-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WNj/DTa3i/HM10XLJe1Ct9vS//KpQcT8Dgy27JHNpT46sFucrLGG/KQLmlVGoRBQ 0MPvAp6RhCLefcFfwPENMw== 0001020017-99-000003.txt : 19990413 0001020017-99-000003.hdr.sgml : 19990413 ACCESSION NUMBER: 0001020017-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLSTAR SYSTEMS INC CENTRAL INDEX KEY: 0001020017 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 760515249 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21479 FILM NUMBER: 99591669 BUSINESS ADDRESS: STREET 1: 6401 SOUTHWEST FREEWAY CITY: HOUSTON STATE: TX ZIP: 77074 BUSINESS PHONE: 7137952000 MAIL ADDRESS: STREET 1: 6401 SOUTHWEST FREEWAY CITY: HOUSTON STATE: TX ZIP: 77074 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-21479 ALLSTAR SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Delaware 76-0515249 (State of Incorporation) (I.R.S. Employer Identification No.) 6401 Southwest Freeway Houston, TX 77074 (Address of principal executive offices)(Zip code) Registrant's telephone number including area code: (713) 795-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, $.01 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on March 31, 1999, as reported on NASDAQ National Market System, was approximately $2,602,406. The number of shares of Common Stock, $.01 Par Value, outstanding as of March 31, 1999 was 4,232,211. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III, Items 10, 11, 12, and 13. PART I Item 1. Business SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONTAINED IN ITEM 1. - "BUSINESS" ITEM 2. "PROPERTIES," ITEM 3. - "LEGAL PROCEEDINGS" AND ITEM 7. "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED THAT ANY STATEMENT THAT IS NOT A STATEMENT OF HISTORICAL FACT, INCLUDING BUT NOT LIMITED TO, STATEMENTS WHICH MAY BE IDENTIFIED BY WORDS INCLUDING, BUT NOT LIMITED TO, "ANTICIPATE," "APPEAR," "BELIEVE," "COULD," "ESTIMATE," "EXPECT" "HOPE," "INDICATE," "INTEND," "LIKELY," "MAY," "MIGHT," "PLAN," "POTENTIAL," "SEEK," "SHOULD," "WILL," "WOULD," AND OTHER VARIATIONS OR NEGATIVE EXPRESSIONS THEREOF, ARE PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. NUMEROUS FACTORS, INCLUDING FACTORS WHICH THE COMPANY HAS LITTLE OR NO CONTROL OVER, MAY AFFECT THE COMPANY'S ACTUAL RESULTS AND MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. IN EVALUATING SUCH STATEMENTS, READERS SHOULD CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING MATTERS SET FORTH IN ITEM 1. "FACTORS WHICH MAY AFFECT THE FUTURE RESULTS OF OPERATIONS," WHICH COULD CAUSE ACTUAL EVENTS, PERFORMANCE OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH STATEMENTS. GENERAL Allstar Systems, Inc. is engaged in the business of providing its customers with solutions to their information and communications technology needs. The company markets its products and services primarily in Texas from five locations in the Houston, Dallas-Fort Worth, El Paso, Austin and San Antonio metropolitan areas. The company's customer base of approximately 2,700 accounts is comprised primarily of mid-sized customers and regional offices of larger customers in commercial, educational and governmental sectors. The company positions itself to provide its customers with single-source solutions for both their computer and telecommunications needs by offering a broad range of products and services and the expertise to service and support integrated computer and telecommunications applications. The company's revenue is derived from three business segments: Information Technology sells computer hardware and software products, along with networking and data communications products, including related integration and support services. Telecom Systems sells and supports telecommunications systems, including smaller "key" telephone systems, larger private branch exchange ("PBX") telephone systems, video conferencing systems and voice mail systems. CTI Software, through a wholly owned subsidiary, Stratasoft, Inc., markets its own software products for computer-telephony integration, including products for call center and other high volume calling applications. The company was incorporated in 1983 as a Texas corporation and was reincorporated in 1996 as a Delaware corporation. The executive offices are located at 6401 Southwest Freeway, Houston, Texas 77074 and the telephone number is (713) 795-2000. The market for information and communications technology products and services has experienced significant growth in recent years and the use of such products and outsourced services within organizations has been impacted by several trends. The company believes that the general demand for information technology products and related services has increased because of the following trends: The introduction of local-area and wide-area networks has allowed organizations to supplement or replace expensive, centralized mainframe computer systems with more flexible and affordable microcomputer based client/server platforms. The emergence of widely-accepted industry standards for hardware and software has increased the acceptance of open architecture networks that can, and frequently do, contain products from numerous manufacturers and suppliers. Rapid technological improvements in computer hardware and the introduction of new software operating systems have also created the need to expand or upgrade existing networks and systems. The proliferation of Internet access has increased the demand for increased computing power and network throughput. Price decreases have made such networks and systems more affordable to a larger number of organizations. The advent of open architecture networks has impacted the market for information technology services. Wider use of complex networks involving a variety of manufacturer's equipment, operating systems and applications software has made it increasingly difficult for users of information and communications technology to diagnose problems and to maintain the technical knowledge and repair parts necessary to provide support services. The company believes that increased outsourcing of more sophisticated support services by business and institutional customers has resulted from the technical complexities created by multi-manufacturer and supplier network systems and rapid technological change. Increasingly, organizations seeking technology products often require prospective vendors not only to offer products from many manufacturers and suppliers, but also to have available proficient service expertise to assist them in product selection, system design, installation and post-installation support and service. The company believes that the ability to offer customers a comprehensive solution to their information technology needs, combined with the ability to work within its customers' environments as integral members of their information and communications technology systems management team, are increasingly important in the marketplace. Telecommunications systems have evolved in recent years from simple analog telephone systems to sophisticated digital systems, with modern digital systems featuring voice processing, automated attendant, voice and fax mail, automatic call distribution and call accounting. The ability to interface these new digital phone systems to user's computer systems now allows these telephone systems to interact with the user's computerized data to create powerful business solutions. Computerized "call accounting" allows an organization with integrated telephone and computer systems to track telephone usage and long distance toll billing and easily interface that data with computerized accounting and billing systems. Integrated voice and facsimile handling allows a user to retrieve, send and manage voice and facsimile messages on his or her computer screen. Computerized telephone number listings allow the user to look up telephone numbers on the computer and then have the computer dial the number automatically. For more complex call center applications, computer systems can manage outbound calling campaigns while automatically blending inbound calls to available agents in order to enhance agent productivity. The company believes that the evolution of the digital telephone system to a more open architecture, aided by standards established by large software manufacturers for the interface of telephone and computer technologies, is causing rapid industry change. These digital telephone systems, along with the many software products that are rapidly becoming available for use in computer-telephony, require sophisticated installation and integration service capability. The company believes that the trend toward computer-telephony integration is likely to continue and that integrated voice, data and video communication will become more affordable. As the technology and management of telecommunications and computer systems converge over the next decade, the company believes that growth opportunities will be presented for companies presently able to provide and service the latest integrated telecommunications and computer technologies. BUSINESS STRATEGY To achieve its objectives, the company intends to pursue these key strategies: Geographic Expansion into New Markets. In order to expand into new geographic markets and create growth opportunities with new customers, the company opened a number of new offices over a short period of time during late 1997 and early 1998. The company opened new offices in Austin, Texas in the third quarter of 1997 and in McAllen and El Paso, Texas late in 1997. Early in 1998, the company significantly increased the size of its El Paso office and opened offices in Albuquerque and Las Cruces, New Mexico. Later in 1998, the company opened its eighth office in San Antonio, Texas. During the second half of 1998, the company also began employing sales representatives to work from their homes in new markets, and employed new sales representatives in the states of Florida, Nebraska, Missouri and Oklahoma. The expenditures that were required to establish a marketing and operating organization in those new markets has been a factor in causing profitability to decline during the past year. Of primary short-term importance is solidifying the revenue gains that the company has made in those new markets, while continuing to increase revenue to a level at which the new offices are contributing to profitability. Longer term, the company intends to evaluate the need for opening additional offices in Texas and other regions as opportunities and circumstances warrant. Pursue "Same Office" Growth. The company has continued to produce revenue growth in its older, more mature offices in Houston and Dallas and intends to continue to pursue growth opportunities in those markets through increased numbers of customer relationships. By expanding the number of product and service offerings made available to customers, the company hopes to increase revenue from existing customers in these mature offices. Enhance Services Component in Information Technology. For many years, and continuing through 1998, the company employed a separate sales force, reporting to separate management, for the marketing of Information Technology services and products. The company is combining the two sales forces under a single organizational structure in order to take advantage of the much larger products sales force to sell services offerings. The products sales force, at the end of 1998, was approximately ten times as large, in terms of total sales staff, as the services sales force. The company intends to pursue having the products sales staff market services in an attempt to produce higher growth rates from services revenues, which typically produce higher margins than that of product revenues. The company also intends to expand the number of service offerings in order to provide additional sources of service revenues and to produce higher rates of growth from services revenues. Improve Telecom Systems and CTI Software Profitability. The company began offering Telecom Systems and CTI Software in 1994 and 1995, respectively, and these two business units have produced high rates of revenue growth. Compared to the previous year, Telecom Systems revenue grew 41.3% and 38.8% and CTI Software revenue grew 66.5% and 44.3% during 1997 and 1998, respectively. While these business units produce higher than company average gross margin, they have produced operating losses in each of the past two years. The company's challenge is to continue the growth in these business units while improving profitability during 1999 and thereafter. PRODUCTS AND SERVICES The company's revenues are derived from sales of information and communications systems and by providing services related to the use of such. The company believes that much of its product sales revenues are reliant upon the company's ability to offer services related to the installation, integration, support and service of such products. The products and/or services marketed in each of the company's three business segments are described below. Information Technology: The company offers its customers a wide variety of computer hardware and software products available from approximately 900 manufacturers and suppliers. The company's products include desktop and laptop computers, monitors, printers and other peripheral devices, operating system and application software, network products and mid-range host and server systems. The company is an authorized reseller of products from a number of leading manufacturers of computer hardware, software and networking equipment. The company markets a variety of services offerings related to the service and support of information technology systems. The company prices its services on a time and materials basis, under fixed price project pricing or under fixed fee service contracts, depending on customer preference and the level of service commitment required. To support and maintain the quality of these services and to maintain vendor accreditation necessary to resell and service its significant product lines, the company's technical staff participates in various certification and authorization programs sponsored by hardware manufacturers and software suppliers. In markets where the company does not maintain branch offices, it often subcontracts for necessary technical personnel, particularly where required for larger scope or prolonged duration contracts. Information Technology services include the following: Contract Systems Engineer, Technician and Programmer Staffing. The company provides short-term supplemental technical staffing, including hardware and software technicians, help desk personnel, systems and network engineers and programming staff. Systems Engineering. The company provides systems engineering services including information technology consulting, network design, on-site and remote network administration, network diagnostics, new technology feasibility and impact analyses and disaster recovery plan analyses. Information Technology Project Management. The company provides project management services for major hardware and software upgrades and conversions, delivery and installation "roll-outs" of major new hardware and software installations and large network installations, including multiple citywide-area network implementations. Information Systems Support. The company is an authorized warranty service provider for many popular computer and computer peripheral products and provides hardware repair and maintenance services, complex network diagnostic services, end user support services and software diagnostic services. The company also offers complete outsourcing of a customer's computer and network management and technical support needs on a contract basis. The company provides on-site service parts stocking, help desk assistance, fixed asset management and tracking. Telecommunications and Data Systems Cabling. The company provides networking and telecommunications cabling services required for all major networking topologies, including fiber optic cabling. The company also offers cabling services for adding to, moving or changing existing network systems. Contract Programming Services. The company offers contract programming services, primarily related to database design and implementation, client server applications and Internet site development. IT Staffing Services. In January 1997 the company, through its wholly owned subsidiary IT Staffing, Inc., began providing customers with technical personnel for temporary and permanent positions. The company recruits and places personnel for a wide variety of technical positions related principally to computing hardware and software skill sets. Telecom Systems: The company began its Telecom Systems business in 1994 to capitalize on the trend toward computer-telephony integration. The company currently markets, installs and services business telephone systems, including large PBX systems and small key systems, along with a variety of related products including hardware and software products for data and voice integration, wide area connectivity and telephone system networking and wireless communications. CTI Software: Through its wholly-owned subsidiary, Stratasoft, Inc., the company develops and markets proprietary CTI Software, which integrates business telephone systems and networked computer systems, under the trade name "Stratasoft." CTI Software is designed to improve the efficiency of a call center and other types of high volume calling applications, for both inbound and outbound calls. Basic products offered by the company are typically customized to suit a customer's particular needs and are often bundled with computer hardware supplied by the company at the customer's request. The company entered the CTI Software business in late 1995 by acquiring two computer-telephony software products, currently sold under the names StrataDial and StrataVoice. A new product, Strata-Interactive, has also been developed by the company. The company now markets these three computer-telephony software products, which are described below: StrataDial. StrataDial is a predictive dialer software product for outbound call center applications such as sales and promotion, collections, surveys, lead generation and announcements that require personal contact. StrataDial features inbound/outbound call blending without requiring an automated call distribution feature of the telephone system. StrataDial collects campaign specific data during the telephone call and provides comprehensive on line reporting and statistical analysis of the campaign data. StrataDial also features open architecture that allows easy interaction with the customer's other database applications. Dialing parameters and campaign characteristics can be changed without shutting down the dialer, as is required with many competing products. StrataVoice. StrataVoice is an outbound dialing product designed for high volume applications that do not require human interaction. StrataVoice applications include appointment confirmation and setting, court appearance notification, surveys, community notification such as school closings and emergency evacuation, employee updates, absenteeism notification, telemarketing and market research. A telephone system utilizing StrataVoice dials a computerized list of numbers and can ask the contacted person a number of questions, including branching to other questions and statements based on responses. StrataVoice also allows the contacted person to leave messages. Scripting tools are included that allow the user to develop campaigns. The system builds a database of respondent data and has comprehensive response reporting capabilities. Strata-Interactive. Strata-Interactive is an interactive voice response software product that allows telephone calls to access computer information at any time using a simple touch-tone telephone. Applications for interactive voice response technology vary and include insurance coverage verification and claims reporting, utility company account information and outage reporting, bank account information and on-line transactions, and shipment verification and tracking information. Strata-Interactive is based upon open architecture and is designed to work with networked computers. FINANCIAL INFORMATION BY BUSINESS SEGMENT See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for financial information on revenue and operating income of each business segment. SALES AND MARKETING The company markets its products and services primarily through direct sales representatives. Direct sales representatives are teamed with in-house customer service representatives and are assigned to specific customer accounts. The company believes that direct sales lead to better account penetration and management, better communications and long-term relationships with its customers. The company's sales personnel, including account managers and customer service representatives, are partially compensated, and in some cases are solely compensated, on the profitability of accounts which they participate in developing. The company's three business segments utilize slightly different methods of sales and marketing: Information Technology. The Information Technology business segment operates from all of the company's offices, and promotes its products and services through general and trade advertising, participation in trade shows and telemarketing campaigns. The company believes that a significant portion of this business segment's new customers originate through word-of-mouth referrals from existing customers and industry partners such as manufacturers' representatives, and through customer and lead sharing with the company's other two business units. Telecom Systems. The Telecom Systems business unit operates primarily from the company's Houston office, and its sales and marketing efforts are concentrated in that market. Telecom Systems uses primarily telemarketing, along with participation in trade shows and general trade advertising to market its products and services. CTI Software. Stratasoft, Inc., the company's CTI Software business unit, operates from the company's Houston office and utilizes telemarketing, participation in trade shows and general trade advertising to market its products. Leads are followed up on and managed by account managers. In addition, Stratasoft markets its products through a network of value added resellers, who typically integrate their products with Stratasoft's software products to provide a complete solution. CUSTOMERS The company focuses its marketing efforts on mid-sized customers and regional offices of larger customers located in or near the metropolitan areas in which the company maintains offices. The company occasionally provides products and/or services in markets where the company does not have an office, typically to branch operations of customers with which the company has an established relationship. The company's customer base is not concentrated in any industry group. The company's top ten customers (which have varied from year to year) accounted for 33.2%, 21.2% and 31.7% of the company's revenue during 1996, 1997 and 1998, respectively. Approximately 2,700 customers purchased products or services from the company during 1998. In 1998, the largest single customer constituted 9.3% of total revenues; however, in prior years, the company's largest customer has constituted as high as 11.2% of revenues. The company has only a small amount of backlog relative to total revenues because the company has no long-term commitments by customers to purchase products or services from the company. Although the company has service contracts with many of its large customers, such service contracts are project-based and/or terminable upon relatively short notice. SUPPLY AND DISTRIBUTION The company relies on wholesale distributors to supply a majority of the products that it sells through its Information Technology and CTI Software business units. The company purchases the majority of its products from three primary suppliers to obtain competitive pricing, better product availability and improved quality control. Products sold by the company's Telecom Systems business unit are generally purchased directly from the original equipment manufacturer. The company attempts to develop strategic arrangements with its principal suppliers, including the coordination of drop shipment orders, the outsourcing of certain computer configuration services, national roll-out and installation projects and the sharing of product information. The company maintains standard authorized dealership agreements from many leading manufacturers of computer and telecommunications hardware and software. Under the terms of these authorized dealership agreements, the company is entitled to resell associated products to end-users and to provide warranty service. The company's status as an authorized reseller of key product lines is essential to the operation of the company's business. In general, the authorized dealer agreements do not require minimum purchases and include termination provisions ranging from immediate termination to termination upon 90 days prior written notice. Some of these agreements are conditioned upon the continuation of the company's supply arrangement with a major wholesale distributor acceptable to the manufacturer. The company operates small warehouses within each of its branch offices and a major regional distribution center located in Dallas, for the purpose of receiving, warehousing, configuration and shipping products. In 1995, the company began an initiative to drop ship a higher percentage of orders directly from its suppliers to its customers. This initiative has resulted in the percentage of drop shipped orders increasing significantly. While the company does not believe that it is in its best interest to drop ship all orders, it does intend to try to increase the volume of drop shipments with the expectation of reducing its freight, distribution and administrative costs related to these revenues. While some manufacturers of products sold by the company offer to price-protect the inventory carried by the company for a certain length of time following a price decrease by the manufacturer, recently many manufacturers have moved to more restrictive price protection policies or have largely eliminated price protection. In addition, certain manufacturers and suppliers have implemented a more restrictive policy regarding inventory returns during the past year. MANAGEMENT INFORMATION SYSTEMS The company depends on its customized management information systems ("MIS") to manage most aspects of its business. The company's MIS provides its sales staff, customer service representatives and certain customers with product pricing and availability from its principal suppliers' warehouses throughout the United States. The purchasing systems are real time, allowing buyers to act within minutes on a newly received and credit-approved sales order. The company's MIS contain productivity tools for sales lead generation, including integration between telemarketing and prospect database management. Sales management features include a variety of reports available for any combination of customer, salesperson, sales team and office criteria. The company uses its MIS to manage sales orders, purchasing, service contracts, service calls and work orders, engineer and technician scheduling and time tracking, service parts acquisition and manufacturer warranties. Reporting can also be generated for project profitability, contract and customer analysis, parts tracking and employee time tracking. During the second quarter of 1998 the company completed a conversion of its MIS to a more powerful computing platform which will allow the company to improve and enhance its MIS. EMPLOYEES As of December 31, 1998 the company employed approximately 513 individuals. Of these, approximately 128 were employed in sales, marketing and customer service, 214 were employed in engineering and technical positions and 171 were employed in administration, finance and MIS. The company believes that its ability to recruit and retain highly skilled and experienced technical, sales and management personnel has been, and will continue to be, critical to its ability to execute its business plans. None of the company's employees are represented by a labor union or are subject to a collective bargaining agreement. The company believes that its relations with its employees are good. HISTORY AND REINCORPORATION The company was incorporated under Texas law in 1983 under the name Technicomp Corp. On June 30, 1993, the company changed its name to Allstar-Valcom, Inc., and then again, on December 28, 1993, the company changed its name to Allstar Systems, Inc. On December 27, 1993, the company engaged in a merger in which it was the surviving corporation. In the merger, Allstar Services, Inc. and R. Cano, Inc., both of which were affiliated with the company, were merged with and into Allstar Systems, Inc. in order to streamline the business. In 1995 the company formed a wholly owned subsidiary, Stratasoft, Inc., to purchase and develop its CTI Software business unit. In 1997, the company formed another wholly-owned subsidiary, IT Staffing, Inc., for the purpose of conducting business in the placement of temporary and permanent technical personnel. In 1998 the company formed another wholly owned subsidiary, Allstar Systems Rio Grande, Inc., to develop and manage business opportunities in the Rio Grande region congruent with the business of the parent, Allstar Systems, Inc. In October 1996, the company effected a reincorporation and merger in the State of Delaware through which the 328,125 shares of the company's predecessor, Allstar Systems, Inc., a Texas corporation, which were outstanding prior to the merger, were converted into approximately 2,675,000 shares of the newly incorporated Delaware corporation (the "Reincorporation"). The effect of the Reincorporation on the number of shares outstanding prior to the Reincorporation was similar in effect to an approximately 8.15-for-1 stock split. FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATION Risk of Low Margin Business Given the significant levels of competition that characterize the computer reseller market, it is unlikely that the company will be able to increase gross profit margins. In order to attract and retain many of its larger customers, the company frequently must agree to volume discounts and maximum allowable markups that serve to limit the profitability of sales to such customers. In addition, manufacturers of products sold by the company have recently changed their business practices to largely eliminate price protection for inventory held by the company and have also reduced and/or eliminated return privileges for inventory held by the company. Any increase in inventory devaluation risks that cannot be passed onto the company's customers would result in write-offs or markdowns of the value of such inventory with the result being a charge to gross profit, reducing gross margin. Any failure by the company to maintain or increase its gross profit margins and sales levels could have a material adverse effect on the company's financial condition and results of operations. Dependence on Availability of Credit The company's business activities are capital intensive in that the company is required to finance accounts receivable and inventory. In order to obtain necessary working capital, the company relies primarily on lines of credit under which the available credit are dependent on the amount and quality of the company's accounts receivable and inventory. As a result, the amount of credit available to the company may be adversely affected by factors such as delays in collection or deterioration in the quality of the company's accounts receivable, inventory obsolescence, economic trends in the computer industry, interest rate fluctuations and the lending policies of the company's lenders. Many of these factors are beyond the company's control. Any decrease or material limitation on the amount of capital available to the company under its credit lines and other financing arrangements would limit the ability of the company to fill existing sales orders, purchase inventory or expand its sales levels and, therefore, would have a material adverse effect on the company's financial condition and results of operations. (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Interest Rates Any significant increases in interest rates will increase the company's cost of capital and would have an adverse effect on the company's financial condition and results of operations. The inability of the company to have continuous access to capital at reasonable costs would materially and adversely impact the company's financial condition and results of operations. (See Item 7 - - "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Highly Competitive Business The company is engaged in business activities that are intensely competitive and rapidly changing. Price competition could materially adversely affect the company's financial condition and results of operations. The company's competitors include major computer products and telephone equipment manufacturers and distributors, including certain manufacturers and distributors that supply products to the company. Other competitors include established national, regional and local resellers, systems integrators, telephone systems dealers, computer-telephony value-added resellers and other computer-telephony software suppliers. Management of Growth The company has experienced rapid growth that has and may continue to put strains on the company's management and operational resources. The company's ability to manage growth effectively will require it to continue to implement and improve its operational, financial and sales systems, to develop the skills of its managers and supervisors and to hire, train, motivate and manage its employees. Regional Concentration For the foreseeable future, the company expects that it will continue to derive most of its revenue from customers located in or near the metropolitan areas in which the company maintains offices. Accordingly, an economic downturn in any of those metropolitan areas or in the region in general, would likely have a material adverse effect on the company's financial condition and results of operations. Dependence on Key Personnel The success of the company for the foreseeable future will depend largely on the continued services of key members of management, leading salespersons and technical personnel. The company does not maintain key personnel life insurance on any of its executive officers or salespersons other than its Chairman and Chief Executive Officer. The company's success also depends in part on its ability to attract, hire, train and retain qualified managerial, technical and sales and marketing personnel at a reasonable cost, particularly those involved in providing systems integration, support services and training. Competition for such personnel is intense. The company's financial condition and results of operations could be materially adversely affected if the company were unable to attract, hire, train and retain qualified personnel. Dependence on Continued Authorization to Resell and Provide Manufacturer-Authorized Services The company's future success in both product sales and services depends largely on its continued status as an authorized reseller of products and its continued authorization as a service provider. The company maintains sales and service authorizations with many industry-leading product manufacturers. Without such sales and service authorizations, the company would be unable to provide the range of products and services currently offered. In addition, some of these agreements are based upon the company's continued supply relationship with its major distributors. Furthermore, loss of manufacturer authorizations for products that have been financed under the company's credit facilities constitutes an event of default under such credit facilities. In general, the agreements between the company and its product manufacturers either provide for fixed terms or for termination on 30 days prior written notice. Failure to maintain such authorizations could have a material adverse effect on the company's financial condition and its results of operations. Dependence on Suppliers The company's business depends upon its ability to obtain an adequate supply of products and parts at competitive prices and on reasonable terms. The company's suppliers are not obligated to have product on hand for timely delivery to the company nor can they guarantee product availability in sufficient quantities to meet the company's demands. Any material disruption in the company's supply of products would have a material adverse effect on the company's financial condition and results of operations. Inventory Obsolescence The business in which the company competes is characterized by rapid technological change and frequent introduction of new products and product enhancements. The company's success depends in large part on its ability to identify and obtain products that meet the changing requirements of the marketplace. There can be no assurance that the company will be able to identify and offer products necessary to remain competitive or avoid losses related to obsolete inventory and drastic price reductions. The company attempts to maintain a level of inventory required to meet its near term delivery requirements by relying on the ready availability of products from its principal suppliers. Accordingly, the failure of the company's suppliers to maintain adequate inventory levels of products demanded by the company's existing and potential customers and to react effectively to new product introductions could have a material adverse effect on the company's financial condition and results of operations. Additionally, the company is at risk for decreases in realizable inventory value for inventory held by the company, due to product obsolescence. Reliance on Key Customers The company's top ten customers, which have varied from year to year, accounted for 33.2%, 21.2% and 31.7% of the company's revenue during 1996, 1997 and 1998, respectively. During 1998, the company's largest customer accounted for 9.3% of total revenues, but in past years the single largest customer has accounted for as much as 11.2% of total revenues. Based upon historical results and its existing relationships with customers, the company believes that a substantial portion of its total revenue and gross profit will continue to be derived from sales to existing customers. There are no long-term commitments by such customers to purchase products or services from the company. A significant reduction in business with any of the company's largest customers could have a material adverse effect on the company's financial condition and results of operations. Reliance on MIS The company's success is largely dependent on the accuracy, quality and utilization of the information generated by its customized MIS, which affects its ability to manage its sales, accounting, inventory and distribution. The company anticipates that it will continually need to refine and enhance its management information systems as the company grows and the needs of its business evolve. Although the company has a plan to try to mitigate any problems that might arise from the Year 2000 problem, there can be no assurance that this issue will not impact the company's information and telecommunications systems. In view of the company's reliance on its information and telecommunication systems, any interruption or errors in these systems could have a material adverse effect on the company's financial condition and results of operations. (See Item 1 - "Management Information Systems" and Item 7 - "Year 2000 Issue"). Acquisition Risk The company intends to pursue potential acquisitions of complementary businesses. The success of this strategy depends not only upon the company's ability to acquire complementary businesses on a cost-effective basis, but also upon its ability to integrate acquired operations into its organization effectively, to retain and motivate key personnel and to retain customers of acquired firms. Control by Existing Stockholders James H. Long, founder, Chairman of the Board, President and Chief Executive Officer of the company owns 50.1% of the outstanding Common Stock and Mr. Long will have the ability to control the election of a majority of the members of the company's board of directors, prevent the approval of certain matters requiring the approval of at least two-thirds of all stockholders and exert significant influence over the affairs of the company. Anti-Takeover Considerations The company's Certificate of Incorporation and Bylaws contain certain provisions that may delay, deter or prevent a change in control of the company. Among other things, these provisions authorize the board of directors of the company to issue shares of preferred stock on such terms and with such rights, preferences and designations as the board of directors of the company may determine without further stockholder action and limit the ability of stockholders to call special meetings or amend the company's Certificate of Incorporation or Bylaws. Each of these provisions, as well as the Delaware business combination statute could, among other things, restrict the ability of certain stockholders to effect a merger or business combination or obtain control of the company. Absence of Dividends The company expects to retain cash generated from operations to support its cash needs and does not anticipate the payment of any dividends on the Common Stock for the foreseeable future. In addition, the company's credit facilities prohibit the declaration or payment of dividends, unless consent is obtained from each lender. Item 2. Properties FACILITIES The company does not own any real property and currently leases all of its existing facilities. The company subleases its headquarters and Houston office that are housed in a free standing building of approximately 48,000 square feet. The Houston office sublease expired on December 31, 1998 and was extended for an additional year under similar terms and conditions. The company's corporate level operations occupy approximately 12,600 square feet of the Houston office. Telecom Systems and CTI Software occupy approximately 6,500 and 3,700 square feet of the Houston, respectively but occupy no space in any of the company's other offices. The company's Dallas office is housed in a freestanding building of approximately 20,000 square feet. The Dallas facility lease expired on June 30, 1998 and was renewed for an additional three years under similar terms and conditions. The company also leases a storage facility of approximately 7,000 square feet in Houston. The lease on this warehouse expired on April 14, 1998 and the company extended the lease on a month-to-month basis pending assessment of future needs. During 1997, the company added additional offices in Austin, McAllen and El Paso, Texas. During 1998 the company opened additional offices in San Antonio, Texas and in Albuquerque and Las Cruces, New Mexico, and moved its El Paso office to larger facilities. The company has leased interim offices in Albuquerque, Las Cruces and McAllen under leases expiring in less than one year, in two years for the San Antonio office and in three years for the Austin office. In 1998 the company expanded its distribution capabilities by entering into a three year lease on a 30,000 square foot warehouse in Dallas. The company intends to lease other facilities in these cities as its business expands. The company believes that suitable facilities will be available as needed. All of the non-Houston facilities are occupied solely by Information Technology. Item 3. Legal Proceedings The company is party to litigation and claims which management believes are normal in the course of its operations; while the results of such litigation and claims cannot be predicted with certainty, the company believes the final outcome of such matters will not have a material adverse effect on its results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters On July 7, 1997 the company completed an initial public offering of its Common Stock. The shares are traded on the Nasdaq National Market under the symbol "ALLS". High Low Fiscal 1997 Third quarter (Commencing July 7, 1997) 8 6 Fourth quarter 7 1/2 3 15/16 Fiscal 1998 First quarter 5 5/16 4 3/8 Second quarter 4 1/4 3 5/8 Third quarter 3 1 7/8 Fourth quarter 2 15/16 1 3/8 The company estimates that, as of December 31, 1998, there were approximately 890 beneficial holders of the company's common stock. The company has never declared or paid any cash dividends on its Common Stock. The company currently anticipates that it will retain all earnings for use in its business operations. The payment of dividends is prohibited under the company's credit agreements, unless approved by the lenders. Item 6. Selected Financial Data The following sets forth the selected data of the company for the five years ended December 31, 1998.
