AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 333-09789
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLSTAR SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5045 76-0515249
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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 3, 1996
PROSPECTUS
2,035,000 SHARES
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 Company has applied for listing of the Common Stock on the
Nasdaq National Market under the symbol "ALLS."
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.
================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(1)(2) STOCKHOLDER
- --------------------------------------------------------------------------------
Per Share.... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)..... $ $ $ $
================================================================================
(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 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 3,800 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 integration 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 six
months ended June 30, 1996, the Company increased operating income by 90.7% on a
47.0% 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 in the second half of 1996,
(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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue........................ $ 49,536 $ 64,076 $ 91,085 $ 39,554 $ 58,150
Gross profit......................... 7,247 8,535 11,385 5,123 7,353
Operating income..................... 1,187 1,087 2,079 799 1,524
Income before provision for
income taxes....................... 543 323 861 170 941
Net income........................... 314 183 519 103 607
Net income per share................. $ 0.15 $ 0.07 $ 0.19 $ 0.04 $ 0.23
Weighted average shares
outstanding........................ 2,120,242 2,554,808 2,675,000 2,675,000 2,675,000
</TABLE>
AS OF JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
BALANCE SHEET DATA:
Working capital...................... $ 1,625 $ 16,382
Total assets......................... 24,436 29,656
Short-term borrowings(2)............. 9,537 --
Long-term debt....................... -- --
Stockholders' equity................. 3,331 18,088
- ------------
(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.
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 half 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
six months of 1996, the Company has been 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 54.8% of the Company's total product
purchases in 1993, 1994, 1995 and the first six months of 1996, respectively. In
July 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 14.3% of the Company's total
product purchases in 1993, 1994, 1995 and the first six 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 35.5% of
the Company's total revenue during 1993, 1994, 1995 and the first six months
ending June 30, 1996, respectively. During the six months ended June 30, 1996,
the Company had one customer that accounted for 12.0% 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 evolves. 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 $6.67
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 84% of
the estimated net proceeds) to repay 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
$9.5 million at June 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 June 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 one-year
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
June 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 JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
Short-term borrowings(1)............. $ 9,537 $ --
--------- ------------
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)(2)............ -- 42
Additional paid-in capital...... 1,504 16,221
Retained earnings............... 1,825 1,825
--------- ------------
Total stockholders'
equity.................. 3,331 18,088
--------- ------------
Total capitalization.... $ 12,868 $ 18,088
========= ============
- ------------
(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) 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 June 30, 1996, was $3.3
million or $1.25 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
June 30, 1996, would have been $18.1 million or $4.33 per share. This represents
an immediate increase in net tangible book value of $3.08 per share to existing
holders of Common Stock and an immediate dilution of $6.67 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 June 30, 1996....... $ 1.25
Increase per share attributable
to new investors................ 3.08
---------
Adjusted net tangible book value per share after
this Offering................................... 4.33
---------
Dilution per share to new investors............. $ 6.67
=========
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 six months ended June 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $ 39,554 $ 58,150
Cost of sales and service............... 12,692 25,371 42,289 55,541 79,700 34,431 50,797
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 4,121 5,809 7,247 8,535 11,385 5,123 7,353
Selling, general and administrative
expenses.............................. 3,479 6,063 6,060 7,448 9,306 4,324 5,829
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............. 642 (254) 1,187 1,087 2,079 799 1,524
Interest expense........................ 153 243 644 764 1,218 629 583
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes........ 489 (497) 543 323 861 170 941
Provision (benefit) for income taxes.... 177 (122) 229 140 342 67 334
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ 312 $ (375) $ 314 $ 183 $ 519 $ 103 $ 607
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share............. $ 0.15 $ (0.18) $ 0.15 $ 0.07 $ 0.19 $ 0.04 $ 0.23
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 JUNE 30, 1996
--------- --------- --------- --------- --------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 297 $ (269) $ 1,307 $ 1,363 $ 1,732 $1,625
Total assets............................ 5,823 8,796 17,431 19,077 24,266 24,436
Short-term borrowings(1)................ 2,253 2,806 6,896 8,972 9,912 9,537
Long-term debt.......................... -- 47 43 -- -- --
Stockholders' equity.................... 582 208 2,022 2,205 2,724 3,331
</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 9.7% to 12.2% over the three and a half year period ended June 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 28.3% 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 48.6% 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 has been approximately 60%, primarily due to
the intellectual property value of the Company's proprietary CTI Software.
Revenue from CTI Software has accounted for less than 1% of the Company's total
revenue since its introduction in 1995.
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 5.1% in the first six months
of 1995 to 18.4% in the first six 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 54.6%
of the Company's total product purchases in 1993, 1994, 1995 and the first six
months of 1996, respectively. In July 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- -------------------
1993 1994 1995 1995
------------------- ------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Revenue:
Computer Products..................... $44,405 89.6 $57,792 90.2 $81,740 89.7 $35,343 89.4
IT Services........................... 5,131 10.4 6,167 9.6 7,814 8.6 3,692 9.3
Telecom Systems....................... -- 0.0 117 0.2 1,458 1.6 519 1.3
CTI Software.......................... -- 0.0 -- 0.0 73 0.1 -- 0.0
Total revenue....................... 49,536 100.0 64,076 100.0 91,085 100.0 39,554 100.0
Gross profit(1):
Computer Products..................... 5,429 12.2 5,962 10.3 8,491 10.4 3,899 11.0
IT Services........................... 1,818 35.4 2,523 40.9 2,379 30.4 1,043 28.3
Telecom Systems....................... -- -- 50 42.7 482 33.1 181 34.9
CTI Software.......................... -- -- -- -- 33 45.2 -- --
Total gross profit.................. 7,247 14.6 8,535 13.3 11,385 12.5 5,123 12.9
Selling, general and
administrative
expenses.............................. 6,060 12.2 7,448 11.6 9,306 10.2 4,324 10.9
Operating income...................... 1,187 2.4 1,087 1.7 2,079 2.3 799 2.0
Interest expense........................ 644 1.3 764 1.2 1,218 1.3 629 1.6
Income before provision for income
taxes............................... 543 1.1 323 0.5 861 1.0 170 0.4
Provision for income taxes.............. 229 0.5 140 0.2 342 0.4 67 0.1
Net income............................ 314 0.6 183 0.3 519 0.6 103 0.3
PER OFFICE DATA(1):
Houston Office:
Revenue............................. 39,104 78.9 41,057 64.1 53,095 58.3 22,004 55.6
Gross profit........................ 5,811 14.9 5,946 14.5 6,968 13.1 3,028 13.8
Dallas Office:
Revenue............................. 10,432 21.1 23,019 35.9 37,990 41.7 17,550 44.4
Gross profit........................ 1,436 13.8 2,589 11.2 4,417 11.6 2,095 11.9
(Table continued below)
</TABLE>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996
-------------------
AMOUNT %
------- ---------
OPERATING DATA(1):
Revenue:
Computer Products..................... $52,525 90.3
IT Services........................... 3,719 6.4
Telecom Systems....................... 1,398 2.4
CTI Software.......................... 508 0.9
Total revenue....................... 58,150 100.0
Gross profit(1):
Computer Products..................... 5,082 9.7
IT Services........................... 1,287 34.6
Telecom Systems....................... 679 48.6
CTI Software.......................... 305 60.0
Total gross profit.................. 7,353 12.6
Selling, general and administrative
expenses.............................. 5,829 10.0
Operating income...................... 1,524 2.6
Interest expense........................ 583 1.0
Income before provision for income
taxes............................... 941 1.6
Provision for income taxes.............. 334 0.6
Net income............................ 607 1.0
PER OFFICE DATA(1):
Houston Office:
Revenue............................. 27,934 48.0
Gross profit........................ 4,247 15.2
Dallas Office:
Revenue............................. 30,216 52.0
Gross profit........................ 3,106 10.3
- ------------
(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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
TOTAL REVENUE. Total revenue increased by $18.6 million (47.0%) from $39.6
million in the first six months of 1995 to $58.2 million in the first six months
of 1996. Revenue from Computer Products, which comprised 90.3% of total revenue,
increased by $17.2 million (48.6%). 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 6.4% 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 more than 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 six months of 1996 compared to the same period in
1995, IT Services revenue as a percentage of total revenue declined over the
same periods. This percentage change is generally reflective of the fact that
the combined growth rate of the Company's other three businesses over the same
periods was greater than the growth rate of IT Services revenue. The Company
presently expects that this trend will continue over the near term, though there
can be no such assurance due to competitive factors influencing the revenue
growth of each of the Company's four businesses. Revenue from Telecom Systems
sales, which comprised 2.4% of total revenue, increased by $879,000 (169.4%).
The increase in Telecom Systems revenue was primarily the result of adding new
customers, of which one customer accounted for $460,000 (52.3%) 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
$508,000 during the first six months of 1996.
17
<PAGE>
GROSS PROFIT. Gross profit increased by $2.2 million (43.5%) from $5.1
million in the first half of 1995 to $7.4 million in the first half of 1996,
while gross margin decreased from 12.9% in the first six months of 1995 to 12.6%
in the first six months of 1996. The gross margin for Computer Products
decreased from 11.0% in the 1995 period to 9.7% in the corresponding period in
1996. This decrease was largely the result of continued price competition and a
large, drop shipped sale to a single customer which prepaid for the sale in
exchange for a reduced price. Also contributing to the decrease in gross margin
for Computer Products was the Company's continuing practice of offering its
Computer Products in the Dallas-Fort Worth market at gross margins lower than it
typically received in the Houston market in order to increase market
penetration. The gross margin for IT Services increased from 28.3% in the first
half 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 34.9% in the first six months of 1995 to 48.6% in the
corresponding period in 1996, primarily attributable to a large purchase of a
complex system by a single customer at a higher than usual margin. CTI Software
sales resulted in a gross margin of 60.0% for the first half 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 $1.5 million (34.8%) from $4.3 million in
the first six months of 1995 to $5.8 million in the corresponding period of
1996. As a percentage of total revenue, selling, general and administrative
expenses decreased from 10.9% in the six months ended June 30, 1995 to 10.0% for
the corresponding 1996 period. Of the dollar increase, $714,000 (47.4%) 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. Additionally, the Company contained the growth of
administrative expenses to a rate substantially less than the growth of total
revenue over the same period.
OPERATING INCOME. Operating income increased by $725,000 (90.7%) from
$799,000 in the first half of 1995 to $1.5 million in the same period in 1996.
Operating income increased as a percentage of total revenue from 2.0% in the
1995 period to 2.6% in the 1996 period.
INTEREST EXPENSE. Interest expense decreased by $46,000 (7.3%) from
$629,000 in the first six months of 1995 to $583,000 in the first six months of
1996, due principally to advance payments for a large purchase by a single
customer in 1996. The prepayments resulted in reduced accounts receivable and a
related reduction in borrowing. Interest expense as a percentage of total
revenue decreased from 1.6% in the first half of 1995 to 1.0% in the
corresponding period of 1996.
NET INCOME. Net income increased by $504,000 (489.3%) from $103,000 in the
1995 period to $607,000 in the 1996 period. Net income as a percentage of total
revenue increased from 0.3% in the first six months of 1995 to 1.0% 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 Systemsoperations. 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 Computer Products increased slightly from 10.3% in 1994 to
10.4% in 1995, despite the continuation of the
18
<PAGE>
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. 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 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.
19
<PAGE>
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. 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
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ ---------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue........................ $ 20,685 $ 18,869 $ 23,726 $ 27,805 $ 25,948 $ 32,202
Cost of sales and service............ 18,208 16,223 20,665 24,604 22,662 28,135
--------- -------- ------------- ------------ ---------- ---------
Gross profit..................... 2,477 2,646 3,061 3,201 3,286 4,067
Selling, general and administrative
expenses........................... 2,148 2,176 2,512 2,470 2,738 3,091
--------- -------- ------------- ------------ ---------- ---------
Operating income................. 329 470 549 731 548 976
Interest expense..................... 319 310 276 313 298 285
--------- -------- ------------- ------------ ---------- ---------
Income before provision income
taxes.......................... 10 160 273 418 250 691
Provision for income taxes........... 4 63 108 167 111 223
--------- -------- ------------- ------------ ---------- ---------
Net income....................... $ 6 $ 97 $ 165 $ 251 $ 139 $ 468
========= ======== ============= ============ ========== =========
Net income per share................. $ 0.00 $ 0.04 $ 0.06 $ 0.09 $ 0.05 $ 0.18
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
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 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............ 88.0 86.0 87.1 88.5 87.3 87.4
--------- -------- ------------- ------------ ---------- ---------
Gross profit..................... 12.0 14.0 12.9 11.5 12.7 12.6
Selling, general and administrative
expenses........................... 10.4 11.5 10.6 8.9 10.6 9.6
--------- -------- ------------- ------------ ---------- ---------
Operating income................. 1.6 2.5 2.3 2.6 2.1 3.0
Interest expense..................... 1.5 1.7 1.2 1.1 1.1 0.9
--------- -------- ------------- ------------ ---------- ---------
Income before provision for
income taxes................... 0.1 0.8 1.1 1.5 1.0 2.1
Provision for income taxes........... 0.0 0.3 0.4 0.6 0.4 0.7
--------- -------- ------------- ------------ ---------- ---------
Net income....................... 0.1% 0.5% 0.7% 0.9% 0.6% 1.4%
========= ======== ============= ============ ========== =========
</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 $1.6 million at December 31, 1995 and June 30,
1996, respectively. As of June 30, 1996, the Company had borrowing capacity
under the IBMCC credit facility of $3.8 million.
CASH FLOW
Operating activities used net cash totaling $4.9 million, $3.2 million and
$2.4 million during 1993, 1994 and 1995, respectively, and provided net cash
flow of $1.4 million for the six months ended June 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 decreased $768,000 for the six months ended June 30,
1996. Inventory also increased as a result of the growth in total revenue by
$912,000, $1.7 million, $60,000 and $1.4 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 August 1996, the Company entered into an agreement with the state
to pay the agreed upon amounts. Had the sales taxes been timely paid, net cash
used in operations during 1995 would have been approximately $3.8 million.
Investing activities used cash totaling $51,000, $447,000, $419,000 and
$303,000, respectively, during 1993, 1994, 1995 and the six months ended June
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 six months of 1996, financing activities used net
cash of $1.6 million as a result of the reduction of 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 $15.1 million at June
30, 1996. The number of days' sales outstanding in trade accounts receivable was
45 days, 45 days and 49 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%, 2.9% and 4.6% at December 31, 1994 and 1995 and June 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 six months of 1996 was 11.8 times, 14.4 times and 15.5 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 June
30, 1996, the total indebtedness of the Company under the IBMCC Facility was
$15.6 million of which $9.6 million was outstanding under the Accounts Line and
$6.0 million was outstanding under the Inventory Line. The Company's remaining
available credit at June 30, 1996, based on its borrowing base was $3.8 million.
The Company intends to apply approximately $12.0 million of the net proceeds of
this Offering to repay 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 June
30, 1996, the amount outstanding under the DFS Facility was $1.2 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 six 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 November 15, 1996
or the day after the closing date of this Offering in the case of IBMCC or the
day of the closing of this Offering in the case of DFS. 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
November 15, 1996, reverting to
23
<PAGE>
8.0 to 1 thereafter. IBMCC increased the maximum permissible ratio of 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 3,800 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 in the second half of 1996, (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, 1995 and the
six months ended June 30, 1996, accounted for approximately 90% of the Company's
total revenue. During 1993, 1994, 1995 and the first six months of 1996, IT
Services comprised approximately 10.4%, 9.6%, 8.6% and 6.4%, 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 58.1%,
for 1993, 1994, 1995 and the first six 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.
During the second half of 1996, 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 June 30, 1996, the Company had licensed and installed 11
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 June 30, 1996,
the Company had licensed and installed 20 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 3,800 customers purchased products or
services from the Company during the 12-month period ended June 30, 1996. During
1993, 1994, 1995 and the first six 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 35.5%, 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
12.0%. The customers shown below, each of which purchased products or services
in excess of $100,000 during the 18-month period ending June 30, 1996,
illustrate the diversity of the Company's customers:
Amoco Corporation Lucent Technologies
Baker Oil Tools, Inc. MCI Telecommunications Corp.
Bank America Corporation Motorola, Inc.
Blockbuster Entertainment Rockwell International
Chevron Chemical Company Southwestern Bell Telephone Co.
Coopers & Lybrand L.L.P. Tandy Corp.
Exxon Corp. Texas Commerce Bank
General Instrument Corp. Toshiba International Corp.
GTE VISNET Transamerica Finance Services
H&R Block of South Texas Turner Construction Company
Houston Lighting & Power Co. 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 six months of 1996, the Company purchased
from Inacom approximately 55.6%, 46.4%, 36.6% and 54.8%, 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 six months of 1996, the Company purchased
from Ingram approximately 8.3%, 14.1%, 20.6% and 14.3% 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
service. The Company's status as an authorized reseller of key product lines is
essential to the operation of
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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 5.1% during the six
months ended June 30, 1995 to 18.4% during the six months ended June 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 June 30, 1996, the company employed approximately 279 individuals. Of
these, approximately 105 were employed in sales, marketing and customer service,
105 were employed in engineering and technical positions and 69 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 suppliers. Some of the Company's current and potential competitors have
longer operating histories and
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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, 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:
NAME AGE POSITION
---- --- --------
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... 41 Vice President, Purchasing and Distribution
Anthony Adame........ 40 President, Computer Products Division
Shabbir K. Ali....... 33 President, IT Services Division
Michael A. Torigian.. 37 President, Telecom Systems Division
William R. Hennessy.. 38 President, Stratasoft, Inc.
