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, 2000
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
I-SECTOR CORPORATION
(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 16,
2001, as reported on NASDAQ Small Cap Market, was approximately $2,056,400.
The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 16, 2001 was 4,042,525.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
Item 1. Business
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 RELATING TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY INCLUDING, BUT
NOT LIMITED TO, STATEMENTS CONTAINED IN ITEM 1. - "BUSINESS" ITEM 2. -
"PROPERTIES," ITEM 3. - "LEGAL PROCEEDINGS" AND ITEM 7. - "MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED THAT ANY STATEMENT THAT IS NOT A STATEMENT OF HISTORICAL
FACT, INCLUDING BUT NOT LIMITED TO, STATEMENTS WHICH MAY BE IDENTIFIED BY WORDS
INCLUDING, BUT NOT LIMITED TO, "ANTICIPATE," "APPEAR," "BELIEVE," "COULD,"
"ESTIMATE," "EXPECT" "HOPE," "INDICATE," "INTEND," "LIKELY," "MAY," "MIGHT,"
"PLAN," "POTENTIAL," "SEEK," "SHOULD," "WILL," "WOULD," AND OTHER VARIATIONS OR
NEGATIVE EXPRESSIONS THEREOF, ARE PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. NUMEROUS FACTORS, INCLUDING FACTORS
THAT 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. "RISKS
RELATED TO OUR BUSINESS STRATEGY," WHICH COULD CAUSE ACTUAL EVENTS, PERFORMANCE
OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH STATEMENTS.
GENERAL
I-Sector Corporation owns and operates subsidiary companies that are
engaged in various aspects of the information and communications technology
industries. In 2000, our revenue from continuing operations was derived through
five primary subsidiary companies:
Allstar Computer Services, Inc provides information technology services
including: on site and carry-in computer repair; application support;
operating system and network design and implementation; and turnkey
systems support.
Internetwork Experts, Inc is a network professional services
organization with areas of practice that include: network design and
implementation; turnkey support; security audits and firewall design;
and network infrastructure management and consulting services.
IT Staffing, Inc. is a contract staffing and recruiting company for IT
professionals that provides contract staffing for temporary assignments
and recruiting for permanent placements.
Synergy Helpdesk Solutions, Inc. is an information technology
professional services firm that provides: technical staff augmentation
for IT helpdesk operations; turnkey outsourcing of the IT helpdesk
function; helpdesk solutions consulting services; and information
technology systems consulting and project management services.
Stratasoft, Inc. has developed, and is engaged in marketing, its
software products for computer-telephony integration, including
products for call center and other high volume calling applications.
As discussed in further detail below in Item 1. "Recent Sales of
Business Segments," during the year 2000 we sold certain key assets of, and the
ongoing business operations of, our Computer Products business and our Telecom
Systems business.
INDUSTRY CHANGES
The market for information and communications technology products and
services has experienced tremendous growth over the past decade and the industry
has changed significantly as the market has grown and evolved. Reselling of
popular computing hardware and software products, and the support and
maintenance of such products, which was formerly an early stage high growth
industry sector, has matured. Other information technology industry sectors,
such as consulting and project management related to Internet and Intranet
network infrastructure are still somewhat early stage industry sectors. Yet
other information technology industry sectors, such as consulting and project
management related to Web-enabled supply chain management and customer resource
management systems are in their infancy. As the information technology market
has evolved, both challenges and opportunities have been created for industry
participants.
Our Computer Products business, which had evolved from a business model
created in the early 1980's, had been struggling with numerous challenges
related to the evolution of the computer reselling industry. Major product
manufacturers had been changing their business models and their relationship
with the computer reseller community. Web-based product reselling and direct
selling by the major manufacturers was creating rapid change that resulted in
lower gross margins throughout the computer product reselling industry. The
proliferation of new products created an increasingly complex operating
environment. These changes are, in part, modifying the purchasing habits of
corporations related to both information technology products and services.
At the same time, we believe the market for information technology
services has grown increasingly larger, and increasingly more complex and
varied. Only a few short years ago, it was normal for a mid-sized corporation to
utilize a single-source provider for all of its information technology services,
but that has changed. The increasing number of software and hardware providers,
combined with the increasing diversity of, and complexity of, computing and
communication technology used by corporate America today demands that superior
information technology service providers specialize. Focus and specialization
create improved quality, productivity and operational effectiveness. Corporate
America today realizes this and increasingly looks to specialized providers for
their needs.
Recently, starting approximately in the fourth quarter of 2000, the
overall information technology industry experienced a marked slowdown. This
slowdown has been in conjunction with and is most likely related to, the overall
slowdown in the U.S. economy that began at approximately the same time.
RECENT SALES OF BUSINESS SEGMENTS
Disposition of Computer Products Business
On March 16, 2000 I-Sector entered into an agreement to sell certain
assets of and the ongoing operations of our Computer Products Division, along
with certain assets and operations of our IT Services Division related to our El
Paso branch office. That sale closed on May 19, 2000 after shareholder and other
required consents were obtained. Under this agreement, said assets and
operations were sold to Amherst Computer Products Southwest, L.P., an affiliate
of Amherst Technologies, L.L.C. The terms of the agreement included cash
consideration of $14,779, plus the possibility of receiving a future payment of
up to $500 from an escrow account. I-Sector realized a gain of approximately
$3,700, net of taxes, on the sale. The proceeds of the sale were used to reduce
debt. The discontinued operations of the Computer Products Division produced
income of $132, $1,343 and $302 in 1998, 1999 and 2000, respectively (net of
taxes of $68, $688 and $156 in 1998, 1999 and 2000, respectively). We retained
accounts receivable of $20,266, net of reserves, fixed assets of $255 and
liabilities related to the Computer Products Division. At December 31, 2000,
accounts receivable related to the Computer Products Division were $775. Fixed
assets were redeployed in continuing operations. In connection with the sale of
the Computer Products Division, I-Sector also sold the El Paso portion of the IT
Services business. The El Paso branch office portion of the IT Services business
accounted for revenues of $935, $2,012 and $955 for the years ended December 31,
1998, 1999, and 2000, respectively. For financial accounting presentation the El
Paso services business was included in the corporate segment of continuing
operations for the year ended December 31, 2000.
Sale of Telecom Systems Business
Through our former Telecom Systems segment, until March 16, 2000, we
marketed, installed and serviced business telephone systems, including large PBX
systems and small "key systems", along with a variety of related products
including hardware and software products for data and voice integration, wide
area connectivity and telephone system networking, wireless communications and
video conferencing. Because we were unable to profitably operate the Telecom
Systems business, on November 2, 1999 we determined to exit this business. On
March 16, 2000, we sold Telecom Systems to Communications World International,
Inc. ("CommWorld"), a publicly traded company (OTC Bulletin Board: CWII). Under
the terms of the sale, for the inventory and operations of Telecom Systems, we
received $250 cash. Additionally, the purchaser assumed all of our telephone
equipment warranty obligations up to a maximum of $30. The warranty assumed was
consumed during the year 2000 and any excess warranty costs incurred by the
purchaser will be billed to us at an agreed upon rate. An estimate of future
warranty costs of $95 at December 31, 2000 is included in the balance sheet
caption "Net liabilities related to discontinued operations". A disposal loss,
including an estimate of the operating results from the measurement date,
November 2, 1999, to the closing date of the sale of $580, and estimates for
impairment of assets caused by the disposal decision of $558, totaling $1,138
(net of an income tax saving of $586) was recognized. The loss from discontinued
operations (net of income tax savings of $505 and $159) was $981 and $310 in
1999 and 1998, respectively. We retained accounts receivable of $1.4 million,
net of reserves, fixed assets of $30 and liabilities related to Telecom Systems.
At December 31, 2000, the Company had no net accounts receivable related to
Telecom Systems. Fixed assets were redeployed in the continuing operations.
BUSINESS STRATEGY
Mindful of the manner in which the information technology industry was
changing, we evaluated our situation in 1999 and decided that change was
prudent. We decided that we should exit our Telecom Systems business both
because we had been ineffective at achieving profitably since we began Telecom
Systems in 1994 and because the business of selling and installing telephone
systems was a mature industry that we believed offered less opportunity for
growth than other emerging areas. We decided to sell our Computer Products
Division because, in spite of the fact that Computer Products had been a
profitable business for us until that time, we foresaw negative industry trends
and we believed that we could deploy the proceeds from a sale of Computer
Products in other ways that we believed would ultimately create greater
stockholder value. We consummated the sale of each of those businesses in the
first half of 2000 and during the second half of the year we structured and
organized the remaining company for the future.
Going forward, we intend to utilize our capital resources to build a
portfolio of focused subsidiary companies, each of which will be involved in
some facet of information and/or communications technology. We believe we can
produce higher rates of growth, and better financial performance, by providing
our products and services through focused, specialized companies, each branded
to pursue a specialized mission and each led by a separate management team with
personal financial incentives tied to their company's financial performance. We
plan to continue to expand each of our existing subsidiary companies through
internally generated sales and possibly through the acquisition of compatible
and synergistic companies. We will also continuously evaluate the possibility of
entering new lines of business either by starting new subsidiary companies or by
acquiring other companies. We also intend to continuously evaluate investments
in other non-related companies.
PRODUCTS AND SERVICES
We currently provide all of our products and services, and produce all
of our revenue, through our five wholly-owned subsidiary companies, further
details of which are provided below.
Allstar Computer Services, Inc.
Allstar Computer Services, Inc. ("ACS"), offers a variety of service
offerings related to the service and support of computing technology. The
services that ACS offers include:
On site and carry-in computer hardware repair
Application support
Operating system and network migration services
Network design and implementation
Turnkey systems support
ACS typically 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 the vendor accreditation
necessary to service their significant product lines, ACS's technical staff
participates in various certification and authorization programs sponsored by
hardware manufacturers and software suppliers. ACS has offices in Houston and
Dallas, and in markets where they do not maintain branch offices, often
subcontracts for necessary technical personnel, particularly where required for
larger scope or prolonged duration contracts. ACS's customers are typically
small to medium sized commercial accounts.
Internetwork Experts, Inc.
Internetwork Experts, Inc. ("INX"), is a provider of network
infrastructure professional services and a reseller network infrastructure
products manufactured by Cisco Systems, Inc. ("Cisco"). INX has developed the
following areas of network expertise:
Network baseline assessment
Design/architecture
Implementation
Network management
Project management
Network security
Knowledge transfer
Specific technologies in which INX offers expertise include:
Routing
Switching (LAN/MAN/WAN)
Virtual Private Networks (VPN)
Voice over X (VoX)
Wireless
Security
Thin Client Computing
Server Farms
INX's consultants have held critical leadership roles in all major
phases of the project life cycle including analysis, design, implementation,
support, management, and documentation. Their certified experts have also
presented many educational seminars for professional organizations within the
networking industry and are often engaged to provide knowledge transfer for
clients as well as vendors. INX is headquartered in Dallas and has a branch
office in Houston. INX's customers are typically large corporate accounts and
communications firms that utilize large complex network infrastructures.
IT Staffing, Inc.
IT Staffing, Inc. ("IT Staffing"), provides qualified, screened
information technology consultants and contractors for any length of engagement
as well as performing recruiting services for permanent placements. IT Staffing
seeks to differentiate itself from other staffing companies by specializing in
the information technology industry. IT Staffing employs dedicated account
managers who stay abreast of industry trends and who know and understand their
client's needs. IT Staffing employs recruiting specialists who are extremely
knowledgeable about the information technology industry and who utilize IT
Staffing's infrastructure of database tools, search engines and resume databases
to quickly and efficiently locate the best possible candidates for a client's
needs. Upon request, a client is provided with optional testing and screening
services, which enables the client to quickly make qualified decisions on
potential candidates.
IT Staffing is headquartered in Houston and does business primarily in
Houston through its single office located there. IT Staffing's customers are
typically medium to large corporate clients as well as state and local
governmental agencies.
Stratasoft, Inc.
Stratasoft, Inc. ("Stratasoft"), develops and markets its proprietary
CTI Software, which integrates business telephone systems and networked computer
systems, under the trade name "Stratasoft." Stratasoft's products are designed
to improve the efficiency of a call center or other type of high volume calling
application, for both inbound and outbound calls. Stratasoft's software products
are often customized to suit a customer's particular needs and are sometimes
bundled with computer hardware supplied by us or by one our value added
resellers at the customer's request. Stratasoft currently has two primary
computer-telephony software products, which are marketed under the trade names
StrataDial and StrataVoice:
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 some competing products.
StrataVoice is an outbound dialing product designed for high volume
calling 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.
Stratasoft is headquartered in Houston, but markets its products
nationally, and to a lesser extent, internationally, through both its own sales
account managers as well as a network of resellers. Stratasoft's customers are
typically call center companies or companies or organizations that operate a
call center, and includes political and non-profit organizations. A majority of
Stratasoft's customers are located in the United States, but Stratasoft has also
sold and installed its products in several other countries.
Synergy Helpdesk Solutions, Inc.
