FORM 10-Q/A
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, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-09789
Allstar Systems, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 76-0062751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6401 Southwest Freeway
Houston, Texas 77074
(Address of principal executive offices) (Zip code)
(713) 795-2000
(Registrant's telephone number including area code)
Not applicable (Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock $.01 par value As of September 30, 1997
per share outstanding 4,440,125 shares
Part I. Financial Information
Item 1. Financial Statements
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
September 30, December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash $407 $94
----------------------
Cash 709 135
--------------------------------- --------- ---------
Total cash and cash equivalents 1,117 229
Accounts receivable - trade, net 18,999 16,517
---------
Accounts receivable - affiliates 664 140
---------
Inventory 5,005 4,862
--------------------------------
Deferred taxes 160 350
---------------------------
Deferred offering costs - 412
------------------
Other current asset 253 174
---------------------- --------- ---------
Total current assets 26,198 22,684
------------
Property and equipment 1,727 1,644
-------------------------
Other assets 52 392
----------------------------------- -------- ----------
Total $27,977 $24,720
------------------------------------------ ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $2,954 $9,975
----------------------------
Accounts payable 7,966 7,157
--------------------------
Accrued expenses 3,084 2,759
--------------------------
Income taxes payable (346) 206
----------------------
Deferred service revenue 184 296
------------------ --------- ---------
Total current liabilities 13,842 20,393
--------
Deferred Credit - Stock warrants 195 -
---------- --------- -----------
Total liabilities 14,037 20,393
------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued
Common stock:
$.01 par value, 50,000,000 shares authorized,
2,675,000 and 4,440,125 shares issued and outstanding
on December 31, 1996 and September 30, 1997, respectively 44 27
Additional paid in capital 9,973 1,479
-------------
Retained earnings 3,923 2,821
---------------------- --------- ----------
Total stockholders' equity 13,940 4,327
---- -------- ----------
Total $27,977 $24,720
--------------------------------------- ======== ========
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 September. 30,.
1997 1996
---- ----
Total Revenue $31,914 $29,187
Cost of sales and services 27,777 24,669
-------------------------- ------- ------
Gross Profit 4,137 4,518
----------------------------------------
Selling, general and administrative expenses 3,439 3,319
-------- -------- --------
Operating income 698 1,199
------------------------------------
Interest expense and other income (net) 82 338
------------- ------- -------
Income before provision for income taxes 616 861
------------
Provision for income taxes 236 362
-------------------------- -------- --------
Net income $ 380 $ 499
------------------------------------------ ========= ========
Net income per share:
Primary $0.09 $0.19
------------------------------------ ==== ====
Fully diluted $0.09 $0.19
------------------------------ ==== ====
Weighted average shares outstanding:
Primary 4,268,664 2,675,000
----------------------------------- ========= =========
Fully diluted 4,195,991 2,675,000
----------------------------- ========= =========
Nine Months Ended September. 30,
1997 1996
Total Revenue $90,745 $87,337
Cost of sales and services 77,850 75,630
------------------------- ------- -------
Gross Profit 12,895 11,707
---------------------------------------
Selling, general and administrative expenses 10,412 8,985
-------- -------
Operating income 2,483 2,722
-----------------------------------
Interest expense and other 680 922
------------------------- -------- --------
Income before provision for income taxes 1,803 1,802
-----------
Provision for income taxes 701 696
------------------------- -------- --------
Net income $ 1,102 $ 1,106
----------------------------------------- ======= ========
Net income per share:
Primary $0.34 $0.41
----------------------------------- ==== ====
Fully diluted $0.34 $0.41
----------------------------- ==== ====
Weighted average shares outstanding:
Primary 3,212,059 2,675,000
----------------------------------- ========= =========
Fully diluted 3,187,569 2,675,000
----------------------------- ========= =========
See notes to consolidated financial statements
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
Nine months Nine Months
ended ended
September 30, September 30,
1997 1996
Net income ............................................. $ 1,102 $ 1,106
-------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Gain of disposal of assets ........................ -- (11)
-------
Depreciation and amortization ..................... 384 264
-------
Deferred taxes .................................... 190 (12)
-------
Deferred offering costs ........................... 412 --
-------
Changes in assets and liabilities that provided (used) cash:
Accounts receivable - trade, net .................. (2,482) (1,329)
-------
Accounts receivable - affiliates .................. (87) 77
-------
Inventory ......................................... (143) (1,580)
-------
Other current assets .............................. (176) (41)
-------
Accounts payable .................................. 809 (986)
-------
Accrued expenses .................................. 325 (901)
-------
Income taxes payable .............................. (552) 404
-------
Deferred service revenue .......................... (112) (15)
------- -------
Net cash provided by (used in) operating
activities ............................... (330) (3,024)
-------
Cash flows from investing activities:
Capital Expenditures .............................. (467) (448)
-------
Proceeds from sale of fixed assets ............ -- 13
------- -------
Net cash used in investing activities: ........ (467) (435)
-------
Cash flows from financing activities:
Net proceeds from sale of common stock ............ 8,706 --
-------
Net increase (decrease) in notes payable .......... (7,021) 3,956
- -------------------------------------------------------- ------- -------
Net cash provided by (used in) financing
activities: .............................. 1,685 3,956
-------
Net increase (decrease) in cash and cash
equivalents ....................................... 888 497
-------
Cash and cash equivalents at beginning of period ....... 229 1,029
------- -------
Cash and cash equivalents at end of period ............. $ 1,117 $ 1,526
- -------------------------------------------------------- ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest ............................ $ 794 $ 560
======= =======
Cash paid for taxes ............................... $ 976 $ 318
======= =======
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. BASIS OF PRESENTATION
Allstar Systems, Inc. and subsidiaries ("Allstar"') is engaged in the sale
and service of computer and telecommunications hardware and software products.