Year ended December 31, (In Thousands except share and per share amounts) 1994 1995 1996 1997 1998 Operating Data: Revenue $64,076 $91,085 $120,359 $129,167 $167,173 Cost of sales and services 55,541 79,857 104,302 111,126 145,039 Gross profit 8,535 11,228 16,057 18,041 22,134 Selling, general and administrative expenses 7,448 9,149 12,284 14,386 23,422 Operating income (loss) 1,087 2,079 3,773 3,655 (1,288) Interest expense (net of other income 764 1,218 1,183 685 351 Income (loss) before provision for income taxes 323 861 2,590 2,970 (1,639) Provision (benefit) for income taxes 140 342 987 1,126 (541) Net income (loss) $ 183 $ 519 $ 1,603 $ 1,844 $ (1,098) Supplemental Data: Net income (loss) per share: Basic $ 0.07 $ 0.19 $ 0.60 $ 0.52 $ ( 0.25) Diluted $ 0.07 $ 0.19 $ 0.60 $ 0.52 $ ( 0.25) Weighted average shares outstanding: Basic 2,554,808 2,675,000 2,675,000 3,519,821 4,345,883 Diluted 2,554,808 2,675,000 2,675,000 3,526,787 4,345,883
As of December 31, (In Thousands) 1994 1995 1996 1997 1998 Balance Sheet Data: Working Capital $1,363 $1,732 $2,291 $12,738 $9,800 Total Assets 19,077 24,266 24,720 34,855 51,028 Short-term borrowings(1) 8,972 9,912 9,975 1,572 15,958 Long-term debt 0 0 0 0 0 Stockholders' equity 2,205 2,724 4,327 14,637 12,705 (1) See Note 4 to the company's Consolidated Financial Statements. Short-term borrowings do not include amounts recorded as floor plan financing which are included in accounts payable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is qualified in its entirety by, and should be read in conjunction with, the company's Consolidated Financial Statements, including the Notes thereto, included elsewhere in this Annual Report on Form 10-K. Overview The company was formed in 1983 to engage in the business of reselling computer hardware and software products and providing related services. To date, most of its revenue has been derived from sales of computer products and related services. The company operated from a single office in Houston, Texas until 1992 when it opened a branch office in Dallas, Texas. In 1994, the company began offering Telecom Systems in its Houston office. In 1995, the company acquired and began marketing certain computer-telephony software products. During 1997 the company opened offices in Austin, McAllen and El Paso, Texas, and during 1998 opened additional offices in Albuquerque and Las Cruces, New Mexico, and San Antonio, Texas. In addition, the company employs sales representatives who work from their homes in Florida, Missouri, Nebraska and Oklahoma. Effective for the year ended December 31, 1998, the company will begin segment reporting as required by Statement of Financial Accounting Standard ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information, issued by the Financial Accounting Standards Board ("FASB") Three segments will be reported, with results detailed down to the earnings before interest and taxes line. The three segments are Information Technology, Telecom Systems and CTI Software. The results for the new Information Technology segment are the combined Computer Products and IT Services business units for which revenue and gross profit have been reported during past reporting periods. The gross margin varies substantially between each of these business segments. Over the past three years the gross margin in Information Technology has ranged between 11.7% and 12.9%; the gross margin in Telecom Systems has ranged between 26.1% and 35.5%; and the gross margin for CTI Software has ranged between 40.2% to 48.2%. Information Technology, Telecom Systems and CTI Software accounted for 93.6%, 4.5% and 1.9% of total revenues, respectively, during 1998. In order to reduce freight costs and selling, general and administrative expenses associated with product handling, the company began in 1995 to drop ship a higher percentage of orders directly from its suppliers to its customers. This initiative has resulted in the percentage of drop shipped orders (measured as the cost of goods drop shipped as a percentage of total cost of goods sold) growing from 18.1% in 1996, to 31.9% in 1998. While the company does not believe that it is in its best interest to drop ship all orders, it does intend to increase the volume of drop shipments with the expectation of reducing its freight, distribution and administrative costs related to these revenues. A significant portion of the company's selling, general and administrative expenses relate to personnel costs, some of which are variable and others of which are relatively fixed. The company's variable personnel costs are substantially comprised of sales commissions, which are typically calculated based upon the company's gross profit on a particular sales transaction and thus generally fluctuate with the company's overall gross profit. The remainder of the company's selling, general and administrative expenses are relatively more fixed and, while still somewhat variable, do not vary with increases in revenue as directly as do sales commissions. Manufacturers of many of the computer products resold by the company have consistently reduced unit prices near the end of a product's life cycle, most frequently following the introduction of newer, more advanced models. While some manufacturers of products sold by the company offer to price-protect the inventory carried by the company for a certain length of time following a price decrease by the manufacturer, recently many manufacturers have moved to more restrictive price protection policies or have largely eliminated price protection. Additionally, manufacturers have developed specialized marketing programs designed to improve or protect the manufacturer's market share. These programs often involve the granting of rebates to resellers to subsidize sales of computer products at reduced prices. While these programs generally enhance revenues they also generally result in lower margins being realized by the reseller. The company has participated in an increasing number of these programs in recent years. Based upon recent trends, the company believes that the number and amount of these programs will increase. Inacom Corp. ("Inacom") is the largest supplier of products sold by the company. Purchases from Inacom accounted for approximately 57.0%, 51.4%, and 33.2% of the company's total product purchases in 1996, 1997 and 1998, respectively. In August 1996, the company renewed its long-term supply arrangement with Inacom and agreed to purchase at least 80% of its products from Inacom, but only to the extent that such products were available through Inacom and made available within a reasonable period of time at reasonably competitive pricing. Inacom does not carry certain product lines sold by the company and Inacom may be unable to offer reasonable product availability and reasonably competitive pricing from time to time on those product lines that it carries. The company thus expects that less than 80% of its total purchases, as in past years, will be made from Inacom. Results of Operations The following table sets forth, for the periods indicated, certain financial data derived from the company's consolidated statements of operations and indicates the percentage of total revenue for each item .
Year ended December 31, 1996 1997 1998 Amount % Amount % Amount % (Dollars in thousands) Revenue Information Technology....... $ 115,247 95.7% $121,619 94.1% $156,579 93.6% Telecom Systems.............. 3,824 3.2 5,403 4.2 7,499 4.5 CTI Software................. 1,288 1.1 2,145 1.7 3,095 1.9 Total..................... 120,359 100.0 129,167 100.0 167,173 100.0 Gross profit Information Technology....... 14,180 12.3 15,707 12.9 18,316 11.7 Telecom Systems.............. 1,359 35.5 1,412 26.1 2,326 31.0 CTI Software................. 518 40.2 922 43.0 1,492 48.2 Total...................... 16,057 13.3 18,041 13.9 22,134 13.2 Selling, general and Administrative expenses Information Technology....... 10,459 9.1 11,431 9.4 18,786 12.0 Telecom Systems.............. 1,163 30.4 1,859 34.4 2,763 36.8 CTI Software................. 662 51.4 1,096 51.1 1,873 60.5 Total...................... 12,284 10.2 14,386 11.1 23,422 14.0 Operating income (loss) Information Technology....... 3,721 3.2 4,276 3.5 (470) (0.3) Telecom Systems.............. 196 5.1 (447) (8.3) (437) (5.8) CTI Software................. (144) (11.2) (174) (8.1) (381) (12.3) Total...................... 3,773 3.1 3,655 2.8 (1,288) (0.8) Interest expense (net of other income).................. 1,183 1.0 685 0.5 351 0.2 Income (loss) before provision (benefit) for income taxes..... 2,590 2.2 2,970 2.3 (1,639) (1.0) Provision (benefit) for income Taxes.......................... 987 0.8 1,126 0.9 (541) (0.3) Net income (loss)............... $ 1,603 1.3% $ 1,844 1.4% $ (1,098) (0.7)% (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, 1998 Compared to the Year Ended December 31, 1997 (Dollars in thousands) Revenue. Total revenue increased $38,006 (29.4%) to $167,173 in 1998 from $129,167 in 1997. Revenue from Information Technology, which comprised 93.6% of total revenue in 1998 compared to 94.1% in 1997, increased $34,960 (28.7%) to $156,579 in 1998 from $121,619 in 1997. The increase in Information Technology revenue was generally attributable to increased sales of products and services to new and existing customers and to sales generated in the company's newer branch offices. Of the $34,960 increase in Information Technology revenue, $17,526 (50.1%) resulted from increased sales in the company's more established offices in Houston and Dallas and $17,434 (49.9%) resulted from sales in the company's newer offices opened since mid-1997. The increase of $17,526 from the older, more established offices in Houston and Dallas represented an increase of 14.6% to $137,290 in 1998 from $119,764 in 1997. The increase of $17,434 from the company's newer branch offices represented an increase of 939.8% to $19,289 in 1998 from $1,855 in 1997. Total 1998 Information Technology revenue consisted of $143,407 (91.6% of total Information Technology revenue) from product sales and $13,172 (8.4% of total) from services as compared to $111,145 (91.4% of total) and $10,474 (8.6% of total), respectively, in 1997. Information Technology revenue from product sales increased 29.0% and revenue from services increased 25.8% during 1998 compared to 1997. Revenue from Telecom Systems, which comprised 4.5% of total revenue in 1998, compared to 4.2% in 1997, increased $2,096 (38.8%) to $7,499 in 1998 from $5,403 in 1997. The increase in Telecom Systems revenue was primarily the result of increased sales of systems to new and existing customers and due to sales of larger systems. Telecom Systems operates primarily out of the company's Houston office and, therefore, has insignificant revenues attributable to sales from the company's other offices. Revenue from CTI Software, which comprised 1.9% of total revenue in 1998, compared to 1.7% in 1997, increased $950 (44.3%) to $3,095 in 1998 from $2,145 in 1997. The increased revenues from CTI Software were primarily the result of sales to new customers, the introduction of a new call center software product, the addition of several new resellers for their products and the integration of products with several third-party software products. Gross Profit. Gross profit increased $4,093 (22.7%) to $22,134 in 1998 from $18,041 in 1997, while gross margin decreased to 13.2% in 1998 from 13.9% in 1997. Gross profit and gross margin were affected by asset valuation markdowns of $2,040 in the company's Information Technology segment related to reducing the carrying value of that segment's inventory and certain vendor accounts receivables. The company decided that the mark-downs in inventory value were necessary based upon an analysis of the impact of supplier's changes in product return privileges and price protection policies made available by product manufacturers and suppliers. The markdowns related to reducing the carrying value of certain vendor accounts receivables were due to the company's inability to collect certain accounts related to special promotional funds owed to the company from certain of its suppliers. The gross margin for Information Technology decreased to 11.7% in 1998 from 12.9% in 1997, reflecting the effect of the aforementioned asset valuation markdowns and lower gross margin produced on the services revenue component of total Information Technology revenues. The gross margin for Telecom Systems increased to 31.0% in 1998 from 26.1% in 1997. This improvement in gross margin was primarily due to an increase to a more normal gross margin from the year earlier period when gross margin was lower than expected due to a number of circumstances, including the fact that the 1997 period contained a number of larger, lower margin sales. The gross margin for CTI Software increased to 48.2% in 1998 from 43.0% in 1997. This increase was due primarily to lower system installation costs, relative to revenue, reflecting improved productivity and efficiency due to improved software installation and customization tools introduced in 1998. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $9,036 (62.8%) to $23,422 in 1998 from $14,386 in 1997. As a percentage of total revenue, selling, general and administrative expenses increased to 14.0% in 1998 from 11.1% in 1997. The dollar increase of approximately $3,200 was attributable to a 60.7% increase in sales personnel compensation due to the company's efforts to expand its sales force, particularly in the newer branch offices, and to increased commissions paid to sales staff resulting from increases in revenue; approximately $2,500 was attributable to a 59.5% increase in compensation to administrative personnel primarily related to the opening of additional offices; and $840 was attributable to a 79.3% increase in rent, utilities and telephone expenses primarily related to the company operating eight physical branch offices and a regional distribution facility at the end of the 1998 period compared to only three branch offices at the end of 1997. Other costs were generally higher in 1998 compared to 1997 due to the company opening and operating the additional branch offices and the distribution center and due to increased levels of business activity. Selling, general and administrative expenses in Information Technology increased $7,355 (64.3%) to $18,786 in 1998 compared to $11,431 in 1997. For Telecom Systems, selling, general and administrative expenses increased $904 (48.6%) to $2,763 in 1998 from $1,859 in 1997. For CTI Software, selling, general and administrative expenses increased $777 (70.9%) to $1,873 from $1,096 in 1997. Operating Income (loss). Operating income decreased $4,943 (135.2 %) to a loss of $1,288 in 1998 from a profit of $3,655 in 1997 due primarily to the increase in selling, general and administrative expenses and the effect of the aforementioned asset valuation markdowns. Operating income in Information Technology decreased $4,746 (111.0%) to a loss of $470 in 1998 from operating income of $4,276 in 1997. For Telecom Systems, the operating loss decreased $10 (2.2%) to $437 in 1998 from $447 in 1997. For CTI Software, the operating loss increased $207 (119.0%) to $381 in 1998 from $174 in 1997. Interest Expense (Net of Other Income). Interest expense (net of other income) decreased $334 (48.8%) to $351 in 1998 compared to $685 in 1997. Interest expense decreased in 1998 due to the reduction of outstanding debt resulting from the 1997 stock offering proceeds applied to the reduction of debt. Net Income (Loss). Net income (loss), after an income tax benefit totaling $541 (reflecting an effective tax rate of 33.0% for 1998 compared to 37.9% for 1997), became a loss of $1,098 in 1998 compared to a profit of $1,844 in 1997. Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996 (Dollars in thousands) Revenue. Total revenue increased $8,808 (7.3%) to $129,167 in 1997 from $120,359 in 1996. Revenue from Information Technology, which comprised 94.1% of total revenue, increased $6,372 (5.5%) to $121,619 in 1997 from $115,247 in 1996. The increase in Information Technology revenue was generally attributable to increased sales to new and existing customers. Revenue in Information Technology did not grow as expected in 1997 principally due to insufficient capital resources during the first half of 1997 and the inability of the newly added sales personnel to attain the level of revenue production normally expected of new personnel. Revenue from Telecom Systems, which comprised 4.2% of total revenue, increased $1,579 (41.2%) to $5,403 in 1997 from $3,824 in 1996. The increase in Telecom Systems' revenue was primarily the result of adding new customers, of which one customer accounted for approximately $1,300 (82.3%) of the increase. Revenue from CTI Software increased $857 (66.5%) to $2,145 in 1997 from $1,288 in 1996. The increased revenues were primarily the result of sales to new customers. Gross Profit. Gross profit increased $1,984 (12.4%) to $18,041 in 1997 from $16,057 in 1996. Gross margin increased to 13.9% in 1997 from 13.3% in 1996. The gross margin for Information Technology increased to 12.9% in 1997 from 12.3% in 1996. The gross margin for Telecom Systems decreased to 26.1% in 1997 from 35.5% in 1996. In 1997, Telecom Systems bid on and won the installation of several large systems. As a result of the competitive bidding process employed by certain customers these large systems were projects that had lower than normal margins. In addition, gross margin decreased in 1997 due to the purchase of a large system by a single customer at a lower than usual margin. CTI Software gross margin increased to 43.0% in 1997, from 40.2% in 1996. This increase in CTI Software gross margin reflected slightly lower, installation costs and development costs (as a percentage of revenue) in 1997 compared to 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2,102 (17.1%) to $14,386 in 1997 from $12,284 in 1996. As a percentage of total revenue, selling, general and administrative expenses increased to 11.1% in 1997 from 10.2% in 1996. Of the dollar increase, approximately $1,500 (71.4%) was attributable to increased temporary and permanent personnel, principally in non-sales personnel. Other costs that grew at a rate in excess of the rate of growth in revenues include expenses relating to becoming and being a publicly held corporation and professional fees. The increase as a percentage of total revenue resulted primarily from increased expenditures for those expenses that do not fluctuate with gross profit or revenues. Selling, general and administrative expense in Information Technology increased $972 (9.3%) to $11,431 in 1997 compared to $10,459 in 1996. For Telecom Systems, selling, general and administrative expense increased $696 (59.8%) to $1,859 in 1997 from $1,163 in 1996. For CTI Software, selling, general and administrative expense increased $434 (65.6%) to $1,096 in 1997 from $662 in 1996. Operating Income. Operating income decreased $118 (3.1%) to $3,655 in 1997 from $3,773 in 1996. Operating income as a percentage of total revenue decreased to 2.8% in 1997 from 3.1% in 1996 largely due to increases in selling, general and administrative expenses. Operating income in Information Technology business segment increased $555 (14.9%) to $4,276 in 1997 from $3,721 in 1996. For Telecom Systems, operating income decreased $643 (327.6%) to an operating loss of $447 in 1997 compared to operating income of $196 in 1996. For CTI Software, the operating loss decreased $30 (20.8%) to $174 in 1997 from $144 in 1996. Interest Expense (Net of Other Income). Interest expense (net of other income) decreased $498 (42.1%) to $685 in 1997 from $1,183 in 1996. Interest expense decreased due primarily to the reduction of outstanding debt by applying the proceeds of the company's initial public offering to the reduction of debt. Net Income. Net income, after a provision for income taxes totaling $1,126 (reflecting an effective tax rate of 37.9% in 1997 compared to 38.1% in 1996), increased $241 to $1,844 in 1997 from $1,603 in 1996. Net income increased as a percentage of total revenue to 1.4% in 1997 from 1.3% in 1996. Quarterly Results of Operations The following table sets forth certain unaudited quarterly financial information for each of the company's last eight quarters and, in the opinion of management, includes all adjustments (consisting of only normal recurring adjustments) which the company considers necessary for a fair presentation of the information set forth therein. The company's quarterly results may vary significantly depending on factors such as the timing of large customer orders, timing of new product introductions, adequacy of product supply, variations in the company's product costs, variations in the company's product mix, promotions by the company, seasonal influences and competitive pricing pressures. Furthermore, the company generally experiences a higher volume of product orders in its Information Technology business segment in the fourth quarter, which the company attributes to year-end capital spending by some of its customers. Any decrease in the number of year-end orders experienced by the company may not be offset by increased revenues in the company's first three quarters. The results of any particular quarter may not be indicative of results for the full year or any future period.