Synergy Helpdesk Solutions, Inc. ("Synergy") is a purely
services-oriented company providing customers with a variety of services related
to the implementation and support of internal IT helpdesk solutions, including:
Technical staff augmentation for IT helpdesk operations
Helpdesk solutions consulting
Turn-key outsourcing of the IT helpdesk function
Network support and network management
IT project management
Synergy employs full-time technical professionals to deliver its broad range of
service offerings. Synergy has offices located in Dallas and Houston, and its
focus has been on the south central region of the U.S., however, a number of its
customer successes are projects that were implemented nationally. Synergy's
customers are typically larger corporate clients as well as state and local
governmental organizations.
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
All of our subsidiary companies utilize sales personnel, including
account managers and customer service representatives, to sell their products
and/or services. These sales personnel are partially compensated, and in some
cases are solely compensated, on the profitability of accounts that they
participate in developing. 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. The subsidiary
companies promote their products and services through general and trade
advertising, participation in trade shows and telemarketing campaigns. We
believe that a significant portion of new customer relationships have originated
through word-of-mouth referrals from existing customers.
CUSTOMERS
The focus of the various subsidiary companies' marketing efforts
varies, as does the makeup of each company's customer base. ACS's customer base
consists primarily of small to medium sized commercial accounts, primarily in
Houston and Dallas. INX's customers are typically larger corporate organizations
or communications companies that utilize large network infrastructures, a
majority of which are located in, or make significant network infrastructure
decisions in, Dallas or Houston, but for which work is performed nationally. IT
Staffing's customer base consists primarily of medium and large sized commercial
accounts and state and local governmental agencies in Houston, Texas.
Stratasoft's customers are typically call center companies or companies or
organizations that operate a call center, and includes political and non-profit
organizations. A majority of Stratasoft's customers are located in the United
States, but Stratasoft has also sold and installed its call center systems in
several other countries. Synergy's customers are typically larger corporate and
governmental organizations that operate an internal IT infrastructure helpdesk
organization. We had no single customer that represented 10% or greater of our
total continuing revenues in the years ended December 31, 2000, 1999 or 1998.
SUPPLY AND DISTRIBUTION
As most of our revenue is derived from providing services, or from the
sale of our own software products, our reliance on supply and distribution
channels is limited. We do, however, purchase limited amounts of computing and
communications equipment that is sold in conjunction with Stratasoft's software
products and as part of turn-key network infrastructure solutions in our
Internetwork Experts subsidiary. We have historically relied on wholesale
distributors to supply a majority of the products that we have sold. We have
recently purchased the majority of our products from two primary suppliers in
order to obtain competitive pricing, better product availability and improved
quality control. In addition, we purchase or exchange service parts in our ACS,
INX and Synergy subsidiaries, such transactions typically being with the product
manufacturer or its authorized distributor.
MANAGEMENT INFORMATION SYSTEMS
We utilize an internally developed, highly customized management
information system ("MIS") to manage most aspects of our business. All of our
subsidiary companies utilize our MIS, which is customized to their specific
needs. We use our MIS to manage sales orders, purchasing, service contracts,
service calls and work orders, engineer and technician scheduling and time
tracking, service parts acquisition and manufacturer warranties. Reporting can
be generated for project profitability, contract and customer analysis, parts
tracking and employee time tracking. The system provides for separate company
accounting and also for consolidation of all subsidiary company financial
information.
EMPLOYEES
As of December 31, 2000 we employed approximately 211 individuals. Of
these, approximately 35 were employed in sales, marketing and customer service,
95 were employed in engineering and technical positions and 81 were employed in
administration, finance and MIS. We believe that our ability to recruit and
retain highly skilled and experienced technical, sales and management personnel
has been, and will continue to be, critical to our ability to execute our
business plans. None of our employees are represented by a labor union nor are
any subject to a collective bargaining agreement. We believe that our relations
with our employees are good.
RECENT ORGANIZATIONAL CHANGE
We sold our Telecom Systems business on March 16, 2000 and we sold our
Computer Products Division on May 19, 2000, after which we retained our IT
Services and Stratasoft businesses. In July 2000, we separated our former IT
Services business into three separate businesses, each of which is a
wholly-owned subsidiary corporation. One of these subsidiary companies is IT
Staffing, Inc., which had already been operated as a wholly-owned subsidiary
since 1997. We contributed the remaining components of the former IT Services
business to two newly formed corporations, Allstar Computer Services Inc. and
Synergy Helpdesk Solutions, Inc. In July 2000, we also formed another
wholly-owned subsidiary, Internetwork Sciences Corporation. In October 2000
Internetwork Sciences Corporation acquired certain assets and the ongoing
operations of an unrelated company, Internetwork Experts, Inc., and adopted the
name of the acquired firm by changing its legal name to the latter.
RISKS RELATED TO OUR BUSINESS STRATEGY
Our business strategy is based on our ability to redeploy the proceeds
from the sale of our Computer Products and Telecom Systems businesses to improve
the performance of our existing businesses, make selective acquisitions and
pursue selected business opportunities. This strategy involves many risks
including, but not limited to, the following:
Risks of Potential Future Acquisitions and Investments
Our business will depend in the future on the successful acquisition,
integration, financing and performance of businesses. Our strategy involves the
substantial risk that we will not find suitable businesses to acquire on terms
we believe are reasonable and that the new businesses we choose to enter will
not provide the benefits we expect. Our future business prospects should
therefore be considered in light of the risks, expenses, problems and delays
inherent in acquiring a new business. We cannot be certain that we will identify
and assess these risks. Some of the acquisition and operating risks that could
adversely affect us include the following:
We may be unsuccessful in identifying new business opportunities,
completing and financing acquisitions and start-ups on favorable terms
and in subsequently operating the businesses profitably.
Competition for the acquisition of companies in the information and
communication sector will likely be intense. Our competitors for
suitable new businesses may have greater financial, personnel and
technical resources than us, which may put us at a disadvantage in
finding and concluding acquisitions. These competitive limitations may
compel us to select less attractive acquisitions than if we had greater
resources at our disposal.
Businesses in the information and communication sector are the general
focus of our new business expansion strategy. Businesses in this sector
often have an undeveloped or unproven product, technology or marketing
strategy, which may prove unsuccessful.
We may choose to acquire or invest in a business that is financially
unstable or that is in the early stages of development, including one
without earnings or positive cash flow, which may require substantial
additional capital infusions to support.
Because we plan to seek new businesses with growth potential, there is
a substantial likelihood that the new business will be in competition
with much larger, more established and better capitalized competitors,
thus putting it at a competitive disadvantage.
Our success in a new business will also depend on our ability to
integrate a new business and its personnel with our existing business
and personnel with a minimum of disruption to both existing and new
enterprises, including management information systems. We also may be
unable to attract and retain new, qualified personnel to operate and
grow our new businesses.
If we choose to make a strategic investment by acquiring a minority
interest in a business, we may lack sufficient control to influence the
operations and strategy of the business and thus will depend on that
entity's management for our success; additionally, if we choose to make
an investment in a publicly traded company such investment would also
be subject to market risks.
Uncertain Revenue Sources
In order reach profitability from our existing businesses we will have
to grow the revenues of those businesses at a much greater rate than we have
historically been able to grow revenues. The relatively high level of operating
expenses remaining after the divestiture of Computer Products has contributed to
operating losses, which are expected to continue until new revenues can be
generated to offset some of the loss of revenues from the businesses that have
been sold.
Possible Need For Additional Financing
We may be required to obtain cash to supplement our available capital
to acquire a new business and for working capital to run existing businesses and
any businesses we acquire. We have no commitments to provide any such additional
capital and we may be unable to find suitable capital on terms we consider
acceptable.
If we obtain debt financing for our existing businesses or to acquire
new businesses, we will be subject to the risks inherent in debt financing. Some
of these include:
interest rate fluctuations;
inability to obtain additional debt financing;
insufficiency of cash flow to pay interest and principal; and
restrictive debt covenants imposed by lenders that may limit or
prohibit business activities we consider desirable.
We may seek to raise equity capital to meet our future cash needs. We
may also issue additional shares of our common stock or other equity securities
to acquire new businesses. If we do issue additional equity securities, some of
the possible adverse effects include:
the percentage of our common stock owned by existing stockholders could
be substantially reduced;
possible increases in the number of shares of our common stock that are
considered restricted stock for federal and state securities laws
purposes, the actual or potential future sale of which could adversely
effect the price of our common stock; and
we may be required to issue preferred stock which could have rights,
privileges and preferences superior to those of our then existing
stockholders.
Increased Dependence on Service Businesses and Stratasoft
Our existing five subsidiary companies, four of which are providers of
information technology services and one of which develops and markets software,
are currently our only revenue producing business segments. Because of that, our
ability to be successful in these areas of business takes on a much greater
significance to us than in the past. We plan to concentrate our efforts on
growing these businesses. The risk exists that we may be unable to accomplish
this improvement, and the operations of these businesses alone may not enable us
to operate profitably.
Adverse Changes in Our Industry
As described above under the caption "Industry Changes" our industry is
undergoing rapid changes that may adversely affect us. If we do not successfully
adapt our business strategy to these new conditions, there is a growing risk
that we may be unable to compete and be profitable in the future.
Highly Competitive Business
We have been engaged in business activities that are intensely
competitive and rapidly changing. Price competition could have a material
adverse effect on our financial condition and results of operations. Our
competitors include major information technology service organizations,
resellers and distributors, including certain manufacturers and distributors
that supply products to us. Other competitors include systems integrators,
computer-telephony value-added resellers and other computer-telephony software
suppliers.
Regional Concentration
For the foreseeable future, we expect that we will continue to derive
most of our revenue from customers located within the geographic regions into
which we market. Accordingly, an economic downturn in any of those metropolitan
areas within the region in general, would likely have a material adverse effect
on our financial condition and results of operations.
Dependence on Key Personnel
Our success for the foreseeable future will depend largely on the
continued services of key members of management, leading salespersons and
technical personnel. We do not maintain key personnel life insurance on any of
our executive officers or salespersons other than our Chairman and Chief
Executive Officer. Our success also depends in part on our ability to attract,
hire, train and retain qualified managerial, technical and sales and marketing
personnel at a reasonable cost, particularly those involved in providing systems
integration, support services and training. Competition for such personnel is
intense. Our financial condition and results of operations could be materially
adversely affected if we are unable to attract, hire, train and retain qualified
personnel.
Dependence on Continued Authorization to Resell and Provide
Manufacturer-Authorized Services
Our future success in our services businesses depends largely on our
continued status as an authorized reseller and/or service provider. We maintain
sales and service authorizations with many industry-leading product
manufacturers. Without such sales and service authorizations, we would be unable
to provide the range of services currently offered. In addition, Internetwork
Expert's ability to resell Cisco network products is dependent upon its Cisco
authorization. Furthermore, loss of manufacturer authorizations for products
that have been financed under our credit facilities constitutes an event of
default under such credit facilities. In general, the agreements between us and
our product manufacturers either provide for fixed terms or for termination on
30 days prior written notice. Failure to maintain such authorizations could have
a material adverse effect on our financial condition and our results of
operations.
Dependence on Suppliers
Our business depends upon our ability to obtain an adequate supply of
products and parts at competitive prices and on reasonable terms. Our suppliers
are not obligated to have product on hand for timely delivery to us nor can they
guarantee product availability in sufficient quantities to meet our demands. Any
material disruption in our supply of products could have a material adverse
effect on our financial condition and results of operations.
Inventory Obsolescence
The business in which we compete is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. Our success depends in large part on our ability to identify and
obtain products that meet the changing requirements of the marketplace. There
can be no assurance that we will be able to identify and offer products
necessary to remain competitive or avoid losses related to obsolete inventory
and drastic price reductions. We attempt to maintain a level of inventory
required to meet our near term delivery requirements by relying on the ready
availability of products from our principal suppliers. Accordingly, the failure
of our suppliers to maintain adequate inventory levels of products demanded by
our existing and potential customers and to react effectively to new product
introductions could have a material adverse effect on our financial condition
and results of operations.
Reliance on MIS
Our success is largely dependent on the accuracy, quality and
utilization of the information generated by our customized MIS, which affects
our ability to manage our sales, projects, accounting and inventory. We
anticipate that we will continually need to refine and enhance our management
information systems as we grow and the needs of our business evolve.
Control by Existing Stockholders
James H. Long, founder, Chairman of the Board, President and Chief
Executive Officer, owns 51.6% of the outstanding Common Stock and Mr. Long will
have the ability to control the election of the members of our board of
directors, prevent the approval of certain matters requiring the approval of at
least two-thirds of all stockholders and exert significant influence over our
affairs.
Anti-Takeover Considerations
Our Certificate of Incorporation and Bylaws contain certain provisions
that may delay, deter or prevent a change in our control. Among other things,
these provisions authorize our board of directors to issue shares of preferred
stock on such terms and with such rights, preferences and designations as the
board of directors may determine without further stockholder action and limit
the ability of stockholders to call special meetings or amend our Certificate of
Incorporation or Bylaws. Each of these provisions, as well as the Delaware
business combination statute could, among other things, restrict the ability of
certain stockholders to effect a merger or business combination or obtain
control of the company.
