FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-09789
ALLSTAR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0515249
(State of incorporation) (I.R.S. Employer Identification No.)
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (713) 795-2000
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X _ No_ __
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock $.01 par value per share As of November 2, 1999,
4,171,125 shares outstanding
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
September 30, December 31
1999 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................$ 3,788 $ 2,538
Accounts receivable, net.................. 32,478 34,893
Accounts receivable - affiliates ......... 456 373
Inventory................................. 10,002 8,497
Deferred taxes ........................... 431 431
Income taxes receivable................... 637 637
Other current assets ..................... 346 559
---------- ----------
Total current assets ............ 48,138 47,928
Property and equipment......................... 2,611 2,902
Other assets ................................. 160 198
---------- ----------
Total ......................................$ 50,909 $ 51,028
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................$ 12,738 $ 15,958
Accounts payable.......................... 19,899 16,641
Accrued expenses.......................... 5,161 5,273
Deferred service revenue.................. 195 256
---------- ----------
Total current liabilities........ 37,993 38,128
Deferred credit - stock warrants.......... 195 195
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares
issued Common stock:
$.01 par value, 15,000,000 shares
authorized, 4,442,325 and 4,503,411
shares issued and outstanding on
September 30, 1999 and
December 31, 1998................ 44 45
Additional paid in capital................ 10,037 10,196
Unearned equity compensation.............. (1) (269)
Treasury stock (271,200 shares, at cost).. (834) (834)
Retained earnings......................... 3,475 3,567
---------- ----------
Total stockholders' equity....... 12,721 12,705
---------- ----------
Total..........................................$ 50,909 $ 51,028
========== ==========
See notes to consolidated financial statements
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30,
1999 1998
---- ----
Total revenue .................................$ 51,585 $ 44,775
Cost of sales and services..................... 45,378 38,211
---------- ----------
Gross profit ................................. 6,207 6,564
Selling, general and administrative expenses... 5,527 6,325
---------- ----------
Operating income............................... 680 239
Interest expense, net of other income.......... 187 95
---------- ----------
Income before provision for income taxes....... 493 144
Provision for income taxes..................... 161 57
---------- ----------
Net income .................................$ 332 $ 87
========== ==========
Net income per share:
Basic.................................$ 0.08 $ 0.02
========== ==========
Diluted...............................$ 0.08 $ 0.02
========== ==========
Weighted average shares outstanding:
Basic................................. 4,169,125 4,340,364
========= =========
Diluted............................... 4,214,064 4,340,364
========= =========
Nine Months Ended September 30,
1999 1998
---- ----
Total revenue .................................$ 149,744 $ 117,157
Cost of sales and services..................... 132,420 99,833
---------- ----------
Gross profit ................................. 17,324 17,324
Selling, general and administrative expenses... 16,802 16,364
---------- ----------
Operating income............................... 522 960
Interest expense, net of other income.......... 637 175
---------- ----------
(Loss) income before (benefit) provision for
income taxes.............................. (115) 785
(Benefit) provision for income taxes........... (23) 305
---------- ----------
Net (loss) income..............................$ (92) $ 480
========== ==========
Net (loss) income per share:
Basic.................................$ (0.02) $ 0.11
========== ==========
Diluted...............................$ (0.02) $ 0.11
========== ==========
Weighted average shares outstanding:
Basic................................. 4,169,023 4,405,517
========== ==========
Diluted............................... 4,169,023 4,395,310
========== ==========
See notes to consolidated financial statements
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
1999 1998
---- ----
Net (loss) income..............................$ (92) $ 480
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities:
Depreciation and amortization............. 806 573
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable, net.................. 2,415 (4,911)
Accounts receivable - affiliates.......... (83) (221)
Inventory................................. (1,505) (5,441)
Other current assets...................... 213 6
Other assets.............................. --- (159)
Accounts payable.......................... 3,258 3,800
Accrued expenses.......................... (4) 1,466
Income taxes payable...................... --- (95)
Deferred service revenue.................. (61) (9)
------------ -----------
Net cash provided by (used in)
operating Activities............. 4,947 ( 4,511)
---------- -----------
Cash flows from investing activities:
Capital expenditures...................... (477) (842)
----------- ----------
Net cash used in investing activities: (477) (842)
----------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock --- 33
Purchase of treasury stock................ --- (900)
Net (decrease) increase in notes payable.. (3,220) 6,070
---------- ----------
Net cash (used in) provided by
financing activities:............ (3,220) 5,203
---------- ----------
Net increase in cash and cash
Equivalents............................... 1,250 (150)
Cash and cash equivalents at beginning
of period.................................$ 2,538 $ 1,581
---------- ----------
Cash and cash equivalents at end of period.....$ 3,788 $ 1,431
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 754 $ 254
========== ==========
Cash paid for taxes $ 0 $ 401
========== ==========
See notes to consolidated financial statements
<PAGE>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS AND 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., a
wholly owned subsidiary, to provide temporary and permanent placement services
of technical personnel. In March 1998, Allstar formed Allstar Systems Rio
Grande, Inc., a wholly owned subsidiary, to engage in the sale and service of
computer products in western Texas and New Mexico.
A substantial portion of Allstar's sales and services are authorized under
arrangements with product manufacturers. 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
that underlie the credit arrangements that are used for working capital.
The condensed consolidated financial statements presented herein at
September 30, 1999 and for the three months and the nine months ended September
30, 1999 are unaudited; however, all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the periods covered have been made and are of a
normal, recurring nature. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of the
interim periods are not necessarily indicative of results for the full year. The
consolidated balance sheet at December 31, 1998 is derived from audited
consolidated financial statements but does not include all disclosures required
by generally accepted accounting principles. Although management believes the
disclosures are adequate, certain information and disclosures normally included
in the notes to the financial statements has been condensed or omitted as
permitted by the rules and regulations of the Securities and Exchange
Commission.
Reclassifications - Certain amounts in the consolidated financial
statements presented herein have been reclassified to conform to current year
presentation.
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 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of Statement No. 133" ("SFAS No. 137"). SFAS No. 137 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management is evaluating what impact the pronouncement might have, if any, and
additional disclosures may be required when this statement is implemented.
<PAGE>
2. INCENTIVE STOCK 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 and the Incentive 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. The stock option grants will vest ratably over the five year period from
the date of issuance.
The number of options granted and the exercise price under each of the two
Plans were as follows at September 30, 1999:
Exercise Price Director Plan Incentive Plan
$6.0000 8,000
$1.7500 9,000 2,400
$1.5000 28,000 198,480
$1.5625 18,600
$1.0630 186,672
------- -------
Total granted 37,000 414,152
======= =======
In addition, incentive awards in the form of restricted stock were granted for
14,286 shares that would have vested ratably over the two-year period ending
July 7, 1999 and 50,000 shares, which would have vested ratably over the
five-year period ending May 20, 2004. During the quarter ended June 30, 1999
Allstar exchanged restricted stock awards for 63,086 shares for stock option
grants on 126,172 shares at an exercise price of $1.06 per share. The stock
option grants vest over the same period as the exchanged restricted stock
awards. As of September 30, 1999, Allstar had restricted stock awards
outstanding for 2,200 shares.
3. LITIGATION
During 1998 Allstar filed suit against a former employee and such former
employee has filed a counter-claim against Allstar. Allstar intends to
vigorously defend such counter claim. Allstar is unable to estimate the range of
possible recovery by the former employee because the suit is still in the early
stages of discovery.
Allstar is party to litigation and claims which management believes are
normal in the course of its operations; while the results of such litigation and
claims cannot be predicted with certainty, Allstar believes the final outcome of
such matters will not have a materially adverse effect on its results of
operations or financial position.
<PAGE>
4. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period were as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands except share and per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)...................... $332 $87 ($92) $480
==== === ==== ====
Denominator:
Denominator for basic earnings per
share - weighted-average shares
outstanding.......................... 4,169,125 4,340,364 4,169,023 4,405,517
Effect of dilutive securities:
Shares issuable from assumed conversion
of common stock options, warrants and
restricted stock.......................... 44,939 0 0 10,207
---------- ---------- --------- ----------
Denominator for diluted earnings per share.. 4,214,064 4,340,364 4,169,023 4,395,310
========= ========= ========= =========
Basic earnings per share.................... $ 0.08 $0.02 $(0.02) $0.11
==== ===== ====
Diluted earnings per share.................. $ 0.08 $0.02 $(0.02) $0.11
==== ==== ===== ====
<FN>
The potentially dilutive options totaling 67,559 shares, calculated under the
treasury stock method, were not used in the calculation of diluted earnings per
share for the nine months ended September 30, 1999 since the effect of
potentially dilutive securities in computing a loss per share is antidilutive.
</FN>
</TABLE>
<PAGE>
5. SEGMENT INFORMATION
Allstar has three reportable segments: (1) Information Technology, (2)
Telecom Systems and (3) CTI Software. Information Technology includes products
and services relating to computer products and management information systems.
Telecom Systems includes products, installation and services relating to
telephone systems. CTI Software includes software products that facilitate
telephony and computer integration primarily for telemarketing and call center
applications. Allstar evaluates performance of each segment based on operating
income. Management only views accounts receivable, and not total assets, by
segment in their decision making. The tables below show the results of the three
reportable segments:
Information Telecom CTI
Technology Systems Software Consolidated
For the quarter ended
September 30, 1999:
Total revenue....................... $ 49,552 $ 704 $ 1,329 $ 51,585
Cost of sales and services.......... 44,208 547 623 45,378
------- ------- ------- -------
Gross profit........................ 5,344 157 706 6,207
Selling, general and
administrative expenses........ 4,438 565 524 5,527
------- ------- ------- -------
Operating income (loss)............. $ 906 $ (408) $ 182 $ 680
======= ======= ======= =======
Accounts receivable, net............ $ 28,861 $ 2,701 $ 916 $ 32,478
======= ======= ======= =======
For the quarter ended
September 30, 1998:
Total revenues $ 41,750 $ 2,302 $ 723 $ 44,775
Cost of sales and services.......... 36,139 1,753 319 38,211
------ ------- ------- -------
Gross profit........................ 5,611 549 404 6,564
Selling, general and
administrative expenses........ 5,067 863 395 6,325
------- ------- ------- -------
Operating income (loss)............. $ 544 $ (314) $ 9 $ 239
======= ======= ======= =======
Accounts receivable, net............ $ 29,164 $ 2,985 $ 185 $ 32,334
======= ======= ======= =======
For the nine months ended
September 30, 1999:
Total revenue....................... $143,656 $ 3,164 $ 2,924 $149,744
Cost of sales and services.......... 128,638 2,415 1,367 132,420
------- ------- ------- -------
Gross profit........................ 15,018 749 1,557 17,324
Selling, general and
administrative expenses......... 13,605 1,728 1,469 16,802
------- ------- ------- -------
Operating income (loss)............. $ 1,413 $ (979) $ 88 $ 522
======= ======= ======= =======
Accounts receivable, net............ $ 28,861 $ 2,701 $ 916 $ 32,478
======= ======= ======= =======
For the nine months ended
September 30, 1998:
Total revenue....................... $109,903 $ 5,192 $ 2,062 $117,157
Cost of sales and services.......... 95,037 3,684 1,112 99,833
------- ------- ------- -------
Gross profit........................ 14,866 1,508 950 17,324
Selling, general and
administrative expenses........... 13,131 2,014 1,219 16,364
------- ------- ------- -------
Operating income (loss)............. $ 1,735 $ (506) $ (269) $ 960
======= ======= ======= =======
Accounts receivable, net............ $ 29,164 $ 2,985 $ 185 $ 32,334
======= ======= ======= =======
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ALLSTAR SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the company's consolidated financial statements,
including the notes thereto included elsewhere in this Form 10-Q and the
company's Form 10-K, previously filed with the Securities and Exchange
Commission.
Overview
Allstar Systems, Inc. is engaged in the business of reselling computer
hardware, business telephone systems and software products and providing related
services. In addition, we derive revenue from providing services to purchasers
of computer products and other customers. We operate from offices in Houston,
Austin, El Paso, San Antonio and Dallas, Texas and in Albuquerque and Las
Cruces, New Mexico. While all offices offer computer related products and
services, most offices do not offer telecommunications products and services. We
develop and market CTI Software through our wholly owned subsidiary Stratasoft,
Inc. To date, most of our revenue has been derived from computer products sales
and related services. During the quarter ended September 30, 1999, Information
Technology totaled 96.0% of revenues while Telecom Systems and CTI Software
totaled 1.4% and 2.6% of revenues, respectively.
Information Technology sells a wide variety of computer and data
communications hardware and software products available from over 600
manufacturers. We sell desktop and laptop computers, monitors, printers and
other peripheral devices, operating system and application software, network
products and mid-range host and server systems. We are an authorized reseller of
products from a number of leading manufacturers of computer hardware, software
and networking equipment.
Generally, products and system sales are made on a purchase order basis,
with few on-going commitments to purchase from its customers. On certain
occasions, large "roll-out" orders are received with delivery scheduled over a
longer term, such as three to nine months, while normal orders are received and
delivered to the customers usually within approximately thirty days of the
receipt of the order. Because of this pattern of sales and delivery, we normally
do not have a significant backlog of computer product sales.
Services are provided by Information Technology both in conjunction with
and separately from its product and system sales. We typically price our
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 we do not maintain branch offices, we often subcontract for
necessary technical personnel, particularly where required for larger scope or
prolonged duration contracts. The services provided include information systems
support, authorized warranty service, hardware repair and maintenance services,
complex network diagnostic services, end user support services and software
diagnostic services. We also offer complete outsourcing of a customer's computer
and network management and technical support needs on a contract basis. In
addition, we provide temporary and permanent technical staffing services.
To support and maintain the quality of these services and to maintain
vendor accreditation necessary to resell and service its significant product
lines, our technical staff participates in various certifications and
authorization programs sponsored by hardware manufacturers and software
suppliers. Our ability to attract and retain qualified professional and
technical personnel is critical to the success of our services business. The
most significant portion of the costs associated with the delivery of services
is personnel costs. Therefore, in order to be successful, our billable rates
must be in excess of the personnel costs and our margin is dependent upon
maintaining high utilization of our service personnel. In addition, the
competition for high quality personnel has generally intensified causing our and
other service providers personnel costs to increase.
<PAGE>
While we often have service contracts with our larger customers, many of
these contracts are project based or are terminable on relatively short notice.
Through Telecom Systems, we market, install and service business telephone
systems, including large PBX systems and smaller "key systems", along with a
variety of related products including hardware and software products for data
and voice integration, wide area connectivity and telephone system networking,
wireless communications and video conferencing. As with Information Technology,
Telecom System's cost of sales include both product cost and labor cost, and the
labor has a more fixed nature. During periods when there is downward pressure on
pricing systems, management of labor cost is necessary for Telecom Systems not
to have erosion of gross margin.
We develop and market proprietary CTI Software, which integrates business
telephone systems and networked computer systems, under the trade name
"Stratasoft." Our basic products are typically customized to suit a customer's
particular needs and are often bundled with computer hardware supplied by us at
the customer's request. Stratasoft products include software for call center
management, both in-bound and out-bound, as well as interactive voice response
software.
We believe that each of our three businesses are complementary to each
other and allow us to offer a broader range of integrated products and services
in order to satisfy our customers' information and communication technology
requirements than many of our competitors. Our strategy is to maintain and
expand our relationships with our customers by satisfying a greater portion of
these requirements.
Our cost of sales and services include product cost and labor. Labor has a
more fixed nature such that higher levels of service revenues produce more gross
margin while lower levels of service revenues produce less gross margin.
Management of labor cost is important in order to prevent erosion of gross
margins.
A significant portion of our selling, general and administrative expenses
relate to personnel costs, some of which are variable and others of which are
relatively fixed. Our variable personnel costs are substantially comprised of
sales commissions, which are typically calculated based upon our gross profit on
a particular sales transaction and thus generally fluctuate with our overall
gross profit. The remainder of 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.
We manage our inventory in order to minimize the amount of inventory held
for resale and the risk of inventory obsolescence and decreases in market value.
We attempt to maintain a level of inventory required to reach only our near term
delivery requirements by relying on the ready availability of products from our
principal suppliers. Manufacturers of our major products generally provide price
protection, which reduces our exposure to decreases in prices. In the past,
product suppliers generally allowed for returns of excess inventory, which, on a
limited basis, were made without material restocking fees. However, significant
suppliers recently revised their policies to restrict the amount of returns
allowed. It is expected that this change will increase our risks associated with
inventory ownership. In particular, we have greater risk associated with
inventory obsolescence and declining values. In addition, certain manufacturers
of products have generally become more restrictive with respect to price
protection. This has increased our risks, as they relate to the value of
inventories. Each of these changes may cause a reduction of gross margins
realized on the sale of products.
Special notice regarding forward-looking statements
This quarterly annual report on Form 10-Q contains forward-looking
statements within the meaning of the private securities litigation reform act of
1995 relating to future events or our future financial performance including,
but not limited to, statements contained in item 1 "financial statements" and
item 2. - "management's discussion and analysis of financial condition and
results of operations." Readers are cautioned that any statement that is not a
statement of historical fact, including but not limited to, statements which may
be identified by words including, but not limited to, "anticipate," "appear,"
"believe," "could," "estimate," "expect," "hope," "indicate," "intend,"
"likely," "may," "might," "plan," "potential," "seek," "should," "will,"
"would," and other variations or negative expressions thereof, are predictions
or estimations and are subject to known and unknown risks and uncertainties.
Numerous factors, including factors which we have little or no control over, may
affect the company's actual results and may cause actual results to differ
materially from those expressed in the forward-looking statements contained
herein. In evaluating such statements, readers should consider the various
factors identified in the company's annual report on Form 10-K, as filed with
the Securities and Exchange Commission including matters set forth in item 1.-
"factors which may affect the future results of operations," which could cause
actual events, performance or results to differ materially from those indicated
by such statements.
Three Months Ended September 30, 1999 Compared To Three Months Ended
September 30, 1998 (Dollars in thousands)
The following table sets forth, for the periods indicated, certain
financial data derived from our unaudited consolidated statements of operations
for the three months ended September 30, 1999 and 1998.
Three months ended September 30,
1999 1998
---- ----
Amount % Amount %
Revenue
Information Technology.........................$ 49,552 96.0 $ 41,750 93.2
Telecom Systems................................ 704 1.4 2,302 5.2
CTI Software................................... 1,329 2.6 723 1.6
------- ----- -------- -----
Total revenue......................... 51,585 100.0 44,775 100.0
Gross profit:
Information Technology......................... 5,344 10.8 5,611 13.4
Telecom Systems................................ 157 22.3 549 23.8
CTI Software................................... 706 53.1 404 55.9
------- ----- -------- -----
Total gross profit.................... 6,207 12.0 6,564 14.6
Selling, general and administrative expenses... 5,527 10.7 6,325 14.1
------- ----- -------- -----
Operating income............................... 680 1.3 239 0.5
Interest expense, net of other income.......... 187 0.3 95 0.2
------- ----- -------- -----
(Loss) income before (benefit)
provision for income taxes.................... 493 1.0 144 0.3
(Benefit) provision for income taxes........... 161 0.4 57 0.1
------- ----- -------- -----
Net (loss) income..............................$ 332 0.6 $ 87 0.2
======= ===== ======== =====
Percentages shown are percentages of total revenue, except gross profit
percentages, which represent gross profit by each business unit as a percentage
for each such unit.
<PAGE>
TOTAL REVENUE. Total revenue increased by $6,810 (15.2%) to $51,585 in 1999
from $44,775 in 1998.
Information Technology revenue increased by $7,802 (18.7%) to $49,552 in
1999 from $41,750 in 1998. As a percentage of total revenue, Information
Technology revenue increased to 96.0% in 1999 from 93.2% in 1998. The increase
in Information Technology revenues was attributable to revenues derived from new
customer relationships in offices opened in late 1997 and during 1998, together
with significant revenue growth realized from new and existing customers in our
more mature offices in Dallas and Houston. Information Technology revenues from
our newer offices, opened in 1997 and 1998, increased by $3,480 (61.6%) while
revenues from our more mature offices in Dallas and Houston increased by $4,322
(12%).
Telecom Systems revenue decreased by $1,598 (69.4%) to $704 in 1999 from
$2,302 in 1998. Revenue from Telecom Systems as a percentage of total revenue
decreased to 1.4% in 1999 from 5.2% in 1998. Revenue decreased in 1999 compared
to 1998 because during the third quarter of 1998 Telecom Systems had begun to
realize revenues from a large installation for a single customer. We were not
able to replace those revenues with new orders of the magnitude of that large
installation. In addition, during the 1999 period, we attempted to make changes
to our Telecom Systems business, which has produced unsatisfactory profitability
results to date, in an attempt to ultimately improve financial performance in
this business unit, and this caused decreased sales activity as management,
operational procedure and staffing changes were made.
CTI Software revenue increased by $606 (83.8%) to $1,329 in 1999 from $723
in 1998. The increase in CTI Software revenues was due to both increased sales
and increased size of sales of its products in 1999. Revenue from CTI Software,
as a percentage of total revenue, increased to 2.6% in 1999 from 1.6% in 1998.
GROSS PROFIT. Gross profit decreased by $357 (5.4%) to $6,207 in 1999 from
$6,564 in 1998. Gross margin decreased to 12.0% in 1999 from 14.6% in 1998.
Information Technology gross profit decreased by $267 to $5,344 in 1999
from $5,611 in 1998 even though revenues increased by 18.7%. The decline in
gross profit was due to the realization of lower margins in 1999. Information
Technology gross margin decreased to 10.8% in 1999 from 13.4% in 1998. The
reduction in gross margin was the result of the combined effects of our
participation in lower margin large volume sales transactions, lower average
selling prices for computers realized throughout the industry, costs related to
eliminating unwanted inventory and excessive freight costs not passed on to
customers.
Telecom Systems gross profit decreased by $392 (71.4%) to $157 in 1999
compared to $549 in 1998 due to lower revenues being realized in the 1999
period. Gross margin for Telecom Systems decreased slightly from the prior year
to 22.3% in 1999 from 23.8% in 1998. Under normal circumstances we expect to
realize between 25% and 35% gross margins in Telecom Systems. The decline in
gross margin in Telecom Systems as compared to both the expected normal levels
and 1998 was due to a reduction in revenue without a corresponding reduction in
those costs of sales and services which tend to be fixed in nature.
CTI Software gross profit increased by $302 (74.8%) to $706 in 1999 from
$404 in 1998. Gross margins for CTI Software decreased slightly to 53.1% in 1999
from 55.9% in 1998 but were in line with expectations for this business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $798 (12.6%) to $5,527 in 1999 from $6,325
in 1998. As a percentage of revenue, these expenses decreased by 3.5%, to 10.6%
of revenue in 1999 from 14.1% of revenue in 1998. The decrease in selling,
general and administrative expenses as a percentage of revenue was the direct
result of our effort to reduce these costs through the closing of unprofitable
offices, the downsizing of certain branch offices and the reduction of certain
expense structures. Additionally, we realigned certain operations to eliminate
redundancies and improve efficiency. During 1998 we increased our spending
relating to opening and staffing new offices and sales operations with the
expectation of producing a sufficient revenue base to cover those expenses and
turn these new offices into profitable operations. Late in 1998, management
realized that certain of these new offices and operations would not be able to
rapidly attain sufficient revenues and gross profits to meet those expectations.
Consequently, we began downsizing or closing those operations and this has
resulted in reduced selling, general and administrative expenses.
During the quarter our Information Technology offices produced earnings
before the allocation of corporate overhead costs and all but one Information
Technology office produced earnings before interest and taxes.
In spite of the fact that selling, general and administrative expenses
declined as a percentage of revenue, we were not able to reduce selling, general
and administrative expenses as much as we desired. We reduced the total number
of full-time employees by 17 (3.9%) from approximately 440 at June 30, 1999 to
423 at September 30, 1999, but did not realize the full impact of expense
reduction in the quarter due to the fact that the reductions occurred throughout
the quarter and because of severance paid to certain employees.
OPERATING INCOME. Operating income increased by $441 (185%) to $680 in 1999
from $239 in 1998 due, principally, to the reduction in selling, general and
administrative expenses, which more than offset lower gross profit realized
because of, lower gross margin. Operating income increased as a percentage of
total revenue to 1.4% in 1999 from 0.5% in 1998.
INTEREST EXPENSE, NET OF OTHER INCOME. Interest expense, net of other
income increased by $92 to $187 in 1999 compared to $95 in 1998. This reflects a
higher level of borrowing on our credit facilities in 1999 as compared to 1998
and higher interest rates in 1999 compared to 1998.
NET INCOME. Net income, after a provision for income taxes totaling $161
(reflecting an effective tax rate of 32.7% in 1999 compared to 39.6% in 1998),
increased by $245 to $332 in 1999 compared to $87 in 1998.
<PAGE>
Nine Months Ended September 30, 1999 Compared To Nine Months Ended
September 30, 1998 (Dollars in thousands)
The following table sets forth, for the periods indicated, certain
financial data derived from our unaudited consolidated statements of operations
for the nine months ended September 30, 1999 and 1998.
Nine months ended September 30,
1999 1998
---- ----
Amount % Amount %
Revenue :
Information Technology.........................$143,656 95.9 $109,903 93.8
Telecom Systems................................ 3,164 2.1 5,192 4.4
CTI Software................................... 2,924 2.0 2,062 1.8
------- ----- ------- -----
Total revenue......................... 149,744 100.0 117,157 100.0
Gross profit:
Information Technology......................... 15,018 10.5 14,866 13.5
Telecom Systems................................ 749 23.7 1,508 29.0
CTI Software................................... 1,557 53.2 950 46.1
------- ----- ------ -----
Total gross profit.................... 17,324 11.6 17,324 14.8
Selling, general and administrative expenses... 16,802 11.2 16,364 14.0
------- ----- ------ -----
Operating income............................... 522 0.4 960 0.8
Interest expense, net of other income.......... 637 0.5 175 0.1
------- ----- ------ -----
(Loss) income before (benefit)
provision for income taxes.................... (115) (0.1) 785 0.7
Provision for income taxes..................... (23) (0.0) 305 0.3
------- ----- ------- -----
Net (loss) income..............................$ (92) (0.1) $ 480 0.4
======= ===== ======= =====
Percentages shown are percentages of total revenue, except gross profit
percentages, which represent gross profit by each business unit as a percentage
for each such unit.
TOTAL REVENUE. Total revenue increased by $32,587 (27.8%) to $149,744 in
1999 from $117,157 in 1998.
Information Technology revenue increased by $33,753 (30.7%) to $143,656 in
1999 from $109,903 in 1998. As a percentage of total revenue, Information
Technology revenue increased to 95.9% in 1999 from 93.8% in 1998. The increase
in Information Technologies revenues was attributable to revenues derived from
new customer relationships in offices opened in late 1997 and during 1998,
together with significant revenue growth realized from new and existing
customers in our more mature offices in Dallas and Houston. Information
Technology revenues from the company's newer offices, opened in 1997 and 1998,
increased by $9,542 (136.4%). Revenues from our more mature offices in Dallas
and Houston increased by $16,409 (26.8%).
Telecom Systems revenue decreased by $2,028 (39.1%) to $3,164 in 1999 from
$5,192 in 1998. Revenue from Telecom Systems as a percentage of total revenue
decreased to 2.1% in 1999 from 4.4% in 1998. Revenue decreased in 1999 compared
to 1998 because during the third quarter of 1998 Telecom Systems had begun to
realize revenues from a large installation for a single customer. We were not
able to replace those revenues with new orders of the magnitude of that large
installation. In addition, during the 1999 period a portion of the decrease in
Telecom Systems revenue was due to increased pricing competition from a directly
owned subsidiary of the manufacturer of the telephone system product line that
has accounted for a majority of Telecom Systems revenues over the past year.
Several large sales were lost to this competitor at far below the pricing levels
at which we were willing to price such systems. In addition, during the 1999
period, we attempted to make changes to our Telecom Systems business, which has
produced unsatisfactory profitability results to date, in an attempt to
ultimately improve financial performance in this business unit, and this caused
decreased sales activity as management, operational procedure and staffing
changes were made.
<PAGE>
CTI Software revenue increased by $862 (41.8%) to $2,924 in 1999 from
$2,062 in 1998. The increase in CTI Software revenues was due to both increased
sales and increased size of sales of its products in 1999. Revenue from CTI
Software, as a percentage of total revenue, increased to 2.0% in 1999 from 1.8%
in 1998.
GROSS PROFIT. Gross profit remained unchanged at $17,324 in 1999 and 1998
despite a 27.8% increase in revenues. This is because gross margin percentage
decreased to 11.6% in 1999 from 14.8% in 1998.
Information Technology gross profit increased by $152 to $15,018 in 1999
from $14,866 in 1998 in spite of the increased revenues described above, due to
lower gross margin realized in 1999. Information Technology gross margin
percentage decreased to 10.5% in 1999 from 13.5% in 1998. The reduction in gross
margin was the result of the combined effects of our participation in lower
margin large volume sales transactions, of lower average selling prices for
computers realized throughout the industry, of costs related to eliminating
unwanted inventory, of excessive freight costs not passed on to customers and of
write-offs of vendor accounts receivable. In addition, the service component of
Information Technology produced below our expected level of gross margin because
we experienced lower utilization of our technical staff during the 1999 period
as we were unable to immediately reassign staff from completed projects to new
projects and due to an effort by us to change our mix of services business to
include a higher percentage of what is believed to ultimately be more profitable
services offerings.
Telecom Systems gross profit decreased by $759 (50.3%) to $749 in 1999
compared to $1,508 in 1998 primarily due to the decrease in revenues and, to a
lesser extent, due to a decrease in gross margin. Gross margin for Telecom
Systems decreased from the prior year to 23.7% in 1999 from 29.0% in 1998. Under
normal circumstances we expect to realize between 25% and 35% gross margins in
Telecom Systems. The significant decline in gross profit and gross margin in
Telecom Systems as compared to both the expected normal levels and 1998 was due
to the factors described above, which significantly decreased gross margin due
to a reduction a revenue without a corresponding reduction in those costs of
sales and services which tend to be fixed in nature.
CTI Software gross profit increased by $607 (63.9%) to $1,557 in 1999 from
$950 in 1998. Gross margin for CTI Software increased to 53.2% in 1999 from
46.1% in 1998 due to a higher content of software-only sales in 1999, our
ability to realize higher prices for its CTI software products relative to the
hardware component and to a reduction in the cost of software development costs
as compared to revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $438 (2.7%) to $16,802 in 1999 from $16,364
in 1998. These expenses as a percentage of total revenue decreased to 11.2% of
revenue in 1999 from 14.0% in 1998. The decrease in selling, general and
administrative expenses as a percentage of revenue was the direct result of our
effort to reduce these costs through the closing of unprofitable offices,
through downsizing of certain branch offices and through the reduction of
certain expense structures when expected revenues were insufficient to cover
operating expenses. Additionally, we realigned certain operations to eliminate
redundancies and improve efficiency. During 1998 we increased our spending
relating to opening and staffing new offices and sales operations with the
expectation of producing a sufficient revenue base to cover those expenses and
turn these new offices into profitable operations. Late in 1998, management
realized that certain of these new offices and operations would not be able to
rapidly attain sufficient revenues and gross profits to meet those expectations.
Consequently, we began downsizing or closing those operations and this has
resulted in reduced selling, general and administrative expenses and lower
losses in the combined new offices. The company reduced the total number of
full-time employees by 90 (17.5%) from approximately 513 at December 31, 1998 to
423 at September 30, 1999, but did not realize the full impact of expense
reduction in the nine month period due to the fact that some of the reductions
occurred throughout the nine month period and because of severance paid to
certain employees.
<PAGE>
OPERATING INCOME. Operating income decreased by $438 (45.6%) to operating
income of $522 in 1999 from operating income of $960 in 1998 due, principally,
to lower gross margins realized in Information Technology and Telecom Systems
operations. Operating income decreased as a percentage of total revenue to
income of 0.4% in 1999 from income of 0.8% in 1998.
INTEREST EXPENSE, NET OF OTHER INCOME. Interest expense, net of other
income increased $462 to $637 in 1999 compared to $175 in 1998. This reflects a
higher level of borrowings on our credit facility in 1999 as compared to 1998
and higher interest rates in 1999 compared to 1998.
NET INCOME. Net income, after a provision for income taxes decreased by
$572 to a net loss of $92 in 1999 compared to net income of $480 in 1998.
Liquidity and Capital Resources
Our working capital was $10,145 and $9,800 at September 30, 1999 and
December 31, 1998, respectively. As of September 30, 1999, we had borrowing
capacity under our credit facility of $30,000 of which $23,822 was used under
our floor plan and revolving credit facility leaving unused borrowing capacity
of $4,165.
Cash Flow
Operating activities provided net cash totaling $4,947 during the nine
months ended September 30, 1999. Operating activities provided net cash during
the period primarily because of cash provided by increases in accounts payable
($3,258) and decreases in accounts receivables ($2,415), which more than offset
cash used by a increase in inventory ($1,505). The increase in accounts payable
was primarily the result of a increased purchases of inventory late in the
period, as well as the size of and the timing of the normal payment on our
credit facility which occurred after the end of the period. The decrease in
accounts receivable was primarily the result of improved collections. The
increase in inventory was primarily the result of increases in inventory
associated with work in process due to orders received near the end of the
period and a higher than usual level of inventory "intransit" to us or to our
customers at September 30, 1999.
Investing activities used cash totaling $477 during the nine months ended
September 30, 1999 related entirely to capital expenditures. During the
remainder of 1999, we expect to incur additional capital expenditures for
upgrades and replacement of existing equipment and facilities, as well as
upgrades of computing equipment.
Financing activities used cash totaling $3,220 as borrowings were reduced
under our credit facility during the nine months ended September 30, 1999.
Asset Management
We had accounts receivable, net of allowance for doubtful accounts, of
$32,478 at September 30, 1999. The number of days' sales outstanding in accounts
receivable was 61 days, which is slightly lower than the 67 days outstanding at
December 31, 1998. The number of days outstanding continues to reflect improved
but still slower than normal payment by our customers during the nine months
ended September 30, 1999. Bad debt expense as a percentage of total revenue for
the nine months ended September 30, 1999 was 0.3%, the same as during the nine
months ended September 30, 1998. Our allowance for doubtful accounts, as a
percentage of accounts receivable, was 3.1% at September 30, 1999 and 1.0% at
December 31, 1998, a significant portion of the increase reflects a change in
the method of providing for returns and allowances. Inventory turnover for the
nine months ended September 30, 1999 was 13.2 times versus 16.4 times for the
comparable period in 1998.
<PAGE>
Current Debt Obligations
Historically, we have satisfied our cash requirements principally through
borrowings under our lines of credit and through operations. We maintain a cash
position sufficient to pay only our immediately due obligations and expenses.
When the amount of cash available falls below its immediate needs, we request
advances under a credit facility provided by Deutsche Financial Services ("DFS
Facility")
The total credit available under the DFS Facility is $30,000 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 DFS Facility for floor plan financing of inventory from
approved manufacturers (the "Inventory Line") is $20,000. Available credit under
the DFS Facility, net of Inventory Line advances, is $10,000 million, which is
used 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 our inventory vendors directly, generally in exchange
for negotiated financial incentives. Typically, the financial incentives
received are such that DFS does not charge us interest until 40 days after the
transaction is financed, at which time we are 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 7.0%.
The DFS Facility is collateralized by a security interest in substantially
all of our assets, including our accounts receivable, inventory, equipment and
bank accounts. Collections of our 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 we are in compliance with its debt to tangible net
worth covenant, we have discretion over the use and application of the funds
collected in the lockbox. If we exceed that financial ratio, DFS may require
that lockbox payments be applied to reduce our indebtedness to DFS. If in the
future DFS requires that all lockbox payments be applied to reduce our
indebtedness, we would be required to seek funding from DFS or other sources to
meet substantially all of our cash needs.
We have a $2,000 credit facility with IBM Credit Corporation (the "IBMCC
Facility") for the purchase of IBM branded inventory from certain suppliers.
Advances under the 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 amount of invoices for inventory financed through IBMCC is required to be
paid. 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 IBMCC Facility is immediately terminable by
either party by written notice to the other.
Under the DFS Facility we are required to maintain (i) a tangible net worth
of $10,000, defined under the agreement as book value of assets (excluding
intangibles such as receivables from officers, directors, employees,
stockholders and affiliates, net leasehold improvements, goodwill, prepaid
expenses, franchise fees and other similar items) less liabilities (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 1.25 to
1.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends unless consented to by the lender.
Year 2000 Issue
The Year 2000 problem generally results from the use in computer hardware
and software of two digits rather than four digits to define the applicable
year. When computers must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The Year 2000 problem, including some of the identified
risks, has been more fully described in our previous periodic reports filed with
the Securities and Exchange Commission, including our most recent annual report
on form 10K.
<PAGE>
State of Readiness:
Our board of directors has been briefed about the Year 2000 problem. The
board of directors has adopted a Year 2000 project (the "Y2K Plan") aimed at
preventing our mission-critical functions from being impaired due to the year
2000 problem.
Our Vice President of Information Systems is supervising the implementation
of the Y2K Plan. We are actively implementing the Y2K Plan, which will be
modified as events warrant. Under the plan, we have inventoried all of the
computer systems and the telephone system at our corporate offices. During the
second quarter of 1999 we substantially completed a complete inventory of all
computers, software and telephone systems used in our branch offices, replaced
many items that were determined to not be Year 2000 compliant, and are currently
in the process of establishing a time table for upgrading or replacing any other
systems that cannot be verified as warranted by the system's manufacturer to be
Year 2000 compliant. In addition, in June, 1999, we performed a
total-system-shut-down, the purpose of which was to change the computer dates
forward to past January 1, 2000 in an attempt to evaluate the system performance
using test transactions. The test was successful and it was determined that our
primary computer systems performed correctly. During the three months ended
September 30, 1999 we continued to collect information about our vendors' state
of readiness and continued to upgrade computers to be Year 2000 compliant.
Our Y2K Plan recognizes that the computer, telecommunications and other
systems of outside entities have the potential for major, mission-critical,
adverse effects on the conduct of company business. We do not have control of
these outside entities or outside systems; however, our Y2K Plan includes
attempting to verify the readiness of those outside entities or outside systems
which might possibly have a material adverse effect on our business by
contacting those outside entities to determine their readiness and to coordinate
with those outside entities to mitigate the possibility of an interruption of
any mission-critical process.
Costs to Address Year 2000 Issues:
We have incurred expenditures, as part of an overall upgrading of its
computer and telecommunications systems, during 1998 and through 1999 to date.
We have also recognized higher expenditures in managing our information and
telecommunications systems as staff members have expended time and resources
evaluating the company's Year 2000 readiness and implemented required changes.
It is difficult to assess the additional expenditures over and above what would
have been expended under normal circumstances, but we estimate that we have
incurred expenditures in the form of additional expenses of approximately $350
over and above that which would have been incurred were it not for the Year 2000
issue. In addition, we estimate that we have made capital expenditures in the
amount of approximately $351 over an above the amount of capital expenditures
that would have been required if it were not for the Year 2000 issue. Although
impossible to accurately predict, we currently believe that the additional
expenditures specifically related to preparing for the Year 2000 issue will not
be significant. Although we believe that our estimates are reasonable, there can
be no assurance that the costs of implementing the Y2K Plan will not differ
materially from the estimated costs or that we will not be materially adversely
affected by year 2000 issues.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During 1998 Allstar filed suit against a former employee and said former
employee has filed a counter-claim against Allstar. Allstar intends to
vigorously defend such counter claim. Allstar is unable to estimate the range of
possible recovery by the former employee because the suit is still in the early
stages of discovery.
<PAGE>
We are 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, We believe the final outcome of such
matters will not have a materially adverse effect on its results of operations
or financial position.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Allstar Systems, Inc.
November 3, 1999 By: /s/ JAMES H. LONG
-----------------
Date James H. Long, Chief Executive Officer
November 3, 1999 By: /s/ DONALD R. CHADWICK
Date Donald R. Chadwick, Chief Financial Officer
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