SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21479
ALLSTAR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0515249
(State of Incorporation) (I.R.S. Employer Identification No.)
6401 Southwest Freeway
Houston, TX 77074
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code: (713) 795-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __x__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on March 24,
1998, as reported on NASDAQ National Market System, was approximately
$11,591,000.
The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 24, 1997 was 4,454,411.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III, Items 10,
11, 12, and 13.
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PART I
Item 1. Business
Special Notice Regarding Forward-Looking Statements
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR THE FUTURE FINANIAL PERFORMANCE OF THE COMPANY, INCLUDING BUT
NOT LIMITED TO STATEMENTS CONTAINED IN ITEM 1 - "FACTORS WHICH AFFECT FUTURE
OPERATING RESULTS," "ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "PROPERTIES" AND "BUSINESS." READERS ARE
CAUTIONED THAT SUCH STATEMENTS, WHICH MAY BE IDENTIFIED BY WORDS INCLUDING
"ANTICIPATES," "BELIEVES," "INTENDS," "ESTIMATES," "EXPECTS" "PLANS" AND OTHER
SIMILAR EXPRESSIONS, ARE ONLY PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, OVER WHICH THE COMPANY HAS LITTLE OR
NO CONTROL. IN EVALUATING SUCH STATEMENTS, READERS SHOULD CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING MATTERS SET
FORTH IN "FACTORS WHICH MAY AFFECT THE FUTURE OPERATING RESULTS," WHICH COULD
CAUSE ACTUAL EVENTS, PERFORMANCE OR RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH STATEMENTS.
GENERAL
Allstar Systems, Inc. (the "Company") is a regional provider of
computer and telecommunications hardware and software products and related
services. The Company primarily markets its products and services in Texas from
five locations in the Houston, Dallas-Fort Worth, El Paso and Austin
metropolitan areas and through a small, recently opened office in McAllen,
Texas. During 1997, the Company's customer base of approximately 2,700 accounts
was comprised primarily of mid-sized customers and regional offices of larger
customers in commercial, educational and governmental sectors. The Company
positions itself to provide its customers with single-source solutions for both
their computer and telecommunications needs by offering a broad range of
products and services and by providing the expertise to support integrated
computer and telecommunications applications.
The Company's revenue is derived from sales of Computer Products, IT
Services, Telecom Systems and CTI Software. The Company is an authorized
reseller of computer products from Compaq, Hewlett-Packard, IBM, Microsoft,
Novell and other leading manufacturers. The Company has long-standing
relationships with leading aggregators and wholesale distributors of computer
hardware and software products which enable the Company to provide its customers
with competitive product pricing and ready product availability. IT Services
include system design, installation, integration and support services. With
respect to Telecom Systems, the Company markets, installs and services
telecommunications equipment, including PBX telephone systems from NEC,
Inter-tel and Mitel. In 1995, the Company introduced its proprietary CTI
Software products which facilitate computer and telephone integration, primarily
for telemarketing, call center and other high volume calling applications.
The Company was incorporated in 1983 as a Texas corporation and was
reincorporated in 1996 as a Delaware corporation. The Company's executive
offices are located at 6401 Southwest Freeway, Houston, Texas 77074 and its
telephone number is (713) 795-2000.
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
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computer hardware and the introduction of new software operating systems have
also created the need to expand or upgrade existing networks and systems. At the
same time, price decreases have made such networks and systems affordable to a
larger number of organizations. The Company believes that these trends have
increased the general demand for computer products and related information
technology services.
Distribution channels for computer products changed significantly
beginning in the early 1990s. During that period, many manufacturers of
computers began to scale back their sales forces and, in order to ensure the
continued wide distribution of their products, started to offer their products
to wholesale computer distributors which previously had sold only software and
peripheral equipment. In addition, manufacturers also began allowing resellers
to purchase products from more than one aggregator or distributor, a practice
known as "open sourcing. " Expanding computer sales to distributors and allowing
open sourcing intensified price competition among suppliers. The Company
believes that, in general, the manufacturers of its primary product lines are
continuing to rely to a large degree on resellers of computer products to
distribute a significant portion of their products to end-users. Distribution
patterns may continue to evolve, however, and any future changes may
significantly affect the Company's business.
The advent of open architecture networks has also impacted the market
for information technology services. Wider use of complex networks involving a
variety of manufacturer's equipment, operating systems and applications software
has made it increasingly difficult to diagnose problems and maintain the
technical knowledge and repair parts necessary to provide support services. The
Company believes that increased outsourcing of more sophisticated support
services by business and institutional customers has resulted from the technical
complexities created by multi-manufacturer and supplier network systems and
rapid technological change. Increasingly, organizations seeking computer
products often require prospective vendors not only to offer products from many
manufacturers and suppliers, but to have available and proficient service
expertise to assist them in product selection, system design, installation and
post-installation assistance and service. The Company believes that the ability
to offer customers a comprehensive solution to their information technology
needs, including the ability to work within its customers' corporate
environments as integral members of their management information system staff,
are increasingly important in the marketplace.
Telecommunications systems have evolved in recent years from simple
analog telephone systems to sophisticated digital systems, with modern digital
systems featuring voice processing, automated attendant, voice and fax mail,
automatic call distribution and call accounting. The ability to interface these
new digital phone systems to the user's PC-based computer systems now allows
these telephone systems to interact with the user's computerized data to create
powerful business solutions. New features, such as "caller ID" that is coupled
with a digital telephone system and integrated with a computer system, can
provide automatic look-up and display of account information while the user is
receiving a new call, thereby increasing productivity and the level of customer
service. Computerized "call accounting" allows an organization with integrated
telephone and computer systems to track telephone usage and long distance toll
billing and easily interface that data with computerized accounting and billing
systems. Integrated voice and facsimile handling allows a user to retrieve, send
and manage voice and facsimile messages on his computer screen. Computerized
telephone number listings allow the user to look up telephone numbers on the
computer and then have the computer dial the number automatically. For more
complex call center applications, computer systems can manage out-bound calling
campaigns while automatically blending in-bound calls to available agents in
order to enhance agent productivity.
The Company believes that the evolution of the digital telephone system
to a more open architecture, aided by standards established by Microsoft and
Novell for the interface of telephone and computer technologies, is causing
rapid industry change. This change is creating demand for digital telephone
systems which adhere to these new industry standards. These digital telephone
systems, along with the many software products which are rapidly becoming
available for use in CTI, require sophisticated installation and integration
service capability. The Company believes that the trend toward CTI is likely to
continue and that integrated voice, data and video communication will become
more affordable. As the technology and management of telecommunications and
computer systems converge over the next decade, the Company expects that growth
opportunities will be presented for companies able to provide and service the
latest integrated telecommunications and computer technologies.
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BUSINESS STRATEGY
The Company's goals include continuing the growth of its
regionally-based business while preparing the Company to become a national
provider of computer and telephone hardware and software products and related
services. To achieve its objectives, the Company intends to pursue these 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 opened new offices in Austin, Texas in the third quarter
of 1997 and in McAllen and El Paso late in 1997. The Company intends to open
other offices in Texas and other regions as opportunities and circumstances
warrant.
Increase Telecom Systems And CTI Software Businesses. The Company began offering
Telecom Systems in 1994 in its Houston office and CTI Software in 1995 to
capitalize on the growing trend in CTI. The Company expanded Telecom Systems
operations to the Dallas-Fort Worth market in the second half of 1997. The
Company intends to expand its Telecom Systems operations to (i) all of its
offices, (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.
By accessing an Internet home page currently under development, the Company's
sales representatives and customers will be able to obtain product pricing and
availability data, enter or change orders and access customer account status
information. The Company plans to employ experienced sales representatives in
selected metropolitan markets who will be supported by the new Internet-based
system and by a national sales support call center performing order entry and
customer service functions.
After utilizing the Internet-based system to support its direct sales
force the Company expects to establish customer relationships in new markets
under the trade name "800 PC Deals." The Company then intends to establish
branch offices in certain of these markets. Implementation of this strategy was
anticipated to begin in the second half of 1997 but has been deferred
indefinitely until the Company can better ascertain the potential profitability
of this program and further develop its Internet based marketing systems. There
can be no assurance that the Company will complete the development of the
Internet system and if developed whether the Company will implement the
marketing program.
PRODUCTS AND SERVICES
The Company's revenues are derived from the marketing of technological
information systems. Management of the Company believes that such revenues are
reliant upon the ability to offer related services (which comprise less than 10
% of revenues) on those products. For the convenience of the reader the products
offered and the related services have been provided below.
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 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 53.7%, 58.9%, and 56.8%, for 1995, 1996 and 1997,
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.
<PAGE>
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:
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.
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.
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.
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.
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.
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.
IT Staffing Services. In January 1997 the Company, through its wholly-owned
subsidiary IT Staffing, Inc., began providing technical personnel for temporary
and permanent positions to it customers. The Company recruits and places
personnel for a wide variety of technical positions related principally to
computing hardware and software skill sets.
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.
<PAGE>
TELECOM SYSTEMS
The Company began its Telecom Systems business in 1994 to capitalize on
the trend toward CTI. The Company currently markets, installs and services
business telephone systems, including large PBX systems and small key systems,
along with a variety of related products including hardware and software
products for data and voice integration, wide area connectivity and telephone
system networking and wireless communications. The Company resells PBX systems
manufactured by NEC and Mitel and smaller "key systems," including products from
Macrotel, NEC and Winn Communications. Wireless products include products from
Uniden and Spectralink. Software products include voice mail products from
Active Voice and AVT, interactive voice response applications from AVT and call
center activity reporting products from Taske.
Prior to 1997, the Company marketed Telecom Systems only from its
Houston office. During the second half of 1997, the Company expanded Telecom
Systems sales to its Dallas office. The Company intends to expand the marketing
of its Telecom Systems products into each new office as they are established.
The Company also intends to expand its Telecom Systems products, particularly in
the area of CTI products, as suitable new products become available for resale.
CTI SOFTWARE
The Company develops and markets proprietary CTI Software, which
integrates business telephone systems and networked computer systems, under the
trade name "Stratasoft. " CTI Software is designed to improve the efficiency of
call center, both inbound and outbound 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. 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:
Stratadial. StrataDial is a predictive dialer software product for outbound call
center applications such as sales and promotion, collections, surveys, lead
generation and announcements that require personal contact. StrataDial features
inbound/outbound call blending without requiring an automated call distribution
feature ("ACD") of the PBX telephone system. 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. During 1997, the Company sold and installed 48 StrataDial systems.
