all shares issuable pursuant to the MG Warrant and the BGCA
Option) may be resold publicly only following their effective registration under
the Securities Act or pursuant to an exemption from the registration
requirements of that act, such as Rule 144 thereunder.
When the Offering closes, BrightStar also will have outstanding (i) options
to purchase approximately 617,000 shares of Common Stock, which were (or will
have been) granted pursuant to the 1997 Long-Term Incentive Plan, (ii) the MG
Warrant (which provides for the issuance of up to 50,000 shares of Common Stock
and grants the holder thereof certain registration rights), and (iii) the BGCA
Option (which provides for the issuance of up to 14,285 shares of Common Stock).
If the Company enters into the Credit Facility, the Lender Option (which
provides for the issuance of up to 100,000 shares of Common Stock) will also be
outstanding. BrightStar intends to file a registration statement on Form S-8 to
register the shares issuable pursuant to its 1997 Long-Term Incentive Plan.
After that registration statement becomes effective, the shares registered
thereby generally will on issuance be available for sale in the open market by
holders who are not affiliates of BrightStar and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates of BrightStar. See
"Management -- 1997 Long-Term Incentive Plan."
In general, under Rule 144, if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from BrightStar or
an affiliate of BrightStar, the holder (or holders whose shares of Common Stock
are aggregated), of such restricted securities, including holders who may be
deemed "affiliates of BrightStar," is entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of the Common Stock (approximately 78,000 shares on
completion of the Offering) or (ii) the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the manner
of sale, notice requirements and the availability of current public information
about BrightStar. Affiliates may sell shares not constituting restricted
securities in accordance with the foregoing volume limitations and other
requirements but without regard to the one year holding period. Under Rule
144(k), if a period of at least two years has elapsed since the later of the
date on which restricted securities were acquired from BrightStar or an
affiliate of BrightStar, a holder of such restricted securities who is not an
affiliate at the time of the sale and has not been an affiliate for at least
three months prior to the sale is entitled to sell the shares immediately
without regard to the volume limitations and other conditions of Rule 144
described above. The foregoing summary of Rule 144 is not intended to be a
complete description thereof and is qualified in its entirety by reference
thereto. The SEC has proposed certain amendments to Rule 144 that would, among
other things, eliminate the manner of sale requirements and revise the notice
provisions of that rule. The SEC has also solicited comments on other possible
changes to Rule 144, including possible revisions to the one- and two-year
holding periods and volume limitations described above.
BrightStar and its directors and executive officers, BITI, all persons who
will receive BrightStar Common Stock in connection with the Share Exchange and
all persons who receive shares of Common Stock in connection with the
Acquisitions have agreed that they will not, without the prior written consent
of CIBC Oppenheimer Corp., directly or indirectly, make any offer, sale,
assignment, transfer, contract to sell, grant of an option to purchase or other
disposition of any Common Stock beneficially owned (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934, as amended) by them for a
period of one year subsequent to the date of this Prospectus, other than Common
Stock to be sold in the Offering, gifts, transfers by will or the laws of
descent and distribution and transfers to a family limited partnership created
for the benefit of the stockholder's family, which, in each case, requires that
the recipient of such transfer agrees to be bound by all terms of such lockup
agreement, except that BrightStar may issue Common Stock in connection with
future acquisitions and on exercise of the MG Warrant, the BGCA Option, and the
Lender Option, provided that the recipients of those shares agree not to offer
or sell any of those shares during the Lockup
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<PAGE> 50
Period, and pursuant to Awards under the 1997 Long-Term Incentive Plan. In
addition, each person who will receive shares of Common Stock in connection with
the Acquisitions will enter into a stock transfer restriction agreement which
prohibits any sale or transfer of Common Stock for a period of 365 days from the
closing of the Offering, other than gifts, transfers by will or the laws of
descent and distribution and transfers to a family limited partnership created
for the benefit of the stockholder's family, which, in each case, requires that
the recipient of such transfer agrees to be bound by all terms of the stock
transfer restriction agreement. Each employee or other person associated with
the Company who acquires any of the up to 200,000 shares of Common Stock
reserved by the Underwriters for sale to such persons will agree not to offer or
sell any shares of Common Stock for a period of 180 days from the date of this
Prospectus without the prior written consent of CIBC Oppenheimer Corp.
BrightStar intends to register 4,000,000 additional shares of Common Stock
under the Securities Act during 1998 for its use in connection with future
acquisitions. Those shares generally will be freely tradable after their
issuance by persons not affiliated with the Company except to the extent that
the Company contractually restricts their resale. Resales of those shares during
the Lockup Period would require the prior written consent of CIBC Oppenheimer
Corp. The registration rights described above do not apply to the registration
statement relating to the shares registered for use in connection with future
acquisitions.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), BrightStar has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom CIBC Oppenheimer Corp. and Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated ("Dain Rauscher Wessels"), are acting as the
representatives (the "Representatives"), has severally agreed to purchase from
BrightStar, the respective number of shares of Common Stock set forth opposite
the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
CIBC Oppenheimer Corp. ..................................... 1,525,000
Dain Rauscher Wessels....................................... 1,015,000
BancAmerica Robertson Stephens.............................. 125,000
BT Alex. Brown Incorporated................................. 125,000
Cowen & Company............................................. 125,000
Furman Selz LLC............................................. 125,000
Salomon Brothers Inc ....................................... 125,000
SBC Warburg Dillon Read Inc. ............................... 125,000
Adams, Harkness & Hill, Inc. ............................... 60,000
Robert W. Baird & Co. Incorporated.......................... 60,000
Brean Murray & Co., Inc. ................................... 60,000
EVEREN Securities, Inc. .................................... 60,000
Fahnestock & Co. Inc. ...................................... 60,000
First Albany Corporation.................................... 60,000
First of Michigan Corporation............................... 60,000
Jefferies & Company......................................... 60,000
Legg Mason Wood Walker, Incorporated........................ 60,000
Morgan Keegan & Company, Inc. .............................. 60,000
Parker/Hunter Incorporated.................................. 60,000
Pennsylvania Merchant Group................................. 60,000
Soundview Financial Group................................... 60,000
Sterne, Agee & Leach, Inc. ................................. 60,000
C.E. Unterberg, Towbin...................................... 60,000
Wheat, First Securities, Inc. .............................. 60,000
---------
Total............................................. 4,250,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and at such price less a concession of not in excess of $0.55
per share to certain security dealers, of which a concession not in excess of
$0.10 per share may be reallowed to certain other securities dealers. After the
Offering, the public offering price, allowances, concessions and other selling
terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase Common Stock are subject to certain conditions,
including that if any of the Common Stock is purchased by the Underwriters
pursuant to the Underwriting Agreement, all such shares must be so purchased
(other than those covered by the over-allotment option described below).
BrightStar has granted to the Underwriters an option, exercisable for up to
30 days after the date of this Prospectus, to purchase up to an aggregate of
637,500 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them bears to the
4,250,000 shares of Common Stock offered hereby. BrightStar will be
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<PAGE> 52
obligated, pursuant to the over-allotment option granted to the Underwriters, to
sell Common Stock to the Underwriters to the extent that such over-allotment
option is exercised.
BrightStar and its directors and executive officers, BITI, all persons who
will receive BrightStar Common Stock in connection with the Share Exchange and
all persons acquiring shares of Common Stock in connection with the Acquisitions
have agreed that they will not, without the prior written consent of CIBC
Oppenheimer Corp., directly or indirectly, make any offer, sale, assignment,
transfer, contract to sell, grant of an option to purchase or other disposition
of any Common Stock beneficially owned (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) by them for a period of one
year subsequent to the date of this Prospectus, other than Common Stock to be
sold in the Offering or transferred as a gift or gifts (provided that any donee
thereof agrees in writing to be bound by the terms of such lockup agreement),
except that BrightStar may, subject to certain limitations, issue shares of
Common Stock in connection with future acquisitions and on exercise of the MG
Warrant, the BGCA Option and the Lender Option, provided that the recipients of
these shares agree not to offer or sell any of these shares during the Lockup
Period, and pursuant to Awards under the 1997 Long-Term Incentive Plan.
BrightStar has agreed to indemnify the Representatives and the several
Underwriters against certain liabilities, including, without limitation,
liabilities under the Securities Act, and to contribute, under certain
circumstances, to certain payments that the Underwriters may be required to make
in respect thereof.
The Representatives have informed BrightStar that the Underwriters do not
intend to confirm sales of shares of Common Stock offered hereby to accounts
over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price was negotiated among BrightStar and the
Representatives. Among the factors considered in determining the initial public
offering price, in addition to prevailing market conditions, were the history of
and the prospects for the industry in which the Company competes, the past and
present operations of the Founding Companies, the historical results of
operations of the Founding Companies, the Company's capital structure, estimates
of the business potential and earnings prospects of the Company, an overall
assessment of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses. There can be no assurance that an active trading market
will develop for the Common Stock or as to the price at which the Common Stock
may trade in the public market from time to time subsequent to the Offering made
hereby.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
At the request of BrightStar, the Underwriters have reserved up to 200,000
of the shares of Common Stock offered hereby for sale at the initial public
offering price to employees of the Company and other persons associated with the
Company. Each such employee or other person who acquires any of such shares will
agree not to offer or sell any shares of Common Stock for a period of 180 days
from the date of this Prospectus without the prior written consent of CIBC
Oppenheimer Corp.
Any offer of the shares of Common Stock in Canada was made only pursuant to
an exemption from the requirements to file a prospectus in the relevant province
of Canada in which such offer is made.
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<PAGE> 53
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the law and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
Dain Rauscher Wessels provided financial advisory services to BrightStar in
connection with the Acquisitions and the Offering, for which Dain Rauscher
Wessels will be paid a fee of $100,000, payable by BrightStar. Dain Rauscher
Wessels is also the holder of 20 Series A-2 Class A units of BITI, which it
acquired for a purchase price of $100,000.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed on for the Company by Chamberlain, Hrdlicka, White,
Williams & Martin of Houston, Texas. Certain members of Chamberlain, Hrdlicka,
White, Williams & Martin own Series A-2 Class A units of BITI, representing
approximately 3.8% of the outstanding Series A-2 Class A units. Certain legal
matters related to the Offering will be passed on for the Underwriters by
Fulbright & Jaworski L.L.P., Houston, Texas.
EXPERTS
The audited financial statements of Blackmarr, ICON, Mindworks, SCS
America, SII and Zelo included in this Prospectus have been audited by Deloitte
& Touche LLP, independent auditors, as indicated in their reports (included
herein), and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The audited financial statements of SCS Australia included in this
Prospectus have been audited by Deloitte Touche Tohmatsu, independent auditors,
as indicated in their report (included herein), and are included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
BrightStar has not previously been subject to the reporting requirements of
the Exchange Act. BrightStar has filed with the SEC a Registration Statement on
Form S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the SEC. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance that a reference is
made to a contract or other document filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by such reference. A
copy of the Registration Statement may be examined without charge at the SEC's
principal offices at 450 Fifth Street, N. W., Washington, D.C. 20549, and at the
regional offices of the SEC located at 7 World Trade Center, Suite 1300, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of the Registration Statement
may be obtained from the Public Reference Section of the SEC upon payment of
certain fees prescribed by the SEC. Copies of such materials may also be
obtained over the Internet at http://www.sec.gov.
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<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Statements
Basis of Presentation of Unaudited Pro Forma Combined
Financial Statements.................................... F-2
Unaudited Pro Forma Combined Balance Sheet as of December
31, 1997................................................ F-3
Unaudited Pro Forma Combined Statement of Operations for
the year ended December 31, 1997........................ F-4
Notes to Unaudited Pro Forma Financial Statements......... F-5
Historical Financial Statements
Brian R. Blackmarr and Associates, Inc.
Independent Auditors' Report............................ F-11
Balance Sheet as of September 30, 1996 and 1997......... F-12
Statement of Operations for each of the three years in
the period ended September 30, 1997.................... F-13
Statement of Stockholders' Equity for each of the three
years in the period ended September 30, 1997........... F-14
Statement of Cash Flows for each of the three years in
the period ended September 30, 1997.................... F-15
Notes to Financial Statements........................... F-16
Integrated Controls, Inc.
Independent Auditors' Report............................ F-20
Balance Sheet as of December 31, 1996 and 1997.......... F-21
Statement of Income for each of the three years in the
period ended December 31, 1997......................... F-22
Statement of Stockholders' Equity for each of the three
years in the period ended December 31, 1997............ F-23
Statement of Cash Flows for each of the three years in
the period ended December 31, 1997..................... F-24
Notes to Financial Statements........................... F-25
Mindworks Professional Education Group, Inc.
Independent Auditors' Report............................ F-30
Balance Sheet as of December 31, 1996 and 1997.......... F-31
Statement of Operations for each of the two years in the
period ended December 31, 1997......................... F-32
Statement of Stockholders' Equity for each of the two
years in the period ended December 31, 1997............ F-33
Statement of Cash Flows for each of the two years in the
period ended December 31, 1997......................... F-34
Notes to Financial Statements........................... F-35
Software Consulting Services America, LLC
Independent Auditors' Report............................ F-39
Balance Sheet as of December 31, 1996 and 1997.......... F-40
Statement of Income for the period ended December 31,
1995 and each of the two years in the period ended
December 31, 1997...................................... F-41
Statement of Members' Equity for the period ended
December 31, 1995 and each of the two years in the
period ended December 31, 1997......................... F-42
Statement of Cash Flows for the period ended December
31, 1995 and each of the two years in the period ended
December 31, 1997...................................... F-43
Notes to Financial Statements........................... F-44
SCS Unit Trust
Independent Auditors' Report............................ F-48
Balance Sheet as of June 30, 1996 and 1997.............. F-49
Statement of Income for the period ended June 30, 1995
and for each of the two years in the period ended June
30, 1997............................................... F-50
Statement of Unit Capital and Beneficiaries' Loan
Accounts for the period ended June 30, 1995 and for
each of the two years in the period ended June 30,
1997................................................... F-51
Statement of Cash Flows for the period ended June 30,
1995 and for each of the two years in the period ended
June 30, 1997.......................................... F-52
Notes to Financial Statements........................... F-53
Software Innovators, Inc.
Independent Auditors' Report............................ F-57
Balance Sheet as of July 31, 1996 and 1997.............. F-58
Statement of Operations for each of the two years in the
period ended July 31, 1997............................. F-59
Statement of Stockholders' Equity for each of the two
years in the period ended July 31, 1997................ F-60
Statement of Cash Flows for each of the two years in the
period ended July 31, 1997............................. F-61
Notes to Financial Statements........................... F-62
Zelo Group, Inc.
Independent Auditors' Report............................ F-65
Balance Sheet as of December 31, 1996 and 1997.......... F-66
Statement of Operations for each of the two years in the
period ended December 31, 1997......................... F-67
Statement of Stockholders' Deficit for each of the two
years in the period ended December 31, 1997............ F-68
Statement of Cash Flows for each of the two years in the
period ended December 31, 1997......................... F-69
Notes to Financial Statements........................... F-70
BIT Investors, LLC
Independent Auditors' Report............................ F-73
Consolidated Balance Sheet as of December 31, 1997...... F-74
Consolidated Statement of Operations for the period
ended December 31, 1997................................ F-75
Consolidated Statement of Stockholder's Deficit for the
period ended December 31, 1997......................... F-76
Consolidated Statement of Cash Flows for the period
ended December 31, 1997................................ F-77
Notes to Consolidated Financial Statements.............. F-78
</TABLE>
F-1
<PAGE> 55
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
BASIS OF PRESENTATION OF UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions (the "Acquisitions") by BrightStar Information
Technology Group, Inc. ("BrightStar") of (a) the outstanding capital stock of
Brian R. Blackmarr and Associates, Inc. ("Blackmarr"), Integrated Controls, Inc.
("ICON"), Mindworks Professionals Education Group, Inc. ("Mindworks"), Software
Innovators, Inc. ("SII"), Zelo Group, Inc ("Zelo") and (b) substantially all the
net assets of Software Consulting Services America, LLC ("SCS America") and SCS
Unit Trust ("SCS Australia" and, together with Blackmarr, ICON, Mindworks, SII,
Zelo, SCS America and SCS Australia, the "Founding Companies") and (ii) a share
exchange with BIT Investors, LLC ("BITI") and senior management of BrightStar
for all outstanding common stock of BIT Group Services, Inc. ("BITG") and (iii)
the closing of BrightStar's initial public offering (the "Offering") and the
application of the estimated net proceeds therefrom. BrightStar and the Founding
Companies are hereinafter collectively referred to as the "Company." The
Acquisitions will close concurrently with and as a condition to the closing of
the Offering and will be accounted for using the purchase method of accounting,
with Blackmarr being reflected as the "accounting acquiror." Pursuant to the
share exchange agreement between BrightStar and the BITG stockholders (the
"Share Exchange Agreement"), the aggregate amount of common stock issued in
connection with the Acquisitions and the Share Exchange shall be 3,588,735
shares (excluding any shares, par value $0.001 per share, of BrightStar ("Common
Stock") that may become issuable pursuant to post-closing adjustments to the
purchase price for two of the Acquisitions).
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions, the Share Exchange and the Offering as if they had occurred on
December 31, 1997. The unaudited pro forma combined statements of operations
give effect to the Acquisitions and the Offering as if they had occurred on
January 1, 1997.
The Company believes the combination of the Founding Companies will provide
opportunities to improve operating margins and increase profitability, including
the consolidation of certain duplicative administrative functions. The Company
believes it will be able to achieve operating efficiencies by consolidating
certain administrative functions. The pro forma financial information herein
reflects neither expected savings nor margin improvements but does reflect
management's estimate of certain incremental corporate general and
administrative costs.
The pro forma adjustments are based on preliminary estimates (primarily of
the aggregate purchase price of the Acquisitions), available information and
certain assumptions that management deems appropriate, but which may be revised
as additional information becomes available. The pro forma financial information
does not purport to represent what the Company's financial position or results
of operations would actually have been if such transactions had in fact occurred
on the dates assumed and is not necessarily representative of the Company's
financial position or results of operations for any future period. Since the
Founding Companies were not under common control or management, historical
combined results may not be comparable to, or indicative of, future performance.
The unaudited pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included in
this Prospectus. See "Risk Factors" included in this Prospectus.
F-2
<PAGE> 56
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
BLACKMARR ICON MINDWORKS SCS AMERICA SCS AUSTRALIA SII ZELO
---------- ---------- --------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $ 2,994 $ 170,711 $ 25,801 $ 332,254 $ 112,594 $ 745,852
Accounts receivable, net of
allowance for doubtful
accounts....................... 4,243,050 2,773,956 63,125 1,829,256 3,495,676 149,865 $ 123,341
Inventory....................... 24,505
Unbilled revenue................ 652,711 153,391 631,401
Deferred taxes.................. 161,564
Prepaid expenses and other
current assets................. 11,806 11,000 36,190 800
---------- ---------- --------- ---------- ---------- --------- ---------
Total current assets......... 5,060,319 2,956,473 124,431 2,314,901 4,239,671 931,907 124,141
Property and equipment, net..... 276,753 1,213,693 153,750 183,652 131,113 61,266 171,616
Goodwill........................ 99,774
Other assets.................... 88,300 87,565 33,985 37,499 40,929 500 4,027
---------- ---------- --------- ---------- ---------- --------- ---------
TOTAL ASSETS................. $5,425,372 $4,357,505 $ 312,166 $2,536,052 $4,411,713 $ 993,673 $ 299,784
========== ========== ========= ========== ========== ========= =========
Accounts payable................ $ 423,143 $ 184,723 $ 89,531 $ 981,793 $ 71,335 $ 130,381
Short-term debt................. 847,764 1,372,583 $ 181,633 565,000 1,766,284 550,000 260,085
Current maturities of long-term
debt........................... 213,185 276,600 44,262 130,000
Current portion of capital lease
obligations.................... 64,322 6,303 48,647
Accrued liabilities and other
accrued expenses............... 2,610,929 586,918 62,700 488,665 1,608,981 151,567
Deferred revenue................ 621,329 2,685
Deferred income taxes........... 608,870 45,545
Payable to Founding Companies...