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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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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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 is currently in the process of filing 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 six months ended June 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 six months of 1996,
payments by Allstar Equities to Jakascki under the lease arrangement amounted to
$85,000, $150,000, $150,000 and $159,000, 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 six months of 1996, rentals under the sublease arrangement amounted to
$290,000, $312,000, $372,000 and $186,000, 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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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 six months ended June 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 six months ended June 30, 1996 was
$194,500. Effective June 30, 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.
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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 $9,800 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 June 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
June 30, 1996 was approximately $8,100. 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 0.5% 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 for each successive calendar year. 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 June 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 June 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 Company has applied for listing of the Common Stock on the Nasdaq
National Market under the symbol "ALLS."
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
June 30, 1996 (Unaudited)............. F-3
Consolidated Statements of Operations
for the Years Ended December 31,
1993, 1994 and 1995 and for the Six
Months Ended
June 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 Six
Months Ended
June 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 Six Months
Ended June 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 2, 1996
F-2
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1994 1995 JUNE 30, 1996
--------- --------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents:
Restricted cash.................. $ 336 $ 581 $ 481
Cash............................. 334 448 --
--------- --------- --------------
Total cash and cash
equivalents................ 670 1,029 481
Accounts receivable - trade, net... 11,385 15,822 15,054
Accounts receivable - affiliates... 599 679 56
Inventory.......................... 5,386 5,407 6,767
Deferred taxes..................... 112 258 270
Other current assets............... 83 79 102
--------- --------- --------------
Total current assets.......... 18,235 23,274 22,730
Property and equipment, net............. 835 986 1,182
Other assets - affiliates............... 7 6 524
--------- --------- --------------
Total................................... $ 19,077 $ 24,266 $ 24,436
========= ========= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................... $ 8,972 $ 9,912 $ 9,537
Floor plan liability............... 4,563 6,769 5,542
Accounts payable................... 1,109 880 1,342
Accrued expenses................... 1,684 3,357 3,940
Income taxes payable............... 230 283 539
Deferred service revenue........... 314 341 205
--------- --------- --------------
Total current liabilities..... 16,872 21,542 21,105
--------- --------- --------------
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 1,825
--------- --------- --------------
Total stockholders' equity.... 2,205 2,724 3,331
--------- --------- --------------
Total................................... $ 19,077 $ 24,266 $ 24,436
========= ========= ==============
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 SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenue........................ $ 49,536 $ 64,076 $ 91,085 $ 39,554 $ 58,150
Cost of sales and services........... 42,289 55,541 79,700 34,431 50,797
----------- ----------- ----------- ----------- -----------
Gross profit......................... 7,247 8,535 11,385 5,123 7,353
Selling, general and administrative
expenses........................... 6,060 7,448 9,306 4,324 5,829
----------- ----------- ----------- ----------- -----------
Operating income..................... 1,187 1,087 2,079 799 1,524
Interest expense, net................ 644 764 1,218 629 583
----------- ----------- ----------- ----------- -----------
Income before provision for income
taxes.............................. 543 323 861 170 941
Provision for income taxes........... 229 140 342 67 334
----------- ----------- ----------- ----------- -----------
Net income........................... $ 314 $ 183 $ 519 $ 103 $ 607
=========== =========== =========== =========== ===========
Net income per share................. $ 0.15 $ 0.07 $ 0.19 $ 0.04 $ 0.23
=========== =========== =========== =========== ===========
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 SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 314 $ 183 $ 519 $ 103 $ 607
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Gain on disposal of assets...... (5) -- (1) -- --
Depreciation and amortization... 149 211 309 129 179
Deferred taxes.................. (342) 230 (146) (29) (12)
Changes in assets and liabilities
that provided (used) cash:
Accounts receivable - trade,
net............................. (4,937) (2,018) (4,437) 1,138 768
Accounts
receivable - affiliates....... 51 (241) (80) 113 104
Inventory....................... (912) (1,681) (60) (1,138) (1,431)
Other current assets............ 19 (55) 4 56 (23)
Accounts payable................ (751) 424 (229) (1,109) 462
Accrued expenses................ 567 290 1,673 529 583
Income taxes payable............ 500 (341) 53 (163) 256
Deferred service revenue........ 428 (207) 27 (89) (136)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) operating
activities.............. (4,919) (3,205) (2,368) (460) 1,357
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures............... (162) (447) (479) (34) (303)
Proceeds from sale of fixed
assets.......................... 22 -- 60 -- --
Payments received on note
receivable -- related party..... 89 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities................. (51) (447) (419) (34) (303)
Cash flows from financing activities:
Net increase (decrease) in notes
payable......................... 4,090 2,075 940 454 (375)
Net increase (decrease) in floor
plan liability.................. 1,992 (735) 2,206 73 (1,227)
Proceeds from sale of common
stock........................... -- 1,500 -- -- --
Payment of long-term debt.......... (4) (43) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used
in) financing
activities.............. 6,078 2,797 3,146 527 (1,602)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... 1,108 (855) 359 33 (548)
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 $ 703 $ 481
========= ========= ========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid for interest............. $ 520 $ 667 $ 1,189 $ 524 $ 355
========= ========= ========= ========= =========
Cash paid for income taxes......... $ 68 $ 221 $ 432 $ 271 $ 94
========= ========= ========= ========= =========
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 SIX MONTHS ENDED JUNE 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)............. -- -- -- 607 607
--------- ------ ---------- --------- ---------
Balance at June 30, 1996
(unaudited)........................ 328,125(1) $ 2 $1,504 $ 1,825 $ 3,331
========= ====== ========== ========= =========
</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 SIX MONTHS ENDED JUNE 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 June 30, 1996 and
for the six-month periods ended June 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 Notes 5 and 11). 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, Allstar was not in compliance with certain of
these covenants; however, the financing company has waived such noncompliance
through the earlier of November 15, 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 $20 million in April 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, Allstar was not in compliance with certain of these
covenants; however, the financing company has waived such noncompliance through
the earlier of November 15, 1996, or the closing of an initial public offering.
Allstar believes that it will have sufficient equity capital available to enable
it to comply with the restrictive financial covenants provided for by the Credit
Agreement.
F-9
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Allstar is currently in the process of renewing this lease for
1996; in the interim, rental payments will continue at $31 per month. 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. Employer contributions to the plan are at Allstar's discretion and
amounted to approximately $27, $30 and $46 in 1993, 1994 and 1995, respectively;
however, such amounts have not been remitted for 1994 or 1995. 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 June 30, 1996, Allstar and its principal stockholder entered into
a promissory note to repay certain advances, which were approximately $173 at
June 30, 1996, in annual installments of $35, plus interest, from August 1997
through 2001. This note bears interest at 9% per year. The advances as of June
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 June 30, 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 advances as of
June 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.
Allstar is currently in process of filing 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
COMPANY NAMES*
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
- ------------
* All company names and trade names are the legal property of their respective
owners.
G-1
<PAGE>
TECHNICAL TERMS
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
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
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:
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
+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.
II-2
<PAGE>
*10.2 -- Agreement for Wholesale Financing dated September 20, 1993,
by and between ITT Commercial Finance Corp. and Allstar-Valcom,
Inc.
*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.
II-3
<PAGE>
*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.
*10.31 -- Insurance Proceeds Agreement dated August 2, 1996, by and
between Jack B. Corey 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.
- ------------
* 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 3, 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 3rd day of October, 1996.
SIGNATURE TITLE DATE
- ------------------------ -------------------------------- ---------------
/s/JAMES H. LONG Director, Chairman of the Board, October 3, 1996
JAMES H. LONG President and Chief Executive
Officer
(Principal Executive Officer)
/s/DONALD R. CHADWICK Director and Chief Financial Officer October 3, 1996
DONALD R. CHADWICK (Principal Financial Officer and
Principal Accounting Officer)
II-5
<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> <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 1.1
ALLSTAR SYSTEMS, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------
UNDERWRITING AGREEMENT
------------
_______________, 1996
Rauscher Pierce Refsnes, Inc.,
Sutro & Co. Incorporated
As Representatives of the several
Underwriters named in Schedule I hereto,
c/o Rauscher Pierce Refsnes, Inc.
Cityplace
2711 N. Haskell Avenue, Suite 2400
Dallas, Texas 75204-2936
Dear Sirs:
Allstar Systems, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
1,500,000 shares and, at the election of the Underwriters, up to 305,250
additional shares of Common Stock, par value $.01 per share ("Stock") of the
Company, and the stockholder of the Company named in Schedule II hereto (the
"Selling Stockholder") proposes, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 535,000 shares of Stock. The
aggregate of 2,035,000 shares to be sold by the Company and the Selling
Stockholder is herein called the "Firm Shares" and the aggregate of 305,250
additional shares to be sold by the Company is herein called the "Optional
Shares." The Firm Shares and the Optional Shares which the Underwriters elect to
purchase pursuant to Section 2 hereof are herein collectively called the
"Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement in respect of the Firm Shares and
Optional Shares has been filed with the Securities and Exchange
Commission (the "Commission"); such registration statement and any
post-effective amendment thereto, each in the form heretofore delivered
to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; no other document with respect to such registration statement has
heretofore been filed with the Commission; and no stop order suspending
the effectiveness of such registration statement has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in such
<PAGE>
registration statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the
Securities Act of 1933, as amended (the "Act"), being hereinafter called
a "Preliminary Prospectus"; the various parts of such registration
statement, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A or Rule 434 under the Act to be
part of the registration statement at the time it was declared
effective, each as amended at the time such part of the registration
statement became effective, being hereinafter called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant
to Rule 424(b) under the Act, being hereinafter called the
"Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission or the Blue Sky or
securities authority of any jurisdiction, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by (A) an Underwriter
through you expressly for use therein or (B) a Selling Stockholder
expressly for use in the preparation of the information required to be
presented therein pursuant to Item 7 of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of the
applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information
furnished in writing to the Company by (A) an Underwriter through you
expressly for use therein or (B) a Selling Stockholder for use in the
preparation of the information to be presented therein pursuant to Item
7 of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, that has had a material adverse effect on the general
affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect") and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus
and except as set forth or contemplated in the Prospectus, there has not
been any change in the capital stock, short-term debt or long-term debt
of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective Material Adverse
Effect;
2
(v) The Company and its subsidiaries have good and marketable
title in fee simple or, in jurisdictions outside of the United States,
the substantive equivalent thereto, to all material real property and
good and marketable title to all material personal property owned by
them, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and
its subsidiaries; and any material real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, or is subject to no
material liability or disability by reason of failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been
duly incorporated and is validly existing as a corporation and is in
good standing under the laws of its jurisdiction of incorporation;
(vii) This Agreement and the transactions contemplated herein
have been duly and validly authorized by the Company and this Agreement
has been duly and validly executed and delivered by the Company.
(viii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description thereof contained in
the Prospectus in all material respects; and all of the issued shares of
capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances or
claims;
(ix) All offers and sales of (A) the Common Stock by the Company
(other than the Shares); and (B) the Common Stock of Allstar Systems,
Inc., a Texas corporation and the Company's predecessor, were at all
relevant times exempt from the registration requirements of the Act and
were the subject of an available exemption from the registration
requirements of applicable state securities or Blue Sky laws.
(x) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and nonassessable and
will conform to the description of the Stock contained in the Prospectus
in all material respects;
(xi) The issue and sale of the Firm Shares and the Optional
Shares by the Company and the compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any
3
<PAGE>
indenture, mortgage, deed of trust, loan agreement, sale/leaseback
agreement or other agreement or instrument (collectively, the "Specified
Documents") to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject except where such conflict, breach or violation would not
have a Material Adverse Effect, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or the
Bylaws of the Company or any statute or any order, rule or regulation of
any court or government agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties except
where such violation would not have a Material Adverse Effect; and no
consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is required for
the issue and sale of the Shares or the consummation by the Company of
the transactions contemplated by this Agreement, except the registration
under the Act of the Shares, such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters and such consents,
approvals, authorizations, registrations or qualifications the absence
of which would not have a Material Adverse Effect;
(xii) Other than as set forth or contemplated in the Prospectus,
there are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect; and, to
the best of the Company's knowledge, no such proceedings are threatened
by governmental authorities or by others;
(xiii) Deloitte & Touche LLP, who have certified financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(xiv) The historical financial statements, including the notes
thereto, and schedules included in the Registration Statement and the
Prospectus present fairly, on the basis stated therein, the financial
position of the Company as of the dates of such financial statements and
the results of such operations for the periods specified. Such financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis, except as otherwise
disclosed in the Registration Statement; the schedules included in the
Registration Statement present fairly the information required to be
stated therein; and the other historical financial data of the Company
and its subsidiaries included in the Registration Statement and the
Prospectus are materially accurate and prepared on a basis consistent
with such financial statements and schedules and the books and records
of the Company;
(xv) The Company has no subsidiaries other than Stratasoft, Inc.;
(xvi) The Company and its subsidiaries own, or possess adequate
rights to use, all the patents, trademarks, service marks, trade names
and copyrights ("Intellectual Property") necessary for the conduct of
its business as currently conducted by it. To the best knowledge of the
Company, none of the activities engaged in by the Company infringes or
conflicts with Intellectual Property rights of others;
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(xvii) Except as set forth in the Prospectus, no person has any
right to require the Company to register any securities under the Act;
(xviii) The Company has not taken, directly or indirectly, any
action designed to cause or result in, or which constitutes or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate
the sale or resale of the Shares;
(xvix) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as
an "investment company" under the Investment Company Act of 1940;
(xx) There are no Specified Documents of a character required to
be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement by the Act or
by the Regulations that have not been described or referred to therein
or filed as required;
(xxi) The Company and each of its subsidiaries maintain a system
of internal accounting controls that, taken as a whole, are sufficient
to provide reasonable assurance that: (A) transactions are executed in
accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (C) access to
assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences; and
(xxii) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to
doing business with the Government of Cuba or any person or affiliate
located in Cuba.
(b) The Selling Stockholder represents and warrants to, and agrees with,
each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Stockholder of this
Agreement, the Power of Attorney (the "Power of Attorney") and the
Custody Agreement (the "Custody Agreement") hereinafter referred to, and
for the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder
has full right, power and authority to enter into this Agreement, the
Power of Attorney and the Custody Agreement and to sell, assign,
transfer and deliver the Shares to be sold by such Selling Stockholder
hereunder;
(ii) The sale of the Shares to be sold by such Selling
Stockholder hereunder and the compliance by such Selling Stockholder
with all of the provisions of this Agreement, the Power of Attorney and
the Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any statute, any indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder is
bound or to which any of the property or assets
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of such Selling Stockholder is subject, nor will such action result in
any violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Stockholder if such Selling Stockholder is a
corporation, or the Articles of Partnership of such Selling Stockholder
if such Selling Stockholder is a partnership, or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder;
(iii) Such Selling Stockholder has good and valid title to the
Shares to be sold at the First Time of Delivery (as defined in Section 4
hereof) by such Selling Stockholder hereunder, free and clear of all
liens, encumbrances, equities and claims, and immediately prior to the
First Time of Delivery such Selling Stockholder will have good and valid
title to the Shares to be sold at such Time of Delivery by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances,
equities or claims; and, upon delivery of such Shares and payment
therefor pursuant hereto, good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims, will pass to the
several Underwriters;
(iv) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares; and
(v) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein, such Preliminary
Prospectus and the Registration Statement did, and the Prospectus and
any further amendments or supplements to the Registration Statement and
the Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
In order to document the Underwriters' compliance with the reporting and
withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982
with respect to the transactions herein contemplated, each of the Selling
Stockholder agrees to deliver to you prior to or at the First Time of Delivery
(as hereinafter defined) a properly completed and executed United States
Treasury Department Form W-9 (or Form W-8 if applicable, or other applicable
form or statement specified by Treasury Department regulations in lieu thereof).
The Selling Stockholder represents and warrants that certificates in
negotiable form representing all of the Shares to be sold by such Selling
Stockholder hereunder have been placed in custody under a Custody Agreement, in
the form heretofore furnished to you, duly executed and delivered by such
Selling Stockholder to the persons indicated on Schedule II hereto, and each of
them, as custodians (the "Custodians"), and that such Selling Stockholder has
duly executed and delivered a Power of Attorney, in the form heretofore
furnished to you, appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement on
behalf of such Selling Stockholder, to determine the purchase price to be paid
by the Underwriters to the Selling Stockholder as provided in Section 2 hereof,
to authorize the
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delivery of the Shares to be sold by such Selling Stockholder hereunder and
otherwise to act on behalf of such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the Custody Agreement.
