SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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, TX 77074
(Address of principal executive offices)(Zip code)
Registrant's telephone number including area code: (713) 795-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on March 31,
1999, as reported on NASDAQ National Market System, was approximately
$2,602,406.
The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 31, 1999 was 4,232,211.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III, Items 10,
11, 12, and 13.
PART I
Item 1. Business
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 RELATING TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY INCLUDING, BUT
NOT LIMITED TO, STATEMENTS CONTAINED IN ITEM 1. - "BUSINESS" ITEM 2.
"PROPERTIES," ITEM 3. - "LEGAL PROCEEDINGS" AND ITEM 7. "MANAGEMENTS 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 THE COMPANY HAS 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 THIS
ANNUAL REPORT ON FORM 10-K, 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.
GENERAL
Allstar Systems, Inc. is engaged in the business of providing its customers
with solutions to their information and communications technology needs. The
company markets its products and services primarily in Texas from five locations
in the Houston, Dallas-Fort Worth, El Paso, Austin and San Antonio metropolitan
areas. The company's customer base of approximately 2,700 accounts is comprised
primarily of mid-sized customers and regional offices of larger customers in
commercial, educational and governmental sectors. The company positions itself
to provide its customers with single-source solutions for both their computer
and telecommunications needs by offering a broad range of products and services
and the expertise to service and support integrated computer and
telecommunications applications.
The company's revenue is derived from three business segments:
Information Technology sells computer hardware and software products,
along with networking and data communications products, including
related integration and support services.
Telecom Systems sells and supports telecommunications systems,
including smaller "key" telephone systems, larger private branch
exchange ("PBX") telephone systems, video conferencing systems and
voice mail systems.
CTI Software, through a wholly owned subsidiary, Stratasoft, Inc.,
markets its own software products for computer-telephony integration,
including products for call center and other high volume calling
applications.
The company was incorporated in 1983 as a Texas corporation and was
reincorporated in 1996 as a Delaware corporation. The executive offices are
located at 6401 Southwest Freeway, Houston, Texas 77074 and the telephone number
is (713) 795-2000.
The market for information and communications technology products and
services has experienced significant growth in recent years and the use of such
products and outsourced services within organizations has been impacted by
several trends. The company believes that the general demand for information
technology products and related services has increased because of the following
trends:
The introduction of local-area and wide-area networks has allowed
organizations to supplement or replace expensive, centralized
mainframe computer systems with more flexible and affordable
microcomputer based client/server platforms.
The emergence of widely-accepted industry standards for hardware and
software has increased the acceptance of open architecture networks
that can, and frequently do, contain products from numerous
manufacturers and suppliers.
Rapid technological improvements in computer hardware and the
introduction of new software operating systems have also created the
need to expand or upgrade existing networks and systems.
The proliferation of Internet access has increased the demand for
increased computing power and network throughput.
Price decreases have made such networks and systems more affordable to
a larger number of organizations.
The advent of open architecture networks has impacted the market for
information technology services. Wider use of complex networks involving a
variety of manufacturer's equipment, operating systems and applications software
has made it increasingly difficult for users of information and communications
technology to diagnose problems and to maintain the technical knowledge and
repair parts necessary to provide support services. The company believes that
increased outsourcing of more sophisticated support services by business and
institutional customers has resulted from the technical complexities created by
multi-manufacturer and supplier network systems and rapid technological change.
Increasingly, organizations seeking technology products often require
prospective vendors not only to offer products from many manufacturers and
suppliers, but also to have available proficient service expertise to assist
them in product selection, system design, installation and post-installation
support and service. The company believes that the ability to offer customers a
comprehensive solution to their information technology needs, combined with the
ability to work within its customers' environments as integral members of their
information and communications technology systems management team, are
increasingly important in the marketplace.
Telecommunications systems have evolved in recent years from simple analog
telephone systems to sophisticated digital systems, with modern digital systems
featuring voice processing, automated attendant, voice and fax mail, automatic
call distribution and call accounting. The ability to interface these new
digital phone systems to user's computer systems now allows these telephone
systems to interact with the user's computerized data to create powerful
business solutions. Computerized "call accounting" allows an organization with
integrated telephone and computer systems to track telephone usage and long
distance toll billing and easily interface that data with computerized
accounting and billing systems. Integrated voice and facsimile handling allows a
user to retrieve, send and manage voice and facsimile messages on his or her
computer screen. Computerized telephone number listings allow the user to look
up telephone numbers on the computer and then have the computer dial the number
automatically. For more complex call center applications, computer systems can
manage outbound calling campaigns while automatically blending inbound calls to
available agents in order to enhance agent productivity.
The company believes that the evolution of the digital telephone system to
a more open architecture, aided by standards established by large software
manufacturers for the interface of telephone and computer technologies, is
causing rapid industry change. These digital telephone systems, along with the
many software products that are rapidly becoming available for use in
computer-telephony, require sophisticated installation and integration service
capability. The company believes that the trend toward computer-telephony
integration is likely to continue and that integrated voice, data and video
communication will become more affordable. As the technology and management of
telecommunications and computer systems converge over the next decade, the
company believes that growth opportunities will be presented for companies
presently able to provide and service the latest integrated telecommunications
and computer technologies.
BUSINESS STRATEGY
To achieve its objectives, the company intends to pursue these key
strategies:
Geographic Expansion into New Markets. In order to expand into new
geographic markets and create growth opportunities with new customers, the
company opened a number of new offices over a short period of time during late
1997 and early 1998. The company opened new offices in Austin, Texas in the
third quarter of 1997 and in McAllen and El Paso, Texas late in 1997. Early in
1998, the company significantly increased the size of its El Paso office and
opened offices in Albuquerque and Las Cruces, New Mexico. Later in 1998, the
company opened its eighth office in San Antonio, Texas. During the second half
of 1998, the company also began employing sales representatives to work from
their homes in new markets, and employed new sales representatives in the states
of Florida, Nebraska, Missouri and Oklahoma. The expenditures that were required
to establish a marketing and operating organization in those new markets has
been a factor in causing profitability to decline during the past year. Of
primary short-term importance is solidifying the revenue gains that the company
has made in those new markets, while continuing to increase revenue to a level
at which the new offices are contributing to profitability. Longer term, the
company intends to evaluate the need for opening additional offices in Texas and
other regions as opportunities and circumstances warrant.
Pursue "Same Office" Growth. The company has continued to produce revenue
growth in its older, more mature offices in Houston and Dallas and intends to
continue to pursue growth opportunities in those markets through increased
numbers of customer relationships. By expanding the number of product and
service offerings made available to customers, the company hopes to increase
revenue from existing customers in these mature offices.
Enhance Services Component in Information Technology. For many years, and
continuing through 1998, the company employed a separate sales force, reporting
to separate management, for the marketing of Information Technology services and
products. The company is combining the two sales forces under a single
organizational structure in order to take advantage of the much larger products
sales force to sell services offerings. The products sales force, at the end of
1998, was approximately ten times as large, in terms of total sales staff, as
the services sales force. The company intends to pursue having the products
sales staff market services in an attempt to produce higher growth rates from
services revenues, which typically produce higher margins than that of product
revenues. The company also intends to expand the number of service offerings in
order to provide additional sources of service revenues and to produce higher
rates of growth from services revenues.
Improve Telecom Systems and CTI Software Profitability. The company began
offering Telecom Systems and CTI Software in 1994 and 1995, respectively, and
these two business units have produced high rates of revenue growth. Compared to
the previous year, Telecom Systems revenue grew 41.3% and 38.8% and CTI Software
revenue grew 66.5% and 44.3% during 1997 and 1998, respectively. While these
business units produce higher than company average gross margin, they have
produced operating losses in each of the past two years. The company's challenge
is to continue the growth in these business units while improving profitability
during 1999 and thereafter.
PRODUCTS AND SERVICES
The company's revenues are derived from sales of information and
communications systems and by providing services related to the use of such. The
company believes that much of its product sales revenues are reliant upon the
company's ability to offer services related to the installation, integration,
support and service of such products. The products and/or services marketed in
each of the company's three business segments are described below.
Information Technology:
The company offers its customers a wide variety of computer hardware and
software products available from approximately 900 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.
The company markets a variety of services offerings related to the service
and support of information technology systems. The company prices its services
on a time and materials basis, under fixed price project pricing or under fixed
fee service contracts, depending on customer preference and the level of service
commitment required. 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 participates in various
certification and authorization programs sponsored by hardware manufacturers and
software suppliers. 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. Information
Technology services include the following:
Contract Systems Engineer, Technician and Programmer Staffing. The
company provides short-term supplemental technical staffing, including
hardware and software technicians, help desk personnel, systems and
network engineers and programming staff.
Systems Engineering. The company provides systems engineering services
including information technology consulting, network design, on-site
and remote network administration, network diagnostics, new technology
feasibility and impact analyses and disaster recovery plan analyses.
Information Technology Project Management. The company provides
project management services for major hardware and software upgrades
and conversions, delivery and installation "roll-outs" of major new
hardware and software installations and large network installations,
including multiple citywide-area network implementations.
Information Systems Support. The company is an authorized warranty
service provider for many popular computer and computer peripheral
products and provides hardware repair and maintenance services,
complex network diagnostic services, end user support services and
software diagnostic services. The company also offers complete
outsourcing of a customer's computer and network management and
technical support needs on a contract basis. The company provides
on-site service parts stocking, help desk assistance, fixed asset
management and tracking.
Telecommunications and Data Systems Cabling. The company provides
networking and telecommunications cabling services required for all
major networking topologies, including fiber optic cabling. The
company also offers cabling services for adding to, moving or changing
existing network systems.
Contract Programming Services. The company offers contract programming
services, primarily related to database design and implementation,
client server applications and Internet site development.
IT Staffing Services. In January 1997 the company, through its wholly
owned subsidiary IT Staffing, Inc., began providing customers with
technical personnel for temporary and permanent positions. The company
recruits and places personnel for a wide variety of technical
positions related principally to computing hardware and software skill
sets.
Telecom Systems:
The company began its Telecom Systems business in 1994 to capitalize on the
trend toward computer-telephony integration. The company currently markets,
installs and services business telephone systems, including large PBX systems
and small key systems, along with a variety of related products including
hardware and software products for data and voice integration, wide area
connectivity and telephone system networking and wireless communications.
CTI Software:
Through its wholly-owned subsidiary, Stratasoft, Inc., the company develops
and markets proprietary CTI Software, which integrates business telephone
systems and networked computer systems, under the trade name "Stratasoft." CTI
Software is designed to improve the efficiency of a call center and other types
of high volume calling applications, for both inbound and outbound calls. Basic
products offered by the company are typically customized to suit a customer's
particular needs and are often bundled with computer hardware supplied by the
company at the customer's request. The company entered the CTI Software business
in late 1995 by acquiring two computer-telephony software products, currently
sold under the names StrataDial and StrataVoice. A new product,
Strata-Interactive, has also been developed by the company. The company now
markets these three computer-telephony software products, which are described
below:
StrataDial. StrataDial is a predictive dialer software product for
outbound call center applications such as sales and promotion,
collections, surveys, lead generation and announcements that require
personal contact. StrataDial features inbound/outbound call blending
without requiring an automated call distribution feature of the
telephone system. StrataDial collects campaign specific data during
the telephone call and provides comprehensive on line reporting and
statistical analysis of the campaign data. StrataDial also features
open architecture that allows easy interaction with the customer's
other database applications. Dialing parameters and campaign
characteristics can be changed without shutting down the dialer, as is
required with many competing products.
StrataVoice. StrataVoice is an outbound dialing product designed for
high volume applications that do not require human interaction.
StrataVoice applications include appointment confirmation and setting,
court appearance notification, surveys, community notification such as
school closings and emergency evacuation, employee updates,
absenteeism notification, telemarketing and market research. A
telephone system utilizing StrataVoice dials a computerized list of
numbers and can ask the contacted person a number of questions,
including branching to other questions and statements based on
responses. StrataVoice also allows the contacted person to leave
messages. Scripting tools are included that allow the user to develop
campaigns. The system builds a database of respondent data and has
comprehensive response reporting capabilities. Strata-Interactive.
Strata-Interactive is an interactive voice response software product
that allows telephone calls to access computer information at any time
using a simple touch-tone telephone. Applications for interactive
voice response technology vary and include insurance coverage
verification and claims reporting, utility company account information
and outage reporting, bank account information and on-line
transactions, and shipment verification and tracking information.
Strata-Interactive is based upon open architecture and is designed to
work with networked computers.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for financial information on revenue and operating
income of each business segment.
SALES AND MARKETING
The company markets its products and services primarily through direct
sales representatives. Direct sales representatives are teamed with in-house
customer service representatives and are assigned to specific customer accounts.
