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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-6920
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0553110
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
4900 HOPYARD ROAD, SUITE 200
PLEASANTON, CALIFORNIA 94588
(925) 251-0000
(Address, including zip code, area code with phone number
of the registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant at March 27, 2000, based on the $8.84 per share
closing price for the registrant's common stock on the NASDAQ National Market
was approximately $76,395,581. For purposes of this computation, all officers,
directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
registrant.
The number of shares of the registrant's common stock outstanding as of
March 27, 2000 was 8,642,034.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual
Meeting of Stockholders to be held in June 2000, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
Report.
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PART I
ITEM 1: BUSINESS
THE COMPANY
BrightStar Information Technology Group, Inc. ("BrightStar" or the
"Company") is a leading e-business solutions and application service provider
(ASP) to Global 2000 companies and public sector organizations. BrightStar's
rapidly deployed solutions for e-commerce, supply chain management (SCM),
customer relationship management (CRM), enterprise resource planning (ERP),
corporate portal and application outsourcing help companies transform themselves
into successful e-businesses and achieve a competitive advantage by delivering
superior service to their customers while improving operational efficiencies.
BrightStar has approximately 650 employees in offices throughout North America
and Australia.
BrightStar's e-commerce practice leverages our extensive experience in
implementing enterprise applications to help companies develop, rapidly deploy,
and support business-to-business and business-to-consumer commerce sites, as
well as traditional Internet information publishing sites, that are tightly
integrated with existing information systems. Our partnerships with BroadVision,
Microsoft and other technology companies, combined with our expertise in
enterprise application integration, web site design and Internet information
security issues enable the Company to put in place comprehensive e-commerce
solutions tailored to the specific needs of our clients.
BrightStar's Customer Relationship Management (CRM) practice assists
companies in attaining competitive advantage by improving their visibility into
all the varied contacts made with their customers. To accomplish this, we
implement from Siebel Systems, applications enabling organizations to optimize
their resources and offer superior service to their customers through the
integrated management of traditional, as well as web-based, channels for sales,
marketing, and customer service.
For Enterprise Resource Planning (ERP), BrightStar implements SAP,
PeopleSoft and J.D. Edwards applications, covering a complete range of business
processes, from manufacturing and finance to human resources, procurement and
supply chain planning. BrightStar ERP solutions are tailored to fit the specific
needs of individual organizations, helping them to automate business processes
across the enterprise through the creation of a single data environment that
spans departments and job functions.
BrightStar's Supply Chain Management (SCM) practice utilizes applications
from i2 Technologies, Netscape and other software vendors to automate and
optimize the numerous interactions, such as forecasting, procurement,
manufacturing, distribution and delivery that take place between an enterprise
and the members of its trading communities. This not only increases
opportunities for conducting business through a myriad of affinity relationships
but also extends the cost savings and operational efficiencies of
business-to-business commerce to all members of a company's supply chain.
To help companies provide universal access to their information resources,
BrightStar's Corporate Portal practice implements Plumtree Software's
market-leading packaged application and provides the necessary enterprise
application integration required to provide employees with personalized, secure,
web-based access to the knowledge and information systems necessary to make
faster, more informed decisions.
In addition to providing the expertise and experience required to implement
e-business solutions, BrightStar offers a comprehensive suite of application
outsourcing services, from remote production support to hosting and application
management, all the way to leasing applications on a per user or per transaction
basis over a contracted period of time. Outsourcing lets companies focus on
their core business objectives and gives them a viable alternative to building
the infrastructure and trying to hire and retain all of the skilled
professionals required to implement and maintain the sophisticated applications
that they've come to rely on to run their operations. Finally, through our
partnership with Exodus Communications, BrightStar is able to offer our clients
access to the highest levels of security, back-up capabilities, 24 x 7 support
and virtually limitless bandwidth -- all of which translates into maximum uptime
and reliability for our clients.
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To provide its services, the Company recruits and employs project managers,
skilled senior-level consultants, engineers and other technical personnel with
both business as well as technical expertise. The Company believes this
combination of business and technical expertise, the breadth and depth of its
solution offerings and its ability to deliver these solutions in both the
traditional consulting and implementation model as well as the emerging ASP
model are sources of differentiation for the Company in the Internet Services
Market and critical factors in its success.
INFORMATION ABOUT OPERATING SEGMENT
BrightStar operates in a single business segment: Internet Services. An
independent research organization (IDC Corp.) estimates that the global market
for Internet services to grow from $7.8 billion in 1998 to $78 billion in 2003
and spending for ASP services will reach $7.7 billion in 2004.
Among the leading factors driving the growth in the Internet Services
market is the transition to packaged software solutions, the emergence of new
technologies and the increased bandwidth and usability of the Internet through
the Web. These new technologies enable the creation and utilization of more
functional and flexible applications that can increase productivity, reduce
costs and improve customer service.
Managing the transition to a new generation of e-business applications is
placing a severe burden on many corporate IT departments. Many organizations do
not have the expertise to implement the new technologies and they are reluctant
or unable to expand their IT departments and re-deploy their in-house personnel.
Consequently, many organizations are outsourcing the design, implementation and
hosting of their new applications to acquire the necessary expertise and
accelerate deployment.
CUSTOMERS AND MARKETS
BrightStar's marketing efforts focus on mid to large companies, as well as,
emerging companies in the Internet marketplace, who have a need for rapid
deployment of e-business applications as well as a wide range of other
technology consulting services. The Company serves customers in a broad range of
industries, including communications, consumer products, energy, financial
services, healthcare, industrial, insurance, media, professional services,
retail and technology. Many of these relationships have existed over several
years and involved numerous projects.
SALES AND MARKETING
BrightStar sells and delivers its services through a direct sales force in
the U.S. and Australia. As of December 31, 1999, the Company sales force
consisted of 59 employees worldwide of which 42 were employed in the U.S. and 17
were employed in Australia.
The Company maintains a network of U.S. sales offices located in the cities
of Atlanta, Georgia; Austin, Texas; Boston, Massachusetts; Chicago, Illinois;
Dallas, Texas; Denver, Colorado; Foster City, California; Houston, Texas;
Irvine, California; Lafayette, Louisiana; Overland Park, Kansas; Little Rock,
Arkansas; New Orleans, Louisiana; Scottsdale, Arizona; and New York, New York.
The Company has significant foreign operations in Australia through its six
branch offices in Adelaide, Canberra, Melbourne, Perth, Sydney, and Victoria.
Revenues from foreign operations accounted for $34.2 million, representing
approximately 33% of the consolidated total of $103.4 million for the year ended
December 31, 1999.
CONSULTING
As of December 31, 1999, BrightStar employed approximately 550 consultants,
supported by a staff of approximately 100 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 and internet consulting
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and industry experience, and maintains a staff of 7 full-time recruiters to aid
in this effort. 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
Market share in the IT industry was initially concentrated among large
computer manufacturers but the industry has become increasingly competitive and
fragmented. IT services are provided by numerous firms including multinational
accounting firms, systems consulting and implementation firms, software
application vendors, general management consulting firms and data processing
outsourcing companies.
OTHER INFORMATION
BrightStar began operations as a global provider of strategic information
technology business solutions through seven subsidiary companies. The Company's
management has reorganized the Company by integrating the operations of its
subsidiaries into a single operating entity. This new structure has been in
place since January 1, 1999. This is the latest step in the Company's evolution
to streamline operations, increase leverage of sales staff, and improve focus on
targeted market opportunities. The new organization provides for a consolidated
finance group, a consolidated sales organization, and the six operating
divisions discussed previously.
EXECUTIVE OFFICERS OF BRIGHTSTAR
The following table and notes thereto identify and set forth information
about the Company's three executive officers:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CAPACITIES IN WHICH SERVED
- ------------------ --------------------------
<S> <C>
George M. Siegel(1)............................. Chairman of the Board of Directors
Michael A. Ober(2).............................. President and Chief Executive Officer
Donald W. Rowley(3)............................. Chief Financial Officer and Secretary
</TABLE>
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1) Mr. Siegel, age 61, 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 Compensation Committee of its board of directors.
2) Mr. Ober, age 43, has served as the Company's President since September 1998
and was named Chief Executive Officer in February 1999. In 1995, Mr. Ober
founded SCS America, a Founding Company, and served as President and Chief
Executive Officer through September, 1998. Mr. Ober has worked in the
software and computing industries for over 20 years. Prior to founding SCS
America, Mr. Ober was a Director of Marketing for Novell, Inc.
3) Mr. Rowley, age 48, joined the Company in February 1999, when he was elected
its Chief Financial Officer and Secretary. Prior to that appointment, Mr.
Rowley was interim Chief Financial Officer and a director of PetroChemNet,
Inc., an Internet based electronic distributor and communications network
serving the petrochemical and petroleum segments of the energy industry,
from 1998 to 1999. From 1995 to 1998, he was an independent management
consultant and worked with several companies, which included serving as
interim Chief Financial Officer of Norand Corporation, a public company
engaged in the design and development of mobile computing systems and
wireless data networks. From 1994 to 1995, Mr. Rowley was President and a
director of VTX Electronics Corporation, a public company engaged in the
distribution of electronic components and cable, and manufacturer of
electronic cable assemblies.
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ITEM 2: PROPERTIES
BrightStar's principal executive offices are located at 4900 Hopyard Road,
Suite 200, Pleasanton, California 94588. The Company's lease on these premises
covers approximately 5,600 square feet and expires December 31, 2003.
The Company also operates through leased facilities in:
U.S. Leased Facilities
- Atlanta, GA
- Dallas, TX
- New Orleans, LA
- Austin, TX
- Denver, CO
- Irvine, CA
- Foster City, CA
- Lafayette, LA
- Boston, MA
- Scottsdale, AZ
- Chicago, IL
- Houston, TX
- Little Rock, AR
- New York, NY
- Overland Park, KS
International Leased Facilities
- Adelaide, Australia
- Canberra, Australia
- Melbourne, Australia
- Perth, Australia
- Sydney, Australia
- Victoria, Australia
Substantially all of the Company's services are performed on-site at
customer locations. BrightStar anticipates that additional space will be
required as its business expands, and believes that it will be able to obtain
suitable space as needed.
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that the Company
believes could have a material adverse effect on the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER OF
1999
None.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "BTSR". The following table sets forth for the quarterly periods
indicated the range of high and low sales prices for the Company's Common Stock
since its initial public offering ("IPO") effective as of April 17, 1998.
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter...................................... $11.00 $3.688
Second Quarter..................................... $20.75 $10.00 $5.844 $3.125
Third Quarter...................................... $14.25 $ 5.50 $ 5.00 $2.875
Fourth Quarter..................................... $10.50 $ 5.00 $10.50 $ 3.00
</TABLE>
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The Company has never declared nor paid cash dividends on its Common Stock.
The Company's credit facility contains restrictions on the Company's ability to
pay cash dividends. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
As of March 26, 2000, there were 129 shareholders of record of the
Company's Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES.
On March 10, 2000, pursuant to an agreement with Strong River Investments,
Inc. and Montrose Investments Ltd. (collectively, the "Purchasers"), the Company
sold to the Purchasers 709,555 shares of the Company's common stock (the
"Shares") for $7.5 million, or $10.57 per share (the "Transaction"). Net
proceeds to the Company amounted to $7.2 million after related issuance costs.
Proceeds were applied to the Company's borrowings under its Credit Facility. In
connection the purchase of the Shares, the Company issued two warrants to the
Purchasers. One warrant has a five-year term during which the Purchasers may
purchase up to 157,500 shares of the Company's common stock at a price of $12.00
per share. The second warrant covers an adjustable amount of shares of the
Company's common stock at an adjustable exercise price, based on the market
price of the Company's common stock during three (3) separate periods of thirty-
one (31) trading days commencing 270 calendar days after the date of the
Transaction. The Company also issued to Wharton Capital Partners Ltd.
("Wharton"), as compensation for Wharton's services in completing the
Transaction, a warrant which has a five-year term during which Wharton may
purchase up to 45,000 shares of the Company's common stock at a price of $12.00
per share. The Company anticipates registering the Shares sold to Purchaser in
April 2000. The Company and the Purchaser further agreed that the Company will
sell and the Purchaser will purchase up to an additional $7.5 million worth of
the Company's common stock six months following the Transaction subject to
certain conditions.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for BrightStar is
derived from the Company's Financial Statements and related notes thereto. The
following selected consolidated financial data should be read in connection with
and is qualified in its entirety by BrightStar's Financial Statements and
related notes thereto and other financial information included elsewhere in this
Form 10-K report.
BrightStar was organized in July 1997 and completed its initial public
offering (IPO) April 16, 1998. Concurrent with the IPO, Brightstar acquired (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 (c) executed a share exchange
with BIT Investors, LLC ("BITI") and senior management of BrightStar for all
outstanding common stock of BIT Group Services, Inc. ("BITG"). BrightStar and
the Founding Companies are hereinafter collectively referred to as the
"Company." The acquisitions were accounted for using the purchase method of
accounting, with Blackmarr being reflected as the "accounting acquirer."
The following tables present selected historical data for Blackmarr, the
accounting acquirer, for the years 1994 through 1997. The 1998 data presented in
the following table for the Company is comprised of (i) the results of operation
of Blackmarr for the year ending December 31, 1998, (ii) the results of
operations of the Founding Companies for the periods subsequent to their
acquisitions and (iii) the results of the operations of companies acquired by
BrightStar after the initial public offering.
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The Blackmarr results have been derived from (i) the audited financial
statements of Blackmarr for the years ended and as of September 30, 1995, 1996
and 1997 and the year ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
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HISTORICAL OPERATIONS DATA: 1995 1996 1997 1998 1999
- --------------------------- ------ ------ ------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $7,043 $9,227 $12,190 $ 63,584 $ 103,449
Cost of revenue.......................... 5,592 7,659 10,063 45,409 76,476
Selling, general and administrative
expenses............................... 1,413 1,555 1,668 15,445 26,797
Stock compensation expense............... -- -- 305 6,766 468
In process research & development........ -- -- -- 3,000 --
Restructure charge....................... -- -- -- 7,614 --
Depreciation and amortization............ 78 101 135 1,652 3,056
------ ------ ------- ---------- ----------
Income (loss) from operations....... (40) (88) 19 (16,302) (3,348)
Other income, net........................ 186 124 33 158 (15)
Interest expense......................... (66) (67) (96) (66) (518)
Income tax provision (benefit)........... 40 -- 6 612 (1,313)
Income (loss) on discontinued
operations............................. -- -- -- 278 (7,447)
------ ------ ------- ---------- ----------
Net income (loss).............. $ 40 $ (31) $ (50) $ (16,544) $ (10,015)
====== ====== ======= ========== ==========
Average common shares:
Basic and diluted...................... -- -- -- 6,275,031 8,642,034
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------------------- -----------------
HISTORICAL BALANCE SHEET DATA: 1994 1995 1996 1997 1998 1999
- ------------------------------ ------ ------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Working capital......................... $ 134 $ 284 $ 233 $ 337 $14,348 $10,409
Total assets............................ 1,923 1,609 1,926 3,501 92,401 85,008
Stockholders' equity.................... 342 396 423 682 70,074 60,451
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in connection with BrightStar's
Consolidated Financial Statements and related notes thereto and other financial
information included elsewhere in the Form 10-K report.
ACQUISITIONS
Concurrent with and as a condition to the closing of the Company's initial
public offering in April 1998, BrightStar acquired all of the outstanding
capital stock or substantially all the net assets 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"), Software Consulting Services America, LLC
("SCS America") and SCS Unit Trust ("SCS Australia") representing the "Founding
Companies". The acquisitions have been accounted for using the purchase method
of accounting with Blackmarr being treated as the accounting acquirer, in
accordance with Staff Accounting Bulletin No. 97 ("SAB 97").
On June 30, 1998, the Company completed the acquisition of Cogent
Technologies, LLC (Cogent), a provider of PeopleSoft and Platinum consulting and
implementation services.
On August 31, 1998, the Company completed the acquisition of Total Business
Quality Associates, Inc. (TBQ), a provider of SAP consulting and implementing
services.
Effective September 30, 1998, the Company completed the acquisition of
PROSAP Australia Pty. LTD (PROSAP), a SAP certified National Implementation
Partner located in Sydney, Australia.
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On May 28, 1999, the Company completed the acquisition of Integrated
Services Consulting LLP (ISC), a provider of SAP consulting services.
RESULTS OF OPERATIONS
The Company reported net losses of $1.16 and $2.64 per basic and diluted
share for the years ended December 31, 1999 and 1998. The results of operations
for 1999 and 1998 reflect the impact of the following items:
Goodwill Amortization
In July of 1996, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of accounting and
requires that one of the companies be designated as the accounting acquirer.