The Selling Stockholder specifically agrees that the Shares represented
by the certificates held in custody for such Selling Stockholder under the
Custody Agreement are subject to the interests of the Underwriters hereunder and
that the arrangements made by such Selling Stockholder for such custody, and the
appointment by such Selling Stockholder of the Attorneys-in-Fact by the Power of
Attorney, are to that extent irrevocable. The Selling Stockholder specifically
agrees that the obligations of the Selling Stockholder hereunder shall not be
terminated by operation of law, whether by the death or incapacity of any
individual Selling Stockholder or, in the case of an estate or trust, by the
death or incapacity of any executor or trustee or the termination of such estate
or trust, or in the case of a partnership or corporation, by the dissolution of
such partnership or corporation, or by the occurrence of any other event. If any
individual Selling Stockholder or any such executor or trustee should die or
become incapacitated, or if any such estate or trust should be terminated, or if
any such partnership or corporation should be dissolved, or if any other such
event should occur, before the delivery of the Shares hereunder, certificates
representing the Shares shall be delivered by or on behalf of the Selling
Stockholder in accordance with the terms and conditions of this Agreement and of
the Custody Agreement, and actions taken by the Attorneys-in Fact pursuant to
the Powers of Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of whether
or not the Custodians, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, termination, dissolution or other
event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and the Selling Stockholder agree, severally and not jointly, to sell to each of
the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholder, at a purchase
price per share of $[_____], the number of Firm Shares (to be adjusted by you so
as to eliminate fractional shares) determined by multiplying the aggregate
number of Firm Shares to be sold by the Company and the Selling Stockholder as
set forth opposite their respective names in Schedule II hereto by a fraction,
the numerator of which is the aggregate number of Firm Shares to be purchased by
such Underwriter as set forth opposite the name of such Underwriter in Schedule
I hereto and the denominator of which is the aggregate number of Firm Shares to
be purchased by all the Underwriters from the Company and the Selling
Stockholder hereunder and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as provided
below, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at the purchase price per share set forth in clause (a) of this Section
2, that portion of the number of Optional Shares as to which such election shall
have been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of the Optional Shares which all of the Underwriters are entitled to
purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 305,250 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
over-allotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 45 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional
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Shares to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time of
Delivery (as defined in Section 4 hereof) or, unless you and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. Certificates in definitive form for the Shares to be purchased by
each Underwriter hereunder, and in such denominations and registered in such
names as Rauscher Pierce Refsnes, Inc. may request upon at least 48 hours' prior
notice to the Company and the Selling Stockholder, shall be delivered by or on
behalf of the Company and the Selling Stockholder to you for the account of such
Underwriter, against payment by such Underwriter or on its behalf of the
purchase price therefor by wire transfer to the Company and the Selling
Stockholder, as their interests may appear in same day funds, or by payment in
such other manner as shall be agreed to in writing by the Company and Rauscher
Pierce Refsnes, Inc., all at the offices of Rauscher Pierce Refsnes, Inc.,
Cityplace, 2711 North Haskell Avenue, Suite 2400, Dallas, Texas 75204-2936, or
at such other place as shall be agreed upon by you and the Company. The time and
date of such delivery and payment shall be, with respect to the Firm Shares,
9:00 a.m., Dallas time, on , 1996, or at such other time and date as you and the
Company and the Selling Stockholder may agree upon in writing, and, with respect
to the Optional Shares, 9:00 a.m., Dallas time, on the date specified by you in
the written notice given by you of the Underwriters' election to purchase such
Optional Shares, or at such other time and date as you and the Company may agree
upon in writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery," such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the "Second
Time of Delivery," and each such time and date for delivery is herein called a
"Time of Delivery."
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) or Rule 434 under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when the
Registration Statement, or any amendment thereto, has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you with copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop order or
of any order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, to use promptly its best efforts to obtain
its withdrawal;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
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jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) To furnish the Underwriters with copies of the Prospectus in such
quantities as you may from time to time reasonably request, and, if the delivery
of a prospectus is required at any time prior to the expiration of nine months
after the time of the issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such same period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its security holders as soon as
practicable, but in any event not later than 18 months after the effective date
of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including at the option of the Company Rule 158);
(e) (i) During the period beginning from the date hereof and continuing
to and including the date 180 days after the effective date of the Prospectus,
not to, directly or indirectly, offer, sell, contract to sell, grant any option
to sell or otherwise dispose of Stock, or other securities which are
substantially similar to the Stock, or securities which are convertible into or
exercisable or exchangeable for or any rights to purchase or acquire Stock or
other securities which are substantially similar to the Stock, without your
prior written consent (other than the sale of the Shares pursuant to this
Agreement or the grant of options or of restricted stock awards pursuant to
stock option or restricted stock plans existing on the date of this Agreement,
provided such options are not exercisable within the 180 day period); and (ii)
that it will use its reasonable efforts to cause each person who has entered
into a Lock-up Agreement to comply therewith, will not grant any waivers or
consents to non-compliance therewith and will otherwise enforce its rights under
each such agreement, in each case unless and to the extent that it shall have
obtained your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flow of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
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(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders, and deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use its best efforts to have the Shares accepted for quotation on
the Nasdaq National Market;
(i) The Company will apply the net proceeds from the sale of the Shares
in the manner described in "Use of Proceeds" in the Prospectus; and
(j) The Company will file with the Commission such reports on Form SR as
may be required pursuant to Rule 463 of the Regulations.
6. The Company and the Selling Stockholder covenant and agree with one
another and with the several Underwriters that, except as provided below, the
Company will pay or cause to be paid all costs and expenses incident to the
performance of the Company's and the Selling Stockholder's obligations hereunder
including: (i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum and
any other documents in connection with the offering, purchase, sale and delivery
of the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) the filing fees and the fees and expenses of the
Underwriters incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
(v) the cost of preparing stock certificates; (vi) the cost and charges of any
transfer agent or registrar; (vii) the Selling Stockholder's pro rata share of
the fees and expenses of the Attorneys-in-Fact and the Custodians; and (viii)
all registration expenses and stock transfer taxes incident to the sale and
delivery of the Shares to be sold by the Selling Stockholder to the Underwriters
hereunder; PROVIDED, HOWEVER, that, notwithstanding the foregoing, (A) all
underwriters' discounts and commissions in respect of the sale of the Shares by
the Selling Stockholder shall be paid by the Selling Stockholder, (B) your
$150,000 non-accountable expense allowance for due diligence shall be paid by
the Company and the Selling Stockholder in proportion to the number of Shares
sold by each in the public offering and (C) all fees and expenses of counsel to
the Selling Stockholder shall be paid by the Selling Stockholder. In connection
with Clause (viii) of the preceding sentence, the Company agrees to reimburse
Rauscher Pierce Refsnes, Inc. for associated carrying costs if such tax payment
is not rebated on the day of payment and for any portion of such tax payment not
rebated. It is understood, however, that the Company shall bear, and the Selling
Stockholder shall not be required to pay or reimburse the Company for, the cost
of any other matters not directly relating to the sale and purchase of the
Shares pursuant to this Agreement and that, except as provided in this Section,
Section 8 and Section 11 hereof, the Underwriters will pay all of their own
costs and expenses, including the fees of their counsel, stock
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transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholder herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Selling
Stockholder shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
no stop order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Gardere & Wynne, L.L.P., counsel for the Underwriters, shall have
furnished to you such opinion or opinions, dated such Time of Delivery, with
respect to the incorporation of the Company, this Agreement, the validity of the
Shares being delivered at such Time of Delivery, the Registration Statement, the
Prospectus, and other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Porter & Hedges, L.L.P, counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery,
but with respect to such Shares to be issued and delivered by the
Company, when issued and delivered by the Company pursuant to this
Agreement against payment therefor) have been duly and validly
authorized and issued and are fully paid and non-assessable; and the
Shares conform to the description of the Stock contained in the
Prospectus in all material respects;
(iii) The form of certificates for the Shares complies in all
material respects with the requirements of the General Corporation Law
of the State of Delaware and the Company's Bylaws.
(iv) The Company is duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification, except where
such failure would not have a Material Adverse Effect (such counsel
being entitled to rely in respect
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of the opinion in this clause upon certificates of Secretaries of State
or other appropriate public officials and in respect of matters of fact
upon certificates of officers of the Company);
(v) Each subsidiary of the Company listed on Exhibit A has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation; and all of
the issued shares of capital stock of each such subsidiary have been
duly and validly authorized and issued, are fully paid and
non-assessable, and to best of such counsel's knowledge such shares
(except for directors' qualifying shares and except as otherwise set
forth in the Prospectus) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances or claims (such
counsel being entitled to rely in respect of the opinion in this clause
upon certificates of Secretaries of State or other appropriate public
officials and in respect of matters of fact upon certificates of
officers of the Company or its subsidiaries);
(vi) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries
is the subject which, if determined adversely to the Company or any of
its subsidiaries, would individually or in the aggregate have a Material
Adverse Effect; and, to the best of such counsel's knowledge, no such
proceedings are threatened by governmental authorities or others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The execution and delivery of this Agreement and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions contemplated herein will not
(A) conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any Specified Document
known to such counsel (based solely on their review of the documents on
a list of all Specified Documents of the Company as certified by the
Chief Executive Officer and the Chief Financial Officer of the Company
and such other Specified Documents, if any, known to members of such
counsel devoting substantive attention to matters as to which such
counsel has been retained by the Company) which conflict, breach or
default would have a Material Adverse Effect, (B) result in any
violation of the provisions of the Certificate of Incorporation or
Bylaws of the Company or (C) result in any violation of any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or
any of their properties where such violation would have a Material
Adverse Effect (provided, however, that no opinion is expressed in this
clause (C) with respect to the antifraud provisions of the federal and
any state's securities laws or the rules and regulations promulgated
thereunder);
(ix) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the issue and sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement, except
the registration under the Act of the Shares, and such consents,
approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters; and
(x) The Registration Statement and the Prospectus and any further
amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements and
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related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder;
Such counsel shall state that such counsel has participated in
conferences with directors, officers and other representatives of the Company,
representatives of the independent public accountants of the Company and your
representatives at which the contents of the Registration Statement and
Prospectus and related matters were discussed, have participated in the
preparation of the Registration Statement and the Prospectus, have reviewed all
documents referred to in the Prospectus or annexed as an exhibit to the
Registration Statement, as well as certain other corporate documents furnished
to such counsel by the Company and, on the basis of the foregoing and without
independent check or verification, no facts have come to the attention of such
counsel to lead such counsel to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the Company
prior to such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading or that, as
of its date, the Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel need express
no opinion) contained an untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as of such Time
of Delivery, either the Registration Statement or the Prospectus or any further
amendment thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, as to which such counsel
need express no opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
Such counsel shall also state that because the primary purpose of such
counsel's engagement was not to establish or confirm factual matters or
financial, accounting or statistical matters or related data and because of the
wholly or partially non-legal character of many of the statements contained in
the Registration Statement and the Prospectus, such counsel is not passing upon,
and does not assume responsibility for and have not verified, the accuracy,
completeness and fairness of, the statements contained in the Registration
Statement or the Prospectus, or any amendment thereof or supplement thereto,
that without limiting the foregoing, such counsel assumes no responsibility for
and has not independently verified the accuracy, completeness or fairness of the
financial statements and schedules and other financial, statistical and related
data included in the Registration Statement and the Prospectus (and such counsel
has not examined the accounting, financial or statistical records from which
such financial statements, schedules and related data are derived), and that,
although certain portions of the Registration Statement and the Prospectus
(including financial statements and schedules and related data) have been
included therein on the authority of "experts" within the meaning of the Act,
such counsel is not an expert with respect to any portion of the Registration
Statement;
In rendering such opinion, such counsel may also state that as used in
such opinion, the words "to our knowledge," "known to us," or words of similar
import mean that during the course of such counsel's representation of the
Company, which commenced on July 3, 1996, no information has come to the
attention of the attorneys of such firm who have devoted substantive attention
to the transactions described herein which would give such attorneys actual
knowledge that the opinions expressed are factually incorrect. Such counsel may
also state that except as described therein, they have not reviewed the
13
<PAGE>
records of any court or governmental agency or undertaken any independent
factual investigation for the purpose of rendering any opinion which is
expressed to be to such counsel's knowledge;
Such counsel may also state that they express no opinion as to the laws
of any jurisdiction other than the laws of the State of Texas (excluding
conflict of law rules), the General Corporation Law of the State of Delaware,
and the federal laws of the United States;
Such opinion may state that it is being delivered to you for your sole
use and benefit in connection with the transaction above, and may not be
duplicated, distributed or relied upon by any other person, except with such
counsel's written consent;
(d) [ ], counsel for the Selling Stockholder, as indicated in Schedule
II hereto, shall have furnished to you their written opinion with respect to
each of such Selling Stockholder, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
authorized, executed and delivered by each such Selling Stockholder and
constitute valid and binding agreements of such Selling Stockholder in
accordance with their terms;
(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Stockholder; and the sale of
the Shares to be sold by such Selling Stockholder hereunder and the
compliance by such Selling Stockholder with all of the provisions of
this Agreement, the Power of Attorney and the Custody Agreement and the
consummation of the transactions herein and therein contemplated will
not (a) conflict with the laws of the State of Texas or the State of
Delaware or the federal laws of the United States by which such Selling
Stockholder is bound, or (b) result in a breach or violation of any
order, rule or regulation known to such counsel of any court or
governmental agency or body which, to such counsel's knowledge, has
jurisdiction over such Selling Stockholder or the Stock of such Selling
Stockholder;
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by such Selling Stockholder hereunder, except such as
have been obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters; and
(iv) Title to such Shares, free of all adverse claims, has been
transferred to each of the several Underwriters who have purchased such
Shares in good faith and without notice of any such adverse claim within
the meaning of the Uniform Commercial Code;
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the laws of the State of
Texas (excluding conflict of law rules), the General Corporation Law of the
State of Delaware, and the federal laws of the United States;
(e) At 9:00 a.m., Dallas time, on the effective date of the Registration
Statement and the effective date of the most recently filed post-effective
amendment to the Registration Statement and also at each Time of Delivery,
Deloitte & Touche LLP shall have furnished to you a letter dated the respective
date of delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex I hereto;
14
<PAGE>
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, that has had a
Material Adverse Effect, and (ii) since the respective dates as of which
information is given in the Prospectus and except as set forth or contemplated
therein, there shall not have been any change in the capital stock (other than
issuances of stock upon the exercise of stock options or restricted stock awards
which were outstanding on the date of the latest balance sheet included in the
Prospectus), short-term or long-term debt of the Company or any of its
subsidiaries or any Material Adverse Effect, or any development involving a
prospective Material Adverse Effect, the effect of which, in any such case
described in clause (i) or (ii), is in your judgment so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange; (ii) a general moratorium on
commercial banking activities in New York declared by either Federal or New York
authorities; or (iii) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency or
war, if the effect of any such event specified in this Clause (iii) in your
judgment makes it impracticable or inadvisable to proceed with the public
offering or delivery of the Shares being delivered at such Time of Delivery on
the terms and in the manner contemplated by the Prospectus;
(h) The Shares to be sold by the Company and the Selling Stockholder at
such Time of Delivery shall have been duly accepted, subject to notice of
issuance, for quotation on the Nasdaq National Market;
(i) The Company and the Selling Stockholder shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Stockholder, respectively, satisfactory to you
as to the accuracy of the representations and warranties of the Company and the
Selling Stockholder, respectively, herein at and as of such Time of Delivery, as
to the performance by the Company and the Selling Stockholder of all of their
respective obligations hereunder to be performed at or prior to such Time of
Delivery, and as to such other matters as you may reasonably request and the
Company shall have furnished or caused to be furnished certificates as to the
matters set forth in subsections (a) and (f) of this Section and as to such
other matters as you may reasonably request; and
(j) On or prior to the First Time of Delivery, James H. Long, Donald R.
Chadwick, Thomas N. McCulley, Paulette R. Blount, Anthony Adame, Shabbir K. Ali,
Michael A. Torigian, William R. Hennessy, and Frank Cano shall have entered into
a Lock-up Agreement with the Underwriters that, during the period beginning from
the date hereof and continuing to and including the date 180 days after the date
of the Prospectus, not to, directly or indirectly, offer, sell, contract to
sell, grant any option to sell or otherwise dispose of any Stock, or other
securities which are substantially similar to the Stock, or securities which are
convertible into or exercisable or exchangeable for or any rights to purchase or
acquire Stock or other securities which are substantially similar to the Stock,
without your prior written consent.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the
15
<PAGE>
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company and
such Selling Stockholder shall not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through you
expressly for use therein.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that (i) the Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through you expressly for use
therein and (ii) in no event shall the liability of any Selling Stockholder
under this subsection (b) exceed the total gross proceeds from the sale of
Shares by such Selling Stockholder hereunder.
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through you expressly for use
therein; and will reimburse the Company and each Selling Stockholder for any
legal or other expenses reasonably incurred by the Company or such Selling
Stockholder in connection with investigating or defending any such action or
claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is
16
<PAGE>
to be made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party shall not relieve it from any liability which
it may have to any indemnified party otherwise than under such subsection. In
case any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholder on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholder on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholder on the one hand and
the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholder bear to the total underwriting discounts and commissions received by
the Underwriters with respect to the Shares purchased under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Stockholder on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Stockholder and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purposes) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), (i) no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission and (ii) no
17
<PAGE>
Selling Stockholder shall be required to contribute any amount in excess of the
gross proceeds from the sale of Shares by such Selling Stockholder hereunder. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint. The Selling Stockholder's obligations in
this subsection (e) to contribute are several and not joint.
(f) The obligations of the Company and the Selling Stockholder under
this Section 8 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at the Time of Delivery,
you may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within 36 hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Stockholder shall be entitled to a
further period of 36 hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company and the
Selling Stockholder that you have so arranged for the purchase of such Shares,
or the Company and the Selling Stockholder notify you that they have so arranged
for the purchase of such Shares, you or the Company and the Selling Stockholder
shall have the right to postpone such Time of Delivery for a period of not more
than seven days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-tenth of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholder shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholder as provided in subsection (a) above, the aggregate
number of Shares which remains unpurchased exceeds one-tenth of the aggregate
number of all the Shares to be purchased at such Time of Delivery, or if the
Company and the Selling Stockholder shall not exercise the right described in
subsection (b) above to require non-
18
<PAGE>
defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company and
the Selling Stockholder to sell the Optional Shares) shall thereupon terminate,
without liability on the part of any nondefaulting Underwriter or the Company or
the Selling Stockholder, except for the expenses to be borne by the Company and
the Selling Stockholder and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholder and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholder or any officer or
director or controlling person of the Company, or controlling person of any
Selling Stockholder, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholder shall be under any liability to
any Underwriter except as provided in Section 6 and Section 8 hereof; but, if
for any other reason any Shares are not delivered by on behalf of the Company
and the Selling Stockholder as provided herein, the Company and each of the
Selling Stockholder pro rata (based on the number of Shares to be sold by the
Company and such Selling Stockholder hereunder) will reimburse the Underwriters
through you for all out-of-pocket expenses approved in writing by you, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company and the Selling Stockholder shall then be under no
further liability to any Underwriter in respect of the Shares not so delivered
except as provided in Section 6 and Section 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Rauscher Pierce Refsnes, Inc. on behalf of you as the
Representative, and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the Representative in care of Rauscher Pierce
Refsnes, Inc. at Cityplace, 2711 N. Haskell Avenue, Suite 2400, Dallas, Texas
75204-2936, Attention: Corporate Syndicate Department; if to any Selling
Stockholder shall be delivered or sent by mail, telex or facsimile transmission
to counsel for such Selling Stockholder at its address set forth in Schedule II
hereto; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling
Stockholder by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
19
<PAGE>
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholder and, to
the extent provided in Section 8 and Section 10 hereof, the officers and
directors of the Company and each person who controls the Company, any Selling
Stockholder or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right by virtue of this Agreement. No purchaser of any of the Shares
from any Underwriter shall be deemed a successor or assign by reason merely of
such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us seven counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters, the
Company and each of the Selling Stockholder. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company and the Selling Stockholder for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Any person executing and delivering this Agreement as Attorneys-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorneys-in-Fact by such Selling Stockholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorneys-in-Fact to take
such action.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
20
<PAGE>
Very truly yours,
ALLSTAR SYSTEMS, INC.
