AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1997
REGISTRATION NO. 333-09789
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
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>
<CAPTION>
DELAWARE 5045 76-0515249
<S> <C> <C>
(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) 226-0237 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, JUNE 26, 1997
PROSPECTUS
2,035,000 SHARES
LOGO -- ALLSTAR SYSTEMS, INC.
COMMON STOCK
Of the 2,035,000 shares of Common Stock, $.01 par value per share ("Common
Stock") offered hereby (the "Offering"), 1,500,000 shares are being sold by
Allstar Systems, Inc. ("Allstar" or the "Company") and 535,000 shares are
being sold by a stockholder of the Company (the "Selling Stockholder"). The
Company will not receive any of the proceeds from any sale of Common Stock by
the Selling Stockholder. See "Principal and Selling Stockholders."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently anticipated that the public offering price will be
between $8.00 and $10.00 per share. For information relating to the factors
considered in determining the initial public offering price, see
"Underwriting." The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "ALLS," subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER
- --------------------------------------------------------------------------------
Per Share............. $ $ $ $
- --------------------------------------------------------------------------------
Total(3).............. $ $ $ $
================================================================================
(1) Excludes the value of warrants to purchase up to 203,500 shares of Common
Stock at an exercise price per share equal to the greater of 120% of the
initial public offering price per share or $9.60 per share, issuable upon
exercise of warrants to be issued to Sutro & Co. Incorporated and Cruttenden
Roth Incorporated (the "Representatives") upon the closing of this
Offering (the "Representatives' Warrants"). Also excludes a
non-accountable expense allowance payable to the Representatives. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase a maximum of 305,250
additional shares of Common Stock from the Company solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part and to withdraw, cancel or modify this Offering without
notice. It is expected that delivery of the certificates for the shares will be
made on or about , 1997.
SUTRO & CO. INCORPORATED CRUTTENDEN ROTH
INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997
<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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<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 approximately 3,400 accounts is comprised primarily of mid-sized
companies and regional offices of larger companies 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.
Long-standing relationships with leading aggregators and wholesale distributors
of computer hardware and software products 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, and smaller "key systems," including products from Inter-Tel, Macrotel
and NEC. 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, 1996, the Company's operating income
increased 81.5% on a 32.1% increase in total revenue from the prior year. 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 compared to 1994. 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.
3
<PAGE>
The Company's goal is to expand its regionally-based business as a provider
of computer and telephone hardware and software products and related services.
To achieve this objective, 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 during the third quarter of 1997,
(ii) pursue acquisitions of regional telephone system resellers with established
customer bases in targeted markets and (iii) increase the variety and
capabilities of its CTI Software products through internal development and
acquisitions of complementary software products.
IMPLEMENT INTERNET-BASED NATIONAL MARKETING PROGRAM. The Company intends
to implement a new method of marketing its Computer Products on a nationwide
basis under the trade name "800 PC Deals." By accessing an Internet home page
currently under development, the Company's sales representatives and customers
will be able to obtain product pricing and availability data, enter or change
orders and access customer account status information. The Company plans to
employ experienced sales representatives in selected metropolitan markets who
will be supported by the new Internet-based system and by a national sales
support call center performing order entry and customer service functions. 800
PC Deals is anticipated to begin operation in the second 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 (i) 417,500 shares of Common Stock reserved for issuance under the
1996 Incentive Stock Plan, of which options to purchase 100,000 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, (ii) restricted stock awards for 14,286 shares which
will be granted upon closing of this Offering to certain key employees, none
of which will be vested, (iii) 100,000 shares reserved for issuance under
the 1996 Non-Employee Director Stock Option Plan, none of which are issued
or outstanding and (iv) 203,500 shares of Common Stock issuable upon
exercise of the Representatives' Warrants.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue........................ $ 64,076 $ 91,085 $ 120,359 $ 25,948 $ 26,593
Gross profit......................... 8,535 11,228 16,057 3,221 3,831
Operating income..................... 1,087 2,079 3,773 547 696
Income before provision for income
taxes.............................. 323 861 2,590 250 407
Net income........................... 183 519 1,603 139 253
Net income per share................. $ 0.07 $ 0.19 $ 0.60 $ 0.05 $ 0.09
Weighted average shares
outstanding........................ 2,554,808 2,675,000 2,675,000 2,675,000 2,675,000
</TABLE>
AS OF MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
BALANCE SHEET DATA:
Working capital...................... $ 2,534 $ 14,172
Total assets......................... 27,301 28,527
Short-term borrowings(2)............. 10,411 --
Long-term debt....................... -- --
Stockholders' equity................. 4,580 16,218
- ------------
(1) As adjusted gives effect to this Offering and the application of the net
proceeds therefrom, assuming an initial public offering price of $9.00 per
share. See "Use of Proceeds."
(2) See Note 5 to the Company's Consolidated Financial Statements. Short-term
borrowings do not include amounts recorded as floor plan financing which are
included in 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 1994, 1995 and 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 in 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 IBM Credit Corporation
("IBMCC"), through which it maintains a base $20.0 million revolving line of
credit facility, and Deutsche Financial Services Corporation ("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 1994, 1995 and the first seven
months of 1996, the Company was in default of certain financial and other
covenants under both its IBMCC and DFS credit facilities due largely to the
financing of its rapid growth during those periods by short-term indebtedness
under those same credit facilities. Although the Company has periodically sought
and obtained waivers from its lenders for prior defaults of certain covenants
(and may be required to do so in the future), and has obtained amendments to its
credit facilities liberalizing certain other covenants, there can be no
assurance that either of its principal lenders will accommodate future requests
for waivers or amendments. There can be no assurance that financing from IBMCC,
DFS or other lenders will be available to the Company in the future in the
amounts presently available, or at all. The inability of the Company to have
continuous access to such financing at reasonable costs would materially and
adversely impact the Company's financial condition and results of
6
<PAGE>
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
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 have a material adverse affect on 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,
offering new or improved products and services to the Company's customers or
increasing 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 have a material adverse affect on the Company's financial position and
results of operations. 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,
7
<PAGE>
customers and key personnel. 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, 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
inability to attract, hire, train and retain qualified personnel could have a
material adverse affect on the Company's financial condition and results of
operations.
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 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, Inter-Tel, Macrotel and Mitel. Without such sales and
service authorizations, the Company would be unable to provide the range of
products and services currently offered. 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, 46.4%, 36.6% and 57.0% of the Company's total product purchases
in 1994, 1995 and 1996, respectively. In August 1996, the Company renewed its
long-term supply arrangement with Inacom and is obligated under the terms of
that agreement to purchase at least 80% of its Computer Products from Inacom,
but only to the extent that such products are made available within a reasonable
period of time at reasonably competitive pricing. The Company's purchases from
its second largest supplier, Ingram, accounted for approximately 14.1%, 20.6%
and 14.7% of the Company's total product purchases in 1994, 1995 and 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."
8
<PAGE>
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 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 31.4%, 27.9% and 33.2% of the
Company's total revenue during 1994, 1995 and 1996, respectively. During 1996,
the Company had one customer that accounted for 11.2% of its total revenue.
Based upon historical results and existing relationships with customers, the
Company believes that a substantial portion of its total revenue and gross
profit will continue to be derived from sales to existing customers. There are
no long-term commitments by such customers to purchase products or services from
the Company. Product sales by the Company are typically made on a purchase order
basis. A significant reduction in orders from any of the Company's largest
customers could have a material adverse effect on the Company's financial
condition and results of operations. Similarly, the loss of any one of the
Company's largest customers or the failure of any one of such customers to pay
its accounts receivable on a timely basis could have a material adverse effect
on the Company's financial condition and results of operations. There can be no
assurance that the Company's largest customers will continue to place orders
with the Company or that orders by such customers will continue at their
previous levels. There can be no assurance that the Company's service customers
will continue to enter into service contracts with the Company or that existing
contracts will not be terminated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations" and
"Business -- Customers."
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's success is largely dependent on the accuracy, quality and
utilization of the information generated by its customized management
information systems, which affects its ability to manage its sales, accounting,
inventory and distribution systems. The Company anticipates that it will
continually need to refine and enhance its management information systems as the
Company grows and the needs of its business evolve. In view of the Company's
reliance on information and telephone communication systems, any interruption or
errors in these systems could have a material adverse effect on the Company's
financial condition and results of operations. The Company's new Internet-based
system, through which 800 PC Deals will operate, is currently under development
and its implementation may encounter technical difficulties. There can be no
assurance that the new system will function as expected. See "Business --
Management Information Systems."
ACQUISITION RISK
The Company intends to pursue potential acquisitions of complementary
businesses. The success of this strategy depends not only upon the Company's
ability to acquire complementary businesses on a cost-
9
<PAGE>
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 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 filed for, but has
not yet received, federal copyright protection for StrataDial and StrataVoice,
two of the Company's proprietary CTI software products. The Company is also
seeking 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. Mr. Long will have the ability to control the
election of a majority of the members of the Company's Board of Directors,
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
granted to the Selling Stockholder an option to purchase up to 118,000 shares of
Common Stock held by Mr. Long at the initial public offering price, such option
being conditioned on the successful completion of this Offering. If exercised,
the Selling Stockholder may benefit through the potential unrealized gains in
the value of any shares of Common Stock acquired by exercise of the option. 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 all or 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
10
<PAGE>
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 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 134,286 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.
The Company has agreed to grant demand and incidental or "piggyback"
registration rights to the Representativeswith respect to the resale by them of
the 203,500 shares of Common Stock issuable upon the exercise of the
Representatives' Warrants.
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 $5.12
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 $9.00 per share, after
deducting underwriting discounts and commissions and estimated Offering expenses
payable by the Company, are estimated to be $11.6 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 $10.4 million (approximately 90% of
the estimated net proceeds) to repay all or substantially all of the Company's
outstanding short-term indebtedness under its accounts receivable revolving line
of credit with IBMCC. The outstanding balance under this accounts receivable
revolving line of credit, which was incurred to finance working capital, was
$10.4 million at March 31, 1997. 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 March 31, 1997, the interest rate in
effect for the IBMCC accounts receivable revolving line of credit was 10.5% per
annum. Principal and interest outstanding under the credit facility are due upon
termination of the facility, which remains in effect for successive 13 month
periods until terminated by the Company or IBMCC upon 60 days written notice.
The Company intends to expend an estimated $1.0 million for leasehold
improvements and other capital expenditures, a majority of which will be
expended in connection with the planned consolidation of its warehouse
facilities into a single facility in the Dallas-Fort Worth area, the relocation
of its Dallas branch office and the opening of two branch offices in Austin and
San Antonio, Texas. All or a portion of the $1.0 million in capital expenditures
currently budgeted by the Company for such purposes may be paid from the net
proceeds of the Offering remaining after repayment of short-term indebtedness,
depending on the availability of remaining net offering proceeds at the time of
such expenditures and the availability of other sources of funds. Any remaining
proceeds available for working capital and general corporate purposes may be
used to acquire complementary businesses and technologies. The Company is not
currently a party to any commitments or agreements and is not currently involved
in any negotiations with respect to any acquisitions. Pending such uses, the
Company intends to invest the net proceeds from this Offering in short-term,
interest-bearing securities or accounts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on the Common Stock.
The Company intends to retain any future earnings for reinvestment in its
business and does not intend to pay cash dividends in the foreseeable future.
Under the Company's credit facilities with IBMCC and DFS, the Company is
prohibited from declaring or paying dividends unless consent is obtained from
each lender. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997 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 $9.00 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 MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
Short-term borrowings(1)............. $ 10,411 $ --
--------- ------------
Long-term debt....................... -- --
Stockholders' equity:
Preferred Stock; $.01 par value;
5,000,000 shares authorized; no
shares outstanding............. -- --
Common Stock:
$.01 par value; 50,000,000
shares authorized;
2,675,000 shares
outstanding (4,175,000
shares as
adjusted)(2)............ 27 42
Additional paid-in capital...... 1,479 13,102
Retained earnings............... 3,074 3,074
--------- ------------
Total stockholders'
equity.................. 4,580 16,218
--------- ------------
Total capitalization.... $ 14,991 $ 16,218
========= ============
- ------------
(1) See Note 5 to the Company's Consolidated Financial Statements. Short-term
borrowings do not include amounts recorded as floor plan financing which are
included in accounts payable.
(2) Excludes (i) 417,500 shares of Common Stock reserved for issuance under the
1996 Incentive Stock Plan, of which options to purchase 100,000 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, (ii) restricted stock awards for 14,286 shares which
will be granted upon closing of this Offering to certain key employees, none
of which will be vested, (iii) 100,000 shares reserved for issuance under
the 1996 Non-Employee Director Stock Option Plan, none of which are issued
or outstanding and (iv) 203,500 shares of Common Stock issuable upon
exercise of the Representatives' Warrants.
13
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997, was $4.6
million or $1.71 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 $9.00 per share) and the application of the
estimated net proceeds therefrom, the net tangible book value of the Company at
March 31, 1997, would have been $16.2 million or $3.88 per share. This
represents an immediate increase in net tangible book value of $2.17 per share
to existing holders of Common Stock and an immediate dilution of $5.12 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......... $ 9.00
Net tangible book value per
share as of March 31, 1997...... $ 1.71
Increase per share attributable
to new investors................ 2.17
---------
Adjusted net tangible book value per share after
this Offering................................... 3.88
---------
Dilution per share to new investors............. $ 5.12
=========
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 10.0% $ 0.56
New investors........................ 1,500,000 35.9 13,500,000 90.0 9.00
----------- ------- -------------- -------
Total........................... 4,175,000 100.0% $ 15,005,700 100.0%
=========== ======= ============== =======
</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 (i) 417,500 shares of Common Stock reserved for issuance under the
1996 Incentive Stock Plan, of which options to purchase 100,000 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, (ii) restricted stock awards for 14,286 shares which
will be granted upon closing of this Offering to certain key employees, none
of which will be vested, (iii) 100,000 shares reserved for issuance under
the 1996 Non-Employee Director Stock Option Plan, none of which are issued
or outstanding and (iv) 203,500 shares of Common Stock issuable upon
exercise of the Representatives' Warrants.
14
<PAGE>
SELECTED FINANCIAL DATA
The following sets forth certain selected financial data derived from the
audited financial statements of the Company for the years ended December 31,
1992, 1993, 1994, 1995 and 1996 and contains selected financial data derived
from the unaudited financial statements of the Company for the three months
ended March 31, 1996 and 1997. The unaudited financial statements of the Company
as of and for the three months ended March 31, 1996 and 1997 reflect all
adjustments necessary in the opinion of management (consisting only of normal
recurring adjustments), for a fair presentation of such financial data. The
selected 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue........................... $ 31,180 $ 49,536 $ 64,076 $ 91,085 $ 120,359 $ 25,948 $ 26,593
Cost of sales and services.............. 25,371 42,289 55,541 79,857 104,302 22,727 22,762
--------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 5,809 7,247 8,535 11,228 16,057 3,221 3,831
Selling, general and administrative
expenses.............................. 6,063 6,060 7,448 9,149 12,284 2,674 3,135
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............. (254) 1,187 1,087 2,079 3,773 547 696
Interest expense (net of other
income)............................... 243 644 764 1,218 1,183 297 289
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes........ (497) 543 323 861 2,590 250 407
Provision (benefit) for income taxes.... (122) 229 140 342 987 111 154
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................... $ (375) $ 314 $ 183 $ 519 $ 1,603 $ 139 $ 253
========= ========= ========= ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net income (loss) per share............. $ (0.18) $ 0.15 $ 0.07 $ 0.19 $ 0.60 $ 0.05 $ 0.09
Weighted average shares outstanding..... 2,118,600 2,120,242 2,554,808 2,675,000 2,675,000 2,675,000 2,675,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------- AS OF
1992 1993 1994 1995 1996 MARCH 31, 1997
--------- --------- --------- --------- --------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ (269) $ 1,307 $ 1,363 $ 1,732 $ 2,291 $ 2,534
Total assets............................ 8,796 17,431 19,077 24,266 24,720 27,301
Short-term borrowings(1)................ 2,806 6,896 8,972 9,912 9,975 10,411
Long-term debt.......................... 47 43 -- -- -- --
Stockholders' equity.................... 208 2,022 2,205 2,724 4,327 4,580
</TABLE>
- ------------
(1) See Note 5 to the Company's Consolidated Financial Statements. Short-term
borrowings do not include amounts recorded as floor plan financing which are
included in 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 providing related services. To date,
most of its revenue has been derived from Computer Products sales. In addition,
the Company derives revenue from providing IT Services to purchasers of Computer
Products and other customers. The Company operated from a single office in
Houston, Texas until 1992 when it opened a branch office in Dallas, Texas. In
1994, the Company began offering Telecom Systems in its Houston office. In the
fourth quarter of 1995, the Company acquired and began marketing CTI Software.
The Company's gross margin varies substantially between each of its
businesses. The Company's Computer Products sales have produced a gross margin
ranging from 10.3% to 10.4% over the three year period ended December 31, 1996,
due to the commodity nature of the Computer Products market. The gross margin
for IT Services, which reflects direct labor costs, has ranged from 30.4% to
40.9% over the same period. 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 23.0% and
42.7% since the Company entered the Telecom Systems market in 1994. This
variation reflects the different mix of product sales and the amount of
services-related revenue from period to period. The gross margin for CTI
Software was 40.2% in 1996, primarily due to the amount expended by the Company
to acquire and develop the software relative to the licensing value of the CTI
Software. CTI Software accounted for approximately 1.1% of the Company's
revenues in 1996.
In 1995 and 1996, the Company's revenues increased at rates of 42.2% and
32.1%, respectively. A significant portion of the increased revenue was
generated by the Company's Dallas office which opened in mid-1992. While the
Dallas office has experienced significant revenue growth, its gross margins have
been below those of the Company's Houston office. This difference partly results
from the Company's effort to increase its market share in Dallas by generally
pricing sales of Computer Products at gross margins lower than those realized in
the Houston office. The Houston office, on the other hand, has realized higher
gross margins due in part to sales of higher margin products and services
offered by Telecom Systems and CTI Software, which do not currently operate in
the Dallas office.
In order to reduce freight costs and selling, general and administrative
expenses associated with product handling, the Company began in 1995 to drop
ship a higher percentage of orders directly from its suppliers to its customers.
This initiative has resulted in the percentage of drop shipped orders (measured
by the cost of goods dropped shipped as a percentage of total cost of goods)
growing from 2.1% in 1994 to 9.0% in 1995 and to 18.1% in 1996. While the
Company does not believe that it is in its best interest to drop ship all
orders, it does intend to increase the volume of drop shipments in Computer
Products with the expectation of reducing its freight, distribution and
administrative costs related to these revenues.
A significant portion of Company's selling, general and administrative
expenses relate to personnel costs, some of which are variable and others of
which are relatively fixed. The Company's variable personnel costs are
substantially comprised of sales commissions, which are typically calculated
based upon the Company's gross profit on a particular salestransaction and thus
generally fluctuate with the Company's overall gross profit. The remainder of
the Company's selling, general and administrative expenses are relatively more
fixed and, while still somewhat variable, do not vary with increases in revenue
as directly as do sales commissions.
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
16
<PAGE>
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 products sold by the Company. Purchases
from Inacom accounted for approximately 46.4%, 36.6% and 57.0% of the Company's
total product purchases in 1994, 1995 and 1996, respectively. In August 1996,
the Company renewed its long-term supply arrangement with Inacom and agreed to
purchase at least 80% of its Computer Products from Inacom, but only to the
extent that such products are made available within a reasonable period of time
at reasonably competitive pricing. Inacom does not carry certain product lines
sold by the Company and Inacom may be unable to offer reasonable product
availability and reasonably competitive pricing from time to time on those
product lines that it carries. The Company thus expects that less than 80% of
its total purchases will be made from Inacom, and that any increase or decrease
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.
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 the percentage of total revenue for each item.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -------------------
1994 1995 1996 1996
------------------- ------------------- -------------------- -------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- --------- ------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1):
Revenue:
Computer Products.................. $57,792 90.2 $81,654 89.6 $107,251 89.1 $23,381 90.1
IT Services........................ 6,167 9.6 7,900 8.7 7,996 6.6 2,019 7.8
Telecom Systems.................... 117 0.2 1,458 1.6 3,824 3.2 390 1.5
CTI Software....................... -- -- 73 0.1 1,288 1.1 158 0.6
Total revenue.................... 64,076 100.0 91,085 100.0 120,359 100.0 25,948 100.0
Gross profit(1):
Computer Products.................. 5,962 10.3 8,466 10.4 11,172 10.4 2,427 10.4
IT Services........................ 2,523 40.9 2,404 30.4 3,008 37.6 594 29.4
Telecom Systems.................... 50 42.7 335 23.0 1,359 35.5 119 30.5
CTI Software....................... -- -- 23 31.5 518 40.2 81 51.3
Total gross profit............... 8,535 13.3 11,228 12.3 16,057 13.3 3,221 12.4
Selling, general and
administrative expenses............ 7,448 11.6 9,149 10.0 12,284 10.2 2,674 10.3
Operating income................... 1,087 1.7 2,079 2.3 3,773 3.1 547 2.1
Interest expense (net of
other income)...................... 764 1.2 1,218 1.3 1,183 1.0 297 1.1
Income before provision for income
taxes............................ 323 0.5 861 1.0 2,590 2.1 250 1.0
Provision for income taxes........... 140 0.2 342 0.4 987 0.8 111 0.4
Net income......................... 183 0.3 519 0.6 1,603 1.3 139 0.6
PER OFFICE DATA(1):
Houston Office:
Revenue.......................... 41,057 64.1 53,095 58.3 57,929 48.1 13,555 52.2
Gross profit..................... 5,946 14.5 6,880 13.0 9,470 16.4 1,986 14.7
Dallas Office:
Revenue.......................... 23,019 35.9 37,990 41.7 62,430 51.9 12,393 47.8
Gross profit..................... 2,589 11.2 4,348 11.5 6,587 10.6 1,235 10.0
</TABLE>
1997
-------------------
AMOUNT %
------- ---------
OPERATING DATA(1):
Revenue:
Computer Products.................. $23,182 87.2
IT Services........................ 2,031 7.6
Telecom Systems.................... 953 3.6
CTI Software....................... 427 1.6
Total revenue.................... 26,593 100.0
Gross profit(1):
Computer Products.................. 2,469 10.7
IT Services........................ 867 42.7
Telecom Systems.................... 303 31.8
CTI Software....................... 192 45.0
Total gross profit............... 3,831 14.4
Selling, general and
administrative expenses............ 3,135 11.8
Operating income................... 696 2.6
Interest expense (net of
other income)...................... 289 1.1
Income before provision for income
taxes............................ 407 1.5
Provision for income taxes........... 154 0.6
Net income......................... 253 0.9
PER OFFICE DATA(1):
Houston Office:
Revenue.......................... 14,566 54.8
Gross profit..................... 2,228 15.3
Dallas Office:
Revenue.......................... 12,027 45.2
Gross profit..................... 1,603 13.3
- ------------
(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.
17
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
TOTAL REVENUE. Total revenue increased by $645,000 (2.5%) from $25.9
million in the three months ended March 31, 1996 to $26.6 million in the 1997
period. Revenue from Computer Products, which comprised 87.2% of total revenue,
decreased by $199,000 (0.9%). Revenue from Computer Products for the 1996 period
was favorably impacted by the delivery and acceptance of a significant portion
of the Computer Products sold to a single customer as part of a large
"roll-out" installation in several of that customer's offices. No comparable
large "roll-out" installation was made during the 1997 period. Revenue from IT
Services remained substantially unchanged at $2.0 million in the three months
ended March 31, 1996 as compared to the same period in 1997 because of the
Company's implementation of a program at the beginning of 1996 to replace less
profitable hardware maintenance and repair services with a variety of services
that were expected to generate higher gross margins. This program resulted in
the elimination of certain IT Services customer relationships which had been
producing lower than average gross margin. The loss of this lower margin revenue
was offset, however, by sales to new IT Services customers and to existing
customers, generally at higher gross margins than those earned on sales to the
former customers. Revenue from IT Services as a percentage of total revenue
remained substantially unchanged from the year earlier period. Revenue from
Telecom Systems increased by $563,000 (144.4%) from $390,000 in the three months
ended March 31, 1996 to $953,000 in the 1997 period. The increase in Telecom
Systems revenue was primarily the result of hiring additional sales personnel
and expanding marketing efforts, which resulted in the addition of new
customers. Revenue from Telecom Systems as a percentage of total revenue
increased from 1.5% in the 1996 period to 3.6% in the 1997 period. CTI Software
revenue increased by $269,000 (170.3%) from $158,000 in the three months ended
March 31, 1996 to $427,000 in the 1997 period. The growth in CTI Software
revenues was primarily due to increased marketing efforts which resulted in the
addition of new customers. Revenue from CTI Software, as a percentage of total
revenue, increased from 0.6% in the 1996 period to 1.6% in the 1997 period.