---------- ---------- --------- ---------- ---------- --------- ---------
Total current liabilities.... 4,780,672 3,029,694 291,280 1,143,196 4,357,058 824,750 569,113
Long-term debt, net of current
maturities..................... 66,292 282,877
Capital lease obligations, net
of current portion............. 209,854 11,907 83,886
Deferred taxes.................. 111,594 6,306
---------- ---------- --------- ---------- ---------- --------- ---------
Total long-term
liabilities................ -- 387,740 282,877 -- -- 18,213 83,886
Common stock.................... 318,068 16,250 600 1,000 5,000
Stock warrants..................
Additional paid-in capital...... 25,248 59,400 54,655 35,882
Retained earnings (deficit)..... 326,632 1,078,608 (321,991) 1,392,856 667,578 (358,215)
Treasury stock.................. (180,035) (553,750)
---------- ---------- --------- ---------- ---------- --------- ---------
Total equity................. 644,700 940,071 (261,991) 1,392,856 54,655 150,710 (353,215)
---------- ---------- --------- ---------- ---------- --------- ---------
TOTAL LIABILITIES AND
EQUITY..................... $5,425,372 $4,357,505 $ 312,166 $2,536,052 $4,411,713 $ 993,673 $ 299,784
========== ========== ========= ========== ========== ========= =========
<CAPTION>
PRO FORMA OFFERING
BITI ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
CONSOLIDATED TOTAL (NOTE 3A) COMBINED (NOTE 3) AS ADJUSTED
------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $ 552,126 $ 1,942,332 $ 1,942,332 $ 7,147,820(b),(c) $ 9,090,152
Accounts receivable, net of
allowance for doubtful
accounts....................... 12,678,269 12,678,269 12,678,269
Inventory....................... 24,505 24,505 24,505
Unbilled revenue................ 1,437,503 1,437,503 1,437,503
Deferred taxes.................. 161,564 161,564 161,564
Prepaid expenses and other
current assets................. 881 60,677 60,677 60,677
---------- ----------- ----------- ----------- ------------ ------------
Total current assets......... 553,007 16,304,850 -- 16,304,850 7,147,820 23,452,670
Property and equipment, net..... 136,516 2,328,359 2,328,359 2,328,359
Goodwill........................ 99,774 $43,054,768 43,154,542 4,580,878(d),(e),(f) 47,735,420
Other assets.................... 1,950,000 2,242,805 (1,950,000) 292,805 292,805
---------- ----------- ----------- ----------- ------------ ------------
TOTAL ASSETS................. $2,639,523 $20,975,788 $41,104,768 $62,080,556 $ 11,728,698 $ 73,809,254
========== =========== =========== =========== ============ ============
Accounts payable................ $1,112,756 $ 2,993,662 $ $ 2,993,662 (673,785)(c) $ 2,319,877
Short-term debt................. 1,805,000 7,348,349 7,348,349 (7,348,349)(c)
Current maturities of long-term
debt........................... 664,047 664,047 (664,047)(c) --
Current portion of capital lease
obligations.................... 119,272 119,272 -- 119,272
Accrued liabilities and other
accrued expenses............... 5,509,760 5,509,760 5,509,760
Deferred revenue................ 624,014 624,014 624,014
Deferred income taxes........... 654,415 654,415 654,415
Payable to Founding Companies... -- 31,599,330 31,599,330 (31,599,330)(c) --
---------- ----------- ----------- ----------- ------------ ------------
Total current liabilities.... 2,917,756 17,913,519 31,599,330 49,512,849 (40,285,511) 9,227,338
Long-term debt, net of current
maturities..................... 349,169 349,169 (349,169)(c)
Capital lease obligations, net
of current portion............. 305,647 305,647 305,647
Deferred taxes.................. 117,900 117,900 117,900
---------- ----------- ----------- ----------- ------------ ------------
Total long-term
liabilities................ -- 772,716 772,716 (349,169) 423,547
Common stock.................... 100 341,018 (20,100) 320,918 (313,079)(b) 7,839
Stock warrants.................. 450,000(e) 450,000
Additional paid-in capital...... 4,614,426 4,789,611 12,647,852 17,437,463 52,226,457(b),(d),(e),(f) 69,663,920
Retained earnings (deficit)..... (4,892,759) (2,107,291) (3,856,099) (5,963,390) (5,963,390)
Treasury stock.................. (733,785) 733,785 --
---------- ----------- ----------- ----------- ------------ ------------
Total equity................. (278,233) 2,289,553 9,505,438 11,794,991 52,363,378 64,158,369
---------- ----------- ----------- ----------- ------------ ------------
TOTAL LIABILITIES AND
EQUITY..................... $2,639,523 $20,975,788 $41,104,768 $62,080,556 $ 11,728,698 $ 73,809,254
========== =========== =========== =========== ============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-3
<PAGE> 57
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BLACKMARR ICON MINDWORKS SCS AMERICA SCS AUSTRALIA SII ZELO
----------- ----------- ---------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $16,714,051 $11,503,504 $1,444,095 $8,401,117 $16,719,907 $3,618,324 $1,049,298
Cost of revenue............... 13,843,732 7,631,356 590,440 6,176,798 13,225,315 2,133,158 582,428
----------- ----------- ---------- ---------- ----------- ---------- ----------
Gross profit.................. 2,870,319 3,872,148 853,655 2,224,319 3,494,592 1,485,166 466,870
Selling, general and
administrative expenses..... 1,981,513 2,725,216 891,793 1,571,560 2,004,954 1,247,400 586,789
Stock compensation expense.... 305,000
Depreciation and
amortization................ 139,303 275,084 69,726 74,656 67,329 24,352 40,403
Goodwill amortization.........
----------- ----------- ---------- ---------- ----------- ---------- ----------
Income (loss) from
operations.................. 444,503 871,848 (107,864) 578,103 1,422,309 213,414 (160,322)
Interest expense.............. (105,659) (162,186) (27,468) (10,654) (186,230) (2,033) (30,223)
Other income (expense), net... 33,060 20,933 (566) (155,687) 33,502
----------- ----------- ---------- ---------- ----------- ---------- ----------
Income (loss) before income
taxes....................... 371,904 730,595 (135,332) 566,883 1,080,392 244,883 (190,545)
Income tax provision.......... 160,059 293,371 93,768
----------- ----------- ---------- ---------- ----------- ---------- ----------
Net income (loss)............. $ 211,845 $ 437,224 $(135,332) $ 566,883 $ 1,080,392 $ 151,115 $ (190,545)
=========== =========== ========== ========== =========== ========== ==========
Net loss per basic and diluted
common share................
Shares used in computing net
loss per basic and diluted
common share................
<CAPTION>
BITI COMBINED ADJUSTMENTS
CONSOLIDATED TOTAL NOTE 4 PRO FORMA
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue....................... $59,450,296 $59,450,296
Cost of revenue............... 44,183,227 44,183,227
----------- ----------- ----------- -----------
Gross profit.................. 15,267,069 15,267,069
Selling, general and
administrative expenses..... $ 285,919 11,295,144 $2,100,000(d)(f) 13,395,144
Stock compensation expense.... 4,604,526 4,909,526 (4,604,526)(e)(g) 305,000
Depreciation and
amortization................ 2,314 693,167 -- 693,167
Goodwill amortization......... 1,193,386(b) 1,193,386
----------- ----------- ----------- -----------
Income (loss) from
operations.................. (4,892,759) (1,630,768) 1,311,140 (319,628)
Interest expense.............. (524,453) 481,961(a) (42,492)
Other income (expense), net... (68,758) (68,758)
----------- ----------- ----------- -----------
Income (loss) before income
taxes....................... (4,892,759) (2,223,979) 1,793,101 (430,878)
Income tax provision.......... 547,198 (258,110)(b)(c) 289,088
----------- ----------- ----------- -----------
Net income (loss)............. $(4,892,759) $(2,771,177) $2,051,211 $ (719,966)
=========== =========== =========== ===========
Net loss per basic and diluted
common share................ $ (0.09)
===========
Shares used in computing net
loss per basic and diluted
common share................ 7,838,735
===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-4
<PAGE> 58
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. GENERAL
BrightStar was formed to create a national provider of information
technology consulting services. BrightStar has conducted no operations to date
and will acquire the Founding Companies concurrently with and as a condition to
the closing of the Offering.
The historical financial statements represent the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements as indicated. All Founding
Companies have a December 31 year-end except for Blackmarr, SII and SCS
Australia. The unaudited pro forma combined statement of operations present (i)
the results of operations of Icon, Mindworks, SCS America, SCS Australia, SII
and Zelo for the year ended 1997 and (ii) the results of operations of Blackmarr
for the years ended September 30, 1996 and 1997. The audited historical
financial statements included herein have been included in accordance with Rule
3-05 of Regulation S-X of the Securities and Exchange Commission.
2. ACQUISITION OF FOUNDING COMPANIES
Concurrent with and as a condition to the closing of the Offering,
BrightStar will acquire all of the outstanding capital stock or substantially
all the net assets of the Founding Companies. The acquisitions will be accounted
for using the purchase method of accounting, with Blackmarr being treated as the
accounting acquiror. Management of BrightStar anticipates, based on its
preliminary analysis, that the historical carrying values of the Founding
Companies' assets and liabilities will approximate their fair values.
The following table sets forth the estimated consideration to be paid in
cash and shares of common stock. For purposes of computing the estimated
purchase price for accounting purposes, the value of the shares is determined
using an estimated fair value of $11.70 per share, which represents a discount
of 10% from the initial public offering price of $13.00 per share due to
restrictions on the resale and transferability of the shares to be issued in the
Acquisitions. The estimated purchase price for each Acquisition and related
allocations of the excess purchase price are subject to certain purchase price
adjustments at and following closing.
<TABLE>
<CAPTION>
AMOUNT IN COMMON
COMMON STOCK
CASH STOCK SHARES
------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Founding Company:
ICON.............................................. $ 6,224 $ 4,149 319,197
Mindworks......................................... 445 1,052 80,894
SCS America....................................... 11,000 5,000 384,615
SCS Australia(1).................................. 9,815 5,889 452,976
SII(2)............................................ 450 2,413 185,633
Zelo.............................................. 375 875 67,307
------- ------- ---------
Subtotal.................................. 28,309 19,378 1,490,622
Blackmarr......................................... 3,290 13,160 1,012,306
------- ------- ---------
Total..................................... $31,599 $32,538 2,502,928
======= ======= =========
</TABLE>
- ---------------
(1) Does not include any shares of Common Stock that may be issuable in
connection with a post-closing adjustment to be based upon 1998 revenue. The
Company currently estimates that no shares of Common Stock will be issuable
in connection with that post-closing adjustment.
(2) Does not include any shares of Common Stock that may be issuable in
connection with a post-closing adjustment to be based upon 1998 pre-tax net
income. The Company currently estimates that no shares of Common Stock will
be issuable in connection with that post-closing adjustment. The cash
consideration includes the assumed repayment of a $550,000 promissory note
issued in December 1997 to a former
F-5
<PAGE> 59
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
stockholder of SII in exchange for his equity interest in SII in
anticipation of BrightStar's acquisition of SII.
In connection with the acquisitions of the Founding Companies, the excess
of cost over fair value of net assets acquired will be amortized using the
straight-line method over 40 years. Management of the acquired businesses have
successfully operated the Founding Companies for a number of years. BrightStar
is not aware of any major changes in the business conditions in which the
acquired Founding Companies operate which might affect the recoverability of the
recorded intangibles. However, in the event business conditions change, the
recoverability will be reevaluated based upon revised projections of future
undiscounted operating income and cash flows and, if impaired, the balances will
be adjusted accordingly.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS AS OF
DECEMBER 31, 1997
PRO FORMA ADJUSTMENTS
a. Records the purchase by Blackmarr (the accounting acquiror for
financial statement purposes) of the other Founding Companies and
BITG, as described in Note 2, for an aggregate purchase price
consisting of an estimated $31.6 million in cash and 2,502,928 shares
of Common Stock, resulting in an aggregate of $43.1 million of
goodwill, which includes the effect of the write off of $1.9 million
of deferred offering costs that had been recorded by BITG. The
purchase price allocation below also gives effect to the writeoff of
the one-time charge for acquired in-process research and development
of $3.0 million discussed in note 4.f.
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
---------------
(IN THOUSANDS)
<S> <C>
Assets:
Goodwill.................................................. $43,055
Other assets.............................................. (1,950)
-------
Total assets...................................... $41,105
=======
Liabilities and stockholders' equity:
Payable to founding stockholders.......................... $31,599
-------
Stockholders' equity:
Common stock........................................... (20)
Paid-in capital........................................ 12,648
Retained earnings...................................... (3,856)
Treasury stock......................................... 734
-------
Total stockholders' equity........................ 9,506
-------
Total liabilities and stockholders' equity........ $41,105
=======
</TABLE>
F-6
<PAGE> 60
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The following is the calculation of goodwill arising from the Acquisitions
of the Founding Companies and BITG:
<TABLE>
<S> <C>
Cash paid to founding companies............................. $ 31,599
Stock issued to founding companies (valued at $11.70 per
share).................................................... 29,284
Cash paid to Blackmarr, charged to retained earnings........ (3,290)
Discounted value of stock issued to Blackmarr included in
amount of stock issued to founding companies above........ (11,844)
--------
Total consideration (purchase price) attributable to
acquisition of founding companies and BITI by
Blackmarr, the accounting acquiror.................... 45,749
Pro forma combined net assets of all founding companies and
BITI...................................................... (2,290)
Net assets of Blackmarr..................................... 645
Deferred offering costs at BITI............................. 1,950
Goodwill at ICON............................................ 100
In process research and development......................... (3,000)
--------
Total.................................................. $ 43,154
========
</TABLE>
The following research and development projects comprise the $3.0 million
write-off of in-process research and development costs:
<TABLE>
<CAPTION>
ENTITY IN-PROCESS TECHNOLOGY ($ IN MILLION)
------ --------------------- --------------
(VALUE)
<S> <C> <C>
Zelo Group, Inc. ...................... Document Archiving System $0.50
Integrated Controls, Inc. ............. JAK Real Time Data and Intranet 1.50
Employee Analysis Software
Software Innovators, Inc. ............. Bridging/File Conversion Tool 0.60
Mindworks Professional Education Group, 0.40
Inc. ................................ Multimedia Training Software
-----
Total...................................................................... $3.00
=====
</TABLE>
OFFERING ADJUSTMENTS
b. Records the $55.3 million of cash proceeds from the issuance of shares
of Common Stock, net of estimated cash offering costs of $7.5 million.
Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees, financial advisory fees
(including fees paid through the issuance to advisors of a warrant and
an option to purchase Common Stock) and printing expenses. Also
reflects adjustments to aggregate par value of Common Stock
outstanding after giving effect to the Offering to reflect the total
number of shares to be outstanding, including the shares to be issued
to BrightStar's management (see note 3.d).
c. Records the cash portion of the consideration paid in connection with
the Acquisitions and reduction of debt obligations with the proceeds
from the Offering.
d. Records the issuance of 301,326 shares of Common Stock to be issued as
consideration for the Class B units of BITI, which were issued to
members of the Company's management. These shares were valued at a
discount of 10% to the initial public offering price of $13.00 per
share, and represent a stock compensation charge of approximately $3.5
million and is reflected as a one-time charge to deferred compensation
(a contra paid-in capital) and will be amortized over the vesting
period of one year.
F-7
<PAGE> 61
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
e. Records the issuance of 437,681 shares of Common Stock as
consideration for the Series A-1 and Series A-2 Class A units of BITI.
These shares were valued at a discount of 10% to the initial public
offering price of $13.00 per share. These shares less 46,153 shares
issued to affiliated parties have been included in goodwill as a cost
of the acquisition of the Founding Companies. The shares issued to
affiliated parties have been recorded as a charge to paid-in capital.
Also, records the issuance of a warrant and an option to purchase
Common Stock, which were issued as partial payment for certain
financial advisory and consulting services.
f. Records the issuance of 346,800 shares of Common Stock issued to
senior management of BrightStar in the Share Exchange. These shares
were valued at a discount of 10% to the initial offering price of
$13.00 per share, and represent a stock compensation charge of
approximately $4.1 million and is reflected as a one-time charge to
deferred compensation (a contra paid-in-capital) and will be amortized
over the vesting period of one year.
<TABLE>
<CAPTION>
OFFERING
(B) (C) (E) ADJUSTMENTS
-------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................... $ 47,782 $(40,634) $ 7,148
Goodwill.................................... $ 4,581 4,581
-------- -------- -------- --------
Total Assets............................. $ 47,782 $(40,634) $ 4,581 $ 11,729
======== ======== ======== ========
Liabilities and Stockholders' Equity:
Account payable............................. $ (674) $ (674)
Short-term debt payable..................... (7,348) (7,348)
Long-term debt, including current
maturities............................... (1,013) (1,013)
Cash consideration payable to Founding
Company stockholders..................... (31,599) (31,599)
-------- -------- -------- --------
Total Liabilities........................ (40,634) (40,634)
-------- -------- -------- --------
Stockholders' Equity:
Common stock............................. $ (313) (313)
Stock warrants........................... $ 450 450
Paid-in capital(d),(f)................... 48,095 4,131 52,226
-------- -------- -------- --------
Total Stockholders' Equity............... 47,782 4,581 52,363
-------- -------- -------- --------
Total Liabilities and Stockholders'
Equity................................. $ 47,782 $(40,634) $ 4,581 $ 11,729
======== ======== ======== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997
a. Records the anticipated reduction in interest expense due to repayment
of the outstanding debt of the Founding Companies and the related
effect on the provision (benefit) for income taxes.
b. Records goodwill amortization related to the Acquisitions, using a
40-year estimated life, and the related tax benefit of deductible
goodwill amortization associated with the purchase of SCS America.
c. Records the incremental provisions for federal and state income taxes
relating to the conversion from an S Corporation (or other status not
subject to corporate-level income tax) to a C Corporation for each of
SCS America, SCS Australia, Mindworks and Zelo.
d. Records BrightStar's estimated corporate selling, general and
administrative expenses (consisting principally of salaries for
corporate personnel and related corporate facility costs) and the
related effect on the provision (benefit) for income taxes.
F-8
<PAGE> 62
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
e. Excludes a $4.1 million non-cash compensation charge and records the
reversal of a $3.7 million non-cash compensation charge related to the
issuance of 346,800 shares of common stock issued to senior management
of BrightStar in the Share Exchange due to its non-recurring nature.
This difference between the non-cash compensation amounts are the
result of a revised estimate of the fair value of the shares.
f. Excludes a $3.0 million one-time charge for acquired in-process
research and development from the Founding Companies, due to its
non-recurring nature.
g. Excludes a $3.5 million non-cash compensation charge and records the
reversal of a $0.9 million non-cash compensation charge related to the
issuance of 301,326 shares of common stock to be issued to members of
the Company's management, as consideration for the Class B units of
BITI, due to its non-recurring nature. This difference between the
non-cash compensation amounts are the result of a revised estimate of
the fair value of the shares.