Accordingly, for financial statement purposes, Blackmarr has been designated as
the acquiring company because its current shareholders, in the aggregate,
acquired more common stock than the former shareholders of any of the other
Founding Companies in conjunction with the acquisitions. The excess of the
aggregate purchase price paid for the Founding Companies other than Blackmarr
over the fair value of the net assets to be acquired by BrightStar was recorded
as goodwill. In addition, goodwill of $4.6 million was recorded attributable to
the issuance of 437,681 shares of Common Stock to BITI unit holders. Together
the goodwill listed above, and the goodwill associated with the acquisition of
COGENT, TBQ and PROSAP, are being amortized over a 40-year period. Goodwill
associated with the purchase of ISC is being amortized over a 20-year period.
Discontinued Operations
During the fourth quarter of 1999, the Company recorded losses related to
the discontinuance of its Training, Controls, and Infrastructure Support
businesses. The loss on discontinued operations of $7.4 million includes; 1)
$5.8 million (including $0.7 million of taxes) recorded to writedown the
Company's net investment in its Controls business and to record $0.8 million of
estimated operating losses to be incurred after the decision to dispose of the
business; 2) $1.0 million (including $0.1 million of taxes) recorded upon the
sale of the Mindworks division of the Company's training business and; 3) $0.6
million (net of $0.3 million of tax benefits) of operating losses from
discontinued operations incurred during 1999. The Company recorded no gain or
loss on the discontinuance of its Texas training business or its infrastructure
support business. The Company has made necessary reclassifications to properly
reflect the discontinued operations in its 1999 and 1998 consolidated financial
statements.
Restructuring Charge
During the fourth quarter of 1998, the Company completed a review of each
of its businesses and the services it provides. At the completion of this review
the Company developed and the Board approved a reorganization plan (the "Plan")
with strategic actions to:
- Consolidate the sales, finance, and administrative functions at the
BrightStar level forming a consolidated sales force and consolidated
finance group; and
- Realign the operations of each of the individual wholly owned
subsidiaries into operating divisions consistent with the Company's lines
of businesses:
The Plan included relocating the Company's corporate offices from Houston,
Texas to Pleasanton, California, eliminating certain positions and personnel,
closing certain businesses and writing-off related assets, and terminating and
consolidating leased facilities. In the fourth quarter of 1998, the Company
recorded a $7.6 million charge for these restructuring actions.
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The Company completed the objectives of its plan of restructuring in 1999.
Remaining amounts recorded as accrued restructuring costs at December 31, 1999
relate to ongoing severance and lease obligations which have extended payment
terms.
The categories of the 1998 restructuring charge and the subsequent
utilization is summarized below:
<TABLE>
<CAPTION>
AMOUNTS AMOUNTS TO
CHARGED TO BE PAID
EARNINGS IN BEYOND
1998 1999
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Workforce severance......................................... $4,960 $1,209
Asset impairment............................................ 1,171 --
Lease and other contract obligations........................ 1,483 552
------ ------
$7,614 $1,761
====== ======
</TABLE>
Stock Compensation Expense
In connection with the offering and acquisition of the Founding Companies,
certain directors and members of management received 648,126 shares of common
stock. These shares, valued at $11.70, were recorded as deferred compensation
and were charged to stock compensation expense over a one-year period based upon
the terms of a stock repurchase agreement between the Company and related
shareholders. Total stock compensation expense recorded during 1999 and 1998 in
connection with the above was $468,000 and $6.8 million. At December 31, 1998,
certain members of management were terminated in connection with the
restructuring plan described above. As a result, the remaining deferred
compensation totaling $2.1 million, attributable to the shares held by these
terminated employees was charged to expense and is included in the 1998
restructuring charge.
Revenue
The Company provides services to its customers for fees that are based on
time and materials or fixed fee contracts. Accordingly, revenue is recognized as
consulting services are performed. Unbilled revenue is recorded for contract
services provided for which a billing has not been rendered. Deferred revenue
represents the excess of amounts billed over contract costs and expenses
incurred.
The timing of revenue is difficult to forecast because the Company's sales
cycle for certain of its services can be relatively long and is subject to a
number of uncertainties, including customers' budgetary constraints, the timing
of customers' budget cycles, customers' internal approval processes and general
economic conditions. In addition, as is customary in the industry, the Company's
engagements, generally, are terminable without a customer penalty. The Company's
revenue and results of operations may fluctuate significantly from quarter to
quarter or year to year because of a number of factors, including, but not
limited to, the rate of hiring and the productivity of revenue generating
personnel; the availability of qualified IT professionals; the significance of
customer engagements commenced and completed during a quarter; the number of
business days in the quarter; changes in the relative mix of the Company's
services; changes in the pricing of the Company's services; the timing and the
rate of entrance into new geographic or IT specialty markets; departures or
temporary absences of key revenue-generating personnel; the structure and timing
of acquisitions; changes in the demand for IT services; and general economic
factors.
Revenue increased $39.9 million or 63% for the year ended December 31, 1999
compared to 1998 as a result of (i) a full years operations of the Founding
Companies acquired on April 16, 1998 at the time of the initial public offering,
(ii) four additional companies acquired subsequent to the initial public
offering and (iii) new customer contracts for implementation of ERP systems and
development of e-commerce applications. The increase in revenues attributed to
factors described above was partially offset by a reduced revenue stream from
all existing businesses during the second half of 1999 attributable to executing
the Company's plan for reorganizing and the impact of reduced demand for
services offered by the Company due to the Year 2000. The Company expects to
continue to generate lower revenues through the first half of 2000.
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Revenue increased, for the twelve months ended December 31, 1998, compared
to the prior periods primarily as a result of (i) the acquisition of the
Founding Companies on April 16, 1998 at the time of the initial public offering,
(ii) the acquisition of three additional companies subsequent to the initial
public offering and (iii) new customer contracts for implementation of ERP
systems and development of custom applications.
Cost of Revenue
Cost of revenue primarily consists of salaries (including non-billable and
training time) and benefits for consultants. The Company generally strives to
maintain its gross profit margins by offsetting increases in salaries and
benefits with increases in billing rates.
Cost of revenue increased, for the twelve months ended December 31, 1999
and 1998 compared to the respective prior periods due to an increase in variable
costs associated with the increased revenue described above.
Cost of revenue for 1999 reflects costs associated with two fixed fee
contracts in Dallas, Texas which exceeded related revenues by $3.2 million in
1999 ($1.6 million in the fourth quarter of 1999) compared to gross margins
recorded on the same contracts in 1998. The Company does not believe that any
additional losses associated with the two contracts will be incurred in the year
2000.
Operating Expenses
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 expenses.
Selling, general and administrative expenses increased $11.4 million or 74%
in 1999 compared to 1998 as a result of personnel added to support the increased
volume of business described in the revenue discussion above.
Selling, general and administrative expenses increased, for the twelve
months ended December 31, 1998 compared to the prior periods due primarily to
additional support personnel added through the Company's acquisitions.
MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates.
The Company is exposed to market risk because of changes in foreign
currency exchange rates as measured against the U.S. dollar and currencies of
the Company's subsidiaries and operations in Australia.
Revenues from these operations are typically denominated in Australian
dollars thereby potentially affecting the Company's financial position, results
of operations, and cash flows due to fluctuations in exchange rates. The Company
does not anticipate that near-term changes in exchange rates will have a
material impact on future earnings, fair values or cash flows of the Company.
However there can be no assurance that a sudden and significant decline in the
value of the Australian Dollar would not have a material adverse effect on the
Company's financial condition and results of operations.
The Company's long-term debt bears interest at variable rates; therefore,
the Company's results of operations would only be affected by interest rate
changes to the long-term debt outstanding. An immediate 10 percent change in
interest rates would not have a material effect on the Company's results of
operations over the next fiscal year.
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Effective March 29, 1999, the Company established a $15 million credit
facility (the "Credit Facility") with Comerica Bank. Under terms of the
agreement, the Credit Facility will be used for working capital needs, including
issuance of letters of credit, and for general corporate purposes. Borrowings
under the Credit Facility bear an interest rate of prime plus .25%, or the
Eurodollar rate plus 2.5%. The Company pays a commitment fee on unused amounts
of the Credit Facility amounting to .375% per annum based on the average daily
amount by which the commitment amount exceeds the principal amount outstanding
during the preceding month. Interest is payable monthly on prime rate borrowings
and quarterly or at the end of the applicable interest period for the Eurodollar
rate borrowings.
The Credit Facility is secured by liens on substantially all the Company's
assets (including accounts receivable) and a pledge of all of the outstanding
capital stock of the Company's domestic operating subsidiaries. The Credit
Facility also requires that the Company comply with various loan covenants,
including (i) maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness and (iii) restrictions on liens, guarantees and payments
of dividends. As of, and during the quarters ended September 30, 1999 and
December 31, 1999, the Company was not in compliance with a certain financial
covenant. Comerica Bank has agreed to waive the default for both periods.
The Credit Facility contains 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. Borrowings outstanding under the Credit Facility amounted to $8.6
million at December 31, 1999. As of March 28, 2000 the Company has reduced its
borrowings under the Credit Facility to approximately $2 million. The Credit
Facility expires on March 30, 2001.
On March 10, 2000, pursuant to an agreement with Strong River Investments,
Inc. and Montrose Investments Ltd. (collectively the "Purchasers"), the Company
sold to the Purchasers 709,555 shares of the Company's common stock for $7.5
million or $10.57 per share. Net proceeds to the Company amounted to $7.2
million after related issuance costs. The Company expects to register the common
shares sold to the Purchasers in April 2000. The Company and the Purchasers
further agreed that the Company will sell and the Purchaser will purchase up to
an additional $7.5 million worth of the Company's common stock six months
following the initial transaction, subject to certain conditions.
The Company is required to make payments in 2000 amounting to $2.0 million
related to prior acquisitions. The Company has the option to issue common stock
to satisfy up to $1.0 million of the amounts due. In addition, the Company
expects to make contingent payments to the prior owners of Cogent and ISC
related to earn out agreements. The amount of the contingent payments is
expected to be in a range from $1.5-$2.8 million. The Company expects that a
significant portion of the amounts due will be satisfied upon the issuance of
common stock.
The Company's principal sources of ongoing liquidity are the cash flows of
its subsidiaries and the cash available from the Credit Facility.
The Company intends to continue 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 under
the Credit Facility.
The Company believes that cash flow from operations, proceeds from the
issuance of stock and borrowings under the Credit Facility will be sufficient to
fund its requirements for the foreseeable 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.
10
<PAGE> 12
UNCERTAINTIES
Nature of Projects
Many of the Company's projects are billed on a fixed fee basis. The
Company's failure to estimate accurately the resources and related expenses
required for a fixed fee project or failure to complete contractual obligations
in a manner consistent with the project plan upon which the fixed fee contract
is based could have a material adverse effect on the Company.
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation. In addition, the Company is exposed
to various risks and liabilities associated with placing its employees and
consultants in the workplaces of others, including possible claims of errors and
omissions, misuse of client proprietary information, misappropriation of funds,
discrimination and harassment, theft of client property, other criminal activity
or torts and other claims. Although BrightStar has not experienced any material
claims of these types, there can be no assurance that the Company will not
experience such claims in the future. If claims are successfully brought against
the Company as a result of the Company's performance on a project, or if the
Company's reputation is damaged, there could be a material adverse effect on the
Company. Additionally, the Company could continue to experience adverse effects
resulting from the integration of acquired companies.
Reorganization
The Company has undergone significant managerial and operational change in
connection with its corporate reorganization. Although the Company believes the
reorganization will provide long-term benefits, there can be no assurance that
these efforts will be successful. In addition, although the Company believes it
has recognized substantially all of the costs of the reorganization, additional
costs may be incurred as the reorganization proceeds.
Reorganization's Effect on Sales
The Company began to execute its Plan for reorganizing BrightStar on
January 1, 1999. As part of the Plan, the individual sales groups from the
BrightStar subsidiaries were combined into a consolidated BrightStar sales
group. Prior to January 1, 1999 most of these salespeople sold only a subset of
BrightStar's service offerings and in many cases only a single service. The
Company has undertaken a training program to train these salespeople to sell all
of the BrightStar service offerings. However, there can be no assurance that
these salespeople have the expertise and ability to successfully sell the entire
portfolio of BrightStar services. Any disruption to the BrightStar sales group
caused by the reorganization could disrupt the Company's ability to generate
revenues and could have a material adverse effect on the Company.
Decrease in the Market for Services Due to the Year 2000
The purchasing patterns of clients were affected by Year 2000 issues as
companies expended significant resources to correct their current systems for
Year 2000 compliance. These expenditures resulted in reduced funds available to
purchase services offered by the Company, which had an adverse effect on the
Company in the second half of 1999 and is expected to continue through the first
half of 2000.
FORWARD-LOOKING INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical facts,
included in this MD&A regarding the Company's financial position, business
strategy and plans, and objectives of management of the Company for future
operations are forward-looking statements. These
11
<PAGE> 13
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside of the Company's control, that could cause actual results to
materially differ from such statements. While the Company believes that the
assumptions concerning future events are reasonable, it cautions that there are
inherent difficulties in predicting certain important factors, especially the
timing and magnitude of technological advances; the performance of recently
acquired businesses; the prospects for future acquisitions; the possibility that
a current customer could be acquired or otherwise be affected by a future event
that would diminish their information technology requirements; the competition
in the information technology industry and the impact of such competition on
pricing, revenues and margins; the degree to which business entities continue to
outsource information technology and business processes; uncertainties
surrounding budget reductions or changes in funding priorities or existing
government programs and the cost of attracting and retaining highly skilled
personnel.
UNAUDITED QUARTERLY DATA
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH(A) THIRD SECOND(B) FIRST
-------- ------- ------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............................ $ 21,608 $26,830 $29,511 $25,500 $ 24,524 $20,965 $ 14,009 $4,086
Gross profit....................... 5,736 6,758 8,715 $ 5,764 4,828 6,547 5,386 $1,414
Income (loss) from continuing
operations....................... (2,653) 488 429 (832) (12,212) (1,315) (3,417) 122
Income (loss) from discontinued
operations....................... (7,473) (123) (93) 242 (91) 196 16 157
Net income (loss).................. (10,126) 365 336 (590) (12,303) (1,119) (3,401) 279
Per share basis: basic and diluted
Continuing operations.............. $ (0.31) $ 0.05 $ 0.05 $ (0.10) $ (1.95) $ (0.15) $ (0.47) $ 0.12
Discontinued operations............ (0.86) (0.01) (0.01) 0.03 (0.01) 0.02 -- 0.16
-------- ------- ------- ------- -------- ------- --------- ------
$ (1.17) $ 0.04 $ 0.04 $ (0.07) $ (1.96) $ (0.13) $ (0.47) $ 0.28
======== ======= ======= ======= ======== ======= ========= ======
</TABLE>
- ---------------
(a) Included in the fourth quarter 1998 is a restructuring charge of $7,614.
(b) Included in the second quarter 1998 is the initial public offering
concurrent with the acquisitions of the Founding Companies.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company is exposed to market risk
because of changes in foreign currency exchange rates as measured against the
U.S. dollar and currencies of the Company's subsidiaries and operations in
Australia.
Foreign Currency Exchange Rate Risk. The Company has a wholly owned
subsidiary in Australia. Revenues from these operations are denominated in
Australian Dollars respectively, thereby potentially affecting the Company's
financial position, results of operations and cash flows due to fluctuations in
exchange rates. The Company does not anticipate that near-term changes in
exchange rates will have a material impact on future earnings, fair values or
cash flows of the Company. There can be no assurance that a sudden and
significant decline in the value of the Australian Dollar will not have a
material adverse effect on the Company's financial condition and results of
operations.
The Company's long-term debt bears interest at variable rates; therefore,
the Company's results of operations would only be affected by interest rate
changes to the long-term debt outstanding. An immediate 10 percent change in
interest rates would not have a material effect on the Company's results of
operations over the next fiscal year.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements are included as an exhibit as
described in Item 14.
12
<PAGE> 14
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference in the proxy statement for the 2000 Annual
Meeting of Stockholders.
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 2000 Annual Meeting of Stockholders ("the Proxy
Statement").
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a) Information concerning directors of the Company appears in the Company's
Proxy Statement, under Item 1 -- "Election of Directors." This portion of the
Proxy Statement is incorporated herein by reference.
b) For information with respect to Executive Officers, see Part I of this
Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference in the proxy statement for the 2000 Annual
Meeting of Stockholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference in the proxy statement for the 2000 Annual
Meeting of Stockholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in the proxy statement for the 2000 Annual
Meeting of Stockholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1.A Consolidated Financial Statements
The following financial statements and notes thereto, and related
Independent Auditors Report, are filed as part of this Form 10-K as follows:
Independent Auditors' Reports
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Operations for the Year Ended September 30,
1997, the Three Months Ended December 31, 1997 and the years ended December
31, 1998 and 1999.
Consolidated Statement of Stockholders' Equity for the Year Ended
September 30, 1997, the Three Months Ended December 31, 1997 and the Years
Ended December 31, 1998 and 1999.
Consolidated Statements of Cash Flows for the Year Ended September 30,
1997, the Three Months Ended December 31, 1997 and the Years Ended December
31, 1998 and 1999.
Notes to Consolidated Financial Statements.