Risks Related to Patent Infringement
A competitor of Stratasoft's has alleged that Stratasoft's products
infringe upon their patents (see Item 3. "Legal Proceedings"). While Stratasoft
does not believe that their products infringe upon such competitor's patents,
there can be no assurance that the matter will be resolved in a manner that is
favorable to Stratasoft and it is possible that other companies may also believe
that Stratasoft's products infringe upon other patents. Patent infringement
litigation is complex and expensive and if the current litigation is not
resolved in Stratasoft's favor, in a cost efficient manner, or if there are
other future assertions of patent infringement by other competitors, such would
have a material adverse effect on our financial performance financial condition
and our results of operations.
Absence of Dividends
We expect to retain any cash generated from operations to support our
cash needs and do not anticipate the payment of any dividends on the Common
Stock for the foreseeable future. In addition, our credit facilities prohibit
the declaration or payment of dividends, unless consent is obtained from the
lender.
Item 2. Properties
FACILITIES
We do not own any real property and currently lease all of our existing
facilities. We lease our Houston office that is housed in a freestanding
building of approximately 48,000 square feet. On November 30, 1999 the building
was acquired by a Corporation owned by the Chairman, Chief Executive Officer and
President of the Company and a new lease was signed which expires on December 1,
2004.
Our Dallas office is a space of approximately 8,960 square feet. The
Dallas facility lease term began July 2000 and expires in July 2003.
Item 3. Legal Proceedings
We are party to litigation and claims which management believes are
normal in the course of our operations; while the results of such litigation and
claims cannot be predicted with certainty, we believe the final outcome of such
matters will not have a material adverse effect on our results of operations or
financial position.
On February 1, 2000, a competitor brought a suit against our
wholly-owned subsidiary Stratasoft, Inc. in ESHARE TECHNOLOGIES, INC. AND
INVENTIONS, INC. V STRATASOFT, INC., Cause No. 1 99-CV-2303 for the United
States District Court for the Northern District of Georgia. The plaintiff
alleges infringement of certain patents owned by the competitor and is seeking a
permanent injunction to prevent Stratasoft, Inc. from manufacturing, selling,
offering for sale or using the alleged infringing products covered by patents
owned by Eshare Technology, Inc. et al, as well as unspecified monetary damages.
The suit is in its early stages of discovery, and therefore we are unable to
determine the ultimate costs of this matter. We believe that this suit is
without merit and intend to vigorously defend such action, however the case is
currently scheduled for mediation in the immediate future. We have no assurance
that mediation will result in a settlement on terms that are acceptable to us.
On May 17, 2000, Jack B. Corey ("Corey") filed a lawsuit against the
Company styled JACK B. COREY V ALLSTAR SYSTEMS, INC., Cause No. 2000-24796, in
the District Court of Harris County, Texas, 113th Judicial District, in which he
sought a temporary restraining order, temporary and permanent injunctions to
enjoin the Company's sale of certain assets to Amherst Technologies, L.L.C.
("Amherst"), and damages based on alleged shareholder oppression. The Court
denied Corey's Application for Temporary Restraining Order and, after hearing,
denied his request for a temporary injunction. On June 22, 2000, Corey filed his
First Amended Original Petition and Application for Permanent Injunction,
seeking to permanently enjoin the sale of assets which had already been
consummated and to assert a cause of action for shareholder oppression based on
alleged failures to provide Corey, a Company shareholder, notices relating to
the shareholders' meeting held to approve the sale of assets to Amherst. The
Company has answered and denied all claims and intends to vigorously contest
Corey's claims. The case is set for trial on June 18, 2001. In addition to the
claims he has asserted in the above-described lawsuit, Corey has verbally
asserted claims in conversations with the Company's representatives and
attorneys that the Company made various alleged misrepresentations regarding the
Company's initial public offering that affected Corey's ability and intention to
sell his Company shares. Corey verbally claims to have been damaged in the
approximate amount of $1,337,500 but has not initiated litigation to pursue his
verbal claims. Subsequently, Corey verbally offered a settlement of all matters
for substantially less than his claimed damage amount. Should Corey initiate
litigation to pursue his claims, the Company intends to vigorously contest those
claims, however the Company will give consideration to offers to settle such
matter if such a settlement is deemed to be in the best interest of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's shares were traded on the NASDAQ Small Cap Market under
the symbol "ALLS" prior to July 11, 2000. Upon the change of our corporate name
on July 11, 2000, our stock began trading under the symbol "ISEC".
High Low
Fiscal 1999
First quarter 2.1875 1.00
Second quarter 2.875 1.0625
Third quarter 1.75 1.0625
Fourth quarter 1.875 1.00
Fiscal 2000
First quarter 5.00 1.375
Second quarter 3.50 1.938
Third quarter 2.438 1.563
Fourth quarter 1.688 0.625
As of March 16, 2001, there were 45 shareholders of record. Management
estimates that there are approximately 890 beneficial holders of our common
stock. We have never declared or paid any cash dividends on our Common Stock. On
March 16, 2001, the closing sales price of our Common Stock as reported by
NASDAQ was $ 1.063 per share. We currently anticipate that we will retain all
earnings for use in our business operations. The payment of dividends is
prohibited under our credit agreements, unless approved by the lenders.
Item 6. Selected Financial Data
The following sets forth the selected data of the company for the five
years ended December 31, 2000.
Year ended December 31,
(In thousands except share and per share amounts)
1996 1997 1998 1999 2000 (1)
Operating Data:
Revenue $ 8,492 $ 12,385 $ 16,278 $ 19,175 $ 18,329
Cost of sales and services 5,635 7,433 10,578 12,598 13,881
Gross profit 2,857 4,952 5,700 6,577 4,448
Selling, general and
Administrative expenses 2,885 5,101 7,111 6,671 9,970
operating income (loss) (28) (149) (1,411) (94) (5,522)
Interest expense (income) 113 (43) (41) (23) (239)
Income loss from continuing
operations before benefit
for income taxes (141) (106) (1,370) (71) (5,283)
Benefit for income taxes (52) (39) (450) (2) (1,548)
Net loss from
continuing operations (89) (67) (920) (69) (3,735)
Discontinued Operations:
Net income (loss) from
discontinued operations, net
of taxes 1,692 1,911 (178) 362 302
Loss on disposal, net of taxes (1,138) 3,390
Net income (loss) $ 1,603 $ 1,844 $ (1,098) $ (845) $ (43)
Net loss per share:
Basic and diluted:
Net loss from continuing
operations $ (0.02) $ (0.02) $ (0.21) $ (0.02) $ (0.92)
Net income (loss) from
discontinued operations 0.40 0.54 (0.04) 0.09 0.07
Loss on disposal (0.27) 0.84
Net income (loss) per share $ 0.38 $ 0.52 $ (0.25) $ (0.20) $ (0.01)
As of December 31,
(In thousands)
1996 1997 1998 1999 2000
Balance Sheet Data:
Working Capital $ 2,291 $ 12,738 $ 9,800 $ 9,567 $ 10,098
Total Assets 24,720 34,855 51,028 54,531 17,142
Short-term borrowings 9,975 1,572 15,958 15,869 -0-
Long-term debt -0- -0- -0- -0- -0-
Stockholders' equity 4,327 14,637 12,705 11,830 11,912
<FN>
(1) Includes the operations of Internetwork Experts, which was formed in July 2000.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is qualified in its entirety by, and should be
read in conjunction with, our Consolidated Financial Statements, including the
Notes thereto, included elsewhere in this Annual Report on Form 10-K.
Overview
I-Sector Corporation ("I-Sector"), formerly Allstar Systems, Inc., has
historically been engaged in the business of providing its customers with
solutions to their information and communications technology needs. Through
1999, our revenue was historically derived through four primary areas of
business, IT Services, CTI Software, Computer Products and Telecom Systems, each
of which were historically been reported as a separate segment. During the year
ended December 31, 1999 we discontinued our Telecom Systems business and during
the quarter ended March 31, 2000 we discontinued our Computer Products business.
We sold both Telecom Systems and Computer Products businesses in separate
transactions during the first quarter of 2000. After the sale of these two
businesses, in July 2000, we separated what had been the IT Services business
into three separate businesses, each of which is a wholly-owned subsidiary
corporation. One of these subsidiary companies is IT Staffing, Inc. ("IT
Staffing"), which had already been operated as a wholly-owned subsidiary. We
contributed the remaining components of the former IT Services business to two
newly formed wholly-owned corporations, Allstar Computer Services, Inc. ("ACS")
and Synergy Helpdesk Solutions, Inc. ("Synergy"). In July 2000, we formed
another wholly-owned subsidiary, Internetworking Sciences, Inc. ("INX"), a
professional services organization that focuses on the design, deployment and
support of large-scale network infrastructure requirements. In October 2000 INX
acquired certain assets of an unrelated professional service company in the
Dallas area, which had a similar focus, and subsequently underwent a legal name
change to Internetwork Experts, Inc. Our CTI Software business was not affected
by the sale of the Computer Products and Telecom Systems business units, however
we are now referring to this segment by its corporate name, "Stratasoft" rather
than "CTI Software" as we have in the past. We market our services businesses in
Texas from locations in the Houston and Dallas-Fort Worth metropolitan areas.
Stratasoft markets its products worldwide through a direct sales force and an
authorized dealer network. By operating through these highly focused
wholly-owned subsidiaries, we believe that we will offer better customer
service, and improve our financial performance. During the year ended December
31, 2000, ACS, Synergy, INX and IT Staffing produced 13.6%, 24.3%, 10.2% and
6.8% of total revenues, while Stratasoft produced 36.3% of total revenues. Gross
margin varies substantially between each of these business segments. Over the
past three years gross margin in the previously existing, but continuing,
service businesses has ranged between 37.9% and 19.0% and gross margin for
Stratasoft has ranged between 46.4% to 50.8%.
On March 16, 2000 we entered into an agreement whereby we agreed to
sell the ongoing business operations of our Computer Products business, together
with certain key assets of our IT Services business located in El Paso, Texas.
Under the terms of the sale we received for the sale of the operations of the
Computer Products business cash consideration of $14,779, plus the possibility
of receiving a future payment of up to $500 from an escrow account. A gain on
disposal of the Computer Products business, including an estimate of the
operating results from the measurement date, March 16, 2000, to the closing date
of the sale, May 19, 2000, of $914, and estimates for impairment of assets
caused by the disposal decision of $2,820, totaling $3,734 (net of taxes of
$2,607) has been recognized in the year ended December 31, 2000. Our income from
discontinued operations of the Computer Products business was $302 and $1,343
and 132 (net of taxes of $156 and $688 and $68) in 2000, 1999 and 1998,
respectively. We retained accounts receivable related to the Computer Products
business of $20,266, net of reserves, fixed assets of $255 and liabilities
related to the Computer Products business. The accounts receivable collected
were used to repay all remaining liabilities of the Computer Products Division.
Fixed assets were redeployed in the continuing operations. The sale of Computer
Products closed on May 19, 2000, after shareholder and other required consents
were obtained.
On November 2, 1999, we approved a plan to sell or close our Telecom
Systems Division. The sale was finalized on March 16, 2000. Under the terms of
the sale we received for the sale of the inventory and operations of Telecom
Systems $250 cash. Additionally, the purchaser assumed all of our telephone
equipment warranty obligations up to a maximum of $30, which was reached in
October 2000. All future warranty costs incurred by the purchaser will be billed
to us at an agreed upon rate. An estimate of the cost of future telephone
equipment warranty obligations of $95 is included at December 31, 2000 in the
balance sheet caption "Net liabilities related to discontinued operations". A
disposal loss, including an estimate of the operating results from the
measurement date, November 2, 1999 to the closing date of the sale of $580, and
estimates for impairment of assets caused by the disposal decision of $558,
totaling $1,138 (net of an income tax saving of $586) was recognized. Our loss
from discontinued operations (net of income tax savings of $159 and $505) was
$310 and $981 in 1998 and 1999, respectively. We retained accounts receivable of
$1.4 million, net of reserves, fixed assets of $30 and liabilities related to
the Telecom Division. Accounts receivable, net of reserves, is $0 at December
31, 2000. Fixed assets were redeployed in the continuing operations. The
accounts receivable collected were used to repay all remaining liabilities of
the Telecom Division.
A significant portion of our selling, general and administrative
expenses relate to personnel costs, some of which are variable and others of
which are relatively fixed. Our variable personnel costs are substantially
comprised of sales commissions, which are typically calculated based upon our
gross profit on a particular sales transaction and thus generally fluctuate with
our overall gross profit. The remainder of our selling, general and
administrative expenses are relatively more fixed and, while still somewhat
variable, do not vary with increases in revenue as directly as do sales
commissions. We account for wages and related taxes and employee benefits paid
to technical staff as a cost of service provided and therefore such costs are a
component of cost of goods sold, gross profit and gross margin. As a certain
component of total technical staff wages and related costs are of a fixed
nature, gross margin will vary to the extent that revenues fluctuate from period
to period.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data derived from our consolidated statements of operations.