<TABLE>
<CAPTION>
OFFERING
(A) (B) (C) (D) (E)(G) ADJUSTMENTS
------- ------- ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $ $ $ $ $ $
Cost of revenue...............
Selling, general and
administrative
expenses(f)................. 2,100 2,100
Depreciation and
amortization................
Stock compensation expense.... (4,605) (4,605)
Interest expense.............. (482) (482)
Goodwill amortization......... 1,193 1,193
------- ------- ------- ------- ------- -------
Income (loss) before taxes.... 482 (1,193) (2,100) 4,605 1,794
Provision (benefit) for income
taxes....................... 188 (142) 515 (819) (258)
------- ------- ------- ------- ------- -------
Net income (loss)........ $ 294 $(1,051) $ (515) $(1,281) $ 4,605 $ 2,052
======= ======= ======= ======= ======= =======
</TABLE>
5. PRO FORMA LOSS PER COMMON SHARE
Basic EPS excludes dilution and is determined by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. The number of shares used to compute pro forma
basic loss per common share includes the total number of shares of common stock
outstanding when the Offering closes of 7,838,735 shares. Diluted EPS reflects
the potential dilution that could occur if securities and other contracts to
issue common stock were exercised or converted into common stock. Common shares
issuable upon exercise of common stock warrants and common stock options are
anti-dilutive (decreases the net loss per share) for the periods presented.
6. STOCKHOLDERS' EQUITY
COMMON STOCK PURCHASE WARRANT AND OPTION
In August 1997, BITG entered into an advisory agreement with an investment
banking firm, and issued a warrant (the "MG Warrant") to the firm for $100. The
MG warrant provides for the purchase of 50,000 shares of Common Stock at an
exercise price of the lesser of $6.00 per share or 60 percent of the initial
price to the public in the Offering and is exercisable at any time prior to
August 14, 2002.
In September 1997, BrightStar engaged Brewer-Gruenert Capital Advisors, LLC
("BGCA") to provide consulting services regarding corporate development matters
for a period of one year. In connection with the BGCA Agreement, BrightStar
issued the BGCA Option giving BGCA the option to purchase the number of
F-9
<PAGE> 63
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
shares of Common Stock equal to $100,000 divided by the difference between the
per share initial public offering price of the Common Stock and $6.00 (14,285
shares at the initial public offering price of $13.00 per share).
The estimated combined fair value of the MG Warrant and the BGCA Option of
$450,000 has been included in offering costs in the pro forma financial
statements, as a portion of financial advisory fees.
SHARE EXCHANGE AGREEMENT
In connection with the formation of BrightStar, BITG issued 100,000 shares
of its common stock to BITI in consideration for a cash payment in the amount of
$10,000. Effective December 15, 1997, BITI executed a share exchange agreement
with BrightStar to effect the Share Exchange concurrently with the closing of
the Offering. The governing regulations of BITI provide that BITI is to be
dissolved and liquidated effective upon the closing of the Offering. Upon
dissolution and liquidation of BITI following the closing of the Share Exchange
and the Offering, (i) the holders of the Series A-1 Class A units will receive
in cash their original purchase price of $490,000 ("Purchase Price") for the
units, plus shares of Common Stock having an aggregate value equal to the
holder's Purchase Price, based on the initial public offering price of the
Common Stock (the "IPO Price"), (ii) the holders of the Series A-2 Class A units
will receive in cash their Purchase Price of $1,300,000 for the units, plus
shares of Common Stock having an aggregate value equal to four times the
holder's Purchase Price (based on the IPO Price), and (iii) the holders of the
Class B units are entitled to receive the remaining shares of Common Stock
received by BITI in the Share Exchange and the remaining cash, if any.
Under the terms of the Share Exchange Agreement, BrightStar will exchange
shares of its newly issued Common Stock for all of the outstanding capital stock
of BITG (on a 7.3901-for-one basis) concurrently with the closing of the
Offering. BITI will receive 739,007 shares of Common Stock in connection with
the Share Exchange, of which an aggregate of 301,326 shares will then be
distributed to the holders of Class B units of BITI (as described above), and an
aggregate of 437,681 shares will then be distributed to the holders of the
Series A-1 and Series A-2 Class A units of BITI (as described above). In
addition, BrightStar will issue an aggregate of 346,800 shares of Common Stock
to its officers and directors (each of whom is also an officer or director of
BITG) in exchange for an aggregate of 41,958 shares of BITG common stock
acquired by such persons at a purchase price of $0.10 per share.
F-10
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Brian R. Blackmarr and Associates, Inc.:
We have audited the accompanying balance sheets of Brian R. Blackmarr and
Associates, Inc. (the "Company") as of September 30, 1996 and 1997, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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, such financial statements present fairly, in all material
respects, the financial position of Brian R. Blackmarr and Associates, Inc. at
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 19, 1997
F-11
<PAGE> 65
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1996 1997 1997
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 16,905 $ 19,777 $ 2,994
Certificate of deposit.............................. 60,000
Trade accounts receivable, net of allowance for
doubtful accounts of $442,438, $437,013 and
$451,534 at September 30, 1996 and 1997 and
December 31, 1997, respectively.................. 1,102,791 2,729,262 4,202,180
Accounts receivable -- employees.................... 47,500 39,529 3,355
Income tax refund receivable........................ 18,476 37,515 37,515
Unbilled revenue.................................... 285,046 151,704 652,711
Deferred tax asset.................................. 163,569 161,564 161,564
---------- ---------- ----------
Total current assets........................ 1,694,287 3,139,351 5,060,319
PROPERTY AND EQUIPMENT -- Net......................... 181,035 292,483 276,753
DEFERRED TAX ASSET.................................... 16,051 9,943 31,541
OTHER ASSETS.......................................... 34,702 58,845 56,759
---------- ---------- ----------
TOTAL ASSETS.......................................... $1,926,075 $3,500,622 $5,425,372
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 423,877 $ 421,293 $ 423,143
Line of credit...................................... 599,764 822,764 847,764
Current maturities of notes payable................. 37,332 234,981 213,185
Current maturities of capital lease obligations..... 30,200 76,299 64,322
Accrued salaries and payroll taxes.................. 224,633 401,740 675,669
Other accrued expenses.............................. 10,537 280,966 1,935,260
Income taxes payable................................ 32,609
Deferred revenue.................................... 101,969 563,987 621,329
---------- ---------- ----------
Total current liabilities................... 1,460,921 2,802,030 4,780,672
LONG-TERM DEBT:
Notes payable, net of current maturities............ 37,336 10,898
Capital lease obligations, net of current portion... 4,348 6,172
---------- ---------- ----------
Total long-term debt........................ 41,684 17,070 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value -- 100,000 shares
authorized, 10,000, 13,068 and 13,068 shares
issued and outstanding at September 30, 1996 and
1997 and December 31, 1997, respectively......... 10,000 318,068 318,068
Retained earnings................................... 413,470 363,454 326,632
---------- ---------- ----------
Total stockholders' equity.................. 423,470 681,522 644,700
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $1,926,075 $3,500,622 $5,425,372
========== ========== ==========
</TABLE>
See notes to financial statements.
F-12
<PAGE> 66
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------- --------------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE..................... $7,043,296 $9,226,955 $12,189,942 $2,098,702 $6,622,811
COST OF REVENUE............. 5,592,329 7,659,342 10,063,300 2,029,516 5,809,948
---------- ---------- ----------- ---------- ----------
Gross profit.............. 1,450,967 1,567,613 2,126,642 69,186 812,863
OPERATING EXPENSES:
Selling, general and
administrative......... 1,413,485 1,554,926 1,667,897 503,326 816,942
Stock compensation
expense................ 305,000
Depreciation and
amortization........... 78,218 100,661 134,689 25,942 30,556
---------- ---------- ----------- ---------- ----------
Total operating
expenses........ 1,491,703 1,655,587 2,107,586 529,268 847,498
---------- ---------- ----------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS................ (40,736) (87,974) 19,056 (460,082) (34,635)
OTHER INCOME................ 185,782 124,412 33,414 7,310 6,956
INTEREST EXPENSE............ (66,343) (67,178) (96,020) (21,102) (30,741)
---------- ---------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES..................... 78,703 (30,740) (43,550) (473,874) (58,420)
INCOME TAX EXPENSE
(BENEFIT)................. 39,233 106 6,466 (175,191) (21,598)
---------- ---------- ----------- ---------- ----------
NET INCOME (LOSS)........... $ 39,470 $ (30,846) $ (50,016) $ (298,683) $ (36,822)
========== ========== =========== ========== ==========
</TABLE>
See notes to financial statements.
F-13
<PAGE> 67
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994.......................... 10,000 $ 10,000 $404,846 $414,846
Net income...................................... 39,470 39,470
------ -------- -------- --------
BALANCE, SEPTEMBER 30, 1995....................... 10,000 10,000 444,316 454,316
Net loss........................................ (30,846) (30,846)
------ -------- -------- --------
BALANCE, SEPTEMBER 30, 1996....................... 10,000 10,000 413,470 423,470
Issuance of common stock........................ 3,068 308,068 308,068
Net loss........................................ (50,016) (50,016)
------ -------- -------- --------
BALANCE, SEPTEMBER 30, 1997....................... 13,068 318,068 363,454 681,522
Net loss (Unaudited)............................ (36,822) (36,822)
------ -------- -------- --------
BALANCE, DECEMBER 31, 1997 (Unaudited)............ 13,068 $318,068 $326,632 $644,700
====== ======== ======== ========
</TABLE>
See notes to financial statements.
F-14
<PAGE> 68
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31
------------------------------------- --------------------------
1995 1996 1997 1996 1997
--------- --------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................. $ 39,470 $ (30,846) $ (50,016) $(298,683) $ (36,822)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 78,218 100,661 134,689 25,942 30,556
Additions to allowance for doubtful accounts.... 464,510 (5,425) 15,000 14,521
Deferred income taxes........................... 14,591 (32,503) 8,113 (178,191) (21,598)
Compensation expense on issuance of common
stock......................................... 305,000
Cash provided by (used in) operating working
capital:
Trade accounts receivable..................... (170,773) (330,930) (1,621,046) 111,541 (1,487,439)
Accounts receivable -- employees.............. (39,799) (4,834) 7,971 11,137 36,174
Income tax refund receivable.................. (1,585) (16,891) (19,039)
Unbilled revenue.............................. 5,320 (158,693) 133,342 219,219 (501,007)
Other assets.................................. (14,456) 12,740 (24,143) (33,337) 2,086
Accounts payable.............................. 206,414 (300,708) (2,584) 190,285 1,850
Accrued salaries and payroll taxes............ 2,020 215,633 177,107 (131,188) 273,929
Other accrued expenses........................ 10,537 270,429 1,654,294
Income taxes payable.......................... 6,765 (83,417) (32,609) (2,521) 57,342
Deferred revenue.............................. (121,917) 76,043 462,018 (50,000)
--------- --------- ----------- --------- ----------
Net cash provided by (used in) operating
activities................................ 4,268 (78,698) (256,193) (120,796) 23,886
--------- --------- ----------- --------- ----------
INVESTING ACTIVITIES:
Redemption of (investment in) certificate of
deposit......................................... 500,000 (60,000) 60,000 60,000
Capital expenditures.............................. (13,013) (150,576) (111,612) (92,685) (14,826)
--------- --------- ----------- --------- ----------
Net cash provided by (used in) investing
activities................................ 486,987 (210,576) (51,612) (32,685) (14,826)
--------- --------- ----------- --------- ----------
FINANCING ACTIVITIES:
Borrowings under (payments on) line of credit..... 599,764 223,000 71,000 25,000
Proceeds from (payments on) term loan............. (454,596) (357,900) 141,679 165,593 (32,694)
Payments on note payable and capital lease
obligations..................................... (66,568) (5,068) (57,070) (20,706) (18,149)
Proceeds from issuance of common stock............ 3,068
--------- --------- ----------- --------- ----------
Net cash provided by (used in) financing
activities................................ (521,164) 236,796 310,677 215,887 (25,843)
--------- --------- ----------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (29,909) (52,478) 2,872 62,406 (16,783)
CASH AND CASH EQUIVALENTS:
Beginning of period............................... 99,292 69,383 16,905 16,905 19,777
--------- --------- ----------- --------- ----------
End of period..................................... $ 69,383 $ 16,905 $ 19,777 79,311 2,994
========= ========= =========== ========= ==========
SUPPLEMENTAL INFORMATION:
Interest paid..................................... $ 66,343 $ 67,178 $ 96,020 $ 21,102 $ 30,741
========= ========= =========== ========= ==========
Income taxes paid................................. $ 32,609 $ -- $ 50,000 $ -- $ --
========= ========= =========== ========= ==========
Equipment financed through capital leases......... $ -- $ 34,548 $ 47,923 $ 121,131 $ --
========= ========= =========== ========= ==========
</TABLE>
See notes to financial statements.
F-15
<PAGE> 69
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Brian R. Blackmarr and Associates, Inc., a Texas
corporation (the "Company"), is an interdisciplinary, professional consulting
firm that provides managerial information system and engineering services to a
variety of businesses and government agencies. The Company was incorporated in
1979 and is headquartered in Dallas, Texas.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition -- The Company provides its services for fees that are
primarily based on time and materials used to complete projects for clients.
Accordingly, revenue is recognized as consulting services are performed.
Unbilled revenue is recorded for contract services provided for which a billing
has not been rendered. Deferred revenue represents the excess of amounts billed
over contract costs and expenses incurred.
Cash Equivalents -- The Company's cash equivalents consist of liquid
investments purchased with original maturities of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed using the declining balance method over the estimated
useful lives of the assets, which range from three to seven years. Amortization
is computed over the estimated useful lives of the assets or the lease term,
whichever is shorter.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, trade accounts receivable, short-term debt and
accounts and notes payable, the carrying values of which are reasonable
estimates of their fair values due to the short-term maturities or current
interest rates.
Deferred Income Taxes -- The Company provides for deferred income taxes
under the asset and liability method for temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
Other Accrued Expenses -- Other accrued expenses at December 31, 1997
include accrued products costs of $1,584,300 related to costs incurred by the
Company to purchase hardware, software and related products to complete projects
for clients.
Interim Financial Information -- The interim financial statements as of
December 31, 1997 and for the three months ended December 31, 1996 and 1997 are
unaudited, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results to be achieved
for the entire fiscal year.
F-16
<PAGE> 70
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment and software............................. $365,554 $475,928
Furniture and fixtures...................................... 243,399 244,637
Equipment under capital lease............................... 111,910 246,435
-------- --------
Total....................................................... 720,863 967,000
Less accumulated depreciation and amortization.............. 539,828 674,517
-------- --------
Property and equipment -- net..................... $181,035 $292,483
======== ========
</TABLE>
Depreciation and amortization expense charged to operations was $100,661
and $134,689 for the years ended September 30, 1996 and 1997, respectively.
3. LINE OF CREDIT AND LONG-TERM DEBT
At September 30, 1996 and 1997, the Company had $599,764 and $822,764,
respectively, of borrowings outstanding under a revolving line of credit
provided by a commercial bank. The borrowing capacity under the line of credit
was increased in November 1996 from $750,000 to $1,000,000, with interest
payable monthly at the bank's prime lending rate plus 1.0% (9.5% at September
30, 1997). Borrowings under the line of credit are due and payable on demand,
are subject to borrowing base requirements based on 80% of eligible accounts
receivable (as defined in a related financing and security agreement) and are
secured by the Company's accounts receivable and guaranteed by the Company's
principal stockholder.
At September 30, 1996, the Company also had indebtedness outstanding under
a promissory note issued to a financial institution in the amount of $74,668,
due in 36 monthly principal payments and bearing interest at the lender's prime
rate plus 1.5%. On November 5, 1996, the Company refinanced the indebtedness
outstanding under the line of credit and the promissory note. Through the
refinancing, a term loan in the principal amount of $261,557 was originated to
refinance $250,000 of indebtedness outstanding under the line of credit and the
balance due on the promissory note totaling $71,557, reduced by the Company's
$60,000 certificate of deposit. The term loan is payable in 24 monthly
installments of $10,898, plus interest at the bank's prime lending rate plus
0.5% (9.0% at September 30, 1997). The term loan is secured by the Company's
accounts receivable and a guarantee from the Company's principal stockholder. At
September 30, 1997, the outstanding balance under the term loan was $141,679 and
matures as follows: $130,781 through September 1998 and $10,898 through
September 1999.
At September 30, 1997, the Company also had indebtedness outstanding under
another note payable in the principal amount of $104,200, which was issued to a
bank and is payable on demand, with interest at 10% per annum.
4. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current expense...................................... $24,642 $ 32,609 $(1,647)
Deferred expense (benefit)........................... 14,591 (32,503) 8,113
------- -------- -------
Total...................................... $39,233 $ 106 $ 6,466
======= ======== =======
</TABLE>
F-17
<PAGE> 71
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Provision (benefit) at statutory rate............... $27,546 $(10,759) $(14,807)
State taxes, net of federal benefits................ 2,091 6 (1,293)
Nondeductible travel and entertainment.............. 9,596 10,859 22,566
------- -------- --------
Total..................................... $39,233 $ 106 $ 6,466
======= ======== ========
</TABLE>
The tax effects of temporary differences result in a net deferred tax asset
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Current deferred tax asset -- allowance for doubtful
accounts.................................................. $163,569 $161,564
Noncurrent deferred tax asset -- property and equipment..... 16,051 9,943
-------- --------
Net deferred tax asset............................ $179,620 $171,507
======== ========
</TABLE>
Management believes that no valuation allowance against the net deferred
tax asset is necessary.
5. LEASE COMMITMENTS
The Company leases office space, computer workstations and office equipment
under various operating and capital leases, that expire at various dates through
the year 2000. At September 30, 1996 and 1997, assets recorded under capital
leases were $111,910 and $246,435, respectively, and related accumulated
amortization was $54,851 and $104,579, respectively.
Minimum future commitments under these agreements at September 30, 1997 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
Year ending September 30:
1998...................................................... $78,063 $208,992
1999...................................................... 6,845 70,582
2000...................................................... 9,637
------- --------
Total minimum lease payments................................ 84,908 $289,211
========
Less amounts representing interest.......................... 2,437
-------
Present value of capital lease obligations.................. 82,471
Less current portion of capital lease obligations........... 76,299
-------
Long-term capital lease obligations, less current portion... $ 6,172
=======
</TABLE>
Rent expense was $365,214, $372,271 and $394,123 during the years ended
September 30, 1995, 1996 and 1997, respectively, and is included in selling,
general and administrative expense in the statements of operations.
6. COMMON STOCK
During March 1997, the Company issued 3,068 shares of common stock with an
estimated fair value of approximately $100 per share to certain employees for $1
per share. In connection with these stock issuances, compensation expense
totaling $305,000 was recognized during the year ended September 30, 1997 and is
included in stock compensation expense.
F-18
<PAGE> 72
BRIAN R. BLACKMARR AND ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT PLAN
The Company maintains a 401(k) retirement plan in which substantially all
salaried employees are eligible to participate. Employees may contribute up to
15% of their compensation to the plan, subject to certain limits imposed by
regulations under the Internal Revenue Code. The Company may, at its sole
discretion, make contributions to the plan. The Company has not made any
contributions to the plan.
8. PENDING ACQUISITION
In December 1997, the stockholders of the Company entered into a definitive
agreement with BrightStar Information Technology Group, Inc. ("BrightStar") for
the acquisition by BrightStar of all the Company's outstanding common stock. The
consummation of the acquisition is contingent upon BrightStar's initial public
offering of its common stock.
