AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1996
REGISTRATION NO. 333-09789
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLSTAR SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5045
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
76-0515249
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
TELEPHONE: (713) 795-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES H. LONG
CHIEF EXECUTIVE OFFICER
ALLSTAR SYSTEMS, INC.
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
TELEPHONE: (713) 795-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
NICK D. NICHOLAS RANDALL G. RAY
PORTER & HEDGES, L.L.P. GARDERE & WYNNE, L.L.P.
700 LOUISIANA, 35TH FLOOR 1601 ELM STREET, SUITE 3000
HOUSTON, TEXAS 77002-2764 DALLAS, TEXAS 75201
TELEPHONE: (713) 226-0600 TELEPHONE: (214) 999-3000
FAX: (713) 228-1331 FAX: (214) 999-4667
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 24, 1996
PROSPECTUS
2,035,000 SHARES
LOGO -- ALLSTAR SYSTEMS, INC.
COMMON STOCK
Of the 2,035,000 shares of Common Stock, $.01 par value per share ("Common
Stock") offered hereby (the "Offering"), 1,500,000 shares are being sold by
Allstar Systems, Inc. ("Allstar" or the "Company") and 535,000 shares are
being sold by a stockholder of the Company (the "Selling Stockholder"). The
Company will not receive any of the proceeds from any sale of Common Stock by
the Selling Stockholder. See "Principal and Selling Stockholders."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently anticipated that the public offering price will be
between $10.00 and $12.00 per share. For information relating to the factors
considered in determining the initial public offering price, see
"Underwriting." The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "ALLS," subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(1)(2) STOCKHOLDER
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share................................. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).................................. $ $ $ $
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- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Excludes a
non-accountable expense allowance payable to the Representatives of the
Underwriters. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 305,250 shares of Common Stock, solely to cover
over-allotments. See "Underwriting." If the Underwriters exercise this
option in full, the total price to public, underwriting discount and
proceeds to the Company will be $ , $ and $ ,
respectively.
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is
<PAGE>
expected that certificates evidencing the shares will be ready for delivery at
the offices of Rauscher Pierce Refsnes, Inc., Dallas, Texas, on or about
, 1996.
RAUSCHER PIERCE REFSNES, INC. SUTRO & CO. INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
[GRAPHICS]
The graphics on page two of the Prospectus are on the inside front cover,
seen when first opening the Prospectus. Page two contains at the bottom the
stabilization and other language set forth below. Page two also contains a copy
of the Company's logo below which are the following pictures: (i) computer
products; (ii) a call center agent working on a computer; (iii) a technician
explaining a computer system to another person while seated in front of the
computer; and (iv) two phone systems. Each of the pictures is in one of the four
quadrants of the space and represents the four business divisions of the
Company. Below each of the pictures is a caption of the business division that
the picture represents, which are Computer Products, CTI Software, IT Services,
and Telecom Systems, respectively.
Prior to the Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by independent certified
public accountants following the end of each fiscal year and with quarterly
reports containing unaudited summary financial information for each of the first
three quarters of each fiscal year.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION HEREIN AND IN THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED
ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES TO THE "COMPANY" OR TO
"ALLSTAR" REFER TO ALLSTAR SYSTEMS, INC., ITS PREDECESSORS AND SUBSIDIARIES.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS THE
REINCORPORATION OF THE COMPANY AS A DELAWARE CORPORATION IN OCTOBER 1996 AND THE
RESULTING 8.15-FOR-1 SHARE CONVERSION OF THE COMMON STOCK AND (II) ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. SEE
"BUSINESS -- HISTORY AND REINCORPORATION" AND "UNDERWRITING." A GLOSSARY OF
NAMES AND CERTAIN TECHNICAL TERMS IS LOCATED AFTER THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS IN THIS PROSPECTUS BEGINNING AT PAGE G-1.
THE COMPANY
The Company is a growing regional provider of computer and
telecommunications hardware and software products and related services. The
Company primarily markets its products and services in Texas from two locations
in the Houston and Dallas-Fort Worth metropolitan areas. The Company's customer
base of over 3,500 accounts is comprised primarily of mid-sized customers and
regional offices of larger customers in commercial, educational and governmental
sectors. The Company positions itself to provide its customers with
single-source solutions for both their computer and telecommunications needs by
offering a broad range of products and services and by providing the expertise
to support integrated computer and telecommunications applications.
The Company's revenue is derived from sales of computer hardware and
software ("Computer Products"), computer-related information technology services
("IT Services"), telecommunications equipment and services ("Telecom Systems")
and the Company's proprietary computer/telephone integra- tion software ("CTI
Software"). The Company is an authorized reseller of computer products from
Compaq, Hewlett-Packard, IBM, Microsoft, Novell and other leading manufacturers.
The Company has long-standing relationships with leading aggregators and
wholesale distributors of computer hardware and software products which enable
the Company to provide its customers with competitive product pricing and ready
product availability. IT Services include system design, installation,
integration and support services. With respect to Telecom Systems, the Company
markets, installs and services telecommunications equipment, including large PBX
telephone systems from NEC and Mitel. In 1995, the Company introduced
proprietary CTI Software products which facilitate computer and telephone
integration ("CTI"), primarily for telemarketing, call center and other high
volume calling applications.
The Company believes that the trend toward CTI is likely to continue and
that integrated voice, data and video communication will become more prevalent
and affordable. The Company believes open architecture CTI standards and
solutions will develop as they did in the computer industry. As the technology
and management of telecommunications and computer systems converge over the next
decade, the Company expects that customers will demand products and services
which integrate telecommunications and computer technologies.
For the year ended December 31, 1995, the Company produced a 91.3% increase
in operating income on a 42.2% increase in total revenue from 1994. For the nine
months ended September 30, 1996, the Company increased operating income by
102.1% on a 38.0% increase in total revenue over the comparable period in 1995.
The Company's growth has been particularly influenced by the expansion of its
Computer Products and IT Services operations into the Dallas-Fort Worth market
and the launch of its Telecom Systems business, which completed its first full
year of operations in 1995. As the Company has grown, selling, general and
administrative expenses have declined as a percentage of total revenue during
each of the last three years.
3
<PAGE>
The Company's goals include continuing the growth of its regionally-based
business while preparing the Company to be a national provider of computer and
telephone hardware and software products and related services. To achieve its
objectives, the Company intends to pursue several key strategies:
EXPAND GEOGRAPHICALLY. The Company intends to open additional offices
within Texas and in new regions to service existing customers and attract new
customers. The Company plans to open two new offices within the next year, the
first in Austin, Texas and the second in San Antonio, Texas. Upon opening an
office in San Antonio, the Company will have branch offices in three of the ten
largest metropolitan areas in the United States.
INCREASE TELECOM SYSTEMS AND CTI SOFTWARE BUSINESSES. The Company began
offering Telecom Systems in 1994 and CTI Software in 1995 to capitalize on the
growing trend in CTI. The Company intends to (i) expand Telecom Systems
operations to the Dallas-Fort Worth market by the end of the first quarter of
1997, (ii) pursue acquisitions of regional telephone system resellers with
established customer bases in targeted markets and (iii) increase the variety
and capabilities of its CTI Software products through internal development and
acquisitions of complementary software products.
IMPLEMENT INTERNET-BASED NATIONAL MARKETING PROGRAM. The Company intends
to implement a new method of marketing its Computer Products on a nationwide
basis under the trade name "800 PC Deals." By accessing an Internet home page
currently under development, the Company's sales representatives and customers
will be able to obtain product pricing and availability data, enter or change
orders and access customer account status information. The Company plans to
employ experienced sales representatives in selected metropolitan markets who
will be supported by the new Internet-based system and by a national sales
support call center performing order entry and customer service functions. After
establishing customer relationships in new markets with 800 PC Deals, the
Company intends to establish branch offices in certain of these markets. 800 PC
Deals is anticipated to begin operation in the first half of 1997.
The Company's executive offices are located at 6401 Southwest Freeway,
Houston, Texas 77074 and its telephone number is (713) 795-2000.
THE OFFERING
Common Stock offered by the 1,500,000 shares
Company............................
Common Stock offered by the Selling 535,000 shares
Stockholder........................
Common Stock to be outstanding after 4,175,000 shares(1)
this Offering......................
Use of proceeds by the Company....... To repay short-term borrowings, for
working capital and for general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol........ ALLS
- ------------
(1) Excludes 417,500 shares of Common Stock reserved for issuance under the 1996
Incentive Stock Plan, of which options to purchase 80,000 shares of Common
Stock will be granted upon closing of the Offering with exercise prices at
or above the initial public offering price, none of which will be currently
exercisable, and restricted stock awards for 10,000 shares which will be
granted upon closing of this Offering to certain key employees, none of
which will be vested. Also excludes 100,000 shares reserved for issuance
under the 1996 Non-Employee Director Stock Option Plan, none of which are
issued or outstanding. See "Management -- Incentive and Stock Option
Plans."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue........................ $ 49,536 $ 64,076 $ 91,085 $ 63,280 $ 87,337
Gross profit......................... 7,247 8,535 11,385 8,184 12,004
Operating income..................... 1,187 1,087 2,079 1,348 2,724
Income before provision for
income taxes....................... 543 323 861 443 1,802
Net income........................... 314 183 519 267 1,106
Net income per share................. $ 0.15 $ 0.07 $ 0.19 $ 0.10 $ 0.41
Weighted average shares
outstanding........................ 2,120,242 2,554,808 2,675,000 2,675,000 2,675,000
</TABLE>
AS OF SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
BALANCE SHEET DATA:
Working capital...................... $ 2,308 $ 17,065
Total assets......................... 27,830 30,087
Short-term borrowings(2)(3).......... 13,868 1,368
Long-term debt....................... -- --
Stockholders' equity................. 3,830 18,587
- ------------
(1) As adjusted gives effect to this Offering and the application of the net
proceeds therefrom, assuming an initial public offering price of $11.00 per
share. See "Use of Proceeds."
(2) See Notes 4 and 5 to the Company's Consolidated Financial Statements.
Short-term borrowings does not include amounts recorded as floor plan
financing which are considered to be accounts payable.
(3) The Company anticipates that the application of approximately $12.5 million
of the net proceeds of this Offering will be sufficient to repay all or
substantially all short-term borrowings under its accounts receivable line
of credit from its principal lender. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS, EACH OF WHICH COULD AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
AND PROSPECTS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY.
RISK OF LOW MARGIN BUSINESS
The Company's past growth in net income has been fueled primarily by sales
growth rather than increased gross profit margins. Given the significant levels
of competition that characterize the computer reseller market, it is unlikely
that the Company will be able to increase gross profit margins in its core
business of reselling computer products which accounted for approximately 90% of
the Company's total revenue in 1993, 1994, 1995 and the first nine months of
1996. Moreover, in order to attract and retain many of its larger customers, the
Company frequently must agree to volume discounts and maximum allowable markups
that serve to limit the profitability of sales to such customers. Accordingly,
to the extent that the Company's sales to such customers increase, the Company's
gross profit margins may be reduced and, therefore, any future increases in net
income will have to be derived from continued sales growth or effective
expansion into higher margin businesses, neither of which can be assured.
Furthermore, low margins increase the sensitivity of the Company's results of
operations to increases in costs of financing. Any failure by the Company to
maintain or increase its gross profit margins and sales levels could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON AVAILABILITY OF CREDIT; DEPENDENCE ON IBMCC; INTEREST RATE
SENSITIVITY
The Company is highly leveraged and the Company's business activities are
capital intensive in that the Company is required to finance accounts receivable
and inventory. In order to obtain necessary working capital, the Company relies
primarily on lines of credit under which the available credit and credit limits
are dependent on the amount and quality of the Company's accounts receivable and
inventory. As a result, the amount of credit available to the Company may be
adversely affected by factors such as delays in collection or deterioration in
the quality of the Company's accounts receivable, inventory obsolescence,
economic trends in the computer industry, interest rate fluctuations and the
lending policies of the Company's lenders. Many of these factors are beyond the
Company's control. Any decrease or material limitation on the amount of capital
available to the Company under its credit lines and other financing arrangements
would limit the ability of the Company to fill existing sales orders, purchase
inventory or expand its sales levels and, therefore, would have a material
adverse effect on the Company's financial condition and results of operations.
In addition, any significant increases in interest rates will increase the cost
of financing to the Company and would have a material adverse effect on the
Company's financial condition and results of operations. Substantially all of
the Company's credit availability is provided by IBMCC, through which it
maintains a $20.0 million revolving line of credit facility, and DFS, through
which it maintains a $3.0 million line of credit facility to finance certain
inventory purchases. It is anticipated that the Company will continue to rely on
accounts receivable and inventory financing from IBMCC and inventory financing
from DFS to finance future growth. During each of 1993, 1994, 1995 and the first
seven months of 1996, the Company was in default of certain financial and other
covenants under both its IBMCC and DFS credit facilities due largely to the
financing of its rapid growth during those periods by short-term indebtedness
under those same credit facilities. Although the Company has periodically sought
and obtained waivers from its lenders for prior defaults of certain covenants
(and may be required to do so in the future), and has obtained amendments to its
credit facilities liberalizing certain other covenants, there can be no
assurance that either of its principal lenders will accommodate future requests
for waivers or amendments. There can be no assurance that financing from IBMCC,
DFS or other lenders will be available to the Company in the future in the
amounts presently available, or at all. The inability of the Company to have
continuous access to such financing at reasonable costs would materially and
adversely impact the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
6
<PAGE>
HIGHLY COMPETITIVE BUSINESS
The Company is engaged in business activities that are intensely
competitive and rapidly changing. The Company believes that the principal
competitive factors in the business in which it operates are relative price and
performance, product availability, technical expertise, adherence to industry
standards, financial stability, service support and reputation. Price
competition has intensified, particularly in the Company's Computer Products and
IT Services businesses, and is likely to continue to intensify. Such price
competition could materially adversely affect the Company's financial condition
and results of operations. There can be no assurance that the Company will be
able to continue to compete successfully with existing or new competitors. The
Company's competitors include major computer products and telephone equipment
manufacturers, aggregators and distributors, including certain manufacturers,
aggregators and distributors which supply products to the Company. Other
competitors include established national, regional and local resellers, systems
integrators, telephone systems dealers, computer-telephony VARs and other CTI
software suppliers. Some of the Company's current and potential competitors have
longer operating histories and financial, sales, marketing, technical and other
competitive resources which are substantially greater than those of the Company.
As a result, the Company's competitors may be able to adapt more quickly to
changes in customer needs or to devote greater resources than the Company to
sales and service of its products. Such competitors could also attempt to
increase their presence in the Company's markets by forming strategic alliances
with other competitors of the Company, offer new or improved products and
services to the Company's customers or increase their efforts to gain and retain
market share through competitive pricing. See "Business -- Competition."
MANAGEMENT OF GROWTH; REGIONAL CONCENTRATION
The Company has experienced rapid growth which has and may continue to put
strains on the Company's management, operational and financial resources. The
Company's ability to manage growth effectively will require it to continue to
implement and improve its operational, financial and sales systems, to develop
the skills of its managers and supervisors and to hire, train, motivate and
manage its employees. The Company's future growth, if any, is expected to
require the addition of new management personnel and the development of
additional expertise by existing management personnel. There can be no assurance
that the Company will be successful in managing growth and the failure to do so
could materially adversely affect the Company's financial position and results
of operation. Within the next 12 months, the Company intends to open new offices
in Austin and San Antonio. The Company also plans to relocate its Dallas-Fort
Worth office and consolidate substantially all of its warehouse and distribution
operations in the Dallas-Fort Worth metropolitan area. The Company anticipates
that it will incur substantial costs in connection with these new office
openings, including expenditures for furniture, fixtures and equipment.
Additional burdens on the Company's working capital are also expected in
connection with the start-up of such operations. Any significant disruption or
unanticipated expenses in connection with these plans could also have a material
adverse effect on the Company's financial condition and results of operations.
For the foreseeable future, the Company expects that it will continue to derive
most of its total revenue from customers located in or near the metropolitan
areas in Texas in which the Company maintains offices. Accordingly, an economic
downturn in any of those metropolitan areas, or in the region in general, would
likely have a material adverse effect on the Company's financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company for the foreseeable future will depend largely
on the continued services of key members of management, leading salespersons and
technical personnel. There can be no assurance that the departure of one or more
of such key personnel would not have a material adverse effect on the Company's
results of operations. The Company is particularly dependent upon James H. Long,
founder, Chairman of the Board, President and Chief Executive Officer of the
Company, because of his knowledge of the Company's operations, industry
knowledge, marketing skills and relationships with major vendors and customers.
The Company does not maintain key personnel life insurance on any of its
executive officers or salespersons other than Mr. Long. The Company's success
also depends in part on its ability to attract,
7
<PAGE>
hire, train and retain qualified managerial, technical and sales and marketing
personnel at a reasonable cost, particularly those involved in providing systems
integration, support services and training. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining the qualified personnel, including technical personnel,
it requires to conduct and expand its operations successfully. The Company's
financial condition and results of operations could be materially adversely
affected if the Company were unable to attract, hire, train and retain qualified
personnel.
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE
MANUFACTURER-AUTHORIZED SERVICES
The Company's future success in both product sales and services depends
largely on its continued status as an authorized reseller of products and its
continued authorization as a service provider. With respect to the Company's
computer hardware and software product sales and service, the Company maintains
sales and service authorizations with many industry-leading manufacturers,
including Compaq, Hewlett-Packard, IBM, Microsoft, NEC and Novell. In addition,
some of such agreements are based upon the Company's continued supply
relationship with Inacom or another aggregator or distributor approved by such
manufacturers. With respect to the Company's Telecom Systems business, the
Company maintains sales and service authorizations with industry-leading
manufacturers, including Active Voice, AVT, NEC, Macrotel and Mitel. Without
such sales and service authorizations, the Company would be unable to provide
the range of products and services currently offered by the Company. In
addition, loss of manufacturer authorizations for products that have been
financed under the Company's credit facilities constitutes an event of default
under such credit facilities. In general, the agreements between the Company and
its products manufacturers either provide for fixed terms or for termination on
30 days prior written notice. There can be no assurance that such manufacturers
will continue to authorize the Company as an approved reseller or service
provider.
DEPENDENCE ON SUPPLIERS
The Company's business depends upon its ability to obtain an adequate
supply of products and parts at competitive prices and on reasonable terms. The
Company's suppliers are not obligated to have product on hand for timely
delivery to the Company nor can they guarantee product availability in
sufficient quantities to meet the Company's demands. There can be no assurance,
therefore, that such products will be available as required by the Company at
prices or on terms acceptable to the Company. The Company procures a majority of
computers, computer systems, components and parts primarily from Inacom and
Ingram in order to obtain competitive pricing, maximize product availability and
maintain quality control. The Company's purchases from Inacom accounted for
approximately 55.6%, 46.4%, 36.6% and 54.9% of the Company's total product
purchases in 1993, 1994, 1995 and the first nine months of 1996, respectively.
In August 1996, the Company renewed its long-term supply arrangement with Inacom
and is obligated under the terms of that agreement to purchase at least 80% of
its Computer Products from Inacom, but only to the extent that such products are
made available within a reasonable period of time at reasonably competitive
pricing. The Company's purchases from its second largest supplier, Ingram,
accounted for approximately 8.3%, 14.1%, 20.6% and 15.4% of the Company's total
product purchases in 1993, 1994, 1995 and the first nine months of 1996,
respectively. There can be no assurance that the Company will be able to
continue to obtain necessary products from Inacom or Ingram on terms acceptable
to the Company, if at all. There can be no assurance that such relationships
will continue or that, in the event of a termination of its relationships with
either Inacom or Ingram, or both of such suppliers, it would be able to obtain
alternative sources of supply without a material disruption in the Company's
ability to provide products to its customers. Any material disruption in the
Company's supply of products would have a material adverse effect on the
Company's financial condition and results of operations. See
"Business -- Supply and Distribution."
RAPID TECHNOLOGICAL CHANGE
The business in which the Company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. The Company's success depends in large part on its ability to
identify and obtain products that meet the changing requirements of the
marketplace. There can be no assurance that the Company will be able to identify
and offer products necessary to remain
8
<PAGE>
competitive or avoid losses related to obsolete inventory and drastic price
reductions. The Company attempts to maintain a level of inventory required to
meet its near term delivery requirements by relying on the ready availability of
products from its principal suppliers. Accordingly, the failure of the Company's
suppliers to maintain adequate inventory levels of products demanded by the
Company's existing and potential customers and to react effectively to new
product introductions could have a material adverse effect on the Company's
financial condition and results of operations. In addition, because certain
products offered by the Company are subject to manufacturer or distributor
allocations, which limit the number of units available to the Company, there can
be no assurance that the Company will be able to offer new products or product
enhancements to its customers in sufficient quantity to meet demand. Failure of
the Company to gain sufficient access to such new products or product
enhancements could also have a material adverse effect on the Company's
financial condition and results of operations. See "Business -- Supply and
Distribution."
RELIANCE ON KEY CUSTOMERS
The Company's top ten customers (which varied from period to period)
accounted in the aggregate for approximately 37.2%, 31.4%, 27.9% and 43.4% of
the Company's total revenue during 1993, 1994, 1995 and the first nine months
ended September 30, 1996, respectively. During the nine months ended September
30, 1996, the Company had one customer that accounted for 9.5% of its total
revenue. Based upon historical results and existing relationships with
customers, the Company believes that a substantial portion of its total revenue
and gross profit will continue to be derived from sales to existing customers.
There are no long-term commitments by such customers to purchase products or
services from the Company. Product sales by the Company are typically made on a
purchase order basis. A significant reduction in orders from any of the
Company's largest customers could have a material adverse effect on the
Company's financial condition and results of operations. Similarly, the loss of
any one of the Company's largest customers or the failure of any one of such
customers to pay its accounts receivable on a timely basis could have a material
adverse effect on the Company's financial condition and results of operations.
There can be no assurance that the Company's largest customers will continue to
place orders with the Company or that orders by such customers will continue at
their previous levels. There can be no assurance that the Company's service
customers will continue to enter into service contracts with the Company or that
existing contracts will not be terminated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "Business -- Customers."
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's success is largely dependent on the accuracy, quality and
utilization of the information generated by its customized management
information systems, which affects its ability to manage its sales, accounting,
inventory and distribution systems. The Company anticipates that it will
continually need to refine and enhance its management information systems as the
Company grows and the needs of its business evolve. In view of the Company's
reliance on information and telephone communication systems, any interruption or
errors in these systems could have a material adverse effect on the Company's
financial condition and results of operations. The Company's new Internet-based
system, through which 800 PC Deals will operate, is currently under development
and its implementation may encounter technical difficulties. There can be no
assurance that the new system will function as expected. See "Business --
Management Information Systems."
ACQUISITION RISK
The Company intends to pursue potential acquisitions of complementary
businesses. The success of this strategy depends not only upon the Company's
ability to acquire complementary businesses on a cost-effective basis, but also
upon its ability to integrate acquired operations into its organization
effectively, to retain and motivate key personnel and to retain customers of
acquired firms. No specific acquisitions are being negotiated or planned as of
the date of this Prospectus and there can be no assurance that the Company will
be able to find suitable acquisition candidates or be successful in acquiring or
integrating
9
<PAGE>
such businesses. Furthermore, there can be no assurance that financing required
for any such transactions will be available on satisfactory terms.