The company believes that direct sales lead to better account penetration and
management, better communications and long-term relationships with its
customers. The company's sales personnel, including account managers and
customer service representatives, are partially compensated, and in some cases
are solely compensated, on the profitability of accounts which they participate
in developing. The company's three business segments utilize slightly different
methods of sales and marketing:
Information Technology. The Information Technology business segment
operates from all of the company's offices, and promotes its products and
services through general and trade advertising, participation in trade
shows and telemarketing campaigns. The company believes that a significant
portion of this business segment's new customers originate through
word-of-mouth referrals from existing customers and industry partners such
as manufacturers' representatives, and through customer and lead sharing
with the company's other two business units.
Telecom Systems. The Telecom Systems business unit operates primarily from
the company's Houston office, and its sales and marketing efforts are
concentrated in that market. Telecom Systems uses primarily telemarketing,
along with participation in trade shows and general trade advertising to
market its products and services.
CTI Software. Stratasoft, Inc., the company's CTI Software business unit,
operates from the company's Houston office and utilizes telemarketing,
participation in trade shows and general trade advertising to market its
products. Leads are followed up on and managed by account managers. In
addition, Stratasoft markets its products through a network of value added
resellers, who typically integrate their products with Stratasoft's
software products to provide a complete solution.
CUSTOMERS
The company focuses its marketing efforts on mid-sized customers and
regional offices of larger customers located in or near the metropolitan areas
in which the company maintains offices. The company occasionally provides
products and/or services in markets where the company does not have an office,
typically to branch operations of customers with which the company has an
established relationship. The company's customer base is not concentrated in any
industry group. The company's top ten customers (which have varied from year to
year) accounted for 33.2%, 21.2% and 31.7% of the company's revenue during 1996,
1997 and 1998, respectively. Approximately 2,700 customers purchased products or
services from the company during 1998. In 1998, the largest single customer
constituted 9.3% of total revenues; however, in prior years, the company's
largest customer has constituted as high as 11.2% of revenues. The company has
only a small amount of backlog relative to total revenues because the company
has no long-term commitments by customers to purchase products or services from
the company. Although the company has service contracts with many of its large
customers, such service contracts are project-based and/or terminable upon
relatively short notice.
SUPPLY AND DISTRIBUTION
The company relies on wholesale distributors to supply a majority of the
products that it sells through its Information Technology and CTI Software
business units. The company purchases the majority of its products from three
primary suppliers to obtain competitive pricing, better product availability and
improved quality control. Products sold by the company's Telecom Systems
business unit are generally purchased directly from the original equipment
manufacturer. The company attempts to develop strategic arrangements with its
principal suppliers, including the coordination of drop shipment orders, the
outsourcing of certain computer configuration services, national roll-out and
installation projects and the sharing of product information.
The company maintains standard authorized dealership agreements from many
leading manufacturers of computer and telecommunications hardware and software.
Under the terms of these authorized dealership agreements, the company is
entitled to resell associated products to end-users and to provide warranty
service. The company's status as an authorized reseller of key product lines is
essential to the operation of the company's business. In general, the authorized
dealer agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. Some of these agreements are conditioned upon the continuation
of the company's supply arrangement with a major wholesale distributor
acceptable to the manufacturer.
The company operates small warehouses within each of its branch offices and
a major regional distribution center located in Dallas, for the purpose of
receiving, warehousing, configuration and shipping products.
In 1995, the company began an initiative to drop ship a higher percentage
of orders directly from its suppliers to its customers. This initiative has
resulted in the percentage of drop shipped orders increasing significantly.
While the company does not believe that it is in its best interest to drop ship
all orders, it does intend to try to increase the volume of drop shipments with
the expectation of reducing its freight, distribution and administrative costs
related to these revenues.
While some manufacturers of products sold by the company offer to
price-protect the inventory carried by the company for a certain length of time
following a price decrease by the manufacturer, recently many manufacturers have
moved to more restrictive price protection policies or have largely eliminated
price protection. In addition, certain manufacturers and suppliers have
implemented a more restrictive policy regarding inventory returns during the
past year.
MANAGEMENT INFORMATION SYSTEMS
The company depends on its customized management information systems
("MIS") to manage most aspects of its business. The company's MIS provides its
sales staff, customer service representatives and certain customers with product
pricing and availability from its principal suppliers' warehouses throughout the
United States. The purchasing systems are real time, allowing buyers to act
within minutes on a newly received and credit-approved sales order. The
company's MIS contain productivity tools for sales lead generation, including
integration between telemarketing and prospect database management. Sales
management features include a variety of reports available for any combination
of customer, salesperson, sales team and office criteria. The company uses its
MIS to manage sales orders, purchasing, service contracts, service calls and
work orders, engineer and technician scheduling and time tracking, service parts
acquisition and manufacturer warranties. Reporting can also be generated for
project profitability, contract and customer analysis, parts tracking and
employee time tracking. During the second quarter of 1998 the company completed
a conversion of its MIS to a more powerful computing platform which will allow
the company to improve and enhance its MIS.
EMPLOYEES
As of December 31, 1998 the company employed approximately 513 individuals.
Of these, approximately 128 were employed in sales, marketing and customer
service, 214 were employed in engineering and technical positions and 171 were
employed in administration, finance and MIS. The company believes that its
ability to recruit and retain highly skilled and experienced technical, sales
and management personnel has been, and will continue to be, critical to its
ability to execute its business plans. None of the company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The company believes that its relations with its employees are good.
HISTORY AND REINCORPORATION
The company was incorporated under Texas law in 1983 under the name
Technicomp Corp. On June 30, 1993, the company changed its name to
Allstar-Valcom, Inc., and then again, on December 28, 1993, the company changed
its name to Allstar Systems, Inc. On December 27, 1993, the company engaged in a
merger in which it was the surviving corporation. In the merger, Allstar
Services, Inc. and R. Cano, Inc., both of which were affiliated with the
company, were merged with and into Allstar Systems, Inc. in order to streamline
the business. In 1995 the company formed a wholly owned subsidiary, Stratasoft,
Inc., to purchase and develop its CTI Software business unit. In 1997, the
company formed another wholly-owned subsidiary, IT Staffing, Inc., for the
purpose of conducting business in the placement of temporary and permanent
technical personnel. In 1998 the company formed another wholly owned subsidiary,
Allstar Systems Rio Grande, Inc., to develop and manage business opportunities
in the Rio Grande region congruent with the business of the parent, Allstar
Systems, Inc. In October 1996, the company effected a reincorporation and merger
in the State of Delaware through which the 328,125 shares of the company's
predecessor, Allstar Systems, Inc., a Texas corporation, which were outstanding
prior to the merger, were converted into approximately 2,675,000 shares of the
newly incorporated Delaware corporation (the "Reincorporation"). The effect of
the Reincorporation on the number of shares outstanding prior to the
Reincorporation was similar in effect to an approximately 8.15-for-1 stock
split.
FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATION
Risk of Low Margin Business
Given the significant levels of competition that characterize the computer
reseller market, it is unlikely that the company will be able to increase gross
profit margins. In order to attract and retain many of its larger customers, the
company frequently must agree to volume discounts and maximum allowable markups
that serve to limit the profitability of sales to such customers. In addition,
manufacturers of products sold by the company have recently changed their
business practices to largely eliminate price protection for inventory held by
the company and have also reduced and/or eliminated return privileges for
inventory held by the company. Any increase in inventory devaluation risks that
cannot be passed onto the company's customers would result in write-offs or
markdowns of the value of such inventory with the result being a charge to gross
profit, reducing gross margin. Any failure by the company to maintain or
increase its gross profit margins and sales levels could have a material adverse
effect on the company's financial condition and results of operations.
Dependence on Availability of Credit
The company's business activities are capital intensive in that the company
is required to finance accounts receivable and inventory. In order to obtain
necessary working capital, the company relies primarily on lines of credit under
which the available credit are dependent on the amount and quality of the
company's accounts receivable and inventory. As a result, the amount of credit
available to the company may be adversely affected by factors such as delays in
collection or deterioration in the quality of the company's accounts receivable,
inventory obsolescence, economic trends in the computer industry, interest rate
fluctuations and the lending policies of the company's lenders. Many of these
factors are beyond the company's control. Any decrease or material limitation on
the amount of capital available to the company under its credit lines and other
financing arrangements would limit the ability of the company to fill existing
sales orders, purchase inventory or expand its sales levels and, therefore,
would have a material adverse effect on the company's financial condition and
results of operations. (See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Interest Rates
Any significant increases in interest rates will increase the company's
cost of capital and would have an adverse effect on the company's financial
condition and results of operations. The inability of the company to have
continuous access to capital at reasonable costs would materially and adversely
impact the company's financial condition and results of operations. (See Item 7
- - "Management's Discussion and Analysis of Financial Condition and Results of
Operations").
Highly Competitive Business
The company is engaged in business activities that are intensely
competitive and rapidly changing. Price competition could materially adversely
affect the company's financial condition and results of operations. The
company's competitors include major computer products and telephone equipment
manufacturers and distributors, including certain manufacturers and distributors
that supply products to the company. Other competitors include established
national, regional and local resellers, systems integrators, telephone systems
dealers, computer-telephony value-added resellers and other computer-telephony
software suppliers.
Management of Growth
The company has experienced rapid growth that has and may continue to
put strains on the company's management and operational resources. The company's
ability to manage growth effectively will require it to continue to implement
and improve its operational, financial and sales systems, to develop the skills
of its managers and supervisors and to hire, train, motivate and manage its
employees.
Regional Concentration
For the foreseeable future, the company expects that it will continue to
derive most of its revenue from customers located in or near the metropolitan
areas in which the company maintains offices. Accordingly, an economic downturn
in any of those metropolitan areas or in the region in general, would likely
have a material adverse effect on the company's financial condition and results
of operations.
Dependence on Key Personnel
The success of the company for the foreseeable future will depend largely
on the continued services of key members of management, leading salespersons and
technical personnel. The company does not maintain key personnel life insurance
on any of its executive officers or salespersons other than its Chairman and
Chief Executive Officer. The company's success also depends in part on its
ability to attract, hire, train and retain qualified managerial, technical and
sales and marketing personnel at a reasonable cost, particularly those involved
in providing systems integration, support services and training. Competition for
such personnel is intense. The company's financial condition and results of
operations could be materially adversely affected if the company were unable to
attract, hire, train and retain qualified personnel.
Dependence on Continued Authorization to Resell and Provide
Manufacturer-Authorized Services
The company's future success in both product sales and services depends
largely on its continued status as an authorized reseller of products and its
continued authorization as a service provider. The company maintains sales and
service authorizations with many industry-leading product manufacturers. Without
such sales and service authorizations, the company would be unable to provide
the range of products and services currently offered. In addition, some of these
agreements are based upon the company's continued supply relationship with its
major distributors. Furthermore, loss of manufacturer authorizations for
products that have been financed under the company's credit facilities
constitutes an event of default under such credit facilities. In general, the
agreements between the company and its product manufacturers either provide for
fixed terms or for termination on 30 days prior written notice. Failure to
maintain such authorizations could have a material adverse effect on the
company's financial condition and its results of operations.
Dependence on Suppliers
The company's business depends upon its ability to obtain an adequate
supply of products and parts at competitive prices and on reasonable terms. The
company's suppliers are not obligated to have product on hand for timely
delivery to the company nor can they guarantee product availability in
sufficient quantities to meet the company's demands. Any material disruption in
the company's supply of products would have a material adverse effect on the
company's financial condition and results of operations.
Inventory Obsolescence
The business in which the company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. The company's success depends in large part on its ability to
identify and obtain products that meet the changing requirements of the
marketplace. There can be no assurance that the company will be able to identify
and offer products necessary to remain competitive or avoid losses related to
obsolete inventory and drastic price reductions. The company attempts to
maintain a level of inventory required to meet its near term delivery
requirements by relying on the ready availability of products from its principal
suppliers. Accordingly, the failure of the company's suppliers to maintain
adequate inventory levels of products demanded by the company's existing and
potential customers and to react effectively to new product introductions could
have a material adverse effect on the company's financial condition and results
of operations. Additionally, the company is at risk for decreases in realizable
inventory value for inventory held by the company, due to product obsolescence.
Reliance on Key Customers
The company's top ten customers, which have varied from year to year,
accounted for 33.2%, 21.2% and 31.7% of the company's revenue during 1996, 1997
and 1998, respectively. During 1998, the company's largest customer accounted
for 9.3% of total revenues, but in past years the single largest customer has
accounted for as much as 11.2% of total revenues. Based upon historical results
and its existing relationships with customers, the company believes that a
substantial portion of its total revenue and gross profit will continue to be
derived from sales to existing customers. There are no long-term commitments by
such customers to purchase products or services from the company. A significant
reduction in business with any of the company's largest customers could have a
material adverse effect on the company's financial condition and results of
operations.