Percentages shown in the table below 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 1999 2000
Amount % Amount % Amount %
(Dollars in thousands)
Revenue
ACS $ 3,958 24.3% $ 3,644 19.0% $ 2,491 13.6%
Synergy 6,933 42.6 7,318 38.2 4,455 24.3
INX 0 0.0 0 0.0 1,874 10.2
IT Staffing 870 5.3 1,191 6.2 1,242 6.8
Stratasoft 3,095 19.0 4,318 22.5 6,660 36.3
Corporate 1,422 8.8 2,704 14.1 1,640 9.0
Eliminations 0 0.0 0 0.0 (33) (0.2)
Total 16,278 100.0 19,175 100.0 18,329 100.0
Gross profit
ACS 802 20.3 1,120 30.7 511 20.5
Synergy 2,625 37.9 2,262 30.9 845 19.0
INX 0 0.0 0 0.0 (43) (2.3)
IT Staffing 370 42.5 399 33.5 329 26.5
Stratasoft 1,492 48.2 2,192 50.8 3,087 46.4
Corporate 411 28.9 604 22.3 (269) (16.4)
Eliminations 0 0.0 0 0.0 (12) 36.4
Total 5,700 35.0 6,577 34.3 4,448 24.3
Selling, general and
administrative expenses
ACS 1,681 42.5 1,086 29.8 1,240 49.8
Synergy 2,504 36.1 2,187 29.9 1,946 43.7
INX 0 0.0 0 0.0 935 49.9
IT Staffing 396 45.5 464 39.0 491 39.5
Stratasoft 1,873 60.5 1,960 45.4 3,647 54.8
Corporate 657 46.2 974 36.0 1,723 105.1
Elimination 0.0 0.0 (12) 36.4
Total 7,111 43.7 6,671 34.8 9,970 54.4
Operating income (loss)
ACS (879) (22.2) 34 0.9 (729) (29.3)
Synergy 121 1.7 75 1.0 (1,101) (24.7)
INX 0 0.0 0 0.0 (978) (52.2)
IT Staffing (26) (3.0) (65) (5.5) (162) (13.0)
Stratasoft (381) (12.3) 232 5.4 (560) (8.4)
Corporate (246) (17.3) (370) (13.7) (1,992) (121.5)
Total (1,411) (8.7) (94) (0.5) (5,522) (30.1)
Interest expense (income) (41) 0.3 (23) 0.1 (239) 1.3
Loss from continuing
operations before provision (1,370) (8.4) (71) (0.4) (5,283) (28.8)
Benefit for income taxes (450) (2.8) (2) (0.0) (1,548) (8.4)
Net loss from continuing
operations (920) (5.7) (69) (0.4) (3,735) (20.4)
Discontinued operations:
Income (loss) from discontinued
operations, net of taxes (178) (1.1) 362 1.9 302 1.6
Gain (loss) on disposal,
net of taxes (1,138) (5.9) 3,390 18.5
Net income $ (1,098) (6.7)% $ (845) (4.4)% $ (43) (0.2)%
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
(Dollars in thousands)
Revenue. Total revenue decreased $846 (4.4%) to $18,329 in 2000 from
$19,175 in 1999.
Total 2000 ACS revenue which comprised 13.6% of total revenues compared
to 19.0% in 1999, decreased $1,153 (31.6%) to $2,491 in 2000 from $3,644 in
1999. The decrease in revenue is attributable to the reorganization of our
former IT Services Division into wholly-owned subsidiaries, each of which have a
particular market focus, and one of which is ACS, together with the loss of
revenue from certain customers and the loss of certain categories of revenue
after the sale of the Computer Products Division.
Total 2000 Synergy revenue which comprised 24.3% of total revenues
compared to 38.2% in 1999, decreased $2,863 (39.1%) to $4,455 in 2000 from
$7,318 in 1999. The decrease in revenue is attributable to the reorganization of
our former IT Services Division into wholly-owned subsidiaries, each of which
have a particular market focus, and one of which is Synergy, together with the
loss of revenue from certain customers and the loss of certain categories of
revenue after the sale of the Computer Products Division.
Total 2000 INX revenue comprised 10.2% of total revenues. INX was newly
formed in July, 2000 to meet the needs of customers in the area of large-scale
network infrastructure requirements. INX exerted intense efforts to introduce
itself to the market in Dallas and Houston and to form customer relationships.
In October, 2000 INX acquired an established service business in Dallas. The
purchase included an established customer list, seven engineers and two sales
staff members.
Total 2000 IT Staffing revenue, which comprised 6.8% of total revenues
compared to 6.2% in 1999, increased $51 (4.3%) to $1,242 in 2000 from $1,191 in
1999. Of the various components of our former IT Services Division, IT Staffing
revenue was least affected by the sale of the Computer Products Division. The
increased revenue is a result of increased selling efforts and new customer
relationships.
Revenue from Stratasoft, which comprised 36.3% of total revenue in
2000, compared to 22.5% in 1999, increased $2,342 (54.2%) to $6,660 in 2000 from
$4,318 in 1999. The increased revenues from Stratasoft were primarily the result
of better recognition of Stratasoft products in the market place, the expansion
of the sales staff and dealer network and to increased advertising and marketing
efforts.
The Corporate segment includes both costs related to the operation of
the corporate entity that are not allocated to any subsidiary company, plus
certain operations that are not on-going because of the sale of the Computer
Products Division (see discussion at Item 1. "Disposition of Computer Products
Business"), and including installation revenues that were related to a certain
customer of our Computer Products Division and revenue from our former El Paso
branch office, which ceased because of the sale of the Computer Products
Division. Corporate revenue, which comprised 9.0% of total revenues in 2000
compared to 14.1% in 1999, decreased by $1,064 (39.3%) in 2000 to $1,640
compared to $2,704 in 1999. The decrease in 2000 was due to $1,078 decrease in
revenues from the El Paso branch office, offset by $76 higher installation
revenues for that certain customer of our Computer Products Division in spite of
the loss of the customer in May, 2000 due to the sale of the Computer Products
Division.
Gross Profit. Gross profit decreased $2,129 (32.4%) to $4,448 in 2000
from $6,577 in 1999, while gross margin decreased to 24.3% in 2000 from 34.3% in
1999.
ACS gross profit decreased by $609 (54.4%) to $511 in 2000 compared to
$1,120 in 1999. Gross margin rates for ACS were 20.5% in 2000 as compared to
30.7% in 1999. ACS's cost of service consists primarily of labor cost. Labor has
a more fixed nature such that higher levels of service revenue produce higher
levels of gross margin while lower levels of service revenue produce lower gross
margin. In periods when service revenue decreases, it becomes more important to
manage labor cost in order to prevent erosion of gross margin. Subsequent to the
separation of the IT Services segment into wholly-owned subsidiary companies in
July 2000, ACS experienced lower labor utilization related to lower revenue. In
addition to the billable technical staff utilization issue, ACS had a single
large project on which gross profit margin was about 12% below normal levels,
which negatively impacted the overall margin.
Synergy gross profit decreased by $1,417 (62.6%) to $845 in 2000
compared to $2,262 in 1999. Gross margin rates decreased to 19.0% in 2000 as
compared to 30.9% in 1999. As with ACS our cost of service is labor intensive.
Labor has a more fixed nature such that higher levels of service revenue produce
higher gross margin while lower levels of service revenue produces less gross
margin. In periods when service revenue decreases, it becomes more important to
manage labor cost in order to prevent erosion of gross margin. As with ACS,
after the restructuring and separation of the IT Service segment in to
wholly-owned subsidiary companies, Synergy experienced lower labor utilization
related to lower revenue.
INX gross loss was $(43) for a gross margin rate of (2.3%). Since INX
was formed in July, 2000, there is no history for comparison. As a newly-formed
start-up operation, INX had to have billable technical staff in place in order
to be able to market their services, but was unable to utilize that technical
staff sufficiently to cover their labor cost.
IT Staffing gross profit decreased by $70 (17.5%) to $329 in 2000
compared to $399 in 1999. Gross margin rates for IT Staffing were 26.5% in 2000
as compared to 33.5% in 1999. The decrease in gross margin percentages was
primarily due to a contract with a major customer which limits the billable
rates for that particular customer, which more than offset a positive impact
related to higher levels of higher margin placement fees for permanent
placements as compared to the year earlier period.
The gross profit for Stratasoft increased by $895 (40.8%) to $3,087 in
2000 from $2,192 in 1999. Gross margin rates for Stratasoft were 46.4% in 2000
as compared to 50.8% in 1999. The decreased gross margin was primarily due to
inventory markdowns along with increased travel costs for technical staff
traveling nationally and internationally for project installations. Gross margin
was also negatively impacted by the mix of sales with a higher proportion of
total systems sales, which include a hardware component, as compared to software
only sales, which do not have a hardware cost of goods component. The lower
gross margin rates were offset by volume increases due primarily to higher
revenues in 2000, thereby producing increased gross profit.
Corporate gross profit decreased by $873 (144.5%) to $(269) in 2000
compared to $604 in 1999 as revenue decreased by 39.3%. Gross margin rates for
the Corporate segment were (16.4%) in 1999 as compared to 22.3% in 1999. The El
Paso service business that was sold on May 19,2000 produced gross profit of $558
in 1999 as compared to a gross loss of $(48) in 2000, a decrease of $606. We
experienced certain costs related to winding up our service operations in the El
Paso branch office that negatively impacted gross profit. Augmenting those
results, the gross margin on installations for the customer that was lost in the
Computer Products Division sale produced a gross loss of $(235) in 2000 as
compared to gross profit of $46 in 1999, a decrease of $281.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3,299 (49.5%) to $9,970 in 2000 from $6,671
in 1999. As a percentage of total revenue, selling, general and administrative
expenses for continuing operations increased to 54.4% in 2000 from 34.8% in
1999.
Of the $3,299 increase, $1,687 was attributable to Stratasoft.
Stratasoft incurred increased sales compensation of $379, accompanied by
increased payroll taxes, employee benefits, and advertising expense, all of
which is consistent with increased revenues of 54.2%. Additionally, Stratasoft's
bad debt expense increased $393, primarily due to more conservative reserve and
write off policies and legal expense increased $551, primarily due to patent
infringement litigation. Adding to the increase from Stratasoft, INX, the new
subsidiary contributed $935 of the increase. Selling, general and administrative
expenses totaling $677 from the Corporate Segment represents the remaining
increase and effective beginning in July 2000 certain of these costs were no
longer allocated out to the operating segments.
Operating Loss. Operating loss increased $5,428 to an operating loss of
$5,522 in 2000 from a loss of $94 in 1999 due primarily to the increase in
selling, general and administrative expenses of $3,299 and the decrease in gross
profit of $2,129 in 2000. The operating loss for the Corporate Segment increased
$1,622 to an operating loss of $1,992 in 2000 compared to an operating loss of
$370 in 1999. ACS's operating loss of $729 in 2000 compares to $34 operating
income in 1999, an increase of $763. Synergy's operating loss of $1,101 in 2000
compares to income of $75 in 1999, a decrease of $1,176. INX experienced an
operating loss of $978 in 2000. For Stratasoft, the operating income of $232 in
1999 decreased $792 to a loss of $560 in 2000.
Interest expense (income)). Interest expense (income) decreased $216
(939.1%) to income of $(239) in 2000 compared to $(23) in 1999. Subsequent to
the sale of the Computer Products Division cash balances were invested in
interest bearing overnight deposits.
Net loss from continuing operations. Net loss from continuing
operations, after an income tax provision totaling $1,548 (reflecting an
effective tax rate of 29.3% for 2000), was $3,735 in 2000 compared to a loss of
$69 in 1999.
Discontinued operations. During 2000 we sold the Computer Products
Division and as a consequence, the operations of the Computer Products Division
are reported as discontinued operations. We experienced net income on the
operations of the Computer Products Division prior to the measurement date,
March 16, 2000, of $302 in 2000, net of tax of $156 and a gain on disposal of
$3,734, net of taxes of $2,607. The loss on disposal of the Telecom Division of
$1,138 (net of taxes of $586) was recognized at December 31, 1999. During the
year ended December 31, 2000 additional expenses related to the disposal of the
Telecom Division was recognized of $344 (net of taxes of $240). The income from
discontinued operations in 1999 was $362, net of taxes of $183.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
(Dollars in thousands)
Revenue. Total revenue increased $2,897 (17.8%) to $19,175 in 1999 from
$16,278 in 1998.
Total 1999 ACS revenue which comprised 19.0% of total revenues compared
to 24.3% in 1998, decreased $314 (7.9%) to $3,644 in 1999 from $3,958 in 1998.
The decrease in revenue is attributable to decreased sales to existing
customers.
Total 1999 Synergy revenue which comprised 38.2% of total revenues
compared to 42.6% in 1998, increased $385 (5.6%) to $7,318 in 1999 from $6,933
in 1998. The increase in revenue is attributable to increased sales to existing
customers and to new customers.
Total 1999 IT Staffing revenue which comprised 6.2% of total revenues
compared to 5.3% in 1998, increased $321 (36.9%) to $1,191 in 1999 from $870 in
1998. The increase in revenue is attributable to increased sales to existing
customers and to new customers.
Revenue from Stratasoft, which comprised 22.5% of total revenue in
1999, compared to 19.0% in 1998, increased $1,223 (39.5%) to $4,318 in 1999 from
$3,095 in 1998. The increased revenues from Stratasoft were primarily the result
of sales to new customers and the expansion of geographic market.
The Corporate segment includes both costs related to the operation of
the corporate entity that are not allocated to any subsidiary company, plus
certain operations which are not on-going because of the sale of the Computer
Products Division, see discussion at Item 1, "Disposition of Computer Products
Business" and including installation revenues that were related to a certain
customer of our Computer Products Division and revenue from our former El Paso
branch office, both of which are included in the Corporate segment because both
ceased in 2000 due to the sale of the Computer Products Division. Corporate
revenue, which comprised 14.1% of total revenues in 1999 compared to 8.8% in
1998, increased by $1,282 (90.2%) in 1999 to $2,704 compared to $1,422 in 1998.