1997 1998 (In thousands, except per share amounts) First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Revenue Information Technology. $25,213 $30,358 $30,463 $35,585 $30,644 $37,509 $41,750 $46,676 Telecom Systems........ 953 1,284 801 2,365 1,072 1,818 2,302 2,307 CTI Software........... 427 597 650 471 826 513 723 1,033 Total 26,593 32,239 31,914 38,421 32,542 39,840 44,775 50,016 Cost of sales and service Information Technology. 21,877 26,089 26,741 31,205 26,317 32,581 36,139 43,226 Telecom Systems........ 650 951 618 1,772 900 1,031 1,753 1,489 CTI Software........... 235 272 418 298 515 278 319 491 Total 22,762 27,312 27,777 33,275 27,732 33,890 38,211 45,206 Gross Profit Information Technology. 3,336 4,269 3,722 4,380 4,327 4,928 5,611 3,450 Telecom Systems........ 303 333 183 593 172 787 549 818 CTI Software........... 192 325 232 173 311 235 404 542 Total 3,831 4,927 4,137 5,146 4,810 5,950 6,564 4,810 Selling, general and administrative expenses Information Technology. 2,607 3,031 2,773 3,020 3,634 4,431 5,067 5,654 Telecom Systems........ 344 518 351 646 568 583 863 749 CTI Software........... 184 290 315 307 374 450 395 654 Total............. 3,135 3,839 3,439 3,973 4,576 5,464 6,325 7,057 Operating Income (loss) Information Technology. 729 1,238 949 1,360 693 497 544 (2,204) Telecom Systems........ (41) (185) (168) (53) (396) 204 (314) 69 CTI Software........... 8 35 (83) (134) (63) (215) 9 (112) Total $ 696 $ 1,088 $ 698 $ 1,173 $ 234 $ 486 $ 239 $(2,247) Interest expense (net of other income 289 309 82 5 28 51 95 177 Income (loss) before Provision (benefit) for income taxes......... 407 779 616 1,168 206 435 144 (2,424) Provision (benefit) for income taxes......... 154 310 237 425 82 165 57 (845) Net income (loss) $ 253 $ 469 $ 379 $ 743 $ 124 $ 270 $ 87 $ (1,579) Net income (loss) per share (Basic and Diluted).. $0.09 $0.17 $0.09 $0.17 $0.03 $0.06 $0.02 $ (0.37)
Liquidity and Capital Resources Historically, the company has satisfied its cash requirements principally through borrowings under its lines of credit and through operations. The company maintains a cash position sufficient to pay only its immediately due obligations and expenses. When the amount of cash available falls below its immediate needs the company requests an advance under its credit facility. As the company's total revenue has grown, the company has obtained increases in its available lines of credit to enable it to finance its growth. The company's working capital was $2,291, $12,738 and $9,800 at December 31, 1996, 1997 and 1998, respectively. The increase in working capital during 1997 was attributable to the receipt of net proceeds from a public offering of the company's common stock in July 1997 and net earnings. The decrease in working capital during 1998 was primarily attributable to the net operating loss and capital expenditures. At December 31, 1998, the company had total borrowing capacity under its credit facility of approximately $30,000 as compared to $23,900 at December 31, 1997. At December 31, 1998 the company had outstanding borrowings of $29,999 and, thus, was fully borrowed against its credit facility based upon its collateral base at that time. At December 31, 1998, the company had a $30,000 credit facility with its primary lender, which was increased on a temporary basis to $40,000 to accommodate an increased level of business. The company is seeking a permanent increase in its credit facility to support a higher level of business. As of December 31, 1998, the company was fully borrowed against its available borrowing based due to the higher level of business during the fourth quarter. The company expects an increased level of business in 1999 and to support an increased level of business over the fourth quarter, the company will be required to increase its borrowing base relative to the borrowing base as of December 31, 1998. The company expects to accomplish this requirement by improved asset management. If the company does not increase its borrowing base it will not be able to significantly increase its level of revenue over that which was realized in the fourth quarter. Cash Flows Operating activities provided net cash totaling $89 and $2,086 during 1996 and 1997, respectively, and used net cash totaling $10,831 during 1998. Net cash provided during 1996, was due primarily to the combined effect of significantly increased net income, a relatively small year-to-year increase in accounts receivable and a year-to-year decrease in inventory. During 1997, net cash was provided from operations due primarily to net income, increased levels of trade accounts payable and accrued expenses which more than offset increases in accounts receivable. During 1998, net cash was used by operations due primarily to a net loss, a large increase in accounts receivable, an increase in inventory, which was offset somewhat by an increase in accounts payable and accrued expenses. Accounts receivable increased $695, $8,999 and $9,377 during 1996, 1997 and 1998, respectively. Inventory decreased $545 and $162 in 1996 and 1997, respectively, and increased $3,797 in 1998. Investing activities used cash totaling $952, $992 and $1,764 during 1996, 1997 and 1998, respectively. The company's investing activities that used cash during these periods were primarily related to capital expenditures related to new offices, an expanded work force and upgrading of computing equipment and the company's management information systems. During the next twelve months, the company expects to incur an estimated $500 for capital expenditures. All or a portion of the $500 in capital expenditures currently anticipated by the company for such purposes are presently expected to be financed from net cash flow from operations or borrowings under the company's line of credit. The actual amount and timing of such capital expenditures may vary substantially depending upon, among other things, the performance of certain of the company's recently opened branch offices. Financing activities provided cash totaling $63, $258 and $13,552 during 1996, 1997 and 1998, respectively. In July 1997, the company received $8,661 net proceeds from the sale of Common Stock in a public offering. Those proceeds were used to reduce the outstanding balance under the company's line of credit. The primary source of cash from financing activities in other periods has been borrowings on the company's lines of credit. The lines of credit have been used principally to satisfy the company's cash requirements, including financing increases in accounts receivable and inventory. During 1998, the company used $834 to repurchase shares that were held in treasury at the end of 1998. Asset Management The company's cash flow from operations has been affected primarily by the timing of its collection of accounts receivable. The company typically sells its products and services on short-term credit terms and seeks to minimize its credit risk by performing credit checks and conducting its own collection efforts. The company had accounts receivable, net of allowance for doubtful accounts, of $16,517, $25,516 and $34,893 at December 31, 1996, 1997 and 1998, respectively. The number of days' sales outstanding in trade accounts receivable was 40 days, 60 days and 67 days for years 1996, 1997 and 1998, respectively. The increase in days' sales outstanding was caused by a general slow down in payments by the company's customers. Bad debt expense as a percentage of total revenue for the same periods was 0.2%, 0.2% and 0.2%. The company's allowance for doubtful accounts, as a percentage of accounts receivable, was 1.3%, 1.0% and 1.0% at December 31, 1996, 1997 and 1998, respectively. The company attempts to manage its inventory in order to minimize the amount of inventory held for resale and the risk of inventory obsolescence and decreases in market value. The company attempts to maintain a level of inventory required to reach only its near term delivery requirements by relying on the ready availability of products from its principal suppliers. Manufacturers of the company's major products have in the past generally provided price protection, which reduces the company's exposure to decreases in prices, but during 1998 most major product manufacturers reduced or largely eliminated price protection. The company's suppliers generally allow for some levels of returns of excess inventory, which, on a limited basis, are made without material restocking fees. During 1998, the Companies suppliers generally became more restrictive in their policies regarding product return privileges. Inventory turnover for 1996, 1997 and 1998 was 19.2 times, 21.5 times, and 22.0 times, respectively. Credit Facilities On February 27, 1998 the company executed agreements with Deutsche Financial Services ("DFS") for a revolving line of credit (the "DFS Facility") which replaced the company's prior primary credit facility as the company's principal source of liquidity. The company's prior primary credit facility with IBM Credit Corporation ("IBMCC") was converted into a credit facility for the purchase of IBM branded computer products (the "IBMCC Facility"). The total credit available under the DFS Facility is $30,000, subject to borrowing base limitations which are generally computed as a percentage of various classes of eligible accounts receivable and qualifying inventory. Credit available under the DFS Facility for floor plan financing of inventory from approved manufacturers (the "Inventory Line") is $20,000. Available credit under the DFS Facility, net of Inventory Line advances, is $10,000, which is used by the company primarily to carry accounts receivable and for other working capital and general corporate purposes (the "Accounts Line"). Borrowings under the Accounts Line bear interest at the fluctuating prime rate minus 1.0% per annum. Under the Inventory Line, DFS pays the company's inventory vendors directly, generally in exchange for negotiated financial incentives. Typically, the financial incentives received are such that DFS does not charge interest to the company until 40 days after the transaction is financed, at which time the company is required to either pay the full invoice amount of the inventory purchased from corporate funds or to borrow under the Accounts Line for the amount due to DFS. Inventory Line advances not paid within 40 days after the financing date bear interest at the fluctuating prime rate plus 5.0%. For purposes of calculating interest charges the minimum prime rate under the DFS Facility is 7.0%. DFS may change the computation of the borrowing base and disqualify accounts receivable upon which advances have been made and require repayment of such advances to the extent such disqualifications cause the company's borrowings to exceed the reduced borrowing base. The DFS Facility is collateralized by a security interest in substantially all of the company's assets, including its accounts receivable, inventory, equipment and bank accounts. Collections of the company's accounts receivable are required to be applied through a lockbox arrangement to repay indebtedness to DFS; however, DFS has amended the lockbox agreement to make such arrangements contingent upon certain financial ratios. Provided the company is in compliance with its debt to tangible net worth covenant, the company has discretion over the use and application of the funds collected in the lockbox. If the company exceeds that financial ratio, DFS may require that lockbox payments be applied to reduce the company's indebtedness to DFS. If in the future DFS requires that all lockbox payments be applied to reduce the company's indebtedness, the company would be required to seek funding from DFS or other sources to meet substantially all of its cash needs. The DFS agreement contains restrictive covenants which, among other things, require specific ratios of current assets to current liabilities and debt to tangible net worth and require Allstar to maintain a minimum tangible net worth. The terms of the agreement also prohibits the payment of dividends and other similar expenditures, including advances to related parties. The IBMCC Facility is a $2,000 credit facility for the purchase of IBM branded inventory from certain suppliers. Advances under the IBMCC Facility are typically interest free for 30 days after the financing date for transactions in which adequate financial incentives are received by IBMCC from the vendor. Within 30 days after the financing date, the full amount of the invoice for inventory financed through IBMCC is required to be paid by the company. Amounts remaining outstanding thereafter bear interest at the fluctuating prime rate (but not less than 6.5%) plus 6.0%. IBMCC retains a security interest in the inventory financed. The IBMCC Facility is immediately terminable by either party by written notice to the other. Both the IBMCC Facility and the DFS Facility prohibit the payment of dividends unless consented to by the lender. Year 2000 Issue The Year 2000 problem generally results from the use in computer hardware and software of two digits rather than four digits to define the applicable year. When computers must process dates both before and after January 1, 2000, two-digit year "fields" may create processing ambiguities that can cause errors and system failures. For example, a date represented by "00" may be interpreted by the system as referring to the year 1900 rather than 2000. The effects of the Year 2000 problem can be exacerbated by the interdependence of computer and telecommunications systems in the United States and throughout the world. This interdependence can affect the company and its suppliers, trading partners, and customers ("outside entities"). The following are some of the identified risks related to the Year 2000 problem: Shortage of Resources. Between now and the year 2000 it is anticipated that there will be increased competition for people with technical and managerial skills necessary to deal with the Year 2000 problem. Both the company and outside entities could face an inability to attract and/or keep personnel with the necessary skills to solve and/or mitigate problems related to the Year 2000 problem. Potential Shortcomings. The company estimates that its mission-critical systems will be Year 2000-ready substantially before January 1, 2000. However, there is no assurance that the Y2K Plan will succeed in accomplishing its purpose, or that unforeseen circumstances will not arise during implementation of the Project that would materially adversely affect the company. Cascading Effect. The company is taking reasonable steps to identify, assess and, where appropriate, to replace devices that contain embedded microprocessors that cannot be determined to be warranted by the manufacturer to be Year 2000-ready. Despite these reasonable efforts, the company anticipates that it will not be able to find and remediate all embedded microprocessors in all systems. Further, it is anticipated that outside entities also will not be able to find and remediate all embedded microprocessors in their systems. Some of the disruptions, failures or errors may spread from the systems in which they are located, including from systems of outside entities, to other of the company's systems causing adverse effects upon the company's ability to maintain safe operations, to serve its customers and otherwise to fulfill certain contractual and other legal obligations. Third Parties. The company cannot assure that suppliers upon which it depends for essential goods and services, or customers upon which it depends for revenue and for timely payment of amounts due to the company, will convert and test their mission-critical systems and processes in a timely manner. Failure or delay by all or some of these entities, including federal, state or local governments, could create substantial disruptions which could have a material adverse effect on the company's business. State of Readiness: The company's board of directors has been briefed about the Year 2000 problem. The board of directors has adopted a Year 2000 project (the "Y2K Plan") aimed at preventing the company's mission-critical functions from being impaired due to the year 2000 problem. "Mission-critical" functions are those critical functions whose loss would cause an immediate stoppage or significant impairment to core business processes. The company's Vice President of Information Systems is supervising the implementation of the Y2K Plan. The company is actively implementing the Y2K Plan, which will be modified as events warrant. Under the plan, the company has inventoried all of the computer systems and the telephone system at its corporate offices. The company is upgrading all computer and software systems that cannot be verified as warranted by the system's manufacturer to be Year 2000 compliant. The company's corporate offices telephone system is warranted by the manufacturer to be Year 2000 compliant. During the second quarter of 1999, the company will complete an inventory of all computers, software and telephone systems used in its branch offices and will upgrade or replace any systems that cannot be verified as warranted by the system's manufacturer to be Year 2000 compliant. The company's Y2K Plan recognizes that the computer, telecommunications and other systems of outside entities have the potential for major, mission-critical, adverse effects on the conduct of company business. The company does not have control of these outside entities or outside systems; however, the company's Y2K Plan includes attempting to verify the readiness of those outside entities or outside systems which might possibly have a material adverse effect on the company's business by contacting those outside entities to determine their readiness and to coordinate with those outside entities to mitigate the possibility of an interruption of any mission-critical process. The company will, throughout 1999, attempt to evaluate the readiness of any outside systems which might possibly create a material adverse effect on any mission-critical process. It is important to recognize that the processes of inventorying, assessing, analyzing, converting (where necessary), testing, and developing contingency plans for mission-critical items in anticipation of the Year 2000 event may be iterative processes, requiring a repeat of some or all of these processes as the company learns more about the Year 2000 problem and its effects on the internal business information systems and on outside systems, and about the effects of embedded microprocessors on systems and business operations. The company anticipates that it will continue with these processes through January 1, 2000 and on into the year 2000 in order to assess and remediate problems that reasonably can be identified only after the start of the new century. Costs to Address Year 2000 Issues: The company has not incurred substantial historical costs for Year 2000 awareness, inventory, assessment, analysis, conversion, testing, or contingency planning and anticipates that any future costs for these purposes, including those for implementing Year 2000 contingency plans, are not likely to be substantial. The company has incurred expenditures, as part of an overall upgrading of its computer and telecommunications systems, during 1998 and through 1999 to date. The company has also recognized higher expenditures in managing its information and telecommunications systems as staff members have expended time and resources evaluating the company's Year 2000 readiness and implemented required changes. It is difficult to assess the additional expenditures over and above what would have been expended under normal circumstances, but the company estimates that it incurred expenditures of approximately $300 over and above that which would have been incurred were it not for the Year 2000 issue. The company currently believes that the additional expenditures specifically related to preparing for the Year 2000 issue will not be significant. Although the company believes that its estimates are reasonable, there can be no assurance that the costs of implementing the Y2K Plan will not differ materially from the estimated costs or that the company will not be materially adversely affected by year 2000 issues. Worst Case Scenario: The Securities and Exchange Commission requires that public companies must forecast the most reasonably likely worst case Year 2000 scenario, assuming that the company's Year 2000 plan is not effective. Analysis of the most reasonably likely worst case Year 2000 scenarios the company may face leads to contemplation of the following possibilities which, though considered highly unlikely, must be included in any consideration of worst cases: widespread failure of electrical, natural gas, and similar supplies by utilities serving the company; widespread disruption of the services of communications common carriers; similar disruption to means and modes of transportation for the company and its employees, contractors, suppliers, and customers; significant disruption to the company's ability to gain access to, and continue working in, office buildings and other facilities; the failure of substantial numbers of mission-critical hardware and software computer systems, including both internal business systems and other systems (such as those with embedded microprocessors); and the failure of outside systems, the effects of which would have a cumulative material adverse impact on the company's mission-critical systems. Among other things, the company could face substantial claims by customers for loss of revenues due to service level interruptions, inability to fulfill contractual obligations, inability to account for certain revenues or obligations or to bill customers or pay vendors accurately and on a timely basis, and increased expenses associated with litigation, stabilization of operations following mission-critical failures, and the execution of contingency plans. The company could also experience an inability by customers, and others to pay, on a timely basis or at all, obligations owed to the company. The company's suppliers may not be able to deliver goods and services required by the company. Under these circumstances, the adverse effect on the company, and the diminution of company revenues, could be material, although not quantifiable at this time. Further in this scenario, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on the company, and the diminution of company revenues, from a domestic or global recession or depression also could be material, although not quantifiable at this time. The company will continue to monitor business conditions with the aim of assessing and quantifying material adverse effects, if any, that result or may result from the Year 2000 problem. As part of its Y2K Plan, the company is developing contingency plans that deal with, among others, two primary aspects of the year 2000 problem: (i) that the company, despite its good-faith, reasonable efforts, may not have satisfactorily remediated all internal, mission-critical systems; and (ii) that systems of outside entities may not be Year 2000 ready, despite the company's good-faith, reasonable efforts to work with outside entities. These contingency plans are being designed to mitigate the disruptions or other adverse effects resulting from Year 2000 incompatibilities regarding these mission-critical functions or systems, and to facilitate the early identification and remediation of mission-critical Year 2000 problems that first manifest themselves after January 1, 2000. These contingency plans will contemplate an assessment of all mission-critical internal information and communications technology systems and internal operational systems that use computer-based controls and any recognizable potential outside entities or systems which might possibly have a material adverse affect on any mission-critical processes. This process will be pursued continuously into the Year 2000 as circumstances require. These contingency plans will include the creation, as deemed reasonably appropriate, of teams that will be standing by on the eve of the new millennium, prepared to respond rapidly and otherwise as necessary to mitigate any problems with mission-critical processes as soon as they become known. Accounting Pronouncements SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, were issued by the FASB in June 1997. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about Pensions and Other Postretirement Benefits. These Statements became effective for the current fiscal year. The company does not have any items that constitute other comprehensive income for the year ended December 31, 1998, as identified by SFAS No. 130. Consequently it did not include a statement of comprehensive income as part of its financial statements. SFAS No. 131 was adopted by the company during 1998 and the segment disclosure requirements have been incorporated in the notes to the financial statements with prior period information being restated. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans and is an amendment of SFAS No. 87, 88, and 106. This statement does not have an impact on the company's 1998 financial statements In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the FASB. SFAS No. 133 is effective for fiscal years beginning after January 1, 2000. This statement will not have any effect on the 1998 financial statements. Management is evaluating what impact, if any, the adoption of this statement may have, and additional disclosures may be required when this statement is implemented. In March 1998, the Accounting Standards Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This Statement provides guidance on accounting for costs of computer software developed or obtained for internal use. SOP No. 98-1 is effective for fiscal years beginning after December 15, 1998. In April 1998, SOP N0. 98-5, Reporting on the Costs of Start-Up Activities, was issued by AcSEC. This Statement provides guidance on determining what constitutes a start-up activity and requires that the costs of these start-up activities be expensed as incurred. These two Statements will be implemented by the company in the year ending December 31, 1999, should the circumstances arise. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company incurs certain market risks related to interest rate variations because the company holds floating rate debt. Based upon the average amount of debt outstanding during 1998, a one-percent increase in interest rates paid by the company on its debt would have resulted in an increase in interest expense of approximately $57 for the year. Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements: Independent Auditors' Report....................................... 25 Consolidated Balance Sheets as of December 31, 1997 and 1998....... 26 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998............................... 27 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998......................... 28 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998............................... 29 Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1997 and 1998............................... 30 INDEPENDENT AUDITORS' REPORT To the Stockholders of Allstar Systems, Inc.: We have audited the accompanying consolidated balance sheets of Allstar Systems, Inc. and subsidiaries ("Allstar") at December 31, 1997 and 1998, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of Allstar's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Allstar at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Houston, Texas March 31, 1999 ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998 (In thousands, except share and per share amounts) ......... ASSETS 1997 1998 Current Assets: Cash and cash equivalents: Restricted cash $ 280 0 Cash 1,301 $ 2,538 Total cash and cash equivalents 1,581 2,538 Accounts receivable, net 25,516 34,893 Accounts receivable - affiliates 434 373 Inventory 4,700 8,497 Deferred taxes 212 431 Income taxes receivable 0 637 Other current assets 318 559 Total current assets 32,761 47,928 Property and equipment, net 2,013 2,902 Other assets 81 198 $ 34,855 $ 51,028 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable $ 1,572 $ 15,958 Accounts payable 14,562 16,641 Accrued expenses 3,565 5,273 Income taxes payable 82 0 Deferred service revenue 242 256 Total current liabilities 20,023 38,128 Deferred credit - Stock warrants 195 195 Commitments and Contingencies (See Note 9) Stockholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued Common stock, $.01 par value, 15,000,000 shares authorized, 4,454,411 and 4,503,411 issued at December 31, 1997 and 1998, respectively 45 45 Additional paid in capital 10,013 10,196 Unearned equity compensation (86) (269) Treasury stock, 271,200 shares, at cost 0 (834) Retained earnings 4,665 3,567 Total stockholders' equity $ 14,637 $ 12,705 $ 34,855 $ 51,028 See notes to consolidated financial statements. ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (In thousands, except share and per share amounts) Years ended December 31, 1996 1997 1998 Total revenue $ 120,359 $ 129,167 $ 167,173 Cost of goods and services 104,302 111,126 145,039 Gross profit 16,057 18,041 22,134 Selling, general and administrative expenses 12,284 14,386 23,422 Operating income (loss) 3,773 3,655 (1,288) Interest expense (net of other income) 1,183 685 351 Income (loss) before provision (benefit) for income taxes 2,590 2,970 (1,639) Provision (benefit) for income taxes 987 1,126 (541) Net income (loss) $ 1,603 $ 1,844 $ (1,098) Net income (loss) per share: Basic $ 0.60 $ 0.52 $ (0.25) Diluted $ 0.60 $ 0.52 $ (0.25) Weighted-average number of shares outstanding: Basic 2,675,000 3,519,821 4,345,883 Diluted 2,675,000 3,526,787 4,345,883 See notes to consolidated financial statements. ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (In thousands, except share and per share amounts)
$.01 par value No par value Additional Unearned Common Stock Common Stock Paid-In Treasury Equity Retained Shares Amount Shares Amount Capital Stock Compensation Earnings Total Balance at January 1, 1996 328,125 $ 2 $ 1,504 $ 1,218 $ 2,724 Issuance of common stock on conversion 2,675,000 $ 27 (328,125) (2) (25) Net income 1,603 1,603 Balance at December 31, 1996 2,675,000 27 1,479 2,821 4,327 Sale of common stock, net of initial public offering expenses of $2,040 1,765,125 18 8,448 8,466 Issuance of restricted stock 14,286 86 (86) Net income 1,844 1,844 Balance at December 31, 1997 4,454,411 45 10,013 (86) 4,665 14,637 Issuance of restricted stock 63,500 237 (237) Cancellation of restricted stock (14,500) (54) 54 Purchase of treasury stock (271,200) (834) (834) Net loss (1,098) (1,098) Balance at December 31, 1998 4,232,211 $ 45 $ 0 $ 0 $10,196 $ (834) $ (269) $3,567 $ 12,705 See notes to consolidated financial statements.