GROSS PROFIT. Gross profit increased by $610,000 (18.9%) from $3.2 million
in the three months ended March 31, 1996 to $3.8 million in the three months
ended March 31, 1997, while gross margin increased from 12.4% in the 1996 period
to 14.4% in the 1997 period. The gross margin for Computer Products increased
from 10.4% in the three months ended March 31, 1996 to 10.7% in the 1997 period,
which was primarily a result of a large "roll-out" type transaction, which
usually produces lower gross margin, being substantially completed during the
1996 period. The gross margin from IT Services increased from 29.4% in the three
months ended March 31, 1996 to 42.7% during the 1997 period. As noted above,
this increase was primarily attributable to the replacement of less profitable
IT Services business with more profitable business from new and existing IT
Services customers. The gross margin for Telecom Systems sales increased from
30.5% in the 1996 period to 31.8% in the 1997 period, reflecting higher margin
services and increased support services revenues. The gross margin for CTI
Software decreased from 51.3% in the three months ended March 31, 1996 to 45.0%
in the 1997 period, which was primarily a result of increased spending on
technical staff related to new product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $461,000 (17.2%) from $2.7 million in the
three months ended March 31, 1996 to $3.1 million in the 1997 period. As a
percentage of total revenue, selling, general and administrative expenses
increased from 10.3% in the 1996 period to 11.8% in the 1997 period. The
increase as a percentage of total revenue resulted primarily from the hiring of
new employees in sales and sales support functions, as well as additional
personnel hired for IT Services administration and other general administration
functions.
OPERATING INCOME. Operating income increased by $149,000 (27.2%) from
$547,000 in the three months ended March 31, 1996 to $696,000 in the 1997
period. Operating income increased as a percentage of total revenue from 2.1% in
the 1996 period to 2.6% in the 1997 period.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense (net of other
income) declined slightly from $297,000 during the three months ended March 31,
1996 to $289,000 during the 1997 period. Despite a small increase in the
effective interest rate paid by the Company during the three months ended March
31, 1997, due to lower average borrowings on the Company's lines of credit
during such period, interest expense (net of other income) remained
substantially unchanged.
18
<PAGE>
NET INCOME. Net income, after a provision for income taxes totaling
$154,000 (reflecting an effective tax rate of 37.8% compared to 44.4% in the
1996 period), increased by $114,000 (82.0%) from $139,000 in the three months
ended March 31, 1996 to $253,000 in the 1997 period.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUE. Total revenue increased by $29.3 million (32.1%) from $91.1
million in 1995 to $120.4 million in 1996. Revenue from Computer Products, which
comprised 89.1% of total revenue, increased by $25.6 million (31.3%). 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 increased by $96,000 (1.2%) from $7.9
million in 1995 to $8.0 million in 1996. The marginal increase was primarily the
result of the Company's implementation of a program at the beginning of 1996 to
replace less profitable hardware maintenance and repair services with a variety
of services that were expected to generate higher gross margins. This program
resulted in the elimination of certain IT Services customer relationships which
had been producing lower than average gross margin. The loss of this lower
margin revenue was offset, however, by sales to new IT Services customers and to
existing customers, generally at higher gross margins than those earned on sales
to the former customers. Revenue from IT Services as a percentage of total
revenue decreased from 8.7% in 1995 to 6.6% in 1996 due to both the minimal
growth in IT Services revenues and to growth in the Company's three other
business categories. Revenue from Telecom Systems, which comprised 3.2% of total
revenue, increased by $2.4 million (162.3%). This increase in Telecom Systems
revenue was primarily the result of hiring additional sales personnel and adding
new customers, of which one customer accounted for $699,000 (29.5%) of the
increase, and expanding advertising and marketing efforts. Sales of CTI
Software, which commenced during the fourth quarter of 1995, contributed total
revenue of $1.3 million during 1996, which comprised 1.1% of the Company's total
revenue.
GROSS PROFIT. Gross profit increased by $4.8 million (43.0%) from $11.2
million in 1995 to $16.1 million in 1996, while gross margin increased from
12.3% in 1995 to 13.3% in 1996. The gross margin for Computer Products remained
consistent at 10.4% for both periods. The gross margin from IT Services
increased from 30.4% in 1995 to 37.6% in 1996. As noted above, this increase was
primarily attributable to the replacement of less profitable IT Services
business with more profitable business from new and existing IT Services
customers. The gross margin for Telecom Systems sales increased from 23.0% in
1995 to 35.5% in 1996. In 1995, Telecom Systems was generally selling products
and services at lower gross margin than in the 1996 period in order to gain
market share during its first year of operation. In addition, gross margin for
Telecom Systems increased in 1996 due to the purchase of a large, complex system
by a single customer at a higher than usual margin. CTI Software sales resulted
in a gross margin of 40.2% in 1996, which was the first full year of operations
for the Company's CTI Software business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3.1 million (34.3%) from $9.1 million in
1995 to $12.3 million in 1996. As a percentage of total revenue, selling,
general and administrative expenses increased from 10.0% in 1995 to 10.2% in
1996. Of the dollar increase, $1.2 million was attributable to increased sales
compensation due to increased gross profits and an increase in the number of
sales personnel and $1.0 million was attributable to increases in non-sales
personnel costs. The increase as a percentage of total revenue resulted
primarily from increased gross margins and the related increase in the variable
component of selling, general and administrative expenses that fluctuates with
gross profit, and from the increase in bad debt expense, a portion of which was
due to actual losses and a portion of which was due to increases in reserves for
potential future losses.
OPERATING INCOME. Operating income increased by $1.7 million (81.5%) from
$2.1 million in 1995 to $3.8 million in 1996. Operating income increased as a
percentage of total revenue from 2.3% in 1995 to 3.1% in 1996.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense (net of other
income) decreased by $35,000 (2.9%). Interest expense remained substantially
unchanged compared to the increase in revenue due to decreased leverage
resulting from increased use of equity and increased asset turns, together with
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.
19
<PAGE>
NET INCOME. Net income, after a provision for income taxes totaling
$987,000 (reflecting an effective tax rate of 38.1% compared to 39.7% in 1995),
increased by $1.1 million from $519,000 in 1995 to $1.6 million in 1996. Net
income increased as a percentage of total revenue from 0.6% in 1995 to 1.3% 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 89.6% of total revenue, increased by $23.9 million (41.3%). 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 8.7% of total
revenue, increased by $1.7 million (28.1%). The increase in revenue from IT
Services was primarily attributable to the addition of support contracts with
new customers and, to a lesser degree, additional non-contract business. Revenue
from Telecom Systems, which comprised 1.6% of total revenue, increased by $1.3
million in the first full year of Telecom Systems operations. The revenue gains
in Telecom Systems were largely the result of the addition of new customers
during 1995.
GROSS PROFIT. Gross profit increased by $2.7 million (31.6%) from $8.5
million in 1994 to $11.2 million in 1995; however, overall gross margin,
expressed as a percentage of revenue, decreased from 13.3% in 1994 to 12.3% 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 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 23.0% 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 $1.7 million (22.8%) from $7.4 million in
1994 to $9.1 million in 1995. As a percentage of total revenue, selling, general
and administrative expenses decreased from 11.6% in 1994 to 10.0% in 1995. The
dollar increase was primarily attributable to increased sales compensation as a
result of increased sales levels. In 1995, however, overall sales compensation
decreased as a percentage of total revenue because the Company completed
implementation of a change in its sales compensation policy, which resulted in a
reduction of overall sales commissions as a percentage of total revenue, and
reclassified certain types of business on which lower commission rates were paid
to sales personnel. Personnel costs, the largest component of general and
administrative expenses, also increased at a substantially slower rate than
total revenue. Certain general and administrative expenses are relatively fixed,
and the Company was able to leverage these expenses as revenue increased during
1995. In addition, certain variable expenses, primarily warehouse personnel and
distribution costs, were reduced as a percentage of total revenue. These
improvements were offset somewhat by certain expenses associated with the
start-up of the Company's Telecom Systems business in 1994.
OPERATING INCOME. Operating income increased by $992,000 (91.3%) from $1.1
million in 1994 to $2.1 million in 1995. Operating income increased as a
percentage of total revenue from 1.7% in 1994 to 2.3% in 1995.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense increased by
$454,000 (59.4%) from $764,000 in 1994 to $1.2 million in 1995. Interest expense
increased as a percentage of total revenue from 1.2% in 1994 to 1.3% in 1995.
The increase in interest expense was due principally to increased borrowing to
finance accounts receivable and a nominal increase in the prime rate.
NET INCOME. Net income, after a provision for income taxes totaling
$342,000 (reflecting an effective tax rate of 39.7% compared to 43.3% in 1994),
increased by $336,000 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.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last nine quarters 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, seasonal influences and competitive pricing pressures.
Furthermore, the Company generally experiences a higher volume of orders of
Computer Products in the fourth quarter, which the Company attributes to
year-end capital spending by its customers. Any decrease in the number of
year-end orders experienced by the Company may not be offset by increased
revenues in the Company's first three quarters. The results of any particular
quarter may not be indicative of results for the full year or any future period.
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------- --------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue........................ $20,685 $18,869 $23,726 $27,805 $25,948 $32,202 $29,187 $33,022
Cost of sales and services........... 18,218 16,248 20,717 24,674 22,727 28,234 24,669 28,672
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit..................... 2,467 2,621 3,009 3,131 3,221 3,968 4,518 4,350
Selling, general and administrative
expenses........................... 2,138 2,151 2,460 2,399 2,674 2,992 3,319 3,299
-------- -------- -------- -------- -------- -------- -------- --------
Operating income................. 329 470 549 732 547 976 1,199 1,051
Interest expense (net of other
income)............................ 319 310 276 314 297 285 338 263
-------- -------- -------- -------- -------- -------- -------- --------
Income before provision for
income taxes................... 10 160 273 418 250 691 861 788
Provision for income taxes........... 4 63 108 167 111 223 362 291
-------- -------- -------- -------- -------- -------- -------- --------
Net income....................... $ 6 $ 97 $ 165 $ 251 $ 139 $ 468 $ 499 $ 497
======== ======== ======== ======== ======== ======== ======== ========
Net income per share................. $ 0.00 $ 0.04 $ 0.06 $ 0.09 $ 0.05 $ 0.17 $ 0.19 $ 0.19
</TABLE>
1997
--------
FIRST
QUARTER
--------
Total revenue........................ $26,593
Cost of sales and services........... 22,762
--------
Gross profit..................... 3,831
Selling, general and administrative
expenses........................... 3,135
--------
Operating income................. 696
Interest expense (net of other
income)............................ 289
--------
Income before provision for
income taxes................... 407
Provision for income taxes........... 154
--------
Net income....................... $ 253
========
Net income per share................. $ 0.09
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------- --------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue........................ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Cost of sales and services........... 88.1 86.1 87.3 88.7 87.6 87.7 84.5 86.8
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit..................... 11.9 13.9 12.7 11.3 12.4 12.3 15.5 13.2
Selling, general and administrative
expenses........................... 10.3 11.4 10.4 8.6 10.3 9.3 11.4 10.0
-------- -------- -------- -------- -------- -------- -------- --------
Operating income................. 1.6 2.5 2.3 2.7 2.1 3.0 4.1 3.2
Interest expense..................... 1.5 1.7 1.2 1.1 1.1 0.9 1.2 0.8
-------- -------- -------- -------- -------- -------- -------- --------
Income before provision for
income taxes................... 0.1 0.8 1.1 1.6 1.0 2.1 2.9 2.4
Provision for income taxes........... 0.0 0.3 0.4 0.6 0.4 0.7 1.2 0.9
-------- -------- -------- -------- -------- -------- -------- --------
Net income....................... 0.1 % 0.5 % 0.7 % 1.0 % 0.6 % 1.4 % 1.7 % 1.5%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
1997
--------
FIRST
QUARTER
--------
Total revenue........................ 100.0 %
Cost of sales and services........... 85.6
--------
Gross profit..................... 14.4
Selling, general and administrative
expenses........................... 11.8
--------
Operating income................. 2.6
Interest expense..................... 1.1
--------
Income before provision for
income taxes................... 1.5
Provision for income taxes........... 0.6
--------
Net income....................... 0.9 %
========
21
<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, $2.3 million and $2.5 million at December 31, 1995 and
1996 and March 31, 1997, respectively. As of March 31, 1997, the Company had
borrowing capacity under the IBMCC credit facility of $1.2 million.
CASH FLOW
Operating activities used net cash totaling $3.9 million and $123,000
during 1994 and 1995, respectively, and provided net cash totaling $89,000 and
$1.2 million during 1996 and the three months ended March 31, 1997,
respectively. Net cash used in 1994 and 1995 was primarily due to working
capital requirements to finance increased accounts receivable and inventory. In
1996, net cash was provided from operations due primarily to the combined effect
of significantly increased net income, a relatively small year-to-year increase
in accounts receivable and a year-to-year decrease in inventory. During the
three months ended March 31, 1997, net cash was provided from operations due
primarily to increased levels of trade accounts payable which more than offset
lesser increases in accounts receivable and inventory levels, and to a lesser
degree increased net income.
Trade accounts receivable increased $2.0 million, $4.4 million, $695,000
and $676,000 during 1994, 1995, 1996 and the three months ended March 31, 1997,
respectively. Inventory increased $1.7 million and $21,000 in 1994 and 1995,
respectively, decreased $545,000 in 1996 and increased $272,000 in the three
months ended March 31, 1997.
Net cash used in operating activities during 1995 of $123,000 was net of an
accrual of $1.4 million for a delinquent Texas sales tax liability for the
period June 1995 to November 1995. Interest was accrued on the liability;
however, all penalties were waived by the state. The delinquency resulted from a
programming error in the Company's accounting system that has since been
corrected. In September 1996, the Company paid the state the agreed upon sales
taxes. Had the sales taxes been timely paid, net cash used in operations during
1995 would have been approximately $1.5 million and net cash provided by
operations in 1996 would have been $1.5 million.
Investing activities used cash totaling $447,000, $458,000, $952,000 and
$109,000 during 1994, 1995, 1996 and the three months ended March 31, 1997,
respectively. The Company's investing activities that used cash during these
periods were primarily related to capital expenditures. 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.
Financing activities provided cash totaling $3.5 million, $940,000, $63,000
and $436,000 during 1994, 1995, 1996 and the three months ended March 31, 1997,
respectively. In March 1994, the Company received $1.5 million cash proceeds
from the sale of Common Stock to the Selling Stockholder. The primary source of
cash from financing activities each period has been borrowings on the Company's
lines
22
<PAGE>
of credit. The lines of credit have been used principally to finance accounts
receivable balances and inventory purchases.
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, net of allowance for
doubtful accounts of $15.8 million and $16.5 million at December 31, 1995 and
1996, respectively, and $17.2 million at March 31, 1997. The number of days'
sales outstanding in trade accounts receivable was 45 days, 45 days, 40 days and
49 days for the years 1994, 1995, 1996 and the three months ended March 31,
1997, respectively. Bad debt expense as a percentage of total revenue for the
same periods was 0.1%, 0.1%, 0.2% and less than 0.1%. The Company's allowance
for doubtful accounts, as a percentage of trade accounts receivable, was 1.6%,
2.8% and 1.3% at December 31, 1994, 1995 and 1996, respectively, and 1.1% at
March 31, 1997.
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.
Through March 31, 1997, 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, 1996 and
three months ended March 31, 1997 was 8.4 times, 14.6 times 19.2 times and 16.9
times, respectively.
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
$20.0 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
23
<PAGE>
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.
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 stockholder 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
increased the base 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 base limit of $20.0 million thereafter. At March 31, 1997,
the total indebtedness of the Company under the IBMCC Facility was $17.3 million
of which $10.4 million was outstanding under the Accounts Line and $6.9 million
was outstanding under the Inventory Line. The Company's remaining available
credit at March 31, 1997, based on its borrowing base was approximately $1.2
million. The Company intends to apply approximately $10.4 million of the net
proceeds of this Offering to repay all or substantially all indebtedness
anticipated to be outstanding under the Accounts Line on the closing date of
this Offering.
The Company has a $3.0 million credit facility with Deutsche Financial
Services (the "DFS Facility") for the purchase of inventory from certain
suppliers. From October 1995 through May 1996, the Company received a temporary
increase in the available credit line to $6.0 million. As in the case of the
IBMCC Inventory Line, advances under the DFS Facility are typically interest
free for 30 days after the financing date for transactions in which adequate
financial incentives are received by DFS from the vendor. Within 30 days after
the financing date, the full invoice amount for inventory financed through DFS
is required to be paid by the Company. Amounts remaining outstanding thereafter
bear interest at the fluctuating prime rate (but not less than 6.5%) plus 6.0%.
DFS retains a security interest in the inventory financed. The DFS Facility is
immediately terminable by either party by written notice to the other. At March
31, 1997, the amount outstanding under the DFS Facility was $1.5 million.
The Company is required to comply with certain key financial and other
covenants under the IBMCC Facility and DFS Facility. During 1994 and 1995 and
the first seven months of 1996, the Company was in default of certain financial
covenants and certain other covenants under the IBMCC Facility and DFS Facility.
For example, the Company was required under the IBMCC Facility to maintain
during 1995 the following financial ratios: net profits after taxes to revenue
of at least 0.5%; annualized revenues to working capital of more than zero but
no greater than 35.0 to 1; and total liabilities to tangible net worth of more
than zero but no more than 12.0 to 1. The ratios actually attained by the
Company for the year ended December 31, 1995, were approximately 0.57%, 43.9 to
1 and 12.7 to 1, respectively. The DFS Facility, for instance, requires that at
all times the Company's indebtedness for borrowed money and capital lease
obligations divided by its tangible net worth plus subordinated debt not exceed
8.0 to 1, but at June 30, 1996, the actual ratio attained by the Company was
approximately 9.18 to 1. In addition to financial ratio covenants, the Company
has violated other covenants under both credit facilities, including timely
filing of periodic financial reports and covenants prohibiting certain
transactions with subsidiaries and other affiliates. IBMCC and DFS have,
however, waived defaults when requested by the Company from time to time. Most
recently, IBMCC and DFS waived certain defaults in August 1996 through December
31, 1996. Additionally, both lenders liberalized certain financial covenants in
connection with their waivers. DFS
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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 December 31, 1996, reverting to 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. As
of March 31, 1997, the Company was in compliance with the key financial and
other covenants under both the IBMCC Facility and the DFS Facility. See Note 5
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 ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") which determines compensation cost
using the fair value method of accounting. Allstar has elected to continue to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," which determines compensation cost using the intrinsic value
based method of accounting. At March 31, 1997, the Company had no stock options
or similar equity instruments outstanding; accordingly, SFAS No. 123 had no
effect on the consolidated financial statements or notes thereto.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128
requires dual presentation of basic and diluted earnings per share for entities
with complex capital structures. At March 31, 1997, the Company had no stock
options or similar equity instruments outstanding; accordingly, SFAS No. 128
will have no effect on the consolidated financial statements as of and for the
three years in the period ended December 31, 1996 or the three months ended
March 31, 1997 upon its adoption at December 31, 1997.
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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 approximately 3,400 accounts is comprised primarily of mid-sized
companies and regional offices of larger companies 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. Long-standing relationships with leading
aggregators and wholesale distributors of computer hardware and software
products 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, and smaller "key
systems," including products from Inter-Tel, Macrotel and NEC. 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 manufacturers' 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
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rapid technological change. Increasingly, organizations seeking computer
products often require prospective 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," 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 perform "call blending"
functions during out-bound calling campaigns by automatically routing 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 goal is to expand its regionally-based business as a provider
of computer and telephone hardware and software products and related services.
To achieve this objective, 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 during the third quarter of 1997,
(ii) pursue acquisitions of regional telephone system resellers with established
customer bases in targeted markets, and (iii) increase the variety and
capabilities of its CTI Software products through internal development and
acquisitions of complementary software products.
IMPLEMENT INTERNET-BASED NATIONAL MARKETING PROGRAM. The Company intends
to implement a new method of marketing its Computer Products on a nationwide
basis under the trade name "800 PC Deals."
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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. 800 PC Deals is anticipated to begin operation in
the second 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 1994, 1995, 1996 and the three months ended March 31,
1997, accounted for approximately 90.2%, 89.6%, 89.1% and 87.2%, respectively,
of the Company's total revenue. During 1994, 1995, 1996 and the three months
ended March 31, 1997, IT Services comprised approximately 9.6%, 8.7%, 6.6% and
7.6%, respectively, of the Company's total revenue. The Company began selling
Telecom Systems in 1994 and it accounted for approximately 1.6%, 3.2% and 3.6%
of the Company's total revenue in 1995, 1996 and the three months ended March
31, 1997, respectively. The Company began selling CTI Software in 1995 and it
accounted for approximately 1.1% of the Company's total revenue in 1996 and
approximately 1.6% of the Company's total revenue in the three months ended
March 31, 1997.
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 47.5%, 53.7% and 58.9%, for
1994, 1995 and 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.
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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 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 smaller "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 Inter-Tel, Macrotel and NEC. 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 third quarter of 1997, the Company plans to expand Telecom Systems
sales to its Dallas office. The Company also intends to expand its Telecom
Systems products, particularly in the area of CTI products and video
conferencing 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, in-bound and out-bound 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
out-bound 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
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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 campaign. The
use of a predictive dialer product in telemarketing substantially
increases worker productivity due to increased call volume. StrataDial
features in-bound/out-bound 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 March 31, 1997, the Company had licensed and installed 42
StrataDial systems.
o STRATAVOICE. StrataVoice is an out-bound 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 March 31, 1997,
the Company had licensed and installed 96 StrataVoice systems.
o STRATA-INTERACTIVE. Strata-Interactive is an interactive voice
response ("IVR") software product which allows a caller 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 installation of the
Strata-Interactive product was completed in the fourth quarter of
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 its new customers originate from word-of-mouth referrals by 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,
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Computer Products and IT Services 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 VARs.
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. 800 PC Deals is expected to begin
operation in the second 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 companies and
regional offices of larger companies located in or near the metropolitan areas
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 companies with which the Company has
an established relationship. The Company's customer base is not concentrated in
any industry group. Approximately 3,400 customers purchased products or services
from the Company during 1996. During 1994, 1995 and 1996, the Company's top ten
customers (which varied from period to period) in the aggregate accounted for
approximately 31.4%, 27.9% and 33.2%, 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 3.6%, 5.8% and 11.2%. In
1996, the Company's largest single customer was Paging Network, Inc. The
selected customers shown below, each of which purchased products or services in
excess of $100,000 during 1996, illustrate the diversity of the Company's
customer base:
Amoco Corporation Chevron Chemical Company
AT&T Exxon Corp.
Baker Oil Tools, Inc. Federal Home Loan Bank
Bank America Corporation GTE VISNET
Blockbuster Entertainment H&R Block of South Texas
Brinks Home Security Ingersoll-Rand
3Com Corporation Maxum Health Corp.
Castrol Industrial MCI Telecommunications Corp.
Motorola, Inc.
Paging Network, Inc.
Southwestern Bell Telephone Co.
Tandy Corp.
Toshiba International Corp.
Transamerica Finance Services
Turner Construction Company
Western Atlas International, Inc.
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The Company has no long-term written commitments by customers to purchase
products from the Company. In addition, although the Company has service
contracts with many of its large customers, such service contracts are
project-based and terminable upon relatively short notice. A significant
reduction in orders from any of the Company's largest customers could have a
material adverse effect on the Company's financial condition and results of
operations.
SUPPLY AND DISTRIBUTION
The Company relies on aggregators and distributors of computer hardware,
software and peripherals to supply a majority of its Computer Products. Although
the Company uses many industry suppliers, the Company purchases its Computer
Products chiefly from two suppliers, Inacom and Ingram, to obtain competitive
pricing, better product availability and improved quality control. The Company
attempts to develop strategic arrangements with its principal suppliers,
including the coordination of drop shipment orders, the outsourcing of certain
computer configuration services, national roll-out and installation projects and
the sharing of product information. Telecommunications hardware and software
products are generally purchased by the Company on an as-needed basis directly
from the original equipment manufacturer. Suppliers providing trade to the
Company typically maintain a vendor's lien in the goods sold by them to the
Company.