By:
Name:
Title:
SELLING STOCKHOLDER:
Jack B. Corey
By: __________________________
James H. Long or Donald R. Chadwick,
As Attorney-in-Fact acting on behalf
of the Selling Stockholder
Accepted as of the date hereof:
RAUSCHER PIERCE REFSNES, INC.
SUTRO & CO. INCORPORATED
By: _________________________
Rauscher Pierce Refsnes, Inc.
On behalf of each of the Underwriters
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
=====================================================================================================
Number of Optional Shares
Total Number of Firm to be Purchased if
UNDERWRITER SHARES TO BE PURCHASED MAXIMUM OPTION EXERCISED
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Rauscher Pierce Refsnes, Inc.
Sutro & Co. Incorporated
[Names of other Underwriters]
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total 2,035,000 305,250
========= =======
=====================================================================================================
</TABLE>
I-1
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
=====================================================================================================
Number of Optional Shares
Total Number of Firm to be Sold if
UNDERWRITER SHARES TO BE SOLD MAXIMUM OPTION EXERCISED
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
The Company 1,500,000 305,250
- -----------------------------------------------------------------------------------------------------
The Selling Stockholder 535,000 ---
(Jack B. Corey)
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total 2,035,000 305,250
========= =======
=====================================================================================================
</TABLE>
(a) This Selling Stockholder is represented by [SELLING STOCKHOLDER'S COUNSEL
NAME AND ADDRESS], and has appointed James H. Long and Donald R. Chadwick, and
each of them, as Attorneys-in-Fact and Custodians.
I-II
<PAGE>
ANNEX I
Pursuant to Section 7(e) of the Underwriting Agreement, Deloitte & Touche
LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the Act
and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules audited (and, if
applicable, prospective financial statements and/or pro forma financial
information examined) by them and included in the Prospectus or the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial information,
prospective financial statements and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) On the basis of limited procedures, not constituting an
audit in accordance with generally accepted auditing standards, consisting
of a reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) any unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows as of dates or for periods beginning after December 31,
1995 included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations
thereunder, or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent
with the basis for the audited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus;
(B) any other unaudited income statement data and balance
sheet items for the periods or as of the dates referred to in
Clause (A) above included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
<PAGE>
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements as of dates or for
periods beginning after December 31, 1995 and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in
consolidated net current assets or net assets or other items
specified by the Representatives or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the
Prospectus; except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts of consolidated net income or other items specified
by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period
of corresponding length specified by the Representative[s],
except in each case for decreases or increases which the
Prospectus discloses have occurred or may occur or which are
described in such letter; and
(iv) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraph (iii) above,
they have carried out certain specified procedures, not constituting an
audit in accordance with generally accepted auditing standards, with respect
to certain amounts, percentages and financial information specified by the
Representative[s], which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus, or in Part
II of, or in exhibits and schedules to, the Registration Statement specified
by the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its subsidiaries and have found them to be in agreement.
<PAGE>
EXHIBIT A
CORPORATE JURISDICTION OF
SUBSIDIARIES INCORPORATION
1) Stratasoft, Inc. Texas
EXHIBIT 3.1
BYLAWS
OF
ALLSTAR SYSTEMS, INC.
(a Delaware Corporation)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office will be in
Houston, Texas.
Section 2. OTHER OFFICES. The Corporation may also have offices
at such other places within or without the State of Delaware as the board of
directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders
will be held at the principal office of the Corporation, or at such other place
within or without the State of Delaware as may be determined by the board of
directors and stated in the notice of the meeting or in a duly executed waiver
of notice thereof.
Section 2. ANNUAL MEETINGS. An annual meeting of Stockholders
shall be held for the election of directors at such date, time and place, either
within or without the State of Delaware, as may be designated by resolution of
the board of directors from time to time; provided that each successive annual
meeting shall be held on a date within 13 months after the date of the preceding
annual meeting. Only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting given by or at
the direction of the board of directors, (b) otherwise properly brought before
the meeting or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder of the Corporation. For
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, no
less than 60 days nor more than 180 days prior to the anniversary date of the
immediately preceding annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 60 days later than the anniversary
date of the immediately preceding annual meeting, notice by the stockholder to
be timely must be received not later than the close of business on the tenth day
following the earlier of the date on which a written statement setting forth the
date of the annual meeting was mailed to stockholders or the date on which it is
first disclosed to the public. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before
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the annual meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such proposal, (c) the class
and number of shares of the Corporation that are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
In addition, if the stockholder's ownership of shares of the Corporation, as set
forth in the notice, is solely beneficial, documentary evidence of such
ownership must accompany the notice. Notwithstanding anything else in these
bylaws to the contrary, no business shall be conducted at an annual meeting
except in accordance with the procedures set forth in this Section 2. The
presiding officer of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that any business that was not properly brought
before the meeting is out of order and shall not be transacted at the meeting.
Section 3. NOTICE OF ANNUAL MEETING. Written or printed notice of
the annual meeting, stating the place, day and hour thereof, will be served upon
or mailed to each stockholder entitled to vote thereat at such address as
appears on the books of the Corporation, not less than ten days nor more than
sixty days before the date of the meeting.
Section 4. SPECIAL MEETING. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or the
Certificate of Incorporation, may be called by the President, the Chairman of
the Board, the Chief Executive Officer or by not less than a quorum of the board
of directors, and shall be called by the President or Secretary at the request
in writing of stockholders owning not less than two-thirds of the shares of
capital stock of the Corporation issued and outstanding and entitled to vote at
such meeting. Such request will state the purpose or purposes of the proposed
meeting.
Section 5. NOTICE OF SPECIAL MEETING. Written notice of a special
meeting of stockholders, stating the place, day and hour and purpose or purposes
thereof, will be served upon or mailed to each stockholder entitled to vote
thereat at such address as appears on the books of the Corporation, not less
than ten days nor more than sixty days before the date of the meeting.
Section 6. BUSINESS AT SPECIAL MEETING. Business transacted at
all special meetings will be confined to the purpose or purposes stated in the
notice.
Section 7. STOCKHOLDER LIST. At least ten days before each
meeting of stockholders, a complete list of the stockholders entitled to vote at
such meeting or any adjournment thereof, arranged in alphabetical order, with
the address of and the number of shares held by each, will be prepared by the
Secretary. Such list, for a period of ten days prior to such meeting, will be
kept on file at the registered office of the Corporation and will be subject to
inspection by any stockholder at any time during usual business hours. Such list
will also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any stockholder during the whole time of
the meeting.
Section 8. QUORUM. The holders of at least one-half of the shares
of capital stock issued and outstanding and entitled to vote thereat,
represented in person or by proxy, will constitute
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a quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute, the Certificate of Incorporation or
these bylaws. If, however, such quorum is not present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat,
represented in person or by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At any such adjourned meeting at which a
quorum is represented any business may be transacted which might have been
transacted at the meeting as originally notified.
Section 9. MAJORITY VOTE. When a quorum is present at any
meeting, the vote of the holders of a majority of the shares having voting power
represented in person or by proxy will decide any question brought before such
meeting, unless the question is one upon which, by express provision of statute,
the Certificate of Incorporation or these bylaws, a different vote is required,
in which case such express provision will govern and control the decision of
such question.
Section 10. PROXIES. At any meeting of the stockholders every
stockholder having the right to vote will be entitled to vote in person, or by
proxy appointed by an instrument in writing subscribed by such stockholder or
his duly authorized attorney in fact and bearing a date not more than eleven
months prior to said meeting.
Section 11. VOTING. Unless otherwise provided by statute, the
Certificate of Incorporation or these bylaws, each stockholder will have one
vote for each share of stock having voting power, registered in his name on the
books of the Corporation.
ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation
will be managed by a board of directors. The board may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute,
by the Certificate of Incorporation or these bylaws directed or required to be
exercised or done by the stockholders.
Section 2. NUMBER OF DIRECTORS. The number of directors which
constitute the whole board will be no less than three and no more than twelve,
as such number shall be determined by resolution of the board of directors from
time to time; provided that no decrease in the number of directors shall have
the effect of shortening the term of any incumbent director. As of the date of
the initial adoption of these bylaws, the number of directors constituting the
board of directors shall be two.
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Section 3. NOMINATION. Only persons who are nominated in
accordance with the procedures set forth in these bylaws shall be eligible to
serve as Directors. Nominations of persons for election to the board of
directors of the Corporation may be made at a meeting of stockholders (a) by or
at the direction of the board of directors or (b) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 3, who shall be entitled to vote for the election
of directors at the meeting and who complies with the notice procedures set
forth in this Section 3.
Nominations by stockholders shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation (a) in the case of an annual
meeting, not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is changed by more than 30 days
from such anniversary date, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure was made, and (b) in the case of a special meeting at which
directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to the stockholder giving the notice
(i) the name and address, as they appear on the Corporation's books, of such
stockholder and (ii) the class and number of shares of the Corporation which are
beneficially owned by such stockholder and also which are owned of record by
such stockholder; and (c) as to the beneficial owner, if any, on whose behalf
the nomination is made, (i) the name and address of such person and (ii) the
class and number of shares of the Corporation which are beneficially owned by
such person. At the request of the board of directors, any person nominated by
the board of directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 3, and he shall so
declare to the meeting and the defective nomination shall be disregarded.
Section 4. ELECTION AND TERM. The directors shall be elected at
the annual meeting of stockholders, except as provided in Section 5, and each
director elected shall hold office until his successor shall be elected and
shall qualify. Directors need not be residents of Delaware or stockholders of
the Corporation.
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Section 5. VACANCIES. If any vacancy occurs in the Board of
Directors caused by death, resignation, retirement, disqualification, or removal
from office of any director, or otherwise, or if any new directorship is created
by an increase in the authorized number of directors, a majority of the
directors then in office, though less than a quorum, or a sole remaining
director, may choose a successor or fill the newly created directorship; and a
director so chosen shall hold office until the next election and until his
successor shall be duly elected and shall qualify, unless sooner displaced. Any
director may be removed either for or without cause at any special meeting of
stockholders duly called and held for such purpose.
Section 6. RESIGNATION; REMOVAL. Any director may resign at any
time. The board of directors may, by majority vote of the directors then in
office, remove a director for cause.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. FIRST MEETING. Each newly elected board of directors
may hold its first meeting for the purpose of organization and the transaction
of business, if a quorum is present, immediately after and at the same place as
the annual meeting of the stockholders, and no notice of such meeting shall be
necessary; or the board may meet at such place and time as is fixed by the
consent in writing of all the directors.
Section 2. REGULAR MEETINGS. Regular meetings of the board may be
held at such time and place either within or without the State of Delaware and
with such notice or without notice as is determined from time to time by the
board.
Section 3. SPECIAL MEETINGS. Special meetings of the board may be
called by the President or the Chairman of the Board of directors on one day's
notice to each director, either personally or by mail or telegram. Special
meetings will be called by the President or the Secretary in like manner and on
like notice upon the written request of any director.
Section 4. QUORUM AND VOTING. At all meetings of the board, a
majority of the directors will be necessary and sufficient to constitute a
quorum for the transaction of business; and the act of a majority of the
directors present at any meeting at which there is a quorum will be the act of
the board of directors, except as may be otherwise specifically provided by
statute, the Certificate of Incorporation or these bylaws. If a quorum is not
present at any meeting of directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
Section 5. TELEPHONE MEETINGS. The directors may hold their
meetings in any manner permitted by law. Without limitation, at any meeting of
the board, a member may attend by telephone, radio, television, interactive
media or similar means of communication by means of
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which all participants can hear each other which permits him to participate in
the meeting, and a director so attending will be deemed present at the meeting
for all purposes including the determination of whether a quorum is present.
Section 6. ACTION BY WRITTEN CONSENT. Any action required or
permitted to be taken by the board of directors or executive committee under
applicable statutory provisions, the Certificate of Incorporation, or these
bylaws, may be taken without a meeting if a consent in writing, setting forth
the action so taken, is signed by all the members of the board of directors or
executive committee, as the case may be, and filed with the minutes of the
proceedings of the directors or executive committee, as the case may be.
ARTICLE V
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors shall
establish an Audit Committee and a Compensation Committee, and may establish an
Executive Committee and such other committees as may be established by
resolution of a majority of the whole Board. Each of such committees shall
consist of one or more members of the Board. Members of committees of the board
of directors shall be elected annually by vote of a majority of the board. The
Chief Executive Officer shall be an ex-officio nonvoting member of each
committee (except the Audit and Compensation Committees) of which he is not an
official voting member. With respect to any committee (including the Audit and
Compensation Committees) of which the Chief Executive Officer is not an official
voting member, the Chief Executive Officer shall be given notice of all
committee meetings at the same time notice is given to committee members, and
the Chief Executive Officer shall be afforded the opportunity to speak at the
committee meeting. Presence of a majority of the committee members (not counting
any ex-officio nonvoting members) shall constitute a quorum. Committees may act
by majority vote of the voting members present at a meeting. Each of such
committees shall have and may exercise such of the powers of the board of
directors in the management of the business and affairs of the Corporation as
may be provided in these bylaws or by resolution of the board of directors. Each
of such committees may authorize the seal of the Corporation to be affixed to
any document or instrument. The board of directors may designate one or more
directors as alternate members of any such committee, who may replace any absent
or disqualified member at any meeting of such committee. Meetings of committees
may be called by any member of a committee by written, telegraphic or telephonic
notice to all members of the committee and the Chief Executive Officer and shall
be at such time and place as shall be stated in the notice of such meeting. Any
member of a committee may participate in any meeting by means of conference
telephone or similar communications equipment. In the absence or
disqualification of a member of any committee the member or members thereof
present at any meeting and not disqualified from voting, whether or not
constituting a quorum may, if deemed advisable, unanimously appoint another
member of the board to act at the meeting in the place of the disqualified or
absent member. Each committee may fix such other rules and procedures governing
conduct of meetings as it shall deem appropriate.
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Section 2. EXECUTIVE COMMITTEE. The board of directors, by
resolution adopted by a majority of the whole board, may designate two or more
directors to constitute an executive committee, which committee, to the extent
provided in such resolution, will have and may exercise all of the authority of
the board of directors in the business and affairs of the Corporation, and may
have power to authorize the seal of the Corporation to be affixed to all papers
which may require it, except where action by the board of directors is specified
by statute. The executive committee will keep regular minutes of its proceedings
and report the same to the board when required.
Section 3. AUDIT COMMITTEE. The Audit Committee shall consist of
not less than two members of the board of directors. The Audit Committee shall
be responsible for recommending to the entire board engagement and discharge of
independent auditors of the financial statements of the Corporation, shall
review the professional service provided by the independent auditors, shall
review the independence of independent auditors, shall review with the auditors
the plan and results of the auditing engagement, shall consider the range of
audit and non-audit fees, shall review the adequacy of the Corporation's system
of internal audit controls, shall review the results of procedures for internal
auditing and shall consult with the internal auditor of the Corporation with
respect to all aspects of the Corporation's internal auditing program. In
addition, the Audit Committee shall direct and supervise special investigations
as deemed necessary by the Audit Committee.
Section 4. COMPENSATION COMMITTEE. The Compensation Committee
shall consist of not less than two members of the board of directors. The
Compensation Committee shall recommend to the board the compensation to be paid
to officers and key employees of the Corporation and the compensation of the
board of directors. Except as otherwise provided in any specific plan adopted by
the board of directors, the Compensation Committee shall be responsible for
administration of executive compensation plans, stock option plans and other
forms of direct or indirect compensation of officers and key employees, and each
member of the Compensation Committee shall have the power and authority to
execute and bind the Corporation to such documents, agreements and instruments
related to such plans and compensation as are approved by the Compensation
Committee. In the alternative, the Compensation Committee may authorize any
officer of the Corporation to execute such documents, agreements and instruments
on behalf of the Corporation. In addition, the Compensation Committee shall
review levels of pension benefits and insurance programs for officers and key
employees.
Section 5. OTHER COMMITTEES. The board of directors may similarly
create other committees for such terms and with such powers and duties as the
board deems appropriate.
Section 6. ADVISORY DIRECTORS. The board of directors may, by
majority vote, appoint one or more advisory directors. Advisory directors shall
serve at the board's convenience solely to advise the board of directors, and
shall have no formal responsibilities. No advisory director shall be entitled to
vote at meetings of the board, nor shall any advisory director be counted when
determining whether there is a quorum at directors' meetings. Advisory directors
shall not be,
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by virtue of their position as advisory directors, agents of the Corporation,
and they shall not have the power to bind the Corporation.
ARTICLE VI
COMPENSATION OF DIRECTORS
Section 1. ATTENDANCE FEES. Directors, as such, will not receive
any stated salary for their services, but by resolution of the board a fixed sum
and expenses of attendance may be allowed for attendance at each regular or
special meeting of the board; however, this provision will not preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of committees may be allowed like compensation
for attending committee meetings.
