Back to GetFilings.com
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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 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 17,
2000, as reported on NASDAQ Small Cap Market, was approximately $7,805,300.
The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 17, 2000 was 4,060,525.
DOCUMENTS INCORPORATED BY REFERENCE
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 single-source solutions to their information and communications technology
needs. We market our products and services primarily in Texas from five
locations in the Houston, Dallas-Fort Worth, El Paso, Austin and San Antonio
metropolitan areas. Our customer base of approximately 2,800 accounts has been
comprised primarily of mid-sized customers and regional offices of larger
customers in commercial, educational and governmental sectors. In 1999, our
revenue was derived through four primary areas of business:
(1) IT Services has provided a variety of services related to the use of
information technology, including primarily: Consulting and project
management services related to networking. Supplemental IT technical
staffing. Computer equipment repair services and desktop computer and
application support.
(2) CTI Software, through a wholly owned subsidiary, Stratasoft, Inc., has
engaged in marketing its own software products for computer-telephony
integration, including products for call center and other high volume
calling applications.
(3) Computer Products has engaged in the business of selling a wide variety of
computer hardware and software products from over 600 manufacturers and
suppliers.
(4) Telecom Systems has engaged in the business of selling business telephone
systems, including large "PBX" systems and smaller "key" systems.
As discussed below in further detail in Item 1. "Recent Developments," we
recently sold certain key assets of, and the ongoing business operations of, our
Telecom Systems business and entered into an agreement to sell certain key
assets of, and the ongoing business operations of, our Computer Products
business.
INDUSTRY CHANGES
The market for information and communications technology products and
services has experienced tremendous growth over the past decade and the industry
has changed significantly as the market has grown and evolved. Reselling of
popular computing hardware and software products, and the support and
maintenance of such products, which was formerly an early stage high growth
industry sector, has now matured. Other information technology industry sectors,
such as consulting and project management related to Internet and Intranet
network infrastructure are still somewhat early stage industry sectors. Yet
other information technology industry sectors, such as consulting and project
management related to Web-enabled Supply Chain Management and Customer Resource
Management systems are in their infancy. As the information technology market
has evolved, both challenges and opportunities have been created for industry
participants.
Our Computer Products business, which has evolved from a business model
created in the early 1980's, has been struggling with numerous challenges
related to the evolution of the computer reselling industry. Major product
manufacturers have been changing their business models and their relationship
with the computer reseller community. Web-based product reselling and direct
selling by the major manufacturers is creating rapid change that has resulted in
lower gross margins throughout the industry. The proliferation of new products
has created an increasingly complex environment in which we and other computer
resellers are forced to operate. Changes related to B2B e-commerce are changing
the purchasing habits of corporations related to computer products purchasing.
Many companies engaged in computer reselling have had difficulty adjusting to
these changes and many of these companies have experienced financial difficulty.
At the same time, we believe the market for information technology services
has grown increasingly larger, and increasingly more complex and varied. Only a
few short years ago, it was normal for a mid-sized corporation to have a
single-source provider for all of its information technology services, but that
has changed. The increasing number of software and hardware providers, combined
with the increasing diversity of, and complexity of, computing technology used
by corporate America today demands that information technology service providers
specialize. Focus and specialization create improved quality, productivity and
operational effectiveness. Corporate America today realizes this and
increasingly looks to specialized service providers for their needs.
The proliferation of network computing, using standardized operating
systems and application software, combined with the continuing evolution of the
Internet, continue to create new industry sectors. The implementation of
Web-enabled extended enterprise applications such as supply chain management
systems, customer relationship management systems, and systems used for
e-Business and e-Commerce, are changing the shape of the information technology
services industry.
In addition, business opportunities are currently being created by the
manner in which the Internet is destined to change commerce and communications.
Web commerce, both business-to-consumer (B2C) and business-to-business (B2B), is
expected to create very extensive change in the buying patterns and habits of
both consumer and business buyers. This is creating unprecedented change and
opportunity for businesses that offer products and services that can be marketed
via the Internet. The Internet is also expected to radically change the method
by which we communicate. Internet voice communications is expected to
significantly change the market for long-distance communications over the next
three-to-five years.
Mindful of the manner in which the Internet is expected to change commerce
and communications, and realizing that focused specialization by an operating
company was key to operational and marketing effectiveness, we evaluated our
situation and decided that change was prudent. We decided that we should exit
our Telecom Systems business primarily because we had been ineffective at
achieving profitably since we began Telecom Systems in 1994 and secondarily
because the business of selling and installing telephone systems is a mature
industry that offers less opportunity for growth than other emerging areas. We
decided to sell our Computer Products division because, in spite of the fact
that Computer Products is profitable, we could deploy the proceeds from a sale
of Computer Products in other ways that we believe will ultimately create
greater stockholder value.
RECENT DEVELOPMENTS
On March 16, 2000 we entered into separate agreements whereby we sold
certain key assets of, and the ongoing business operations of, our Telecom
Systems business and we propose to sell certain key assets of, and the ongoing
business operations of, our Computer Products business.
Proposed Disposition of Computer Products Business
On March 16, 2000 Allstar entered into an agreement to sell certain assets
of and the ongoing operations of our Computer Products division, along with
certain assets and operations of our IT Services division related to our El Paso
branch office. Under this agreement, said assets and operations are to be sold
to Amherst Computer Products Southwest, L.P., an affiliate of Amherst
Technologies, L.L.C. The sale transaction is expected to close on or before May
31, 2000 after shareholder and other required consents are obtained. The terms
of the agreement include cash consideration of $14.25 million, plus a cash
payment related to the purchase of certain inventory and equipment, the amount
of which is to be determined, plus the possibility of receiving a future payment
of up to $500,000 from an escrow account. The terms of the agreement also
include possible future cash payments contingent upon future performance of the
operations being sold. Allstar Systems expects to realize a gain of
approximately $5.6 million, net of taxes, on the sale. Upon the closing of the
proposed transaction and after realization of the retained current assets
related to the Computer Products division, we expect to have no debt and cash on
hand of approximately $18 to $20 million. Additional information regarding this
proposed transaction can be found in the recently filed Proxy related to the
transaction.
Sale of Telecom Systems Business
Through Telecom Systems, until March 16, 2000, we marketed, installed and
serviced 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, wireless communications and video conferencing.
Because we have been unable to profitably operate the Telecom Systems business,
we determined to exit this business on November 2, 1999. On March 16, 2000, we
sold Telecom Systems to Communications World International, Inc. ("CommWorld"),
a publicly traded company (OTC Bulletin Board: CWII). Under the terms of the
sale, for the inventory and operations of Telecom Systems, we received $250,000
cash, and the ability to obtain up to approximately 100,000 shares of restricted
common stock of CommWorld depending upon the performance of the acquired
operations during a period ending six months after the closing date.
Additionally, the purchaser assumed all of our telephone equipment warranty
obligations up to a maximum of $30,000. Any excess warranty costs incurred by
the purchaser will be billed to us at an agreed upon rate. A disposal loss,
including an estimate of the operating results from the measurement date,
November 2, 1999 to the closing date of the sale of $580,000, and estimates for
impairment of assets caused by the disposal decision of $558,000, totaling
$1,138,000 (net of an income tax saving of $586,000) was recognized. The loss
from discontinued operations (net of income tax savings of $167,000, $159,000
and $505,000) was $323,000, $310,000 and $981,000 in 1999, 1998 and 1997,
respectively. We will retain accounts receivable of $1.4 million, net of
reserves, fixed assets of $30,000 and liabilities related to the Telecom
division. Fixed assets are being redeployed in the continuing operations. The
accounts receivable will be collected in the ordinary course of business and
these amounts will be used to repay all remaining liabilities of the Telecom
division. Any excess cash will be used to repay our line of credit and fund
general corporate purposes.
BUSINESS STRATEGY
We believe the proposed sale of our Computer Products division provides
sufficient cash to initiate a fundamental change in our business strategy that
will allow us to deploy our increased capital in endeavors that we believe will
ultimately result in improved stockholder value.
We believe we can produce more rapid growth, and better financial
performance, by segregating the various IT Services operations into focused,
specialized companies. We intend to organize our existing IT Services operations
into wholly owned subsidiary companies, each branded to pursue a specialized
mission and each led by a separate management team with personal financial
incentives tied to their company's financial performance.