The Company's largest supplier of Computer Products is Inacom, a leading
computer products aggregator. Inacom markets and distributes computer products
and provides various services on a wholesale basis through a network of
franchisees and resellers and also markets its products directly to end-users.
During 1994, 1995 and 1996, the Company purchased from Inacom approximately
46.4%, 36.6% and 57.0%, 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 1994, 1995 and 1996, the Company purchased from Ingram approximately
14.1%, 20.6% and 14.7%, 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, the Company would be able to
obtain an alternative supplier or suppliers without a material disruption in its
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 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
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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, configuring 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 customers 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 2.1% during 1994 to
9.0% during 1995 and to 18.1% during 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 include 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 March 31, 1997, the company employed approximately 320 individuals.
Of these, approximately 85 were employed in sales, marketing and customer
service, 118 were employed in engineering and technical positions and 117 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 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
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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 product shipments 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 states' 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.
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
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protect its rights in its proprietary technology. Additionally, the Company has
filed 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 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, negligence, negligent misrepresentation and other statutory violations
and is seeking actual monetary damages of approximately $3 million and 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 material
adverse effect on the Company.
HISTORY AND REINCORPORATION
The Company was incorporated under Texas law in 1983 under the name
Technicomp Corp. On June 30, 1993, the Company changed its name to
Allstar-Valcom, Inc. and then again, on December 28, 1993, the Company changed
its name to Allstar Systems, Inc. On December 27, 1993, the Company engaged in a
merger in which it was the surviving corporation. In the merger, Allstar
Services, Inc. and R. Cano, Inc., both of which were affiliated with the
Company, were merged with and into Allstar Systems, Inc. in order to streamline
the business. In 1995, the Company formed a wholly owned subsidiary, Stratasoft,
Inc., to purchase and develop its CTI Software. See "Certain Relationships and
Related Transactions -- Acquisition of Stratasoft Products." In October 1996,
the Company effected a reincorporation merger in the state of Delaware through
which the 328,125 shares of the Company's predecessor, Allstar Systems, Inc., a
Texas corporation, which were outstanding prior to the merger, were converted
into approximately 2,675,000 shares of the newly incorporated Delaware
corporation (the "Reincorporation"). The effect of the Reincorporation on the
number of shares outstanding prior to the Reincorporation was similar in effect
to an approximately 8.15-for-1 stock split.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
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....... 42 Vice President, Purchasing and Distribution
Anthony Adame............ 40 President, Computer Products Division
Shabbir K. Ali........... 34 President, IT Services Division
Michael A. Torigian...... 38 President, Telecom Systems Division
William R. Hennessy...... 38 President, Stratasoft, Inc.
G. Chris Andersen........ 58 Director Nominee
Richard D. Darrell....... 42 Director Nominee
Jack M. Johnson, Jr. .... 58 Director Nominee
Donald D. Sykora......... 66 Director Nominee
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.
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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
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.
G. CHRIS ANDERSEN has agreed to become a director of the Company upon
closing of this Offerring. Mr. Andersen is a principal of Andersen, Weinroth &
Co., a merchant banking firm founded in 1996. From 1990 through 1995, he was
Vice Chairman of PaineWebber Incorporated. For 20 years prior to 1990, Mr.
Andersen held senior executive positons at various investment banking firms. Mr.
Andersen is also a director of Terex Corporation, a publicly traded company that
manufactures construction equipment and truck trailers; Sunshine Mining Company,
a publicly traded company engaged in mining; Headway Corporate Resources, Inc.,
a publicly traded company providing staffing services; and United Waste Systems,
Inc., a publicly traded company engaged in waste management.
RICHARD D. DARRELL has agreed to become a director of the Company upon the
closing of this Offering. Mr. Darrell has been President of American Technology
Acquisition Corporation, a company specializing in mergers, acquisitions and
divestitures of technology related companies, for the last four years. Prior to
that, Mr. Darrell served as President and Chief Executive Officer of Direct
Computer Corporation, a computer reseller and distribution company based in
Dallas, Texas. Mr. Darrell has also served as president of numerous other
computer reseller and distribution companies, including Dealers Choice Systems
Corporation, Interprint Corporation and Quality Connection Inc. Mr. Darrell
began his career in sales and management positions with such companies as Xerox
Printing Systems Division, Texas Instruments, Inc. and IBM.
JACK M. JOHNSON, JR. has agreed to become a director of the Company upon
the closing of this Offering. For over five years Mr. Johnson has been Managing
General Partner of Winterman & Company, a general partnership that owns
approximately 25,000 acres of real estate in Texas, which is used in farming,
ranching and oil and gas exploration activities. Mr. Johnson is also President
of Winco Agriproducts, an
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agricultural products company that primarily processes rice for seed and
commercial sale. Mr. Johnson was previously the Chairman of the Board of the
Lower Colorado River Authority, the sixth largest electrical utility in Texas,
with approximately 1,700 employees and an annual budget of over $400 million.
Mr. Johnson was also previously the Chairman of the Board of North Houston Bank,
a commercial bank with assets of approximately $75 million. Mr. Johnson
currently serves on the board of directors of Houston National Bank, a
commercial bank located in Houston, Texas with assets of approximately $100
million; Security State Bank, a commercial bank located in Anahuac, Texas with
assets of approximately $60 million; and Team, Inc., a publicly traded company
which provides environmental services for industrial operations.
DON D. SYKORA has agreed to become a director of the Company upon the
closing of this Offering. Mr. Sykora was formerly the President and Chief
Operating Officer of Houston Industries,Inc. and is currently attached to the
Office of the Chairman with responsibility for special projects. Houston
Industries is an international holding company with interests in electric and
gas utility companies, including Houston Lighting & Power Co., with over 8,000
employees and annual revenues of over $4 billion. Mr. Sykora currently serves on
the board of directors of Powell Industries, Inc., a publicly traded company
which manufactures electrical equipment and systems; Pool Energy Services Co., a
publicly traded company which provides oil and gas well servicing; American
Residential Services, Inc., a publicly traded company which provides services
for heating, ventilation and air conditioning, plumbing, electrical and indoor
air quality systems, and TransTexas Gas Corporation, a publicly traded producer
and marketer of natural gas.
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. Following the
closing of this Offering, the Company will expand the Board to six positions and
Messrs. Andersen, Darrell, Johnson and Sykora (the "independent directors")
will be elected to the newly-created positions. 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 the four 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 1996 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.
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."
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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, 1996, 1995 and 1994.
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..................... 1996 $116,000 $35,000
1995 40,800 100,000 -- -- -- --
1994 43,500 -- -- -- -- --
Anthony Adame
President, Computer Products
Division.............................. 1996 $ 95,902 $36,128 $ 1,000
1995 93,900 24,040 -- -- -- --
1994 83,717 -- -- -- -- --
</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 based 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 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 of up to 417,500 shares of Common Stock, subject to certain
antidilution adjustments, to key employees of the Company and its subsidiaries.
The incentive awards
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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 100,000
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 14,286 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
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.
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 from the Company,
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(iii) the employee's death or disability, (iv) the termination of the employee's
employment with the Company or (v) the termination of the Plan.
As a result of operational defects in the administration of the Plan since
1992, the Company has filed under the Internal Revenue Service Walk-In Closing
Agreement Program to negotiate a settlement regarding the qualified status of
the Plan in order to meet the requirements of Section 401(a) of the Code. During
1996, the Company 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 1994, 1995 and 1996, payments by Allstar Equities to
Jakascki under the lease arrangement amounted to $150,000, $150,000 and
$251,500, respectively. The monthly rental of the building is $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 $1.6 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 1994, 1995 and 1996,
rentals under the sublease arrangement amounted to $312,000, $372,000 and
$372,000, 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 $31,500 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 preparation and filing of the registration
statement pursuant to the Act paid by Company; and (iv) share pro
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<PAGE>
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 1997, ranging from approximately $2,152,200 to $2,416,200, 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. In August 1996, the consulting arrangement was modified and
commemorated in a written Consulting Agreement between the Company and Mr.
Corey. Through March 31, 1997, the Company had paid aggregate consulting fees of
$214,000 to Mr. Corey. 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, 1996, the maximum aggregate amount outstanding under such loans was
$414,549. 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, 1996 was $209,773. Effective July 1, 1996, Mr. Long
executed a promissory note payable to the Company in the amount of $173,300,
which represents all amounts outstanding as of that date, bearing interest at
9.0% per annum. Under the terms of the note, Mr. Long has agreed to pay the
Company in five equal installments, each due on the first day of July of the
next five years, beginning July 1, 1997, with a maturity date of July 1, 2001.
At March 31, 1997, Mr. Long was otherwise indebted to the Company in the amount
of $7,206 for amounts advanced on his behalf.
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
43
<PAGE>
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 contractual provisions 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. Through March 31, 1997, the Company has sold an aggregate of
approximately $1.8 million of Computer Products to Mintech, which represented an
aggregate discount of approximately $9,900 below the aggregate sale price which
the Company would have charged had the sales been made directly by the Company
to Mintech's customers.
Mintech has limited financial capacity, and the Company provides financial
support in the form of carrying accounts payable until Mintech's customers pay
for products it has sold. In addition, the Company collects on Mintech's
accounts receivable as an assignee of those receivables. Collections on the
accounts receivable are applied to amounts owed to the Company and the
difference is remitted to Mintech. No cash payments had been made to Mintech
through December 31, 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 net amount due to Mintech at
March 31, 1997 was approximately $6,600. No accounts receivable from Mintech
have been written off as uncollectible, and payments of accounts receivable due
from Mintech and Mintech's customers are typically received within time periods
generally consistent with average collection times for other customers.
The Company expects that it will continue to refer potential customers
wishing to do business with a minority-owned business to Mintech, and that the
Company will continue to act as Mintech's supplier with respect to such
referrals. The Company intends to establish written contractual arrangements
with Mintech under which Mintech will sell Computer Products to its customers at
the same price the Company sells those products to Mintech, with Mintech
receiving a rebate of approximately 5.0% of the Company's gross profit on the
transaction when collected. A lock box collection system is also intended to be
established as part of an accounts receivable financing arrangement with Mintech
to ensure the collection by the Company of amounts due it from Mintech upon
receipt of payments from Mintech's end-user customers.
ACQUISITION OF STRATASOFT PRODUCTS
In late 1995, the Company entered the business of creating, manufacturing
and marketing the Company's customized CTI software by forming a new wholly
owned subsidiary, Stratasoft, Inc., and acquiring the rights to two software
products from William R. Hennessy and ILC and Aspen. 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 approximately $6,800. In addition, Mr. Hennessy is
paid a bonus equal to 10% of Stratasoft's gross profits for the first eighteen
months of his employment and an additional bonus equal to 10% of Stratasoft's
net profit multiplied by its net margin during the tenure of his employment. Mr.
Hennessy's agreement contains restrictive covenants regarding confidential
information which generally prohibit disclosure of certain information and, for
a period of 12 months after termination of his employment with the Company,
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
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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 March 31, 1997, 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 SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO NUMBER OF AFTER
OFFERING(1)(2)(3) SHARES OFFERING(1)(2)(3)
--------------------- 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 March 31, 1997 and 4,175,000 shares of Common Stock
outstanding after the completion of this Offering.
(3) Mr. Long has granted to Mr. Corey an option to acquire 118,000 shares of
Common Stock held by Mr. Long at the initial public offering price, such
option being conditioned upon the completion of this Offering (the "Corey
Option"). The Corey Option may not be exercised until the expiration of 180
days after the closing of this Offering, and terminates on the date that is
five years after the closing of this Offering. If exercised in full, Mr.
Corey will hold approximately 2.8% of the Common Stock outstanding after the
completion of this Offering.
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<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
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<PAGE>
proxies to elect its own slate of directors or otherwise 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
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<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. The Company has also agreed to grant
certain demand and incidental or "piggyback" registration rights to the
Representatives with respect to the resale of Common Stock issuable upon
exercise of the Representatives' Warrants. See "Certain Relationships and
Related Transactions -- Certain Selling Stockholder Agreements" and
"Underwriting."
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 director,
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.
48
<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 in effect beginning April 29, 1997, 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 one year 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
two years, is entitled to sell such shares under Rule 144, as in effect
beginning April 29, 1997, 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."
The Company has agreed to grant demand and incidental or "piggyback"
registration rights to the Representatives with respect to the resale by them of
the 203,500 shares of Common Stock issuable upon exercise of the
Representatives' Warrants.
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."
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UNDERWRITING
The Underwriters named below, acting through their representatives, Sutro &
Co. Incorporated and Cruttenden Roth Incorporated (the "Representatives"),
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement with the Company, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
NUMBER
NAME OF SHARES
- ---------------------------------------- ---------
Sutro & Co. Incorporated................
Cruttenden Roth Incorporated............
---------
Total.............................. 2,035,000
=========
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow selected
dealers a concession of not more than $ per share, and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the initial public offering, the price and
concessions and reallowances to dealers may be changed by the Representatives.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or part.
The Company has granted the Underwriters an option exercisable for 45 days
after the date of the Underwriting Agreement to purchase up to a maximum of
305,250 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the foregoing table.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Company, its directors, officers and certain stockholders have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock of the
Company for a period of 180 days after the date of this Prospectus without the
prior written consent of the Representatives except for: (i) the sale of the
shares hereunder; (ii) the issuance by the Company of Common Stock pursuant to
the exercise of options under the Company's stock plans disclosed in the
Prospectus; (iii) the granting by the Company of stock options after the date of
this Prospectus under the 1996 Incentive Plan or the 1996 Directors Plan; or
(iv) as a bona fide gift to a third party or as a distribution to the partners
or stockholders of a Company stockholder, provided that the recipient(s) thereof
agree in writing to be bound by the terms of the lock-up agreement to which such
stockholder is bound.
The Underwriters may engage in stabilizing bids, cover syndicate short
positions or impose penalty bids. A stabilizing bid is a bid for, or the
purchase of the Common Stock on behalf of, the Underwriters for the purpose of
fixing or maintaining the price of the Common Stock. If the Underwriters create
a short position in the Common Stock in connection with this Offering (i.e., if
they sell more shares of Common Stock than are set forth on the cover page of
this Prospectus), the Representatives may reduce that short position by
purchasing Common Stock in the open market. The Representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option described herein.
50
<PAGE>
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of this Offering. In general, purchases of a
security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
may have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in this Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of, or any effect that the
transactions described above may have on, the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or,
once commenced, will not be discontinued without notice.
The Company has agreed to sell to the Representatives for $.01 per warrant,
the Representatives' Warrants to purchase from the Company up to 203,500 shares
of Common Stock at an exercise price per share equal to the greater of 120% of
the initial public offering price per share or $9.60 per share. The
Representatives' Warrants will be exercisable for a period beginning one year
from the date of this Prospectus until five years from the date of this
Prospectus. The Representatives' Warrants may not be sold, transferred,
assigned, pledged or hypothecated by the Representatives except to officers and
partners of the Representatives, the Underwriters or officers and partners of
the Underwriters. In addition, the Company has granted certain demand and
piggyback registration rights to the holders of the Representatives' Warrants,
which enable them to register resales of the Common Stock underlying the
Representatives' Warrants under the Securities Act. The Representatives'
Warrants are being issued as a bonus to the Representatives for their services
in connection with this Offering. Using a Black-Scholes pricing model, the
Company, in consultation with the Representatives, has valued the
Representatives' Warrants at $404,965.
The Company and the Selling Stockholder have agreed to pay, on a pro rata
basis, the Representatives a non-accountable expense allowance in an amount
equal to 1.5% of the gross proceeds of this Offering to cover some of the
underwriting costs and due diligence expenses related to this Offering.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and the
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, its past and present operations, its past and
present earnings and the trend of such earnings, the prospects for future
earnings, the present state of the Company's development, the general conditions
of the securities market at the time of the Offering, and the market prices of
publicly traded common stocks of comparable companies in recent periods. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters and certain related persons against certain liabilities relating to
this Offering contemplated by this Prospectus, including liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "ALLS," subject to notice of issuance.
LEGAL MATTERS
Certain legal matters in connection with the Common 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.
51
<PAGE>
EXPERTS
The consolidated financial statements at December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996, 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.
52
<PAGE>
ALLSTAR SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............ F-2
Consolidated Balance Sheets at December
31, 1995 and 1996 and at March 31,
1997 (Unaudited)...................... F-3
Consolidated Statements of Operations
for the Years Ended December 31, 1994,
1995
and 1996 and for the Three Months
Ended March 31, 1996 and 1997
(Unaudited)........................... F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended December
31, 1994,
1995 and 1996 and for the Three Months
Ended March 31, 1997 (Unaudited)...... F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1994,
1995
and 1996 and for the Three Months
Ended March 31, 1996 and 1997
(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, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements present fairly, in
all material respects, the financial position of Allstar at December 31, 1995
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Houston, Texas
March 26, 1997
F-2
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents:
Restricted cash.................. $ 581 $ 94 $ 1,149
Cash............................. 448 135 570
--------- --------- -----------
Total cash and cash
equivalents................ 1,029 229 1,719
Accounts receivable - trade, net... 15,822 16,517 17,193
Accounts receivable - affiliates... 679 140 259
Inventory.......................... 5,407 4,862 5,134
Deferred taxes..................... 258 350 350
Deferred offering costs............ -- 412 412
Other current assets............... 79 174 188
--------- --------- -----------
Total current assets.......... 23,274 22,684 25,255
Property and equipment, net............. 986 1,644 1,628
Other assets - affiliates............... 6 392 418
--------- --------- -----------
Total................................... $ 24,266 $ 24,720 $27,301
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................... $ 9,912 $ 9,975 10,411
Accounts payable................... 7,649 7,157 9,053
Accrued expenses................... 3,357 2,759 2,688
Income taxes payable............... 283 206 342
Deferred service revenue........... 341 296 227
--------- --------- -----------
Total current liabilities..... 21,542 20,393 22,721
--------- --------- -----------
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........ 2 -- --
$.01 par value, 50,000,000 shares
authorized, 2,675,000 shares
issued and outstanding........ -- 27 27
Additional paid-in capital......... 1,504 1,479 1,479
Retained earnings.................. 1,218 2,821 3,074
--------- --------- -----------
Total stockholders' equity.... 2,724 4,327 4,580
--------- --------- -----------
Total................................... $ 24,266 $ 24,720 $27,301
========= ========= ===========
See notes to consolidated financial statements.
F-3
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenue........................... $ 64,076 $ 91,085 $ 120,359 $ 25,948 $ 26,593
Cost of sales and services.............. 55,541 79,857 104,302 22,727 22,762
----------- ----------- ----------- ----------- -----------
Gross profit............................ 8,535 11,228 16,057 3,221 3,831
Selling, general and administrative
expenses.............................. 7,448 9,149 12,284 2,674 3,135
----------- ----------- ----------- ----------- -----------
Operating income........................ 1,087 2,079 3,773 547 696
Interest expense and other.............. 764 1,218 1,183 297 289
----------- ----------- ----------- ----------- -----------
Income before provision for income
taxes................................. 323 861 2,590 250 407
Provision for income taxes.............. 140 342 987 111 154
----------- ----------- ----------- ----------- -----------
Net income.............................. $ 183 $ 519 $ 1,603 $ 139 $ 253
=========== =========== =========== =========== ===========
Net income per share.................... $ 0.07 $ 0.19 $ 0.60 $ 0.05 $ 0.09
=========== =========== =========== =========== ===========
Weighted average shares outstanding..... 2,554,808 2,675,000 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 STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
$.01 PAR VALUE NO PAR VALUE
COMMON STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------ PAID-IN RETAINED
SHARE AMOUNT SHARE AMOUNT CAPITAL EARNINGS TOTAL
------------ ------ ---------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994.............. 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
Issuance of common stock
upon conversion
(see Note 1)..................... 2,675,000 $ 27 (328,125) (2) (25) -- --
Net income......................... -- -- -- -- -- 1,603 1,603
------------ ------ ---------- ------ ---------- --------- ---------
Balance at December 31, 1996............ 2,675,000 $ 27 -- $ 0 $1,479 $ 2,821 $ 4,327
------------ ------ ---------- ------ ---------- --------- ---------
Net income (unaudited)............. -- -- -- -- -- 253 253
------------ ------ ---------- ------ ---------- --------- ---------
Balance at March 31, 1997 (unaudited)... 2,675,000 $ 27 -- $ 0 $1,479 $ 3,074 $ 4,580
============ ====== ========== ====== ========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 183 $ 519 $ 1,603 $ 139 $ 253
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Gain on disposal of assets......... -- (1) (11) -- --
Depreciation and amortization...... 211 309 305 59 125
Deferred taxes..................... 230 (146) (92) --
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable - trade, net... (2,018) (4,437) (695) 6,779 (676)
Accounts receivable - affiliates... (241) (80) 153 528 (119)
Inventory.......................... (1,681) (21) 545 (1,602) (272)
Other assets....................... (55) 4 (507) (396) (40)
Accounts payable................... (311) 1,977 (492) (3,411) 1,896
Accrued expenses................... 290 1,673 (598) 414 (71)
Income taxes payable............... (341) 53 (77) 48 136
Deferred service revenue........... (207) 27 (45) 6 (69)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities....... (3,940) (123) 89 2,564 1,163
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................. (447) (518) (965) -- (109)
Proceeds from sale of fixed assets.... -- 60 13 -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities................. (447) (458) (952) -- (109)
Cash flows from financing activities:
Net increase (decrease) in notes
payable............................ 2,075 940 63 (1,649) 436
Proceeds from sale of common stock.... 1,500 -- -- -- --
Payment of long-term debt............. (43) -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities....... 3,532 940 63 (1,649) 436
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents........................... (855) 359 (800) 915 1,490
Cash and cash equivalents at beginning
of period............................. 1,525 670 1,029 1,029 229
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period................................ $ 670 1,029 $ 229 $ 1,944 $ 1,719
========= ========= ========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid for interest................ $ 667 $ 1,189 $ 1,140 $ 140 $ 403
========= ========= ========= ========= =========
Cash paid for income taxes............ $ 221 $ 432 $ 1,138 $ 50 $ --
========= ========= ========= ========= =========
</TABLE>
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, 1994, 1995 AND 1996
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allstar Systems, Inc. and subsidiary ("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 of products or allowance for volume discounts.
Furthermore, net income before income taxes could be affected by changes in
interest rates which underlie the credit arrangements which are used for working
capital (see Note 5). For the year ended December 31, 1996, Allstar had sales to
one customer representing approximately 11.2% of total revenue.
The consolidated financial statements presented herein at March 31, 1997
and for the three-month periods ended March 31, 1996 and 1997 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.
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 $210, $307, and $303 for 1994, 1995 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996 Allstar
adopted Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," ("SFAS No. 121") which requires that long-lived assets be reviewed by an
entity for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of SFAS No.
121 in 1996 did not result in a charge to earnings in the accompanying
consolidated financial statements.
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.
F-7
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1994, 1995 and 1996, Allstar had no
such contracts in process.
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 amounts charged
to expense were $13 and $96 in 1995 and 1996, respectively. No such costs were
incurred during 1994.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Allstar's financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable 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 values of related-party receivables due to the nature of the instruments.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include any highly
liquid debt instruments with a maturity of three months or less when purchased.
See Note 5 for discussion of restricted cash.
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.
ACCOUNTING PRONOUNCEMENTS -- In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which
determines compensation cost using the fair value method of accounting. Allstar
has elected to continue to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which determines compensation cost
using the intrinsic value based method of accounting. At December 31, 1996
Allstar had no stock options or similar equity instruments outstanding (see Note
9); accordingly, SFAS No. 123 had no effect on Allstar's consolidated financial
statements or Notes thereto.
In February 1997, the FASB issued Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
requires dual presentation of basic and diluted earnings per share for entities
with complex capital structures. At December 31, 1996 Allstar had no stock
options or similar equity instruments outstanding (see Note 9); accordingly,
SFAS No. 128 will have no effect on Allstar's consolidated financial statements
included herein upon its adoption at December 31, 1997.
RECLASSIFICATIONS -- The accompanying consolidated financial statements for
the years presented have been reclassified to give retroactive effect to certain
changes in presentation.
