FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-09789
ALLSTAR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0062751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
(Address of principal executive offices) (Zip code)
(713) 795-2000
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock $.01 par value per share As of August 4, 1997, 4,440,125 shares
outstanding
<PAGE>
Allstar Systems, Inc.
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes To Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31, June 30,
1996 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash $ 94 $ 1,529
Cash 135 867
------- -------
Total cash and cash equivalents 229 2,396
Accounts receivable - trade, net 16,517 19,981
Accounts receivable - affiliates 140 601
Inventory 4,862 4,382
Deferred taxes 350 160
Deferred offering costs 412 512
Other current asset 174 164
------- -------
Total current assets 22,684 28,196
Property and equipment 1,644 1,517
Other assets 392 52
------- -------
Total $24,720 $29,765
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 9,975 $11,751
Accounts payable 7,157 9,266
Accrued expenses 2,759 3,073
Income taxes payable 206 421
Deferred service revenue 296 205
------- -------
Total current liabilities 20,393 24,716
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued
Common stock:
$.01 par value, 50,000,000 shares authorized,
2,675,000 shares issued and outstanding 27 27
Additional paid in capital 1,479 1,479
Retained earnings 2,821 3,543
------- -------
Total stockholders' equity 4,327 5,049
------- -------
Total $24,720 $29,765
======= =======
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended June 30,
1996 1997
Total Revenue $ 32,202 $ 32,239
Cost of sales and services 28,234 27,312
---------- ----------
Gross Profit 3,968 4,927
Selling, general and administrative expenses 2,992 3,839
---------- ----------
Operating income 976 1,088
Interest expense and other 285 309
---------- ----------
Income before provision for income taxes 691 779
Provision for income taxes 223 310
---------- ----------
Net income $ 468 $ 469
========== ==========
Net income per share $ 0.17 $ 0.17
========== ==========
Weighted average shares outstanding 2,675,000 2,675,000
========== ==========
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands,)
(Unaudited)
Six months Six Months
ended ended
June30, June 30,
1996 1997
Net income $ 607 $ 722
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Gain of disposal of assets -- --
Depreciation and amortization 179 252
Deferred taxes (12) 190
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable - trade, net 768 (3,464)
Accounts receivable - affiliates 104 (121)
Inventory (1,431) 480
Deferred offering costs -- (100)
Other current assets (23) 10
Accounts payable (765) 2,109
Accrued expenses 583 314
Income taxes payable 256 215
Deferred service revenue (136) (91)
------- -------
Net cash provided by (used in) operating
activities 130 516
Cash flows from investing activities:
Capital Expenditures (303) (125)
Proceeds from sale of fixed assets -- --
Net cash used in investing activities: (303) (125)
Cash flows from financing activities:
Net increase (decrease) in notes payable (375) 1,776
------- -------
Net cash provided by (used in) financing
activities: (375) 1,776
Net increase (decrease) in cash and cash
equivalents (548) 2,167
Cash and cash equivalents at beginning of period 1,029 229
------- -------
Cash and cash equivalents at end of period $ 481 $ 2,396
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 355 $ 298
======= =======
Cash paid for taxes $ 94 $ 115
======= =======
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allstar Systems, Inc. and subsidiaries ("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. In January, 1997 Allstar formed IT Staffing Inc. to
provide temporary and permanent placement services of technical personnel. 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).
The consolidated financial statements presented herein at June 30, 1997 and
for the three-month periods ended June 30, 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
subsidiaries. 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 $30 ,and $127 for the three months ended June 30, 1996 and 1997,
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.
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 June 30, 1996 and 1997, 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 $14 and $31 in quarters ended June 30, 1996 and 1997,
respectively.
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 and June 30,
1997 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997, specifies
the computation, presentation and disclosure requirements of earnings per share
("EPS") and supersedes Accounting Principles Board Opinion No. 15 ("APB No.
15"). SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS,
which excludes the impact of common stock equivalents, replaces primary EPS.
Diluted EPS, which utilizes the average market price per share as opposed to the
greater of the average market price per share or ending market price per share
when applying the treasury stock method in determining common stock equivalents,
replaces fully diluted EPS. Pro forma basic and diluted EPS for all historical
periods presented, assuming SFAS No. 128 was effective at the beginning of each
such historical period, would not be materially different than the presentations
using APE No.