We plan to continue to expand our CTI Software business through our wholly
owned subsidiary, Stratasoft, Inc. Stratasoft is an example of our successfully
entering a new market with a start-up operation and rapidly creating a valuable
vertical market software company producing high levels of revenue and
profitability growth in a short time. Stratasoft is working to enable its call
center systems to utilize voice-over-IP technology and as voice-over-IP becomes
a viable voice communications methodology, we expect the Stratasoft call center
product to be ready for the significant change that will be created in call
center communications.
After the completion of the sale of Computer Products, we also intend to
pursue starting, acquiring or investing in, including taking significant stakes
in other companies that we expect to benefit from the manner in which the
Internet is changing commerce and communications. Targeted businesses are
expected to include B2B e-commerce product or services sales companies,
companies providing IT services related to network and Web development and
companies involved in the enabling of e-Commerce and e-Business.
PRODUCTS AND SERVICES
IT Services:
To date, we have marketed a variety of service offerings related to the
service and support of information technology systems. We have priced our
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 service their
significant product lines, our technical staff participates in various
certification and authorization programs sponsored by hardware manufacturers and
software suppliers. In markets where we do not maintain branch offices, we often
subcontract for necessary technical personnel, particularly where required for
larger scope or prolonged duration contracts. IT services include the following:
o Consulting and project management services related to networking.
o Supplemental IT technical staffing.
o Computer equipment repair services and desktop computer and
application support.
As mentioned above in Item 1. "Business Strategy," we intend to organize our
various IT Services offerings into separate wholly owned companies with a
specialized focus in order to maximize management and operational effectiveness
and because we believe that doing so will result in overall higher revenue
growth and improved financial results.
CTI Software:
Through our wholly owned subsidiary, Stratasoft, Inc., we develop and
market Stratasoft's proprietary CTI Software, which integrates business
telephone systems and networked computer systems, under the trade name
"Stratasoft." Stratasoft's products are designed to improve the efficiency of a
call center or other type of high volume calling application, for both inbound
and outbound calls. The software products offered are typically customized to
suit a customer's particular needs and are often bundled with computer hardware
supplied by us or by one of Stratasoft's value added resellers at the customer's
request. Stratasoft currently has two primary computer-telephony software
products, which it markets under the trade names StrataDial and StrataVoice.
These products are further described below:
o 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.
o 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.
Computer Products:
Our Computer Products business has offered our customers a wide variety of
computer hardware and software products available from approximately 600
manufacturers and suppliers. Our 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. We
are an authorized reseller of products from a number of leading manufacturers of
computer hardware, software and networking equipment. The Computer Products
division had operating income in 1999 of $2,702,000 as compared to $560,000 in
1998. Downward pressures on product pricing margins have been a trend in the
industry, although growth of revenues of 27.4% in 1999 as compared to 1998 were
achieved in spite of continuing downward pressure on prices. As computer prices
decrease, more significant increases in the number of units sold must occur in
order to produce revenue growth. As discussed above in Item 1. "Recent
Developments," the proposed sale of the Computer Products division is expected
to close on or before May 31, 2000.
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
To date, we have primarily marketed our products and services through
direct sales representatives. Direct sales representatives have been teamed with
in-house customer service representatives and assigned to specific customer
accounts. We believe that direct sales lead to better account penetration and
management, better communications and long-term relationships with its
customers. Our sales personnel, including account managers and customer service
representatives, are partially compensated, and in some cases are solely
compensated, on the profitability of accounts that they participate in
developing. Our three remaining business segments have utilized slightly
different methods of sales and marketing:
(1) IT Services. The IT Services business segment operates from all of our
offices, and promotes its products and services through general and
trade advertising, participation in trade shows and telemarketing
campaigns. We believe that a significant portion of IT Services' new
customers have originated through word-of-mouth referrals from
existing customers and industry partners such as manufacturers'
representatives, and through customer and lead sharing with our other
two business units.
(2) CTI Software. Stratasoft, Inc., our CTI Software business segment,
operates from our 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.
(3) Computer Products. Our Computer Products business segment operates
from all of our offices, and promotes its products and services
through general and trade advertising, participation in trade shows
and telemarketing campaigns. As previously discussed, we entered into
an agreement on March 16, 2000 to sell certain assets of, and the
ongoing operations of this business.
CUSTOMERS
The focus of our marketing efforts has been on mid-sized customers and
regional offices of larger customers located within the regions in which we
maintain offices. We have occasionally provided products and/or services in
markets where we do not have an office, typically to branch operations of
customers with which we have an established relationship. Our customer base has
not been concentrated in any industry group. Our top ten customers (which have
varied from year to year) accounted for 21.2%, 31.7% and 28.4% of our revenue
during 1997, 1998 and 1999, respectively. Approximately 2,800 customers
purchased products or services from us during 1999. In 1999, the largest single
customer constituted 8.3% of total revenues; however, in prior years, our
largest customer has constituted as high as 11.2% of revenues. We have only a
small amount of backlog relative to total revenues because we have no long-term
commitments by customers to purchase products or services from us. Although we
have service contracts with many of our large customers, such service contracts
are project-based and/or terminable upon relatively short notice.
SUPPLY AND DISTRIBUTION
We have relied on wholesale distributors to supply a majority of the
products that we have sold through our Computer Products and CTI Software
business segments. We have purchased the majority of our products from three
primary suppliers to obtain competitive pricing, better product availability and
improved quality control.
MANAGEMENT INFORMATION SYSTEMS
We utilize a highly customized management information systems ("MIS") to
manage most aspects of our business. Our MIS has provided our 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. Our MIS contains
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. We use our 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.
EMPLOYEES
As of December 31, 1999 we employed approximately 417 individuals. Of
these, approximately 98 were employed in sales, marketing and customer service,
171 were employed in engineering and technical positions and 148 were employed
in administration, finance and MIS. We believe that our ability to recruit and
retain highly skilled and experienced technical, sales and management personnel
has been, and will continue to be, critical to our ability to execute our
business plans. None of our employees are represented by a labor union or are
subject to a collective bargaining agreement. We believe that our relations with
our employees are good.
HISTORY AND REINCORPORATION
Our company was incorporated under Texas law in 1983 under the name
Technicomp Corp. On June 30, 1993, we changed our name to Allstar-Valcom, Inc.,
and then again, on December 28, 1993, we changed our name to Allstar Systems,
Inc. On December 27, 1993, we engaged in a merger in which we were the surviving
corporation. In the merger, Allstar Services, Inc. and R. Cano, Inc., both of
which were affiliated with us, were merged with and into Allstar Systems, Inc.
in order to streamline the business. In 1995 we formed a wholly owned
subsidiary, Stratasoft, Inc., to purchase and develop our CTI Software business
segment. In 1997, we 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 we 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. In October 1996, we effected a reincorporation and merger in the State
of Delaware through which the 328,125 shares of our 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.
RISKS OF OUR NEW BUSINESS STRATEGY
We plan to sell our Computer Products Division, retain our IT Services and
Stratasoft businesses, and embark on new lines of business that we have not yet
identified. Our new business strategy is based on our ability to redeploy the
proceeds from the sale of our Computer Products to both improve the performance
of businesses we will retain and to enter new lines of business. This strategy
involves many risks including the following:
Closing of Computer Products Division Sale
We believe that having cash on hand from the sale of the Computer Products
Division will improve our ability to negotiate and consummate acquisitions,
pursue investment opportunities and better enable us to start-up new lines of
business, once we have identified the specific businesses we wish to pursue. We
also will seek to grow our retained businesses using proceeds from the sale.
Closing of the Computer Products Division sale is, however, subject to many
contingencies which could cause the transaction not to close. Some of these
conditions include:
o the absence of any material adverse change in our business prior to
closing;
o the truth of the representations and warranties made by us and the
buyer in the Asset Purchase Agreement;
o consent of a number of our principal suppliers and customers to the
assignment to the buyer of our contracts with them;
o other conditions included in the Asset Purchase Agreement relating to
the Computer Products Division sale, a copy of which is an exhibit to
this report.
If for any reason the proposed sale of the Computer Products Division does not
close, we will not have sufficient cash to pursue our new business strategy.