F-8
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1995 and
1996:
1995 1996
--------- ---------
Trade................................... $ 16,286 $ 16,736
Allowances for doubtful accounts........ (464) (219)
--------- ---------
Total............................ $ 15,822 $ 16,517
========= =========
3. DEFERRED OFFERING COSTS
Deferred offering costs represent amounts incurred by Allstar through
December 31, 1996 in preparation of filing an offering document. If Allstar
determines not to go forward with the offering, these amounts will be charged to
expense at that time.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and
1996:
1995 1996
--------- ---------
Equipment............................... $ 224 $ 282
Computer equipment...................... 893 1,964
Furniture and fixtures.................. 410 294
Leasehold improvements.................. 47 47
Vehicles................................ 129 105
--------- ---------
1,703 2,692
Accumulated depreciation and
amortization.......................... (717) (1,048)
--------- ---------
Total.............................. $ 986 $ 1,644
========= =========
5. CREDIT ARRANGEMENTS
Allstar has two revolving lines of credit with a commercial finance
company. This agreement, which continues in full force and effect for successive
13 month periods until terminated by 60 day written notice from either the
lender or Allstar, is collateralized by substantially all of Allstar's assets
and a personal guarantee of the principal stockholder of Allstar. The 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 the agreement also prohibit
the payment of dividends, the purchase of Allstar common stock and other similar
expenditures, including advances to related parties. During 1996, Allstar was
not in compliance with certain of these covenants; however, the finance company
waived such noncompliance through December 31, 1996 and executed amendments to
the agreement to liberalize certain financial covenants. At December 31, 1996,
Allstar was in compliance with these less restrictive financial covenants. In
April 1996 the aggregate maximum combined lines of credit were increased from
$15.0 million to $20.0 million and in September 1996 were temporarily increased
to $30.0 million for the period from September 1996 through February 1997, to
$28.0 million during March 1997 and to $25.0 million in April 1997, thereafter
returning to the stated credit line of $20.0 million. The maximum combined
credit limit is subject to borrowing base limitations which are generally
computed as a percentage of various classes of eligible accounts receivable and
qualifying inventory (as defined). Allstar pays an annual facility fee of
approximately 0.25% of the total credit line.
Under the first revolving line of credit (the "Accounts Line"),
outstanding principal and interest are due upon termination of the agreement.
Transactions on the Accounts Line are reflected as Notes Payable in
F-9
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the consolidated financial statements. The Accounts Line accrues interest at the
prime rate plus 2% (10.25% at December 31, 1996). The agreement requires that
all payments received from customers on pledged accounts receivable be applied
to the outstanding balance on the Accounts Line. Accordingly, accounts
receivable payments received in the amount of $581 and $94 at December 31, 1995
and 1996, respectively, but not yet applied to the line of credit, are shown as
restricted cash in the accompanying balance sheets. The weighted average
interest rate on the Accounts Line for 1994, 1995 and 1996 was 9.78%, 12.84% and
10.25%, respectively.
The second revolving line of credit (the "Inventory Line") is used by
Allstar to floor plan inventory purchases. At December 31, 1995 and 1996,
aggregate borrowings on the Inventory Line were $5,298 and $6,134, respectively.
Interest accrues at the prime rate plus 6% (14.25% at December 31, 1996) for all
outstanding balances over 30 days.
In addition, Allstar maintains a $3.0 million credit line with another
financing company to be used to floor plan inventory purchases. At December 31,
1995 and 1996, aggregate borrowings on this line were $3,128 and $993,
respectively. Interest accrues at the prime rate, which for purposes of this
agreement will not fall below 6.5%, plus 6% (14.25% at December 31, 1996) for
all outstanding balances over 30 days. 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 (as defined).
The terms of this agreement also prohibit the payment of dividends, the purchase
of Allstar common stock and other similar expenditures, including advances to
related parties. During 1996, Allstar was not in compliance with certain of
these covenants; however, the finance company waived such noncompliance through
December 31, 1996. At December 31, 1996, Allstar was in compliance with the
restrictive financial covenants provided in the agreement.
Amounts borrowed under the Inventory Line and the $3.0 million line of
credit (collectively the "Floor Plan Agreements") are included in accounts
payable in the consolidated financial statements. Under the Floor Plan
Agreements the financing companies pay Allstar's suppliers directly and maintain
a purchase money security interest in the related inventory. Allstar incurred
interest expense under the Floor Plan Agreements of $19, $35 and $59 in 1994,
1995 and 1996, respectively. The Floor Plan Agreements require payment of
interest on a monthly basis and principal on demand.
The combined borrowing base under all credit arrangements was $18,841 at
December 31, 1996.
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consisted of the following:
1994 1995 1996
--------- --------- ---------
Current provision (benefit):
Federal............................ $ (105) $ 446 $ 962
State.............................. 15 42 117
--------- --------- ---------
Total current provision (benefit)....... (90) 488 1,079
Deferred provision (benefit)............ 230 (146) (92)
--------- --------- ---------
Total.............................. $ 140 $ 342 $ 987
========= ========= =========
F-10
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total provision for income taxes varied from the U.S. federal statutory
rate due to the following:
1994 1995 1996
--------- --------- ---------
Federal income tax at statutory rate.... $ 113 $ 301 $ 907
Nondeductible expenses.................. 17 48 17
State income taxes...................... 10 28 77
Other................................... -- (35) (14)
--------- --------- ---------
Total.............................. $ 140 $ 342 $ 987
========= ========= =========
Deferred tax assets computed at the statutory rate related to temporary
differences at December 31, 1995 and 1996 were as follows:
1995 1996
--------- ---------
Deferred tax assets:
Accounts receivable................ $ 71 $ 142
Deferred service revenue........... 75 69
Inventory.......................... 112 139
--------- ---------
Total deferred tax assets.......... $ 258 $ 350
========= =========
7. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1995 and
1996:
1995 1996
--------- ---------
Sales tax payable....................... $ 2,607 $ 1,309
Accrued employee benefits, payroll and
other related costs................... 456 996
Accrued interest........................ -- 209
Other................................... 294 245
--------- ---------
Total.............................. $ 3,357 $ 2,759
--------- ---------
In August 1996, Allstar entered into an agreement with the state
comptroller's office to pay 1995 delinquent sales taxes of $1.4 million plus
interest. All penalties were waived by the state. The $1.4 million plus interest
was included in accrued expenses at December 31, 1995. The delinquent taxes were
paid in 1996.
8. FRANCHISE FEES
Allstar entered into an agreement in May 1989 whereby it became a franchise
of Inacom Corp. ("Inacom"). 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.
Allstar entered into an agreement in August 1996 in which Allstar is
required to purchase at least 80% of its computer products from Inacom if such
are available within a reasonable period of time at reasonably competitive
prices. 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. Allstar is accruing this
cancellation fee over the initial agreement period by an approximate $9 monthly
charge to earnings. For the year ended December 31, 1996, Allstar charged to
expense $44 related to this agreement.
F-11
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In 1996, Allstar renewed its office sublease with monthly rental
payments of $31.5 in 1997 and $32 in 1998, plus certain operating expenses
through December 1998. Rental expense under this agreement amounted to
approximately $312, $372 and $372 during 1994, 1995 and 1996, respectively.
Additionally, minimum annual rentals at December 31, 1996 on other
operating leases amount to approximately $101 for 1997, $23 in 1998, $16 in 1999
and $8 in 2000. Amounts paid during 1994, 1995 and 1996 under such agreements
totaled approximately $116, $137 and $252, respectively.
BENEFIT PLANS -- 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 $74, $67
and $193 during 1994, 1995 and 1996, respectively.
Allstar maintains a 401(k) savings plan. All full-time employees who have
completed one year of service with Allstar are eligible to participate in the
plan. Allstar also has the option of making additional contributions based on
net profitability. Declaration of such contributions is at the discretion of
Allstar's Board of Directors. Allstar made no additional contributions to the
plan for the years ended December, 1994 and 1995. In 1996 Allstar contributed
$136 to the plan.
Allstar has filed under the Internal Revenue Service Walk-in Closing
Agreement Program (the "Program") to negotiate a settlement regarding the
qualified status of the 401(k) savings plan in order to meet the requirements of
Section 401(a) of the Internal Revenue Code. Under the Program, any sanction
amount negotiated is based upon the total tax liability which could be assessed
if the plan were to be disqualified. At December 31, 1996 the Company has
accrued $50 for the estimated settlement cost.
In September 1996 Allstar adopted the 1996 Incentive Stock Plan (the
"Incentive Plan") and the 1996 Non-Employee Director Stock Option Plan (the
"Director 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. 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. Allstar has reserved for issuance, under the
Director Plan, 100,000 shares of common stock, subject to certain antidilution
adjustments. The Director Plan provides for a one-time option by newly elected
directors to purchase up to 5,000 common shares, after which each director is
entitled to receive an option to purchase up to 2,000 common shares upon each
date of re-election to Allstar's Board of Directors. Options granted under the
Director Plan have an exercise price equal to the fair market value on the date
of grant and generally expire ten years after the grant date. No incentive
awards or stock options have been granted under these plans at December 31,
1996.
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 other statutory violations and is seeking actual monetary damages
of approximately $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible recovery
by the plaintiff because the suit is still in the early stages of discovery.
However, the Company is vigorously defending the action.
F-12
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Allstar is party to other litigation and claims which management believes
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 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 the 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.
Allstar has from time to time made payments on behalf of Equities and the
Company's principal stockholders for taxes, property and equipment. Effective
July 1, 1996, Allstar and its principal stockholder entered into a promissory
note to repay certain advances, which were approximately $173 at July 1, 1996,
in equal annual installments of principal and interest, from August 1997 through
2001. This note bears interest at 9% per year. Also effective July 1, 1996,
Allstar and Equities entered into a promissory note whereby Equities would repay
the balance of amounts advanced, which were approximately $387 at July 1, 1996,
in monthly installments of $6.5, including interest, from July 1996 through
November 1998 with a final payment of $275 due on December 1, 1998. This note
bears interest at 9% per year. The principal amounts as of December 31, 1996 are
classified as Accounts receivable -- affiliates and Other assets -- affiliates
based on the repayment terms of the promissory notes. At December 31, 1995 and
1996, Allstar receivables from these affiliates amounted to approximately $405
and $501, respectively.
During each of 1995 and 1996, Allstar paid $75 in consulting fees to a
minority stockholder.
* * * * * *
F-13
<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.
Inter-Tel..................... Inter-Tel, Incorporated
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
<TABLE>
<S> <C> <C>
Aggregator.............................. A company that purchases directly from manufacturers in large
quantities, maintains inventory, breaks bulk and resells to dis-
tributors, resellers and value-added resellers
Configuration........................... The customization of equipment to a customer's specifications which
may include the loading of software, adding of memory or combining
different manufacturers' equipment in such a way that it will be
compatible as an integrated system
CTI..................................... Computer and telephone integration
IVR..................................... Interactive voice response
LAN..................................... Local-area network
MIS..................................... Management information systems
Open architecture networks.............. Networks based on industry standard technical specifications that
enable the system to operate with hardware and software from
different manufacturers meeting those standards
PBX..................................... Private branch exchange
PC...................................... Personal computer
Price protection........................ A voluntary policy by a manufacturer that when a decrease in the
price of its product is instituted, the manufacturer will rebate
the Company for the difference between the new price and the price
paid by the Company for product in its inventory
Roll-out................................ Single sale involving a large volume of similar products to be
delivered on a pre-specified timetable
SQL..................................... Structured query language
VAR (Value-added reseller).............. A company that purchases equipment or software from a manu-
facturer, aggregator or distributor, provides value added services
to their clients including network management, configuration
systems integration and training and subsequently resells the
enhanced product
WAN..................................... Wide-area network
</TABLE>
G-2
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 6
Use of Proceeds...................... 12
Dividend Policy...................... 12
Capitalization....................... 13
Dilution............................. 14
Selected Financial Data.............. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Business............................. 26
Management........................... 36
Certain Relationships and Related
Transactions....................... 42
Principal and Selling Stockholders... 45
Description of Capital Stock......... 46
Shares Eligible for Future Sale...... 49
Underwriting......................... 50
Legal Matters........................ 51
Experts.............................. 51
Additional Information............... 52
Index to Consolidated Financial
Statements......................... F-1
Glossary............................. G-1
------------------------
UNTIL , 1997, (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,035,000 SHARES
LOGO -- ALLSTAR
SYSTEMS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
SUTRO & CO. INCORPORATED
CRUTTENDEN ROTH
INCORPORATED
, 1997
================================================================================
<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.................... 100,000
Legal fees and expenses.............. 183,000
Accounting fees and expenses......... 247,000
Blue Sky fees and expenses (including
legal fees).......................... 5,550
Transfer Agent and Registrar fees.... 5,000
Representatives' non-accountable
expense allowance.................... 202,500
Miscellaneous........................ 65,458
----------
TOTAL........................... $ 850,000
==========
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.
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 Company has agreed to issue, subject to completion of the Offering,
14,286 shares of restricted Common Stock and options to acquire up to an
aggregate of 100,000 shares of Common Stock, as described in the prospectus
included in this Registration Statement under "Management -- Incentive and
Stock Option Plans."
The Company has agreed to issue to the Representatives of the Underwriters,
subject to completion of the Offering, warrants to purchase 203,500 shares of
Common Stock, as described in the prospectus included in this Registration
Statement under "Underwriting."
All shares, options and warrants described in this Item 15 were issued in
privately-negotiated transactions with sophisticated persons, and each issuance
was made pursuant to the exemption from the registration provisions of the
Securities Act of 1933, as amended, provided by Section 4(2) thereof for
transactions not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all the exhibits and financial statement
schedules filed as part of the Registration Statement.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement.
*2.1 -- Form of Plan and Agreement of Merger by and between Allstar Systems, Inc., a Texas
corporation and Allstar Systems, Inc., a Delaware corporation.
*3.1 -- Bylaws of the Company.
*3.2 -- Certificate of Incorporation of the Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+3.3 -- Amended and Restated Bylaws of the Company.
+3.4 -- Certificate of Amendment to 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.
+4.3 -- Form of Warrant Purchase Agreement by and between the Company, Sutro & Co. Incorporated
and Cruttenden Roth Incorporated.
*5.1 -- Opinion of Porter & Hedges, L.L.P. with respect to legality of securities.
*10.1 -- Revolving Loan and Security Agreement dated August 5, 1993, by and between IBM Credit
Corporation and Allstar Systems, Inc.
*10.2 -- Agreement for Wholesale Financing dated September 20, 1993, by and between ITT Commercial
Finance Corp. and Allstar-Valcom, Inc.
*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.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*10.25 -- Lease Agreement dated June 24, 1992, by and between James J. Laney, et al. as lessors, and
Technicomp Corporation and Allstar Services as lessees.
*10.26 -- Consulting Agreement dated August 2, 1996, by and between Jack B. Corey and Allstar
Systems, Inc.
*10.27 -- Acknowledgement, Waiver and Amendment to Revolving Loan Agreement dated August 2, 1996, by
and between IBM Credit Corporation and Allstar Systems, Inc.
*10.28 -- Agreement dated August 5, 1996, by and between DFS and Allstar Systems, Inc.
*10.29 -- Letter Agreement dated September 12, 1996 by and between Jack B. Corey, Jakascki
Corporation, James H. Long, Allstar Equities, Inc. and Allstar Systems, Inc.
*10.30 -- 1996 Credit Line Uplift Program supplement to Revolving Loan Agreement dated September 10,
1996, by and between IBM Credit Agreement and Allstar Systems, Inc.
*10.31 -- Insurance Proceeds Agreement dated August 2, 1996, by and between Jack B. Corey and
Allstar Systems, Inc.
*10.32 -- Extension of Acknowledgement, Waiver and Amendment to Revolving Loan Agreement dated
October 23, 1996, by and between IBM Credit Corporation and Allstar Systems, Inc.
*10.33 -- Modification of Amendment Termination Date of Agreement dated October 23, 1996, by and
between DFS and Allstar Systems, Inc.
+10.34 -- Letter Agreement dated May 19, 1997, by and between Jack B. Corey, Jakascki Corporation,
James H. Long, Allstar Equities, Inc. 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).
*23.3 -- Consent of Donald D. Sykora
*23.4 -- Consent of Jack M. Johnson, Jr.
*23.5 -- Consent of Richard D. Darrell
*23.6 -- Consent of G. Chris Andersen
24.1 -- Power of Attorney (included on the signature page hereto).
*27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
+ Filed herewith.
(b) Financial Statements Schedules:
The following financial statement schedule is included in Part II of this
Registration Statement, can be found on the page indicated and should be read in
conjunction with the financial statements and notes thereto:
ITEM PAGE
- ---------------------------------------- ----
Schedule II Valuation and Qualifying
Accounts.............................. S-1
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are omitted because they are
not required under the related instructions, are inapplicable or the required
information is included elsewhere in the financial statements.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To provide to the underwriter at the closing date specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
(2) That for the purpose of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
II-4
<PAGE>
(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-5
<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 June 25, 1997.
ALLSTAR SYSTEMS, INC.
By: 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 twenty-fifth day of June, 1997.
SIGNATURE TITLE DATE
- ----------------------- -------------------------------------- --------------
JAMES H. LONG Director, Chairman of the Board, June 25, 1997
JAMES H. LONG President and Chief Executive Officer
(Principal Executive Officer)
DONALD R. CHADWICK Director and June 25, 1997
DONALD R. CHADWICK Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
II-6
<PAGE>
FINANCIAL STATEMENT SCHEDULE II
ALLSTAR SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1996
(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:
1996.......................... $ 464 $ 890 -- $(1,135)(A) $ 219
1995.......................... 188 353 -- (77)(A) 464
1994.......................... 41 170 -- (23)(A) 188
Inventory reserves:
1996.......................... $ 368 $ 743 -- $(1,000)(A) $ 111
1995.......................... 178 190 -- -- 368
1994.......................... 216 -- -- (38)(A) 178
Reserves other than those deducted from
assets on balance sheet:
Allowance for doubtful vendor
receivables:
1996.......................... $ 250 $ 119 -- $ (169)(A) $ 200
1995.......................... 150 155 -- (55)(A) 250
1994.......................... 626 49 -- (525)(A) 150
</TABLE>
- ------------
(A) Reductions related to amounts written off.
S-1
<PAGE>
INDEX TO 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.
+3.3-- Amended and Restated Bylaws of the
Company.
+3.4-- Certificate of Amendment to
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.
+4.3 -- Form of Warrant Purchase Agreement by
and between the Company, Sutro & Co.
Incorporated and Cruttenden Roth
Incorporated.
*5.1 -- Opinion of Porter & Hedges, L.L.P.
with respect to legality of
securities.
*10.1 -- Revolving Loan and Security Agreement
dated August 5, 1993, by and between
IBM Credit Corporation and Allstar
Systems, Inc.
*10.2 -- Agreement for Wholesale Financing
dated September 20, 1993, by and
between ITT Commercial Finance Corp.
and Allstar-Valcom, Inc.
*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 mem-
bers 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.
<PAGE>
*10.19 -- Confirmation of Allstar Systems,
Inc.'s status as a Compaq authorized
reseller dated August 6, 1996.
*10.20 -- Hewlett-Packard U.S. Agreement for
Authorized Second Tier Resellers
dated March 13, 1995, by and between
Hewlett-Packard Company and Allstar
Systems, Inc.
*10.21 -- Associate Agreement dated May 23,
1996, by and between NEC America,
Inc. and Allstar Systems, Inc.
*10.22 -- Mitel Elite Dealer Agreement and
Extension Addendum dated August 5,
1996, by and between Mitel, Inc. and
Allstar Systems, Inc.
*10.23 -- Dealer Agreement dated March 1, 1995,
by and between Applied Voice
Technology and Allstar Systems, Inc.
*10.24 -- Industrial Lease Agreement dated
March 9, 1996, by and between H-5
J.E.T. Ltd. as lessor and Allstar
Systems, Inc. as lessee.
*10.25 -- Lease Agreement dated June 24, 1992,
by and between James J. Laney, et al.
as lessors, and Technicomp
Corporation and Allstar Services as
lessees.
*10.26 -- Consulting Agreement dated August 2,
1996, by and between Jack B. Corey
and Allstar Systems, Inc.
*10.27 -- Acknowledgement, Waiver and Amendment
to Revolving Loan Agreement dated
August 2, 1996, by and between IBM
Credit Corporation and Allstar
Systems, Inc.
*10.28 -- Agreement dated August 5, 1996, by
and between DFS and Allstar Systems,
Inc.
*10.29 -- Letter Agreement dated September 12,
1996 by and between Jack B. Corey,
Jakascki Corporation, James H. Long,
Allstar Equities, Inc. and Allstar
Systems, Inc.
*10.30 -- 1996 Credit Line Uplift Program
supplement to Revolving Loan
Agreement dated September 10, 1996,
by and between IBM Credit Agreement
and Allstar Systems, Inc.
*10.31 -- Insurance Proceeds Agreement dated
August 2, 1996, by and between Jack
B. Corey and Allstar Systems, Inc.
*10.32 -- Extension of Acknowledgement, Waiver
and Amendment to Revolving Loan
Agreement dated October 23, 1996, by
and between IBM Credit Corporation
and Allstar Systems, Inc.
*10.33 -- Modification of Amendment Termination
Date of Agreement dated October 23,
1996, by and between DFS and Allstar
Systems, Inc.
+10.34 -- Letter Agreement dated May 19, 1997,
by and between Jack B. Corey,
Jakascki Corporation, James H. Long,
Allstar Equities, Inc. 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).
*23.3 -- Consent of Donald D. Sykora
*23.4 -- Consent of Jack M. Johnson, Jr.
*23.5 -- Consent of Richard D. Darrell
*23.6 -- Consent of G. Chris Andersen
24.1 -- Power of Attorney (included on the
signature page hereto).
*27.1 -- Financial Data Schedule.
- ------------
* Previously filed.
+ Filed herewith.
EXHIBIT 1.1
DRAFT 06/24/97 10:37PM
2,035,000 Shares
(Subject to increase of up to 305,250 additional
shares solely to cover over-allotments)
ALLSTAR SYSTEMS, INC.
(a Delaware corporation)
Common Stock
(par value $0.01 per share)
UNDERWRITING AGREEMENT
, 1997
Sutro & Co. Incorporated
Cruttenden Roth Incorporated
As Representatives of the several Underwriters
c/o Sutro & Co. Incorporated
11150 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Ladies and Gentlemen:
Allstar Systems, Inc., a Delaware corporation (the "Company"), and the
stockholder of the Company named in Schedule A hereto (the "Selling
Stockholder") propose, subject to the terms and conditions stated herein, to
issue and sell, or to sell, as the case may be, to the several Underwriters
named in Schedule B hereto (the "Underwriters"), for which you are acting as
representatives (the "Representatives"), an aggregate of 2,035,000 shares (the
"Firm Common Shares") of common stock, par value $0.01 per share (the "Common
Stock"), of the Company, including 1,500,000 shares of authorized but unissued
shares to be sold by the Company and 535,000 shares to be sold by the Selling
Stockholder. In addition, the Company proposes to grant to the Underwriters an
option to purchase up to 305,250 additional shares of Common Stock (the
"Optional Common Shares"), as provided in Section 5 hereof, for the purpose of
covering over-allotments in connection with the sale of the Firm Common Shares.
The Company also proposes to sell to Sutro & Co. Incorporated and Cruttenden
Roth Incorporated (collectively, the "Representatives"), individually and not in
your capacities as Representatives of the several underwriters, five-year
warrants (the "Representatives' Warrants") to purchase up to an aggregate of
203,500 shares of Common Stock of the Company (the "Representatives' Warrant
Stock"), which sale will be consummated in accordance with the terms and
conditions of the
<PAGE>
Representatives' Warrant Agreement (the "Representatives' Warrant Agreement") in
substantially the form filed as an exhibit to the Registration Statement
described below. The Firm Common Shares and, to the extent such option is
exercised, the Optional Common Shares are hereinafter collectively referred to
as the "Common Shares."
The Company and the Selling Stockholder understand that the Underwriters
propose to make a public offering of their respective portions of the Common
Shares on the effective date of the registration statement hereinafter referred
to or as soon thereafter as in your judgment is advisable. The Company hereby
confirms that the Underwriters and any dealers have been authorized to
distribute or cause to be distributed each Preliminary Prospectus (as defined
below) and are authorized to distribute the Prospectus (as defined below), as
from time to time amended or supplemented, on the effective date of the
registration statement hereinafter referred to or as soon thereafter as in your
judgment is advisable.