15.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 130 and 131 are effective for periods beginning after December 15,
1997. These three statements will not have any effect on the Company's 1997
financial statements, however, management is evaluating what, if any additional
disclosures may be required when these three statements are implemented.
RECLASSIFICATIONS - The accompanying consolidated financial statements for
the years presented have been reclassified to give retroactive effect to certain
changes in presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1996 and
June 30, 1997:
1996 1997
Trade $ 16,736 $ 20,219
Allowances for doubtful accounts (219) (238)
-------- --------
Total $ 16,517 $ 19,981
======== ========
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. (see Note 10)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
June 30, 1997:
1996 1997
Equipment $ 282 $ 286
Computer equipment 1,964 2,086
Furniture and fixtures 294 293
Leasehold improvements 47 47
Vehicles 105 105
------- -------
2,692 2,817
Accumulated depreciation and amortization (1,048) (1,300)
------- -------
Total $ 1,644 $ 1,517
======= =======
<PAGE>
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. Throughout 1997,
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
$18,000.
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 the consolidated
financial statements. The Accounts Line accrues interest at the prime rate plus
2% (10.25% at December 31, 1996 and 10.50% at June 30, 1997). 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 $94 and
$1,529 at December 31, 1996 and June 30, 1997, 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 the three
months ended June 30, 1996 and 1997 was 10.25% and 10.50%, respectively.
The second revolving line of credit (the "Inventory Line") is used by
Allstar to floor plan inventory purchases. At December 31, 1996 and June 30,
1997, aggregate borrowings on the Inventory Line were $6,134 and $4,806,
respectively. Interest accrues at the prime rate plus 6% (14.50% at June 30,
1997) 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,
1996 and June 30, 1997, aggregate borrowings on this line were $993 and $941,
respectively. Interest accrues at the prime rate, which for purposes of this
agreement will not fall below 6.5%, plus 6% (14.50% at June 30, 1997) 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. Throughout 1997, 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 $27 and $13 during the three
month ended June 30, 1996 and 1997, 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 and
$18,273 at December 31, 1996 and June 30, 1997, respectively.
6. INCOME TAXES
The provision for income taxes for the three months ended June 30, 1996
and 1997 consisted of the following:
1996 1997
---- ----
Current Provision (benefit)
Federal $ 196 $429
State 27 41
Total current provision 223 470
Deferred Provision (160)
----
Total $ 223 $310
The total provision for income taxes during the three month ended June
30, 1996 and 1997 varied from the U.S. federal statutory rate due to the
following:
1996 1997
---- ----
Federal income tax at statutory rate $ 242 $273
Nondeductible expenses 3 4
State income taxes 17 26
Other (39) 7
----- ----
Total $ 223 $310
===== ====
Deferred tax assets computed at the statutory rate related to temporary
differences at December 31, 1996 and June 30, 1997 were as follows:
December 31 June 30,
1996 1997
Deferred tax assets:
Accounts receivable $142 $ 85
Deferred service revenue 69 21
Inventory 139 54
---- ----
Total deferred tax assets $350 $160
==== ====
7. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1996 and
June 30, 1997:
December, 31 June 30,
1996 1997
Sales tax payable $1,309 $1,418
Accrued employee benefits, payroll and
other related costs 996 1,332
Accrued interest 209 120
Other 245 203
Total $2,759 $3,073
====== ======
<PAGE>
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 three months ended June 30, 1996 and 1997, Allstar
charged to expense $0 and $26 related to this agreement.
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 $93 and $95 during the three months ended June 30, 1996 and 1997,
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 the three months ended June 30, 1996 and
1997 under such agreements totaled approximately $52 and $33, respectively.
Benefit Plans - Allstar maintains a group medical and hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims exceeding $30 per employee or a cumulative maximum of approximately
$180 per year are insured by an outside insurance company. Allstar's claim and
premium expense for this self-insurance program totaled approximately $16,949
for the 2nd quarter 1996 and $106,713 for the 2nd quarter 1997.
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
$71 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 June 30, 1997 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 June 30, 1997.