13
<PAGE> 15
2. Financial Statement Schedule
The following financial statement schedule of the Company and the related
Independent Auditors Report are filed as part of this Form 10-K.
[X] Schedule II -- Valuation And Qualifying Accounts
All other financial statement schedules have been omitted because such
schedules are not required or the information required has been presented in the
aforementioned financial statements.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on November 16, 1999,
which disclosed the resignation of Deloitte & Touche LLP, its independent
accountants, on November 8, 1999.
The Company filed a current report on Form 8-K on November 30, 1999
which provided information with respect to the resignation of Deloitte &
Touche LLP, by report on Form 8-K filed on November 16, 1999.
The Company filed a current report on Form 8-K on January 14, 2000
which disclosed that the Company engaged Grant Thornton LLP as its
independent accountants, effective January 10, 2000.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BRIGHTSTAR INFORMATION
TECHNOLOGY GROUP, INC.
By /s/ MICHAEL A. OBER
-----------------------------------
Michael A. Ober
President and Chief Executive
Officer
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL A. OBER Chief Executive Officer March 30, 2000
- -----------------------------------------------------
Michael A. Ober
/s/ DONALD W. ROWLEY Chief Financial Officer and March 30, 2000
- ----------------------------------------------------- Secretary (Principal
Donald W. Rowley Financial Officer)
/s/ DAVID L. CHRISTESON Controller and Assistant March 30, 2000
- ----------------------------------------------------- Secretary (Principal
David L. Christeson Accounting Officer)
Directors:
George M. Siegel* Chairman of the Board and Director
Jennifer T. Barrett* Director
Brian R. Blackmarr* Director
Michael A. Ober* Director
Donald W. Rowley* Director
*By: /s/ MICHAEL A. OBER
-----------------------------------------------
Michael A. Ober,
Attorney-in-Fact **
</TABLE>
** By authority of the power of attorney filed herewith.
March 30, 2000
15
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.
We have audited the accompanying consolidated balance sheet of BrightStar
Information Technology Group, Inc. (the "Company"), a Delaware corporation, as
of December 31, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of the
Company, as of and for the year ended December 31, 1998, were audited by other
auditors whose report dated March 30, 1999, expressed an unqualified opinion on
those statements. As discussed in Note 3, the Company has restated its 1998
consolidated financial statements to reflect its discontinued operations. The
other auditors reported on the 1998 financial statements before the restatement.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BrightStar
Information Technology Group, Inc. as of December 31, 1999, and the consolidated
results of its operations and its consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
We also audited the adjustments described in Note 3 to the consolidated
financial statements that were applied to restate the 1998 consolidated
financial statements. In our opinion, such adjustments are appropriate and have
been properly applied.
/s/ GRANT THORNTON LLP
San Jose, California
March 28, 2000
16
<PAGE> 18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors BrightStar Information Technology Group, Inc.,
Pleasanton, California
We have audited the accompanying consolidated balance sheet as of December
31, 1998 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows of BrightStar Information Technology Group,
Inc. ("the Company") for the year ended September 30, 1997, the three months
ended December 31, 1997 and the year ended December 31, 1998 (of which the 1998
financial statements have been restated and are no longer presented herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 or 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 consolidated balance sheet as of December 31, 1998 and the results
of its operations and its cash flows for the year ended September 30, 1997, the
three months ended December 31, 1997 and the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 30, 1999
17
<PAGE> 19
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 973 $ 3,122
Trade accounts receivables, net of allowance for doubtful
accounts of $1,987 in 1999 and $1,296 in 1998.......... 16,127 17,140
Unbilled revenue.......................................... 1,591 2,238
Deferred tax asset........................................ 1,712 785
Income tax receivable..................................... 810 --
Prepaid expenses and other................................ 1,166 1,070
Net assets of discontinued operations..................... 4,000 12,260
-------- --------
Total current assets.............................. 26,379 36,615
Property and equipment...................................... 6,736 3,513
Less-accumulated depreciation............................. (2,720) (1,207)
-------- --------
Property and equipment, net............................... 4,016 2,306
Goodwill.................................................... 56,848 53,940
Less-accumulated amortization............................. (2,284) (873)
-------- --------
Goodwill, net............................................. 54,564 53,067
Other....................................................... 49 413
-------- --------
Total............................................. $ 85,008 $ 92,401
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,063 $ 3,542
Acquisition payables...................................... 2,000 4,784
Restructuring reserve..................................... 1,761 4,383
Accrued salaries and other expenses....................... 8,105 5,936
Income taxes payable...................................... -- 1,791
Deferred revenue.......................................... 41 1,831
-------- --------
Total current liabilities......................... 15,970 22,267
Line of credit.............................................. 8,579 --
Other liabilities........................................... 8 60
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 35,000,000 shares
authorized; 8,642,034 and 7,989,059 shares issued and
outstanding in 1999 and 1998, respectively............. 9 8
Additional paid-in capital................................ 89,693 82,818
Common stock payable...................................... -- 6,875
Common stock warrant and option........................... 100 100
Deferred stock compensation............................... -- (468)
Accumulated other comprehensive income.................... 171 248
Retained earnings (deficit)............................... (29,522) (19,507)
-------- --------
Total stockholders' equity........................ 60,451 70,074
-------- --------
Total............................................. $ 85,008 $ 92,401
======== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 20
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR END
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue..................................... $ 103,449 $ 63,584 $ 6,623 $12,190
Cost of revenue............................. 76,476 45,409 5,810 10,063
--------- --------- --------- -------
Gross profit................................ 26,973 18,175 813 2,127
Operating expenses:
Selling, general and administrative....... 26,797 15,445 817 1,668
Stock compensation........................ 468 6,766 -- 305
In process research & development......... -- 3,000 -- --
Restructuring charge...................... -- 7,614 -- --
Goodwill amortization..................... 1,423 883 -- --
Depreciation and amortization............. 1,633 769 31 135
--------- --------- --------- -------
Total operating expenses.......... 30,321 34,477 848 2,108
Income (loss) from operations............. (3,348) (16,302) (35) 19
Other income (expense).................... (15) 158 7 33
Interest expense, net..................... (518) (66) (31) (96)
--------- --------- --------- -------
Loss from continuing operations before
income taxes........................... (3,881) (16,210) (59) (44)
Income tax provision (benefit).............. (1,313) 612 (22) 6
--------- --------- --------- -------
Loss from continuing operations............. (2,568) (16,822) (37) (50)
Discontinued operations:
Income (loss) from discontinued
operations, net of tax................. (648) 278 -- --
Loss on disposal of discontinued
operations, net of tax................. (6,799) -- -- --
--------- --------- --------- -------
Total discontinued operations............. (7,447) 278
--------- ---------
Net income (loss)................. $ (10,015) $ (16,544) $ (37) $ (50)
========= ========= ========= =======
Net income (loss) per share (basic and
diluted):
Income (loss) from continuing
operations............................. $ (0.30) $ (2.68) $ (0.04) $ (0.06)
Loss from discontinued operations......... (0.86) 0.04 -- --
--------- --------- --------- -------
Net loss.................................. $ (1.16) $ (2.64) $ (0.04) $ (0.06)
========= ========= ========= =======
Shares outstanding (basic and diluted):..... 8,642,034 6,275,031 1,012,306 893,475
========= ========= ========= =======
</TABLE>
See notes to consolidated financial statements
19
<PAGE> 21
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON
------------------ ADDITIONAL COMMON STOCK WARRANT
SHARES AMOUNT PAID-IN-CAPITAL STOCK PAYABLE AND OPTION
--------- ------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996........................ 10,000 $ 10 -- -- --
Issuance of common stock......................... 3,068 308
Net loss and comprehensive loss..................
--------- ----- ------- ------- -----
Balance, September 30, 1997........................ 13,068 318 -- -- --
Net loss and comprehensive loss..................
--------- ----- ------- ------- -----
Balance, December 31, 1997......................... 13,068 318 -- -- --
Issuance of common stock in public offering...... 4,887,500 5 $58,635 $ 450
Stock used for acquisition of Founding
Companies...................................... 1,408,120 1 15,934 $ 5,300
Common stock issued to management and
promoters...................................... 648,126 1 7,582
Stock split to conform Blackmarr................. 999,238 (317) 317
Exercise of stock warrants....................... 33,007 -- 350 (350)
Common stock granted to employees................ 1,575
Amortization of deferred compensation............
Write-off of deferred compensation of terminated
employees......................................
Net loss.........................................
Other comprehensive income (loss)................
--------- ----- ------- ------- -----
Balance, December 31, 1998......................... 7,989,059 8 $82,818 $ 6,875 100
Stock issued to owners of Founding Company....... 441,400 1 5,300 (5,300)
Common stock issued to directors and
management..................................... 11,575
Common stock issued to employees................. 200,000 1,575 (1,575)
Common stock issued to management and
promoters......................................
Amortization of deferred compensation............
Net loss.........................................
Other comprehensive income (loss)................
--------- ----- ------- ------- -----
Balance, December 31, 1999......................... 8,642,034 $ 9 $89,693 $ -- $ 100
========= ===== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED TOTAL
UNEARNED INCOME EARNINGS STOCKHOLDERS' COMPREHENSIVE
COMPENSATION (LOSS) (DEFICIT) EQUITY INCOME (LOSS)
------------ ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996..................... -- -- $ 413 $ 423
Issuance of common stock...................... 308
Net loss and comprehensive loss............... (50) (50) $ (50)
------- ---- -------- -------- ========
Balance, September 30, 1997..................... -- -- 363 681
Net loss and comprehensive loss............... (36) (36) $ (36)
------- ---- -------- -------- ========
Balance, December 31, 1997...................... -- -- 327 645
Issuance of common stock in public offering... 59,090
Stock used for acquisition of Founding
Companies................................... (3,290) 17,945
Common stock issued to management and
promoters................................... (7,583) --
Stock split to conform Blackmarr.............. --
Exercise of stock warrants....................
Common stock granted to employees............. 1,575
Amortization of deferred compensation......... 5,055 5,055
Write-off of deferred compensation of
terminated employees........................ 2,060 2,060
Net loss...................................... (16,544) (16,544) $(16,544)
Other comprehensive income.................... 248 248 248
------- ---- -------- -------- --------
Balance, December 31, 1998...................... (468) 248 (19,507) 70,074 $(16,296)
Stock issued to owners of Founding Company.... 1
Common stock issued to directors and
management.................................. --
Common stock issued to employees.............. --
Amortization of deferred compensation......... 468 468
Net loss...................................... (10,015) (10,015) $(10,015)
Other comprehensive income (loss)............. (77) (77) (77)
------- ---- -------- -------- --------
Balance, December 31, 1999...................... $ -- $171 $(29,522) $ 60,451 $(10,092)
======= ==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
20
<PAGE> 22
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
THREE MONTHS MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss...................................... $(10,015) $(16,544) $ (37) $ (50)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Restructuring charge........................ -- 6,443
Write down of certain intangible and other
assets.................................... -- 841
In process research and development
expense................................... -- 3,000
(Income) loss from discontinued
operations................................ 7,447 (278)
Depreciation and amortization............... 3,056 1,652 31 135
Effect of exchange rate on cash............. (77) 248
Additions to allowance for doubtful
accounts.................................. 691 857 15 (5)
Deferred income taxes....................... (1,944) (1,311) (22) 8
Compensation expense on issuance of common
stock..................................... 468 6,766 305
Changes in operating working capital:
Trade accounts receivable................. 322 (4,137) (1,451) (1,632)
Income tax refund receivable.............. (810) 38 -- --
Unbilled revenue.......................... 647 (672) (501) 133
Prepaid and other assets.................. 268 (167) 2 (24)
Accounts payable.......................... 521 (299) 2 (3)
Restructuring reserve..................... (2,622)
Accrued salaries other accrued expenses... 2,340 (3,061) 1,928 448
Income taxes payable...................... (1,791) 1,509 57 (33)
Deferred revenue.......................... (1,790) 1,210 -- 462
Discontinued operations................... 813 (149) -- --
-------- -------- ------- -------
Net cash provided by (used in)
operating activities................. (2,476) (4,054) 24 (256)
Investing activities:
Cash paid to acquire founding companies....... -- (32,576)
Cash paid to retire debt of founding
companies................................... -- (9,865)
Cash paid for acquisitions.................... (4,898) (6,106)
Redemption of certificate of deposit.......... -- -- -- 60
Capital expenditures.......................... (3,354) (997) (15) (112)
-------- -------- ------- -------
Net cash used in investing
activities........................... (8,252) (49,544) (15) (52)
Financing activities:
Net borrowings under line of credit........... 8,579 -- 25 223
Proceeds from (payments on) term loan......... -- -- (33) 142
Payments on note payable and capital lease
obligations................................. -- (2,373) (18) (57)
Net proceeds from issuance of common stock.... -- 59,090 -- 3
-------- -------- ------- -------
Net cash provided by (used in)
financing activities................. 8,579 56,717 (26) 311
Net increase (decrease) in cash................. (2,149) 3,119 (17) 3
Cash:
Beginning of period........................... 3,122 3 20 17
-------- -------- ------- -------
End of period................................. $ 973 $ 3,122 $ 3 $ 20
======== ======== ======= =======
Supplemental information:
Interest paid................................. $ 518 $ 73 $ 31 $ 96
======== ======== ======= =======
Income taxes paid............................. $ 2,747 -- $ -- $ 50
======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements
21
<PAGE> 23
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation -- BrightStar Information Technology Group, Inc.,
(the "Company" or "BrightStar") is a leading international e-business solutions
and applications service provider (ASP). BrightStar conducted no operations
prior to April 16, 1998 when it completed its initial public offering ("IPO").
The accompanying historical consolidated financial statements for the year ended
December 31, 1999 and the period from the IPO to December 31, 1998 includes the
accounts of all BrightStar subsidiaries. The accompanying financial statements
for all periods prior to the IPO include only the historical financial
information for Blackmarr the "accounting acquirer," which elected to change its
fiscal year-end from September 30 to December 31 prior to the IPO. See note 2
for further discussion of the IPO, and the definition of the "accounting
acquirer."
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Revenue recognition -- The Company provides services to customers for fees
that are based on time and materials or fixed fee contracts. Accordingly,
revenue is recognized as consulting services are performed. Unbilled revenue is
recorded for contract services provided for which a billing has not been
rendered. Revenue related to the sale of hardware is recognized when the
hardware is shipped. Deferred revenue primarily represents the excess of amounts
billed over contract costs and expenses incurred.
Concentration of credit risk is limited to trade receivables and unbilled
revenue and is subject to the financial conditions of certain major clients. The
Company does not require collateral or other security to support client's
receivables. The Company conducts periodic reviews of its clients' financial
conditions and vendor payment practices to minimize collection risk on trade
receivables.
Property and equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of 3
years for computer equipment and software and 5 years for furniture and
fixtures. Leasehold improvements are amortized over the shorter of the lease
term or the assets useful life. Expenditures for repairs and maintenance that do
not improve or extend the life of assets are expensed as incurred.
Goodwill -- Goodwill is the cost in excess of tangible assets acquired.
Goodwill recorded in conjunction with the Founding Companies and all other
acquisitions in 1998 is being amortized over 40 years on a straight-line basis.
Goodwill associated with the acquisition of ISC is being amortized over 20 years
on a straight-line basis. The realizability and period of benefit of goodwill is
evaluated periodically to assess recoverability, and, if warranted, impairment
or adjustments to the period benefited would be recognized. Total amortization
of goodwill from continuing operations for 1999 and 1998 amounted to $1,423 and
$833, respectively.
Cumulative translation adjustment -- Cumulative translation adjustment in
stockholders' equity reflects the unrealized adjustments resulting from
translating the financial statements of foreign subsidiaries. The functional
currency of the Company's foreign subsidiaries is the local currency of that
country. Accordingly, assets and liabilities of the foreign subsidiaries are
translated to U.S. dollars at year-end exchange rates. Income and expense items
are translated at the average rates prevailing during the year. Changes in
exchange rates that affect cash flows and the related receivables or payables
are recognized as transaction gains and losses in the determination of net
income.
Income taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes." SFAS No. 109 requires an asset and
22
<PAGE> 24
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability approach to accounting for income taxes. The Company provides deferred
income taxes for temporary differences that will result in taxable or deductible
amounts in future years. A valuation allowance is recognized if it is
anticipated that some or all of a deferred tax asset may not be realized.
Earnings per share (EPS) -- EPS is based on Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." Accordingly, Basic
EPS is calculated using income available to common shareholders divided by the
weighted average number of common shares outstanding during the year. Diluted
EPS is similar to Basic EPS except that it is based on the weighted average
number of common and potentially dilutive shares, from dilutive stock options
and warrants, outstanding during each year. The weighted average shares used to
calculate earnings per share on the statements of operations prior to the IPO
has been determined by converting the number of outstanding shares of Blackmarr
during the periods presented, based upon the ratio of approximately 77 to 1,
which was the ratio received by Blackmarr as a result of the offering. Common
shares issuable upon exercise of common stock options and convertible debt
instruments are anti-dilutive (decreases net loss per share) for the periods
presented.