Risks of Potential Future Acquisitions and Investments
Our business will depend in the future on the successful acquisition,
integration, financing and performance of businesses we have not yet identified.
Following the sale of our Computer Products Division, we plan to pursue
starting-up, acquiring or taking significant stakes in businesses involved in
internet commerce and communications. We have not yet identified any specific
businesses to start, purchase or invest in, and thus many of the risks of our
strategy are unascertainable. Our strategy involves the substantial risk that we
will not find suitable businesses to acquire on terms we believe are reasonable
and that the new businesses we choose to enter will not provide the benefits we
expect. Our future business prospects should therefore be considered in light of
the risks, expenses, problems and delays inherent in starting or acquiring a new
business. We cannot be certain that we will identify and assess these risks.
Some of the acquisition and operating risks that could adversely affect us
include the following:
o We may be unsuccessful in identifying new business opportunities,
completing and financing acquisitions and start-ups on favorable terms
and in subsequently operating the businesses profitably.
o Competition for the acquisition of companies in the internet commerce
and communication sector will likely be intense. Our competitors for
suitable new businesses may have greater financial, personnel and
technical resources than us which may put us at a disadvantage in
finding and concluding acquisitions. These competitive limitations may
compel us to select less attractive acquisitions than if we had
greater resources at our disposal.
o Businesses in the internet commerce and communication sector are the
general focus of our new business expansion strategy. Businesses in
this sector often have an undeveloped or unproven product, technology
or marketing strategy which may prove unsuccessful.
o We may choose to acquire or invest a business that is financially
unstable or that is in the early stages of development, including one
without earnings or positive cash flow, which may require substantial
additional capital infusions to support.
o Because we plan to seek new businesses with growth potential, there is
a substantial likelihood that the new business will be in competition
with much larger, more established and better capitalized competitors,
thus putting it at a competitive disadvantage.
o Our success in a new business will also depend on our ability to
integrate a new business and its personnel with our existing business
and personnel with a minimum of disruption to both existing and new
enterprises, including management information systems. We also may be
unable to attract and retain new, qualified personnel to operate and
grow our new businesses.
o If we choose to make a strategic investment by acquiring a minority
interest in a business, we may lack sufficient control to influence
the operations and strategy of the business and thus will depend on
that entity's management for our success; additionally, if we choose
to make an investment in a publicly traded company such investment
would also be subject to market risks.
Possible Need for Additional Financing
We may be required to obtain cash to supplement our then available proceeds
from the Computer Products Division Sale to acquire or begin a new business and
for working capital to run existing businesses and any businesses we acquire. We
have no commitments to provide any such additional capital and we may be unable
to find suitable capital on terms we consider acceptable.
If we obtain additional debt financing for our existing businesses or to
acquire new businesses, we will be subject to the risks inherent in debt
financing. Some of these include:
o interest rate fluctuations;
o inability to obtain additional debt financing;
o insufficiency of cash flow to pay interest and principal; and
o restrictive debt covenants imposed by lenders that may limit or
prohibit business activities we consider desirable.
We may seek to raise equity capital to meet our future cash needs. We may
also issue additional shares of our common stock or other equity securities to
acquire new businesses. If we do issue additional equity securities, some of the
possible adverse possible effects include:
o the percentage of our common stock owned by existing stockholders
could be substantially reduced;
o possible increases in the number of shares of our common stock that
are considered restricted stock for federal and state securities laws
purposes, the actual or potential future sale of which could adversely
effect the price of our common stock; and
o we may be required to issue preferred stock which could have rights,
privileges and preferences superior to those of our then existing
stockholders.
Increased Dependence on IT Services and Stratasoft
Our IT Services and Stratasoft software business will be our only two
business segments immediately after the sale of our Computer Products Division.
Because of that, the success of these business segments will take on a much
greater significance to us. We plan to concentrate our efforts on growing these
businesses and we expect to have additional financial resources to do so from
the proceeds of the Computer Products Division sale. The risk exists that we may
be unable to accomplish this improvement, and the operations of these remaining
businesses may not enable us to operate profitably.
Risks of Our Existing Businesses
As noted above, if our Computer Products Division is sold and our new
business strategy is implemented, the nature and magnitude of risks relating to
our business will change significantly. If, however, we do not close the
Computer Products sale as expected, our business will continue to be subject to
the risks and uncertainties we have identified in the past, including those set
forth below:
Adverse Changes in Our Industry
As described above under the caption "Changes in Industry Conditions," our
industry is undergoing rapid changes that may adversely affect us. If we do not
successfully adapt our business strategy to these new conditions, there is a
growing risk that we may be unable to compete and be profitable in the future.
Risk of Low Margin Business
Significant levels of competition that characterize the computer reseller
market, In order to attract and retain many of our larger customers, we have
frequently agreed to volume discounts and maximum allowable markups that serve
to limit the profitability of sales to such customers. Any increase in inventory
devaluation risks that cannot be passed onto our customers would result in
write-offs or markdowns of the value of such inventory with the result being a
charge to gross profit. All of these factors have contributed to our decision to
make the Computer Products Division available for sale.
Dependence on Availability of Credit
Our business activities have been capital intensive in that we are required
to finance accounts receivable and inventory. In order to obtain necessary
working capital, we have relied primarily on lines of credit under which the
available credit is dependent on the amount and quality of our accounts
receivable and inventory. As a result, the amount of credit available to us was
adversely affected by factors such as delays in collection or deterioration in
the quality of our accounts receivable, inventory obsolescence, economic trends
in the computer industry, interest rate fluctuations and the lending policies of
our lenders. Many of these factors were beyond our control. Any decrease or
material limitation on the amount of capital available to us under our credit
lines and other financing arrangements could limit our ability to fill existing
sales orders, purchase inventory or expand our sales levels and, therefore,
would have a material adverse effect on our 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 our cost of
capital and would have an adverse effect on our financial condition and results
of operations. Our inability to have continuous access to capital at reasonable
costs would materially and adversely impact our financial condition and results
of operations. (See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
Highly Competitive Business
We have been engaged in business activities that are intensely competitive
and rapidly changing. Price competition could have a material adverse effect on
our financial condition and results of operations. Our competitors included
major computer products and telephone equipment manufacturers and distributors,
including certain manufacturers and distributors that supplied products to us.
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
We have experienced rapid growth that has, and may continue into 2000 to,
put strains on our management and operational resources. Our ability to manage
growth effectively required it to continue to implement and improve its
operational, financial and sales systems, to develop the skills of our managers
and supervisors and to hire, train, motivate and manage its employees. With the
proceeds of the proposed sale of our Computer Products division, our management
and operational resources will be facing new and different challenges, but the
need to develop the skills of our managers and supervisors remains unchanged.
Regional Concentration
For the foreseeable future, we expect that we will continue to derive most
of our revenue from customers located within the regions in which we maintain
offices. Accordingly, an economic downturn in any of those metropolitan areas
within the region in general, would likely have a material adverse effect on our
financial condition and results of operations.
Dependence on Key Personnel
Our success for the foreseeable future will depend largely on the continued
services of key members of management, leading salespersons and technical
personnel. We do not maintain key personnel life insurance on any of our
executive officers or salespersons other than our Chairman and Chief Executive
Officer. Our success also depends in part on our 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. Our
financial condition and results of operations could be materially adversely
affected if we are unable to attract, hire, train and retain qualified
personnel.
Dependence on Continued Authorization to Resell and Provide
Manufacturer-Authorized Services
Our future success in both product sales and services depends largely on
our continued status as an authorized reseller of products and its continued
authorization as a service provider. We maintain sales and service
authorizations with many industry-leading product manufacturers. Without such
sales and service authorizations, we would be unable to provide the range of
products and services currently offered. In addition, some of these agreements
are based upon our continued supply relationship with our major distributors.
Furthermore, loss of manufacturer authorizations for products that have been
financed under our credit facilities constitutes an event of default under such
credit facilities. In general, the agreements between us and our 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 our financial condition and our results of operations.
Dependence on Suppliers
Our business depends upon our ability to obtain an adequate supply of
products and parts at competitive prices and on reasonable terms. Our suppliers
are not obligated to have product on hand for timely delivery to us nor can they
guarantee product availability in sufficient quantities to meet our demands. Any
material disruption in our supply of products would have a material adverse
effect on our financial condition and results of operations.