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.
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. Upon completion of a public offering of Allstar
common stock the option to require the principal shareholder to purchase the
shares becomes inoperative. In addition Allstar is obligated, under a consulting
agreement with the minority shareholder, to pay consulting fees of $75,000 per
annum.(see Note 11.)
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. The principal amounts as
of June 30, 1997 are classified as Accounts receivable - affiliates based on the
expectation of repayment within one year. At December 31, 1996 and June 30,
1997, Allstar receivables from these affiliates amounted to approximately $501
and $549, respectively.
During each of the three months ended June 30, 1996 and 1997, Allstar paid
no consulting fees to a minority stockholder.
<PAGE>
11. EVENTS SUBSEQUENT TO JUNE 30, 1997:
On July 7, 1997, the Company successfully completed an Initial Public Offering
of 1,767,500 shares of common stock and received net proceeds of $8,190 before
deducting estimated offering expenses of $850. On July 29, 1997, the Company
sold an additional 265,005 shares of common stock under option with the
Underwriters to cover over-allotments and received proceeds of $1,448. The
company used all of the proceeds to reduce short-term debt. In addition, the
Company agreed to sell to the underwriters of the public offering warrants to
purchase 176,750 at an exercise price of the greater of 120% of the public
offering price or $9.60 per share. The purchase price of the warrants was $.01
per warrant and the purchase price was paid on July 29, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
ALLSTAR SYSTEMS. INC.
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.
OVERVIEW
The Company is engaged in the business of reselling computer hardware and
software products and providing related services. In addition, the Company
derives revenue from providing IT Services to purchasers of Computer Products
and other customers. The Company operates from offices in Houston and Dallas,
Texas. In 1994, the Company began offering Telecom Systems in its Houston office
and during the quarter ended June 30, 1997 commenced offering Telecom Systems in
its Dallas office. In the fourth quarter of 1995, the Company acquired and began
marketing CTI Software. To date, most of its revenue has been derived from
Computer Products sales. During the quarter ended June 30, 1997, Computer
Products totaled 85.5% of revenues while IT Services, Telecom Systems and CTI
Software totaled 8.7%, 4.0% and 1.8% of revenues, respectively.
The Company's Computer Products division sells 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.
The Company is an authorized reseller of products from a number of leading
manufacturers of computer hardware, software and networking equipment.
Generally, Computer Products sales are made on a purchase order basis,
with few on-going commitments to purchase from its customers. On certain
occasions, large "roll-out" orders are received with delivery scheduled over a
longer term, such as six to nine months, while normal orders are received and
delivered to the customers usually within approximately thirty days of the
receipt of the order. Because of this pattern of sales and delivery, the Company
normally does not have a significant backlog of computer product sales.
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
information systems support, authorized warranty service, 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. In addition, the Company provides temporary
and permanent staffing services.
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's ability to attract and retain qualified professional
and technical personnel is critical to the success of its IT Services business.
The most significant portion of the costs associated with the delivery of IT
Services are of personnel costs. Therefore, in order to be successful, the
Company's billable rates must be in excess of the personnel costs and its margin
is dependent upon maintaining high utilization of its service personnel. In
addition, the competition for high quality personnel has generally intensified
causing the Company's, along with other IT Service providers, personnel costs to
increase. The Company's costs of goods and services includes the personnel costs
of its billable technical staff.
While the Company has service contracts with its larger customers, many
of these contracts are project based or are terminable on relatively short
notice.
Through the Telecom Systems division, the Company 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, wireless communications and video conferencing. The
Company has historically operated Telecom Systems only from its Houston office.
During the second quarter of 1997, the Company commenced operations of Telecom
Systems in its Dallas office.
The Company develops and markets proprietary CTI Software, which
integrates business telephone systems and networked computer systems, under the
trade name "Stratasoft." 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. Stratasoft
products include software for call center management, both in-bound and
out-bound, as well as interactive voice response software.
The Company believes that each of its four separate businesses are
complementary to each other and allow the Company to offer a broader range of
integrated products and services in order to satisfy its customers' information
and communication technology requirements than many of its competitors. The
Company's strategy is to maintain and expand its relationships with its
customers by satisfying a greater portion of these requirements.