The Company and the Selling Stockholder hereby confirm their respective
agreements with respect to the purchase of the Common Shares by the Underwriters
as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and agrees with, each of the Underwriters
that:
(a) A registration statement on Form S-1 (File No. 333-09789) with respect
to the Common Shares has been prepared by the Company in conformity in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement an
amendment or amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There have been delivered to
you two signed copies of such registration statement and amendments, together
with two copies of each exhibit filed therewith. Conformed copies of such
registration statement and amendments thereto and related preliminary
prospectuses have been delivered to you in such reasonable quantities as you
have requested. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations
or (iii) a term sheet (the "Term Sheet") as described in and in accordance with
Rules 434 and 424(b) of the Rules and Regulations. As filed, the final
prospectus, if one is used, or the Term Sheet and the latest Preliminary
Prospectus sent or given to purchasers of the Common Shares by the Underwriters
prior to or at the same time as the confirmation of such sale, if a final
prospectus is not used, shall include all Rule 430A Information (as defined
below) and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the date and time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond that
contained in the
2
<PAGE>
latest Preliminary Prospectus) as the Company shall have previously advised you
in writing would be included or made therein.
The term "Registration Statement" as used herein shall mean such
registration statement at the time such registration statement becomes effective
and, in the event any post-effective amendment thereto becomes effective prior
to the First Closing Date (as defined below), shall also mean such registration
statement as so amended; provided, however, that such term shall also include
(i) all Rule 430A Information deemed to be included in such registration
statement at the time such registration statement becomes effective as provided
by Rule 430A of the Rules and Regulations and (ii) any registration statement
filed pursuant to Rule 462(b) of the Rules and Regulations relating to the
Common Shares. The term "Preliminary Prospectus" shall mean any preliminary
prospectus relating to the Common Shares and delivered to you as well as any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" shall
mean: (i) the prospectus relating to the Common Shares in the form in which it
is first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations; (ii) if a Term Sheet is not used and no filing pursuant to Rule
424(b) of the Rules and Regulations is required, the form of final prospectus
included in the Registration Statement at the time it becomes effective; or
(iii) if a Term Sheet is used, the Term Sheet in the form in which it is first
filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations,
together with the latest Preliminary Prospectus sent or given to purchasers of
the Common Shares by the Underwriters prior to or at the same time as the
confirmation of such sale. The term "Rule 430A Information" shall mean
information with respect to the Common Shares and the offering thereof permitted
to be omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed
in all material respects to the requirements of the Act and the Rules and
Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; at the time the Registration Statement becomes effective,
and at all times subsequent thereto up to and including each Closing Date
hereinafter mentioned, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and the Registration Statement will not
include any 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, and neither the Prospectus, nor any amendment or supplement thereto,
will include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary, in light of the circumstances
under which they were made, to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
shall be applicable to information contained in or omitted from any Preliminary
Prospectus, the Registration Statement, the Prospectus or any such amendment or
supplement that
3
<PAGE>
is (i) furnished in writing to the Company by an Underwriter and described in
clauses (i) and (ii) of Section 3 hereof or (ii) furnished in writing to the
Company by the Selling Stockholder for use in preparation of the information
presented therein pursuant to Item 7 of Form S-1.
(c) The sole subsidiary of the Company is Stratasoft Inc., a Texas
corporation ("Stratasoft"). The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than Stratasoft.
The Company and Stratasoft have been duly incorporated and are validly existing
as corporations in good standing under the laws of their respective
jurisdictions of incorporation, with full power and authority (corporate and
other) to own and lease their assets and properties and conduct their business
as now being conducted and as described in the Registration Statement. The
Company owns all of the outstanding capital stock of Stratasoft free and clear
of all claims, liens, charges and encumbrances, other than as disclosed in the
Registration Statement. The Company and Stratasoft are duly qualified to do
business and are in good standing as foreign corporations in each jurisdiction
in which the ownership or leasing of their respective properties or the conduct
of their respective businesses requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the general affairs, properties, business, management,
condition (financial or otherwise), stockholders' equity, results of operations
or prospects of the Company and Stratasoft, taken as a whole (a "Material
Adverse Effect"); and to the Company's knowledge, no proceeding has been
instituted in any such jurisdiction revoking, limiting or curtailing, or seeking
to revoke, limit or curtail, such power and authority or qualification.
(d) The Company and Stratasoft hold and are operating in compliance with
all licenses, approvals, certificates, permits, authorizations, consents and
orders from governmental and regulatory authorities, foreign and domestic, which
are necessary or required in the conduct of their respective businesses.
(e) The Company has an authorized capitalization as set forth under the
heading "Capitalization" in the Prospectus; the issued and outstanding shares of
capital stock of the Company are duly authorized and validly issued, are fully
paid and nonassessable, have been issued in compliance with all applicable
federal and state securities laws, have not been issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and conform in all material respects to the description thereof
contained in the Prospectus. All issued and outstanding shares of capital stock
of Stratasoft have been duly authorized and validly issued and are fully paid
and nonassessable. Except as disclosed in or contemplated by the Prospectus and
the financial statements of the Company, and the related notes thereto, included
in the Prospectus, neither the Company nor Stratasoft has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of capital stock of the Company or
Stratasoft or any such options, rights, convertible securities or obligations.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
4
<PAGE>
(f) The Common Shares have been duly authorized and, when issued,
delivered and paid for in the manner set forth in this Agreement, will be
validly issued, fully paid and nonassessable, and will conform in all material
respects to the description thereof contained in the Prospectus. No preemptive
rights or other rights to subscribe for or purchase exist with respect to the
issuance and sale of the Common Shares. Other than the Selling Stockholder, no
stockholder of the Company has any right which has not been waived to require
the Company to register the sale of any shares owned by such stockholder under
the Act in the public offering contemplated by this Agreement. No further
approval or authorization of the stockholders or the Board of Directors of the
Company is required for the issuance and sale of the Common Shares as
contemplated herein.
(g) The Company has full right, power and authority to enter into this
Agreement and the Representatives' Warrant Agreement and perform the
transactions contemplated hereby and therein. This Agreement and the
Representatives' Warrant Agreement have been duly authorized, by the Company,
this Agreement has been duly executed and delivered by the Company and this
Agreement constitutes and the Representatives' Warrant Agreement will
constitute, when executed and delivered by the Company, the valid and binding
agreement of the Company enforceable against it in accordance with their
respective terms, except (i) as limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, (ii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding may be brought and (iii) to
the extent that rights to indemnity or contribution may be limited by federal,
state or provincial securities laws or the public policy underlying such laws.
The execution and delivery of this Agreement and the Representatives' Warrant
Agreement by the Company and the consummation of the transactions herein
contemplated by the Company do not violate any provisions of the certificate or
articles of incorporation or bylaws of the Company or Stratasoft and will not
conflict with, result in the breach or violation of or constitute, either by
itself or upon notice or the passage of time or both, a default under any
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which the Company or Stratasoft is a party or by which
the Company or Stratasoft or any of their respective properties may be bound or
affected, any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or Stratasoft or any of their
respective properties, except where such conflict, breach, violation or default
would not have a Material Adverse Effect. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this Agreement
or the consummation of the transactions contemplated by this Agreement and the
Representatives' Warrant Agreement, except for compliance with the Act, the Blue
Sky laws applicable to the public offering of the Common Shares by the several
Underwriters, the clearance of such offering with the National Association of
Securities Dealers, Inc. (the "NASD") and such other consents, opinion,
authorizations or orders the absence of which would not have a Material Adverse
Effect.
(h) Deloitte & Touche LLP, who have expressed their opinion with respect
to the financial statements filed with the Commission as a part of the
Registration Statement and
5
<PAGE>
included in the Prospectus, are independent accountants as required by the Act
and the Rules and Regulations.
(i) The consolidated financial statements of the Company and Stratasoft,
and the related notes thereto, included in the Registration Statement and the
Prospectus present fairly the consolidated financial position of the Company and
Stratasoft, as of the respective dates of such financial statements and
schedules, and the consolidated results of operations, cash flows and
stockholders' equity and the other information purported to be shown therein of
the Company and Stratasoft for the respective periods covered thereby. Such
statements and related notes have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis (except as noted
therein) as certified by the independent accountants named in Section 1(h). The
Registration Statement includes all of the financial statements and schedules
required under the Act to be included therein. The selected financial data set
forth in the Prospectus under the captions "Summary Consolidated Financial
Data," "Capitalization," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "Business" are
materially accurate and prepared on a basis consistent with the consolidated
financial statements of the Company and Stratasoft and the books and records of
the Company.
(j) Except as disclosed in the Prospectus, and except as to defaults which
individually or in the aggregate would not be material to the Company and
Stratasoft, taken as a whole, (i) neither the Company nor Stratasoft is in
violation or default of any provision of their respective certificate or
articles of incorporation or bylaws, or is in breach of or default with respect
to any provision of any agreement, judgment, decree, order, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
either is a party or by which either or any of their properties is bound; and
(ii) there does not exist any state of facts which constitutes an event of
default (as defined in such documents) on the part of the Company or Stratasoft
or which, with notice or lapse of time or both, would constitute such an event
of default.
(k) There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which have not been
described or filed as required. The contracts so described in the Prospectus are
in full force and effect on the date hereof; and, except as disclosed in the
Prospectus and except as to defaults which individually or in the aggregate
would not be material to the Company and Stratasoft, taken as a whole, neither
the Company nor Stratasoft, nor to the best of the Company's knowledge, any
other party, is in breach of or in default under any of such contracts.
(l) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or Stratasoft is a party or of which property owned or leased by the
Company or Stratasoft is the subject, including actions related to environmental
or discrimination matters, which actions, suits or proceedings might reasonably
be expected to, individually or in the aggregate, prevent or have a material
adverse effect on the transactions contemplated by this Agreement or have a
Material Adverse Effect, and no labor disturbance by the employees of the
Company or Stratasoft exists or is imminent which
6
<PAGE>
might reasonably be expected to have a Material Adverse Effect. Neither the
Company nor Stratasoft is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(m) The Company and Stratasoft have good and marketable title in fee
simple to all material real property and good and marketable title to all
material personal property reflected as owned in the financial statements
hereinabove described or as described elsewhere in the Prospectus, in each case
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements or as described
elsewhere in the Prospectus and (ii) those which are not material in amount and
do not have a material adverse effect on the use made and proposed to be made of
such property by the Company and Stratasoft. The Company and Stratasoft hold
their leased properties under valid, subsisting and enforceable leases, with
such exceptions as are not materially significant in relation to the business of
the Company and Stratasoft. Except as disclosed in the Prospectus, the Company
and Stratasoft own or lease all such properties as are necessary to their
respective operations as now conducted.
(n) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as described in or
contemplated by the Prospectus: (i) neither the Company nor Stratasoft have
incurred any material liabilities or obligations, indirect, direct or
contingent, or entered into any material verbal or written agreement or other
transaction or other development which is not in the ordinary course of business
or which could reasonably be expected to result in a material reduction in the
future earnings of the Company and Stratasoft, taken as a whole; (ii) the
Company and Stratasoft have not sustained any material loss or interference with
their respective businesses or properties from fire, flood, earthquake,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock and the Company and Stratasoft are not in
default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other than
upon the sale of the Common Shares hereunder) or indebtedness of the Company or
Stratasoft that is material to the Company and Stratasoft, taken as a whole
(other than in the ordinary course of business); and (v) there has not been any
Material Adverse Effect.
(o) The Company and Stratasoft have sufficient trademarks, trade names,
service marks, patent rights, mask works, copyrights, licenses, know-how and
other similar rights and proprietary knowledge (collectively, "Intangibles") to
conduct their respective businesses as now conducted, and to the best of the
Company's knowledge, none of the activities engaged in by the Company or
Stratasoft infringes or conflicts with any Intangibles of others, and there is
no claim being made against the Company or Stratasoft regarding any Intangibles
which might reasonably be expected to have a Material Adverse Effect.
(p) The Company has not been advised, and has no reason to believe, that
either the Company or Stratasoft is not conducting their respective business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which they conduct business, including, without limitation, all applicable
local, state and federal environmental laws and
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regulations, except where failure to be in compliance therewith would not
reasonably be expected to have a Material Adverse Effect.
(q) The Company and Stratasoft have filed all necessary federal, state and
foreign tax returns and have paid all taxes shown as due thereon; and the
Company has no knowledge of any tax deficiency which has been or might be
asserted or threatened against the Company or Stratasoft which might reasonably
be expected to have a Material Adverse Effect.
(r) Neither the Company nor Stratasoft is, nor upon completion of the sale
of Common Shares contemplated hereby will be, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(s) The Company has not distributed and will not distribute prior to the
First Closing Date any offering materials in connection with the offering and
sale of the Common Shares other than any Preliminary Prospectus, the Prospectus,
the Registration Statement and the other materials permitted by the Act.
(t) The Company and Stratasoft maintain insurance of the types and in the
amounts generally deemed adequate for their respective business, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company and Stratasoft, against loss, theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(u) Neither the Company nor Stratasoft has at any time during the past
five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law, or
(ii) made any payment to any federal or state governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(v) All transactions between the Company or Stratasoft and their
respective officers and directors and their affiliates that are material to the
Company and Stratasoft, taken as a whole, have been accurately disclosed in the
Prospectus, and the terms of such transactions are fair to the Company and/or
Stratasoft, as the case may be.
(w) Neither the Company nor Stratasoft has taken and will not take,
directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Common Shares, which action
is in violation of the Act and the Rules and Regulations.
(x) The Common Shares have been authorized for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(y) The Company and Stratasoft each maintain a system of internal
accounting controls that, taken as a whole, are sufficient to provide reasonable
assurance that: (i) transactions are
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executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(z) All offers and sales of (i) the Common Stock by the Company (other
than the Common 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 laws and Blue Sky laws.
(aa) The Representatives' Warrants have been duly and validly authorized
by the Company and upon delivery to you in accordance with this Agreement and
the Representatives' Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms, except (i) as limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights generally, (ii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding may be brought and (iii) to the extent
that rights to indemnity or contribution may be limited by federal, state or
provincial securities laws or the public policy underlying such laws.
(bb) The Representatives' Warrant Stock has been duly authorized and
reserved for issuance upon the exercise of the Representatives' Warrants and
when issued upon payment of the exercise price therefor will be validly issued,
fully paid and nonassessable shares of Common Stock.
Any certificate signed by an officer of the Company and delivered to you
or to your counsel shall be deemed a representation and warranty by the Company
to you as to the matters covered thereby. Any certificate delivered by the
Company to its counsel for purposes of enabling such counsel to render the
opinions referred to in Section 7(e) will also be furnished to the
Representatives and counsel to the Underwriters and shall be deemed to be
additional representations and warranties by the Company to each Underwriter as
to the matters covered thereby and each Underwriter and its counsel are entitled
to rely thereon.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
STOCKHOLDER.
(a) The Selling Stockholder severally represents and warrants to, and
covenants and agrees with, each of the Underwriters and the Company that:
(i) The Selling Stockholder has duly executed and delivered a Power
of Attorney (the "Power of Attorney"), appointing James H. Long and Donald
R. Chadwick and each of them, as attorney-in-fact (the
"Attorneys-in-Fact") with full power and
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authority to execute and deliver this Agreement on behalf of the Selling
Stockholder, to authorize the delivery of the Common Shares to be sold by
the Selling Stockholder hereunder, and otherwise to act on behalf of the
Selling Stockholder in connection with the transactions contemplated by
this Agreement.
(ii) The Selling Stockholder has duly executed and delivered a
Custody Agreement (the "Custody Agreement") with James H. Long and Donald
R. Chadwick and each of them, as custodian ("Custodian"), pursuant to
which certificates in negotiable form for the Common Shares to be sold by
the Selling Stockholder hereunder have been placed in custody for delivery
under this Agreement.
(iii) The 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 Common Shares to
be sold by the Selling Stockholder hereunder; and all consents, approvals,
authorizations and orders necessary for the execution and delivery by the
Selling Stockholder of this Agreement, the Power of Attorney and the
Custody Agreement, and for the sale and delivery of the Common Shares to
be sold by the Selling Stockholder hereunder, have been obtained, except
such as may be required by any state securities or Blue Sky laws.
(iv) The Selling Stockholder has, and at the First Closing Date (as
defined below) will have, good and valid title to the Firm Common Shares
to be sold by the Selling Stockholder hereunder, free and clear of any
liens, encumbrances, security interests, equities or claims whatsoever.
Upon delivery of and payment for such Firm Common Shares pursuant to this
Agreement, good and valid title thereto, free and clear of any liens,
encumbrances, security interests, equities or claims whatsoever, will be
transferred to the several Underwriters.
(v) The consummation by the Selling Stockholder of the transactions
herein contemplated and the fulfillment by the Selling Stockholder of the
terms hereof will not conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any
will, mortgage, deed of trust, loan agreement or other agreement,
instrument or obligation to which the Selling Stockholder is a party or to
which any of the property or assets of the Selling Stockholder is subject,
except for such agreements, instruments or obligations for which consents
have been obtained, nor will such actions result in any violations of the
provisions of the articles or certificate of incorporation or bylaws if
the Selling Stockholder is a corporation, the partnership agreement,
certificate or articles if the Selling Stockholder is a partnership, or
any statute, rule, regulation or order applicable to the Selling
Stockholder of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction over the Selling
Stockholder or the property of the Selling Stockholder.
(vi) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably
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be expected to cause or result in, stabilization or manipulation of the
price of the Common Stock.
(vii) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus thereof, the Prospectus
or any amendment or supplement thereto, are made in reliance upon and in
conformity with written information with respect to the Selling
Stockholder furnished to the Company by the Selling Stockholder expressly
for use therein, such Preliminary Prospectus and the Registration
Statement did not, and the Prospectus and any further amendments or
supplements to the Registration Statement and the Prospectus will not,
when they become effective or are filed with the Commission, as the case
may be, 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.
(viii) The Selling Stockholder will not, directly or indirectly,
offer to sell, sell, contract to sell, grant any option to sell, transfer,
assign or otherwise dispose of any shares of Common Stock, or other
securities which are substantially similar to the Common Stock, or
securities convertible into or exchangeable for or any rights to purchase
or acquire Common Stock or other securities which are substantially
similar to the Common Stock, for a period of 180 days after the date of
the Prospectus, otherwise than hereunder or with the written consent of
the Representatives.
(ix) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Common Shares,
which action is in violation of the Act and the Rules and Regulations.
(x) The share ownership shown in the Prospectus under the caption
"Principal and Selling Stockholders" with respect to the Selling
Stockholder is correct.
(b) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Internal Revenue Code of 1986, as amended,
with respect to the transactions herein contemplated, the Selling Stockholder
agrees to deliver to you prior to or at the First Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(c) The Selling Stockholder specifically agrees that the Common Shares
represented by the certificates held in custody for the Selling Stockholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by the 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 coupled with an interest and
irrevocable. If the Selling Stockholder should die or become incapacitated or if
any resulting
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estate or trust should be terminated before the delivery of the Firm Common
Shares hereunder, certificates representing the Firm Common 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 or termination had not occurred, regardless
of whether or not the Custodian, the Attorneys-in-Fact or any of them, shall
have received notice of such death, incapacity or termination.
(d) Any certificate signed by or on behalf of the Selling Stockholder and
delivered to the Representatives or to counsel to the Underwriters shall be
deemed to be a representation and warranty of the Selling Stockholder to each
Underwriter as to the matters covered thereby and each Underwriter and its
counsel are entitled to rely thereon.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under the caption "Underwriting" in the Prospectus
was furnished to the Company by and on behalf of the Underwriters for use in
connection with the preparation of the Registration Statement and the
Prospectus, and such information is correct in all material respects. If
applicable, the Representatives represent and warrant that they have been
authorized by each of the other Underwriters as the Representatives to enter
into this Agreement on behalf of each such Underwriter and to act on behalf of
each such Underwriter in the manner herein provided.
SECTION 4. PURCHASE, SALE AND DELIVERY OF COMMON SHARES. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and the Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter the
number of Firm Common Shares set forth herein or in Schedule A hereto, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Stockholder the number of Firm Common Shares set forth opposite
their respective names in Schedule B hereto. The purchase price per share to be
paid by the several Underwriters shall be $ per share.
Delivery of certificates for the Firm Common Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Sutro & Co.
Incorporated, 11150 Santa Monica Boulevard, Suite 1500, Los Angeles, California
(or such other place as may be agreed upon by the Company and the
Representatives) at such time and date, not later than the fourth full business
day following the date of this Agreement, as you shall designate by at least 48
hours' prior notice to the Company (or at such other time and date, not later
than one week after such fourth full business day, as may be agreed upon by the
Company and the Underwriters) (the "First Closing Date"); provided, however,
that if the Prospectus is at any time prior to the First Closing Date
recirculated to the public, the First Closing Date shall occur upon the later of
the third full business day following the first date that any of the Common
Shares are released by
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you for sale to the public or the date that is 48 hours after the date that the
Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or on
behalf of the Company and the Selling Stockholder to you, for the respective
accounts of the several Underwriters, against payment by you, for the accounts
of the several Underwriters, of the purchase price therefor by wire transfers
payable in same day funds to such accounts as the Company and the Custodian
shall have designated to the Representatives in writing at least two business
days prior to the First Closing Date. The certificates for the Firm Common
Shares shall be registered in such names and denominations as you shall have
requested in writing at least two business days prior to the First Closing Date,
and shall be made available for checking and packaging on the business day
preceding the First Closing Date at such location in New York, New York as may
be designated by you. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations of
the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 305,250 Optional
Common Shares at the purchase price per share to be paid by the Underwriters for
the Firm Common Shares, for use solely in covering any over-allotments made by
the Underwriters for the account of the Underwriters in the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 45 days after the first
date that any of the Common Shares are released by you for sale to the public,
upon notice by you to the Company setting forth the aggregate number of Optional
Common Shares as to which the Underwriters are exercising the option, the names
and denominations in which the certificates for such Optional Common Shares are
to be registered and the time and place at which such certificates are to be
delivered. Such time of delivery (which may not be earlier than the First
Closing Date and being herein referred to as the "Second Closing Date") shall be
determined by you, but if at any time other than the First Closing Date shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. The number of Optional Common Shares to be purchased
by each Underwriter shall be determined by multiplying the number of Optional
Common Shares to be sold by the Company pursuant to such notice of exercise by a
fraction, the numerator of which is the number of Firm Common Shares to be
purchased by such Underwriter as set forth opposite its name in Schedule B and
the denominator of which is 2,035,000 (subject to such adjustments to eliminate
any fractional share purchases as you in your discretion may make). Certificates
for the Optional Common Shares being purchased will be made available for
checking and packaging on the business day preceding the Second Closing Date at
such location in New York, New York as may be designated by you. The manner of
payment for and delivery of such Optional Common Shares shall be the same as for
the Firm Common Shares purchased from the Company as specified in the two
preceding paragraphs. At any time before lapse of the option, you may cancel
such option by giving written notice of such cancellation to the Company. If the
option is canceled or expires unexercised in whole or in part, the Company will
deregister under the Act the number of Optional Common Shares as to which the
option has not been exercised.
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You have advised the Company that each Underwriter has authorized you to
accept delivery of its Common Shares, to make payments and receipt therefor.
You, individually and not as the Representatives of the Underwriters, may (but
shall not be obligated to) make payments for any Common Shares to be purchased
by any Underwriter whose funds shall not have been received by you by the First
Closing Date or the Second Closing Date, as the case may be, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Common Shares as soon
after the effective date of the Registration Statement as in your judgment is
advisable and at the public offering price set forth on the cover page of and on
the terms set forth in the final prospectus, if one is used, or on the first
page of the Term Sheet, if one is used.
SECTION 5. COVENANTS OF THE COMPANY. The Company hereby covenants and
agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible time. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus if you have not
been furnished with a copy a reasonable time prior to such filing, if you
reasonably object to the Company filing of such document or if the document to
be filed is not in compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly upon
your request, any amendments or supplements to the Registration Statement or the
Prospectus which in your judgment may be necessary or advisable to enable the
Underwriters to continue the distribution of the Common Shares and will use its
best efforts to cause the same to become effective as promptly as possible. The
Company will fully and completely comply with the
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provisions of Rule 430A of the Rules and Regulations with respect to information
omitted from the Registration Statement in reliance upon such Rule.
(c) If at any time during which a prospectus relating to the Common Shares
is required to be delivered under the Act any event occurs, as a result of which
the Prospectus, including any amendments or supplements, would include an 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, or if
it is necessary at any time to amend the Prospectus, including any amendments or
supplements, to comply with the Act or the Rules and Regulations, the Company
will promptly advise you thereof and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will correct
such statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become effective
as soon as possible.