Allstar's wholly owned subsidiary, Stratasoft, Inc. creates and markets software
related to the integration of computer and telephone technologies. In January,
1997 Allstar formed IT Staffing Inc. to provide temporary and permanent
placement services of technical personnel. All operations of the business are
primarily conducted from offices located in Houston, Dallas and Austin, Texas.
A substantial portion of Allstar's sales and services are authorized under
arrangements with product manufacturers and Allstar's operations are dependent
upon maintaining its approved status with such manufacturers. As a result of
these arrangements and arrangements with its customers, gross profit could be
limited by the availability of products or allowance for volume discounts.
Furthermore, net income before income taxes could be affected by changes in
interest rates which underlie the credit arrangements which are used for working
capital.
The condensed consolidated financial statements presented herein at
September 30, 1997 and for the three-month and nine-month periods ended
September 30, 1996 and 1997 are unaudited; however, all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods covered have been
made and are of a normal, recurring nature. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end. The
results of the interim periods are not necessarily indicative of results for the
full year. The consolidated balance sheet at December 31, 1996 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.
Accounting Pronouncements - In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which determines
compensation cost using the fair value method of accounting. Allstar has elected
to continue to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," which determines compensation cost using the
intrinsic value based method of accounting. At December 31, 1996 Allstar had no
stock options or similar equity instruments outstanding. During the quarter
ended September 30, 1997, Allstar issued stock options and restricted stock
under certain incentive stock plans (see Note 3). The impact of SFAS No. 123 on
proforma earnings per share was not significant.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997, specifies
the computation, presentation and disclosure requirements of earnings per share
("EPS") and supersedes Accounting Principles Board Opinion No. 15 ("APB No.
15"). SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS,
which excludes the impact of common stock equivalents, replaces primary EPS.
Diluted EPS, which utilizes the average market price per share as opposed to the
greater of the average market price per share or ending market price per share
when applying the treasury stock method in determining common stock equivalents,
replaces fully diluted EPS. Pro forma basic and diluted EPS for all historical
periods presented, assuming SFAS No. 128 was effective at the beginning of each
such historical period, would not be materially different than the presentations
using APB No. 15.
In September 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 130 and 131 are effective for periods beginning after December 15,
1997. These three statements will not have any effect on the Company's 1997
financial statements, however, management is evaluating what, if any additional
disclosures may be required when these three statements are implemented.
2. OPERATING LEASES
Operating Leases - Allstar subleases office space from Allstar Equities,
Inc. ("Equities"), a company wholly owned by the principal stockholder of
Allstar. In 1996, Allstar renewed its office sublease with monthly rental
payments of $31.5 in 1997 and $32 in 1998, plus certain operating expenses
through December 1998. Rental expense under this agreement amounted to
approximately $93 and $95 during the three months ended September 30, 1996 and
1997, respectively.
In August, 1997 Allstar leased certain facilities in Austin, Texas and
extended it lease in Dallas, Texas for monthly rental payments of $2 and $10,
respectively. Under these and other operating leases, minimum annual rentals at
September 30, 1997 on other operating leases amount to approximately $144 for
1997, $114 in 1998, $32 in 1999 and $8 in 2000.
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 417,500 shares of common stock, which have been reserved for
issuance, to certain key employees of Allstar. The Incentive Plan provides for
the granting of incentive awards in the form of stock options, restricted stock,
phantom stock, stock bonuses and cash bonuses in accordance with the provisions
of the plan. Additionally, no shares may be granted after the tenth anniversary
of the Incentive Plan's adoption. Allstar has reserved for issuance, under the
Director Plan, 100,000 shares of common stock, subject to certain antidilution
adjustments. The Director Plan provides for a one-time option by newly elected
directors to purchase up to 5,000 common shares, after which each director is
entitled to receive an option to purchase up to 2,000 common shares upon each
date of re-election to Allstar's Board of Directors. Options granted under the
Director Plan have an exercise price equal to the fair market value on the date
of grant and generally expire ten years after the grant date. As of September
30, 1997 incentive stock options totaling 80, 000 shares have been issued to key
employees. The exercise price of all of the stock option grants is $6.00 per
share and the stock option grants will vest ratably over the five year period
ending July 7, 2002. In addition, an incentive award in the form of restricted
stock was granted for 14,286 shares which will vest ratably over the two year
period ending July 7, 1999.
4. INITIAL PUBLIC OFFERING
On July 7, 1997 Allstar completed an initial public offering of 1,765,125
shares of Allstar's common stock and received proceeds of $8,706, net of
expenses.
In connection with a public offering of the Company's common stock, the
Company has sold to the Representatives of the underwriters warrants to purchase
176,750 shares of the Company's common stock at an exercise price of $9.60 per
share. The warrants will be exercisable for the period beginning July 7, 1998
until July 7, 2002. The warrants were issued as additional compensation for
their services in connection with the sale of the company's common stock. Using
the Black-Scholes pricing model, the Company has valued the warrants at $195.