The Company's gross margin varies substantially between each of its
businesses. The Company's Computer Products sales 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 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. The gross margin
for CTI Software was 40.2% in 1996.
The Company's overall gross margin has ranged between 12.3% and 13.3%
for the three year period ended December 31, 1996. During any period, overall
gross margin may vary significantly because of the mix of the various products
and services revenues realized by the Company during any such period. While the
Company endeavors to strengthen its computer products sales on a continuing
basis, the Company is endeavoring to grow its higher margin products and
services at a higher rate than Computer Products thereby increasing its overall
gross margins.
<PAGE>
Manufacturers of many of the computer products resold by the Company have
consistently reduced unit prices near the end of a product's life cycle, most
frequently following the introduction of newer, more advanced models. While the
major manufacturers of computer products have a policy of providing price
protection to resellers when prices are reduced, on occasion, and particularly
during 1994, manufacturers introduced new models of their products and then
reduced the price of, or discontinued, the older models without price
protection. In these instances, the Company often sells the older models at
reduced prices, which adversely affects gross margin.
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 sales transaction 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.
Inacom Corp. ("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.
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.
This Form 10-Q contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Such forward looking
statements include risks and uncertainties. Such risks and uncertainties, many
of which are not within the control of the Company, may cause the actual results
to differ materially from the results discussed in the forward looking
statements, including, but not limited to, the Company's ability to execute and
implement its plans and strategies and /or control the economic environment in
which the Company it operates.
<PAGE>
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.
RESULTS OF OPERATIONS (Unaudited)
(In thousands, except share and per share amounts)
Three months ended June 30,
1996 1997
Amount % Amount %
Revenue(1)
Computer Products $29,044 90.2% $27,567 85.5%
IT Services 1,800 5.6 2,791 8.7
Telecom Systems 1,009 3.1 1,284 4.0
CTI Software 349 1.1 597 1.8
Total revenue 32,202 100.0 32,239 100.0
Gross Profits
Computer Products 2,706 9.3 3,001 10.9
IT Services 641 35.6 1,268 45.4
Telecom Systems 435 43.1 333 26.0
CTI Software 186 53.3 325 54.4
Total gross profit 3,968 12.3 4,927 15.3
Selling, general and Administrative expense 2,992 9.3 3,839 11.9
Operating income 976 3.0 1,088 3.4
Interest Expense (net of other income) 285 .9 309 1.0
Income before provision for income taxes 691 2.1 779 2.4
Provision (benefit) for income taxes 223 .7 310 1.0
Net income $ 468 1.4 $ 469 1.4
Earnings per share $ 0.17 $ 0.17
Weighted average shares outstanding 2,675,000 2,675,000
(1) Percentages shown are percentages of total revenue, except gross profit
percentages which represent gross profit by each business unit as a percentage
for each such unit.
TOTAL REVENUE. All of the Company's business units, except Computer
Products, increased revenues over the prior year's comparable period. Total
revenue increased by $37,000 (.1%) and remained substantially unchanged at $32.2
million in 1996 compared to $32.2 million in 1997. The absence of growth from
the prior period results from the Company not fully replacing a large "roll-out"
sale which occurred during 1996. This Computer Products sale was approximately
$6 million or 19% of 1996 revenues. Excluding the impact of this order, total
revenues would have increased by approximately 18.8% over 1996. Revenue from
Computer Products decreased by $1.5 million (5.1%) from $29.0 million in 1996 to
$27.6 million in 1997. Revenue from Computer Products as a percentage of total
revenue decreased 4.7% from 90.2% in 1996 to 85.5% in 1997. Revenue from IT
Services increased $991,000 (55.1%) from $1.8 million in 1996 to $2.8 million in
1997 because of the expansion of its sale force and billable technical staff,
together with an emphasis on higher level service offerings to the Company's
customers. Revenue from IT Services as a percentage of total revenue increased
from 5.6% in 1996 to 8.7% of total revenues in 1997. Revenue from Telecom
Systems increased by $275,000 (27.3%) from $1.0 million in 1996 to $1.3 million
in 1997. 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 3.1% in 1996 to 4.0% in 1997. CTI
Software revenue increased by $248,000 (71.1%) from $349,000 in 1996 to $597,000
in 1997. 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 1.1% in 1996 to
1.8 % in 1997.