The increase in 1999 was due to an increase of $421 of installation revenues for
that certain customer of our Computer Products Division and to an $861 increase
in revenues from the El Paso branch office.
Gross Profit. Gross profit increased $877 (15.4%) to $6,577 in 1999
from $5,700 in 1998, while gross margin decreased to 34.3% in 1999 from 35.0% in
1998.
ACS gross profit increased by $318 (39.7%) to $1,120 in 1999 compared
to $802 in 1998. Gross margin rates for ACS were 30.7% in 1999 as compared to
20.3% in 1998. Our cost of service is labor intensive. The increase in gross
profit is attributable to the increased gross margin rates resulting from better
management of the labor pool.
Synergy gross profit decreased by $363 (13.8%) to $2,262 in 1999
compared to $2,625 in 1998. Gross margin rates for IT Services were 30.9% in
1999 as compared to 37.9% in 1998. As with ACS, our cost of service is labor
intensive. It is very important to manage labor cost in order to prevent erosion
of gross margin. One of our major customers required us to have certain
technicians assigned to them although they were not fully utilized, thereby
eroding our gross margins.
IT Staffing gross profit increased by $29 (7.8%) to $399 in 1999
compared to $370 in 1998. Gross margin rates for IT Staffing were 33.5% in 1999
as compared to 42.5% in 1998. The increase in gross profit is commensurate with
the increase in revenues as discussed above.
The gross profit for Stratasoft increased by $700 (46.9%) to $2,192 in
1999 from $1,492 in 1998. Gross margin rates for Stratasoft were 50.8% in 1999
as compared to 48.2% in 1998. This increase was due primarily to higher revenues
coupled with lower system installation costs, relative to revenue, reflecting
improved productivity and efficiency due to improved software installation and
customization tools introduced in 1998.
Corporate gross profit increased by $193 (47.0%) to $604 in 1999
compared to $411 in 1998. Gross margin rates for the Corporate segment were
22.3% in 1999 as compared to 28.9% in 1999. The El Paso service business, which
is included in the Corporate segment because it was sold in 2000 along with the
Computer Products Division, which was acquired during 1998 and did not reflect a
full year of operations, increased its gross profit contribution by $418 to $558
in 1999 as compared to $140 in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $440 (6.2%) to $6,671 in 1999 from $7,111 in
1998. As a percentage of total revenue, selling, general and administrative
expenses for continuing operations decreased to 34.8% in 1999 from 43.7% in
1998. The dollar decrease is primarily attributable to the closing of some
branch offices opened in 1998 and the reduction of sales compensation $150
resulting from using the sales force of the Computer Products Division to sell
for ACS and Synergy. Administrative salaries were reduced $349 and office
expenses were reduced $76 by the closing of those branch offices. Stratasoft's
sales compensation increased $106 and administrative salaries increased $25,
which was commensurate with their increased sales volume
Operating loss. The operating loss decreased $1,317 to an operating
loss of $94 in 1999 from a loss of $1,411 in 1998 due primarily to the increase
in sales volume of $2,897, which produced an increase in gross profit of $877.
The operating loss for ACS decreased $913 to operating income of $34 in 1999
compared to an operating loss of $879 in 1998. For Stratasoft, the operating
loss decreased $613 to income of $232 in 1999 from an operating loss of $381 in
1998. Synergy's operating income decreased $46 to $75 in 1999 from $121 in 1998.
IT Staffing's operating loss increased $39 to $65 in 1999 from $26 in 1998. The
operating loss of the Corporate segment increased $124 to $370 in 1999 from $246
in 1998.
Interest Expense (Income). Interest expense (income) increased $18
(43.9%) to income of $(23) in 1999 compared to income of $(41) in 1998.
Net loss from continuing operations. Net loss from continuing
operations, after an income tax provision totaling $2 (reflecting an effective
tax rate of 2.8% for 1999 compared to 32.8% for 1998), decreased $851 (92.5%) to
a loss of $69 in 1999 compared to a loss of $920 in 1998.
Discontinued operations. We sold the Telecom Division in 1999 and the
Computer Products Division in 2000. As a consequence, the operations of both of
these businesses are reported as discontinued operations for all periods
presented. We experienced net income on the operations of the Computer Products
Division of $1,343 in 1999, net of a tax benefit of $688 and a loss from
operations of Telecom of $981, net of a tax benefit of $505. The loss on
disposal of the Telecom Division of $1,138 (net of taxes of $586) was recognized
at December 31, 1999. The loss from discontinued operations in 1998 was $178,
net of taxes of $92.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of our last eight quarters and, in the opinion of
management, includes all adjustments (consisting of only normal recurring
adjustments) which the company considers necessary for a fair presentation of
the information set forth therein. Our quarterly results may vary significantly
depending on factors such as the timing of large customer orders, timing of new
product introductions, adequacy of product supply, variations in our product
costs, variations in our product mix, promotions, seasonal influences and
competitive pricing pressures. Furthermore, we generally have experienced a
higher volume of product orders in our computer products business segment in the
fourth quarter, which we attribute to year-end capital spending by some of our
customers. Any decrease in the number of year-end orders we experience may not
be offset by increased revenues in our first three quarters. The results of any
particular quarter may not be indicative of results for the full year or any
future period.
1999 2000
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Revenue
ACS $ 903 $ 912 $ 926 $ 903 $ 727 $ 656 $ 571 $ 537
Synergy 1,963 2,034 1,838 1,483 1,562 1,323 841 729
INX 0 0 0 0 0 0 700 1,174
IT Staffing 255 252 269 415 321 315 334 272
Stratasoft 770 825 1,329 1,394 2,473 1,172 1,779 1,236
Corporate 427 493 558 1,226 901 762 (41) 18
Elimination 0 0 0 0 0 0 (11) (22)
Total 4,318 4,516 4,920 5,421 5,984 4,228 4,173 3,944
Cost of sales and services
ACS 647 623 586 668 510 531 511 428
Synergy 1,407 1,391 1,163 1,095 1,094 1,070 735 711
INX 0 0 0 0 0 0 735 1,182
IT Staffing 183 126 189 294 241 231 250 191
Stratasoft 331 413 623 759 1,151 674 1,015 733
Corporate 294 339 477 990 603 988 79 239
Elimination 0 0 0 0 0 0 (-11) (10)
Total 2,862 2,892 3,038 3,806 3,599 3,494 3,314 3,474
Gross Profit
ACS 256 289 340 235 217 125 60 109
Synergy 556 643 675 388 468 253 106 18
INX 0 0 0 0 0 0 (35) (8)
IT Staffing 72 126 80 121 80 84 84 81
Stratasoft 439 412 706 635 322 498 764 503
Corporate 133 154 81 236 298 (226) (120) (221)
Elimination (12)
Total 1,456 1,624 1,882 1,615 2,385 734 859 470
Selling, general and
administrative expenses
ACS 268 284 276 258 255 279 330 376
Synergy 582 633 548 424 550 562 360 474
INX 0 0 0 0 0 0 327 608
IT Staffing 147 105 113 99 104 70 138 179
Stratasoft 497 448 524 491 1,061 747 1,139 700
Corporate 139 205 264 366 339 293 988 103
Elimination (12)
Total 1,633 1,675 1,725 1,638 2,309 1,951 3,282 2,428
Operating income (loss)
ACS (12) 5 64 (23) (38) (154) (270) (267)
Synergy (26) 10 127 (36) (82) (309) (254) (456)
INX 0 0 0 0 0 0 (362) (616)
IT Staffing (75) 21 (33) 22 (24) 14 (54) (98)
Stratasoft (58) (36) 182 144 261 (249) (375) (197)
Corporate (6) (51) (183) (130) (41) (519) (1,108) (324)
Total (177) (51) 157 (23) 76 (1,217) (2,423) (1,958)
Interest expense (net of
other income) 17 8 (19) (29) 15 (50) (100) (104)
Income (loss) before
provision (benefit) for
income taxes (194) (59) 176 6 61 (1,167) (2,323) (1,854)
Provision (benefit) for
income taxes (58) (6) 60 2 19 (386) (708) (473)
Net income (loss) from
continuing operations (136) (53) 116 4 42 (781) (1,615) (1,381)
Discontinued operations:
Net income (loss) from
discontinued operations,
net of tax 82 (317) 216 381 302 0
Gain (loss) on disposal (1,138) 4,872 (387) (1,095)
Net income (loss) $ (54) $ (370)$ 332 $ (753) $ 5,216 $ (1,168)$(2,710) $(1,381)
Net Income (loss) per share:
Basic:
Continuing operations $ (0.03) $ (0.01)$ 0.03 $ (0.00) $ 0.01 $ (0.20)$ (0.40) $(0.34)
Discontinued operations 0.02 (0.08) 0.05 0.09 0.08
Loss on Disposal (0.27) 1.20 (0.09) (0.27)
Net income (loss) per share $ (0.01) $ (0.09)$ 0.08 $ (0.18) $ 1.29 $ (0.29)$ (0.67) $(0.34)
Diluted:
Continuing operations $ (0.03) $ (0.01)$ 0.03 $ $ 0.01 $ (0.20)$ (0.40) $(0.34)
Discontinued operations 0.02 (0.08) 0.05 0.09 0.07
Loss on Disposal (0.27) 1.14 (0.09) (0.27)
Net income (loss) per share $ (0.01) $ (0.09)$ 0.08 $ (0.18) $ 1.22 $ (0.29)$ (0.67) $(0.34)
Liquidity and Capital Resources
Historically, we have satisfied our cash requirements principally
through borrowings under our lines of credit and through operations. We
maintained a cash position sufficient to pay only our immediately due
obligations and expenses. Subsequent to the sale of the Computer Products
Division we had sufficient cash on hand to meet our requirements and have not
had to rely on our line of credit. We have invested our excess cash in interest
bearing overnight deposits. Our working capital was $9,800, $9,567 and $10,098
at December 31, 1998, 1999 and 2000, respectively. The increase in working
capital during 2000 is primarily due to the collection of receivables related to
the discontinued operations of the Computer Products and the Telecom businesses.
The decreases in working capital during 1999 and 1998 were primarily
attributable to increases in our accounts payable as a result of product costs
attributable to our revenue growth, primarily in the discontinued Computer
Products business. The proceeds of the sale of the Computer Products business
were used to pay off our line of credit and at December 31, 2000 we had no
outstanding interest bearing borrowings. Our total collateral base was $2,340 at
December 31, 2000. At December 31, 2000, we had a $10,000 credit facility with
our primary lender.
Cash Flows
Operating activities provided net cash totaling $5,540 and $2,612
during 2000 and 1999, respectively, and used net cash totaling $10,831 during
1998. During 2000, net cash provided by operations resulted from decreases in
accounts receivable which were offset by reductions in accounts payable and
accrued expenses. During 1999, net cash provided by operations resulted from
increases in accounts payable which offset our increase in accounts receivable.
During 1998, net cash was used by operations due primarily to a net loss, a
large increase in accounts receivable and an increase in inventory, which was
offset somewhat by an increase in accounts payable and accrued expenses.
Accounts receivable increased $10,543 and $1,488 during 1998 and 1999,
respectively and decreased $30,763 during 2000. Inventory decreased $603 and
$160 in 1999 and 2000, respectively, and increased $3,797 in 1998.
Investing activities used cash totaling $1,764 and $276 during 1998 and
1999, respectively and provided cash of $14,048 during 2000. Our investing
activities that used cash during these periods were primarily related to capital
expenditures related to new offices, an expanded work force and upgrading of
computing equipment and our management information systems. In 2000, investing
activities primarily related to the proceeds from the sale of the Computer
Products business. During the next twelve months, we do not expect to incur
material capital expenditures.
Financing activities provided cash totaling $13,552 in 1998 and used
cash totaling $227 and $15,889 during 1999 and 2000, respectively. The primary
source of cash from financing activities in 1998 and 1999 has been borrowings on
our lines of credit. The lines of credit have been used principally to satisfy
our cash requirements, including financing increases in accounts receivable and
inventory. During 2000 we used the proceeds of the sale of the Computer Products
business to pay off our line of credit. During 1998,1999, and 2000 we used $834,
$138 and $20, respectively to repurchase shares that were held in treasury at
the end of 2000.
Asset Management
Our cash flow from operations has been affected primarily by the timing
of our collection of accounts receivable. We have typically sold our products
and services on short-term credit terms and seek to minimize our credit risk by
performing credit checks and conducting our own collection efforts. We had
accounts receivable, net of allowance for doubtful accounts of $38,341 and
$4,473 (including $34,444 and $775 relating to discontinued operations) at
December 31, 1999 and 2000, respectively
We attempt to manage our inventory in order to minimize the amount of
inventory held for resale and the risk of inventory obsolescence and decreases
in market value. We attempt to maintain a level of inventory required to reach
only our near term requirements by relying on the ready availability of products
from our principal suppliers.