* * * * * *
F-19
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Integrated Controls, Inc.:
We have audited the accompanying balance sheets of Integrated Controls,
Inc. (the "Company") as of December 31, 1996 and 1997, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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, such financial statements present fairly, in all material
respects, the financial position of Integrated Controls, Inc. at December 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 9, 1998
F-20
<PAGE> 74
INTEGRATED CONTROLS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 61,308 $ 170,711
Accounts receivable, net of allowance for doubtful
accounts of $10,000 and 30,000 at December 31, 1996 and
1997, respectively..................................... 1,634,927 2,773,956
Prepaid expenses and other current assets................. 41,748 11,806
---------- ----------
Total current assets.............................. 1,737,983 2,956,473
PROPERTY AND EQUIPMENT -- Net............................... 802,479 1,213,693
OTHER ASSETS:
Investment in and advances to affiliate................... 45,362 66,076
Goodwill, net of accumulated amortization................. 99,774
Deposits and other........................................ 10,926 21,489
---------- ----------
Total other assets................................ 56,288 187,339
---------- ----------
TOTAL ASSETS................................................ $2,596,750 $4,357,505
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings..................................... $ 983,702 $1,372,583
Current maturities of long-term debt and current portion
of capital lease obligations........................... 183,883 276,600
Accounts payable.......................................... 140,072 184,723
Accrued salaries and other liabilities.................... 246,074 586,918
Deferred income taxes..................................... 334,333 608,870
---------- ----------
Total current liabilities......................... 1,888,064 3,029,694
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities................. 112,168 66,292
Capital lease obligations, net of current portion......... 209,854
Deferred income taxes..................................... 92,759 111,594
---------- ----------
Total long-term liabilities....................... 204,927 387,740
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value -- 600,000 shares authorized;
400,000 shares issued and outstanding at December 31,
1996 and December 31, 1997............................. 16,250 16,250
Additional paid-in capital................................ 25,248 25,248
Retained earnings......................................... 641,384 1,078,608
Treasury stock, 71,649 shares and 71,870 shares at cost at
December 31, 1996 and 1997 respectively................ (179,123) (180,035)
---------- ----------
Total stockholders' equity........................ 503,759 940,071
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $2,596,750 $4,357,505
========== ==========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 75
INTEGRATED CONTROLS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
REVENUE................................................ $3,745,356 $6,126,844 $11,503,504
COST OF REVENUE........................................ 2,598,960 4,000,727 7,631,356
---------- ---------- -----------
Gross profit......................................... 1,146,396 2,126,117 3,872,148
OPERATING EXPENSES:
Selling, general and administrative.................. 745,967 1,588,067 2,725,216
Depreciation and amortization........................ 59,665 124,066 275,084
---------- ---------- -----------
Total operating expenses..................... 805,632 1,712,133 3,000,300
---------- ---------- -----------
INCOME FROM OPERATIONS................................. 340,764 413,984 871,848
OTHER INCOME (EXPENSE):
Interest expense..................................... (23,768) (73,306) (162,186)
Equity in earnings of affiliate...................... 3,125 15,922 20,933
---------- ---------- -----------
Total other income (expense)................. (20,643) (57,384) (141,253)
---------- ---------- -----------
INCOME BEFORE INCOME TAXES............................. 320,121 356,600 730,595
INCOME TAX EXPENSE..................................... 117,720 141,151 293,371
---------- ---------- -----------
NET INCOME............................................. $ 202,401 $ 215,449 $ 437,224
========== ========== ===========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 76
INTEGRATED CONTROLS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............. 400,000 $16,250 $ -- $ 223,534 $ -- $ 239,784
Purchase of treasury shares........ (250,000) (250,000)
Net income......................... 202,401 202,401
------- ------- ------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1995........... 400,000 16,250 -- 425,935 (250,000) 192,185
Sale of treasury shares in
connection with employee stock
purchase plan................... 25,248 70,877 96,125
Net income......................... 215,449 215,449
------- ------- ------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1996........... 400,000 16,250 25,248 641,384 (179,123) 503,759
NET INCOME........................... 437,224 437,224
Purchase of treasury shares.......... (912) (912)
------- ------- ------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1997........... 400,000 $16,250 $25,248 $1,078,608 $(180,035) $ 940,071
======= ======= ======= ========== ========= =========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 77
INTEGRATED CONTROLS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 202,401 $ 215,449 $ 437,224
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 59,665 124,066 275,084
Deferred income taxes................................... 117,720 141,151 293,372
Equity in earnings of affiliate......................... (3,125) (15,922) (20,933)
Cash provided by (used in) operating working capital:
Accounts receivable................................... (394,746) (727,566) (1,098,760)
Prepaid expenses and other current assets............. (2,822) (14,745) 29,942
Accounts payable...................................... 36,607 65,694 44,651
Accrued salaries and other liabilities................ 5,015 147,137 303,276
Deposits and other.................................... (2,802) (6,439) (3,455)
---------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... 17,913 (71,175) 260,401
---------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures...................................... (243,525) (561,411) (289,951)
Advances to and repayments from affiliate................. 78,323 7,219
Acquisition of Einstein Digital Media..................... (37,597)
---------- ----------- -----------
Net cash used in investing activities.............. (165,202) (554,192) (327,548)
---------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... 1,178,029 1,791,570 825,627
Repayment of short-term borrowings........................ (963,765) (1,231,779) (561,746)
Proceeds from issuance of long-term-debt.................. 83,692 309,508 183,177
Repayment of long-term-debt and capital lease
obligations............................................. (51,257) (132,914) (269,596)
Repayment of note payable to related party................ (150,000) --
Repurchase of treasury stock.............................. (100,000) (912)
Proceeds from issuance of common stock.................... 96,125 --
---------- ----------- -----------
Net cash provided by financing activities.......... 146,699 682,510 176,550
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (590) 57,143 109,403
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 4,755 4,165 61,308
---------- ----------- -----------
End of period............................................. $ 4,165 $ 61,308 $ 170,711
========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid............................................. $ 23,779 $ 73,363 $ 159,045
========== =========== ===========
Income taxes paid......................................... $ -- $ -- $ --
========== =========== ===========
NONCASH INVESTING AND FINANCING:
Note payable issued in connection with the acquisition of
Einstein Digital Media.................................. $ -- $ -- $ 125,000
========== =========== ===========
Equipment financed through capital leases................. $ -- $ -- $ 343,114
========== =========== ===========
Repurchase of common stock for note payable............... $ 150,000 $ -- $ --
========== =========== ===========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 78
INTEGRATED CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Integrated Controls, Inc., a Louisiana corporation (the
"Company"), provides control system consulting, digital communication and
computer consulting services to various customers throughout the Gulf Coast area
of the United States and to certain international customers. The Company was
incorporated in 1991 and is headquartered in Lafayette, Louisiana and maintains
offices in Baton Rouge and New Orleans, Louisiana and Houston, Texas.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition -- The Company provides its services for fees that are
based on time and materials used to complete projects for clients. Accordingly,
revenue is recognized as digital communication and computer consulting services
are performed.
Cash Equivalents -- The Company's cash equivalents consist of liquid
investments purchased with original maturities of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed principally using straight-line methods over the
estimated useful lives of the individual assets, which range from five to 15
years. Leasehold improvements are amortized over the lease term.
Goodwill -- The goodwill reflected on the accompanying balance sheets
represents the cost in excess of estimated fair value of the net assets
(including tax attributions) acquired in the Einstein Digital Media acquisition
(see Note 2). Goodwill is being amortized on a straight-line basis over a
seven-year period.
Equity Investment -- The Company owns 50% of ICON Environmental Services,
Inc. ("ICON Environmental") and accounts for this investment using the equity
method of accounting. The Company's share of earnings of this affiliate totaled
$15,922 and $20,933 for the years ended December 31, 1996 and 1997,
respectively. The Company had outstanding advances to ICON Environmental
totaling $26,315 at December 31, 1996 and $26,096 at December 31, 1997. These
balances are included in the investment in and advances to affiliate account.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, accounts receivable, short-term debt, and accounts
and notes payable, the carrying values of which are reasonable estimates of
their fair values due to their short-term maturities or current interest rates.
Deferred Income Taxes -- The Company provides for deferred income taxes
under the asset and liability method for temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
2. ACQUISITION
On May 13, 1997, the Company acquired all the assets of Einstein Digital
Media for cash of $37,597, the issuance of a promissory note in the original
principal amount of $125,000 and the assumption of approximately $44,000 in
liabilities. Einstein Digital Media develops Internet-based advertising and
marketing media. Goodwill in the amount of $110,445 was recorded as a result of
the acquisition.
F-25
<PAGE> 79
INTEGRATED CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Computer equipment and software............................. $ 769,781 $1,373,212
Furniture, fixtures and equipment........................... 247,412 319,609
Vehicles.................................................... 7,900 7,900
---------- ----------
Total............................................. 1,025,093 1,700,721
Less accumulated depreciation and amortization.............. 222,614 487,028
---------- ----------
Property and equipment -- net..................... $ 802,479 $1,213,693
========== ==========
</TABLE>
4. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
Notes payable to AFCO Credit Corporation, due in nine
monthly installments, with interest at 11.50% per annum,
maturing in September 1997................................ $ 30,569 $ --
Promissory note payable to Ritz Hospitality Association in
the original principal amount of $125,000, payable in 11
monthly installments bearing interest at 8% maturing on
April 13, 1998............................................ 52,000
Bank line of credit (see description below)................. 953,133 1,320,583
-------- ----------
Total short-term borrowings ...................... $983,702 $1,372,583
======== ==========
</TABLE>
Bank Line of Credit -- The Company has a $1,700,000 line of credit
($1,320,583 outstanding at December 31, 1997) with a commercial bank for working
capital requirements. The line of credit bears interest at the bank's prime rate
(9.5% at December 31, 1997) plus 1%, and matures May 31, 1998. Amounts available
for borrowings are based on the level and composition of the Company's accounts
receivable. The line of credit is secured by a first security interest in the
Company's accounts receivable and property and equipment and the continuing
guaranty of the Company's principal stockholders.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Equipment loans from a commercial bank (the "Bank"), due in
monthly installments, including interest at rates ranging
from 9.75% to 10.25%, maturing through November 2000,
secured by equipment and the continuing guaranty of the
Company's principal stockholders.......................... $296,051 $246,374
Less current portion........................................ 183,883 180,082
-------- --------
Long-term debt, less current portion........................ $112,168 $ 66,292
======== ========
</TABLE>
Equipment Line of Credit -- Borrowings from the Bank for equipment
purchases are made under an equipment line of credit arrangement (the "Equipment
Line"). The Equipment Line provides for borrowings
F-26
<PAGE> 80
INTEGRATED CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
through May 31, 1998, with repayment terms over a two-year period. The Equipment
Line bears interest at a rate equal to the Bank's prime rate plus 0.5% to 1.5%.
Borrowings under the Equipment Line are generally subject to the same terms and
conditions as the Company's line of credit facility discussed in Note 4.
The aggregate annual maturities of long-term debt at December 31, 1997 are
as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998.................................................. $180,082
1999.................................................. 39,269
2000.................................................. 27,023
--------
Total......................................... $246,374
========
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution (401(k)) plan for all eligible
employees who have completed at least one month of service. Employees may elect
to defer up to 25% of their salary, subject to statutory limits, through
contributions to the plan. Employer matching and profit sharing contributions
are discretionary, and, to date, no matching or profit sharing contributions
have been made.
7. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed certain bank indebtedness of ICON Environmental
in the amount of $40,000 at December 31, 1996 and 1997.
The Company is also jointly listed with ICON Environmental on a
cross-corporate indemnity agreement with an insurance company that entitles
either company to purchase surety bond insurance. In the event there would be a
claim against a performance bond obtained by ICON Environmental, the Company
could be liable in the event of default by ICON Environmental.
The Company entered into a two-year employment agreement with the former
president of Einstein Digital Media. Under the terms of the agreement, the
Company has agreed to pay the employee a bonus of up to $150,000 if certain
performance objectives are achieved. The bonus is payable in May 1998 and is
payable in cash and up to 50% in common stock.
8. STOCKHOLDERS' EQUITY
Stock Split -- In 1996, the Company effected a 1,000-for-1 stock split,
which increased the number of issued shares from 400 to 400,000. The number of
shares of common stock outstanding has been restated to give effect to the stock
split.
Treasury Stock -- During 1995, the Company reacquired 100,000 shares of
common stock from a stockholder for total consideration of $250,000. The Company
paid cash of $100,000 and issued a short-term promissory note in the face amount
of $150,000. The promissory note was repaid in full during 1996. During 1996,
the Company reissued 28,351 of the treasury shares in connection with the
Employee Stock Purchase Plan discussed below. In 1997, the Company reacquired
221 shares of common stock for $4.11 per share.
Employee Stock Purchase Plan -- In 1996, the Company adopted an Employee
Stock Purchase Plan (the "Plan"), which provided eligible employees with the
opportunity to acquire up to 100,000 shares of the Company's common stock at a
price of $4.11 per share, which was the estimated fair value per share based on
an independent appraisal. The Company issued 28,351 shares under the Plan and
raised approximately $96,000, net of offering costs totaling approximately
$20,000. The offering period expired during 1996, and no further shares are
issuable under the Plan. Under the terms of the Plan, the Company had the option
to
F-27
<PAGE> 81
INTEGRATED CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
repurchase employees' shares for a period of seven months after termination of
employment at a price based on a specified formula similar to that used in
determining the offering price.
9. CAPITAL AND OPERATING LEASES
The Company leases various equipment and its office facility under
noncancelable operating lease arrangements extending through 2002. Rental
expense was $77,997, $136,503 and $350,940 for the years ended December 31,
1995, 1996 and 1997, respectively, and is included in selling, general and
administrative expense in the statements of income.
Minimum future lease payments under noncancelable operating leases at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998................................................... 443,689
1999................................................... 419,565
2000................................................... 320,094
2001................................................... 201,814
2002................................................... 15,318
----------
Total.......................................... $1,400,480
==========
</TABLE>
The Company leases computer equipment under capital lease arrangements
extending through 2000. At December 31, 1997, assets recorded under capital
leases were $343,114. Future minimum lease payments required under these
noncancelable leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................... $140,944
1999.................................................... 132,709
2000.................................................... 70,940
--------
Total minimum lease payments............................ 344,593
Less amounts representing interest...................... 38,221
--------
Present value of capital lease obligations.............. 306,372
Less current portion of capital lease obligations....... 96,518
--------
Long-term capital lease obligations, less current
portion.............................................. $209,854
========
</TABLE>
10. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current............................................ $ -- $ -- $ --
Deferred........................................... 117,720 141,151 293,371
-------- -------- --------
Total.................................... $117,720 $141,151 $293,371
======== ======== ========
</TABLE>
Deferred taxes are principally due to differences in the basis and
depreciable lives for property and equipment for book and tax purposes, net
operating loss carryforwards and the use of the cash method of accounting for
tax purposes.
F-28
<PAGE> 82
INTEGRATED CONTROLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Asset -- net operating loss carryforward.................... $ 155,940 $ 137,418
Liabilities:
Cash basis differences.................................... (490,431) (746,575)
Property, equipment and other............................. (92,601) (111,307)
--------- ---------
Net deferred tax liability.................................. $(427,092) $(720,464)
========= =========
</TABLE>
For income tax purposes, the Company has available unused net operating
loss carryforwards of approximately $365,000 at December 31, 1997, which may be
applied against future taxable income of the Company. These carryforwards expire
in various years ranging from 2007 through 2011.
The following is a reconciliation of taxes computed at the federal
statutory rate to the provision for income taxes included in the financial
statements:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Taxes computed by applying federal statutory
rate............................................. $108,841 $121,244 $248,402
State income taxes, net of federal benefits........ 11,524 13,454 27,963
Expenses not deductible for tax purposes........... 3,496 6,453 16,652
Other.............................................. (6,141) 354
-------- -------- --------
Total.................................... $117,720 $141,151 $293,371
======== ======== ========
</TABLE>
11. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A majority of the Company's accounts receivable at December 31, 1997 result
from sales to third-party companies engaged in the oil and gas industry or
related industries. This concentration of customers may impact the Company's
overall credit risk, in that these entities may be similarly affected by changes
in economic or other conditions. In addition, the Company generally does not
require collateral or other security to support customer receivables.
During the year ended December 31, 1996, sales to two customers accounted
for approximately 25% and 12% of the Company's revenues, respectively.
Receivables from these customers totaled approximately $628,000 at December 31,
1996.
During the year ended December 31, 1997, sales to three customers accounted
for approximately 10%, 10% and 8% of the Company's revenues, respectively.
Receivables from these customers totaled approximately $1,430,000 at December
31, 1997.
12. PENDING ACQUISITION
In December 1997, the stockholders of the Company entered into an agreement
with BrightStar Information Technology Group, Inc. ("BrightStar") for the
acquisition by BrightStar of all the Company's outstanding common stock. The
consummation of the acquisition is contingent upon BrightStar's initial public
offering of its common stock.
* * * * * *
F-29
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mindworks Professional Education Group, Inc.:
We have audited the accompanying balance sheets of Mindworks Professional
Education Group, Inc. (the "Company") as of December 31, 1996 and 1997, and the
related statements of operations, stockholders' deficit and cash flows for each
of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Mindworks Professional Education Group, Inc.
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 6, 1998
F-30
<PAGE> 84
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997 1997
--------- --------- ---------
PROFORMA
(NOTE 9)
(UNAUDITED)
---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 17,711 $ 25,801 $ 25,801
Accounts receivable, net of allowance of $10,000 at
December 31, 1997.................................. 63,978 63,125 63,125
Inventory............................................. 5,395 24,505 24,505
Prepaid expenses and other current assets............. 11,000 11,000
--------- --------- ---------
Total current assets.......................... 87,084 124,431 124,431
PROPERTY AND EQUIPMENT -- Net........................... 123,306 153,750 153,750
OTHER ASSETS:
Intangibles, net of accumulated amortization of
$11,250 and $18,750 at December 31, 1996 and 1997,
respectively....................................... 18,750 11,250 11,250
Deposits.............................................. 3,083 22,735 22,735
--------- --------- ---------
Total other assets............................ 21,833 33,985 33,985
--------- --------- ---------
TOTAL ASSETS............................................ $ 232,223 $ 312,166 $ 312,166
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease
obligation......................................... $ 41,307 $ 44,262 $ 44,262
Accounts payable...................................... 34,002 181,633 181,633
Accrued liabilities................................... 14,611 62,700 62,700
Deferred revenue...................................... 4,911 2,685 2,685
--------- --------- ---------
Total current liabilities..................... 94,831 291,280 291,280
LONG-TERM DEBT, net of current maturities............... 264,051 282,877 282,877
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value -- 10,000,000 shares
authorized; 60,000 shares issued and outstanding... 600 600 600
Additional paid-in capital............................ 59,400 59,400 (262,591)
Accumulated deficit................................... (186,659) (321,991) --
--------- --------- ---------
Total stockholders' deficit................... (126,659) (261,991) (261,991)
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT... $ 232,223 $ 312,166 $ 312,166
========= ========= =========
</TABLE>
See notes to financial statements.