GROSS PROFIT. Gross profit increased by $959,000 (24.2%) from $4.0
million in 1996 to $4.9 million in 1997, while gross margin increased from 12.3%
in 1996 to 15.3% in 1997. The gross margin for Computer Products increased from
9.3% in 1996 to 10.9% in 1997, which was primarily the result of the absence of
large "roll-out" type transactions, which typically produce lower gross margin,
in 1997. The gross profit from IT Services increased 97.8% from $641,000 in 1996
to $1.3 million in 1997. Gross margin increased from 35.6% in 1996 to 45.4% in
1997. This increase in gross margin was primarily attributable to the
replacement of less profitable IT Services business with more profitable
business from new and existing IT Services customers. In 1996 the Company
commenced the implementation of a program 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 by
revenues from new IT Services customers and from existing customers at higher
gross margins. The gross margin for Telecom Systems sales decreased from 43.1%
in 1996 to 26.0% in 1997, reflecting the commencement of Telecom Systems
operations in the Company's Dallas office, lower product margins and higher
installation costs than are normally incurred. In addition, the Company
installed a large complex system in 1996 which had an unusually high margin as
compared to the Company's normalized business. The gross margin for CTI Software
increased from 53.3% in 1996 to 54.4 % in the 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . Selling, general and
administrative expenses increased by $847,000 (28.3%) from $3.0 million in 1996
to $3.8 million in 1997. As a percentage of total revenue, selling, general and
administrative expenses increased from 9.3% in 1996 to 11.9% in 1997. A portion
of the increase, expressed 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 financial
administration functions. In addition, the Company incurred higher
non-capitalized professional service fees as it prepared for a public offering
of its common stock.
OPERATING INCOME. Operating income increased by $112,000 (11.5%) from
$976,000 in 1996 to $1.1 million in 1997. Operating income increased as a
percentage of total revenue from 3.0% in 1996 to 3.4% in 1997.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense (net of other
income) increased $24,000 from $285,000 during 1996 to $309,000 during 1997.
This reflects a small increase in the effective interest rate paid by the
Company during 1997 and higher average borrowings on the Company's lines of
credit during such period.
NET INCOME. Net income, after a provision for income taxes totaling
$310,000 (reflecting an effective tax rate of 39.8% in 1997 compared to 32.3% in
1996), increased nominally by $1,000 from $468,000 in 1996 to $469,000 in 1997.
The unusually low effective tax rate in 1996 was the result of an adjustment of
an excessive provision in a period prior to the quarter ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $2.3 million and $3.5 million at
December 31, 1996 and June 30, 1997, respectively. As of June 30, 1997, the
Company had borrowing capacity under the Company's credit facility of $3.2
million.
CASH FLOW
Operating activities used net cash totaling $645,000 and provided cash
totaling $516,000 during the three months and the six months ended June 30,
1997, respectively. During the three months ended June 30, 1997, net cash was
used in operations due primarily to increased levels of trade accounts
receivables which more than offset net income, lesser decreases in inventory
levels and lesser increases in trade accounts payable. Operating activities
provided net cash during the six months ended June 30, 1997 because the increase
in trade accounts receivable was offset by net income and depreciation,
increases in accounts payable and increases in other liabilities.
Trade accounts receivable increased $2.8 million during the three month
period ended June 30, 1997 and by $3.5 million during the six months ended June
30, 1997. Inventory decreased by $752,000 and $481,000 during the same periods,
respectively. The increase in trade accounts receivable resulted from slower
payments by the Company's customers during the second quarter of 1997. Inventory
decreased because of improved inventory turnover, particularly during the second
quarter of 1997. Accounts payable increased by $213,000 during the three months
ended June 30, 1997 and by $2.2 million during the six months ended June 30,
1997, due principally to extension of more liberal terms from certain of the
Company's suppliers and the slower payment by the Company of trade accounts
payable.