The value of the warrants has been treated as underwriting costs in connection
with the offering and charged against paid in capital.. A deferred credit has
been established to offset the charge to paid in capital. Upon the exercise or
expiration of the warrants the deferred credit will be added to paid in capital.
5. LITIGATION
On July 13, 1996, a former customer brought suit against the Company in the
152nd Judicial District Court of Harris County, Texas. The plaintiff alleges
that the Company failed to provide and complete promised installation and
configuration of certain computer equipment within the time promised by the
Company. Based on these allegations, the plaintiff is suing for breach of
contract and other statutory violations and is seeking actual monetary damages
of approximately $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible recovery
by the plaintiff because the suit is still in the early stages of discovery.
However, the Company is vigorously defending the action.
Allstar is party to other litigation and claims which management believes
are normal in the course of its operations; while the results of such litigation
and claims cannot be predicted with certainty, Allstar believes the final
outcome of such matters will not have a materially adverse effect on its results
of operations or financial position.
6. RELATED-PARTY TRANSACTIONS
Allstar has from time to time made payments on behalf of Equities and the
Company's principal stockholders for taxes, property and equipment. Effective
July 1, 1996, Allstar and its principal stockholder entered into a promissory
note to repay certain advances, which were approximately $173 at July 1, 1996,
in equal annual installments of principal and interest, from August 1997 through
2001. This note bears interest at 9% per year. Also effective July 1, 1996,
Allstar and Equities entered into a promissory note whereby Equities would repay
the balance of amounts advanced, which were approximately $387 at July 1, 1996,
in monthly installments of $6.5, including interest, from July 1996 through
November 1998 with a final payment of $275 due on December 1, 1998. This note
bears interest at 9% per year. The principal amounts as of December 31, 1996 are
classified as Accounts receivable - affiliates and Other assets based on the
repayment terms of the promissory notes. The principal amounts as of September
30, 1997 are classified as Accounts receivable - affiliates based on the
expectation of repayment within one year. At December 31, 1996 and September 30,
1997, Allstar receivables from these affiliates amounted to approximately $501
and $535, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
ALLSTAR SYSTEMS. INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements,
including the Notes thereto.
OVERVIEW
The Company is engaged in the business of reselling computer hardware and
software products and providing related services. In addition, the Company
derives revenue from providing IT Services to purchasers of Computer Products
and other customers. The Company operates Computer Products and IT Services from
offices in Houston, Austin and Dallas, Texas. In 1994, the Company began
offering Telecom Systems in its Houston office and during the quarter ended June
30, 1997 commenced offering Telecom Systems in its Dallas office. In the fourth
quarter of 1995, the Company acquired and began marketing CTI Software. To date,
most of its revenue has been derived from Computer Products sales. During the
quarter ended September 30, 1997, Computer Products totaled 87.0% of revenues
while IT Services, Telecom Systems and CTI Software totaled 8.5%, 2.5% and 2.0%
of revenues, respectively.
The Company's Computer Products division sells a wide variety of
computer hardware and software products available from over 600 manufacturers
and suppliers. The Company's products include desktop and laptop computers,
monitors, printers and other peripheral devices, operating system and
application software, network products and mid-range host and server systems.
The Company is an authorized reseller of products from a number of leading
manufacturers of computer hardware, software and networking equipment.
Generally, Computer Products sales are made on a purchase order basis,
with few on-going commitments to purchase from its customers. On certain
occasions, large "roll-out" orders are received with delivery scheduled over a
longer term, such as six to nine months, while normal orders are received and
delivered to the customers usually within approximately thirty days of the
receipt of the order. Because of this pattern of sales and delivery, the Company
normally does not have a significant backlog of computer product sales.
IT Services are provided by the Company both in conjunction with and
separately from its Computer Products sales. The Company typically prices its IT
Services on a time and materials basis or under fixed fee service contracts,
depending on customer preference and the level of service commitment required.
In markets where the Company does not maintain branch offices, it often
subcontracts for necessary technical personnel, particularly where required for
larger scope or prolonged duration contracts. The Company's IT Services include
information systems support, authorized warranty service, hardware repair and
maintenance services, complex network diagnostic services, end user support
services and software diagnostic services. The Company also offers complete
outsourcing of a customer's computer and network management and technical
support needs on a contract basis. In addition, the Company provides temporary
and permanent staffing services.
To support and maintain the quality of these services and to maintain
vendor accreditation necessary to resell and service its significant product
lines, the Company's technical staff participate in various certification and
authorization programs sponsored by hardware manufacturers and software
suppliers. The Company's ability to attract and retain qualified professional
and technical personnel is critical to the success of its IT Services business.
The most significant portion of the costs associated with the delivery of IT
Services are of personnel costs. Therefore, in order to be successful, the
Company's billable rates must be in excess of the personnel costs and its margin
is dependent upon maintaining high utilization of its service personnel. In
addition, the competition for high quality personnel has generally intensified
causing the Company's, along with other IT Service providers, personnel costs to
increase. The Company's costs of goods and services includes the personnel costs
of its billable technical staff.
While the Company has service contracts with its larger customers, many
of these contracts are project based or are terminable on relatively short
notice.