(d) During such period as a prospectus is required by law to be delivered
in connection with sales by an Underwriter or dealer, the Company, at its
expense, will furnish to you or mail to your order copies of the Registration
Statement, the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in such
quantities as you may reasonably request, for the purposes contemplated in the
Act.
(e) As soon as practicable, but not later than 45 days after the end of
the first quarter ending after the first anniversary of the effective date of
the Registration Statement (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions from
the application of) the Blue Sky laws of such jurisdictions as you designate,
will comply with such laws and will continue such qualifications, registrations
and exemptions in effect so long as reasonably required for the distribution of
the Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification, registration
or exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(g) For a period of five years from the First Closing Date, the Company
will furnish to the Representatives: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report of the Company containing the
consolidated balance sheet of the Company as of the close of such fiscal year
and consolidated statements of income, stockholders' equity and cash
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flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement and annual and other report filed by the
Company with the Commission, The Nasdaq Stock Market or any securities exchange;
and (iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock.
(h) (i) During the period beginning from the date of the Prospectus and
continuing to and including the date 180 days after the date of the Prospectus,
the Company will not, directly or indirectly, offer to sell, sell, contract to
sell, grant any option to sell, transfer, assign or otherwise dispose of Common
Stock, or other securities which are substantially similar to the Common Stock,
or securities which are convertible into or exercisable or exchangeable for or
any rights to purchase or acquire Common Stock or other securities which are
substantially similar to the Common Stock, without your prior written consent
(other than the sale of the Common Shares pursuant to this Agreement, the
issuance and sale of the Representatives' Warrants pursuant to the
Representatives' Warrant 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) the Company 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 the prior written consent of Sutro & Co.
Incorporated;
(i) The Company will apply the net proceeds of the sale of the Common
Shares in the manner described under the caption "Use of Proceeds" in the
Prospectus.
(j) The Company will use its best efforts to designate and maintain the
Common Stock for quotation on the Nasdaq National Market.
(k) The Company will file with the Commission such reports on Form SR as
may be required by Rule 463 under the Act.
You, on behalf of the Underwriters, may in your sole discretion, waive in
writing the performance by the Company of any one or more of the foregoing
covenants or extend the time for their performance.
SECTION 6. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and the Selling Stockholder agree that the Company will
pay or cause to be paid all costs, fees and expenses incurred in connection with
the performance of the Company's and Selling Stockholder's obligations hereunder
and in connection with the transactions contemplated hereby, including without
limiting the generality of the foregoing: (i) all expenses incident to the
issuance and delivery of the Common Shares (including all printing and engraving
costs), (ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other taxes in connection
with the issuance and sale of the Common Shares to the
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Underwriters, (iv) all fees and expenses of counsel and independent accountants
of the Company and Stratasoft, (v) all costs and expenses incurred in connection
with the printing, filing, shipping and distribution of the Registration
Statement, each Preliminary Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, this Agreement, the Agreement Among Underwriters, the Selected
Dealers Agreement, the Underwriters' Questionnaire, the Underwriters' Power of
Attorney, the Preliminary and the Final Blue Sky Memoranda, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under any state securities or Blue Sky laws, (vii) the filing fees and
fees and expenses of the Underwriters incident to securing any required review
by the NASD of the terms of the sale of the Common Shares, (viii) any fees and
expenses relating to the inclusion of the Common Shares on the Nasdaq National
Market and (ix) all other fees, costs and expenses referred to in Item 13 of the
Registration Statement; provided, however, that, notwithstanding the foregoing,
(A) all underwriters' discounts and commissions in respect of the sale of the
Common Shares by the Selling Stockholder shall be paid by the Selling
Stockholder, (B) your non-accountable expense allowance for due diligence (equal
in amount to 1.5% of the gross proceeds of the offering and sale of the Common
Shares) shall be paid by the Company and the Selling Stockholder in proportion
to the number of Common 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 (iii) of the preceding sentence,
the Company agrees to reimburse Sutro & Co. Incorporated 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 Common Shares pursuant to this Agreement. Except
as provided in this Section 6, Section 3 and Section 10 hereof, the Underwriters
shall pay all of their own expenses, including the fees and disbursements of
their counsel (excluding those relating to qualification, registration or
exemption under the state securities and Blue Sky laws and the Blue Sky
Memoranda referred to above)
SECTION 7. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
and the Selling Stockholder made pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholder of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
5:30 P.M. (or in the case of a registration statement filed pursuant to Rule
462(b) of the Rules and Regulations relating to the Common Shares, not later
than 10:00 P.M.), Washington, D.C. time, on the date of this Agreement, or at
such later time as shall have been consented to by you. If
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the filing of the Prospectus, or any supplement thereto, is required pursuant to
Rule 424(b) of the Rules and Regulations, the Prospectus shall have been filed
in the manner and within the time period required by Rule 424(b) of the Rules
and Regulations. Prior to such Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or,
to the knowledge of the Company or you, shall be contemplated by the Commission.
Any request of the Commission for inclusion of additional information in the
Registration Statement, or otherwise, shall have been complied with to your
satisfaction.
(b) You shall be satisfied that since the respective dates as of which
information is given in the Registration Statement and Prospectus, (i) there
shall not have been any change in the capital stock of the Company or Stratasoft
(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) or any material change in the indebtedness (other
than in the ordinary course of business) of the Company or Stratasoft, (ii)
except as set forth in or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other transaction shall
have been entered into by the Company or Stratasoft, which is not in the
ordinary course of business or which could reasonably be expected to result in a
material reduction in the future earnings of the Company and Stratasoft, taken
as a whole, (iii) no loss or damage (whether or not insured) to the property of
the Company or Stratasoft shall have been sustained which could have a Material
Adverse Effect, (iv) no legal or governmental action, suit or proceeding
affecting the Company or Stratasoft which is material to the Company and
Stratasoft, taken as a whole, or which materially affects or may materially
affect the transactions contemplated by this Agreement, shall have been
instituted or threatened and (v) there shall not have been any Material Adverse
Effect which makes it impractical or inadvisable in your reasonable judgment to
proceed with the public offering or purchase the Common Shares as contemplated
hereby.
(c) There shall have been delivered to you the Firm Common Shares and, if
any Optional Common Shares are then being purchased, such Optional Common
Shares.
(d) The NASD, upon review of the terms of the public offering of the
Common Shares, shall not have objected to the fairness and reasonableness of the
underwriting terms and arrangements as proposed in this Agreement.
(e) There shall have been furnished to you, as Representatives of the
Underwriters on each Closing Date, in form and substance reasonably satisfactory
to you, except as otherwise expressly provided below:
(i) An opinion of Porter & Hedges, L.L.P, counsel for the Company
and Stratasoft, addressed to the Underwriters and dated the First Closing
Date or the Second Closing Date, as the case may be, as set forth in
Schedule C hereto.
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(ii) An opinion of counsel for the Selling Stockholder, which
counsel shall be reasonably acceptable to the Representatives (counsel may
be Porter & Hedges, L.L.P., or other counsel to the Company reasonably
acceptable to the Representatives), dated the First Closing Date addressed
to the Underwriters, to the effect that:
(1) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by the Selling Stockholder and are the valid
and binding agreements of the Selling Stockholder.
(2) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Stockholder.
(3) The sale of the Common Shares to be sold by the Selling
Stockholder hereunder and the compliance by the 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, result in a
breach or violation of any terms or provisions of or constitute a
default under, any statute, any indenture, mortgage deed of trust,
loan agreement or other agreement or instrument known to such
counsel to which the Selling Stockholder is a party or by which the
Selling Stockholder is bound or to which any of the property or
assets of the Selling Stockholder is subject, nor will such action
result in any violation of the provisions of the organizational
documents of the Selling Stockholder if the Selling Stockholder is a
corporation or partnership, or any order, rule or regulation known
to such counsel of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property of the
Selling Stockholder.
(4) 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 Common Shares to be sold by the Selling Stockholder hereunder,
except such consents, approvals, authorizations or orders as have
been validly obtained and are in full force and effect, such as have
been obtained under the Act and such as may be required under the
State securities or Blue Sky laws in connection with the purchase
and distribution of such Common Shares by the Underwriters.
(5) The Selling Stockholder has full right, power and
authority transfer and deliver the Common Shares to be sold by the
Selling Stockholder hereunder.
(6) Good and valid title to the Common Shares being sold by
the Selling Stockholder, free and clear of any claims, liens,
encumbrances, security interests or other adverse claims, has been
transferred to each of the several Underwriters who have purchased
such Common Shares in good faith and without
19
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notice of any such claim, lien, encumbrance, security interest or
other 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.
In rendering the opinions described above, counsel for the Selling
Stockholder may rely, as to matters of fact with respect to the Selling
Stockholder, upon the representations of the Selling Stockholder contained
in this Agreement, the Power of Attorney and the Custody Agreement and
upon certificates of the Selling Stockholder and of public officials.
(iii) Such opinion or opinions of Gardere & Wynne, L.L.P., counsel
for the Underwriters, dated the First Closing Date or the Second Closing
Date, as the case may be with respect to the incorporation of the Company,
the sufficiency of all corporate proceedings and other legal matters
relating to this Agreement, the validity of the Common Shares, the
Registration Statement and the Prospectus and other related matters as you
may reasonably require, and the Company shall have furnished to such
counsel such documents and shall have exhibited to them such papers and
records as they may reasonably request for the purpose of enabling them to
pass upon such matters. In connection with such opinions, such counsel may
rely on representations or certificates of officers of the Company and
governmental officials.
(iv) A certificate of the Company executed by the Chief Executive
Officer and the Chief Financial Officer of the Company, dated the First
Closing Date or the Second Closing Date, as the case may be, to the effect
that:
(1) The representations and warranties of the Company set
forth in Section 1 of this Agreement were true and correct as of the
date of this Agreement and are true and correct in all material
respects as of the First Closing Date or the Second Closing Date, as
the case may be, and the Company has complied in all material
respects with all the agreements and satisfied in all material
respects all the conditions on its part to be performed or satisfied
on or prior to such Closing Date.
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus
filed as a part of the Registration Statement or any amendment or
supplement thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the best of the
knowledge of the respective signers, no proceedings for that purpose
have been instituted or are pending or contemplated under the Act.
20
<PAGE>
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus,
and, in his opinion and to the best of his knowledge, the
Registration Statement and the Prospectus and any amendments or
supplements thereto contain all statements required to be stated
therein regarding the Company and neither the Registration Statement
nor the Prospectus nor any amendments or supplement thereto includes
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(4) Since the initial date on which the Registration Statement
was filed, no agreement, whether written or oral, transaction or
event has occurred which should have been set forth in an amendment
to the Registration Statement or in a supplement to or amendment of
any prospectus which has not been disclosed in such a supplement or
amendment.
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except
as disclosed in or contemplated by the Prospectus, there has not
been any Material Adverse Effect or a development involving a
Material Adverse Effect. No legal or governmental action, suit or
proceeding is pending or threatened against the Company or
Stratasoft which is material to the Company and Stratasoft, taken as
a whole, whether or not arising from transactions in the ordinary
course of business, or which may adversely affect the transactions
contemplated by this Agreement. Since such dates and except as so
disclosed, the Company and Stratasoft have not entered into any
verbal or written agreement or other transactions which is not in
the ordinary course of business or which could result in a material
reduction in the future earnings of the Company and Stratasoft or
incurred any material liability or obligation, direct, contingent or
indirect, made any change in their respective capital stock, made
any material change in their respective short-term debt or funded
debt or repurchased or otherwise acquired any of the Company's
capital stock. The Company has not declared or paid any dividend, or
made any other distribution, upon its outstanding capital stock
payable to stockholders of record on a date prior to the First
Closing Date or Second Closing Date.
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as
disclosed in or contemplated by the Prospectus, the Company and
Stratasoft have not sustained a material loss or damage by strike,
fire, flood, windstorm, accident or other calamity (whether or not
insured).
(v) A certificate of the Selling Stockholder, dated the First
Closing Date pursuant to which the Selling Stockholder certifies that its
representations and warranties set forth in this Agreement are true and
correct in all material respects as of the First
21
<PAGE>
Closing Date and that they have performed all of its obligations under
this Agreement to be performed at or prior to the First Closing Date.
(vi) On the date before this Agreement is executed and also on each
Closing Date, a letter addressed to you, as Representatives of the
Underwriters, from Deloitte & Touche LLP, independent accountants, the
first one to be dated the date of this Agreement, the second one to be
dated the First Closing Date and the third one (in the event of a second
closing hereunder) to be dated the Second Closing Date, in form and
substance reasonably satisfactory to you, to the effect that they are
independent public accountants with respect to the Company within the
meaning of the Act and the related Rules and Regulations, and containing
statements and information of the type ordinarily included in accountants
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus.
(vii) On or before the First Closing Date, 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
each entered into a Lock-Up Agreement with the Underwriters that, during
the period beginning from the date of the Prospectus and continuing to and
including the date 180 days after the date of the Prospectus, such person
shall not, directly or indirectly, offer, sell, contract to sell, grant
any option to sell or otherwise dispose of any Common Stock, or other
securities which are substantially similar to the Common Stock, or
securities which are convertible into or exercisable or exchangeable for
or any rights to purchase or acquire Common Stock or other securities
which are substantially similar to the Common Stock, without your prior
written consent.
(viii) Such further certificates and documents from the Company and
the Selling Stockholders as the Representatives may reasonably request.
(f) On or before the date any of the Common Shares are released by the
Representatives for sale to the public and on the First Closing Date, the Common
Shares shall be quoted on the Nasdaq National Market.
(g) At or prior to the First Closing Date, the Representatives' Warrant
Agreement shall have been entered into by the Company and you and the
Representatives' Warrants shall have been issued and sold to you pursuant
thereto.
(h) The Common Shares shall be qualified for sale in such States and
jurisdictions as the Representatives may reasonably request, each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the First Closing Date and the Second Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Gardere & Wynne, L.L.P.,
22
<PAGE>
counsel for the Underwriters. The Company shall furnish you with such manually
signed or conformed copies of such opinions, certificates, letters and documents
as you request. Any certificate signed by any officer of the Company or
Stratasoft and delivered to the Underwriters or to counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company to the
Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company without liability on the part of you or any Underwriter or the Company
except for the expenses to be paid or reimbursed by the Company pursuant to
Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof.
SECTION 8. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by you pursuant
to Section 7 or Section 13 hereof, the Company agrees to reimburse you and the
other Underwriters upon demand for all out-of-pocket expenses that shall have
been reasonably incurred by them in connection with the proposed purchase and
the sale of the Firm Common Shares, including but not limited to reasonable fees
and disbursements of counsel, printing expenses, travel expenses, postage and
telephone charges relating directly to the offering contemplated by the
Prospectus up to a maximum of $45,000. If this Agreement is terminated by the
Company or the Selling Stockholder, or the sale to the Underwriters of the Firm
Common Shares at the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholder to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse you and the other Underwriters for all
such out-of-pocket expenses up to a maximum of $70,000. Any such termination
shall be without liability of any party to any other party except that the
provisions of this Section and Section 6 and Section 10 hereof shall at all
times be effective and shall apply.
SECTION 9. EFFECTIVENESS OF REGISTRATION STATEMENT. You and the Company
will use your and its respective best efforts to cause the Registration
Statement to become effective, to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.
SECTION 10. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to (i) indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages, liabilities or expenses, joint or
several, to which such Underwriter or such controlling person may become
subject, under the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
23
<PAGE>
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading, or arise out
of or are based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder or under law; and (ii) reimburse each
Underwriter and each such controlling person for any legal and other expenses as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or expenses arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 3
hereof.
The Selling Stockholder agrees to (i) indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages, liabilities or
expenses, joint or several, to which such Underwriter or such controlling person
may become subject, under the Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect hereof as contemplated below) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto or arise out of or are based
upon the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of them
not misleading, but only to the extent that the untrue statement or alleged
untrue statement or omission or alleged omission was made in any Registration
Statement, Preliminary Prospectus, Prospectus, or amendment or supplement
thereto in reliance upon and conformity with written information furnished to
the Company by the Selling Stockholder for use therein, or arise out of or are
based in whole or in part on any inaccuracy in the representations and
warranties of the Selling Stockholder contained herein or any failure of the
Selling Stockholder to perform his obligations hereunder or under law; and (ii)
reimburse each Underwriter and each such controlling person for any legal and
other expenses as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the Selling Stockholder will not be liable in
any such case to the extent that any such loss, claim, damage, liability or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with the information furnished to
the Company pursuant to Section 3 hereof.
24
<PAGE>
In addition to their other obligations under this Section 10(a), the
Company and the Selling Stockholder, jointly and severally, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any untrue statement or
omission, or any alleged untrue statement or omission, or any inaccuracy in the
representations and warranties of the Company or any Selling Stockholder herein
or any failure to perform their obligations hereunder, all as described in this
Section 10(a), they will reimburse each Underwriter (and to the extent
applicable each controlling person) on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's and the Selling Stockholder's obligation to
reimburse each Underwriter (and to the extent applicable each controlling
person) for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
each Underwriter (and to the extent applicable each controlling person) shall
promptly return it to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by Bank of
America NT&SA, San Francisco, California (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement will be in addition to any liability
which the Company or the Selling Stockholder may otherwise have. Notwithstanding
the foregoing provisions of this paragraph, neither the Company nor the Selling
Stockholder shall be liable for any such reimbursement of costs incurred after
the defense of any matter has been assumed by either or both of them pursuant to
paragraph (c) of this Section 10.
(b) Each Underwriter agrees to severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Act and the Selling Stockholder, against any losses, claims, damages,
liabilities or expenses to which the Company, any such director, officer or
controlling person or the Selling Stockholder may become subject, under the Act,
the Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, 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 in any of them 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 the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 3 hereof, and will reimburse the
Company and each such director, officer, controlling person or the Selling
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Stockholder for any legal and other expenses, as such expenses are reasonably
incurred by the Company or any such director, officer, controlling person or the
Selling Stockholder in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. In addition to its other obligations under this Section 10(b), each
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any untrue statement or omission, or any alleged untrue statement or
omission, described in this Section 10(b) which relates to information furnished
to the Company pursuant to Section 3 hereof, it will reimburse the Company and
each such officer, director, controlling person or the Selling Stockholder on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and each such officer,
director or controlling person for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Company and each such officer, director,
controlling person or the Selling Stockholder shall promptly return to the
Underwriters, together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the appropriate person within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
the indemnity agreement contained in this Section or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the counsel representing the
parties shall have advised them that, as a matter of professional
responsibility, such counsel cannot represent both the indemnified and
indemnifying parties, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
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connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Underwriters in the case of subsection (a) of
this Section 10, representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, in
each of which cases the reasonable fees and expenses of counsel shall be at the
expense of the indemnifying party. An indemnifying party shall not be liable for
any settlement of any action, suit, proceeding or claim effected without its
written consent.
(d) If the indemnification provided for in this Section 10 is required by
its terms but is for any reason held to be unavailable to hold harmless an
indemnified party under subsections (a), (b) or (c) of this Section 10 in
respect of any losses, claims, damages, liabilities or expenses referred to
herein, then each applicable indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of any losses, claims,
damages, liabilities or expenses referred to herein in such proportion as is
appropriate to reflect the relative benefits received by the Company, the
Selling Stockholder and the Underwriters from the offering of the Common Shares
and the relative fault of the Company, the Selling Stockholder and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received by
the Company, the Selling Stockholder and the Underwriters shall be deemed to be
in the same proportion, in the case of the Company and the Selling Stockholder,
as the total price paid to the Company for the Common Shares sold by it to the
Underwriters (net of underwriting commissions but before deducting expenses),
and, in the case of the Underwriters, as the underwriting commissions received
by them, bears to the total of such amounts paid to the Company and the amounts
received by the Underwriters as underwriting commissions. The relative fault of
the Company, the Selling Stockholder and the Underwriters 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, the Selling Stockholder or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses refereed to above shall be deemed to include, subject
to the limitations set forth in subsection (c) of this Section 10, any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim.
The provisions set forth in subsection (c) of this Section 10 with respect
to notice of commencement of any action shall apply if a claim for contribution
is to be made under this subsection (d); provided, however, that no additional
notice shall be required with respect to any action for which notice has been
given under subsection (c) for purposes of indemnification. The Company, the
Selling Stockholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 10 were determined solely by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method
27
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of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. Notwithstanding the
provisions of this Section 10, no Underwriter shall be required to contribute
any amount in excess of the amount of the total underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it. 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 to contribute pursuant to this Section 10 are several in proportion
to their respective underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections 10(a) and 10(b) hereof,
including the amounts of any requested reimbursement payments and the method of
determining such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of the New
York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of
the NASD. Any such arbitration must be commenced by service of a written demand
for arbitration or written notice of intention to arbitrate, therein selecting
the arbitration tribunal. In the event the party demanding arbitration does not
make such designation of an arbitration tribunal in such demand or notice, then
the party responding to said demand or notice is authorized to do so. Such an
arbitration would be limited to the operation of the interim reimbursement
provisions contained in Sections 10(a) and 10(b) hereof and would not resolve
the ultimate propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of such Sections 10(a) and 10(b) hereof.
SECTION 11. DEFAULT OF UNDERWRITERS. It shall be a condition to this
Agreement and the obligations of the Company and the Selling Stockholder to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Underwriters of such shares in accordance with the terms hereof.
If applicable, if any Underwriter or Underwriters default in their obligations
to purchase Common Shares hereunder on either the First or Second Closing Date,
and the aggregate number of Common Shares which such defaulting entity agreed
but failed to purchase on such Closing Date does not exceed 10% of the total
number of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the nondefaulting entities shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting entities agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs is more than
the above percentage and arrangements satisfactory to you, the Company and the
Custodian for the purchase of such Common Shares by other persons are not made
within two full business days after such default, this Agreement will terminate
without liability on the part of any nondefaulting Underwriter or the Company or
the Selling Stockholder, except for the expenses to be paid or reimbursed by the
Company pursuant to Sections 6 and 8 hereof and except to the extent provided in
Section 10 hereof.
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If applicable, in the event that Common Shares to which a default relates
are to be purchased by a nondefaulting Underwriter or by another person or
persons, the Representatives shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus, this
Agreement and any other documents, as well as any other arrangements, may be
effected. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. Nothing herein will relieve a
defaulting Underwriter from liability for its default.
SECTION 12. EFFECTIVE DATE. This Agreement shall become effective
immediately as to Sections 6, 8, 10,13 and 14 hereof and, as to all other
provisions, (i) if at the time of execution of this Agreement the Registration
Statement has not become effective, at 9:00 a.m., New York time, on the first
full business day following the effectiveness of the Registration Statement, or
(ii) if at the time of execution of this Agreement the Registration Statement
has been declared effective, at 9:00 a.m., New York time, on the first full
business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Common Shares for sale to the public.
For the purposes of this Section 12, the Common Shares shall be deemed to have
been so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of notices (i) advising
Underwriters that the Common Shares are released for public offering, or (ii)
offering the Common Shares for sale to securities dealers, whichever may occur
first.
SECTION 13. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company or by you by notice to
the other parties hereto at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall be
without liability on the part of the Company or the Selling Stockholder to you
or any Underwriter (except for the expenses to be paid or reimbursed by the
Company pursuant to Sections 6 and 8 hereof and except to the extent provided in
Section 10 hereof) or of you or any Underwriter to the Company or the Selling
Stockholder (except to the extent provided in Section 10 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such Exchange or in the over the counter
market by the NASD, or a general banking moratorium shall have been established
by federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall
29
<PAGE>
have occurred or shall have accelerated or escalated to such an extent, as, in
the reasonable judgment of the Representatives, to affect materially and
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or the Prospectus or which is not reflected in the Registration
Statement or the Prospectus but should be reflected therein in order to make the
statements or information contained therein not misleading in any material
respect or (iv) if there shall be any action, suit or proceeding pending or
threatened, or there shall have been any development or prospective development
involving particularly the business or properties or securities of the Company
or Stratasoft or the transactions contemplated by this Agreement, which, in the
reasonable judgment of the Representatives, may have a Material Adverse Effect
and makes it impracticable or inadvisable to offer or sell the Common Shares.
Any termination pursuant to this Section 13(b) shall be without liability on the
part of any Underwriter to the Company or on the part of the Company or the
Selling Stockholder to you or any Underwriter (except for expenses to be paid or
reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the
extent provided in Section 10 hereof).
SECTION 14. REPRESENTATION AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and the Selling Stockholder, of their respective
officers and of the several Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any inveStigation
made by or on behalf of any Underwriter, the Company or Selling Stockholder, or
any of its or their partners, officers or directors or any controlling persons,
as the case may be, and will survive delivery of and payment for the Common
Shares sold hereunder and any termination of this Agreement.