Stratavoice. StrataVoice is an outbound dialing product designed for high volume
applications that do not require human interaction. StrataVoice applications
include appointment confirmation and setting, court appearance notification,
surveys, community notification such as school closings and emergency
evacuation, employee updates, absenteeism notification, telemarketing and market
research. A telephone system utilizing StrataVoice dials a computerized list of
numbers and can ask the contacted person a number of questions, including
branching to other questions and statements based on responses. StrataVoice also
allows the contacted person to leave messages. Scripting tools are included that
allow the user to develop campaigns. The system builds a database of respondent
data and has comprehensive response reporting capabilities. During 1997, the
Company sold and installed 122 StrataVoice systems.
Strata-Interactive. Strata-Interactive is an interactive voice response ("IVR")
software product which allows telephone calls to access computer information at
any time using a simple touch-tone telephone. Applications for IVR technology
vary and include insurance coverage verification and claims reporting, utility
company account information and outage reporting, bank account information and
on-line transactions, and shipment verification and tracking information.
Strata-Interactive is based upon open architecture and is designed to work with
networked computers. The first beta version of the product was delivered to a
customer in June 1996. In 1997, the Company began integrating the
Strata-Interactive components into the Strata-Dial and Strata-Voice products.
The Company expects the majority of the Strata-Interactive product will be
marketed as a component of Strata-Dial.
<PAGE>
SALES AND MARKETING
DIRECT SALES
The Company markets its products and services primarily through direct
sales representatives. Direct sales representatives are teamed with in-house
customer service representatives and are assigned to specific customer accounts.
The Company believes that direct sales lead to better account penetration and
management, better communications and long-term relationships with its
customers. The Company's sales personnel, including account managers and
customer service representatives, are partially compensated, and in some cases
fully compensated, on the profitability of accounts which they participate in
developing. The Company believes that its past and future growth will depend in
large measure on its ability to attract and retain qualified sales
representatives and sales management personnel. The Company promotes its
products and services through general and trade advertising, participation in
trade shows and telemarketing campaigns. The Company believes that a significant
portion of new customers of its Computer Products and IT Services businesses
originates through word-of-mouth referrals from existing customers and industry
members, such as manufacturer's representatives. Additionally, Telecom Systems
sales personnel seek to capitalize on the many customer relationships developed
by the Company's Computer Products and IT Services personnel. By virtue of their
computer business contacts, Computer Products and IT Services personnel often
learn at a relatively early stage that their customers may soon be in the market
for telecommunications equipment and services. Sales leads developed by this
synergy are then jointly pursued. CTI Software is marketed by direct sales
representatives to organizations using telemarketing, call centers or other high
volume telecommunications functions. In addition, StrataVoice is marketed
through resale arrangements between the Company and a VAR.
INTERNET-BASED SALES SUPPORT SYSTEM
The Company has been developing an Internet-based sales support system
that will be used by its entire sales force, however the Company does not intend
to activate the sales support until additional development occurs. The system
will allow sales representatives to access information on product pricing and
availability, enter and track specific orders and monitor customer account
information. Sales representatives will be able to access the system from their
desktop computers at the Company's offices or on the Internet. The system will
also allow selected customers to enter and manage their own orders on-line. The
Company believes that when implemented this sales support system will enhance
the productivity and flexibility of its sales force and improve its customer
service.
800 PC DEALS
The Company intends to use its proposed Internet-based sales support
system to cost-effectively expand its marketing efforts for Computer Products on
a national level under the trade name 800 PC Deals. Specifically, the Company
intends to employ sales representatives with local experience in targeted
metropolitan markets to establish customer relationships utilizing the new
system. The Company also plans to operate a national sales support call center
to serve sales representatives and customers. Initially, the Company intends to
fulfill a large portion of orders in these new markets by drop shipping product
directly from suppliers to customers. Once sufficient customer relationships are
established and market knowledge is developed, the Company may seek to establish
a branch office in a market. No definitive schedule has been established for the
commencement of operations as 800 PC Deals.
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.
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CUSTOMERS
The Company focuses its marketing efforts on mid-sized customers and
regional offices of larger customers located in or near the metropolitan areas
in Texas in which the Company maintains offices. The Company occasionally
provides Computer Products and IT Services in markets where the Company does not
have an office, typically to branch operations of customers with which the
Company has an established relationship. The Company's customer base is not
concentrated in any industry group. Over 2,700 customers purchased products or
services from the Company during 1997. In 1997, the largest single customer
constituted 4.8% of total revenues, however in prior years the Company's largest
customer has constituted as high as 11.2% of revenues.
The Company has only a small amount of backlog relative to total
revenues because the Company has no long-term commitments by customers to
purchase products or services from the Company. Although the Company has service
contracts with many of its large customers, such service contracts are
project-based and/or 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.
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 1995, 1996 and 1997, the Company purchased from Inacom approximately
36.6%, 57.0% and 51.4%, 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 1995, 1996 and 1997, the Company purchased from Ingram
approximately 20.6%, 14.7% and 20.0% 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.
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Due to intense price competition among computer products resellers, the
price and shipping terms received by the Company from its suppliers, especially
Inacom and Ingram, are critical to the Company's ability to compete in Computer
Products. From time to time the availability of certain products has been
limited. Although the Company has not experienced unusual product availability
problems and has been generally satisfied with the product pricing and terms
available from its principal suppliers, there can be no assurance that such
relationships will continue or that, in the event of a termination of its
relationship with either Inacom or Ingram, or both, it would be able to obtain
an alternative supplier or suppliers without a material disruption in the
Company's ability to provide competitively priced products to its customers.
The Company maintains standard authorized dealership agreements from
many leading manufacturers of computer and telecommunications hardware and
software. Under the terms of these authorized dealership agreements, the Company
is entitled to resell associated products to end-users and to provide warranty
service. The Company's status as an authorized reseller of key product lines is
essential to the operation of the Company's business. In general, the authorized
dealer agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. Some of such agreements are conditioned upon the continuation of
the Company's supply arrangement with Inacom or another major wholesaler
acceptable to the manufacturer.
The Company operates a warehouse at its Houston and Dallas offices for
the purpose of receiving, warehousing, configuration and shipping products. The
Company plans to consolidate its two warehouses into one central regional
warehouse located in the Dallas-Fort Worth metropolitan area in order to achieve
further productivity and efficiency enhancements.
During 1995, the Company began an initiative to drop ship a higher
percentage of its orders directly from the supplier to customer in order to
lower its distribution costs and freight costs. This initiative has resulted in
the percentage of drop shipped orders (measured by the cost of goods drop
shipped as a percentage of total cost of goods) growing from 5. 1% during the
six months ended June 30, 1995 to 18.1% during 1996 and 23.9% in 1997. While the
Company does not believe that it is in its best interest to drop ship all
orders, it does intend to continue to move more of its Computer Products
distribution toward drop shipments.
MANAGEMENT INFORMATION SYSTEMS
The Company depends on its customized MIS to manage most aspects of its
business. The Company's MIS provides its sales staff, customer service
representatives and certain customers with product price, information and
availability from its principal suppliers' warehouses throughout the United
States. The Company utilizes its MIS to rapidly source product from a wide range
of suppliers. Purchase order expediting features including overdue shipment and
partial shipment reporting 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.
During the first quarter of 1998 the Company commenced a conversion of
its MIS to a more powerful computing platform which will allow the Company to
improve and enhance its MIS. The new system will allow the Company to expand it
uses and more fully integrate its operations with the MIS. While the Company
expects the system conversion to be fully implemented with only normal debugging
and reprogramming, a failure to fully implement the conversion with only minimal
disruption of its operation could have an adverse effect on the Company's
results of operations and financial condition.
<PAGE>
The system conversion was implemented as a general upgrading of the
Company's MIS and was not for the purpose of achieving Year 2000 compliance. The
Company believes its prior MIS was, and its new MIS is, Year 2000 compliant.
Accordingly, the Company does not believe that Year 2000 compliance will have a
material adverse effect on its results of operations or financial condition. It
is possible that the Company could be impacted if its significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance with
respect to their own computer systems. The Company has inquired of its two major
suppliers as to the status of their Year 2000 compliance and has been advised
that they expect to achieve Year 2000 compliance. If, contrary to the Company's
expectations, it or the significant suppliers and customers fail to achieve Year
2000 compliance in a timely manner, the Company's results of operations and
financial condition could be materially and adversely effected.
EMPLOYEES
As of December 31, 1997, the company employed approximately 363
individuals. Of these, approximately 81 were employed in sales, marketing and
customer service, 153 were employed in engineering and technical positions and
129 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 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.
<PAGE>
HISTORY AND REINCORPORATION
The Company was incorporated under Texas law in 1983 under the name
Technicomp Corp. On June 30, 1993, the Company changed its name to
Allstar-Valcom, Inc. and then again, on December 28, 1993, the Company changed
its name to Allstar Systems, Inc. On December 27, 1993, the Company engaged in a
merger in which it was the surviving corporation. In the merger, Allstar
Services, Inc. and R. Cano, Inc. , both of which were affiliated with the
Company, were merged with and into Allstar Systems, Inc. in order to streamline
the business. In 1995, Company formed a wholly owned subsidiary, Stratasoft,
Inc. , to purchase and develop its CTI Software. See "Certain Relationships and
Related Transactions--Acquisition of Stratasoft Products. The Company effected a
reincorporation and 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, will be 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.
FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATION
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
86% of the Company's total revenue in 1997. 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 operating
expenses, including 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.
<PAGE>
Dependence On Availability Of Credit; Interest Rate
The Company's business activities are capital intensive in that the
Company is required to finance accounts receivable and inventory. In order to
obtain necessary working capital, the Company relies primarily on lines of
credit under which the available credit and credit limits are dependent on the
amount and quality of the Company's accounts receivable and inventory. As a
result, the amount of credit available to the Company may be adversely affected
by factors such as delays in collection or deterioration in the quality of the
Company's accounts receivable, inventory obsolescence, economic trends in the
computer industry, interest rate fluctuations and the lending policies of the
Company's lenders. Many of these factors are beyond the Company's control. Any
decrease or material limitation on the amount of capital available to the
Company under its credit lines and other financing arrangements would limit the
ability of the Company to fill existing sales orders, purchase inventory or
expand its sales levels and, therefore, would have a material adverse effect on
the Company's financial condition and results of operations. In addition, any
significant increases in interest rates will increase the cost of financing to
the Company and would have an adverse effect on the Company's financial
condition and results of operations. The inability of the Company to have
continuous access to such financing at reasonable costs would materially and
adversely impact the Company's financial condition and results of operations.
(See Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations).
Highly Competitive Business
The Company is engaged in business activities that are intensely
competitive and rapidly changing. The Company believes that the principal
competitive factors in the business in which it operates are relative price and
performance, product availability, technical expertise, adherence to industry
standards, financial stability, service support and reputation. Price
competition has intensified, particularly in the Company's Computer Products and
IT Services businesses, and is likely to continue to intensify. Such price
competition could materially adversely affect the Company's financial condition
and results of operations. The Company's competitors include major computer
products and telephone equipment manufacturers, aggregators and distributors,
including certain manufacturers, aggregators and distributors which supply
products to the Company. Other competitors include established national,
regional and local resellers, systems integrators, telephone systems dealers,
computer-telephony VARs and other CTI software suppliers. Some of the Company's
current and potential competitors have longer operating histories and financial,
sales, marketing, technical and other competitive resources which are
substantially greater than those of the Company. As a result, the Company's
competitors may be able to adapt more quickly to changes in customer needs or to
devote greater resources than the Company to sales and service of its products.
Such competitors could also attempt to increase their presence in the Company's
markets by forming strategic alliances with other competitors of the Company,
offer new or improved products and services to the Company's customers or
increase their efforts to gain and retain market share through competitive
pricing.
Management Of Growth; Regional Concentration
The Company has experienced rapid growth which has and may continue to
put strains on the Company's management and operational 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. The failure to do so could materially
adversely affect the Company's financial position and results of operation.
Within the next 12 months, the Company intends to open new offices. 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.
<PAGE>
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. The Company is particularly dependent upon
James H. Long, founder, Chairman of the Board, President and Chief Executive
Officer of the Company, because of his knowledge of the Company's operations,
industry knowledge, marketing skills and relationships with major vendors and
customers.
The Company does not maintain key personnel life insurance on any of
its executive officers or salespersons other than Mr. Long. The Company's
success also depends in part on its ability to attract, 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. The
Company's financial condition and results of operations could be materially
adversely affected if the Company were unable to attract, hire, train and retain
qualified personnel.
Dependence On Continued Authorization To Resell And Provide Manufacturer-
Authorized Services
The Company's future success in both product sales and services depends
largely on its continued status as an authorized reseller of products and its
continued authorization as a service provider. With respect to the Company's
computer hardware and software product sales and service, the Company maintains
sales and service authorizations with many industry-leading manufacturers,
including Compaq, Hewlett-Packard, IBM, Microsoft, NEC and Novell. In addition,
some of such agreements are based upon the Company's continued supply
relationship with Inacom or another aggregator or distributor approved by such
manufacturers. With respect to the Company's Telecom Systems business, the
Company maintains sales and service authorizations with industry-leading
manufacturers, including Active Voice, AVT, NEC, Inter-tel and Mitel. Without
such sales and service authorizations, the Company would be unable to provide
the range of products and services currently offered by the Company. In
addition, loss of manufacturer authorizations for products that have been
financed under the Company's credit facilities constitutes an event of default
under such credit facilities. In general, the agreements between the Company and
its products manufacturers either provide for fixed terms or for termination on
30 days prior written notice. Failure to maintain such authorizations could have
a material adverse effect on the Company's financial position and its results of
operations.
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. 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. 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.
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. Because certain products offered by the Company are subject to
manufacturer or distributor allocations, which limit the number of units
available to the Company, 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.
<PAGE>
Reliance On Key Customers
The Company's top ten customers (which have varied from year to year)
accounted for 27.9%, 33.2% and 21.2% of the Company's revenue during 1995, 1996
and 1997, respectively. 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 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.
Reliance On Management Information Systems
The Company's success is largely dependent on the accuracy, quality and
utilization of the information generated by its customized management
information systems, which affects its ability to manage its sales, accounting,
inventory and distribution systems. The Company anticipates that it will
continually need to refine and enhance its management information systems as the
Company grows and the needs of its business evolves. In view of the Company's
reliance on information and telephone communication systems, any interruption or
errors in these systems could have a material adverse effect on the Company's
financial condition and results of operations. (See Item 1 - Business
"Management Information Systems").
Acquisition Risk
The Company intends to pursue potential acquisitions of complementary
businesses. The success of this strategy depends not only upon the Company's
ability to acquire complementary businesses on a cost-effective basis, but also
upon its ability to integrate acquired operations into its organization
effectively, to retain and motivate key personnel and to retain customers of
acquired firms. No specific acquisitions are being negotiated or planned as of
the date of this annual report 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.
Control By Existing Stockholders
James H. Long, founder, Chairman of the Board, President and Chief
Executive Officer of the Company owns 47.6% of the outstanding Common Stock and
Mr. Long will have the ability to control the election of a majority of the
members of the Company's Board of Directors, prevent the approval of certain
matters requiring the approval of at least two-thirds of all stockholders and
exert significant influence over the affairs of the Company.
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.
Absence Of Dividends
<PAGE>
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 prohibit the declaration or payment of dividends, unless consent is
obtained from each lender.
GLOSSARY OF NAMES AND TECHNICAL TERMS
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, Inc.
Macrotel..................... Macrotel International Corporation
Microsoft.................... Microsoft Corporation
Mitel........................ Mitel, Inc.
NEC.......................... NEC America, Inc.
Novell....................... Novell, Inc.
Taske........................ Taske Technology, Inc.
Uniden....................... Uniden America Corporation
All company names and trade names are the legal property of their
respective owners.
TECHNICAL TERMS
Aggregator................... A company that purchases directly from
manufacturers in large quantities, maintains
inventory, breaks bulk and resells to
distributors, 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 manufacturer, 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
<PAGE>
Item 2. Properties
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 48,000
square feet. The Houston office sublease expires on December 31, 1998. The
Company expects to enter into a new leasing arrangement for the same facility
during 1998. The Company's Dallas office is housed in a free-standing building
of approximately 20,000 square feet. The Dallas facility lease expired on
September 30, 1997 and has been extended to June 30, 1998. The Company expects
to either renew the existing lease for an additional term of more than one year
or to relocate to different facilities within the Dallas-Ft. Worth metropolitan
area. The Company also leases a storage facility of approximately 7,000 square
feet in Houston. The lease on this warehouse expires on April 14, 1998 and the
Company intends to extend such lease on a month-to-month basis after expiration
of the lease. The Company added offices in Austin, McAllen and El Paso, Texas
during 1997. The Company has leased interim offices in each of those cities
under leases expiring in less than one year. The Company intends to lease other
facilities in these cities 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 protect its rights in its
proprietary technology. Additionally, the Company filed and received copyright
protection for StrataDial and StrataVoice. The Company also applied and received
registration of Stratasoft, StrataDial, StrataVoice as trademarks and intends to
apply for registration of 800 PC Deals as a trademark. 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.
Item 3. 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 effect of an unfavorable outcome could have a
material adverse effect on the Company's results of operations and its financial
condition.
The Company is from time to time involved in routine litigation
incidental to its business. The Company believes that none of such proceedings,
including current proceedings, individually or in the aggregate will have a
materially adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On July 7, 1997 the Company completed its initial public offering of it
Common Stock. The shares are traded on the Nasdaq National Market under the
symbol "ALLS".
High Low
Fiscal 1997
Third quarter (Commencing July 7, 1997) 8 6
Fourth quarter 7 1/2 3 15/16
As of March 13, 1998 there were 15 holders of record of the Company's
common stock. The Company has never declared or paid any cash dividends on its
Common Stock. The Company currently anticipates that it will retain all earnings
for use in its business operations. The payment of dividends is prohibited under
the Company's credit agreements, unless approved by the lenders.
<PAGE>
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
The following sets forth the selected data of the Company for the five
years ended December 31, 1997.
<TABLE>
<CAPTION>
Year ended December 31
(In Thousands except share and per share amounts)
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
Operating Data:
Total revenue $49,536 $64,076 $91,085 $120,359 $129,167
Cost of sales and services 42,289 55,541 79,857 104,302 111,126
------- ------- ------- ------- -------
Gross Profit 7,247 8,535 11,228 16,057 18,041
Selling, general and administrative expenses 6,060 7,448 9,149 12,284 14,386
------- ------- ------- ------- -------
Operating income 1,187 1,087 2,079 3,773 3,655
Interest expense (net of other income) 644 764 1,218 1,183 685
------- ------- ------- ------- -------
Income before provision for income taxes 543 323 861 2,590 2,970
Provision for income taxes 229 140 342 987 1,126
------- ------- ------- ------- -------
Net Income $ 314 $ 183 $ 519 $ 1,603 $ 1,844
======== ======== ======== ========= =========
Supplemental Data:
Net income per share:
Basic $ 0.15 $ 0.07 $ 0.19 $ 0.60 $ 0.52
Diluted.................................... $ 0.15 $ 0.07 $ 0.19 $ 0.60 $ 0.52
Weighted average shares outstanding............. 2,120,242 2,554,808 2,675,000 2,675,000 3,519,821
</TABLE>
<TABLE>
<CAPTION>
As of December 31
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
Balance Sheet Data:
Working Capital................................. $1,307 $1,363 $1,732 $2,291 $12,824
Total Assets.................................... 17,431 19,077 24,266 24,720 33,183
Short-term borrowings(1)........................ 6,896 8,972 9,912 9,975 1,572
Long-term debt.................................. 43 -0- -0- -0- -0-
Stockholders' equity............................ 2,022 2,205 2,724 4,327 14,723
</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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
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 Annual Report on Form
10-K.
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.
During 1997 the Company opened offices in Austin, McAllen and El Paso, Texas to
expand, initially, its Computer Products and IT Services divisions.
<PAGE>
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 10.4% to 10.7% over the three year period ended December 31, 1997,
reflecting 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 37.6% over the same period. This variation is primarily attributable to the
pricing and the mix of services provided, and the level of utilization of
billable technical staff. The gross margin for Telecom Systems, which includes
both product sales and services, has varied between 23.0% and 35.5% during the
last three years. This variation reflects the different mix of product sales and
the amount of services-related revenue from period to period and competitive
pricing of Telecom products. The gross margin for CTI Software was 40.2% in 1996
versus 43.0% in 1997, primarily due to the amount expended by the Company to
acquire and develop the software relative to the level of revenue produced. CTI
Software accounted for approximately 1.1% of the Company's revenues in 1996
compared to 1.7% in 1997.
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 9.0% in 1995 to 18.1% in 1996 and to 23.9% in 1997. 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 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.
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. Additionally,
manufacturers have developed specialized marketing programs designed to improve
or protect the manufacturer's market share. These programs often involve the
granting of rebates to resellers to subsidize sales of computer products at
reduced prices. While these programs generally enhance revenues they also
generally result in lower margins being realized by the reseller. The Company
has participated in a number of these programs in recent years.
Inacom is the largest supplier of products sold by the Company. Purchases
from Inacom accounted for approximately 36.6%, 57.0% and 51.4% of the Company's
total product purchases in 1995, 1996 and 1997, 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.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data derived from the Company's consolidated statements of operations
and indicates the percentage of total revenue for each item.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------------------- --------------------- --------------------
Amount % Amount % Amount %
(Dollars in thousands)
Operating Data(1):
Revenue
Computer Products.............. $81,654 89.6 $107,251 89.1 $111,145 86.0
IT Services.................... 7,900 8.7 7,996 6.6 10,474 8.1
Telecom Systems................ 1,458 1.6 3,824 3.2 5,403 4.2
CTI Software................... 73 1,288 1.1 2,145 1.7
-------- ---- -------- ---- ------- ----
0.1
Total revenue............... 91,085 100.0 120,359 100.0 129,167 100.0
Gross Profit(1)
Computer Products.............. 8,466 10.4 11,172 10.4 11,832 10.7
IT Services.................... 2,404 30.4 3,008 37.6 3,875 37.0
Telecom Systems................ 335 23.0 1,359 35.5 1,412 26.1
CTI Software................... 23 31.5 518 40.2 922 43.0
-------- ---- -------- ---- ------- ----
Total Gross Profit........... 11,228 12.3 16,057 13.3 18,041 13.9
Selling, general and
administrative expenses........ 9,149 10.0 12,284 10.2 14,386 11.1
-------- ---- -------- ---- ------- ----
Operating income............... 2,079 2.3 3,773 3.1 3,655 2.8
Interest expense (net of
other income).................. 1,218 1.3 1,183 1.0 685 .5
-------- ---- -------- ---- ------- ----
Income before provision
for income taxes............. 861 1.0 2,590 0.8 2,970 2.3
Provision for income taxes........ 342 0.4 987 0.8 1,126 0.9
-------- ---- -------- ---- ------- ----
Net income..................... 519 0.6 1,603 1.3 1,844 1.4
======== ==== ======== ==== ======= ====
Per Office Data(1)(2):
Houston Office:
Revenue...................... 53,095 58.3 57,929 48.1 65,614 50.8
Gross profit................. 6,880 13.0 9,470 16.4 9,356 14.3
Dallas Office:
Revenue...................... 37,990 41.7 62,430 51.9 61,698 47.8
Gross profit................. 4,348 11.5 6,587 10.6 8,518 13.8
Austin Office:
Revenue...................... 1,855 1.4
Gross profit................. 167 9.0
</TABLE>
(1) Percentages shown are percentages of total revenue, except gross profit
percentage which represent gross profit by each product category as a
percentage of revenue for each such category.
(2) Revenue realized in the McAllen and El Paso offices during 1997 were
insignificant.
<PAGE>
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Total Revenue. Total revenue increased by $8.8 million (7.3%) from $120.4
million in 1996 to $129.2 million in 1997. Revenue from Computer Products, which
comprised 86.0% of total revenue, increased by $3.9 million (3.6%). The increase
in Computer Products revenue was generally attributable to increased sales to
new and existing customers. Revenue in Computer Products did not grow as
expected in 1997 principally due to insufficient capital resources during the
first half of 1997 and the inability of the newly added sales personnel to
attain the level of revenue production normally expected of new personnel.
Revenue from IT Services increased by $2.5 million (31.0%) from $8.0 million in
1996 to $10.5 million in 1997. The increase was due primarily to sales to new
customers and increases in services provided to existing customers as a result
of customers' increased out-sourcing of their technical support requirements.
Revenue from IT Services as a percentage of total revenue increased from 6.6% in
1996 to 8.1% in 1997 due to the higher growth rate in IT Services revenues
relative to the growth rate of Computer Products revenues in 1997. Revenue from
Telecom Systems, which comprised 4.2% of total revenue, increased by $1.6
million (41.3%). This increase in Telecom Systems revenue was primarily the
result of adding new customers, of which one customer accounted for $1.3 million
(81.2%) of the increase. Sales of CTI Software increased 66.5% from $1.3 million
in 1996 to $2.1 million in 1997. The increased revenues were primarily the
result of sales to new customers.
Gross Profit. Gross profit increased by $2.0 million (12.4%) from $16.0
million in 1996 to $18.0 million in 1997, while gross margin increased from
13.3% in 1996 to 13.9% in 1997. The gross margin for Computer Products increased
from 10.4% in 1996 to 10.7% in 1997, reflecting the continuation of highly
competitive market conditions for Computer Products.
The gross margin from IT Services increased from 37.6% in 1996 to 37.0%
in 1997. This decrease in gross margin was primarily attributable increases,
expressed as a percentage of revenue, in the cost of the billable technical
staff which is due to the relative scarcity of qualified technical staff in the
information technology industry. These cost increases were almost fully offset
by increases in the prices being charged for services which is also due to the
relative scarcity of qualified technical staff in the information technology
industry. 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 35.5% in 1996
to 26.1% in 1997. In 1997, Telecom Systems bid on and won the installation of
several large systems. As a result of the competitive bidding process employed
by certain customers these large systems were projects which had lower than
normal margins. In addition, gross margin decreased in 1997 due to the purchase
of a large system by a single customer at a lower than usual margin.
CTI Software sales resulted in a gross margin of 43.0% in 1997, an
increase from 40.2% in 1996. This reflected slightly lower, as a percentage of
revenue, installation costs and development costs in 1997 compared to 1996.
Selling, General and Administrative Expenses . Selling, general and
administrative expenses increased by $ 2.1 million (17.1%) from $12.3 million in
1996 to $14.4 million in 1997. As a percentage of total revenue, selling,
general and administrative expenses increased from 10.2% in 1996 to 11.1% in
1997. Of the dollar increase, $1.5 million was attributable to increased
temporary and permanent personnel, principally in non-sales personnel. Other
costs which grew at a rate in excess of the rate of growth in revenues includes
expenses relating to becoming and being a publicly held corporation and
professional fees. The increase as a percentage of total revenue resulted
primarily from increased expenditures for those expenses which do not fluctuate
with gross profit or revenues.
Operating Income. Operating income decreased by $118,000 (3.1 %) from $3.8
million in 1996 to $3.7 million in 1997. Operating income decreased as a
percentage of total revenue from 3.1% in 1996 to 2.8% in 1997 largely due to
increases in selling, general and administrative expenses.
Interest Expense (Net of Other Income). Interest expense (net of other
income) decreased by $498,000 (42.1%). Interest expense decreased due to the
reduction of outstanding debt by applying the proceeds of the Company's initial
public offering to the reduction of debt.
<PAGE>
Net Income. Net income, after a provision for income taxes totaling
$1,126,000 ( reflecting an effective tax rate of 37.9% compared to 38.1% in
1996), increased by $241,000 from $1.6 million in 1996 to $1.8 million in 1997.
Net income increased as a percentage of total revenue from 1.3% in 1996 to 1.4%
in 1997.
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.
<PAGE>
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.
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.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last eight 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.
<PAGE>
<TABLE>
<S> <C> <C>
1996 1997
------------------------------------- -------------------------------------
(In thousands, except per share amounts)
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Total Revenue $25,948 $32,202 $29,187 $33,022 $26,593 $32,239 $31,914 $38,423
Cost of sales and service 22,727 28,234 24,669 28,672 22,762 27,312 27,777 33,277
------- ------- ------- ------- ------- ------- ------- -------
Gross Profit 3,221 3,968 4,518 4,350 3,831 4,927 4,137 5,146
Selling, general and
administrative expenses 2,674 2,992 3,319 3,299 3,135 3,839 3,439 3,974
------- ------- ------- ------- ------- ------- ------- -------
Operating Income 547 976 1,199 1,051 696 1,088 698 1,172
Interest expense (net of
other income) 297 285 338 263 289 309 82 5
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes 250 691 861 788 407 779 616 1,167
Provision for income taxes 111 223 362 291 154 310 236 424
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 139 $ 468 $ 499 $ 497 $ 253 $ 469 $ 380 $ 742
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $0.05 $0.17 $0.19 $0.19 $0.09 $0.17 $0.09 $0.17
</TABLE>
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 its 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 $12.8 million at December 31, 1995, 1996 and
1997, respectively. The increase in working capital from 1996 to 1997 was
attributable to the receipt of net proceeds from a public offering of the
Company's common stock in July, 1997 and net earnings. As of December 31, 1997,
the Company had total borrowing capacity, based on its collateral base under its
credit facility of approximately $23.8 million versus $18.8 million at December
31, 1996. At December 31, 1997 the Company had unused borrowing capacity of
approximately $18.6 million versus $1.2 million at December 31, 1996.
Cash Flow
Operating activities used net cash totaling $123,000 during 1995 and
provided net cash totaling $89,000 and $2.0 million during 1996 and 1997,
respectively. Net cash used in 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 1997, net
cash was provided from operations due primarily to net income increased levels
of trade accounts payable and accrued expenses which more than offset increases
in accounts receivable.
Trade accounts receivable increased $4.4 million, $695,000 and $7.2
million during 1995, 1996 and 1997, respectively. Inventory increased $21,000 in
1995 and decreased $545,000 and $162,000 in 1996 and 1997, respectively.
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 $458,000, $952,000 and $992,000
during 1995, 1996 and 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 branch offices in McAllen, El Paso and San
Antonio, Texas. All or a portion of the $1.0 million in capital expenditures
currently budgeted by the Company for such purposes are presently expected to be
financed from net cash flow from operations or borrowings under the Company's
line of credit. 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 $940,000, $63,000 and
$344,000 during 1995 , 1996 and 1997, respectively. In July, 1997, the Company
received $8.7 million net proceeds from the sale of Common Stock in a public
offering. Those proceeds were used to reduce the outstanding balance under the
Company's line of credit. The primary source of cash from financing activities
in other periods has been borrowings on the Company's lines of credit. The lines
of credit have been used principally to finance increases in accounts
receivable.
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, $16.5 million and $23.8 million at December
31, 1995, 1996 and 1997, respectively. The number of days' sales outstanding in
trade accounts receivable was 45 days, 40 days and 53 days for years 1995, 1996
and 1997, respectively. The increase in days' sales outstanding was caused by a
general slow down in payments by the Company's customers. To improve this
condition the Company has increased its collection staff and added an
experienced credit manager. Bad debt expense as a percentage of total revenue
for the same periods was 0.1%, 0.2% and 0.2%. The Company's allowance for
doubtful accounts, as a percentage of trade accounts receivable, was 2.8%, 1.3%
and 1.0% at December 31, 1995, 1996 and 1997, respectively.
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 1995, 1996 and 1997 was
14.6 times, 19.2 times and 21.5 times, respectively.
Prior Debt Obligations
Throughout 1997, the principal source of liquidity for the Company, in
addition to its cash provided from operations, was its revolving line of credit
with IBMCC (the "IBMCC Facility"). On February 27, 1998 the Company executed
agreements with Deutsche Financial Services ("DFS") for a revolving line of
credit which will replace the IBMCC Facility as the Company's principal source
of liquidity and the IBMCC Facility will be converted into a credit facility for
the purchase of IBM branded computer products. The credits facilities described
herein as the "Old IBMCC Facility" and the "Old DFS Facility" set forth the
provisions of the credit facilities in effect during 1997 and prior periods. The
credit facilities described as the "New DFS Facility" and the "New IBMCC
Facility" set forth the provisions of those facilities after the implementation
of the revolving credit agreement with DFS dated February 27, 1998. The total
credit available under the Old IBMCC Facility was $20.0 million, subject to
borrowing base limitations which were generally computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory.
Borrowings were available under the Old IBMCC Facility for floor plan financing
of inventory from approved manufacturers (the "Old Inventory Line"). Available
credit under the Old IBMCC Facility, net of Inventory Line advances, was used by
the Company primarily to carry accounts receivable and for other working capital
and general corporate purposes (the "Old Accounts Line"). Borrowings under the
Old Accounts Line bore interest at the fluctuating prime rate plus 2.0% per
annum. Under the Old Inventory Line, IBMCC paid the Company's inventory vendors
directly, generally in exchange for negotiated financial incentives. Typically,
the financial incentives received were such that IBMCC does not charge interest
to the Company until approximately 30 days after the transaction is financed, at
which time the Company was 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 was 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 did not do so. IBMCC was 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 Old IBMCC Facility was 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 personally guaranteed the Company's indebtedness to
IBMCC. Collections of the Company's accounts receivable were required to be
applied through a lockbox arrangement to repay indebtedness to IBMCC; however,
IBMCC customarily released a portion of the Company's daily collections to the
extent that they exceed the daily estimated borrowing base.
Through most of 1995, the Company's credit limit under the Old 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 December 31,
1997, the total indebtedness of the Company under the Old IBMCC Facility was
$4.3 million of which $1.6 million was outstanding under the Accounts Line and
$1.1 million was outstanding under the Inventory Line. The Company's remaining
available credit at December 31, 1997, based on its borrowing base was
approximately $18.6 million.
The Company had a $3.0 million credit facility with Deutsche Financial
Services (the "Old 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 and on or about November
15, 1997 this facility was increased to $10.0 million in anticipation of
increased usage of this facility for inventory purchases. As in the case of the
Old IBMCC Inventory Line, advances under the Old DFS Facility were 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. On or about November 15, 1997
DFS extended to interest free period for advances under the Old DFS Facility to
40 days. 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 Old DFS Facility is immediately
terminable by either party by written notice to the other. At December 31, 1997,
the amount outstanding under the DFS Facility was $9.4 million.
The Company was required to comply with certain key financial and other
covenants under the Old IBMCC Facility and Old 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 Old IBMCC Facility and
Old DFS Facility. For example, the Company was required under the Old 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 Old 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 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. Throughout 1997, the Company was in compliance
with the key financial and other covenants under both the Old IBMCC Facility and
the Old DFS Facility.
New Credit Facilities.
The total credit available under the New DFS Facility is $30.0 million,
subject to borrowing base limitations which are generally computed as a
percentage of various classes of eligible accounts receivable and qualifying
inventory. Credit available under the New DFS Facility for floor plan financing
of inventory from approved manufacturers (the "Inventory Line") is $20.0
million. Available credit under the New DFS Facility, net of Inventory Line
advances, is $10.0 million, which 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 minus 1.0% per annum. Under the Inventory Line, DFS pays
the Company's inventory vendors directly, generally in exchange for negotiated
financial incentives. Typically, the financial incentives received are such that
DFS does not charge interest to the Company until 40 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 DFS. Inventory Line advances not
paid within 40 days after the financing date bear interest at the fluctuating
prime rate plus 5.0%. For purposes of calculating interest charges the minimum
prime rate under the New DFS Facility is 7.00%. DFS may change 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 New DFS Facility is collateralized by a security interest in
substantially all of the Company's assets, including its accounts receivable,
inventory, equipment and bank accounts. Collections of the Company's accounts
receivable are required to be applied through a lockbox arrangement to repay
indebtedness to DFS; however, DFS has amended the lockbox agreement to make such
arrangements contingent upon certain financial ratios. Provided the Company is
in compliance with its debt to tangible net worth covenant, the Company has
discretion over the use and application of the funds collected in the lockbox.
If the Company exceeds that financial ratio, DFS may require that lockbox
payments be applied to reduce the Company's indebtedness to DFS. If in the
future DFS requires that all lockbox payments be applied to reduce the Company's
indebtedness, the Company would be required to seek funding from DFS or other
sources to meet substantially all of its cash needs.
Effective with the implementation of the New DFS Facility the Company
will have a $2.0 million credit facility with IBMCC (the "New IBMCC Facility")
for the purchase of IBM branded inventory from certain suppliers. As in the case
of the Old IBMCC Inventory Line, advances under the New IBMCC Facility are
typically interest free for 30 days after the financing date for transactions in
which adequate financial incentives are received by IBMCC from the vendor.
Within 30 days after the financing date, the full invoice amount for inventory
financed through IBMCC 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%. IBMCC retains a security interest in the inventory
financed. The New IBMCC Facility is immediately terminable by either party by
written notice to the other.
Under the New DFS Facility the Company is required to maintain (i) a
tangible net worth of $10.0 million, (ii) a ratio of debt minus subordinated
debt to tangible net worth of 4 to 1 and (iii) a ratio of current tangible
assets to current liabilities of not less than 1.4 to 1. The covenants under the
New IBMCC Facility remain unchanged from the Old IBMCC Facility.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends unless consented to by the lender.
Year 2000 Compliance
During the first quarter of 1998 the Company commenced a conversion of
it MIS to a more powerful computing platform which will allow the Company to
improve and enhance its MIS. The new system will allow the Company to expand it
uses and more fully integrate its operations with the MIS. While the Company
expects the system conversion to be fully implemented with only normal debugging
and reprogramming, a failure to fully implement the conversion with only minimal
disruption of its operation could have an adverse effect on the Company's
results of operations and financial condition.
The system conversion was implemented as a general upgrading of the
Company's MIS and was not for the purpose of achieving Year 2000 compliance. The
Company believes its prior MIS was, and its new MIS is, Year 2000 compliant.
Accordingly, the Company does not believe that Year 2000 compliance will have a
material adverse effect on its results of operations or financial condition. It
is possible that the Company could be impacted if its significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance with
respect to their own computer systems. The Company has inquired of its two major
suppliers as to the status of their Year 2000 compliance and has been advised
that they expect to achieve Year 2000 compliance. If, contrary to the Company's
expectations, it or the significant suppliers and customers fail to achieve Year
2000 compliance in a timely manner, the Company's results of operations and
financial condition could be materially and adversely effected.
Accounting Pronouncements
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 two 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 two statements are implemented.
Item 7A. Quantitative and Qualitative disclosures about Market Risk.
This item is inapplicable to the Company.
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Independent Auditor's Report............................................. 27
Consolidated Balance Sheets as of December 31, 1996 and 1997........... 28
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997..,,................................. 29
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997............................... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997..................................... 31
Notes to Consolidated Financial Statements for the years
ended December 31, 1995, 1996 and 1997............................... 32
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Allstar Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Allstar
Systems, Inc. and subsidiaries ("Allstar") at December 31, 1996 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of Allstar's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such 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
March 27, 1998
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
In thousands, except share and per shares amounts)
ASSETS 1996 1997
---- ----
Current Assets:
Cash and cash equivalents:
Restricted cash $ 94 $ 280
Cash 135 1301
----------- -----------
Total cash and cash equivalents 229 1,581
Accounts receivable - trade, net 16,517 23,759
Accounts receivable - affiliates 140 434
Inventory 4,862 4,700
Deferred taxes 350 212
Deferred offering costs 412
Other current assets 174 404
----------- -----------
Total current assets 22,684 31,090
Property and equipment, net 1,644 2,013
Other assets 392 81
----------- -----------
$ 24,720 $ 33,184
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 9,975 $ 1,572
Accounts payable 7,157 12,805
Accrued expenses 2,759 3,565
Income taxes payable 206 82
Deferred service revenue 296 242
----------- -----------
Total current liabilities 20,393 18,266
Deferred credit - Stock warrants 195
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 and
4,454,411 outstanding at December 31,
1996 and 1997, respectively 27 45
Additional paid in capital 1,479 10,013
Retained earnings 2,821 4,665
----------- -----------
Total stockholders' equity $ 4,327 $ 14,723
------------ -----------
$ 24,720 $ 33,184
=========== ===========
See notes to consolidated financial statements.
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except share and per shares amounts)
<TABLE>
<CAPTION>
Years ended December 31, .
<S> <C> <C> <C>
1995 1996 1997
Total revenue .................................................. $ 91,085 $ 120,359 $ 129,167
Cost of goods and services ..................................... 79,857 104,302 111,126
---------- ---------- ----------
Gross profit ................................. 11,228 16,057 18,041
Selling, general and administrative expenses ................... 9,149 12,284 14,386
---------- ---------- ----------
Operating income ............................................... 2,079 3,773 3,655
Interest expense and other ..................................... 1,218 1,183 685
---------- ---------- ----------
Income before provision for income taxes ....................... 861 2,590 2,970
Provision for income taxes ..................................... 342 987 1,126
---------- ---------- ----------
Net income ..................................................... $ 519 $ 1,603 $ 1,844
========== ========== ==========
Net income per share:
Basic ................................................. $ 0.19 $ 0.60 $ 0.52
========== ========== ==========
Diluted ............................................... $ 0.19 $ 0.60 $ 0.52
========== ========== ==========
Weighted average number of shares outstanding:
Basic ................................................. 2,675,000 2,675,000 3,519,821
========== ========== ==========
Diluted ............................................... 2,675,000 2,675,000 3,526,787
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
1995, 1996 AND 1997 (In thousands, except share and per shares amounts)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
$.01 Par value No Par Value Additional
Common Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
BALANCE AT JANUARY 1, 1995 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
on 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 1,479 2,821 4,327
Sale of common stock, net of initial
public offering expenses of $2,040 1,765,125 18 8,448 8,466
Issuance of restricted stock 14,286 86 86
Net income 1,844 1,844
---------- ----- ---------- ------ ------------ ---------- ---------
BALANCE AT DECEMBER 31, 1997 4,544,411 $ 45 $ $ 10,013 $ 4,665 $ 14,723
========== ===== ========== ===== ============ ========== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995,
1996 AND 1997 (In thousands, except share and per shares amounts)
<TABLE>
<CAPTION>
Years ended December 31,
<S> <C> <C> <C>
1995 1996 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income .......................................................... $ 519 $ 1,603 $ 1,844
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on disposal of assets .......................................... (1) (11)
Depreciation and amortization ....................................... 309 305 623
Deferred tax provision .............................................. (146) (92) 138
Changes in assets and liabilities that provided (used) cash:
Accounts receivable - trade, net ........................... (4,437) (695) (7,242)
Accounts receivable - affiliates ........................... (80) 153
(294)
Inventory .................................................. (21) 545 162
Other current assets ....................................... 4 (507) (230)
Other assets ............................................... 311
Accounts payable ........................................... 1,977 (492) 6,060
Accrued expenses ........................................... 1,673 (598) 806
Income taxes payable ....................................... 53 (77) (124)
Deferred service revenue ................................... 27 (45) (54)
------- ------- -------
Net cash provided by (used in) operating activities (123) 89 2,000
CASH FLOWS FROM INVESTING ACTIVITES:
Capital expenditures ................................................ (518) (965) (992)
Proceeds from sale of fixed assets .................................. 60 13
------- ------- -------
Net cash used in investing activities (458) (952) (992)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable 940 63 (8,403)
Net proceeds from sale of common stock 8,747
------- ------- -------
Net cash provided from financing activities 940 63 344
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 359 (800) 1,352
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 670 1,029 229
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,029 $ 229 $ 1,581
======= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,189 $ 1,140 $ 958
========= ======== =========
Cash paid for income taxes $ 432 $ 1,138 $ 1,032
========= ======== =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1995, 1996 AND 1997 (In thousands, except share and per shares 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 conducted from offices located in 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).
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 $307, $303 ,and $623 for the years ended December 31, 1995, 1996
and 1997, respectively.
Impairment of Long-Lived Assets -Allstar records impairment losses on
long-lived assets, including goodwill, used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets.
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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 requires a dual presentation of basic and diluted earnings per
share for entities with complex capital structures. At December 31 1995 and
1996, Allstar had no stock options or similar equity instruments outstanding
accordingly SFAS No. 128 had no retroactive effect on the consolidated financial
statement for the years then ended. During 1997 Allstar granted options to
purchase 200,300 shares, issued 14,286 shares of restricted stock and issued
warrants to purchase 176,750 common shares at $9.60 per share to underwriters in
connection with a public offering of the common stock. If Allstar had adopted
the statement in prior years, earnings per share would have been as follows:
1997 1996 1995
---- ---- ----
Basic......................................$0.52 $0.60 $0.19
Diluted....................................$0.52 $0.60 $0.19
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, 1996 Allstar had no such contracts
in process. At December 31, 1997, Allstar had $868 of such contracts in progress
and $401 of revenue has been deferred together with $197 of costs related to
those revenues.
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, $96 and $157 in the years ended December 31, 1995, 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 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 fiscal years
beginning after December 15, 1997. These two 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 two 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
1997:
1996 1997
Trade.................................... $16,736 $24,008
Allowances for doubtful accounts......... (219) (249)
------- -------
Total............................... $16,517 $23,759
======= =======
3. DEFERRED OFFERING COSTS
Deferred offering costs represent amounts incurred by Allstar through
December 31, 1996 in preparation of filing an offering document. Allstar
completed a public offering of its common stock in 1997 and the deferred
offering costs were included as a cost of issuance of the common stock.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997:
1996 1997
Equipment............................. $ 282 $ 339
Computer equipment.................... 1,964 2,870
Furniture and fixtures 294 316
Leasehold improvements 47 55
Vehicles 105 105
------- -------
$ 2,692 3,685
Accumulated depreciation and amortization (1,048) (1,672)
------- -------
Total $ 1,644 $ 2,013
======= =======
5. CREDIT ARRANGEMENTS
Allstar had two revolving lines of credit with a commercial finance company
which were collateralized by substantially all of Allstar's assets and a
personal guarantee of the principal stockholder of Allstar. The aggregate
maximum combined lines of credit were $20.0 million and $30.0 million at
December 31, 1996 and 1997, respectively. The maximum combined credit limit was
subject to borrowing base limitations which were generally computed as a
percentage of various classes of eligible accounts receivable and qualifying
inventory (as defined). Allstar paid an annual facility fee of $18,000.
Under the first revolving line of credit (the "Accounts Line"), outstanding
principal and interest were due upon termination of the agreement. Transactions
on the Accounts Line are reflected as Notes Payable in the consolidated
financial statements. The Accounts Line accrued interest at the prime rate plus
2% (10.25% at December 31, 1996 and 10.50% at December 31, 1997). The agreement
required 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 $280
at December 31, 1996 and 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 years ended December
31, 1995, 1996 and 1997 was 12.84%, 10.25% and 10.50%, respectively.
The second revolving line of credit (the "Inventory Line") was used by
Allstar to floor plan inventory purchases. At December 31, 1996 and December 31,
1997, aggregate borrowings on the Inventory Line were $6,134 and $1,089,
respectively. Interest accrues at the prime rate plus 6% (14.50% at December 31,
1997) for all outstanding balances over 30 days.
On March 27, 1998, Allstar and the commercial finance company terminated
their credit arrangement and entered into a new $2.0 million revolving credit
line of credit to floor plan inventory. This line of credit accrues interest at
prime plus 6% (14.50% at December 31, 1997) for all outstanding balances over 30
days.
In addition, Allstar had a $10.0 million ($3.0 million at December 31,
1996) credit line with another financing company to be used to floor plan
inventory purchases. At December 31, 1996 and December 31, 1997, aggregate
borrowings on this line were $993 and $9,391, respectively. Interest accrues at
the prime rate, which for purposes of this agreement will not fall below 6.5%,
plus 6% (14.50% at December 31, 1997) for all outstanding balances over 30 days.
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 $35, $59 and $4 during the
years ended December 31, 1995, 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
$23,871 at December 31, 1996 and 1997, respectively.
New Credit Facilities.
On February 27, 1998 Allstar entered into a new credit agreement with a
commercial finance company.. The total credit available under the new credit
facility is $30.0 million, subject to borrowing base limitations which are
generally computed as a percentage of various classes of eligible accounts
receivable and qualifying inventory. Credit available under the new facility for
floor plan financing of inventory from approved manufacturers (the "Inventory
Line") is $20.0 million. Available credit under the new facility, net of
Inventory Line advances, is $10.0 million, which 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 minus 1.0% per annum. Under the
Inventory Line interest accrues at prime rate, which for purposes of this
agreement will not fall below 7.0%, plus 5% for outstanding balances over 40
days.
This agreement, which continues in full force and effect for 36 months or
until terminated by 30 day written notice from the lender and may be terminated
upon 90 days notice by Allstar, subject to a termination fee, is collateralized
by substantially all of Allstar's assets. The credit facility is not guaranteed
by 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.
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 consisted of the following:
1995 1996 1997
---- ---- ----
Current Provision (benefit)
Federal..................... $ 446 $ 962 $ 848
State......................... 42 117 140
------ ------ ------
Total current provision.......... 488 1,079 988
Deferred Provision............... (146) (92) 138
------ ------ ---
Total........................ $ 342 $ 987 $1,126
====== ===== =====
The total provision for income taxes during the years ended December 31,
1995, 1996 and 1997 varied from the U.S. federal statutory rate due to the
following:
1995 1996 1997
---- ---- ----
Federal income tax at statutory rate.. $ 301 $ 907 $1,010
Nondeductible expenses.............. 48 17 24
State income taxes.................. 28 77 92
Other............................... (35) (14)
------ ------ ------
Total............................. $ 342 $ 987 $1,126
====== ====== ======
Deferred tax assets computed at the statutory rate related to temporary
differences at December 31, 1996 and December 31, 1997 were as follows:
December 31 December 31,
1996 1997
Deferred tax assets:
Accounts receivable.................. $ 142 $ 149
Deferred service revenue............. 69 41
Inventory............................ 139 22
------ -------
Total deferred tax assets......... $ 350 $ 212
====== ======
7. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1996 and
1997:
1996 1997
---- ----
Sales tax payable $1,309 $1,922
Accrued employee benefits, payroll
and other related costs 996 962
Accrued interest 209 47
Other 245 634
Total $2,759 $3,565
====== ======
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 years December 31, 1995, 1996 and 1997, Allstar
charged to expense $0, $44 and $105, respectively, 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 $372, $372 and $378 during years ended December 31, 1995, 1996 and
1997, respectively.
Additionally, minimum annual rentals at December 31, 1996 on other
operating leases amount to approximately $126 for 1998, $63 in 1999, and $8 in
2000. Amounts paid during the years ended December 31, 1995, 1996 and 1997 under
such agreements totaled approximately $137, $252 and $142, 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 $67, $193
and $684 for the years ended December 31, 1995, 1996 and 1997, respectively.
Allstar maintains a 401(k) savings plan. All full-time employees who have
completed 90 days 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, 1995 and 1997. 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, 1997 the Company has
accrued $28 for the estimated settlement cost. In 1998, the Internal Revenue
Service accepted the settlement and the Company paid $25.
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. The effect of an
unfavorable outcome could have a material adverse effect on the Company's
results of operations and its financial condition.
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. STOCK OPTION PLANS
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. During 1997
Allstar granted options to purchase 200,300 common shares to its directors,
officers and employees.
The plans activity is summarized below:
1997
Weighted
Average
Exercise
Shares Price
Options outstanding at January 1....... 0 $ 0.00
Granted during the year................ 200,300 5.17
Exercised during the year.............. 0 0.00
Canceled during the year............... 0 0.00
------- ----------
Options outstanding at December 31..... 200,300 $ 5.17
======= ==========
Options exercisable at December 31..... 0 $ 5.17
======= ==========
Options outstanding price range........ $4.625 to $6.00
Option weighted average remaining life. 9.7 Years
Allstar applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for options granted under
the Plans. Accordingly, no compensation expense has been recognized. Had
compensation expense been recognized based on the Black-Scholes option pricing
model value at the grant date for awards consistent with SFAS no. 123
"Accounting for stock-Based Compensation, ." For purposes of estimating the fair
value disclosures below, the fair value of each stock option has been estimated
on the grant date with a Black-Scholes option-pricing model using the following
weighted-average assumptions: dividend yield of 0%; expected volatility of
76.2%; risk-free interest rate of 6.0%; and expected lives of 10 years of stock
options granted. The effects of using the fair value method of accounting on net
income and earnings per share are indicated in the pro forma accounts below:
Net Income:
As Reported.......................................... $ 1,844
Pro forma............................................ $ 1,815
Earnings per share (Basic)
As reported.......................................... $ 0.52
Pro forma............................................ $ 0.52
Earnings per share (Diluted)
As reported.......................................... $ 0.52
Pro forma............................................ $ 0.51
11. RELATED-PARTY TRANSACTIONS
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 based on the
repayment terms of the promissory notes. The principal amounts as of December
31, 1997 are classified as Accounts receivable - affiliates based on the
expectation of repayment within one year. At December 31, 1996 and December 31,
1997, Allstar receivables from these affiliates amounted to approximately $501
and $434, respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
NONE
PART III.
The following items were to be incorporated by reference to the
Company's definitive proxy statement for the 1998 Annual Meeting of Shareholders
but are now being filed by this Amendment on Form 10-K/A to the Company's Annual
Report on Form 10-K.
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
Listed below are the Directors of the Registrant together with certain
information regarding the Directors:
Name, Age, Positions held, Period serving as Director, Principal occupation:
James H. Long - Chairman of the Board, President Chief Executive Officer April,
1983 to present
James H. Long, age 38, 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, - Director, Chief Financial Officer, Treasurer, Secretary,
September 12, 1996 to present.
Donald R. Chadwick, age 54, 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.
G. Chris Andersen, - Director, July 29,1997 to present
G. Chris Andersen, age 59, is a principal of Andersen, Weinroth & Co., a
merchant banking firm founded in 1996. From 1990 through 1995, he was Vice
Chairman of Paine Webber Incorporated. 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 - Director, July 29, 1997 to present
Richard D. Darrell, age 43, 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.
Jack M. Johnson, Jr. - Director, July 29, 1997 to present
Jack M. Johnson, Jr., age 59, 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 for over five years. Mr. Johnson is also President of Winco
Agriproducts, an 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 previously Chairman 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 in Anahuac, Texas with assets of approximately $60 million and
Team, Inc. a publicly traded company which provides environmental services for
industrial operations.
Donald D. Sykora - Director, July 29, 1997 to present
Donald D. Sykora, age 67, was formerly the President and Chief Operating Officer
of Houston Industries, Inc. and is currently attached to the Office of the
Chairman of Houston Industries, Inc. with responsibility for special projects.
Houston Industries is an international holding company with interests in
electric and gas utility companies, including Houston Lighting and 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, Inc., 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, air conditioning, plumbing,
electrical, and indoor air quality systems, and TransTexas Gas Corporation, a
publicly traded producer and marketer of natural gas.
Executive Officers of the Registrant
The executive officers of the Company serve until resignation or removal
by the Board of Directors. The Company's executive officers are as follows:
Name, age, Positions held, Period serving as Executive Officer:
James H. Long - See Directors of the Registrant.
Donald R. Chadwick - See Directors of the Registrant.
Frank Cano - President, Computer Products Division, September, 1997 to present.
Frank Cano, age 33, became the President, Computer Products Division
for the Company in September, 1997 and is responsible for the management of the
Computer Products Division. Prior to that Mr. Cano was Senior Vice President,
Branch Operations from July, 1996 to September, 1997, and was responsible for
the general management of the Company's branch offices. From June 1992 to June
1996, Mr. Cano was the Branch Manager of the Company's Dallas-Fort Worth office.
Thomas N. McCulley - Vice President, Information Systems, September, 1996 to
present,
Thomas N. McCulley, age 51, 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 Management
Information Systems.
Shabbir K. Ali - President, IT Services Division, September, 1996 to present
Shabbir K. Ali, age 35, 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.
Michael A. Torigian - President, Telecom Systems Division, September, 1996 to
present
Michael A. Torigian, age 39, 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.
William R. Hennessy - President, Stratasoft, Inc., September, 1996 to present.
William R. Hennessy, age 39, 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.
Ronald J. Burger - Chief Operating Officer - Computer Products, January 1998 to
present
Ronald J. Burger, age 51, joined the Company as Chief Operating Officer
- - Computer Products in January 1998. His responsibilities include overall
management of purchasing, warehousing, inventory control and shipping and
receiving of inventory products. Prior to joining the Company, Mr. Burger was
Vice President and General Manager for Intelligent Electronics Inc., a computer
industry aggregator/distributor from April 1996 to February 1997. Prior to that
period Mr. Burger was Vice President of Distribution Logistics for National
Computer Distributors, a computer industry distributor, from April 1993 to April
1996. Prior to that time, Mr. Burger was VP Distribution and Logistics for Tech
Data Corporation, a computer industry distributor.
Family Relationships
James H. Long and Frank Cano are brothers-in-law. There are no other
family relationships among any of the directors and executive officers of the
Company.
Item 11. Executive Compensation
Summary Compensation Table. The following table reflects compensation for
services to the Company for the years ended December 31, 1997. 1996 and 1995 of
(i) the Chief Executive Officer of the Company or (ii) the three most highly
compensated executive officers of the Company who were serving as executive
officers at the end of 1997 and whose total annual salary and bonus exceeded
$100,000 in 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long
Term Compensation
Awards Payouts
Name and Principal Other Annual Restricted Underlying LTIP All Other
Bonus Compensation Stock
Position Year Salary (1) awards Options Payouts Compensation
($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James H. Long 1997 $150,000 - - - - - -
CEO (2) 1996 $116,000 $35,000 - - - - -
1995 $40,800 $100,000 - - - - -
Donald R. Chadwick 1997 $98,458 $1,500 - $85,716 - - -
CFO (3)(4) 1996 $75,000 - - - - - -
1995 $75,000 - - - - - -
Frank Cano (4)(5) 1997 $78,125 $22,297 - - - -
President, Computer 1996 $73,500 $23,125 - - - -
Products 1995 $66,000 - - - - - -
William R. Hennessy 1997 $81,400 $73,880 - - - - -
President 1996 $74,618 $27,501 - - - - -
Stratasoft,
Inc. (6) 1995 - - - - - - -
<FN>
(1) 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.
(2) Company has made personal loans to Mr. Long from time to time. See -
"Certain Relationships and Related Transactions."
(3) As of December 31, 1997, Mr. Chadwick owned, in the aggregate, 14,286
shares of restricted Common Stock, with an aggregate value of $58,037.
These shares will fully vest on July 7, 1999. Dividends, if any, will not
be paid on these shares of restricted Common Stock.
(4) Includes $1,500 as consideration for execution of employment agreements.
(5) Includes compensation based upon attainment of certain performance goals.
(6) Includes compensation based upon gross profit realized.
</FN>
</TABLE>
Employee Options
Under the Company's 1996 Incentive Stock Option Plan shares of the Common
Stock may be granted to executive officers and other employees. As of December
31, 1997, 200,300 shares were reserved for outstanding options and 217,200 were
reserved and remained available for future grants pursuant to the Incentive
Stock Option Plan. During 1997, options to purchase 37,000 shares of Common
Stock were granted to the Named Executive Officers under the Incentive Stock
Option Plan.
Option Grants in Last Fiscal Year The following table provides information
concerning stock options granted to the Named Executive Officers during the year
ended December 31, 1997.
<TABLE>
<CAPTION>
Number of Percent of Potential Value Potential Value
at at
Shares of Total Assumed Annual Assumed Annual
Common Options Rate of Stock Rate of Stock
Stock Granted to Exercise Price Price
Underlying Employees or base Appreciation for Appreciation for
Options in Fiscal Price Expiration Option Term Option Term
Granted Year ($/share) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
James H. Long - - - - - -
Donald R. Chadwick 13,000 7.2% $6.00 07/07/07 $49,054 $124,312
Frank Cano 16,000 8.9% $6.00 07/07/07 $60,374 $152,999
William R. Hennessy 8,000 4.4% $6.00 07/07/07 $30,187 $76,500
</TABLE>
Option Exercises and Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-money
Shares Unexercised Options at
Acquired on Value Options at December 31, 1997
Named Executive Officer Exercise Realized December 31, 1997
<S> <C> <C> <C> <C>
James H. Long...................... 0 0 0 0
Donald R. Chadwick................. 0 0 13,000 0
Frank Cano......................... 0 0 16,000 0
William R. Hennessy................ 0 0 8,000 0
</TABLE>
No options were exercisable at December 31, 1997, none were exercised
during 1997 and there were no in-the-money unexercised options at December 31,
1997
Director Compensation
Each director who is not an employee is paid $1,000 per meeting attended
and $500 per committee meeting attended plus reasonable out-of-pocket expenses
incurred to attend Board or committee meetings. In addition, each non-employee
director is entitled to receive stock options pursuant to the Company's
Non-Employee Director Stock Option Plan. Upon his first election to the Board
each such director receives options to purchase 5,000 shares and upon each time
a director is reelected such director receives options to purchase 2,000 shares
commencing with those directors reelected at the Company's 1998 annual meeting
of stockholders. All options granted vest immediately. All options granted under
the Director Plan will have an exercise price equal to the fair market value of
a share of Common Stock on the date of grant and will expire ten years after the
date of grant (subject to earlier termination under the Director Plan). Options
granted under the Director Plan are subject to early termination on the
occurrence of certain events, including ceasing to be a member of the Company's
Board (other than by death). Employment Agreements
Each of the executive officers of the Company has entered into an employment
agreement (collectively, the "Executive Employment Agreements") with the
Company. Under the terms of their respective agreements, Messrs. Long, Chadwick,
Cano and Hennessy are entitled to an annual base salary of $150,000, $100,000,
$75,000 and $81,408, 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
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee, who are identified in
the preceding paragraph, has ever been an employee of the Company nor is there
any family relationship between the members of the Compensation Committee and
any executive officer.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company by (i) all directors of
the Company, (ii) the chief executive officer and each of the other executive
officers, and (iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Owner(1) of Class
<S> <C> <C>
James H Long............................................ 2,118,600 47.6%
Donald R. Chadwick...................................... 24,586 (2) *
Frank Cano.............................................. 10,300 (3) *
Shabbir K. Ali.......................................... 10,000 *
Thomas N McCulley....................................... 300 *
Donald D. Sykora........................................ 1,000 *
Directors and executive officers as a group(12 persons). 2,164,786 48.6%
<FN>
(1) Beneficial owner of a security includes any person who shares voting or
investment power with respect to or has the right to acquire beneficial
ownership of such security within 60 days based solely on information
provided to the Company.
(2) Includes 14,286 restricted shares and 300 shares owned by his minor
children for which Mr. Chadwick disclaims beneficial ownership of the
shares owned by his minor children.
(3) Includes 300 shares owned by Mr. Cano's spouse for which Mr. Cano disclaims
beneficial ownership. * Indicates less than 1%
</FN>
</TABLE>
<PAGE>
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company by any person known to
the Company to be the beneficial owner of more than five percent of any class of
Company's voting securities.
Title Of Class Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Owner of Class
Common Stock Kennedy Capital Management Inc. 230,000 5.2%
10829 Olive Blv.
St. Louis, MO 63141
Item 13. Certain Relationships and Related Transactions
The Company has from time to time made payments on behalf of Allstar Equities,
Inc. a Texas corporation ("Equities"), wholly-owned by James H. Long, the
Company's Chief Executive Officer, and on behalf of Mr. Long, personally for
taxes, property and equipment. Effective July 1, 1996, the Company and Mr. Long
entered into a promissory note to repay certain advances, which were
approximately $173,000 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, the Company and Equities entered
into a promissory note whereby Equities would repay the balance of amounts
advanced, which were approximately $387,000 at July 1, 1996, in monthly
installments of $6,500, including interest, from July 1996 through November 1998
with a final payment of approximately $275,000 due on December 1, 1998. This
note bears interest at 9% per year. At December 31, 1997, the Company's
receivables from Mr. Long and Equities amounted to approximately $434,000.
The Company subleases office space from Equities. In 1996, Allstar renewed
its office sublease with monthly rental payments of $31,500 in 1997 and $32,000
in 1998, plus certain operating expenses through December 1998. Rental expense
under this agreement amounted to approximately $378,000 during the year ended
December 31, 1997.
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
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a (1) Consolidated Financial Statements - See Index to Consolidated Financial
Statements on Page 27
(2) Consolidated Financial Statements Schedule II Valuation and Qualifying
Accounts Exhibit 99.1
(3) Exhibits
<TABLE>
<CAPTION>
3. Exhibits
<S> <C> <C>
Filed Herewith
Exhibit or Incorporated by
Number Description Reference to:
2.1 Plan and Agreement of Merger by and Between Exhibit 2.1 to Form
Allstar Systems, Inc, a Texas corporation and S-1 filed Aug. 8, 1996
Allstar Systems, Inc. a Deleware corporation
3.1 Bylaws of the Company Exhibit 3.1 to Form
S-1 filed Aug. 8, 1996
3.2 Certificate of Incorporation of the Company Exhibit 3.2 to Form
S-1 filed Aug. 8, 1996
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Form
S-1 filed Aug. 8, 1996
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Exhibit 4.2 to Form
Incorporation and Bylaws of the Company defining the rights of the S-1 filed Aug. 8, 1996
holders of Common Stock.
10.1 Revolving Loan and Security Agreement by and between Exhibit 10.1 to Form
IBM Credit Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.2 Agreement for Wholesale Financing dated September 20, 1993, by Exhibit 10.2 to Form
and between ITT Commercial Finance Corp. and Allstar-Valcom, Inc. S-1 filed Aug. 8, 1996
10.3 Amendment to Agreement for Wholesale Financing dated Exhibit 10.3 to Form
October 25, 1994, by and between ITT Commercial Finance Corp. S-1 filed Aug. 8, 1996
and Allstar Systems, Inc.
10.4 Sublease Agreement by and between Allstar Equities and Allstar Exhibit 10.4 to Form
Systems, Inc. S-1 filed Aug. 8, 1996
10.5 Form of Employment Agreement by and between the Company and Exhibit 10.5 to Form
certain members of Management. S-1 filed Aug. 8, 1996
10.6 Employment Agreement dated September 7, 1995, by and between Exhibit 10.6 to Form
Stratasoft, Inc. and William R. Hennessy. S-1 filed Aug. 8, 1996
10.7 Assignment of Certain Software dated September 7, 1995, by Exhibit 10.7 to Form
International Lan and Communications, Inc. and Aspen System S-1 filed Aug. 8, 1996
Technologies, Inc. to Stratasoft, Inc.
10.8 Microsoft Solution Provider Agreement by and between Microsoft Exhibit 10.8 to Form
Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.9 Novell Platinum Reseller Agreement by and between Novell, Inc. Exhibit 10.9 to Form
and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.10 Allstar Systems, Inc. 401(k) Plan. Exhibit 10.10 to Form
S-1 filed Aug. 8, 1996
10.11 Allstar Systems, Inc. 1996 Incentive Stock Plan. Exhibit 10.11 to Form
S-1 filed Aug. 8, 1996
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan. Exhibit 10.12 to Form
S-1 filed Aug. 8, 1996
10.13 Primary Vendor Volume Purchase Agreement dated August 1, 1996 by Exhibit 10.13 to Form
and between Inacom Corp. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.14 Resale Agreement dated December 14, 1995, by and between Ingram Exhibit 10.14 to Form
Micro Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.15 Volume Purchase Agreement dated October 31, 1995, by and between Exhibit 10.15 to Form
Tech Data Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.16 Intelligent Electronics Reseller Agreement by and between Intelligent Exhibit 10.16 to Form
Electronics, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.17 MicroAge Purchasing Agreement by and between MicroAge Computer Exhibit 10.17 to Form
Centers, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.18 IBM Business Partner Agreement by and between IBM Exhibit 10.18 to Form
and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.19 Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized Exhibit 10.19 to Form
reseller dated August 6, 1996. S-1 filed Aug. 8, 1996
10.20 Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers Exhibit 10.20 to Form
by and between Hewlett-Packard Company and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.21 Associate Agreement by and between NEC America, Inc. and Exhibit 10.21 to Form
Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.22 Mitel Elite Dealer Agreement and Extension Addendum by and between Exhibit 10.22 to Form
Mitel, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.23 Dealer Agreement dated March 1, 1995, by and between Applied Voice Exhibit 10.23 to Form
Technology and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.24 Industrial Lease Agreement dated March 9, 1996, by and between Exhibit 10.24 to Form
H-5 J.E.T. Ltd. as lessor and Allstar Systems, Inc. as lessee. S-1 filed Aug. 8, 1996
10.25 Lease Agreement dated June 24, 1992, by and between James J. Laney,
Exhibit 10.25 to Form et al. As lessors, and Technicomp Corporation and
Allstar Services as S-1 filed Aug. 8, 1996 lessees.
10.26 Agreement for Wholesale Financing, Business Financing Agreement Form 10-K filed Mar.
and related agreements and correspondence by and between DFS Financia 31, 1998
Services and Allstar Systems, Inc., dated February 27, 1998
10.27 Sublease Agreement by and between X.O. Spec Corporation and Form 10-K filed Mar.
Allstar Systems, Inc. dated May 12, 1997 31, 1998
21.1 List of Subsidiaries of the Company. Form 10-K filed Mar.
31, 1998
23.1 Independent Auditors' Consent of Deloitte & Touche LLP,. Form 10-K filed Mar.
31, 1998
27.1 Financial Data Schedule. Form 10-K filed Mar.
31, 1998
99.1 Schedule II Valuation and Qualifying Accounts Form 10-K filed Mar.
31, 1998
b No Form 8-K has been filed in the last quarter of the fiscal year covered
by this report
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, March 31, 1998.
Allstar Systems, Inc.
(Registrant)
By:/s/ James H. Long
James H Long, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity
/s/ James H. Long Chief Executive Officer, President and Chairman
of the Board
/s/ Donald R. Chadwick Chief Financial Officer, Secretary and Treasurer
and Director
(Principal Financial and Accounting Officer)
/s/ G. Chris Andersen Director
/s/ Richard D. Darrell Director
/s/ Jack M. Johnson Director
/s/ Donald D. Sykora Director
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001020017
<NAME> ALLSTAR SYSTEMS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-START> JAN-01-1997
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1581
<SECURITIES> 0
<RECEIVABLES> 24540
<ALLOWANCES> (249)
<INVENTORY> 4700
<CURRENT-ASSETS> 31090
<PP&E> 3684
<DEPRECIATION> (1672)
<TOTAL-ASSETS> 33184
<CURRENT-LIABILITIES> 18266
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 14723
<TOTAL-LIABILITY-AND-EQUITY> 33184
<SALES> 129167
<TOTAL-REVENUES> 129167
<CGS> 111126
<TOTAL-COSTS> 111126
<OTHER-EXPENSES> 14386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 685
<INCOME-PRETAX> 2970
<INCOME-TAX> 1126
<INCOME-CONTINUING> 1844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1844
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
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