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I-SECTOR CORPORATION
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I-SECTOR CORPORATION
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 2004
Notice is hereby given that the annual meeting of the holders of common
stock of I-Sector Corporation, a Delaware corporation (the "Company"), will be
held at the offices of the Company located at 6401 Southwest Freeway, Houston,
Texas 77074 on Thursday, December 16, 2004, at 10:00 AM, Central Standard Time,
and any adjournment or postponement thereof, for the following purposes:
1. To elect four (4) nominees to the board of directors to serve until
the next annual meeting of stockholders or until their successors
are elected and qualified;
2. To consider and approve an amendment of the I-Sector Corporation
Incentive Plan (the "Plan"), to, among other matters, increase the
number of shares of common stock reserved for issuance under the
Plan from 600,000 shares of common stock to 900,000 shares of common
stock; and
3. To consider and act upon such other business as may properly be
presented at the annual meeting or any adjournments or postponements
thereof.
The board of directors has fixed the close of business on November 26,
2004 as the record date for the determination of stockholders entitled to notice
of, and to vote at, the annual meeting and any adjournments or postponements
thereof. A stockholders' list will be available commencing ten days prior to the
annual meeting, and may be inspected during normal business hours prior to the
annual meeting at the offices of the Company, 6401 Southwest Freeway, Houston,
Texas 77074.
Your vote is important. Whether or not you plan to attend the annual
meeting in person, we request that you sign, date and return the enclosed proxy
card promptly in the enclosed postage-paid envelope. The prompt return of
proxies will ensure a quorum and save the Company the expense of further
solicitation.
By Order of the Board of Directors,
/s/ Jeffrey A. Sylvester
---------------------------------
Jeffrey A. Sylvester
Secretary
December 1, 2004
I-SECTOR CORPORATION
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
PROXY STATEMENT
This proxy statement and the enclosed proxy card are first being mailed to
the stockholders of I-Sector Corporation, a Delaware corporation (the
"Company"), commencing on or about December 1, 2004, in connection with the
solicitation by the board of directors of the Company (the "Board of Directors"
or the "Board") of proxies to be voted at the annual meeting of stockholders to
be held at the offices of the Company located at 6401 Southwest Freeway,
Houston, Texas 77074 on Thursday, December 16, 2004 at 10:00 a.m., Central
Standard Time and at any adjournments or postponements thereof (the "Meeting"),
for the purposes set forth in the accompanying notice.
A stockholder may revoke a proxy by:
(1) delivering to the Company written notice of revocation;
(2) delivering to the Company a signed proxy of a later date; or
(3) appearing at the Meeting and voting in person.
Votes will be tabulated and the results will be certified by election
inspectors who are required to resolve impartially any interpretive questions as
to the conduct of the vote.
As of November 26, 2004, the record date for the determination of
stockholders entitled to vote at the Meeting (the "Record Date"), there were
outstanding and entitled to vote 5,177,154 shares of the Company's common stock,
par value $.01 per share (the "Common Stock"). The Common Stock is the Company's
only class of voting securities outstanding. Each share of Common Stock entitles
the holder to one vote on all matters presented at the Meeting. Holders of a
majority of the outstanding shares of Common Stock must be present, in person or
by proxy, to constitute a quorum for the transaction of business. Stockholders
who are present at the Meeting in person or by proxy and who abstain, as well as
proxies relating to shares held in "street name" that are marked as "not voted"
("broker non-votes"), will be treated as present for purposes of determining
whether a quorum is present.
If a quorum is not obtained, the Meeting may be adjourned for the purpose
of obtaining additional proxies or votes or for any other purpose, and, at any
subsequent reconvening of the Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
Meeting (except for any proxies which have theretofore been revoked).
Proxies will be voted in accordance with the directions specified thereon
and otherwise in accordance with the judgment of the persons designated as
proxies. Any proxy on which no direction is specified will be voted for the
election of the nominees named herein to the Board of Directors. As to any other
matter that may properly be presented at the meeting, the persons named on the
proxy card will vote according to their best judgment.
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PROPOSAL 1
ELECTION OF DIRECTORS
GENERAL INFORMATION
At the Meeting, four (4) nominees are to be elected to the Board of
Directors. If elected, each director will hold office until the next annual
meeting of stockholders or until his successor is elected and qualifies.
The persons named as proxies in the accompanying proxy will vote for the
election of the nominees named below to the Board of Directors unless authority
is withheld. Messrs. Long, Chadwick and Cartwright have previously been elected
directors by the stockholders. If any nominee should become unavailable for
election, the proxy may be voted for a substitute nominee selected by the Board
of Directors. However, the Board of Directors is not aware of any circumstances
that would prevent any nominee from serving if elected.
APPROVAL AND REQUIRED VOTE
The four nominees for election as directors at the Meeting who receive the
greatest number of votes cast by the holders of shares of common stock present,
in person or by proxy, will be the duly elected directors of the Company. Broker
non-votes and abstentions will not have any effect on the outcome of the
election.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL FOUR NOMINEES TO
THE COMPANY'S BOARD OF DIRECTORS.
NOMINEES FOR DIRECTOR
Set forth below is certain information regarding the nominees for election
to the Board of Directors:
James H. Long, age 46, is the Company's founder and has served as the
Chairman of the Board and Chief Executive Officer since its inception in 1983.
Mr. Long also served as its President through December 2003. Prior to founding
I-Sector, Mr. Long served with the United States Navy in a technical position
and was then employed by IBM in a technical position.
Donald R. Chadwick, age 60, has served as a member of the Board of
Directors since September 1996. He served as Secretary from February 1992 to
August 2002 and served as Chief Financial Officer of the Company from February
1992 until December 1999. As Chief Financial Officer, his duties included
supervision of finance, accounting and controller functions.
John B. Cartwright, age 57, has served as a member of the Board of
Directors since August 2001. He has been the owner of John B. Cartwright &
Associates, a Certified Public Accounting firm, since 1990. From 1973 to 1990,
Mr. Cartwright was the managing partner or managing stockholder of Cartwright,
Matthews, Gonsoulin & Bradley, PC, Cartwright, Matthews & Gonsoulin, a
Partnership and Cartwright & Matthews, a Partnership. From 1969 to 1973 Mr.
Cartwright was an Audit Supervisor of Touche Ross & Co., (now Deloitte & Touche
LLP) in Houston. Mr. Cartwright is a member of the American Institute of
Certified Public Accountants, Texas Society of Certified Public Accountants,
Houston Chapter of the Texas Society of Certified Public Accountants, and the
past President of the Houston Chapter of the Community Associations Institute.
Cary M. Grossman, age 50, is hereby nominated for the first time to serve
on the board of directors. Since April 2004, Mr. Grossman has been involved in
the management of, and currently serves as the Vice President and Chief
Financial Officer, and as a director, of, Sand Hill IT Security Acquisition
Corp., a special purpose acquisition fund. From 2002 until 2003, he served as
Executive Vice President and Chief Financial Officer at US Liquids, Inc., an
AMEX listed environmental services company. Mr. Grossman left US Liquids, Inc.
in 2003 as a result of the acquisition of three of its businesses by a private
equity firm and was President and Chief Executive Officer of the acquiring
company, ERP Environmental Services, until November 2003. From 1997 until 2002,
Mr. Grossman served Pentacon, Inc., a NYSE listed provider of inventory
management services and distributor of components to Fortune 500 original
equipment manufacturers, as a board member and in several senior executive
positions including: Chairman of the Board of Directors, Acting Chief Financial
Officer (2001-2002) and Lead Director (1998-2001). From 1991 until 2002, Mr.
Grossman was the Managing Partner of McFarland, Grossman & Company, Inc., an
investment banking
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and financial advisory firm he co-founded in 1991. Prior to that, Mr. Grossman
practiced public accounting for 15 years. He earned a Bachelor of Business
Administration in Accounting from The University of Texas, and is a Certified
Public Accountant.
BOARD AND COMMITTEE ACTIVITY, STRUCTURE AND COMPENSATION
BOARD AND COMMITTEE MEETINGS
During 2003, the Board of Directors convened two special meetings and four
regularly scheduled meetings, the audit committee (the "Audit Committee") held
two special meetings and four regularly scheduled meetings, and the compensation
committee (the "Compensation Committee") met once. Each director attended at
least 75% of the aggregate of all meetings of the Board of Directors and
committees of the Board to which he belonged.
During 2003, and through November 3, 2004, each director who was not an
employee of the Company was paid $1,000 for each Board and Audit Committee
meeting they attended and $500 for each Compensation Committee meeting they
attended, plus reasonable out-of-pocket expenses incurred to attend the
meetings. The chairperson of the Audit Committee was paid $2,000 for each
meeting attended. In addition, each non-employee director was entitled to
receive stock options pursuant to the Company's Non-Employee Director Stock
Option Plan (the "Director Plan"). Upon election to the Board, each independent
director received options to purchase 5,000 shares of Common Stock. Upon
re-election to the Board, each independent director received options to purchase
5,000 shares of Common Stock. All options granted to directors during 2003
vested immediately. All options granted to directors had an exercise price equal
to the fair market value of a share of Common Stock on the date of grant and
expire ten years after the date of grant (subject to earlier termination).
Options granted to directors are subject to early termination on the occurrence
of certain events, including ceasing to be a member of the Board of Directors
(other than by death). During 2003, options to acquire 15,000 shares of Common
Stock were granted to independent directors.