INTELLECTUAL PROPERTY PROTECTION
The Company's success depends in part upon the protection of its
intellectual property from unauthorized use. The Company has recently filed for,
but has not yet received, federal copyright protection for its CTI Software
products and federal trademark protection for its CTI Software products and the
800 PC Deals trade name. The Company presently relies primarily on trade secrecy
and confidentiality agreements with customers and employees to establish and
protect its rights in its intellectual property. However, without federal
copyright and federal trademark protection, there can be no assurance that the
Company's present protective measures will be adequate to prevent unauthorized
use or disclosure of its intellectual property or independent third party
development of the same or similar technology. Additionally, the prevention of
unauthorized use and disclosure of the Company's intellectual property will
likely become more difficult as its CTI Software business grows.
CONTROL BY, AND BENEFITS TO, EXISTING STOCKHOLDERS
Upon completion of this Offering, James H. Long, founder, Chairman of the
Board, President and Chief Executive Officer of the Company will own 50.7% of
the outstanding Common Stock and Mr. Long will have the ability to control the
election of a majority of the members of the Company's Board of Directors, and
approve (or prevent the approval of) certain matters requiring the approval of
stockholders and exert significant influence over the affairs of the Company.
The existing stockholders of the Company will benefit from this Offering,
principally through the increased liquidity of their holdings, which may result
from the creation of a public market for Common Stock, and through the potential
unrealized gains in the value of the Common Stock held by them. Mr. Long has
personally guaranteed the Company's indebtedness to IBMCC and, therefore, may be
deemed to benefit from the application of a portion of the net proceeds of this
Offering to repay substantially all amounts outstanding under the Company's
accounts receivable revolving line of credit with IBMCC. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources," "Principal and
Selling Stockholders" and "Description of Capital Stock."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, no public market for the Common Stock existed and
there can be no assurance that an active market will develop upon completion of
this Offering or, if developed, that such market will be sustained. The initial
public offering price of the Common Stock was determined through negotiations
between the Company and the Representatives of the Underwriters and may not be
indicative of the market price of the Common Stock after this Offering. See
"Underwriting." The market price for the Common Stock may be volatile and
subject to fluctuations resulting from news announcements concerning the Company
or its industry, general securities market conditions or other factors.
It is anticipated that a significant number of the shares of Common Stock
being offered hereby will be sold to clients of the Representatives. Although
the Representatives have advised the Company that they intend to make a market
in the Common Stock following this Offering, they have no legal obligation to do
so. The Representatives, if they become market makers, could be a dominating
influence in the market for the Common Stock, if one develops. The prices and
the liquidity of the Common Stock may be significantly affected by the degree,
if any, of the Representatives' participation in such market. There can be no
assurance that any market activities of the Representatives, if commenced, will
be continued.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Upon completion of this Offering, the 2,035,000 shares of Common Stock
offered hereby will be freely tradeable by persons other than affiliates of the
Company without restriction. The remaining 2,140,000 shares held by current
stockholders of the Company will be eligible for resale, subject to the
provisions of Rule 144 under the Securities Act. The Company, its existing
stockholders (other than the
10
<PAGE>
Selling Stockholder) and its officers and directors have agreed for a period of
180 days after the date of this Prospectus not to, directly or indirectly,
offer, sell, contract to sell, grant any option to sell or otherwise dispose of
any shares of Common Stock, or other securities substantially similar, or
securities convertible into or exercisable or exchangeable for or any rights to
purchase or acquire Common Stock or other securities substantially similar
(except for the grant of options or of restricted stock awards pursuant to the
1996 Incentive Stock Plan or the 1996 Non-Employee Director Stock Option Plan),
without the prior written consent of the Representatives. After this Offering,
the Company anticipates it will also have outstanding employee and director
stock options and restricted stock awards for an aggregate of 105,000 shares of
Common Stock and plans to file registration statements on Form S-8 with respect
to the issuance of such shares. Accordingly, such shares will generally be
freely tradeable upon issuance, except to the extent held by affiliates. Sales
of substantial amounts of the Common Stock in the public market, whether by
purchasers in this Offering or other stockholders of the Company, or the
perception that such sales could occur, may adversely affect the market price of
the Common Stock. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that may delay, deter or prevent a change in control of the Company.
Among other things, these provisions authorize the board of directors of the
Company to issue shares of preferred stock on such terms and with such rights,
preferences and designations as the board of directors of the Company may
determine without further stockholder action and limit the ability of
stockholders to call special meetings or amend the Company's Certificate of
Incorporation or Bylaws. Each of these provisions, as well as the Delaware
business combination statute could, among other things, restrict the ability of
certain stockholders to effect a merger or business combination or obtain
control of the Company. See "Description of Capital Stock -- Preferred Stock"
and "-- Certain Anti-Takeover Provisions."
DILUTION
A purchaser of Common Stock in this Offering will experience an immediate
and substantial dilution in the net tangible book value of its shares of $6.55
per share. See "Dilution."
ABSENCE OF DIVIDENDS
The Company expects to retain cash generated from operations to support its
cash needs and does not anticipate the payment of any dividends on the Common
Stock for the foreseeable future. In addition, the Company's credit facilities
with IBMCC and DFS prohibit the declaration or payment of dividends, unless
consent is obtained from each lender. See "Dividend Policy."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, at an assumed initial public offering price of $11.00 per share, after
deducting underwriting discounts and commissions and estimated Offering expenses
payable by the Company, are estimated to be $14.8 million. The Company will
receive no proceeds from the sale of Common Stock by the Selling Stockholder.
See "Principal and Selling Stockholders."
The Company intends to use an estimated $12.5 million (approximately 85% of
the estimated net proceeds) to repay all or substantially all of the Company's
outstanding short-term indebtedness under its accounts receivable revolving line
of credit with IBMCC. The outstanding balance under this accounts receivable
revolving line of credit, which was incurred to finance working capital, was
$13.9 million at September 30, 1996. Amounts outstanding under the accounts
receivable revolving line of credit bear interest at a fluctuating rate equal to
the prime interest rate plus 2.0%. At September 30, 1996, the interest rate in
effect for the IBMCC accounts receivable revolving line of credit was 10.25% per
annum. Principal and interest outstanding under the credit facility are due upon
termination of the facility, which remains in effect for successive 13 month
periods until terminated by the Company or IBMCC upon 60 days written notice.
The Company intends to expend an estimated $1.0 million for leasehold
improvements and other capital expenditures, a majority of which will be
expended in connection with the planned consolidation of its warehouse
facilities into a single facility in the Dallas-Fort Worth area, the relocation
of its Dallas branch office and the opening of two branch offices in Austin and
San Antonio, Texas. All or a portion of the $1.0 million in capital expenditures
currently budgeted by the Company for such purposes may be paid from the net
proceeds of the Offering remaining after repayment of short-term indebtedness,
depending on the availability of remaining net offering proceeds at the time of
such expenditures and the availability of other sources of funds. Any remaining
proceeds available for working capital and general corporate purposes may be
used to acquire complementary businesses and technologies. The Company is not
currently a party to any commitments or agreements and is not currently involved
in any negotiations with respect to any acquisitions. Pending such uses, the
Company intends to invest the net proceeds from this Offering in short-term,
interest-bearing securities or accounts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on the Common Stock.
The Company intends to retain any future earnings for reinvestment in its
business and does not intend to pay cash dividends in the foreseeable future.
Under the Company's credit facilities with IBMCC and DFS, the Company is
prohibited from declaring or paying dividends unless consent is obtained from
each lender. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996 and (ii) as adjusted to reflect the sale by the Company of
1,500,000 shares of Common Stock offered hereby (at an assumed initial public
offering price of $11.00 per share) and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the
Company, including the Notes thereto, included elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
Short-term borrowings(1)(2).......... $ 13,868 $ 1,368
--------- ------------
Long-term debt....................... -- --
Stockholders' equity:
Preferred Stock; $.01 par value;
5,000,000 shares authorized; no
shares outstanding............. -- --
Common Stock:
No par value; 1,000,000
shares authorized;
328,125 shares issued
and outstanding
(2,675,000 shares after
effect of
reincorporation)........ 2 --
$.01 par value; 50,000,000
shares authorized; no
shares outstanding
(4,175,000 shares as
adjusted)(3)............ -- 42
Additional paid-in capital...... 1,504 16,221
Retained earnings............... 2,324 2,324
--------- ------------
Total stockholders'
equity.................. 3,830 18,587
--------- ------------
Total capitalization.... $ 17,698 $ 19,955
========= ============
- ------------
(1) See Notes 4 and 5 to the Company's Consolidated Financial Statements.
Short-term borrowings does not include amounts recorded as floor plan
financing which are considered to be accounts payable.
(2) The Company anticipates that the application of approximately $12.5 million
of the net proceeds of this Offering will be sufficient to repay all or
substantially all short-term borrowings under its accounts receivable line
of credit from its principal lender. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(3) Excludes 417,500 shares of Common Stock reserved for issuance under the 1996
Incentive Stock Plan, of which options to purchase 80,000 shares of Common
Stock will be granted upon closing of this Offering with exercise prices at
or above the initial public offering price, none of which will be currently
exercisable, and restricted stock awards for 10,000 shares which will be
granted upon closing of this Offering to certain key employees, none of
which will be vested. Also excludes 100,000 shares reserved for issuance
under the 1996 Non-Employee Director Stock Option Plan, none of which are
issued or outstanding. See "Management -- Incentive and Stock Option
Plans."
13
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996, was
$3.8 million or $1.43 per share. Net tangible book value per share represents
the total tangible assets of the Company reduced by its total liabilities and
divided by the number of outstanding shares of Common Stock. After giving effect
to the sale of Common Stock by the Company in this Offering (at an assumed
initial public offering price of $11.00 per share) and the application of the
estimated net proceeds therefrom, the net tangible book value of the Company at
September 30, 1996, would have been $18.6 million or $4.45 per share. This
represents an immediate increase in net tangible book value of $3.02 per share
to existing holders of Common Stock and an immediate dilution of $6.55 per share
to new investors purchasing shares of Common Stock in this Offering. The
following table illustrates this dilution per share:
Initial public offering price per share......... $ 11.00
Net tangible book value per
share as of September 30,
1996............................ $ 1.43
Increase per share attributable
to new investors................ 3.02
---------
Adjusted net tangible book value per share after
this Offering................................... 4.45
---------
Dilution per share to new investors............. $ 6.55
=========
Utilizing the foregoing assumptions, the following table summarizes the
number of shares purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing holders of Common Stock
and by new investors purchasing shares of Common Stock from the Company in this
Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 2,675,000 64.1% $ 1,505,700 8.4% $ .56
New investors........................ 1,500,000 35.9 16,500,000 91.6 11.00
----------- ------- -------------- -------
Total........................... 4,175,000 100.0% $ 18,005,700 100.0%
=========== ======= ============== =======
</TABLE>
- ------------
(1) Sales of Common Stock by the Selling Stockholder in this Offering will
reduce the number of shares held by existing stockholders to 2,140,000
shares, or 51.3% of the total number of shares of Common Stock outstanding
after this Offering and will increase the number of shares held by new
investors to 2,035,000 shares, or 48.7% of the total number of shares of
Common Stock outstanding after this Offering.
(2) Excludes 417,500 shares of Common Stock reserved for issuance under the 1996
Incentive Stock Plan, of which options to purchase 80,000 shares of Common
Stock will be granted upon closing of this Offering with exercise prices at
or above the initial public offering price, none of which will be currently
exercisable, and restricted stock awards for 10,000 shares which will be
granted upon closing of this Offering to certain key employees, none of
which will be vested. Also excludes 100,000 shares reserved for issuance
under the 1996 Non-Employee Director Stock Option Plan, none of which are
issued or outstanding. See "Management -- Incentive and Stock Option
Plans."
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for each of the three years ended
December 31, 1993, 1994 and 1995 is derived from the Consolidated Financial
Statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors. The selected financial data for each of the two years
ended December 31, 1991 and 1992 is derived from the combined financial
statements of the Company of which the balance sheet as of December 31, 1991 and
1992 and the related combined statement of operations and retained earnings and
cash flows for the year ended December 31, 1992, were audited by other
independent auditors whose report does not appear herein. The selected
consolidated financial data for the nine months ended September 30, 1995 and
1996 is derived from the Company's unaudited consolidated financial statements
and, in the opinion of management, includes all adjustments (consisting of only
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial information set forth therein. Historical results
of operations, percentage fluctuations and any trends that may be inferred from
the data below are not necessarily indicative of the results of operations for
any future period. The selected consolidated financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue........................... $ 16,813 $ 31,180 $ 49,536 $ 64,076 $ 91,085 $ 63,280 $ 87,337
Cost of sales and service............... 12,692 25,371 42,289 55,541 79,700 55,096 75,333
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 4,121 5,809 7,247 8,535 11,385 8,184 12,004
Selling, general and administrative
expenses.............................. 3,479 6,063 6,060 7,448 9,306 6,836 9,280
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............. 642 (254) 1,187 1,087 2,079 1,348 2,724
Interest expense (net of other
income)............................... 153 243 644 764 1,218 905 922
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes........ 489 (497) 543 323 861 443 1,802
Provision (benefit) for income taxes.... 177 (122) 229 140 342 176 696
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ 312 $ (375) $ 314 $ 183 $ 519 $ 267 $ 1,106
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share............. $ 0.15 $ (0.18) $ 0.15 $ 0.07 $ 0.19 $ 0.10 $ 0.41
Weighted average shares outstanding..... 2,118,600 2,118,600 2,120,242 2,554,808 2,675,000 2,675,000 2,675,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------- AS OF
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
--------- --------- --------- --------- --------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 297 $ (269) $ 1,307 $ 1,363 $ 1,732 $ 2,308
Total assets............................ 5,823 8,796 17,431 19,077 24,266 27,830
Short-term borrowings(1)................ 2,253 2,806 6,896 8,972 9,912 13,868
Long-term debt.......................... -- 47 43 -- -- --
Stockholders' equity.................... 582 208 2,022 2,205 2,724 3,830
</TABLE>
- ------------
(1) See Notes 4 and 5 to the Company's Consolidated Financial Statements.
Short-term borrowings does not include amounts recorded as floor plan
financing which are considered to be accounts payable.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE
READ IN CONJUNCTION WITH, THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company was formed in 1983 to engage in the business of reselling
computer hardware and software products and, to date, most of its revenue has
been derived from Computer Products sales. In addition, the Company derives
revenue from providing IT Services to purchasers of Computer Products and other
customers. The Company operated from a single office in Houston, Texas until
1992 when it opened a branch office in Dallas, Texas. In 1994, the Company began
offering Telecom Systems in its Houston office. In the fourth quarter of 1995,
the Company acquired and began marketing CTI Software.
The Company's gross margin varies substantially between each of its
businesses. The Company's Computer Products sales have produced a gross margin
ranging from 10.3% to 12.2% over the three year and nine month period ended
September 30, 1996, due to the intense price competition characteristic of the
Computer Products market. The gross margin for IT Services, which reflects
direct labor costs, has ranged from 30.4% to 40.9% over the same periods. This
variation is primarily attributable to the pricing and the mix of services
provided, and to the level of direct labor as a component of cost during any
given period. The gross margin for Telecom Systems, which includes both product
sales and services, has varied between 33.1% and 47.4% since the Company entered
the Telecom Systems market in 1994. This variation reflects the different mix of
product sales and the amount of services-related revenue from period to period.
The gross margin for CTI Software was 56.4% for the nine months ended September
30, 1996, primarily due to the intellectual property value of the Company's
proprietary CTI Software. Revenue from CTI Software accounted for 1.1% of the
Company's total revenue for the nine months ended September 30, 1996.
For each year since 1993, the Company has lowered its selling, general and
administrative expenses as a percentage of total revenue. Selling, general and
administrative expenses consist primarily of personnel costs and facility costs.
While personnel costs are predominantly variable in nature and facility costs
are relatively fixed, both such costs as a percentage of total revenue have
decreased during these periods. Also contributing to this decrease is the
Company's initiative begun in 1995 to drop ship a higher percentage of orders
directly from suppliers to customers. This initiative has resulted in the
percentage of drop shipped orders (measured by the cost of goods drop shipped as
a percentage of total cost of goods) growing from 5.8% in the first nine months
of 1995 to 17.1% in the first nine months of 1996. While the Company does not
believe that it is in its best interest to drop ship all orders, it does intend
to continue to move more of its Computer Products distribution toward drop
shipments.
Manufacturers of many of the Computer Products resold by the Company have
consistently reduced unit prices near the end of a product's life cycle, most
frequently following the introduction of newer, more advanced models. While the
major manufacturers of computer products have a policy of providing price
protection to resellers when prices are reduced, on occasion, and particularly
during 1994, manufacturers introduced new models of their products and then
reduced the price of, or discontinued the older models without price protection.
In these instances, the Company often sells the older models at reduced prices,
which adversely affects gross margin.
Inacom is the largest supplier of Computer Products sold by the Company.
Purchases from Inacom accounted for approximately 55.6%, 46.4%, 36.6% and 54.9%
of the Company's total product purchases in 1993, 1994, 1995 and the first nine
months of 1996, respectively. In August 1996, the Company renewed its long-term
supply arrangement with Inacom and agreed to purchase at least 80% of its
Computer Products from Inacom, but only to the extent that such products are
made available within a reasonable period of time at reasonably competitive
pricing. Inacom does not carry certain product lines sold by the Company and
Inacom may be unable to offer reasonable product availability and reasonably
competitive pricing from time to time on those product lines that it carries.
The Company thus expects that less than 80% of its total Computer Products
purchases will be made from Inacom, and that any increase over historical levels
in the percentage of products it purchases from Inacom under the new Inacom
agreement will not have any material impact on the Company's results of
operations.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data derived from the Company's consolidated statements of operations
and indicates percentage of total revenue for each item.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------------- ------------------- ------------------- ------------------- -------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT
------- --------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA(1):
Revenue:
Computer Products.................. $44,405 89.6 $57,792 90.2 $81,740 89.7 $56,297 89.0 $77,963
IT Services........................ 5,131 10.4 6,167 9.6 7,814 8.6 5,846 9.2 5,892
Telecom Systems.................... -- 0.0 117 0.2 1,458 1.6 1,137 1.8 2,511
CTI Software....................... -- 0.0 -- 0.0 73 0.1 -- 0.0 971
Total revenue.................... 49,536 100.0 64,076 100.0 91,085 100.0 63,280 100.0 87,337
Gross profit(1):
Computer Products.................. 5,429 12.2 5,962 10.3 8,491 10.4 6,003 10.7 8,230
IT Services........................ 1,818 35.4 2,523 40.9 2,379 30.4 1,767 30.2 2,036
Telecom Systems.................... -- -- 50 42.7 482 33.1 414 36.4 1,190
CTI Software....................... -- -- -- -- 33 45.2 -- -- 548
Total gross profit............... 7,247 14.6 8,535 13.3 11,385 12.5 8,184 12.9 12,004
Selling, general and
administrative expenses............ 6,060 12.2 7,448 11.6 9,306 10.2 6,836 10.8 9,280
Operating income................... 1,187 2.4 1,087 1.7 2,079 2.3 1,348 2.1 2,724
Interest expense (net of other
income)............................ 644 1.3 764 1.2 1,218 1.3 905 1.4 922
Income before provision
for income taxes................. 543 1.1 323 0.5 861 1.0 443 0.7 1,802
Provision for income taxes........... 229 0.5 140 0.2 342 0.4 176 0.3 696
Net income......................... 314 0.6 183 0.3 519 0.6 267 0.4 1,106
PER OFFICE DATA(1):
Houston Office:
Revenue.......................... 39,104 78.9 41,057 64.1 53,095 58.3 35,823 56.6 42,337
Gross profit..................... 5,811 14.9 5,946 14.5 6,968 13.1 4,780 13.3 7,151
Dallas Office:
Revenue.......................... 10,432 21.1 23,019 35.9 37,990 41.7 27,457 43.4 45,000
Gross profit..................... 1,436 13.8 2,589 11.2 4,417 11.6 3,404 12.4 4,853
</TABLE>
%
---------
OPERATING DATA(1):
Revenue:
Computer Products.................. 89.3
IT Services........................ 6.7
Telecom Systems.................... 2.9
CTI Software....................... 1.1
Total revenue.................... 100.0
Gross profit(1):
Computer Products.................. 10.6
IT Services........................ 34.6
Telecom Systems.................... 47.4
CTI Software....................... 56.4
Total gross profit............... 13.7
Selling, general and
administrative expenses............ 10.6
Operating income................... 3.1
Interest expense (net of other
income)............................ 1.0
Income before provision
for income taxes................. 2.1
Provision for income taxes........... 0.8
Net income......................... 1.3
PER OFFICE DATA(1):
Houston Office:
Revenue.......................... 48.5
Gross profit..................... 16.9
Dallas Office:
Revenue.......................... 51.5
Gross profit..................... 10.8
- ------------
(1) Percentages shown are percentages of total revenue, except gross profit
percentages which represent gross profit by each business category as a
percentage of revenue for each such category.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
TOTAL REVENUE. Total revenue increased by $24.1 million (38.0%) from $63.3
million in the first nine months of 1995 to $87.3 million in the first nine
months of 1996. Revenue from Computer Products, which comprised 89.3% of total
revenue, increased by $21.7 million (38.5%). The increase in Computer Products
revenue was generally attributable to increased sales to new and existing
customers resulting from the hiring of additional sales personnel. Revenue from
IT Services, which comprised 6.7% of total revenue, increased by less than one
percent because the Company implemented a program to replace less profitable
services with services that were expected to generate higher gross margins. This
program resulted in the loss of several large customers due to price increases
by the Company. The loss of revenue from those customers was offset, however, by
sales to new IT Services customers and existing customers, generally at greater
gross margins than those earned on sales to the former customers. Although
revenue from IT Services has increased during each of the last three years and
during the first nine months of 1996 compared to the same period in 1995, IT
Services revenue as a percentage of total revenue declined over these same
periods. This percentage decrease is generally reflective of the fact that the
combined growth rate of the Company's three other business categories over the
same periods was greater than the growth rate of IT Services revenue. The
Company presently expects that IT Services revenue, expressed as a percentage of
total revenue, will continue to decline over the near term, because of the
higher growth rates in the three other businesses, although there can be no such
assurance due to competitive factors influencing the revenue growth of each of
the Company's four business categories. Revenue from Telecom Systems, which
comprised 2.9% of total revenue, increased by $1.4 million (120.9%). The
increase in Telecom Systems revenue was primarily the result of hiring
additional sales personnel and adding new customers, of which one customer
accounted for
17
<PAGE>
$678,000 (49.3%) of the increase, and expanding advertising and marketing
efforts. Sales of CTI Software, which were commenced during the fourth quarter
of 1995, contributed total revenue of $971,000 during the first nine months of
1996.