ARTICLE VII
NOTICES
Section 1. METHODS OF NOTICE. Whenever any notice is required to
be given to any stockholder or director under the provisions of any statute, the
Certificate of Incorporation or these bylaws, it will not be construed to
require personal notice, but such notice may be given in writing by mail
addressed to such stockholder or director at such address as appears on the
books of the Corporation, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail with postage
thereon prepaid. Notice to directors may also be given by telegram, and notice
given by such means shall be deemed given at the time it is delivered to the
telegraph office.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to
be given to any stockholder or director under the provisions of any statute, the
Certificate of Incorporation or these bylaws, a waiver thereof in writing signed
by the person or persons entitled to said notice, whether before or after the
time stated therein, will be deemed equivalent to the giving of such notice.
Attendance at any meeting will constitute a waiver of notice thereof except as
otherwise provided by statute.
ARTICLE VIII
OFFICERS
Section 1. EXECUTIVE OFFICERS. The officers of the Corporation
will consist of President, Vice President, Treasurer, and Secretary, each of
whom shall be elected by the board of directors. The board of directors may also
elect a chairman of the board, a chief executive officer, additional vice
presidents, and one or more assistant secretaries and assistant treasurers. Any
two or more offices may be held by the same person.
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Section 2. ELECTION AND QUALIFICATION. The board of directors at
its first meeting after each annual meeting of stockholders will elect the
President, one or more Vice Presidents, a Secretary and a Treasurer, none of
whom need be a member of the board.
Section 3. OTHER OFFICERS AND AGENTS. The board may elect or
appoint such other officers, assistant officers and agents as it deems
necessary, who will hold their offices for such terms and shall exercise such
powers and perform such duties as determined from time to time by the board.
Section 4. SALARIES. The salaries of all officers of the
Corporation will be fixed by the board of directors except as otherwise directed
by the board.
Section 5. TERM, REMOVAL AND VACANCIES. The officers of the
Corporation will hold office until their resignation or their successors are
chosen and qualify. Any officer, agent or member of the executive committee
elected or appointed by the board of directors may be removed at any time by the
board of directors; provided, that such removal shall be without prejudice to
the contract rights, if any, of such removed party. If any such office becomes
vacant for any reason, the vacancy will be filled by the board of directors.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if
one is elected, shall preside at meetings of the board of directors and
stockholders and shall have such other powers and duties as may from time to
time be prescribed by duly adopted resolutions of the board of directors.
Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer,
if one is elected, shall preside at meetings of the board of directors and
stockholders if there is no chairman of the board, and shall supervise and have
overall responsibility for the business, administration and operations of the
Corporation. In general, he shall perform all duties as from time to time may be
assigned to him by the board. He shall from time to time make such reports of
the affairs of the Corporation as the board may require.
Section 8. PRESIDENT. The President shall, subject to the board
of directors, have general executive charge, management and control of the
properties and operations of the corporation in the ordinary course of its
business with all such powers with respect to such responsibilities including
the powers of general manager; and the president shall see that all orders and
resolutions of the board of directors are carried into effect. The president
shall have such other powers and duties as may from time to time be prescribed
by duly adopted resolution of the board of directors.
Section 9. VICE PRESIDENT. The Vice Presidents in the order
determined by the board of directors will, in the absence or disability of the
President, perform the duties and exercise the powers of the President, and will
perform such other duties as the board of directors and President may prescribe.
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Section 10. SECRETARY. The Secretary will attend all meetings of
the board of directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose and
will perform like duties for the standing committees when required. He will
give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the board of directors, and will perform such other duties
as may be prescribed by the board of directors and President. He will keep in
safe custody the seal of the Corporation and, when authorized by the board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an assistant secretary.
Section 11. ASSISTANT SECRETARIES. The assistant secretaries in
the order determined by the board of directors will perform, in the absence or
disability of the Secretary, the duties and exercise the powers of the Secretary
and will perform such other duties as the board of directors and President may
prescribe.
Section 12. TREASURER. The Treasurer will have the custody of the
corporate funds and securities and will keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and will
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the board of
directors. He will disburse the funds of the Corporation as may be ordered by
the board, taking proper vouchers for such disbursements, and will render to the
board of directors and President, whenever they may require it, an account of
all of his transactions as Treasurer and of the financial condition of the
Corporation.
Section 13. ASSISTANT TREASURERS. The Assistant Treasurers in the
order determined by the board of directors, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer and will
perform such other duties as the board of directors and President may prescribe.
Section 14. OFFICER'S BOND. If required by the board of
directors, any officer will give the Corporation a bond (to be renewed as the
board may require) in such sum and with such surety or sureties as is
satisfactory to the board for the faithful performance of the duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation.
ARTICLE IX
SHARES AND STOCKHOLDERS
Section 1. CERTIFICATES REPRESENTING SHARES. The certificates
representing shares of the Corporation will be numbered and entered in the books
of the Corporation as they are issued. They will exhibit the holder's name and
number of shares and will be signed by the President or Vice-President and the
Secretary or an Assistant Secretary, and will be sealed with the seal of the
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Corporation or a facsimile thereof. The signature of any such officer may be
facsimile if the certifi cate is countersigned by a transfer agent or registered
by a registrar, other than the Corporation itself or an employee of the
Corporation. In case any officer who has signed or whose facsimile signature has
been placed upon such certificate has ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer at the date of its issuance.
Section 2. TRANSFER OF SHARES. Upon surrender to the Corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it will be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books. Notwithstanding
the foregoing, no transfer will be recognized by the Corporation if such
transfer would violate federal or state securities laws, the Certificate of
Incorporation, or any stockholders agreements which may be in effect at the time
of the purported transfer. The Corporation may, prior to any such transfer,
require an opinion of counsel to the effect that any such transfer does not
violate applicable securities laws requiring registration or an exemption from
registration prior to any such transfer.
Section 3. FIXING RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of stockholders for any other proper purpose, the
board of directors may provide that the stock transfer books be closed for a
stated period but not to exceed, in any case, sixty days. If the stock transfer
books are closed for the purpose of determining stockholders entitled to notice
of or to vote at a meeting of stockholders, such books must be closed for at
least ten days immediately preceding such meeting. In lieu of closing the stock
transfer books, the board of directors may fix in advance a date as the record
date for any such determination of stockholders, such date, in any case, to be
not more than sixty days and, in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders, or stockholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, will be the record date
for such determination of stockholders. When a determination of stockholders
entitled to vote at any meeting of stockholders has been made as herein
provided, such determination will apply to any adjournment thereof except where
the determination has been made through the closing of stock transfer books and
the stated period of closing has expired.
Section 4. REGISTERED STOCKHOLDERS. The Corporation is entitled
to recognize the exclusive right of a person registered on its books as the
owner of the share to receive dividends, and to vote as such owner, and for all
other purposes as such owner; and the Corporation is not bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it has express or other notice thereof, except
as otherwise provided by the laws of Delaware.
-11-
<PAGE>
Section 5. LOST CERTIFICATE. The board of directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the board of directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representatives, to
advertise the same in such manner as it shall require and/or give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
ARTICLE X
GENERAL
Section 1. DIVIDENDS. The board of directors may from time to
time declare, and the Corporation pay, dividends on its outstanding shares of
capital stock in cash, in property, or in its own shares, except when the
declaration or payment thereof would be contrary to statute or the Certificate
of Incorporation. Such dividends may be declared at any regular or special
meeting of the board, and the declaration and payment will be subject to all
applicable provisions of laws, the Certificate of Incorporation and these
bylaws.
Section 2. RESERVES. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the directors from time to time, in their absolute discretion, deem
proper as a reserve fund to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the directors may think conducive to the interest of the Corporation,
and the directors may modify or abolish any such reserve in the manner in which
it was created.
Section 3. DIRECTORS' ANNUAL STATEMENT. The board of directors
will present at each annual meeting and when called for by vote of the
stockholders at any special meeting of the stockholders, a full and clear
statement of the business and condition of the Corporation.
Section 4. CHECKS. All checks or demands for money and notes of
the Corporation will be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.
Section 5. CORPORATE RECORDS. The Corporation will keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its stockholders giving the names and
addresses of all stockholders and the number and class of shares held by each.
All other books and records of the Corporation may be kept at such place or
places within or without the State of Delaware as the board of directors may
from time to time determine.
-12-
<PAGE>
Section 6. SEAL. The corporate seal will have inscribed thereon
the name of the Corporation. The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or reproduced.
Section 7. AMENDMENT. These bylaws may be altered, amended or
repealed or new bylaws may be adopted at any annual meeting of the stockholders
or at any special meeting of the stockholders at which a quorum is present or
represented, provided notice of the proposed alteration, amendment, repeal or
adoption be contained in the notice of such meeting, by the affirmative vote of
the holders of a majority of the shares entitled to vote at such meeting and
present or represented thereat, or by the affirmative vote of a majority of the
board of directors at any regular meeting of the board or at any special meeting
of the board; provided however, that to amend any provision of these bylaws
relating to the prohibition of stockholder action without a meeting, the
prohibition of stockholders calling a special meeting, the number, election and
term of the Corporation's directors, or the removal of directors, the
affirmative vote of at least two-thirds of the voting power of the then
outstanding shares eligible to vote generally in the election of directors shall
be required. No change of the time or place of the annual meeting of
stockholders may be made after the issuance of notice thereof.
Section 8. INDEMNIFICATION. Each director, officer and former
director or officer of the Corporation, and any person who may have served or
who may hereafter serve at the request of the Corporation as a director or
officer of another corporation in which it owns shares of capital stock or of
which it is a creditor, is hereby indemnified by the Corporation against
expenses actually and necessarily incurred by him in connection with the defense
of any action, suit or proceeding in which he is made a party by reason of being
or having been such director or officer, except in relation to matters as to
which he shall be adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of duty. Such indemnification will
not be deemed exclusive of any other rights to which such director, officer or
other person may be entitled under any agreement, vote of stockholders, or
otherwise. Without limitation, nothing in this section shall limit any
indemnification provisions in the Certificate of Incorporation.
Adopted this 12 day of September, 1996.
/S/ JAMES H. LONG
James H. Long,
Incorporator
-13-
EXHIBIT 4.1
NUMBER SHARES
[ALLSTAR SYSTEMS, INC. LOGO]
ALLSTAR SYSTEMS, INC.
Incorporated Under the Laws of the State of Delaware
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT CUSIP 019892 10 8
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.01 OF THE COMMON
STOCK OF
ALLSTAR SYSTEMS, INC.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all provisions of the
Certificate of Incorporation and of the By-Laws of the Corporation (copies of
which are on file with the Transfer Agent), to all of which the holder, by
acceptance hereof, assents.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
In Witness Whereof, the Corporation has caused this Certificate to be signed by
the facsimile signatures of its duly authorized officers and to be sealed with
the facsimile seal of the Corporation.
Dated:
[SEAL]
/s/ James H. Long /s/ D.R. Chadwick
PRESIDENT AND CHIEF EXECUTIVE OFFICER SECRETARY AND TREASURER
<PAGE>
ALLSTAR SYSTEMS, INC
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF COMMON AND PREFERRED
STOCK. A FULL STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF THE SHARES OF SUCH CLASSES IS SET FORTH IN THE ARTICLES OF
INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE. THE
CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE
OF BUSINESS OR REGISTERED OFFICE.
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
UNIF GIFT
TEN COM-- as tenants in common MIN ACT-- _______ Custodian_______
TEN ENT-- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ________________
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
================================================================================
================================================================================
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS
INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: ________________
_______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO
S.E.C. RULE 17AG-15.
- --------------------------------------------------------------------------------
EXHIBIT 5.1
PORTER & HEDGES, L.L.P.
ATTORNEYS AT LAW
MAILING ADDRESS:
700 LOUISIANA, 35TH FLOOR
HOUSTON, TEXAS 77002-2764 P.O. BOX 4744
HOUSTON, TX 77210-4744
TELECOPIER (713) 228-1331
TELEPHONE (713) 226-0600
October 3, 1996
Allstar Systems, Inc.
6401 Southwest Freeway
Houston, Texas 77074
Gentlemen:
We have acted as counsel for Allstar Systems, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933 of 2,035,000 shares of the Company's common stock, $.01
par value, and up to 305,250 shares of the Company's common stock which may be
sold in the event of the underwriters for the offering elect to exercise their
over-allotment option (the "Shares"), to be offered upon the terms and subject
to the conditions set forth in the proposed Underwriting Agreement, the form of
which is set forth as Exhibit Number 1.1 to the Registration Statement No.
333-09789 on Form S-1 filed with the Securities and Exchange Commission, to be
entered into between the Company, the Selling Shareholder, and Rauscher Pierce
Resfnes, Inc. and Sutro & Co., Incorporated as representatives of the several
underwriters named therein (the "Underwriting Agreement").
In connection therewith, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the Certificate of
Incorporation of the Company, the Bylaws of the Company, the records of
corporate proceedings with respect to the offering of the Shares and such other
documents and instruments as we have deemed necessary or appropriate for the
expression of the opinions expressed herein. We have also examined the Company's
Registration Statement No. 333-09789 on Form S-1, as amended, covering the
Shares (the "Registration Statement") filed with the Securities and Exchange
Commission.
1
<PAGE>
We have assumed the authenticity and completeness of all records,
certificates and other instruments submitted to us, the conformity to original
documents of all records, certificates and other instruments submitted to us as
copies and the correctness of all statements of fact contained in all records,
certificates and other instruments we have examined.
Based on the foregoing, and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that the Shares
proposed to be issued by the Company have been duly and validly authorized for
issuance and, when issued in accordance with the terms of the Underwriting
Agreement, will be duly and validly issued, fully paid and nonassessable.
The opinions expressed herein relate solely to, are based solely upon
and are limited exclusively to the laws of the State of Delaware and the federal
laws of the United States of America, to the extent applicable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included as part of the Registration Statement.
Very truly yours,
/s/ PORTER & HEDGES, L.L.P.
Porter & Hedges, L.L.P.
2
EXHIBIT 10.16
INTELLIGENT ELECTRONICS, INC.
COMPAQ SECOND SOURCE RESELLER AGREEMENT
THIS AGREEMENT dated the 14TH day of SEPTEMBER, 199 3 , by and between
Intelligent Reseller Network, a division of Intelligent Electronics, Inc.
(hereinafter referred to as "IE"), and the undersigned Reseller (hereinafter
referred to as "Reseller").
PURPOSE
Reseller operates a business enterprise at the location (the "Reseller
Location") and as described in this Agreement (the "Reseller Business").
Reseller wishes to purchase Compaq Products ("Products") from IE as a second
source if the Products are unavailable from Reseller's primary sources, for
resale to end-users, as described below.
The parties agree as follows:
1. PRODUCT SUPPLY AND DISTRIBUTION. IE will make available to Reseller such
Products as are made available from time to time by or through IE, subject to
other terms and conditions set forth in this Agreement. Distribution of the
Products to Reseller shall be subject to approval and authorization of Reseller
by the manufacturer or supplier of the Products, and the terms of Reseller's
purchases will be consistent with the policies of Compaq, including but not
limited to: policies regarding price protection, returns, Co-op funding, and the
availability of floor planning. Reseller may, but shall not be required to,
purchase any Products from IE or through Product supply programs made available
by IE, subject to manufacturer's or supplier's authorization.
2. PRODUCTS. As of the date of execution of this Agreement, Reseller desires the
Products offered by Seller from time to time. IE shall attempt to provide such
types or brands of Products, although Reseller acknowledges that the
availability to Reseller of such Products shall be subject to authorization from
the manufacturer of the Products, and IE's allocation of the Products. IE has
the right, in its sole discretion, to discontinue providing to Reseller one or
more of the Products for any reason.
3. IE RESELLER SERVICES - A LA CARTE. IE may, but is not obligated to, make
available from time to time certain programs and/or services believed useful or
beneficial to its Reseller customers or certain of its customers, on terms and
conditions as IE may determine. IE may, without notice to Reseller, change the
conditions or charges or fees for such services from time to time. Any such
charges and fees shall be in addition to the price for Products as described in
this Agreement.
4. PRICE AND PAYMENT TERMS.
4.1 Reseller's price for the Products shall be the prices that are maintained in
its pricing guide established and maintained for the Compaq program from time to
time. IE's prices to Reseller are subject to change without notice to Reseller.
4.2 Payment of the price for the Products by Reseller will be due in advance of
shipment of the Products. Freight and insurance will be prepaid by IE (subject
to change with 30 days notification) within the continental United States unless
such orders are placed with special instructions, including, without limitation,
rush orders, overnight delivery or designated shippers or involve nonstandard
routing or handling.
4.3 Resellers payments shall be made in cash or other immediately available
funds or a credit line from a financial institution approved by IE.
5. NO USE OF IE'S NAMES, MARKS . Reseller shall not use any name, trademark,
logo or slogan ("Marks") now or hereafter owned by IE or its affiliated or
related companies (collectively "IE") except as otherwise authorized in writing
by IE.
6. REPRESENTATIONS AND WARRANTIES.
6.1 Reseller represents to IE that it has full power and authority to enter into
this Agreement, that neither the execution of this Agreement nor any of the
terms of this agreement in any way violates or interferes with the terms of any
other contractual arrangements or agreements to which Reseller may be a party
and that it has received any and all requisite consents, if any, to entering
into this Agreement.
6.2 Reseller acknowledges that it is not guaranteed any exclusive or protected
territory under this Agreement or otherwise and IE is free to distribute
Products to any third party in any geographical area in its sole discretion.
6.3 Reseller agrees to hold IE harmless from any claim, demand, action or
liability of any kind arising from Reseller's misrepresentation or default in
any of the representations and warranties made in this Article 6 or from any
other breach of this Agreement.