SECTION 15. NOTICES. All communications hereunder shall be in writing and,
if sent to the Underwriters, shall be mailed, delivered or telecopied and
confirmed to you at 11150 Santa Monica Boulevard, Suite 1500, Los Angeles,
California 90025, FAX: (310) 477-6060, with a copy to Gardere & Wynne, L.L.P.,
1601 Elm Street, Suite 3000, Dallas, Texas 75201, Attention: Randall G. Ray,
Esq., FAX: (214) 999-4667; if sent to the Company, shall be mailed, delivered or
telecopied and confirmed to the Company at 6401 Southwest Freeway, Houston,
Texas 77074, Attention: James H. Long, FAX: (713) 795-2036, with a copy to
Porter & Hedges, L.L.P., 700 Louisiana, 35th Floor, Houston, Texas 77002,
Attention: Nick D. Nicholas, FAX: (713) 228- 1331. The Company or you may change
the address for receipt of communications hereunder by giving notice to the
others.
SECTION 16. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 11 hereof, and to the benefit of the officers and directors and
controlling persons referred to in Section 10 hereof, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
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SECTION 17. REPRESENTATION OF UNDERWRITERS. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you, as
Representatives, will be binding upon all the Underwriters.
SECTION 18. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, subsection, paragraph or provision of this Agreement is for any
reason determined to be invalid or unenforceable, there shall be deemed to be
made such minor changes (and only such minor changes) as are necessary to make
it valid and enforceable.
SECTION 19. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 20. GENERAL. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The Section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you. If the foregoing is in
accordance with your understanding of our agreement, kindly sign and return to
us the enclosed copies hereof, whereupon it will become a binding agreement
between the Company, the Selling Stockholder and you, all in accordance with its
terms.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
31
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Very truly yours,
ALLSTAR SYSTEMS, INC.
By: ____________________________________
James H. Long, Chief Executive Officer
THE SELLING STOCKHOLDER:
JACK B. COREY
By: ____________________________________
James H. Long or Donald R. Chadwick,
As Attorney-in-Fact acting on behalf
of the Selling Stockholder
The foregoing Underwriting Agreement is hereby confirmed
and accepted by us in Los Angeles, California as of the
date first above written.
SUTRO & CO. INCORPORATED
CRUTTENDEN ROTH INCORPORATED
As Representatives of the several Underwriters
By: Sutro & Co. Incorporated
By:________________________________
Its:_______________________________
On behalf of each of the Underwriters
<PAGE>
SCHEDULE A
SELLING STOCKHOLDERS
NUMBER OF FIRM
COMMON SHARES
SELLER TO BE SOLD
------ ---------
Allstar Systems, Inc.......................... 1,500,000
Jack B. Corey................................. 535,000
---------
Total................................... 2,035,000
=========
<PAGE>
SCHEDULE B
SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM
COMMON SHARES
NAME OF UNDERWRITER TO BE PURCHASED
------------------- ---------------
Sutro & Co. Incorporated............................
Cruttenden Roth Incorporated........................
---------
Total......................................... 2,035,000
---------
<PAGE>
DRAFT--
SUBJECT TO NEGOTIATION WITH COMPANY COUNSEL
SCHEDULE C
OPINION OF COMPANY COUNSEL
Pursuant to Section 7(e)(i) of the Agreement, Porter & Hedges, L.L.P.,
counsel for the Company and Stratasoft, shall furnish its opinion to the
Underwriters to the effect that:
(1) The Company and Stratasoft have been duly incorporated and are
validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation. Each of the Company and
Stratasoft is duly qualified to do business as a foreign corporation and
is in good standing in all other jurisdictions where the ownership or
leasing of properties or the conduct of its respective business requires
such qualification, except for jurisdictions in which the failure to so
qualify would not have a Material Adverse Effect.
(2) Each of the Company and Stratasoft has full corporate power and
authority to own and lease its respective assets and properties and
conduct its respective business as now being conducted and as described in
the Registration Statement.
(3) 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 Common Shares being delivered at such Closing Date, but
with respect to such Common 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 nonassessable; and the Common Shares
conform to the description of the Common Stock contained in the Prospectus
in all material respects.
(4) All of the issued shares of capital stock of Stratasoft have
been duly and validly authorized and issued, are fully paid and
nonassessable, and to the 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.
(5) The Registration Statement has become effective under the Act
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or preventing the use of the
Prospectus has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission. Any required
filing of the Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules and Regulations has been made in the manner and within
the time period required by such Rule 424(b).
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(6) The Registration Statement, the Prospectus and each amendment or
supplement thereto made by the Company prior to such Closing Date (other
than financial statements and 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.
(7) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental actions, suits
or proceedings pending to which the Company or Stratasoft is a party or of
which any property of the Company or Stratasoft is subject, which, if
determined adversely to the Company or Stratasoft, 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.
(8) The Company has the corporate power and authority to enter into
this Agreement and the Representatives' Warrant Agreement. This Agreement
and the Representatives' Warrant Agreement have been duly authorized,
executed and delivered by the Company.
(9) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is
required for the issuance of the Common Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Common 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 Common Shares by the Underwriters.
(10) The execution and delivery of this Agreement by the Company 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, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement,
sale/leaseback agreement or other agreement or instrument (collectively,
the "Specified Documents") 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 Stratasoft 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
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the antifraud provisions of the federal or any state's securities laws or
the rules and regulations promulgated thereunder).
(11) The Company is not, and immediately upon completion of the sale
of Common Shares contemplated hereby will not be, required to register as
an "investment company" under the Investment Company Act of 1940, as
amended.
(12) The Common Stock, including the Common Shares, has been
authorized for quotation, upon notice of issuance, on the Nasdaq National
Market, and, to the best of such counsel's knowledge, no action has been
taken or threatened by the NASD or The Nasdaq Stock Market with respect to
the delisting or permanent suspension from trading of the Common Stock.
(13) The form of certificates for the Common Shares complies in all
material respects with the requirements of the General Corporation Law of
the State of Delaware and the Company's Bylaws.
(14) The Representatives' Warrants have been duly authorized and
when delivered in accordance with this Agreement and the Representatives'
Warrant Agreement will be duly issued and legal, valid and binding
obligations of the Company enforceable against the Company in accordance
with their terms, except (A) as limited by the effect of bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting the rights and remedies of
creditors, (B) as limited by the effect of general principles of equity,
whether enforcement is considered in a proceeding in equity or at law, and
the discretion of the court before which any proceeding therefor may be
brought, and (C) to the extent that rights to indemnity or contribution
may be limited by federal, state or provincial securities laws or the
public policy underlying such laws.
(15) The Representatives' Warrant Stock has been duly authorized and
reserved for issuance and, when issued and delivered in accordance with
the terms of the Representatives' Warrant Agreement, will be duly and
validly issued, fully paid and nonassessable.
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, has
participated in the preparation of the Registration Statement and the
Prospectus, has 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 Closing
Date (other than the
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<PAGE>
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 Closing Date (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 Closing Date, either the Registration Statement or the
Prospectus or any further amendment thereto made by the Company prior to
such Closing Date (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 has 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, and 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 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.
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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.
In rendering such opinion, such counsel may rely on certificates of
officers of the Company and Stratasoft and of governmental officials, in
which case such opinion should state that such counsel is so doing and
copies of said certificates are to be attached to the opinion.
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EXHIBIT 3.3
AMENDED AND RESTATED
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
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<PAGE>
bring before the annual meeting (a) a brief description of the business desired
to be brought before 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.
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<PAGE>
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 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 two 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.
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
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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.
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,
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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 which all participants can hear each
other which permits him to participate in the meeting, and a
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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.
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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.
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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.
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EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALLSTAR SYSTEMS, INC.
PURSUANT to the provisions of Section 242 of the Delaware General
Corporation Law (the "DGCL"), Allstar Systems, Inc., a corporation duly
organized and existing under the DGCL (the "Corporation"), does hereby certify
that:
I. The amendment to the Corporation's Certificate of Incorporation set
forth below was duly adopted by the stockholders of the Corporation on
June 18, 1997 at a Special Meeting of Stockholders.
II. Section A of Article VIII is deleted and replaced in its entirety as
follows:
"A. NUMBER OF BOARD. The number of directors constituting the initial
board of directors shall be two. The number of each subsequent board of
directors shall be fixed by, or in the manner provided in, the bylaws."
IN WITNESS WHEREOF, Allstar Systems, Inc. has caused this certificate to
be executed by James H. Long, its authorized officer, on this 24th day of June
1997.
/s/ JAMES H. LONG
James H. Long, President and
Chief Executive Officer
EXHIBIT 4.3
DRAFT 06/24/97 10:28PM
WARRANT AGREEMENT
THIS AGREEMENT is entered into as of the ____ day of July, 1997, by and
between ALLSTAR SYSTEMS, INC. (the "Company") and SUTRO & CO. INCORPORATED
("Sutro") and CRUTTENDEN ROTH INCORPORATED ("Cruttenden"; Sutro and Cruttenden
are sometimes collectively referred to herein as the "Holders").
R E C I T A L S:
A. In connection with the initial public offering by the Company of
2,035,000 shares of Common Stock (including 535,000 shares sold by Jack B. Corey
("Corey")) in which the Holders were the representatives of the several
underwriters (the "Public Offering"), the Company has agreed to sell to the
Holders warrants to purchase an aggregate of up to Two Hundred Three Thousand
Five Hundred (203,500) shares of Common Stock of the Company (the "Warrants") on
the terms set forth herein.
B. The parties desire to clarify their rights and obligations with respect
to the Warrants.
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations of the Company and the Holders thereunder,
the parties hereto agree as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Common Stock" shall mean and include the Company's Common Stock
authorized on the date hereof and shall also include any capital stock of any
class of the Company hereafter authorized which shall not be limited to a fixed
sum, liquidation preference or percentage in respect of the rights of the
holders thereof to participate in dividends and in the distribution of assets
upon the voluntary liquidation, dissolution or winding up of the Company; or in
the case of any reclassification, change, consolidation, merger, sale or
conveyance of the character referred to in Section 8(b) hereof, the stock,
securities or property provided for in such Section 8(b).
(b) "Exercise Date" shall mean, as to a Warrant, the date on which
the Company shall have received both (a) a Warrant Certificate representing such
Warrant, with the exercise form thereon duly executed by a Holder, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price or pursuant to the net exercise provisions set
forth in the Warrant Certificate.
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(c) "Prospectus" shall, with respect to the Public Offering, have
the meaning set forth in that certain Underwriting Agreement dated
_____________, 1997, by and between the Company, Corey and the Holders as
representatives of the several underwriters in the Public Offering.
(d) "Purchase Price" shall mean the purchase price to be paid upon
exercise of the Warrants in accordance with the terms hereof, which price shall
be ________________ ($________) per share of Common Stock which price is equal
to the greater of (i) 120% of the price per share of the Common Stock sold in
the Public Offering or (ii) $9.60 per share. In any event, the Purchase Price
shall be subject to adjustment from time to time pursuant to the provisions of
Section 8 hereof, and as so adjusted is sometimes herein referred to as the
"Stated Purchase Price."
(e) "Warrant Expiration Date" shall mean 5:00 p.m. (California time)
on _________, 2002 (the date that is five years from the effective date of the
Public Offering); provided that if such date shall in the State of California be
a holiday or a day on which banks are authorized to close, then 5:00 p.m.
(California time) on the next following day which in the State of California is
not a holiday or a day on which banks are authorized to close.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
Upon the execution of this Agreement, the Holders shall deliver to
the Company the aggregate sum of Two Thousand Thirty-Five and No/100 Dollars
($2,035.00) (amounting to $0.01 per share), and Warrant Certificates
representing the right to purchase One Hundred One Thousand Seven Hundred Fifty
(101,750) shares of Common Stock of the Company shall be executed by the Company
and delivered to each of the Holders. The Company hereby represents and warrants
to the Holders that the equity capitalization of the Company immediately
following the Public Offering is fully and fairly presented under the column
labeled "As Adjusted" under the heading "Capitalization" in the Prospectus,
including all Common Stock issued and all Common Stock issuable upon exercise of
outstanding warrants, options and convertible securities, if any.
(a) From time to time, up to the Warrant Expiration Date, the
Company shall execute and deliver Warrant Certificates in required whole number
denominations to the persons entitled thereto in connection with any transfer or
exchange permitted under this Agreement; and at the option of the Company, in
such form as may be approved by the Board of Directors of the Company to reflect
any adjustment or change in the Stated Purchase Price or the number of shares of
Common Stock purchasable upon exercise of the Warrants.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements thereon as the Company
may deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto, or to conform to usage. The Warrant
Certificates shall be dated
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the date of issuance thereof (whether upon initial issuance, transfer, exchange
or in lieu of a mutilated, lost, stolen or destroyed Warrant Certificate) and
issued in registered form.
(b) The Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a seal or a
facsimile of the Company's seal.
SECTION 4. EXERCISE.
The Warrants may be exercised by the Holders, in whole or in part,
at any time on or after one year from the date hereof, but not after the
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the Warrant Certificates. The Warrants shall be deemed to have been
exercised immediately prior to the close of business on the Exercise Date.
Promptly following, and in any event within five days after the date of such
exercise, the Company shall issue and deliver to the Holders thereof a
certificate or certificates for the securities deliverable upon such exercise
(plus a Warrant Certificate for any unexercised portion of the Warrants held by
such Holder).
SECTION 5. RESERVATION OF SHARES; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of the Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of the Warrants. The Company covenants that
all shares of Common Stock which shall be issuable upon exercise of the Warrants
shall, at the time of delivery and assuming payment in accordance herewith, be
duly and validly issued, fully paid, nonassessable and free from all taxes,
liens and charges with respect to the issue thereof (other than those which the
Company shall promptly pay or discharge) and that upon issuance such shares
shall be listed on each national securities exchange or trading market, as the
case may be, if any, on which the other shares of outstanding Common Stock of
the Company are then listed.
(b) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of the Warrants, and the issuance and delivery of any shares upon exercise of
the Warrants.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
The transfer of the Warrants or any interest therein by the Holders
is subject to compliance with all applicable state and federal securities laws.
The Warrants are nontransferable for a period of one year from the effective
date of the Public Offering except to officers and partners of the Holders, any
member participating in the Public Offering or officers and partners of any
member participating in the Public Offering. The Warrant Certificates and each
certificate representing shares of Common Stock issuable upon exercise of the
Warrants (unless no longer required in the opinion of counsel for the Company)
shall be stamped or otherwise printed with a legend substantially in the
following form and such additional legends as may be required under other
applicable state securities laws:
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR A LEGAL OPINION
REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
SECTION 7. LOSS OR MUTILATION.
Upon receipt by the Company of evidence satisfactory to it of the
ownership of and loss, theft, destruction or mutilation of a Warrant Certificate
and in case of loss, theft or destruction of indemnity satisfactory to it, and
in the case of mutilation upon surrender and cancellation thereof, the Company
shall execute (in the absence of notice to the Company that the Warrant
Certificate has been acquired by a bona fide purchaser) and deliver to the
Holder thereof in lieu thereof a new Warrant Certificate of like tenor.
Applicants for a substitute Warrant Certificate shall comply with such other
reasonable regulations and pay such other reasonable charges as the Company may
prescribe.
SECTION 8. ADJUSTMENT OF STATED PURCHASE PRICE AND NUMBER OF SHARES OF COMMON
STOCK OR WARRANTS.
(a) CHANGE OF SHARES. In the event the Company shall, at any time or
from time to time after the date hereof, issue any shares of Common Stock as a
stock dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such issuance, subdivision or combination being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares, the Stated
Purchase Price in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent) determined by
dividing (i) the sum of the total number of shares of Common Stock outstanding
immediately prior to such Change of Shares, multiplied by the Stated Purchase
Price in effect immediately prior to such Change of Shares, by (ii) the total
number of shares of Common Stock outstanding immediately after such Change of
Shares.
Upon each adjustment of the Stated Purchase Price pursuant to
this Section 8, the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in Section
8(b) hereof) be such number of shares purchasable at the Stated Purchase Price
immediately prior to such adjustment multiplied by a fraction, the numerator of
which shall be the Stated Purchase Price in effect immediately prior to such
adjustment and the denominator of which shall be the Stated Purchase Price in
effect immediately after such adjustment.
(b) DISTRIBUTIONS. In case the Company shall fix a record date for
the making of a distribution to all holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the surviving corporation) of evidences of its indebtedness or assets
(including cash, cash dividends, and securities, but
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excluding (i) dividends referred to in Section 8(a), (ii) distributions referred
to in Section 8(c) and (iii) cash dividends out of surplus of the Company), the
number of shares of Common Stock purchasable upon exercise of each Warrant after
such record date shall be adjusted to equal the product obtained by multiplying
the number of shares of Common Stock purchasable upon an exercise of the
Warrants immediately prior to such record date by a fraction, the numerator of
which shall be the Stated Purchase Price immediately prior to such distribution,
and the denominator of which shall be the Stated Purchase Price immediately
prior to such distribution less the fair market value per share as determined by
an investment banking firm other than one of the Holders that is reasonably
acceptable to the Holders (the cost of the engagement of said investment banking
firm to be borne by the Company) of the portion of the assets or evidences of
indebtedness so distributed. Such adjustment shall be made successively whenever
any such distribution is made and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution. If such distribution is not
made, the number of shares of Common Stock into which each Warrant is
exercisable shall again be adjusted to be such number of shares of Common Stock
in effect if the distribution had not been made.
(c) RECLASSIFICATION, MERGER, ETC. In case of any reclassification,
capital reorganization or other change of outstanding shares of Common Stock, or
in case of any consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock),
or in case of any sale or conveyance to another corporation of the property of
the Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that the Holders shall have the right thereafter, by
exercising the Warrants, to acquire the kind and number of shares of stock or
other securities or property (including cash) receivable upon such
reclassification, capital reorganization or other change, consolidation, merger,
sale or conveyance, had the Holders exercised the Warrants immediately prior to
such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. The Company shall not effect any such consolidation,
merger, sale or conveyance, unless prior to or simultaneously with the
consummation thereof, the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets or the appropriate corporation or entity shall assume, by written
instrument, the obligation to deliver to the Holders the shares of stock,
securities or assets to which the Holders may be entitled pursuant to this
Section 8(c). The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(d) Notwithstanding Section 8(c), (i) if the Company merges or
consolidates with, or sells all or substantially all of its property and assets
to, any other person and consideration is payable to holders of Common Stock in
exchange for their Common Stock in connection with such merger, consolidation or
sale which consists solely of cash, or (ii) in the event of the dissolution,
liquidation or winding up of the Company, then the Holders shall be entitled to
receive distributions on the date of such event on an equal basis with holders
of Common Stock (or other securities issuable upon exercise of the Warrants) as
if the Warrants had been exercised immediately prior to such event, less the
Stated Purchase Price. Upon receipt of
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such payment, if any, the rights of the Holders shall terminate and cease and
such Warrants shall expire. In case of any such merger, consolidation or sale of
assets, the surviving or acquiring person and, in the event of any dissolution,
liquidation or winding up of the Company, the Company shall promptly, after
receipt of surrendered Warrant Certificates, make payment by delivering a check
in such amount as is appropriate (or, in the case of consideration other than
cash, such other consideration as is appropriate) to such person as it may be
directed in writing by the respective Holder.
(e) After each adjustment of the Purchase Price pursuant to this
Section 8, the Company will promptly provide to the Holders a certificate of its
Chief Financial Officer, setting forth: (i) the Purchase Price as so adjusted,
(ii) the number of shares of Common Stock purchasable upon exercise of each
Warrant after such adjustment, and (iii) a brief statement of the facts
accounting for such adjustment.
(f) In the event:
(i) that the Company shall authorize the issuance to all
holders of its Common Stock of rights or warrants to subscribe for or purchase
capital stock of the Company or of any other subscription rights or warrants; or
(ii) that the Company shall authorize the distribution to all
holders of its Common Stock of evidences of its indebtedness or assets; or
(iii) of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required, or
of the sale or transfer of the properties and assets of the Company
substantially as an entirety, or of any capital reorganization or
reclassification or change of the Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination); or
(iv) of the voluntary dissolution, liquidation or winding up
of the Company; or
(v) that the Company proposes to take any other action which
would require an adjustment of the Stated Purchase Price of the Warrants issued
by it pursuant to Section 8;
then the Company shall cause to be given to the Holders at least twenty (20)
days prior to the applicable record date hereinafter specified, by first class
mail, postage prepaid, a written notice stating (A) the date as of which the
holders of record of Common Stock to be entitled to receive any such rights,
warrants or distribution are to be determined, or (B) the date on which any such
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
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(g) No adjustment in the number of shares of Common Stock
purchasable upon exercise of the Warrants shall be required unless such
adjustment would require an increase or decrease of at least one percent (1%) in
the number of shares of Common Stock purchasable upon the exercise of each
Warrant; provided, however, that any adjustments that by reason of this Section
8(g) are not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the nearest
one-thousandth of a share.
SECTION 9. FRACTIONAL SHARES.
If the number of shares of Common Stock purchasable upon the
exercise of the Warrants is adjusted pursuant to Section 8 hereof, the Company
shall nevertheless not be required to issue fractions of shares, upon exercise
of the Warrant or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon any
exercise hereof, the Company shall pay to the Holder thereof an amount in cash
equal to such fraction multiplied by the current market value of such fractional
share, determined as follows:
(a) If the Common Stock is listed on a national securities
exchange or quoted on the Nasdaq National Market, the current value shall
be calculated assuming conversion at the last reported sale price of the
Common Stock on such exchange on the last business day prior to the date
of exercise of the Warrant or if no such sale is made on such day, the
average closing bid and asked price for such day on such exchange or
market system; or
(b) If the Common Stock is not listed so or quoted, the
current value shall be calculated assuming conversion at the mean of the
last reported bid and asked prices reported on the OTC Bulletin Board on
the last business day prior to the date of the exercise of the Warrant; or
(c) If the Common Stock is not so listed or quoted and bid and
asked prices are not so reported, the current value shall be determined by
an investment banking firm other than one of the Holders that is
reasonably acceptable to the Holder thereof.
SECTION 10. REGISTRATION.
(a) DEFINITIONS.
(i) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering by the Securities and
Exchange Commission ("SEC") of the effectiveness of such registration statement.
(ii) The term "Registration Period" means a period of five
years beginning on the effective date of the Public Offering.
(iii) The term "Registrable Securities" means (a) the Common
Stock which may be issuable upon exercise of a Warrant and (b) any Common Stock
of the Company which a Holder shall be entitled to receive, or shall have
received, because of a Holder's
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ownership of such securities, such as additional securities received upon stock
splits, recapitalizations and the like, unless such shares were issued in a
transaction registered under the Securities Act.
(b) PIGGYBACK REGISTRATION.
(i) NOTICE OF REGISTRATION. If after the Warrants become
exercisable and prior to the end of the Registration Period, at any time or from
time to time, the Company shall determine to register any of its securities in
connection with an offering of its securities to the general public for cash on
a form which would permit the registration of Registrable Securities, the
Company will, subject to the further provisions of this Section 10:
(A) promptly give the Holders written notice thereof;
and
(B) subject to (ii) below, use its best efforts to
include in such registration (and any related qualification under blue sky
laws), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 30 days
after receipt of such written notice from the Company, by the Holders.
(ii) UNDERWRITING. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 10(b)(i)(A). In such event, the right of each Holder to
registration pursuant to this Section 10(b) shall be conditioned upon the
respective Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. Should a Holder propose to distribute its securities through such
underwriting, it shall (together with the Company) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by the Company. Notwithstanding any other provision of this
Section 10(b), if the underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the underwriter may limit
the Registrable Securities to be included in the registration and underwriting.
Each of the Holders agrees that it will consent to any lockup of securities
demanded by the underwriter in connection with any such registration provided
that such lockup shall be no more restrictive than is similarly imposed on other
selling stockholders.