GROSS PROFIT. Gross profit increased by $3.8 million (46.7%) from $8.2
million in the first nine months of 1995 to $12.0 million in the first nine
months of 1996, while gross margin increased from 12.9% in the first nine months
of 1995 to 13.7% in the first nine months of 1996. The gross margin for Computer
Products decreased from 10.7% in 1995 to 10.6% in the corresponding period in
1996. The gross margin for IT Services increased from 30.2% in the first nine
months of 1995 to 34.6% in the same period in 1996. As noted above, this
increase was primarily attributable to the replacement of less profitable IT
Services business lost due to price increases with more profitable business from
new and existing IT Services customers. The gross margin for Telecom Systems
sales increased from 36.4% in the first nine months of 1995 to 47.4% in the
corresponding period in 1996. The increase was attributable to the purchase of a
large, complex system by a single customer at a higher than usual margin, and,
to a lesser degree, the fact that in the 1995 period, Telecom Systems was
generally selling at lower gross margin than in the 1996 period in order to
establish itself in the market place during its first year of operation. CTI
Software sales resulted in a gross margin of 56.4% in the first nine months of
1996, which was a start-up period for the Company's CTI Software business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.4 million (35.8%) from $6.8 million in
the first nine months of 1995 to $9.3 million in the corresponding period of
1996. As a percentage of total revenue, selling, general and administrative
expenses decreased from 10.8% in the nine months ended September 30, 1995 to
10.6% for the corresponding 1996 period. Of the dollar increase, $1.2 million
(49.1%) was attributable to increased compensation to sales personnel as a
result of increased sales levels. The decrease as a percentage of total revenue
resulted from increased sales without a proportionate increase in sales
personnel and increased efficiencies in certain expense areas, particularly
warehouse and distribution costs.
OPERATING INCOME. Operating income increased by $1.4 million (102.1%) from
$1.3 million in the first nine months of 1995 to $2.7 million in the same period
in 1996. Operating income increased as a percentage of total revenue from 2.1%
in the 1995 period to 3.1% in the 1996 period.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense increased by
$28,000 (3.1%) from $905,000 in the first nine months of 1995 to $933,000 in the
first nine months of 1996. The lesser increase in interest expense relative to
the increase in revenue was due principally to advance payments for a large
purchase by a single customer in the 1996 period. The prepayments resulted in
reduced accounts receivable and a related reduction in borrowing. Interest
expense as a percentage of total revenue decreased from 1.4% in the first nine
months of 1995 to 1.1% in the corresponding period of 1996.
NET INCOME. Net income increased by $839,000 (314.2%) from $267,000 in the
1995 period to $1.1 million in the 1996 period. Net income as a percentage of
total revenue increased from 0.4% in the first nine months of 1995 to 1.3% in
the same period in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue increased by $27.0 million (42.2%) from $64.1
million in 1994 to $91.1 million in 1995. Revenue from Computer Products, which
comprised 89.7% of total revenue, increased by $23.9 million (41.4%). The
increase in Computer Products revenue was generally attributable to increased
sales to new and existing customers resulting from the hiring of additional
sales personnel. Revenue from IT Services, which comprised 8.6% of total
revenue, increased by $1.6 million (26.7%). The increase in revenue from IT
Services was primarily attributable to the addition of support contracts with
new customers and, to a lesser degree, additional non-contract business. Revenue
from Telecom Systems, which comprised 1.6% of total revenue, increased by $1.3
million in the first full year of Telecom Systems operations. The revenue gains
in Telecom Systems were largely the result of the addition of new customers
during 1995.
GROSS PROFIT. Gross profit increased by $2.9 million (33.4%) from $8.5
million in 1994 to $11.4 million in 1995; however, overall gross margin,
expressed as a percentage of revenue, decreased from 13.3% in 1994 to 12.5% in
1995, due primarily to decreased gross margin for IT Services and to higher
revenue growth in the Company's lower gross margin Computer Products business.
The gross margin for
18
<PAGE>
Computer Products increased slightly from 10.3% in 1994 to 10.4% in 1995,
despite the continuation of the Company's practice of offering its Computer
Products in the Dallas-Fort Worth market at gross margins lower than it
typically obtained in the Houston market in order to increase market
penetration. The gross margin for IT Services decreased from 40.9% in 1994 to
30.4% in 1995 because the Company added certain large customers in 1995 at lower
gross margins. The gross margin for Telecom Systems decreased from 42.7% in 1994
to 33.1% in 1995, which represented its first full year of operations. During
1995, the Company reduced gross margins on most Telecom Systems products in
order to add business during this start-up period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.9 million (24.9%) from $7.4 million in
1994 to $9.3 million in 1995. As a percentage of total revenue, selling, general
and administrative expenses decreased from 11.6% in 1994 to 10.2% in 1995. The
dollar increase was primarily attributable to increased sales compensation as a
result of increased sales levels. In 1995, however, overall sales compensation
decreased as a percentage of total revenue because the Company completed
implementation of a change in its sales compensation policy, which resulted in a
reduction of overall sales commissions as a percentage of total revenue, and
reclassified certain types of business on which lower commission rates were paid
to sales personnel. Personnel costs, the largest component of general and
administrative expenses, also increased at a substantially slower rate than
total revenue. Certain general and administrative expenses are relatively fixed,
and the Company was able to leverage these expenses as revenue increased during
1995. In addition, certain variable expenses, primarily warehouse personnel and
distribution costs, were reduced as a percentage of total revenue. These
improvements were offset somewhat by certain expenses associated with the
start-up of the Company's Telecom Systems business in 1994.
OPERATING INCOME. Operating income increased by $992,000 (91.3%) from $1.1
million in 1994 to $2.1 million in 1995. Operating income increased as a
percentage of total revenue from 1.7% in 1994 to 2.3% in 1995.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense increased by
$454,000 (59.4%) from $764,000 in 1994 to $1.2 million in 1995. Interest expense
increased as a percentage of total revenue from 1.2% in 1994 to 1.3% in 1995.
The increase in interest expense was due principally to increased borrowing to
finance accounts receivable and a nominal increase in the prime rate.
NET INCOME. Net income increased by $336,000 (183.6%) from $183,000 in
1994 to $519,000 in 1995. Net income increased as a percentage of total revenue
from 0.3% in 1994 to 0.6% in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
TOTAL REVENUE. Total revenue increased by $14.5 million (29.4%) from $49.5
million in 1993 to $64.1 million in 1994. Revenue from Computer Products, which
comprised 90.2% of total revenue, increased by $13.4 million (30.1%). The
increase in Computer Products revenue was generally attributable to increased
sales to new and existing customers resulting from the hiring of additional
sales personnel. Revenue from IT Services, which comprised 9.6% of total
revenue, increased by $1.0 million (20.2%). The growth in revenue from IT
Services was primarily attributable to the addition of new customers.
GROSS PROFIT. Gross profit increased by $1.3 million (17.8%) from $7.2
million in 1993 to $8.5 million in 1994, while gross margin decreased from 14.6%
in 1993 to 13.3% in 1994. The gross margin for Computer Products declined from
12.2% in 1993 to 10.3% in 1994. This decrease was largely due to entry into the
Dallas-Fort Worth market where, in order to increase market penetration, the
Company offered its products at a gross margin lower than typically received in
the Houston market, and to the absence of price protection from certain Computer
Products manufacturers that introduced new products during 1994. The gross
margin for IT Services increased from 35.4% in 1993 to 40.9% in 1994 due to
higher revenue from new and existing customers which enhanced the productivity
of its technical personnel.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.4 million (22.9%) from $6.1 million in
1993 to $7.4 million in 1994. As a percentage of total revenue, selling, general
and administrative expenses decreased from 12.2% in 1993 to 11.6% in 1994. Of
the dollar increase, $769,000 (55.4%) was attributable to increased compensation
to sales and sales support personnel resulting from increased sales in 1994, the
hiring of additional sales and sales support
19
<PAGE>
personnel and a change in the Company's sales compensation policy which
increased the total portion of sales compensation paid in the form of salary and
decreased the portion paid as commissions.
OPERATING INCOME. Operating income decreased by $100,000 (8.4%) from $1.2
million in 1993 to $1.1 million in 1994. Operating income decreased as a
percentage of total revenue from 2.4% in 1993 to 1.7% in 1994.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense increased by
$120,000 (18.6%) from $644,000 in 1993 to $764,000 in 1994, due principally to
increased borrowing to finance accounts receivable. During the latter part of
1993, the Company changed its primary lender. As a result of a difference in the
method by which the Company's new lender computed interest charges, the Company
realized a lower effective rate of borrowing even though the nominal rate
remained the same. The lower effective interest rate was offset by increases in
the prime rate, which rose from a 6.0% rate throughout 1993 to an average rate
of 7.25% during 1994. Interest expense as a percentage of total revenue
decreased from 1.3% in 1993 to 1.2% in 1994.
NET INCOME. Net income decreased by $131,000 (41.7%) from $314,000 in 1993
to $183,000 in 1994. Net income as a percentage of total revenue decreased from
0.6% in 1993 to 0.3% in 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for the periods indicated and, in the opinion of management,
includes all adjustments (consisting of only normal recurring adjustments) which
the Company considers necessary for a fair presentation of the information set
forth therein. The Company's quarterly results may vary significantly depending
on factors such as the timing of large customer orders, timing of new product
introductions, adequacy of product supply, variations in the Company's product
costs, variations in the Company's product mix, promotions by the Company and
competitive pricing pressures. The results of any particular quarter may not be
indicative of results for the full year or any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1996 1996 1996
--------- -------------- ------------ --------- --------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue........................ $ 18,869 $ 23,726 $ 27,805 $ 25,948 $ 32,202 $ 29,187
Cost of sales and service............ 16,223 20,665 24,604 22,662 28,135 24,536
--------- -------------- ------------ --------- --------- --------------
Gross profit..................... 2,646 3,061 3,201 3,286 4,067 4,651
Selling, general and administrative
expenses........................... 2,176 2,512 2,470 2,738 3,091 3,451
--------- -------------- ------------ --------- --------- --------------
Operating income................. 470 549 731 548 976 1,200
Interest expense (net of other
income)............................ 310 276 313 298 285 339
--------- -------------- ------------ --------- --------- --------------
Income before provision for
income taxes................... 160 273 418 250 691 861
Provision for income taxes........... 63 108 167 111 223 362
--------- -------------- ------------ --------- --------- --------------
Net income....................... $ 97 $ 165 $ 251 $ 139 $ 468 $ 499
========= ============== ============ ========= ========= ==============
Net income per share................. $ 0.04 $ 0.06 $ 0.09 $ 0.05 $ 0.17 $ 0.19
Weighted average shares
outstanding........................ 2,675,000 2,675,000 2,675,000 2,675,000 2,675,000 2,675,000
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
--------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1996 1996 1996
-------- ------------- ------------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and service............ 86.0 87.1 88.5 87.3 87.4 84.1
-------- ------------- ------------ ---------- --------- --------------
Gross profit..................... 14.0 12.9 11.5 12.7 12.6 15.9
Selling, general and administrative
expenses........................... 11.5 10.6 8.9 10.6 9.6 11.8
-------- ------------- ------------ ---------- --------- --------------
Operating income................. 2.5 2.3 2.6 2.1 3.0 4.1
Interest expense..................... 1.7 1.2 1.1 1.1 0.9 1.2
-------- ------------- ------------ ---------- --------- --------------
Income before provision for
income taxes................... 0.8 1.1 1.5 1.0 2.1 2.9
Provision for income taxes........... 0.3 0.4 0.6 0.4 0.7 1.2
-------- ------------- ------------ ---------- --------- --------------
Net income....................... 0.5% 0.7% 0.9% 0.6% 1.4% 1.7%
======== ============= ============ ========== ========= ==============
</TABLE>
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its cash requirements principally
through borrowings under its lines of credit and through operations. The Company
maintains a cash position sufficient to pay only its immediately due obligations
and expenses. When the amount of cash available falls below its immediate needs,
the Company requests advances under the IBMCC credit facility. As the Company's
total revenue has grown, the Company has obtained increases in its available
lines of credit to enable it to finance its growth. The Company's working
capital was $1.7 million and $2.3 million at December 31, 1995 and September 30,
1996, respectively. As of September 30, 1996, the Company had borrowing capacity
under the IBMCC credit facility of $0.6 million.
CASH FLOW
Operating activities used net cash totaling $4.9 million, $3.2 million and
$2.3 million during 1993, 1994 and 1995, and $2.2 million for the nine months
ended September 30, 1996. Net cash used in operating activities has been
significant due to the working capital requirements resulting from the rapid
growth of the Company and, more specifically, the financing of increased
accounts receivable. Trade accounts receivable increased $4.9 million, $2.0
million and $4.4 million for 1993, 1994 and 1995, respectively, and increased
$1.3 million for the nine months ended September 30, 1996. Inventory also
increased to support the growth in total revenue by $912,000, $1.7 million,
$21,000 and $1.6 million for the same periods.
Net cash flow used in operating activities during 1995 of $2.4 million was
net of an accrual of $1.4 million for a delinquent Texas sales tax liability for
the period June 1995 to November 1995. Interest was accrued on the liability;
however, all penalties were waived by the state. The delinquency resulted from a
programming error in the Company's accounting system that has since been
corrected. In September 1996, the Company paid the state the agreed upon sales
taxes. Had the sales taxes been timely paid, net cash used in operations during
1995 would have been approximately $3.8 million and net cash used in operations
for the nine months ended September 30, 1996 would have been $837,000.
Investing activities used cash totaling $51,000, $447,000, $458,000 and
$435,000, respectively, during 1993, 1994, 1995 and the nine months ended
September 30, 1996. The Company's investing activities that used cash during
these periods were primarily related to capital expenditures. The Company
anticipates making capital expenditures within the next year in connection with
the consolidation of its warehouse facilities into a single facility located in
Dallas-Fort Worth, the relocation of its Dallas-Fort Worth branch office and the
opening of two new branch offices in Austin and San Antonio.
Financing activities provided cash totaling $6.1 million, $2.8 million and
$3.1 million during 1993, 1994 and 1995. In March 1994, the Company received
$1.5 million cash proceeds from the sale of Common Stock to the Selling
Stockholder. For the first nine months of 1996, financing activities provided
net cash of $3.2 million as a result of the increase in short-term debt under
the Company's credit facilities. The primary source of cash from financing
activities each period has been borrowings on the Company's lines of credit. The
lines of credit have been used principally to finance accounts receivable
balances and inventory purchases.
During the next twelve months, the Company expects to incur an estimated
$1.0 million for capital expenditures, a majority of which is expected to be
incurred for leasehold improvements and other capital expenditures in connection
with the planned consolidation of its warehouse facilities into a single
facility in the Dallas-Fort Worth area, the relocation of its Dallas branch
office and the opening of two branch offices in Austin and San Antonio, Texas.
All or a portion of the $1.0 million in capital expenditures currently budgeted
by the Company for such purposes may be paid from the net proceeds of this
Offering, depending on the availability of remaining net offering proceeds at
the time of such expenditures and other sources of funds. Any such capital
expenditures not paid from the net proceeds of this Offering are presently
expected to be financed from net cash flow from operations or borrowings under
the Company's line of credit with IBMCC. The actual amount and timing of such
capital expenditures may vary substantially depending upon, among other things,
the actual facilities selected, the level of expenditures required to render the
facilities suitable for the Company's purposes and the terms of lease
arrangements pertaining to the facilities.
21
<PAGE>
ASSET MANAGEMENT
The Company's cash flow from operations has been affected primarily by the
timing of its collection of trade accounts receivable. The Company typically
sells its products and services on short-term credit terms and seeks to minimize
its credit risk by performing credit checks and conducting its own collection
efforts. The Company had trade accounts receivable of $11.4 million and $15.8
million at December 31, 1994 and 1995, respectively, and $17.2 million at
September 30, 1996. The number of days' sales outstanding in trade accounts
receivable was 45 days, 45 days and 57 days for the same periods. Bad debt
expense as a percentage of total revenue for the same periods was 0.1%, 0.1% and
0.3%. The Company's allowance for doubtful accounts, as a percentage of trade
accounts receivable, was 1.6%, 2.8% and 5.7% at December 31, 1994 and 1995 and
September 30, 1996, respectively.
With respect to accounts receivable due from Mintech, Inc. ("Mintech"), a
minority-owned business which is wholly-owned by the wife of Anthony Adame, an
executive officer of the Company, the Company typically carries such accounts
until such time as Mintech's customers pay Mintech or until the Company collects
amounts due as the assignee of accounts receivable due from Mintech's customers.
Since the inception of Mintech in 1995, Mintech has purchased an aggregate of
approximately $1.8 million of Computer Products from the Company. No accounts
receivable from Mintech or Mintech's customers have been written off as
uncollectible and payments of such accounts receivable are typically received
within time periods generally consistent with average collection times for the
Company's other customers. See "Certain Relationships and Related
Transactions -- Certain Related Business Transactions."
The Company manages its inventory in order to minimize the amount of
inventory held for resale and the risk of inventory obsolescence and decreases
in market value. The Company attempts to maintain a level of inventory required
to reach only its near term delivery requirements by relying on the ready
availability of products from its principal suppliers. Manufacturers of the
Company's major products generally provide price protection, which reduces the
Company's exposure to decreases in prices. In addition, its suppliers generally
allow for returns of excess inventory, which, on a limited basis, are made
without material restocking fees. Inventory turnover for 1994, 1995 and the
first nine months of 1996 was 8.4 times, 15.1 times and 15.8 times on an
annualized basis.
CURRENT DEBT OBLIGATIONS
The principal source of liquidity for the Company, in addition to its cash
from operations, is its revolving line of credit with IBMCC (the "IBMCC
Facility"). The total credit available under the IBMCC Facility is currently
$30.0 million, subject to borrowing base limitations which are generally
computed as a percentage of various classes of eligible accounts receivable and
qualifying inventory. Borrowings are available under the IBMCC Facility for
floor plan financing of inventory from approved manufacturers (the "Inventory
Line"). Available credit under the IBMCC Facility, net of Inventory Line
advances, is used by the Company primarily to carry accounts receivable and for
other working capital and general corporate purposes (the "Accounts Line").
Borrowings under the Accounts Line bear interest at the fluctuating prime rate
plus 2.0% per annum. Under the Inventory Line, IBMCC pays the Company's
inventory vendors directly, generally in exchange for negotiated financial
incentives. Typically, the financial incentives received are such that IBMCC
does not charge interest to the Company until approximately 30 days after the
transaction is financed, at which time the Company is required to either pay the
full invoice amount of the inventory purchased from corporate funds or to borrow
under the Accounts Line for the amount due to IBMCC. Inventory Line advances not
paid within 30 days after the financing date bear interest at the fluctuating
prime rate plus 6.0%. IBMCC is permitted to fix a minimum prime rate for the
IBMCC Facility of not less than the average prime rate in effect at the time the
minimum prime rate is set but has not done so. IBMCC is authorized to change, on
30 days notice, the computation of the borrowing base and to disqualify accounts
receivable upon which advances have been made and require repayment of such
advances to the extent such disqualifications cause the Company's borrowings to
exceed the reduced borrowing base. The IBMCC Facility renews for successive
periods of 13 months unless either party chooses to terminate the arrangement on
60 days notice.
22
<PAGE>
The IBMCC Facility is collateralized by a security interest in
substantially all of the Company's assets, including its accounts receivable,
inventory, equipment and bank accounts. The Company's Chief Executive Officer
and principal shareholder has personally guaranteed the Company's indebtedness
to IBMCC. Collections of the Company's accounts receivable are required to be
applied through a lockbox arrangement to repay indebtedness to IBMCC; however,
IBMCC customarily releases a portion of the Company's daily collections to the
extent that they exceed the daily estimated borrowing base. IBMCC is not
obligated to continue this accommodation. If in the future IBMCC insists that
all lockbox payments be applied to reduce the Company's indebtedness, the
Company would be required to seek funding from IBMCC or other sources to meet
substantially all of its cash needs.
Through most of 1995, the Company's credit limit under the IBMCC Facility
was $15.0 million. From October 1995 through February 1996, IBMCC extended a
temporary increase in the credit limit to $22.5 million and in April 1996
permanently increased the credit limit to $20.0 million. Effective September
1996, the Company was notified by IBMCC that it had received further temporary
credit limit adjustments consisting of increases to $30.0 million from September
1996 through February 1997, $28.0 million in March 1997, $25.0 million in April
1997, and returning to the permanent limit of $20.0 million thereafter. At
September 30, 1996, the total indebtedness of the Company under the IBMCC
Facility was $18.9 million of which $13.9 million was outstanding under the
Accounts Line and $5.0 million was outstanding under the Inventory Line. The
Company's remaining available credit at September 30, 1996, based on its
borrowing base was approximately $600,000. The Company intends to apply
approximately $12.5 million of the net proceeds of this Offering to repay all or
substantially all indebtedness anticipated to be outstanding under the Accounts
Line on the closing date of this Offering.
The Company has a $3.0 million credit facility with Deutsche Financial
Services (the "DFS Facility") for the purchase of inventory from certain
suppliers. From October 1995 through May 1996, the Company received a temporary
increase in the available credit line to $6.0 million. As in the case of the
IBMCC Inventory Line, advances under the DFS Facility are typically interest
free for 30 days after the financing date for transactions in which adequate
financial incentives are received by DFS from the vendor. Within 30 days after
the financing date, the full invoice amount for inventory financed through DFS
is required to be paid by the Company. Amounts remaining outstanding thereafter
bear interest at the fluctuating prime rate (but not less than 6.5%) plus 6.0%.
DFS retains a security interest in the inventory financed. The DFS Facility is
immediately terminable by either party by written notice to the other. At
September 30, 1996, the amount outstanding under the DFS Facility was $1.0
million.
The Company is required to comply with certain key financial and other
covenants under the IBMCC Facility and DFS Facility. During each of the periods
ended December 31, 1993, 1994, 1995 and the first seven months of 1996, the
Company was in default of certain financial covenants and certain other
covenants under the IBMCC Facility and DFS Facility. For example, the Company
was required under the IBMCC Facility to maintain during 1995 the following
financial ratios: net profits after taxes to revenue of at least 0.5%;
annualized revenues to working capital of more than zero but no greater than
35.0 to 1; and total liabilities to tangible net worth of more than zero but no
more than 12.0 to 1. The ratios actually attained by the Company for the year
ended December 31, 1995, were approximately 0.57%, 43.9 to 1 and 12.7 to 1,
respectively. The DFS Facility, for instance, requires that at all times the
Company's indebtedness for borrowed money and capital lease obligations divided
by its tangible net worth plus subordinated debt not exceed 8.0 to 1, but at
June 30, 1996, the actual ratio attained by the Company was approximately 9.18
to 1. In addition to financial ratio covenants, the Company has violated other
covenants under both credit facilities, including timely filing of periodic
financial reports and covenants prohibiting certain transactions with
subsidiaries and other affiliates. IBMCC and DFS have, however, waived defaults
when requested by the Company from time to time. Most recently, IBMCC and DFS
waived certain defaults in August 1996, through the earlier of December 31, 1996
or the day after the closing date of this Offering. Additionally, both lenders
liberalized certain financial covenants in connection with their waivers. DFS
increased the maximum permitted ratio for indebtedness for borrowed money plus
capital lease obligations to tangible net worth plus subordinated debt to 9.5 to
1 through the first to occur of the closing of this Offering or December 31,
1996, reverting to 8.0 to 1 thereafter. IBMCC increased the maximum permissible
ratio of
23
<PAGE>
annualized revenue to working capital to 56.0 to 1 through 1996 and to 52.0 to 1
thereafter, reserving the right to further change the ratio upon notice to the
Company. The repayment of all or substantially all indebtedness to IBMCC under
the Accounts Line upon closing of this Offering was not a condition to obtaining
default waivers from IBMCC and DFS. Rather, the termination of such waivers in
connection with the closing of the Offering reflects the Company's expectation
that it will be in compliance with the then applicable financial ratios under
both the IBMCC Facility and DFS facility as of the date it repays substantially
all of the IBMCC Accounts Line. The Company has requested waivers of IBMCC and
DFS under their respective credit agreements from time to time in the past and
may be required to do so in the future. Although the Company has previously
received waivers when requested, there can be no assurance that such defaults
will be waived as in the past. See Notes 4, 5 and 11 of the Company's
Consolidated Financial Statements.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends unless consented to by the lender.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The accounting or disclosure requirements are effective for the
Company's fiscal year 1996. The Company has not yet determined whether it will
adopt the accounting requirements of this standard or whether it will elect only
the disclosure requirements and continue to measure compensation costs using
Accounting Principles Board Opinion No. 25.