Stock based compensation -- the Company utilizes Accounting Principles
Board Opinion No. 25 ("APB No. 25") in its accounting for stock options issued
to employees. No compensation expense is recognized for stock options issued to
employees under the Company's stock option plan as the option price equals or
exceeds the fair market value of the Company's Common Shares at the date of
grant. In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation." The accounting method as provided in
the pronouncement is not required to be adopted; however, it is encouraged. The
Company has adopted the disclosure-only provisions of SFAS No. 123 with respect
to options issued to employees. Compensation expense associated with stock
options and warrants issued to non-employees and non-directors is recognized in
accordance with SFAS No. 123.
Reclassifications -- Certain reclassifications have been made to conform
the prior years' financial statement amounts to the current year
classifications.
(2) ACQUISITIONS
Concurrent with and as a condition to the closing of the IPO, BrightStar
acquired all of the outstanding capital stock or substantially all the net
assets 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"),
Software Consulting Services America, LLC ("SCS America") and SCS Unit Trust
("SCS Australia")(the "Founding Companies"). The acquisitions have been
accounted for using the purchase method of accounting with Blackmarr being
treated as the accounting acquirer, in accordance with Staff Accounting Bulletin
No. 97. The purchase method of accounting requires that the results of
operations of the acquired companies only be included in the consolidated
financial statements subsequent to their respective acquisition dates. At the
acquisition date, the purchase price was allocated to assets acquired, and
liabilities assumed based on their fair market values. The excess of the total
purchase price over the fair value of the net assets acquired represents
goodwill.
23
<PAGE> 25
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the consideration paid in cash and shares of
common stock. For purposes of computing the estimated purchase price for
accounting purposes, the value of the shares was 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 issued in the acquisitions. The
estimated purchase price for each acquisition is subject to certain purchase
price adjustments.
<TABLE>
<CAPTION>
AMOUNT IN COMMON
COMMON STOCK
CASH STOCK SHARES
------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FOUNDING COMPANIES:
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................................................. 450 2,413 185,633
Zelo................................................ 375 1 100
------- ------- ---------
Subtotal.................................... 28,309 18,504 1,423,415
Blackmarr........................................... 3,290 13,160 1,012,306
------- ------- ---------
Total....................................... $31,599 $31,664 2,435,721
======= ======= =========
</TABLE>
- ---------------
(1) Common stock shares were issued in 1999. Such shares are included in common
stock payable at December 31, 1998.
The following is the calculation of goodwill arising from the acquisitions
of the Founding Companies and BITG (in thousands):
<TABLE>
<S> <C>
Cash paid to Founding Companies............................. $ 31,599
Stock issued to Founding Companies (valued at $11.70 per
share).................................................... 28,498
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 the Founding Companies and BITI by
Blackmarr, the accounting acquirer........................ 44,963
Pro forma combined net assets of all Founding Companies and
BITI...................................................... (1,216)
Net assets of Blackmarr..................................... 1,107
Deferred offering costs at BITI............................. 4,907
Other acquisition costs..................................... 1,366
Goodwill at ICON............................................ 94
In-process research and development......................... (3,000)
--------
Total............................................. $ 48,221
========
</TABLE>
Additionally, 437,681 shares of common stock were issued as consideration
for class A units at BITI. These shares were valued at a discount of 10% to the
initial public offering price of $13. These shares, less 46,153 shares issued to
affiliated parties charged to paid-in capital, have been included in goodwill in
the amount of $4,581, as a cost of the acquisition of the Founding Companies.
24
<PAGE> 26
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the IPO Brightstar has completed three acquisitions which were
accounted for as purchase business combinations as follows:
- On June 30, 1998, the Company completed the acquisition of Cogent
Technologies, LLC, for $250 and certain costs, resulting in total
goodwill of approximately $254. The Company will be required to provide
additional consideration in 2000 related to an earnout agreement with the
prior owners.
- On August 31,1998, the Company completed the acquisition of Total
Business Quality Associates, Inc. (TBQ), a provider of SAP consulting and
implementing services for $1,450 and certain costs, resulting in total
goodwill of approximately $1,478.
- Effective September 30, 1998, the Company completed the acquisition of
PROSAP Australia Pty. LTD (PROSAP), a SAP certified National
Implementation Partner located in Sydney, Australia for $8,884 and
certain acquisition costs resulting in total goodwill of approximately
$8,525; $4,100 was paid at closing, $4,284 was paid in 1999. The
remaining amount of $500 is recorded as an acquisition payable at
December 31, 1999.
- On May 28, 1999, the Company purchased Integrated Systems Consultants,
LLC ("ISC") pursuant to an Asset Purchase Agreement (the "Agreement"),
dated as of April 1, 1999. ISC is a provider of SAP consulting services
based in Phoenix, Arizona. The aggregate consideration for this
transaction was $3,000; of which $500 was paid in cash upon closing;
$1,000 will be paid on June 1, 2000 in up to 255,183 shares of common
stock, or a combination of cash and stock as defined in the Agreement;
$500 was financed by a Convertible Subordinated Promissory Note due
August 1, 2000; and, the remaining $1,000 of contingent consideration
will be recorded as additional goodwill paid subject to the achievement
of ISC earnings during the twelve months ending March 31, 2000. The
Company has allocated the entire purchase price and certain other
acquisition costs to goodwill. The pro forma results of operations
assuming the acquisition occurred on January 1, 1999, would not be
materially different than the operating results reported.
(3) DISCONTINUED OPERATIONS
In October 1999, the Company's management approved a plan to discontinue
the operations of its Training, Controls and Infrastructure Support businesses.
Each of the underlying businesses were acquired by BrightStar as part of its IPO
in April 1998. The Company believes that the continued investment in the
Training, Controls, and Infrastructure Support businesses is not consistent with
its long-term strategic objectives. Accordingly, these businesses are reported
as discontinued operations and the consolidated financial statements have been
reclassified to segregate operating results and net assets of the businesses.
Managements' plan to discontinue the operations of each of the businesses
includes the following:
Training Business
The completed sale and closure of the training business -- the Company:
- Sold Mindworks Professional Education Group, Inc. (Mindworks) to its
former owners. The sale of Mindworks was completed in December, 1999 for
approximately $1,100. The Company recorded a pre-tax loss on the sale of
Mindworks of $900, ($1,000, or $0.12 per share including taxes), the loss
includes the associated write-off of net goodwill totaling $1,600.
- Closed its training business in Texas in October 1999. The Company
recorded no gain or loss upon closing the Texas training operations.
25
<PAGE> 27
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Controls Business
The planned sale of the Controls Business within Integrated Controls,
Inc. -- while the Company has had discussions with potential buyers, no formal
sales agreement has been reached as of March, 2000. The Company expects to sell
its Control's business during the first half of 2000. The Company recorded an
estimated loss on the disposal of the Controls business of $5.1 million ($5.8
million including taxes, or $0.67 per share) including provision of $800 for
estimated operating losses until disposal. The amount of operating losses and
the amount the Company will ultimately realize upon the sale could significantly
differ from the amount assumed in arriving of the estimated operating losses
until disposal and estimated proceeds upon disposal.
Infrastructure Support Business
The discontinuance of its Infrastructure Support Business in December
1999 -- the Infrastructure Support Business was engaged in hardware sales and
consulting services relative to systems infrastructure and security. The Company
recorded no gain or loss on the discontinuance of the business.
Summary operating results and financial data for the discontinued
operations for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ----------------------------------------------
INFRASTRUCTURE INFRASTRUCTURE
TRAINING CONTROLS SUPPORT TOTAL TRAINING CONTROLS SUPPORT TOTAL
-------- -------- -------------- ------- -------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue................... $ 4,477 $11,064 $8,635 $24,176 $4,465 $ 9,795 $3,084 $17,344
Cost of revenue............... 3,156 8,145 8,678 19,979 3,288 6,971 2,501 12,760
Operating expenses............ 1,582 3,303 70 4,955 1,208 2,908 -- 4,116
------- ------- ------ ------- ------ ------- ------ -------
Operating income (loss)....... (261) (384) (113) (758) (31) (84) 583 468
Loss on discontinued
operations, net of tax...... $(1,173) $(6,206) $ (68) $(7,447) $ (22) $ (50) $ 350 $ 278
Current assets................ $ 1,542 $ 1,542 $ 263 $ 3,122 $ 3,385
Property and equipment, net... 720 720 244 996 1,240
Deferred income taxes......... 320 320 -- --
Goodwill, net................. 3,234 3,234 1,667 7,046 8,713
Other assets.................. 19 19 36 49 85
------- ------- ------ ------- -------
Total assets.......... 5,835 5,835 2,210 11,213 13,423
Provision for loss until
disposal.................... 800 800 -- -- --
Other current liabilities..... 1,035 1,035 214 949 1,163
------- ------- ------ ------- -------
Total liabilities..... 1,835 1,835 214 949 1,163
------- ------- ------ ------- -------
Net assets of discontinued
operations.................. $ 4,000 $ 4,000 $1,996 $10,264 $12,260
======= ======= ====== ======= =======
</TABLE>
(4) BUSINESS RESTRUCTURING
During the fourth quarter of 1998, the Company announced a plan to
restructure its operations and recorded a restructuring charge of $7,614. The
plan provided for the following:
- Reorganizing the operations of its wholly owned subsidiaries into one
operation that will result in an integrated sales force, focused
operating divisions and consolidated finance and administrative functions
- Realignment into separate operating divisions/consulting service lines
- Relocation of its corporate office
- Reduction of workforce of 13 employees, all of which have been
terminated.
26
<PAGE> 28
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The write-down of certain property and equipment and other assets as a
result of business closures and termination of service lines.
- Contract terminations and other obligations.
The major categories of the 1998 charges are summarized below:
<TABLE>
<CAPTION>
AMOUNTS AMOUNTS TO
CHARGED TO BE PAID
EARNINGS IN BEYOND
1998 1999
----------- ----------
<S> <C> <C>
Workforce severance obligations............................. $4,960 $1,209
Asset impairment............................................ 1,171 --
Lease and other contract obligations........................ 1,483 552
------ ------
Total............................................. $7,614 $1,761
====== ======
</TABLE>
As of December 31, 1999, the Company had expended $5,853 of the charge. The
remaining $1,761 reserved as of December 31, 1999 pertains to 1) remaining
severance obligations which will be paid through the April 2001, and 2)
remaining lease obligations which continue to extend past one year.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Computer equipment and software............................. $ 5,099 $ 2,325
Furniture, fixtures and office equipment.................... 1,294 944
Leasehold improvements...................................... 343 244
------- -------
Total............................................. 6,736 3,513
Accumulated depreciation and amortization................... (2,720) (1,207)
------- -------
Property and equipment, net....................... $ 4,016 $ 2,306
======= =======
</TABLE>
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Accrued payroll and payroll taxes........................... $3,901 $4,895
Accrued operating losses on discontinued operations......... 800 --
Accrued losses on fixed fee contract........................ 1,263 --
Other accrued expenses...................................... 2,141 1,041
------ ------
Total accrued expenses............................ $8,105 $5,936
====== ======
</TABLE>
(7) CREDIT FACILITY
Effective March 29, 1999, the Company established a $15 million credit
facility (the "Credit Facility") with Comerica Bank. Under terms of the
agreement, the Credit Facility will be used for working capital needs, including
issuance of letters of credit, and for general corporate purposes. Borrowings
under the Credit Facility bear an interest rate of prime plus .25%, or the
Eurodollar rate plus 2.5%. The Company pays a commitment
27
<PAGE> 29
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fee on unused amounts of the Credit Facility amounting to .375% per annum based
on the average daily amount by which the commitment amount exceeds the principal
amount outstanding during the preceding month. Interest is payable monthly on
prime rate borrowings and quarterly or at the end of the applicable interest
period for the Eurodollar rate borrowings.
The Credit Facility is secured by liens on substantially all the Company's
assets (including accounts receivable) and a pledge of all of the outstanding
capital stock of the Company's domestic operating subsidiaries. The Credit
Facility also requires that the Company comply with various loan covenants,
including (i) maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness and (iii) restrictions on liens, guarantees and payments
of dividends. As of, and during the quarters ended September 30, 1999 and
December 31, 1999, the Company was not in compliance with a certain financial
covenant. Comerica Bank has agreed to waive the defaults for both periods.
The Credit Facility contains 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. Borrowings outstanding under the Credit Facility amounted to $8.6
million at December 31, 1999. As of March 28, 2000 the Company had reduced
amounts borrowed under the Credit Facility to approximately $2 million. The
Credit Facility expires on March 30, 2001.
(8) STOCKHOLDERS' EQUITY AND OTHER STOCK RELATED INFORMATION
Capital Stock
Authorized capital shares of the company include 3,000,000 shares of
preferred stock, 2,000,000 shares of restricted stock and 35,000,000 shares of
common stock. Rights, preferences and other terms of the preferred stock will be
determined by the board of directors at the time of issuance; no preferred stock
was issued at December 31, 1999.
Common Stock Payable
Common stock payable at December 31, 1998 represented stock issuable under
the terms based upon of the purchase agreement between the Company and SCS
Australia, achieving certain 1998 revenue targets. Upon the final settlement of
the purchase price, the unit holders of SCS Unit Trust received 441,400 common
shares during the first quarter of 1999, with the difference of 11,575 shares
issued to certain directors and members of management under the terms of the
original exchange agreement. As a result, a charge to stock compensation expense
in the amount of $135 was recorded in 1998.
Other Common Stock Warrants and Options
In 1997, the Company entered into an advisory agreement with an investment
banking firm, and issued a warrant to that firm for $100. The warrant provides
for the purchase of 50,000 shares of common stock at an exercise price of $6 per
share, and is exercisable at any time prior to August 14, 2004.
Also in 1997, the Company entered into an agreement for corporate
development services and issued a common stock option to the consulting firm.
The option grants the holder the option to purchase 14,285 shares.
The estimated combined fair value of the warrant and the option of $450
were recorded as offering costs. The common stock warrant was exercised during
1998, with the holder surrendering approximately 17,000 common shares in lieu of
payment for 33,000 common shares, and $350 was charged against paid-in capital.
Stock Options -- During 1998 a stock option plan (The 1997 Plan) was
established, which provides for the issuance of incentive and non-qualified
stock options, restricted stock awards, stock appreciation rights or
28
<PAGE> 30
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance stock awards. The total number of shares that may be issued under
the Plan is 2,000,000 shares, of which only 1,930,000 shares may be granted for
incentive stock options. Options, which constitute the only issuance under the
incentive plans, have been generally granted at fair value of the company's
common stock on the date of grant. The following table summarizes the plan's
stock option activity:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE REMAINING
SHARES PRICE LIFE
--------- -------- ----------
<S> <C> <C> <C>
Options outstanding at December 31, 1997............. --
Granted in 1998...................................... 603,402 $13.00 5.07 years
Exercised............................................ --
Cancelled............................................ --
---------
Options outstanding at December 31, 1998............. 603,402 $13.00 9.75 years
=========
Granted in 1999...................................... 1,428,750 $ 6.88
Exercised............................................ -- --
Cancelled............................................ (218,664) $ 9.96
Options outstanding at December 31, 1999............. 1,813,448 $ 8.50
---------
Exercisable at December 31, 1999..................... 413,929(a)
=========
</TABLE>
- ---------------
(a) 400,179 and 13,750 options are exercisable at $13.00 and $6.00-$7.50,
respectively.
Pro forma disclosures as if the Company had applied the cost recognition
requirements under SFAS No. 123 in 1998 are presented below. The pro forma
compensation cost may not be representative of that expected in future years.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net loss (in thousands)
As reported............................................... $(10,015) $(16,544)
Pro Forma................................................. $(12,048) $(17,622)
Loss per share -- basic and diluted
As reported............................................... $ (1.16) $ (2.64)
Pro Forma................................................. $ (1.39) $ (2.81)
Weighted average fair value of options granted.............. $ 4.39 $ 9.71
</TABLE>
Compensation cost for 1999 and 1998 was calculated in accordance with the
binomial model, using the following weighted average assumptions: (i) expected
volatility of 110% and 60%; (ii) expected dividend yield of 0% in both years;
(iii) expected option term of 10 years in both years; (iv) risk-free rate of
return of 5.86% and 5.60%; and expected (v) a forfeiture rate of 11%.
Recent Sales of Unregistered Securities.
On March 10, 2000, pursuant to an agreement with Strong River Investments,
Inc. and Montrose Investments Ltd. (collectively, the "Purchasers"), the Company
sold to the Purchasers 709,555 shares of the Company's common stock (the
"Shares") for $7.5 million, or $10.57 per share (the "Transaction"). Net
proceeds to the Company amounted to $7.2 million after related issuance costs.