(c) DEMAND REGISTRATION. If, after the Warrants become exercisable
and prior to the end of the Registration Period, the Company shall receive from
Sutro a written demand that the Company effect the registration of the
Registrable Securities held by Sutro, the Company will as soon as practicable,
provide written notice to Cruttenden of the Sutro demand and provide Cruttenden
the opportunity to elect to include the Registrable Securities held by
Cruttenden in such registration, use its commercially reasonable best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities law, and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so required as would permit
or facilitate the sale and distribution of all of such Registrable Securities;
provided, however, that the Company shall not without its consent be required to
maintain effectiveness for more than 180
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days. The Company agrees to include in any such Registration Statement all
information which such Holder shall reasonably request. The Company shall not be
obligated to take any action to effect any such registration, qualification or
compliance pursuant to this Section 10(c):
(i) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance unless the
Company is already subject to service in such jurisdiction and except as
may be required by the Securities Act;
(ii) Within a twelve (12) month period commencing six (6)
months immediately prior to and ending six (6) months immediately
following the effective date of any registration statement pertaining to a
firm commitment underwritten offering of securities of the Company; or
(iii) With respect to each of the Holders, after the Company
has effected one registration pursuant to this Section 10(c) and such
registration has been declared or ordered effective; or
(iv) During any period when such distribution might be deemed
to cause the Company, sellers or affiliates to violate Regulation M under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor regulation; or
Subject to the foregoing clauses (i) through (iv), the Company shall
file a registration statement covering the Registrable Securities so demanded to
be registered as soon as practicable after receipt of the demand of the holder;
provided, however, that, not more than once within any twelve (12) month period,
if the Company shall furnish to the holder a certificate signed by the President
of the Company stating that in the good faith judgment of the Board of Directors
of the Company it would be seriously detrimental to the Company and its
stockholders for such registration statement to be filed on or before the date
filing would be required and it is therefore essential to defer the filing of
such registration statement, the Company shall have the right to defer such
filing for a period of not more than 120 days after receipt of the demand.
(d) EXPENSES OF REGISTRATION. Subject to any state securities or
Blue Sky laws requiring otherwise, all expenses incurred in connection with any
registration, qualification or compliance pursuant to this Section 10, including
without limitation, in each case, all registration, filing and National
Association of Securities Dealer fees; all fees and expenses of complying with
securities or blue sky laws; all word processing, duplicating and printing
expenses, messenger, delivery and shipping expenses; fees and disbursements of
the accountants and counsel for the Company including the expenses of any
special audits or "cold comfort" letters or opinions required by or incident to
such registrations; and any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities (but excluding underwriting discounts
and commissions, if any), shall be borne by the Company; provided, however, that
all fees and disbursements of counsel separately retained by the Holder with
respect to such registration shall be borne by the Holder; and provided further
that the Company shall be obligated to bear the expenses relating to no more
than one demand registration pursuant to Section 10(c).
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(e) INDEMNIFICATION.
(i) If and whenever Registrable Securities of a Holder are
included in a registered offering, the Company will indemnify such Holder and
each of its directors, officers and each person who controls such Holder within
the meaning of the Securities Act, with respect to which registration, against
all claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on (A) any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, or other document
(including any related registration statement) incident to any such registration
or (B) any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (C) any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company and relating to
action or inaction required of the Company in connection with any such
registration, qualification or compliance, and will reimburse such Holder and
each of its directors, officers, and each person who controls such Holder within
the meaning of the Securities Act, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage or
liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by such Holder and stated to
be specifically for use therein.
(ii) A Holder will, if Registrable Securities held by or
issuable to it are included in the securities as to which such registration, is
being effected, indemnify the Company, each of its directors and officers who
sign such registration statement, each underwriter, if any, of the Company's
securities covered by such a registration statement and each person who controls
the Company within the meaning of the Securities Act, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on (A) any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus or other document,
or (B) any 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 the Company, such directors, officers, persons or
underwriters for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus or other document
in reliance upon and in conformity with written information furnished to the
Company by such Holder and stated to be specifically for use therein.
(iii) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under the indemnity agreement contained in this Section or to the extent it is
not prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will
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be entitled to participate in, and, to the extent that it may wish, jointly with
all other indemnifying parties similarly notified, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified party
and the indemnifying party and the counsel representing the parties shall have
advised them that, as a matter of professional responsibility, such counsel
cannot represent both the indemnified and indemnifying parties, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (A) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel, approved
by the Holder in the case of subsection (i) of this Section 10(i), representing
the indemnified parties who are parties to such action) or (B) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the reasonable fees and
expenses of counsel shall be at the expense of the indemnifying party. An
indemnifying party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent.
(f) INFORMATION. A Holder shall furnish in writing to the Company
such information regarding such Holder and the distribution proposed by such
Holder as the Company may request in writing and as shall be required in
connection with any registration, referred to in this Section 10.
(g) SALE WITHOUT REGISTRATION. At the time of any transfer of any
Registrable Securities which shall not be registered under the Securities Act
the Company may require, as a condition of allowing such transfer, that the
Holder or the transferee furnish to the Company: (i) such information as is
reasonably necessary in order to establish that such transfer may be made
without registration under the Securities Act; and (ii) at the expense of the
Holder or the transferee, an opinion of counsel, satisfactory in form and
substance to the Company, to the effect that such transfer may be made without
registration under such Act; provided that nothing contained in this Section
10(g) shall relieve the Company from complying with any request for
registration, qualification or compliance made pursuant to the other provisions
of this Section 10.
(h) TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company
to register securities granted by the Company under Section 10 may be assigned
by a Holder to a transferee or assignee of at least 25% of the Registrable
Securities in accordance with Section 6, provided that such transfer may
otherwise be effected in accordance with applicable securities laws and that the
Company is given written notice at the time of or within a reasonable time after
said transfer, stating the name and address of said transferee or assignee and
identifying the securities with respect to which such registration rights are
being assigned.
SECTION 11. REGISTRATION PROCEDURES.
If and whenever the Company is required to use reasonable efforts to
effect the registration of any Registrable Securities under the Securities Act
as provided in Section 10, the Company will, subject to the limitations provided
herein, as expeditiously as possible:
(a) prepare and (as soon thereafter as possible or in any event no
later than 60 days after the end of the period within which requests for
registration may be given to the Company or such longer period as the Company
shall in good faith require to produce the financial statements required in
connection with such registration) file with the SEC the requisite registration
statement to effect such registration and thereafter use reasonable efforts to
cause such registration statement to become effective, provided that the Company
may discontinue any
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registration of its securities which are not Registrable Securities at any time
prior to the effective date of the registration statement relating thereto;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement; provided, however, that the Company shall not in any event be
required to keep the registration statement effective for a period of more than
180 days after such registration statement becomes effective;
(c) furnish to each seller of Registrable Securities covered by such
registration statement such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus contained in
such registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 under the
Securities Act, and such other documents, as such seller may reasonably request;
(d) use its reasonable best efforts to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or Blue Sky laws of such jurisdictions as
each seller thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement remains in
effect (provided, however, that the Company shall not in any event be required
to keep such registration or qualification in effect for a period of more than
180 days after such registration or qualification becomes effective), and
take any other action which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
securities owned by such seller, except that the Company shall not for any such
purpose be required to qualify generally to do business as a foreign corporation
in any jurisdiction wherein it would not but for the requirements of this
Section 11(d) be obligated to be so qualified or to consent to general service
of process in any such jurisdiction;
(e) furnish to each seller of Registrable Securities a copy, or,
upon request, a signed counterpart, addressed and the underwriters, if any, of
(i) an opinion of counsel for the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), and (ii) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), signed by the independent public accountants who have audited the
Company's financial statements included in such registration statement, covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and,
12
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in the case of the accountants' letter, with respect to events subsequent to the
date of such financial statements, as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the accountants'
letter, such other financial matters as the underwriters, if any, may reasonably
request;
(f) notify each seller of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include 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 in the light of the circumstances under which they were made;
(g) otherwise use reasonable efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least twelve months beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act, and will furnish
to each such seller, upon request of such seller, at least five days prior to
the filing thereof a copy of any amendment or supplement to such registration
statement or prospectus;
(h) provide and cause to be maintained a transfer agent for all
Registrable Securities covered by such registration statement from and after a
date not later than the effective date of such registration statement;
(i) use its reasonable best efforts to list all Registrable
Securities covered by such registration statement on any securities exchange on
which any of the Registrable Securities is then listed; and
(j) refrain from making any sale or distribution of any equity
securities of the Company for at least ninety (90) days after the closing of the
public offering pursuant to such registration, except pursuant to (i) any
employee stock option plan and (ii) any preexisting agreement for the sale of
such securities.
It shall be a condition precedent to the obligations of the Company
to take any action with respect to registering a Holder's Registrable Securities
pursuant to this Section 11 that such seller of Registrable Securities as to
which any registration is being effected furnish the Company in writing such
information regarding such seller, the Registrable Securities and other
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securities of the Company held by such seller, and the distribution of such
securities as the Company may from time to time reasonably request in writing.
If a Holder refuses to provide the Company with any of such information on the
grounds that it is not necessary to include such information in the registration
statement, the Company may exclude such Holder's Registrable Securities from the
registration statement if the Company provides such Holder with an opinion of
counsel to the effect that such information must be included in the registration
statement and such Holder thereafter continues to withhold such information. The
deletion of such Holder's Registrable Securities from a registration statement
shall not affect the registration of the other Registrable Securities to be
included in such registration statement.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 11(g), such Holder will
forthwith discontinue such Holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 11(g) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such holder's possession, of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
SECTION 12. REPORTING REQUIREMENTS UNDER EXCHANGE ACT.
(a) When it is first legally required to do so, the Company shall
register its Common Stock under Section 12 of the Exchange Act and shall keep
effective such registration and shall timely file such information, documents
and reports as the SEC may require or prescribe under Section 13 of the Exchange
Act. From and after the effective date of the first registration statement filed
by the Company under the Securities Act, the Company shall (whether or not it
shall then be required to do so) timely file such information, documents and
reports which a corporation, partnership or other entity subject to Section 13
or 15(d) (whichever is applicable) of the Exchange Act is required to file.
Immediately upon becoming subject to the reporting requirements of
either Section 13 or 15(d) of the Exchange Act, the Company shall forthwith upon
request furnish any Holder of Registrable Securities (i) a written statement by
the Company that it has complied with such reporting requirements, (ii) a copy
or the most recent annual or quarterly report of the Company, and (iii) such
other reports and documents filed by the Company with the SEC as such Holder may
reasonably request in availing itself of an exemption for the sale of
Registrable Securities without registration under the Securities Act. The
Company acknowledges and agrees that the purposes of the requirements contained
in this Section 12 are (i) to enable any such Holder to comply with the current
public information requirement contained in Paragraph (c) of Rule 144 under the
Securities Act should such Holder ever wish to dispose of any of the securities
of the Company acquired by it without registration under the Securities Act in
reliance upon Rule 144 (or any other similar exemptive provision) and (ii) to
qualify the Company for the use of registration statements on Form S-3. In
addition, the Company shall take such other measures and file such other
information, documents and reports, as shall hereafter be required by the SEC as
a condition to the availability of Rule 144 under the Securities Act (or any
similar exemptive provision hereafter in effect) and the use of Form S-3.
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SECTION 13. INVESTMENT REPRESENTATIONS.
Each of the Holders, severally and not jointly, represents and
warrants with respect to the purchase of the Warrants as follows:
(a) Such Holder is acquiring the Warrants, and, upon exercise of the
Warrants, will acquire the shares of Common Stock purchasable thereunder for
investment for its own account, not as a nominee or agent, and not with a view
to, or for resale in connection with, any distribution thereof.
(b) Such Holder understands that the Warrants have not been
registered under the Securities Act on the grounds that the sale provided for in
this Agreement and the issuance of the Warrants hereunder are exempt from
registration under the Securities Act pursuant to Section 4(2) which exemption
depends upon, among other things, the bona fide nature of the investment intent
as expressed herein.
(c) Such Holder has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management and to
review the Company's facilities.
(d) Such Holder qualifies as an "accredited investor" as such term
is defined in Rule 501(a) promulgated under the Securities Act.
SECTION 14. WARRANT HOLDER NOT DEEMED STOCKHOLDER.
The Holders, as holders of the Warrants shall not, as such, be
entitled to vote or to receive dividends or be deemed the holder of Common Stock
that may at any time be issuable upon exercise of such Warrants for any purpose
whatsoever, nor shall anything contained herein be construed to confer upon a
Holder, as a holder of the Warrants, as such, any of the rights of a stockholder
of the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue or
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger or conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights, until such holder
shall have exercised such Warrants in accordance with the provisions hereof.
SECTION 15. AGREEMENT OF HOLDERS AS WARRANT HOLDERS.
Each Holder consents and agrees with the Company that:
(a) The Warrants are transferable only in accordance with Section 6
on the registry books of the Company by such Holder and only if the Warrant
Certificates representing such Warrants are surrendered at the office of the
Company, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Company in its sole discretion, together with payment of any
applicable transfer taxes; and
15
<PAGE>
(b) The Company may deem and treat such Holder as the holder and as
the absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and the Company shall not be affected by any notice or knowledge to
the contrary, except as otherwise expressly provided in Section 6 hereof.
SECTION 16. CANCELLATION OF WARRANT CERTIFICATE.
If the Company shall purchase or acquire the Warrants, the Warrant
Certificates evidencing the same shall thereupon be canceled and retired.
SECTION 17. MODIFICATION OF AGREEMENT.
This Agreement shall not be modified, supplemented or altered in any
respect except with the consent in writing of the Holders and the Company.
SECTION 18. NOTICES.
Any notice or communication must be in writing and given by
depositing the same in the United States mail, addressed to the party to be
notified, postage prepaid and registered or certified with return receipt
requested, or by delivering the same in person or by telecopier. Such notice may
be deemed received on the date on which it is hand-delivered or telecopied or on
the third business day following the date on which it is so mailed. For purposes
of notice, the addresses of the parties shall be:
To: Sutro & Co. Incorporated
11150 Santa Monica Blvd., Suite 1500
Los Angeles, California 90025
Attention: Tom Weinberger
Telecopy: (310) 477-6060
To: Cruttenden Roth Incorporated
18301 Von Karman
Irvine, California 92612
Attention: Joseph C. Sherwood III
Telecopy: (214) 852-9603
With a copy (which shall not constitute notice) to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attention: Randall G. Ray
Telecopy: (214) 999-4667
16
<PAGE>
To: Allstar Systems, Inc.
6401 Southwest Freeway
Houston, Texas 77074
Attention: James H. Long
Telecopy: (713) 795-2036
With a copy (which shall not constitute notice) to:
Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Attention: Nick D. Nicholas
Telecopy: (713) 228-1331
SECTION 19. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, as applied between residents of that state
entering into contracts wholly to be performed in that state. Both parties
hereto agree that they shall submit their persons to personal jurisdiction to
courts sitting in California, and shall accept and agree to venue in California.
SECTION 20. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Holders and their respective successors and assigns, and the
holders from time to time of Warrant Certificates. Nothing in this Agreement is
intended or shall be construed to confer upon any other person any right, remedy
or claim, in equity or at law, or to impose upon any other person any duty,
liability or obligation.
SECTION 21. TERMINATION.
This Agreement shall terminate at the close of business on the
Expiration Date of the Warrants or such earlier date upon which the Warrants
have all been exercised.
SECTION 22. SEVERABILITY.
If any provision of this Agreement is held to be illegal, invalid or
unenforceable under present or future laws effective during the term hereof,
such provisions shall be fully severable and this Agreement shall be construed
and enforced as if such illegal, invalid or unenforceable provision never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
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<PAGE>
SECTION 23. COUNTERPARTS.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
SUTRO & CO. INCORPORATED
By:_____________________________
Its:____________________________
CRUTTENDEN ROTH INCORPORATED
By:_____________________________
Its:____________________________
ALLSTAR SYSTEMS, INC.
By:_____________________________
Its:____________________________
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DRAFT 06/24/97 10:25PM
EXHIBIT A
WARRANT
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. IT MAY NOT BE SOLD, TRANSFERRED OR
PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES
AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE, TRANSFER OR PLEDGE IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
ALLSTAR SYSTEMS, INC.
1. NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and
conditions set forth, in that certain Warrant Agreement of even date (the
"Warrant Agreement") by and between Allstar Systems, Inc. (the "Company"), and
Sutro & Co. Incorporated ("Sutro") and Cruttenden Roth Incorporated
("Cruttenden"), [SUTRO/CRUTTENDEN] is entitled to purchase from the Company at
any time after one year from the date hereof and on or before ______________,
2002, One Hundred One Thousand Seven Hundred (101,750) shares of fully paid and
non-assessable Common Stock of the Company upon surrender hereof at the
principal office of the Company and, at the election of the holder hereof, upon
payment of the purchase price at said office in cash or by check. Subject to
adjustment as provided in the Warrant Agreement, the purchase price of one share
of Common Stock (or such securities as may be substituted for one share of
Common Stock pursuant to the provisions of the Warrant Agreement) shall be _____
_______($___________). The purchase price of one share of Common Stock (or such
securities as may be substituted for one share of Common Stock pursuant to the
provisions set forth in the Warrant Agreement) payable from time to time upon
the exercise of this Warrant (whether such price be the price specified above or
an adjusted price determined as provided in the Warrant Agreement) is referred
to herein as the "Warrant Price."
2. EXERCISE OF WARRANT. This Warrant may be exercised by the holder
hereof, in whole or in part and from time to time, by the surrender of this
Warrant at the principal office of the Company, accompanied by payment to the
Company, by check, of an amount equal to the then applicable Warrant Price per
share multiplied by the number of shares of Common Stock then being purchased.
This Warrant shall be deemed to have been exercised immediately prior to the
close of business on the date of its surrender for exercise as provided above,
and the person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the holder of such shares of
record as of the close of business on such date. As promptly as practicable on
or after such date and in any event within five (5) business days thereafter,
the Company at its expense shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
full shares of Common Stock issuable upon such exercise, together with cash in
lieu of any fraction of a share as
<PAGE>
provided, the Warrant Agreement, and, unless this Warrant has been fully
exercised or has expired, a new Warrant representing the portion of the shares
of Common Stock, if any, with respect to which this Warrant shall not have been
exercised, shall also be issued to the holder hereof. The shares of Common Stock
issuable upon exercise hereof shall, upon their issuance, be fully paid and
nonassessable.
ISSUED as of this _____ day of July, 1997.
ALLSTAR SYSTEMS, INC.
By:____________________
Title:_________________
2
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NOTICE OF EXERCISE:
The undersigned holder of this Warrant hereby exercises this Warrant as to the
number of shares set forth below and tenders the exercise price as follows:
Number of shares exercised ____________
Aggregate exercise price $___________
___________________________________ ___________________________
Signature Date
ASSIGNMENT:
The undersigned holder of this Warrant hereby assigns and transfers this Warrant
to _________________________________ as to the number of shares set forth below:
Number of shares ____________
Transferee: ___________________________________________
_________________________________ __________________________
Signature Date
3
EXHIBIT 10.34
May 19, 1997
Mr. Jack B. Corey
P.O. Box 525
Pinehurst, Texas 77362
Re: Initial Public Offering of Allstar Systems, Inc. Common Stock (the
"Offering")
Dear Jack:
I am writing on behalf of Allstar Systems, Inc. (the "Company"), Allstar
Equities, Inc., and myself, individually. As you know, the Company is planning
to file an amendment to the registration statement covering the Offering, a copy
of which is enclosed for your review. As you are also aware, the Offering is now
proposed to be underwritten by a syndicate of underwriters of which Sutro & Co.
Incorporated and Cruttenden Roth Incorporated, but not Rauscher Pierce Refsnes,
Inc., will act as the representatives of the several underwriters. The purpose
of this letter agreement is (i) to update and confirm various agreements made
between you, Jakascki Corporation, Allstar Equities, Inc., the Company and
myself relating to the Offering and the sale of your shares of the Company's
common stock in the Offering, (ii) to reflect the change in the identity of the
underwriters participating in the Offering and (iii) to address any other
changes that have occurred since our last agreements were entered into.
Therefore, described below are the agreements we entered into pursuant to that
certain letter agreement dated September 12, 1996.
1. You reconfirm your agreement to (i) sell all shares of the Company's
common stock owned by you at the same price received by the Company in the
Offering for the shares sold by it, (ii) bear, in proportion to the number
of shares sold by you, the costs of underwriting discounts, fees and other
compensation of the underwriters, (iii) enter into an underwriting
agreement with the underwriters and (iv) enter into a Custody Agreement
and a Power of Attorney to insure delivery of your shares at closing. An
updated Custody Agreement and Power of Attorney are enclosed for your
signature and it is hereby agreed that the newly exectued versions of
these documents will in all respects supersede and replace any previous
versions thereof. As soon as the underwriters have provided me with their
new form of underwriting agreement, I will forward that to you for your
review.
2. You also reconfirm your agreement to cooperate with the Company and its
legal counsel, auditors and the underwriters in connection with the
Offering, including completing a questionnaire for due diligence purposes.
The lapse of time since you first completed the questionnaire makes it
necessary to enclose a copy of the questionnaire completed by you in
August and ask that you please review it to insure there have been no
changes to the answers
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you last gave. Please contact Nick D. Nicholas of Porter & Hedges, L.L.P.
at (713) 226-0637, to inform him if there have been any changes in your
answers to the questionnaire.
3. You reconfirm that upon the closing of the Offering the following
agreements shall terminate: (i) the Stock Purchase Agreement executed
March 22, 1994 (the "Stock Purchase Agreement"); (ii) the Shareholders
Agreement executed August 2, 1996 (the "Shareholders Agreement"); (iii)
the Insurance Proceeds Agreement dated August 2, 1996; and (iv) the
Consulting Agreement executed August 2, 1996 (the "Consulting Agreement").
4. You reconfirm that upon the closing of the Offer, the following will be
automatically modified: (i) the Guaranty to Lease between Jakascki
Corporation and Allstar Equities, Inc. dated August 2, 1996 (the "Lease
Guaranty"), to exclude the Company as a guarantor and (ii) the Indemnity
Agreement entered into by Allstar Equities, Inc., the Company and James H.
Long dated August 2, 1996 (the "Indemnity Agreement"), to exclude the
Company as an indemnitor.
5. You reconfirm that you have waived the right to prior notice of the
proposed Offering, any preemptive rights or rights of first refusal.
6. You acknowledge the Company's and my waiver of limitations of the amount
of net proceeds receivable by you contained in paragraph 2(b) of each the
Stock Purchase Agreement and the Shareholders Agreement to enable you to
sell all of your shares in the Offering.
7. You reconfirm that you and Jakascki Corporation have agreed that at the
closing, any liabilities or obligations arising out of the following will
be waived and released: (i) the Lease Guaranty; (ii) the Indemnity
Agreement; (iii) the now superseded Lease Agreement dated June 26, 1991,
between Jakascki Corporation and Allstar Equities, Inc.; (iv) the now
superseded Guaranty to Lease dated June 26, 1991, between the Company,
Jakascki Corporation, Allstar Equities, Inc., and James H. Long; (v) the
now superseded Agreement Among Shareholders effective as of December 31,
1993, between you and James H. Long; and (vi) the now superseded Sublease
between Allstar Equities, Inc. and the Company dated August 1, 1991.
8. You acknowledge the correction of the Unsecured Promissory Note executed
by Jakascki Corporation in the principal amount of $150,000 that
mistakenly named the Company as the payee to name Allstar Equities, Inc.
as payee.
9. You reconfirm that you do not wish to be a director of the Company and in
connection therewith your waiver of paragraphs 7(a) and (b) of the
Shareholders Agreement.
Finally, this letter also confirms our understanding that pursuant to that
certain letter agreement dated October 21, 1996, you have decided to exercise
your option to defer, until the
2
<PAGE>
Offering is closed or abandoned, any requirement of me personally or Allstar
Systems, Inc., a Delaware corporation (the "Company"), to make the October 1,
1996, January 1, 1997 and April 1, 1997 minimum quarterly purchases of shares of
common stock of the Company owned by you pursuant to the Shareholder's
Agreement, dated August 2, 1996, by and between you and myself.
By signature hereto you hereby confirm that the above is an accurate
representation of the agreements we have reached. Please acknowledge your
consent by signing below and returning this letter to me in the enclosed,
postage pre-paid envelope.
Very truly yours,
/S/ JAMES H. LONG
James H. Long
Agreed to this 4th day of June 1997.
Dated: June 4th, 1997
By: JACK B. COREY
Jack B. Corey
3
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 5 to Registration Statement No.
333-09789 of Allstar Systems, Inc. ("Allstar") on Form S-1 of our report dated
March 26, 1997, appearing in the Prospectus, which is part of this Registration
Statement, and to the references to us under the heading "Experts" in such
Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of Allstar listed in Item 16(b). This consolidated financial statement
schedule is the responsibility of Allstar's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Houston, Texas
June 25, 1997