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BUSINESS
GENERAL
The Company is a growing regional provider of computer and
telecommunications hardware and software products and related services. The
Company primarily markets its products and services in Texas from two locations
in the Houston and Dallas-Fort Worth metropolitan areas. The Company's customer
base of over 3,500 accounts is comprised primarily of mid-sized customers and
regional offices of larger customers in commercial, educational and governmental
sectors. The Company positions itself to provide its customers with
single-source solutions for both their computer and telecommunications needs by
offering a broad range of products and services and by providing the expertise
to support integrated computer and telecommunications applications.
The Company's revenue is derived from sales of Computer Products, IT
Services, Telecom Systems and CTI Software. The Company is an authorized
reseller of computer products from Compaq, Hewlett-Packard, IBM, Microsoft,
Novell and other leading manufacturers. The Company has long-standing
relationships with leading aggregators and wholesale distributors of computer
hardware and software products which enable the Company to provide its customers
with competitive product pricing and ready product availability. IT Services
include system design, installation, integration and support services. With
respect to Telecom Systems, the Company markets, installs and services
telecommunications equipment, including large PBX telephone systems from NEC and
Mitel. In 1995, the Company introduced its proprietary CTI Software products
which facilitate computer and telephone integration, primarily for
telemarketing, call center and other high volume calling applications.
INDUSTRY OVERVIEW
The market for computer products and services has experienced significant
growth in recent years and the use of such products and services within
organizations has been impacted by several concurrent trends. The introduction
of LANs and WANs has allowed organizations to supplement or replace expensive,
centralized mainframe computer systems with more flexible and affordable
PC-based client/server platforms. The emergence of widely accepted industry
standards for hardware and software has increased the acceptance of open
architecture LANs and WANs which can and frequently do contain products from
numerous manufacturers and suppliers. Rapid technological improvements in
computer hardware and the introduction of new software operating systems have
also created the need to expand or upgrade existing networks and systems. At the
same time price decreases have made such networks and systems affordable to a
larger number of organizations. The Company believes that these trends have
increased the general demand for computer products and related information
technology services.
Distribution channels for computer products changed significantly beginning
in the early 1990s. During that period, many manufacturers of computers began to
scale back their sales forces and, in order to ensure the continued wide
distribution of their products, started to offer their products to wholesale
computer distributors which previously had sold only software and peripheral
equipment. In addition, manufacturers also began allowing resellers to purchase
products from more than one aggregator or distributor, a practice known as
"open sourcing." Expanding computer sales to distributors and allowing open
sourcing intensified price competition among suppliers. The Company believes
that, in general, the manufacturers of its primary product lines are continuing
to rely to a large degree on resellers of computer products to distribute a
significant portion of their products to end-users. Distribution patterns may
continue to evolve, however, and any future changes may significantly affect the
Company's business.
The advent of open architecture networks has also impacted the market for
information technology services. Wider use of complex networks involving a
variety of manufacturer's equipment, operating systems and applications software
has made it increasingly difficult to diagnose problems and maintain the
technical knowledge and repair parts necessary to provide support services. The
Company believes that increased outsourcing of more sophisticated support
services by business and institutional customers has resulted from the technical
complexities created by multi-manufacturer and supplier network systems and
rapid technological change. Increasingly, organizations seeking computer
products often require prospective
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vendors not only to offer products from many manufacturers and suppliers, but to
have available and proficient service expertise to assist them in product
selection, system design, installation and post-installation assistance and
service. The Company believes that the ability to offer customers a
comprehensive solution to their information technology needs, including the
ability to work within its customers' corporate environments as integral members
of their management information system staff, are increasingly important in the
marketplace.
Telecommunications systems have evolved in recent years from simple analog
telephone systems to sophisticated digital systems, with modern digital systems
featuring voice processing, automated attendant, voice and fax mail, automatic
call distribution and call accounting. The ability to interface these new
digital phone systems to the user's PC-based computer systems now allows these
telephone systems to interact with the user's computerized data to create
powerful business solutions. New features, such as "caller ID" that is coupled
with a digital telephone system and integrated with a computer system, can
provide automatic look-up and display of account information while the user is
receiving a new call, thereby increasing productivity and the level of customer
service. Computerized "call accounting" allows an organization with integrated
telephone and computer systems to track telephone usage and long distance toll
billing and easily interface that data with computerized accounting and billing
systems. Integrated voice and facsimile handling allows a user to retrieve, send
and manage voice and facsimile messages on his computer screen. Computerized
telephone number listings allow the user to look up telephone numbers on the
computer and then have the computer dial the number automatically. For more
complex call center applications, computer systems can manage out-bound calling
campaigns while automatically blending in-bound calls to available agents in
order to enhance agent productivity.
The Company believes that the evolution of the digital telephone system to
a more open architecture, aided by standards established by Microsoft and Novell
for the interface of telephone and computer technologies, is causing rapid
industry change. This change is creating demand for digital telephone systems
which adhere to these new industry standards. These digital telephone systems,
along with the many software products which are rapidly becoming available for
use in CTI, require sophisticated installation and integration service
capability. The Company believes that the trend toward CTI is likely to continue
and that integrated voice, data and video communication will become more
affordable. As the technology and management of telecommunications and computer
systems converge over the next decade, the Company expects that growth
opportunities will be presented for companies able to provide and service the
latest integrated telecommunications and computer technologies.
BUSINESS STRATEGY
The Company's goals include continuing the growth of its regionally-based
business while preparing the Company to become a national provider of computer
and telephone hardware and software products and related services. To achieve
its objectives, the Company intends to pursue several key strategies:
EXPAND GEOGRAPHICALLY. The Company intends to open additional offices
within Texas and in new regions to service existing customers and attract new
customers. The Company plans to open two new offices within the next year, the
first in Austin, Texas and the second in San Antonio, Texas. Upon opening an
office in San Antonio, the Company will have branch offices in three of the ten
largest metropolitan areas in the United States.
INCREASE TELECOM SYSTEMS AND CTI SOFTWARE BUSINESSES. The Company began
offering Telecom Systems in 1994 and CTI Software in 1995 to capitalize on the
growing trend in CTI. The Company intends to (i) expand Telecom Systems
operations to the Dallas-Fort Worth market by the end of the first quarter of
1997, (ii) pursue acquisitions of regional telephone system resellers with
established customer bases in targeted markets, and (iii) increase the variety
and capabilities of its CTI Software products through internal development and
acquisitions of complementary software products.
IMPLEMENT INTERNET-BASED NATIONAL MARKETING PROGRAM. The Company intends
to implement a new method of marketing its Computer Products on a nationwide
basis under the trade name "800 PC Deals." By accessing an Internet home page
currently under development, the Company's sales representatives and
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customers will be able to obtain product pricing and availability data, enter or
change orders and access customer account status information. The Company plans
to employ experienced sales representatives in selected metropolitan markets who
will be supported by the new Internet-based system and by a national sales
support call center performing order entry and customer service functions. After
establishing customer relationships in new markets with 800 PC Deals, the
Company intends to establish branch offices in certain of these markets. 800 PC
Deals is anticipated to begin operation in the first half of 1997.
PRODUCTS AND SERVICES
The Company markets computer and telecommunications hardware and software
products and provides related computer and telecommunications services. The
Company's largest source of revenue is derived from the sale of Computer
Products, which during each of the three years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1996, accounted for approximately
90% of the Company's total revenue. During 1993, 1994, 1995 and the first nine
months of 1996, IT Services comprised approximately 10.4%, 9.6%, 8.6% and 6.7%,
respectively, of the Company's total revenue. The Company began selling Telecom
Systems in 1994 and CTI Software in 1995.
COMPUTER PRODUCTS
The Company offers its customers a wide variety of computer hardware and
software products available from over 600 manufacturers and suppliers. The
Company's products include desktop and laptop computers, monitors, printers and
other peripheral devices, operating system and application software, network
products and mid-range host and server systems including the IBM RS6000,
Hewlett-Packard HP9000 and DEC Alpha systems. The Company is an authorized
reseller of products from a number of leading manufacturers of computer
hardware, software and networking equipment, including Compaq, Hewlett-Packard,
IBM, Microsoft and Novell. Products manufactured by Compaq, Hewlett-Packard and
IBM in the aggregate accounted for approximately 57.1%, 47.5%, 53.7% and 57.4%,
for 1993, 1994, 1995 and the first nine months of 1996, respectively, of the
Company's total inventory purchases. There can be no assurance that the Company
will continue to resell such manufacturers' products in the future; however, the
Company believes that its relations with all of its major product manufacturers
and distributors are satisfactory.
IT SERVICES
IT Services are provided by the Company both in conjunction with and
separately from its Computer Products sales. The Company typically prices its IT
Services on a time and materials basis or under fixed fee service contracts,
depending on customer preference and the level of service commitment required.
In markets where the Company does not maintain branch offices, it often
subcontracts for necessary technical personnel, particularly where required for
larger scope or prolonged duration contracts. The Company's IT Services include
the following:
o INFORMATION SYSTEMS SUPPORT. The Company is an authorized warranty
service provider for many popular computer and computer peripheral
products and provides hardware repair and maintenance services,
complex network diagnostic services, end user support services and
software diagnostic services. The Company also offers complete
outsourcing of a customer's computer and network management and
technical support needs on a contract basis. The Company provides
on-site service parts stocking, help desk assistance and fixed asset
management and tracking.
o CONTRACT SYSTEMS ENGINEER, TECHNICIAN AND PROGRAMMER STAFFING. The
Company provides short-term supplemental technical staffing, including
hardware and software technicians, help desk personnel, systems and
network engineers and programming staff.
o SYSTEMS ENGINEERING. The Company provides systems engineering
services including information technology consulting, LAN/WAN design,
on-site and remote network administration, new technology feasibility
and impact analyses and disaster recovery plan analyses.
o INFORMATION TECHNOLOGY PROJECT MANAGEMENT. The Company provides
project management services for major hardware and software upgrades
and conversions, roll-outs of major new hardware
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and software installations and large network installations, including
multiple city WAN implementations.
o TELECOMMUNICATIONS AND DATA SYSTEMS CABLING. The Company provides
networking and telecommunications cabling services required for all
major networking topologies, including fiber optic cabling. The
Company also offers cabling services for adding to, moving or changing
existing network systems
o CONTRACT PROGRAMMING SERVICES. Recently, the Company has begun to
offer contract programming services, primarily related to SQL database
design and implementation, client server applications and Internet
site development.
To support and maintain the quality of these services and to maintain
vendor accreditation necessary to resell and service its significant product
lines, the Company's technical staff participate in various certification and
authorization programs sponsored by hardware manufacturers and software
suppliers. The Company currently has attained several certifications and
authorizations, most notably as a Microsoft Solution Provider and a Novell
Platinum Reseller. The Company's ability to attract and retain qualified
professional and technical personnel is critical to the success of its IT
Services business.
TELECOM SYSTEMS
The Company began its Telecom Systems business in 1994 to capitalize on the
trend toward CTI. The Company currently markets, installs and services business
telephone systems, including large PBX systems and small key systems, along with
a variety of related products including hardware and software products for data
and voice integration, wide area connectivity and telephone system networking
and wireless communications. The Company resells PBX systems manufactured by NEC
and Mitel and smaller "key systems," including products from Macrotel, NEC and
Winn Communications. Wireless products include products from Uniden and
Spectralink. Software products include voice mail products from Active Voice and
AVT, interactive voice response applications from AVT and call center activity
reporting products from Taske.
The Company currently markets Telecom Systems only from its Houston office.
By the end of the first quarter of 1997, the Company plans to expand Telecom
Systems sales to its Dallas office. The Company also intends to expand its
Telecom Systems products, particularly in the area of CTI products, as suitable
new products become available for resale.
CTI SOFTWARE
The Company develops and markets proprietary CTI Software, which integrates
business telephone systems and networked computer systems, under the trade name
"Stratasoft." CTI Software is designed to improve the efficiency of
telemarketing operations, inbound and outbound call centers and other high
volume calling applications. Basic products offered by the Company are typically
customized to suit a customer's particular needs and are often bundled with
computer hardware supplied by the Company at the customer's request. The Company
entered the CTI Software business in late 1995 by acquiring two CTI products,
currently sold under the names StrataDial and StrataVoice, from a corporation
owned by the individual who presently manages the Company's CTI Software
operations. See "Certain Relationships and Related Transactions -- Acquisition
of Stratasoft Products." A new product, Strata-Interactive, has also been
developed by the Company. The Company now markets these three CTI Software
products, which are described below:
o STRATADIAL. StrataDial is a predictive dialer software product for
outbound call center applications such as telemarketing, collections,
surveys, lead generation and announcements that require personal
contact. A predictive dialer is a product which is used in call center
applications to dial telephone numbers from lists of computerized data
and pass completed calls to waiting call center employees along with
computerized data used during the call. The call data displayed for
the employee might include, for example, the pertinent account balance
and payment history in the case of calling overdue credit card
accounts or a telemarketing script in the case of a telemarketing
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campaign. The use of a predictive dialer product in telemarketing
substantially increases worker productivity due to increased call
volume. StrataDial features inbound/outbound call blending without
requiring an automated call distribution feature ("ACD") of the PBX
telephone system. Call blending allows call center employees to work
on out-bound calling campaigns when there are no in-bound calls
waiting to be serviced. Upon receipt of an in-bound call to the call
center, the employee automatically receives the next sequential
in-bound call rather than another out-bound campaign call generated by
the predictive dialer. This allows call center employees to be more
productive by allowing them to make out-bound calls during periods in
which there are no in-bound calls to be serviced. StrataDial collects
campaign specific data during the telephone call and provides
comprehensive on line reporting and statistical analysis of the
campaign data. StrataDial also features open architecture which allows
easy interaction with the customer's other database applications.
Dialing parameters and campaign characteristics can be changed without
shutting down the dialer, as is required with many competing products.
Through September 30, 1996, the Company had licensed and installed 20
StrataDial systems.
o STRATAVOICE. StrataVoice is an outbound dialing product designed for
high volume applications that do not require human interaction.
StrataVoice applications include appointment confirmation and setting,
court appearance notification, surveys, community notification such as
school closings and emergency evacuation, employee updates,
absenteeism notification, telemarketing and market research. A
telephone system utilizing StrataVoice dials a computerized list of
numbers and can ask the contacted person a number of questions,
including branching to other questions and statements based on
responses. StrataVoice also allows the contacted person to leave
messages. Scripting tools are included that allow the user to develop
campaigns. The system builds a database of respondent data and has
comprehensive response reporting capabilities. Through September 30,
1996, the Company had licensed and installed 54 StrataVoice systems.
o STRATA-INTERACTIVE. Strata-Interactive is an interactive voice
response ("IVR") software product which allows telephone calls to
access computer information at any time using a simple touch-tone
telephone. Applications for IVR technology vary and include insurance
coverage verification and claims reporting, utility company account
information and outage reporting, bank account information and on-line
transactions, and shipment verification and tracking information.
Strata-Interactive is based upon open architecture and is designed to
work with networked computers. The first beta version of the product
was delivered to a customer in June 1996.
The Company provides CTI Software to its customers pursuant to a written
license agreement with the customer. The Company also intends to pursue
arrangements under which it will seek to license its CTI Software to
manufacturers and other distributors of CTI hardware and software for inclusion
in the CTI products sold by them, although there can be no assurance that it
will be successful in such efforts.
SALES AND MARKETING
DIRECT SALES
The Company markets its products and services primarily through direct
sales representatives. Direct sales representatives are teamed with in-house
customer service representatives and are assigned to specific customer accounts.
The Company believes that direct sales lead to better account penetration and
management, better communications and long-term relationships with its
customers. The Company's sales personnel, including account managers and
customer service representatives, are partially compensated, and in some cases
fully compensated, on the profitability of accounts which they participate in
developing. The Company believes that its past and future growth will depend in
large measure on its ability to attract and retain qualified sales
representatives and sales management personnel. The Company promotes its
products and services through general and trade advertising, participation in
trade shows and telemarketing campaigns. The Company believes that a significant
portion of new customers of its Computer Products and IT Services businesses
originates through word-of-mouth referrals from existing customers and industry
members, such as manufacturer's representatives. Additionally, Telecom Systems
sales personnel seek to capitalize on the many customer relationships developed
by the Company's Computer Products and IT Services personnel. By virtue of their
computer business contacts, Computer Products and IT Services
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personnel often learn at a relatively early stage that their customers may soon
be in the market for telecommunications equipment and services. Sales leads
developed by this synergy are then jointly pursued. CTI Software is marketed by
direct sales representatives to organizations using telemarketing, call centers
or other high volume telecommunications functions. In addition, StrataVoice is
marketed through resale arrangements between the Company and a VAR.
INTERNET-BASED SALES SUPPORT SYSTEM
The Company is in the process of developing an Internet-based sales support
system that will be used by its entire sales force. The system will allow sales
representatives to access information on product pricing and availability, enter
and track specific orders and monitor customer account information. Sales
representatives will be able to access the system from their desktop computers
at the Company's offices or on the Internet. The system will also allow selected
customers to enter and manage their own orders on-line. The Company believes
that when implemented this sales support system will enhance the productivity
and flexibility of its sales force and improve its customer service.
800 PC DEALS
The Company intends to use its proposed Internet-based sales support system
to cost-effectively expand its marketing efforts for Computer Products on a
national level under the trade name 800 PC Deals. Specifically, the Company
intends to employ sales representatives with local experience in targeted
metropolitan markets to establish customer relationships utilizing the new
system. The Company also plans to operate a national sales support call center
to serve sales representatives and customers. Initially, the Company intends to
fulfill a large portion of orders in these new markets by drop shipping product
directly from suppliers to customers. Once sufficient customer relationships are
established and market knowledge is developed, the Company may seek to establish
a branch office in a market. 800 PC Deals is expected to begin operation in the
first half of 1997.
There can be no assurance that the new system will function as expected or,
if so, that its implementation will enable the marketing approach of 800 PC
Deals to be successful. Many factors could influence the performance of 800 PC
Deals, including competition by others using similar systems, technical
difficulties in the implementation of the new Internet-based system, lack of
customer or supplier acceptance and the inability of local, direct sales
representatives to successfully market Computer Products through 800 PC Deals.
CUSTOMERS
The Company focuses its marketing efforts on mid-sized customers and
regional offices of larger customers located in or near the metropolitan areas
in Texas in which the Company maintains offices. The Company occasionally
provides Computer Products and IT Services in markets where the Company does not
have an office, typically to branch operations of customers with which the
Company has an established relationship. The Company's customer base is not
concentrated in any industry group. Over 3,500 customers purchased products or
services from the Company during the 12-month period ended September 30, 1996.
During 1993, 1994, 1995 and the first nine months of 1996, the Company's top ten
customers (which varied from period to period) in the aggregate accounted for
approximately 37.2%, 31.4%, 27.9% and 43.4%, respectively, of the Company's
total revenue. In each of the same periods, the largest single customer (which
varied from period to period) accounted for approximately 6.4%, 3.6%, 5.8% and
9.5%. The customers shown below, each of which purchased products or services in
excess of $100,000 during the 12-month period ended September 30, 1996,
illustrate the diversity of the Company's customers:
Amoco Corporation
AT&T
Baker Oil Tools, Inc.
Bank America Corporation
Blockbuster Entertainment
Brinks Home Security
3Com Corporation
Castrol Industrial
Chevron Chemical Company
Exxon Corp.
Federal Home Loan Bank
GTE VISNET
H&R Block of South Texas
Ingersoll-Rand
Maxum Health Corp.
MCI Telecommunications Corp.
Motorola, Inc.
Southwestern Bell Telephone Co.
Tandy Corp.
Texas Commerce Bank
Toshiba International Corp.
Transamerica Finance Services
Turner Construction Company
Western Atlas International, Inc.
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The Company has no long-term written commitments by customers to purchase
products from the Company. In addition, although the Company has service
contracts with many of its large customers, such service contracts are
project-based and terminable upon relatively short notice. A significant
reduction in orders from any of the Company's largest customers could have a
material adverse effect on the Company's financial condition and results of
operations.
SUPPLY AND DISTRIBUTION
The Company relies on aggregators and distributors of computer hardware,
software and peripherals to supply a majority of its Computer Products. Although
the Company uses many industry suppliers, the Company purchases its Computer
Products chiefly from two suppliers, Inacom and Ingram, to obtain competitive
pricing, better product availability and improved quality control. The Company
attempts to develop strategic arrangements with its principal suppliers,
including the coordination of drop shipment orders, the outsourcing of certain
computer configuration services, national roll-out and installation projects and
the sharing of product information. Telecommunications hardware and software
products are generally purchased by the Company on an as-needed basis directly
from the original equipment manufacturer. Suppliers providing trade to the
Company typically maintain a vendor's lien in the goods sold by them to the
Company.
The Company's largest supplier of Computer Products is Inacom, a leading
computer products aggregator. Inacom markets and distributes computer products
and provides various services on a wholesale basis through a network of
franchisees and resellers and also markets its products directly to end-users.
During 1993, 1994, 1995 and the first nine months of 1996, the Company purchased
from Inacom approximately 55.6%, 46.4%, 36.6% and 54.9%, respectively, of its
total inventory purchases. The Company purchases Computer Products and obtains
drop shipping and other services from Inacom pursuant to an agreement entered
into in August 1996 (the "Inacom Agreement"). Under the Inacom Agreement, the
Company is required to purchase at least 80% of its Computer Products from
Inacom, but only to the extent that such products are made available within a
reasonable period of time at reasonably competitive pricing. Pricing from Inacom
is generally based on Inacom's cost plus a negotiated markup. With certain
exceptions, the Company is entitled to volume discounts at agreed upon levels.
The term of the Inacom agreement expires on December 31, 2001, and automatically
renews for successive one year periods unless notice of non-renewal is given 60
days prior to the end of the renewal period. A cancellation fee of $570,500 will
be payable by the Company in the event of non-renewal or early termination of
the Inacom Agreement by either party.
The Company's second largest supplier of computer products is Ingram. The
Company also purchases its Computer Products from Ingram on a cost-plus basis.
During 1993, 1994, 1995 and the first nine months of 1996, the Company purchased
from Ingram approximately 8.3%, 14.1%, 20.6% and 15.4% respectively, of its
total inventory purchases. The Company's agreement with Ingram provides for
volume discounts at agreed upon levels. The agreement with Ingram may be
terminated by either party upon 30 days prior written notice.
Due to intense price competition among computer products resellers, the
price and shipping terms received by the Company from its suppliers, especially
Inacom and Ingram, are critical to the Company's ability to compete in Computer
Products. From time to time the availability of certain products has been
limited. Although the Company has not experienced unusual product availability
problems and has been generally satisfied with the product pricing and terms
available from its principal suppliers, there can be no assurance that such
relationships will continue or that, in the event of a termination of its
relationship with either Inacom or Ingram, or both, it would be able to obtain
an alternative supplier or suppliers without a material disruption in the
Company's ability to provide competitively priced products to its customers.
The Company maintains standard authorized dealership agreements from many
leading manufacturers of computer and telecommunications hardware and software.