Credit Facilities
On February 27, 1998 we entered into a credit agreement with Deutsche
Financial Services ("DFS") for a revolving line of credit (the "DFS Facility")
which is our principal source of liquidity. On May 19, 2000, the day of the
closing on the sale of the Computer Products Division, the credit facility was
amended to decrease the total credit available under the facility from $30,000
to $3,000 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 this facility for floor plan financing of
inventory from approved manufacturers (the "Inventory Line") is $3,000.
Borrowings under the Inventory Line accrue interest at the prime rate plus 5% on
outstanding balances over 40 days. Inventory Line borrowings are reflected in
accounts payable on the accompanying balance sheets. For purposes of calculating
interest charges the minimum prime rate under the DFS Facility is 7.0%. At
December 31, 2000, we had $4 outstanding on the Inventory Line and had total
credit availability of $1,311.
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 us, subject to a termination fee, is
collaterized by substantially all of our assets. The agreement contains
restrictive covenants which, among other things, require us to maintain a
minimum tangible net worth. The terms of the agreement also prohibit the payment
of dividends and limit the purchase of our common stock, and other similar
expenditures, including advances to related parties.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133, as amended was adopted on January 1, 2000. The
Company has no derivative instruments as defined by SFAS No. 133 and as a result
the adoption of SFAS No. 133 had no impact on the consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We incur certain market risks related to interest rate variations
because we hold floating rate debt. Based upon the average amount of debt
outstanding during 2000, a one-percent increase in interest rates paid by us on
our debt would have resulted in an increase in interest expense of approximately
$42 for the year.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Independent Auditors' Report 24
Consolidated Balance Sheets at December 31, 1999 and 2000 25
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 26
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1999 and 2000 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 28
Notes to Consolidated Financial Statements for the years
ended December 31, 1998, 1999 and 2000 29
INDEPENDENT AUDITORS' REPORT
To the Stockholders of I-Sector Corporation.:
We have audited the accompanying consolidated balance sheets of
I-Sector Corporation and subsidiaries ("I-Sector") as of December 31, 1999 and
2000, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the index at
Item 14(a)(2). These financial statements and the financial statement schedule
are the responsibility of I-Sector's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 I-Sector as of December 31,
1999 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Houston, Texas
March 16, 2001
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 2000
(In thousands, except share and par value amounts)
ASSETS 1999 2000
Current Assets:
Cash and cash equivalents $ 4,647 $ 8,346
Accounts receivable, net 38,341 4,473
Accounts receivable - affiliates 281 303
Accounts receivable - other 142 141
Inventory 7,442 774
Deferred taxes 836
Income taxes receivable 863
Other current assets 384 233
Total current assets 52,073 15,133
Property and equipment, net 2,280 1,579
Other assets 178 430
$ 54,531 $ 17,142
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 15,869 $
Accounts payable 21,687 1,892
Billings in excess of cost and estimated earnings 615 503
Accrued expenses 3,896 1,635
Net liabilities related to discontinued operations 199 869
Deferred service revenue 240 136
Total current liabilities 42,506 5,035
Deferred credit - stock warrants 195 195
Commitments and Contingencies (See Note 11)
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued
Common stock, $.01 par value, 15,000,000 shares authorized,
4,442,325 issued at December 31,
1999 and 2000, respectively 44 44
Additional paid in capital 10,037 10,182
Unearned equity compensation (1) (1)
Treasury stock, at cost, 381,800 and 399,800 shares at
December 31, 1999 and 2000, respectively (972) (992)
Retained earnings 2,722 2,679
Total stockholders' equity 11,830 11,912
$ 54,531 $ 17,142
See notes to consolidated financial statements.
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(In thousands, except share and per share amounts)
Years ended December 31,
1998 1999 2000
Total revenue $ 16,278 $ 19,175 $ 18,329
Cost of goods and services 10,578 12,598 13,881
Gross profit 5,700 6,577 4,448
Selling, general and administrative expenses 7,111 6,671 9,970
Operating loss 1,411 94 5,522
Interest expense (income) (41) (23) (239)
Loss from continuing operations before
benefit for income taxes 1,370 71 5,283
Benefit for income taxes 450 2 1,548
Net loss from continuing operations 920 69 3,735
Discontinued operations:
Net income (loss) from discontinued
operations, net of taxes (178) 362 302
Gain (loss) on disposal, net of taxes (1,138) 3,390
Net loss $ 1,098 $ 845 $ 43
Net income (loss) per share:
Basic and diluted:
Net loss from continuing operations $ 0.21 $ 0.02 $ 0.92
Net (income) loss from discontinued operations 0.04 (0.09) (0.07)
Gain (loss) on disposal 0.27 (0.84)
Net loss per share $ 0.25 $ 0.20 $ 0.01
Weighted average number of shares outstanding:
Basic and diluted 4,345,883 4,168,140 4,059,618
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(In thousands, except share and per share amounts)
$.01 par value Additional Unearned
Common Stock Paid-In Treasury Equity Retained
Shares Amount Capital Stock Compensation Earnings Total
Balance at January 1, 1998 4,454,411 $ 45 $ 10,013 $ (86) $ 4,665 $ 14,637
Issuance of restricted stock 63,500 237 $ (237)
Cancellation of restricted stock (14,500) (54) 54
Purchase of treasury stock (271,200) $ (834) (834)
Net loss (1,098) (1,098)
Balance at December 31, 1998 4,232,211 45 10,196 (834) (269) 3,567 12,705
Cancellation of restricted stock (61,086) (1) (159) 268 108
Purchase of treasury stock (110,600) $ (138) (138)
Net loss (845) (845)
Balance at December 31, 1999 4,060,525 44 10,037 (972) (1) 2,722 11,830
Purchase of treasury stock (18,000) (20) (20)
Fair value of stock options to
Non-employees 145 145
Net loss (43) (43)
Balance at December 31, 2000 4,042,525 $ 44 $ 10,182 $ (992) $ (1) $ 2,679 $ 11,912
See notes to consolidated financial statements.
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(In thousands, except share and per share amounts)
Years ended December 31,
1998 1999 2000
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (1,098) $ (845) $ (43)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Net (income) loss from discontinued operations 178 (362) (302)
(Gain) loss on disposal of discontinued operations 1,138 (3,390)
Depreciation and amortization 882 850 766
Deferred tax benefit (219)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable, net (10,543) (1,488) 30,763
Accounts receivable - affiliates 61 (50) (22)
Inventory (3,797) 603 160
Income taxes receivable (637) 637 (863)
Other current assets (241) 175 (152)
Other assets (117) (30) 140
Accounts payable 2,079 5,046 (19,795)
Billings in excess of cost and estimated earnings 1,166 (952) (112)
Accrued expenses 1,708 (1,377) (2,261)
Income taxes payable (82)
Deferred service revenue 14 (16) (104)
Net cash provided by (used in) continuing operations (10,646) 3,329 4,785
Net operating activities from discontinued operations (185) (717) 755
Net cash provided by (used in) operating activities (10,831) 2,612 5,540
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (324)
Acquisition costs (341)
Proceeds on sale of discontinued operations 15,029
Net cash provided by continuing operations 14,364
Net cash used in discontinued operations (1,764) (276) (316)
Net cash provided by (used in) investing activities (1,764) (276) 14,048
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (834) (138) (20)
Net increase (decrease) in notes payable 14,386 (89) (15,869)
Net cash provided by (used in) financing activities 13,552 (227) (15,889)
NET INCREASE CASH AND CASH EQUIVALENTS 957 2,109 3,699
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,581 2,538 4,647
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,538 $ 4,647 $ 8,346
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 403 $ 989 $ 386
Cash paid for income taxes $ 397 $ 0 $ 1,009
See notes to consolidated financial statements.
I-SECTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(In thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
I-Sector Corporation and subsidiaries ("I-Sector") is engaged in the
business of providing computer services and of selling associated hardware and
telephony software products in the United States. I-Sector operates from five
wholly-owned subsidiaries:
Allstar Computer Services, Inc. ("ACS") provides customers with on-site
and carry-in computer repair, application support and operating system
and network migration services.
Internetwork Experts, Inc. ("INX") is a professional services
organization that focuses on the design, deployment and support of
large-scale networking infrastructure requirements that are Cisco
centric. INX's areas of practice include network design,
implementation, turnkey support, security audits and firewall design,
network infrastructure management and network infrastructure consulting
services.
IT Staffing, Inc. ("IT Staffing") provides temporary and permanent
placement services of IT professional personnel.
Stratasoft, Inc. ("Stratasoft") creates and markets software related to
the integration of computer and telephone technologies.
Synergy Helpdesk Solutions, Inc. ("Synergy") provides customers with
turn-key outsourced IT helpdesk solutions, technical staff augmentation
for IT helpdesk operations and helpdesk solutions consulting services.
A substantial portion of I-Sector's sales and services are authorized
under arrangements with product manufacturers. I-Sector's operations are
dependent upon maintaining its approved status with such manufacturers. Should
I-Sector's approved status lapse, revenues and gross profit could be adversely
affected.
I-Sector's significant accounting policies are as follows:
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of I-Sector and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Inventory - Inventory consists primarily of dialers, 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 $833, $790 and $699 for the years ended December
31, 1998, 1999 and 2000, respectively.
Intangible Assets - Intangible assets are being amortized over their
estimated useful lives of five years (see Note 5).
Impairment of Long-Lived Assets - I-Sector 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.
Income Taxes - I-Sector accounts for income taxes under the liability
method, which requires, among other things, recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in I-Sector's consolidated financial statements or tax
returns. Under this method, deferred income tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and the
recognition of available tax carryforwards.
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 (See Note 13).
Revenue Recognition - Revenue from the sale of products is recognized
when the product is shipped. Service income is recognized as the services are
earned. 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.
The following reflects the amounts relating to uncompleted contracts at
December 31, 1999 and 2000:
Costs incurred on uncompleted contracts $ 441 $ 135
Estimated earnings 473 361
914 496
Less: Billings to date 1,529 999
Billings in excess of cost and
estimated earnings $ 615 $ 503
Credit Risk - The Company extends credit to its customers in the normal
course of business and generally does not require collateral or other security.
The Company performs ongoing credit evaluations of its customers' financial
condition and historically has not incurred significant credit losses. Earnings
are charged with a provision for doubtful accounts based on a current review of
the collectibility of the accounts. Accounts deemed uncollectible are applied
against the allowance for doubtful accounts.
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 approximately $200 in the years ended December 31, 1998,
1999 and 2000, respectively.
Employee Stock Based Compensation - I-Sector recognizes compensation
expense for stock options and other stock based non-employee compensation awards
based on the fair value of the equity instrument at the measurement date. Awards
of stock options and other stock based employee incentive plans measure the cost
of the equity instrument using the intrinsic value method (See Note 12).
Comprehensive Income - I-Sector had no comprehensive income items to
report for all periods presented.
Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133, as amended, was adopted by I-Sector on January 1, 2001. I-Sector had no
derivative instruments as defined by SFAS No. 133, and as a result, on the date
of the adoption this standard had no impact on the financial position, results
of operations or cash flows of I-Sector.
Fair Value of Financial Instruments - I-Sector'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 securities with an original maturity of three months or less when
purchased.
Use of Estimates - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America 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.
Reclassifications - The accompanying consolidated financial statements
for the years presented have been reclassified to give effect to certain changes
in presentation.
2. DISCONTINUED OPERATIONS
On November 2, 1999, I-Sector approved a plan to sell or close its
Telecom Division. This is the measurement date. I-Sector entertained offers to
acquire a significant portion of the assets of the Telecom Division and to
assume any ongoing operations of the division. A sale was finalized on March 16,
2000. Under the terms of the sale I-Sector received $250 cash. Additionally, the
purchaser assumed all telephone equipment warranty obligations of I-Sector up to
a maximum of $30, all of which was consumed by October, 2000. Future warranty
costs incurred by the purchaser will be billed to I-Sector at an agreed upon
rate. An estimate of future warranty costs of $95 is included at December 31,
2000 in the balance sheet caption "Net liabilities related to discontinued
operations". A disposal loss, including an estimate of the operating results
from the measurement date, November 2, 1999 to the closing date of the sale of
$580, and estimates for impairment of assets caused by the disposal decision of
$558, totaling $1,138 (net of income tax savings of $586), was recognized in
1999. The disposal loss includes an operating loss of $284 (net of income tax
savings of $146) from the measurement date to December 31, 1999. I-Sector
recognized additional losses of $344 (net of taxes of $240) in the year 2000.
Pretax loss from discontinued operations (net of tax savings of $159, $505 and
$0) was $310, $981, and $0 in 1998, 1999 and 2000 respectively. I-Sector
retained accounts receivable of approximately $1,400, net of reserves, fixed
assets of $30 and liabilities related to the Telecom Division, but has no net
retained receivables at December 31, 2000. Fixed assets were redeployed in the
continuing operations. The balance sheet caption "Net liabilities related to
discontinued operations" contains $294 of estimated future expenses relating to
the wind-up of the Telecom Division at December 31, 2000. Revenue for the
Telecom Division for the years ended December 31, 1998, 1999 and 2000 was
$7,499, $3,975 and $0, respectively. The Company allocated interest expense to
its various divisions on a proportional basis based on accounts receivable.