Inventory Obsolescence
The business in which we compete is characterized by rapid technological
change and frequent introduction of new products and product enhancements. Our
success depends in large part on our ability to identify and obtain products
that meet the changing requirements of the marketplace. There can be no
assurance that we will be able to identify and offer products necessary to
remain competitive or avoid losses related to obsolete inventory and drastic
price reductions. We attempt to maintain a level of inventory required to meet
our near term delivery requirements by relying on the ready availability of
products from our principal suppliers. Accordingly, the failure of our suppliers
to maintain adequate inventory levels of products demanded by our existing and
potential customers and to react effectively to new product introductions could
have a material adverse effect on our financial condition and results of
operations.
Reliance on Key Customers
Our top ten customers, which have varied from year to year, accounted for
21.2%, 31.7% and 28.4% of our revenue during 1997, 1998 and 1999, respectively.
During 1999, our largest customer accounted for 8.3% 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 our existing relationships
with customers, we believe that a substantial portion of our total revenue and
gross profit will continue to be derived from sales to existing customers.
However, while our revenues will be greatly reduced by the new direction the
company is taking, the higher margins generated by the existing divisions along
with reductions in overhead association with the proposed sale, should move us
toward profitability in 2000. 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 our largest customers could have a material
adverse effect on our financial condition and results of operations.
Reliance on MIS
Our success is largely dependent on the accuracy, quality and utilization
of the information generated by our customized MIS, which affects our ability to
manage our sales, accounting, inventory and distribution. We anticipate that we
will continually need to refine and enhance our management information systems
as we grow and the needs of our business evolve. We have not yet experienced any
serious problems arising from the Year 2000 issue, and therefore do not
anticipate any future interruption or errors in our information and
telecommunications systems which would have an adverse effect on our financial
condition and results of operations. (See Item 1 - "Management Information
Systems" and Item 7 - "Year 2000 Issue").
Acquisition Risk
We intend to pursue potential acquisitions of complementary businesses.
The success of this strategy depends not only upon our ability to acquire
complementary businesses on a cost-effective basis, but also upon our ability to
integrate acquired operations into our 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, 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 our
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 our affairs.
Anti-Takeover Considerations
Our Certificate of Incorporation and Bylaws contain certain provisions that
may delay, deter or prevent a change in our control. Among other things, these
provisions authorize our board of directors to issue shares of preferred stock
on such terms and with such rights, preferences and designations as the board of
directors may determine without further stockholder action and limit the ability
of stockholders to call special meetings or amend our 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.
Uncertain Revenue Sources
In order to maintain a profit, we will have to grow the revenues of the retained
business at a much greater rate than we have historically been able to grow
those revenues. The relatively high level of operating expenses remaining after
the divestiture of Computer Products will contribute to operating losses unless
new revenues can be generated to offset the loss of revenues from the businesses
that are sold. (See Item 1. "Recent Developments")
Absence of Dividends
We expect to retain cash generated from operations to support our cash
needs and do not anticipate the payment of any dividends on the Common Stock for
the foreseeable future. In addition, our credit facilities prohibit the
declaration or payment of dividends, unless consent is obtained from each
lender.
Item 2. Properties
FACILITIES
We do not own any real property and currently lease all of our existing
facilities. We lease our Houston office that is housed in a freestanding
building of approximately 48,000 square feet. On November 30, 1999 the building
was acquired by a related Corporation and a new lease was signed which expires
on December 1, 2004.
Our Dallas office has been 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. During 1997, the company added additional offices in Austin and El
Paso, Texas and during 1998 we opened an additional office in San Antonio. In
1998 we expanded our distribution capabilities by entering into a three year
lease on a 30,000 square foot warehouse in Dallas.
The Dallas office and distribution center leases will transfer to the
purchaser under the terms of the proposed sale of the Computer Products division
we will acquire space nearby to house our IT Service technicians working in the
Dallas market. The Austin, San Antonio and El Paso office leases will likewise
be assumed by the purchaser. We will find suitable facilities in Austin and San
Antonio as needed. Under the terms of the proposed sale the purchaser will also
be acquiring the El Paso portion of our IT Service Division.
Item 3. Legal Proceedings
We are party to litigation and claims which management believes are normal
in the course of our operations; while the results of such litigation and claims
cannot be predicted with certainty, we believe the final outcome of such matters
will not have a material adverse effect on our results of operations or
financial position.
On February 1, 2000, a competitor brought a suit against our wholly owned
subsidiary Stratasoft, Inc. in the United States District Court for the Northern
District of Georgia. The plaintiff alleges infringement of certain patents owned
by the competitor and is seeking unspecified monetary damages. The suit is in
its early stages of discovery, and therefore we are unable to determine the
ultimate costs of this matter. We believe that this suit is without merit and
intend to vigorously defend such action.
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
The Company's shares are traded on the Nasdaq Small Cap Market under the
symbol "ALLS".
High Low
Fiscal 1998
First quarter 5.50 3.875
Second quarter 5.125 3.625
Third quarter 4.125 1.875
Fourth quarter 3.25 1.25
Fiscal 1999
First quarter 2.1875 1.00
Second quarter 2.875 1.0625
Third quarter 1.75 1.0625
Fourth quarter 1.875 1.00
As of March 17, 2000, there were 45 shareholders of record. Management
estimates that there are approximately 890 beneficial holders of our common
stock. We have never declared or paid any cash dividends on our Common Stock. On
March 17, 2000, the closing sales price of our Common Stock as reported by
Nasdaq was $ 4.00 per share. We currently anticipate that we will retain all
earnings for use in our business operations. The payment of dividends is
prohibited under our 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, 1999.
Year ended December 31,
(In Thousands except share and per share amounts)
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Operating Data:
Revenue $ 89,627 $ 116,535 $ 23,764 $ 159,674 $ 201,817
Cost of sales and services 78,734 101,837 107,135 139,866 179,026
-------- -------- -------- -------- --------
Gross profit 10,893 14,698 16,629 19,808 22,791
Selling, general and
Administrative expenses 8,496 11,121 12,527 20,659 20,183
-------- -------- -------- -------- --------
Operating income (loss) 2,397 3,577 4,102 (851) 2,608
Interest expense (net of
other income) 1,212 1,145 642 319 648
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before provision
(benefit) for income taxes 1,185 2,432 3,496 (1,170) 1,960
Provision (benefit) for
income taxes 452 933 1,305 (382) 686
-------- -------- -------- -------- --------
Net income (loss) from
continuing operations 733 1,499 2,191 (788) 1,274
Discontinued Operations:
Net income (loss) from
discontinued operations, net
of taxes (214) 104 (323) (310) (981)
Loss on disposal, net of taxes (1,138)
Net income (loss) $ 519 $ 1,603 $ 1,844 $ (1,098) $ (845)
======== ======== ======== ========= ========
Net income (loss) per share:
Basic
Net income (loss) from
continuing operations $ 0.17 $ 0.36 $ 0.62 $ (0.18) $ 0.31
Net income (loss) from
discontinued operations (0.05) 0.02 (0.10) (0.07) (0.24)
Loss on disposal (0.27)
-------- -------- -------- -------- --------
Net income (loss) per share $ 0.12 $ 0.38 $ 0.52 $ (0.25) $ (0.20)
======== ======== ======== ======== ========
Diluted
Net income (loss) from
continuing operations $ 0.17 $ 0.36 $ 0.61 $ (0.18) $ 0.30
Net income (loss) from
discontinued operations (0.05) 0.02 (0.09) (0.07) (0.23)
Loss on disposal (0.27)
-------- -------- -------- -------- --------
Net income (loss) per share $ 0.12 $ 0.38 $ 0.52 $ (0.25) $ (0.20)
======== ======== ======== ========= ========
As of December 31,
(In Thousands)
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Balance Sheet Data:
Working Capital $ 1,732 $ 2,291 $ 12,738 $ 9,800 $ 9,567
Total Assets 24,266 24,720 34,855 51,028 53,916
Short-term borrowings (1) 9,912 9,975 1,572 15,958 15,869
Long-term debt -0- -0- -0- -0- -0-
Stockholders' equity 2,724 4,327 14,637 12,705 11,830
(1) See Note 6 to our Consolidated Financial Statements. Short-term borrowings
do not include amounts recorded as floor plan financing which are included in
accounts payable.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, our Consolidated Financial Statements, including the
Notes thereto, included elsewhere in this Annual Report on Form 10-K.