F-31
<PAGE> 85
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1997
------------ ------------ -----------
PRO FORMA
(NOTE 9)
(UNAUDITED)
<S> <C> <C> <C>
REVENUE................................................. $808,192 $1,444,095 $1,444,095
COST OF REVENUE......................................... 358,289 590,440 590,440
-------- ---------- ----------
Gross profit.......................................... 449,903 853,655 853,655
OPERATING EXPENSES:
Selling, general and administrative................... 407,675 891,793 891,793
Depreciation and amortization......................... 63,435 69,726 69,726
-------- ---------- ----------
Total operating expenses...................... 471,110 961,519 961,519
-------- ---------- ----------
LOSS FROM OPERATIONS.................................... (21,207) (107,864) (107,864)
INTEREST EXPENSE........................................ (33,733) (27,468) (27,468)
-------- ---------- ----------
LOSS BEFORE INCOME TAXES................................ (54,940) (135,332) (135,332)
PRO FORMA INCOME TAX BENEFIT............................ (54,133)
-------- ---------- ----------
NET LOSS................................................ $(54,940) $ (135,332) $ (81,199)
======== ========== ==========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 86
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.................. 600 $600 $59,400 $(131,719) $ (71,719)
Net loss................................ (54,940) (54,940)
--- ---- ------- --------- ---------
BALANCE, DECEMBER 31, 1996................ 600 600 59,400 (186,659) (126,659)
Net loss................................ 135,332 135,332
--- ---- ------- --------- ---------
BALANCE, DECEMBER 31, 1997................ 600 $600 $59,400 $(321,991) $(261,991)
=== ==== ======= ========= =========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 87
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------
1996 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(54,940) $(135,332)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 63,435 69,726
Provision for allowance for doubtful accounts.......... 10,000
Cash provided by (used in) operating working capital:
Accounts receivable.................................... (63,978) (9,147)
Inventory.............................................. (395) (19,110)
Prepaid expenses and other current assets.............. 3,618 (30,652)
Accounts payable....................................... 3,505 147,631
Accrued liabilities.................................... 14,611 48,089
Deferred revenue....................................... 4,681 (2,226)
-------- ---------
Net cash provided by (used in) operating
activities...................................... (29,463) 78,979
-------- ---------
INVESTING ACTIVITIES -- Capital expenditures................ (55,089) (92,670)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. 132,296 189,611
Repayment of long-term debt and capital lease............. (34,373) (167,830)
-------- ---------
Net cash provided by (used in) financing
activities...................................... 97,923 21,781
-------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS............................................... 13,371 8,090
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 4,340 17,711
-------- ---------
End of period............................................. $ 17,711 $ 25,801
======== =========
SUPPLEMENTAL INFORMATION:
Interest paid............................................. $ 33,733 $ 20,468
======== =========
</TABLE>
See notes to financial statements.
F-34
<PAGE> 88
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Mindworks Professional Education Group, Inc., an Arizona
corporation (the "Company"), provides technical training and certification
preparation for information technology professionals and others. The Company was
incorporated in 1995 and is headquartered in Scottsdale, Arizona.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition -- The Company recognizes revenue from the sale of
training kits and tuition received from training seminars is recognized as
product is shipped or services are performed. Deferred revenue represents
payments received for future training course attendance.
Cash Equivalents -- The Company's cash equivalents consist of liquid
investments purchased with an original maturity of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed using the declining balance method over the estimated
useful lives of the assets, which range from five to seven years. Amortization
is computed on a straight-line basis over the estimated useful lives of the
assets or the lease term, whichever is shorter.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, accounts receivable, short-term debt and accounts and
notes payable, the carrying values of which are reasonable estimates of their
fair values due to the short-term maturities or current interest rates.
Intangibles -- The Company's intangibles consist of intellectual property
rights contributed by certain principals at the inception of the Company.
Amortization is computed using the straight-line method over four years.
Income Taxes -- The Company is a subchapter S Corporation and, accordingly,
is not subject to corporate-level federal income tax. Income generated by the
Company is taxed to the stockholders individually. Accordingly, no income tax
expense has been recorded in the financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment and software............................. $126,709 $198,379
Furniture, fixtures and equipment........................... 56,032 77,032
Leasehold improvements...................................... 24,840 24,840
-------- --------
Total............................................. 207,581 300,251
Less accumulated depreciation and amortization.............. 84,275 146,501
-------- --------
Property and equipment -- net..................... $123,306 $153,750
======== ========
</TABLE>
Depreciation and amortization expense charged to operations was $55,935 and
$62,226 for the years ended December 31, 1996 and 1997, respectively.
F-35
<PAGE> 89
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Equipment loans, due in monthly installments, including
interest at the bank's prime rate ranging from 9.875% to
10% per annum, maturing through July 2001, secured by
equipment and the continuing guaranty of the Company's
principal stockholders, repaid in September 1997......... $149,166 $ --
Equipment loan, due in monthly installments, including
interest at the bank's prime rate plus 1.5% per annum,
maturing through December 2000, secured by equipment and
the continuing guaranty of the Company's principal
stockholder.............................................. -- 123,187
$300,000 revolving term loan, due in monthly installments
of interest only at the bank's prime rate of 1.5% per
annum through July 31, 1998 (10.0% at December 31, 1997);
after July 31, 1998; balance is payable in 36 monthly
installments plus interest, maturing July 2001, secured
by equipment and the continuing guaranty of the Company's
principal stockholder.................................... -- 53,952
Promissory note payable to a stockholder; due in quarterly
payments through September 30, 1997 -- interest-only at a
rate of 10% per annum; after September 30, 1997 balance
is payable in 30 monthly installments of $5,000 plus
interest................................................. 150,000 150,000
-------- --------
Total long-term debt....................................... 299,166 327,139
Less current portion....................................... 35,115 44,262
-------- --------
Long-term debt, less current portion............. $264,051 $282,877
======== ========
</TABLE>
At December 31, 1997, the Company was not in compliance with certain
financial ratios required under the revolving term loan agreement. The Company
has received a letter from the bank waiving this noncompliance through December
31, 1998.
4. CAPITAL LEASE OBLIGATION
The Company was leasing equipment under a capital lease through October
1997. Future minimum rental payments required under this noncancelable lease at
December 31, 1996 were as follows:
<TABLE>
<S> <C>
Total payments.............................................. $7,170
Less amounts representing interest.......................... 978
------
Capital lease obligation.................................... 6,192
Less current portion........................................ 6,192
------
Capital lease obligation, long-term......................... $ --
======
</TABLE>
5. OPERATING LEASES
The Company leases office space under a noncancelable operating lease
arrangement through October 31, 2000. Rental expenses charged to operations
totaled $35,711 and $42,226 for the year ended December 31, 1996 and 1997,
respectively, and is included in general and administrative expense in the
statements of operations.
F-36
<PAGE> 90
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future lease payments under the noncancelable operating lease at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................... 36,415
1999.................................................... 36,761
2000.................................................... 28,350
--------
Total........................................... $101,526
========
</TABLE>
In October 1997, the Company signed a five-year lease agreement on a new
facility in Scottsdale, Arizona, which will commence on the completion of
certain tenant improvements in 1998. The Company is currently in negotiations to
sublease the existing office space.
Minimum future lease payments under this new operating lease are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................... $105,676
1999.................................................... 183,279
2000.................................................... 186,916
2001.................................................... 190,631
Thereafter.............................................. 276,194
--------
Total........................................... $942,696
========
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company currently offers a Salary Reduction Simplified Employee Pension
plan to its employees. Under the plan, the Company withholds a portion of
participants' salaries, which it forwards to the trustee on a monthly basis. The
funds are then invested in individual retirement accounts as designated by the
employees. The Company does not provide any matching funds under the plan.
7. RELATED PARTY TRANSACTIONS
As of December 31, 1996 and 1997, the Company had an outstanding note
payable to a stockholder for $150,000. The note provides for interest at a rate
of 10% per annum, with interest-only payments made quarterly. Interest expense
charged to operations was $13,500 and $15,000 for the years ended December 31,
1996 and 1997.
8. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to potential concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and trade accounts receivable. The Company places its cash and cash
equivalents and short-term investments in and limits the amount of credit
exposure to one financial institution.
9. PRO FORMA BALANCE SHEET AND STATEMENT OF OPERATIONS (UNAUDITED)
The pro forma statement of operations shows the pro forma effects, of the
estimated deferred taxes related to future deductible temporary differences
arising from the termination of the Company's subchapter S election, recognized
in accordance with the Financial Accounts Standards Board's Statement No. 109,
which the Company will adopt upon such termination.
F-37
<PAGE> 91
MINDWORKS PROFESSIONAL EDUCATION GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma balance sheet at December 31, 1997 shows the pro forma effect
of the reclassification to paid-in capital of the accumulated deficit upon
termination of the Company's subchapter S election.
10. PENDING ACQUISITION
In December 1997, the stockholders of the Company entered into a definitive
agreement with BrightStar Information Technology Group, Inc. ("BrightStar") for
the acquisition by BrightStar of all the Company's outstanding common stock. The
consummation of the acquisition is contingent upon BrightStar's initial public
offering of its common stock.
* * * * * *
F-38
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
To the Members of
Software Consulting Services America, LLC:
We have audited the accompanying balance sheets of Software Consulting
Services America, LLC (the "Company") as of December 31, 1996 and 1997, and the
related statements of income, members' equity and cash flows for the period from
February 7, 1995 (date of inception) to December 31, 1995 and for each of the
two years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of Software Consulting Services America, LLC as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from February 7, 1995 (date of inception) to December 31,
1995 and for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 16, 1998
F-39
<PAGE> 93
SOFTWARE CONSULTING SERVICES AMERICA, LLC
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1997 1997
---------- ---------- -----------
PRO FORMA
(NOTE 9)
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 311,670 $ 332,254 $ 332,254
Trade accounts receivable............................ 622,085 1,829,256 1,829,256
Unbilled revenue..................................... 246,992 153,391 153,391
---------- ---------- ----------
Total current assets......................... 1,180,747 2,314,901 2,314,901
PROPERTY AND EQUIPMENT -- Net.......................... 92,281 183,652 183,652
OTHER ASSETS........................................... 4,358 37,499 37,499
---------- ---------- ----------
TOTAL ASSETS................................. $1,277,386 $2,536,052 $2,536,052
========== ========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 2,919 $ 89,531 $ 89,531
Accrued payroll and payroll taxes.................... 206,051 418,768 418,768
Other accrued expenses............................... 118,603 69,897 69,897
Line of credit....................................... 565,000 565,000
Notes payable to members............................. 150,000
---------- ---------- ----------
Total current liabilities.................... 477,573 1,143,196 1,143,196
COMMITMENTS AND CONTINGENCIES
ADDITIONAL PAID-IN CAPITAL............................. 1,392,856
MEMBERS' EQUITY........................................ 799,813 1,392,856 --
---------- ---------- ----------
TOTAL LIABILITIES AND MEMBERS' EQUITY.................. $1,277,386 $2,536,052 $2,536,052
========== ========== ==========
</TABLE>
See notes to financial statements.
F-40
<PAGE> 94
SOFTWARE CONSULTING SERVICES AMERICA, LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1995 1996 1997 1997
------------ ------------ ------------ -----------
PRO FORMA
(NOTE 9)
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE.............................................. $1,001,402 $4,672,094 $8,401,117 $8,401,117
COST OF REVENUE...................................... 654,827 3,398,398 6,176,798 6,176,798
---------- ---------- ---------- ----------
Gross profit....................................... 346,575 1,273,696 2,224,319 2,224,319
OPERATING EXPENSES:
Selling, general and administrative................ 194,468 753,013 1,571,560 1,571,560
Depreciation and amortization...................... 3,890 19,962 74,656 74,656
---------- ---------- ---------- ----------
Total operating expenses.................... 198,358 772,975 1,646,216 1,646,216
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS............................... 148,217 500,721 578,103 578,103
OTHER INCOME (EXPENSE):
Interest income.................................... 2,485 3,104 329 329
Interest expense................................... (10,654) (10,654)
Other expense...................................... (1,800) (7,775) (895) (895)
---------- ---------- ---------- ----------
Total other income (expense)................ 685 (4,671) (11,220) (11,220)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES........................... 148,902 496,050 566,883 566,883
PRO FORMA INCOME TAX EXPENSE......................... 226,753
---------- ---------- ---------- ----------
NET INCOME........................................... $ 148,902 $ 496,050 $ 566,883 $ 340,130
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-41
<PAGE> 95
SOFTWARE CONSULTING SERVICES AMERICA, LLC
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
Original capital contributed on February 7, 1995.......... $ 200,000
Net income................................................ 148,902
----------
MEMBERS' EQUITY AT DECEMBER 31, 1995........................ 348,902
Capital contributed....................................... 11,111
Distributions to members.................................. (56,250)
Net income................................................ 496,050
----------
MEMBERS' EQUITY AT DECEMBER 31, 1996........................ 799,813
Capital contributed....................................... 61,111
Distributions to members.................................. (34,951)
Net income................................................ 566,883
----------
MEMBERS' EQUITY AT DECEMBER 31, 1997........................ $1,392,856
==========
</TABLE>
See notes to financial statements.
F-42
<PAGE> 96
SOFTWARE CONSULTING SERVICES AMERICA, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------
1995 1996 1997
------------ ------------ -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $ 148,902 $ 496,050 $ 566,883
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 3,890 19,962 74,656
Cash provided by (used in) operating working
capital:
Trade accounts receivable.................. (221,270) (400,815) (1,207,171)
Accounts receivable from employees......... (7,813) 7,813
Unbilled revenue........................... (33,715) (213,277) 93,601
Other assets............................... (3,922) (33,246)
Accounts payable........................... 7,938 (5,019) 86,612
Accrued payroll and payroll taxes.......... 78,355 127,696 212,717
Other accrued expenses..................... 7,400 111,203 (48,706)
--------- --------- -----------
Net cash provided by (used in) operating
activities............................ (16,313) 139,691 (254,654)
--------- --------- -----------
INVESTING ACTIVITIES:
Capital expenditures............................ (20,512) (95,351) (165,922)
Organizational costs............................ (706)
--------- --------- -----------
Net cash used in investing activities... (21,218) (95,351) (165,922)
--------- --------- -----------
FINANCING ACTIVITIES:
Member contributions............................ 200,000 11,111 61,111
Member distributions............................ (56,250) (34,951)
Borrowings (repayments) of notes payable to
members...................................... 150,000 (150,000)
Proceeds from line of credit.................... 565,000
--------- --------- -----------
Net cash provided by financing
activities............................ 200,000 104,861 441,160
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 162,469 149,201 20,584
CASH AND CASH EQUIVALENTS:
Beginning of period............................. 162,469 311,670
--------- --------- -----------
End of period................................... $ 162,469 $ 311,670 $ 332,254
========= ========= ===========
SUPPLEMENTAL INFORMATION:
Interest paid................................... $ -- $ -- $ 10,655
========= ========= ===========
Income taxes paid............................... $ -- $ -- $ --
========= ========= ===========
</TABLE>
See notes to financial statements.
F-43
<PAGE> 97
SOFTWARE CONSULTING SERVICES AMERICA, LLC
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Software Consulting Services America, LLC, a California
limited liability company (the "Company"), provides professional software
consulting services, primarily under subcontracting arrangements with SAP AG of
Germany ("SAP") in connection with the implementation of software systems
developed by SAP. The Company was organized on February 7, 1995, and is
headquartered in Foster City, California. According to the Company's operating
agreement, the Company will continue in existence until December 31, 2020,
unless sooner dissolved pursuant to the operating agreement or the California
Limited Liability Company Act.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition -- The Company provides its services for fees that are
primarily based on time and materials used to complete projects for clients.
Accordingly, revenue is recognized as consulting services are performed.
Unbilled revenue is recorded for contract services for which a billing has not
been rendered.
Cash and Cash Equivalents -- The Company's cash equivalents consist of
liquid instruments with original maturities of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets and amortization, which is three years. Amortization
is computed on a straight-line basis over the estimated useful lives of the
assets or the lease term, whichever is shorter.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, trade accounts receivable, short-term debt, and
accounts and notes payable, the carrying values of which are reasonable
estimates of their fair values due to their short-term maturities or current
interest rates.
Income Taxes -- The Company is treated as a partnership for income tax
purposes, and therefore, is not a taxpaying entity for federal and California
income tax purposes. Income generated by the Company is taxed to the members
individually. Accordingly, no income tax expense has been recorded in the
accompanying financial statements.
2. PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment and software............................. $115,292 $179,536
Furniture and fixtures...................................... 571 102,249
-------- --------
Total....................................................... $115,863 $281,785
Less accumulated depreciation and amortization.............. 23,582 98,133
-------- --------
Property and equipment -- net..................... $ 92,281 $183,652
======== ========
</TABLE>
Depreciation expense charged to operations was $3,890, $19,962 and $74,551
for the years ended December 31, 1995, 1996 and 1997, respectively.
F-44
<PAGE> 98
SOFTWARE CONSULTING SERVICES AMERICA, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LINE OF CREDIT AGREEMENT
In January 1997, the Company entered into a revolving line of credit
agreement with a bank to meet short-term working capital requirements. The line
of credit provides for borrowings equal to the lesser of $650,000 or 80% of
eligible accounts receivable, and borrowings thereunder are secured by all the
Company's assets. The line of credit agreement was scheduled to expire on
January 12, 1998. The interest rate applicable to borrowings under the line of
credit is the bank's prime rate (7.7% at December 31, 1997) plus 1.8%. In
January 1998, the Company amended the credit agreement, increasing the line of
credit to the lessor of $850,000 or 80% of eligible accounts receivable and
extending the maturity date to March 12, 1998.
4. LEASE COMMITMENTS
The Company leases office facilities, computers and certain office
equipment under several noncancelable operating lease agreements. The agreements
expire at various dates through the year 2000.
Future minimum lease commitments under these operating leases at December
31, 1997, are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................. $132,996
1999.................................................. $124,445
2000.................................................. $ 19,830
--------
$277,271
========
</TABLE>
During the period ended December 31, 1995, and the two years ended December
31, 1996 and 1997, rental expense under the various operating lease arrangements
totaled $1,511, $15,167, and $148,264 respectively, and is included in selling,
general and administrative expense in the statements of income.
5. RELATED PARTY TRANSACTIONS
Revenues for the period ended December 31, 1995, and the years ended
December 31, 1996 and 1997, include sales to a member and an affiliate of a
member of the Company totaling $31,728, $123,950, and $10,906, respectively. At
December 31, 1995, 1996 and 1997, unbilled revenue from a member of the Company
were $29,815, $0, and $0, respectively.
Notes payable to members at December 31, 1996 were $150,000. The notes are
unsecured, are due on demand and do not bear interest.
6. OPTION PLANS
The Company established a 1996 and 1997 Option Plan, pursuant to which
options to purchase membership units in the Company are awarded. The option
awards are subject to vesting, at the rate of approximately 16.7% every six
months, over three years from the grant date. The exercise price per unit is not
less than the fair market value on the date each option is granted. Any
unexercised options will expire on the fifth anniversary of the date of grant.
The option agreements may be subject to termination under certain circumstances,
such as a change in control, as defined in the agreements. Unitholders may
receive up to 10% of the net proceeds resulting from certain changes in control
resulting from the sale of all or substantially all the assets of the Company.
F-45
<PAGE> 99
SOFTWARE CONSULTING SERVICES AMERICA, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Options to purchase units awarded under these Option Plans are summarized
as follows:
<TABLE>
<CAPTION>
WEIGHTED
UNITS OPTION AVERAGE WEIGHTED
UNDER PRICE PER EXERCISE AVERAGE
OPTION UNIT PRICE FAIR VALUE
------ ----------- -------- ----------
<S> <C> <C> <C> <C>
Granted in 1995 and outstanding at
December 31, 1995..................... -- $ -- $ -- $ --
Granted in 1996......................... 27,650 $ 1.60 $1.60 $0.42
------
Outstanding at December 31, 1996........ 27,650 $ 1.60 $1.60 $0.42
======
Granted in 1997......................... 53,260 $ 4.27 $4.27 $1.05
Forfeited in 1997....................... (8,050) $1.60-$4.27 $3.14 $0.78
------
Outstanding at December 31, 1997........ 72,860 $1.60-$4.27 $3.38 $0.84
======
Exercisable at December 31, 1997........ 24,738 $1.60-$4.27 $2.16 $0.75
======
</TABLE>
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its options. Accordingly, no compensation cost has been
recognized for such option grants. Had compensation cost for the Company's
options been determined based on the fair value at the grant dates for awards
consistent with the method prescribed by the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's pro forma net income would have been
reduced by $2,400 to $493,650 in 1996 and by $11,800 to $555,083 in 1997.