Proceeds were applied to the Company's borrowings under its Credit Facility. In
connection the purchase of the Shares, the Company issued two warrants to the
Purchasers. One warrant has a five-year term during which the Purchasers may
purchase up to 157,500 shares of the Company's common stock at a price of $12.00
per share. The second warrant covers an adjustable amount of shares of the
Company's common stock at an adjustable exercise price, based on the market
price of the Company's common stock during three (3) separate periods of thirty-
29
<PAGE> 31
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one (31) trading days commencing 270 calendar days after the date of the
Transaction. The Company also issued to Wharton Capital Partners Ltd.
("Wharton"), as compensation for Wharton's services in completing the
Transaction, a warrant which has five-year term during which Wharton may
purchase up to 45,000 shares of the Company's common stock at a price of $12.00
per share. The Company anticipates registering the Shares sold to Purchaser in
April 2000. The Company and the Purchaser further agreed that the Company will
sell and the Purchaser will purchase up to an additional $7.5 million worth of
the Company's common stock six months following the Transaction subject to
certain conditions.
(9) STOCK COMPENSATION EXPENSE
In connection with the offering and acquisition of the Founding Companies,
certain directors and members of management received 648,126 shares of common
stock. These shares, valued at $11.70, were recorded as deferred compensation
and were amortized to stock compensation expense over a one year period based
upon the terms of a stock repurchase agreement between the Company and related
shareholders. Total stock compensation expense recorded during 1999 and 1998 in
connection with the above was $468 and $5,055, respectively. At December 31,
1998, certain members of management that had received substantially all of these
shares were terminated in connection with the Company's restructuring. As a
result, the remaining deferred compensation totaling $2,060, attributable to the
shares held by these terminated employees was charged to expense and included in
the restructuring charge.
In connection with the terms of the acquisition of SCS Unit Trust, certain
key employees were granted 200,000 shares of common stocks under an incentive
stock bonus plan. Based on the share price of $7.88 per share on the date of the
grant, the Company recorded stock compensation expense of $1,575. At December
31, 1998 these common shares had not been formally issued, and accordingly, are
recorded in common stock payable. The shares were issued in 1999.
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. Compensation expense totaling $305 was recognized during the year
ended September 30, 1997.
(10) INCOME TAXES
The components of income (loss) before income taxes from continuing
operations and the related income taxes provided for the years ended December
31, 1999, 1998 and 1997, are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ----
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic................................................ $(5,803) $(17,916) $(44)
Foreign:................................................ 1,922 1,706 --
------- -------- ----
$(3,881) $(16,210) $(44)
======= ======== ====
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- ----
<S> <C> <C> <C>
Provision (benefit) for income taxes:
Current:
Domestic............................................ $ (156) $ 707 $(2)
Foreign............................................. 787 528 --
Deferred:
Domestic............................................ (1,721) (623) 8
Foreign............................................. (223) -- --
------- ----- ---
Total.......................................... $(1,313) $ 612 $ 6
======= ===== ===
</TABLE>
30
<PAGE> 32
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's deferred tax assets are reflected below as of December 31,
1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Bad debt reserves........................................... $ 628 $ 387
Restructure reserve......................................... 669 1,665
Accrued compensation........................................ 422
Losses on discontinued operations........................... 304
Foreign tax assets.......................................... 223 --
Change in accounting method................................. (151)
Other....................................................... 154 120
------ -------
Net deferred tax asset...................................... 2,249 2,172
Valuation allowance......................................... (537) (1,387)
------ -------
$1,712 $ 785
====== =======
</TABLE>
The table below reconciles the expected U.S. federal statutory tax to the
recorded income tax:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ----
<S> <C> <C> <C>
Provision (benefit) at statutory tax rate.................. $(2,031) $(6,270) $(15)
State income taxes, net of federal benefit................. 103 (111) (1)
Goodwill amortization...................................... 498 361
Foreign tax................................................ 564 527 --
Deferred compensation...................................... 164 3,041 --
Goodwill writeoff.......................................... -- 1,506 --
Valuation allowance........................................ (850) 1,386 --
Other, net................................................. 239 172 22
------- ------- ----
Total............................................ $(1,313) $ 612 $ 6
======= ======= ====
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan that covers substantially all U.S. employees.
If applicable, employees would vest in Company contributions evenly over five
years from their date of employment. The Company may provide matching
contributions of up to 6% of the employees base salary. Employer matching and
profit sharing contributions are discretionary, and, to date, no matching or
profit sharing contributions have been made.
(12) COMMITMENTS AND CONTINGENCIES
The Company leases office space, computer and office equipment under
various operating lease agreements that expire at various dates through December
31, 2004. Minimum future commitments under these agreements for the years ending
December 31 are; 2000, $2,641; 2001, $2,240; 2002, $1,625; 2003, $511; and 2004,
$758.
Rent expense was $394, $113, $1,636, $4,048 during the periods ended
September 30, 1997, December 31, 1997 and December 31, 1998, and 1999
respectively.
Employment Agreements -- As of December 31, 1999, the Company had entered
into employment agreements with certain key management personnel which provided
for minimum compensation levels and incentive bonuses, along with provisions for
termination of benefits in certain circumstances and for certain severance
payments in the event of a change in control.
31
<PAGE> 33
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company did not have any customer, individually or considered as a
group under common ownership that accounted for 10% of revenues or accounts
receivable for the periods presented.
The Company operates in a single segment, as a provider of internet
services. Since April 16, 1998, the Company has primarily operated in two
geographic regions. Prior to April 16, 1998, the Company primarily operated in
the United States. Specific information related to the Company's geographic
areas are found in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
UNITED STATES AUSTRALIA CONSOLIDATED UNITED STATES AUSTRALIA CONSOLIDATED
------------- --------- ------------ ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $69,119 $34,250 $103,449 $ 45,607 $17,977 $ 63,584
Income (loss) from continuing
operations before income taxes.... (5,803) 1,922 (3,881) (18,146) 1,936 (16,210)
Long-lived assets................... 57,601 1,028 58,629 54,951 835 55,786
Total assets........................ 77,133 7,875 85,008 81,889 10,512 92,401
</TABLE>
32
<PAGE> 34
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ----------- --------------
ADDITIONS
----------
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Allowance deducted from assets to which it
applies:
Allowance for doubtful accounts:
Year ended December 31, 1998................... $ 439 -- $ 857 $1,296
Year ended December 31, 1999................... 1,296 $1,926 1,235 1,987
Accrued Restructuring Charge:
Year ended December 31, 1998................... -- 7,614 3,231 4,383
Year ended December 31, 1999................... 4,383 2,622 1,761
Tax valuation allowance:
Year ended December 31, 1998................... -- 1,387 -- 1,387
Year ended December 31, 1999................... 1,387 -- 850 537
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
BrightStar Information Technology Group, Inc.
In connection with our audit of the consolidated financial statements of
BrightStar Information Technology Group, Inc. referred to in our report dated
March 28, 2000, which is included in the annual report on Form 10-K, we have
also audited Schedule II for the years ended December 31, 1999 and 1998. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
San Jose, California
March 28, 2000
33
<PAGE> 35
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K:
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation, as amended (Incorporated by
reference from Exhibit 3.1 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).
3.2 -- Bylaws, as amended (Incorporated by reference from
Exhibit 3.2 to Amendment No. 3.2 to BrightStar's
Registration Statement on Form S-1 filed April 14, 1998
(File No. 333-43209)).
4.1 -- Specimen Common Stock Certificates (Incorporated by
reference from Exhibit 4.1 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).
4.2 -- Agreement and Plan of Exchange dated December 15, 1997
among BrightStar, BITG, BITI and the holders of the
outstanding capital stock of BITG (Incorporated by
reference from Exhibit 4.2 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).
4.3 -- Option Agreement dated as of December 16, 1997 between
BrightStar and Brewer-Gruenert Capital Advisors, LLC
(Incorporated by reference from Exhibit 4.4 to Amendment
No. 1 to BrightStar's Registration Statement on Form S-1
filed February 27, 1998 (File No. 333-43209)).
10.1 -- BrightStar 1997 Long-Term Incentive Plan (Incorporated by
reference from Exhibit 10.1 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).
10.2 -- Agreement and Plan of Exchange by and among BrightStar
and the holders of the outstanding capital stock of Brian
R. Blackmarr and Associates, Inc. (Incorporated by
reference from Exhibit 10.2 to BrightStar's Registration
Statement on Form S-1 filed December 24, 1997 (File No.
333-43209)).
10.3 -- Agreement and Plan of Exchange by and among BrightStar
and the holders of the outstanding capital stock of
Integrated Controls, Inc. (Incorporated by reference from
Exhibit 10.3 to BrightStar's Registration Statement on
Form S-1 filed December 24, 1997 (File No. 333-43209)).
10.4 -- Agreement and Plan of Exchange by and among BrightStar
and the holders of the outstanding capital stock of
Mindworks Professional Education Group, Inc.
(Incorporated by reference from Exhibit 10.4 to
BrightStar's Registration Statement on Form S-1 filed
December 24, 1997 (File No. 333-43209)).
10.5 -- Agreement and Plan of Exchange by and among BrightStar,
Software Consulting Services America, LLC and the holders
of the outstanding ownership interests of Software
Consulting Services America, LLC. (Incorporated by
reference from Exhibit 10.5 to BrightStar's Registration
Statement on Form S-1 filed December 24, 1997 (File No.
333-43209)).
10.6 -- Agreement and Plan of Exchange by and among BrightStar
and Software Consulting Services Pty. Ltd. in its
capacity as Trustee of the Software Consulting Services
Unit Trust and the holders of all of the outstanding
ownership interests in the Software Consultants Unit
Trust (Incorporated by reference from Exhibit 10.6 to
BrightStar's Registration Statement on Form S-1 filed
December 24, 1997 (File No. 333-43209)).
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.7 -- Agreement and Plan of Exchange by and among BrightStar
and The holders of the outstanding capital stock of
Software Innovators, Inc. (Incorporated by reference from
Exhibit 10.7 to BrightStar's Registration Statement on
Form S-1 filed December 24, 1997 (File No. 333-43209)).
10.8 -- Agreement and Plan of Exchange by and among BrightStar
and the holder of the outstanding capital stock of Zelo
Group, Inc. and Joel Rayden (Incorporated by reference
from Exhibit 10.8 to BrightStar's Registration Statement
on Form S-1 filed December 24, 1997 (File No.
333-43209)).
10.9 -- Form of Employment Agreement between BrightStar and
Marshall G. Webb, Thomas A. Hudgins and Daniel M. Cofall
(Incorporated by reference from Exhibit 10.9 to Amendment
No. 1 to BrightStar's Registration Statement on Form S-1
filed February 27, 1998 (File No. 333-43209)).*
10.10 -- Employment Agreement between Software Consulting Services
America, Inc. and Michael A. Ober.*
10.11 -- Office Lease dated November 11, 1998, between Principal
Life Insurance Company and BrightStar.
10.12 -- Employment Agreement dated Jan. 31, 1999 between
BrightStar and Donald Rowley.*
10.13 -- Employment Agreement between Brian R. Blackmarr and
Associates, Inc. and Brian R. Blackmarr (Incorporated by
reference from Exhibit 10.10 to Amendment No. 1 to
BrightStar's Registration Statement on Form S-1 filed
February 27, 1998 (File No. 333-43209)).*
10.14 -- Letter Agreement dated August 14, 1997 between BITG and
McFarland, Grossman and Company, Inc., and amended as of
March 17, 1998 (Incorporated by reference from Exhibit
10.11 to Amendment No. 2 to BrightStar's Registration
Statement on Form S-1 filed March 24, 1998 (File No.
333-43209)).
10.15 -- Letter Agreement dated September 26, 1997 between BITG
and Brewer-Gruenert Capital Advisors, LLC, and amended as
of December 15, 1997 (Incorporated by reference from
Exhibit 10.12 to BrightStar's Registration Statement on
Form S-1 filed December 24, 1997 (File No. 333-43209)).
10.16 -- Loan Agreement dated October 16, 1997 between BITI and
BITG (Incorporated by reference from Exhibit 10.13 to
Amendment No. 1 To BrightStar's Registration Statement on
Form S-1 filed February 27, 1998 (File No. 333-43209)).
10.17 -- Stock Repurchase Agreement between BrightStar and
Marshall G. Webb, Daniel M. Cofall, and Thomas A.
Hudgins.*
10.18 -- Agreement Regarding Repurchase of Stock by and among
BrightStar, George M. Siegel, Marshall G. Webb, Thomas A.
Hudgins, Daniel M. Cofall, Mark D. Diggs, Michael A.
Sooley, Michael B. Miller, and Tarrant Hancock.*
10.19 -- Amendment to Agreement and Plan of Exchange dated as of
June 5, 1998 by and BrightStar and the holder of the
outstanding capital stock of Zelo Group, Inc. and Joel
Rayden.
10.20 -- Deed of Variation dated as of April 17, 1998 by and among
BrightStar and Software Consulting Services Pty. Ltd. and
Kentcom Pty. Ltd., Salvatore Fazio, Pepper Tree Pty.
Ltd., Christopher Richard Banks, Cedarman Pty. Ltd,
Stephen Donald Caswell, Quicktrend Pty. Ltd., Desmond
John Lock, Kullamurra Pty. Ltd., Robert Stephen Langford,
and KPMG Information Solutions Pty. Ltd. and Data
Collection Systems Integration Pty. Ltd.
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.21 -- Asset Purchase Agreement dated as of June 30, 1998 among
BrightStar, Cogent Acquisition Corp., Cogent
Technologies, LLC and the holders of all of all the
outstanding membership interest of Cogent Technologies,
LLC.
10.22 -- Asset Purchase Agreement dated as of August 31, 1998
among BrightStar, Software Consulting Services America,
Inc., TBQ Associates, Inc. and the holders of all the
outstanding capital stock of TBQ Associates, Inc.
10.23 -- Stock Purchase Agreement dated effective as of September
30, 1998 among BrightStar, BrightStar Group
International, Inc. and the holders of the outstanding
capital stock of PROSAP AG (Incorporated by reference
from Exhibit 2.1 to the Current Report On Form 8-K of
BrightStar dated November 10, 1998.
10.24 -- Factoring Agreement and Security Agreement dated January
22, 1999 among Metro Factors, Inc. dba Metro Financial
Services, Inc., Brian R. Blackmarr and Associates, Inc.,
Software Consulting Services America, Inc., Software
Innovators, Inc., and Integrated Controls, Inc.
10.25 -- Guaranty dated January 22, 1999 by BrightStar for the
benefit Of Metro Factors, Inc. dba Metro Financial
Services, Inc.
10.26 -- Severance Agreement and Release effective November 20,
1998 between BrightStar and Thomas A. Hudgins.
10.27 -- Severance Agreement and Release effective January 31,
1999 between BrightStar and Daniel M. Cofall.
10.28 -- Severance Agreement and Release effective January 31,
1999 between Marshall G. Webb.
10.29 -- Revolving Credit Agreement dated March 29,1999 between
BrightStar and Comerica Bank
10.30 -- Form of subsidiaries guaranty dated March 29,1999 between
BrightStar subsidiaries and Comerica Bank
10.31 -- Security Agreement (Negotiable collateral) dated March
29,1999 between BrightStar and Comerica Bank
10.32 -- Security Agreement (All assets) dated March 29, 1999
between BrightStar and Comerica Bank
10.33 -- $15,000,000 Revolving Note dated March 29, 1999 from
BrightStar To Comerica Bank
10.34 -- Asset Purchase Agreement Among BrightStar Information
Technology Group, Inc., Software Consulting Services
America, Inc., Integrated Systems Consulting, LLC and the
Individuals Owning All Of The Membership Interests of
Integrated Systems Consulting, LLC dated as of April 1,
1999.
10.35 -- Securities Purchase Agreement Among BrightStar
Information Technology Group, Inc. and Strong River
Investments, Inc. and Montrose Investments LTD
21.1 -- List of Subsidiaries of the Company.
24.1 --
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Management Contract or Compensatory Plan required to be filed as an exhibit to
this form pursuant to Item 14(c) of Form 10-K.
Reports on Item 10-K.
<PAGE> 1
EXHIBIT 10.35
STRONG RIVER INVESTMENTS, INC
c/o Gonzalez-Ruiz & Aleman (BVI) Limited
Wickhams Cay I, Vanterpool Plaza
P.O. Box 873
Road Town, Tortolla. BVI
MONTROSE INVESTMENTS LTD.
300 Crescent Court, Suite 700
Dallas, TX 75201
March 10, 2000
BrightStar Information Technology Group, Inc.
4900 Hopyard Road, Suite 200
Pleasanton, California 94566
Attention: President
Re: BrightStar Information Technology Group, Inc. (the "Company").