Effective November 3, 2004, the Company increased the cash component of
compensation for independent board members. This increase was made due to the
increased size and complexity of the Company, increased requirements of Board
members following and related to the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") and in order to attract the best possible talent to the Board
of Directors. Beginning on November 3, 2004, each non-employee director receives
a quarterly retainer of $3,000, plus $1,000 for each Board and Audit Committee
meeting they physically attend and $500 for each Compensation Committee meeting
they attend, as well as reasonable out-of-pocket expenses incurred to attend the
meetings. In addition, the chairperson of the Audit Committee receives an
additional $4,000 quarterly retainer. For telephonic board meetings lasting more
than one hour, each board member in attendance receives $500, and for telephonic
board meetings lasting less than one hour, each board member is paid $300. An
additional $1,000 per special committee meeting is paid to any director that is
serving as the chairperson of such special committee.
Through December 2003, the Company met the requirements of the "Controlled
Company" exemption under Section 801(a) of the American Stock Exchange Company
Guide (the "AMEX" and the "Guide"). However, as of May 2004, when the Company
completed a public offering of its common stock, the Company is no longer able
to use this exception and must comply with certain additional requirements under
the Guide, including those requiring independence. As such, the Board has
determined that a majority of the Board of Directors are independent, as defined
in Section 121A of the Guide.
The Board of Directors does not have a nominating committee or other
committee performing a similar function. Historically, the entire Board has
selected nominees for election as directors. It is the practice of the Board to
require unanimous approval by directors for the selection of director nominees.
All of the members of the Board of Directors meet the independence requirements
under the listing standards of the American Stock Exchange.
The Board of Directors will solicit and receive recommendations from other
members of the Board, senior executives, individuals personally known to members
of the Board and third party search firms, as appropriate. Consideration of
potential nominees typically will involve a series of internal discussions,
review of information concerning the candidate, and, if appropriate, interviews
with selected candidates.
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In order to be considered for membership on the Board of Directors, a
candidate should possess, at a minimum, the following qualifications:
- high personal and professional ethics and integrity;
- commitment to representing the long-term interests of stockholders;
- objective, practical and mature judgment; and
- willingness to understand the business of the Company and to devote
adequate time to carry out the duties of a director.
These factors, and other qualifications considered useful by the Board of
Directors, are reviewed in the context of an assessment of the perceived needs
of the Company and the Board at a particular moment in time.
The Board of Directors will evaluate nominees of stockholders using the
same criteria as it uses in evaluating other nominees to the Board. A
stockholder seeking to recommend a prospective nominee for consideration by the
Board of Directors may submit the nominee's name and qualifications to the
Company by mailing it to the address listed below under "Communicating with the
Board of Directors."
Effective as of November 2, 2004 (the "Resignation Date"), Kevin M.
Klausmeyer resigned as a member of the Board of Directors. As discussed below,
Mr. Klausmeyer served on the Audit Committee and Compensation Committee and was
Chairman of the Audit Committee. Donald R. Chadwick has been appointed as
interim Chairman of the Audit Committee.
The Board of Directors has two standing committees, an Audit Committee and
a Compensation Committee.
Audit Committee. During 2003 and through the Resignation Date, the Audit
Committee was composed of Messrs. Chadwick, Cartwright and Klausmeyer, all of
whom are independent directors under the rules of the AMEX. The Board previously
determined that Mr. Klausmeyer was qualified as an audit committee financial
expert within the meaning of SEC regulations and has accounting and related
financial management expertise within the listing standards of the Guide. After
Mr. Grossman is elected to the Board at the upcoming stockholder's meeting, the
Board intends to appoint Mr. Grossman to replace Mr. Klausmeyer on the Audit
Committee and intends to appoint him as the chairman of the Audit Committee.
Additionally, the Board has determined that Mr. Grossman is qualified as an
audit committee financial expert within the meaning of the regulations of the
Securities and Exchange Commission (the "SEC") and has accounting and related
financial management expertise within the listing standards of the Guide. The
functions of the Audit Committee are set forth in the federal securities laws,
the rules of the AMEX and a written charter adopted by the Board of Directors
and include, but are not limited to:
1. reviewing the financial reports and other financial and related
information provided by the Company to any governmental body or the
public;
2. reviewing the Company's systems of internal controls regarding
finance, accounting, legal compliance and ethics that management and
the Board have established;
3. reviewing the Company's auditing, accounting and financial reporting
processes generally;
4. the appointment, compensation and oversight of the work of any
registered public accounting firm employed by the Company, including
resolution of disagreements between management and the auditor
regarding financial reporting, for the purpose of preparing or
issuing an audit report; and
5. approving audit services and most non-audit services provided by the
Company's independent auditors.
4
Compensation Committee. During 2003 and through the Resignation Date, the
Compensation Committee was composed of Messrs. Chadwick, Klausmeyer and
Cartwright, all of whom are non-employee directors and are independent directors
under the rules of the AMEX. After the upcoming stockholder's meeting, the Board
intends to appoint Mr. Grossman to replace Mr. Klausmeyer on the Compensation
Committee. The functions of the Compensation Committee include:
1. reviewing and making recommendations regarding the compensation of
the Company's executive officers; and
2. administering and making awards under the Company's compensation
plans.
DIRECTOR ATTENDANCE AT ANNUAL MEETING
The Board of Director's policy regarding director attendance at the annual
meeting is that they are welcome to attend, and the Company will make
appropriate arrangements for directors that choose to attend. In 2003, Mr. Long
and Mr. Chadwick attended the annual meeting.
COMMUNICATING WITH THE BOARD OF DIRECTORS
Any stockholders who desire to contact the Board or specific members of
the Board may do so by writing to: Board of Directors, I-Sector Corporation,
6401 Southwest Freeway, Houston, Texas 77074.
EXECUTIVE OFFICERS
The Company's executive officers serve until resignation or removal by the
Board of Directors. Set forth below is certain information about the Company's
executive officers.
James H. Long - See Nominees for Director.
Mark T. Hilz, age 46, was appointed as the Company's President and Chief
Operating Officer in December 2003. Mr. Hilz' responsibilities include
management of the Company's operations including the operations of its
subsidiaries, Internetwork Experts, Inc. ("INX"), Stratasoft, Inc.
("Stratasoft") and Valerent, Inc. ("Valerent"). Mr. Hilz has also served as the
President of INX since its founding in July 2000. Mr. Hilz served on the Board
of Directors from April 1999 until June 2001. From January 1999 to June 2000,
Mr. Hilz was Vice President of Project Development at Mathews Southwest, LLC,
Inc., a real estate investment and development firm headquartered in Dallas.
From 1998 to July 2000, Mr. Hilz was one of the Company's directors and the
Chief Executive Officer of Nichecast, Inc., a privately held Internet services
company. From July 1990 to July 1998 Mr. Hilz was the founder, President and
Chief Executive Officer of PC Service Source, Inc., a publicly held distributor
of personal computer hardware for the repair industry. Before that, Mr. Hilz was
founder, President and Chief Executive Officer of Hilz Computer Products, Inc.,
a privately held wholesale computer products distributor.
William R. Hennessy, age 45, has served as the President of Stratasoft
since January 1996. Mr. Hennessy's responsibilities include the general
management of the operations of Stratasoft. From July 1991 to January 1996, Mr.
Hennessy was employed by Inter-Tel, Incorporated, a publicly held telephone
systems manufacturer and sales and service company, where he served as the
Director of MIS and the Director of Voice and Data Integration for the central
region.
Frank Cano, age 39, has served as the President of Valerent since November
2002. Mr. Cano's responsibilities include the general management of the
operations of Valerent. From May 2000 to May 2002, Mr. Cano served as a Division
President of Amherst Southwest, LLP. Prior to that, Mr. Cano held various
positions in the Company including serving as the President of its former
computer products division, as its Senior Vice President, Branch Operations and
as its Branch Manager for the Dallas-Fort Worth office. Mr. Cano is the
brother-in-law of Mr. Long.
Jeffrey A. Sylvester, age 49, was appointed as Controller of the Company
in December 2003 and has responsibility for supervision of its accounting and
reporting functions. From March 2001 until September 2003, Mr. Sylvester was
with Balli Klockner, Inc., headquartered in Houston, Texas, where he served as
Chief Financial Officer for the North American operations. From September 2000
to March 2001, Mr. Sylvester was the Corporate
5
Controller of Henley Healthcare, Inc., headquartered in Sugar Land, Texas. From
1995 to 2001, Mr. Sylvester served in various accounting and management
positions, including Controller, Regional Controller and Division President for
Master Graphics, Inc. headquartered in Memphis, and its Houston division
Technigrafiks. Mr. Sylvester is a Certified Public Accountant.
Timothy J. Grothues, age 56, has been Treasurer of the Company since
November 2003. From November 2001 to November 2003, he was the Company's
Assistant Controller. His responsibilities include the treasury and risk
management functions. From January 1998 to November 2001, Mr. Grothues was a
private investor. For the eighteen years prior to that, Mr. Grothues was the
Chief Financial Officer of Blackburn Group, Inc., a privately held industrial
construction company specializing in the petroleum and petrochemical industries.
Paul Klotz, age 42, has served as the Vice President and Chief Operating
Officer of INX since August 2000. Mr. Klotz' responsibilities include the
operations management of INX. From 1997 to July 2000, Mr. Klotz was the Vice
President of Marketing of PC Service Source. Before that, Mr. Klotz served as
the Vice President of Acme Keystone, a privately held consumer products
manufacturing company.