The weighted average fair value of options granted during 1996 and 1997 was
estimated at $0.42 and $1.05, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions used for grants in 1996 and
1997: risk-free interest rates of 6.1% and 5.7%, respectively, no dividend
yield, expected lives of five years and no expected volatility (because the
units are not publicly traded).
7. EMPLOYEE BENEFITS
In September 1996, the Company established an elective salary reduction
profit sharing plan pursuant to Internal Revenue Code Section 401(k). Under the
plan, eligible employees can make voluntary pretax contributions to the plan.
Employee contributions cannot exceed 15% of eligible compensation or other tax-
regulated limits. There are no matching or Company discretionary contributions
under the plan.
Employment agreements with the members require that, in the event of a
change in control of the Company, the Company shall continue the members'
salaries for a one- to two-year period following the change in control.
8. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to potential concentration
of credit risk consist principally of temporary cash investments. The Company
generally places its temporary cash investments in a single financial
institution. On occasion, the Company maintains deposits in excess of federally
insured amounts at that financial institution.
For the period ended December 31, 1995 and the years ended December 31,
1996 and 1997, 91%, 85% and 39%, respectively, of the Company's revenues
consisted of revenues derived from services performed under subcontracting
arrangements with SAP.
F-46
<PAGE> 100
SOFTWARE CONSULTING SERVICES AMERICA, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Approximately 99%, 69% and 23% of the Company's accounts receivable and
12%, 86% and 13% of the Company's unbilled revenue at December 31, 1995, 1996
and 1997, respectively, were attributable to SAP.
For the year ended December 31, 1997, 11% of the Company's revenues were
from another significant customer. Approximately 32% of the Company's accounts
receivable and 32% of the Company's unbilled revenue at December 31, 1997 were
attributable to that customer.
9. PRO FORMA BALANCE SHEET AND STATEMENT OF INCOME (UNAUDITED)
The pro forma statement of operations shows the pro forma effects, of the
estimated deferred taxes related to future deductible temporary differences
arising from the termination of the Company's current tax status (pursuant to
which it is treated as a pass-through entity for federal income tax purposes),
recognized in accordance with the Financial Accounting Standards Board's
Statement No. 109, which the Company will adopt upon such termination.
The pro forma balance sheet at December 31, 1997 provides the effect, on a
pro forma basis, of the reclassification to paid-in capital of members' equity
upon termination of the Company's current tax status.
10. PENDING ACQUISITION
In December 1997, the Company entered into an agreement with BrightStar
Information Technology Group, Inc. ("BrightStar") for the acquisition by
BrightStar of all the Company's assets and assumption of certain of its
liabilities. The consummation of the acquisition is contingent upon BrightStar's
initial public offering of its common stock.
* * * * *
F-47
<PAGE> 101
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Software Consulting Services Pty. Ltd. as
Trustee for the SCS Unit Trust:
We have audited the accompanying balance sheets of the SCS Unit Trust (the
"Trust") as of June 30, 1996 and 1997, and the related statements of income,
unit capital and beneficiaries' loan accounts and cash flows for the period from
October 1, 1994 (date of inception) to June 30, 1995, and for each of the two
years in the period ended June 30, 1997 (all expressed in Australian dollars).
These financial statements are the responsibility of the management of Software
Consulting Services Pty. Ltd. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Australia and the United States of America. Those standards require
that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the SCS Unit Trust as of June 30, 1996 and
1997, and the results of its operations and its cash flows for the period from
October 1, 1994 (date of inception) to June 30, 1995, and for each of the two
years in the period ended June 30, 1997, in conformity with accounting
principles generally accepted in the United States of America.
Our audits also comprehended the translation of Australian dollar amounts
into U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 1. Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
DELOITTE TOUCHE TOHMATSU
Melbourne, Australia
December 19 , 1997
F-48
<PAGE> 102
SCS UNIT TRUST
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
US$
A$ DECEMBER 31,
JUNE 30, US$ A$ --------------------------
----------------------- JUNE 30, DECEMBER 31, PRO FORMA
1996 1997 1997 1997 1997 1997
---------- ---------- ---------- ------------ ------------ -----------
(UNAUDITED) (UNAUDITED) (NOTE 9)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.... $ 427,173 $ 4,790 $ 3,118 $ 172,956 $ 112,594 $ 112,594
Trade accounts receivable.... 1,529,065 3,012,656 1,961,239 5,076,491 3,304,796 3,304,796
Unbilled revenue............. 690,217 449,331 969,894 631,401 631,401
Sundry debtors............... 749 159,803 104,032 269,814 175,649 175,649
Prepaid expenses and other
current assets............ 15,939 23,375 15,217 23,397 15,231 15,231
---------- ---------- ---------- ---------- ---------- ----------
Total current assets.... 1,972,926 3,890,841 2,532,937 6,512,552 4,239,671 4,239,671
PROPERTY AND
EQUIPMENT -- Net............. 58,995 98,809 64,325 201,402 131,113 131,113
OTHER ASSETS................... 34,321 22,343 35,423 23,060 23,060
INVESTMENT IN AFFILIATED
TRUST........................ 27,448 17,869 27,448 17,869 17,869
---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS............. $2,031,921 $4,051,419 $2,637,474 $6,776,825 $4,411,713 $4,411,713
========== ========== ========== ========== ========== ==========
LIABILITIES AND UNIT CAPITAL
CURRENT LIABILITIES:
Accounts payable............. $ 118,057 $ 721,602 $ 469,763 $1,508,131 $ 981,793 $ 981,793
Accrued payroll and payroll
taxes..................... 743,335 1,621,796 1,055,789 2,314,171 1,506,526 1,506,526
Other accrued expenses....... 105,334 118,883 77,393 157,381 102,455 102,455
Beneficiaries' loan
accounts.................. 1,059,359 1,505,302 979,952 2,713,186 1,766,284 1,766,284
---------- ---------- ---------- ---------- ---------- ----------
Total current
liabilities.......... 2,026,085 3,967,583 2,582,897 6,692,869 4,357,058 4,357,058
COMMITMENTS AND CONTINGENCIES
Additional paid-in capital... 54,655
UNIT CAPITAL................... 5,836 83,836 54,577 83,956 54,655
---------- ---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
UNIT CAPITAL........... $2,031,921 $4,051,419 $2,637,474 $6,776,825 $4,411,713 $4,411,713
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-49
<PAGE> 103
SCS UNIT TRUST
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
US$
A$ YEAR AS$
PERIOD FROM A$ ENDED SIX MONTHS ENDED
OCTOBER 1, 1994, YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31,
TO JUNE 30, ------------------------ ---------- -------------------------
1995 1996 1997 1997 1996 1997
---------------- ---------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE........................... $2,774,362 $7,775,358 $14,876,861 $9,684,837 $5,943,983 $13,549,180
COST OF REVENUE................... 2,114,792 5,958,918 11,957,304 7,784,205 4,733,351 10,559,178
---------- ---------- ----------- ---------- ---------- -----------
Gross profit.................... 659,570 1,816,440 2,919,557 1,900,632 1,210,632 2,990,002
OPERATING EXPENSES:
Selling, general and
administrative................ 516,977 1,037,333 2,019,064 1,314,410 949,799 1,626,652
Depreciation and amortization... 20,624 55,193 79,431 51,710 28,706 39,807
---------- ---------- ----------- ---------- ---------- -----------
Total operating
expenses................ 537,601 1,092,526 2,098,495 1,366,120 978,505 1,666,459
---------- ---------- ----------- ---------- ---------- -----------
INCOME FROM OPERATIONS............ 121,969 723,914 821,062 534,512 232,127 1,323,543
OTHER INCOME (EXPENSE):
Equity in losses of affiliated
trust......................... (90,216) (58,731) (45,108)
Allowance for investment in
affiliated trust.............. (162,336) (105,681)
Interest income................. 7,234 19,935 20,857 13,579 15,189 1,279
Interest expense................ (24,481) (81,594) (198,325) (129,110) (105,767) (164,799)
Other income.................... 1,674
Gain (loss) on sale of property
and equipment................. 18,222 (2,273) (1,480) (376)
---------- ---------- ----------- ---------- ---------- -----------
Total other income
(expense)............... (17,247) (41,763) (432,293) (281,423) (136,062) (163,520)
---------- ---------- ----------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES........ 104,722 682,151 388,769 253,089 96,065 1,160,023
PRO FORMA INCOME TAX EXPENSE......
---------- ---------- ----------- ---------- ---------- -----------
NET INCOME................ $ 104,722 $ 682,151 $ 388,769 $ 253,089 $ 96,065 $1,160,023
========== ========== =========== ========== ========== ===========
<CAPTION>
US$
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1997
----------- -----------
(UNAUDITED) PRO FORMA
(NOTE 9)
(UNAUDITED)
<S> <C> <C>
REVENUE........................... $8,820,515 $8,820,515
COST OF REVENUE................... 6,874,025 6,874,025
---------- ----------
Gross profit.................... 1,946,490 1,946,490
OPERATING EXPENSES:
Selling, general and
administrative................ 1,058,950 1,058,950
Depreciation and amortization... 25,914 25,914
---------- ----------
Total operating
expenses................ 1,084,864 1,084,864
---------- ----------
INCOME FROM OPERATIONS............ 861,626 861,626
OTHER INCOME (EXPENSE):
Equity in losses of affiliated
trust.........................
Allowance for investment in
affiliated trust..............
Interest income................. 833 833
Interest expense................ (107,285) (107,285)
Other income....................
Gain (loss) on sale of property
and equipment.................
---------- ----------
Total other income
(expense)............... (106,452) (106,452)
---------- ----------
INCOME BEFORE INCOME TAXES........ 755,174 755,174
PRO FORMA INCOME TAX EXPENSE...... 302,070
---------- ----------
NET INCOME................ $ 755,174 $ 453,104
========== ==========
</TABLE>
See notes to financial statements.
F-50
<PAGE> 104
SCS UNIT TRUST
STATEMENTS OF UNIT CAPITAL AND BENEFICIARIES' LOAN ACCOUNTS
<TABLE>
<CAPTION>
A$
BENEFICIARIES'
A$ LOAN
UNIT CAPITAL ACCOUNTS
------------ --------------
<S> <C> <C>
Original capital contributed and beneficiaries' loans..... $ 5,836 $ 556,847
Net income................................................ 104,722
Repayment of beneficiaries' loans......................... (156,758)
--------- ----------
BALANCES AT JUNE 30, 1995................................... 5,836 504,811
Interest on beneficiaries' accounts....................... 80,856
Repayment of beneficiaries' loans......................... (208,459)
Net income................................................ 682,151
--------- ----------
BALANCES AT JUNE 30, 1996................................... 5,836 1,059,359
Capital contributed....................................... 577,996 435,337
Capital redemption........................................ (499,996)
Repayment of beneficiaries' loans......................... (562,038)
Interest on beneficiaries' accounts....................... 183,875
Net income................................................ 388,769
--------- ----------
BALANCES AT JUNE 30, 1997................................... 83,836 1,505,302
Capital contributed (Unaudited)........................... 120
Repayment of beneficiaries loans (Unaudited).............. (100,000)
Interest on beneficiaries' accounts (Unaudited)........... 147,861
Net income (Unaudited).................................... 1,160,023
--------- ----------
BALANCES AT DECEMBER 31, 1997 (Unaudited)................... $ 83,956 $2,713,186
========= ==========
</TABLE>
<TABLE>
<CAPTION>
US$
BENEFICIARIES'
US$ LOAN
UNIT CAPITAL ACCOUNTS
------------ --------------
<S> <C> <C>
BALANCES AT JUNE 30, 1996................................... $ 3,799 $ 689,643
Capital contributed....................................... 376,275 283,404
Capital redemption........................................ (325,497)
Repayment of beneficiaries' loans......................... (365,887)
Interest on beneficiaries' accounts....................... 119,703
Net income................................................ 253,089
--------- ----------
BALANCES AT JUNE 30, 1997................................... 54,577 979,952
Capital contributed (Unaudited)........................... 78
Repayment of beneficiaries' loans (Unaudited)............. (65,100)
Interest on beneficiaries' accounts (Unaudited)........... 96,258
Net income (Unaudited).................................... 755,174
--------- ----------
BALANCES AT DECEMBER 31, 1997 (Unaudited)................... $ 54,655 $1,766,284
========= ==========
</TABLE>
See notes to financial statements.
F-51
<PAGE> 105
SCS UNIT TRUST
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
A$
A$ US$
PERIOD FROM A$ US$ SIX MONTHS SIX MONTHS
OCTOBER 1, 1994 YEAR ENDED JUNE 30, YEAR ENDED ENDED DECEMBER 31, ENDED
TO JUNE 30, ----------------------- JUNE 30, ------------------------- DECEMBER 31,
1995 1996 1997 1997 1996 1997 1997
--------------- --------- ----------- ---------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................. $ 104,722 $ 682,151 $ 388,769 $ 253,089 $ 96,065 $1,160,023 $ 755,175
Adjustments to reconcile net
income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............ 20,624 55,193 79,431 51,710 28,706 39,807 25,914
Interest expense on
beneficiaries' loan
accounts................ 80,856 183,875 119,703 103,894 147,861 96,258
(Gain) loss on sale of
property and
equipment............... (18,222) 2,273 1,480 376 -- --
Equity in losses of
affiliated trust........ 90,216 58,731 45,108
Allowance for investment
in affiliated trust..... 162,336 105,681
Cash provided by (used in)
operating working
capital:
Trade accounts
receivable............ (822,962) (706,103) (1,483,591) (965,818) (400,117) (2,063,835) (1,343,557)
Unbilled revenue........ (690,217) (449,331) (277,962) (279,677) (182,070)
Sundry debtors.......... (29,600) 28,851 (159,054) (103,544) (69,349) (110,011) (71,617)
Prepaid expenses and
other current assets.. (13,222) (2,717) (7,436) (4,841) 6,990 (22) (14)
Other assets............ (34,321) (22,343) (33,657) (1,102) (717)
Accounts payable........ 34,175 83,882 603,545 392,908 35,375 786,529 512,029
Accrued payroll and
payroll taxes......... 434,708 308,627 878,461 571,876 123,594 692,375 450,736
Other accrued
expenses.............. 105,334 13,549 8,820 88,463 38,498 25,062
--------- --------- ----------- --------- --------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... (271,555) 617,852 27,836 18,121 (252,514) 410,446 267,199
--------- --------- ----------- --------- --------- ----------- -----------
INVESTING ACTIVITIES:
Investment in affiliated
trust..................... (280,000) (182,280) (200,000)
Proceeds from sale of
property and equipment.... 96,883 1,599 1,041 3
Capital expenditures........ (100,406) (108,227) (123,117) (80,149) (73,495) (142,400) (92,702)
--------- --------- ----------- --------- --------- ----------- -----------
Net cash used in
investing
activities.......... (100,406) (11,344) (401,518) (261,388) (273,492) (142,400) (92,702)
--------- --------- ----------- --------- --------- ----------- -----------
FINANCING ACTIVITIES:
Unit capital
contributions............. 996 577,996 376,275 577,996 120 78
Unit capital redemptions.... (499,996) (325,497) (499,996)
Beneficiaries' loans........ 556,847 435,337 283,404 373,145 (100,000) (65,100)
Repayment of beneficiaries'
loans..................... (156,758) (208,459) (562,038) (365,887) (158,133)
Borrowings (repayments) of
unitholders' notes
payable................... 7,243 (7,243)
--------- --------- ----------- --------- --------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... 408,328 (215,702) (48,701) (31,705) 293,012 (99,880) (65,022)
--------- --------- ----------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS... 36,367 390,806 (422,383) (274,972) (232,994) 168,166 109,475
CASH AND CASH EQUIVALENTS:
Beginning of period......... 36,367 427,173 278,090 427,173 4,790 3,119
--------- --------- ----------- --------- --------- ----------- -----------
End of period............... $ 36,367 $ 427,173 $ 4,790 $ 3,118 $ 194,179 $ 172,956 $ 112,594
========= ========= =========== ========= ========= =========== ===========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 106
SCS UNIT TRUST
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- SCS Unit Trust (the "Trust") was formed on October 1, 1994,
and operates as a professional software consulting practice specializing in
implementations of software systems developed by SAP AG of Germany ("SAP"). The
business of the Trust operates under the name of its trustee, Software
Consulting Services Pty. Ltd. (the "Trustee") headquartered in Melbourne,
Australia.
Translation of Australian Dollar Statements to U.S. Dollar
Statements -- The financial statements of the Trust are stated in Australian
dollars ("A$"), the currency of the country in which the Trust is incorporated
and operates. The translation of A$ amounts into U.S. dollar ("US$") amounts as
of June 30, 1997 and December 31, 1997 and for the periods ended June 30, 1997
and December 31, 1997 has been made solely for the convenience of readers in the
United States of America and has been made at the rate of 1.536 (A$) to 1 (US$),
the approximate rate of exchange at December 31, 1997. Such translation should
not be construed as a representation that the A$ amounts could be converted into
US$ at that or any other rate.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Consolidation -- In October 1997, Data Collection Systems Integration Pty.
Ltd. (DCSI), a wholly owned subsidiary of the Trust, was incorporated under the
Australian Corporations Law. DCSI is in the business of marketing and
implementing inventory control hardware and software. The December 31, 1997
financials statements include the accounts of the Trust and its subsidiary. All
significant intercompany items and transactions have been eliminated in
consolidation.
Revenue Recognition -- Revenue is recognized as consulting services are
performed. Any anticipated losses on fixed price consulting contracts are
charged to earnings when identified. Accounts receivable represent only amounts
billed and currently due from clients. Recoverable costs and accrued profit
related to fixed price contracts, on which revenue has been recognized but
billings have not been presented to the client, are included in unbilled
revenue.
Cash and Cash Equivalents -- The Company's cash equivalents consist of
liquid instruments purchased with original maturities of three months or less.
Sundry Debtors -- The Company's sundry debtors represent other receivables
and primarily include the amount of retentions on certain contracts.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation for computer equipment, office equipment and furniture and fixtures
is computed using the declining balance method at rates of 60%, 30% and 20%,
respectively. Leasehold improvements are amortized using the declining balance
method at a rate of 40%.
Investments -- The Trust has a 40% investment in the TCS Discretionary Unit
Trust ("TCS"). Through its investment in TCS, the Trust effectively owns 28% of
the ASAP Discretionary Unit Trust ("ASAP"), which is in the business of
marketing and implementing SAP software for middle-market companies. The Trust's
investment in TCS is accounted for using the equity method of accounting.
Beneficiaries' Loan Accounts -- The beneficiaries of the Trust are the
holders of the Trust's unit capital, are entitled to receive the income of the
Trust and are paid interest on their loan balances at the discretion of the
directors of the Trustee. Profit is allocated to the unitholders at the end of
each fiscal year and is credited to the beneficiaries' accounts. The unitholders
provide funding to the Trust, which is repayable at call. Interest
F-53
<PAGE> 107
SCS UNIT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is calculated on the unpaid balance of the beneficiaries' loan accounts at a
rate approved by the directors of the Trustee, which was 15% for 1995, 1996 and
1997.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, trade accounts receivable and accounts payable, the
carrying values of which are reasonable estimates of their fair values due to
their short-term maturities or current interest rates.