Gentlemen:
Reference is made to the Securities Purchase Agreement (the "Purchase
Agreement"), of even date hereof, among the Company and the undersigned (the
"Purchasers"), pursuant to which the Company will issue and sell to the
Purchasers: (i) certain shares (the "Initial Shares") of common stock, $.001 par
value per share, of the Company (the "Common Stock"), (ii) Common Stock purchase
warrants, each in the form of Exhibit A to the Purchase Agreement, pursuant to
which the holder thereof shall have the right to acquire shares of Common Stock
upon the terms set forth therein (the "Initial Adjustable Warrants") and (iii)
Common Stock purchase warrants, each in the form of Exhibit D to the Purchase
Agreement, pursuant to which the holder thereof shall have the right to acquire
an aggregate of 157,500 shares of Common Stock on the terms set forth therein
(the "Initial Closing Warrants" and together with the Initial Adjustable
Warrants, the "Initial Warrants"), for an aggregate purchase price of
$7,500,000. The Initial Warrants and the Initial Shares are sometimes
collectively referred to herein as the "Initial Securities." Capitalized terms
used and not otherwise defined in this letter that are defined in the Purchase
Agreement shall have the meanings set forth in the Purchase Agreement.
The Purchasers and the Company agree that the Purchasers shall,
severally and not jointly and subject to the terms and conditions hereof,
purchase from the Company and the Company shall sell to the Purchasers on the
Additional Closing Date (as defined herein): (i) up
<PAGE> 2
to [ ](1) additional shares of Common Stock (the "Additional Shares"), (ii)
additional Initial Adjustable Warrants pursuant to which the holder thereof
shall have the right to acquire shares of Common Stock upon the terms set forth
therein (the "Additional Adjustable Warrants") and (iii) additional Initial
Closing Warrants, , pursuant to which the holders thereof shall have the right
at any time and from time to time thereafter through the fifth anniversary of
the Additional Closing Date to acquire up to an aggregate of 157,500 shares of
Common Stock upon the terms set forth therein (the "Additional Closing Warrants"
and together with the Additional Adjustable Warrants, the "Additional
Warrants"), for a purchase price of up to $7,500,000 (the "Additional Financing
Amount"), provided, that the Additional Financing Amount shall not exceed 9.5%
of the market capitalization of the Common Stock on the Additional Closing Date.
The Additional Shares and Additional Warrants are collectively referred to
herein as the "Additional Securities."
The commitments set forth in this letter is subject to the terms,
conditions and qualifications set forth below:
1. Form of Additional Adjustable Warrants. The Additional Adjustable
Warrants shall be identical to the Initial Adjustable Warrants except that the
Purchase Price applicable thereto shall equal the lesser of (i) 110% of the
average of the Per Share Market Values for the five (5) Trading Days immediately
preceding the Additional Closing Date and (ii) $12.50 (subject to equitable
adjustment for stock splits, recapitalization and similar events) (the "Share
Price").
2. Form of Additional Closing Warrants. The Additional Closing Warrants
shall be identical to the Initial Closing Warrants except that the Exercise
Price applicable thereto shall be equal to 125% of the average of the closing
bid prices of the Common Stock for the five (5) Trading Days immediately
preceding the Additional Closing Date.
3. Additional Documentation. In order to effectuate a purchase and sale
of Additional Securities, prior to their issuance, the Company and the
Purchasers shall enter into the following agreements: (a) a securities purchase
agreement identical to the Purchase Agreement, mutatis mutandis, except that for
purposes of Sections 3.8(a) and (b), the period following the Effective Date of
the additional Registration Statement shall be 60 Trading Days (the "Additional
Purchase Agreement") and (b) a registration rights agreement identical to the
Registration Rights Agreement, mutatis mutandis (the "Additional Registration
Rights Agreement," and together with the Additional Purchase Agreement and the
Additional
- -----------------
(1) The number equal to $7,500,000 divided by the lesser of (i)110% of the
average of the closing bid price of the Common Stock during the five
consecutive trading days immediately prior to the Additional Closing Date
and (ii) $12.50 (subject to equitable adjustment for stock splits,
recapitalization and similar events).
2
<PAGE> 3
Warrants, collectively the "Additional Transaction Documents"). The Purchasers
shall prepare the Additional Transaction Documents.
4. Additional Closing. (i) Between the 180th day and the 190th day
following the Closing Date, each of the Purchasers and the Company shall have
the right to deliver a written notice to the other (the "Additional Financing
Notice") requiring such other party to either sell or buy (severally and not
jointly), as the case may be, the Additional Securities for the Additional
Financing Amount indicated therein. At the Additional Closing (as defined
herein) each Purchaser shall, severally and not jointly, purchase (subject to
the terms and conditions herein) such portion of Additional Securities as equals
such Purchaser's pro-rata portion of the Initial Securities issued and sold at
the Closing. The closing of the purchase and sale of the Additional Securities
(the "Additional Closing") shall take place at the offices of Robinson
Silverman,1290 Avenue of the Americas, New York, New York 10104, on the fifth
(5th) Business Day after the Additional Financing Notice is delivered by the
Purchasers or the Company, as the case may be, or on such other date as
otherwise agreed to by the parties hereto provided, that in no case shall the
Additional Closing take place unless and until all of the conditions listed in
Section 5 of this letter shall have been satisfied by the Company or waived by
the Purchasers (it being understood that each Purchaser may elect to waive or
enforce such conditions in its own discretion). The date of the Additional
Closing is hereinafter referred to as the "Additional Closing Date."
Notwithstanding anything to the contrary contained in this letter, each
Purchaser may, prior to the Additional Closing Date, designate an Affiliate
thereof to acquire all or any portion of the Additional Securities to be sold on
the Additional Closing Date.
(ii) At the Additional Closing, the parties shall
deliver or shall cause to be delivered the following: (a) the Company shall
deliver to (x) each Purchaser or its designated Affiliate: (1) the number of
Additional Shares equal to such Purchaser's pro-rata portion of the Initial
Shares issued and sold at the Closing, registered in the name of such Purchaser
or its designated Affiliate, representing the Additional Shares to be issued and
sold to such Purchaser or its designated Affiliate at the Additional Closing,
(2) an Additional Adjustable Warrant registered in the name of such Purchaser or
its designated Affiliate, (3) an Additional Closing Warrant registered in the
name of such Purchaser or its designated Affiliate, entitling the holder thereof
to purchase a number of shares of Common Stock as equals such Purchaser's
pro-rata portion of the shares of Common Stock underlying the Initial Closing
Warrants, (4) a legal opinion in form and substance acceptable to the
Purchasers, and (5) the executed Additional Transaction Documents and the
Transfer Agent Instructions relating to the Additional Securities, and (y)
Robinson Silverman, $20,000 as reimbursement of the legal fees and expenses
incurred by the Purchasers to prepare the Additional Transaction Documents,
which amount shall be deducted by the Purchasers from the amount due to the
Company for the Additional Securities and shall be paid directly to Robinson
Silverman and (b) each Purchaser shall deliver to the Company: (1) its pro-rata
portion of the Additional Financing Amount, in United States dollars in
immediately available funds by wire transfer to an account designated in writing
by the Company for such purpose prior to the Additional Closing Date and (2) the
executed Additional Transaction Documents.
3
<PAGE> 4
5. Conditions precedent to the Additional Closing. Notwithstanding anything
to the contrary contained in this letter, the obligations of a Purchaser to
purchase Additional Securities on the Additional Closing Date is subject to the
satisfaction by the Company or waiver by the Purchasers of each of the following
conditions:
a. Closing of Initial Shares and Initial Warrants. The Closing shall
have occurred;
b. Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company contained in the Purchase
Agreement shall be true and correct as of the date when made and as of the
Additional Closing Date as though made on and as of the Additional Closing Date
(other than representations and warranties which relate to a specific date
(which shall not include representations and warranties relating to the "date
hereof") which representations and warranties shall be true as of such specific
date), as evidenced by an Officer's Certificate attesting to such effect to be
delivered by the Company to the Purchasers on the Additional Closing Date;
c. Performance by the Company. The Company shall have timely performed,
satisfied and complied with all covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company between the Closing Date and the Additional Closing Date and no Event
(as defined in the Registration Rights Agreement) shall have occurred which has
not been cured to the satisfaction of the Purchasers;
d. Underlying Shares Registration Statement. The Underlying Shares
Registration Statement shall have been declared effective under the Securities
Act by the Commission and shall have remained effective at all times, not
subject to any actual or threatened stop order or subject to any actual or
threatened suspension at any time prior to the Additional Closing Date;
e. No Injunction. Since the Closing Date, no statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated, amended, modified or endorsed by any court of governmental
authority of competent jurisdiction or governmental authority, stock market or
trading facility which prohibits the consummation of any of the transactions
contemplated by the Additional Transaction Documents or makes impracticable the
transactions contemplated thereby;
f. Adverse Changes. Since the Closing Date, no event or series of
events which have or reasonably would be expected to result in a Material
Adverse Effect shall have occurred;
4
<PAGE> 5
g. No Suspensions of Trading in Common Stock. The trading in the Common
Stock shall not have been suspended by the Commission or on the NASDAQ at any
time since the Closing Date;
h. Listing of Common Stock. The Common Stock shall have been at all
times since the Closing Date listed for trading on the NASDAQ;
i. Shares of Common Stock. The Company shall have duly reserved the
number of shares of Common Stock as required by the Additional Transaction
Documents to be reserved for issuance upon exercise of the Additional Warrants;
j. Performance of Exercise Obligations. The Company shall have timely
complied with its exercise and delivery requirements under the Initial Warrants;
k. Closing Threshold. For the ten (10) Trading Days immediately
preceding the date of the Additional Financing Notice, the average daily trading
volume of the Common Stock on the NASDAQ shall be at least 50,000 shares and the
average of the Per Share Market Value for such ten (10) Trading Day period shall
be greater than $8.00 (subject to equitable adjustments, stock splits and
similar adjustments);
l. Shareholder Approval. No approval of the shareholders of the Company
shall be required under the rules of the Nasdaq Stock Market or such other
exchange or trading facility or which the Common Stock is the traded or listed
for trading in order to issue a minimum of 200% of the shares of Common Stock
issuable upon exercise of the Additional Adjustable Warrants (assuming such
exercise occurred on the Additional Closing Date);
m. Deliveries pursuant to Additional Transaction Documents. On the
Additional Closing Date, the Company shall deliver the Additional Securities and
executed Additional Transaction Documents and the Transfer Agent Instructions
relating to the Additional Securities in the forms contemplated by this letter;
and
n. Beneficial Ownership of shares of Common Stock. No Purchaser shall
beneficially own in excess of 10% of the shares of Common Stock outstanding
immediately prior to the Additional Closing Date.
6. Conditions precedent to the Additional Closing. Notwithstanding anything
to the contrary contained in this letter, the obligations of the Company to sell
Additional Securities on the Additional Closing Date is subject to the
satisfaction by the Purchasers or waiver by the Company of each of the following
conditions:
a. Accuracy of the Purchasers' Representations and Warranties. The
representations and warranties of each Purchaser contained in the Purchase
Agreement shall be
5
<PAGE> 6
true and correct as of the date when made and as of the Additional Closing Date
as though made on and as of the Additional Closing Date (other than
representations and warranties which relate to a specific date (which shall not
include representations and warranties relating to the "date hereof") which
representations and warranties shall be true as of such specific date);
b. Performance by the Purchasers. Each Purchaser shall have timely
performed, satisfied and complied with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by the Company between the Closing Date and the Additional Closing Date;
and d. Deliveries pursuant to Additional Transaction Documents. On the
Additional Closing Date, each Purchaser shall deliver the executed Additional
Transaction Documents relating to the Additional Securities in the forms
contemplated by this letter.
7. Independent Nature of Purchasers' Rights and Obligations. The rights of
each Purchaser hereunder is several and not joint with the obligations of any
other Purchaser hereunder, and neither Purchaser shall be responsible in any way
for the performance of the obligations of any other Purchaser hereunder. Nothing
contained herein or in any other agreement or document delivered at any closing,
and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed
to constitute the Purchasers as a partnership, an association, a joint venture
or any other kind of entity, or create a presumption that the Purchasers are in
any way acting in concert with respect to such obligations or the transactions
contemplated by this Agreement. Each Purchaser shall be entitled to protect and
enforce its rights, including, without limitation, the rights arising out of
this letter or out of the Additional Transaction Documents, if any, and it shall
not be necessary for any other Purchaser to be joined as an additional party in
any proceeding for such purpose.
8. Governing Law. This letter shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflicts of law thereof.
9. Execution. This letter may be executed in two or more counterparts, all
of which when taken together shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
6
<PAGE> 7
Please indicate your agreement with the foregoing by executing a
countersigned copy of this letter and returning the same to our attention,
whereupon effective immediately thereafter this letter shall become a legally
valid and binding agreement between the Purchasers and the Company.
We look forward to our continuing relationship.
Sincerely,
STRONG RIVER INVESTMENTS, INC.
By:
----------------------------------------------
Name:
Title:
MONTROSE INVESTMENTS, LTD.
By:
----------------------------------------------
Name:
Title:
Agreed and accepted
March __, 2000
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
By:
----------------------------------------------
Name:
Title:
<PAGE> 8
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
WARRANT
Warrant No.C-3 Dated: March 10, 2000
Brightstar Information Technology Group, Inc., a Delaware corporation
(the "Company"), hereby certifies that, for value received, Wharton Capital
Partners Ltd. or its registered assigns ("Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company up to a total of 45,000
shares of common stock, $.001 par value per share (the "Common Stock"), of the
Company (each such share, a "Warrant Share" and all such shares, the "Warrant
Shares") at an exercise price equal to $12.00 per share (as adjusted from time
to time as provided in Section 8, the "Exercise Price"), at any time and from
time to time from and after the date hereof and through and including March 10,
2005 (the "Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the Transfer
Agent or to the Company at its address for notice set forth in Section 12. Upon
any such registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New
<PAGE> 9
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company at its address for notice set forth in
Section 12 for one or more New Warrants, evidencing in the aggregate the right
to purchase the number of Warrant Shares which may then be purchased hereunder.
Any such New Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder
on any business day before 6:30 P.M., New York City time, at any time and from
time to time on or after the date hereof to and including the Expiration Date.
At 6:30 P.M., New York City time on the Expiration Date, the portion of this
Warrant not exercised prior thereto shall be and become void and of no value.
Prior to the Expiration Date, the Company may not call or otherwise redeem this
Warrant without the prior written consent of the Holder.
(b) Upon surrender of this Warrant, with the Form of Election
to Purchase attached hereto duly completed and signed, to the Company at its
address for notice set forth in Section 12 and upon payment of the Exercise
Price multiplied by the number of Warrant Shares that the Holder intends to
purchase hereunder, in the manner provided hereunder, all as specified by the
Holder in the Form of Election to Purchase, the Company shall promptly (but in
no event later than 3 trading days after the Date of Exercise (as defined
herein)) issue or cause to be issued and cause to be delivered to or upon the
written order of the Holder and in such name or names as the Holder may
designate, a certificate for the Warrant Shares issuable upon such exercise,
free of restrictive legends except (i) either in the event that a registration
statement covering the resale of the Warrant Shares and naming the Holder as a
selling stockholder thereunder is not then effective or the Warrant Shares are
not freely transferable without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
or (ii) if this Warrant shall have been issued pursuant to a written agreement
between the original Holder and the Company, as required by such agreement. Any
person so designated by the Holder to receive Warrant Shares shall be deemed to
have become holder of record of such Warrant Shares as of the Date of Exercise
of this Warrant. The Company shall, upon request of the Holder, if available,
use its best efforts to deliver Warrant Shares hereunder electronically through
the Depository Trust Corporation or another established clearing corporation
performing similar functions.
(c) A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable), with
the Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly
<PAGE> 10
signed, and (ii) payment of the Exercise Price for the number of Warrant Shares
so indicated by the holder hereof to be purchased.
(d) This Warrant shall be exercisable, either in its entirety
or, from time to time, for a portion of the number of Warrant Shares. If less
than all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder. The Holder shall be responsible for all other tax liability that may
arise as a result of holding or transferring this Warrant or receiving Warrant
Shares upon exercise hereof.
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity, if
requested, satisfactory to it. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
6. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holder (taking into account the adjustments and
restrictions of Section 8). The Company covenants that all Warrant Shares that
shall be so issuable and deliverable shall, upon issuance and the payment of the
applicable Exercise Price in accordance with the terms hereof, be duly and
validly authorized, issued and fully paid and nonassessable.
7. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 7. Upon each such adjustment of the Exercise
Price pursuant to this Section 7, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant
<PAGE> 11
Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property equal to the amount of Warrant Shares such Holder would have been
entitled to had such Holder exercised this Warrant immediately prior to such
reclassification or share exchange. The terms of any such reclassification or
share exchange shall include such terms so as to continue to give to the Holder
the right to receive the securities or property set forth in this Section 7(b)
upon any exercise following any such reclassification or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 7(a) and (b)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
<PAGE> 12
(d) If the Company or any subsidiary thereof, as applicable
with respect to Common Stock Equivalents (as defined below), at any time while
this Warrant is outstanding, shall issue shares of Common Stock or rights,
warrants, options or other securities or debt that is convertible into or
exchangeable for shares of Common Stock ("Common Stock Equivalents"), entitling
any person to acquire shares of Common Stock at a price per share less than the
Exercise Price (if the holder of the Common Stock or Common Stock Equivalent so
issued shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or otherwise,
or due to warrants, options or rights issued in connection with such issuance,
be entitled to receive shares of Common Stock at a price less than the Exercise
Price, such issuance shall be deemed to have occurred for less than the Exercise
Price), then the Exercise Price shall be multiplied by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such Common Stock or such Common Stock Equivalents plus
the number of shares of Common Stock which the offering price for such shares of
Common Stock or Common Stock Equivalents would purchase at the Exercise Price,
and the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock so issued or issuable, provided, that for purposes hereof, all
shares of Common Stock that are issuable upon conversion, exercise or exchange
of Common Stock Equivalents shall be deemed outstanding immediately after the
issuance of such Common Stock Equivalents. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. However, upon
the expiration of any Common Stock Equivalents the issuance of which resulted in
an adjustment in the Exercise Price pursuant to this Section, if any such Common
Stock Equivalents shall expire and shall not have been exercised, the Exercise
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would have
been (but reflecting any other adjustments in the Exercise Price made pursuant
to the provisions of this Section after the issuance of such Common Stock
Equivalents) had the adjustment of the Exercise Price made upon the issuance of
such Common Stock Equivalents been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such Common Stock Equivalents actually exercised.
(e) In case of any (1) merger or consolidation of the Company
with or into another Person, or (2) sale by the Company of more than one-half of
the assets of the Company (on a book value basis) in one or a series of related
transactions, the Holder shall have the right thereafter to exercise this
Warrant for the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and the Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the Common Stock for which this Warrant could have been exercised
immediately prior to such merger, consolidation or sales would have been
entitled. The terms of any such merger, sale or
<PAGE> 13
consolidation shall include such terms so as continue to give the Holder the
right to receive the securities, cash and property set forth in this Section
upon any conversion or redemption following such event. This provision shall
similarly apply to successive such events.
(f) For the purposes of this Section 7, the following clauses
shall also be applicable:
(i) Record Date. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them (A)
to receive a dividend or other distribution payable in Common Stock or in
securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(g) All calculations under this Section 7 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(h) Whenever the Exercise Price is adjusted pursuant to
Section 7(c) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
If:
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to
<PAGE> 14
subscribe for or purchase any shares of
capital stock of any class or of any rights;
or
(iv) the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock,
any consolidation or merger to which the
Company is a party, any sale or transfer of
all or substantially all of the assets of
the Company, or any compulsory share
exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of
the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 20 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
8. Payment of Exercise Price. The Holder shall pay the Exercise Price
in one of the following manners:
(a) Cash Exercise. The Holder may deliver immediately
available funds; or
(b) Cashless Exercise. The Holder may surrender this Warrant
to the Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as
follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be
issued
to the Holder.
<PAGE> 15
Y = the number of Warrant Shares with
respect to which this Warrant is being
exercised.
A = the average of the closing sale prices
of the Common Stock for the five (5) trading
days immediately prior to (but not
including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
9. Certain Exercise Restrictions.
(a) A Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
promulgated thereunder) in excess of 9.999% of the then issued and outstanding
shares of Common Stock, including shares issuable upon such exercise and held by
such Holder after application of this Section. Since the Holder will not be
obligated to report to the Company the number of shares of Common Stock it may
hold at the time of an exercise hereunder, unless the exercise at issue would
result in the issuance of shares of Common Stock in excess of 9.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular exercise hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of this Warrant is exercisable shall
be the responsibility and obligation of the Holder. If the Holder has delivered
a Form of Election to Purchase for a number of Warrant Shares that, without
regard to any other shares that the Holder or its affiliates may beneficially
own, would result in the issuance in excess of the permitted amount hereunder,
the Company shall notify the Holder of this fact and shall honor the exercise
for the maximum portion of this Warrant permitted to be exercised on such Date
of Exercise in accordance with the periods described herein and, at the option
of the Holder, either keep the portion of the Warrant tendered for exercise in
excess of the permitted amount hereunder for future exercises or return such
excess portion of the Warrant to the Holder. The provisions of this Section may
be waived by a Holder (but only as to itself and not to any other Holder) upon
not less than 61 days prior notice to the Company. Other Holders shall be
unaffected by any such waiver.
<PAGE> 16
(b) Notwithstanding anything herein to the contrary, the
Company's obligation to issue Warrant Shares upon exercise of this Warrant and
that certain Adjustable Warrant of even date hereof issued by the Company in the
name of the Holder to purchase shares of Common Stock, is limited to a number of
Warrant Shares equal to the product of (A) 1,525,000 Warrant Shares (subject to
equitable adjustments for stock splits, recapitalizations and similar events)
and (B) the quotient obtained by dividing (x) the number of shares of Common
Stock issued and sold to the original Holder as of the date hereof by (y) the
number of shares of Common Stock issued and sold by the Company as of the date
hereof, less (C) any Warrant Shares previously issued upon exercise of this
Warrant and the Adjustable Warrant (the "Threshold Maximum"). If no more Warrant
Shares shall be issuable under this Warrant then such Holder's remaining portion
of the Threshold Maximum represented by such Warrant shall be allocated pro-rata
among the remaining Holders.
10. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section, be issuable on
the exercise of this Warrant, the Company shall pay an amount in cash equal to
the Exercise Price multiplied by such fraction.
11. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
4900 Hopyard Road, Suite 200, Pleasanton, California 94588; facsimile number
(925) 251-0001, attention Chief Financial Officer, or (ii) if to the Holder, to
the Holder at the address or facsimile number appearing on the Warrant Register
or such other address or facsimile number as the Holder may provide to the
Company in accordance with this Section.
<PAGE> 17
12. Warrant Agent. The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a
new warrant agent. Any corporation into which the Company or any new warrant
agent may be merged or any corporation resulting from any consolidation to which
the Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit
of the parties hereto and their respective successors and assigns. This Warrant
may be amended only in writing signed by the Company and the Holder and their
successors and assigns.
(b) Subject to Section 13(a), above, nothing in this Warrant
shall be construed to give to any person or corporation other than the Company
and the Holder any legal or equitable right, remedy or cause under this Warrant.
This Warrant shall inure to the sole and exclusive benefit of the Company and
the Holder.
(c) The corporate laws of the State of Delaware shall govern
all issues concerning the relative rights of the Company and its stockholders.
All other questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. The Company and the Holder hereby
irrevocably submit to the exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, or that such suit,
action or proceeding is improper. Each of the Company and the Holder hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by receiving a copy thereof sent
to the Company at the address in effect for notices to it under this instrument
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
<PAGE> 18
(e) In case any one or more of the provisions of this Warrant
shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
<PAGE> 19
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
By:
------------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
<PAGE> 20
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Brightstar Information Technology Group, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of common stock, $.001 par value per share, of Brightstar Information
Technology Group, Inc. (the "Common Stock") and , if such Holder is not
utilizing the cashless exercise provisions set forth in this Warrant, encloses
herewith $________ in cash, certified or official bank check or checks, which
sum represents the aggregate Exercise Price (as defined in the Warrant) for the
number of shares of Common Stock to which this Form of Election to Purchase
relates, together with any applicable taxes payable by the undersigned pursuant
to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR
TAX IDENTIFICATION NUMBER
------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
Dated: , Name of Holder:
------------ -----
Print
-------------------------------------
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Signature must conform in all respects to
name of holder as specified on the face of
the Warrant
<PAGE> 21
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Brightstar
Information Technology Group, Inc. to which the within Warrant relates and
appoints ________________ attorney to transfer said right on the books of
Brightstar Information Technology Group, Inc. with full power of substitution in
the premises.
Dated:
- ---------------, ----
---------------------------------------
Signature must conform in all respects
to name of holder as specified on the
face of the Warrant
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
<PAGE> 22
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
WARRANT
Dated: March 10, 2000
Brightstar Information Technology Group, Inc., a Delaware corporation
(the "Company"), hereby certifies that, for value received, Montrose
Investments, Ltd. or its registered assigns ("Holder"), is entitled, subject to
the terms set forth below, to purchase from the Company the total number of
shares of common stock, $.001 par value per share (the "Common Stock"), of the
Company (each such share, a "Warrant Share" and all such shares, the "Warrant
Shares") calculated pursuant to Section 3 of this Warrant (subject to adjustment
for certain events as set forth herein) at an exercise price equal to $.001 per
share (as adjusted from time to time as provided in Section 8, the "Exercise
Price"), at the times set forth herein through and including the 30th Trading
Day (as defined in Exhibit A) following the Third Vesting Date (as defined
herein), plus an additional Trading Day for each Trading Day during a Blocking
Period (as defined in Section 4 of the Registration Rights Agreement) (the
"Expiration Date"), and subject to the following terms and conditions (certain
terms used herein are defined in Exhibit A attached hereto):
1. Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
<PAGE> 23
2. Registration of Transfers. The Company shall register the transfer
of any portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached hereto duly completed and signed,
to the Transfer Agent or to the Company at the address specified in Section 13.
Upon any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
3. Duration, Vesting and Exercise.
(a) The vesting of the Warrant Shares which the Holder is
permitted to acquire pursuant to this Warrant shall occur on the dates set forth
below. On each such date, this Warrant shall vest with respect to a number of
Warrant Shares calculated pursuant to Section 3(b) below. Only the Warrant
Shares that have vested may be acquired upon exercise of this Warrant.
(i) The First Vesting Date shall be the 31st Trading Day
following the 270th day following the Closing Date (as defined in Exhibit A);
(ii) The Second Vesting Date shall be the 31st Trading
Day following the First Vesting Date; and
(iii) The Third Vesting Date shall be the 31st Trading
Day following the Second Vesting Date.
(iv) Each of the First Vesting Date, Second Vesting
Date, and Third Vesting Date shall be referred to herein as a "Vesting Date."
(b) On each Vesting Date this Warrant shall vest and become
exercisable with respect to the number of Warrant Shares calculated in
accordance with the following formula:
(Applicable Share Number) x (Purchase Price/0. 92 - Adjustment Price)
---------------------------------------------------------------------
Adjustment Price
If the number calculated in accordance with the foregoing
formula is zero or a negative number, no Warrant Shares shall vest hereunder for
such Vesting Date and the Holder shall not be obligated to transfer any shares
of Common Stock to the Company. In addition, the Holder shall not be obligated
to transfer any shares of Common Stock to the Company and the number Warrant
Shares exercisable hereunder which shall have previously vested will not
decrease.
<PAGE> 24
(a) Notwithstanding anything herein to the contrary, if, after
the Effective Date (as defined in Exhibit A), the average of the Per Share
Market Values (as defined in Exhibit A) for 20 consecutive Trading Days is
greater than 140% of the Purchase Price (as defined in Exhibit A), (subject to
equitable adjustments for stock splits, recapitalizations and similar events)
this Warrant shall not vest with respect to any additional Warrant Shares but
will remain in effect as to any Warrant Shares which have vested prior thereto.
(b) Notwithstanding anything herein to the contrary, if on any
Vesting Date the Adjustment Price shall be less than 70% of the Purchase Price
(the "Floor Price"), then on such Vesting Date: (i) this Warrant shall vest with
respect to the Warrant Shares pursuant to Section 3(a) and (b) hereof, provided,
that the Adjustment Price pursuant to the formula set forth in Section 3(b)
shall, exclusively for purposes of this Section 3(d)(i), equal the Floor Price
(such number of Warrant Shares, the "Initial Shares") and (ii) with respect to
the Warrant Shares whose vesting would result in a vesting of Warrant Shares in
excess of the Initial Shares, the Company will have the option to elect by
written notice (the "Notice") delivered to the Holder no later than twenty (20)
Trading Days prior to the applicable Vesting Date to either (x) pay to the
Holder, in cash (the "Cash Payment"), within three (3) Trading Days from the
Vesting Date at issue, an amount equal to the product obtained by multiplying
(A) the applicable Adjustment Price and (B) the difference between the number of
Warrant Shares which would have otherwise vested on such Vesting Date pursuant
to Section 3(a) and (b) hereof and the Initial Shares (such number of Warrant
Shares, the "Subsequent Shares") or (y) allow this Warrant to vest with respect
to the Subsequent Shares. A failure by the Company to deliver the Notice to the
Holder pursuant to the terms of this Section shall constitute an election by the
Company to allow this Warrant to vest as to the Subsequent Shares pursuant to
the terms hereof. If the Company shall fail to pay the Cash Payment in full to
the Holder by the third (3rd) Trading Day from the Vesting Date at issue, then,
at the election of the Holder, the Company shall either (x) pay to the Holder
$5,000 per day until the Cash Payment and all additional payments due hereunder
are paid in full, or (y) allow this Warrant to vest with respect to the
Subsequent Shares.
(c) Notwithstanding the foregoing provisions of this Section
3, at any time during the period between the Closing Date and the Expiration
Date, within ten (10) Trading Days following the occurrence of any of the
following events (each, an "Event"), the Holder shall have the option to elect,
by providing the Company with a notice (an "Event Vesting Notice"), to have this
Warrant vest with respect to those Warrant Shares that have not yet already
vested:
(i) upon the occurrence of any of (i) an acquisition
after the date hereof by an individual or legal entity or "group" (as
described in Rule 13d-5(b)(1) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of in excess of 1/3 of the voting
securities of the Company, (ii) a replacement of more than one-half of the
members of the Company's board of directors which is not approved by those
individuals who are members of the board of directors on the date hereof in one
or a series of related transactions, (iii) the merger of the Company with or
into another entity, consolidation or sale of all or substantially all of the
assets of the Company in one or a series of related transactions, unless
following such transaction
<PAGE> 25
or series of transactions, the holders of the Company's securities
prior to the first such transaction continue to hold at least 2/3 of the
securities of the surviving entity or acquirer of such assets or (iv) the
execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth above in (i), (ii)
or (iii);
(ii) immediately prior to an assignment by the
Company for the benefit of creditors or commencement of a voluntary case under
Title 11 of the United States Code, or an entering into of an order for relief
in an involuntary case under Title 11 of the United States Code, or adoption by
the Company of a plan of liquidation or dissolution;
(iii) five (5) Business Days prior to the proposed
consummation with respect to the Company of a "Rule 13e-3 transaction" as
defined in Rule 13e-3 under the Exchange Act (or, if necessary, such earlier
date as the Company shall determine in good faith to be required in order for
the Holder to be able to participate in such transaction), it being agreed that
the Holder will receive actual notice of the 13e-3 Statement filed with the
Commission;
(iv) For any period of three (3) Trading Days (which
need not be consecutive Trading Days) commencing on or after the date of
issuance of this Warrant, there shall be no closing bid price on the Common
Stock on the Nasdaq (as defined in Exhibit A) or a Subsequent Market (as defined
in Exhibit A);
(v) The Common Stock fails to be listed or quoted for
trading on the Nasdaq or a Subsequent Market or for a period of three (3)
Trading Days (which need not be consecutive Trading Days);
(vi) After the Effective Date, a holder of
Registrable Securities (as defined in the Registration Rights Agreement) is not
permitted to sell Registrable Securities under the Underlying Shares
Registration Statement (as defined in Exhibit A) for any reason, except for a
suspension of trading permitted under Section 4 of the Registration Rights
Agreement, for five (5) or more days (whether or not consecutive); or
(vii) The Company shall fail or default in the timely
performance of any material obligation under the Transaction Documents and such
failure or default shall continue uncured for a period of five (5) Business Days
after the date on which notice of such failure or default is first given to the
Company (it being understood that no prior notice need be provided in the case
of defaults which cannot reasonably be cured within a 5-day period).
(viii) In the event the Holder delivers an Event
Vesting Notice, this Warrant shall vest with respect to the number of Warrant
Shares calculated in accordance with the formula set forth in Section 3(b),
provided, that for purposes of such calculation, (A) the Adjustment Price shall
be deemed to mean the average of the 20 lowest Per Share Market Values (which
need not occur on consecutive Trading Days) during the 30 consecutive Trading
Days preceding the date of the Event and (B) the Applicable Share Number shall
be deemed to mean 100% of the number of shares of Common Stock purchased by the
Holder pursuant to the Purchase Agreement.
<PAGE> 26
(d) Subject to Sections 3(a) and (b), this Warrant shall be
exercisable by the registered Holder on any Business Day before 6:30 P.M., New
York City time, at any time and from time to time on or after the date hereof to
and including the Expiration Date. At 6:30 P.M., New York City time on the
Expiration Date, the portion of this Warrant not exercised prior thereto shall
be and become void and of no value.
(e) Subject to Sections 3(a) and (b), this Warrant shall be
exercisable, either in its entirety or, from time to time, for a portion of the
number of Warrant Shares. If less than all of the Warrant Shares which may be
purchased under this Warrant are exercised at any time, the Company shall issue
or cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares for which no exercise has been
evidenced by this Warrant.
4. Delivery of Warrant Shares.
(a) Upon surrender of this Warrant, with the Form of Election
to Purchase attached hereto duly completed and signed, to the Company at its
address for notice set forth in Section 12 and upon payment of the Exercise
Price multiplied by the number of Warrant Shares that the Holder intends to
purchase hereunder, in the manner provided hereunder, all as specified by the
Holder in the Form of Election to Purchase, the Company shall promptly (but in
no event later than 3 business days after the Date of Exercise (as defined
herein)) issue or cause to be issued and cause to be delivered to or upon the
written order of the Holder and in such name or names as the Holder may
designate, a certificate for the Warrant Shares issuable upon such exercise,
free of restrictive legends except (i) either in the event that a registration
statement covering the resale of the Warrant Shares and naming the Holder as a
selling stockholder thereunder is not then effective or the Warrant Shares are
not freely transferable without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
or (ii) if this Warrant shall have been issued pursuant to a written agreement
between the original Holder and the Company, as required by such agreement. Any
person so designated by the Holder to receive Warrant Shares shall be deemed to
have become holder of record of such Warrant Shares as of the Date of Exercise
of this Warrant. The Company shall, upon request of the Holder, if available,
use its best efforts to deliver Warrant Shares hereunder electronically through
the Depository Trust Corporation or another established clearing corporation
performing similar functions.
A "Date of Exercise" means the date on which the
Holders shall have delivered to the Company (i) this Warrant (or any New
Warrant, as applicable), with the Form of Election to Purchase attached hereto
(or attached to such New Warrant) appropriately completed and duly signed, and
(ii) payment of the Exercise Price for the number of Warrant Shares so indicated
by the holder hereof to be purchased.
(b) If the Company fails to deliver to the Holder certificate
or certificates representing the Warrant Shares pursuant to Section 4(a) by the
third (3rd) Trading Day after the Date of Exercise, the Company shall pay to
such Holder, in cash, as liquidated damages and not as a
<PAGE> 27
penalty, $5,000 for each day after such third (3rd) Trading Day until such
certificates are delivered. Nothing herein shall limit the Holder's right to
pursue actual damages for the Company's failure to deliver certificates
representing shares of Common Stock upon exercise within the period specified
herein and the Holder shall have the right to pursue all remedies available to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law.
(c) In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder certificate or certificates
representing the Warrant Shares pursuant to Section 4(a) by the third (3rd)
Trading Day after the Date of Exercise, and if after such third (3rd) Trading
Day the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant
Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"),
then the Company shall pay (1) in cash to the Holder the amount by which (x) the
Holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of Warrant Shares that the Company was required to
deliver pursuant to Section 4(b) to deliver to the Holder in connection with the
exercise at issue by (B) the Per Share Market Value at the time of the
obligation giving rise to such purchase obligation and (2) deliver to the Holder
the number of shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations under Section 4(b).
For example, if the Holder purchases Common Stock having a total purchase price
of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of
Common Stock with a market price on the date of exercise totaled $10,000, under
clause (A) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
(d) The Company's obligations to issue and deliver Warrant
Shares in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
Warrant Shares. If the Company breaches its obligations under this Warrant,
then, in addition to any other liabilities the Company may have hereunder and
under applicable law, the Company shall pay or reimburse the Holder on demand
for all costs of collection and enforcement (including reasonable attorneys fees
and expenses).
5. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer
<PAGE> 28
involved in the registration of any certificates for Warrant Shares or Warrants
in a name other than that of the Holder. The Holder shall be responsible for all
other tax liability that may arise as a result of holding or transferring this
Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable indemnity, if requested. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holder (taking into account the adjustments and
restrictions of Section 8). The Company covenants that all Warrant Shares that
shall be so issuable and deliverable shall, upon issuance and the payment of the
applicable Exercise Price in accordance with the terms hereof, be duly and
validly authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section. Upon each such adjustment of the Exercise
Price pursuant to this Section, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders
<PAGE> 29
entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision or
combination, and shall apply to successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, transfer or share exchange, and
the Holder shall be entitled upon such event to receive such amount of
securities or property equal to the amount of Warrant Shares such Holder would
have been entitled to had such Holder exercised this Warrant immediately prior
to such reclassification or share exchange. The terms of any such
reclassification or share exchange shall include such terms so as to continue to
give to the Holder the right to receive the securities or property set forth in
this Section 8(b) upon any exercise following any such reclassification or share
exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 8(i), (ii) and (iv)), then in each such case the Exercise Price shall
be determined by multiplying the Exercise Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) In case of any (1) merger or consolidation of the Company
with or into another Person, or (2) sale by the Company of more than one-half of
the assets of the Company (on a book value basis) in one or a series of related
transactions, the Holder shall have the right thereafter to exercise this
Warrant for the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and the Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the Common Stock for which this Warrant could have been exercised
immediately prior to such merger, consolidation or sales would have been
entitled. The terms of any such merger, sale or consolidation shall include such
terms so as continue to give the Holder the right to receive the securities,
cash and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
<PAGE> 30
(e) For the purposes of this Section 8, the following clauses
shall also be applicable:
(i) Record Date. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them (A)
to receive a dividend or other distribution payable in Common Stock or in
securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to
Section 8(iii) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
(h) If (i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; (ii) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock; (iii) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (iv) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or (v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the affairs of the Company, then the
Company shall cause to be mailed to each Holder at their last addresses as they
shall appear upon the Warrant Register, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
<PAGE> 31
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice.
9. Payment of Exercise Price. The Holder shall pay the Exercise Price
in one of the following manners:
(a) Cash Exercise. The Holder may deliver immediately
available funds; or
(b) Cashless Exercise. The Holder may surrender this Warrant
to the Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as
follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued
to the Holder.
Y = the number of Warrant Shares with respect to
which this Warrant is being exercised.
A = the average of the closing sale prices of the
Common Stock for the five (5) trading days
immediately prior to (but not including) the Date of
Exercise as reported by Bloomberg Information
Systems, Inc. (or any successor to its function of
reporting stock prices).
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
<PAGE> 32
10. Certain Exercise Restrictions.
(a) A Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the
then issued and outstanding shares of Common Stock, including shares issuable
upon such exercise and held by such Holder after application of this Section.
Since the Holder will not be obligated to report to the Company the number of
shares of Common Stock it may hold at the time of an exercise hereunder, unless
the exercise at issue would result in the issuance of shares of Common Stock in
excess of 9.999% of the then outstanding shares of Common Stock without regard
to any other shares which may be beneficially owned by the Holder or an
affiliate thereof, the Holder shall have the authority and obligation to
determine whether the restriction contained in this Section will limit any
particular exercise hereunder and to the extent that the Holder determines that
the limitation contained in this Section applies, the determination of which
portion of this Warrant is exercisable shall be the responsibility and
obligation of the Holder. If the Holder has delivered a Form of Election to
Purchase for a number of Warrant Shares that, without regard to any other shares
that the Holder or its affiliates may beneficially own, would result in the
issuance in excess of the permitted amount hereunder, the Company shall notify
the Holder of this fact and shall honor the exercise for the maximum portion of
this Warrant permitted to be exercised on such Date of Exercise in accordance
with the periods described herein and, at the option of the Holder, either keep
the portion of the Warrant tendered for exercise in excess of the permitted
amount hereunder for future exercises or return such excess portion of the
Warrant to the Holder. The provisions of this Section may be waived by a Holder
(but only as to itself and not to any other Holder) upon not less than 61 days
prior notice to the Company. Other Holders shall be unaffected by any such
waiver.
(b) If the Company Stock is then listed for trading on the
Nasdaq or the Nasdaq SmallCap Market and the Company has not obtained the
Shareholder Approval (as defined below), then the Company may not issue in
excess of the product of (i) 1,728,321 Warrant Shares upon exercise of this
Warrant and (ii) the quotient obtained by dividing (x) the number of shares of
Common Stock issued and sold to the original Holder on the Closing Date by (y)
the number of shares of Common Stock issued and sold by the Company on the
Closing Date (such number of shares, the "Issuable Maximum"). The Issuable
Maximum equals 19.999% of the number of shares of Common Stock outstanding
multiplied by the quotient obtained by dividing (x) the number of shares of
Common Stock issued and sold to the original Holder on the Closing Date by (y)
the number of shares of Common Stock issued and sold by the Company on the
Closing Date. If any Holder shall no longer hold Warrants then such Holder's
remaining portion of the Issuable Maximum shall be allocated pro-rata among the
remaining Holders. If on any Date of Exercise (A) the Company Stock is listed
for trading on the Nasdaq or the Nasdaq SmallCap Market, (B) the Exercise Price
then in effect is such that the aggregate number of shares of Common Stock that
would then be issuable upon exercise in full of this Warrant, together with any
shares of Common Stock previously issued upon exercise of this Warrant, would
equal or exceed the Issuable Maximum, and (C) the Company shall not have
previously obtained the vote of shareholders, if any, as may be required by the
applicable rules
<PAGE> 33
and regulations of the Nasdaq Stock Market to approve the issuance of shares of
Common Stock in excess of the Issuable Maximum pursuant to the terms hereof (the
"Shareholder Approval"), then the Company shall issue to the Holder a number of
shares of Common Stock equal to the Issuable Maximum and, with respect to the
shares whose issuance would result in an issuance of shares of Common Stock in
excess of the Issuable Maximum, (the "Excess Warrant Shares"), the Holder shall
have the option to require the Company to either (1) use its best efforts to
obtain the Shareholder Approval applicable to such issuance as soon as possible,
but in any event no later than 60 days after such request (such 60th day, the
"Target Date") or (2) pay to the Holder, within one (1) Trading Day from the
request therefor, an amount in cash equal to the product of (x) the Excess
Warrant Shares multiplied by (y) the closing sales price of the Common Stock on
(a) the Target Date or (b) the Date of Exercise giving rise to the obligation to
seek Shareholder Approval, whichever is greater (the "Cash Payment"). In the
event the Holder has elected to require the Company to seek the Shareholder
Approval pursuant to clause (1) of the immediately preceding sentence and the
Company does not obtain the Shareholder Approval on or prior to the Target Date,
then, on the Target Date, the Company shall pay the Cash Payment to the Holder.
If the Company fails to pay the Cash Payment in full pursuant to this Section
within seven (7) days after the date payable, the Company will pay interest on
such amount at a rate of 18% per annum, or such lesser maximum amount that is
permitted to be paid by applicable law, to the Holder, accruing daily from the
date payable until such amount, plus all such interest thereon, is paid in full.
The Company and the Holder understand and agree that shares of Common Stock
issued upon exercise of this Warrant and then held by the Holder or an affiliate
thereof may not cast votes or be deemed outstanding for purposes of any vote to
obtain the Shareholder Approval.
(c) Notwithstanding anything herein to the contrary, the
Company's obligation to issue Warrant Shares upon exercise of this Warrant and
that certain Closing Warrant of even date hereof issued by the Company in the
name of the Holder to purchase shares of Common Stock, is limited to a number of
Warrant Shares equal to the product of (A) 1,525,000 Warrant Shares (subject to
equitable adjustments for stock splits, recapitalizations and similar events)
and (B) the quotient obtained by dividing (x) the number of shares of Common
Stock issued and sold to the original Holder on the Closing Date by (y) the
number of shares of Common Stock issued and sold by the Company on the Closing
Date, less (C) any Warrant Shares previously issued upon exercise of this
Warrant and the Closing Warrant (the "Threshold Maximum"). If no more Warrant
Shares shall be issuable under this Warrant then such Holder's remaining portion
of the Threshold Maximum represented by such Warrant shall be allocated pro-rata
among the remaining Holders.
11. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 11, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
<PAGE> 34
12. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 P.M. (New York City time) on a Business Day, (ii) the
Business Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 P.M. (New York City time) on any date and earlier than
11:59 P.M. (New York City time) on such date, (iii) the Business Day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
4900 Hopyard Road, Suite 200, Pleasanton, California 94588; facsimile number
(925) 251-0001, attention Chief Financial Officer, or (ii) if to the Holder, to
the Holder at the address or facsimile number appearing on the Warrant Register
or such other address or facsimile number as the Holder may provide to the
Company in accordance with this Section.
13. Warrant Agent.
(a) The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a
new warrant agent.
(b) Any corporation into which the Company or any new warrant
agent may be merged or any corporation resulting from any consolidation to which
the Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
14. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit
of the parties hereto and their respective successors and assigns. This Warrant
may be amended only in writing signed by the Company and the Holder and their
successors and assigns.
(b) Subject to Section 14(a), above, nothing in this Warrant
shall be construed to give to any person or corporation other than the Company
and the Holder any legal or equitable right, remedy or cause under this Warrant.
This Warrant shall inure to the sole and exclusive benefit of the Company and
the Holder.
(c) The corporate laws of the State of Delaware shall govern
all issues concerning the relative rights of the Company and its stockholders.
All other questions
<PAGE> 35
concerning the construction, validity, enforcement and interpretation of this
Warrant shall be governed by and construed and enforced in accordance with the
internal laws of the State of New York, without regard to the principles of
conflicts of law thereof. The Company and the Holder hereby irrevocably submit
to the exclusive jurisdiction of the state and federal courts sitting in the
City of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or that such suit, action or proceeding is
improper. Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under this instrument and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
(e) In case any one or more of the provisions of this Warrant
shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
<PAGE> 36
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC.
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
<PAGE> 37
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Brightstar Information Technology Group, Inc.
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of common stock ("Common Stock"), $.001 par value per share, of
Brightstar Information Technology Group, Inc. and, if such Holder is not
utilizing the cashless exercise provisions set forth in this Warrant, encloses
herewith $________ in cash, certified or official bank check or checks, which
sum represents the aggregate Exercise Price (as defined in the Warrant) for the
number of shares of Common Stock to which this Form of Election to Purchase
relates, together with any applicable taxes payable by the undersigned pursuant
to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
--------------------------------------
- -------------------------------------------------------------------------------
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
- -------------------------------------------------------------------------------
(Please print name and address)
Dated: , Name of Holder:
-------------- ----
Print
--------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
Signature must conform in all respects to
name of holder as specified on the face of
the Warrant
<PAGE> 38
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Brightstar
Information Technology Group, Inc. to which the within Warrant relates and
appoints ________________ attorney to transfer said right on the books of
Brightstar Information Technology Group, Inc. with full power of substitution in
the premises.
Dated:
- ---------------, ----
-------------------------------------
Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
-------------------------------------
Address of Transferee
-------------------------------------
-------------------------------------
In the presence of:
- --------------------------
<PAGE> 39
Exhibit A
"Adjustment Price" means the average of any 20 Per Share Market Values
(which need not occur on consecutive Trading Days) during the 30 consecutive
Trading Days preceding a Vesting Date (which may include Trading Days prior to
the Effective Date).
"Applicable Share Number" means 1/3 of the number of shares of Common
Stock purchased by the Holder pursuant to the Purchase Agreement.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a federal legal holiday or a day on which banking institutions in the
State of New York and the State of California generally are authorized or
required by law or other governmental action to close.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Effective Date" the date on which the Underlying Shares Registration
Statement is first declared effective by the Commission.
"Nasdaq" means the Nasdaq National Market.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq or on any
Subsequent Market on which the Common Stock is then listed or quoted, as
reported by Bloomberg Information Services, Inc. (or any successor entity
succeeding to its function of reporting prices), or if there is no such price on
such date, then the closing bid price on the Nasdaq or on such Subsequent Market
on the date nearest preceding such date, as reported by Bloomberg Information
Services, Inc. (or any successor entity succeeding to its function of reporting
prices), or (b) if the Common Stock is not then listed or quoted on the Nasdaq
or a Subsequent Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock is not
then publicly traded the fair market value of a share of Common Stock as
determined by an appraiser selected in good faith by the Holders of a majority
of the applicable Warrant Shares.
"Purchase Agreement" means the Securities Purchase Agreement, dated the
date hereof to which the Company and the original Holder are parties and
pursuant to which this Warrant was issued.
"Purchase Price" means $10.57 (which number shall be subject to
equitable adjustment for stock splits, recombinations and similar events) .
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof to which the Company and the original Holder
are parties.
"Subsequent Market" shall mean any of the New York Stock Exchange,
American Stock Exchange, Inc or Nasdaq SmallCap Market.
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq or on the Subsequent Market on which the Common Stock is then listed
or quoted, as the case may be, or (b) if the Common Stock s not listed on the
Nasdaq or on a Subsequent Market, a day on which the Common Stock is traded in
the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if
the Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National
<PAGE> 40
Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); provided, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean a Business Day.
"Transaction Documents"shall have the meaning set forth in the Purchase
Agreement.
"Underlying Shares Registration Statement" shall have the meaning
ascribed to it in the Purchase Agreement.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 973
<SECURITIES> 0
<RECEIVABLES> 16,127
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,379
<PP&E> 6,736
<DEPRECIATION> 2,720
<TOTAL-ASSETS> 85,008
<CURRENT-LIABILITIES> 15,970
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 60,442
<TOTAL-LIABILITY-AND-EQUITY> 85,008
<SALES> 103,449
<TOTAL-REVENUES> 103,449
<CGS> 76,476
<TOTAL-COSTS> 76,476
<OTHER-EXPENSES> 30,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 518
<INCOME-PRETAX> (3,881)
<INCOME-TAX> (1,313)
<INCOME-CONTINUING> (2,568)
<DISCONTINUED> (7,447)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,015)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