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (In thousands, except share and per share amounts) Years ended December 31, 1996 1997 1998 CASH FLOW FROM OPERATING ACTIVITIES: Net Income (loss) $ 1,603 $ 1,844 $ (1,098) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on disposal of assets (11) (7) Depreciation and amortization 305 623 882 Deferred tax provision (92) 138 (219) Changes in assets and liabilities that provided (used) cash: Accounts receivable, net (695) (8,999) (9,377) Accounts receivable - affiliates 153 (294) 61 Inventory 545 162 (3,797) Income taxes receivable (637) Other current assets (507) (144) (241) Other assets 311 (117) Accounts payable (492) 7,817 2,079 Accrued expenses (598) 806 1,708 Income taxes payable (77) (124) (82) Deferred service revenue (45) (54) 14 Net cash provided by (used in) operating activities 89 2,086 (10,831) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (965) (992) (1,774) Proceeds from sale of fixed assets 13 10 Net cash used in investing activities (952) (992) (1,764) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (834) Net proceeds on sale of common stock 8,661 Net increase (decrease) in notes payable 63 (8,403) 14,386 Net cash provided from financing activities 63 258 13,552 NET (DECREASE) INCREASE CASH AND CASH EQUIVALENTS (800) 1,352 957 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,029 229 1,581 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 229 $ 1,581 $ 2,538 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 1,140 $ 958 $ 403 Cash paid for income taxes $ 1,138 $ 1,032 $ 397 See notes to consolidated financial statements. ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (In thousands, except share and per share amounts) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Allstar Systems, Inc. and subsidiaries ("Allstar") is engaged in the sale and service of computer and telecommunications hardware and software products. During 1995 Allstar formed and incorporated Stratasoft, Inc., a wholly-owned subsidiary, to create and market software related to the integration of computer and telephone technologies. In January 1997, Allstar formed IT Staffing Inc., a wholly-owned subsidiary, to provide temporary and permanent placement services of technical personnel. In March 1998 Allstar formed Allstar Systems Rio Grande, Inc., a wholly-owned subsidiary to engage in the sale and service of computer products in western Texas and New Mexico. A substantial portion of Allstar's sales and services are authorized under arrangements with product manufacturers. Allstar's operations are dependent upon maintaining its approved status with such manufacturers. As a result of these arrangements and arrangements with its customers, gross profit could be limited by the availability of products or allowance for volume discounts. Furthermore, net income before income taxes could be affected by changes in interest rates which underlie the credit arrangements which are used for working capital (see Note 4). Allstar's significant accounting policies are as follows: Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Allstar Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Inventory - Inventory consists primarily of personal computers and components and is valued at the lower of cost or market with cost determined on the first-in first-out method. Property and Equipment - Property and equipment are recorded at cost. Expenditures for repairs and maintenance are charged to expense when incurred, while expenditures for betterments are capitalized. Disposals are removed at cost less accumulated depreciation with the resulting gain or loss reflected in operations in the year of disposal. Property and equipment are depreciated over their estimated useful lives ranging from five to ten years using the straight-line method. Depreciation expense totaled $304, $620, and $833 for the years ended December 31, 1996, 1997 and 1998, respectively. Impairment of Long-Lived Assets - Allstar records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Federal Income Taxes - Allstar accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS"), No. 109 "Accounting for Income Taxes" issued by the Financial Accounting Standards Board ("FASB"). SFAS No. 109 requires the recognition of deferred tax assets and liabilities for differences between the financial reporting and bases of assets and liabilities. Earnings per Share - In accordance with the provisions of SFAS No. 128, "Earnings Per Share," basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the periods. Diluted net income per share is computed based upon the weighted-average number of common shares plus the assumed issuance of common shares for all potentially dilutive securities using the treasury stock method. Revenue Recognition - Revenue from the sale of computer products is recognized when the product is shipped. Service income is recognized ratably over the service contract life. Revenues resulting from installations of equipment for which duration is in excess of three months are recognized using the percentage-of-completion method. The percentage of revenue recognized on each contract is based on the most recent cost estimate available. Revisions of estimates are reflected in the period in which the facts necessitating the revisions become known; when a contract indicates a loss, a provision is made for the total anticipated loss. At December 31, 1996 Allstar had no such contracts in process. At December 31, 1997, Allstar had $868 of such contracts in progress and $401 of revenue has been deferred together with $197 of costs related to those revenues. At December 31, 1998, Allstar had $3,682 of such contracts in progress and $1,567 of revenue has been deferred together with $826 of cost related to those revenues. Research and Development Costs - Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged to expense were $96, $157 and $250 in the years ended December 31, 1996, 1997 and 1998, respectively. Fair Value of Financial Instruments - Allstar's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and notes payable for which the carrying values approximate fair values given the short-term maturity of the instruments. It is not practicable to estimate the fair values of related-party receivables due to the nature of the instruments. Cash and Cash Equivalents - Cash and cash equivalents include any highly liquid debt instruments with a maturity of three months or less when purchased. See Note 4 for discussion of restricted cash. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. Accounting Pronouncements - SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, were issued by the FASB in June 1997. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about Pensions and Other Postretirement Benefits. These three Statements became effective for the current fiscal year. Allstar does not have any items that constitute other comprehensive income for the year ended December 31, 1998, as identified by SFAS No. 130. Consequently it did not include a statement of comprehensive income as part of its financial statements. SFAS No. 131 was adopted by Allstar during 1998 and the segment disclosure requirements have been incorporated in these financial statements with prior period information being restated. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans and is an amendment of SFAS No. 87, 88, and 106. This statement does not have an impact on the 1998 financial statements. In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the FASB. SFAS No. 133 is effective for fiscal years beginning after January 1, 2000. Management is evaluating what impact, if any, and additional disclosures may be required when this statement is implemented. In March 1998, the Accounting Standards Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This Statement provides guidance on accounting for costs of computer software developed or obtained for internal use. SOP No. 98-1 is effective for fiscal years beginning after December 15, 1998. In April 1998, SOP No. 98-5, Reporting on the Costs of Start-Up Activities, was issued by AcSEC. This Statement provides guidance on determining what constitutes a start-up activity and requires that the costs of these start-up activities be expensed as incurred. These two Statements will be implemented by Allstar in the year ending December 31, 1999, should the circumstances arise. Reclassifications - The accompanying consolidated financial statements for the years presented have been reclassified to give retroactive effect to certain changes in presentation. 2. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at December 31, 1997 and 1998: 1997 1998 Accounts Receivable...................... $25,765 $35,251 Allowances for doubtful accounts......... (249) (358) Total........................... $25,516 $34,893 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 1997 and 1998: 1997 1998 Equipment $ 339 $ 502 Computer equipment 2,870 4,218 Furniture and fixtures 316 442 Leasehold improvements 55 138 Vehicles 105 27 $ 3,685 5,327 Accumulated depreciation and amortization (1,672) (2,425) Total $ 2,013 $ 2,902 4. CREDIT ARRANGEMENTS On February 27, 1998 Allstar entered into a credit agreement with a commercial finance company. The total credit available under the credit facility is $30,000, subject to borrowing base limitations which are generally computed as a percentage of various classes of eligible accounts receivable and qualifying inventory. Credit available under the facility for floor plan financing of inventory from approved manufacturers (the "Inventory Line") is $20,000. Available credit under the facility, net of Inventory Line advances, is $10,000, which is used by Allstar primarily to carry accounts receivable and for other working capital and general corporate purposes (the "Accounts Line"). Borrowings under the Accounts Line bear interest at the fluctuating prime rate minus 1.0% per annum. Under the Inventory Line interest accrues at prime rate, which for purposes of this agreement will not fall below 7.0%, plus 5.0% for outstanding balances over 40 days. This agreement, which continues in full force and effect for 36 months or until terminated by 30 day written notice from the lender and may be terminated upon 90 days notice by Allstar, subject to a termination fee, is collateralized by substantially all of Allstar's assets. The agreement contains restrictive covenants which, among other things, require specific ratios of current assets to current liabilities and debt to tangible net worth and require Allstar to maintain a minimum tangible net worth. The terms of the agreement also prohibit the payment of dividends and limit the purchase of Allstar common stock, and other similar expenditures, including advances to related parties. Allstar also maintains a $2,000 revolving credit line with another commercial finance company to floor plan inventory. This line of credit accrues interest at prime (but not less than 6.5%) plus 6% (13.75% at December 31, 1998) for all outstanding balances over 30 days. The credit facilities at December 31, 1997 required that all payments received from customers on pledged accounts receivable be applied to the outstanding balance on the Accounts Line. Accordingly, accounts receivable payments received in the amount of $280 at December 31, 1997, but not yet applied to the line of credit, are shown as restricted cash in the accompanying balance sheet. The combined borrowing base under all credit arrangements was $23,871 and $29,999 at December 31, 1997 and 1998, respectively. The weighted-average interest rate for borrowings under all credit arrangements in effect during 1996, 1997 and 1998 was 10.25%, 10.50% and 7.53%, respectively. 5. INCOME TAXES The provision for income taxes for the years ended December 31, 1996, 1997 and 1998 consisted of the following: 1996 1997 1998 Current provision (benefit): Federal......................... $ 962 $ 848 $ (325) State........................... 117 140 3 Total current provision............ 1,079 988 (322) Deferred provision................. (92) 138 (219) Total..................... $ 987 $1,126 $ (541) The total provision for income taxes during the years ended December 31, 1996, 1997 and 1998 varied from the U.S. federal statutory rate due to the following: 1996 1997 1998 Federal income tax at statutory rate.... $ 907 $ 1,010 $ (557) Nondeductible expenses.................. 17 24 26 State income taxes...................... 77 92 (10) Other ............................... (14) Total..................... $ 987 $ 1,126 $ (541) Deferred tax assets computed at the statutory rate related to temporary differences at December 31, 1997 and December 31, 1998 were as follows: 1997 1998 Deferred tax assets: Accounts receivable............ $ 149 $ 242 Closing and severance costs.... 60 Deferred service revenue....... 41 62 Inventory...................... 22 67 Total deferred tax assets. $ 212 $ 431 Management believes that the realization of the deferred tax assets is more likely than not, based upon the expectation that Allstar can utilize a tax loss carry back. A valuation allowance has not been deemed necessary by management. 6. ACCRUED EXPENSES Accrued liabilities consisted of the following as of December 31, 1997 and 1998: 1997 1998 Sales tax payable $ 1,922 $ 2,253 Accrued employee benefits, payroll and other related costs 962 1,736 Accrued interest 47 94 Other 634 1,190 Total $ 3,565 $ 5,273 7. FRANCHISE FEES Allstar entered into an agreement in May 1989 whereby it became a franchise of Inacom Corp. ("Inacom"). Annual fees, amounting to 0.05% of certain gross sales, were expensed in the period incurred. Allstar obtained a waiver effective January 1, 1995, which eliminated the payment of franchise fees. Allstar entered into an agreement in August 1996 in which Allstar is required to purchase at least 80% of its computer products from Inacom if such are available within a reasonable period of time at reasonably competitive prices. The agreement expires on December 31, 2001 and automatically renews for successive one-year periods. A cancellation fee of $571 will be payable by Allstar in the event of non-renewal or early termination of the agreement by either party; however, Allstar does not anticipate termination to occur by either party prior to the initial termination date. Allstar is accruing this cancellation fee over the initial agreement period by an approximate $9 monthly charge to earnings. For the years December 31, 1996, 1997 and 1998, Allstar charged to expense $44, $105 and $105, respectively, related to this agreement. 8. SHAREHOLDERS' EQUITY In October 1996, Allstar completed a reincorporation in order to change its state of domicile to Delaware, to authorize 50,000,000 shares of $.01 par value common stock and to authorize 5,000,000 shares of $.01 par value preferred stock. The reincorporation had the effect of an 8.15-for-1 split of Allstar's common stock. All applicable share and per share data in the consolidated financial statements and related notes give effect to this reincorporation and resulting stock conversion. During 1998 the shareholders of Allstar approved a reduction in the number of authorized shares of common stock from 50,000,000 to 15,000,000. On October 23, 1997, the Board of Directors (the "Board") authorized the purchase of up to an aggregate maximum of 100,000 shares of common stock of Allstar from time to time in the open market to be held in treasury for the purpose of, but not limited to, fulfilling any obligations arising under Allstar's stock option plans. Again, on September 8, 1998, the Board authorized the purchase of an additional 200,000 shares for the same purpose. At December 31, 1998, 271,200 shares were held in treasury under these authorizations. Allstar issued 14,286 common shares and 63,500 common shares of restricted stock in 1997 and 1998, respectively and cancelled 14,500 common shares of restricted stock during 1998. These restricted shares had par value of $0.01 per share. The 14,286 shares, valued at $86, vest at the end of a two year period while the 49,000 shares (63,500 less the 14,500 cancelled shares), valued at $183, vest ratably at the end of each one year period over a five year period from the date of issuance. During 1997, Allstar issued warrants to purchase 176,750 common shares at $9.60 per share to underwriters in connection with a public offering of common stock. The warrants expire on July 7, 2002. 9. COMMITMENTS AND CONTINGENCIES Operating Leases - Allstar subleases office space from Allstar Equities, Inc. ("Equities"), a Allstar wholly owned by the principal stockholder of Allstar. In 1996, Allstar renewed its office sublease with monthly rental payments of $32 in 1997 and $33 in 1998, plus certain operating expenses through December 1998. Such sublease has been extended through December 31, 1999. Rental expense under this agreement amounted to approximately $372, $378 and $390 during years ended December 31, 1996, 1997 and 1998, respectively. This agreement requires a minimum annual rental of $390 for the year ended December 31, 1999. Additionally, minimum annual rentals on other operating leases amount to approximately $488 in 1999, $420 in 2000, $250 in 2001, $239 in 2002, $179 in 2003, and $514 in years thereafter. Amounts paid during the years ended December 31, 1996, 1997 and 1998 under such agreements totaled approximately $252, $142 and $509 respectively. Benefit Plans - Allstar maintains a group medical and hospitalization insurance program under which Allstar pays employees' covered health care costs. Any claims exceeding $30 per employee or a cumulative maximum of approximately $577 per year are insured by an outside insurance company. Allstar's claim and premium expense for this self-insurance program totaled approximately $193, $684, and $581 for the years ended December 31, 1996, 1997, and 1998, respectively. Allstar maintains a 401(k) savings plan wherein Allstar matches a portion of the employee contribution. In addition, Allstar has a discretionary matching fund based on the net profitability of Allstar. All full-time employees who have completed 90 days of service with Allstar are eligible to participate in the plan. Declaration of the discretionary portion of the matching fund is the decision of the Board of Directors. Allstar has made no additional contributions to the plan for the years ended December, 1997 or 1998, but however, did elect to do so in 1996 when Allstar contributed an additional $136 to the plan. Under the standard Allstar matching program Allstar match was $72, $24, and $45 for the years ended December 31, 1996, 1997 and 1998, respectively. Allstar has filed under the Internal Revenue Service Walk-in Closing Agreement Program (the "Program") to negotiate a settlement regarding the qualified status of the 401(k) savings plan in order to meet the requirements of Sections 401(a) of the Internal Revenue Code. Under the Program, any sanction amount negotiated is based upon the total tax liability which could be assessed if the plan were to be disqualified. At December 31, 1997 Allstar had accrued $28 for the estimated settlement cost. In 1998, the Internal Revenue Service accepted the settlement and Allstar paid $25. Allstar is party to litigation and claims which management believes are normal in the course of its operations; while the results of such litigation and claims cannot be predicted with certainty, Allstar believes the final outcome of such matters will not have a material adverse effect on its results of operations or financial position. 10. STOCK OPTION PLANS In September 1996 Allstar adopted the 1996 Incentive Stock Plan (the "Incentive Plan"') and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan"). Under the Incentive Plan, Allstar's Compensation Committee may grant up to 417,500 shares of common stock, which have been reserved for issuance to certain employees of Allstar. The Incentive Plan provides for the granting of incentive awards in the form of stock options, restricted stock, phantom stock, stock bonuses and cash bonuses in accordance with the provisions of the plan. Additionally, no shares may be granted after the tenth anniversary of the Incentive Plan's adoption. Allstar has reserved for issuance, under the Director Plan, 100,000 shares of common stock, subject to certain antidilution adjustments. The Director Plan provides for a one-time option by newly elected directors to purchase up to 5,000 common shares, after which each director is entitled to receive an option to purchase up to 2,000 common shares upon each date of re-election to Allstar's Board of Directors. Options granted under the Director Plan and the Incentive Plan have an exercise price equal to the fair market value on the date of grant and generally expire ten years after the grant date. During 1997 Allstar granted options to purchase 20,000 common shares to its directors, which vest immediately, and 180,300 common shares to its employees, which vest over five years. During 1998, Allstar granted options to purchase 8,000 common shares to its directors, which vest immediately, and 129,850 common shares to its employees, which vest over five years. The plan's activity is summarized below: 1997 1998 Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price Options outstanding at January 1....... 200,300 $ 5.17 Granted during the year................. 200,300 $ 5.17 137,850 3.13 Exercised during the year............... - - - - Options canceled for repricing - - (260,350) 4.25 Option granted at new price - - 260,350 1.50 Canceled during the year................ - - (69,800) 4.50 Options outstanding at December 31...... 200,300 $ 5.17 268,350 $ 1.63 Options exercisable at December 31...... 20,000 $ 5.17 56,940 $ 1.63 Options outstanding price range......... $4.625.to.$6.00 $1.50 to $6.00 Options weighted-average remaining life. 9.7.Years 9.7 Years Allstar applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for options granted under the Plans. Accordingly, no compensation expense has been recognized. Had compensation expense been recognized based on the Black-Scholes option pricing model value at the grant date for awards consistent with SFAS No. 123, Allstar's net income and earnings per share would have been reduced to the pro forma amounts shown below. For purposes of estimating the fair value disclosures below, the fair value of each stock option has been estimated on the grant date or the grant repricing date with a Black-Scholes option pricing model using the following weighted-average assumptions; dividend yield of 0%; expected volatility of 179%; risk-free interest rate of 6.0%; and expected lives of eight years from the original date of the stock option grants. 1997 1998 Net Income: As reported................ $ 1,844 $ (1,098) Pro forma.................. $ 1,815 $ (1,180) Earnings per share (Basic) As reported................ $ 0.52 $ (0.25) Pro forma.................. $ 0.52 $ (0.27) Earnings per share (Diluted) As reported................ $ 0.52 $ (0.25) Pro forma.................. $ 0.51 $ (0.27) 11. EARNINGS PER SHARE The computations of basic and diluted earnings per share for each year were as follows: 1996 1997 1998 (Amounts in thousands except share and per share data) Numerator: Net income (loss).................. $1,603 $1,844 ($1,098) Denominator: Denominator for basic earnings per Share - weighted-average shares outstanding...................... 2,675,000 3,519,821 4,345,883 Effect of dilutive securities: Shares issuable from assumed conversion of common stock options, warrants and restricted stock................. 0 6,966 197,140 Denominator for diluted earnings per share. 2,675,000 3,526,787 4,543,023 Basic earnings per share................ $0.60 $0.52 $(0.25) Diluted earnings per share.............. $0.60 $0.52 $(0.25) The potentially dilutive options were not used in the calculation of diluted earnings per share for the year ended December 31, 1998 since the effect of potentially dilutive securities in computing a loss per share is antidilutive. There were warrants to purchase 0, 176,750 and 176,750 shares of common stock for 1996, 1997 and 1998, respectively, which were not included in computing the effect of dilutive securities because the inclusion would have been antidilutive. There were 0, 200,300 and 8,000 options to purchase common stock for 1996, 1997 and 1998, respectively, which were not included in computing the effect of dilutive securities because the inclusion would have been antidilutive. 12. SEGMENT INFORMATION Allstar has three reportable segments: (1) Information Technology, (2) Telecom Systems and (3) CTI Software. Information Technology includes products and services relating to computer products and management information systems. Telecom Systems includes products, installation and services relating to telephone systems. CTI Software includes software products that facilitate telephony and computer integration primarily for telemarketing and call center applications. The accounting policies of the business segments are the same as those described in Note 1. Allstar evaluates performance of each segment based on operating income. Management only views accounts receivable, and not total assets, by segment in their decision making. Prior to 1998, Management did not view accounts receivable by segment in their decision making.
For the year ended December 31, 1998: Information Telecom CTI Technology Systems Software Consolidated Revenue ........................... $156,579 $ 7,499 $ 3,095 $167,173 Cost of goods sold.................. 138,263 5,173 1,603 145,039 Gross profit........................ 18,316 2,326 1,492 22,134 Selling, general and administrative expense............ 18,786 2,763 1,873 23,422 Operating loss...................... (470) $ (437) $ (381) $ (1,288) Less: interest expense and other... 351 Loss before provision for income taxes $ (1,639) Accounts receivable................. $ 30,871 $ 3,704 $ 676 $ 35,251 Allowance for doubtful accounts..... (358) Accounts receivable , net........... $ 34,893
For the year ended December 31, 1997: Information Telecom CTI Technology Systems Software Consolidated Revenue ........................... $121,619 $ 5,403 $ 2,145 $129,167 Cost of goods sold.................. 105,912 3,991 1,223 111,126 Gross profit........................ 15,707 1,412 922 18,041 Selling, general and administrative expense............ 11,431 1,859 1,096 14,386 Operating income (loss)............. $ 4,276 $ (447) $ (174) $ 3,655 Less: interest expense and other 685 Income before provision for income taxes $ 2,970
For the year ended December 31, 1996: Information Telecom CTI Technology Systems Software Consolidated Revenue ........................... $115,247 $ 3,824 $ 1,288 $120,359 Cost of goods sold.................. 101,067 2,465 770 104,302 Gross profit........................ 14,180 1,359 518 16,057 Selling, general and administrative expense............ 10,459 1,163 662 12,284 Operating income (loss)............ $ 3,721 $ 196 $ (144) $ 3,773 Less: interest expense and other 1,183 Income before provision for income taxes $ 2,590
13. RELATED-PARTY TRANSACTIONS Allstar has from time to time made payments on behalf of Equities and Allstar's principal stockholders for taxes, property and equipment. Effective July 1, 1996, Allstar and its principal stockholder entered into a promissory note to repay certain advances, which were approximately $173 at July 1, 1996, in equal annual installments of principal and interest, from August 1997 through 2001. This note bears interest at 9% per year. Also effective July 1, 1996, Allstar and Equities entered into a promissory note whereby Equities would repay the balance of amounts advanced, which were approximately $387 at July 1, 1996, in monthly installments of $7, including interest, from July 1996 through November 1998 with a final payment of $275 due on December 1, 1998. This note bears interest at 9% per year. Effective December 1, 1998 this note was extended for a period of one year, with interest and principal becoming due on December 1, 1999. The principal amounts as of December 31, 1997 and December 31, 1998 were classified as Accounts receivable - affiliates based on the expectation of repayment within one year. At December 31, 1997 and December 31, 1998, Allstar receivables from these affiliates amounted to approximately $434 and $373, respectively. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure NONE PART III Item 10-13. The Registrant incorporates the information required by Form 10-K, Items 10 through 13 by reference to Allstar's definitive proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Commission prior to April 30, 1999. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed as part of this report (1) Consolidated Financial Statements - See Index to Consolidated Financial Statements on Page 25 (2) Exhibits
Exhibits Filed Herewith Exhibit or Incorporated by Number Description Reference to: 2.1 Plan and Agreement of Merger by and Between Exhibit 2.1 to Form Allstar Systems, Inc, a Texas corporation and S-1 filed Aug. 8, 1996 Allstar Systems, Inc. a Deleware corporation 3.1 Bylaws of the Company Exhibit 3.1 to Form S-1 filed Aug. 8, 1996 3.2 Certificate of Incorporation of the Company Exhibit 3.2 to Form S-1 filed Aug. 8, 1996 4.1 Specimen Common Stock Certificate Exhibit 4.1 to Form S-1 filed Aug. 8, 1996 4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Exhibit 4.2 to Form Incorporation and Bylaws of the Company defining the rights of the S-1 filed Aug. 8, 1996 holders of Common Stock. 10.1 Revolving Loan and Security Agreement by and between Exhibit 10.1 to Form IBM Credit Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.2 Agreement for Wholesale Financing dated September 20, 1993, by Exhibit 10.2 to Form and between ITT Commercial Finance Corp. and Allstar-Valcom, Inc. S-1 filed Aug. 8, 1996 10.3 Amendment to Agreement for Wholesale Financing dated Exhibit 10.3 to Form October 25, 1994, by and between ITT Commercial Finance Corp. S-1 filed Aug. 8, 1996 and Allstar Systems, Inc. 10.4 Sublease Agreement by and between Allstar Equities and Allstar Exhibit 10.4 to Form Systems, Inc. S-1 filed Aug. 8, 1996 10.5 Form of Employment Agreement by and between the Company and Exhibit 10.5 to Form certain members of Management. S-1 filed Aug. 8, 1996 10.6 Employment Agreement dated September 7, 1995, by and between Exhibit 10.6 to Form Stratasoft, Inc. and William R. Hennessy. S-1 filed Aug. 8, 1996 10.7 Assignment of Certain Software dated September 7, 1995, by Exhibit 10.7 to Form International Lan and Communications, Inc. and Aspen System S-1 filed Aug. 8, 1996 Technologies, Inc. to Stratasoft, Inc. 10.8 Microsoft Solution Provider Agreement by and between Microsoft Exhibit 10.8 to Form Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.9 Novell Platinum Reseller Agreement by and between Novell, Inc. Exhibit 10.9 to Form and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.10 Allstar Systems, Inc. 401(k) Plan. Exhibit 10.10 to Form S-1 filed Aug. 8, 1996 10.11 Allstar Systems, Inc. 1996 Incentive Stock Plan. Exhibit 10.11 to Form S-1 filed Aug. 8, 1996 10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan. Exhibit 10.12 to Form S-1 filed Aug. 8, 1996 10.13 Primary Vendor Volume Purchase Agreement dated August 1, 1996 by Exhibit 10.13 to Form and between Inacom Corp. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.14 Resale Agreement dated December 14, 1995, by and between Ingram Exhibit 10.14 to Form Micro Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.15 Volume Purchase Agreement dated October 31, 1995, by and between Exhibit 10.15 to Form Tech Data Corporation and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.16 Intelligent Electronics Reseller Agreement by and between Intelligent Exhibit 10.16 to Form Electronics, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.17 MicroAge Purchasing Agreement by and between MicroAge Computer Exhibit 10.17 to Form Centers, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.18 IBM Business Partner Agreement by and between IBM Exhibit 10.18 to Form and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.19 Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized Exhibit 10.19 to Form reseller dated August 6, 1996. S-1 filed Aug. 8, 1996 10.20 Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers Exhibit 10.20 to Form by and between Hewlett-Packard Company and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.21 Associate Agreement by and between NEC America, Inc. and Exhibit 10.21 to Form Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.22 Mitel Elite Dealer Agreement and Extension Addendum by and between Exhibit 10.22 to Form Mitel, Inc. and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.23 Dealer Agreement dated March 1, 1995, by and between Applied Voice Exhibit 10.23 to Form Technology and Allstar Systems, Inc. S-1 filed Aug. 8, 1996 10.24 Industrial Lease Agreement dated March 9, 1996, by and between Exhibit 10.24 to Form H-5 J.E.T. Ltd. as lessor and Allstar Systems, Inc. as lessee. S-1 filed Aug. 8, 1996 10.25 Lease Agreement dated June 24, 1992, by and between James J. Laney, Exhibit 10.25 to Form et al. As lessors, and Technicomp Corporation and Allstar Services S-1 filed Aug. 8, 1996 Allstar Services as lessees. 10.26 Agreement for Wholesale Financing, Business Financing Agreement Form 10-K filed Mar. and related agreements and correspondence by and between DFS Financia 31, 1998 Services and Allstar Systems, Inc., dated February 27, 1998 10.27 Sublease Agreement by and between X.O. Spec Corporation and Form 10-K filed Mar. Allstar Systems, Inc. dated May 12, 1997 31, 1998 10.28 Lease Agreement dated May 14, 1998 by and between University Hill Plaza Form 10-K filed April and Allstar Systems Rio Grande, Inc. 12, 1999 10.29 Lease Agreement dated March 4, 1998 by and between The Rugby Group, Inc., Form 10-K filed April and Allstar Systems, Inc. 12, 1999 10.30 Sublease Extention Agreement dated December 31, 1998 by and between Form 10-K filed April Allstar Equities, Inc. and Allstar Systems, Inc. 12, 1999 10.31 Amendment to Lease Agreement dated June 24, 1992, by and between James J. Form 10-K filed April Laney, et al. As lessors, and Technicomp Corporation and Allstar Services 12, 1999 as lessees. 21.1 List of Subsidiaries of the Company. Form 10-K filed Mar. 31, 1998 23.1 Independent Auditors' Consent of Deloitte & Touche LLP,. Form 10-K filed Mar. 31, 1998 27.1 Financial Data Schedule. Form 10-K filed Mar. 31, 1998 99.1 Schedule II Valuation and Qualifying Accounts Form 10-K filed Mar. 31, 1998 b No Form 8-K has been filed in the last quarter of the fiscal year covered by this report
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, March 31, 1998. Allstar Systems, Inc. (Registrant) By:/s/ James H. Long James H Long, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity /s/ James H. Long Chief Executive Officer, President and Chairman of the Board /s/ Donald R. Chadwick Chief Financial Officer, Secretary and Treasurer and Director (Principal Financial and Accounting Officer) /s/ G. Chris Andersen Director /s/ Richard D. Darrell Director /s/ Jack M. Johnson Director EX-10.28 2 OFFICE LEASE UNIVERSITY HILL PLAZA LEASE AGREEMENT TABLE OF CONTENTS ARTICLE PAGE 1 EXHIBITS 1 2 LEASED PREMISES AND QUIET ENJOYMENT 1 3 EFFECTIVE DAY, TERM AND CONSTRUCTION WORK 1 4 RENEWAL OPTION 2 5 BASIC OPTION 2 6 LATE CHARGES 3 7 CONDUCT OF BUSINESS OF TENANT 3 8 PARKING, COMMON AREA AND CHARGE 4 9 MAINTENANCE OF LEASE PREMISES 6 10 SIGNS, AWNINGS, CANOPIES, FIXTURES ALTERATIONS, ROOF AND WALLS 6 11 REAL ESTATE TAX 7 12 PERSONAL PROPERTY TAXES 7 13 UTILITIES 7 14 INSURANCE 7 15 RIGHT OF ENTRY 8 16 INDEMNIFICATION 8 17 SUBORDINATION 8 18 DAMAGE AND DESTRUCTION 8 19 EMINENT DOMAIN 8 20 ASSIGNMENT AND SUBLETTING 21 LANDLORD'S PERFORMANCE FOR ACCOUNT OF TENANT 9 22 DEFAULT BY TENANT 10 23 DEFAULT BY LANDLORD 11 25 APPLICATION OF PAYMENTS RECEIVED FROM TENANT 11 26 ENVIRONMENTAL ISSUES 11 27 NOTICES 28 SALES OF PREMISES BY LANDLORD 11 29 ATTORNEY'S FEES 11 30 TITLE OF SHOPPING CENTER 11 31 WAIVER 11 32 SHORT FORM OR LEASE RECORDING 12 33 SECURITY DEPOSIT 12 34 HOLDING OVER AND SUCCESSORS 12 35 BROKERS OR FINDERS 12 36 MISCELLANEOUS 12 37 SIGNATURE PAGE 14 38 EXHIBIT E 15 39 EXHIBIT D 16 40 EXHIBIT C 17 41 EXHIBIT B 18 42 EXHIBIT A (TO BE ATTACHED) SHOPPING CENTER LEASE This Lease, made this 14th day of May, 1998, by and between University Hill Plaza (hereinafter called Landlord), and All Star Systems Rio Grande Inc., a Texas corporation (hereinafter called Tenant) cover space in the University Hill Plaza Shopping Center, located at 3800 N. Mesa, El Paso, Texas (herein after called Shopping Center). WITNESSETH THAT, in consideration of the rents, covenants and agreements herein set forth, such parties enter into the following agreement: 1. EXHIBIT: The exhibits listed below and attached to this Lease are incorporated herein by reference. A. Exhibit "A" Plot and Floor Plan of the space demised hereunder to Tenant (the "Premise"), which include the legal description of the Shopping Center Tract (the "Total Tract") B. Exhibit "B" Landlord's Sign Criteria. C. Exhibit "C" Rules and Regulations applicable to Tenant. D. Exhibit "D" Construction Addendum. E. Exhibit "E" Guarantee. 2. LEASED PREMISES AND QUIET ENJOYMENT: A. Leased premised: Landlord hereby leases to Tenant, and Tenant hereby rents form Landlord, the space in the Shopping Center Designated as B-1, outlined in red on Exhibit "A" (hereinafter called "the Premises"), with a front width of approximately 144 feet and a depth of approximately 70 Feet 6 Inches feet measured to the center line of all party or common walls, to the exterior face of all other walls, and to the building line where there is no wall, containing approximately 10,080 square feet. B. Quiet Enjoyment: So long as Tenant is not in default hereunder, Tenant shall have peaceful, quiet use and possession of the Premises throughout the term hereof, subject to all matters of record and to any mortgage, deed of trust or other agreement to which this Lease is or may hereafter be subordinated. 3. EFFECTIVE DATE, TERM AND CONSTRUCTION WORK: A. Effective Date: The "Effective Date" of this Lease is the day and year first above written i.e., notwithstanding the fact that the Commencement Date of the Term of this Lease may be a date subsequent to the Effective Date of this Lease, Landlord and Tenant intend that both shall have vested rights immediately upon the execution of this Lease, subject, however, to the terms hereof, and that this Lease shall be binding and in full force and effect upon such execution. B. Term: The Term of this Lease shall be for a period of TEN (10) years, commencing on the date that the construction set forth in Exhibit "D" Construction Addendum is complete and the Premises is made available for occupancy by the Tenant (the "Commencement Date") and ending on ten (10) years after the date set forth in Exhibit 'D' Construction Addendum. C. Construction Work: (1) Landlord's Work: Landlord shall construct, at its expense, the improvements in accordance with the Construction Addendum attached hereto as Exhibit "D" and Landlord's Plans and Specifications, as from time to time amended. (2) Tenant's Work: Tenant agrees, prior to the Commencement Date, at Tenant's sole cost and expense, to construct the premises in accordance with the requirements of Drawings and Specifications with respect to the work Tenant intends to perform in the Premises. 4. RENEWAL OPTION: That providing Tenant has not defaulted in respect to any provision of this Lease, Tenant shall have the right to extend the term of this lease for an additional period of Five (5) years from the expiration of the term above stated, provided however that written notice is given to the Landlord of such intenetion to extend the Lease six (6) months prior to the expiration date above stated, and further provided that all provisions of this Lease shall continue in full force and effect for the period of such extension. Minimum guaranteed rental for said additional term of years shall increase no less than 30% more than the Minimum Monthly Rental set forth in Section 5A hereof, as adjusted pursuant to Section 5A (I) and (ii) hereof during the previous Lease Year. 5. BASIC RENTAL: A. Minimum Monthly Rental : (I) Tenant shall pay to the Landlord as Minimum Monthly Rental for the Premises the sum of Eight Thousand Four Hundred Dollars ($8,400.00 ), per month, which sum shall be subject to possible upward adjustment as provided in Paragraph 5A (ii) below. Said Minimum Monthly Rental shall be paid in advance on the first day of each month of the term, with proration to occur for any partial month, if the Commencement Date is other than on the first day of the calendar month. All rentals to be paid by the Tenant to Landlord shall be in lawful money of the United States of America and shall be paid without deduction or offset, prior notice or demand, on or before the first (1st) day of each and every month during the term hereof, and at such place or places as may be designated from time to time by Landlord. (ii) At the end of the Third (3rd) Lease Year and every Lease Year thereafter, the Minimum Monthly Rental as provided in Paragraph 5A(i) above, shall be adjusted to reflect any increase in the Cost of Living during the Lease Year Period just ended based upon the "Consumer Price Index" for El Paso, Texas area - All items (hereinafter referred to as the "index), published by the Bureau of Labor Statistices of the United States Department of Labor. The Index Number of the first (1st) month of the third (3rd) Lease Year shall be the "Base Index Number" and the corresponding Index Number for the last month of the Lease Year just ended shall be the "Current Index Number." The Base Index Number shall be subtraced from the Current Index Number, and the result obtained shall be converted to a percentage of the Base Index Number. The Minimum Monthly Rental as provided in Paragraphs 5A(i) above shall then be increased by such percentage and the result so obtained shall be the new Minimum Monthly Rental for the Premises effective as of the first day of the new period. In no event, however, shall the Minimum Monthly Rental during the new period be less than the Minimum Monthly Rental during the immediatly preceding period. Tenants shall continue payment of the Minimum Monthly Rental rate in effect for the expiring period until notified by Landlord of any increase in such Minimum Monthly Rental. Such notification shall include a memorandum showing the calculation used by Landlord in determining the new Minimum Monthly Rental. On the first day of the calendar month immediatley succeeding receipt of such notice, Tenant shall commence payment of the new Minimum Monthly Rental specified in the notice, and shall also pay to Landlord, with respect to the month(s) already expired, the excess of the required monthly rental as specified in the notice over the monthly amounts actually paid by Tenant. If publication of the index shall be discontinued or unavailable, a comparable index published by any branch or department of the United States Government shall be substitited, and such adjustments in the method of computation shall be made as may be necessary to carry out the intent of this cost-of-living provision. The term "Lease Year" as used in this Lease shall mean a period during the lease term commencing on Jamuary 1 of each year and ending at midnight on December 31 next succeeding, except that the first Lease Year shall be the period Commencing on the Commencement Date and ending as midnight on December 31 next succeeding, and the last Lease Year shall end at the end of the lease term. C. Additional Rent: Tenant shall pay Landlord annually, as additional rental, in accordance with Paragraphs 5. "Tenant's Share" of the Operating Expenses as defined in paragraph 8C, real estate taxes, utilities, insurance premiums and utilities as provided in Paragraphs 11, 13 and 14 respectively. 6. LATE CHARGES: Tenants agrees to pay a late charge of 5% of each payment due hereunder that is not paid on or before ten (10) days of the due date and the failure to pay such late charge shall cause this Lease to be canceled and terminated at the option of Landlord by written notice to Tenant or pursue any and all other remedies available hereunder to Landlord. Any rental and/or other payments due hereunder returned to Landlord marked "Insufficient Funds" will entitle Landlord to collect an additional 5% of such payment from Tenant and the failure to pay the same shall likewise give Landlord the right and option to cancel and terminate this Lease by written notice to Tenant or pursue any and all other remedies available hereunder to Landlord. 7. CONDUCT OF BUSINESS OF TENANT: A. Use of Premises. The Premises shall be occupied and used by Tenant solely for the purpose of conducting therein the business of : Technology sales, computer service sales and service integration. B. Prompt Occupancy and Use: Tenant will occupy the Premises upon the Commencement Date and thereafter continuously operate in 100% of the Premises during the entire Lease Term, with a reasonable staff and Reasonable Business Hours. As used herein, "Reasonable Business Hours" shall mean the hours of 9:00 AM to 5:00 pm Monday through Friday. C. Exclusivity: During the term of this Lease, and provided Tenant is not in default in any other of its obligations under this Lease, Landlord shall not execute any other leases or provide space within the Shopping Center to any other person or entity whose activities and operations are competitive with or are similar to the business of technology sales, computer service sales and service integration. C. Conduct of business: Such businesses shall be conducted: (a) in Tenant's own name or under the name Allstar Systems Rio Grande , unless another name is previously approved in writing by the Landlord; and (b) in such manner as shall assure the transaction of a maximum volume of business in and at the Premises. Tenant's store shall be and remain open during reasonable business hours. D. Operation by Tenant: Tenant covenants and agrees that it will: not place or maintain any merchandise, vending machines or other articles in any vestibule or entry of the Premises or outside the Premises; store garbage, trash, rubbish and other refuse in rat-proof and insect-proof containers inside the Premises, and remove the same frequently and regularly and if directed by Landlord, by such means and methods and at such times and intervals as are designed by Landlord, all at Tenant's cost; not permit any sound system audible or objectionable advertising medium visible, outside the Premises; keep all mechanical equipment free of vibration and noise and in good working order and condition; not commit or permit waste or a nuisance upon the Premises; not permit or cause odors to emanated or be dispelled from the Premises; not solicit business in the Common Area nor distribute advertising matter to, in or upon any Common Area; not permit the loading or unloading or the parking or standing of delivery vehicles outside any area designated therefore, nor permit any use of vehicles which will interfere with the use of any Common Area in the Shopping Center; comply with all laws, recommendations, ordinances, rules and regulations of governmental, public, private and other authorities and agencies, including those with authority over insurance rates, with respect to the use or occupancy of the Premises regardless of when they became effective; light all signs each night of the years for not less than one hour after the Premises are permitted to be closed; not permit any noxious, toxic or corrosive fuel or gas, dust, dirt or fly ash on the Premises; nor place a load of any floor in the Shopping Center which exceeds the floor load per square foot which such floor was designed to carry. E. Storage: Except in emergencies, Tenant shall have in the Premises only merchandise which Tenant intends to sell at retail at, in, or from the Premises, or as used in relation to the permitted use. F. Painting, Decorating, Displays, Alterations: Tenants will not paint, decorate or change the architectural treatment of any part of the exterior of the Premises nor any part of the interior of the Premises visible from the exterior nor make any structural alterations, additions or changes in the Premises without Landlord's written approval thereto, and will promptly remove any paint, decoration, alteration, addition or changes applied or installed without the Landlords's approval or take such other action with respect thereto as Landlord directs. Tenants will install and maintain at all times, subject to the other provisions of this Section F, merchandise displays in any show windows of the Premises; the arrangement, style, color and general appearance thereof and of displays in the interior of the Premises which are visible from the exterior, including, but not limited to, window displays, advertising matters, signs, merchandise and store fixtures, to be maintained in keeping with the character and standards of the Center. G. Sales and Dignified Use: No public or private auction or any fire, "going out of business," bankruptcy or similar sales or auctions shall be conducted in or from the Premises and the Premises shall not be used except in a dignified and ethical manner consistent with general high standards of merchandising in the Center and not in a disreputable or immoral manner or in violation of the national, state or local laws. 8. PARKING, COMMON AREA AND CHARGE A. Common Areas: (I) All parking areas, access roads and facilities furnished, made available or maintained by Landlord in or near the Center, including employee parking areas, truck ways, driveways, loading docks and areas, delivery areas, package pickup stations, pedestrian sidewalks, malls ( including enclosed mall) courts and ramps, landscaped areas, retaining walls, stairways, bus stops, first-aid and comfort stations, lighting facilities, and other areas and improvements provided by Landlord for the general use in common of tenants and their customers in the Plaza ( all herein called "Common Areas") shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right, from time to time, to establish, modify and enforce reasonable rules and regulations with respect to all Common Areas. Tenant agrees to comply with all rules and regulations set forth in Exhibit "C" attached hereto and all reasonable amendments thereto. (ii) Landlord shall have the right from time to time to change the sizes, locations, shapes and arrangements of parking areas and other Common Areas; PROVIDED, HOWEVER, that the size of parking areas on the Total Tract, as shown upon Exhibit "A" remain in compliance with applicable municipal requirements. Landlord shall have the right to restrict parking by employees to designated areas; construct surface, sub-surface or elevated parking area and facilities; establish and from time to time change the level or grade of parking surfaces; enforce parking charges (by meters or otherwise) with appropriate provisions for ticket validating; and do and perform such other acts in and to said areas and improvements as Landlord in its sole discretion, reasonably applied, deemed advisable for the use thereof by tenants and their customers. (iii) Condemnation or other taking by any public authority, or sale in lieu of condemnation, or any or all of said parking areas shall not constitute a violation of any covenant by Landlord or entitle Tenant to terminate this Lease or any abatement of its rent hereunder. B. Use of Common Areas: Tenant and its business invitees, employees and customers shall have the nonexclusive right, in common with Landlord and all others to whom Landlord may from time to time impose and the rights of Landlord set forth above. Tenant shall pay Landlord, upon demand, $25.00 for each day on which a car of Tenant a concessionaire, employee or agent of Tenant is parking outside any area designated by Landlord for employee parking. Tenant authorizes Landlord to cause any such car to be towed from the Shopping Center and Tenant will reimburse Landlord for the cost thereof upon demand, and otherwise indemnity and hold Landlord harmless with respect thereto. Tenant shall abide by all rules and regulations and cause its concessionaires, officers, employees, agents, customers, and invitees to abide thereby. Landlord may at any time close temporarily any Common Area to make repairs or changes, prevent the acquisition of public rights therein, discourage non-customer parking, or for other reasonable purposes. Tenant shall furnish Landlord license numbers and description of cars used by Tenant and its concessionaires, officers and employees. Tenant shall not interfere with Landlord's other tenants' rights to use any part of the Common Areas. Landlord shall designate thirty-five (35) parking spaces for specific use by Tenant and Tenant's customers. Specifically, such spaces shall be designated on the site plan attached as Exhibit "A" of the Lease. C. Expense of Operating and Maintaining the Common Areas: The term "Operating Expenses" as used herein means the total cost and expense incurred by Landlord in operating and maintaining the Common Areas, including, without limitation, the following: (I) premiums for liability, rent and property insurance for the Shopping Center; (ii) real and personal property taxes assessed against the Shopping Center; (iii) landscaping, watering and gardening expense incurred in connection with the operation of the Shopping Center; (iv) the expense of maintenance, repair, painting and replacement of any part of or facility within the Shopping Center and all equipment used in connection therewith; (v) the expense of cleaning, striping, snow removal and lighting of the Common Areas; (vi) the expense of maintaining, repair and replacement and depreciation on machinery and equipment used in the maintenance and cleaning of the Common Ares and properly allocable thereto; (vii) the cost of police, fire protection, guard and security services; (viii) total compensation and benefits (including premiums for worker's compensation insurance) of all personnel employed by Landlord to operate, maintain and service the Common Areas; (ix) utility expense incurred in operating the Common Area; (x) any cost or expense incurred by Landlord in the contest of the amount of real and personal property taxes assessed against the Shopping Center; (xi) such other expenses reasonably incurred by Landlord in operating and maintaining the Common Areas in a first-class condition; and (xii) and a Administration equal to 15% of the foregoing cost. During each of the second (2nd) and third (3rd) Lease Years only, and subject to the exception for taxes and insurance (as described below), Landlord shall assure that Tenant's proportionate share of the Operating Expenses in each Lease Year shall not exceed As per Paragraph 36 Miscellaneous, Section O. Additional Provisions, E. CAM, Taxes And Insurance. In all events, however, Tenant acknowledges and agrees that Landlord has limited or no power to control charges for taxes and insurance applicable to the Premises. Accordingly, Landlord's agreement to provide certain maximum amounts to the Tenant's share of the Operating Expenses (also known as "CAM Charges") as provided in this paragraph shall not apply to any increases for taxes and insurance for the applicable Lease Year. D. Payment of Operating Expense: Tenant agrees to pay Landlord, as additional rent, in the manner hereinafter provided, Tenant's Share of the Operating Expenses; Tenant's Share thereof being the Operating Expenses multiplied by a fraction, the numerator of which is the number of square feet in the Premises and the denominator of which is the total number of square feet leasable to tenants of the Shopping Center. The additional rent agreed to be paid by Tenant to Landlord pursuant to this Lease shall be estimated by Landlord at the beginning of each Lease Year and paid monthly by Tenant to Landlord based upon the Operating Expenses for the preceding Lease Year; each such monthly payment to equal one-twelfth (1/12) of Tenant's proportionate share of the Operating Expenses for the preceding Lease Year. At the end of each Lease Year Landlord shall compute the Operating Expenses for such period of time and compute Tenant's proportionate share thereof. Having done so, Landlord shall invoice Tenant thereof, deducting therefrom the amount paid by Tenant during the preceding period of time. Should Tenant owe any additional sum as evidenced by such invoice, the amount thereof shall be paid to Landlord by Tenant within (10) ten days after receipt of such invoice by Tenant. Conversely, should the invoice reflect an overpayment by Tenant to Landlord during the preceding period, the amount of such overpayment shall be deducted from the next monthly payments due from Tenant to Landlord pursuant to this section. In addition, simultaneously with the giving of the above referenced invoice, Landlord shall advise Tenant of the estimated monthly amount due by Tenant to Landlord during the next twelve (12) months period. E. Square Footage: In measuring the number of square feet in the Premises and the total number of square feet leasable to tenants of the Shopping Center, all such measurements shall be from the exterior walls and store fronts, and the center line of party walls. In the event Landlord's actual field measurement of the Premises shall disclose a square foot area contained in the Premises at a variance with the square foot area stated in this Lease, Landlord may, at it's option, adjust the number of the Premises for purposes of this Lease. In making the determination as to the number of square feet from time to time leasable to tenants in the Shopping Center, such determination shall be made at the beginning of Lease Year throughout the term of this Lease. 9. MAINTENANCE OF LEASE PREMISES: A. Maintenance by Landlord: Landlord shall keep or cause to be kept the foundations, roof and structural portions of walls of the Premises in good order, repair and condition except for damage thereto due to the acts or omissions of Tenants, its employees or invitees. Landlord shall commence required repairs as soon as reasonably practicable after receiving written notice from Tenant thereof. Except as provided in this Section, Landlord shall not be obligated to make repairs, replacements or improvements of any kind upon the Premises, or to any equipment, merchandise, stock in trade, facilities or fixtures therein, all of which shall be Tenant's responsibility. In all events, however, Tenant shall not be required to replace equipment categorized as capital items in accordance with generally accepted accounting principles such as HVAC units, provided that during the term of this Lease, Tenant shall in good faith diligently comply with its obligations to maintain such equipment and their appurtenances as provided in Section 9B of this Lease. B. Maintenance by Tenant: Tenant shall at all times keep the Premises (including all entrances and vestibules) and all partitions, window and window frames and moldings, glass doors, door openers, fixtures, equipment and appurtenances thereof (including lighting, heating, electrical, plumbing, ventilating, and air conditioning fixtures and systems and other mechanical equipment and appurtenances) and all parts of the Premises not required herein to be maintained by Landlord in good order, condition and repair and clean, orderly, sanitary and safe, damage by unavoidable casualty excepted, (including but not limited to doing such things as are necessary to cause the Premises to comply with applicable laws, ordinances, rules, regulations and orders or governmental and public bodies and agencies. If replacement of equipment, fixtures and appurtenances thereto are necessary, Tenant shall replace the same with equipment, fixtures and appurtenances of the same quality, and repair all damages done in or by such replacement. If Tenant fails to perform work resulting from Tenant's acts, actions or omissions and add the cost of the same to the next installment of Minimum Monthly Rent due hereunder. Landlord shall warrant the HVAC, mechanical, major electrical and plumbing for a period of sixty (60) days after possession. C. Surrender of Premises: At the expiration of the tenancy hereby created, Tenant shall surrender the Premises in the same condition as they were in on the Commencement Date, reasonable wear and tear and damage by unavoidable casualty excepted, and deliver all keys for, and all combinations on locks, safes and vaults in, the Premises to Landlord at Landlord's Notice Address. D. Maintenance Contract: Tenant agrees that immediately upon taking possession of the Premises to enter into a valid standard maintenance contract for the routine and regular maintenance of all heating and air conditioning equipment, said contract to be at the sole expense of the Tenant and will be renewed annually during the entire term of the Lease or any renewals or extensions thereof. Tenant shall be responsible for repairs as well as maintenance of said equipment. E. Fire Extinguishers: Tenant agrees to supply and maintain at its own expense any fire extinguishers, or other fire prevention equipment required by laws, rules, orders, ordinances, and regulations of any city, county, or state in which the Premises are located, and/or required by any underwriters association, bureau, or any other similar body have jurisdiction involving said Premises. 10. SIGNS, AWNINGS, CANOPIES, FIXTURES ALTERATIONS, ROOF AND WALLS: A. Fixtures: All fixtures installed by Tenant shall be new or completely reconditioned. B. Removal and Restoration by Tenant: All alterations, changes and additions and all improvements, including leasehold improvements, made by Tenant, or made by Landlord on Tenant's behalf, whether part of Tenant's Work or not and whether or not paid for wholly or in part by Landlord, shall remain Tenant's property for the Lease Term. Any alterations, changes, additions and improvements shall immediately upon the termination of this Lease become Landlord's property, be considered part of the Premises, and not be removed at or prior to the end of the Lease Term without Landlord's written consent unless Landlord requests Tenant to remove same. If Tenant fails to remove any shelving, decoration, equipment, trade fixtures and personal property then Tenant shall repair or pay for the repair of any damage done to the Premises resulting from removing the same. C. Tenant Shall Discharge All Liens: Tenant's shall promptly pay all contractors and materialman, and not permit or suffer any lien to attach to the Shopping Center or any part thereof, and shall and does hereby indemnify and save harmless Landlord against the same. Landlord shall have the right to require Tenant to furnish a bond or other indemnity satisfactory to Landlord prior to the commencement of any work by the Tenant on the Premises, or if any lien attaches or is claimed, to require such bond or indemnity in addition to all other remedies. D. Signs, Awnings, and Canopies: Tenant will not place any exterior door window or any wall of the Premises or otherwise, any sign, awning, canopy, advertising matter, decoration, lettering or other things of any kind which do not comply with the Sign Criteria set forth in Exhibit "B" attached hereto. E. Roof and Walls: Landlord shall have the exclusive right to use all or part of the roof, side and rear walls of the Premises for any purpose, including but not limited to erecting signs or other structures on or over any part of the same, erecting scaffolds and other aids to the construction and installations of the same, and installing, maintaining, using, repairing and replacing pipes, ducts, conduit and wires leading through, to or from the Premises and serving other parts of the Shopping Center in locations which do not materially interfere with Tenant's uses of the Premises. Tenant shall have no right whatsoever to the exterior of exterior walls or the roof of the Premises or any portion of the Shopping Center outside the Premises except as provided in Section, hereof. 11. REAL ESTATES TAX: Landlord shall promptly pay all taxes commonly called real estate taxes levied upon, or assessed against the Shopping Center of which the Premises are a part during the term of this Lease; the amounts so paid being an Operating Expense. 12. PERSONAL PROPERTY TAXES: During the term of this lease Tenant shall pay prior to delinquency all taxes assessed against and levied upon fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises. 13. UTILITIES: Tenant agrees to pay before delinquency all charges for gas, heat, power, electricity, telephone, charges and all other utility charges including hook up or connection fees or charges which may accrue with respect to the Premises during the term of this Lease whether the same be charged or assessed at flat rates, measured by separate meters or prorated by the utility company or Landlord. Landlord shall in no event be liable to Tenant for any interruption in the service of any such utilities to the Premises, howsoever such interruption may be caused; and this Lease shall continue in full force and effect despite any such interruptions. 14. INSURANCE: A. Landlord's Obligations: Landlord shall procure and maintain at its own expense during the term of this Lease such fire and extended coverage insurance on the buildings in Shopping Center as Landlord deems appropriate; the expense thereof being Operating Expense. B. Tenant's Obligations: (I) Tenant will, during the full term of this Lease or any renewal or extension thereof, carry in a standard company full coverage insurance on all plate glass in the Premises and cause same to be replaced if chipped, cracked or broken; said insurance policy or certificate from Tenant's insurance company to be deposited with Landlord or his agent, and such policy shall provide that it shall not be canceled for any reason unless and until Landlord or his agent is given fifteen (15) days notice in writing by the insurance company. (ii) Tenant's will, during the full term of this agreement or any renewal or extension thereof, carry in a standard company, for the protection of himself and Landlord, public liability insurance with limits of at least Five Hundred Thousand Dollars ($500,000.00) and property damage per occurrence insurance with minimum limits of Fifty Thousand Dollars ($50,000.00); said insurance policy or certificate from Tenant's insurance company to be deposited with Landlord or his agent, and such policy shall provide that it shall not be canceled for any reason unless and until Landlord or his agent is given fifteen (15) days' notice in writing by the insurance company. (iii) Tenant also agrees to carry insurance against fire and such other risks as are from time to time included in standard Extended Coverage insurance, for the full insurable value, covering all of Tenant's's merchandise, trade fixtures, furnishings, wall coverings, floor coverings, carpeting, drapes, equipment and all items of personal property of Tenant located on or within the Premises. Tenant will provide Landlord with copies of the polices or certificates evidencing that such insurance is in full force and effect and stating the terms thereof. C. Mutual Waiver of Subrogation Rights: Landlord and Tenant and all parties claiming under them mutually release and discharge each other from all claims and liabilities arising from or caused by any casualty or hazard covered or required hereunder to be covered in whole or in part by insurance or in connection with property on or activities conducted on the Premises, and waive any right of subrogation which might otherwise exist in or accrue to any person on account thereof, provided that such release shall not operate in any case where the effects is to invalidate the cost of such insurance coverage (provided, that in the case of increased cost, the other party shall have right, within thirty (30) days written notice, to pay such increases cost, thereby keeping such release and waiver in full force and effect). D. WAIVER: Landlord, its agents and employees, shall not be liable for, and Tenant waives all claims for damage including but not limited to consequential damages, to person, property or otherwise, sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon any part of the Shopping Center including, but no limited to, claims for damages resulting from: (a) any equipment or appurtenances becoming out of repair: (b) Landlord's failure to keep any part of the Shopping Center in repair; (C) injury done or caused by wind, water, or other natural elements; (d) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water, and steam pipes, stairs, porches railings or walks; (e) broken glass; (f) the backing up of any sewer pipe or downspout; (g) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about such buildings on the Premises; (h) the escaped of steam or hot water; (I) water, snow or ice upon the Premises; (j) the falling of any fixture, plaster or stucco; (k) damage to or loss by theft or otherwise of property of Tenant's or other; (l) acts or omissions of persons in the Premises, other tenants in the Shopping Center, occupants of nearby properties, or any other persons; and (m) any act or omission of owners or adjacent or contiguous property, or of Landlord, its agents or employees. Tenant's agreement to waive all such claims as set forth in this Section shall not apply in the event that any such claims arise due to Landlord's gross negligence or willful misconduct. All property of Tenant kept in the Premises shall be so kept at Tenant's risk only and Tenant's shall save Landlord harmless from claims arising out of damage to the same, including subrogation claims by Tenant's insurance carrier. 15. RIGHT OF ENTRY: Landlord, its agents and employees shall have the right to enter the Premises from time to time at reasonable times to examine, show them prospective purchasers, and other persons, and make such repairs, alterations, improvements or additions as Landlord deems desirable. Rent shall in no wise abate while any such repairs, alterations, improvements, or additions are being made. During the last six (6) months of the Lease Term, Landlord may exhibit the Premises to prospective tenants ans maintain upon the Premises notices deemed advisable by Landlord. In addition, during any apparent emergency, Landlord or its agents may enter the Premises forcibly without liability therefor and without in any manner affecting Tenant's obligations under this Lease. Nothing herein contained, however, shall be deemed to impose upon Landlord any obligation, responsibility or liability whatsoever, for any care, maintenance or repair except as otherwise herein expressly provided. 16. INDEMNIFICATION: Tenant shall indemnify and save harmless Landlord from against any and all liability, liens, claims, demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions and causes of action of any and every kind and nature arising or growing out of or in any way connected with Tenant's use, occupancy, management or control of the Premises or Tenant's operations, conduct or activities in the Shopping Center. The provisions regarding Tenant's indemnifications to Landlord shall not apply in the event that any such obligations for indemnification arise due to Landlord's gros negligence or willful misconduct. 17. SUBORDINATION: The Lease shall be prior, senior and superior at all time s to the lien of any first mortgage and mortgages which now or hereafter are a lien upon any part of the Total Tract. However, upon Landlord's request, Tenant will subordinate its rights hereunder to the liens of any mortgages or any liens resulting from any method of financing or refinancing (hereinafter collectively referred to as "mortgage") now and hereafter existing against all or part of Total Tract ( as set out Exhibit "A" hereinbefore), and to all renewals, modifications, replacements, consolidations and extensions thereof, and shall execute and deliver all documents requested by a mortgage or security holder to effect such subordination, provided the mortgage or security holder agrees in writing that if Landlord defaults under the mortgage, said mortgage or security holder shall not disturb Tenant's possession while Tenant is not in default hereunder. 18. DAMAGE AND DESTRUCTION: A. Damage to Premises: If the Premises hereafter damaged or destroyed or rendered partially untenable for their accustomed use by fire or other casualty insured under the coverage which Landlord is obligated to carry hereunder, Landlord shall promptly repair the same to substantially the condition which they were in immediately prior to the happenings of such casualty (excluding stock in trade, fixtures, furniture, carpeting, floor coverings, drapes and equipment), and from the date of such casualty until the Premises are so repaired and restored, the Minimum Monthly Rent payments hereunder shall abate in such proportion as the part of said Premises thus destroyed or rendered untenable bears to the total Premises PROVIDED, HOWEVER, that Landlord shall not be obligated to repair and restore if such casualty is caused directly or indirectly by the negligence of a Tenant, its agents, and employees; and PROVIDED, FURTHER, that Landlord shall not be obligated to expend for such repair or restoration an amount in excess of the insurance proceeds recovered and made available to Landlord as a result of such damages, and PROVIDED, FURTHER, that if the Premises be damaged, destroyed or rendered untenable for their accustomed uses by fire other casualty to the extent of more that 50% of the cost to replace the Premises during the last two years of the term of this Lease, then Landlord shall have the right to terminate this Lease effective as of the date of such casualty by giving to Tenant, within sixty (60) days after happening of such casualty, written notice of such termination. If such notice be given, this Lease shall terminate and Landlord shall promptly repay to Tenant any rent thereto fore paid in advance which was not earned at the date of such casualty. If said notice is not given and Landlord is required or elects to repair or restore the Premises as herein provided, then Tenant shall promptly repair or replace its stock in trade, fixtures, furnishings, furniture, carpeting, wall covering, floor covering, drapes and equipment to the same condition as they wherein immediately prior to the casualty, and if Tenant has closed its business, Tenant shall promptly reopen for business upon the completion of such repairs. 19. EMINENT DOMAIN: A. Eminent Domain: If ten percent (10%) or more of the Premises or 15% or more of the Shopping Center shall be under threat of condemnation or condemned by right of eminent domain for any public or quasi public use or purpose, the Landlord at its election may terminate this Lease by giving notice to Tenant of its election, and in such event rentals shall be apportioned and adjusted as of the date of termination. If the Lease shall not be terminated as aforesaid, then it shall continue in full force and effect, and Landlord shall within a reasonable time after possession is physically taken (subject to delays due to shortage of labor, materials or equipment, labor difficulties, breakdown or equipment, government restrictions, fires, other casualties or other causes beyond the reasonable control of Landlord) repair or rebuild what remains of the Premises for Tenant's occupancy, provided, however, Landlord shall have no obligation to expend in excess of funds secured in relation to threat of condemnation or condemnations; and a just proportion to the Minimum Monthly Rental shall be abated, according to the nature and extent of the injury to the Premises until such repairs and rebuilding are completed, and thereafter for the balance of the Lease Term. B. Damages: Landlord reserves and Tenant assigns Landlord, all rights to damages on account of any taking or condemnation or any act of any public or quasi pubic authority for which damages are payable. Tenant shall execute such instruments of assignment as Landlord requires, join with Landlord in any action for the recovery of damages, if requested by Landlord, and turn over to Landlord any damages recovered in any proceeding. If Tenant fails to execute instruments required by Landlord, or undertake such other steps as requested, Landlord shall be deemed the duly authorized irrevocable agent and attorney-in-fact of Tenant to execute such instruments and undertake such steps on behalf of Tenant. However, Landlord does not reserve any damages payable for trade fixtures installed by Tenant as its own cost which are not part of the realty. 20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease or any interest therein whether voluntarily, by operation of law, or otherwise and shall not sublet the Premises or any part thereof, except by written permission and consent of Landlord being first hand and obtained. Consent of Landlord to any such assignment shall not be unreasonably withheld if: (I) At the time of such assignment or transfer Tenant is not in default in the performance and observance of any of the covenants and conditions of this Lease; (ii) The assignee or subtenant or Tenant shall expressly assume in writing all of Tenant's obligations hereunder; (iii) Tenant shall provide proof to Landlord that the assignee or subtenant has a financial condition which is satisfactory to landlord and Landlord's lender and (iv) The Premises continue to be used solely for the purposes set forth in Paragraph 7A and the assignee or subtenant is, in Landlord's opinion, capable of operating such business. In connection with any such assignment or sublease, Tenant or the assignee of Tenant shall pay to Landlord a fee of $250.00 for legal and administrative costs incurred by Landlord. Any such subleasing or assignment, even with the approval of Landlord shall not relieve Tenant or any Guarantor from liability for payment of all forms of rental and other charges herein provided or from the obligations to keep and be bound by the terms, conditions and covenants of this Lease. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease, or a consent in the assignment or subletting of the Premises. Consent to any assignment or subletting shall not be deemed a consent to any further assignment or subletting. Any merger, consolidation or transfer of corporate shares of Tenant, if Tenant is a corporation, so as to result in a change in the present voting control of the Tenant's by the person or persons owning a majority of said corporate shares on the date of this Lease, shall constitute an assignment and be subject to the conditions of this paragraph. 21. LANDLORD'S PERFORMANCE FOR ACCOUNT OF TENANT: If the Tenant shall continue in default in the performance of any of the covenants or agreements herein contained after the time limit for the curing thereof, then Landlord may perform the same for the account of Tenant. Any amount paid or expense or liability incurred by Landlord in the performance of any such matter for the account of Tenant shall be deemed to be additional rent and the same (together with interest thereon at the maximum rate permitted by law from the date upon which any such expense shall have been incurred) may, at the option of Landlord, be added to any rent then due or thereafter falling due hereunder. 22. DEFAULT BY TENANT: A. Right to Re-Enter: The following shall be considered for all purposes to be defaults under and breaches of this Lease: (a) any failure Tenant to pay rent or other amount when due hereunder; (b) any failure by Tenant to perform or observe any other of the terms, provisions, conditions and covenants of this Lease for more than ten (10) days after written notice of such failure; (C) Landlord determining that Tenant had submitted any false report required to be furnished hereunder; (d) Tenant shall do anything upon or in connection with the Premises or the construction of any part thereof which directly or indirectly interferes in any way with, or results in a work stoppage in connection with, construction of any part of the Shopping Center or any other tenant's spaces; (e) Tenant shall become bankrupt or insolvent or file or have filed against it a petition in bankruptcy or for reorganization or arrangement or for the appointment of a receiver or trustee of all or a portion of Tenant's property, or Tenant makes an assignment for the benefit of creditors; (f) if Tenant abandons or vacates or does not do business in the Premises for ten (10) days, or (g) this Lease or Tenant's interest herein or in the premises or any improvements thereon or any property of Tenant are executed upon or attached; or (h) the Premises comes into the hands of any person other than expressly permitted under this Lease. In any such event, and without grace period, demand or notice, except as herein provided ( the same being hereby waived by Tenant), Landlord, in addition to all other rights or remedies it may have, shall have the right thereupon or at any time thereafter to terminate this Lease by giving notice to Tenant stating the date upon which such termination shall be effective, and shall have the right, either before or after any such termination, to re-enter and take possession of the Premises, remove all persons and property from the Premises and store such property at Tenant's's expense, all without notice or resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage occasioned thereby. Nothing herein shall be construed to require Landlord to give notice before exercising any of its rights and remedies provided for in this Lease. B. Right to Relet: If Landlord re-enters as above provided, or if Landlord takes possession pursuant to legal proceedings or otherwise, Landlord may ether terminate this Lease or Landlord may, from time to time, without terminating this Lease, make such alterations and repairs as it deems advisable to relet the premises, and relet the Premises or any part thereof for such term or terms (which may extend beyond the Lease Term) and at such rentals and upon such other terms and conditions as Landlord in its sole discretion deems advisable. Upon each such reletting all rentals received by Landlord therefrom shall be applied, first, to any indebtedness other than rent due hereunder from Tenant of Landlord; second, to pay any costs and expenses of reletting, including brokers and attorneys' fees and costs of alterations and repairs; third, to rent due hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as it becomes due hereunder. If rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall immediately pay any such deficiency to Landlord. No re-entry or taking possession of the Premises by Landlord shall be construed as an election to terminate this Lease unless a written notice of such termination is given by Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter terminate this Lease for any prior breach or default. If Landlord terminates this Lease for any breach, in addition to any other remedies Landlord may have, Landlord may recover from Tenant all damages incurred by reason of such breach or default, including all costs of retaking the Premises and including the excess, if any, of the total rent and charges reserved in this Lease for the remainder of the Lease Term over the then reasonable rental value of the Premises for the remainder of the Lease Term all of which shall be immediately due and payable by Tenant to Landlord. In determining the rent payable by Tenant hereunder subsequent to default, the Minimum Monthly Rental for each month of the unexpired portion of the Lease Term shall have equal the average Minimum Monthly Rental paid during each Lease Year which Tenant was obligated to pay from the commencement of the Lease Term to the time of default, or during the preceding One (1) full calendar years, whichever period is shorter. Notwithstanding the provisions of the Texas Property Code, upon the occurrence of an event of default under the Lease, Landlord shall be entitled to change locks at the Premises. Tenant agrees that entry may be granted for that purpose through use of a duplicate or master key or any other means, that the same may be conducted out of the presence of Tenant if Landlord so elects, that no notice shall be required to be posted by the Landlord on any door to the Premises (or elsewhere) disclosing the reason for such action or any other further information, and that Landlord shall not be obligated to provide a key to the changed lock to Tenant unless Tenant shall have first: (a) brought current all payments due to Landlord under this Lease, provided, however, that if Landlord has thereforeto formally and permanently repossessed the Premises, or has terminated this Lease, then Landlord shall be under no obligation to provide a key to the new lock(s) to Tenants regardless of Tenant's payment of past-due amounts, damages, or any other payments or amounts of any nature or kind whatsoever; (b) fully cured and remedied to Landlord's satisfaction all other defaults of Tenant under this Lease (but if such defaults are not subject to cure, such as early abandonment or vacation of the Premises, the Landlord shall not be obligated to provide the new key to Tenant under any circumstance), and (c) given Landlord security and assurance satisfactory to Landlord that Tenant intends to and is able to meet and comply with its future obligations under this Lease, both monetary and nonmonetary. In the event Landlord is ever required by law to mitigate damages due to Tenant's default, the placement of a sign upon the Premises advertising the Premises for lease shall deemed to satisfy any obligation of Landlord to mitigate its damages. C. Counterclaim: If Landlord commences any proceedings for non-payment of rent, Minimum Monthly Rent, Percentage Rent or additional rent Tenant will not interpose any counterclaim of any nature or description of proceedings. This shall not, however, be construed as a waiver if Tenant's's right to assert such claims in a separate action brought by Tenant. The covenants to pay rent and other amount hereunder are independent covenants and Tenant shall have no right to hold back, offset or fail to pay any such amounts for default by Landlord or any other reason whatsoever. D. Waiver of Rights of Redemption: To the extent permitted by law, Tenant waives any and all rights of redemption granted by or under any present or future laws if Tenant is evicted or dispossessed for any cause, or if Landlord obtains possession of the Premises due to Tenant's default hereunder or otherwise. E. To secure the performance of Tenant's obligations under this Lease, Tenant, as Debtor, and referred to in this paragraph as "Debtor", hereby grants Landlord, as "Secured Party", a security interest in and an express contractual lien upon all Debtor's equipment, furniture, furnishings, appliance, goods, trade fixtures, inventory, chattels, and other personal property of Debtor which is now on the Premises or which is placed on the Premises at some later date, and all proceeds from such items. This property shall not be removed from the Premises without consent of Secured Party until all arrearages in rent and all other sums of money being due to Secured Party under this Lease have been paid and discharged, and all covenants, agreements, and conditions of this Lease have been fully complied with and performed by Debtor. Secured Party is authorized and Debtor hereby irrevocably and throughout the term of this Lease (and any extensions or renewals thereof) appoints Secured Party as its attorney-in-fact to prepare and file financing statements signed only by Secured Party as attorney-in-fact on behalf of Debtor covering the security described above; moreover, Debtor agrees to sign the same upon request. Notwithstanding the foregoing, Secured Party is hereby authorized to file a duplicate original or Xerox copy of this Lease as a financing statement with the Office of the Secretary of State and with the appropriate county clerk's office for the county where the Premises are located, as appropriate. Upon default under this Lease by Debtor, any or all of Debtor's obligations to Secured Party secured hereby shall, at Secured Party's option, be immediately due and payable without notice or demand. In addition to all rights or remedies of Secured Party under this Lease and the law, including the right to a judicial or nonjudicial foreclosure, Secured Party shall have the rights and remedies of a secured party under the Uniform Commercial Code as enacted in the State of Texas. This security interest hereby created shall survive the termination of this Lease if such termination results from Debtor's default. The above-described security interest and lien are in addition to and cumulative of the Landlord's lien provided by the laws of the State of Texas. In the event Landlord sell Tenant's's property at a judicial or nonjudicial foreclosure sale, tenant hereby expressly consents to and gives Landlord the authority to bid on and purchase all or a portion of Tenant's property at such sale. Provided, however, Landlord shall subordinate its Landlord's lien on any of Tenant's personal property located on the Premises (whether statutory or contractual) to any UCC liens granted to any bona fide third party lender of the Tenant. 23. DEFAULT BY LANDLORD: Landlord shall in no event be charged with default in any of its obligations hereunder unless and until Landlord shall have failed to perform such obligations within thirty (30) days (or such additional time is as reasonably required to correct any such default) after written notice to Landlord by Tenant, specifically describing such failure. 25. APPLICATION OF PAYMENTS RECEIVED FROM TENANT: Landlord shall have the right to apply any payments made by Tenant to the satisfaction of any debt or obligation of Tenant of Landlord according to Landlord's sole discretion and regardless of the instructions of Tenant as to application of any such sum, whether such instructions be endorsed upon Tenant's checks or otherwise, unless otherwise agreed upon by both parties in writing. The acceptance by Landlord of a check or checks drawn by others than Tenant shall in no ways affect Tenant's liability hereunder nor shall it be deemed an approval of any assignment of this Lease by Tenant. 26. Environmental Issues. 26.1 No Hazardous Materials. Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Premises or the Center by Tenant, its agents, employees, contractors or invitees without the prior written consent of Landlord, which Landlord shall not unreasonably withhold provided Tenant demonstrates to Landlord's satisfaction that such Hazardous Material is necessary or useful to Tenant's business and will be used, kept and stored in a manner that complies with all laws regulating any such Hazardous Material so brought upon or used or kept in or about the Premises or the Center. 26.2 Indemnification. In addition to, and without limitation on the general indemnity obligations of Tenant under this Lease, Tenant specifically agrees that it shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises, the Center or neighboring properties, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises, and sums paid in settlement of claims, attorney's fees, consultant fees and expert fees) which arise during or after the lease term as a result of any breach by Tenant of its obligations under this Paragraph 36 or any contamination of the Premises, the Center or neighboring properties resulting from the presence of Hazardous Materials on or about the Premises caused or permitted by Tenant, its agents, employees, contractors or invitees. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present on or in the Premises, the Center or neighboring properties. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises, Center or neighboring properties caused or permitted by Tenant, its agents, employees, contractors or invitees results in any contamination of the Premises, Center or neighboring properties, Tenant shall promptly take all actions at its sole expense as are necessary to return the Premises, Center or neighboring properties to the condition existing prior to the introduction of any such Hazardous Material to the Premises, Center or neighboring properties provided that Landlord's approval of such actions shall first be obtained. Tenant further agrees to defend Landlord, its agents, employees, and assigns in any administrative or judicial proceeding commenced by private individuals or governmental entities seeking recovery of damages for personal injury or property damage, or recovery of civil penalties or fines arising out of, connected with, or relating to any breach by Tenant of its obligations under this Paragraph 36 or any contamination of the Premises, the Center or neighboring properties resulting from the presence of hazardous Materials on or about the Premises, the Center or neighboring properties caused or permitted by Tenant, its agents, employees, contractors or invitees. 'The foregoing indemnity shall survive the expiration or earlier termination of this Lease. 26.3 Hazardous Material. As used herein, the term "Hazardous Material" means any pollutant, toxic substance, regulated substance, hazardous waste, hazardous material, hazardous substance, oil, hydrocarbon, asbestos or similar item as defined in or pursuant to the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, the Federal Clean Water Act, as amended, the Safe Drinking Water Act, as amended, the Federal Water Pollution Control Act, as amended, the Texas Water Code, as amended, the Texas Solid Waste Disposal Act, as amended, or any other federal, state or local environmental or health and safety related, constitutional provisions, law, regulation, ordinance, rule, or bylaw, whether existing as of the date hereof, previously enforced or subsequently enacted (collectively the "Environmental Laws"). 26.4 Notice of Certain Events. Tenant shall immediately advise Landlord in writing of (a) any governmental or regulatory actions instituted or threatened under any Environmental Law affecting the Tenant or the Premises, (b) all claims made or threatened by any third party against Tenant or the Premises or the Center relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials, (C) the discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Premises that could cause the Premises or the Center to be classified in a manner which may support a claim under any Environmental Law, and (d) the discovery of any occurrence or condition on the Premises or the Center or any real property adjoining or in the vicinity of the Premises or the Center which could subject Tenant, the Premises or the Center to any restrictions in ownership, occupancy, transferability or use of the Premises under any Environmental Law. Landlord may elect to join and participate in any settlements, remedial actions, legal proceedings or other actions initiated in connection with any claims under any Environmental Law and to have its reasonable attorney's fees paid by Tenant. At its sole cost and expense, Tenant agrees when applicable or upon request of Landlord to promptly and completely cure and remedy every violation of an Environmental Law caused by Tenant, its agents, employees, contractors or invitees. 27. NOTICES: All notices required to be given hereunder shall be in writing, and if intended for the Landlord, shall be served upon an officer or upon its agent, or shall be mailed by registered mail, postage paid, to the principal place of business of the Landlord at: 3800 N. Mesa Suite D-2 El Paso, Texas 79902 or if intended for the Tenant, shall be served upon one of the officers of Tenant personally, or shall be mailed by registered mail, postage paid, to the principal place of business of said Tenant at: 3800 N. Mesa Suite B-1 El Paso, Texas 79902. Either party shall have the right to change its principal office by service by registered mail, of such change. 28. SALE OF PREMISES BY LANDLORD: In the event of any sale of the Premises by Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or delivered from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease. 29. ATTORNEY'S FEES: In the event the Landlord finds it necessary to retain an attorney in connection with the default by the Tenant in any of the agreement or covenants contained in this Lease, Tenant shall pay reasonable attorney's fees to said attorney. In the event of any litigation regarding this Lease, the losing party shall pay to the prevailing party's reasonable attorneys' fees. 30. TITLE OF SHOPPING CENTER:. Tenant's shall not have or acquire any interest in the name of the Shopping Center. Landlord reserves the right to change the name, title or address of the Shopping Center or the address of the Premises at any time, and Tenant waives all claims for damages caused by such change. 31. WAIVER: No delay or omission in the exercise of any right or remedy of Landlord on any default by Tenant shall impair such a right or remedy or be construed as a waiver. The receipt and acceptance by Landlord of delinquent rent shall not constitute a waiver of any other default; it shall constitute only a waiver or timely payment for the particular rent payment involved. No act or conduct of Landlord, including without limitations, the acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. 32. SHORT FORM OF LEASE RECORDING: The parties hereto agree that at or prior to commencement of the term they will execute, acknowledge, and deliver a short form of Lease to the end that the same may be recorded among the Land Records of the City or County in which the Premises is located. Recording charges and any stamp or like tax shall be paid by Tenant. Prior approval of recording must be obtained from Landlord. 33. SECURITY DEPOSIT: Landlord hereby acknowledges receipt from Tenant of the sum of Nine Thousand Eight Hundred and Eighty (dollars) ($ 9,880.00 ), to be held as collateral security or the payments of any rentals and any other sums of money for which Tenant shall become liable to Landlord under this Lease, and for the faithful performance by Tenant of all other covenants and agreements made herein; said deposit is acknowledged as being the first and last month's Minimum Monthly Rental due under this Lease. 34. HOLDING OVER AND SUCCESSORS: A. Holding Over: If Tenant holds over of occupies the Premises beyond the Lease Term (it being agreed there shall be no such holding over or occupancy without Landlord's written consent), Tenant shall pay Landlord for each day of such holding over a sum equal to 1.25 times the Minimum Monthly rental prorated for the number of days of such holding over. If Tenant holds over with or without Landlord's written consent Tenant shall occupy the Premises on an tenancy from month to month and all other terms and provisions of this Lease shall be applicable to such period. B. Successors: All rights and liabilities herein given to or imposed upon the respective parties hereto shall bind and insure to the several respective heirs, successors, administrators, executors ans assigns of the parties and if Tenant is more than one person, they shall be bound jointly and severally by this Lease. No rights, however, shall insure to the benefit of the assignee of Tenant unless the assignment was approved by Landlord in writing. 35. BROKERS OR FINDERS: Landlord has engaged CB Commercial/Southern Boarder Partners ("CB") as its broker regarding the negotiation and execution of this Lease. Landlord shall be fully responsible and shall pay all fees and other expenses owing CB in connection with the transaction contemplated by this Lease. Accordingly, Landlord shall indemnify Tenant for any claims for brokerage fees or other compensation or reimbursements made by CB in connection with the transactions contemplated by this Lease. Other than Landlord's engagement of CB as described above, each party represents and warrants to the other that it has engaged no broker or finder and that no claims for brokerage commissions or finders fees will arise in connection with the execution of this Lease and each party agrees to indemnify the other against, and hold it harmless from any liability or expense (including attorney's fees) arising from such claim. Each party represents and warrants other than the Brokers named herein, to the other that it has engaged no Broker or Finder and that no claims for brokerage commissions or finders' fees will arise in connection with the execution of this Lease and each party agrees to indemnify the other against, and hold it harmless from any liability or expense (including attorney's's fees) arising from such claim. 36. MISCELLANEOUS: A. Successors: The covenants hereby contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall jointly and severally liable hereunder. B. Partial Invalidity: If any term, covenant, condition or provision of this Lease is held by a Court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions hereof shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. C. Captions: The various headings and numbers herein and the grouping of the provisions of this Lease into paragraphs are for the purpose of convenience only and shall not be considered a part hereof. D. Gender; Number: As used in this Lease whenever required by the context hereof, each number, both singular and plural, shall include all numbers, and each gender shall include all genders. E. Applicable Laws: This Lease shall be governed by the law of the Great State of Texas. F. Time: Time is of the essence of this Lease. G. Joint and Several Liability: If Tenant is a partnership or other business organization the members of which as subject to personal liability, the liability of each such member shall be deemed to be joint and several. H. Limitation of Liability: Anything to the contrary herein contained, notwithstanding, there shall be absolutely no personal liability on persons, firms or entitles who constitute Landlord with respect to any of the terms, covenants, conditions, and provisions of this Lease, and Tenant shall look solely to the interest of Landlord, its successors and assigns, in the Total Tract for the satisfaction of each and every remedy of Tenant in the event of default by Landlord hereunder; such exculpation of personal liability is absolute and without any exception whatsoever. I. Mortgagee's's Approval: If any mortgagee of the Shopping Center requires any modifications of the terms and provisions of this Lease as a condition to such financing as Landlord may desire, then, Landlord shall have the right to cancel this Lease if Tenant fails or refuses to approve and execute such modification(s) within thirty (30) days after Landlord's request therefore, provided said request is made at least thirty (30) days prior to delivery of possession. Upon such cancellation by Landlord, this Lease shall be null and void and neither party shall have any liability either for damages or otherwise to the other by reason of such cancellation. In no event, however, shall Tenant be required to agree, and Landlord shall not have any right of cancellation for Tenant's refusal to agree, to any modification of the provisions of this Lease relating to: the amount of rent or other charges reserved herein; the size and/or location of the Premises; the duration and/or commencement date of the term; or reducing the improvements to be made by Landlord to the Premises prior to delivery of possession. J. Accord and Satisfaction: Landlord is entitled to accept, receive and cash or deposit any payment made by Tenant for any reason, purpose or in any amount whatsoever, and apply the same at Landlord's option to any obligation of endorsement or statement on any check or letter of Tenant shall be deemed an accord ans satisfaction or otherwise recognized for any purpose whatsoever. The acceptance of any such check or payment shall be without prejudice to Landlord's right to recover any and al amounts owed by Tenant hereunder and the Landlord's right to pursue any other viable remedy. K. Entire Agreement: There are no representations, covenants, warranties, promises, agreements, conditions or undertakings, oral or written between Landlord and Tenant other than herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, charge or addition to this Lease shall be binding upon Landlord or Tenant unless in writing and signed by them. L. No Partnership: Landlord does not, in any way or for any purpose, become a partner, employer, principal, master, agent or joint venturer of or with any Tenant. M. Force Majeure: If either party hereto shall be delayed or hindered in or prevented from performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure material, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of the like nature not eh fault of the party delayed in performing work or doing acts required under this Lease, the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. Tenant shall not be excused from any obligations for payment of rent, percentage rent, additional rent or any other payments required by the terms of the Lease when same are due, and all such amount shall be paid when due. N. Submission of Lease: Submission of Lease to tenant does not constitute an offer to lease; this Lease shall become effective only upon execution ans delivery thereof by Landlord and Tenant. Upon execution of this Lease by Tenant, Landlord is granted ans irrevocable option for sixty (60) days to execute this Lease within said period and thereafter return a fully executed copy to Tenant. The effective date of this Lease shall be the date filled in on Page 1 hereof by Landlord which shall be the date of execution by the last of the parties to execute Lease. O. ADDITIONAL PROVISIONS: Lessee agrees to furnish upon execution as a condition of this Lease agreement, as may be required by Lessor or any financial institutions connected with the financing of University Hill Plaza, any or all of the following information: A. Copy of Lessee's financial statement: B. A company history report: C. Corporate Tax I.D. number: D. Social Security Number - to be used to obtain Lessee's credit history Lessee hereby by consents to any individual or corporate credit checks which may be required by Lessor or any financial institutions connected with the financing of University Hill Plaza. E. CAM, Taxes and Insurance: All Taxes, Insurance, and Common Area Maintenance shall not exceed $1,480.00 per month, for years one (1), two (2) and three (3) only. F. Other: Base Rent $8,400.00 Total $9,880.00 G. Early Termination: After the third (3rd) Lease Year, Tenant by giving Landlord one hundred and eighty (180)days notice may terminate Lease by paying Landlord one hundred and eighty (180) days of Rent monthly. Tenant shall have option to remain occupying space for three (3) months after written notice in addition to any Base Rent or Additional Rent. H. Improvements: The following improvements shall be made by Landlord with the budget below and Tenant shall pay Landlord the sum of $637.50 per month for thirty-six (36) months as a contribution to said improvements: Budget: Partitioning $5,500.00 Restrooms Addition 14,000.00 Dock Ramp (enlargement) 1,500.00 Rear Storage(enlargement) 2,500.00 Floor Covering 5,000.00 Total $31,500.00 The specific manner in which the Landlord's improvements shall be completed (including, but not limited to, specific placement and number of outlets, and specific layout of wiring, lighting, and ventilation) shall be determined by Landlord's and Tenant's written agreement to the specific build-out plans for the Premises. IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this Lease as of the day and year first above written. (LANDLORD): BY: (TENANT): (INDIVIDUALS): CORPORATION: BY: EXHIBIT B. UNIVERSITY HILL PLAZA SIGN CRITERIA The Tenant agrees to abide by the following Sign Criteria/Graphics 1. Tenant's shall provide and use high quality, creative, innovative signs placed upon the fascia of the front elevation of the Shopping Center over Tenant's Store Front Area. Signage and graphics shall not be permitted on outer face of exterior walls, columns, roof or any other surface other than the fascia. 2. Tenant shall not be permitted to employ detached signs of any kind, exterior attraction boards or changeable letter signs; flashing or oscillating signs; smoke emitting designs; moving lights or variable light intensities; unedged or uncapped letters; exposed fastenings, cans, ballast boxers or transformers. 3. Signs/graphics shall be individual, dimensional letters in a script or print style; panel signs shall not be permitted. No portion of the sign shall be closer than 12" from the bottom of the fascia or closer than 28" from the top of the fascia. All signs and graphics shall be in the 36" area in-between these clearances with no individual letter taller than 24" . The major portion or most prominent portion of the sign shall be back lighted internally from a concealed source. 4. Signs/graphics are to be individual letters, neon-illuminated with plastic faces trimmed with 1/2" trim cap. Construction shall be 24 gauge sheet metal fillers, painted opaque bronze using P.K housings, and attached to the fascia in a manner to conceal all fittings, wiring, and connections. The face plastic shall be transparent bronze #2412 over translucent white #7138. All edges, sides and returns shall be opaque bronze, or such color as Landlord and Tenant agree upon. 5. All signs, placards, graphics, advertising matter etc., exposed to the exterior of the building are subject to approval by Landlord. The sizes, designs, color, materials, specific location, content, type of construction, installation, method of mounting and illuminating of any design/sign/graphic shall be subject to the Landlord's approval. Submit 2 sets of shop drawings of all designs for signs/graphics clearly indicating all of the above information to Landlord for his written approval prior to fabrication or installation. Any signs/graphics installed without prior written approval of the Landlord shall be subject to removal by the Landlord at the expense of the Tenant. 6. These sign criteria are subject to the sole interpretation of the landlord whose decision shall be final. The Landlord's judgement or the standard of quality or appropriateness to the Shopping Center operation of any exterior design or type or exposed advertising shall be final. The Landlord reserves the right to modify or supplement these sign criteria. 7. Tenant shall heed recommendation(s) of Landlord for construction of all signage through appropriate, qualified, sign companies. Disclosed companies have been selected in order to maintain consistency of appearance for entire Shopping Center. 8. Tenant agrees to have sign in place within sixty (60) days of Commencement Date. EXHIBIT C. RULES AND REGULATIONS The Tenant agrees to abide by the following rules and regulations: 1. The sidewalks, roadways, ans other public portions of the Shopping Center shall be used by the Tenants for the purpose solely of ingress and egress to and from the Premises so demised by the Tenants. 2. All waste paper, refuse, and garbage shall be kept by Tenants in metal trash cans, with covers, to be located at the rear of the store, and to be removed at thee Tenant's expense. 3. The Tenants shall keep the exterior and interior portions of the stores, all windows, doors, and all other glass or plate fixtures in a clean condition. The Tenants shall keep the display windows in the store illuminated during such hours as the windows throughout a major portion of the Shopping Center are illuminated. 4. The Tenant shall not keep or permit to be kept in the premises any flammable or combustible fluid, chemical or explosives. 5. The Tenant shall not hold any auction, fire or bankruptcy sale on the premises demised. 6. The Tenants shall conduct their business in an orderly manner in the best interests of the Shopping Center. The Tenants shall not permit noises from the use of radios, televisions, loudspeakers, talking machines, phonographs, or other instruments to reach outside the Premises, which will in the judgement of the Landlord interfere in any way with other tenants in the Shopping Center. 7. The Tenants shall not burn any trash or garbage of any kind in or about the building, or on the grounds of the Shopping Center. 8. The plumbing facilities shall be used for the purposes for which they have been constructed, and no foreign substance of any kind shall be thrown therein. The expense of any breakage, stoppage, or damage resulting from a violation of this provision caused by any Tenants, it employees, agents, or invitees shall be borne by such Tenant. 9. The Landlord reserves the right to amend, or waive any of the rules or regulations listed above, and further to make such reasonable rules and regulations as nay from time to time seem necessary or desirable for the best interests of University Hill Plaza and of the Tenants, and any such other and further rules and regulations shall be binding upon the Tenants with the same force and effect as if they had been set forth herein at the time of the execution of the within Lease. 10. The Landlord reserves the further right to control and operate the public portions of he Shopping Center in such a manner as the Landlord deems necessary or desirable for the best interests of the Shopping Center and the Tenants and for the protection of the buildings and other property on the Shopping Center. The Landlord, however, shall not be liable to any Tenant for damages arising out of such control and operation. EXHIBIT "D" - CONSTRUCTION ADDENDUM This Construction Addendum dated May 1 1998, by and between University Hill Plaza, hereinafter referred to as "Landlord" and All Star Systems Rio Grande, Inc., hereinafter referred to as "Tenant," shall be attached to and become a part of that certain Standard Shopping Center Lease (the "Lease") between the parties dated of even date herewith for the rental of space in the University Hill Plaza Shopping Center located at 3800 Mesa, El Paso, Texas. Landlord agrees to construct, at Landlord's expense, improvements to the interior of the Premises upon the following terms and conditions: I. The improvements to be constructed by Landlord consist of the items described o Schedule I and more particularly described in the space layout plan attached hereto as Schedule 2. All construction and design shall be done by Landlord or Landlord's contractor or architect in substantial accordance with plans and specifications approved by both Landlord and Tenant. The Landlord's architect or contractor shall consult with Tenant in its preparation of the plans and specifications for the Premises. 2. Landlord shall not be obligated to commence construction of such improvements until Tenant has approved in writing the plans and specifications for the interior of the Premises. Tenant shall approve the plans and specifications for the interior of the Premises within five business days (5) days after such plans and specifications have been submitted to Tenant. In the event Tenant has not approved the plans and specifications within this five (5) day period, Landlord shall have the option to terminate this Lease or continue this Lease and construct the improvements in substantial accordance with the plans and specifications, which Tenant will be deemed to have approved. If this Lease is so terminated, Tenant agrees to pay all costs and charges incurred by Landlord through the date of termination, including without limitation, the cost of all materials and all charges that are billed by Landlord's architects and/or contractors for work and services incurred in connection with the improvements to the Premises. Landlord agrees to expend up to $3 1,500.00 for the construction of the improvements to the interior of the Premises; such sum being herein referred to as the "Allowance". The Allowance represents the total amount of money that the Landlord will expend toward the development of the Premises over and above "Building Standard Improvements" as such term is described in Paragraph 5 of this Construction Addendum. 4. In the event the cost of constructing such improvements in accordance with the agreed upon plans and specifications is, in Landlord's opinion, reasonably likely to exceed the Allowance, Tenant shall deposit the estimated amount of such excess (herein "Estimated Additional Costs") with Landlord prior to Landlord's commencement of the work. Landlord shall apply such money to the costs of completing the improvements as work progresses. In the event the total actual cost of constructing such improvements exceeds the Allowance and the Estimated Additional Costs, Tenant shall pay such excess to Landlord with in ten (IO) days of demand therefore. In the event the total actual cost is equal to or greater than the Allowance but less than the Estimated Additional Costs, Landlord shall refund the unused portion of the Estimated Additional Costs to Tenant. Tenant shall not be entitled to any reduction in rent if the actual cost of the construction is less than the Allowance. 5. As used herein, the term "Building Standard Improvements" shall mean: (i) four unfinished walls (including glass front); concrete slab; (iii) roof and (iv) "stub-up" for water, gas, electricity and telephone 6. Notwithstanding anything in Paragraph 2 of the Lease to the contrary, the Commencement Date of the Lease shall be the date of substantial completion of the tenant improvements in accordance with the approved plans and 7. Landlord will use its best efforts to substantially complete construction of the improvements to the interior of the Premises and have the Premises available for occupancy by Tenant on or before June 15th, 1998 If Landlord is not able to complete the improvements by said date, Landlord shall not be liable to Tenant for any damages therefor and the validity of the Lease shall not be affected. 8. Tenant may enter the Premises for the purpose of installing its fixtures and equipment provided Tenant coordinates such activities with Landlord and Landlord's contractors and does not interfere with their work. Any such entry shall be subject to all of the terms and conditions of the Lease, including without limitation, the insurance and indemnity provisions thereof-, provided, however, no rent shall be payable until the Commencement Date. 9. Tenant's acceptance of occupancy from Landlord shall constitute acknowledgment by Tenant that the Premises are then in the condition called for in the Lease and that Landlord has satisfactorily completed Landlord's work hereunder. 10. Landlord and Tenant agree to execute an addendum to the Lease in which both parties acknowledge the actual day of the Commencement Date of the Lease. 11. Capitalized terms used in this Addendum shall have the same meaning as capitalized terms in the Lease. IN WITNESS WHEREOF, Landlord and Tenant have signed this Addendum as of the day and year first above written. AGREED AND ACCEPTED: LANDLORD: Guarantor: By: By: Its: Its: TENANT: By: Its: EXHIBIT "E" - GUARANTEE Allstar Systems, Inc., a Delaware corporation ("Guarantor"), in consideration of the covenants contained in the Lease referenced hereinafter, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by Guarantor, hereby absolutely and unconditionally guarantees the prompt, complete, and full and punctual payment, observance, and performance of all the terms, covenants, and conditions provided to be paid, kept, and performed by the Tenant in the Lease Agreement ("Lease") dated May 14th, 1998, between University Hills Plaza, a Texas corporation, as Landlord ("Landlord"), and Allstar Systems Rio Grande, Inc., a Texas corporation, as Tenant ("Tenant") covering the premises described as B- I in the University Hill Plaza Shopping Center, and all renewals, amendments, expansions, and modifications of the Lease. This Guaranty shall include any liability of Tenant which shall accrue under the Lease for any period preceding as well as any period following the term of the Lease. The obligation of the Guarantor is primary and independent of Tenant's obligations under the Lease and may be enforced directly against the Guarantor independently of and without proceeding against the Tenant or exhausting or pursuing any remedy against Tenant or any other person or entity. This instrument may not be changed, modified, discharged, or terminated orally or in any manner other than by an agreement in writing signed by Guarantor and the Landlord. The obligations of Guarantor under this Guaranty shall not be released or otherwise affected by reason of any sublease, assignment, or other transfer of the Tenant's interest under the Lease, whether or not Landlord consents to such sublease, assignment, or other transfer. Any act of Landlord, or the successors or assigns of Landlord, consisting of a waiver of any of the terms or conditions of said Lease, or the giving of any consent to any manner or thin- relating to said Lease, or the granting of any indulgences or extensions of time to Tenant, may be done without notice to Guarantor and without releasing the obligations of Guarantor hereunder. Guarantor waives any requirement that Landlord mitigate damages under the Lease, except as required by law The obligations of Guarantor hereunder shall not be released by Landlord's receipt, application, or release of security given for the performance and observance of covenants and conditions in said Lease contained on Tenant's part to be performed or observed; nor by any modification of such Lease, but in case of any such modification the liability of Guarantor, shall be deemed modified in accordance with the terms of any such modification of the Lease. Guarantor waives any defense or right arising by reason of any disability or lack of authority or power of Tenant and shall remain liable hereunder if Tenant or any other party shall not be liable under the Lease for such reason. This Guaranty may not be revoked by Guarantor. Until all the covenants and conditions in said Lease on Tenant's part to be performed and observed are fully performed and observed, Guarantor: (i) shall have no right of subrogation against Tenant by reason of any payments or acts of performance by the Guarantor, in compliance with the obligations of the Guarantor hereunder; (ii) waives any right to enforce any remedy which Guarantor now or hereafter shall have against Tenant by reason of any one or more payments or acts of performance in compliance with the obligations of Guarantor hereunder; and (iii) subordinates any liability or indebtedness of Tenant now or hereafter held by Guarantor to the obligations of Tenant to the Landlord under said Lease. The liability of Guarantor hereunder shall not be released or otherwise affected by (i) the release or discharge of Tenant in any insolvency, bankruptcy, reorganization, receivership, or other debtor relief proceeding involving Tenant (collectively "proceeding for relief'); (ii) the impairment, limitation, or modification of the liability of Tenant or the estate of the Tenant in any proceeding for relief, or of any remedy for the enforcement of Tenant's liability under the Lease, resulting from the operation of any law relating to bankruptcy, insolvency, or similar proceeding or other law or from the decision in any court; (iii) the rejection or disaffirmance of the Lease in any proceeding for relief, or (iv) the cessation from any cause whatsoever of the liability of Tenant. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment by Tenant to Landlord under the Lease is rescinded or must otherwise be returned by Landlord upon the insolvency, bankruptcy, reorganization, receivership, or other debtor relief proceeding involving Tenant, all as though such payment had not been made. This Guaranty is executed and delivered for the benefit of Landlord and it successors and assigns, and is and shall be binding upon Guarantor and its heirs, executors, administrators, successors and assigns, but Guarantor may not assign its obligations hereunder. Guarantor acknowledges that Landlord has no duty of good faith to Guarantor, and acknowledges that no special relationship, such as a fiduciary or trust relationship, exists between Landlord and Guarantor. Guarantor agrees that no such duty of good faith shall arise, and no such special relationship shall exist, unless pursuant to, and only to the extent set forth in, a written agreement that is signed by Landlord and Guarantor and that expressly states such duty of good faith or such special relationship. This Guaranty shall be governed by and construed in accordance with the internal laws of the State of Texas excluding any principles of conflicts of laws. For the purpose solely of litigating any dispute under this Guaranty, the undersigned submits to the jurisdiction of the courts of said state GUARANTOR: ALL STAR SYSTEMS, INC. By: Its: EX-10.29 3 WAREHOUSE LEASE Exhibit 10.29 SUBLEASE AGREEMENT THIS SUBLEASE, dated this 4th day of April, 1998, between THE RUGBY GROUP, INC., a New York corporation ("Sublessor"), whose address is 3400 West Lake Avenue, Glenview, Illinois 60025, Attention: Raymond Pagels and ALLSTAR SYSTEMS, INC., a Delaware corporation ("Sublessee"), whose address is 6401 S.W. Freeway, Houston, Texas 77274. W I T N E S S E T H : WHEREAS, Sublessor and Industrial Developments International, Inc. entered into that certain Industrial Lease Agreement dated August 29, 1995 (the "Lease") for the premises located in the City of Farmers Branch, County of Dallas, State of Texas, commonly known as 13920 Senlac Drive, Suite 100, Farmers Branch, Texas (the "Premises") ; and WHEREAS, Sublessor desires to sublet to Sublessee the entire Premises pursuant to the terms of this Sublease. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Sublessor leases to Sublessee and Sublessee hires from said Sublessor the Premises, subject to the following terms and conditions: 1. SUBJECT TO LEASE. This Sublease is subject to all of the terms and conditions of the Lease and Sublessee shall assume and perform Tenant's obligations in said Lease, to the extent said terms and conditions are applicable to the Premises. Sublessee shall not commit or permit to be committed on the Premises any act or omission which shall violate any term or condition of the Lease. In the event of the termination of Sublessor's interest as Tenant under the Lease for any reason, then this Sublease shall terminate coincidently therewith without any liability of Sublessor to Sublessee. 2. INCORPORATION. All of the terms and conditions contained in the Lease in Exhibit A are incorporated herein except for paragraphs 3, 4, 5, 6, 9 and 10 of Exhibit C to the Lease, as terms and conditions of this Sublease (with each reference therein to Landlord and Tenant to be deemed to refer to Sublessor and Sublessee, respectively) and along with all of the following paragraphs set out in this Sublease, shall be the complete terms and conditions of this Sublease. Notwithstanding anything contained herein to the contrary, Sublessee shall have none of the rights of Tenant as contained in paragraphs 3, 4, 5, 6, 9 and 10 of Exhibit C to the Lease. 3. RENTAL. a. Commencing on April 17, 1998, Sublessee shall pay to Sublessor without deduction, setoff, prior notice or demand, as rental the sum of Eight Thousand Eight Hundred Seventy Five and 00/100 Dollars ($8,875.00) per month (the "Base Rent"). Base Rent for any partial month shall be prorated at the rate of 1/30th of Base Rent per day. A partial payment of Base Rent equal to $4,141.67 shall be paid to Sublessor contemporaneously with Sublessee's execution of this Sublease for the period from April 17, 1998 through April 30, 1998. b. In addition, commencing on April 17, 1998, Sublessee shall pay as additional rent an amount equal to Tenant's Percentage share of Operating Expenses and Additional Rent (collectively, the "Additional Rent"), as such term is defined in the Lease. A partial payment of Additional Rent equal to $1,429.04 shall be paid to Sublessor contemporaneously with Sublessee's execution of this Sublease for the period from April 17, 1998 through April 30, 1998. c. Base Rent and Additional Rent shall be paid by Sublessee to Sublessor monthly in advance on the 25th day of each month, in lawful money of the United States of America, commencing on April 25, 1998 and continuing through December 25, 2000, for the period commencing May 1, 1998 and continuing through January 31, 2001. Rent shall be paid to Sublessor at 3400 West Lake Avenue, Glenview, Illinois 60025, Attention: Raymond Pagels or at such other place or places as Sublessor may from time to time direct. 4. SECURITY DEPOSIT. Contemporaneously with the execution hereof, Sublessee shall pay to Sublessor the sum of $8,875.00 as a security deposit to secure Sublessee's obligations hereunder. Said sum shall be held by Sublessor as security for the faithful performance by Sublessee of all the terms, covenants and conditions of this Sublease to be kept and performed by Sublessee and not as an advance rental deposit or as a measure of Sublessor's damage in case of Sublessee's default. If Sublessee defaults with respect to any provision of this Sublease, Sublessor may use any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Sublessor may spend or become obligated to spend by reason of Sublessee's default, or to compensate Sublessor for any other loss or damage which Sublessor may suffer by reason of Sublessee's default. If any portion is so used, Sublessee shall within five (5) days after written demand therefor, deposit with Sublessor an amount sufficient to restore the Security Deposit to its original amount and Sublessee's failure to do so shall be a material breach of this Sublease. Sublessor shall not be required to keep the Security Deposit separate from its general funds, and Sublessee shall not be entitled to interest on such deposit. If Sublessee shall fully and faithfully perform every provision of this Sublease to be performed by it, the Security Deposit or any balance thereof shall be returned to Sublessee at such time after termination of this Sublease when Sublessor shall have determined that all of Sublessee's obligations under this Sublease have been fulfilled. 5. TERM. a. The term of this Sublease shall be for a period of commencing on the 17th day of April, 1998, and ending on the 31st day of January, 2001. b. If Sublessee, with Sublessor's consent, takes possession prior to the commencement of the term, Sublessee shall do so subject to all of the covenants and conditions hereof and shall pay rent for the period ending with the commencement of the term at the same rental as that prescribed for the first month of the term, prorated at the rate of 1/30th thereof per day. 6. USE. Sublessee shall use the Premises for general warehouse use and purposes related to the distribution and assembly of computers and for no other purpose, without the prior wirtten consent of Sublessor. Sublessee's business shall be established and conducted throughout the term hereof in a first class manner. Sublessee shall not use the Premises for, or carry on, or permit to be carried on, any offensive, noisy or dangerous trade, business, manufacture or occupation nor permit any auction sale to be held or conducted on or about the Premises. Sublessee shall not do or suffer anything to be done upon the Premises which will cause structural injury to the premiss or the building of which the same form a part. The Premises shall not be overloaded and no machinery, apparatus or other appliance shall be used or operated upon the Premises which will in any manner injure, vibrate or shake the Premises or the building of which it is a part. No use shall be made of the Premises which will in any way impair the efficient operation of the sprinkler system (if any) within the building containing the Premises. Sublessee shall not leave the Premises unoccupied or vacant during the first twelve (12) months of the term. After said twelve (12) month period, Sublessee may vacate the Premises only upon prior written notice to Sublessor, said notice to be provided no later than the date which is ninety (90) days prior to the date upon which Sublessee intends to leave the Premises unoccupied or vacant. Upon vacating the Premises, Sublessee will be obligated to comply with all other terms of the Lease, including without limitation, the terms set forth in Paragraph 3 of this Sublease. If Sublessee has vacated the Premises, Sublessor has the option, in its sole discretion, to terminate this Sublease upon thirty (30) days written notice to Sublessee. No musical instrument of any sort, or any noise making device will be operated or allowed upon the Premises for the purpose of attracting trade or otherwise. Sublessee shall not use or permit the use of the Premises or any part thereof for any purpose which will increase the existing rate of insurance upon the building in which the Premises are located, or cause a cancellation of any insurance policy covering the building or any part thereof. If any act on the part of Sublessee or use of the Premises by Sublessee shall cause directly or indirectly, any increase of Sublessor's insurance expense, said additional expense shall be paid by Sublessee to Sublessor upon demand. No such payment by Sublessee shall limit Sublessor in the exercise of any other rights or remedies, or constitute a waiver of Sublessor's right to require Sublessee to discontinue such act or use. 7. SUBLESSEE TO HOLD SUBLESSOR HARMLESS. Sublessor warrants that as of the commencement date of this Sublease, there will be no uncured default under the Lease. If Sublessee defaults under the Lease, Sublessee shall indemnify and hold Sublessor harmless from all damages resulting from the default. If Sublessee defaults in its obligations under the Lease and Sublessor pays rent to Landlord or fulfills any of Sublessee's other obligations in order to prevent Sublessee from being in default, Sublessee immediately shall reimburse Sublessor for the amount of rent or costs incurred by Sublessor in fulfilling Sublessee's obligations under this Sublease, together with interest on those sums at the rate of fifteen percent (15%) per annum, or the highest legal rate. 8. ATTORNEY'S FEES. If any party commences an action against any of the parties arising out of or in connection with this Sublease, the prevailing party or parties shall be entitled to recover from the losing party or parties reasonable attorney's fees and cost of suit. 9. NOTICE. Any notice, demand, request, consent, approval or communication that either party desires or is required to give to the other party or any other person shall be in writing and either served personally, sent by prepaid, first-class mail or sent by a nationally recognized overnight courier service. Any notice, demand, request, consent, approval, or communication that either party desires or is required to give to the other party shall be addressed to the other party at the address set forth in the introductory paragraph of this Sublease. Either party may change its address by notifying the other party of the change of address. 10. CONFLICTS. In the event of any conflicts between the terms of the Lease and the terms of the Sublease, the terms of this Sublease shall prevail as to the Sublessor and the Sublessee. SUBLESSOR: SUBLESSEE: THE RUGBY GROUP, INC., ALLSTAR SYSTEMS, INC. a New York corporation a Delaware corporation By: ___________________ By: ___________________ Title: ________________ Title: ________________ CONSENT TO SUBLEASE The undersigned, as Landlord under that certain Lease dated August 29, 1995 (the "Lease"), as more fully set forth in the attached Sublease Agreement (the "Sublease"), hereby consents to the foregoing Sublease between THE RUGBY GROUP, INC., a New York corporation ("Sublessor") and ALLSTAR SYSTEMS, INC., a Delaware corporation ("Sublessee"). This consent is given upon the expressed following conditions: 1. There shall be no modifications or amendments of the Sublease Agreement without the prior written consent of Landlord, except that Landlord hereby agrees to modify the use provision contained in Section 1(l) of the Lease to allow for Sublessee to use the Premises for general warehouse use and for uses normally incident to a general warehouse use and for no other purpose whatsoever. 2. In the event of any default under the terms and provisions of the Lease, Landlord shall have the right to collect the rental attributable to the Premises directly from Sublessee without waiving any of Landlord's rights against Sublessor as a result of such default. 3. Landlord shall not be liable for, and Sublessor hereby indemnifies and holds Landlord harmless from, any commission payable associated with the Sublease. 4. In the event of any conflict between the terms and provisions of the Lease and the Sublease, the terms and provisions of the Lease shall control. LANDLORD: By: Title: Date: EX-10.30 4 HOUSTON SUBLEASE EXTENTION AGREEMENT SUBLEASE EXTENTION AGREEMENT Allstar Systems, Inc. ("Sublessee") and Allstar Equities, Inc. ("Sublessor"), hereby, as of December 31, 1998, agree to extend that certain SUBLEASE AGREEMENT entered into on August 2, 1996, but made effective January 1, 1996 for the property situated in Harris County, Texas, commonly known as 6401 Southwest Freeway, Houston, Texas. Both parties hereto hereby agree to extend the term of the SUBLEASE AGREEMENT for one year, with the sublease hereby extended through December 31, 1999. All other terms, conditions, and rental payments of the SUBLEASE AGREEMENT shall remain the same as those set forth in the SUBLEASE AGREEMENT. Allstar Systems, Inc. Allstar Equities, Inc. - ------------------------------- ------------------------------- Donald L. Chadwick James H. Long Chief Financial Officer President December 31, 1998 December 31, 1998 EX-10.30 5 AMENDMENT TO LEASE AGREEMENT SECOND AMENDMENT TO LEASE AGREEMNT This Second Amendment to Lease Agreement is dated to be effective as of July 1, 1998, and is made between James J. Laney, David M. Laney as Trustee of the Olivia Laney Fall Trust, and Robert W. Decherd, Trustee of Laney Children's Trusts (the "Landlord") and Allstar Systems, Inc., a Delaware corporation (the "Tenant" RECITALS A. By Lease Agreement dated June 24,1992 (the 'Original Lease"), Landlord leased to Technicomp Corporation and Allstar Services, Inc. (the "Original Tenant") the land and building known as 14202 and 14204 Proton Road, Farmers Branch, Texas, as more particularly described in the Original Lease (the "Demised Premises"). B. The Original Lease was amended by letter agreement between Landlord and Tenant (the "First Amendment"). The Original Lease together with the first Amendment Shall hereinafter collectively be referred to as the "Lease". C. The Original Tenant assigned its interest in the Lease to Tenant. D. The term of the Lease expires on June 30, 1998, and Landlord and Tenant desire to extend the term and to amend and modify the Lease upon the terms and conditions set forth below. NOW. THEREFORE, in consideration of the mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Section 1.05 of the Lease is hereby amended to extend the Lease Term for an additional five (5) years, commencing on July 1, 1998 and expiring on June 30, 2003. 2. Section 1.06 of the Lease is hereby amended to reflect that Rent shall be S10,000.00 per month. 3. If Tenant is not in default under this Lease, and if Tenant pays to Landlord the Early Termination Payment (defined below) in the manner set forth below, then Tenant shall have the right to terminate this Lease in accordance with the following provisions. Tenant's right to terminate this Lease must be exercised by written notice to Landlord at least one hundred fifty (150) days prior to the expiration of the third year of the Lease Term, or Tenant shall have waived its right of termination. Time is of essence in giving such notice. If Tenant properly gives such notice of termination, then this Lease shall end as of the last day of the third year of the Lease Term (the "Early Termination Date). The Lease shall terminate on the Early Termination Date as if such date were the scheduled expiration date of the Lease. As a condition to exercising such right of termination, Tenant must pay to Landlord, at the same time as Tenant gives its termination notice. Twenty-five Thousand and No/1OO Dollars ($25,000.00) (the "Early Termination Payment). 4. Landlord hereby consents to Tenant's performance of and Tenant hereby agrees to perform, certain improvements to the Premises(,) at the Tenant's cost except as otherwise set forth herein, and in accordance with the provision below (the "Approved Improvements"). The Approved Improvements are as follows: a. HVAC repair work as more particularly describing in a letter dated June 8, 1998, from West Mechanical to Tenant. Landlord shall reimburse Tenant an amount not to exceed Two Thousand Three Hundred Ninety and No/100 Dollars ($2,390.00) for this work. b. Installation of 4 ton gas heat Arcoaire package unit in the Northeast corner in accordance with HVAC Installation Agreement with West Mechanical. Landlord shall reimburse Tenant an amount not to exceed Five Thousand Two Hundred Forty and No/100 Dollars ($5,240.00) for such work. c. Five (5) year warranty and maintenance contract on all HVAC rooftop equipment (including the unit described in (b) above) as set forth in HVAC Warranty Agreement with West Mechanical. Landlord shall reimburse Tenant an amount not to exceed Seven Hundred Fifty and No/100 Dollars ($750.00) per year for such work. Tenant agrees to keep in force the maintenance contract required by West Mechanical to keep the warranty in effect. d. Replacement of driveway at South side of the Demised Premises as set forth in a Proposal dated June 11, 1998, from Charles Cadenhead Construction Company. Landlord shall reimburse Tenant an amount not to exceed Eleven Thousand Seven Hundred Forty-seven and 50/100 Dollars ($11,747.50) for such work. e. Parking lot repairs at 14202 Proton, as set forth in the Proposal dated June 2, 1998 from Charles Cadenhead Construction Company. Landlord shall reimburse Tenant an amount not to exceed Eight Thousand and No/100 Dollars ($8,000.00) for such work. Tenant or Tenant's contractors shall obtain all necessary permits and approvals for the Approved Improvements. Tenant hereby assumes any and all liability arising out of or relating to the Approved Improvements, including any liability arising out of statutory or common law for any and all injuries to or death of any and all persons (including but not limited to Tenant's contractors and subcontractors and their employees) and any liability for any and all damage to property caused by, or resulting from, or arising out of any act or omission on the part of Tenant, Tenant's contractors, subcontractors, and employees in the performance of the Approved Improvements. Tenant agrees to insure the foregoing assumed contractual liability in its liability policies of insurance. Landlord shall reimburse Tenant (am amount not to exceed in each instance) the amounts set forth [in subsections (a) through (e) above,] only after lien-free final completion of such work and receipt by Landlord of proof that all bills in connection therewith have been paid in full and all persons or entities with the right to file a lien in connection therewith have finally waived and released their lien rights in connection therewith in a manner satisfactory to Landlord. 5. Sections 16.1, 16.3, 16.5, and 16.6 of the Lease are hereby deleted in their entirety. 6. The Option to Extend Term Lease Rider is hereby deleted in its entirety. 7. In all other respects, the terms and provisions of the Lease remain unchanged and the Lease, as modified and amended hereby, is hereby ratified, adopted, and confirmed in all respects by Landlord and Tenant and continues in full force and effect in accordance with the terms, conditions, and provisions thereof as amended and modified hereby. SEE EXHIBIT 'A' ATTACHED. IN WITNESS WHEREOF, this Second Amendment to Lease Agreement is hereby executed as of the day and year first set forth above. LANDLORD James J. Laney, David M. Laney as Trustee of the Olivia Laney Fall Trust, and Robert W. Decherd, Trustee of Laney Children's Trusts. By: James J. Laney By: David M. Laney as Trustee of the Olivia Fall Trust By: Robert W. Decherd, Trustee of Laney Children's Trusts, by Patrick B. Mitchell, Attorney-in-fact. TENANT Allstar Systems, Inc. a Delaware corporation By: \\Donald R. Chadwick Title: CFO Exhibit "A" Renewal Option. The landlord grants the tenant the right to renew its lease for an additional term of three 3 years at the then prevailing market rate for comparable buildings within a two mile radius. The Tenant must notify Landlord at least four (4) months prior to the lease expiration of its intention to renew. Brokerage Fee: The Landlord agrees to pay The Staubach Company a fee equal to 4% of the rent due for the noncancelable portion of the lease term. In addition, the Landlord agrees to pay The Staubach Company a fee equal to 4% of the rent due for years 4 and 5 provided ALLSTAR does not exercise its right to cancel. The fee to Staubach for the noncancelable portion of the lease will be due within 30 days after the Second Amendment is signed by tenant and landlord. The fee for the remaining term will be due within 30 days after July 1, 2001. Allstar Systems, Inc. By:\\ Donald R. Chadwick Chief Financial Officer EX-21 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 List of Subsidiaries of the Company Name State of Incorporation Stratasoft, Inc Texas IT Staffing, Inc. Delaware Allstar Systems Rio Grande, Inc. Texas EX-23 7 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-09789 of Allstar Systems, Inc. on Form S-8 of our report dated March 31, 1999 appearing in this Annual Report on Form 10-K of Allstar Systems, Inc. for the year ended December 31, 1998. Deloitte & Touche LLP Houston, Texas April 12, 1999 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 0001020017 ALLSTAR SYSTEMS, INC. 1000 JAN-01-1998 YEAR DEC-31-1998 DEC-31-1998 2,538 0 35,251 (358) 8,497 47,928 5,327 (2,425) 51,028 38,128 0 0 0 45 14,723 51,028 167,173 167,173 145,039 145,039 23,422 0 351 (1,639) (541) (1,098) 0 0 0 (1,098) (0.25) (0.25)
EX-27.2 9 FINANCIAL DATA SCHEDULE
5 0001020017 ALLSTAR SYSTEMS, INC. 1000 JAN-01-1997 YEAR DEC-31-1997 DEC-31-1997 1,581 0 24,540 (249) 4,700 31,090 3,685 (1,672) 33,184 18,266 0 0 0 45 14,723 33,184 129,167 129,167 111,126 111,126 14,386 0 685 2,970 1,126 1,844 0 0 0 1,844 .52 .52
EX-27.3 10 FINANCIAL DATA SCHEDULE
5 0001020017 ALLSTAR SYSTEMS, INC. 1000 JAN-01-1996 YEAR DEC-31-1996 DEC-31-1996 229 0 16,876 (219) 4,862 22,684 2,692 (1,048) 24,720 20,393 0 0 0 27 4,327 24,720 120,359 120,359 104,302 104,302 12,284 0 1,183 2,590 987 1,603 0 0 0 1,603 .60 .60
EX-99 11 VALUATION AND QUALIFYING ACCOUNTS Exhibit 99
FINANCIAL STATEMENT SCHEDULE II ALLSTAR SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS AS OF DECEMBER 31, 1998 (In Thousands) Balance at Charges to Charge to Beginning Costs and Other Other Balance at Description of Year Expenses Accounts Changes End of year Accumulated provision deducted from related assets on balance sheet: Allowance for doubtful accounts receivable: 1996................................. $ 464 $ 890 $ (1,135) (A) $ 219 1997................................. 219 386 (66) (290) (A) 249 1998................................. 249 3,410 (3,301) (A) 358 Inventory reserves: 1996................................. $ 368 $ 743 $ (1,000) (A) $ 111 1997................................. 111 456 (551) (A) 16 1998................................. 16 1,900 (1,916) (A) 0 Reserves other than those deducted from assets on balance sheet: Allowance for doubtful vendor accounts receivable: 1996................................. $ 250 $ 119 $ (169) (A) $ 200 1997................................. 200 198 (49) (A) 349 1998................................. 349 1,049 (1,243) (A) 155 (A) Reductions related to amounts written off.
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