Through the Telecom Systems division, the Company markets, installs and
services business telephone systems, including large PBX systems and smaller
"key systems"', along with a variety of related products including hardware and
software products for data and voice integration, wide area connectivity and
telephone system networking, wireless communications and video conferencing.
The Company develops and markets proprietary CTI Software, which
integrates business telephone systems and networked computer systems, under the
trade name "Stratasoft."' Basic products offered by the Company are typically
customized to suit a customer's particular needs and are often bundled with
computer hardware supplied by the Company at the customer's request. Stratasoft
products include software for call center management, both in-bound and
out-bound, as well as interactive voice response software.
The Company believes that each of its four separate businesses are
complementary to each other and allow the Company to offer a broader range of
integrated products and services in order to satisfy its customers' information
and communication technology requirements than many of its competitors. The
Company's strategy is to maintain and expand its relationships with its
customers by satisfying a greater portion of these requirements.
The Company's gross margin varies substantially between each of its
businesses. The Company's Computer Products sales produced a gross margin
ranging from 10.3% to 10.4% over the three year period ended December 31, 1996,
due to the commodity nature of Computer Products market. The gross margin for IT
Services, which reflects direct labor costs, has ranged from 30.4% to 40.9% over
the same period. This variation is primarily attributable to the pricing and the
mix of services provided, and to the level of direct labor as a component of
cost during any given period. The gross margin for Telecom Systems, which
includes both product sales and services, has varied between 23.0% and 42.7%
since the Company entered the Telecom Systems market in 1994. The gross margin
for CTI Software was 40.2% in 1996.
The Company's overall gross margin has ranged between 12.3% and 13.3%
for the three year period ended December 31, 1996. During any period, overall
gross margin may vary significantly because of the mix of the various products
and services revenues realized by the Company during any such period. While the
Company endeavors to strengthen its computer products sales on a continuing
basis, the Company is endeavoring to grow its higher margin products and
services at a higher rate than Computer Products thereby increasing its overall
gross margins.
Manufacturers of many of the computer products resold by the Company have
consistently reduced unit prices near the end of a product's life cycle, most
frequently following the introduction of newer, more advanced models. While the
major manufacturers of computer products have a policy of providing price
protection to resellers when prices are reduced, on occasion, and particularly
during 1994, manufacturers introduced new models of their products and then
reduced the price of, or discontinued, the older models without price
protection. In these instances, the Company often sells the older models at
reduced prices, which adversely affects gross margin.
A significant portion of Company's selling, general and administrative
expenses relate to personnel costs, some of which are variable and others of
which are relatively fixed. The Company's variable personnel costs are
substantially comprised of sales commissions, which are typically calculated
based upon the Company's gross profit on a particular sales transaction and thus
generally fluctuate with the Company's overall gross profit. The remainder of
the Company's selling, general and administrative expenses are relatively more
fixed and, while still somewhat variable, do not vary with increases in revenue
as directly as do sales commissions.
Inacom Corp. ("Inacom") is the largest supplier of products sold by the
Company. In August 1996, the Company renewed its long-term supply arrangement
with Inacom and agreed to purchase at least 80% of its Computer Products from
Inacom, but only to the extent that such products are made available within a
reasonable period of time at reasonably competitive pricing. Inacom does not
carry certain product lines sold by the Company and Inacom may be unable to
offer reasonable product availability and reasonably competitive pricing from
time to time on those product lines that it carries. The Company thus expects
that less than 80% of its total purchases will be made from Inacom, and that any
increase or decrease over historical levels in the percentage of products it
purchases from Inacom under the new Inacom agreement will not have any material
impact on the Company's results of operations.
The Company manages its inventory in order to minimize the amount of
inventory held for resale and the risk of inventory obsolescence and decreases
in market value. The Company attempts to maintain a level of inventory required
to reach only its near term delivery requirements by relying on the ready
availability of products from its principal suppliers. Manufacturers of the
Company's major products generally provide price protection, which reduces the
Company's exposure to decreases in prices. In addition, its suppliers generally
allow for returns of excess inventory, which, on a limited basis, are made
without material restocking fees.
This Form 10-Q contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Such forward looking
statements include risks and uncertainties. Such risks and uncertainties, many
of which are not within the control of the Company, may cause the actual results
to differ materially from the results discussed in the forward looking
statements, including, but not limited to, the Company's ability to execute and
implement its plans and strategies and /or control the economic environment in
which the Company it operates.
The following table sets forth, for the periods indicated, certain
financial data derived from the Company's consolidated statements of operations
and indicates the percentage of total revenue for each item.
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ ---
Revenue(1)
Computer Products....... $27,767 $25,589 87.7 $78,620 86.6 $78,115 889.4
IT Services............. 2,696 8.5 2,022 6.9 7,413 8.2 5,740 6.6
Telecom systems......... 801 2.5 1,113 3.8 3,038 3.4 2,511 2.9
CTI Software............ 650 2.0 463 1.6 1,674 1.8 971 1.1
Total revenue......... 31,914 100.0 29,187 100.0 90,745 100.0 87,337 100.0
Gross Profit
Computer Products....... 2,879 10.4 3,447 13.5 8,602 10.9 8,674 11.1
IT Services............. 843 31.3 450 22.3 2,725 36.8 1,592 27.7
Telecom Systems......... 183 22.8 416 37.3 820 27.0 969 38.6
CTI Software............ 232 35.7 205 44.3 748 44.7 472 48.6
Total Gross Profit.... 4,137 13.0 4,518 15.5 12,895 14.2 11,707 13.4
Selling, general and
administrative expense.. 3,439 10.8 3,319 11.4 10,412 11.5 8,985 10.3
Operating income........... 698 2.2 1,199 4.1 2,483 2.7 2,722 3.1
Interest expense (net of
other income)........... 82 0.3 338 1.2 680 0.7 920 1.1
Income before provision
for income taxes........ 616 1.9 861 2.9 1,803 2.0 1,802 2.1
Provision (benefit) for
income taxes............ 237 0.7 362 1.2 701 0.8 696 0.8
Net Income................. $ 380 1.2 $ 499 1.7 $ 1,102 1.2 $ 1,106 1.3
Earnings per share......... $0.09 $0.19 $0.34 $0.41
==== ==== ==== ====
Weighted average shares
outstanding............. 4,268,664 2,675,000 3,212,059 2,675,000
========= ========= ========= =========
(1) Percentages shown are percentages of total revenue, except gross profit
percentages which represent gross profit by each business unit as a
percentage for each such unit.
Three Months Ended September 30, 1997 Compared To Three Months
Ended September 30, 1996
TOTAL REVENUE. All of the Company's business units, except Telecom
Systems, increased revenues over the prior year's comparable period. Total
revenue increased by $2.7 million (9.3%) from $29.2 million in 1996 compared to
$31.9 million in 1997. Revenue from Computer Products increased by $2.2 million
(8.5%) from $25.6 million in 1996 to $27.8 million in 1997. Revenue from
Computer Products as a percentage of total revenue decreased 0.7% from 87.7% in
1996 to 87.0% in 1997. Revenue from IT Services increased $674,000 (33.3%) from
$2.0 million in 1996 to $2.7 million in 1997 because of the continued expansion
of its billable technical staff, together with an emphasis on higher level
service offerings to the Company's customers. Revenue from IT Services as a
percentage of total revenue increased from 6.9% in 1996 to 8.5% of total
revenues in 1997. Revenue from Telecom Systems decreased by $312,000 (28.0%)
from $1.1 million in 1996 to $801,000 in 1997. The decrease in Telecom Systems
revenue was primarily the result of the Company's inability to obtain orders for
system installations from new customers together with construction delays
associated with the installation of two systems. These systems are expected to
be installed in the succeeding quarter. Revenue from Telecom Systems as a
percentage of total revenue decreased from 3.8% in 1996 to 2.5% in 1997. CTI
Software revenue increased by $187,000 (40.4%) from $463,000 in 1996 to $650,000
in 1997. The growth in CTI Software revenues was primarily due to increased
marketing efforts which resulted in the addition of new customers. Revenue from
CTI Software, as a percentage of total revenue, increased from 1.6% in 1996 to
2.0% in 1997.
GROSS PROFIT. Gross profit decreased by $381,000 (8.4%) from $4.5 million
in 1996 to $4.1 million in 1997 and gross margin decreased from 15.5% in 1996 to
13.0% in 1997. The gross margin for Computer Products decreased from 13.5% in
1996 to 10.4% in 1997, which was primarily the result of lower unit prices on
the products sold, intensified competition and higher freight costs due to a
work stoppage affecting one of the Company's freight carriers. The gross profit
from IT Services increased 87.3% from $450,000 in 1996 to $842,000 in 1997.
Gross margin increased from 22.3% in 1996 to 31.3% in 1997. This increase in
gross margin was primarily attributable to the replacement of less profitable IT
Services business with more profitable business from new and existing IT
Services customers. Additionally, the prices being charged for services are
generally higher in the 1997 period compared to the 1996 period, due to the
relative scarcity of qualified technical staff in the computing services
industry. In 1996 the Company commenced the implementation of a program to
replace less profitable hardware maintenance and repair services with a variety
of services that were expected to generate higher gross margins. This program
resulted in the elimination of certain IT Services customer relationships which
had been producing lower than average gross margin. The loss of this lower
margin revenue was offset by revenues from new IT Services customers and from
existing customers at higher gross margins. The gross margin for Telecom Systems
sales decreased from 37.3% in 1996 to 22.8% in 1997, reflecting the commencement
of Telecom Systems operations in the Company's Dallas office, lower product
margins and higher installation costs than are normally incurred. The Company
treats its costs associated with its technical staff as parts of the cost of
sales. Due to the relatively fixed nature of technical staff costs, when lower
revenues are realized, cost of sales, expressed as a percentage of revenues,
increases proportionately. The gross margin for CTI Software decreased from
44.3% in 1996 to 35.7% in the 1997 due to higher installation costs on its
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . Selling, general and
administrative expenses increased by $120,000 (3.6%) from $3.3 million in 1996
to $3.4 million in 1997. As a percentage of total revenue, selling, general and
administrative expenses decreased from 11.4% in 1996 to 10.8% in 1997. While no
single component of selling, general and administrative expenses increased
significantly, as a percentage of revenues, commission expense decreased from
3.0% of revenues in the 1996 period to 2.7% of revenues in the 1997 period. This
decrease was the result of the lower gross profits and gross margins realized by
the Company in the 1997 period..
OPERATING INCOME. Operating income decreased by $501,000 (41.8%) from
$1.2 million in 1996 to $698,000 in 1997 due to lower gross profits and slightly
higher selling, general and administrative expenses. Operating income decreased
as a percentage of total revenue from 4.1% in 1996 to 2.2% in 1997.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense (net of other
income) decreased $256,000 from $338,000 during 1996 period compared to $82,000
in the 1997 period. This reflects the repayment of a substantial portion of the
Company's short-term debt during the 1997 period. The repayment was accomplished
by applying all of the net proceeds from the sale of common stock to the
repayment of the Company's debt.
NET INCOME. Net income, after a provision for income taxes totaling
$236,000 (reflecting an effective tax rate of 38.3% in 1997 compared to 42.0% in
1996), decreased by $119,000 from $499,000 in 1996 to $380,000 in 1997.
Nine Months Ended September 30, 1997 Compared To The Nine Months
Ended September 30, 1996
TOTAL REVENUE. Total revenue increased by $3.4 million (3.9%) from $87.3
million in the nine months ended September 30, 1996 to $90.7 million in the 1997
period. Revenue from Computer Products, which comprised 86.6% of total revenue,
increased by $505,000 (0.6%). Revenue from Computer Products as a percentage of
total revenue decreased 2.8% from 89.4% in 1996 to 86.6% in 1997. Revenue from
IT Services increased by $1.7 million (29.1%) from $5.7 million in 1996 to $7.4
million in 1997 because of the Company's implementation of a program at the
beginning of 1996 to replace less profitable hardware maintenance and repair
services with a variety of services that were expected to generate higher
revenues. This program resulted in the elimination of certain IT Services
customer relationships which had been producing lower than average gross margin.
The loss of this lower margin revenue has been offset, however, by sales to new
IT Services customers and to existing customers in the 1997 period, generally at
higher gross margins than those earned on sales to the former customers. IT
Services revenues also increased because of the expansion of its sale force and
billable technical staff, together with an emphasis on higher level service
offerings to the Company's customers. Revenue from IT Services as a percentage
of total revenue increased from 6.6% in 1996 to 8.2% in 1997. Revenue from
Telecom Systems increased by $527,000 (21.0%) from $2.5 million in the nine
months ended September 30, 1996 to $3.0 million in the 1997 period. The increase
in Telecom Systems revenue was primarily the result of hiring additional sales
personnel and expanding marketing efforts, which resulted in the addition of new
customers. Revenue from Telecom Systems as a percentage of total revenue
increased from 2.9% in the 1996 period to 3.4% in the 1997 period. CTI Software
revenue increased by $703,000 (72.4%) from $971,000 in the nine months ended
September 30, 1996 to $1.7 million in the 1997 period. The growth in CTI
Software revenues was primarily due to increased marketing efforts which
resulted in the addition of new customers. Revenue from CTI Software, as a
percentage of total revenue, increased from 1.1% in the 1996 period to 1.8 % in
the 1997 period.
GROSS PROFIT. Gross profit increased by $1.2 million (10.1%) from $11.7
million in the nine months ended September 30, 1996 to $12.9 million in the nine
months ended September 30, 1997, while gross margin increased from 13.4% in the
1996 period to 14.2% in the 1997 period. The gross margin for Computer Products
decreased from 11.1% in the nine months ended September 30, 1996 to 10.9% in the
1997 period, which was primarily a result of lower prices and profit margins due
to competitive factors and higher freight costs. Gross profit from IT Services
increased $1.1 million (71.2%) from $1.6 million in the 1996 period to $2.7
million in the 1997 period. The gross margin from IT Services increased from
27.7% in the nine months ended September 30, 1996 to 36.8% during the 1997
period. As noted above, this increase was primarily attributable to the
replacement of less profitable IT Services business with more profitable
business from new and existing IT Services customers. Gross profit from Telecom
Systems decreased by $149,000 (15.4%) from $969,000 in 1996 to $820,000 in 1997.
The gross margin for Telecom Systems sales decreased from 38.6% in the 1996
period to 27.0% in the 1997 period, reflecting the commencement of Telecom
Systems operations in the Company's Dallas office, lower product margins and
higher installation costs than are normally incurred. Gross profit from CTI
Software increased $276,000 (58.5%) from $472,000 in 1996 to $748,000 in 1997.
The gross margin for CTI Software decreased from 48.6% in the nine months ended
September 30, 1996 to 44.7% in the 1997 period, which was primarily a result of
increased spending on technical staff related to new product installation and
development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.4 million (15.9%) from $9.0 million in
the nine months ended September 30, 1996 to $10.4 million in the 1997 period. As
a percentage of total revenue, selling, general and administrative expenses
increased from 10.3% in the 1996 period to 11.5% in the 1997 period. The
increase as a percentage of total revenue resulted primarily from the hiring of
new employees in sales support functions, as well as additional personnel hired
for IT Services administration and other general administration functions.
OPERATING INCOME. Operating income decreased by $239,000 ( 8.8%) from
$2.7 million in the nine months ended September 30, 1996 to $2.5 million in the
1997 period. Operating income decreased as a percentage of total revenue from
3.1% in the 1996 period to 2.7% in the 1997 period.
INTEREST EXPENSE (NET OF OTHER INCOME). Interest expense (net of other
income) decreased from $920,000 during the nine months ended September 30, 1996
to $680,000 during the 1997 period.. This reflects the repayment of a
substantial portion of the Company's short-term debt during the 1997 period. The
repayment was accomplished by applying all of the net proceeds from the sale of
common stock to the repayment of the Company's debt.
NET INCOME. Net income, after a provision for income taxes totaling
$701,000 (reflecting an effective tax rate of 38.9% compared to 38.6% in the
1996 period), decreased by $4,000 (0.4%) from $1,106,000 in the nine months
ended September 30, 1996 to $1,102,000 in the 1997 period. Net income decreased
as a percentage of revenues from 1.3% in the 1996 period to 1.2% in the 1997
period.
Liquidity And Capital Resources
The Company's working capital was $2.3 million and $12.4 million at
December 31, 1996 and September 30, 1997, respectively. As of September 30,
1997, the Company had borrowing capacity under the Company's credit facility of
$7.4 million.
Cash Flow
Operating activities used net cash totaling $331,000 during the nine
months ended September 30, 1997. Operating activities used net cash during the
nine months ended September 30, 1997 because the increase in trade accounts
receivable was not offset by net income and depreciation, increases in accounts
payables.
Investing activities used cash totaling $468,000 during the nine months
ended September 30, 1997. The Company's investing activities that used cash
during this period was primarily related to capital expenditures. During the
next twelve months, the Company expects to incur an estimated $700,000 million
for capital expenditures, a majority of which is expected to be incurred for
leasehold improvements and other capital expenditures in connection with the
planned consolidation of its warehouse facilities into a single facility in the
Dallas-Fort Worth area, the relocation of its Dallas branch office and the
opening of a branch office in San Antonio, Texas. The actual amount and timing
of such capital expenditures may vary substantially depending upon, among other
things, the actual facilities selected, the level of expenditures required to
render the facilities suitable for the Company's purposes and the terms of lease
arrangements pertaining to the facilities.
Financing activities provided cash totaling $1.7 million during the nine
months ended September 30, 1997. During the quarter ended September 30, 1997 the
Company completed the sale of 1,765,125 common shares which resulted in the
receipt of net proceeds of $8.7 million, all of which was used to repay
short-term debt.
Asset Management
The Company had trade accounts receivable, net of allowance for doubtful
accounts, of $19.0 million at September 30, 1997. The number of days' sales
outstanding in trade accounts receivable was 52 days, which is equal to the days
outstanding of the prior quarter but reflecting slower than normal
payment by the Company's customers during the three months ended September 30,
1997. Bad debt expense as a percentage of total revenue for the three months
ended September 30, 1997 was 0.3%, which was slightly less than bad debt expense
for the three months ended September 30, 1996. The Company's allowance for
doubtful accounts, as a percentage of trade accounts receivable, was 1.3% at
December 31, 1996, and 1.1% at September 30, 1997. Inventory turnover for the
three months and nine months ended September 30, 1997 was 19.7 times, and 19.4
times, respectively.
Current Debt Obligations
Historically, the Company has satisfied its cash requirements principally
through borrowings under its lines of credit and through operations. The Company
maintains a cash position sufficient to pay only its immediately due obligations
and expenses. When the amount of cash available falls below its immediate needs,
the Company requests advances under a credit facility provided by IBM Credit
Corporation ("IBMCC Facility")
The total credit available under the IBMCC Facility is currently $20.0
million, subject to borrowing base limitations which are generally computed as a
percentage of various classes of eligible accounts receivable and qualifying
inventory. Borrowings are available under the IBMCC Facility for floor plan
financing of inventory from approved manufacturers (the "Inventory Line"').
Available credit under the IBMCC Facility, net of Inventory Line advances, is
used by the Company primarily to carry accounts receivable and for other working
capital and general corporate purposes (the "Accounts Line"). Borrowings under
the Accounts Line bear interest at the fluctuating prime rate plus 2.0% per
annum (10.5% at September 30, 1997). Under the Inventory Line, IBMCC pays the
Company's inventory vendors directly, generally in exchange for negotiated
financial incentives. Typically, the financial incentives received are such that
IBMCC does not charge interest to the Company until approximately 30 days after
the transaction is financed, at which time the Company is required to either pay
the full invoice amount of the inventory purchased from corporate funds or to
borrow under the Accounts Line for the amount due to IBMCC. Inventory Line
advances not paid within 30 days after the financing date bear interest at the
fluctuating prime rate plus 6.0%. IBMCC is permitted to fix a minimum prime rate
for the IBMCC Facility of not less than the average prime rate in effect at the
time the minimum prime rate is set but has not done so. IBMCC is authorized to
change, on 30 days notice, the computation of the borrowing base and to
disqualify accounts receivable upon which advances have been made and require
repayment of such advances to the extent such disqualifications cause the
Company's borrowings to exceed the reduced borrowing base. The IBMCC Facility
renews for successive periods of 13 months unless either party chooses to
terminate the arrangement on 60 days notice.
The IBMCC Facility is collateralized by a security interest in
substantially all of the Company's assets, including its accounts receivable,
inventory, equipment and bank accounts. The Company's Chief Executive Officer
and principal stockholder has personally guaranteed the Company's indebtedness
to IBMCC. Collections of the Company's accounts receivable are required to be
applied through a lockbox arrangement to repay indebtedness to IBMCC; however,
IBMCC customarily releases a portion of the Company's daily collections to the
extent that they exceed the daily estimated borrowing base. IBMCC is not
obligated to continue this accommodation. If in the future IBMCC insists that
all lockbox payments be applied to reduce the Company's indebtedness, the
Company would be required to seek funding from IBMCC or other sources to meet
substantially all of its cash needs.
At September 30, 1997, the total indebtedness of the Company under the
IBMCC Facility was $7.7 million of which $3.0 million was outstanding under the
Accounts Line and $4.7 million was outstanding under the Inventory Line. The
Company's remaining available credit at September 30, 1997, based on its
borrowing base was approximately $7.4 million.
The Company has a $3.0 million credit facility with Deutsche Financial
Services (the "DFS Facility") for the purchase of inventory from certain
suppliers. As in the case of the IBMCC Inventory Line, advances under the DFS
Facility are typically interest free for 30 days after the financing date for
transactions in which adequate financial incentives are received by DFS from the
vendor. Within 30 days after the financing date, the full invoice amount for
inventory financed through DFS is required to be paid by the Company. Amounts
remaining outstanding thereafter bear interest at the fluctuating prime rate
(but not less than 6.5%) plus 6.0%. DFS retains a security interest in the
inventory financed. The DFS Facility is immediately terminable by either party
by written notice to the other. At September 30, 1997, the amount outstanding
under the DFS Facility was $1.7 million.
Both the IBMCC Facility and the DFS Facility prohibit the payment of
dividends, repurchase of the Company's shares and advances to affiliates unless
consented to by the lender.
Subsequent Events
In October, 1997 the Company commenced the renegotiation of the Company's credit
facilities with its existing lenders and sought financing proposals from other
financing sources. Based upon the proposals the Company has received it is
likely that the Company will restructure its existing credit facilities on terms
more favorable to the Company than its currently existing credit facilities.
In October, 1997 the Company's Board of Directors authorized the establishment
of the 1997 Employee Stock Purchase Plan whereby the Company's employees may
voluntarily purchase shares of the Company's stock. Under the Plan the Company
may issue newly issued shares or purchase shares in the open market. The Company
expects to purchase such shares as may be required for the plan in the open
market. The Board of Directors has, however, authorized the issuance of up to
100,000 shares for such purpose.
EXHIBIT 11
ALLSTAR SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
(In thousands of dollars, except per share amounts)
For the Three Months ended
September 30,
1997 1996
PRIMARY EARNINGS PER SHARE:
Weighted average shares of common stock outstanding 4,261,609 2,675,000
Effect of issuance of shares from exercise of stock
options or warrants (treasury stock method) 7,055 -
---------- --------
Weighted average shares 4,268,664 2,675,000
------------------------ ========= =========
Net Income $ 380 $ 499
------------------------------------- ============ ===========
Primary earnings per share $ 0.09 $ 0.19
-------------------- ============ ===========
FULLY DILUTED EARNINGS PER SHARE: (a)
Weighted average shares of common stock outstanding 4,261,609 2,675,000
-
Effect of issuance of shares from exercise of stock
options or warrants (treasury stock method) (65,618) -
- ---------- ----------
Weighted average shares 4,195,991 2,675,000
---------------------------- ========= =========
Net Income $ 380 $ 499
----------------------------------------- ============ ===========
Fully diluted earnings per share $ 0.09 $ 0.19
------------------- ============ ===========
For the Nine Months ended
September 30,
1997 1996
PRIMARY EARNINGS PER SHARE:
Weighted average shares of common stock outstanding 3,209,681 2,675,000
Effect of issuance of shares from exercise of stock
options or warrants (treasury stock method) 3,278 -
------------ -----------
Weighted average shares 3,212,059 2,675,000
----------------------------- ========= =========
Net Income $ 1,102 $ 1,106
------------------------------------------ =========== ===========
Primary earnings per share $ 0.34 $ 0.41
-------------------------- =========== ===========
FULLY DILUTED EARNINGS PER SHARE: (a)
Weighted average shares of common stock outstanding 3,209,681 2,675,000
Effect of issuance of shares from exercise of stock
options or warrants (treasury stock method) (22,112) -
Weighted average shares 3,187,569 2,675,000
----------------------------- ========= =========
Net Income $ 1,102 $ 1,106
------------------------------------------ =========== ===========
Fully diluted earnings per share $ 0.35 $ 0.41
-------------------- ============ ===========
(a)This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraphs 14, 30 and 40 of APB Opinion
No. 15 because it produces an antidilutive result for period set forth above.
Part II. Other Information
Item 1. Legal Proceedings
On July 13, 1996, a former customer brought suit against the Company in the
152nd Judicial District Court of Harris County, Texas. The plaintiff alleges
that the Company failed to provide and complete promised installation and
configuration of certain computer equipment within the time promised by the
Company. Based on these allegations, the plaintiff is suing for breach of
contract and other statutory violations and is seeking actual monetary damages
of approximately $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible recovery
by the plaintiff because the suit is still in the early stages of discovery.
However, the Company is vigorously defending the action.
Allstar is party to other litigation and claims which management believes
are normal in the course of its operations; while the results of such litigation
and claims cannot be predicted with certainty, Allstar believes the final
outcome of such matters will not have a materially adverse effect on its results
of operations or financial position.
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.
October 4, 1997 BY: /s/ James H. Long
Date James H. Long, Chief Executive Officer
October 4,1997 BY: /s/ Donald R. Chadwick
Date Donald R. Chadwick, Chief Financial Officer