Income Taxes -- Under current income tax legislation, the Trustee and the
Trust are not subject to income tax, provided the unitholders are presently
entitled to the net income of the Trust for taxation purposes. Accordingly, no
income tax expense has been recorded in the financial statements.
Interim Financial Information -- The interim financial statements as of
December 31, 1997, and for the six months ended December 31, 1996 and 1997, are
unaudited, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results to be achieved
for the entire fiscal year.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
A$
JUNE 30, US$
--------------------- JUNE 30,
1996 1997 1997
-------- --------- --------
<S> <C> <C> <C>
Computer equipment and software................... $ 71,190 $ 145,401 $105,546
Furniture, fixtures and equipment................. 34,244 73,010 52,998
Leasehold improvements............................ 5,054 3,669
-------- --------- --------
Total............................................. 105,434 223,465 162,213
Less accumulated depreciation and amortization.... (46,439) (124,656) (90,488)
-------- --------- --------
Property and equipment -- net........... $ 58,995 $ 98,809 $ 71,725
======== ========= ========
</TABLE>
Depreciation and amortization expense charged to operations was A$55,193
and A$79,431 (US$57,659) for the years ended June 30, 1996 and 1997,
respectively.
3. OVERDRAFT FACILITY
The Trust has a A$900,000 (US$653,310) bank overdraft facility agreement. A
debenture charge over the assets of the trust and the trustee and a deed of
subordination over the beneficiaries' loan accounts of $1,200,000 serves as
collateral for borrowings under the facility. The facility bears interest at the
bank's overdraft interest rate plus 0.4%. At June 30, 1997, the interest rate
was 9.85%.
Approximately A$444,000 (US$322,300) was outstanding under the facility at
June 30, 1997. No borrowings were outstanding at June 30, 1996.
The availability under the overdraft facility has increased to A$1,500,000
as of December 31, 1997. Approximately A$1,035,000 was outstanding under the
facility at December 31, 1997.
F-54
<PAGE> 108
SCS UNIT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LEASE COMMITMENTS
The Trust leases office facilities and certain computer and office
equipment under several noncancelable operating lease agreements. The agreements
expire at various dates through the year 2001.
Future minimum lease commitments under these operating leases at June 30,
1997, are as follows:
<TABLE>
<CAPTION>
A$ US$
-------- --------
<S> <C> <C>
Year ending June 30:
1998................................................. $443,264 $321,765
1999................................................. 286,660 208,086
2000................................................. 37,182 26,990
2001................................................. 2,457 1,784
-------- --------
$769,563 $558,625
======== ========
</TABLE>
During the periods ended June 30, 1995, 1996 and 1997, rental expense under
the various operating lease obligations totaled A$8,470, A$59,272 and A$333,505
(US$242,091), respectively, and is included in selling, general and
administrative expense in the statements of income.
5. RELATED PARTY TRANSACTIONS
The Trust is subcontracted by a unitholder of the Trust and an affiliated
trust to provide software implementation services. Revenue included sales to a
unitholder of the Trust for the period ended June 30, 1997, totaling A$4,193,598
(US$3,044,133). Sales to an affiliated trust for the periods ended June 30, 1996
and 1997, were A$132,825 and A$2,601,464 (US$1,888,403), respectively.
Trade Accounts Receivables and Unbilled Revenue regarding the sales to a
unitholder of the Trust at June 30, 1997 are A$650,310 (US$472,060) and
A$504,802 (US$366,436), respectively.
Receivables from an affiliated trust at June 30, 1996 and 1997 are
A$132,825 and A$409,208 (US$297,044), respectively.
Expenses include payments for consultants to a unitholder of the Trust for
the period ended June 30, 1997 of A$256,888 (US$186,475) and a reimbursement of
expenses by an affiliated trust for the same period of A$128,541 (US$93,308).
Payables to a unitholder of the Trust for the period ended June 30, 1997
are A$145,970 (US$105,960).
All of the transactions noted above were on terms and conditions no more
favorable than the normal commercial terms and conditions applicable to the
Trust and its affiliate.
6. INVESTMENT IN AFFILIATED TRUST
At June 30, 1997, the Trust's equity investment in TCS exceeded the Trust's
share of the net assets of TCS. This excess has resulted in a write-down of the
carrying value of the investment as follows:
<TABLE>
<CAPTION>
A$ US$
-------- --------
<S> <C> <C>
Cost of investment in TCS................................... $280,000 $203,253
Share of operating losses................................... 90,216 65,488
-------- --------
Equity accounted investment................................. 189,784 137,765
Allowance to reduce investment to estimated fair value...... 162,336 117,840
-------- --------
Investment in affiliated trust.............................. $ 27,448 $ 19,925
======== ========
</TABLE>
F-55
<PAGE> 109
SCS UNIT TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUPERANNUATION
Employees other than contractors participate in a superannuation plan,
which is a mandatory retirement savings plan in Australia. Under the plan,
employers must contribute 6% of the salary of eligible employees to the plan.
The Trust does not sponsor a specific plan, and employees may contribute to the
superannuation plan of their choice. There are no matching or discretionary
contributions by the Trust.
8. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Trust to potential concentration of
credit risk consist principally of cash and cash equivalents, short-term
investments and trade accounts receivable. The Trust places its cash and cash
equivalents and short-term investments in and limits the amount of credit
exposure to one financial institution.
9. PRO FORMA BALANCE SHEET AND STATEMENT OF INCOME (UNAUDITED)
The pro forma statement of operations shows the pro forma effects, of the
estimated deferred taxes related to future deductible temporary differences
arising from the termination of the Company's current tax status (pursuant to
which it is not subject to any income tax) and recognized in accordance with the
Financial Accounting Standards Board's Statement No. 109, which the Company will
adopt upon such termination.
The pro forma balance sheet at December 31, 1997 shows the effect, on a pro
forma basis, of the reclassification to paid-in capital of unit capital upon
termination of the Company's current tax status.
10. PENDING ACQUISITION
In December 1997, the Trust entered into an agreement with BrightStar
Information Technology Group, Inc. ("BrightStar") for the acquisition by
BrightStar of all the Trust's assets and assumption of certain of its
liabilities. The consummation of the acquisition is contingent upon BrightStar's
initial public offering of its common stock.
* * * * * *
F-56
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Software Innovators, Inc.:
We have audited the accompanying balance sheets of Software Innovators,
Inc. (the "Company") as of July 31, 1996 and 1997, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 accompanying financial statements present fairly, in
all material respects, the financial position of Software Innovators, Inc. as of
July 31, 1996 and 1997, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 19, 1997
F-57
<PAGE> 111
SOFTWARE INNOVATORS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31,
-------------------- JANUARY 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $163,053 $354,754 $407,318
Accounts receivable..................................... 173,815 196,782 222,529
Note receivable......................................... 90,000
Prepaid expenses and other current assets............... 50,014 18,549 6,139
-------- -------- --------
Total current assets............................ 386,882 570,085 725,986
PROPERTY AND EQUIPMENT -- Net............................. 60,545 69,986 134,782
DEFERRED TAX ASSET........................................ 7,463
-------- -------- --------
TOTAL ASSETS.................................... $447,427 $640,071 $868,231
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 10,202 $ 4,052 $ 856
Current portion of capital lease obligation............. 4,522 4,750
Note payable............................................ 550,000
Income taxes payable.................................... 127,530
Accrued expenses........................................ 40,104 258,575 128,582
Deferred income taxes................................... 56,832 45,545 63,532
-------- -------- --------
Total current liabilities....................... 107,138 312,694 875,250
CAPITAL LEASE OBLIGATION, net of current portion.......... 15,518 13,084
DEFERRED INCOME TAXES..................................... 11,184 6,306
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY(DEFICIT):
Common stock, $1 par value -- 1,000 shares authorized,
issued and outstanding; nonvoting common stock $1 par
value -- 9,000 shares authorized, none outstanding... 1,000 1,000 1,000
Additional paid-in capital.............................. 9,000 35,882 35,882
Retained earnings....................................... 325,855 272,421 496,765
Treasury stock, 450 shares and 250 shares, respectively,
at cost................................................. (6,750) (3,750) (553,750)
-------- -------- --------
Total stockholders' equity(deficit)............. 329,105 305,553 (20,103)
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $447,427 $640,071 $868,231
======== ======== ========
</TABLE>
See notes to financial statements.
F-58
<PAGE> 112
SOFTWARE INNOVATORS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31,
----------------------- -----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE...................................... $1,952,713 $2,981,802 $1,393,536 $2,032,706
COST OF REVENUE.............................. 1,262,822 1,948,546 926,838 1,268,422
---------- ---------- ---------- ----------
Gross profit............................... 689,891 1,033,256 466,698 764,284
OPERATING EXPENSES:
Selling, general and administrative........ 501,181 1,100,335 272,059 414,816
Depreciation and amortization.............. 26,221 23,444 11,881 7,611
---------- ---------- ---------- ----------
Total operating expenses........... 527,402 1,123,779 283,940 422,427
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS................ 162,489 (90,523) 182,758 341,857
OTHER INCOME:
Interest income............................ 6,440 17,231 6,211 10,353
Other, net................................. 5,685 3,694 22,191 20,189
---------- ---------- ---------- ----------
Total other income................. 12,125 20,925 28,402 30,542
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES............ 174,614 (69,598) 211,160 372,399
INCOME TAX EXPENSE (BENEFIT):
Current.................................... 8,314 92,307 143,836
Deferred................................... 61,582 (16,164) (8,082) 4,219
---------- ---------- ---------- ----------
Total income tax expense
(benefit)........................ 69,896 (16,164) 84,225 148,055
---------- ---------- ---------- ----------
NET INCOME (LOSS)............................ $ 104,718 $ (53,434) $ 126,935 $ 224,344
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-59
<PAGE> 113
SOFTWARE INNOVATORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK STOCKHOLDERS'
--------------- PAID-IN RETAINED ------------------ EQUITY
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT (DEFICIT)
------ ------ ---------- -------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1995........... 1,000 $1,000 $ 9,000 $221,137 450 $ (6,750) $ 224,387
Net income...................... 104,718 104,718
----- ------ ------- -------- ---- --------- ---------
BALANCE, JULY 31, 1996............ 1,000 1,000 9,000 325,855 450 (6,750) 329,105
Reissuance of 200 shares of
treasury stock............... 26,882 (200) 3,000 29,882
Net loss........................ (53,434) (53,434)
----- ------ ------- -------- ---- --------- ---------
BALANCE, JULY 31, 1997............ 1,000 1,000 35,882 272,421 250 (3,750) 305,553
Purchase of 150 shares of
treasury stock (Unaudited)... 150 (550,000) (550,000)
Net income (Unaudited).......... 224,344 224,344
----- ------ ------- -------- ---- --------- ---------
BALANCE, JANUARY 31, 1998
(Unaudited)..................... 1,000 $1,000 $35,882 $496,765 400 $(553,750) $ (20,103)
===== ====== ======= ======== ==== ========= =========
</TABLE>
See notes to financial statements.
F-60
<PAGE> 114
SOFTWARE INNOVATORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
------------------- -------------------------
1996 1997 1997 1998
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................ $104,718 $(53,434) $126,935 $224,344
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization................. 26,221 23,444 11,881 7,611
Deferred income taxes......................... 61,582 (16,164) (8,082) 5,220
Cash provided by (used in) operating working
capital:
Accounts receivable......................... (90,002) (22,967) (9,953) (25,747)
Note receivable............................. (90,000)
Prepaid expenses and other assets........... (50,604) 31,465 10,501 12,410
Accounts payable............................ (38,936) (6,150) (7,272) (3,196)
Income taxes payable........................ 127,530
Accrued expenses............................ (14,820) 218,463 97,484 (129,993)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities............................. (1,841) 174,657 221,494 128,179
-------- -------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of equipment.................. 10,000
Capital expenditures............................. (5,245) (7,891) -- (73,410)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities............................. 4,755 (7,891) -- (73,410)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Payments on capital lease obligation............. (4,947) (1,959) (2,205)
Proceeds from issuance of treasury stock......... 29,882 29,882
-------- -------- -------- --------
Net cash provided by financing
activities............................. -- 24,935 27,923 (2,205)
-------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 2,914 191,701 249,417 52,564
CASH AND CASH EQUIVALENTS:
Beginning of period.............................. 160,139 163,053 163,053 354,754
-------- -------- -------- --------
End of year period............................... $163,053 $354,754 $412,470 $407,318
======== ======== ======== ========
SUPPLEMENTAL INFORMATION:
Interest paid.................................... $ -- $ 2,227 $ 1,152 $ 3,399
======== ======== ======== ========
Income taxes paid................................ $ 33,600 $ -- $ -- $ --
======== ======== ======== ========
Equipment financed through capital lease......... $ -- $ 24,987 $ 24,140 $ 24,140
======== ======== ======== ========
Issuance of note payable for purchase of common
stock......................................... $ -- $ -- $ -- $550,000
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-61
<PAGE> 115
SOFTWARE INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Software Innovators, Inc., an Arkansas corporation (the
"Company"), provides computer and data processing consulting services to a
variety of businesses and government agencies. The Company was incorporated in
1989 and operates primarily within the State of Arkansas.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition -- The Company provides its services for fees that are
primarily based on time and materials used to complete projects for clients.
Accordingly, revenue is recognized as consulting services are performed.
Cash Equivalents -- The Company's cash equivalents consist of liquid
investments purchased with original maturities of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to 15 years. Leasehold
improvements are amortized on the straight-line method over the primary term of
the lease.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, accounts receivable, short-term debt and accounts and
notes payable, the carrying values of which are reasonable estimates of their
fair values due to their short maturities or current interest rates.
Deferred Income Taxes -- The Company provides for deferred income taxes
under the asset and liability method for temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
Interim Financial Information -- The interim financial statements as of
January 31, 1998, and for the six months ended January 31, 1997 and 1998, are
unaudited, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results to be achieved
for the entire fiscal year.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JULY 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Computer and office equipment............................... $ 77,082 $ 77,082
Furniture and fixtures...................................... 27,165 27,165
Leasehold improvements...................................... 17,415 46,700
-------- --------
Total....................................................... 121,662 150,947
Less accumulated depreciation and amortization.............. 61,117 80,961
-------- --------
Property and equipment -- net..................... $ 60,545 $ 69,986
======== ========
</TABLE>
F-62
<PAGE> 116
SOFTWARE INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES
The components of deferred income taxes in the accompanying balance sheets
are as follows:
<TABLE>
<CAPTION>
JULY 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable....................................... $ 66,554 $ 75,348
Accumulated depreciation and amortization................. 11,184 6,308
Other..................................................... 9,543 1,884
-------- --------
87,281 83,540
Deferred tax assets -- accrued vacation and other
expenses.................................................. (19,265) (31,688)
-------- --------
Net deferred tax liabilities................................ $ 68,016 $ 51,852
======== ========
</TABLE>
The provisions for income taxes in the financial statements differ from the
amounts determined by applying the federal statutory rate of 34% to earnings
(loss) before income taxes. The reconciling items and amounts as of July 31 are
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Provision (benefit) at statutory rate....................... $ 59,369 $(25,348)
Permanent differences....................................... 3,036 12,382
State taxes, net of federal benefits........................ 7,491 (3,198)
-------- --------
$ 69,896 $(16,164)
======== ========
</TABLE>
4. COMMITMENTS
The Company leases office space and certain equipment and vehicles under
several noncancelable operating lease agreements that expire at various dates
through June 2000. Future minimum lease payments under these agreements at July
31, 1997, are as follows:
<TABLE>
<S> <C>
Year Ending July 31:
1998.................................................... $ 62,338
1999.................................................... 32,841
2000.................................................... 11,772
--------
$106,951
========
</TABLE>
The Company incurred lease expense of $47,116 and $57,396 in fiscal 1996
and fiscal 1997, respectively, which is included in selling, general and
administrative expense in the statements of operations.
F-63
<PAGE> 117
SOFTWARE INNOVATORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company is leasing a telephone system under a capital lease that
extends through May 2001. Future minimum rental payments required under this
noncancelable lease at July 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending July 31:
1998...................................................... $ 6,303
1999...................................................... 6,303
2000...................................................... 6,303
2001...................................................... 5,251
-------
24,160
Less amounts representing interest.......................... 4,120
-------
Capital lease obligation at July 31, 1997................... 20,040
Less current portion........................................ 4,522
-------
Capital lease obligation, long-term......................... $15,518
=======
</TABLE>
In December 1997, the Company issued a note payable to a stockholder for
$550,000 for the purchase of 150 shares of common stock.
In December 1997, the Company entered in a revolving loan agreement with
BIT Group Services, Inc to advance up to $125,000, with interest accrued at
prime rate plus 1% (9.5% at December 31, 1997). There are no scheduled repayment
terms and the note receivable matures at the earlier of October 31, 1998, or 30
days following the successful completion of BrightStar's initial public
offering.
5. EMPLOYEE BENEFIT PLANS
The Company has established a 401(k) plan effective January 1, 1997, for
all employees who have attained the age of 21 and completed at least one year of
service. Each plan participant can contribute up to the maximum amount allowed
by the Internal Revenue Code to the plan through payroll deductions. The
Company's matching contribution to the plan is discretionary and is determined
each year by the Board of Directors. The employee's vested percentage regarding
the Company's matching contribution varies according to years of service. The
Company's expense for contributions to the plan was $15,256 during fiscal 1997.
No contributions were made by the Company in fiscal 1996.
6. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company maintains its cash in bank deposit accounts that, at times, may
exceed federally insured limits.
For the years ended July 31, 1996 and 1997, programming and consulting
services to one customer accounted for approximately 63% and 62%, respectively,
of the Company's total revenues. This customer accounted for approximately 44%
and 68% of the outstanding accounts receivable balance at July 31, 1996 and
1997, respectively.
7. PENDING ACQUISITION
In December 1997, the stockholders of the Company entered into a definitive
agreement with BrightStar Information Technology Group, Inc. ("BrightStar") for
the acquisition by BrightStar of all the Company's outstanding common stock. The
consummation of the acquisition is contingent upon BrightStar's initial public
offering of its common stock.
* * * * * *
F-64
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Zelo Group, Inc.:
We have audited the accompanying balance sheets of Zelo Group, Inc. (the
"Company") as of December 31, 1996 and 1997, and the related statements of
operations, stockholder's deficit and cash flows for each of the two years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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, such financial statements present fairly, in all material
respects, the financial position of Zelo Group, Inc. at December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 16, 1998
F-65
<PAGE> 119
ZELO GROUP, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1997 PRO FORMA
------------ ------------- -------------
(NOTE 7)
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 3,014 $ -- $ --
Trade accounts receivable less allowance of 18,341
in 1997......................................... 35,337 123,341 123,341
Prepaid expenses and other current assets.......... 800 800 800
--------- --------- ---------
Total current assets....................... 39,151 124,141 124,141
PROPERTY AND EQUIPMENT -- Net........................ 18,878 171,616 171,616
OTHER ASSETS......................................... 1,400 4,027 4,027
--------- --------- ---------
TOTAL ASSETS............................... $ 59,429 $ 299,784 $ 299,784
========= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current maturities of notes payable................ $ 145,000 $ 130,000 $ 130,000
Current obligations under capital leases........... 48,647 48,647
Credit facilities.................................. 47,282 260,085 260,085
Accounts payable and accrued liabilities........... 29,817 130,381 130,381
--------- --------- ---------
Total current liabilities.................. 222,099 569,113 569,113
OBLIGATIONS UNDER CAPITAL LEASES -- Less current
portion............................................ 83,886 83,886
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, no par value -- 25,000 shares
authorized; 2,500 shares issued and
outstanding..................................... 5,000 5,000 5,000
Additional paid-in capital......................... (358,215)
Accumulated deficit................................ (167,670) (358,215) --
--------- --------- ---------
Total stockholder's deficit................ (162,670) (353,215) (353,215)
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S
DEFICIT.................................. $ 59,429 $ 299,784 $ 299,784
========= ========= =========
</TABLE>
See notes to financial statements.