Interest expense allocated to the Telecom Division for the year ended December
31, 1998 and for the period from January 1, 1999 to November 2, 1999 was $32 and
$69, respectively. The Company has allocated interest expense from November 2,
1999 to the disposal date of March 16, 2000 of $20 both of which were included
in the loss on disposal in 1999.
On March 16, 2000, I-Sector entered into an agreement to sell certain
assets of and the ongoing operations of its Computer Products Division. The sale
transaction closed on May 19, 2000 after shareholder and other required consents
were obtained. Under the terms of the sale, I-Sector received $14,529 plus $250
as reimbursement of certain selling costs. Proceeds of the sale were used to
retire debt under our existing credit facility. Pretax income from the
discontinued operations of the Computer Products Division (net of taxes of $156)
was $302 for the period from January 1 to March 16, 2000, the measurement date,
$1,343 and $132 (net of taxes of $688 and $68) for the years ended December 31,
1999 and 1998, respectively. A gain on disposal of $3,734 (net of taxes of
$2,607), which includes operating results from the measurement date, March 16,
2000 to the closing date of the sale, as well as a loss on equipment sold of
$352 (net of taxes of $144) and estimates for the impairment of assets caused by
the disposal decision of $2,820 (net of taxes of $1,156) have been recognized in
the year ended December 31, 2000. I-Sector retained accounts receivable of
$20,266, net of reserves, and has retained receivables related to the Computer
Products Division of $775 at December 31, 2000, fixed assets of $255 and
liabilities related to the Computer Products Division. Fixed assets which were
not sold have been redeployed in the continuing operations. The balance sheet
caption "Net Liabilities related to discontinued operations" contains $575 of
estimated future expenses related to the winding up of the Computer Products
Division, and include amounts related to the collection of accounts receivable
and settlement of pending litigation and to settlements with employees
terminated as a result of the sale. Revenue for the Computer Products Division
for the years ended December 31, 1998, 1999 and 2000 were $143,396, $182,642 and
$29,323 (net of $5,772 after the measurement date and included in the gain on
sale), respectively. The Company allocates interest expense to its various
divisions on a proportional basis based on accounts receivable. Interest expense
allocated to the Computer Products Division for the years ended December 31,
1998, 1999 and 2000 for the period from April 1, 2000 to May 19, 2000 was $360,
$671 and $62. In connection with the sale of the Computer Products Division,
I-Sector also sold the El Paso portion of the IT Services business. The El Paso
branch office portion of the IT Services business accounted for revenues of
$935, $2,012 and $955 for the years ended December 31, 1998, 1999, and 2000,
respectively. For financial reporting presentation the El Paso services business
was included in the continuing operations for the year ended December 31, 2000.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1999 and
2000:
1999 2000
Accounts receivable $ 4,125 $ 4,438
Accounts receivable retained
- discontinued operations 34,444 775
Allowances for doubtful accounts (228) (740)
Total $ 38,341 $ 4,473
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1999
and 2000:
1999 2000
Equipment $ 512 $ 459
Computer equipment 4,067 2,787
Furniture and fixtures 507 439
Leasehold improvements 203 383
Vehicles 27 27
5,316 4,095
Accumulated depreciation and
amortization (3,036) (2,516)
Total $ 2,280 $ 1,579
5. ACQUISITION
On October 27, 2000, INX acquired certain assets and liabilities of
Internetwork Experts, Inc., a professional services firm focused on the
architecture, design, implementation and support of high-end network
infrastructure. The purchase price was $225 in cash and assumed liabilities of
$116. The acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the assets and
liabilities acquired based on fair values at the date of acquisition. The excess
of the purchase price over the fair market value of the net assets acquired was
approximately $341, which has been allocated to a customer list and service
agreements. These intangible assets are being amortized over their estimated
useful lives of five years. Amortization expense and accumulated amortization
was $16 for the year ended December 31, 2000. INX also is contingently liable
for future payments to the former owner based on the level of service revenues
generated within a specified period of time and within certain ranges for the
customers included on the customer list acquired.
6. CREDIT ARRANGEMENTS
On February 27, 1998 I-Sector entered into a credit agreement with a
commercial finance company. On May 19, 2000, the day of the closing on the sale
of the Computer Products Division, the credit facility was amended to decrease
the total credit available under the facility from $30,000 to $3,000 subject to
borrowing base limitations that are generally computed as a percentage of
qualifying inventory. Credit available under this facility for floor plan
financing of inventory from approved manufacturers (the "Inventory line") is
$3,000. Borrowings under the Inventory line accrue interest at the prime rate
plus 5% on outstanding balances over 40 days. Inventory line borrowings are
reflected in Accounts payable on the accompanying balance sheets. For purposes
of calculating interest charges the minimum prime rate under the amended
facility is 7.0%. At December 31, 2000, I-Sector had $4 outstanding on the
Inventory Line and had total credit availability of $1,311.
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 I-Sector, subject to a termination fee, is
collateralized by substantially all of I-Sector'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
I-Sector to maintain a minimum tangible net worth. The terms of the agreement
also prohibit the payment of dividends and limits the purchase of I-Sector
common stock, and other similar expenditures, including advances to related
parties.
The weighted-average interest rate for borrowings under all credit
arrangements in effect during 1998, 1999 and 2000 was 7.53%, 7.13%, and 7.93%
respectively. Interest expense was $441, $969 and $385 for the years ended
December 31, 1998, 1999 and 2000 respectively.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998,
1999 and 2000 consisted of the following:
1998 1999 2000
Current provision (benefit):
Federal $ (234) $ (2) $ (1,548)
State 3
Total current provision (231) (2) (1,548)
Deferred provision (benefit) (219)
Total provision (benefit) from continuing operations (450) (2) (1,548)
Total provision for (benefit from)
discontinued operations (91) 183 156
Total provision for (benefit from) gain (loss)
on disposal (586) 2,367
Total $ (541) $ (405) $ 975
The total provision for income taxes during the years ended December
31, 1998, 1999 and 2000 varied from the U.S. federal statutory rate due to the
following:
1998 1999 2000
Federal income tax at statutory rate $ (466) $ (24) $(1,796)
Nondeductible expenses 26 22 17
State income taxes 3
Valuation allowance 231
Other (13)
Total provision (benefit) from
continuing operations$ (450) $ (2) $(1,548)
Net deferred tax assets computed at the statutory rate related to
temporary differences at December 31, 1999 and December 31, 2000 were as
follows:
1999 2000
Net deferred tax assets:
Accounts receivable $ 172 $ 251
Closing and severance costs 76 391
Deferred service revenue (41) 30
Inventory 43 134
Amortization of intangibles (23)
Net operating loss carryforwards 586
Total current deferred tax assets 836 783
Less Valuation allowance (783)
Total $ 836 $ 0
Due to the company's recurring losses, a valuation allowance was
established for the deferred tax assets at December 31, 2000.
At December 31, 2000, I-Sector had no net operating loss carry
forwards.
8. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1999
and 2000:
1999 2000
Sales tax payable $1,530 $ 121
Accrued employee benefits, payroll
and other related costs 1,506 860
Accrued interest 1
Accrued supplier fee 404
Accrued warranty costs 182 238
Other 273 416
Total $3,896 $ 1,635
9. RELATED-PARTY TRANSACTIONS
I-Sector has from time to time made payments on behalf of Allstar
Equities, Inc. ("Equities"), which is wholly-owned by the principal stockholder
of I-Sector, and I-Sector's principal stockholder for taxes, property and
equipment. On December 1, 1999, a note receivable was signed by Equities for
$336 in 60 monthly payments of $7. The note bears interest at 9%. Equities made
twelve payments in advance and at December 31, 2000 the Company's receivables
from Equities amounted to $204. The principal amounts as of December 31, 1999
and December 31, 2000 are classified as Accounts receivable - affiliates based
on the expectation of repayment within one year. At December 31, 1999 and
December 31, 2000, I-Sector's receivables from these affiliates amounted to
approximately $281 and $303, respectively.
(See Note 11 related to lease commitments to equities.)
In connection with the sale of the Computer Products Division, a member
of I-Sector's Board of Directors received a finders fee of $350.
10. SHAREHOLDERS' EQUITY
Holders of I-Sector's common stock are entitled to one vote per share
on all matters to be voted on by shareholders and are entitled to receive
dividends, if any, as may be declared from time to time by the Board of
Directors of I-Sector ("the Board"). Upon any liquidation or dissolution of
I-Sector, the holders of common stock are entitled, subject to any preferential
rights of the holders of preferred stock, to receive a pro rata share of all of
the assets remaining available for distribution to shareholders after payment of
all liabilities.
I-Sector's Board authorized the purchase of common stock of I-Sector
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 I-Sector's stock
option plans. At December 31, 2000, 399,800 shares were held in treasury under
these authorizations.
I-Sector issued 14,286, 63,500 and 1,000 common shares of restricted
stock in 1997, 1998 and 1999, respectively, and cancelled 14,500, 62,086 and
1,000 common shares of restricted stock during 1998, 1999 and 2000 respectively.
The restricted shares have par value of $0.01 per share. The remaining 1,200
shares, valued at $1.563, vest ratably at the end of each one year period over a
five year period from the date of issuance.
I-Sector issued warrants to purchase 176,750 common shares at $9.60
per share to underwriters in connection with its public offering of common
stock. The warrants expire on July 7, 2002.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases - I-Sector subleases office space from Equities. In
1999, I-Sector renewed its office lease for a five year period with monthly
rental payments of $38 plus certain operating expenses through December 1, 2004.
Rental expense under this agreement amounted to approximately $390, $395 and
$452 during years ended December 31, 1998, 1999 and 2000 respectively.
Additionally, minimum annual rentals on other operating leases amount
to approximately, $154 in 2001, $145 in 2002, $91 in 2003, $0 in 2004, $0 in
2005 and $0 in years thereafter. Amounts paid during the years ended December
31, 1998, 1999 and 2000 under such agreements totaled approximately $509, $766
and $296 respectively.
I-Sector maintains a 401(k) savings plan wherein I-Sector matches a
portion of the employee contribution. In addition, I-Sector has a discretionary
matching fund based on the net profitability of I-Sector. All full-time
employees who have completed 90 days of service with I-Sector are eligible to
participate in the plan. Declaration of the discretionary portion of the
matching fund is the decision of the Board of Directors. I-Sector has made no
additional contributions to the plan for the years ended December 31, 1998,
1999, or 2000. Under the standard I-Sector matching program, I-Sector's match
was $45, $64 and $46 for the years ended December 31, 1998, 1999 and 2000,
respectively.
I-Sector 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, I-Sector believes the final
outcome of such matters will not have a material adverse effect on its financial
position, results of operations or cash flows.
On February 1, 2000, a competitor brought a suit against our
wholly-owned subsidiary Stratasoft, Inc. in ESHARE TECHNOLOGIES, INC. AND
INVENTIONS, INC. V STRATASOFT, INC., Cause No. 1 99-CV-2303 for the United
States District Court for the Northern District of Georgia. The plaintiff
alleges infringement of certain patents owned by the competitor and is seeking a
permanent injunction to prevent Stratasoft, Inc. from manufacturing, selling,
offering for sale or using the alleged infringing products covered by patents
owned by Eshare Technology, Inc. et al, as well as unspecified monetary damages.
The suit is in its early stages of discovery, and therefore I-Sector is unable
to determine the ultimate costs of this matter. I-Sector believes that this suit
is without merit and intend to vigorously defend such action, however the case
is currently scheduled for mediation in the immediate future. I-Sector has no
assurance that mediation will result in a settlement on terms that are
acceptable to us.
On May 17, 2000, Jack B. Corey ("Corey") filed a lawsuit against the Company
styled JACK B. COREY V ALLSTAR SYSTEMS, INC., Cause No. 2000-24796, in the
District Court of Harris County, Texas, 113th Judicial District, in which he
sought a temporary restraining order, temporary and permanent injunctions to
enjoin the Company's sale of certain assets to Amherst Technologies, L.L.C.
("Amherst"), and damages based on alleged shareholder oppression. The Court
denied Corey's Application for Temporary Restraining Order and, after hearing,
denied his request for a temporary injunction. On June 22, 2000, Corey filed his
First Amended Original Petition and Application for Permanent Injunction,
seeking to permanently enjoin the sale of assets which had already been
consummated and to assert a cause of action for shareholder oppression based on
alleged failures to provide Corey, a Company shareholder, notices relating to
the shareholders' meeting held to approve the sale of assets to Amherst. The
Company has answered and denied all claims and intends to vigorously contest
Corey's claims. The case is set for trial on June 18, 2001. In addition to the
claims he has asserted in the above-described lawsuit, Corey has verbally
asserted claims in conversations with the Company's representatives and
attorneys that the Company made various alleged misrepresentations regarding the
Company's initial public offering that affected Corey's ability and intention to
sell his Company shares. Corey verbally claims to have been damaged in the
approximate amount of $1,337,500 but has not initiated litigation to pursue his
verbal claims. Subsequently, Corey verbally offered to a settlement of all
matters for substantially less than his claimed damage amount. Should Corey
initiate litigation to pursue his claims, the Company intends to vigorously
contest those claims, however the Company will give consideration to offers to
settle such matter if such a settlement is deemed to be in the best interest of
the Company.