Reliance on MIS
The company's success is largely dependent on the accuracy, quality and
utilization of the information generated by its customized MIS, which affects
its ability to manage its sales, accounting, inventory and distribution. The
company anticipates that it will continually need to refine and enhance its
management information systems as the company grows and the needs of its
business evolve. Although the company has a plan to try to mitigate any problems
that might arise from the Year 2000 problem, there can be no assurance that this
issue will not impact the company's information and telecommunications systems.
In view of the company's reliance on its information and telecommunication
systems, any interruption or errors in these systems could have a material
adverse effect on the company's financial condition and results of operations.
(See Item 1 - "Management Information Systems" and Item 7 - "Year 2000 Issue").
Acquisition Risk
The company intends to pursue potential acquisitions of complementary
businesses. The success of this strategy depends not only upon the company's
ability to acquire complementary businesses on a cost-effective basis, but also
upon its ability to integrate acquired operations into its organization
effectively, to retain and motivate key personnel and to retain customers of
acquired firms.
Control by Existing Stockholders
James H. Long, founder, Chairman of the Board, President and Chief
Executive Officer of the company owns 50.1% of the outstanding Common Stock and
Mr. Long will have the ability to control the election of a majority of the
members of the company's board of directors, prevent the approval of certain
matters requiring the approval of at least two-thirds of all stockholders and
exert significant influence over the affairs of the company.
Anti-Takeover Considerations
The company's Certificate of Incorporation and Bylaws contain certain
provisions that may delay, deter or prevent a change in control of the company.
Among other things, these provisions authorize the board of directors of the
company to issue shares of preferred stock on such terms and with such rights,
preferences and designations as the board of directors of the company may
determine without further stockholder action and limit the ability of
stockholders to call special meetings or amend the company's Certificate of
Incorporation or Bylaws. Each of these provisions, as well as the Delaware
business combination statute could, among other things, restrict the ability of
certain stockholders to effect a merger or business combination or obtain
control of the company.
Absence of Dividends
The company expects to retain cash generated from operations to support its
cash needs and does not anticipate the payment of any dividends on the Common
Stock for the foreseeable future. In addition, the company's credit facilities
prohibit the declaration or payment of dividends, unless consent is obtained
from each lender.
Item 2. Properties
FACILITIES
The company does not own any real property and currently leases all of its
existing facilities. The company subleases its headquarters and Houston office
that are housed in a free standing building of approximately 48,000 square feet.
The Houston office sublease expired on December 31, 1998 and was extended for an
additional year under similar terms and conditions. The company's corporate
level operations occupy approximately 12,600 square feet of the Houston office.
Telecom Systems and CTI Software occupy approximately 6,500 and 3,700 square
feet of the Houston, respectively but occupy no space in any of the company's
other offices.
The company's Dallas office is housed in a freestanding building of
approximately 20,000 square feet. The Dallas facility lease expired on June 30,
1998 and was renewed for an additional three years under similar terms and
conditions. The company also leases a storage facility of approximately 7,000
square feet in Houston. The lease on this warehouse expired on April 14, 1998
and the company extended the lease on a month-to-month basis pending assessment
of future needs. During 1997, the company added additional offices in Austin,
McAllen and El Paso, Texas. During 1998 the company opened additional offices in
San Antonio, Texas and in Albuquerque and Las Cruces, New Mexico, and moved its
El Paso office to larger facilities. The company has leased interim offices in
Albuquerque, Las Cruces and McAllen under leases expiring in less than one year,
in two years for the San Antonio office and in three years for the Austin
office. In 1998 the company expanded its distribution capabilities by entering
into a three year lease on a 30,000 square foot warehouse in Dallas. The company
intends to lease other facilities in these cities as its business expands. The
company believes that suitable facilities will be available as needed. All of
the non-Houston facilities are occupied solely by Information Technology.
Item 3. Legal Proceedings
The company 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, the company believes the final
outcome of such matters will not have a material adverse effect on its results
of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On July 7, 1997 the company completed an initial public offering of its
Common Stock. The shares are traded on the Nasdaq National Market under the
symbol "ALLS".
High Low
Fiscal 1997
Third quarter (Commencing July 7, 1997) 8 6
Fourth quarter 7 1/2 3 15/16
Fiscal 1998
First quarter 5 5/16 4 3/8
Second quarter 4 1/4 3 5/8
Third quarter 3 1 7/8
Fourth quarter 2 15/16 1 3/8
The company estimates that, as of December 31, 1998, there were
approximately 890 beneficial holders of the company's common stock. The company
has never declared or paid any cash dividends on its Common Stock. The company
currently anticipates that it will retain all earnings for use in its business
operations. The payment of dividends is prohibited under the company's credit
agreements, unless approved by the lenders.
Item 6. Selected Financial Data
The following sets forth the selected data of the company for the five
years ended December 31, 1998.
Year ended December 31,
(In Thousands except share and per share amounts)
1994 1995 1996 1997 1998
Operating Data:
Revenue $64,076 $91,085 $120,359 $129,167 $167,173
Cost of sales and services 55,541 79,857 104,302 111,126 145,039
Gross profit 8,535 11,228 16,057 18,041 22,134
Selling, general and administrative
expenses 7,448 9,149 12,284 14,386 23,422
Operating income (loss) 1,087 2,079 3,773 3,655 (1,288)
Interest expense (net of other
income 764 1,218 1,183 685 351
Income (loss) before
provision for income taxes 323 861 2,590 2,970 (1,639)
Provision (benefit) for
income taxes 140 342 987 1,126 (541)
Net income (loss) $ 183 $ 519 $ 1,603 $ 1,844 $ (1,098)
Supplemental Data:
Net income (loss) per share:
Basic $ 0.07 $ 0.19 $ 0.60 $ 0.52 $ ( 0.25)
Diluted $ 0.07 $ 0.19 $ 0.60 $ 0.52 $ ( 0.25)
Weighted average shares outstanding:
Basic 2,554,808 2,675,000 2,675,000 3,519,821 4,345,883
Diluted 2,554,808 2,675,000 2,675,000 3,526,787 4,345,883
As of December 31,
(In Thousands)
1994 1995 1996 1997 1998
Balance Sheet Data:
Working Capital $1,363 $1,732 $2,291 $12,738 $9,800
Total Assets 19,077 24,266 24,720 34,855 51,028
Short-term borrowings(1) 8,972 9,912 9,975 1,572 15,958
Long-term debt 0 0 0 0 0
Stockholders' equity 2,205 2,724 4,327 14,637 12,705
<FN>
(1) See Note 4 to the company's Consolidated Financial Statements. Short-term
borrowings do not include amounts recorded as floor plan financing which are
included in accounts payable.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the company's Consolidated Financial Statements,
including the Notes thereto, included elsewhere in this Annual Report on Form
10-K.
Overview
The company was formed in 1983 to engage in the business of reselling
computer hardware and software products and providing related services. To date,
most of its revenue has been derived from sales of computer products and related
services. The company operated from a single office in Houston, Texas until 1992
when it opened a branch office in Dallas, Texas. In 1994, the company began
offering Telecom Systems in its Houston office. In 1995, the company acquired
and began marketing certain computer-telephony software products. During 1997
the company opened offices in Austin, McAllen and El Paso, Texas, and during
1998 opened additional offices in Albuquerque and Las Cruces, New Mexico, and
San Antonio, Texas. In addition, the company employs sales representatives who
work from their homes in Florida, Missouri, Nebraska and Oklahoma.
Effective for the year ended December 31, 1998, the company will begin
segment reporting as required by Statement of Financial Accounting Standard
("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information, issued by the Financial Accounting Standards Board ("FASB") Three
segments will be reported, with results detailed down to the earnings before
interest and taxes line. The three segments are Information Technology, Telecom
Systems and CTI Software. The results for the new Information Technology segment
are the combined Computer Products and IT Services business units for which
revenue and gross profit have been reported during past reporting periods.
The gross margin varies substantially between each of these business
segments. Over the past three years the gross margin in Information Technology
has ranged between 11.7% and 12.9%; the gross margin in Telecom Systems has
ranged between 26.1% and 35.5%; and the gross margin for CTI Software has ranged
between 40.2% to 48.2%. Information Technology, Telecom Systems and CTI Software
accounted for 93.6%, 4.5% and 1.9% of total revenues, respectively, during 1998.
In order to reduce freight costs and selling, general and administrative
expenses associated with product handling, the company began in 1995 to drop
ship a higher percentage of orders directly from its suppliers to its customers.
This initiative has resulted in the percentage of drop shipped orders (measured
as the cost of goods drop shipped as a percentage of total cost of goods sold)
growing from 18.1% in 1996, to 31.9% in 1998. While the company does not believe
that it is in its best interest to drop ship all orders, it does intend to
increase the volume of drop shipments with the expectation of reducing its
freight, distribution and administrative costs related to these revenues.
A significant portion of the company's selling, general and administrative
expenses relate to personnel costs, some of which are variable and others of
which are relatively fixed. The company's variable personnel costs are
substantially comprised of sales commissions, which are typically calculated
based upon the company's gross profit on a particular sales transaction and thus
generally fluctuate with the company's overall gross profit. The remainder of
the company's selling, general and administrative expenses are relatively more
fixed and, while still somewhat variable, do not vary with increases in revenue
as directly as do sales commissions.
Manufacturers of many of the computer products resold by the company have
consistently reduced unit prices near the end of a product's life cycle, most
frequently following the introduction of newer, more advanced models. While some
manufacturers of products sold by the company offer to price-protect the
inventory carried by the company for a certain length of time following a price
decrease by the manufacturer, recently many manufacturers have moved to more
restrictive price protection policies or have largely eliminated price
protection. Additionally, manufacturers have developed specialized marketing
programs designed to improve or protect the manufacturer's market share. These
programs often involve the granting of rebates to resellers to subsidize sales
of computer products at reduced prices. While these programs generally enhance
revenues they also generally result in lower margins being realized by the
reseller. The company has participated in an increasing number of these programs
in recent years. Based upon recent trends, the company believes that the number
and amount of these programs will increase.
Inacom Corp. ("Inacom") is the largest supplier of products sold by the
company. Purchases from Inacom accounted for approximately 57.0%, 51.4%, and
33.2% of the company's total product purchases in 1996, 1997 and 1998,
respectively. In August 1996, the company renewed its long-term supply
arrangement with Inacom and agreed to purchase at least 80% of its products from
Inacom, but only to the extent that such products were available through Inacom
and 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, as in past
years, will be made from Inacom.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data derived from the company's consolidated statements of operations
and indicates the percentage of total revenue for each item .
Year ended December 31,
1996 1997 1998
Amount % Amount % Amount %
(Dollars in thousands)
Revenue
Information Technology....... $ 115,247 95.7% $121,619 94.1% $156,579 93.6%
Telecom Systems.............. 3,824 3.2 5,403 4.2 7,499 4.5
CTI Software................. 1,288 1.1 2,145 1.7 3,095 1.9
Total..................... 120,359 100.0 129,167 100.0 167,173 100.0
Gross profit
Information Technology....... 14,180 12.3 15,707 12.9 18,316 11.7
Telecom Systems.............. 1,359 35.5 1,412 26.1 2,326 31.0
CTI Software................. 518 40.2 922 43.0 1,492 48.2
Total...................... 16,057 13.3 18,041 13.9 22,134 13.2
Selling, general and
Administrative expenses
Information Technology....... 10,459 9.1 11,431 9.4 18,786 12.0
Telecom Systems.............. 1,163 30.4 1,859 34.4 2,763 36.8
CTI Software................. 662 51.4 1,096 51.1 1,873 60.5
Total...................... 12,284 10.2 14,386 11.1 23,422 14.0
Operating income (loss)
Information Technology....... 3,721 3.2 4,276 3.5 (470) (0.3)
Telecom Systems.............. 196 5.1 (447) (8.3) (437) (5.8)
CTI Software................. (144) (11.2) (174) (8.1) (381) (12.3)
Total...................... 3,773 3.1 3,655 2.8 (1,288) (0.8)
Interest expense (net of
other income).................. 1,183 1.0 685 0.5 351 0.2
Income (loss) before provision
(benefit) for income taxes..... 2,590 2.2 2,970 2.3 (1,639) (1.0)
Provision (benefit) for income
Taxes.......................... 987 0.8 1,126 0.9 (541) (0.3)
Net income (loss)............... $ 1,603 1.3% $ 1,844 1.4% $ (1,098) (0.7)%
<FN>
(1) Percentages shown in the table above are percentages of total company
revenue, except for each individual segment's gross profit, selling,
general and administrative expenses, and operating income, which are
percentages of the respective segment's revenue.