F-66
<PAGE> 120
ZELO GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1997
---------- ---------- -----------
PRO FORMA
(NOTE 7)
(UNAUDITED)
<S> <C> <C> <C>
REVENUE................................................ $1,081,694 $1,049,298 $1,049,298
COST OF REVENUE........................................ 729,760 582,428 582,428
---------- ---------- ----------
Gross profit......................................... 351,934 466,870 466,870
OPERATING EXPENSES:
Selling, general and administrative.................. 374,468 586,789 586,789
Depreciation and amortization........................ 11,534 40,403 40,403
---------- ---------- ----------
Total operating expenses..................... 386,002 627,192 627,192
---------- ---------- ----------
LOSS FROM OPERATIONS................................... (34,068) (160,322) (160,322)
OTHER EXPENSE -- Interest.............................. (12,473) (30,223) (30,223)
---------- ---------- ----------
LOSS BEFORE INCOME TAXES............................... (46,541) (190,545) (190,545)
PRO FORMA INCOME TAX BENEFIT........................... (76,218)
---------- ---------- ----------
NET LOSS............................................... $ (46,541) $ (190,545) $ (114,327)
========== ========== ==========
</TABLE>
See notes to financial statements.
F-67
<PAGE> 121
ZELO GROUP, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996......................... 2,500 $5,000 $(121,129) $(116,129)
Net loss....................................... (46,541) (46,541)
----- ------ --------- ---------
BALANCE, DECEMBER 31, 1996....................... 2,500 5,000 (167,670) (162,670)
Net loss....................................... (190,545) (190,545)
----- ------ --------- ---------
BALANCE, DECEMBER 31, 1997....................... 2,500 $5,000 $(358,215) $(353,215)
===== ====== ========= =========
</TABLE>
See notes to financial statements.
F-68
<PAGE> 122
ZELO GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (46,541) $(190,545)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 11,534 40,403
Cash provided by (used in) operating working capital:
Accounts receivable.................................. 86,224 (88,004)
Prepaid expenses and other current assets............ (400) (2,627)
Accounts payable and accrued liabilities............. (148,373) 100,564
--------- ---------
Net cash used in operating activities............. (97,556) (140,209)
--------- ---------
INVESTING ACTIVITIES -- Capital expenditures................ (13,867) (34,452)
--------- ---------
FINANCING ACTIVITIES:
Borrowings (payments) on notes payable.................... 95,000 (15,000)
Payments on capital lease obligations..................... (26,156)
Net borrowings from line of credit........................ 19,437 212,803
--------- ---------
Net cash provided by financing activities......... 114,437 171,647
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,014 (3,014)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 3,014
--------- ---------
End of period............................................. $ 3,014 $ --
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid............................................. $ 7,106 $ 24,662
========= =========
Income taxes paid......................................... $ -- $ --
========= =========
Equipment financed through capital leases................. $ -- $ 158,689
========= =========
</TABLE>
See notes to financial statements.
F-69
<PAGE> 123
ZELO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Zelo Group, Inc., a California corporation (the "Company"),
provides document management services using digital scanning equipment to store
documents on compact disc. The Company also provides system integration services
for complex document management systems to various customers primarily in the
legal and medical professions. The Company was incorporated in 1992 and is
headquartered in Ventura, California.
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition -- The Company provides its services for fees that are
primarily based on time and materials used to complete projects for clients.
Accordingly, revenue is recognized as services are performed.
Cash Equivalents -- The Company's cash equivalents consist of liquid
investments purchased with original maturities of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is provided principally using straight-line methods over the
estimated useful lives of the individual assets of five years. Amortization is
computed on a straight-line basis over the estimated useful lives of the assets
or the lease term, whichever is shorter.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, accounts receivable, short-term debt and accounts and
notes payable, the carrying values of which are reasonable estimates of their
fair values due to their short-term maturities or current interest rates.
Income Taxes -- The Company is a Subchapter S Corporation and, accordingly,
is not subject to corporate-level federal income tax. Income generated by the
Company is taxed to the stockholder. Accordingly, no income tax expense has been
recorded in the financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
------- --------
<S> <C> <C>
Computers, equipment and software........................... $39,233 $231,782
Furniture, fixtures and equipment........................... 18,438 18,438
------- --------
Total....................................................... 57,671 250,220
Less accumulated depreciation and amortization.............. 38,793 78,604
------- --------
Property and equipment -- net..................... $18,878 $171,616
======= ========
</TABLE>
3. SHORT-TERM BORROWINGS
The Company has a $175,000 line of credit facility with a commercial bank
for working capital requirements. Borrowings outstanding of $160,085 at December
31, 1997 under this facility bear interest at a rate of 13% per annum and are
due on demand.
F-70
<PAGE> 124
ZELO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a $400,000 non-revolving line of credit facility with
a commercial bank for working capital requirements. Borrowings outstanding of
$100,000 at December 31, 1997 under the Facility bear interest at the bank's
prime rate plus 2% (10.5% at December 31, 1997) and are due March 26, 1998. The
Company has promissory notes payable to Madison Management Company in the
aggregate original principal amount of $150,000, with an aggregate balance of
$130,000 at December 31, 1997. The notes have no scheduled repayment terms, bear
interest at rates ranging from 8.75% to 12% per annum and mature on March 31,
1998.
4. LEASE COMMITMENTS
The Company leases various equipment and its office facility under
noncancelable lease arrangements extending through 2001. Rental expense was
$24,230 and $95,749 for the year ended December 31, 1996 and 1997, respectively.
Minimum future lease payments under noncancelable operating leases at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................... $$141,436
1999.................................................... 96,364
2000.................................................... 90,145
2001.................................................... 39,067
--------
Total........................................... $367,012
========
</TABLE>
In March 1997, the Company began leasing computer equipment under capital
lease arrangements extending through 2001. Future minimum lease payments
required under these noncancelable leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.................................................... $ 62,897
1999.................................................... 46,544
2000.................................................... 35,916
2001.................................................... 13,897
--------
Total minimum lease payments.................... 159,254
Less amounts representing interest.............. 26,721
--------
Present value of net minimum lease payments..... 132,533
Less current portion of capital lease
obligations................................... 48,647
--------
Long-term capital lease obligation, less current
portion....................................... $ 83,886
========
</TABLE>
6. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Document management services to three major customers accounted for an
aggregate of approximately 59% and 44% of the Company's total revenue for the
year ended December 31, 1997 and 1996, respectively. These customers accounted
for an aggregate of approximately 80% and 53% of the outstanding accounts
receivable balance at December 31, 1997 and 1996, respectively.
7. PRO FORMA BALANCE SHEET AND STATEMENT OF OPERATIONS (UNAUDITED)
The pro forma statement of operations shows the pro forma effects, of the
estimated deferred taxes related to future deductible temporary differences
arising from the termination of the Company's subchapter
F-71
<PAGE> 125
ZELO GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
S election and recognized in accordance with the Financial Accounting Standards
Board's Statement No. 109, which the Company will adopt upon such termination.
The pro forma balance sheet at December 31, 1997 shows the pro forma effect
of the reclassification to paid-in capital of the accumulated deficit upon
termination of the Company's subchapter S election.
8. PENDING ACQUISITION
In December 1997, the stockholder of the Company entered into an agreement
with BrightStar Information Technology Group, Inc. ("BrightStar") for the
acquisition by BrightStar of all the Company's outstanding common stock. The
consummation of the acquisition is contingent upon BrightStar's initial public
offering of its common stock.
* * * * * *
F-72
<PAGE> 126
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
BIT Investors, LLC
We have audited the accompanying consolidated balance sheet of BIT
Investors, LLC and subsidiary, a Texas limited liability company (the
"Company"), as of December 31, 1997, and the related consolidated statements of
operations, members' deficit and cash flows for the period from July 24, 1997
(date of inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BIT
Investors, LLC and subsidiary as of December 31, 1997, and the results of its
operations and its cash flows for the period from July 24, 1997 (date of
inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 16, 1998
F-73
<PAGE> 127
BIT INVESTORS, LLC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 552,126
Prepaid expenses and other current assets................. 881
----------
Total current assets.............................. 553,007
PROPERTY AND EQUIPMENT -- Net............................... 136,516
DEFERRED OFFERING COSTS..................................... 1,950,000
----------
TOTAL ASSETS................................................ $2,639,523
==========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $1,112,756
Short-term borrowings..................................... 1,805,000
----------
Total current liabilities......................... 2,917,756
MEMBER'S DEFICIT............................................ (278,233)
----------
TOTAL LIABILITIES AND MEMBERS' DEFICIT...................... $2,639,523
==========
</TABLE>
See notes to consolidated financial statements.
F-74
<PAGE> 128
BIT INVESTORS, LLC
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 24, 1997 TO
DECEMBER 31, 1997
-----------------
<S> <C>
REVENUE..................................................... $ --
COST OF REVENUE.............................................
-----------
Gross profit..............................................
OPERATING EXPENSES:
Selling, general and administrative....................... 285,919
Stock compensation expense................................ 4,604,526
Depreciation and amortization............................. 2,314
-----------
Total operating expenses.......................... 4,892,759
-----------
LOSS FROM OPERATIONS........................................ (4,892,759)
INTEREST EXPENSE............................................ --
-----------
NET LOSS.................................................... $(4,892,759)
===========
</TABLE>
See notes to consolidated financial statements.
F-75
<PAGE> 129
BIT INVESTORS, LLC
CONSOLIDATED STATEMENT OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
CONTRIBUTED ACCUMULATED MEMBER'S
AMOUNT CAPITAL DEFICIT DEFICIT
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Original capital contributed............... $100 $ 9,900 $ -- $ 10,000
Stock compensation expense................. 4,604,526 4,604,526
Net loss................................... (4,892,759) (4,892,759)
---- ---------- ----------- -----------
Balance, December 31, 1997................. $100 $4,614,426 $(4,892,759) $ (278,233)
==== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-76
<PAGE> 130
BIT INVESTORS, LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 24, 1997 TO
DECEMBER 31, 1997
-----------------
<S> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(4,892,759)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 2,314
Compensation expense on issuance of common stock....... 4,604,526
Cash provided by (used in) operating working capital:
Prepaid expenses and other current assets............ (881)
Accounts payable and accrued liabilities............. 1,112,756
-----------
Net cash provided by operating activities......... 825,956
-----------
INVESTING ACTIVITIES -- Capital expenditures................ (138,830)
-----------
FINANCING ACTIVITIES:
Deferred offering costs................................... (1,950,000)
Short-term borrowings..................................... 1,805,000
Capital contributions..................................... 10,000
-----------
Net cash used in financing activities............. (135,000)
-----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 552,126
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... --
-----------
End of period............................................. $ 552,126
===========
SUPPLEMENTAL INFORMATION:
Interest paid............................................. $ --
===========
Income taxes paid......................................... $ --
===========
</TABLE>
See notes to consolidated financial statements.
F-77
<PAGE> 131
BIT INVESTORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
BIT Investors, LLC, a Texas limited liability company ("BITI" or the
"Company") was founded in July 1997 to create a single-source provider of a wide
range of IT services to Fortune 1000 organizations. The shareholders of the
Company have entered into a share exchange agreement with BrightStar Information
Technology Group, Inc., a Delaware corporation ("BrightStar"), to exchange (the
"Share Exchange") all outstanding common stock of BIT Group Services, Inc., a
Texas corporation and a wholly owned subsidiary of BITI ("BITG"), for BrightStar
common stock ("Common Stock"). BrightStar has entered into agreements to acquire
(the "Acquisitions") all of the common stock or substantially all the net assets
of seven established IT service providers (the "Founding Companies")
concurrently with the Share Exchange and the completion of an initial public
offering (the "Offering") of Common Stock. BrightStar was formed in October 1997
as a wholly owned subsidiary of BITG.
The Company has not conducted any operations, other than payment of salary
to certain officers, and all activities to date have related to the Offering and
the Acquisitions. The Company's cash balances were provided from advances from
its stockholders and loans from BITI. There is no assurance that the pending
Share Exchange, Acquisitions or Offering will be completed or that the Company
or BrightStar will be able to generate future operating revenue.
The accompanying consolidated financial statements include the accounts of
BITI, BITG and BrightStar. All significant intercompany accounts and
transactions have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates -- The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents -- The Company's cash equivalents consist of liquid
financial instruments with original maturities of three months or less.
Property and Equipment -- The Company's various items of property and
equipment are stated at cost less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets of primarily five years.
Deferred Offering Costs -- The Company's deferred offering costs primarily
consist of costs incurred for the Offering. These costs, which include legal,
accounting and financial advisory fees, have been deferred and relate to the
Offering.
Financial Instruments -- The Company's financial instruments consist of
cash and cash equivalents, short-term debt, and notes payable, the carrying
values of which are reasonable estimates of their fair values due to their
short-term maturities or current interest rates.
Federal Income Taxes -- Deferred tax assets of approximately $328,000 as of
December 31, 1997 consist primarily of net operating loss carryforwards and are
offset by a valuation allowance. SFAS No. 109 requires that a valuation
allowance be recorded against tax assets which are not likely to be realized.
Due to the uncertain nature of their ultimate realization, the Company has
established a full valuation allowance against carryforward benefits and is
recognizing the benefits only as reassessment demonstrates they are realizable.
Realization is entirely dependent upon future earnings. While the need for this
valuation allowance is subject to periodic review, if the allowance is reduced,
the tax benefits of the carryforwards will be recorded in future operations as a
reduction of the Company's income tax expense.
F-78
<PAGE> 132
BIT INVESTORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Computer equipment.......................................... $ 56,604
Furniture, fixtures and equipment........................... 82,226
--------
Total............................................. 138,830
Less accumulated depreciation and amortization.............. 2,314
--------
Property and equipment -- net..................... $136,516
========
</TABLE>
4. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
$125,000 revolving loan agreement with one of the Founding $ 15,000
Companies which accrues interest at prime rate plus 1%
(9.5% at December 31, 1997), has no scheduled repayment
terms and matures at the earlier of October 31, 1998 or 30
days following the successful completion of the Offering.
Advances from Class A unitholders to be repaid following the 1,790,000
successful completion of the Offering.
----------
Total $1,805,000
==========
</TABLE>
5. STOCKHOLDER'S EQUITY
Common Stock Purchase Warrant
In August 1997, BITG entered into an advisory agreement with an investment
banking firm, and issued a warrant (the "MG Warrant") to that firm for $100. The
MG warrant provides for the purchase of 50,000 shares of Common Stock at an
exercise price of the lesser of $6 per share or 60 percent of the initial price
to the public in the Offering and is exercisable at any time prior to August 14,
2004.
Common Stock Option
In September 1997, BrightStar engaged Brewer-Gruenert Capital Advisors, LLC
("BGCA"), to provide consulting services regarding corporate development matters
for a period of one year . In connection with the BGCA Agreement, BrightStar
issued the BGCA Option giving BGCA the option to purchase the number of shares
of Common Stock equal to $100,000 divided by the difference between the per
share initial public offering price of the Common Stock and $6 (16,666 shares
assuming an initial offering price of $12.00 per share).
Share Exchange Agreement
In connection with the formation of BrightStar, BITG issued 100,000 shares
of its common stock to BITI in consideration for a cash payment in the amount of
$10,000. Effective December 15, 1997, BITI executed a share exchange agreement
with BrightStar to effect the Share Exchange concurrently with the closing of
the Offering. The governing regulations of BITI provide that BITI is to be
dissolved and liquidated effective upon the closing of the Offering. Upon
dissolution and liquidation of BITI following the closing of the Share Exchange
and the Offering, (i) the holders of the Series A-1 Class A units will receive
in cash their original
F-79
<PAGE> 133
BIT INVESTORS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price of $490,000 ("Purchase Price") for the units, plus shares of
Common Stock having an aggregate value equal to the holder's Purchase Price,
based on the initial public offering price of the Common Stock (the "IPO
Price"), (ii) the holders of the Series A-2 Class A units will receive in cash
their Purchase Price of $1,300,000 for the units, plus shares of Common Stock
having an aggregate value equal to four times the holder's Purchase Price (based
on the IPO Price), and (iii) the holders of the Class B units are entitled to
receive the remaining shares of Common Stock received by BITI in the Share
Exchange and the remaining cash, if any.
In connection with the formation of BrightStar, BITG issued an aggregate of
41,958 shares of its common stock to its officers and directors (each of whom is
also an officer or director of the Company) at a purchase price of $0.10 per
share. Under the terms of the Share Exchange Agreement, BrightStar will exchange
shares of its newly issued Common Stock for all of the outstanding capital stock
of BITG (on a 8.2655-for-one basis) concurrently with the closing of the
Offering. BITI will receive 553,710 shares of Common Stock in connection with
the Share Exchange (of which an aggregate of 79,545 shares will then be
distributed to the holders of Class B units of BITI (as described above)) and an
aggregate of 474,165 shares will then be distributed to the holders of the
Series A-1 and Series A-2 Class A units of BITI (as described above). In
addition, an aggregate of 346,800 shares of Common Stock will be issued to
members of BrightStar's management in exchange for their shares of BITG common
stock.
6. STOCK COMPENSATION
In July 1997, BITG issued 41,958 shares of common stock (which will be
exchanged for 346,800 shares of Common Stock in connection with the Offering) to
certain members of management. In connection with these stock issuances,
compensation expense totaling $3,745,440 was recognized based upon the Company's
revised estimate of the fair value of the shares issued during the period ended
December 31, 1997.
In connection with formation of BITI, BITG and the Share Exchange, the
holders of BITI Class B units, who are also the founders of BITI, are entitled
and will receive 79,545 shares of Common Stock in the Offering. Accordingly,
compensation expense totaling $859,086 was recognized based upon the Company's
revised estimate of the fair value of the shares issued during the period ended
December 31, 1997.
* * * * * *
F-80
<PAGE> 134
Inside back cover
[DESCRIPTION OF GRAPHIC]
Map of the World with inset map of North America with points representing
office locations.
BrightStar logo in the top right corner with "ERP*PLUS(SM) Services" under
the North American map. A list of U.S. and international cities appears at the
bottom of the page.
<PAGE> 135
=============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT, AS OF ANY DATE SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................... 3
Risk Factors............................................ 7
The Company............................................. 14
Use of Proceeds......................................... 18
Dividend Policy......................................... 18
Capitalization.......................................... 19
Dilution................................................ 20
Selected Financial Data................................. 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 22
Business................................................ 29
Management.............................................. 36
Security Ownership of Certain Beneficial Owners and
Management............................................ 42
Certain Transactions.................................... 43
Description of Capital Stock............................ 46
Shares Eligible for Future Sale......................... 49
Underwriting............................................ 51
Legal Matters........................................... 53
Experts................................................. 53
Additional Information.................................. 53
Index to Financial Statements........................... F-1
</TABLE>
------------------
UNTIL MAY 11, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=============================================================================
=============================================================================
4,250,000 SHARES
BRIGHTSTAR LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
CIBC OPPENHEIMER
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
APRIL 16, 1998
=============================================================================