Overview
Our company was formed to engage in the business of reselling computer
hardware and software products and providing related services. To date, most of
our revenue has been derived from sales of computer products and related
services. Operations are primarily conducted in Houston and Dallas, Texas.
During 1997 we 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. During 1999 we reevaluated the structure of our operations
of the new offices and merged their operations where a physical presence was not
necessary, thereby retaining the El Paso, Austin and San Antonio offices, which
we believe can effectively serve the targeted markets.
Through Telecom Systems, we marketed, installed and serviced 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, wireless communications and video conferencing. On November 2, 1999,
we approved a plan to sell or close our Telecom Systems division. Offers were
entertained for the acquisition of a significant portion of the assets of
Telecom Systems and to assume any ongoing operations of the division. The sale
was finalized on March 16, 2000. Under the terms of the sale we received for the
sale of the inventory and operations of Telecom Systems $250,000 cash, and the
ability to obtain restricted stock in the purchaser contingent upon the
performance of the acquired operations during a period ending six months after
the closing date. Additionally, the purchaser assumed all of our telephone
equipment warranty obligations up to a maximum of $30,000. Any excess warranty
costs incurred by the purchaser will be billed to us at an agreed upon rate. A
disposal loss, including an estimate of the operating results from the
measurement date, November 2, 1999 to the closing date of the sale of $580,000,
and estimates for impairment of assets caused by the disposal decision of
$558,000, totaling $1,138,000 (net of an income tax saving of $586,000) was
recognized. Our loss from discontinued operations (net of income tax savings of
$167,000, $159,000 and $505,000) was $323,000, $310,000 and $981,000 in 1999,
1998 and 1997, respectively. We will retain accounts receivable of $1.4 million,
net of reserves, fixed assets of $30,000 and liabilities related to the Telecom
division. Fixed assets are being redeployed in the continuing operations. The
accounts receivable will be collected in the ordinary course of business and
these amounts will be used to repay all remaining liabilities of the Telecom
division. Any excess cash will be used to repay our line of credit and fund
general corporate purposes.
Our continuing operations are reported as three segments and are IT
Services, CTI Software and Computer Products. Telecom Systems was reported
previously as a segment, accordingly, Telecom Systems has been presented as a
discontinued operation for all information presented. The Computer Products and
IT Services business units were previously combined and reported as the
Information Technology segment during past reporting periods. On March 16, 2000
Allstar entered into an agreement to sell certain assets of and the ongoing
operations of its Computer Products division. The sale is expected to close on
or before May 31, 2000 after shareholder and other required consents are
obtained.
The gross margin varies substantially between each of these business
segments. Over the past three years the gross margin in IT Services has ranged
between 39.3% and 29.5%; the gross margin for CTI Software has ranged between
43.0% to 50.8% and the gross margin in Computer Products has ranged between 8.9%
and 10.5%. IT Services, CTI Software and Computer Products accounted for 7.4%,
2.1% and 90.5% of total revenues, respectively, during 1999.
In order to reduce freight costs and selling, general and administrative
expenses associated with product handling, we drop ship orders directly from our
suppliers to our customers where possible. Drop shipped orders (measured as the
cost of goods drop shipped as a percentage of total cost of goods sold) were
31.9 % in 1998 and 44.4 % in 1999. While we have not believed that it is in our
best interest to drop ship all orders, we have attempted to increase the volume
of drop shipments with the expectation of reducing our freight, distribution and
administrative costs related to these revenues.
A significant portion of our selling, general and administrative expenses
relate to personnel costs, some of which are variable and others of which are
relatively fixed. Our variable personnel costs are substantially comprised of
sales commissions, which are typically calculated based upon our gross profit on
a particular sales transaction and thus generally fluctuate with our overall
gross profit. The remainder of our 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 us offer to price-protect the inventory
carried by us 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. We have
participated in an increasing number of these programs in recent years. Based
upon recent trends, we believe that the number and amount of these programs will
increase.
Inacom Corp. ("Inacom") has historically been the largest supplier of
products we sell, but purchases from Inacom have declined recently. Purchases
from Inacom accounted for approximately 51.4%, 33.2%, and 17.7% of our total
product purchases in 1997, 1998 and 1999, respectively. We have a long-term
supply arrangement with Inacom under which we have agreed to purchase at least
80% of our 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
that we sell and Inacom may be unable to offer reasonable product availability
with reasonably competitive pricing on those product lines that it does carry.
We expect prospectively that less than 80% of our 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 our consolidated statements of operations and
indicates the percentage of total revenue for each item.
Year ended December 31,
1997 1998 1999
Amount % Amount % Amount %
(Dollars in thousands)
Revenue
IT Services $ 10,240 8.3% $ 13,183 8.3% $ 14,857 7.4%
CTI Software 2,145 1.7 3,095 1.9 4,318 2.1
Computer Products 111,379 90.0 143,396 89.8 182,642 90.5
------- ----- ------- ----- ------- -----
Total 123,764 100.0 159,674 100.0 201,817 100.0
Gross profit
IT Services 4,029 39.3 4,208 31.9 4,385 29.5
CTI Software 922 43.0 1,492 48.2 2,192 50.8
Computer Products 11,678 10.5 14,108 9.8 16,214 8.9
------- ----- ------- ----- ------- -----
Total 16,629 13.4 19,808 12.4 22,791 11.3
Selling, general and
administrative expenses
IT Services 4,005 39.1 5,238 39.7 4,711 31.7
CTI Software 1,096 51.1 1,873 60.5 1,960 45.4
Computer Products 7,426 6.7 13,548 9.4 13,512 7.4
------- ----- ------- ----- ------- -----
Total 12,527 10.1 20,659 12.9 20,183 10.0
Operating income (loss)
IT Services 24 0.2 (1,030) (7.8) (326) (2.2)
CTI Software (174) (8.1) (381)(12.3) 232 5.4
Computer Products 4,252 3.8 560 0.4 2,702 1.5
------- ----- ------- ----- ------- -----
Total 4,102 3.3 (851) (0.5) 2,608 1.3
Interest expense (net of other income) 642 0.5 319 0.2 648 0.3
------- ----- ------- ----- ------- -----
Income (loss from continuing
operations before provision 3,460 2.8 (1,170) (0.7) 1,960 1.0
Provision (benefit) for income taxes 1,293 1.0 (382) (0.2) 686 (0.3)
------- ----- ------- ----- ------- -----
Net income (loss) from continuing
operations 2,167 1.8 (788) 0.5 1,274 0.7
Discontinued operations:
Income (loss) from discontinued
operations, net of taxes (323 (0.3) (310) (0.2) (981) (0.5)
Loss on disposal, net of taxes (1,138) (0.6)
------- ----- -------- ----- ------- -----
Net income $ 1,844 1.5% $ (1,098) (0.7)% $ (845) 0.4%
======= ===== ======= ===== ======= =====
(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.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
(Dollars in thousands)
Revenue. Total revenue increased $42,143 (26.4%) to $201,817 in 1999 from
$159,674 in 1998.
Total 1999 IT Services revenue which comprised 7.4% of total revenues
compared to 8.3% in 1998, increased $1,674 (12.7%) to $14,857 in 1999 from
$13,183 in 1998. The increase in revenue is attributable to growth in our newer
offices and increased sales to existing customers and to new customers.
Revenue from CTI Software, which comprised 2.1% of total revenue in 1999,
compared to 1.9% in 1998, increased $1,223 (39.5%) to $4,318 in 1999 from $3,095
in 1998. The increased revenues from CTI Software were primarily the result of
sales to new customers and the expansion of geographic market.
Revenue from Computer Products, which comprised 90.5% of total revenue in
1999 compared to 89.8% in 1998, increased $39,246 (27.4%) to $182,642 in 1999
from $143,396 in 1998. The increase in Computer Products revenue was generally
attributable to increased sales of products and services to new and existing
customers and to sales generated in our newer branch offices. Of the $39,246
increase in Computer Products revenue, $25,396 (64.7%) resulted from increased
sales in our more established offices in Houston and Dallas and $13,850 (35.3%)
resulted from sales in our newer offices opened since mid-1997. The increase of
$25,396 from the older, more established offices in Houston and Dallas
represented an increase of 20.3% to $150,624 in 1999 from $125,228 in 1998. The
increase of $13,850 from our newer branch offices represented an increase of
76.2% to $32,018 in 1999 from $18,168 in 1998.