</FN>
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
(Dollars in thousands)
Revenue. Total revenue increased $38,006 (29.4%) to $167,173 in 1998 from
$129,167 in 1997.
Revenue from Information Technology, which comprised 93.6% of total
revenue in 1998 compared to 94.1% in 1997, increased $34,960 (28.7%) to $156,579
in 1998 from $121,619 in 1997. The increase in Information Technology revenue
was generally attributable to increased sales of products and services to new
and existing customers and to sales generated in the company's newer branch
offices. Of the $34,960 increase in Information Technology revenue, $17,526
(50.1%) resulted from increased sales in the company's more established offices
in Houston and Dallas and $17,434 (49.9%) resulted from sales in the company's
newer offices opened since mid-1997. The increase of $17,526 from the older,
more established offices in Houston and Dallas represented an increase of 14.6%
to $137,290 in 1998 from $119,764 in 1997. The increase of $17,434 from the
company's newer branch offices represented an increase of 939.8% to $19,289 in
1998 from $1,855 in 1997. Total 1998 Information Technology revenue consisted of
$143,407 (91.6% of total Information Technology revenue) from product sales and
$13,172 (8.4% of total) from services as compared to $111,145 (91.4% of total)
and $10,474 (8.6% of total), respectively, in 1997. Information Technology
revenue from product sales increased 29.0% and revenue from services increased
25.8% during 1998 compared to 1997.
Revenue from Telecom Systems, which comprised 4.5% of total revenue in
1998, compared to 4.2% in 1997, increased $2,096 (38.8%) to $7,499 in 1998 from
$5,403 in 1997. The increase in Telecom Systems revenue was primarily the result
of increased sales of systems to new and existing customers and due to sales of
larger systems. Telecom Systems operates primarily out of the company's Houston
office and, therefore, has insignificant revenues attributable to sales from the
company's other offices.
Revenue from CTI Software, which comprised 1.9% of total revenue in 1998,
compared to 1.7% in 1997, increased $950 (44.3%) to $3,095 in 1998 from $2,145
in 1997. The increased revenues from CTI Software were primarily the result of
sales to new customers, the introduction of a new call center software product,
the addition of several new resellers for their products and the integration of
products with several third-party software products.
Gross Profit. Gross profit increased $4,093 (22.7%) to $22,134 in 1998 from
$18,041 in 1997, while gross margin decreased to 13.2% in 1998 from 13.9% in
1997. Gross profit and gross margin were affected by asset valuation markdowns
of $2,040 in the company's Information Technology segment related to reducing
the carrying value of that segment's inventory and certain vendor accounts
receivables. The company decided that the mark-downs in inventory value were
necessary based upon an analysis of the impact of supplier's changes in product
return privileges and price protection policies made available by product
manufacturers and suppliers. The markdowns related to reducing the carrying
value of certain vendor accounts receivables were due to the company's inability
to collect certain accounts related to special promotional funds owed to the
company from certain of its suppliers.
The gross margin for Information Technology decreased to 11.7% in 1998 from
12.9% in 1997, reflecting the effect of the aforementioned asset valuation
markdowns and lower gross margin produced on the services revenue component of
total Information Technology revenues.
The gross margin for Telecom Systems increased to 31.0% in 1998 from 26.1%
in 1997. This improvement in gross margin was primarily due to an increase to a
more normal gross margin from the year earlier period when gross margin was
lower than expected due to a number of circumstances, including the fact that
the 1997 period contained a number of larger, lower margin sales.
The gross margin for CTI Software increased to 48.2% in 1998 from 43.0% in
1997. This increase was due primarily to lower system installation costs,
relative to revenue, reflecting improved productivity and efficiency due to
improved software installation and customization tools introduced in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9,036 (62.8%) to $23,422 in 1998 from $14,386
in 1997. As a percentage of total revenue, selling, general and administrative
expenses increased to 14.0% in 1998 from 11.1% in 1997.
The dollar increase of approximately $3,200 was attributable to a 60.7%
increase in sales personnel compensation due to the company's efforts to expand
its sales force, particularly in the newer branch offices, and to increased
commissions paid to sales staff resulting from increases in revenue;
approximately $2,500 was attributable to a 59.5% increase in compensation to
administrative personnel primarily related to the opening of additional offices;
and $840 was attributable to a 79.3% increase in rent, utilities and telephone
expenses primarily related to the company operating eight physical branch
offices and a regional distribution facility at the end of the 1998 period
compared to only three branch offices at the end of 1997. Other costs were
generally higher in 1998 compared to 1997 due to the company opening and
operating the additional branch offices and the distribution center and due to
increased levels of business activity.
Selling, general and administrative expenses in Information Technology
increased $7,355 (64.3%) to $18,786 in 1998 compared to $11,431 in 1997. For
Telecom Systems, selling, general and administrative expenses increased $904
(48.6%) to $2,763 in 1998 from $1,859 in 1997. For CTI Software, selling,
general and administrative expenses increased $777 (70.9%) to $1,873 from $1,096
in 1997.
Operating Income (loss). Operating income decreased $4,943 (135.2 %) to a
loss of $1,288 in 1998 from a profit of $3,655 in 1997 due primarily to the
increase in selling, general and administrative expenses and the effect of the
aforementioned asset valuation markdowns. Operating income in Information
Technology decreased $4,746 (111.0%) to a loss of $470 in 1998 from operating
income of $4,276 in 1997. For Telecom Systems, the operating loss decreased $10
(2.2%) to $437 in 1998 from $447 in 1997. For CTI Software, the operating loss
increased $207 (119.0%) to $381 in 1998 from $174 in 1997.
Interest Expense (Net of Other Income). Interest expense (net of other
income) decreased $334 (48.8%) to $351 in 1998 compared to $685 in 1997.
Interest expense decreased in 1998 due to the reduction of outstanding debt
resulting from the 1997 stock offering proceeds applied to the reduction of
debt.
Net Income (Loss). Net income (loss), after an income tax benefit totaling
$541 (reflecting an effective tax rate of 33.0% for 1998 compared to 37.9% for
1997), became a loss of $1,098 in 1998 compared to a profit of $1,844 in 1997.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
(Dollars in thousands)
Revenue. Total revenue increased $8,808 (7.3%) to $129,167 in 1997 from
$120,359 in 1996. Revenue from Information Technology, which comprised 94.1% of
total revenue, increased $6,372 (5.5%) to $121,619 in 1997 from $115,247 in
1996. The increase in Information Technology revenue was generally attributable
to increased sales to new and existing customers. Revenue in Information
Technology did not grow as expected in 1997 principally due to insufficient
capital resources during the first half of 1997 and the inability of the newly
added sales personnel to attain the level of revenue production normally
expected of new personnel. Revenue from Telecom Systems, which comprised 4.2% of
total revenue, increased $1,579 (41.2%) to $5,403 in 1997 from $3,824 in 1996.
The increase in Telecom Systems' revenue was primarily the result of adding new
customers, of which one customer accounted for approximately $1,300 (82.3%) of
the increase. Revenue from CTI Software increased $857 (66.5%) to $2,145 in 1997
from $1,288 in 1996. The increased revenues were primarily the result of sales
to new customers.
Gross Profit. Gross profit increased $1,984 (12.4%) to $18,041 in 1997 from
$16,057 in 1996. Gross margin increased to 13.9% in 1997 from 13.3% in 1996. The
gross margin for Information Technology increased to 12.9% in 1997 from 12.3% in
1996. The gross margin for Telecom Systems decreased to 26.1% in 1997 from 35.5%
in 1996. In 1997, Telecom Systems bid on and won the installation of several
large systems. As a result of the competitive bidding process employed by
certain customers these large systems were projects that had lower than normal
margins. In addition, gross margin decreased in 1997 due to the purchase of a
large system by a single customer at a lower than usual margin. CTI Software
gross margin increased to 43.0% in 1997, from 40.2% in 1996. This increase in
CTI Software gross margin reflected slightly lower, installation costs and
development costs (as a percentage of revenue) in 1997 compared to 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2,102 (17.1%) to $14,386 in 1997 from $12,284
in 1996. As a percentage of total revenue, selling, general and administrative
expenses increased to 11.1% in 1997 from 10.2% in 1996. Of the dollar increase,
approximately $1,500 (71.4%) was attributable to increased temporary and
permanent personnel, principally in non-sales personnel. Other costs that grew
at a rate in excess of the rate of growth in revenues include expenses relating
to becoming and being a publicly held corporation and professional fees. The
increase as a percentage of total revenue resulted primarily from increased
expenditures for those expenses that do not fluctuate with gross profit or
revenues. Selling, general and administrative expense in Information Technology
increased $972 (9.3%) to $11,431 in 1997 compared to $10,459 in 1996. For
Telecom Systems, selling, general and administrative expense increased $696
(59.8%) to $1,859 in 1997 from $1,163 in 1996. For CTI Software, selling,
general and administrative expense increased $434 (65.6%) to $1,096 in 1997 from
$662 in 1996.
Operating Income. Operating income decreased $118 (3.1%) to $3,655 in 1997
from $3,773 in 1996. Operating income as a percentage of total revenue decreased
to 2.8% in 1997 from 3.1% in 1996 largely due to increases in selling, general
and administrative expenses. Operating income in Information Technology business
segment increased $555 (14.9%) to $4,276 in 1997 from $3,721 in 1996. For
Telecom Systems, operating income decreased $643 (327.6%) to an operating loss
of $447 in 1997 compared to operating income of $196 in 1996. For CTI Software,
the operating loss decreased $30 (20.8%) to $174 in 1997 from $144 in 1996.
Interest Expense (Net of Other Income). Interest expense (net of other
income) decreased $498 (42.1%) to $685 in 1997 from $1,183 in 1996. Interest
expense decreased due primarily to the reduction of outstanding debt by applying
the proceeds of the company's initial public offering to the reduction of debt.
Net Income. Net income, after a provision for income taxes totaling $1,126
(reflecting an effective tax rate of 37.9% in 1997 compared to 38.1% in 1996),
increased $241 to $1,844 in 1997 from $1,603 in 1996. Net income increased as a
percentage of total revenue to 1.4% in 1997 from 1.3% in 1996.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of the company's last eight quarters and, in the opinion of
management, includes all adjustments (consisting of only normal recurring
adjustments) which the company considers necessary for a fair presentation of
the information set forth therein. The company's quarterly results may vary
significantly depending on factors such as the timing of large customer orders,
timing of new product introductions, adequacy of product supply, variations in
the company's product costs, variations in the company's product mix, promotions
by the company, seasonal influences and competitive pricing pressures.
Furthermore, the company generally experiences a higher volume of product orders
in its Information Technology business segment in the fourth quarter, which the
company attributes to year-end capital spending by some of its customers. Any
decrease in the number of year-end orders experienced by the company may not be
offset by increased revenues in the company's first three quarters. The results
of any particular quarter may not be indicative of results for the full year or
any future period.
1997 1998
(In thousands, except per share amounts)
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Revenue
Information Technology. $25,213 $30,358 $30,463 $35,585 $30,644 $37,509 $41,750 $46,676
Telecom Systems........ 953 1,284 801 2,365 1,072 1,818 2,302 2,307
CTI Software........... 427 597 650 471 826 513 723 1,033
Total 26,593 32,239 31,914 38,421 32,542 39,840 44,775 50,016
Cost of sales and service
Information Technology. 21,877 26,089 26,741 31,205 26,317 32,581 36,139 43,226
Telecom Systems........ 650 951 618 1,772 900 1,031 1,753 1,489
CTI Software........... 235 272 418 298 515 278 319 491
Total 22,762 27,312 27,777 33,275 27,732 33,890 38,211 45,206
Gross Profit
Information Technology. 3,336 4,269 3,722 4,380 4,327 4,928 5,611 3,450
Telecom Systems........ 303 333 183 593 172 787 549 818
CTI Software........... 192 325 232 173 311 235 404 542
Total 3,831 4,927 4,137 5,146 4,810 5,950 6,564 4,810
Selling, general and
administrative expenses
Information Technology. 2,607 3,031 2,773 3,020 3,634 4,431 5,067 5,654
Telecom Systems........ 344 518 351 646 568 583 863 749
CTI Software........... 184 290 315 307 374 450 395 654
Total............. 3,135 3,839 3,439 3,973 4,576 5,464 6,325 7,057
Operating Income (loss)
Information Technology. 729 1,238 949 1,360 693 497 544 (2,204)
Telecom Systems........ (41) (185) (168) (53) (396) 204 (314) 69
CTI Software........... 8 35 (83) (134) (63) (215) 9 (112)
Total $ 696 $ 1,088 $ 698 $ 1,173 $ 234 $ 486 $ 239 $(2,247)
Interest expense (net of
other income 289 309 82 5 28 51 95 177
Income (loss) before
Provision (benefit) for
income taxes......... 407 779 616 1,168 206 435 144 (2,424)
Provision (benefit) for
income taxes......... 154 310 237 425 82 165 57 (845)
Net income (loss) $ 253 $ 469 $ 379 $ 743 $ 124 $ 270 $ 87 $ (1,579)
Net income (loss) per share
(Basic and Diluted).. $0.09 $0.17 $0.09 $0.17 $0.03 $0.06 $0.02 $ (0.37)
Liquidity and Capital Resources
Historically, the company has satisfied its cash requirements principally
through borrowings under its lines of credit and through operations. The company
maintains a cash position sufficient to pay only its immediately due obligations
and expenses. When the amount of cash available falls below its immediate needs
the company requests an advance under its credit facility. As the company's
total revenue has grown, the company has obtained increases in its available
lines of credit to enable it to finance its growth. The company's working
capital was $2,291, $12,738 and $9,800 at December 31, 1996, 1997 and 1998,
respectively. The increase in working capital during 1997 was attributable to
the receipt of net proceeds from a public offering of the company's common stock
in July 1997 and net earnings. The decrease in working capital during 1998 was
primarily attributable to the net operating loss and capital expenditures. At
December 31, 1998, the company had total borrowing capacity under its credit
facility of approximately $30,000 as compared to $23,900 at December 31, 1997.
At December 31, 1998 the company had outstanding borrowings of $29,999 and,
thus, was fully borrowed against its credit facility based upon its collateral
base at that time. At December 31, 1998, the company had a $30,000 credit
facility with its primary lender, which was increased on a temporary basis to
$40,000 to accommodate an increased level of business. The company is seeking a
permanent increase in its credit facility to support a higher level of business.
As of December 31, 1998, the company was fully borrowed against its available
borrowing based due to the higher level of business during the fourth quarter.
The company expects an increased level of business in 1999 and to support an
increased level of business over the fourth quarter, the company will be
required to increase its borrowing base relative to the borrowing base as of
December 31, 1998. The company expects to accomplish this requirement by
improved asset management. If the company does not increase its borrowing base
it will not be able to significantly increase its level of revenue over that
which was realized in the fourth quarter.
Cash Flows
Operating activities provided net cash totaling $89 and $2,086 during 1996
and 1997, respectively, and used net cash totaling $10,831 during 1998. Net cash
provided during 1996, was due primarily to the combined effect of significantly
increased net income, a relatively small year-to-year increase in accounts
receivable and a year-to-year decrease in inventory. During 1997, net cash was
provided from operations due primarily to net income, increased levels of trade
accounts payable and accrued expenses which more than offset increases in
accounts receivable. During 1998, net cash was used by operations due primarily
to a net loss, a large increase in accounts receivable, an increase in
inventory, which was offset somewhat by an increase in accounts payable and
accrued expenses.
Accounts receivable increased $695, $8,999 and $9,377 during 1996, 1997
and 1998, respectively. Inventory decreased $545 and $162 in 1996 and 1997,
respectively, and increased $3,797 in 1998.
Investing activities used cash totaling $952, $992 and $1,764 during 1996,
1997 and 1998, respectively. The company's investing activities that used cash
during these periods were primarily related to capital expenditures related to
new offices, an expanded work force and upgrading of computing equipment and the
company's management information systems. During the next twelve months, the
company expects to incur an estimated $500 for capital expenditures. All or a
portion of the $500 in capital expenditures currently anticipated by the company
for such purposes are presently expected to be financed from net cash flow from
operations or borrowings under the company's line of credit. The actual amount
and timing of such capital expenditures may vary substantially depending upon,
among other things, the performance of certain of the company's recently opened
branch offices.
Financing activities provided cash totaling $63, $258 and $13,552 during
1996, 1997 and 1998, respectively. In July 1997, the company received $8,661 net
proceeds from the sale of Common Stock in a public offering. Those proceeds were
used to reduce the outstanding balance under the company's line of credit. The
primary source of cash from financing activities in other periods has been
borrowings on the company's lines of credit. The lines of credit have been used
principally to satisfy the company's cash requirements, including financing
increases in accounts receivable and inventory. During 1998, the company used
$834 to repurchase shares that were held in treasury at the end of 1998.
Asset Management
The company's cash flow from operations has been affected primarily by the
timing of its collection of accounts receivable. The company typically sells its
products and services on short-term credit terms and seeks to minimize its
credit risk by performing credit checks and conducting its own collection
efforts. The company had accounts receivable, net of allowance for doubtful
accounts, of $16,517, $25,516 and $34,893 at December 31, 1996, 1997 and 1998,
respectively. The number of days' sales outstanding in trade accounts receivable
was 40 days, 60 days and 67 days for years 1996, 1997 and 1998, respectively.
The increase in days' sales outstanding was caused by a general slow down in
payments by the company's customers. Bad debt expense as a percentage of total
revenue for the same periods was 0.2%, 0.2% and 0.2%. The company's allowance
for doubtful accounts, as a percentage of accounts receivable, was 1.3%, 1.0%
and 1.0% at December 31, 1996, 1997 and 1998, respectively.
The company attempts to manage 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 have in the past generally provided price
protection, which reduces the company's exposure to decreases in prices, but
during 1998 most major product manufacturers reduced or largely eliminated price
protection. The company's suppliers generally allow for some levels of returns
of excess inventory, which, on a limited basis, are made without material
restocking fees. During 1998, the Companies suppliers generally became more
restrictive in their policies regarding product return privileges. Inventory
turnover for 1996, 1997 and 1998 was 19.2 times, 21.5 times, and 22.0 times,
respectively.
Credit Facilities
On February 27, 1998 the company executed agreements with Deutsche
Financial Services ("DFS") for a revolving line of credit (the "DFS Facility")
which replaced the company's prior primary credit facility as the company's
principal source of liquidity. The company's prior primary credit facility with
IBM Credit Corporation ("IBMCC") was converted into a credit facility for the
purchase of IBM branded computer products (the "IBMCC Facility").
The total credit available under the DFS Facility is $30,000, subject to
borrowing base limitations which are generally computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory. Credit
available under the DFS Facility for floor plan financing of inventory from
approved manufacturers (the "Inventory Line") is $20,000. Available credit under
the DFS Facility, net of Inventory Line advances, is $10,000, which is used by
the company primarily to carry accounts receivable and for other working capital
and general corporate purposes (the "Accounts Line"). Borrowings under the
Accounts Line bear interest at the fluctuating prime rate minus 1.0% per annum.
Under the Inventory Line, DFS pays the company's inventory vendors directly,
generally in exchange for negotiated financial incentives. Typically, the
financial incentives received are such that DFS does not charge interest to the
company until 40 days after the transaction is financed, at which time the
company is required to either pay the full invoice amount of the inventory
purchased from corporate funds or to borrow under the Accounts Line for the
amount due to DFS. Inventory Line advances not paid within 40 days after the
financing date bear interest at the fluctuating prime rate plus 5.0%. For
purposes of calculating interest charges the minimum prime rate under the DFS
Facility is 7.0%. DFS may change the computation of the borrowing base and
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 DFS Facility is collateralized by a security interest in substantially
all of the company's assets, including its accounts receivable, inventory,
equipment and bank accounts. Collections of the company's accounts receivable
are required to be applied through a lockbox arrangement to repay indebtedness
to DFS; however, DFS has amended the lockbox agreement to make such arrangements
contingent upon certain financial ratios. Provided the company is in compliance
with its debt to tangible net worth covenant, the company has discretion over
the use and application of the funds collected in the lockbox. If the company
exceeds that financial ratio, DFS may require that lockbox payments be applied
to reduce the company's indebtedness to DFS. If in the future DFS requires that
all lockbox payments be applied to reduce the company's indebtedness, the
company would be required to seek funding from DFS or other sources to meet
substantially all of its cash needs. The DFS agreement contains restrictive
covenants which, among other things, require specific ratios of current assets
to current liabilities and debt to tangible net worth and require Allstar to
maintain a minimum tangible net worth. The terms of the agreement also prohibits
the payment of dividends and other similar expenditures, including advances to
related parties.
The IBMCC Facility is a $2,000 credit 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 the invoice for
inventory financed through IBMCC is required to be paid by the company. Amounts
remaining outstanding thereafter bear interest at the fluctuating prime rate
(but not less than 6.5%) plus 6.0%. IBMCC retains a security interest in the
inventory financed. The 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.
Year 2000 Issue
The Year 2000 problem generally results from the use in computer hardware
and software of two digits rather than four digits to define the applicable
year. When computers must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. For example, a date represented by "00" may be interpreted
by the system as referring to the year 1900 rather than 2000. The effects of the
Year 2000 problem can be exacerbated by the interdependence of computer and
telecommunications systems in the United States and throughout the world. This
interdependence can affect the company and its suppliers, trading partners, and
customers ("outside entities"). The following are some of the identified risks
related to the Year 2000 problem:
Shortage of Resources. Between now and the year 2000 it is anticipated that
there will be increased competition for people with technical and managerial
skills necessary to deal with the Year 2000 problem. Both the company and
outside entities could face an inability to attract and/or keep personnel with
the necessary skills to solve and/or mitigate problems related to the Year 2000
problem.
Potential Shortcomings. The company estimates that its mission-critical
systems will be Year 2000-ready substantially before January 1, 2000. However,
there is no assurance that the Y2K Plan will succeed in accomplishing its
purpose, or that unforeseen circumstances will not arise during implementation
of the Project that would materially adversely affect the company.
Cascading Effect. The company is taking reasonable steps to identify,
assess and, where appropriate, to replace devices that contain embedded
microprocessors that cannot be determined to be warranted by the manufacturer to
be Year 2000-ready. Despite these reasonable efforts, the company anticipates
that it will not be able to find and remediate all embedded microprocessors in
all systems. Further, it is anticipated that outside entities also will not be
able to find and remediate all embedded microprocessors in their systems. Some
of the disruptions, failures or errors may spread from the systems in which they
are located, including from systems of outside entities, to other of the
company's systems causing adverse effects upon the company's ability to maintain
safe operations, to serve its customers and otherwise to fulfill certain
contractual and other legal obligations.
Third Parties. The company cannot assure that suppliers upon which it
depends for essential goods and services, or customers upon which it depends for
revenue and for timely payment of amounts due to the company, will convert and
test their mission-critical systems and processes in a timely manner. Failure or
delay by all or some of these entities, including federal, state or local
governments, could create substantial disruptions which could have a material
adverse effect on the company's business.
State of Readiness:
The company's board of directors has been briefed about the Year 2000
problem. The board of directors has adopted a Year 2000 project (the "Y2K Plan")
aimed at preventing the company's mission-critical functions from being impaired
due to the year 2000 problem. "Mission-critical" functions are those critical
functions whose loss would cause an immediate stoppage or significant impairment
to core business processes.
The company's Vice President of Information Systems is supervising the
implementation of the Y2K Plan. The company is actively implementing the Y2K
Plan, which will be modified as events warrant. Under the plan, the company has
inventoried all of the computer systems and the telephone system at its
corporate offices. The company is upgrading all computer and software systems
that cannot be verified as warranted by the system's manufacturer to be Year
2000 compliant. The company's corporate offices telephone system is warranted by
the manufacturer to be Year 2000 compliant. During the second quarter of 1999,
the company will complete an inventory of all computers, software and telephone
systems used in its branch offices and will upgrade or replace any systems that
cannot be verified as warranted by the system's manufacturer to be Year 2000
compliant.
The company's Y2K Plan recognizes that the computer, telecommunications and
other systems of outside entities have the potential for major,
mission-critical, adverse effects on the conduct of company business. The
company does not have control of these outside entities or outside systems;
however, the company's Y2K Plan includes attempting to verify the readiness of
those outside entities or outside systems which might possibly have a material
adverse effect on the company's business by contacting those outside entities to
determine their readiness and to coordinate with those outside entities to
mitigate the possibility of an interruption of any mission-critical process. The
company will, throughout 1999, attempt to evaluate the readiness of any outside
systems which might possibly create a material adverse effect on any
mission-critical process.
It is important to recognize that the processes of inventorying, assessing,
analyzing, converting (where necessary), testing, and developing contingency
plans for mission-critical items in anticipation of the Year 2000 event may be
iterative processes, requiring a repeat of some or all of these processes as the
company learns more about the Year 2000 problem and its effects on the internal
business information systems and on outside systems, and about the effects of
embedded microprocessors on systems and business operations. The company
anticipates that it will continue with these processes through January 1, 2000
and on into the year 2000 in order to assess and remediate problems that
reasonably can be identified only after the start of the new century.
Costs to Address Year 2000 Issues:
The company has not incurred substantial historical costs for Year 2000
awareness, inventory, assessment, analysis, conversion, testing, or contingency
planning and anticipates that any future costs for these purposes, including
those for implementing Year 2000 contingency plans, are not likely to be
substantial. The company has incurred expenditures, as part of an overall
upgrading of its computer and telecommunications systems, during 1998 and
through 1999 to date. The company has also recognized higher expenditures in
managing its information and telecommunications systems as staff members have
expended time and resources evaluating the company's Year 2000 readiness and
implemented required changes. It is difficult to assess the additional
expenditures over and above what would have been expended under normal
circumstances, but the company estimates that it incurred expenditures of
approximately $300 over and above that which would have been incurred were it
not for the Year 2000 issue. The company currently believes that the additional
expenditures specifically related to preparing for the Year 2000 issue will not
be significant. Although the company believes that its estimates are reasonable,
there can be no assurance that the costs of implementing the Y2K Plan will not
differ materially from the estimated costs or that the company will not be
materially adversely affected by year 2000 issues.
Worst Case Scenario:
The Securities and Exchange Commission requires that public companies must
forecast the most reasonably likely worst case Year 2000 scenario, assuming that
the company's Year 2000 plan is not effective. Analysis of the most reasonably
likely worst case Year 2000 scenarios the company may face leads to
contemplation of the following possibilities which, though considered highly
unlikely, must be included in any consideration of worst cases: widespread
failure of electrical, natural gas, and similar supplies by utilities serving
the company; widespread disruption of the services of communications common
carriers; similar disruption to means and modes of transportation for the
company and its employees, contractors, suppliers, and customers; significant
disruption to the company's ability to gain access to, and continue working in,
office buildings and other facilities; the failure of substantial numbers of
mission-critical hardware and software computer systems, including both internal
business systems and other systems (such as those with embedded
microprocessors); and the failure of outside systems, the effects of which would
have a cumulative material adverse impact on the company's mission-critical
systems. Among other things, the company could face substantial claims by
customers for loss of revenues due to service level interruptions, inability to
fulfill contractual obligations, inability to account for certain revenues or
obligations or to bill customers or pay vendors accurately and on a timely
basis, and increased expenses associated with litigation, stabilization of
operations following mission-critical failures, and the execution of contingency
plans. The company could also experience an inability by customers, and others
to pay, on a timely basis or at all, obligations owed to the company. The
company's suppliers may not be able to deliver goods and services required by
the company. Under these circumstances, the adverse effect on the company, and
the diminution of company revenues, could be material, although not quantifiable
at this time. Further in this scenario, the cumulative effect of these failures
could have a substantial adverse effect on the economy, domestically and
internationally. The adverse effect on the company, and the diminution of
company revenues, from a domestic or global recession or depression also could
be material, although not quantifiable at this time. The company will continue
to monitor business conditions with the aim of assessing and quantifying
material adverse effects, if any, that result or may result from the Year 2000
problem.
As part of its Y2K Plan, the company is developing contingency plans that
deal with, among others, two primary aspects of the year 2000 problem: (i) that
the company, despite its good-faith, reasonable efforts, may not have
satisfactorily remediated all internal, mission-critical systems; and (ii) that
systems of outside entities may not be Year 2000 ready, despite the company's
good-faith, reasonable efforts to work with outside entities. These contingency
plans are being designed to mitigate the disruptions or other adverse effects
resulting from Year 2000 incompatibilities regarding these mission-critical
functions or systems, and to facilitate the early identification and remediation
of mission-critical Year 2000 problems that first manifest themselves after
January 1, 2000.
These contingency plans will contemplate an assessment of all
mission-critical internal information and communications technology systems and
internal operational systems that use computer-based controls and any
recognizable potential outside entities or systems which might possibly have a
material adverse affect on any mission-critical processes. This process will be
pursued continuously into the Year 2000 as circumstances require.
These contingency plans will include the creation, as deemed reasonably
appropriate, of teams that will be standing by on the eve of the new millennium,
prepared to respond rapidly and otherwise as necessary to mitigate any problems
with mission-critical processes as soon as they become known.
Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, were issued by the FASB
in June 1997. In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosure about Pensions and Other Postretirement Benefits. These Statements
became effective for the current fiscal year. The company does not have any
items that constitute other comprehensive income for the year ended December 31,
1998, as identified by SFAS No. 130. Consequently it did not include a statement
of comprehensive income as part of its financial statements. SFAS No. 131 was
adopted by the company during 1998 and the segment disclosure requirements have
been incorporated in the notes to the financial statements with prior period
information being restated. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans and is an amendment of SFAS No.
87, 88, and 106. This statement does not have an impact on the company's 1998
financial statements
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the FASB. SFAS No. 133 is effective for fiscal
years beginning after January 1, 2000. This statement will not have any effect
on the 1998 financial statements. Management is evaluating what impact, if any,
the adoption of this statement may have, and additional disclosures may be
required when this statement is implemented.
In March 1998, the Accounting Standards Committee ("AcSEC") issued
Statement of Position ("SOP") No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This Statement provides
guidance on accounting for costs of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for fiscal years beginning after
December 15, 1998. In April 1998, SOP N0. 98-5, Reporting on the Costs of
Start-Up Activities, was issued by AcSEC. This Statement provides guidance on
determining what constitutes a start-up activity and requires that the costs of
these start-up activities be expensed as incurred. These two Statements will be
implemented by the company in the year ending December 31, 1999, should the
circumstances arise.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The company incurs certain market risks related to interest rate variations
because the company holds floating rate debt. Based upon the average amount of
debt outstanding during 1998, a one-percent increase in interest rates paid by
the company on its debt would have resulted in an increase in interest expense
of approximately $57 for the year.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Independent Auditors' Report....................................... 25
Consolidated Balance Sheets as of December 31, 1997 and 1998....... 26
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998............................... 27
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998......................... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998............................... 29
Notes to Consolidated Financial Statements for the years ended
December 31, 1996, 1997 and 1998............................... 30
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Allstar Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Allstar
Systems, Inc. and subsidiaries ("Allstar") at December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of Allstar's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Allstar at December 31, 1997
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Houston, Texas
March 31, 1999
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998 (In thousands,
except share and per share amounts) .........
ASSETS 1997 1998
Current Assets:
Cash and cash equivalents:
Restricted cash $ 280 0
Cash 1,301 $ 2,538
Total cash and cash equivalents 1,581 2,538
Accounts receivable, net 25,516 34,893
Accounts receivable - affiliates 434 373
Inventory 4,700 8,497
Deferred taxes 212 431
Income taxes receivable 0 637
Other current assets 318 559
Total current assets 32,761 47,928
Property and equipment, net 2,013 2,902
Other assets 81 198
$ 34,855 $ 51,028
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,572 $ 15,958
Accounts payable 14,562 16,641
Accrued expenses 3,565 5,273
Income taxes payable 82 0
Deferred service revenue 242 256
Total current liabilities 20,023 38,128
Deferred credit - Stock warrants 195 195
Commitments and Contingencies (See Note 9)
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,
4,454,411 and 4,503,411 issued at December 31,
1997 and 1998, respectively 45 45
Additional paid in capital 10,013 10,196
Unearned equity compensation (86) (269)
Treasury stock, 271,200 shares, at cost 0 (834)
Retained earnings 4,665 3,567
Total stockholders' equity $ 14,637 $ 12,705
$ 34,855 $ 51,028
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands, except share and per share amounts)
Years ended December 31,
1996 1997 1998
Total revenue $ 120,359 $ 129,167 $ 167,173
Cost of goods and services 104,302 111,126 145,039
Gross profit 16,057 18,041 22,134
Selling, general and administrative
expenses 12,284 14,386 23,422
Operating income (loss) 3,773 3,655 (1,288)
Interest expense (net of other income) 1,183 685 351
Income (loss) before provision (benefit)
for income taxes 2,590 2,970 (1,639)
Provision (benefit) for income taxes 987 1,126 (541)
Net income (loss) $ 1,603 $ 1,844 $ (1,098)
Net income (loss) per share:
Basic $ 0.60 $ 0.52 $ (0.25)
Diluted $ 0.60 $ 0.52 $ (0.25)
Weighted-average number of shares outstanding:
Basic 2,675,000 3,519,821 4,345,883
Diluted 2,675,000 3,526,787 4,345,883
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands, except share and per share amounts)
$.01 par value No par value Additional Unearned
Common Stock Common Stock Paid-In Treasury Equity Retained
Shares Amount Shares Amount Capital Stock Compensation Earnings Total
Balance at January 1, 1996 328,125 $ 2 $ 1,504 $ 1,218 $ 2,724
Issuance of common stock
on conversion 2,675,000 $ 27 (328,125) (2) (25)
Net income 1,603 1,603
Balance at December 31, 1996 2,675,000 27 1,479 2,821 4,327
Sale of common stock, net of
initial public offering
expenses of $2,040 1,765,125 18 8,448 8,466
Issuance of restricted stock 14,286 86 (86)
Net income 1,844 1,844
Balance at December 31, 1997 4,454,411 45 10,013 (86) 4,665 14,637
Issuance of restricted stock 63,500 237 (237)
Cancellation of restricted stock (14,500) (54) 54
Purchase of treasury stock (271,200) (834) (834)
Net loss (1,098) (1,098)
Balance at December 31, 1998 4,232,211 $ 45 $ 0 $ 0 $10,196 $ (834) $ (269) $3,567 $ 12,705
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands, except share and per share amounts)
Years ended December 31,
1996 1997 1998
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 1,603 $ 1,844 $ (1,098)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Gain on disposal of assets (11) (7)
Depreciation and amortization 305 623 882
Deferred tax provision (92) 138 (219)
Changes in assets and liabilities
that provided (used) cash:
Accounts receivable, net (695) (8,999) (9,377)
Accounts receivable - affiliates 153 (294) 61
Inventory 545 162 (3,797)
Income taxes receivable (637)
Other current assets (507) (144) (241)
Other assets 311 (117)
Accounts payable (492) 7,817 2,079
Accrued expenses (598) 806 1,708
Income taxes payable (77) (124) (82)
Deferred service revenue (45) (54) 14
Net cash provided by
(used in) operating activities 89 2,086 (10,831)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (965) (992) (1,774)
Proceeds from sale of fixed assets 13 10
Net cash used in investing activities (952) (992) (1,764)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (834)
Net proceeds on sale of common stock 8,661
Net increase (decrease) in notes payable 63 (8,403) 14,386
Net cash provided from financing activities 63 258 13,552
NET (DECREASE) INCREASE CASH AND CASH EQUIVALENTS (800) 1,352 957
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,029 229 1,581
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 229 $ 1,581 $ 2,538
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,140 $ 958 $ 403
Cash paid for income taxes $ 1,138 $ 1,032 $ 397
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allstar Systems, Inc. and subsidiaries ("Allstar") is engaged in the sale
and service of computer and telecommunications hardware and software products.
During 1995 Allstar formed and incorporated Stratasoft, Inc., a wholly-owned
subsidiary, to create and market software related to the integration of computer
and telephone technologies. In January 1997, Allstar formed IT Staffing Inc., a
wholly-owned subsidiary, to provide temporary and permanent placement services
of technical personnel. In March 1998 Allstar formed Allstar Systems Rio Grande,
Inc., a wholly-owned subsidiary to engage in the sale and service of computer
products in western Texas and New Mexico.
A substantial portion of Allstar's sales and services are authorized under
arrangements with product manufacturers. Allstar's operations are dependent upon
maintaining its approved status with such manufacturers. As a result of these
arrangements and arrangements with its customers, gross profit could be limited
by the availability of products or allowance for volume discounts. Furthermore,
net income before income taxes could be affected by changes in interest rates
which underlie the credit arrangements which are used for working capital (see
Note 4).
Allstar's significant accounting policies are as follows:
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Allstar Systems, Inc. and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Inventory - Inventory consists primarily of personal computers and
components and is valued at the lower of cost or market with cost determined on
the first-in first-out method.
Property and Equipment - Property and equipment are recorded at cost.
Expenditures for repairs and maintenance are charged to expense when incurred,
while expenditures for betterments are capitalized. Disposals are removed at
cost less accumulated depreciation with the resulting gain or loss reflected in
operations in the year of disposal.
Property and equipment are depreciated over their estimated useful lives
ranging from five to ten years using the straight-line method. Depreciation
expense totaled $304, $620, and $833 for the years ended December 31, 1996, 1997
and 1998, respectively.
Impairment of Long-Lived Assets - Allstar records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
Federal Income Taxes - Allstar accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS"), No. 109 "Accounting for
Income Taxes" issued by the Financial Accounting Standards Board ("FASB"). SFAS
No. 109 requires the recognition of deferred tax assets and liabilities for
differences between the financial reporting and bases of assets and liabilities.
Earnings per Share - In accordance with the provisions of SFAS No. 128,
"Earnings Per Share," basic net income per share is computed on the basis of the
weighted-average number of common shares outstanding during the periods. Diluted
net income per share is computed based upon the weighted-average number of
common shares plus the assumed issuance of common shares for all potentially
dilutive securities using the treasury stock method.
Revenue Recognition - Revenue from the sale of computer products is
recognized when the product is shipped. Service income is recognized ratably
over the service contract life. Revenues resulting from installations of
equipment for which duration is in excess of three months are recognized using
the percentage-of-completion method. The percentage of revenue recognized on
each contract is based on the most recent cost estimate available. Revisions of
estimates are reflected in the period in which the facts necessitating the
revisions become known; when a contract indicates a loss, a provision is made
for the total anticipated loss. At December 31, 1996 Allstar had no such
contracts in process. At December 31, 1997, Allstar had $868 of such contracts
in progress and $401 of revenue has been deferred together with $197 of costs
related to those revenues. At December 31, 1998, Allstar had $3,682 of such
contracts in progress and $1,567 of revenue has been deferred together with $826
of cost related to those revenues.
Research and Development Costs - Expenditures relating to the development
of new products and processes, including significant improvements and
refinements to existing products, are expensed as incurred. The amounts charged
to expense were $96, $157 and $250 in the years ended December 31, 1996, 1997
and 1998, respectively.
Fair Value of Financial Instruments - Allstar's financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable and
notes payable for which the carrying values approximate fair values given the
short-term maturity of the instruments. It is not practicable to estimate the
fair values of related-party receivables due to the nature of the instruments.
Cash and Cash Equivalents - Cash and cash equivalents include any highly
liquid debt instruments with a maturity of three months or less when purchased.
See Note 4 for discussion of restricted cash.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Accounting Pronouncements - SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, were issued by the FASB in June 1997. In February 1998, the FASB
issued SFAS No. 132, Employers' Disclosure about Pensions and Other
Postretirement Benefits. These three Statements became effective for the current
fiscal year. Allstar does not have any items that constitute other comprehensive
income for the year ended December 31, 1998, as identified by SFAS No. 130.
Consequently it did not include a statement of comprehensive income as part of
its financial statements. SFAS No. 131 was adopted by Allstar during 1998 and
the segment disclosure requirements have been incorporated in these financial
statements with prior period information being restated. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans and
is an amendment of SFAS No. 87, 88, and 106. This statement does not have an
impact on the 1998 financial statements.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the FASB. SFAS No. 133 is effective for fiscal
years beginning after January 1, 2000. Management is evaluating what impact, if
any, and additional disclosures may be required when this statement is
implemented.
In March 1998, the Accounting Standards Committee ("AcSEC") issued
Statement of Position ("SOP") No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This Statement provides
guidance on accounting for costs of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for fiscal years beginning after
December 15, 1998. In April 1998, SOP No. 98-5, Reporting on the Costs of
Start-Up Activities, was issued by AcSEC. This Statement provides guidance on
determining what constitutes a start-up activity and requires that the costs of
these start-up activities be expensed as incurred. These two Statements will be
implemented by Allstar in the year ending December 31, 1999, should the
circumstances arise.
Reclassifications - The accompanying consolidated financial statements for
the years presented have been reclassified to give retroactive effect to certain
changes in presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1997 and
1998:
1997 1998
Accounts Receivable...................... $25,765 $35,251
Allowances for doubtful accounts......... (249) (358)
Total........................... $25,516 $34,893
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and
1998:
1997 1998
Equipment $ 339 $ 502
Computer equipment 2,870 4,218
Furniture and fixtures 316 442
Leasehold improvements 55 138
Vehicles 105 27
$ 3,685 5,327
Accumulated depreciation and amortization (1,672) (2,425)
Total $ 2,013 $ 2,902
4. CREDIT ARRANGEMENTS
On February 27, 1998 Allstar entered into a credit agreement with a
commercial finance company. The total credit available under the credit facility
is $30,000, subject to borrowing base limitations which are generally computed
as a percentage of various classes of eligible accounts receivable and
qualifying inventory. Credit available under the facility for floor plan
financing of inventory from approved manufacturers (the "Inventory Line") is
$20,000. Available credit under the facility, net of Inventory Line advances, is
$10,000, which is used by Allstar primarily to carry accounts receivable and for
other working capital and general corporate purposes (the "Accounts Line").
Borrowings under the Accounts Line bear interest at the fluctuating prime rate
minus 1.0% per annum. Under the Inventory Line interest accrues at prime rate,
which for purposes of this agreement will not fall below 7.0%, plus 5.0% for
outstanding balances over 40 days.
This agreement, which continues in full force and effect for 36 months or
until terminated by 30 day written notice from the lender and may be terminated
upon 90 days notice by Allstar, subject to a termination fee, is collateralized
by substantially all of Allstar's assets. The agreement contains restrictive
covenants which, among other things, require specific ratios of current assets
to current liabilities and debt to tangible net worth and require Allstar to
maintain a minimum tangible net worth. The terms of the agreement also prohibit
the payment of dividends and limit the purchase of Allstar common stock, and
other similar expenditures, including advances to related parties.
Allstar also maintains a $2,000 revolving credit line with another
commercial finance company to floor plan inventory. This line of credit accrues
interest at prime (but not less than 6.5%) plus 6% (13.75% at December 31, 1998)
for all outstanding balances over 30 days.
The credit facilities at December 31, 1997 required that all payments
received from customers on pledged accounts receivable be applied to the
outstanding balance on the Accounts Line. Accordingly, accounts receivable
payments received in the amount of $280 at December 31, 1997, but not yet
applied to the line of credit, are shown as restricted cash in the accompanying
balance sheet.
The combined borrowing base under all credit arrangements was $23,871 and
$29,999 at December 31, 1997 and 1998, respectively. The weighted-average
interest rate for borrowings under all credit arrangements in effect during
1996, 1997 and 1998 was 10.25%, 10.50% and 7.53%, respectively.
5. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 consisted of the following:
1996 1997 1998
Current provision (benefit):
Federal......................... $ 962 $ 848 $ (325)
State........................... 117 140 3
Total current provision............ 1,079 988 (322)
Deferred provision................. (92) 138 (219)
Total..................... $ 987 $1,126 $ (541)
The total provision for income taxes during the years ended December 31,
1996, 1997 and 1998 varied from the U.S. federal statutory rate due to the
following:
1996 1997 1998
Federal income tax at statutory rate.... $ 907 $ 1,010 $ (557)
Nondeductible expenses.................. 17 24 26
State income taxes...................... 77 92 (10)
Other ............................... (14)
Total..................... $ 987 $ 1,126 $ (541)
Deferred tax assets computed at the statutory rate related to temporary
differences at December 31, 1997 and December 31, 1998 were as follows:
1997 1998
Deferred tax assets:
Accounts receivable............ $ 149 $ 242
Closing and severance costs.... 60
Deferred service revenue....... 41 62
Inventory...................... 22 67
Total deferred tax assets. $ 212 $ 431
Management believes that the realization of the deferred tax assets is more
likely than not, based upon the expectation that Allstar can utilize a tax loss
carry back. A valuation allowance has not been deemed necessary by management.
6. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1997 and
1998:
1997 1998
Sales tax payable $ 1,922 $ 2,253
Accrued employee benefits, payroll
and other related costs 962 1,736
Accrued interest 47 94
Other 634 1,190
Total $ 3,565 $ 5,273
7. FRANCHISE FEES
Allstar entered into an agreement in May 1989 whereby it became a franchise
of Inacom Corp. ("Inacom"). Annual fees, amounting to 0.05% of certain gross
sales, were expensed in the period incurred. Allstar obtained a waiver effective
January 1, 1995, which eliminated the payment of franchise fees.
Allstar entered into an agreement in August 1996 in which Allstar is
required to purchase at least 80% of its computer products from Inacom if such
are available within a reasonable period of time at reasonably competitive
prices. The agreement expires on December 31, 2001 and automatically renews for
successive one-year periods. A cancellation fee of $571 will be payable by
Allstar in the event of non-renewal or early termination of the agreement by
either party; however, Allstar does not anticipate termination to occur by
either party prior to the initial termination date. Allstar is accruing this
cancellation fee over the initial agreement period by an approximate $9 monthly
charge to earnings. For the years December 31, 1996, 1997 and 1998, Allstar
charged to expense $44, $105 and $105, respectively, related to this agreement.
8. SHAREHOLDERS' EQUITY
In October 1996, Allstar completed a reincorporation in order to change its
state of domicile to Delaware, to authorize 50,000,000 shares of $.01 par value
common stock and to authorize 5,000,000 shares of $.01 par value preferred
stock. The reincorporation had the effect of an 8.15-for-1 split of Allstar's
common stock. All applicable share and per share data in the consolidated
financial statements and related notes give effect to this reincorporation and
resulting stock conversion. During 1998 the shareholders of Allstar approved a
reduction in the number of authorized shares of common stock from 50,000,000 to
15,000,000.
On October 23, 1997, the Board of Directors (the "Board") authorized the
purchase of up to an aggregate maximum of 100,000 shares of common stock of
Allstar from time to time in the open market to be held in treasury for the
purpose of, but not limited to, fulfilling any obligations arising under
Allstar's stock option plans. Again, on September 8, 1998, the Board authorized
the purchase of an additional 200,000 shares for the same purpose. At December
31, 1998, 271,200 shares were held in treasury under these authorizations.
Allstar issued 14,286 common shares and 63,500 common shares of restricted
stock in 1997 and 1998, respectively and cancelled 14,500 common shares of
restricted stock during 1998. These restricted shares had par value of $0.01 per
share. The 14,286 shares, valued at $86, vest at the end of a two year period
while the 49,000 shares (63,500 less the 14,500 cancelled shares), valued at
$183, vest ratably at the end of each one year period over a five year period
from the date of issuance.
During 1997, Allstar issued warrants to purchase 176,750 common shares at
$9.60 per share to underwriters in connection with a public offering of common
stock. The warrants expire on July 7, 2002.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases - Allstar subleases office space from Allstar Equities,
Inc. ("Equities"), a Allstar wholly owned by the principal stockholder of
Allstar. In 1996, Allstar renewed its office sublease with monthly rental
payments of $32 in 1997 and $33 in 1998, plus certain operating expenses through
December 1998. Such sublease has been extended through December 31, 1999. Rental
expense under this agreement amounted to approximately $372, $378 and $390
during years ended December 31, 1996, 1997 and 1998, respectively. This
agreement requires a minimum annual rental of $390 for the year ended December
31, 1999.
Additionally, minimum annual rentals on other operating leases amount to
approximately $488 in 1999, $420 in 2000, $250 in 2001, $239 in 2002, $179 in
2003, and $514 in years thereafter. Amounts paid during the years ended December
31, 1996, 1997 and 1998 under such agreements totaled approximately $252, $142
and $509 respectively.
Benefit Plans - Allstar maintains a group medical and hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims exceeding $30 per employee or a cumulative maximum of approximately
$577 per year are insured by an outside insurance company. Allstar's claim and
premium expense for this self-insurance program totaled approximately $193,
$684, and $581 for the years ended December 31, 1996, 1997, and 1998,
respectively.
Allstar maintains a 401(k) savings plan wherein Allstar matches a portion
of the employee contribution. In addition, Allstar has a discretionary matching
fund based on the net profitability of Allstar. All full-time employees who have
completed 90 days of service with Allstar are eligible to participate in the
plan. Declaration of the discretionary portion of the matching fund is the
decision of the Board of Directors. Allstar has made no additional contributions
to the plan for the years ended December, 1997 or 1998, but however, did elect
to do so in 1996 when Allstar contributed an additional $136 to the plan. Under
the standard Allstar matching program Allstar match was $72, $24, and $45 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Allstar has filed under the Internal Revenue Service Walk-in Closing
Agreement Program (the "Program") to negotiate a settlement regarding the
qualified status of the 401(k) savings plan in order to meet the requirements of
Sections 401(a) of the Internal Revenue Code. Under the Program, any sanction
amount negotiated is based upon the total tax liability which could be assessed
if the plan were to be disqualified. At December 31, 1997 Allstar had accrued
$28 for the estimated settlement cost. In 1998, the Internal Revenue Service
accepted the settlement and Allstar paid $25.
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 material adverse effect on its results of
operations or financial position.
10. STOCK OPTION PLANS
In September 1996 Allstar adopted the 1996 Incentive Stock Plan (the
"Incentive Plan"') and the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan"). Under the Incentive Plan, Allstar's Compensation Committee may
grant up to 417,500 shares of common stock, which have been reserved for
issuance to certain 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. During 1997 Allstar granted options to purchase 20,000 common shares to
its directors, which vest immediately, and 180,300 common shares to its
employees, which vest over five years. During 1998, Allstar granted options to
purchase 8,000 common shares to its directors, which vest immediately, and
129,850 common shares to its employees, which vest over five years.
The plan's activity is summarized below:
1997 1998
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding at January 1....... 200,300 $ 5.17
Granted during the year................. 200,300 $ 5.17 137,850 3.13
Exercised during the year............... - - - -
Options canceled for repricing - - (260,350) 4.25
Option granted at new price - - 260,350 1.50
Canceled during the year................ - - (69,800) 4.50
Options outstanding at December 31...... 200,300 $ 5.17 268,350 $ 1.63
Options exercisable at December 31...... 20,000 $ 5.17 56,940 $ 1.63
Options outstanding price range......... $4.625.to.$6.00 $1.50 to $6.00
Options weighted-average remaining life. 9.7.Years 9.7 Years
Allstar applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for options granted under
the Plans. Accordingly, no compensation expense has been recognized. Had
compensation expense been recognized based on the Black-Scholes option pricing
model value at the grant date for awards consistent with SFAS No. 123, Allstar's
net income and earnings per share would have been reduced to the pro forma
amounts shown below. For purposes of estimating the fair value disclosures
below, the fair value of each stock option has been estimated on the grant date
or the grant repricing date with a Black-Scholes option pricing model using the
following weighted-average assumptions; dividend yield of 0%; expected
volatility of 179%; risk-free interest rate of 6.0%; and expected lives of eight
years from the original date of the stock option grants.
1997 1998
Net Income:
As reported................ $ 1,844 $ (1,098)
Pro forma.................. $ 1,815 $ (1,180)
Earnings per share (Basic)
As reported................ $ 0.52 $ (0.25)
Pro forma.................. $ 0.52 $ (0.27)
Earnings per share (Diluted)
As reported................ $ 0.52 $ (0.25)
Pro forma.................. $ 0.51 $ (0.27)
11. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year were as
follows:
1996 1997 1998
(Amounts in thousands except share and per share data)
Numerator:
Net income (loss).................. $1,603 $1,844 ($1,098)
Denominator:
Denominator for basic earnings per
Share - weighted-average shares
outstanding...................... 2,675,000 3,519,821 4,345,883
Effect of dilutive securities:
Shares issuable from assumed
conversion of common stock
options, warrants and
restricted stock................. 0 6,966 197,140
Denominator for diluted earnings per share. 2,675,000 3,526,787 4,543,023
Basic earnings per share................ $0.60 $0.52 $(0.25)
Diluted earnings per share.............. $0.60 $0.52 $(0.25)
The potentially dilutive options were not used in the calculation of diluted
earnings per share for the year ended December 31, 1998 since the effect of
potentially dilutive securities in computing a loss per share is antidilutive.
There were warrants to purchase 0, 176,750 and 176,750 shares of common stock
for 1996, 1997 and 1998, respectively, which were not included in computing the
effect of dilutive securities because the inclusion would have been
antidilutive.
There were 0, 200,300 and 8,000 options to purchase common stock for 1996, 1997
and 1998, respectively, which were not included in computing the effect of
dilutive securities because the inclusion would have been antidilutive.
12. SEGMENT INFORMATION
Allstar has three reportable segments: (1) Information Technology, (2)
Telecom Systems and (3) CTI Software. Information Technology includes products
and services relating to computer products and management information systems.
Telecom Systems includes products, installation and services relating to
telephone systems. CTI Software includes software products that facilitate
telephony and computer integration primarily for telemarketing and call center
applications. The accounting policies of the business segments are the same as
those described in Note 1. 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. Prior to 1998, Management did not
view accounts receivable by segment in their decision making.
For the year ended December 31, 1998:
Information Telecom CTI
Technology Systems Software Consolidated
Revenue ........................... $156,579 $ 7,499 $ 3,095 $167,173
Cost of goods sold.................. 138,263 5,173 1,603 145,039
Gross profit........................ 18,316 2,326 1,492 22,134
Selling, general and
administrative expense............ 18,786 2,763 1,873 23,422
Operating loss...................... (470) $ (437) $ (381) $ (1,288)
Less: interest expense and other... 351
Loss before provision for income taxes $ (1,639)
Accounts receivable................. $ 30,871 $ 3,704 $ 676 $ 35,251
Allowance for doubtful accounts..... (358)
Accounts receivable , net........... $ 34,893
For the year ended December 31, 1997:
Information Telecom CTI
Technology Systems Software Consolidated
Revenue ........................... $121,619 $ 5,403 $ 2,145 $129,167
Cost of goods sold.................. 105,912 3,991 1,223 111,126
Gross profit........................ 15,707 1,412 922 18,041
Selling, general and
administrative expense............ 11,431 1,859 1,096 14,386
Operating income (loss)............. $ 4,276 $ (447) $ (174) $ 3,655
Less: interest expense and other 685
Income before provision for income
taxes $ 2,970
For the year ended December 31, 1996:
Information Telecom CTI
Technology Systems Software Consolidated
Revenue ........................... $115,247 $ 3,824 $ 1,288 $120,359
Cost of goods sold.................. 101,067 2,465 770 104,302
Gross profit........................ 14,180 1,359 518 16,057
Selling, general and
administrative expense............ 10,459 1,163 662 12,284
Operating income (loss)............ $ 3,721 $ 196 $ (144) $ 3,773
Less: interest expense and other 1,183
Income before provision for income
taxes $ 2,590
13. RELATED-PARTY TRANSACTIONS
Allstar has from time to time made payments on behalf of Equities and
Allstar'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 $7, 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. Effective December 1, 1998 this note was extended
for a period of one year, with interest and principal becoming due on December
1, 1999. The principal amounts as of December 31, 1997 and December 31, 1998
were classified as Accounts receivable - affiliates based on the expectation of
repayment within one year. At December 31, 1997 and December 31, 1998, Allstar
receivables from these affiliates amounted to approximately $434 and $373,
respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
NONE
PART III
Item 10-13.
The Registrant incorporates the information required by Form 10-K, Items 10
through 13 by reference to Allstar's definitive proxy statement for its 1999
Annual Meeting of Shareholders which will be filed with the Commission prior to
April 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this report
(1) Consolidated Financial Statements - See Index to Consolidated
Financial Statements on Page 25
(2) Exhibits
Exhibits
Filed Herewith
Exhibit or Incorporated by
Number Description Reference to:
2.1 Plan and Agreement of Merger by and Between Exhibit 2.1 to Form
Allstar Systems, Inc, a Texas corporation and S-1 filed Aug. 8, 1996
Allstar Systems, Inc. a Deleware corporation
3.1 Bylaws of the Company Exhibit 3.1 to Form
S-1 filed Aug. 8, 1996
3.2 Certificate of Incorporation of the Company Exhibit 3.2 to Form
S-1 filed Aug. 8, 1996
4.1 Specimen Common Stock Certificate Exhibit 4.1 to Form
S-1 filed Aug. 8, 1996
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Exhibit 4.2 to Form
Incorporation and Bylaws of the Company defining the rights of the S-1 filed Aug. 8, 1996
holders of Common Stock.
10.1 Revolving Loan and Security Agreement by and between Exhibit 10.1 to Form
IBM Credit Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.2 Agreement for Wholesale Financing dated September 20, 1993, by Exhibit 10.2 to Form
and between ITT Commercial Finance Corp. and Allstar-Valcom, Inc. S-1 filed Aug. 8, 1996
10.3 Amendment to Agreement for Wholesale Financing dated Exhibit 10.3 to Form
October 25, 1994, by and between ITT Commercial Finance Corp. S-1 filed Aug. 8, 1996
and Allstar Systems, Inc.
10.4 Sublease Agreement by and between Allstar Equities and Allstar Exhibit 10.4 to Form
Systems, Inc. S-1 filed Aug. 8, 1996
10.5 Form of Employment Agreement by and between the Company and Exhibit 10.5 to Form
certain members of Management. S-1 filed Aug. 8, 1996
10.6 Employment Agreement dated September 7, 1995, by and between Exhibit 10.6 to Form
Stratasoft, Inc. and William R. Hennessy. S-1 filed Aug. 8, 1996
10.7 Assignment of Certain Software dated September 7, 1995, by Exhibit 10.7 to Form
International Lan and Communications, Inc. and Aspen System S-1 filed Aug. 8, 1996
Technologies, Inc. to Stratasoft, Inc.
10.8 Microsoft Solution Provider Agreement by and between Microsoft Exhibit 10.8 to Form
Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.9 Novell Platinum Reseller Agreement by and between Novell, Inc. Exhibit 10.9 to Form
and Allstar Systems, Inc.
S-1 filed Aug. 8, 1996
10.10 Allstar Systems, Inc. 401(k) Plan. Exhibit 10.10 to Form
S-1 filed Aug. 8, 1996
10.11 Allstar Systems, Inc. 1996 Incentive Stock Plan. Exhibit 10.11 to Form
S-1 filed Aug. 8, 1996
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan. Exhibit 10.12 to Form
S-1 filed Aug. 8, 1996
10.13 Primary Vendor Volume Purchase Agreement dated August 1, 1996 by Exhibit 10.13 to Form
and between Inacom Corp. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.14 Resale Agreement dated December 14, 1995, by and between Ingram Exhibit 10.14 to Form
Micro Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.15 Volume Purchase Agreement dated October 31, 1995, by and between Exhibit 10.15 to Form
Tech Data Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.16 Intelligent Electronics Reseller Agreement by and between Intelligent Exhibit 10.16 to Form
Electronics, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.17 MicroAge Purchasing Agreement by and between MicroAge Computer Exhibit 10.17 to Form
Centers, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.18 IBM Business Partner Agreement by and between IBM Exhibit 10.18 to Form
and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.19 Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized Exhibit 10.19 to Form
reseller dated August 6, 1996. S-1 filed Aug. 8, 1996
10.20 Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers Exhibit 10.20 to Form
by and between Hewlett-Packard Company and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.21 Associate Agreement by and between NEC America, Inc. and Exhibit 10.21 to Form
Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.22 Mitel Elite Dealer Agreement and Extension Addendum by and between Exhibit 10.22 to Form
Mitel, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.23 Dealer Agreement dated March 1, 1995, by and between Applied Voice Exhibit 10.23 to Form
Technology and Allstar Systems, Inc. S-1 filed Aug. 8, 1996
10.24 Industrial Lease Agreement dated March 9, 1996, by and between Exhibit 10.24 to Form
H-5 J.E.T. Ltd. as lessor and Allstar Systems, Inc. as lessee. S-1 filed Aug. 8, 1996
10.25 Lease Agreement dated June 24, 1992, by and between James J. Laney, Exhibit 10.25 to Form
et al. As lessors, and Technicomp Corporation and Allstar Services S-1 filed Aug. 8, 1996
Allstar Services as lessees.
10.26 Agreement for Wholesale Financing, Business Financing Agreement Form 10-K filed Mar.
and related agreements and correspondence by and between DFS Financia 31, 1998
Services and Allstar Systems, Inc., dated February 27, 1998
10.27 Sublease Agreement by and between X.O. Spec Corporation and Form 10-K filed Mar.
Allstar Systems, Inc. dated May 12, 1997 31, 1998
10.28 Lease Agreement dated May 14, 1998 by and between University Hill Plaza Form 10-K filed April
and Allstar Systems Rio Grande, Inc. 12, 1999
10.29 Lease Agreement dated March 4, 1998 by and between The Rugby Group, Inc., Form 10-K filed April
and Allstar Systems, Inc. 12, 1999
10.30 Sublease Extention Agreement dated December 31, 1998 by and between Form 10-K filed April
Allstar Equities, Inc. and Allstar Systems, Inc. 12, 1999
10.31 Amendment to Lease Agreement dated June 24, 1992, by and between James J. Form 10-K filed April
Laney, et al. As lessors, and Technicomp Corporation and Allstar Services 12, 1999
as lessees.
21.1 List of Subsidiaries of the Company. Form 10-K filed Mar.
31, 1998
23.1 Independent Auditors' Consent of Deloitte & Touche LLP,. Form 10-K filed Mar.
31, 1998
27.1 Financial Data Schedule. Form 10-K filed Mar.
31, 1998
99.1 Schedule II Valuation and Qualifying Accounts Form 10-K filed Mar.
31, 1998
b No Form 8-K has been filed in the last quarter of the fiscal year covered
by this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, March 31, 1998.
Allstar Systems, Inc.
(Registrant)
By:/s/ James H. Long
James H Long, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity
/s/ James H. Long Chief Executive Officer, President and Chairman
of the Board
/s/ Donald R. Chadwick Chief Financial Officer, Secretary and Treasurer
and Director
(Principal Financial and Accounting Officer)
/s/ G. Chris Andersen Director
/s/ Richard D. Darrell Director
/s/ Jack M. Johnson Director