Investing activities used cash totaling $17,000 and $125,000 during the
three months and six months ended June 30, 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. 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 $1.3 million and $1.8 million
during the three months and six month ended June 30, 1997, respectively. The
primary source of cash from financing activities each period has been borrowings
on the Company's lines of credit. The lines of credit have been used principally
to finance accounts receivable balances.
ASSET MANAGEMENT
The Company had trade accounts receivable, net of allowance for doubtful
accounts, of $20.0 million at June 30, 1997. The number of days' sales
outstanding in trade accounts receivable was 52 days, which reflects the slowing
of payment by the Company's customers during the three months ended June 30,
1997. Bad debt expense as a percentage of total revenue for the three months
ended June 30, 1997 was 0.3%, which was equal to bad debt expense for the three
months ended June 30, 1996. The Company's allowance for doubtful accounts, as a
percentage of trade accounts receivable, was 1.3% at December 31, 1996, and 1.1%
at June 30, 1997. Inventory turnover for the three months and six months ended
June 30, 1997 was 21.3 times, and 20.1 times, respectively.
CURRENT DEBT OBLIGATIONS
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 a credit facility provided by IBM Credit
Corporation ("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 (10.5% at June 30, 1997). Under the Inventory Line, IBMCC pays the
Company's inventory vendors directly, generally in exchange for negotiated
financial incentives. Typically, the financial incentives received are such that
IBMCC does not charge interest to the Company until approximately 30 days after
the transaction is financed, at which time the Company is required to either pay
the full invoice amount of the inventory purchased from corporate funds or to
borrow under the Accounts Line for the amount due to IBMCC. Inventory Line
advances not paid within 30 days after the financing date bear interest at the
fluctuating prime rate plus 6.0%. IBMCC is permitted to fix a minimum prime rate
for the IBMCC Facility of not less than the average prime rate in effect at the
time the minimum prime rate is set but has not done so. IBMCC is authorized to
change, on 30 days notice, the computation of the borrowing base and to
disqualify accounts receivable upon which advances have been made and require
repayment of such advances to the extent such disqualifications cause the
Company's borrowings to exceed the reduced borrowing base. The IBMCC Facility
renews for successive periods of 13 months unless either party chooses to
terminate the arrangement on 60 days notice.
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.
At June 30, 1997, the total indebtedness of the Company under the IBMCC
Facility was $16.6 million of which $11.8 million was outstanding under the
Accounts Line and $4.8 million was outstanding under the Inventory Line. The
Company's remaining available credit at June 30, 1997, based on its borrowing
base was approximately $3.2 million.
The Company has a $3.0 million credit facility with Deutsche Financial
Services (the "DFS Facility") for the purchase of inventory from certain
suppliers. As in the case of the IBMCC Inventory Line, advances under the DFS
Facility are typically interest free for 30 days after the financing date for
transactions in which adequate financial incentives are received by DFS from the
vendor. Within 30 days after the financing date, the full invoice amount for
inventory financed through DFS is required to be paid by the Company. Amounts
remaining outstanding thereafter bear interest at the fluctuating prime rate
(but not less than 6.5%) plus 6.0%. DFS retains a security interest in the
inventory financed. The DFS Facility is immediately terminable by either party
by written notice to the other. At June 30, 1997, the amount outstanding under
the DFS Facility was $940,000.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends unless consented to by the lender.
SUBSEQUENT EVENT
On July 7, 1997, the Company sold, pursuant to a public offering,
1,500,000 shares of common stock at an issuance price of $6.00 per share. The
Company received net proceeds from the sale of the common stock of $8.2 million
and anticipates receiving an additional $1.4 million in connection with the
exercise, by the underwriters, of an option to purchase an additional 265,125
shares at a price of $6.00 per share. The Company intends to apply all of the
net proceeds from the sale of common stock to repay a substantial portion of the
indebtedness outstanding under the Accounts Line upon the receipt of those
funds.
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 June 30, 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 June 30, 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 December 31, 1996 or
the three months and six months ended June 30, 1997
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, 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.
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Allstar Systems, Inc.
August 6, 1997 By: /s/ JAMES H. LONG
Date James H. Long, Chief Executive Officer
August 6, 1997 By:/s/ DONALD R. CHADWICK
Date Donald R. Chadwick, Chief Financial Officer
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