12. STOCK OPTION PLANS
Under the 1996 Incentive Stock Plan (the "Incentive Plan"') and the
1996 Non-Employee Director Stock Option Plan (the "Director Plan"). I-Sector's
Compensation Committee may grant up to 442,500 shares of common stock, which
have been reserved for issuance to certain employees of I-Sector. At December
31, 2000 33,488 shares were available for future grant under the Incentive Plan.
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. I-Sector
has reserved for issuance, under the Director Plan, 100,000 shares of common
stock, subject to certain antidilution adjustments of which 28,000 were
available for future grants at December 31, 2000. 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 I-Sector'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.
In May 2000, I-Sector adopted the 2000 Stock Incentive Plan (the "2000
Incentive Plan"). Under the 2000 Incentive Plan, I-Sector's Compensation
Committee may grant up to the greater of 400,000 shares of common stock or 10%
of the number of shares of common stock issued and outstanding on the first day
of the then preceding calendar quarter. The 2000 Incentive Plan provides for the
granting of incentive awards in the form of stock-based awards and cash bonuses
in accordance with the provisions of the plan. All employees, including officers
, and consultants and non-employee directs are eligible to participate in the
2000 Stock Incentive Plan. Generally, the Compensation Committee has the
discretion to determine the exercise price of each stock option under the 2000
Incentive Plan, and they must be exercised within ten years of the grant date,
except those classified as Incentive Stock Option ("ISO") grants to a 10% or
greater stockholder. ISO options grants to a 10% or greater stockholder must be
exercised within five years of the grant date. The exercise price of each ISO
option grant may not be less than 100% of the fair market value of a share of
common stock on the date of grant (110% in the case of a 10% or greater
stockholder). At December 31, 2000 314,129 shares were available for future
grant under the 2000 Incentive Plan.
During 1998, 1999 and 2000 I-Sector granted options to purchase 8,000,
9,000 and 35,000 common shares to its directors, respectively, which vest
immediately, and 129,850, 216,872 and 94,671 common shares to its employees,
respectively, which vest over five years.
The activity of employees in all plans is summarized below:
1998 1999 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding at January 1 200,300 $ 5.17 268,350 $ 1.63 458,232 $ 1.41
Granted during the year 137,850 3.13 225,872 1.15 71,400 1.76
Exercised during the year
Transfers to non-employees 2.19
(133,220)
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 (35,990) 1.45 2.23
(13,300)
Options outstanding at December 31 268,350 $ 1.63 458,232 $ 1.41 383,112 $ 1.72
Options exercisable at December 31 56,940 $ 1.63 196,072 $ 1.41 254,212 $ 1.37
Options outstanding price range $1.5 to $6.00 $1.06 to $1.75 $1.06 to $2.31
Weighted Average fair value of
options granted during the year $3.16 $1.07 $1.15
Options weighted-average
remaining life 9.83 Years 9.87 Years 8.00 Years
I-Sector 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,
I-Sector's net loss and loss per share would have been increased 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 121% to 179%; risk-free interest rate of 6.0%; and expected lives
of eight years from the original date of the stock option grants. The effects of
applying SFAS No. 123 for pro forma disclosures are not likely to be
representative of the effects on reported net income (loss) for future years.
1998 1999 2000
Net Income (loss):
As reported $ (1,098) $ (845) $ (43)
Pro forma $ (1,180) $ (923) $ (48)
Earnings per share (basic and diluted )
As reported $ (0.25) $ (0.20) $ (0.01)
Pro forma $ (0.27) $ (0.22) $ (0.01)
Employees affected by the sale of the Telecom Division on March 16, 2000 and of
the Computer Products Division on May 19, 2000 (See Note 2) retained their
respective stock option grants received prior to I-Sector's disposal of these
divisions. In addition, certain affected employees were eligible and received
stock options awards subsequent to their termination dates. The affected
employee's awards will vest or continue to vest according to the periods
specified in their respective stock option agreements, generally five years,
contingent upon the employment with the respective division's acquiror. As a
result of their termination from I-Sector, and the change in employee status,
these awards were remeasured as of the respective sale dates or date of
subsequent issuance. The fair values of each of these stock option awards was
estimated using the Black-Scholes option pricing model using the following
assumptions; dividend yield of 0%; expected volatility of 87.29% to 121.45%;
risk free interest rate of 6% and an expected remaining life of 3 to 5 years.
The fair values have been reflected as a component of Stockholder's equity at
December 31, 2000 and are being recognized as compensation expense of the
Discontinued operations over the estimated remaining vesting period. For the
year ended December 31, 2000 $36 of compensation expense was recorded.
The activity of this non-employee group is summarized below:
2000
Weighted
Average
Shares Exercise Price
Transfer from Employee plan 133,220 $ 2.19
Grants during the year 58,271 2.27
Exercised during the year
Canceled during the year (7,720) 1.66
Options outstanding December 31 183,771 $ 2.18
Options exercisable December 31 45,500 $ 1.87
Options outstanding price range $2.86 to $2.31
Weighted average fair value of options
granted during the year $ 2.18
Options weighted average remaining
life 3.85 years
13. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year
were as follows:
1998 1999 2000
(Amounts in thousands except share and per share data)
Numerator:
Net loss from continuing operations $ (920) $ (69) $ (3,735)
Discontinued operations:
Net income (loss) from discontinued
operations, net of taxes (178) 362 302
Gain (loss) on disposal, net of taxes (1,138) 3,390
Net loss $ (1,098) $ (845) $ (43)
Denominator:
Denominator for basic earnings per
share - weighted-average shares
outstanding 4,345,883 4,168,140 4,059,618
Effect of dilutive securities:
Shares issuable from assumed conversion
of common stock options, warrants and
restricted stock
Denominator for diluted earnings per share 4,345,883 4,168,140 4,059,618
Net income (loss) per share:
Basic and diluted:
Net loss from continuing operations $ (0.21) $ (0.02) $ (0.92)
Net income (loss) from discontinued operations (0.04) 0.09 0.07
Gain (loss) on disposal (0.27) 0.84
Net loss per share $ (0.25) $ (0.20) $ (0.01)
The potentially dilutive options were not used in the calculation of
diluted earnings per share for the year ended December 31, 1998, 1999 and 2000
since the effect of potentially dilutive securities in computing a loss per
share is antidilutive.
There were warrants to purchase, 176,750 shares of common stock for
1998, 1999 and 2000, respectively, which were not included in computing the
effect of dilutive securities because the inclusion would have been
antidilutive.
There were 8,000, 37,600 and 48,344 options to purchase common stock
for 1998, 1999 and 2000, respectively, which were not included in computing the
effect of dilutive securities because the inclusion would have been
antidilutive.
14. SEGMENT INFORMATION
I-Sector has five reportable segments: (1) ACS, (2) Synergy, (3) IT
Staffing, (4) Stratasoft, (5) INX and (6) Corporate. ACS, Synergy and IT
Staffing were previously reported as the IT Services segment. Corporate includes
the operations of the Company's El Paso service operations which were sold on
May 19, 2000, and service operations relating to computer installations for a
certain customer. ACS provides customers with on-site and carry-in computer
repair, application support and operating system and network migration services.
Synergy provides customers with turnkey outsourced IT helpdesk solutions,
technical staff augmentation for IT helpdesk operation and helpdesk consulting
services. IT Staffing provides IT professionals to work on temporary assignments
and does permanent placements. Stratasoft produces software products that
facilitate telephony and computer integration primarily for telemarketing and
call center applications. INX is a provider of network infrastructure
professional services and a reseller of Cisco network infrastructure products.
The accounting policies of the business segments are the same as those described
in Note 1. I-Sector evaluates performance of each segment based on operating
income. Management only views accounts receivable, and not total assets, by
segment in their decision making. Intersegment sales and transfers are not
significant. The tables below show the results of the five reportable segments:
For the year ended December 31, 2000:
IT
ACS Synergy INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 2,491 $ 4,455 $ 1,874 $ 1,242 $ 6,660 $ 1,640 $ (33) $ 18,329
Cost of sales and services 1,980 3,610 1,917 913 3,573 1,909 (21) 13,881
Gross profit (loss) 511 845 (43) 329 3,087 (269) (12) 4,448
Selling, general and
administrative expenses 1,240 1,946 935 491 3,647 1,723 (12) 9,970
Operating loss $ (729) $(1,101) $ (978) $ (162) $ (560) $(1,992) $ 0 (5,522)
Interest expense (income) (239)
Loss before benefit for income tax (5,283)
Benefit for income tax 1,548
Net loss from continuing operations (3,735)
Net income from discontinued
Operations 302
Net gain on disposal, net of taxes 3,390
Net loss $ (43)
Accounts receivable, net $ 362 $ 627 $ 1,075 $ 235 $ 1,390 $ 9 $ 0 $ 3,698
Accounts receivable retained from
discontinued operations, net 775
Total accounts receivable, net $ 4,473
For the year ended December 31, 1999:
IT
ACS Synergy INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 3,644 $ 7,318 $ 0 $ 1,191 $ 4,318 $ 2,704 $ 0 $ 19,175
Cost of sales and services 2,524 5,056 0 792 2,126 2,100 0 12,598
Gross profit 1,120 2,262 0 399 2,192 604 0 6,577
Selling, general and
administrative expenses 1,086 2,187 0 464 1,960 974 0 6,671
Operating income (loss) $ 34 $ 75 $ 0 $ (65) $ 232 $ (370) $ 0 (94)
Interest expense (income) (23)
Loss before benefit for income tax (71)
Benefit for income tax (2)
Net loss from continuing operations (69)
Income from discontinued operations,
net of taxes 362
Net loss on disposal, net of taxes (1,138)
Net loss $ (845)
For the year ended December 31, 1998:
IT
ACS Synergy INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 3,958 $ 6,933 $ 0 $ 870 $ 3,095 $ 1,422 $ 0 $ 16,278
Cost of sales and services 3,156 4,308 0 500 1,603 1,011 0 10,578
Gross profit 802 2,625 0 370 1,492 411 0 5,700
Selling, general and
administrative expenses 1,681 2,504 0 396 1,873 657 0 7,111
Operating income (loss) $ (879) $ 121 $ 0 $ (26) $ (381) $ (246) $ 0 (1,411)
Interest expense (income) (41)
Loss before benefit for income tax (1,370)
Benefit for income tax (450)
Net loss from continuing operations (920)
Loss from discontinued operations,
net of taxes (178)
Net loss $ (1,098)
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers
Directors
James H. Long - Director, April 1983 to present.
James H. Long, age 42, is the founder of the Company and has served as
Chairman of the Board, Chief Executive Officer and President since the Company's
inception in 1983. Prior to founding the Company, 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 - Director, September 12, 1996 to present.
Donald R. Chadwick, age 57, has served as Secretary since February,
1992 and served as the 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 within the Company.
Richard D. Darrell - Director, July 29, 1997 to present.
Richard D. Darrell, age 45, has been President of American Technology
Acquisition Corporation, a company specializing in mergers, acquisitions, and
divestitures of technology related companies since 1995. Prior to that, Mr.
Darrell served as President and Chief Executive Officer of Direct Computer
Corporation, a computer reseller and distribution company based in Dallas,
Texas.
Jack M. Johnson, Jr. - Director, July 29, 1997 to present.
Jack M. Johnson, Jr., age 61, has been Managing General Partner of
Winterman & Company, a general partnership that owns approximately 25,000 acres
of real estate in Texas, which is used in farming, ranching, and oil and gas
exploration activities, since 1996. Mr. Johnson is also President of Winco
Agriproducts, an agricultural products company that primarily processes rice for
seed and commercial sale. Mr. Johnson was previously the Chairman of the Board
of the Lower Colorado River Authority, the sixth largest electrical utility in
Texas, with approximately 1,700 employees and an annual budget of over $400
million. Mr. Johnson was previously Chairman of North Houston Bank, a commercial
bank with assets of approximately $75 million. Mr. Johnson currently serves on
the board of directors of Houston National Bank, a commercial bank located in
Houston, Texas with assets of approximately $100 million; Security State Bank, a
commercial bank in Anahuac, Texas with assets of approximately $60 million and
Team, Inc. a publicly traded company which provides environmental services for
industrial operations.
Mark T. Hilz - Director, June 24, 1999 to present.
Mark T. Hilz, age 42, is the President of Internetwork Experts, Inc. He
has formerly served as Chief Executive Officer of Nichecast, Inc., a privately
held internet services company. From 1990 to 1998, Mr. Hilz was founder,
President and Chief Executive Officer of PC Service Source, Inc., a
publicly-held distributor of personal computer hardware for the repair industry.
Executive Officers
The executive officers of the Company serve until resignation or
removal by the Board of Directors. Set forth below is certain information about
the Company's Executive Officers, other than James H. Long .
Thomas N. McCulley - Vice President, Information Systems, September 1996 to
present.
Thomas N. McCulley, age 54, has been the Vice President, Information
Systems for the Company since July 1996. From January 1992 to June 1996, Mr.
McCulley served as the Information Services Director for the Company. He has
responsibility for management and supervision of the Company's Management
Information Systems.
William R. Hennessy - President, Stratasoft, Inc., September 1996 to present.
William R. Hennessy, age 42, has served as the President of Stratasoft,
Inc., the Company's wholly-owned subsidiary that was formed in 1995 to develop
and market CTI Software, since joining the Company in January 1996. