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 March 31, 2000
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: 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, 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 May 19, 2000
4,050,525 shares outstanding
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................... $ 4,045 $ 4,647
Accounts receivable, net ..................... 26,764 37,726
Accounts receivable - affiliates ............. 420 423
Inventory .................................... 4,995 7,442
Deferred taxes ............................... 723 836
Sale Proceeds Receivable ..................... 14,250
Other current assets ......................... 346 384
-------- --------
Total current assets ..................... 51,543 51,458
Property and equipment ........................... 1,879 2,280
Other assets ..................................... 174 178
-------- --------
Total ............................................ $ 53,596 $ 53,916
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................ $ 12,869 $ 15,869
Accounts payable ............................. 15,004 21,687
Accrued expenses ............................. 3,555 3,896
Net liabilities related to
discontinued operations .................... 2,239 199
Income taxes payable ......................... 2,574
Deferred service revenue ..................... 128 240
-------- --------
Total current liabilities ................ 36,369 41,891
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 4,442,325 shares issued at
March 31, 2000 and December 31, 1999 ... 44 44
Additional paid in capital ................... 10,037 10,037
Unearned equity compensation ................. (1) (1)
Treasury stock (391,800 and 381,800
shares, at cost) at March 31, 2000
and December 31, 1999 ...................... (986) (972)
Retained earnings ............................ 7,938 2,722
-------- --------
Total stockholders' equity ............... 17,032 11,830
-------- --------
Total ............................................ $ 53,596 $ 53,916
======== ========
See notes to consolidated financial statements
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2000 1999
----------- -----------
Total revenue .............................................. $ 5,984 $ 4,318
Cost of sales and services ................................. 3,599 2,862
----------- -----------
Gross profit ............................................... 2,385 1,456
Selling, general and administrative expenses ............... 2,309 1,633
----------- -----------
Operating income (loss) .................................... 76 (177)
Interest expense, net of other income ...................... 15 17
----------- -----------
Income (loss) from continuing operations before
provision (benefit) for income taxes ................... 61 (194)
Provision (benefit) for income taxes ...................... 19 (58)
----------- -----------
Net income (loss) from continuing operations ............... 42 (136)
Discontinued Operations:
Net income from discontinued operations, net of taxes .. 302 82
Gain on disposal, net of taxes ......................... 4,872
----------- -----------
Net income (loss) .......................................... $ 5,216 $ (54)
=========== ===========
Net income (loss) per share:
Basic:
Net income (loss) from continuing operations ....... $ 0.01 $ (0.03)
Net income on discontinued operations .............. 0.08 0.02
Gain on disposal, net of taxes ..................... 1.20
----------- -----------
Net income (loss) per share ..................... $ 1.29 $ (0.01)
=========== ===========
Diluted:
Net income (loss) from continuing operations ...... $ 0.01 $ (0.03)
Net income on discontinued operations .............. 0.07 0.02
Gain on disposal, net of taxes ..................... 1.14
----------- -----------
Net income (loss) per share ........................ $ 1.22 $ (0.01)
=========== ===========
Weighted average shares outstanding:
Basic .............................................. 4,048,964 4,168,925
=========== ===========
Diluted ............................................ 4,287,201 4,168,925
=========== ===========
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
Net income (loss) from continuing operations................. $ 42 $ (136)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................... 103 265
Deferred tax provision .................................. 113
Changes in assets and liabilities that provided (used) cash:
Accounts receivable, net ................................ 9,066 2,613
Accounts receivable - affiliates ........................ (1) (122)
Inventory ............................................... 162 992
Other current assets .................................... (18) 10
Other assets ............................................ 4
Accounts payable ........................................ (6,683) (2,010)
Accrued expenses ........................................ (341) 471
Income taxes payable .................................... 19
Deferred service revenue ................................ (112) (65)
------- -------
Net cash provided by continuing operating activities ........ 2,354 2,018
Net operating activities from discontinued activities ....... 116 82
------- -------
Net cash provided by operating activities ........... 2,470 2,100
Cash flows from investing activities:
Capital expenditures .................................... (58) (226)
------- -------
Net cash used in investing activities: .............. (58) (226)
------- -------
Cash flows from financing activities:
Purchase of treasury stock .............................. (14)
Net decrease in notes payable ........................... (3,000) (792)
------- -------
Net cash (used in) financing activities: ............ (3,014) (792)
------- -------
Net increase (decrease) in cash and cash
Equivalents ............................................. (602) 1,082
Cash and cash equivalents at beginning of period ............ 4,647 2,538
------- -------
Cash and cash equivalents at end of period .................. $ 4,045 $ 3,620
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest .................................. $ 261 $ 254
======= =======
Cash paid for taxes ..................................... $ 0 $ 0
======= =======
See notes to consolidated financial statements
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 telecommunication software products in the United
States. 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 as of and
for the three months ended March 31, 2000 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, 1999 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 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities- ("SFAS No. 133"). SFAS No.
133, as amended by 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 adjustment or disclosures may
be required when this statement is implemented.
2. DISCONTINUED OPERATIONS
On March 16, 2000 Allstar entered into an agreement to sell certain assets
of and the ongoing operations of its Computer Products division. The sale
transaction closed on May 19, 2000 after stockholder approval was obtained and
other required conditions of closing were satisfied. Under the terms of the
agreement, Allstar received a cash purchase price at closing of approximately
$16,440, including $1,600 attributable to inventory and $279 attributable to
equipment, plus the contingent right to receive up to $500 in proceeds from an
escrow account established to satisfy the Company's liability for any breaches
of the Company's representations and warranties under the agreement. The cash
purchase price is subject to certain post-closing adjustment which, management
estimates will result in a credit to the purchaser of approximately $350. Pretax
income from the discontinued operations of the Computer Products Division (net
of taxes of $156) was $302 for the quarter ended March 31, 2000 and (net of
taxes of $58) $112 for the same quarter of 1999. A gain on disposal of $5,091
(net of taxes of $2,625) which included an estimated loss of $604 (net of taxes
of $ 311) for the operating results from the measurement date, March 16, 2000 to
the closing date of the sale, as well as a loss on the equipment sold of $352
(net of taxes of $181) and estimates for the impairment of assets caused by the
disposal decision of $2,593 (net of taxes of $1,336) were recognized at March
31, 2000. Allstar retained accounts receivable attributable to the Computer
Products Division which, at March 31, 2000, were approximately $21,608, net of
reserves. Allstar also retained fixed assets of $255 and liabilities related to
the Computer Products Division. Fixed assets which were not sold are being
redeployed in the continuing operations. The balance sheet caption "Net
liabilities related to discontinued operations" includes $ 915 of estimated
operating losses for the period from March 31, 2000 through the date of closing.
Revenue for the Computer Products Division for the quarters ended March 31, 1999
and 2000 were $42,254 and $29,323 (net of $5,772 after the measurement date and
included in the gain on sale), respectively. The Company allocates interest
expense to its various divisions on a proportional basis based on accounts
receivable. Interest expense allocated to the Computer Products Division for the
quarters ended March 31, 1999 and 2000 and for the period from April 1, 2000 to
May 19, 2000 was $206, $174 and $34. In connection with the sale of the Computer
Products Division, Allstar also sold the El Paso portion of the IT Services
business. The El Paso branch office portion of the IT Services business
accounted for revenues of $424 and $712 and operating loss of $(14) and $ (173)
in the quarters ended March 31, 1999 and 2000, respectively. The El Paso
services business has been included in the continuing operations for the quarter
ended March 31, 2000 and will be in the quarter ended June 30, 2000 through the
close date of May 19, 2000.
On November 2, 1999, Allstar approved a plan to sell or close its Telecom
division. This was the measurement date. The sale was finalized on March 16,
2000. Under the terms of the sale Allstar received $250 cash and the ability to
obtain restricted stock in the purchaser contingent upon the performance of the
acquired operations during a period ending six months after the closing date.
Additionally, the purchaser assumed all telephone equipment warranty obligations
of Allstar up to a maximum of $30. Any excess warranty costs incurred by the
purchaser will be billed to Allstar at an agreed upon rate. Pretax loss from
discontinued operations (net of tax savings of $15) was $30 for the quarter
ended March 31, 1999. A disposal loss, including an estimate of the operating
results from the measurement date, November 2, 1999 to the closing date of the
sale, as well as estimates for impairment of assets caused by the disposal
decision were recognized at December 31, 1999. During the quarter ended March
31, 2000 Allstar revised its estimate of the loss on disposal and recorded an
additional loss (net of tax savings of $113) of $219. Allstar has retained
accounts receivable of approximately $1,342, net of reserves, at March 31, 2000
related to the Telecom Division.
3. 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 442,500 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 Incentive Plan stock option grants will vest ratably
over the five year period from the date of issuance.
The number of options outstanding and the exercise price under each of the
two Plans were as follows at March 31, 2000:
EXERCISE PRICE DIRECTOR PLAN INCENTIVE PLAN
-------------- ------------- --------------
$6.0000 8,000
$1.7500 9,000 2,300
$1.5000 28,000 213,780
$1.5625 18,000
$1.3750 5,200
$1.0630 190,972
------ -------
TOTAL GRANTED 37,000 438,252
====== =======
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 62,086 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 March 31, 2000, Allstar had restricted stock awards outstanding
for 1,200 shares.
4. LITIGATION
On February 1, 2000, a competitor brought a suit against Allstar Systems,
Inc.'s wholly owned subsidiary Stratasoft, Inc. in the United States District
Court for the Northern District of Georgia. The plaintiff alleges infringement
of certain patents owned by the competitor and is seeking unspecified monetary
damages. Management of Allstar believes that this suit is without merit and
intends to vigorously defend such action.
On May 16, 2000, Jack B. Corey ("Corey") filed suit against the Company in
JACK B. COREY V. ALLSTAR SYSTEMS, INC., Cause No. 2000-24796; in the District
Court of Harris County, Texas, 113th Judicial District, seeking to enjoin the
sale of its computer product division and certain other assets to Amherst
Technologies, and for unspecified damages. On Wednesday, May 17, 2000, a state
court denied Corey's Application for Temporary Restraining Order and on Monday,
May 22, 2000, a second state court denied his Application for a Temporary
Injunction and for Expedited Discovery as moot. The present pleadings lack
specificity as to Corey's claim for damages and it is unclear at this time
whether Corey will pursue such a claim. However, the Company strongly denies
that it engaged in any improper conduct with regard to the sale of its assets
and intends to vigorously defend any claim which might be pursued by Corey.
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.
5. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each period
were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---------- ----------
(Amounts in thousands except share and per share data)
Numerator:
Net income (loss) from continuing operations ...... $ 42 $ (136)
Discontinued Operations:
Net income from discontinued operations,
Net of taxes ............................. 302 82
Gain on disposal, net of taxes ............. 4,872 0
---------- ----------
Net income (loss) ................................. $ 5,216 $ (54)
========== ==========
Denominator:
Denominator for basic earnings per
share - weighted-average shares
outstanding ..................................... 4,048,964 4,168,925
========== ==========
Effect of dilutive securities:
Shares issuable from assumed conversion
of common stock options, warrants and
restricted stock ................................ 238,237 0
---------- ----------
Denominator for diluted earnings per share ............ 4,287,201 4,168,925
========== ==========
Basic:
Net income (loss) from continuing operations ...... $ 0.01 $ (0.03)
Net income from discontinued operations ........... 0.08 0.02
Gain on disposal .................................. 1.20
---------- ----------
Net income (loss) per share .......................... $ 1.29 $ (0.01)
========== ==========
Diluted:
Net income (loss) from continuing operations .......... $ 0.01 $ (0.03)
Net income from discontinued operations ............... 0.07 0.02
Gain on disposal ...................................... 1.14
---------- ----------
Net income (loss) per share .......................... $ 1.22 $ (0.01)
========== ==========
The potentially dilutive options totaling 68,082 shares, calculated under the
treasury stock method, were not used in the calculation of diluted earnings per
share for the three months ended March 31, 1999 since the effect of potentially
dilutive securities in computing a loss per share is antidilutive
There were warrants to purchase 176,750 shares of common stock for the three
months ended March 31, 2000 and 1999 which were not included in computing the
effect of dilutive securities because the inclusion would have been
antidilutive.
6. SEGMENT INFORMATION
Allstar has two reportable segments: IT Services and CTI Software. IT
Services includes various services relating to computer products and management
information systems. CTI Software includes software products that facilitate
telephony and computer integration primarily for telemarketing and call center
applications. The accounting policies of the business segments are the same as
those for Allstar. 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. Intersegment sales and transfers
are not significant. The tables below show the results of the three reportable
segments:
IT CTI
SERVICES SOFTWARE CONSOLIDATED
-------- -------- ------------
For the quarter ended March 31, 2000:
Total revenue ........................................ $ 3,511 $ 2,473 $ 5,984
Cost of sales and services ............................ 2,447 1,152 3,599
-------- -------- --------
Gross profit .......................................... 1,064 1,321 2,385
Selling, general and
administrative expenses ............................... 1,248 1,061 2,309
-------- -------- --------
Operating income (loss) ............................... $ (184) $ 260 76
-------- -------- --------
Interest expense (net of other income) ................ 15
--------
Income before provision for income tax ................ 61
Provision for income tax .............................. 19
--------
Net income from continuing operations ................. 42
Net income from discontinued operations, net of tax ... 302
Net gain on disposal, net of taxes .................... 4,872
--------
Net income ............................................ $ 5,216
========
Accounts receivable, net .............................. $ 2,839 $ 2,317 $ 5,156
-------- -------- --------
Accounts receivable retained from discontinued
operations, net ...................................... 21,608
--------
Total accounts receivable, net ....................... $ 26,764
========
For the quarter ended March 31, 1999:
Total revenues ....................................... $ 3,548 $ 770 $ 4,318
Cost of sales and services ............................ 2,531 331 2,862
-------- -------- --------
Gross profit .......................................... 1,017 439 1,456
Selling, general and
administrative expenses ............................... 1,136 497 1,633
-------- -------- --------
Operating loss ....................................... $ (119) $ (58) (177)
-------- --------
Interest expense (net of other income) ................ 17
--------
Loss before benefit for income tax .................... (194)
Benefit for income tax ................................ (58)
--------
Net loss from continuing operations ................... (136)
Net income from discontinued operations, net of tax ... 82
--------
Net loss .............................................. $ (54)
========
Accounts receivable, net .............................. $ 2,647 $ 618 $ 3,265
======== ========
Accounts receivable retained from discontinued
operations, net ...................................... 29,015
--------
Total accounts receivable, net ....................... $ 32,280
========
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 providing its customers
with solutions to their information and communications technology needs. We
market our products and services in Texas from five locations in the Houston,
Dallas-Fort Worth, Austin, El Paso and San Antonio metropolitan areas. Our
revenue has been derived through four primary areas of business, IT Services,
CTI Software, Computer Products and Telecom Systems.
Recent Developments
On March 16, 2000 we entered into separate agreements whereby we sold
certain key assets of, and the ongoing business operations of, our Telecom
Systems business and we agreed to sell certain key assets of our IT Services
business located in El Paso, Texas, and the ongoing business operations of, our
Computer Products business. We retained accounts receivable attributable to the
Computer Products Division. The sale of the Computer Products Division closed on
May 19, 2000. A disposal loss (net of taxes), including an estimate of the
operating results from the measurement date, November 2, 1999 to the closing
date of the sale of Telecom Systems was recognized at December 31, 1999. A gain
on disposal of the Computer Products Division has been recognized as of March
31, 2000. We retained the other assets of our IT Service business, which
provides a variety of services related to the use of information technology. We
also retained our CTI Software business which develops and markets software
through our wholly owned subsidiary Stratasoft, Inc. To date, most of our
revenue of our continuing operations has been derived from proprietary CTI
software sales and related services. During the quarter ended March 31, 2000, IT
Services totaled 58.7% of revenues while CTI Software totaled 41.3% of revenues,
respectively.
We believe the proposed sale of our Computer Products Division provides
sufficient cash to initiate a fundamental change in our business strategy that
will allow us to deploy our liquid capital in endeavors that we believe will
ultimately result in improved stockholder value. We believe we can produce more
rapid growth, and better financial performance, by segregating the various IT
Services operations into focused, specialized companies. We intend to organize
our existing IT Services operations into wholly owned subsidiary companies, each
branded to pursue a specialized mission and each led by a separate management
team with personal financial incentives tied to their company's financial
performance. Additionally, we plan to continue to expand our CTI Software
business through our wholly owned subsidiary, Stratasoft, Inc.
After the completion of the sale of Computer Products, we also intend to
pursue starting, acquiring or investing in, including taking significant stakes
in other companies that we expect to benefit from the manner in which the
Internet is changing commerce and communications. Targeted businesses are
expected to include B2B e-commerce product or services sales companies,
companies providing IT services related to network and Web development and
companies involved in the enabling of e-Commerce and E-Business.
Our IT Services division has marketed a variety of service offerings related
to the service and support of information technology systems. IT Services
include consulting and project management services related to networking,
supplemental IT technical staffing and computer equipment repair services and
desktop computer and application support. To support and maintain the quality of
these services and to maintain vendor accreditation necessary to service their
significant product lines, our technical staff participates in various
certification and authorization programs sponsored by hardware manufacturers and
software suppliers. In markets where we do not maintain branch offices, we often
subcontract for necessary technical personnel,
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.
Our IT Service cost of services is primarily comprised of 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 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.
SALE OF COMPUTER PRODUCTS DIVISION
As discussed above we entered into an agreement on March 16, 2000 whereby we
proposed to sell certain key assets of, and the ongoing business operations of,
our Computer Products business. The sale transaction closed on May 19, 2000
after stockholder approval was obtained and other conditions to closing were
satisfied. The terms of the agreement included cash consideration of $14.6
million, plus the possibility of receiving a future payment of up to $500,000
from an escrow account. The cash we recieved at closing is subject to certain
post closing adjustments which we estimate will result in a reduction of the
amount we ultimately receive of approximately $350,000. The terms of the
agreement also include possible future cash payments contingent upon future
performance of the operations being sold. We recognized a gain of approximately
$5.1 million, net of taxes, on the sale. The cash we received at closing is
subject to a pure closing adjustment which we estimate will result in an
approximately $350,000 credit to the buyer.
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly 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 our 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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
(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 March 31, 2000 and 1999. Likewise the discussion below
relates only to our continuing operations, unless otherwise noted.
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
2000 1999
---------------------- ----------------------
AMOUNT % AMOUNT %
------- ----- ------- -----
Revenue
IT Services ........................................ $ 3,511 58.7 $ 3,548 82.2
CTI Software ....................................... 2,473 41.3 770 17.8
------- ----- ------- -----
Total revenue .............................. 5,984 100.0 4,318 100.0
Gross profit:
IT Services ........................................ 1,064 30.3 1,017 28.7
CTI Software ....................................... 1,321 53.4 439 57.0
------- ----- ------- -----
Total gross profit ......................... 2,385 39.9 1,456 33.7
Selling, general and administrative expenses:
IT Services ........................................ 1,248 35.5 1,136 32.0
CTI Software ....................................... 1,061 42.9 497 64.5
------- ----- ------- -----
Total selling, general and administrative
expenses ................................... 2,309 38.6 1,633 37.8
Operating income (loss):
IT Services ........................................ (184) (5.2) (119) (3.4)
CTI Software ....................................... 260 10.5 (58) (7.5)
------- ----- ------- -----
Total operating income (loss) .............. 76 1.3 (177) (4.1)
Interest expense, net of other income .............. 15 0.3 17 0.4
------- ----- ------- -----
Income (loss) before provision
(benefit) for income taxes ....................... 61 1.0 (194) (4.5)
Provision (benefit) for income taxes .............. 19 0.3 (58) (1.3)
------- ----- ------- -----
Net income (loss) from continuing operations ....... 42 0.7 (136) (3.2)
Discontinued operations:
Net income from discontinued operations .......... 302 5.0 82 1.9
Gain on disposal ................................. 4,872 81.4 0 0.0
------- ----- ------- -----
Net income (loss) .................................. $ 5,216 87.2 $ (54) (1.3)
======= ===== ======= =====
Percentages shown are percentages of total revenue, except gross profit
percentages, which represent gross profit for each business unit as a percentage
of revenue for each such unit.
TOTAL REVENUE. Total revenue increased by $1,666 (38.6%) to $5,984 in 2000
from $4,318 in 1999.
IT Services revenue decreased by $37 (1.0%) to $3,511 in 2000 from $3,548 in
1999. As a percentage of total revenue, IT Services revenue decreased to 58.7%
in 2000 from 82.2% in 1999. The 1.0% decrease in IT Services revenues was
attributable to the closing of one of our newer offices in 1999. In connection
with the sale of the Computer Products business discussed above, we sold the El
Paso branch office service business which had revenues of $712 and $424 in the
quarters ended March 31, 2000 and 1999. The El Paso service business has been
included in
the continuing operations for the quarter ended March 31, 2000 and will be in
the quarter ended June 30, 2000 through the sale of these assets occurred on May
19, 2000.
CTI Software revenue increased by $1,703 (221.2%) to $2,473 in 2000 from
$770 in 1999. The increase in CTI Software revenues was due to both better
recognition of CTI Software products in the market place, to the expansion of
the sales staff and to increased marketing efforts. CTI Software, as a
percentage of total revenue, increased to 41.3% in 2000 from 17.8% in 1999.
GROSS PROFIT. Gross profit increased by $929 (63.8%) to $2,385 in 2000 from
$1,456 in 1999. Gross margin increased to 39.9% in 2000 from 33.7% in 1999.
IT Services gross profit increased by $47 (4.6%) to $1,064 in 2000 from
$1,017 in 2000 even though revenues decreased by 1.0% due to the increase in
gross margin in 2000. IT Services gross margin increased to 30.3% in 2000 from
28.7% in 1999. The increase in gross margin was the result increased
manufacturer subsidies of service support, and improved technical staff
utilization.
CTI Software gross profit increased by $882 (200.9%) to $1,321 in 2000 from
$439 in 1999. Gross margin for CTI Software decreased slightly to 53.4% in 2000
from 57.0% in 2000 but were in line with expectations for this business. The
decreased gross margins were primarily due to higher product cost on sales
because of upgrading the quality of hardware product used.
SELLING,GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $676 (41.4%) to $2,309 in 2000 from $1,633
in 1999. As a percentage of revenue, these expenses increased by 0.8%, to 38.6%
of revenue in 2000 from 37.8% of revenue in 1999. The increase in selling,
general and administrative expenses as a percentage of revenue was due to
increased legal expenses relating to litigation, higher sales compensation due
to increased sales staff, increased travel expenses and increased administrative
compensation for CTI software. IT Services selling, general and administrative
expenses are higher in 2000 than in the same quarter of 1999 primarily due to
increased corporate overhead allocations.
During the quarters ended March 31, 2000 and 1999, our IT Services
businesses produced earnings before the allocation of corporate overhead costs.
OPERATING INCOME FROM CONTINUING OPERATIONS. Operating income increased by
$253 (142.9%) to $76 in 2000 from $(177) in 1999 due, principally, to the
increase in CTI Software revenues and gross profit realized Operating income
increased as a percentage of total revenue to 1.3% in 2000 from (4.1)% in 1999.
As discussed above, in connection with the sale of the Computer Products
division, the El Paso branch office portion of the IT Services business was
sold. The operating loss for the El Paso service business was $(173) and $(14)
for the quarters ended March 31, 2000 and 1999, respectively.
INTEREST EXPENSE, NET OF OTHER INCOME. Interest expense, net of other
income, decreased by $2 to $15 in 2000 compared to $17 in 1999.
DISCONTINUED OPERATIONS. On November 2, 1999 we approved a plan to sell or
close our Telecom Systems division. A sale of certain assets of the division and
its ongoing operations closed on March 16, 2000. As a consequence of these
events, the operations of Telecom Systems are reported as discontinued
operations. The company experienced a loss on disposal of $219 (net of taxes of
$113) in the quarter ended March 31, 2000 from this discontinued operation. The
loss on discontinued operations in the quarter ended March 31, 1999 was $30, net
of a tax benefit of $15.
On March 16, 2000 we entered into an agreement to sell certain assets of,
and the ongoing operation of, our Computer Products Division. The sale
transaction closed on May 19, 2000. As a consequence of these events, the
operations of Computer Products are reported as discontinued operations. For the
quarter ended March 31, 2000 the company experienced net income on the
operations of the Computer Products Division of $302 (net of taxes of $156) In
addition, we experienced a gain on disposal of $5,091 (net of taxes of $2,625)
related to the transaction. The income on discontinued operations in the quarter
ended March 31, 1999 was $112, net of taxes of $58.
NET INCOME. Net income on continuing operations, after a provision for
income taxes totaling $19 (reflecting an effective tax rate of 31.1% in 2000
compared to 29.9% in 1999), increased by $178 to $42 in 2000 compared to $(136)
in 1999. The Company also had net income from discontinued operations of $302
and $82, net of taxes of $156 and $43, in the quarters ended March 31, 2000 and
1999. Additionally, a gain on disposal of $5,091, net of taxes of $2,625 was
recognized in the quarter ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $15,174 and $9,567 at March 31, 2000 and December
31, 1999, respectively. As of March 31, 2000, we had outstanding borrowings of
$22,566 and we had excess borrowings against our available borrowing base of
$1,202. The excess borrowings were repaid in April, 2000. We used the proceeds
from the sale of our Computer Products division and certain assets of IT
services business located in El Paso, Texas to repay $9,300 in secured debt to
Deutsche Financial Services ("DFS"). We expect to satisfy our capital
requirements, from our existing cash balances, collection of our accounts
receivables and borrowings under our credit facilities.
CASH FLOW
Operating activities provided net cash totaling $2,470 during the three
months ended March 31, 2000. Operating activities provided net cash during the
period primarily because of cash provided by a decrease in accounts receivable
($9,066) and a decrease in accounts payable (6,683). The decrease in accounts
payable was primarily the result of normal payment of payables which had swelled
due to the higher level of sales in the fourth quarter of 1999. The increase in
liabilities related to discontinued operations results from accruals related to
the sale of the Computer Products Division. The decrease in accounts receivable
was primarily the result of lower sales in our discontinued Computer Product
Division and improved collections.
Investing activities used cash totaling $58 during the three months ended
March 31, 2000 related entirely to capital expenditures.
Financing activities used cash totaling $3,014 primarily because borrowings
were reduced under our credit facility during the three months ended March 31,
2000. We intend to use the $14,250 proceeds of the Computer Products Division
sale to pay down our obligations under our existing credit facility.
ASSET MANAGEMENT
We had accounts receivable, net of allowance for doubtful accounts, of
$26,764 at March 31, 2000. The number of days' sales outstanding in accounts
receivable was 71 days, which is higher than the 60 days outstanding at December
31, 1999. The number of days outstanding has increased because of a slowdown of
collections from a large customer. Bad debt expense as a percentage of total
revenue was 0.4% and 0.2% for the three months ended March 31, 2000 and 1999.
Our allowance for doubtful accounts, as a percentage of accounts receivable, was
16.9% at March 31, 2000 and 1.0% at December 31, 1999. Inventory turnover for
the three months ended March 31, 2000 was 21.4 times versus 12.5 times for the
comparable period in 1999. The improvement in the inventory turnover primarily
reflects increases in inventory reserves related to the sale of the Computer
Products Division.
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 DFS ("DFS Facility")
On May 19, 2000, the day we closed the sale of our Computer Product
Division, we amended our DFS Facility to decrease the total credit available
under the facility from $30,000 to $10,000 subject to borrowing base limitations
that 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 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.
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.
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.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends unless consented to by the lender.
We intend to use all of the proceeds of the sale of our Computer Products
Division to pay down our obligations under our DFS credit facility and accounts
payable we owe. In the future we will not require the same amount of financing
and intend to modify our relationship in the second quarter with one of our
existing lenders during the quarter ended June 30, 2000.
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.
On February 1, 2000, a competitor brought a suit against our wholly owned
subsidiary Stratasoft, Inc. in the United States District Court for the Northern
District of Georgia. The plaintiff alleges infringement of certain patents owned
by the competitor and is seeking unspecified monetary damages. The suit is in
its early stages of discovery, and therefore we are unable to determine the
ultimate costs of this matter. We believe that this suit is without merit and
intend to vigorously defend such action.
On May 16, 2000, Jack B. Corey ("Corey") filed suit against the Company in
JACK B. COREY V. ALLSTAR SYSTEMS, INC., Cause No. 2000-24796; in the District
Court of Harris County, Texas, 113th Judicial District, seeking to enjoin the
sale of its computer product division and certain other assets to Amherst
Technologies, and for unspecified damages. On Wednesday, May 17, 2000, a state
court denied Corey's Application for Temporary Restraining Order and on Monday,
May 22, 2000, a second state court denied his Application for a Temporary
Injunction and for Expedited Discovery as moot. The present pleadings lack
specificity as to Corey's claim for damages and it is unclear at this time
whether Corey will pursue such a claim. However, the Company strongly denies
that it engaged in any improper conduct with regard to the sale of its assets
and intends to vigorously defend any claim which might be pursued by Corey.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K, dated March 22, 2000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We incur certain market risks related to interest rate variations because we
hold floating rate debt. Based upon the average amount of debt outstanding
during the quarter ended March 31, 2000, a one-percent increase in interest
rates paid by us on our debt would have resulted in an increase in interest
expense of approximately $34 for the quarter.
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.
May 19, 2000 By: /s/ JAMES H. LONG
Date James H. Long, Chief Executive Officer, President and Chairman
of the Board (Principal Financial and Accounting Officer)
May 19, 2000 By: /s/ DONALD R. CHADWICK
Date Donald R. Chadwick, Secretary and Director