7. NO IE FRANCHISES OFFERED. Reseller is not an agent,
employee or franchisee of IE. There is no agency, partnership,
franchise or joint venture relationship between IE and Reseller under
this agreement or by any course of dealing between them.
8. TERMINATIONS. Either party may terminate this Agreement
at any time, with or without cause, upon thirty (30) days' notice to the
other party, unless modified in an Exhibit to this Agreement.
9. GENERAL PROVISIONS.
9.1 No amendment, change or variance from this Agreement shall be binding on
either party unless mutually agreed to by the parties and executed by them or
their authorized officers or agents in writing.
9.2 This Agreement may not be assigned or transferred by
Reseller. This Agreement is fully assignable by IE and shall inure to
the benefit of IE's successors and assignees.
9.3 The validity and construction of this Agreement shall be governed by the
laws of the State of Colorado. Venue and jurisdiction for any action taken under
this Agreement will be the state or federal courts located in Denver, Colorado.
9.4 If any provision of this Agreement is held invalid by any tribunal in a
final decision from which no appeal is or can be taken, such provision shall be
deemed modified to eliminate the invalid element and, as so modified, such
provision shall be deemed a part of this Agreement as though originally
included. The remaining provisions of this Agreement shall not be affected by
such modification.
9.5 All notices required to be given under this Agreement shall be given in
writing, by certified mail, return receipt requested, at the following address:
IE: Intelligent Electronics Reseller Network
Business Development Department
5340 S. Quebec, Suite 300
Englewood, Colorado 80111
Reseller: TECHNICOMP INC.
DBA ALLSTAR VALCOM
14202 PROTON
DALLAS, TX 75244
or at such other addresses as either party may designate from time to time, and
shall be effectively given when deposited in the United States mail, postage
prepaid.
9.6 RESELLER BUSINESS DESCRIPTION.
LOCATION:
14202 PROTON
DALLAS, TX 75244
RESELLER BUSINESS
Storefront
Office
Retail
<PAGE>
VAR X
Systems Integrator
Sales Tax Number 1-76-0062751-1
Reseller is (check one):
_____ Sole Proprietorship
_____ Partnership
__X__ Corporation
* PLEASE ATTACH A COPY OF YOUR RESALE TAX EXEMPTION CERTIFICATE TO THIS
AGREEMENT.
If Partnership, give state of formation, name and address of such partner and
percentage owned, and whether active in management:
If Corporation give state and date of incorporation, the names and addresses of
such officer, director and shareholder, and indicate the percentage share
ownership of each:
INC. DATE 4/28/83
JIM LONG, SOLE OWNER, 100%
6401 SOUTHWEST FREEWAY, HOUSTON, TX 77074
9.7 This Agreement constitutes the entire agreement of IE and Reseller and
supersedes all prior negotiations, agreements, representations and warranties,
whether written or oral.
9.8 This Agreement may be executed in any number of copies, all of which taken
together will constitute one Agreement, and any party to this Agreement may
execute this Agreement by signing one or more copies of the Agreement. Reseller
and IE agree that, as a course of their business relations, a copy of this
Agreement that has been executed by Reseller and IE that is transmitted by
facsimile will be the original, binding Agreement between them and that their
signatures on the facsimile transmitted will bind them to the Agreement. This
Agreement may be amended by the mutual written agreement of Reseller and IE that
may also be transmitted by facsimile by Reseller and IE.
AGREED:
Reseller: (if an individual)
________________________________
Individually
Or: (if corporation or partnership)
ALLSTAR VALCOM
Company name
By: EVA THORN
Its: OPERATION MANAGER DALLAS
INTELLIGENT RESELLER NETWORK,
a division of INTELLIGENT ELECTRONICS, INC.
By: SIGNATURE ILLEGIBLE
Its: ___________________________
Effective
date: 9/14/93
Intelligent Electronics, Inc.
Compaq Second Source Reseller Agreement Page 2
- --------------------------------------------------------------------------------
IBM IBM PC
Remarketer
Authorized Announcement
Remarketer --------------------
March 18, 1996
- --------------------------------------------------------------------------------
IBM PERSONAL COMPUTER DEALER PROGRAM EVALUATION
Recently IBM has taken significant actions to strengthen our relationship with
our reseller channel by resolving those issues you told us were inhibitors to
our mutual success. We announced a change in our go-tomarket strategy to depend
on you as the primary fulfillment channel for all personal computer products. We
also changed the mission of PC Direct to a consumer focused sales organization
and a demand generation operation to deliver sales leads to our Business
Partners. We stopped all IBM internal organizations from sourcing personal
computers for resale and we closed our Availability Services Customized
Operational Support (COS) centers. We implemented a compensation program for IBM
Sales and Services (S&S) representatives that compensates them fully for
Business Partner PC placements and educated them on the benefits of jointly
marketing products and services with you to the customer. Finally, we put it all
in writing through the Business Partner Charter.
Today we are continuing this commitment to you by automatically extending IBM
Personal Computer Dealer Agreements for twelve months upon their expiration.
This includes those Dealer Agreements about to expire for not achieving the end
user sales Minimum Renewal Criteria (MRC). We are taking this action while we
evaluate further improvements to our Dealer Program.
Thank you for your partnership and we look forward to building a new, mutually
successful, relationship with you for the future.
THIS ANNOUNCEMENT IS PROVIDED FOR YOUR INFORMATION ONLY AND IS SUBJECT TO CHANGE
WITHOUT NOTICE. FOR ADDITIONAL INFORMATION, CONTACT YOUR IBM REPRESENTATIVE.
- --------------------------------------------------------------------------------
INTERNATIONAL BUSINESS MACHINES CORPORATION PCR 96-006
IBM PERSONAL COMPUTER COMPANY - AMERICAS PCD 96-006
3038 CORNWALLIS ROAD, RESEARCH TRIANGLE PARK, NC 27709
<PAGE>
===================PCRMKTR Remarketer Memos/IBM PC Co. N.A.===============
94-015 Introduction of 24-month Business Partner Agreement
September 13, 1994
MEMORANDUM TO: IBM Authorized Personal Computer Dealers
IBM Authorized Industry Remarketers
- Personal Computer
IBM Authorized Aggregators
IBM Authorized Distributors
SUBJECT: Introduction of 24-month Business Partner
Agreement
In response to remarketer feedback, the IBM PC Company is pleased to introduce
the 24-month Business Partner Agreement for qualifying Personal Computer Dealers
(PCDs), Industry Remarketers - Personal Computer (IRPCs), Aggregators and
Distributors.
To qualify, you must have achieved your agreement's minimum renewal criteria
(MRC) for the prior year and have satisfied any outstanding notices of
deficiency.
If you are in your first year of IBM authorization, you must successfully
complete your 12-month agreement and achieve 100% of your MRC before you will be
offered a 24-month renewal agreement.
If you currently qualify for a 24-month term, your agreement will be extended 12
months from your current expiration date. Tour MRC will be adjusted to an amount
equal to twice the 12- month MRC shown on your current Dealer, Industry
Remarketer or Distributor Profile.
The effective date of this offering is October 1, 1994. This memo serves as
notification of your agreement's new expiration date. Terms and conditions of
your current IBM Business Partner Agreement apply for the contract period. A
copy of your next agreement will not be mailed to you until your next renewal
period.
We hope this transition to 24-month agreements simplifies your renewal process
and contributes to your continued success. For further information, please
contact your IBM representative.
D. C. Boucher
Vice President
Channel Marketing
Blind note: HQ contact is Genie Sayre, tie line
336-9023 or RHQVMIS(GMSAYRE).
<PAGE>
[GRAPHIC OMITTED]
IBM BUSINESS PARTNER AGREEMENT
DEALER PROFILE
- --------------------------------------------------------------------------------
We welcome you as an IBM Business Partner.
This Profile covers the details of your authorization to market our Products to
End Users. Like you, we are committed to providing the highest quality Products
to the Customer. As our dealer, please let us know if you have any questions or
problems with our Products.
By signing below, each of us agrees to the terms of the following (collectively
called the "Agreement"):
(a) this Profile;
(b) Remarketer General Terms (2125-4800-02 3/93); and
(c) the applicable Attachments referred to in this Profile.
This Agreement and its applicable Transaction Documents are the complete
agreement regarding this relationship, and replace any prior oral or written
communications between us. Once this Profile is signed, 1) any reproduction of
this Agreement or a Transaction Document made by reliable means (for example,
photocopy or facsimile) is considered an original and 2) all Products you order
and Services you perform under this Agreement are subject to it.
Revised Profile (yes/no): NO Date received by IBM: JUNE 29, 1993
AGREED TO: (IBM Business Partner name) AGREED TO:
Technicomp Corp International Business Machines
Houston, TX 77074 Corporation
By /s/ JAMES H. LONG By /s/ N.S. BOLER
Authorized signature Authorized signature
Name (type or print): Name (type or print): N.S. Boler
Date: 6/28/93 Date: 6/29/93
IBM Business Partner address: IBM Office address:
Technicomp Corp 3200 Windy Hill Rd. Wildwood-G 3rd Floor
Marietta, GA 30067
ValCom Computer Center
5401 Southwest Freeway
Houston, TX 77074
AFTER SIGNING, PLEASE RETURN A COPY OF THIS PROFILE TO THE LOCAL "IBM OFFICE
ADDRESS" SHOWN ABOVE.
- --------------------------------------------------------------------------------
Page 1 of 6
<PAGE>
DETAILS OF OUR RELATIONSHIP
1. CONTRACT-PERIOD START DATE (MONTH/YEAR): 09/93 DURATION (MONTHS): 12
The start date is always the first day of a month. The start date does not
change with a revised Profile.
2. RELATIONSHIP APPROVAL/ACCEPTANCE OF ADDITIONAL TERMS:
For each approved relationship, each of us agrees to the terms of the
applicable Attachment by signing this Profile. Copies of those Attachments
are included. Please make sure you have them (and the Remarketer General
Terms) and notify us if any are missing.
<TABLE>
<CAPTION>
APPROVED
AUTHORIZED RELATIONSHIP (YES/NO) ATTACHMENT
<S> <C> <C> <C>
1) Dealer YES Z125-4802-03 3/93
2) Aggregator for IBM Authorized Dealers NO Z125-4803-00 3/92
3) Aggregator for IBM Authorized Industry Remarketers NO Z125-4803-00 3/92
4) Federal Remarketer Program (for Dealer Headquarters) NO Z125-5060-00 4/93
Associated Federal Integrator DOU Z125-5057-00 4/93
Associated Federal Integrator Application NAFI
THE FOLLOWING OFFERING HAS ADDITIONAL
TERMS IN THE APPLICABLE ATTACHMENT:
1) Licensed Education Offerings NO Z125-4814-02 6/92
3. IBM EMPLOYEE SALES PROGRAM/IBM FUND FOR COMMUNITY SERVICE PROGRAM:
Do you wish to participate in these programs? (yes/no) NO
</TABLE>
4. NAME AND ADDRESS OF YOUR AGGREGATOR, IF APPLICABLE:
You may receive Products through this Aggregator. By selecting this
Aggregator, you agree that it (and not we) will provide the functions
identified in the Remarketer General Terms as the Aggregator's
responsibility.
INACOM CORPORATION
INACOM CORP
10810 FARNAM STREET
OMAHA, NE 68154
Page 2 of 6
<PAGE>
5. PRODUCT APPROVAL:
The following Products are listed in the Dealer Exhibit.
<TABLE>
<CAPTION>
APPROVED TO MARKET APPROVED TO DISTRIBUTE
TO END USERS AS AN AGGREGATOR
SYSTEM UNITS, INCLUDING THEIR (YES/NO) (YES/NO)
ASSOCIATED PROGRAMS AND PERIPHERALS
<S> <C> <C>
1) IBM PS/2 YES NO
Models 852x through 854x (1)
2) IBM PS/2 YES NO
(Advanced Products)
Models 855x through 259x (1)
3) IBM PS/ValuePoint (1) YES NO
4) IBM ThinkPad and IBM PS/Note (1) YES NO
PROGRAMS
1) Programs (1) YES NO
PRODUCTS AND OFFERINGS
1) Selected Academic Solutions NO NO
2) IBM Personal Typing System NO NO
Selected Products
3) Licensed Education Off`erings NO NO
</TABLE>
(1) As per the Dealer/Retailer Attachment, we may also approve you to market to
associated resellers approved by us.
(2) Not eligible for Program preload under the Dealer/Retailer Attachment's
rental terms.
EXCLUSIONS, IF APPLICABLE:
Although included by reference above, you are not approved for these
individual Products.
N/A
Page 3 of 6
<PAGE>
6. AUTHORIZED LOCATIONS:
TOTAL NUMBER OF AUTHORIZED LOCATIONS LISTED IN THIS PROFILE: 2
- --------------------------------------------------------------------------------
LOC. ID | LOC. TYPE(1) | AUTHORIZED LOCATION
| | (STREET ADDRESS, CITY, STATE, ZIP CODE)
A1022 | PCD | 5401 SOUTHWEST FREEWAY
| | HOUSTON, TX 77074
- --------------------------------------------------------------------------------
MINIMUM RENEWAL CRITERIA
- --------------------------------------------------------------------------------
Product Name | Volumes/Revenue/Other
Advanced PS/2 | $100,000.00 End User Sales
- --------------------------------------------------------------------------------
Agreement #OBD4197
- --------------------------------------------------------------------------------
MINIMUM NUMBER OF TRAINED PERSONNEL
- --------------------------------------------------------------------------------
PRODUCT/COURSE NAME | MGMT | SALES | PROG SUPPORT | SERVICE
Advanced PS/2 | n/a | All | All | All
- --------------------------------------------------------------------------------
DEALER CERTIFICATION (2)
- --------------------------------------------------------------------------------
04 | 20 | 26 | 28 | 47 | 51 | 56 | 59 | 67 | 58 | 69 | 79 | 80 | 140 | 182
N | N | Y | N | N | N | N | N | N | N | N | N | N | N | N
+o | +m | | | | | | | | | | | | |
N | N | | | | | | | | | | | | |
- --------------------------------------------------------------------------------
(1) A location type of "PCD" means a personal computer dealer, "ARD" means an
authorized rental-only dealer, "ASD" means an authorized software-only
dealer.
(2) The location must be certified for you (as our dealer) to market certain
Products or you (when also approved as our Authorized Personal Systems
Servicer) to service certain Products. A "Y" means certified; an "N" (or
anything other than a "Y") means not certified. The group to which each
Product is assigned is specified in the Dealer Exhibit.
CERTIFIED GROUPS:
<TABLE>
<CAPTION>
<S> <C> <C>
04 * IBM Authorized Personal Systems Servicer 47 = Cooperative Processing Products - 79 = IBM VoiceType
20 = IBM Personal Typing System IBM OfficeVision 80 = IBM DirectTalk/++
Selected Products & PTS/2 51 = Advanced Connectivity Products - 140 = Licensed Education Offerings
26 = Advanced Products - IBM PS/2 IBM Tokenway Model 90R (3174) 182 = IBM ImagePlus%
Models 955x through 969x 56 = Selected Academic Solutions (a) +o = Approved to order IBM AIX PS/2
38 = IBM PS/2 RPG II Application 59 = IBM THINKable Products Program (c)
Toolkit and Platform 67 = NetWare (b) - Basic +w = Approved to market IBM AIX PS/2
68 = NetWare - Gold Programs (d)
69 = NetWare - Platinum
</TABLE>
(a) Certification is for a PCD Authorized Location approved to market Selected
Academic Solutions only to qualified educational End Users.
(b) Registered trademark of Novell, Inc.
(c) Certification is for a headquarters PCD Authorized Location approved to
order the Products directly from us.
(d) Certification is for a PCD Authorized Location approved to market the
Products received from its headquarters location or from our system
software remarketers.
(e) While certified, you may not assign Warranty Service responsibility for any
Machines.
Page 4 of 6
<PAGE>
AUTHORIZED LOCATIONS (CONTINUED)
- --------------------------------------------------------------------------------
LOC. ID | LOC. TYPE(1) | AUTHORIZED LOCATION
| | (STREET ADDRESS, CITY, STATE, ZIP CODE)
71565 | PCD | 14202 Proton
| | Dallas, TX 75244
- --------------------------------------------------------------------------------
MINIMUM RENEWAL CRITERIA
- --------------------------------------------------------------------------------
Product Name | Volumes/Revenue/Other
Advanced PS/2 | $100,000.00 End User Sales
- --------------------------------------------------------------------------------
Agreement #OBD4197
- --------------------------------------------------------------------------------
MINIMUM NUMBER OF TRAINED PERSONNEL
- --------------------------------------------------------------------------------
PRODUCT/COURSE NAME | MGMT | SALES | PROG SUPPORT | SERVICE
Advanced PS/2 | n/a | All | All | All
- --------------------------------------------------------------------------------
DEALER CERTIFICATION (2)
- --------------------------------------------------------------------------------
04 | 20 | 26 | 28 | 47 | 51 | 56 | 59 | 67 | 58 | 69 | 79 | 80 | 140 | 182
N | N | Y | N | N | N | N | N | N | N | N | N | N | N | N
+o | +m | | | | | | | | | | | | |
N | N | | | | | | | | | | | | |
- --------------------------------------------------------------------------------
Page 5 of 6
<PAGE>
7. ASSIGNMENT OF WARRANTY SERVICE RESPONSIBILITY, IF APPLICABLE:
You assign to us, or an IBM Authorized Personal Systems Servicer, Warranty
Service responsibility for these Machines. Please refer to the Dealer Exhibit
for those Machines that are assignable.