FAMILY RELATIONSHIPS
James H. Long and Frank Cano are brothers-in-law. There are no other
family relationships among any of the directors and executive officers of the
Company.
AUDIT COMMITTEE REPORT
The Audit Committee has furnished the following report on its activities
for the year 2003:
The Audit Committee exists to provide independent, objective
oversight of the Company's accounting functions and internal controls.
Under the rules of the American Stock Exchange, all of the members of the
Audit Committee are independent. The Audit Committee operates under a
written charter adopted by the Board of Directors on August 15, 2001. The
Audit Committee has reviewed the relevant requirements of the
Sarbanes-Oxley Act of 2002, the rules, proposed and adopted, of the
Securities and Exchange Commission and the listing standards of the
American Stock Exchange regarding audit committee procedures and
responsibilities. Although the Audit Committee's existing procedures and
responsibilities generally complied with the requirements of these rules
and standards, the Board of Directors has adopted amendments, including in
July 2003, to the Audit Committee's charter to voluntarily implement
certain of the rules and to make explicit its adherence to others. A copy
of the amended charter is attached to this proxy statement as Appendix A.
The Audit Committee met quarterly in 2003 and has held discussions
with management and Grant Thornton, LLP ("Grant Thornton"), the Company's
independent auditors, regarding the audited financial statements for the
year ended December 31, 2003. The Audit Committee reviewed with the
independent auditors who are responsible for expressing an opinion on the
conformity of the audited financial statements with generally accepted
accounting principles, their judgments as to quality, not just the
acceptability, of the Company's accounting functions and such other
matters as are required to be discussed with the Audit Committee under
generally accepted auditing standards. The Audit Committee has also
discussed with Grant Thornton the matters required to be discussed by the
Statement of Auditing Standards No. 61 (Communication with Audit
Committees) and by the Statement of Auditing Standards No. 90 (Audit
Committee Communications).
In addition, the Audit Committee has received a written statement
from Grant Thornton describing all relationships between the independent
auditors and the Company that may impact their objectivity and
independence as required by Independence Standards Board Standard No. 1
and has discussed with Grant Thornton matters relating to its
independence, including review of audit and non-audit fees and any
relationships that may impair its independence and satisfied itself as to
their independence.
6
Based on the foregoing, the Audit Committee of the Company has
recommended to the Board of Directors that the audited financial
statements of the Company be included in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 2003 for filing with the
Securities and Exchange Commission.
THE AUDIT COMMITTEE
Kevin Klausmeyer, Chairman
Donald R. Chadwick
John B. Cartwright
INDEPENDENT AUDITORS
CHANGE OF INDEPENDENT AUDITORS
As previously disclosed, on June 5, 2003, the Company dismissed Deloitte &
Touche, LLP ("Deloitte") as its independent auditors and engaged Grant Thornton
LLP ("Grant Thornton"). The Audit Committee approved the decision to change
independent auditors.
In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 2002, and the subsequent interim period through
June 5, 2003, there were no disagreements with Deloitte on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to their satisfaction,
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. In the unaudited interim periods ended March
31, 2003 and through June 5, 2003, there were no disagreements with Deloitte on
any matter of accounting principles or practices or financial statement
disclosure. The audit report of Deloitte on the consolidated financial
statements of the Company and its subsidiaries as of and for the year ended
December 31, 2002 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. During the fiscal years ended December 31, 2002 and the
subsequent interim period prior to engaging Grant Thornton, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the fiscal years ended December 31, 2002 and the subsequent interim
period prior to engaging Grant Thornton, neither the Company nor anyone on its
behalf consulted with Grant Thornton regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements,
and neither a written report nor oral advice was provided to the Company by
Grant Thornton that was an important factor considered by the Company in
reaching a decision as to any accounting, auditing or financial reporting issue.
In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 2003, there were no disagreements with Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to their satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement. In the
unaudited interim periods ended June 30, 2003 and September 30, 2003, and
through December 31, 2003, there were no disagreements with Grant Thornton on
any matter of accounting principles or practices or financial statement
disclosure. The audit report of Grant Thornton on the consolidated financial
statements of the Company and its subsidiaries as of and for the year ended
December 31, 2003 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. During the fiscal year ended December 31, 2003, there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
PRINCIPAL ACCOUNTING FIRM FEES
The following information sets forth the aggregate fees billed or to be
billed by Grant Thornton and Deloitte for services performed for the fiscal year
2003 and fees billed by Deloitte for the fiscal year 2002. The Audit Committee
has reviewed the audit and non-audit fees that the Company paid to the
independent auditors for purposes of considering whether such fees are
compatible with maintaining the auditor's independence. Under the
7
SEC's new rule on auditor independence, which is effective for the first fiscal
year ending after December 15, 2003 and was adopted as a result of implementing
Sarbanes-Oxley, fees would be categorized as follows:
Audit Fees. Estimated fees billed for services rendered by Grant Thornton
for the audit of the Company's financial statements included in its annual
report and the reviews of financial statements included in its quarterly reports
were $95,500 for 2003. Fees billed for services rendered by Deloitte for the
audit of the financial statements included in the Company's annual report and
the reviews of financial statements included in its quarterly reports were
$144,799 for 2002 and $8,500 for 2003.
Audit-Related Fees. The Company did not retain Grant Thornton or Deloitte
for any audit-related services in 2002 or 2003 and there were no fees for
audit-related services during those years.
Tax Fees. Aggregate fees billed for tax services related to the
preparation of the Company's annual corporate tax returns rendered by Grant
Thornton were $17,700 for 2003. Aggregate fees billed for tax services related
to the preparation of the Company's annual corporate tax returns rendered by
Deloitte were $14,300 for 2002.
All Other Fees. The aggregate fees billed by Grant Thornton for services
rendered to the Company, other than the services described above, for the year
ended December 31, 2003 were $230,325, which consists of $46,000 for assistance
with a response to an SEC comment letter, $183,500 for fees incurred in
connection with the prospectus for a secondary offering, and $825 for accounting
research and discussions relating to the accounting for certain employee benefit
matters. The aggregate fees billed by Deloitte for services rendered to the
Company, other than the services described above, for the year ended December
31, 2003 were $112,705, which consists of $40,945 for assistance with a response
to an SEC comment letter, $63,590 for fees incurred in connection with the
prospectus for a secondary offering, $5,000 for successor audit review, $650 for
successor tax review and $2,520 for accounting research and discussions relating
to SAS 57.
The Audit Committee must now pre-approve all audit and most non-audit
services that are received from its independent auditors. This pre-approval
authority may be delegated to a single member of the Audit Committee and then
reviewed by the entire Audit Committee at the committee's next meeting.
Approvals of non-audit services will be publicly disclosed in the Company's
periodic reports filed with the SEC. Representatives of Grant Thornton are
expected to be in attendance at the Meeting.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
I-SECTOR COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of the Common Stock as of the Record Date by:
- each person, or group of affiliated persons, known by the Company to
be the beneficial owner of more than 5% of its outstanding common
stock;
- each of the Company's directors;
- each executive officer named in the summary compensation table
below; and
- all of the Company's directors and executive officers as a group.
8
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
- ---------------------------------- ------------------------ --------
James H. Long..................... 1,997,430 (2) 35.2%
Donald R. Chadwick................ 32,386 (3) *
Kevin Klausmeyer.................. 6,250 (4) *
William R. Hennessey.............. 115,000 (5) 2.0%
John B. Cartwright................ 15,200 (6) *
Mark T. Hilz...................... 32,000 (7) *
Paul Klotz ....................... 25,000 (8) *
All officers and directors........ 2,358,095 (9) 41.5%
- -----------
*Less than 1%
(1) Beneficially owned shares include shares over which the named person
exercises either sole or shared voting power or sole or shared investment
power. It also includes shares the named person has the right to acquire
within 60 days by the exercise of any right or option. Unless otherwise
noted, all shares are owned of record and beneficially by the named
person.
(2) Includes 2,400 shares that may be acquired upon exercise of currently
exercisable options.
(3) Includes 12,686 shares that may be acquired upon exercise of currently
exercisable options and 200 shares owned by his minor children for which
Mr. Chadwick disclaims beneficial ownership.
(4) Includes 6,250 shares that may be acquired upon exercise of currently
exercisable options.
(5) Includes 98,000 shares that may be acquired upon exercise of currently
exercisable options and 2,000 shares owned by his children, one of which
is a minor, for which Mr. Hennessey disclaims beneficial ownership.
(6) Includes 15,000 shares that may be acquired upon exercise of currently
exercisable options.
(7) Includes 32,000 shares that may be acquired upon exercise of currently
exercisable options.
(8) Includes 25,000 shares that may be acquired upon exercise of currently
exercisable options.
(9) Includes 262,205 shares that may be acquired upon exercise of currently
exercisable options.
The following table sets forth, as of the Record Date, the address and number of
shares and percentage of Common Stock owned by each stockholder of the Company
that owns 5% or more of the outstanding Common Stock.
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- ------------------------------------ ----------------------- --------
James H. Long (1)................... 1,997,430 35.2%
6401 Southwest Freeway
Houston, Texas 77074
(1) Includes 2,400 shares that may be acquired upon exercise of currently
exercisable options.
INTERNETWORK EXPERTS COMMON STOCK
As of the Record Date, the Company owns 92.4% of the issued and
outstanding common stock of INX. The following table sets forth information
regarding the beneficial ownership of the common stock of INX as of the date of
this proxy statement by:
- each of the Company's directors;
- each executive officer named in the summary compensation table
above; and
- all of the Company's directors and executive officers as a group.
9
Except as otherwise indicated, the persons listed below have sole voting
and investment power with respect to all of the common stock of INX owned by
them.
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
- ------------------------ ------------------------ --------
Mark T. Hilz........................ 2,220,000 (2) 7.6%
Paul Klotz.......................... 498,333 (3) 1.7%
All officers and directors.......... 5,077,105 (4) 17.5%
(1) Beneficially owned shares include shares over which the named person
exercises either sole or shared voting power or sole or shared investment
power. It also includes shares the named person has the right to acquire
within 60 days by the exercise of any right or option. Unless otherwise
noted, all shares are owned of record and beneficially by the named
person.
(2) Includes 2,200,000 shares that may be acquired upon exercise of currently
vested options. This amount does not include an additional 2,180,000
shares of the common stock of INX that may be issued upon exercise of
options that vest in the future. All such options, except 300,000 vested
options, are also subject to the further condition to exercise described
in "Internetwork Experts Stock Options" below.
(3) Includes 498,333 shares that may be acquired upon exercise of currently
vested options. This amount does not include an additional 576,667 shares
of the common stock of INX that may be issued upon exercise of options
that vest in the future.
(4) This amount does not include an additional 3,652,350 shares of the common
stock of INX that may be issued upon exercise of options that vest in the
future.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has furnished the following report on executive
compensation for fiscal year 2003:
The Compensation Committee met once in 2003. The base compensation
of executive officers during 2003 was continued under compensation
arrangements existing from 2002. The Committee's policies and those
compensation arrangements are described below:
The Compensation Committee establishes compensation for executive
officers based on performance goals related to the area for which they are
responsible while also taking into consideration the ability to reward
executive officers who contribute to the overall success of the Company.
The following characteristics are factored into the compensation policies.
1. The Company seeks to pay competitive salaries in order to
attract and retain the best people.
2. Executive officer rewards are based on the level of
performance attained by the individual measured by the
performance of the subsidiary or department for which they are
responsible. Awards in the finance area of the Company are
based on qualitative performance objectives.
3. At the beginning of the performance cycle, quarterly and
annual objectives are set for each officer. At the end of each
performance cycle, the level of achievement of the objectives
are measured and used as the basis for decisions on merit
increases, bonus awards and stock option grants. The CEO
conducts the review and makes recommendations to the
Compensation Committee accordingly.
In 2003, Mark T. Hilz, currently President and Chief Operating
Officer of the Company as well as President of Internetwork Experts, Inc.
was granted options to purchase 300,000 common shares of Internetwork
Experts, Inc. at an exercise price of $0.25 per share to vest immediately
as compensation for his personal guarantee of the Textron credit facility.
Chief Executive Officer Compensation: James H. Long has served as
Chief Executive Officer of the Company since its inception until December
2003, and as President until
10
December 2003. During 2003, Mr. Long's compensation consisted of a base
salary plus options to purchase 1.2 million common shares of Internetwork
Experts, Inc. at an exercise price of $0.25 per share to vest immediately
as compensation for his personal guarantee of the Textron credit facility.
Because Mr. Long owned in excess of 50% of the common stock of the
Company, both Mr. Long and the Compensation Committee agreed that neither
a cash bonus nor stock options were necessary to motivate Mr. Long to
achieve positive financial results, as Mr. Long will be rewarded along
with all other stockholders through the stock price if positive results
for the Company are achieved. Thus, at the 2002 Compensation Committee
meeting, Mr. Long asked that his base salary be the minimal amount
required to meet his immediate cash needs. During the year ended December
31, 2001, without input from the Compensation Committee, Mr. Long
voluntarily took a compensation reduction from the salary level set by the
Committee at its 2000 meeting. Mr. Long's reduced compensation continued
through 2003. In determining Mr. Long's compensation at the 2003 meeting,
the Compensation Committee considered Mr. Long's 2002 input as to his
minimal immediate cash needs and Mr. Long's input regarding his desire to
not receive performance-based compensation other than his financial reward
related to his stock ownership appreciation.
THE COMPENSATION COMMITTEE
John B. Cartwright, Chairman
Kevin M. Klausmeyer
Donald R. Chadwick
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Klausmeyer, Cartwright and Chadwick, each of whom are or were
outside directors during 2003, served on the Compensation Committee in 2003.
During 2003, no director or executive officer of the Company served on the
compensation committee or the board of directors of any company for which
Messrs. Klausmeyer, Cartwright and Chadwick served as executive officers or
directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information about compensation that the
Company paid or awarded for services rendered during the fiscal years ended
December 31, 2003, 2002 and 2001 to its (i) Chief Executive Officer and (ii) the
three most highly compensated executive officers who were serving as executive
officers at the end of 2003 and whose total annual salary and bonus exceeded
$100,000 (the "Named Executive Officers").
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------- ---------------------
OTHER ANNUAL SECURITIES UNDERLYING
COMPENSATION ($) OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2)
- ------------------------------------- ------ -------- ----- ---------------- ---------------------
James H. Long........................ 2003 $121,636 --
Chairman, Chief Executive Officer.... 2002 127,690 --
and Chief Financial Officer.......... 2001 133,315 --
Mark T. Hilz......................... 2003 200,000 55,120 32,000
President and Chief Operating........ 2002 185,190 --
Officer.............................. 2001 185,190 --
William R. Hennessy.................. 2003 125,000 19,063 80,000
President,........................... 2002 133,167 59,028 --
Stratasoft Inc. ..................... 2001 91,162 60,966 --
Paul Klotz .......................... 2003 150,000 41,370 25,000
Vice President,...................... 2002 144,252 7,500 --
Internetwork Experts, Inc............ 2001 144,854 --
11
- -------------
(1) Amounts exclude the value of perquisites and personal benefits because the
aggregate amount thereof did not exceed the lesser of $50,000 or 10% of
the Named Executive Officer's total annual salary and bonus.
(2) See "Internetwork Stock Options" for information regarding grants of INX
options to the Named Executive Officers.
I-SECTOR STOCK OPTIONS
The Company has issued stock options to purchase its common stock to its
officers, directors and employees. INX has also issued stock options to purchase
its common stock to officers, directors and employees of INX. The INX stock
option plan and the options issued under such plan are discussed below under the
caption "Internetwork Experts Stock Options."
Options to purchase shares of the Company's common stock may be granted to
executive officers and other employees under the 1996 Incentive Stock Option
Plan (the "1996 Incentive Plan") and the Plan.
Options Granted in Last Fiscal Year. The following table sets forth
information regarding stock options that the Company granted to each of the
Named Executive Officers during the fiscal year ended December 31, 2003. The
Company did not grant any stock appreciation rights in the fiscal year ended
December 31, 2003.
PERCENT OF
NUMBER OF TOTAL
SHARES OF OPTIONS POTENTIAL REALIZABLE POTENTIAL REALIZABLE
COMMON GRANTED VALUE AT ASSUMED VALUE AT ASSUMED
STOCK TO EXERCISE ANNUAL RATE OF STOCK ANNUAL RATE OF STOCK
UNDERLYING EMPLOYEES OR BASE PRICE APPRECIATION PRICE APPRECIATION
OPTIONS IN FISCAL PRICE EXPIRATION FOR OPTION TERM 5% FOR OPTION TERM 10%
NAME GRANTED YEAR ($/SHARE) DATE (3) (3)
- ------------------------- ----------- ----------- --------- ---------- --------------------- --------------------
William R. Hennessy(1)... 50,000 15.4% $2.70 09/08/2013 $ 219,901 $ 350,155
William R. Hennessy(1)... 30,000 9.3% 4.14 10/03/2013 202,309 322,143
Mark T. Hilz(2).......... 32,000 9.9% 4.14 10/03/2013 215,796 343,619
Paul Klotz(2)............ 25,000 7.7% 4.14 10/03/2013 168,591 268,452
(1) 100% of the options vested as of January 1, 2004, and are currently
exercisable. The options expire ten years from the date of grant. Vesting
was contingent upon continued employment with the Company. The option is
not assignable or transferable otherwise than by will or by the laws of
descent and distribution.
(2) Options vested cumulatively as follows: 50% of the shares vested on April
3, 2004 and 50% of the shares vested on October 3, 2004. Vesting was
contingent upon continued employment with the Company, or one of its
subsidiaries. The options are exercisable at any time after six months
from the date of grant, but expire ten years from such date. The option is
not assignable or transferable otherwise than by will or by the laws of
descent and distribution.
(3) The dollar amounts under these columns are the result of calculations at
the 5% and 10% compounded annual rates set by the SEC, and therefore are
not intended to forecast future appreciation, if any, in the price of the
common stock. The potential realizable values illustrated at the 5% and
10% compounded annual rates of appreciation assume that the price of the
common stock increases to $5.89 and $9.37 per share on a weighted average
basis, respectively, over the 10-year term of the options.
12
Aggregated Option Exercises and Year-End Option Values. The following
table sets forth information regarding option exercises during the fiscal year
ended December 31, 2003, as well as the number and total of in-the-money options
at December 31, 2003 for each of the Named Executive Officers:
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE MONEY OPTIONS AT
SHARES DECEMBER 31, 2003 DECEMBER 31, 2003
ACQUIRED ON VALUE ------------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- -------- ----------- ------------- ----------- -------------
James H. Long.............. -- $ -- 2,400 -- $ 37,632 $ --
William R. Hennessy........ -- -- 68,000 30,000 1,066,240 470,400
Mark T. Hilz............... 15,000 109,150 -- 32,000 501,760
Paul Klotz................. -- -- -- 25,000 392,000
INTERNETWORK EXPERTS STOCK OPTIONS
The Internetwork Experts, Inc. Incentive Plan (the "INX Plan") was adopted
effective July 1, 2000 when INX was formed. The INX Plan was amended, effective
December 31, 2003, so that no further grants may be made under this plan in the
future. The Company has determined that because INX is a large portion of its
total business, all future stock-based compensation for INX officers and
employees will be made under I-Sector option plans rather than under the INX
Plan.
Under the INX Plan and related option grant agreements, options typically
vest ratably over three to five years. In December 2003, the Company amended
option agreements with INX's two most senior executives, Mark Hilz and Paul
Klotz, to change the vesting under their INX options to a fixed five-year
vesting schedule from one that was determined based on the percentage of
attainment of predefined financial goals by INX. Any unvested INX stock options
may vest immediately upon the occurrence of a liquidity event. Liquidity events
include: (a) a sale of substantially all of INX's common stock to a non-related
party; (b) a sale of substantially all of INX's assets; or (c) a sale of all of
INX's stock to the general public in which the general public owns at least 20%
of the total outstanding INX common stock. The INX options expire ten years
after the grant date if they are not exercised. The INX stock option grants are
subject to dilution if and when the Company purchases additional shares of INX
stock.
As of December 31, 2001, 2002 and 2003, options for 1,388,500, 5,444,499
and 9,490,692 shares, respectively, of INX stock were granted and outstanding
under the INX Plan. The number of shares of INX stock underlying vested INX
options was 3,777,666 shares as of December 31, 2003. On the date of grant, the
INX options had an exercise price equal to or greater than the fair market value
of the underlying INX stock. The exercise price of the INX options ranges from
$.01 per share to $0.25 per share. For 2000, 2001, 2002 and 2003, the weighted
average exercise price of the outstanding INX options was $0.07, $0.07, $0.13
and $0.17, respectively. A portion of the options granted under the INX Plan
will become exercisable only upon a liquidity event involving INX, or during a
thirty-day period prior to expiration of the option.
During 2000, 2002 and 2003, options under the INX Plan were granted for
900,000, 4,100,000 and 1,675,000 shares of INX stock, respectively, to each of
the Named Executive Officers. The following table sets forth for each of those
years certain information with respect to the INX options issued to the Named
Executive Officers. INX has not granted any restricted stock or stock
appreciation rights under the INX Plan.
13
POTENTIAL
NUMBER OF REALIZABLE
SHARES OF VALUE AT
COMMON POTENTIAL REALIZABLE ASSUMED
STOCK PERCENT OF VALUE AT ASSUMED ANNUAL RATE OF
UNDERLYING TOTAL OPTIONS EXERCISE ANNUAL RATE OF PRICE
OPTIONS GRANTED TO OR BASE PRICE APPRECIATION APPRECIATION
NAME AND GRANTED IN EMPLOYEES IN PRICE EXPIRATION FOR OPTION FOR OPTION
PRINCIPAL POSITION YEAR YEAR (1) FISCAL YEAR ($/SHARE) DATE TERM 5% (2) TERM 10% (2)
- ----------------------- ----- ----------- ------------- --------- ------------ -------------------- ---------------
James H. Long, 2003 1,200,000 29.7% $ 0.25 09/01/2013 $ 488,688 $ 778,123
Chairman, 2002 - - - - - -
Chief Executive Officer 2001 - - - - - -
and 2000 - - - - - -
Chief Financial Officer
Mark T. Hilz, 2003 300,000 7.4% 0.25 09/01/2013 122,167 194,531
President and 2002 3,400,000 82.5% 0.15 03/01/2012 872,273 1,455,090
Chief Operating 2001 - - - - - -
Officer 2000 700,000 54.9% 0.01 07/01/2010 11,402 18,156
Paul Klotz, 2003 175,000 4.3% 0.25 11/10/2013 57,011 90,781
Vice President, 2002 700,000 17.0% 0.15 03/01/2012 171,034 272,343
Internetwork Exports, 2001 - - - - - -
Inc. 2000 200,000 15.7% 0.01 08/14/2010 3,592 5,992
All Other Employees 2003 2,365,192 58.6% 0.20 11/10/2013 770,530 1,226,940
2002 23,000 0.5% 0.20 12/09/2012 7,493 11,931
2001 52,500 100.0% 0.20 11/05/2011 17,103 27,234
2000 375,000 29.4% 0.20 10/30/2010 122,167 194,531
- -----------------
(1) During the quarter ended September 30, 2003, INX granted options to
purchase 1,200,000 shares to Mr. Long and 300,000 shares to Mr. Hilz for
their personal limited guarantee of the Company's credit facility. In
February 2004, Mr. Long voluntarily cancelled his 1,200,000 share option
in exchange for the issuance by INX to I-Sector of the I-Sector warrant
for the same number of shares, at the same exercise price. Mr. Hilz's
option grant for 300,000 shares related to the personal limited guarantee
is fully vested and may be exercised at any time until expiration.
(2) There is currently no trading market for the common stock of INX. The
dollar amounts under these columns are the result of calculations at the
5% and 10% compounded annual rates and are not intended to forecast future
appreciation, if any, in the value of the INX common stock. The potential
realizable values illustrated at the 5% and 10% compounded annual rates of
appreciation are based on the exercise price of INX options on their
respective dates of grant, over the 10-year term of the options.
14
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The table presented below contains certain information about the Company's
equity compensation plans, as of December 31, 2003, which consists of the 1996
Incentive Plan, the Director Plan and the Plan. The Company's stockholders
approved all of the equity compensation plans.
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE WEIGHTED FOR FUTURE ISSUANCE
ISSUED UPON AVERAGE UNDER EQUITY
EXERCISE OF EXERCISE COMPENSATION PLANS
OUTSTANDING PRICE OF OUTSTANDING (EXCLUDING SECURITIES
OPTIONS, WARRANTS OPTIONS, WARRANTS REFLECTED IN COLUMN
AND RIGHTS AND RIGHTS (a))
PLAN CATEGORY(1) (a) (b) (c)
---------------- -------------------- ---------------------- -----------------------
Equity compensation plans approved
by security holders............... 501,966 $2.85 128, 658
Equity compensation plans not
approved by security holders...... None None None
- -----------------
(1) Does not include the INX Plan. See "Executive Compensation."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the Named
Executive Officers. Under the terms of the respective agreements, Messrs. Long,
Hennessy, Hilz and Klotz are entitled to an annual base salary of $150,000,
$125,000, $200,000 and $150,000 respectively, plus other bonuses, the amounts
and payment of which are within the discretion of the Compensation Committee.
Beginning in the quarter ended June 30, 2001, Messrs. Long, Hilz and Klotz took
voluntarily pay reductions as compared to the base salary set in their
respective employment agreements. The voluntary pay reductions were terminated
for Messrs. Hilz and Klotz after certain financial performance goals were
attained. Mr. Long has extended his voluntary pay reduction through the current
pay period. The agreements with Messrs. Long, Hennessy, Hilz and Klotz also
include special bonus plan provisions that may be changed or eliminated at the
sole discretion of the Company. These four executives each currently have an
opportunity to receive two bonuses on a quarterly basis, which two bonuses are
tied to each of gross profits per share compared to plan and earnings per share
compared to plan for the pertinent subsidiary. The bonus amounts that may be
earned range from zero to as much as 70% of their quarterly salary based upon
performance attained. These bonus arrangements may be modified at any time at
the sole discretion of the Compensation Committee. All of these employment
agreements may be terminated by the Company or by the officer named therein at
any time by giving proper notice. These employment agreements generally provide
that the executive officer will not, for the term of his employment and for a
period of either twelve or eighteen months, whichever the case may be, following
the end of such executive officer's employment, compete with the Company,
disclose any of the Company's confidential information, solicit any of the
Company's employees or customers or otherwise interfere with its business
relations. The non-compete provision with Mr. Long does not apply if the Company
elects to terminate Mr. Long's employment without cause; except that, the
Company may elect to continue the non-compete restrictions in that event by
paying Mr. Long a severance amount during the restricted period. The severance
amount payable to Mr. Long is based upon the greater of 75% of his salary at the
time of termination or 75% of his average monthly salary and bonus, calculated
based on his compensation during the 12 months period prior to his termination.
15
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space from Allstar Equities, Inc., a Texas
corporation ("Equities"), a company wholly-owned by the Company's chief
executive officer. On December 1, 1999, Equities purchased the Company's
corporate office building and executed a direct lease with the Company with an
expiration date of December 31, 2004. In conjunction with Equities obtaining new
financing on the building, a new lease was executed with the Company on February
1, 2002, with an expiration date of January 31, 2007. The lease has rental rates
of $37,192 per month.
From time to time, I-Sector makes short-term loans and travel advances to
its non-executive employees. The balance of approximately $16,000 relating to
these loans and advances is included in the Company's consolidated balance sheet
and reported as part of "Accounts receivable - other" at December 31, 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company's directors, executive officers, and
stockholders who own more than 10% of the Common Stock (the "Reporting Persons")
are required to file reports of stock ownership and changes in ownership of
common stock with the SEC and to furnish the Company with copies of all such
reports they file. The Company believes that, for fiscal year 2003, all the
Reporting Persons complied with all applicable filing requirements, with the
exception of the following officers and directors: (i) Donald R. Chadwick -
filed one late report reporting one transaction; (ii) John B. Cartwright - filed
one late report reporting one transaction; (iii) William R. Hennessy - filed one
late report reporting two transactions; (iv) Frank Cano - filed one late report
reporting two transactions; (v) Mark T. Hilz - filed one late report reporting
one transaction; (vi) Paul Klotz - filed one late report reporting one
transaction; (vii) Timothy J. Grothues - filed one late report reporting two
transactions; (viii) Jeffrey A. Sylvester - filed one late report reporting one
transaction; (ix) Kevin Klausmeyer (former director) - filed one late report
reporting one transaction; and (x) Patricia L. Winstead (former vice president)
- - filed one late report reporting three transactions.
PROPOSAL 2
AMENDMENT OF THE COMPANY'S INCENTIVE PLAN
GENERAL INFORMATION
The Board of Directors approved an amendment of the Plan (the "Plan
Amendment") on November 24, 2004, subject to approval by stockholders at this
Meeting. The Plan was first approved by the Board on March 16, 2000, and
stockholders approved the Plan on May 19, 2000. The Board approved an amendment
and restatement of the Plan on July 28, 2003, which was approved by the
stockholders on August 20, 2003 and was effective as of July 28, 2003. The
Company is asking stockholders to approve the Plan Amendment, as the Company
believes that its continued ability to grant incentive awards under the Plan is
essential to its success, particularly with respect to its strategy of making
acquisitions to increase its geographic presence.
The purpose of the Plan is to attract and to encourage the continued
employment and service of, and maximum efforts by, officers, outside directors,
key employees, consultants and other key individuals by offering those persons
an opportunity to acquire or increase a direct proprietary interest in the
operations and future success of the Company. In the judgment of the Board of
Directors, an initial or increased grant under the Plan will be a valuable
incentive and will serve to the ultimate benefit of stockholders by aligning
more closely the interests of the Plan participants with those of the
stockholders. Approval of the Plan Amendment by stockholders is also necessary
to ensure that the Company has the ability to grant options that qualify as
performance-based under Section 162(m) of the Internal Revenue Code, as amended
(the "Code") (as described in more detail below), as incentive stock options
under the Code and to comply with the AMEX listing requirements.
As of the Record Date, there was 555,500 shares of Common Stock issued or
reserved for issuance under the Plan and the closing price of the Common Stock
was $7.30 per share. Because participation and the types of awards under the
Plan are subject to the discretion of the compensation committee, the benefits
or amounts that will be received by any participant or groups of participants in
the Amended and Restated Plan, including officers and directors of the Company,
is not currently determinable.
16
DESCRIPTION OF THE PLAN AMENDMENT
A description of the provisions of the Plan Amendment is set forth below.
This summary is qualified in its entirety by the detailed provisions of the Plan
Amendment, a copy of which is attached as Appendix B to this proxy statement.
Capitalized terms not defined in this description shall have the meaning
provided to such term in the Plan.
The definition of "Committee" is amended to also require that during the
period that the Company is a Publicly Held Corporation, that the Committee
members shall also meet the "independent" requirements of any rules of any
national exchange, or the NASDAQ, as the case may be, on which any of the
securities of the Company are traded, listed or quoted. The definition of "Other
Stock-Based Award" has been clarified to provide that such awards are payable in
Common Stock or cash.
The number of Shares of Company Common Stock available for Incentive
Awards under the Plan has been increased to 900,000.
With respect to meeting the performance-based exception for compensation
in excess of $1 million under Section 162(m) of the Code (which generally
provides that compensation in excess of $1 million to a Covered Employee per
year that is not performance-based is not deductible by the Company), the
following has been provided:
(a) The maximum number of Shares that may be granted to or vested in any
calendar year pursuant to any Incentive Award held by any individual
Employee under the Plan is 900,000.
(b) The maximum aggregate cash payout with respect to any Incentive
Award granted in any calendar year which may be made to any
individual Employee shall be $20,000,000.
(c) With respect to Stock Options or Stock Appreciation Rights, if such
rights are cancelled or repriced, the Shares subject to such
Incentive Awards shall continue to count against the maximum number
of Shares that may be the subject as Stock Options or Stock
Appreciation Rights to an Employee under the Plan to the extent that
it is required under Code Section 162(m).
The Plan has been amended to provide that at the Committee's discretion
outstanding grants of stock options or other stock-based incentive awards that
are granted under a stock option plan (or incentive plan) that is maintained by
a newly acquired or currently owned corporation or other entity that is merged
into, restructured or consolidated with, or whose stock or assets are acquired
by the Company or a Subsidiary of the Company as a surviving corporation, may be
assumed and continued under the Plan.
The Plan is also amended to provide that at the discretion of the
Committee, Incentive Awards granted under the Plan may be granted in
substitution or exchange for an award granted under another plan of the Company
or a Subsidiary of the Company. If an Incentive Award is granted in substitution
or exchange for another award under another plan of the Company or a Subsidiary
of the Company, the Committee shall require the surrender of such other award.
Any Shares issued by the Company through such substitution or exchange of
outstanding grants shall reduce the Shares available for Incentive Awards under
the Plan.
APPROVAL AND REQUIRED VOTE
The affirmative vote of a majority of the shares of Common Stock present,
in person or by proxy, is required to approve the Plan Amendment. Incentive
awards may be granted under the Plan pursuant to the Plan Amendment prior to the
receipt of such stockholder approval; provided, however, that if the requisite
stockholder approval is not obtained, then any such incentive awards granted
hereunder shall automatically become null and void and have no force and effect.
Abstentions will have the same effect as a vote against approval of the Plan
Amendment. Broker non-votes will not have any effect on the approval of the Plan
Amendment. Unless otherwise indicated, properly executed proxies will be voted
in favor of the proposal to approve the Plan Amendment.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PLAN AMENDMENT.
17
STOCK PERFORMANCE GRAPH
The following graph compares the performance of the Common Stock with the
Nasdaq Stock Market (U.S. Companies) Index and with the Russell 2000 Index. The
graph assumes that $100 was invested on December 31, 1998 in the Common Stock
and in each index on the last trading day for each year end thereafter, and that
any cash dividends were reinvested. The Company has not declared any dividends
during the period covered by this graph.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG I-SECTOR CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE RUSSELL 2000 INDEX
[PERFORMANCE GRAPH]
ASSUMED INVESTMENT WITH REINVESTMENT OF DIVIDENDS
12/98 3/99 6/99 9/99 12/99 3/00 6/00
------- ------ ------ ------ ------ ------ ------
I-SECTOR CORPORATION 100.00 66.67 90.00 66.67 70.03 160.00 123.36
NASDAQ STOCK MARKET (U.S.) 100.00 113.73 123.61 131.30 188.60 222.53 197.97
RUSSELL 2000 100.00 94.58 109.28 102.37 121.26 129.85 124.94
9/00 12/00 3/01 6/01 9/01 12/01 3/02
------- ------ ------ ------ ------ ------ ------
I-SECTOR CORPORATION 86.67 53.33 56.69 53.87 48.00 44.80 49.33
NASDAQ STOCK MARKET (U.S.) 180.87 128.96 91.89 88.64 80.67 71.63 72.32
RUSSELL 2000 126.32 117.59 109.94 125.76 99.53 120.52 125.32
6/02 9/02 12/02 3/03 6/03 9/03 12/03
------- ------ ------ ------ ------ ------ ------
I-SECTOR CORPORATION 114.13 72.00 106.67 108.00 127.47 234.67 836.27
NASDAQ STOCK MARKET (U.S.) 75.35 70.28 65.43 59.08 72.55 83.56 93.78
RUSSELL 2000 114.85 90.27 95.83 91.53 112.97 123.22 141.11
18
The preceding graph depicts the past performance of the Common Stock
and in no way should be used to predict future performance. The Company does
not make or endorse any predictions as to future share performance.
The stock performance graph shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
any filing under the Securities Act of 1933, as amended, or under the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates this graph by reference, and shall not otherwise be
deemed filed under such acts.
CODE OF ETHICS
The Board of Directors has adopted a Code of Ethics applicable to the
Company's chief executive officer and other senior officers and has also adopted
a Code of Ethics for Financial Executives (together, the "Codes"). Copies of the
Codes are available on the "Investor Information" page of the Company's website
at http://www.i-sector.com. The Company will provide the Codes in print, free of
charge, to stockholders who request them. Any waiver of the Codes with respect
to executive officers and directors may be made only by the Board of Directors
or a Board committee and will be promptly disclosed to stockholders on the
Company's website, as will any amendments to the Codes.
DISTRIBUTION OF ANNUAL REPORTS
The annual report (Form 10-K) to stockholders covering the year ended
December 31, 2003 was mailed concurrently with this proxy statement to each
stockholder entitled to vote at the Meeting.
STOCKHOLDER PROPOSALS
Any stockholder who wishes to submit a proposal for action to be included
in the proxy statement and form of proxy relating to the Meeting was required to
submit such proposal to the Company on or before March 31, 2004. If we did not
receive notice of any matter that a stockholder wishes to raise at the Meeting
by June 14, 2004 and a matter is raised at that meeting, the proxy holders for
the Meeting will have discretionary authority to vote on the matter. To have a
proposal included in the proxy statement and form of proxy for the 2005 annual
stockholders meeting, a stockholder must deliver such proposal a reasonable time
before the Company begins to print and mail its proxy materials for such
meeting. Stockholder proposals and notices should be sent to Secretary, I-Sector
Corporation, 6401 Southwest Freeway, Houston, Texas 77074.
COST OF SOLICITING PROXIES
The cost of soliciting proxies, including the cost of reimbursing banks
and brokers for forwarding proxies and proxy statements to their principals, in
the accompanying form, will be borne by the Company. In addition to
solicitations by mail, a number of regular employees of the Company may, if
necessary to assure the presence of a quorum, solicit proxies in person or by
telephone, for which they will receive no additional compensation. Brokerage
houses, banks and other custodians, nominees and fiduciaries will be reimbursed
for their customary out-of-pocket and reasonable expenses incurred in forwarding
proxy materials to beneficial owners.
The persons designated as proxies intend to exercise their judgment in
voting such shares on other matters that may properly come before the Meeting.
Management does not know of any matters other than those referred to in this
proxy statement that will be presented for action at the Meeting.
By Order of the Board of Directors,
/s/ Jeffrey A. Sylvester
------------------------------------
Jeffrey A. Sylvester, Secretary
December 1, 2004
19
APPENDIX A
I-SECTOR CORPORATION
CHARTER OF THE
AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
(AS ADOPTED ON AUGUST 15, 2000 AND AMENDED
NOVEMBER 5, 2002 AND JULY 28, 2003)
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of Directors
in fulfilling its oversight responsibilities by reviewing:
1. the financial reports and other financial and related information provided
by the Corporation to any governmental body or the public;
2. the Corporation's systems of internal controls regarding finance,
accounting, legal compliance and ethics that management and the Board have
established;
3. the Corporation's auditing, accounting and financial reporting processes
generally.
The Audit Committee will primarily fulfill these responsibilities by carrying
out the activities enumerated in Section IV. of this Charter. In doing so, it is
the responsibility of the Audit Committee to maintain free and open means of
communication between the Board, the independent accountants and the financial
management of the Corporation. The Audit Committee will encourage continuous
improvement of, and foster adherence to, the Corporation's policies, procedures
and practices at all levels.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as determined
by the Board, each of whom shall be independent directors, and free from any
relationship that would interfere with the exercise of his or her independent
judgment. A director with any of the following relationships will not be
considered independent:
1. Employees: a director who has been employed by the Corporation or any of
its affiliates for the current year or any of the past three years. (An
affiliate includes a subsidiary, sibling company, predecessor, parent
company or former parent company of the Corporation);
2. Business Relationship: (a) a director accepting any compensation from the
Corporation or any of its affiliates in excess of $60,000 during the
previous fiscal year, other than compensation for Board service, benefits
under a tax-qualified retirement plan or non-discretionary compensation or
(b) a director being a partner in, or a controlling shareholder or an
executive officer of, any for-profit business organization to which the
Corporation made, or from which the Corporation received, payments (other
than those arising solely from investments in the Corporation's
securities) that exceed 5% of the Corporation's or the business
organization's consolidated gross revenues for that year, or $200,000,
whichever is more, in any of the past three years;
3. Cross Compensation Committee Link; a director who is employed as an
executive of another company where any of the Corporation's executives
serve on that entity's compensation committee; or
4. Immediate Family; a director who is a member of the immediate family of an
individual who is, or has been in any of the past three years, employed by
the Corporation or any of its affiliates as an executive officer.
Immediate family includes a person's spouse, parents, children, siblings,
mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law,
daughter-in-law, and anyone who resides in such person's home.
A-1
The Board may appoint one director to the Audit Committee who is not considered
independent and who is not a current employee of the Corporation or an immediate
family member of a current employee of the Corporation, if:
1. the Board determines that is in the best interests of the Corporation and the
Stockholders to appoint the `non-independent' director to the Audit Committee;
and
2. the Board discloses the following information in the Corporation's first
proxy statement filed with the Securities & Exchange Commission after the
appointment of the `non-independent' director:
a) the nature of the director's relationship with the Corporation; and
b) the reasons for determining that the appointment of the director was
in the best interests of the Corporation and stockholders.
Each member of the Audit Committee shall be able to read and understand
fundamental financial statements or will become able to do so within a
reasonable period of time after his or her appointment to the Audit Committee.
Audit Committee members may enhance their familiarity with finance and
accounting by participating in educational programs conducted by the Corporation
or an outside consultant. At least one member of the Audit Committee shall have
either:
1. Past employment experience in finance or accounting;
2. Professional certification in accounting; or
3. Other comparable experience or background which results in the
individual's financial sophistication.
The members of the Audit Committee shall be elected by the Board at the annual
meeting of the Board or until their successors shall be duly elected and
qualified. Unless a Chair is elected by the Board, the members of the Audit
Committee may designate a Chair by majority vote.
III. MEETINGS
The Audit Committee shall meet at least four times annually, or more frequently
as circumstances dictate. As part of its job to foster open communication, the
Audit Committee should meet at least annually with management and the
independent accountants in separate executive sessions to discuss any matters
that the Audit Committee or each of these groups believe should be discussed
privately. In addition, the Committee or at least its Chair should meet with the
independent accountants and management quarterly to review the Corporation's
financials consistent with IV. 3 below.
IV. RESPONSIBILITIES AND DUTIES
DOCUMENTS/REPORTS REVIEW
1. Review and assess the adequacy of this Charter annually, and update as
conditions dictate.
2. Review the Corporation's annual audited financial statements and any
reports or other financial information submitted to any governmental body,
or the public, including any certification, report, opinion, or review
rendered by the independent accountants. The review should include
discussion with management and independent auditors of significant issues
regarding accounting principles, practices, estimates and judgments.
3. Review with financial management and the independent accountants each Form
10-Q prior to its filing and/or release of earnings. The Chair of the
Committee may represent the entire Committee for purposes of this review.
A-2
INDEPENDENT ACCOUNTANTS
4. Because the independent accountants for the Corporation are ultimately
accountable to the Audit Committee, the Audit Committee has the ultimate
authority and responsibility to select, evaluate and, where appropriate,
replace the independent accountants.
5. All engagements for auditing services and non-audit services by the
independent auditors must be approved by the Audit Committee prior to the
commencement of services, except as otherwise may be provided under the
Securities Exchange Act. The Audit Committee may designate a member of
the Audit Committee to represent the entire Audit Committee for purposes
of approval of audit or non-audit services, subject to approval by the
Audit Committee at the next regularly scheduled meeting. The
Corporation's independent auditors may not be engaged to perform
prohibited activities under the Sarbanes-Oxley Act of 2002 or the rules
of the Public Company Accounting Oversight Board or the Securities and
Exchange Commission.
6. On an annual basis, the Audit Committee shall ensure its receipt from the
independent accountants of a formal written statement delineating all
relationships between the independent accountants and the Corporation
consistent with Independence Standards Board Standard 1 and review and
discuss with the independent accountants all significant relationships
they have with the Corporation or services they provide that could impair
the accountants objectivity and independence.
7. Periodically consult with the independent accountants out of the presence
of management about the adequacy and effectiveness of the Corporation's
internal controls and the fullness and accuracy of the Corporation's
financial statements.
FINANCIAL REPORTING PROCESSES
8. In consultation with management and the independent accountants, consider
the integrity of the Corporation's financial reporting processes. Discuss
significant financial risk exposures and the steps management has taken
to monitor, control and report such exposures. The Audit Committee should
also review significant findings prepared by the independent accountants
with management's responses, the status of management's responses to
previous recommendations from the independent accountants and the status
of any previous instructions to management from the Audit Committee.
9. Establish regular and separate systems of reporting to the Audit
Committee by each of management and the independent accountants regarding
any significant judgments made in management's preparation of the
financial statements and the view of each as to appropriateness of such
judgments.
10. Following completion of the annual audit, review separately with each of
management and the independent accountants any significant difficulties
encountered during the course of the audit, and other matters related to
the conduct of the audit which should be communicated to the Audit
Committee under generally accepted auditing standards.
11. Review any significant disagreement among management and the independent
accountants in connection with the preparation of the financial
statements.
ETHICAL AND LEGAL COMPLIANCE
12. Establish, review and update periodically a Code of Ethical Conduct and
ensure that management has established a system to enforce this Code.
13. Establish procedures to allow any employee or investor to report a
suspected violation of SEC accounting or reporting rules and regulations,
any suspected violations of generally accepted accounting principles and
any suspected acts of fraud by employees or management of the company.
Such procedures should include documenting the report, the investigation
of the report, and any follow-up response to the report.
14. Establish procedures for resolution of any reported conflicts of interest
or irregularities or other violations of the code of ethical conduct or
significant, or potentially significant, regulatory non-compliance issues
that are identified.
15. Review, with the Corporation's counsel, legal matters that may have a
material impact on the financial statements, the Corporation's compliance
policies, including the Code of Ethical Conduct, and any material reports
or inquiries received from regulators or governmental agencies.
A-3
APPENDIX B
FIRST AMENDMENT TO THE
I-SECTOR CORP. INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE JULY 28, 2003)
WHEREAS, the I-Sector Corp. Incentive Plan as amended and restated effective
July 28, 2003, (the "Plan") was adopted by the Board of Directors of I-Sector
Corp. and approved by shareholders on August 20, 2003; and
WHEREAS, under Section 7.7 of the Plan the Board has the authority to amend the
Plan subject to certain shareholder approval requirements; and
WHEREAS, the Board has authorized this first amendment of the Plan subject to
stockholder approval as provided herein.
NOW THEREFORE, the Plan is hereby amended as follows:
1. The first paragraph of Section 1.2(f) shall be amended as follows
(f) COMMITTEE. A committee appointed by the Board consisting of not less
than two directors as appointed by the Board to administer the Plan. During such
period that the Company is a Publicly Held Corporation, the Plan shall be
administered by a committee appointed by the Board consisting of not less than
two directors who fulfill the "non-employee director" requirements of Rule 16b-3
under the Exchange Act, the "outside director" requirements of Section 162(m) of
the Code and the "independent" requirements of the rules of any national
securities exchange or the NASDAQ, as the case may be, on which any of the
securities of the Company are traded, listed or quoted. The Committee may be the
Compensation Committee of the Board, or any subcommittee of the Compensation
Committee, provided that the members of the Committee satisfy the requirements
of the previous provisions of this paragraph.
2. Section 1.2(bb), OTHER STOCK-BASED AWARD. An award granted by the
Committee to a Grantee under Section 5.1 that is valued in whole or in part by
reference to, or is otherwise based upon Common Stock, and is payable in Common
Stock or cash.
3. Section 1.4 shall be amended in its entirety to read as follows:
1.4 SHARES OF COMMON STOCK AVAILABLE FOR INCENTIVE AWARDS
Subject to adjustment under Section 6.5, there shall be available for
Incentive Awards that are granted wholly or partly in Common Stock (including
rights or Options that may be exercised for or settled in Common Stock) 900,000
Shares of Common Stock. The total number of Shares reserved for issuance under
the Plan (pursuant to the previous sentence) shall be available for any one of
the following types of grants: Incentive Stock Options, Nonstatutory Stock
Options, SAR, Restricted Stock, a payment of a Performance Share in Shares, a
payout of a Performance Unit in Shares, a payout of an Other Stock-Based Award
in Shares described in Section 5 (which includes, without limitation, Deferred
Stock, purchase rights, shares of Common Stock awarded which are not subject to
any restrictions or conditions, convertible or exchangeable debentures, other
rights convertible into Shares, Incentive Awards valued by reference to the
value of securities of or the performance of a specified Subsidiary, division or
department, and settlement in cancellation of rights of any person with a vested
interest in any other plan, fund, program or arrangement that is or was
sponsored, maintained or participated in by the Company or any Parent or
Subsidiary. The number of Shares of Common Stock that are the subject of
Incentive Awards under this Plan, that are forfeited or terminated, expire
unexercised, are settled in cash in lieu of Common Stock or in a manner such
that all or some of the Shares covered by an Incentive Award are not issued to a
Grantee or are exchanged for Incentive Awards that do not involve Common Stock,
shall again immediately become available for Incentive Awards hereunder. The
Committee may from time to time adopt and observe such procedures concerning the
counting of Shares against the Plan maximum as it may deem appropriate. The
Board and the appropriate officers of the Company shall from time to time take
whatever actions are necessary to file any required documents with governmental
authorities, stock exchanges and transaction reporting systems to ensure that
Shares are available for issuance pursuant to Incentive Awards.
B-1
During any period that the Company is a Publicly Held Corporation, then
unless and until the Committee determines that a particular Incentive Award
granted to a Covered Employee is not intended to comply with the
Performance-Based Exception, the following rules shall apply to grants of
Incentive Awards to Covered Employees:
(a) Subject to adjustment as provided in Section 6.5, the maximum
aggregate number of Shares of Common Stock (including Stock Options, SARs,
Restricted Stock, Performance Units and Performance Shares paid out in Shares,
or Other Stock-Based Awards paid out in Shares) that may be granted or that may
vest, as applicable, in any calendar year pursuant to any Incentive Award held
by any individual Employee shall be 900,000 Shares.
(b) The maximum aggregate cash payout (including SARs, Performance
Units and Performance Shares paid out in cash, or Other Stock-Based Awards paid
out in cash) with respect to Incentive Awards granted in any calendar year which
may be made to any individual Employee shall be Twenty Million dollars
($20,000,000).
(c) With respect to any Stock Option or Stock Appreciation Right
granted to a Covered Employee that is canceled or repriced, the number of Shares
subject to such Stock Option or Stock Appreciation Right shall continue to count
against the maximum number of Shares that may be the subject of Stock Options or
Stock Appreciation Rights granted to such Employee hereunder to the extent such
is required in accordance with Section 162(m) of the Code.
(d) The limitations of subsections (a), (b) and (c) above shall be
construed and administered so as to comply with the Performance-Based Exception.
4. Section 6.5(e) shall be amended in its entirety as follows:
(e) ASSUMPTION UNDER THE PLAN OF OUTSTANDING STOCK OPTIONS.
Notwithstanding any other provision of the Plan, the Committee, in its absolute
discretion, may authorize the assumption and continuation under the Plan of
outstanding and unexercised stock options or other types of stock-based
incentive awards that were granted under a stock option plan (or other type of
stock incentive plan or agreement) that is or was maintained by a newly acquired
or currently owned corporation or other entity that was merged into,
restructured, or consolidated with, or whose stock or assets were acquired by,
the Company or a Subsidiary of the Company as the surviving corporation. Any
such action shall be upon such terms and conditions as the Committee, in its
discretion, may deem appropriate, including provisions to preserve the holder's
rights under the previously granted and unexercised stock option or other
stock-based incentive award, such as, for example, retaining an existing
exercise price under an outstanding stock option. Any such assumption and
continuation of any such previously granted and unexercised incentive award
shall be treated as an outstanding Incentive Award under the Plan and shall thus
count against the number of Shares reserved for issuance pursuant to Section
1.4. In addition, any Shares issued by the Company through assumption or
substitution or exchange of outstanding grants from an acquired company shall
reduce the Shares available for grants under Section 1.4.
5. Section 6.5 of the Plan shall be amended by inserting the following new
paragraph:
(g) SUBSTITUTE AWARDS. Incentive Awards granted under the Plan may,
at the discretion of the Committee, be granted in substitution or exchange for,
any other award granted under another plan of the Company or any Subsidiary of
the Company. Such substitution and exchange may be granted at any time. If an
Incentive Award is granted in substitution or exchange for another award under
another plan of the Company or a plan of a Subsidiary, the Committee shall
require the surrender of such other award. Any Shares issued by the Company
through substitution or exchange of outstanding grants under this Section 6.5(g)
shall reduce the Shares available for grants under Section 1.4.
B-2
The Plan as amended hereby is effective on December 16, 2004, subject to
approval of the stockholders of the Company within one year from December 16,
2004. Incentive Awards may be granted under the Plan pursuant to this amendment
prior to the receipt of such stockholder approval; provided however, that if the
requisite stockholder approval is not obtained then any such Incentive Awards
granted hereunder shall automatically become null and void and have no force and
effect.
I-SECTOR CORP.
By: /s/ JAMES H. LONG
--------------------------
James H. Long, Chairman of the Board and
Chief Executive Officer
B-3
I-SECTOR CORPORATION
6401 SOUTHWEST FREEWAY, HOUSTON, TEXAS 77074
PROXY
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS, DECEMBER 16, 2004
The undersigned hereby appoints Timothy J. Grothues and Helena Y. Shiu,
either or both of them, proxies of the undersigned with full power of
substitution, to vote all shares of I-Sector Corporation Common Stock which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of
I-Sector Corporation to be held in Houston, Texas on Thursday, December 16, 2004
at 10:00 a.m., local time, or at any adjournment or postponement thereof, upon
the matters set forth on the reverse side and described in the accompanying
Proxy Statement and upon such other business as may properly come before the
meeting or any adjournment or postponement thereof.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
ANNUAL MEETING OF STOCKHOLDERS OF
I-SECTOR CORPORATION
DECEMBER 16, 2004
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
EACH OF THE DIRECTORS AND A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT OF THE I-SECTOR CORPORATION INCENTIVE PLAN.
1. ELECTION OF DIRECTORS:
FOR WITHHOLD
James H. Long _________ _____________
Donald R. Chadwick _________ _____________
John B. Cartwright _________ _____________
Cary M. Grossman _________ _____________
2. APPROVAL OF THE AMENDMENT OF THE I-SECTOR CORPORATION INCENTIVE PLAN:
________FOR ________ AGAINST ___________ ABSTAIN
THIS PROXY WILL BE VOTED AS INDICATED BY THE STOCKHOLDER(s). IF NO CHOICE IS
INDICATED ABOVE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF EACH OF THE
DIRECTORS AND "FOR" THE APPROVAL OF THE I-SECTOR CORPORATION INCENTIVE PLAN.
Signature of Stockholder:____________________________________________
Signature of Stockholder: ___________________________________________
NOTE: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give full
title as such.
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE
AS SOON AS POSSIBLE.