Under the terms of these authorized dealership agreements, the Company is
entitled to resell associated products to end-users and to provide warranty
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service. The Company's status as an authorized reseller of key product lines is
essential to the operation of the Company's business. In general, the authorized
dealer agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. Some of such agreements are conditioned upon the continuation of
the Company's supply arrangement with Inacom or another major wholesaler
acceptable to the manufacturer.
The Company operates a warehouse at each of its two current offices for the
purpose of receiving, warehousing, configuration and shipping products. The
Company plans to consolidate its two warehouses into one central regional
warehouse located in the Dallas-Fort Worth metropolitan area in order to achieve
further productivity and efficiency enhancements.
During 1995, the Company began an initiative to drop ship a higher
percentage of its orders directly from the supplier to customer in order to
lower its distribution costs and freight costs. This initiative has resulted in
the percentage of drop shipped orders (measured by the cost of goods drop
shipped as a percentage of total cost of goods) growing from 5.8% during the
nine months ended September 30, 1995 to 17.1% during the nine months ended
September 30, 1996. While the Company does not believe that it is in its best
interest to drop ship all orders, it does intend to continue to move more of its
Computer Products distribution toward drop shipments.
MANAGEMENT INFORMATION SYSTEMS
The Company depends on its customized MIS to manage most aspects of its
business. The Company's MIS provides its sales staff, customer service
representatives and certain customers with product price, information and
availability from its principal suppliers' warehouses throughout the United
States. The Company utilizes its MIS to rapidly source product from a wide range
of suppliers. Purchase order expediting features including overdue shipment and
partial shipment reporting which enable the Company to identify and resolve
supplier and or freight carrier problems quickly. The purchasing systems are
real time, allowing buyers to act within minutes on a newly received and
credit-approved sales order. The Company's MIS contain productivity tools for
sales lead generation, including integration between telemarketing and prospect
database management. Sales management features include a variety of reports
available for any combination of customer, salesperson, sales team and office
criteria. The Company uses its MIS to manage service contracts, service calls
and work orders, engineer and technician scheduling and time tracking, service
parts acquisition and manufacturer warranties. Reporting can also be generated
for project profitability, contract and customer analysis, parts tracking and
employee time tracking.
EMPLOYEES
As of September 30, 1996, the company employed approximately 281
individuals. Of these, approximately 87 were employed in sales, marketing and
customer service, 96 were employed in engineering and technical positions and 98
were employed in administration, finance and MIS. The Company believes that its
ability to recruit and retain highly skilled and experienced technical, sales
and management personnel has been, and will continue to be, critical to its
ability to execute its business plans. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
COMPETITION
The markets in which the Company competes are all intensely competitive and
changing rapidly. The Company believes that the principal competitive factors in
the business activities in which it operates include relative price and
performance, product availability, technical expertise, adherence to industry
standards, financial stability, service, support and reputation. The Company
believes that it has many direct and indirect competitors in each of its
businesses, none of which is dominant in the Company's geographic markets. The
Company's competitors include major computer products and telephone equipment
manufacturers, aggregators and distributors, including certain manufacturers,
aggregators and distributors which supply products to the Company. Other
competitors include established national, regional and local resellers, systems
integrators, telephone systems dealers, computer-telephony VARs and other CTI
software
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suppliers. Some of the Company's current and potential competitors have longer
operating histories and financial, sales, marketing, technical and other
competitive resources which are substantially greater than those of the Company.
As the markets in which the Company competes have matured, product price
competition has intensified and is likely to continue to intensify. Such price
competition could adversely affect the Company's financial condition and results
of operations. There can be no assurance that the Company will be able to
continue to compete successfully with existing or new competitors.
STATE SALES TAX COLLECTION
The Company presently collects sales tax only on shipments of Computer
Products to destinations in Texas. Various states have attempted to impose on
direct marketers the burden of collecting sales or use taxes on the sales of
products shipped to those state's residents. The United States Supreme Court in
1992 affirmed its position that it is unconstitutional for a state to impose
sales or use tax collection obligations on an out-of-state mail order company
whose only "nexus" with the state is the distribution of catalogs and other
advertising materials through the mail and whose subsequent delivery of
purchased goods is by United States mail or by interstate common carrier.
Legislation has been introduced in the United States Congress that if enacted
would supersede the Supreme Court's ruling and allow states to impose a tax
collection obligation on out of state sellers of goods destined for delivery
with the state. If legislation of this type is enacted, the imposition of a tax
collection obligation on the Company in states to which it ships products may
result in reduced demand for the Company's products and additional
administrative expense.
Certain states into which the Company delivers products through drop
shipping arrangements with its principal suppliers have imposed a sales tax
collection obligation on such sales based on the suppliers' (rather than the
Company's) contact with the state. Inacom has advised the Company that, due to
the existence of a nexus between Inacom and these states, Inacom must charge and
collect sales tax on any shipment it delivers into these states, including drop
shipments to the Company's customers in these states. The imposition of sales
taxes on the Company's drop shipments from Inacom will have the effect of
increasing the Company's costs on those shipments. The cost increase will either
be in the form of sales taxes on the products purchased from Inacom for drop
shipment to the taxing states or the higher costs of handling to bring the
product into the Company's Texas facilities and then ship the product to the
end-user's location. While the level of drop shipments to these states is at
present relatively low, an increase in the number of states imposing sales taxes
on these drop shipments could substantially reduce or eliminate any cost savings
to the Company from its plan to reduce shipping and distribution costs by
increasing the percentage of sales to be delivered by drop shipments.
The Company intends in the near term to hire sales representatives for 800
PC Deals to market Computer Products in states other than Texas. The presence of
its sales representatives in these states will impose a state tax collection
obligation in those states, thus reducing the number of markets into which the
Company may ship its Computer Products without collecting sales tax from its
customers. In some cases, the inapplicability of a state sales tax collection
obligation on the Company provides it with a pricing advantage when competing
against companies obligated to collect state taxes from the potential customer.
The Company believes, however, that the purchasing decisions of most of its
customers (who are primarily business organizations) is only slightly influenced
by whether state sales taxes will be collected on their purchase.
FACILITIES
The Company does not own any real property and currently leases all of its
existing facilities. The Company subleases its headquarters and Houston office
which are housed in a free standing building of approximately 49,000 square
feet. See "Certain Relationships and Related Transactions -- Houston Office
Lease." The Houston office sublease expires on December 31, 1998. The Company's
Dallas office is housed in a free-standing building of approximately 20,000
square feet. The Dallas facility lease expires on September 30, 1997. The
Company also leases a storage facility of approximately 7,000 square feet in
Houston. The lease on the storage facility expires on March 9, 1998. The Company
intends to lease other facilities as its business expands. The Company believes
that suitable facilities will be available as needed.
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INTELLECTUAL PROPERTY
The Company's success depends in part upon its proprietary technology,
including its Stratasoft software. The Company relies primarily on trade secrecy
and confidentiality agreements to establish and protect its rights in its
proprietary technology. Additionally, the Company intends to file for copyright
protection for StrataDial and StrataVoice. The Company also has applied for
registration of Stratasoft, StrataDial, StrataVoice and 800 PC Deals as
trademarks. There can be no assurance that the Company's present protective
measures will be adequate to prevent unauthorized use or disclosure of its
technology or independent third party development of the same or similar
technology. While the Company's competitive position could be affected by its
ability to protect its proprietary and trade secret information, the Company
believes other factors, such as the technical expertise and knowledge of the
Company's management and technical personnel and the timeliness and quality of
support services provided by the Company, to be more significant in maintaining
the Company's competitive position.
The Company's various authorization agreements with manufacturers generally
permit the Company to refer to itself as an authorized dealer of the respective
manufacturer's products and to use their trademarks and trade names for
marketing purposes, but prohibit other uses. The Company considers the use of
these trademarks and trade names in its marketing efforts to be important to its
business.
LEGAL PROCEEDINGS
On August 29, 1995, a former employee of the Company brought suit in the
125th Judicial District Court of Harris County, Texas against the Company and
James H. Long and Anthony Adame, individually. The plaintiff has alleged that he
was wrongfully terminated from the Company and is suing for wrongful
termination, intentional infliction of emotional distress and breach of
contract. The plaintiff is seeking unspecified actual and punitive monetary
damages. The Company intends to vigorously defend such action.
On July 13, 1996, a former customer brought suit against the Company in the
152nd Judicial District Court of Harris County, Texas. The plaintiff alleges
that the Company failed to provide and complete promised installation and
configuration of certain computer equipment within the time promised by the
Company. Based on these allegations, the plaintiff is suing for breach of
contract and violations of the Texas Deceptive Trade Practices Act and is
seeking unspecified actual and punitive monetary damages, including treble
damages under the Texas Deceptive Trade Practices Act. The Company intends to
vigorously defend such action.
The Company is from time to time involved in routine litigation incidental
to its business. The Company believes that none of such proceedings, including
current proceedings, individually or in the aggregate will have a materially
adverse effect on the Company.
HISTORY AND REINCORPORATION
The Company was incorporated under Texas law in 1983 under the name
Technicomp Corp. On June 30, 1993, the Company changed its name to
Allstar-Valcom, Inc. and then again, on December 28, 1993, the Company changed
its name to Allstar Systems, Inc. On December 27, 1993, the Company engaged in a
merger in which it was the surviving corporation. In the merger, Allstar
Services, Inc. and R. Cano, Inc., both of which were affiliated with the
Company, were merged with and into Allstar Systems, Inc. in order to streamline
the business. In 1995, the Company formed a wholly owned subsidiary, Stratasoft,
Inc., to purchase and develop its CTI Software. See "Certain Relationships and
Related Transactions -- Acquisition of Stratasoft Products." In October 1996,
the Company effected a reincorporation merger in the state of Delaware through
which the 328,125 shares of the Company's predecessor, Allstar Systems, Inc., a
Texas corporation, which were outstanding prior to the merger, were converted
into approximately 2,675,000 shares of the newly incorporated Delaware
corporation (the "Reincorporation"). The effect of the Reincorporation on the
number of shares outstanding prior to the Reincorporation was similar in effect
to an approximately 8.15-for-1 stock split.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
James H. Long........................... 38 Chairman of the Board, President and Chief Executive Officer
Donald R. Chadwick...................... 53 Director, Chief Financial Officer, Treasurer and Secretary
Frank Cano.............................. 32 Senior Vice President, Branch Office Operations
Thomas N. McCulley...................... 50 Vice President, Information Systems
Paulette R. Blount...................... 42 Vice President, Purchasing and Distribution
Anthony Adame........................... 40 President, Computer Products Division
Shabbir K. Ali.......................... 33 President, IT Services Division
Michael A. Torigian..................... 38 President, Telecom Systems Division
William R. Hennessy..................... 38 President, Stratasoft, Inc.
</TABLE>
JAMES H. LONG is the founder of the Company and has served as Chairman of
the Board, Chief Executive Officer and President since the Company's inception
in 1983. Prior to founding the Company, Mr. Long served with the United States
Navy in a technical position and was then employed by IBM in a technical
position.
DONALD R. CHADWICK has been the Chief Financial Officer of the Company
since February 1992. As Chief Financial Officer, his duties include supervision
of finance, accounting and controller functions within the Company. During 1990
and 1991 Mr. Chadwick served as the President of Regis, William Capital Corp., a
privately owned investment banking firm. Between 1988 and 1989 he served as a
Senior Vice President in investment banking with Underwood, Neuhaus & Co.,
Incorporated. From 1974 to 1988 he was a Senior Vice President of Prescott, Ball
and Turben, Inc., a Cleveland, Ohio-based investment banking firm.
FRANK CANO became the Senior Vice President, Branch Office Operations for
the Company in July 1996, and is responsible for the general management of the
Company's branch office. From June 1992 to June 1996, Mr. Cano was the Branch
Manager of the Company's Dallas-Fort Worth office. From June 1986 to May 1992,
Mr. Cano was employed by the Company as a sales representative. Prior to that,
Mr. Cano served at the Company in a variety of administrative and technical
positions, including Service Account Manager, Sales Account Manager, Purchasing
Agent and Computer Technician.
THOMAS N. MCCULLEY has been the Vice President, Information Systems for the
Company since July 1996. From January 1992 to June 1996, Mr. McCulley served as
the Information Services Director for the Company. He has responsibility for
management and supervision of the Company's MIS. Prior to joining the Company,
Mr. McCulley was employed with Mediacomp, Inc., a subsidiary of S.L. Brown &
Associates, for seven years, where his duties included development and
supervision of the conversion of MIS from mainframe applications to PC-based
applications.
PAULETTE R. BLOUNT joined the Company as Director of Product Purchasing and
Distribution in September 1994 and became Vice President, Purchasing and
Distribution in July 1996. Her responsibilities include overall management of
purchasing, warehousing, inventory control and shipping and receiving of
inventory products. Prior to joining the Company, Ms. Blount was the Director of
Service Operations in the Houston office of The Future Now, Inc., a computer
sales and service company, since May 1993. Prior to that time, Ms. Blount was
employed as the Director of Service for Techron Corp., a ComputerLand franchise
in Houston, Texas.
ANTHONY ADAME has been President of the Computer Products Division since
July 1996. From January 1996 to June 1996, Mr. Adame served as Vice President,
Computer Products, and from January 1991 to December 1995 as Vice President of
Sales. His current responsibilities include management of the Computer Products
Division. From 1986 until joining the Company, Mr. Adame was employed by Techron
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Corp., where he was Vice President of Sales. Prior to that he was the Sales
Manager at Computer Galleries, a Houston retail computer store, for two years.
SHABBIR K. ALI has been the President of the IT Services Division since
July 1996. From January 1996 to June 1996, Mr. Ali served as Vice President, IT
Services Division and between August 1993 and December 1995 as Vice President of
Service Operations. Between July 1990 and July 1993 Mr. Ali served as the
Company's Operations Manager. Mr. Ali's present responsibilities include the
overall management of the Company's IT Services Division. Prior to joining the
Company, Mr. Ali was the Director of Operations for United Business Machines,
Inc. in Houston between 1987 and 1990.
MICHAEL A. TORIGIAN has been the President of the Telecom Systems Division
since July 1996. Between July 1994 and June 1996 Mr. Torigian served as Vice
President, Telecom Systems Division. His current responsibilities include the
overall management of the Company's Telecom Systems Division. From July 1992 to
May 1994, Mr. Torigian served as Director of Sales for CTWP, Inc., an
Austin-based computer, copier and office equipment dealer. From March 1990
through April 1992, he was the President of Communications Solutions, Inc., a
telephone and computer solutions provider in Houston. From March 1988 to
February 1990, Mr. Torigian was a Senior Dealer Sales Representative for Zenith
Data Systems. Prior to that, Mr. Torigian was Director of Sales at CTWP, Inc.
WILLIAM R. HENNESSY has served as the President of Stratasoft, Inc., the
Company's wholly owned subsidiary that was formed in 1995 to develop and market
CTI Software, since joining the Company in January 1996. Mr. Hennessy's
responsibilities include the general management of Stratasoft, Inc. From July
1991 to January 1996, Mr. Hennessy was employed by Inter-Tel, Incorporated, a
telephone systems manufacturer and sales and service company, where he served as
the Director of MIS and the Director of Voice and Data Integration for the
central region. From October 1984 to July 1991, Mr. Hennessy served as the MIS
Director of TSI/Bell Atlantic, a Houston-based subsidiary of a regional Bell
telephone company that sold and serviced business telephone systems and which
was acquired by Inter-Tel, Incorporated in 1991.
James H. Long and Frank Cano are brothers-in-law. There are no other family
relationships among any of the directors or executive officers of the Company.
All executive officers of the Company are elected by the board of directors
of the Company (the "Board") and hold office until the earlier of their
resignation, removal or other termination. All of the executive officers listed
above have entered into employment agreements with the Company effective upon
the closing of this Offering pursuant to which they hold their current
positions. See "-- Employment Agreements."
The Company's Board is currently composed of two directors. Within 90 days
following this Offering, the Company intends to expand the Board to five
positions by adding three directors who are not employees of or otherwise
affiliated with the Company ("independent directors"). Directors of the
Company hold office until the next annual meeting of stockholders or until their
successors are duly elected and qualified.
Following this Offering and the election of independent directors, the
Board will have an Audit Committee and a Compensation Committee, each of which
will initially be comprised of independent directors. The Audit Committee will
review the results and scope of the audit and other services provided by the
Company's independent auditors. The Compensation Committee will determine
salaries, incentive compensation and other benefits payable to the Company's
executive officers following this Offering, and will administer the Company's
1996 Incentive Stock Plan and 1996 Non-Employee Director Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995 and prior years, compensation levels were determined by the
Company's Board, each of the members of which were executive officers of the
Company. Following this Offering, the Company intends to create a Compensation
Committee, which will initially be composed of independent directors.
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DIRECTORS' COMPENSATION
Employee directors of the Company do not receive any additional
compensation for their services as a director of the Company. The Company
intends to pay each independent director $1,000 for each Board meeting attended
and $500 for each committee meeting attended. The Company will also pay
reasonable out-of-pocket expenses incurred by independent directors to attend
Board and committee meetings. Independent directors also will be entitled to
receive options pursuant to the 1996 Non-Employee Director Stock Option Plan.
See "-- Incentive and Stock Option Plans."
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by, or paid to, the Company's
Chief Executive Officer and the most highly compensated executive officer of the
Company whose aggregate cash compensation exceeded $100,000 (the "Named
Executive Officers") during the years ended December 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
ANNUAL COMPENSATION RESTRICTED STOCK
NAME AND PRINCIPAL -------------------------------------------- STOCK OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS OTHER(1)(2) AWARDS (SHARES) COMPENSATION
- ---------------------------------------- ----- -------- -------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James H. Long
Chairman of the Board,
President and Chief
Executive Officer..................... 1995 $ 40,800 $100,000 -- -- -- --
1994 $ 43,500 -- -- -- -- --
1993 $ 40,800 -- -- -- -- --
Anthony Adame
President, Computer Products
Division.............................. 1995 $112,190 -- -- -- -- --
1994 $ 83,717 -- -- -- -- --
1993 $ 80,521 -- -- -- -- --
</TABLE>
- ------------
(1) The Company has made personal loans to Mr. Long from time to time. See
"Certain Relationships and Related Transactions -- Loans to Chairman and
Affiliates."
(2) Amounts exclude the value of perquisites and personal benefits because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
Named Executive Officer's total annual salary and bonus.
The Company believes that its success is attributed in part to its ability
to attract and keep quality management personnel. The Company intends to pursue
growth using an entrepreneurial management style, giving responsible management
broad latitude to manage the office's or division's business, including profit
and loss responsibility. Commencing January 1996, executive managers began to be
compensated in part, on the profitability of their respective operations.
EMPLOYMENT AGREEMENTS
Each of the executive officers of the Company has entered into an
employment agreement (collectively, the "Executive Employment Agreements")
with the Company, which are effective upon the closing of this Offering. Under
the terms of their respective agreements, Messrs. Long and Adame are entitled to
an annual base salary of $150,000 and $96,000, respectively, plus other bonuses,
the amounts and payment of which are within the discretion of the Compensation
Committee. The Executive Employment Agreements may be terminated by the Company
or by the executive officer's resignation at any time by giving proper notice.
The Agreements generally provide that the executive officer will not, for the
term of his employment and for a period of either twelve or eighteen months,
whichever the case may be, following the end of such
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<PAGE>
executive officer's employment with the Company, compete with the Company,
disclose any confidential information of the Company, solicit any of the
Company's employees or customers or otherwise interfere with the relations of
the Company.
INCENTIVE AND STOCK OPTION PLANS
INCENTIVE PLAN. In September 1996, the Company's Board adopted and the
stockholders approved the Company's 1996 Incentive Stock Plan (the "Incentive
Plan"). Under the Incentive Plan, the Compensation Committee may grant
incentive awards to key employees of the Company and its subsidiaries with
respect to up to 417,500 shares of Common Stock, subject to certain antidilution
adjustments. The incentive awards available for grant under the Incentive Plan
include (i) incentive stock options (as provided in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code")) and non-qualified stock
options, (ii) shares of restricted stock, (iii) shares of phantom stock, (iv)
stock bonuses and (v) cash bonuses (collectively, the "Incentive Awards"). The
maximum number of shares of Common Stock subject to Incentive Awards which can
be granted to any one individual during any calendar year is 100,000 shares. No
Incentive Awards may be granted after the tenth anniversary of the adoption of
the Incentive Plan. Incentive Awards generally vest or otherwise become payable
on the occurrence of a change in control. Incentive Awards are reduced or
subject to early termination on the occurrence of certain events, including
termination of employment. No Incentive Awards have been granted under the
Incentive Plan. Upon closing of this Offering, however, the Company anticipates
granting to certain of its key executives non-qualified options to purchase up
to an aggregate of 80,000 shares of Common Stock, with an exercise price equal
to the fair market value of the Common Stock at the date of grant and which will
vest over five years, and restricted stock awards for 10,000 shares of Common
Stock which will vest over two years.
DIRECTOR PLAN. In September 1996, the Company's Board adopted and the
stockholders approved the Company's 1996 Non-Employee Director Stock Option Plan
(the "Director Plan"). The Director Plan provides for the grant of
non-qualified options to purchase up to 100,000 shares of Common Stock, subject
to certain antidilution adjustments. To the extent shares remain available under
the Director Plan, the Director Plan entitles each newly elected non-employee
director, other than certain directors elected as part of financing or
acquisition transactions, to receive a one-time option to purchase 5,000 shares
of Common Stock as of the date of his first election to the Company's Board.
Furthermore, to the extent shares remain available under the Director Plan, each
incumbent director is entitled to receive an option to purchase 2,000 shares on
each date he is reelected to serve as a member of the Company's Board
(commencing with those directors reelected at the Company's 1997 annual meeting
of stockholders). All options granted under the Director Plan will have an
exercise price equal to the fair market value of a share of Common Stock on the
date of grant and will expire ten years after the date of grant (subject to
earlier termination under the Director Plan). Options granted under the Director
Plan are subject to early termination on the occurrence of certain events,
including ceasing to be a member of the Company's Board (other than by death).
ADMINISTRATION. The Incentive Plan and the Director Plan will be
administered by the Compensation Committee of the Board, which initially will be
composed of independent directors appointed by the Company's Board. Under the
Incentive Plan, the Compensation Committee determines which employees receive
grants of Incentive Awards, the type of Incentive Award granted and the number
of shares subject to each Incentive Award, and it also determines, subject to
the terms of the Incentive Plan, the prices, expiration dates, vesting schedules
and other material features of the Incentive Awards granted under the Incentive
Plan. The Compensation Committee has no discretion under the Director Plan as to
the selection of the non-employee directors to whom options are to be granted,
the number of shares subject to any option granted, the exercise price of any
option granted or the ten-year maximum term of any option granted thereunder.
The Compensation Committee has the authority to interpret and construe any
provision of the Incentive Plan and the Director Plan and to adopt such rules
and regulations for administering the Incentive Plan and the Director Plan as it
deems necessary.
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<PAGE>
401(K) PLAN
In 1992, the Company adopted a Section 401(k) Profit Sharing Plan and Trust
(the "Plan"). The Plan is intended to qualify for tax exemption under Section
401(k) of the Code and is subject to the Employee Retirement Income Security Act
of 1974. The Plan covers substantially all of the Company's employees who, as of
the enrollment eligibility dates under the Plan, have completed at least one
year of service with the Company and have elected to participate in the Plan.
Employees may contribute up to 15% of their annual compensation, which is
matched by the Company under a defined formula. In addition, the Company may
make discretionary contributions to the Plan, for the benefit of all
participants, at the election of the Board. All employee contributions are fully
vested at all times and contributions by the Company vest over a six-year period
based upon an employee's years of service. Benefits will normally be distributed
to an employee upon (i) the employee reaching age 59 1/2, (ii) the employee's
retirement with the Company, (iii) the employee's death or disability, (iv) the
termination of the employee's employment with the Company or (v) the termination
of the Plan.
As a result of operational defects in the administration of the Plan since
1992, the Company has filed under the Internal Revenue Service Walk-In Closing
Agreement Program to negotiate a settlement regarding the qualified status of
the Plan in order to meet the requirements of Section 401(a) of the Code. During
the nine months ended September 30, 1996, the Company has accrued $50,000 for
estimated settlement costs.
KEY MAN INSURANCE
James H. Long is a key employee of the Company and the loss of Mr. Long
could adversely affect the Company's business. The Company maintains, and is the
beneficiary of, a life insurance policy on the life of Mr. Long. The face amount
of such policy is $7,000,000. The continuance of such policy is at the
discretion of the Board and may or may not continue in the future.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Board of the Company has adopted a policy requiring that any future
transactions between the Company and its officers, directors, principal
stockholders and their affiliates be on terms no less favorable to the Company
than could be obtained from unrelated third parties and that any such
transactions be approved by a majority of the disinterested members of the
Company's Board.
HOUSTON OFFICE LEASE
Since 1991, the Company has subleased its Houston, Texas headquarters
facility from Allstar Equities, Inc. ("Allstar Equities"), a Texas corporation
wholly-owned by James H. Long. Mr. Long is the Chief Executive Officer of the
Company and its largest stockholder.
Allstar Equities initially leased the Company's headquarters building in
1991 pursuant to a lease purchase agreement from Jakascki Corporation
("Jakascki"), a Texas corporation wholly-owned by the Selling Stockholder. The
initial lease purchase agreement between Allstar Equities and Jakascki expired
on December 31, 1993, and was continued on a day-to-day basis from that date
until August 1996, when a new lease purchase agreement was entered into (the
"New Lease"). During 1993, 1994, 1995 and the first nine months of 1996,
payments by Allstar Equities to Jakascki under the lease arrangement amounted to
$85,000, $150,000, $150,000 and $211,500, respectively. The monthly rental of
the building is $17,500 through December of 1996, $18,000 during 1997 and
$18,500 during 1998 under the New Lease. Additionally, Allstar Equities is
required to pay certain operating costs, including insurance, real property
taxes and utilities. Under the New Lease, Allstar Equities has an option to
purchase the building for $1.55 million in 1996, $1.6 million in 1997 and $1.7
million in 1998. In each case, the purchase price is to be reduced by the unpaid
principal outstanding on an interest free promissory note dated as of January 1,
1995, payable by Jakascki to Allstar Equities in the original principal amount
of $150,000. The Company and James H. Long each guaranteed the obligations of
Allstar Equities under the expired lease purchase agreement and have also
guaranteed the obligations of Allstar Equities under the New Lease. The New
Lease expires on December 31, 1998.
The initial sublease expired on December 31, 1993, and was continued on a
day-to-day tenancy basis from that time until August 1996, at which time a new
sublease was executed (the "New Sublease"). During 1993, 1994, 1995 and the
first nine months of 1996, rentals under the sublease arrangement amounted to
$290,000, $312,000, $372,000 and $279,000, respectively. In August 1996, the New
Sublease was executed in connection with the execution of the New Lease under
which Allstar Equities leases the facility. Under the New Sublease, the Company
will pay a monthly rental of $31,000 in 1996, $31,500 per month in 1997 and
$32,000 per month in 1998, and will also pay certain operating costs including
insurance and utilities, but not real property taxes. The New Sublease expires
on December 31, 1998.
In August 1996, the Company retained an independent real estate consulting
firm to conduct a survey of rental rates for facilities in Houston, Texas that
are in the vicinity of, and comparable to, its Houston headquarters facility.
Based upon this survey, and additional consultations with representatives of the
real estate consulting firm, the Company believes that the rental rate and other
terms of the Company's sublease from Allstar Equities are at least as favorable
as those that could be obtained in an arms-length transaction with an
unaffiliated third party.
CERTAIN SELLING STOCKHOLDER AGREEMENTS
In March 1994, Jack B. Corey, the Selling Stockholder, purchased a number
of shares of the Company's Common Stock equal to 20.0% of the then outstanding
shares of Common Stock for cash consideration of $1.5 million. After giving
effect to the Reincorporation, the number of shares held by Mr. Corey is
535,000. Contemporaneously with the share purchase, Mr. Corey entered into a
Stock Purchase Agreement with the Company under which Mr. Corey is entitled to:
(i) 90 days written notice of the Company's decision to make a public offering
of its Common Stock; (ii) require the Company to include all shares owned by Mr.
Corey in any offering, provided that the sale of such shares does not exceed a
number that would result in net proceeds to him of more than $1.5 million; (iii)
have all costs associated with the
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<PAGE>
preparation and filing of the registration statement pursuant to the Act paid by
Company; and (iv) share pro rata any underwriting commissions and costs
associated with a proposed public offering. Also executed in connection with the
share purchase was an Agreement Among Shareholders between Mr. Corey and James
H. Long containing certain buy-sell provisions and other shareholder matters
which was superceded by a Shareholders' Agreement executed in August 1996
containing similar provisions. In connection with the execution of the current
Shareholders Agreement, the Company and Mr. Corey entered into an Insurance
Agreement pursuant to which the Company agreed to repurchase Mr. Corey's Common
Stock in the event of Mr. Long's death, and to maintain life insurance on Mr.
Long sufficient for that purpose. The repurchase price under the Insurance
Agreement escalates monthly at prices during 1996, ranging from approximately
$1,904,800 to $2,130,200, for all 535,000 shares of Common Stock owned by Mr.
Corey. The Stock Purchase Agreement, the current Shareholders' Agreement and the
Insurance Agreement will be terminated upon the closing of this Offering.
COREY CONSULTING ARRANGEMENT
The Company entered into a consulting arrangement in March 1994, pursuant
to which the Selling Shareholder, Jack B. Corey, consults with the Company's
Chief Executive Officer on an as-needed basis concerning the Company's business
and affairs. The consulting arrangement was insisted upon by Mr. Corey as a
condition to his investment in the Company described under "-- Certain Selling
Stockholder Agreements." Consulting fees of $75,000 per year were payable under
the arrangement. Through June 30, 1996, the Company had paid aggregate
consulting fees of $139,000 to Mr. Corey. In August 1996, the consulting
arrangement was modified and commemorated in a written Consulting Agreement
between the Company and Mr. Corey. Consulting fees of $25,000 were paid in
connection with the execution of the Consulting Agreement, with an additional
payment of $25,000 (or a pro rata portion) being due on the first to occur of
November 15, 1996 or the closing of this Offering. Only minimal services have
been rendered by Mr. Corey under his consulting arrangements with the Company.
The Consulting Agreement will be terminated upon the closing of this Offering.
LOANS TO CHAIRMAN AND AFFILIATES
The Company has paid for the costs of substantially all leasehold repairs
and improvements to its Houston office since the inception of its sublease with
Allstar Equities, which is wholly owned by James H. Long. See "-- Houston
Office Lease." The Company has also loaned funds to Allstar Equities for the
payment of federal income tax liability associated with Mr. Long's ownership of
Allstar Equities, an S corporation for federal income tax purposes. These costs
have been treated by the Company and Allstar Equities as interest free, demand
loans by the Company to Allstar Equities. During the three year period ended
December 31, 1995 and the nine months ended September 30, 1996, the maximum
aggregate amount outstanding under such loans was $435,179. On July 1, 1996, the
amounts remaining due from Allstar Equities were consolidated into a promissory
note payable to the Company in the original principal amount of approximately
$386,600, and bearing interest at 9.0% per annum. Under the note, Allstar
Equities must make equal monthly payments of principal and interest until the
full amount owed has been paid. On December 1, 1998, all unpaid principal and
interest become due.
The Company has, from time to time, made personal loans and advances for a
variety of purposes to its Chief Executive Officer and principal stockholder,
Mr. Long. The maximum aggregate amount owed by Mr. Long during the three year
period ended December 31, 1995 and the nine months ended September 30, 1996 was
$194,500. Effective July 1, 1996, Mr. Long executed a promissory note payable to
the Company in the amount of $173,300, which represents all amounts outstanding
as of that date, bearing interest at 9.0% per annum. Under the terms of the
note, Mr. Long has agreed to pay the Company in five equal installments, each
due on the first day of July of the next five years, beginning July 1, 1997,
with a maturity date of July 1, 2001.
41
<PAGE>
CERTAIN RELATED BUSINESS TRANSACTIONS
The Company supplies Computer Products to and provides marketing support
for Mintech, Inc. ("Mintech"), a minority-owned business engaged in reselling
computer products to third parties. Mintech is wholly owned by Consuelo Adame,
wife of Anthony Adame, who is also an officer of Mintech. James H. Long
currently is a director of Mintech and Donald R. Chadwick currently is both an
officer and director of Mintech. Messrs. Long, Chadwick and Adame will resign
from their positions at Mintech prior to the closing of this Offering.
The Company believes its commercial relationship with Mintech is beneficial
in obtaining Computer Products sales that would otherwise be lost to competitors
but for its relationship with Mintech. From time to time potential customers
advise the Company that they would prefer to procure Computer Products from a
minority-owned business. Most frequently, the Company believes, the customer's
preference is the result of provisions of contracts between the customer and
governmental entities or related governmental regulations mandating that a
certain portion of the customer's purchases be directed to minority-owned
business. In such instances, the Company has referred customers to Mintech.
Mintech fills the orders of customers referred to it by the Company by purchase
from the Company at a slight discount which represents Mintech's gross margin on
the sale. Since the inception of Mintech in 1995, the Company has sold an
aggregate of approximately $1.8 million of Computer Products to Mintech, which
represented an aggregate discount of approximately $9,900 below the aggregate
sale price which the Company would have charged had the sales been made directly
by the Company to Mintech's customers.
Mintech has limited financial capacity, and the Company provides financial
support in the form of carrying accounts payable until Mintech's customers pay
for products it has sold. In addition, the Company collects on Mintech's
accounts receivable as an assignee of those receivables. Collections on the
accounts receivable are applied to amounts owed to the Company and the
difference is remitted to Mintech. No cash payments had been made to Mintech
through September 30, 1996; however, the Company was indebted to Mintech for the
cumulative difference between amounts collected from Mintech's customers and the
amount of Mintech's purchases from the Company. The amount due to Mintech at
September 30, 1996 was approximately $6,600. No accounts receivable from Mintech
have been written off as uncollectible and payments of accounts receivable due
from Mintech and Mintech's customers are typically received within time periods
generally consistent with average collection times for other customers.
The Company expects that it will continue to refer potential customers
wishing to do business with a minority-owned business to Mintech, and that the
Company will continue to act as Mintech's supplier with respect to such
referrals. The Company intends to establish written contractual arrangements
with Mintech under which Mintech will sell Computer Products to its customers at
the same price the Company sells those products to Mintech, with Mintech
receiving a rebate of approximately 5.0% of the Company's gross profit on the
transaction when collected. A lock box collection system is also intended to be
established as part of an accounts receivable financing arrangement with Mintech
to ensure the collection by the Company of amounts due it from Mintech upon
receipt of payments from Mintech's end-user customers.
ACQUISITION OF STRATASOFT PRODUCTS
In late 1995, the Company entered the business of creating, manufacturing
and marketing the Company's customized CTI software by forming a new wholly
owned subsidiary, Stratasoft, Inc., and acquiring the rights to two software
products from William R. Hennessy and ILC and Aspen, companies of which Mr.
Hennessy is a director and officer and officer, respectively. Mr. Hennessy is
presently an executive officer of Stratasoft but was not employed by the Company
in any capacity at the time of such acquisition.
Stratasoft entered into an employment agreement with Mr. Hennessy as
consideration for the purchase of the software pursuant to which Mr. Hennessy
receives a monthly salary of aproximately $6,800. In addition, Mr. Hennessy is
paid a bonus equal to 10% of Stratasoft's gross profits for the first eighteen
months of his employment and an additional bonus equal to 10% of Stratasoft's
net profit multiplied by its net margin during the tenure of his employment. Mr.
Hennessy's agreement contains restrictive covenants
42
<PAGE>
regarding confidential information which generally prohibit disclosure of
certain information and, for a period of 12 months, certain competition with
Stratasoft. Additionally, Mr. Hennessy's agreement with Stratasoft provides
that, as long as he is not in violation of any of the restrictive covenants just
described, upon termination of his employment Mr. Hennessy will receive a
termination bonus equal to 10% of Stratasoft's net profits for the twelve
consecutive months immediately preceding the termination. Employment under the
agreement is terminable at will by either party upon 10 days notice.
At the same time the employment agreement was entered into, Mr. Hennessy
and Stratasoft entered into an agreement under which, Mr. Hennessy had the right
to purchase all rights to the software for nominal consideration if his
employment was terminated, by either himself or Stratasoft, at any time prior to
January 31, 1997. However, such rights were subject to Stratasoft's overriding
option to retain the software by making monthly payments of $7,500 following any
termination and ending on January 31, 1997. This agreement was terminated in
August 1996 by the parties for consideration of $5,000 paid by Stratasoft to Mr.
Hennessy.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially 5% or more of
the outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers and (iv) all officers and directors
as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO NUMBER OF OWNED
OFFERING(1)(2) SHARES AFTER OFFERING(1)(2)
-------------------- BEING --------------------
NAME AND ADDRESS NUMBER % OFFERED NUMBER %
- ------------------------------------- ----------- ------ ---------- ----------- ------
<S> <C> <C> <C> <C> <C>
James H. Long
6401 Southwest Freeway
Houston, Texas 77074............... 2,118,600 79.2% -- 2,118,600 50.7%
Anthony Adame
6401 Southwest Freeway
Houston, Texas 77074............... 21,400 * -- 21,400 *
Jack B. Corey
Post Office Box 525
Pinehurst, Texas 77362-0525........ 535,000 20.0% 535,000 -- --
All executive officers and directors
as a group (9 persons)............. 2,140,000 80.0% -- 2,140,000 51.3%
</TABLE>
- ------------
* Represents less than one percent of shares of Common Stock.
(1) Except as set forth in the footnotes to this table and subject to applicable
community property law, the persons named in the table have sole voting and
investment power with respect to all shares.
(2) Applicable percentage of ownership is based on 2,675,000 shares of Common
Stock outstanding on September 30, 1996 and 4,175,000 shares of Common Stock
outstanding after the completion of this Offering.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions with respect to the Company's
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the Company's Certificate of Incorporation
("Certificate") and Bylaws that have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part and by provisions
of applicable law.
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.01 par value per share, of which 2,675,000 shares were issued
and outstanding before this Offering and held of record by three stockholders
and 5,000,000 shares of preferred stock, $.01 par value per share ("Preferred
Stock"), none of which have been issued.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends, subject
to the senior rights of preferred stockholders, if any, when, as and if declared
by the Board and to share ratably in the assets of the Company legally available
for distribution to its stockholders, in the event of the liquidation,
dissolution or winding-up of the Company. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. All of the shares of
Common Stock to be sold in this Offering will be duly authorized, validly
issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of the Company, without any action by the stockholders of the
Company, is authorized to issue up to 5,000,000 shares of Preferred Stock in one
or more series and to determine the voting rights (including the right to vote
as a series on particular matters), preferences as to dividends and in
liquidation and the conversion and other rights of each such series. There are
no shares of Preferred Stock outstanding.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate and Bylaws contain a number of provisions that could make
more difficult the acquisition of the Company by means of a tender or exchange
offer, a proxy contest or otherwise. The provisions are summarized below.
REMOVAL OF DIRECTORS. The Certificate provides that directors of the
Company may only be removed for cause and only by the affirmative vote of the
holders of two-thirds or more of the voting power of all of the then outstanding
shares of capital stock entitled to vote generally in the election of directors
(the "Voting Stock"), voting together as a single class. For purposes of
director removal, cause means conviction of a felony involving moral turpitude,
proof beyond a reasonable doubt that a director has committed grossly negligent
or willful misconduct resulting in a material detriment to the Company or
commission of a material breach of fiduciary duty to the Company resulting in a
material detriment to the Company.
ADVANCE NOTICE PROVISIONS FOR CERTAIN STOCKHOLDER ACTIONS. The Bylaws
establish an advance notice procedure with regard to the nomination, other than
by or at the direction of the Board or a committee thereof, of candidates for
election as directors and with regard to certain matters to be brought before an
annual meeting of stockholders of the Company. The advance notice procedures
generally require that a stockholder give prior written notice, in proper form,
to the Secretary of the Company, the requirements as to the form and timing of
such notices specified in the Bylaws. If it is determined that such advance
notice procedures were not complied with, a Board nomination could be precluded
or certain business may not be conducted at the meeting.
Although the Bylaws do not give the Board the power to approve or
disapprove stockholder nominations for the election of directors or of any other
business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws (i) may have the effect of precluding a nomination for the
election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed, or (ii) may discourage
or deter a third party from conducting a solicitation of
44
<PAGE>
proxies to elect its own slate of directors or other wise attempting to obtain
control of the Company, even if the conduct of such solicitation or such attempt
might be beneficial to the Company.
PREFERRED STOCK. The Certificate authorizes the Board to establish and
issue one or more series of Preferred Stock without any action by the
stockholders of the Company. Although the Board has no intention at the present
time of doing so, it could issue a series of Preferred Stock that could,
depending on the terms of such series, provide for a liquidation preference over
the Common Stock or impede the completion of a merger, tender offer or other
takeover attempt. The Board, in so acting, could issue Preferred Stock having
terms that discourage an acquisition attempt through which an acquiror may be
otherwise able to change the composition of the Board, including a tender or
exchange offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interest.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The
Certificate provides that stockholder action can be taken only at an annual or
special meeting of stockholders and prohibits stockholder action by written
consent in lieu of a meeting. The Certificate and the Bylaws provide that
special meetings of stockholders can be called only by the Chairman of the
Board, the Chief Executive Officer, the President, the Board by the written
order of a majority of directors or upon a written request of stockholders
owning two-thirds or more of the entire capital stock of the Company issued and
outstanding and entitled to vote, stating the purpose of such meeting and
delivered to the Chairman of the Board, Chief Executive Officer, the President
or the Secretary. Accordingly, holders of a significant percentage of the
outstanding capital stock of the Company may not be able to request a special
meeting of stockholders.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BYLAWS. Under the General Corporation Law of the State of Delaware (the
"DGCL"), the stockholders have the right to adopt, amend or repeal the Bylaws
and with the approval of the Board, the Certificate of Incorporation. The
Company's Certificate provides that the affirmative vote of at least two-thirds
of the voting power of the then outstanding shares of Voting Stock, voting
together as a single class and in addition to any other vote required by the
Certificate or Bylaws, is required to amend provisions of the Certificate or
Bylaws relating to: (i) the prohibition of stockholder action without a meeting;
(ii) the restriction of stockholders calling a special meeting; (iii) the
number, election and term of the Company's directors; or (iv) the removal of
directors. The vote of a majority of the voting power of the then outstanding
shares of Voting Stock is required to amend all other provisions of the
Certificate. The Certificate further provides that the Bylaws may otherwise be
amended by the Board or by the affirmative vote of at least a majority of the
voting power of the then outstanding shares of Voting Stock, voting together as
a single class. These supermajority voting requirements will have the effect of
making more difficult any amendment by the stockholders of the Bylaws or the
provisions of the Certificate described above.
ANTI-TAKEOVER LEGISLATION. As a Delaware corporation, the Company is
subject to Section 203 of the DGCL. In general, Section 203 prohibits a
corporation from engaging in a "business combination" (as defined therein)
with an "interested stockholder" (defined generally as a person owning 15% or
more of a corporation's outstanding voting stock) for three years following the
time such person became an interested stockholder unless (i) before such person
became an interested stockholder, the board of directors of the corporation
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of the stockholders by the affirmative vote of the holders of two-thirds
of the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three
45
<PAGE>
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
CERTAIN REGISTRATION RIGHTS
The Company and the Selling Stockholder are parties to certain agreements
granting the Selling Stockholder registration rights with respect to the shares
of the Company's Common Stock owned by him. See "Certain Relationships and
Related Transactions -- Certain Selling Stockholder Agreements."
CERTAIN STATUTORY AND CHARTER PROVISIONS REGARDING LIABILITY OF DIRECTORS
As permitted by the DGCL, the Company's Certificate includes a provision
that eliminates the personal liability of its directors to the Company and its
stockholders for monetary damages for breach of fiduciary duty as a directors,
except liability for (i) breaches of the duty of loyalty to the Company or its
stockholders, (ii) acts or omissions in bad faith or involving intentional
misconduct or knowing violations of law, (iii) violations of Section 174 of the
DGCL (including the payment of unlawful dividends or unlawful stock purchases or
redemptions) or (iv) transactions in which a director receives an improper
personal benefit. The Certificate also contains provisions requiring the
indemnification of the Company's directors and officers to the fullest extent
permitted by the DGCL, including circumstances in which indemnification is
otherwise discretionary. The Company also has the power to maintain insurance,
on terms and conditions the Board deems acceptable, on behalf of officers and
directors against any expense, liability or loss arising out of such person's
status as an officer or director. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Co.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,175,000 shares of Common Stock. Of these shares, the 2,035,000 shares sold in
this Offering will be freely transferable without restriction or registration
under the Securities Act by persons other than "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act. The remaining
2,140,000 shares of Common Stock outstanding are "restricted securities" (the
"Restricted Shares") within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including an exemption
afforded by Rule 144.
The Company, its current stockholders (other than the Selling Stockholder),
directors and executive officers have entered into lock-up agreements with the
Representatives, providing that, subject to certain exceptions, they will not,
directly or indirectly, offer, sell contract to sell, grant any option to sell
or otherwise dispose of any shares of Common Stock, or other securities
substantially similar, or securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, Common Stock or other
securities substantially similar (except for the grant of options or of
restricted stock awards pursuant to the Incentive Plan or the Director Plan),
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives. See "Underwriting." Following the
expiration of the lock-up period, all of the Restricted Shares will be eligible
for resale in the public market pursuant to Rule 144, subject to certain
limitations described below.
Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
Restricted Shares for at least two years but less than three years is entitled
to sell, commencing 90 days after the date of this Prospectus, within any three-
month period, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of Common Stock (41,750 shares immediately after
this Offering) or the average weekly trading volume in the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 also are
subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about the Company. However, a person
who is not an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned Restricted Shares for at least
three years, is entitled to sell such shares under Rule 144 without regard to
the limitations described above.
The Company plans to register, under the Securities Act, the 517,500 shares
of Common Stock available for issuance pursuant to the 1996 Incentive Stock Plan
and the 1996 Non-Employee Director Stock Option Plan on registration statements
on Form S-8. The Company intends to file such Form S-8 registration statements
with the Securities and Exchange Commission before any option first becomes
exercisable. Common Stock acquired pursuant to such plans can be sold in the
open market by holders who are not affiliates of the Company, but will be
subject to volume and other limitations of Rule 144 by holders who are
affiliates of the Company. Furthermore, shares of restricted stock and
non-qualified options issued pursuant to the Incentive Plan will be subject to
vesting requirements and will not be tradeable until vested. See
"Management -- Incentive and Stock Option Plans."
Since there has been no public market for shares of the Common Stock prior
to this Offering, the Company is unable to predict the effect that sales made
pursuant to Rule 144, or otherwise, may have on the prevailing market price at
such times for shares of the Common Stock. Nevertheless, sales of a substantial
amount of the Common Stock in the public market, or the perception that such
sales could occur, could adversely affect market prices. See "Risk
Factors -- Potential Effect of Shares Eligible for Future Sale on Price of
Common Stock."
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below, for whom Rauscher Pierce Refsnes, Inc. and Sutro &
Co. Incorporated are acting as representatives (the "Representatives"), has
agreed severally to purchase from the Company and the Selling Stockholder the
number of shares of Common Stock set forth opposite its name below.
NUMBER
NAME OF SHARES
- ---------------------------------------- ---------
Rauscher Pierce Refsnes, Inc............
Sutro & Co. Incorporated................
---------
Total.............................. 2,035,000
=========
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered by this
Prospectus, if any are taken.
The Underwriters propose initially to offer the shares of Common Stock
offered by this Prospectus to the public at the initial public offering price
set forth on the cover page of this Prospectus. The Underwriters may allow a
concession to selected dealers not in excess of per share and the
Underwriters may allow, and such dealers may reallow, to certain other dealers a
discount not in excess of per share. After the initial public offering, the
price to the public, the concession and the reallowance may be changed by the
Representatives. The Representatives have advised the Company that they do not
expect any sales by the Underwriters to accounts over which they exercise
discretionary authority.
The Company has granted an option to the Underwriters, exercisable within
45 days after the date of this Prospectus, to purchase up to an additional
305,250 shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus for the
purpose of covering over-allotments, if any. If the Underwriters exercise the
over-allotment option, each Underwriter will be committed, subject to certain
conditions, to purchase from the Company pursuant to the over-allotment option
that number of additional shares which is proportionate to such Underwriter's
initial commitment.
The Company and the Selling Stockholder have agreed to pay, on a pro rata
basis, the Representatives a non-accountable expense allowance of $150,000 to
cover some of the underwriting costs and due diligence expenses related to this
Offering.
The Company, its stockholders (other than the Selling Stockholder) and its
executive officers and directors have agreed with the Underwriters, for a period
of 180 days after the date of this Prospectus, not to, directly or indirectly,
offer, sell, contract to sell, grant any option to sell or otherwise dispose of
any shares of Common Stock, or other securities substantially similar, or
securities convertible into or exercisable or exchangeable for, or any rights to
purchase or acquire, Common Stock or other securities substantially similar
(except for the grant of options or of restricted stock awards pursuant to the
Incentive Plan or the Director Plan), without the prior written consent of the
Representatives.
Prior to this Offering, no public market for the Common Stock existed. The
initial public offering price was negotiated between the Company and the
Representatives. Among the factors considered in determining such offering price
of the Common Stock, in addition to prevailing market conditions, were the
historical performance of the Company, estimates of the business potential and
earnings prospects of the Company, an assessment of the management of the
Company and the consideration of the above factors in relation to the market
valuation of companies in related businesses.
48
<PAGE>
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters and certain related persons against certain liabilities relating to
this Offering contemplated by this Prospectus, including liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "ALLS," subject to notice of issuance.
LEGAL MATTERS
Certain legal matters in connection with the Commons Stock offered hereby
are being passed upon for the Company by Porter & Hedges, L.L.P. Certain legal
matters relating to this Offering will be passed upon for the Underwriters by
Gardere & Wynne, L.L.P.
EXPERTS
The consolidated financial statements at December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon such reports given upon the authority of that firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act
(the "Registration Statement"), with respect to the shares of Common Stock
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits filed therewith. For further information with respect
to the Company and the shares of Common Stock offered hereby, reference is made
to the Registration Statement and to such exhibits filed therewith. Statements
contained herein as to the content of any contract or other document are not
necessarily complete and, in each instance reference is made to a copy of such
contract or other document filed as an exhibit to the Registration Statement and
each such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto may be inspected
without charge at the principal office of the Commission at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such documents may be obtained from the Public Reference Section of
the Commission, at prescribed rates, or on the Internet at HTTP://WWW.SEC.GOV.
49
<PAGE>
ALLSTAR SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and at
September 30, 1996 (Unaudited) ......................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 and for the Nine Months Ended September 30,
1995 and 1996 (Unaudited) .............................................. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 and for the Nine Months Ended September 30,
1995 and 1996 (Unaudited) .............................................. F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995 and for the Nine Months Ended
September 30, 1996 (Unaudited) ......................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Allstar Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Allstar
Systems, Inc. and subsidiary ("Allstar") at December 31, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of Allstar's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Allstar at December 31, 1994 and 1995, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Houston, Texas
April 19, 1996, except for
Notes 1, 4, 5 and 11 as to which
the date is October 23, 1996
F-2
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 SEPTEMBER 30, 1996
--------- --------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents:
Restricted cash.................. $ 336 $ 581 $ 796
Cash............................. 334 448 730
--------- --------- -------------------
Total cash and cash
equivalents................ 670 1,029 1,526
Accounts receivable - trade, net... 11,385 15,822 17,151
Accounts receivable - affiliates... 599 679 254
Inventory.......................... 5,386 5,407 6,987
Deferred taxes..................... 112 258 270
Other current assets............... 83 79 120
--------- --------- -------------------
Total current assets.......... 18,235 23,274 26,308
Property and equipment, net............. 835 986 1,168
Other assets - affiliates............... 7 6 354
--------- --------- -------------------
Total................................... $ 19,077 $ 24,266 $27,830
========= ========= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................... $ 8,972 $ 9,912 $13,868
Floor plan liability............... 4,563 6,769 5,984
Accounts payable................... 1,109 880 679
Accrued expenses................... 1,684 3,357 2,456
Income taxes payable............... 230 283 687
Deferred service revenue........... 314 341 326
--------- --------- -------------------
Total current liabilities..... 16,872 21,542 24,000
--------- --------- -------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no
shares issued.................... -- -- --
Common stock:
No par value, 1,000,000 shares
authorized, 328,125 shares
issued and outstanding,
respectively.................. 2 2 2
$.01 par value, 50,000,000 shares
authorized, no shares issued
(2,675,000 shares issued and
outstanding after effect of
reincorporation and
conversion)................... -- -- --
Additional paid-in capital......... 1,504 1,504 1,504
Retained earnings.................. 699 1,218 2,324
--------- --------- -------------------
Total stockholders' equity.... 2,205 2,724 3,830
--------- --------- -------------------
Total................................... $ 19,077 $ 24,266 $27,830
========= ========= ===================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenue........................ $ 49,536 $ 64,076 $ 91,085 $ 63,280 $ 87,337
Cost of sales and services........... 42,289 55,541 79,700 55,096 75,333
----------- ----------- ----------- ----------- -----------
Gross profit......................... 7,247 8,535 11,385 8,184 12,004
Selling, general and administrative
expenses........................... 6,060 7,448 9,306 6,836 9,280
----------- ----------- ----------- ----------- -----------
Operating income..................... 1,187 1,087 2,079 1,348 2,724
Interest expense and other........... 644 764 1,218 905 922
----------- ----------- ----------- ----------- -----------
Income before provision for income
taxes.............................. 543 323 861 443 1,802
Provision for income taxes........... 229 140 342 176 696
----------- ----------- ----------- ----------- -----------
Net income........................... $ 314 $ 183 $ 519 $ 267 $ 1,106
=========== =========== =========== =========== ===========
Net income per share................. $ 0.15 $ 0.07 $ 0.19 $ 0.10 $ 0.41
=========== =========== =========== =========== ===========
Weighted average shares
outstanding........................ 2,120,242 2,554,808 2,675,000 2,675,000 2,675,000
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 314 $ 183 $ 519 $ 267 $ 1,106
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Gain on disposal of assets...... (5) -- (1) (1) (11)
Depreciation and amortization... 149 211 309 173 264
Deferred taxes.................. (342) 230 (146) (139) (12)
Changes in assets and liabilities
that provided (used) cash:
Accounts receivable - trade,
net............................. (4,937) (2,018) (4,437) (635) (1,329)
Accounts
receivable - affiliates....... 51 (241) (80) (135) 77
Inventory....................... (912) (1,681) (21) (1,666) (1,580)
Other current assets............ 19 (55) 4 (38) (41)
Accounts payable................ (751) 424 (229) 191 (201)
Accrued expenses................ 567 290 1,673 789 (901)
Income taxes payable............ 500 (341) 53 (14) 404
Deferred service revenue........ 428 (207) 27 65 (15)
--------- --------- --------- --------- ---------
Net cash used in operating
activities.............. (4,919) (3,205) (2,329) (1,143) (2,239)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures............... (162) (447) (518) (34) (448)
Proceeds from sale of fixed
assets.......................... 22 -- 60 60 13
Payments received on note
receivable -- related party..... 89 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used
in) investing
activities.............. (51) (447) (458) 26 (435)
Cash flows from financing activities:
Net increase (decrease) in notes
payable......................... 4,090 2,075 940 2,835 3,956
Net increase (decrease) in floor
plan liability.................. 1,992 (735) 2,206 394 (785)
Proceeds from sale of common
stock........................... -- 1,500 -- -- --
Payment of long-term debt.......... (4) (43) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities.... 6,078 2,797 3,146 3,229 3,171
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... 1,108 (855) 359 2,112 497
Cash and cash equivalents at
beginning of period................ 417 1,525 670 670 1,029
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period............................. $ 1,525 $ 670 1,029 $ 2,782 $ 1,526
========= ========= ========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid for interest............. $ 520 $ 667 $ 1,189 $ 945 $ 560
========= ========= ========= ========= =========
Cash paid for income taxes......... $ 68 $ 221 $ 432 $ 256 $ 318
========= ========= ========= ========= =========
Schedule of noncash financing
activities:
Stock subscription receivable for
sale of common stock............ $ 1,500
=========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NO PAR VALUE
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993.............. 259,875 $ 2 $ 4 $ 202 $ 208
Net income......................... -- -- -- 314 314
Issuance of stock.................. 2,625 -- -- -- --
Sale of stock subscription......... -- -- 1,500 -- 1,500
--------- ------ ---------- --------- ---------
Balance at December 31, 1993............ 262,500 2 1,504 516 2,022
Net income......................... -- -- -- 183 183
Issuance of stock subscribed....... 65,625 -- -- -- --
--------- ------ ---------- --------- ---------
Balance at December 31, 1994............ 328,125 2 1,504 699 2,205
Net income......................... -- -- -- 519 519
--------- ------ ---------- --------- ---------
Balance at December 31, 1995............ 328,125 2 1,504 1,218 2,724
Net income (unaudited)............. -- -- -- 1,106 1,106
--------- ------ ---------- --------- ---------
Balance at September 30, 1996
(unaudited)........................ 328,125(1) $ 2 $1,504 $ 2,324 $ 3,830
========= ====== ========== ========= =========
</TABLE>
- ------------
(1) 2,675,000 shares of $.01 par value common stock after effect of
reincorporation and conversion as discussed in Note 1.
See notes to consolidated financial statements.
F-6
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allstar Systems, Inc. ("Allstar") is engaged in the sale and service of
computer and telecommunications hardware and software products. During 1995
Allstar formed and incorporated Stratasoft, Inc., a wholly owned subsidiary, to
create and market software related to the integration of computer and telephone
technologies. All operations of the business are primarily conducted from
offices located in Houston and Dallas, Texas.
A substantial portion of Allstar's sales and services are authorized under
arrangements with product manufacturers and Allstar's operations are dependent
upon maintaining its approved status with such manufacturers. As a result of
these arrangements and arrangements with its customers, gross profit could be
limited by the availability or allowance of volume discounts. Furthermore, net
income before income taxes could be affected by changes in interest rates which
underlie the revolving credit agreements which are used for working capital
(Notes 4 and 5).
The consolidated financial statements presented herein at September 30,
1996 and for the nine-month periods ended September 30, 1995 and 1996 are
unaudited; however, all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods covered have been made and are of a
normal, recurring nature. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The results of the
interim periods are not necessarily indicative of results for the full year.
Allstar's significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of Allstar Systems, Inc. and its wholly owned
subsidiary. All significant intercompany balances and transactions have been
eliminated.
REVENUE RECOGNITION -- Revenue from the sale of computer products is
recognized when the product is shipped. Service income is recognized ratably
over the service contract life. Revenues resulting from installations of
equipment for which duration is in excess of three months are recognized using
the percentage-of-completion method. The percentage of revenue recognized on
each contract is based on the most recent cost estimate available. Revisions of
estimates are reflected in the period in which the facts necessitating the
revision become known; when a contract indicates a loss, a provision is made for
the total anticipated loss. At December 31, 1993, 1994 and 1995, Allstar had no
such contracts in process.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include any highly
liquid debt instruments purchased with a maturity of three months or less when
purchased. See Note 4 for discussion of restricted cash.
INVENTORY -- Inventory consists primarily of personal computers and
components and is valued at the lower of cost or market with cost determined on
the first-in first-out method. Management provides a reserve for inventory which
may be slow-moving or obsolete.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Expenditures for repairs and maintenance are charged to expense when incurred,
while expenditures for betterments are capitalized. Disposals are removed at
cost less accumulated depreciation with the resulting gain or loss reflected in
operations in the year of disposal.
Property and equipment are depreciated over their estimated useful lives
ranging from five to ten years using the straight-line method. Depreciation
expense totaled $148, $210 and $307 for 1993, 1994 and 1995, respectively.
F-7
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEDERAL INCOME TAXES -- Deferred taxes are provided at enacted rates for
the temporary differences between the financial reporting bases and the tax
bases of assets and liabilities.
RESEARCH AND DEVELOPMENT COSTS -- Expenditures relating to the development
of new products and processes, including significant improvements and
refinements to existing products, are expensed as incurred. The amount charged
to expense was $13 for the year ended December 31, 1995. No such costs were
incurred during 1993 or 1994.
USE OF ESTIMATES -- The preparation of the 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Allstar's financial instruments
consist of cash and cash equivalents, accounts receivable, floor plan liability
and accounts and notes payable for which the carrying values approximate fair
values given the short-term maturity of the instruments. It is not practicable
to estimate the fair value of related-party receivables due to the nature of the
instrument.
EARNINGS PER SHARE -- Net earnings per share of common stock are based on
the weighted average number of shares of common stock and common stock
equivalents, if any, outstanding during each period. In October 1996, the
Company completed a reincorporation in order to change its state of domicile to
Delaware, to authorize 50,000,000 shares of $.01 par value common stock and to
authorize 5,000,000 shares of $.01 par value preferred stock. The
reincorporation had the effect of an 8.15-for-1 split of Allstar's common stock.
All applicable share and per share data in the consolidated financial statements
and related notes give effect to this reincorporation and resulting stock
conversion.
RECLASSIFICATIONS -- The accompanying consolidated financial statements for
the years presented have been reclassified to give retroactive effect to certain
changes in presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1994 and
1995:
1994 1995
--------- ---------
Trade................................... $ 11,573 $ 16,286
Allowance for doubtful accounts......... (188) (464)
--------- ---------
Total.............................. $ 11,385 $ 15,822
========= =========
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994 and
1995:
1994 1995
--------- ---------
Equipment............................... $ 443 $ 581
Furniture and fixtures.................. 700 946
Leasehold improvements.................. 47 47
Vehicles................................ 105 129
--------- ---------
1,295 1,703
Accumulated depreciation and
amortization.......................... (460) (717)
--------- ---------
Total.............................. $ 835 $ 986
========= =========
F-8
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE
Notes payable at December 31, 1995 consisted of advances under a revolving
credit agreement that provides for a $15 million credit line which, at Allstar's
discretion, may be used for inventory purchases (see Note 5). Advances under the
agreement are limited to a collateral base as defined, which at December 31,
1995 was approximately $10.6 million. Outstanding principal and interest are due
upon termination of the agreement, which continues in full force and effect for
successive thirteen month periods until terminated by 60 day written notice from
the lender or Allstar. The notes are collateralized by substantially all of
Allstar's assets and a personal guarantee of the principal stockholder of
Allstar. The agreement contains default provisions which allow the lender to
accelerate payment if it determines itself to be insecure with respect to any of
the collateral or the payment of any part of the obligation.
At December 31, 1995, notes payable accrued interest at the prime rate
(8.25% at December 31, 1995) plus 2.0%. Allstar also pays an annual facility fee
of approximately 0.25%. The weighted average interest rate for 1993, 1994 and
1995 was 8.54%, 9.78% and 12.84%, respectively.
The credit agreement contains restrictive covenants which, among other
things, require specific ratios of revenue to working capital, total liabilities
to tangible net worth and net profit after tax to revenue. The terms of this
credit facility also prohibit the payment of dividends, purchase of Allstar
common stock and other similar expenditures, including advances to related
parties. As of December 31, 1995, and for the first seven months of 1996,
Allstar was not in compliance with certain of these covenants; however, the
financing company waived such noncompliance in October 1996 through the earlier
of December 31, 1996, or the closing of an initial public offering. In addition
to obtaining the waiver, the financing company liberalized certain financial
covenants, which Allstar had in the past violated. Allstar believes that it will
be able to comply with these less restrictive financial covenants currently
provided by the Credit Agreement. In April 1996 the credit line was permanently
increased to $20 million and in September 1996 was temporarily increased to $30
million for the period from September 1996 through February 1997, $28 million
during March 1997 and $25 million in April 1997; thereafter returning to the
permanent credit line of $20.0 million.
The above agreement requires that all payments received from customers on
pledged accounts receivable be applied to the outstanding balance on the line of
credit. Accordingly, accounts receivable payments received in the amount of $336
and $581 at December 31, 1994 and 1995, respectively, but not yet applied to the
line of credit are shown as restricted cash in the accompanying balance sheets.
5. FLOOR PLAN LIABILITY
Allstar maintains two financing agreements to "floor plan" inventory
purchases. The first agreement, discussed in Note 4 above, provides for the
financing of inventory purchases as needed by Allstar. In no event shall the
combined indebtedness for the floor plan liability portion of this agreement and
the notes payable exceed $15 million (increased to $30 million in September
1996). Provisions with respect to interest, collateralization and termination as
discussed in Note 4 also apply to the floor plan borrowings.
The second agreement provides a $3 million credit line to be used for
inventory purchases. Outstanding principal and interest are due upon termination
of the agreement, which continues in full force and effect until terminated by
notice from the lender or Allstar. This agreement contains restrictive covenants
which, among other things, require a specific ratio of total liabilities to
tangible net worth and a minimum tangible net worth. The terms of this credit
facility also prohibit the payment of dividends, purchase of Allstar common
stock and other similar expenditures, including advances to related parties. As
of December 31, 1995, and for the first seven months of 1996, Allstar was not in
compliance with certain of these covenants; however, the financing company
waived such noncompliance in October 1996 through the earlier of December 31,
1996, or the closing of an initial public offering. Allstar believes that it
will have
F-9
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sufficient equity capital available to enable it to comply with the restrictive
financial covenants provided for by the Credit Agreement.
Under both floor plan agreements, suppliers' invoices are paid directly by
the financing companies, who maintain a purchase money security interest in the
related inventory. The amounts due under both agreements are typically interest
free for 30 days from the financing date. After 30 days, interest accrues under
the first floor plan agreement at the prime rate plus 6.0% and interest accrues
under the second floor plan agreement at prime, which for purposes of this
agreement will not fall below 6.5%, plus 6.0%. At various times during 1995,
both financing companies extended to Allstar temporary financing in excess of
the amounts stated in the respective agreements. At December 31, 1995, Allstar
had credit lines totalling $28.5 million, subject to borrowing base limitations,
under these two financing agreements.
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 consisted of the following:
1993 1994 1995
--------- --------- ---------
Current provision (benefit):
Federal............................ $ 541 $ (105) $ 446
State.............................. 30 15 42
--------- --------- ---------
Total current provision (benefit)....... 571 (90) 488
Deferred provision (benefit)............ (342) 230 (146)
--------- --------- ---------
Total.............................. $ 229 $ 140 $ 342
========= ========= =========
The total provision for income taxes varied from the U.S. federal statutory
rate due to the following:
1993 1994 1995
--------- --------- ---------
Federal income tax at statutory rate.... $ 190 $ 113 $ 301
Nondeductible expenses.................. 2 17 48
State income taxes...................... 30 15 42
Other................................... 7 (5) (49)
--------- --------- ---------
Total.............................. $ 229 $ 140 $ 342
========= ========= =========
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences at December 31, 1994 and 1995 were as follows:
1994 1995
--------- ---------
Deferred tax assets:
Accounts receivable................ $ 115 $ 71
Deferred service revenue........... -- 75
Inventory.......................... -- 112
Other.............................. 19 --
--------- ---------
134 258
Deferred tax liabilities -- other....... (22) --
--------- ---------
Net deferred tax assets................. $ 112 $ 258
========= =========
F-10
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1994 and
1995:
1994 1995
--------- ---------
Sales tax payable (see Note 11)......... $ 904 $ 2,607
Accrued employee benefits, payroll, and
other related costs................... 536 456
Other................................... 244 294
--------- ---------
Total.............................. $ 1,684 $ 3,357
========= =========
8. FRANCHISE FEES
Allstar entered into an agreement in May 1989 whereby it became a
franchisee of Inacom Corp. Annual fees, amounting to 0.05% of certain gross
sales, were expensed in the period incurred. Allstar obtained a waiver effective
January 1, 1995 which eliminated the payment of franchise fees to Inacom Corp.
See Note 11.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES -- Allstar subleases office space from Allstar Equities,
Inc. ("Equities"), a company wholly owned by the principal stockholder of
Allstar. The lease is renewable annually. Rental expense under this agreement
amounted to approximately $290, $312 and $372 during 1993, 1994 and 1995,
respectively. See Note 11.
Additionally, minimum annual rentals at December 31, 1995 on other
operating leases amount to approximately $101 for 1996 and $71 for 1997. Amounts
paid during 1993, 1994 and 1995 under such agreements totaled approximately
$134, $116 and $137, respectively.
BENEFIT PLAN -- Allstar maintains a group medical and hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims exceeding $10 per employee or a cumulative maximum of approximately
$112 per year are insured by an outside insurance company. Allstar's claim and
premium expense for this self-insurance program totaled approximately $127, $74
and $67 during 1993, 1994 and 1995, respectively.
Allstar maintains a 401(k) savings plan. All full-time employees who have
completed one year of service with Allstar are eligible to participate in the
plan. Allstar also has the option of making additional contributions based on
net profitability. Declaration of such contributions is at the discretion of
Allstar's Board of Directors. For the years ended December 31, 1993, 1994 and
1995, Allstar made no additional contributions to the plan. See Note 11.
Allstar is party to litigation and claims which are normal in the course of
its operations; while the results of such litigation and claims cannot be
predicted with certainty, Allstar believes the final outcome of such matters
will not have a materially adverse effect on its results of operations or
consolidated financial position.
10. RELATED-PARTY TRANSACTIONS
Effective December 31, 1993, Allstar entered into a stock sale agreement
whereby 65,625 shares of Allstar no par value common stock (535,000 shares of
$.01 par value common stock after effect of reincorporation and
conversion -- see Note 1) were sold for $1.5 million. The proceeds from the
stock subscription agreement were recorded as accounts receivable - affiliates
and additional paid-in capital at December 31, 1993. In May 1994 the
subscription price was received and the shares of common stock were issued. The
principal stockholder of Allstar and this minority stockholder have entered into
an agreement under which this minority stockholder has the option to require the
principal stockholder to repurchase these shares at an established price
dependent upon the number of months held. In addition, the principal stockholder
may offer to have Allstar purchase these shares; however, any such offer will
not obligate Allstar to purchase such shares. The minority stockholder is
offering these shares for sale to the public pursuant to the terms of Allstar's
initial public offering.
F-11
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Allstar has from time to time made payments on behalf of Equities and the
Company's principal stockholders for taxes, property and equipment. At December
31, 1994 and 1995, Allstar receivables from these affiliates amounted to
approximately $314 and $405, respectively. See Note 11.
During 1995 Allstar paid $75 in consulting fees to a minority stockholder.
11. SUBSEQUENT EVENTS
Effective July 1, 1996, Allstar and its principal stockholder entered into
a promissory note to repay certain advances, which were approximately $173 at
July 1, 1996, in equal annual installments of principal and interest, from
August 1997 through 2001. This note bears interest at 9% per year. The principal
amounts due after one year, as of September 30, 1996, are classified as
long-term other assets-affiliates based on the repayment terms of the promissory
note.
Effective July 1, 1996, Allstar and Equities entered into a promissory note
whereby Equities would repay the balance of amounts advanced, which were
approximately $387 at July 1, 1996, in monthly installments of $6.5, including
interest, from August 1996 through November 1998 and a final payment of $275 on
December 1, 1998. This note bears interest at 9% per year. The principal amounts
as of September 30, 1996 are classified as accounts receivable-affiliates and
long-term other assets-affiliates based on the repayment terms of the promissory
note.
In August 1996, Allstar renewed its office sublease from Equities (see Note
9), with monthly rental payments of $31 in 1996, $31.5 in 1997 and $32 in 1998,
plus certain operating expenses, through December 1998.
Allstar entered into an agreement with a supplier in August 1996 in which
Allstar is required to purchase at least 80% of its computer products from the
supplier if such are available within a reasonable period of time at a
reasonably competitive price. The agreement expires on December 31, 2001 and
automatically renews for successive one-year periods. A cancellation fee of $571
will be payable by Allstar in the event of non-renewal or early termination of
the agreement by either party; however, Allstar does not anticipate termination
to occur by either party prior to the initial termination date. In August 1996,
Allstar began to accrue for this cancellation fee, which will result in an
approximate $9 monthly charge to earnings over the initial agreement period.
In August 1996, Allstar entered into an agreement with the state
comptroller's office to pay 1995 delinquent sales taxes of $1.4 million plus
interest. All penalties were waived by the state. The $1.4 million plus interest
was included in accrued expenses at December 31, 1995. The delinquent taxes were
paid in September, 1996.
Allstar has filed under the Internal Revenue Service Walk-In Closing
Agreement Program (the "Program") to negotiate a settlement regarding the
qualified status of the 401(k) savings plan in order to meet the requirements of
Section 401(a) of the Internal Revenue Code. Under the Program, any sanction
amount negotiated is based upon the total tax liability which could be assessed
if the plan were to be disqualified. The Company has accrued for the estimated
settlement costs.
In September 1996, Allstar adopted the 1996 Incentive Stock Plan (the
"Incentive Plan"). Under the Incentive Plan, Allstar's Compensation Committee
may grant up to 417,500 shares of common stock, which have been reserved for
issuance, to certain key employees of Allstar. No incentive awards have been
granted under this plan. The Incentive Plan provides for the granting of
incentive awards in the form of stock options, restricted stock, phantom stock,
stock bonuses and cash bonuses in accordance with the provisions of the plan.
Additionally, no shares may be granted after the tenth anniversary of the
Incentive Plan's adoption.
* * * * * *
F-12
<PAGE>
GLOSSARY
<TABLE>
<CAPTION>
COMPANY NAMES*
<C> <C>
3Com.................................... 3Com Corporation
AVT..................................... Applied Voice Technology
Active Voice............................ Active Voice Corporation
Aspen................................... Aspen System Technologies, Inc.
Compaq.................................. Compaq Computer Corporation
DEC..................................... DEC Digital Equipment Corporation
DFS..................................... Deutsche Financial Services Corporation
Epson................................... Epson America, Inc.
Hewlett-Packard......................... Hewlett-Packard Company
IBM..................................... International Business Machines Corporation
IBMCC................................... IBM Credit Corporation
ILC..................................... International Lan and Communications, Inc.
Inacom.................................. Inacom Corp.
Ingram.................................. Ingram Micro, Inc.
Macrotel................................ Macrotel International Corporation
Microsoft............................... Microsoft Corporation
Mitel................................... Mitel, Inc.
NEC..................................... NEC America, Inc.
Novell.................................. Novell, Inc.
Taske................................... Taske Technology, Inc.
Uniden.................................. Uniden America Corporation
</TABLE>
- ------------
* All company names and trade names are the legal property of their respective
owners.
G-1
<PAGE>
TECHNICAL TERMS
<TABLE>
<CAPTION>
<S> <C>
Aggregator.............................. A company that purchases directly from manufacturers in large
quantities, maintains inventory, breaks bulk and resells to dis-
tributors, resellers and value-added resellers
Configuration........................... The customization of equipment to a customer's specifications which
may include the loading of software, adding of memory or combining
different manufacturers' equipment in such a way that it will be
compatible as an integrated system
CTI..................................... Computer and telephone integration
IVR..................................... Interactive voice response
LAN..................................... Local-area network
MIS..................................... Management information systems
Open architecture networks.............. Networks based on industry standard technical specifications that
enable the system to operate with hardware and software from
different manufacturers meeting those standards
PBX..................................... Private branch exchange
PC...................................... Personal computer
Price protection........................ A voluntary policy by a manufacturer that when a decrease in the
price of its product is instituted, the manufacturer will rebate
the Company for the difference between the new price and the price
paid by the Company for product in its inventory
Roll-out................................ Single sale involving a large volume of similar products to be
delivered on a pre-specified timetable
SQL..................................... Structured query language
VAR (Value-added reseller).............. A company that purchases equipment or software from a manu-
facturer, aggregator or distributor, provides value added services
to their clients including network management, configuration
systems integration and training and subsequently resells the
enhanced product
WAN..................................... Wide-area network
</TABLE>
G-2
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ...................................................... 3
Risk Factors ............................................................ 6
Use of Proceeds ......................................................... 12
Dividend Policy ......................................................... 12
Capitalization .......................................................... 13
Dilution ................................................................ 14
Selected Financial Data ................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... 16
Business ................................................................ 25
Management .............................................................. 35
Certain Relationships and Related Transactions .......................... 40
Principal and Selling Stockholders ...................................... 43
Description of Capital Stock ............................................ 44
Shares Eligible for Future Sale ......................................... 47
Underwriting ............................................................ 48
Legal Matters ........................................................... 49
Experts ................................................................. 49
Additional Information .................................................. 49
Index to Consolidated Financial Statements .............................. F-1
Glossary ................................................................ G-1
------------------------
UNTIL , 1996, (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,035,000 SHARES
LOGO -- ALLSTAR
SYSTEMS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAUSCHER PIERCE REFSNES, INC.
SUTRO & CO. INCORPORATED
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with this
Offering are as follows:
Securities and Exchange Commission
registration fee..................... $ 9,684
NASD filing fee...................... 3,308
Nasdaq National Market listing fee... 28,500
Printing expenses.................... 70,000
Legal fees and expenses.............. 150,000
Accounting fees and expenses......... 150,000
Blue Sky fees and expenses (including
legal fees).......................... 5,000
Transfer Agent and Registrar fees.... 5,000
Representatives' non-accountable
expense allowance.................... 111,000
Miscellaneous........................ 55,608
----------
TOTAL........................... $ 588,100
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may include provisions in its certificate
of incorporation that will relieve its directors of monetary liability for
breaches of their fiduciary duty to the corporation, except under certain
circumstances, including a breach of the director's duty of loyalty, acts or
omissions of the director not in good faith or which involve intentional
misconduct or a knowing violation of law, the approval of an improper payment of
a dividend or an improper stock repurchase or redemption or any transaction from
which the director derived an improper personal benefit. The Certificate of
Incorporation provides that the Company's directors are not liable to the
Company or its stockholders for monetary damages for breach of their fiduciary
duty, subject to the described exceptions specified by Delaware law.
Section 145 of the General Corporation Law of the State of Delaware
("DGCL") grants to the Company the authority to indemnify each officer and
director of the Company against liabilities and expenses incurred by reason of
the fact that he is or was an officer or director of the Company if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
determination as to whether a person seeking indemnification has met the
required standard of conduct is to be made (i) by a majority vote of a quorum of
disinterested members of the Board, or (ii) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct or (iii) by the stockholders. The Bylaws provide for
indemnification of each officer and director of the Company to the fullest
extent permitted by Delaware law.
In a suit brought to obtain a judgment in the corporation's favor, whether
by the Company itself or derivatively by a stockholder, Section 145 of the DGCL
only allows the Company to indemnify for expenses, including attorney's fees,
actually and reasonably incurred in connection with the defense or settlement of
the case, and the Company may not indemnify for amounts paid in satisfaction of
a judgment or in settlement of the claim. In any such action, no indemnification
may be paid in respect of any claim, issue or matter as to which such persons
shall have been adjudged liable to the Company except as otherwise approved by
the Delaware Court of Chancery or the court in which the claim was brought.
According to the statute, in any other type of proceeding, the indemnification
may extend to judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with such other proceeding, as well as to
expenses (including attorneys' fees).
Section 145 of the DGCL also allows the Company to purchase and maintain
insurance on behalf of its directors and officers against liabilities that may
be asserted against, or incurred by, such persons in any
II-1
<PAGE>
such capacity, whether the Company would have the authority to indemnify such
person against liability under the provisions of Section 145. The Company
intends to purchase and maintain a directors' and officers' liability policy for
such purposes.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement for certain provisions regarding the
indemnification of the Company, its officers and directors and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and therefore is unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 3, 1993, the Company's predecessor, Allstar Systems, Inc., a
Texas corporation, issued 2,625 shares of common stock to Anthony Adame in a
privately negotiated transaction. Pursuant to an agreement entered into between
Mr. Adame and the Company at the time Mr. Adame first joined the Company, it was
agreed that when and if the Company considered an issuance to any party other
than James H. Long, the then sole stockholder, Mr. Adame would receive an amount
of shares equal to one percent of the outstanding shares of the Company at the
time of such issuance. The consideration for the shares issued to Mr. Adame was
his agreement to join the Company and his continued employment; thus, no cash
payment was received by the Company from Mr. Adame upon issuance of the shares.
The net book value of such shares at the time of issuance was approximately
$3,018. Mr. Adame had been employed by the Company for three years when the
Company considered the issuance of shares to Jack B. Corey described below and
the 2,625 shares of common stock were issued to Mr. Adame. The issuance of such
securities was exempt from registration under the Securities Act pursuant to
Section 4(2) as a transaction not involving any public offering.
On March 22, 1994, the Company's predecessor, Allstar Systems, Inc., a
Texas corporation, issued 65,625 shares of common stock to Jack B. Corey in a
privately negotiated transaction. The aggregate consideration paid for these
shares was $1.5 million. The sale of such securities was exempt from
registration under the Securities Act pursuant to Section 4(2) as a transaction
not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all the exhibits and financial statement
schedules filed as part of the Registration Statement.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*1.1 -- Form of Underwriting Agreement.
*2.1 -- Form of Plan and Agreement of Merger by and Between Allstar Systems, Inc., a Texas
corporation and Allstar Systems, Inc., a Delaware corporation.
*3.1 -- Bylaws of the Company.
*3.2 -- Certificate of Incorporation of the Company.
*4.1 -- Specimen Common Stock Certificate.
*4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws of
the Company defining the rights of the holders of Common Stock.
*5.1 -- Opinion of Porter & Hedges, L.L.P. with respect to legality of securities.
*10.1 -- Revolving Loan and Security Agreement dated August 5, 1993, by and between IBM Credit
Corporation and Allstar Systems, Inc.
*10.2 -- Agreement for Wholesale Financing dated September 20, 1993, by and between ITT Commercial
Finance Corp. and Allstar-Valcom, Inc.
II-2
<PAGE>
*10.3 -- Amendment to Agreement for Wholesale Financing dated October 25, 1994, by and between ITT
Commercial Finance Corp. and Allstar Systems, Inc.
*10.4 -- Sublease Agreement dated August 2, 1996, by and between Allstar Equities and Allstar
Systems, Inc.
*10.5 -- Form of Employment Agreement by and between the Company and certain members of Management.
*10.6 -- Employment Agreement dated September 7, 1995, by and between Stratasoft, Inc. and William
R. Hennessy.
*10.7 -- Assignment of Certain Software dated September 7, 1995, by International Lan and
Communications, Inc. and Aspen System Technologies, Inc. to Stratasoft, Inc.
*10.8 -- Microsoft Solution Provider Agreement by and between Microsoft Corporation and Allstar
Systems, Inc.
*10.9 -- Novell Platinum Reseller Agreement dated February 22, 1989, by and between Novell, Inc.
and Allstar Systems, Inc.
*10.10 -- Promissory Note dated August 6, 1996, by and between James H. Long and Allstar Systems,
Inc.
*10.11 -- Allstar Systems, Inc. 1996 Incentive Stock Plan.
*10.12 -- Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan.
*10.13 -- Primary Vendor Volume Purchase Agreement dated August 1, 1996 by and between Inacom Corp.
and Allstar Systems, Inc.
*10.14 -- Resale Agreement dated December 14, 1995, by and between Ingram Micro Inc. and Allstar
Systems, Inc.
*10.15 -- Volume Purchase Agreement dated October 31, 1995, by and between Tech Data Corporation and
Allstar Systems, Inc.
*10.16 -- Intelligent Electronics, Inc. Compaq Second Source Reseller Agreement dated September 14,
1993 by and between Intelligent Reseller Network and Allstar Valcom.
10.17 -- Number 10.17 not used.
*10.18 -- IBM Business Partner Agreement dated June 29, 1993, by and between IBM and Allstar
Systems, Inc.
*10.19 -- Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized reseller dated
August 6, 1996.
*10.20 -- Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers dated March 13, 1995,
by and between Hewlett-Packard Company and Allstar Systems, Inc.
*10.21 -- Associate Agreement dated May 23, 1996, by and between NEC America, Inc. and Allstar
Systems, Inc.
*10.22 -- Mitel Elite Dealer Agreement and Extension Addendum dated August 5, 1996, by and between
Mitel, Inc. and Allstar Systems, Inc.
*10.23 -- Dealer Agreement dated March 1, 1995, by and between Applied Voice Technology and Allstar
Systems, Inc.
*10.24 -- Industrial Lease Agreement dated March 9, 1996, by and between H-5 J.E.T. Ltd. as lessor
and Allstar Systems, Inc. as lessee.
*10.25 -- Lease Agreement dated June 24, 1992, by and between James J. Laney, et al. as lessors, and
Technicomp Corporation and Allstar Services as lessees.
*10.26 -- Consulting Agreement dated August 2, 1996, by and between Jack B. Corey and Allstar
Systems, Inc.
*10.27 -- Acknowledgement, Waiver and Amendment to Revolving Loan Agreement dated August 2, 1996, by
and between IBM Credit Corporation and Allstar Systems, Inc.
*10.28 -- Agreement dated August 5, 1996, by and between DFS and Allstar Systems, Inc.
*10.29 -- Letter Agreement dated September 12, 1996 by and between Jack B. Corey, Jakascki
Corporation, James H. Long, Allstar Equities, Inc. and Allstar Systems, Inc.
*10.30 -- 1996 Credit Line Uplift Program supplement to Revolving Loan Agreement dated September 10,
1996, by and between IBM Credit Agreement and Allstar Systems, Inc.
II-3
<PAGE>
<C> <S>
*10.31 -- Insurance Proceeds Agreement dated August 2, 1996, by and between Jack B. Corey and
Allstar Systems, Inc.
+10.32 -- Extension of Acknowledgement, Waiver and Amendment to Revolving Loan Agreement dated
October 23, 1996, by and between IBM Credit Corporation and Allstar Systems, Inc.
+10.33 -- Modification of Amendment Termination Date of Agreement dated October 23, 1996, by and
between DFS and Allstar Systems, Inc.
*21.1 -- List of Subsidiaries of the Company.
+23.1 -- Consent and Report on Schedule of Deloitte & Touche LLP, independent auditors.
*23.2 -- Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on the signature page hereto).
+27.1 -- Financial Data Schedule.
- ------------
</TABLE>
* Previously filed.
+ Filed herewith.
(b) Financial Statements Schedules:
The following financial statement schedule is included in Part II of this
Registration Statement, can be found on the page indicated and should be read in
conjunction with the financial statements and notes thereto:
ITEM PAGE
- ---------------------------------------- ----
Schedule II Valuation and Qualifying
Accounts.............................. S-1
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are omitted because they are
not required under the related instructions, are inapplicable or the required
information is included elsewhere in the financial statements.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To provide to the underwriter at the closing date specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
(2) That for the purpose of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and this
Offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James H. Long and Donald R. Chadwick, and each of
them, either of whom may act without joinder of the other, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all pre- and post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of either of them, may lawfully do or cause to be done
by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on October 24, 1996.
ALLSTAR SYSTEMS, INC.
By: ______/s/__JAMES H. LONG__________
JAMES H. LONG,
CHAIRMAN OF THE BOARD, PRESIDENT
AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the indicated
capacities and on the 24th day of October, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------- --------------------
<S> <C> <C> <C>
/s/JAMES H. LONG Director, Chairman of the Board, October 24, 1996
JAMES H. LONG President and Chief Executive
Officer
(Principal Executive Officer)
/s/DONALD R. CHADWICK Director and October 24, 1996
DONALD R. CHADWICK Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
II-5
</TABLE>
<PAGE>
FINANCIAL STATEMENT SCHEDULE II
ALLSTAR SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGE TO CHARGE TO
BEGINNING COSTS AND OTHER OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS CHANGES END OF YEAR
- ---------------------------------------- ---------- --------- --------- ------- -----------
<S> <C> <C> <C> <C>
Accumulated provision deducted from
related assets on balance sheet:
Allowance for doubtful accounts
receivable:
1995.......................... $ 188 $ 353 -- $ (77 )(A) $ 464
1994.......................... 41 170 -- (23 )(A) 188
1993.......................... 110 281 -- (350 )(A) 41
Inventory reserves:
1995.......................... $ 178 $ 190 -- -- $ 368
1994.......................... 216 -- -- $ (38 )(A) 178
1993.......................... 200 16 -- -- 216
Reserves other than those deducted from
assets on balance sheet:
Allowance for doubtful vendor
receivables:
1995.......................... $ 150 $ 155 -- $ (55 )(A) $ 250
1994.......................... 626 49 -- (525 )(A) 150
1993.......................... 445 181 -- -- 626
</TABLE>
- ------------
(A) Reductions related to amounts written off.
S-1
EXHIBIT 10.32
[IBM LETTERHEAD]
International Business Machines Corporation IBM Credit Corporation
2707 Butterfield Road
Oakbrook, Illinois 60521
October 23, 1996
Mr. Donald Chadwick
Chief Financial Officer
Allstar Systems, Inc.
6401 Southwest Freeway
Houston, TX 77074-1619
Dear Mr. Chadwick,
On August 2, 1996, an Acknowledgement, Waiver and Amendment to the Agreement for
Wholesale Financing - Flexible Payment Plan ("Amendment") was signed between
Allstar Systems, Inc. ("Allstar") and IBM Credit Corporation ("IBM Credit").
At that time, the defaults identified in the Amendment were waived by IBM Credit
until the earlier of November 15, 1996 or the day after the closing of the stock
sale of the initial public offering referred to in Section 4 of the Amendment.
At this time, IBM Credit agrees to hereby extend the waiver of such defaults of
Customer with the terms of the Agreement for Wholesale Financing - Flexible
Payment Plan to the extent such defaults are set forth in Section 2 of the
Amendment, through the earlier of December 31, 1996 or the day after the closing
of the stock sale of the initial public offering referred to above.
If you have any questions, please feel free to call me at (800) 753-7053 Ext.
7523.
Sincerely,
IBM CREDIT CORPORATION
/s/ ALBERT G. MITCHELL
Albert G. Mitchell
Credit Manager
1
EXHIBIT 10.33
[DEUTSCHE FINANCIAL SERVICES LETTERHEAD]
Allstar Systems, Inc.
6401 Southwest Freeway
Houston, TX 77074
Re: Amendment Termination Extension
Gentlemen:
Allstar Systems, Inc. ("Allstar") and Deutsche Financial Services Corporation
("DFS") are parties to that certain Agreement dated as of August 5, 1996 (the
"Agreement", capitalized terms used but not defined herein shall have the
meanings given to them in the Agreement).
Allstar has requested that DFS extend the Amendment Termination Date. DFS and
Allstar hereby agree that the Amendment Termination Date shall be modified to be
the earlier to occur of the date of the IPO or December 31, 1996.
By your signature below, Allstar hereby agrees to the terms and conditions of
this letter.
Very truly yours,
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: /s/BOB POWELL
Name: Bob Powell
Title: Regional Branch Manager
Accepted and agreed to as this 23RD day of October, 1996
ALLSTAR SYSTEMS, INC.
By: /s/ D.R. CHADWICK
Name: D.R. CHADWICK
Title: CHIEF FINANCIAL OFFICER
Guarantor Acknowledgment
/s/ JAMES LONG
James Long
Date: 10-23-96
Rhonda Long
Date:
1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-09789 of Allstar Systems, Inc. ("Allstar") on Form S-1 of our report dated
April 19, 1996, except for Notes 1, 4, 5 and 11 as to which the date is October
23, 1996, appearing in the Prospectus, which is part of this Registration
Statement, and to the references to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of Allstar listed in Item 16(b). This consolidated financial statement
schedule is the responsibility of Allstar's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Houston, Texas
October 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ALLSTAR SYSTEMS, INC. AT DECEMBER
31, 1994 AND 1995 AND SEPTEMBER 30, 1996 (UNAUDITED) AND FOR EACH OF THE THREE
YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1993 DEC-31-1994 DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1993 DEC-31-1994 DEC-31-1995 SEP-30-1996
<CASH> 0 670 1,029 1,526
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 11,573 16,286 18,180
<ALLOWANCES> 0 (188) (464) (1,029)
<INVENTORY> 0 5,386 5,407 6,987
<CURRENT-ASSETS> 0 18,235 23,274 26,308
<PP&E> 0 1,295 1,703 2,128
<DEPRECIATION> 0 (460) (717) (960)
<TOTAL-ASSETS> 0 19,077 24,266 27,830
<CURRENT-LIABILITIES> 0 16,872 21,542 24,000
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 2 2 2
<OTHER-SE> 0 2,205 2,724 3,830
<TOTAL-LIABILITY-AND-EQUITY> 0 19,077 24,266 27,830
<SALES> 49,536 64,076 91,085 87,337
<TOTAL-REVENUES> 49,536 64,076 91,085 87,337
<CGS> 42,289 55,541 79,700 75,333
<TOTAL-COSTS> 42,289 55,541 79,700 75,333
<OTHER-EXPENSES> 6,060 7,448 9,306 9,280
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 644 764 1,218 922
<INCOME-PRETAX> 543 323 861 1,802
<INCOME-TAX> 229 140 342 696
<INCOME-CONTINUING> 314 183 519 1,106
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 314 183 519 1,106
<EPS-PRIMARY> .15 .07 .19 .41
<EPS-DILUTED> 0 0 0 0
</TABLE>