Type/Model Type/Model Type/Model Type/Model
n/a
- ------------- -------------- -------------------- ---------------------
- ------------- -------------- -------------------- ---------------------
- ------------- -------------- -------------------- ---------------------
- ------------- -------------- -------------------- ---------------------
Unless you wish to make this assignment to us, please specify the name of the
IBM Authorized Personal Systems Servicer:
_______________________________
Page 6 of 6
<PAGE>
IBM BUSINESS PARTNER AGREEMENT
REMARKETER GENERAL TERMS
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SECTION TITLE PAGE
1. Definitions.........................................................2
2. Agreement Structure.................................................3
3. Our Relationship....................................................4
4. Marketing Funds and Promotional Offering............................5
5. Status Change.......................................................5
6. Export of Products..................................................5
7. Federal Reporting Requirements......................................6
8. Ordering and Delivery...............................................6
9. Inventory Adjustments...............................................7
10. Prices and Price Changes............................................7
11. Invoicing, Payment, and Taxes.......................................7
12. Title...............................................................8
13. Risk of Loss........................................................8
14. Engineering Changes.................................................9
15. Licensed Internal Code..............................................9
16. Programs............................................................9
17. Installation and Warranty..........................................10
18. Warranty Service...................................................10
19. Marketing of IBM Maintenance Services..............................11
20. Patents and Copyrights.............................................12
21. Liability..........................................................12
22. Trademarks.........................................................13
23. No Property Rights.................................................13
24. Changes to the Agreement Terms.....................................13
25. Agreement Termination..............................................13
26. Waiver of Noncompliance............................................14
27. Electronic Communications..........................................14
28. Geographic Scope...................................................14
29. Governing Law......................................................14
Page 1 of 14
<PAGE>
IBM BUSINESS PARTNER AGREEMENT
REMARKETER GENERAL TERMS
- --------------------------------------------------------------------------------
1. DEFINITIONS
AGGREGATOR is our remarketer who we authorize to acquire Products from us to
supply to its Customers who are also our remarketers. In addition, we may
authorize a remarketer to supply our Products to others (for example, our
industry remarketers). An "Aggregator" is responsible for ordering,
delivery, invoicing, payment, taxes, price reductions, and inventory
adjustments. In your Profile, we specify 1) the identity of your
"Aggregator," if any, or 2) if we approve you as an "Aggregator."
AUTHORIZED LOCATION is a site, controlled and operated by you, at which we
authorize you to perform your responsibilities under this Agreement. We may
specify in your Profile certain requirement to which you must adhere at each
Authorized Location (such as, minimum renewal criteria and minimum number of
trained personnel).
CUSTOMER is either an End User, or a reseller who does not market to other
resellers. We specify in your Profile if we authorize you to provide
Products to End Users, resellers, or both.
CUSTOMER-SET-UP MACHINE is an IBM Machine that you (or your Customer) set up
according to our instructions.
END USER is anyone, unaffiliated with you (except if you are a qualified
educational institution), who acquires Products for its own use and not for
resale.
MACHINE is an IBM or non-IBM machine, its features, conversions, upgrades,
elements, accessories, cables, or any combination of them (provided by use
or your Aggregator) that we approve you to provide to your Customers.
PRODUCT is a Machine, Program, or Service.
PROGRAM is an IBM or non-IBM licensed program (provided by us or your
Aggregator) that we approve you to provide to your Customers. The term
"Program" does not include Licensed Internal Code.
SERVICE is assistance (for example, Product maintenance) that we approve you
to perform or market. The term "Service" includes use of a resource (such as
a network) that we approve you to provide to your Customers.
Page 2 of 14
<PAGE>
2. AGREEMENT STRUCTURE
The Remarketer General Terms apply to all our remarketers.
PROFILES
We specify the details of our relationship (for example, the type of
remarketer you are) in a document called a "Profile." Each of us agrees to
the terms of the Profile, the Remarketer General Terms, and the applicable
Attachments referred to in the Profile, (collectively called the
"Agreement"), by signing the Profile.
ATTACHMENTS
We describe additional terms that apply to our relationship in documents
called "Attachments." For example, we describe the additional terms that
apply specifically to dealers in an Attachment. Several Attachments may
apply to you. We specify in your Profile the Attachments that apply.
TRANSACTION DOCUMENTS
We will provide to you the appropriate "Transaction Documents" that confirm
the details or your order or provide additional information about our
relationship. The following are examples of Transaction Documents, with
examples of the information they may contain:
1. invoices (item, quantity, price, and amount due);
2. addenda (trial period and trial Products); and
3. exhibits (eligible Products, warranty information, and other
Product-specific information). We may change the terms of an exhibit on
written notice.
CONFLICTING TERMS
If there is a conflict among the terms in the various documents, those of an
Attachment prevail over those of the Remarketer General Terms. The terms of
a Profile prevail over those of both of these documents. The terms of a
Transaction Document prevail over those of all the documents.
OUR ACCEPTANCE OF YOUR ORDER
A Product becomes subject to this Agreement when we accept your order by:
1. sending you a Transaction Document; or
2. providing the Product to you.
ACCEPTANCE OF THE TERMS IN A TRANSACTION DOCUMENT
You accept the terms in a Transaction Document by doing any of the
following:
1. signing it;
2. accepting the Product described in the Transaction Document;
3. providing the Product to your Customer; or
4. making any payment for the Product.
Page 3 of 14
<PAGE>
3. OUR RELATIONSHIP
MUTUAL RESPONSIBILITIES
Each of us agrees that under this Agreement:
1. the Products we approve you to market are complex in nature and require
that you provide high quality support, both before and after the sale,
to ensure Customer satisfaction;
2. we offer a money-back guarantee to End Users for certain Products. You
agree to inform the Customer of the terms of this guarantee before the
applicable sale. For any such Product, you agree to 1) accept its return
within the time frame we specify, 2) refund the full amount paid to you
for it, and 3) dispose of it (including all its components) as we
specify. We will pay transportation charges for return of the Product to
us and will give you an appropriate credit;
3. you are an independent contractor. Neither of us is a legal
representative or agent of the other. Neither of us is legally a partner
of the other (for example, neither of us is responsible for debts
incurred by the other), and you are not our employee or franchise;
4. each is free to enter into similar agreements with others, to market
competitive Products, and to conduct its business in whatever way it
chooses, provided there is no conflict with this Agreement. We may
increase or decrease the number of our remarketers, the types of
distribution channels, and the number of participants in such channels;
5. each is free to establish its own prices;
6. all information exchanged is nonconfidential. If either of us requires
the exchange of confidential information, it will be made under a signed
confidentiality agreement;
7. neither of us will bring a legal action against the other more than two
years after the cause of action arose; and
8. you may acquire an insignificant number of Products for your own
internal use.
YOUR OTHER RESPONSIBILITIES
You agree not to do any of the following:
1. assign, or otherwise transfer, this Agreement or your rights under it,
delegate your obligations, or appoint another reseller (including a
related company) or agent to represent you or to market our Products,
without our prior written consent. Any attempt to do so is void;
2. assume or create any obligations on our behalf, or make any
representations or warranties about us or our Products, other than those
we authorize;
3. make complaints to us about any other remarketer's pricing or other
marketing practices. We do not wish to receive, and will disregard, any
such complaints (written or oral). Any comments by our representatives
contrary to this are expressly unauthorized and disclaimed by us; or
4. conduct your business in a way (for example, failure to maintain the
highest quality professionalism in all your dealings with Customers)
that adversely affects our reputation or goodwill.
You agree to:
1. sell only to End Users, unless otherwise specified in this Agreement;
2. be responsible for Customer satisfaction with our Products and all your
related activities, and participate in Customer- satisfaction programs
as we determine. For example, you agree to provide us with the names and
addresses of all End Users who have acquired our Products from you;
3. actively and diligently promote our Products;
4. ensure that your compensation or incentive plans for your employees who
market our Products are not unfair to us in comparison with your plans
for competitive products you market.
Page 4 of 14
<PAGE>
5. meet, during the contract period, any minimum renewal criteria specified
in your Profile. These criteria are a measurement of the performance
expected of you (such as sales);
6. maintain trained personnel and comply with any certification
requirements;
7. provide us with relevant financial information about your business
enterprise on request.
8. furnish sales receipts to your Customers before or upon delivery of
Products. You agree to specify on the sales receipt your Customer's name
and address, the Machine type/model and serial number, installed
location, date of sale, any non-IBM alterations or attachments made, and
the Warranty Service provider;
9. provide us with any Customer documents we require, within 10 days of the
applicable transaction (for example, End User signing of our license or
maintenance agreement);
10. provide us with sales and inventory information for our Products on
request;
11. retain records by location of each Product transaction (for example, a
sale or credit) for five years and of each warranty claim for three
years. Records must include (as applicable) Machine type/model and
serial number, Authorized Location to which distributed, and Customer
name and address;
12. assist us in tracing and locating Products;
13. provide us with reasonable, free, and safe access to your facilities, at
a mutually-convenient time, for us to fill our obligations. If you
become aware of any unsafe conditions or hazardous materials to which
our personnel would be exposed at any of your facilities, you agree to
notify us promptly; and
14. comply with all laws and regulations (such as those governing consumer
transactions).
OUR REVIEW OF YOUR COMPLIANCE WITH AGREEMENT
We may periodically review your performance under this Agreement. You agree
to provide us with relevant records on request. We have the right to
reproduce them, retain the copies, and audit your compliance with this
Agreement on your premises during your normal business hours. We may use an
independent auditor for this.
4. MARKETING FUNDS AND PROMOTIONAL OFFERINGS
You agree to use any marketing funds and promotional offerings according to
our guidelines. For Products you provide to resellers, you agree to
administer and disburse these funds or offerings in a proportional and
equitable manner. You also agree to keep records of such funds or offering
for three years.
We may withhold or recover marketing funds and promotional offerings if you
breach any of the terms of this Agreement. Upon notice of termination, any
marketing funds and promotional offerings will no longer be available for
use by, or accrual to, you.
5. STATUS CHANGE
You agree to give us prompt written notice (unless precluded by law or
regulation) of any change, or anticipated change, in your financial
condition, business structure, or operating environment (for example, a
material change in equity ownership or ownership or management, closing or
relocation of an Authorized Location, or any change to information supplied
in your application). Such change or failure to give notice may result in
termination of this Agreement.
6. EXPORT OF PRODUCTS
You are not authorized to actively market Products outside the geographic
scope of this Agreement, and you agree not to use anyone else to do so.
Page 5 of 14
<PAGE>
If a Customer acquires a Product for export, our responsibilities under this
Agreement no longer apply to that Product. You agree to use your best
efforts to ensure that your Customer complies with United States export laws
and regulations, and any import requirements of the destination country.
Before the sale of a Product, you agree to prepare a support plan for it and
obtain your Customer's agreement to that plan. Within one month of sale, you
agree to provide us with the Customer's name and address, Machine type/model
and serial number, date of sale, and destination country.
We exclude these Products from:
1. attainment of your minimum renewal criteria;
2. attainment of your committed quantities;
3. qualification for applicable promotional offerings and marketing funds;
and
4. qualification for any lower prices.
We may also reduce future supply allocations to you by the number of
exported Products.
Our Programs may not be exported.
7. FEDERAL REPORTING REQUIREMENTS
To comply with Federal law, you agree not to employ or compensate any
individuals to perform activities under this Agreement (without our prior
written approval) who were, within the last two years:
1. members of the armed forces in a pay grade of O-4 or higher; or
2. civilians employed by the Department of Defense with a pay rate equal
to, or greater than, the minimum rate for a grade GS-13.
You agree to provide us with any information that we need to comply with
this law.
8. ORDERING AND DELIVERY
You may order Products either from us or your Aggregator. We accept orders
for withdrawn Products subject to their availability.
On our request, you agree to make reasonable efforts to use our automated
order-entry system. You agree to pay all expenses associated with it.
We will mutually agree to a location to which we ship Products. We will use
reasonable efforts to meet your requested delivery dates for Products you
order from us. We select the method of transportation and pay associated
charges for Products we ship.
You agree to notify us within 20 days of receipt, of any discrepancies
between our shipping manifest and the Products received from us. We will
work with you to reconcile any differences.
CANCELLATION OF AN ORDER
You may cancel an order for a Product before we ship it. We may charge you a
cancellation charge. We determine this charge by multiplying the amount we
charge you for the Product by the cancellation-charge percent. We will
inform you in writing of that percent. The cancellation charge does not
apply to a Product if 1) we postpone its shipment for more than 15 days from
its estimated shipment date and 2) you cancel your order before shipment.
We may not be able to honor a cancellation request received less than 10
business days before the Product's estimated shipment date. If you return
such Product, our inventory-adjustment terms apply.
Page 6 of 14
<PAGE>
DELAYED SHIPMENT OF A PRODUCT
Circumstances may arise where we delay the shipment of a Product due to our
inability to meet the original estimated shipment date. If this delay causes
the estimated shipment date to be after the end of your contract period, the
terms of this Agreement apply to that Product. It will be treated as if you
had acquired it during the contract period.
9. INVENTORY ADJUSTMENTS
For purposes of rebalancing your inventory, we will inform you in writing
which Products you may return to us for credit, their inventory-adjustment
categories, and any terms associated with these categories. We will issue a
credit to you when we accept the returned Product. You may use the credit
only after we issue it.
We may charge you a handling charge for returned Products. We determine this
charge by multiplying the inventoryadjustment credit amount for the Product
by the handling-charge percent. We will inform you in writing of that
percent. You agree to pay shipping charges for Products you return. They
must be in our original, undamaged packages (unopened for Machines), and
without any non-IBM labels.
Certain Products may be acquired only as Machines and Programs packaged
together as a solution. These Products must be returned with all their
components intact. However, we do not require the shipping container to be
unopened for some of these Products (for example, Selected Academic
Solutions), as we determine.
Returned Products must be unused and in new condition. You agree to ensure
that the Products are free of any legal obligations or restrictions that
prevent their return. We accept them only from locations to which we ship
Products.
We will reject any returned Product that does not comply with these terms
and send it back to you at your expense.
10. PRICES AND PRICE CHANGES
We will specify the prices for each Product and inform you of any changes.
Price increases do not apply to you if we receive your order before the
effective date of the increase. You receive the benefit or a price decrease
for Products we ship on or after the effective date.
PRICE-REDUCTION CREDITS
If we decrease the price for a Product, you may be eligible to receive a
price-reduction credit for eligible Products in your inventory. We will
specify the Product's price-reduction credit category and associated terms
in writing, and will inform you periodically of any changes. You may use the
credit only after we issue it.
ADDITIONAL CHARGES
Depending on the circumstances, additional charges may apply. For example,
if we perform a Service for you, we charge an additional amount. We will
notify you in advance if these charges apply.
11. INVOICING, PAYMENT, AND TAXES
Payment in full is due upon receipt of our invoice. You agree to pay as we
specify in the invoice. We may offset any amounts due you, or designated for
your use (for example, marketing funds or promotional offerings), against
amounts due us or any of our subsidiaries.
Page 7 of 14
<PAGE>
You agree to pay the amounts equal to any applicable taxes resulting from
any transaction under this Agreement. This does not include taxes based on
our net income. You are responsible for personal property taxes for each
Product from the date we ship it to you or the End User.
You agree to provide us with valid reseller-exemption documentation for each
applicable taxing jurisdiction. Otherwise, we will charge you all applicable
state and local taxes or duties. You agree to notify us promptly if this
documentation is revoked or modified. You are liable for any claims or
assessments that result from any taxing jurisdiction refusing to recognize
your exemption.
FAILURE TO PAY ANY AMOUNTS DUE
If your account becomes delinquent, you agree that we may do one or more of
the following:
1. impose a finance charge, up to the maximum permitted by law, on the
delinquent portion of the balance due;
2. repossess any Products. If we do so, you agree to pay all expenses
associated with repossession and collection, including reasonable
attorney's fees. You agree to make the Products available to us at a
site that is mutually convenient;
3. terminate this Agreement; or
4. pursue any other remedy available at law.
In addition, if your account with any of our subsidiaries becomes
delinquent, we may terminate this Agreement.
12. TITLE
As an Aggregator, when you order a Machine from us, we do not transfer title
to you. As any other remarketer, when you order a Machine, we transfer title
to you when the Machine is shipped by us or your Aggregator.
Any prior transfer of title to a Machine to you is void from its inception
when 1) it is accepted as a returned Machine or 2) you deliver it under the
IBM Employee Sales Program.
If an End Users orders a Machine from us (and not from you) and we pay you a
fee to deliver that Machine. we transfer title to the End User (and not to
you) when you deliver the Machine.
We do not transfer title to Programs.
PURCHASE MONEY SECURITY INTEREST
We reserve a purchase money security interest in a Machine, and you grant us
a purchase money security interest in your proceeds from the sale of, and
your accounts receivable for, a Product, until we receive the amounts due.
For a feature, conversion, or upgrade involving the removal of parts that
become our property, we reserve the security interest until we receive the
amounts due and the removed parts. You agree to sign an appropriate document
(for example, a "UCC-1") to permit us to perfect our purchase money security
interest.
END USER LEASE FINANCING
If an End User obtains a lease for a Machine for legitimate financing
purposes, you may transfer title to the Machine to the lessor. You may
finance End Users' Product acquisitions.
13. RISK OF LOSS
We bear the risk of loss for a Product until its initial delivery from us.
Page 8 of 14
<PAGE>
14. ENGINEERING CHANGES
You agree to allow us to install, at a mutually-convenient location,
mandatory engineering changes (such as those required for safety) on all
Machines in your inventory, and to use your best efforts to enable us to
install such engineering changes on your Customers' Machines. Mandatory
engineering changes are installed at our expense and any removed parts
become our property.
During the warranty period, we manage and install engineering changes at:
1. your or your Customers' locations for Machines for which we provide
Warranty Services; and
2. your location for other Machines. Alternatively, we will provide you
with the parts (at no charge) and instructions to do the installation
yourself. We will reimburse you for your labor at a rate we specify.
15. LICENSED INTERNAL CODE
Certain Machines we specify (called "Specific Machines") use Licensed
Internal Code (called "Code"). We own copyrights in Code. We own all copies
of Code, including all copies made from them.