Gross Profit. Gross profit increased $2,983 (15.1%) to $22,791 in 1999 from
$19,808 in 1998, while gross margin decreased to 11.3% in 1999 from 12.4% in
1998.
IT Services gross profit increased by $177 (4.2%) to $4,385 in 1999
compared to $4,208 in 1998. Gross margin rates for IT Services were 29.5% in
1999 as compared to 31.9% in 1998. The increase in gross profit is commensurate
with the increase in revenues as discussed above.
The gross profit for CTI Software increased by $700 (46.9%) to $2,192 in
1999 from $1,492 in 1998. Gross margin rates for CTI Software were 50.8% in 1999
as compared to 48.2% in 1998. This increase was due primarily to higher revenues
coupled with lower system installation costs, relative to revenue, reflecting
improved productivity and efficiency due to improved software installation and
customization tools introduced in 1998.
Gross profit and gross margin in 1998 were affected by asset valuation
markdowns of $2,040 in our Computer Products segment related to reducing the
carrying value of that segment's inventory and certain vendor accounts
receivables. In 1999 we sold at auction some of the inventory which had become
aged. In addition, we continued to experience downward pressure on product
selling prices from our customers. The gross margin for Computer Products
decreased to 8.9% in 1999 from 9.8% in 1998, reflecting the effect of the
aforementioned auctions, the downward pressures on pricing, excessive freight
costs not passed on to customers and of write-offs of vendor accounts
receivable.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $476 (2.3%) to $20,183 in 1999 from $20,659 in
1998. As a percentage of total revenue, selling, general and administrative
expenses for continuing operations decreased to 10.0% in 1999 from 12.9% in
1998.
The dollar decrease of approximately $476 was attributable to a decrease in
Delaware franchise tax of $152 (26.4%) attributable to the restructuring of the
authorized stock in 1998 and to reduced property taxes primarily resulting from
both appealing the property taxes for the Houston office and to the closing of
some of the branch offices opened in 1998. Additionally employee recruiting
expenses were reduced by $112 and general office expenses decreased by $137,
primarily due to the closing of unprofitable offices, downsizing of certain
branch offices and the reduction of certain expense structures. Additionally, we
realigned certain operations to eliminate redundancies and improve efficiency.
Contract labor costs decreased by $429 (60.4%) due to the conversion to employee
status and promotional and advertising expenses were decreased by $452 (221.5%),
primarily due to increased vendor co-op funds received in 1999. These savings
were offset by an increase in sales commissions of $294 (5.6%) attributable to
the increased sales volume, and by and increase in bad debt expense of $326
(127.9%).
IT Services' selling, general and administrative expenses decreased $527
(10.1%) to $4,711 in 1999 from $5,238 in 1998. For CTI Software, selling,
general and administrative expenses increased $87 (4.6%) to $1,960 from $1,873
in 1998. Selling, general and administrative expenses in Computer Products
decreased $36 (0.3%) to $13,512 in 1999 compared to $13,548 in 1998.
Operating Income (loss). Operating income increased $3,459 (406.5%) to
operating income of $2,608 in 1999 from a loss of $851 in 1998 due primarily to
the increase in sales volume of $42,143. Operating income for IT Services
increased $704 (68.3%) to an operating loss of $326 in 1999 compared to an
operating loss of $1,030 in 1998. For CTI Software, the operating income
increased $613 (160.9%) to income of $232 in 1999 from an operating loss of $381
in 1998. Computer Products' operating income increased $2,142 (382.5%) to
operating income of $2,702 in 1999 from $560 in 1998.
Interest Expense (Net of Other Income). Interest expense (net of other
income) increased $329 (103.1%) to $648 in 1999 compared to $319 in 1998.
Interest expense was lower in 1998 due to the reduction of outstanding debt
resulting from the 1997 stock offering proceeds applied to the reduction of
debt. Additionally, increased sales volume in 1999 resulting in higher inventory
purchases and accounts receivable levels contributed to higher interest expense
in 1999.
Net Income (Loss) from continuing operations. Net income (loss) from
continuing operations, after an income tax provision totaling $686 (reflecting
an effective tax rate of 35.0% for 1999 compared to 32.6% for 1998), became
income of $1,274 in 1999 compared to a loss of $788 in 1998.
Discontinued operations. On November 2, 1999 we approved a plan to sell
or close our Telecom Systems division. A sale of certain assets of the division
and its ongoing operations closed on March 16, 2000. As a consequence of these
events, the operations of Telecom Systems are reported as discontinued
operations. The company experienced a net loss on the operations of the Telecom
Division of $981 in 1999, net of a tax benefit of $505 and a loss on disposal of
$1,138, net of a tax benefit of $586. The loss on discontinued operations in
1998 was $ 310, net of taxes of $159.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
(Dollars in thousands)
Revenue. Total revenue increased $35,910 (29.0%) to $159,674 in 1998 from
$123,764 in 1997.
Total 1998 IT Services revenue consisted of $13,183 (8.3%) as compared to
$10,240 (8.3%) , in 1997.
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.
Revenue from Computer Products, which comprised 89.8% of total revenue in
1998 compared to 90.0% in 1997, increased $32,017 (28.7%) to $143,396 in 1998
from $111,379 in 1997. The increase in Computer Products revenue was generally
attributable to increased sales of products and services to new and existing
customers and to sales generated in our newer branch offices. Of the $32,017
increase in Computer Product's revenue, $15,898 (49.7%) resulted from increased
sales in our more established offices in Houston and Dallas and $16,119 (50.3%)
resulted from sales in our newer offices opened since mid-1997. The increase of
$15,898 from the older, more established offices in Houston and Dallas
represented an increase of 14.6% to $124,851 in 1998 from $108,953 in 1997. The
increase of $16,119 from our newer branch offices represented an increase of
785.9% to $18,170 in 1998 from $2,051 in 1997.
Gross Profit. Gross profit increased $3,174 (19.1%) to $19,808 in 1998 from
$16,629 in 1997, while gross margin decreased to 12.4% in 1998 from 13.4% in
1997. Gross profit and gross margin were affected by asset valuation markdowns
of $2,040 in our Computer Products division related to reducing the carrying
value of that segment's inventory and certain vendor accounts receivables. We
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 our inability to collect certain accounts related to
special promotional funds owed to us from certain of our suppliers.
Gross profit for IT Services increased $179 to $4,208 in 1998 from $4,029
in 1997 while gross margins decreased in 1998 to 31.9% from 39.3% in 1997
reflecting pricing pressures.
The gross profit for CTI Software increased $570 to $1,492 in 1998 from
$922 in 1997 while gross margins 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.
The gross profit for Computer Products decreased to 9.8% in 1998 from 10.5%
in 1997, reflecting the effect of the aforementioned asset valuation markdowns
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8,132 (64.9%) to $20,659 in 1998 from $12,527
in 1997. As a percentage of total revenue, selling, general and administrative
expenses increased to 12.9% in 1998 from 10.1% in 1997.
The dollar increase of approximately $3,200 was attributable to a 60.7% in
sales personnel compensation due to our efforts to expand our 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 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 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 IT Services increased
$1,233 (30.8%) to $5,238 in 1998 compared to $4,005 in 1997. For CTI Software,
selling, general and administrative expenses increased $777 (70.9%) to $1,873
from $1,096 in 1997. For Computer products, selling, general and administrative
expenses increased $6,122 (82.4%) to $13,548 from $7,426.
Operating Income (loss). Operating income decreased $4,953 to a loss of
$851 in 1998 from a profit of $4,102 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 IT Services
decreased $1,054 to a loss of $1,030 in 1998 from operating income of $24 in
1997. For CTI Software, the operating loss increased $207 (119.0%) to $381 in
1998 from $174 in 1997. For Computer Products, the operating income decreased
$3,692 (86.8%) to $560 in 1998 from $4,252 in 1997.
Interest Expense (Net of Other Income). Interest expense (net of other
income) decreased $323 (50.3%) to $319 in 1998 compared to $642 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) From Continuing Operations. Net income (loss) from
continuing operations, after an income tax benefit totaling $382 (reflecting an
effective tax rate of 32.6% for 1998 compared to 37.4% for 1997), became a loss
of $788 in 1998 compared to a profit of $2,167 in 1997.
Discontinued Operations. The loss on discontinued operations was $310 in
1998, net of taxes of $159, as compared to $323 in 1997, net of taxes of $167.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of our 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. Our 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 our product
costs, variations in our product mix, promotions, seasonal influences and
competitive pricing pressures. Furthermore, we generally have experienced a
higher volume of product orders in our computer products business segment in the
fourth quarter, which we attribute to year-end capital spending by some of our
customers. Any decrease in the number of year-end orders we experience may not
be offset by increased revenues in our first three quarters. The results of any
particular quarter may not be indicative of results for the full year or any
future period.
1998 1999
------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Revenue
IT Services $ 2,892 $ 3,062 $ 3,533 $ 3,696 $ 3,548 $ 3,691 $ 3,591 $ 4,027
CTI Software 826 513 723 1,033 770 825 1,329 1,394
Computer Products 27,752 34,447 38,217 42,980 42,254 44,611 45,961 49,816
------- ------- ------- ------- ------- ------- ------- -------
Total 31,470 38,022 42,473 47,709 46,572 49,127 50,881 55,237
Cost of sales and services
IT Services 1,917 2,025 2,406 2,627 2,531 2,479 2,415 3,047
CTI Software 515 278 319 491 331 413 623 759
Computer Products 24,400 30,556 33,733 40,599 38,419 41,001 41,793 45,215
------- ------- ------- ------- ------- ------- ------- -------
Total 26,832 32,859 36,458 43,717 41,281 43,893 44,831 49,021
Gross Profit
IT Services 975 1,037 1,127 1,069 1,017 1,212 1,176 980
CTI Software 311 235 404 542 439 412 706 635
Computer Products 3,352 3,891 4,484 2,381 3,835 3,610 4,168 4,601
------- ------- ------- ------- ------- ------- ------- -------
Total 4,638 5,163 6,015 3,992 5,291 5,234 6,050 6,216
Selling, general and
administrative expenses
IT Services 972 1,212 1,452 1,602 1,136 1,227 1,201 1,147
CTI Software 374 450 395 654 497 448 524 491
Computer Products 2,662 3,219 3,615 4,052 3,459 3,345 3,237 3,471
------- ------- ------- ------- ------- ------- ------- -------
Total 4,008 4,881 5,462 6,308 5,092 5,020 4,962 5,109
Operating income (loss)
IT Services 3 (175) (325) (533) (119) (15) (25) (167)
CTI Software (63) (215) 9 (112) (58) (36) 182 144
Computer Products 690 672 869 (1,671) 376 265 931 1,130
------- ------- ------- ------- ------- ------- ------- -------
Total 630 282 553 (2,316) 199 214 1,088 1,107
Interest expense (net of
other income) 21 44 88 166 222 183 169 74
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes 609 238 465 (2,482) (23) 31 919 1,033
Provision (benefit) for
income taxes 219 98 166 (865) 1 25 306 354
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) from
continuing operations 390 140 299 (1,617) (24) 6 613 679
Discontinued operations:
Net income (loss) from
discontinued operations,
net of tax (266) 130 (212) 38 (30) (376) (281) (294)
Loss on disposal (1,138)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 124 $ 270 $ 87 $ (1,579) $ (54) $ (370) $ 332 $ (753)
======= ======= ======= ======= ======= ======= ======= =======
Net Income (loss) per share:
Basic:
Continuing Operations $ 0.09 $ 0.03 $ 0.07 $ (0.38) $ (0.01) $ 0.01 $ 0.15 $ 0.16
Discontinued Operations (0.06) 0.03 (0.05) 0.01 (0.01) (0.09) (0.07) (0.07)
Loss on Disposal (0.27)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share $ 0.03 $ 0.06 $ 0.02 $ (0.37) $ (0.02) $ (0.08) $ 0.08 $ (0.18)
======= ======= ======= ======= ======= ======= ======= =======
Diluted:
Continuing Operations $ 0.09 $ 0.03 $ 0.07 $ (0.38) $ (0.01) $ 0.01 $ 0.14 $ 0.16
Discontinued Operations (0.06) 0.03 (0.05) 0.01 (0.01) (0.09) (0.06) (0.07)
Loss on Disposal (0.27)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share $ 0.03 $ 0.06 $ 0.02 $ (0.37) $ (0.02) $ (0.08) $ 0.08 $ (0.18)
======= ======= ======= ======= ======= ======= ======= =======
Liquidity and Capital Resources
Historically, we have satisfied our cash requirements principally through
borrowings under our lines of credit and through operations. We maintain a cash
position sufficient to pay only our immediately due obligations and expenses.
When the amount of cash available falls below our immediate needs we request an
advance under our credit facility. As our total revenue has grown, we have
obtained increases in our available lines of credit to enable us to finance our
growth. Our working capital was $12,738, $9,800 and $9,567 at December 31, 1997,
1998 and 1999, respectively. The decreases in working capital during 1999 and
1998 were primarily attributable to increases in our accounts payable as a
result of product costs attributable to our revenue growth. At December 31, 1999
we had outstanding borrowings of $30,129. Our total collateral base was $30,462
at December 31, 1999, of which $1,952 is available to borrow from our secondary
lenders and $1,620 is payable to the primary lender. Such amount was paid from
existing cash balances in January 2000. At December 31, 1999, we had a $30,000
credit facility with our primary lender. As of December 31, 1999, we were fully
borrowed against our available borrowing based due to the higher level of
business during the fourth quarter.
Cash Flows
Operating activities provided net cash totaling $2,086 and $2,612 during
1997 and 1999, respectively, and used net cash totaling $10,831 during 1998.
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
and an increase in inventory, which was offset somewhat by an increase in
accounts payable and accrued expenses. During 1999 net cash provided by
operations resulted from increases in accounts payable which offset our increase
in accounts receivable.
Accounts receivable increased $8,999, $9,377 and $3,138 during 1997, 1998
and 1999, respectively. Inventory decreased $162 and $516 in 1997 and 1999,
respectively, and increased $3,797 in 1998.
Investing activities used cash totaling $992, $1,764 and $276 during 1997,
1998 and 1999, respectively. Our 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 our
management information systems. During the next twelve months, we do not expect
to incur material capital expenditures.
Financing activities provided cash totaling $258, $13,552 and used cash
totaling $227 during 1997,1998 and 1999, respectively. In July 1997, we 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 our line of credit.
The primary source of cash from financing activities in other periods has been
borrowings on our lines of credit. The lines of credit have been used
principally to satisfy our cash requirements, including financing increases in
accounts receivable and inventory. During 1998 and 1999 we used $834 and $138,
respectively to repurchase shares that were held in treasury at the end of 1999.
Asset Management
Our cash flow from operations has been affected primarily by the timing of
its collection of accounts receivable. We have typically sold our products and
services on short-term credit terms and seek to minimize our credit risk by
performing credit checks and conducting our own collection efforts. We had
accounts receivable, net of allowance for doubtful accounts of $34,893 and
$37,726 at December 31, 1998 and 1999, respectively. The number of days' sales
outstanding in trade accounts receivable was 60 days, 67 days and 66 days for
years 1997, 1998 and 1999, respectively. The increase in days' sales outstanding
in 1998 was caused by a general slow down in payments by our customers. Bad debt
expense as a percentage of total revenue for the same periods was 0.2%, 0.2% and
0.2% Our allowance for doubtful accounts, as a percentage of accounts
receivable, was 1.0%, 1.0% and 1.0% at December 31, 1997, 1998 and 1999,
respectively.
We attempt to manage our inventory in order to minimize the amount of
inventory held for resale and the risk of inventory obsolescence and decreases
in market value. We attempt to maintain a level of inventory required to reach
only our near term delivery requirements by relying on the ready availability of
products from our principal suppliers. Manufacturers of our major products have
in the past generally provided price protection, which reduces our exposure to
decreases in prices, but during 1998 most major product manufacturers reduced or
largely eliminated price protection. Our suppliers generally allow for some
levels of returns of excess inventory, which, on a limited basis, are made
without material restocking fees. During 1998, our suppliers generally became
more restrictive in their policies regarding product return privileges.
Inventory turnover for 1997, 1998 and 1999 was 21.5 times, 22.0 times, and 22.5
times, respectively.
Credit Facilities
On February 27, 1998 we executed agreements with Deutsche Financial
Services ("DFS") for a revolving line of credit (the "DFS Facility") which is
our principal source of liquidity. We have a credit facility with IBM Credit
Corporation ("IBMCC") 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 we use
primarily to carry accounts receivable and for other working capital and general
corporate purposes (the "Accounts Line"). Borrowings under the Accounts Line
bear interest at the fluctuating prime rate minus 1.0% per annum. Under the
Inventory Line, DFS pays our inventory vendors directly, generally in exchange
for negotiated financial incentives. Typically, the financial incentives
received are such that DFS does not charge us interest until 40 days after the
transaction is financed, at which time we are required to either pay the full
invoice amount of the inventory purchased from corporate funds or to borrow
under the Accounts Line for the amount due to DFS. Inventory Line advances not
paid within 40 days after the financing date bear interest at the fluctuating
prime rate plus 5.0%. For purposes of calculating interest charges the minimum
prime rate under the DFS Facility is 7.0%. 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 our borrowings to exceed the reduced borrowing base.
The DFS Facility is collateralized by a security interest in substantially
all of our assets, including its accounts receivable, inventory and bank
accounts. Collections of our accounts receivable are required to be applied
through a lockbox arrangement to repay indebtedness to DFS; however, DFS has
amended the lockbox agreement to make such arrangements contingent upon certain
financial ratios. Provided we are in compliance with our debt to tangible net
worth covenant, we have discretion over the use and application of the funds
collected in the lockbox. If we exceed that financial ratio, DFS may require
that lockbox payments be applied to reduce our indebtedness to DFS. If in the
future DFS requires that all lockbox payments be applied to reduce our
indebtedness, we would be required to seek funding from DFS or other sources to
meet substantially all of our cash needs. 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 us 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. 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 and prohibits payment of dividends. At December 31,
1999, we had $30,080 and $48 outstanding on the DFS Facility and the IBMCC
Facility, respectively. A payment was made in January 2000 to comply with the
borrowing base limitations under the DFS Facility.
Year 2000 Issue
The Year 2000 issue is the result of computer programs using two digits to
define the applicable year. These programs were designed without consideration
for the effect of the change in century and if not corrected could have failed
or created erroneous results at the turn of the century. Essentially all the
company's MIS were potentially affected by the Year 2000 issue.
In order to prepare for the Year 2000 issue we implemented the following
remediation plan for our MIS:
(1) Identification of all applications and hardware with potential Year
2000 issues.
(2) For each item identified, perform an assessment to determine an
appropriate action plan and timetable for remediation of each item.
(3) Implementation of the specific action plan.
(4) Test each application upon completion.
(5) Place the new process into production and conduct system integration
testing.
We successfully implemented the above remediation plan for all affected MIS.
Following the arrival of the Year 2000 we experienced no significant problems
with any of our systems as a result of the Year 2000 issue. There was no
interruption in our ability to transact business with suppliers and customers.
We continue to monitor our systems, suppliers and customers for any
unanticipated issues that may not have been manifested yet. The implementation
of the remediation plan was entirely funded from operations. We estimate that we
incurred approximately $300 in expenses during 1998 and 1999 related to the Year
2000 issue.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Management is
evaluating what impact, if any, and additional disclosures may be required when
this statement is adopted.
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. We have implemented these two
Statements in the year ending December 31, 1999.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We incur certain market risks related to interest rate variations because
we hold floating rate debt. Based upon the average amount of debt outstanding
during 1999, a one-percent increase in interest rates paid by us on our debt
would have resulted in an increase in interest expense of approximately $135 for
the year.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Independent Auditors' Report 26
Consolidated Balance Sheets at December 31, 1998 and 1999 27
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 28
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 30
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1998 and 1999 31
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") as of December 31, 1998 and 1999, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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, 1998
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 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.
/s/ Deloitte & Touche LLP
Houston, Texas
March 17, 2000
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
(In thousands, except share and par value amounts)
ASSETS 1998 1999
Current Assets:
Cash and cash equivalents $ 2,538 $ 4,647
Accounts receivable, net 34,893 37,726
Accounts receivable - affiliates 373 423
Inventory 8,497 7,442
Deferred taxes 431 836
Income taxes receivable 637
Other current assets 559 384
--------- ---------
Total current assets 47,928 51,458
Property and equipment, net 2,902 2,280
Other assets 198 178
--------- ---------
$ 51,028 $ 53,916
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 15,958 $ 15,869
Accounts payable 16,641 21,687
Accrued expenses 5,273 3,896
Net liabilities related to
discontinued operations 199
Deferred service revenue 256 240
--------- ---------
Total current liabilities 38,128 41,891
Deferred credit - stock warrants 195 195
Commitments and Contingencies (See Note 11)
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,
4,503,411 and
4,442,325 issued at December 31,
1998 and 1999, respectively 45 44
Additional paid in capital 10,196 10,037
Unearned equity compensation (269) (1)
Treasury stock, at cost,
271,200 and 381,800 shares at (834) (972)
December 31, 1998 and 1999, respectively
Retained earnings 3,567 2,722
--------- ---------
Total stockholders' equity 12,705 11,830
--------- ---------
$ 51,028 $ 53,916
========= =========
See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(In thousands, except share and per share amounts)
Years ended December 31
----------------------------------------------
1997 1998 1999
Total revenue $ 123,764 $ 159,674 $ 201,817
Cost of goods and services 107,135 139,866 179,026
------------ ------------ ------------
Gross profit 16,629 19,808 22,791
Selling, general and administrative expenses 12,527 20,659 20,183
------------ ------------ ------------
Operating income (loss) 4,102 (851) 2,608
Interest expense (net of other income) 642 319 648
------------ ------------ ------------
Income (loss) from continuing operations before
provision (benefit) for income taxes 3,460 (1,170) 1,960
Provision (benefit) for income taxes 1,293 (382) 686
------------ ------------ ------------
Net income (loss) from continuing operations 2,167 (788) 1,274
Discontinued operations:
Net loss from discontinued operations, net of taxes (323) (310) (981)
Loss on disposal, net of taxes (1,138)
------------ ------------ ------------
Net income (loss) $ 1,844 $ (1,098) $ (845)
============ ============ ============
Net income (loss) per share:
Basic:
Net income (loss) from continuing operations $ 0.62 $ (0.18) $ 0.31
Net loss from discontinued operations (0.10) (0.07) (0.24)
Loss on disposal (0.27)
------------ ------------ ------------
Net loss per share $ (0.52) $ (0.25) $ (0.20)
============ ============ ============
Diluted:
Net income (loss) from continuing operations $ 0.61 $ (0.18) $ 0.30
Discontinued operations (0.09) (0.07) (0.23)
Loss on disposal (0.27)
------------ ------------ ------------
Net loss per share $ (0.52) $ (0.25) $ (0.20)
============ ============ ============
Weighted average number of shares outstanding:
Basic 3,519,821 4,345,883 4,168,140
============ ============ ============
Diluted 3,526,787 4,345,883 4,226,911
============ ============ ============
See motes to consolidated financial statements
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(In thousands, except share and per share amounts)
$.01 par value Additional Unearned
Common Stock Paid-In Treasury Equity Retained
Shares Amount Capital Stock Compensation Earnings Total
Balance at January 1, 1997 2,675,000 $ 27 $ 1,479 $ 2,821 $ 4,327
Sale of common stock, net of
initial public offering
expenses of $2,040
on conversion 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 10,196 (834) (269) 3,567 12,705
Cancellation of restricted stock (61,086) (1) (159) 268 108
Purchase of treasury stock (110,600) (138) (138)
Net loss (845) (845)
---------- ------ --------- ------- -------- -------- -------
Balance at December 31, 1999 4,060,525 $ 44 $ 10,037 $ (972) $ (1) $ 2,722 $ 11,830
========== ====== ========= ======= =======