We will identify each specific Machine in writing. We grant the rightful
possessor of a Specific Machine a license to use the Cde (or any replacement
we provide) on, or in conjunction with, only the Specific Machine,
designated by serial number, for which the Code is provided. We license the
Code to only one rightful possessor at a time. You agree that you are bound
by the terms of the separate license agreement that we will provide to you.
YOUR RESPONSIBILITIES
You agree to inform your Customer, and record on the sales receipt, that the
Machine you provide is a Specific Machine using Licensed Internal Code. You
agree to 1) provide the applicable license agreement to your Customer before
the sale and 2) ensure that the agreement is signed before a sale to an End
User.
6. PROGRAMS
For certain Programs, we require End Users to sign our license agreements.
You agree to ensure those signatures are obtained and the appropriate
supplements are issued before those Programs are provided. All other
Programs (called "Program Packages") are licensed under the terms of the
agreements provided with them.
When you make authorized copies of Programs, you agree to reproduce the
copyright notice and any other legend of ownership on the copies. When we
provide you with service materials for Programs, you agree to copy and
distribute those materials to End Users.
You agree to refund the amount paid for:
1. an IBM Program Package returned to you because the End User does not
accept the terms of the license (for example, by not opening the media
envelope). However, if such Program is packaged together with other
Programs or Machines as a solution, all components must be returned. In
this case, you agree to refund the amount paid for all the components;
and
2. any detective IBM Program returned to you under the terms of its
warranty.
In either case, you may return the IBM Product to us for credit.
Page 9 of 14
<PAGE>
17. INSTALLATION AND WARRANTY
For a Machine to function properly, it must be installed in a suitable
physical environment. For a Machine we install, we will ensure that it is in
good working order and meets the criteria specified in its Official
Published Specifications before we consider it installed. We provide
instructions to enable the setup of Customer-set-up Machines. We are not
responsible for the installation of Programs or non-IBM Machines.
With each IBM Machine we ship, we include a copy of our statement of limited
warranty. We will provide a copy to you. You agree to make it available to
the End User for review before the sale. We provide non-IBM Products on an
"AS IS" basis. However, non-IBM manufacturers, suppliers, or publishers may
provide their own warranties to you.
DATE OF INSTALLATION
We calculate the expiration of an IBM Machine's warranty period from the
Machine's Date of Installation.
The Date of Installation for a Machine we are responsible for installing is
the business day after the day 1) we install it or 2) we make it available
for installation, if you (or the End User) defer installation. Otherwise
(for example, if others install it or break its warranty seal), it is the
day we deliver the Machine to you (or the End User).
The date of Installation for a Customer-set-up Machine:
1. that we ship to the End User (or to you for your own use), is the fifth
business day after the day the Machine is received;
2. that you ship, is the earlier of 1) the second business day after the
End User receives the Machine or 2) the day you or your Customer place
the Machine in use; or
3. is the same as the Date of Installation for a Machine that we install,
if the Customer-set-up Machine is being installed with, and attached to,
it.
If we authorize you to install Programs on a Machine at an Authorized
Location (and therefore you set up the Machine), we do not consider this as
the Date of Installation, as long as you promptly ship the Machine to the
End User.
You (or your Customer, if other than an End User) must record the Machine's
Date of Installation on the End User's sales receipt. You must also notify
us upon our request.
18. WARRANTY SERVICE
We will inform you in writing who is responsible for providing Warranty
Service for Machines. We do so by specifying the Warranty Service category
for each Machine.
WHEN WE ARE RESPONSIBLE FOR SERVICING MACHINES
When we are responsible for providing Warranty Service, we do so for the IBM
Machine during its warranty period at no charge to keep it in, or restore it
to, good working order. In this case, you are not authorized to perform
Warranty Service. You agree to convey all (or the remaining portion) of our
warranty to your Customer.
When You are Responsible for Servicing Machines
When you are responsible for providing Warranty Service, you agree to do the
following according the Service support guidelines we provide:
1. maintain Warranty Service capability;
2. ensure that it is performed only by personnel trained to our standards
and consistent with the terms of our statement of limited warranty;
Page 10 of 14
<PAGE>
3. provide it even for Machines that the End User did not acquire from you;
and
4. submit only valid warranty-reimbursement requests to us.
We will:
1. train you to provide Warranty Service. We provide training, at no
charge, for the minimum number of your Service personnel that we
require. Additional training may be provided for a fee;
2. provide you with necessary technical information; and
3. pay you for Warranty Service performed and exchange (or reimburse you
for) parts.
MAINTENANCE PARTS
We sell maintenance parts for use in providing Warranty Service and for
maintaining Machines. You may sell such parts to others for use in
maintaining Machines.
ASSIGNMENT OF WARRANTY SERVICE RESPONSIBILITY FOR MACHINES WITH ON-SITE TYPE
OF SERVICE
For a Machine that we designate as having on-site type of service (performed
at the Customer's location as opposed to the warranty provider's service
location), you may assign Warranty Service responsibility to us or to anyone
else authorized by us to provide it. You agree to:
1. ensure that the assignee accepts Warranty Service responsibility for
each Machine assigned to it;
2. provide a copy of the sales receipt to the assignee;
3. notify your Customer of the assignment; and
4. remain responsible for your Customer's satisfaction with that Service.
If you assign Warranty Service responsibility for all units of a Machine
type to us, you are no longer required to be Warranty Service capable for
that Machine type.
When you accept Warranty Service responsibility from another of our
remarketers, you may not reassign that responsibility and are responsible
for Customer satisfaction with that Service.
WARRANTY SERVICE FOR NON-IBM PRODUCTS
For non-IBM Products that we do not warrant and other non-IBM equipment that
a Customer may reasonably believe is warranted by us, you agree to inform
your Customer in writing, before the sale, that we do not warrant them. You
also agree to inform your Customer 1) that the Products or equipment are
non-IBM, 2) of the applicable warranty (if any), and 3) of the procedure to
obtain any warranty service.
19. MARKETING OF IBM MAINTENANCE SERVICES
For Machines you are approved to market, you may market our Maintenance
Services to any End User. We provide Maintenance Services under the terms of
our applicable agreement. You agree to provide us with any required
documents signed by you or the End User, and inform the End User of our
service procedures.
When we confirm the specific terms applicable to the End user's Machine, we
will pay you a specific fee. However, we will not pay the fee if the Machine
is already under one Maintenance Services or these Services have been
terminated for the Machine with the prior six months. If the End User
terminates Maintenance Services before the initial-charge period specified
in the applicable agreement, you agree to refund the fee.
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20. PATENTS AND COPYRIGHTS
For purposes of this section only, the term "Product" includes Licensed
Internal Code and excludes Services.
If a third party claims that a Product we provide under this Agreement
infringes that party's patent or copyright, we will defend you against that
claim at our expense and pay all costs, damages, and attorney's fees that a
court finally awards, provided that you:
1. promptly notify us in writing of the claim; and
2. allow us to control, and cooperate with us in, the defense and any
related settlement negotiations.
If such a claim is made or appears likely to be made, about a Product in
your inventory, you agree to permit us to either enable you to continue to
market and use the Product, or to modify or replace it. If we determine that
none of these alternatives is reasonably available, you agree to return the
Product to us on our written request. We will then give you an appropriate
credit, as we determine, which will be either 1) the price you paid us for
the Product or 2) the depreciated price.
This is our entire obligation to you regarding any claim of infringement.
CLAIMS FOR WHICH WE ARE RESPONSIBLE
We have no obligation regarding any claim based on any of the following:
1. your modification of a Product, or a Program's use in other than its
specified operating environment;
2. the combination, operation, or use of a Product with any product, data,
or apparatus that we did not provide; or
3. infringement by a non-IBM Product alone, as opposed to its combination
as part of a system of Products that we provide.
21. LIABILITY
Circumstances may arise where, because of a default or other liability, one
of us is entitled to recover damages from the other. In each such instance,
regardless of the basis on which damages can be claimed, the following terms
apply.
Our Liability
We are responsible for:
1. payments referred to in our patent and copyright terms described above;
2. bodily injury (including death), and damage to real property and
tangible personal property caused by our Products; and
3. the amount of any other actual loss or damage, up to the greater of
$100,000 or the charges (if recurring, 12 months' charges apply) for the
Product that is the subject of the claim.
ITEMS FOR WHICH WE ARE NOT LIABLE
Under no circumstances are we liable for any of the following:
1. third-party claims against you for losses or damages (other than those
under the first two items above);
2. loss of, damage to, your records or data; or
3. economic consequential damages (including lost profits or savings) or
incidental damages, even if we are informed of their possibility.
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YOUR LIABILITY
In addition to damages for which you are liable under law and the terms of
this Agreement, you will indemnify us for claims by others made against us
(particularly regarding statements, representations, or warranties not
authorized by us) arising out of your conduct under this Agreement or as a
result of your relations with anyone else.
22. TRADEMARKS
We will provide you with advertising guidelines for our logos, trade and
service marks, trade names, emblems, and titles (collectively called
"Trademarks"). We will notify you in writing of the title you are authorized
to use. You may also use the IBM Business Partner emblem associated with
that title. You may use the Trademarks only as described in the guidelines
and only in association with the Products we approve you to market.
On our request, you agree to change or stop using any advertising or
promotional material that does not comply (as we determine) with our
guidelines or this Agreement. When this Agreement ends, you agree to
promptly stop using our Trademarks. If you do not, you agree to pay any
expenses and fees that we incur in getting you to stop.
You agree that any goodwill attaching to our Trademarks as a result of your
use of them belongs to us. You agree not to register or use any mark that is
confusingly similar to any of our Trademarks.
23. NO PROPERTY RIGHTS
Your rights under this Agreement are not property rights and, therefore, you
cannot transfer them to anyone else or encumber them in any way. For
example, you may not sell your authorization to market our Products or your
right to use our Trademarks.
24. CHANGES TO THE AGREEMENT TERMS
In order to maintain flexibility in our relationships, we may change the
terms of this Agreement by giving you one month's written notice. However,
these changes are not retroactive. They apply as of the effective date we
specify in the notice. If you do not accept a change, you must inform us in
writing before its effective date. If you do so, any future change will not
apply to you. However, if you sign a revised Profile, then all prior changes
become effective.
Otherwise, for a change to be valid, both of us must sign it. Additional or
different terms in any order or written communication from you are void.
25. AGREEMENT TERMINATION
You may terminate this Agreement, with or without cause, on one month's
written notice.
We may terminate this Agreement, with or without cause, on three months'
written notice. If the termination is for cause, we may (at our discretion)
allow you a reasonable opportunity to cure. If you fail to do so, the date
of termination is that specified in the notice. However, certain acts or
omissions are so serious as to warrant immediate termination. If you
repudiate this Agreement, materially breach any of its terms, or make any
material misrepresentation to us, we may terminate this Agreement at any
time, on written notice. Examples of a material breach are violation of our
status-change terms, violation of our trademark terms, submission of a false
warranty claim, and unauthorized sale to a reseller. You agree that our only
obligation is to provide the notice called for in this section and we are
not liable for any claims or losses if we do so.
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Upon termination, you must immediately pay us all amounts due. We may offset
any amounts due you against amounts due us or any of our subsidiaries. Any
terms of this Agreement, which by their nature extend beyond its
termination, remain in effect until fulfilled, and apply to respective
successors and assignees.
We may permit you to continue to provide Products after this Agreement ends
(it ends when terminated or when the contract period ends). If we do so, you
agree to provide those Products under the terms of this Agreement.
RETURN OF PRODUCTS
At the end of this Agreement, you agree to:
1. pay for or return to us, at our discretion, any Products for which you
have not paid, and
2. allow us, at our discretion, to repurchase any other Products in your
possession or control at the price you paid us, less any credits issued
to you.
Products to be returned must be unused, in new condition, and in your
inventory (or in transit from us) on the day of termination. We will inspect
the Products and reserve the right to reject them. You agree to pay all
shipping charges. Products returned to you under our money-back guarantee
terms may be used and we pay their shipping charges.
26. WAIVER OF NONCOMPLIANCE
Failure by either of us to insist on strict performance or to exercise a
right when entitled, does not prevent us from doing so at a later time,
either in relation to that default or any subsequent one.
27. ELECTRONIC COMMUNICATIONS
Each of us may communicate with the other by electronic means. Each of us
agrees that when electronic communications are used, they are the equivalent
of written and signed documents.
ELECTRONIC DATA INTERCHANGE
We may provide Electronic Data Interchange (called "EDI") options to you.
Electronic invoicing and electronic payment are examples of these options.
When using EDI options, each of us agrees:
1. when a bank is involved, to pay our respective bank charges and to
notify the other promptly of any changes to the bank payment process;
and
2. to notify the other promptly of any changes to the technology, process,
or information upon which the EDI transactions are based.
We will specify respective responsibilities for the EDI option you choose.
28. GEOGRAPHIC SCOPE
All your rights and all our obligations are valid only in the United States
and Puerto Rico.
29. GOVERNING LAW
Since we are a New York corporation, the laws of the State of New York
govern this Agreement.
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IBM BUSINESS PARTNER AGREEMENT - REMARKETER
DEALER/RETAILER ATTACHMENT
- --------------------------------------------------------------------------------
THESE TERMS APPLY TO DEALERS, RETAILERS, AND SUPERSTORES.
1. MARKETING OF PRODUCTS
For Products you market, you agree to:
1. market, support (including setup and test), and service them only at
Authorized Locations or End Users' locations;
2. receive and place in inventory, Products and maintenance parts, only at
Authorized Locations or ship-to-locations (and not at End Users'
locations);
3. maintain a sufficient inventory at Authorized Locations to meet expected
demand;
4. provide adequate floor space and related facilities at Authorized
Locations to display and demonstrate the Products; and
5. when referring to locations in your advertising, refer only to
Authorized Locations.
2. END USER SUPPORT
Except for Programs and features for Customer-set-up Machines, we require
you to provide certain activities using your trained personnel whose place
of business is an Authorized Location.
You agree to (at a minimum):
1. have at least one face-to-face meeting with the End User before an
initial sale;
2. select Products that best meet the End User's needs;
3. inform the End User that you are available to provide ongoing support;
and 4. verify the successful operation of a Product before delivery to
the End User.
3. ASSOCIATION WITH SELECTED RESELLERS
With our prior written approval, you may market Products to certain
resellers we approve who add significant value to those Products and who
market them only to End Users. We reserve the right to withdraw our approval
of 1) any such reseller or 2) your association with any such reseller.
You agree to:
1. require the reseller to market our Products in a manner not contrary to
this Agreement;
2. use your best efforts to ensure that for each Product the reseller
markets, it retains the required records and provides the applicable
money-back guarantee, warranty information, license agreement, and sales
receipt;
3. retain responsibility for End User satisfaction;
4. provide Warranty Service and Program Services to the End User, if
applicable; and
5. ensure the reseller provides a copy of a completed proof-of-purchase
document (that we provide) to the End User and to you. You agree to
retain such document as you would a sales receipt. You may share certain
technical assistance responsibilities that we specify with the reseller.
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4. RENTAL OF MACHINES
From an Authorized Location, you may rent certain Machines to 1) End Users
or 2) our remarketers that we specify. We may approve you to have an
Authorized Location dedicated solely to the rental of Machines.
You agree to retain title to a rental Machine for 12 months from its Date of
Installation. You must record this date.
Certain Programs specified in the Dealer Exhibit may be preloaded onto
rental Machines. You must have an original license in place from us for each
of these Programs you wish to preload. With our permission, you may make the
number of copies authorized of these Programs (including their printed
documentation) solely for preloading onto, and use with, your rental
Machines. The copies are subject to the terms of the original Program's
license agreement, except that you may not transfer them. We will invoice
you for the additional licenses we authorize. You must retain a copy of our
invoice as proof of authorization.
You agree:
1. to provide the applicable license agreement to the End User before
renting the Machine. You agree to inform the End User that the terms
apply to each copy of each Program.
2. to recover all copies of each Program from the End User at the end of
the Machine's rental period. You may continue to use the Program for
successive End Users without additional approval or charge; and
3. not to provide any backup copy of a preloaded Program. You may reload
the Program, if necessary.
Our approval to preload Programs may be withdrawn on three months' written
notice. However, if you fail to comply with any of the above terms, we may
withdraw our approval at any time, on written notice.
5. IBM EMPLOYEE SALES PROGRAM
If you choose to participate in the IBM Employee Sales Program, we will pay
you a fee for providing certain Products to our employees. Before you
deliver the Product, you agree to verify its successful operation. You may
deliver the Product only at an Authorized Location.
You may terminate your participation in this offering by giving us written
notice. You agree to honor orders received before the termination date. We
may terminate your participation in this offering on one month's written
notice.
We will specify the price our employee is to be charged for the Product. Our
employee will order the Product from you and pay you for it.
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6. IBM FUND FOR COMMUNITY SERVICE PROGRAM
If you participate in the IBM Employee Sales Program, you must participate
in the IBM Fund for Community Service Program. Under this offering, we
donate certain Products to selected community-service organizations. We ship
Products to you for delivery to these organizations. We will pay you a fee
for this service.
You agree to:
1. verify the Product's operation before delivery; and
2. deliver the Product only at an Authorized Location to the organization
when it presents you with the appropriate documentation.
We will notify you of a cancellation that occurs after shipment of a
Product. We will offer you all Products in the order at the price we charge
our employees. You may obtain all the cancelled Products by submitting a
purchase order to us. Alternatively, you may return the order by following
procedures we specify. If we do not receive all Products in the cancelled
order within the allowable time for return, we will invoice you for Products
we did not receive. We will charge you the lowest dealer price for which you
are then eligible.
Termination is handled as described in the IBM Employee Sales Program.
Termination of either offering, terminates the other.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 2 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
2, 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 L.L.P.
Houston, Texas
October 2, 1996
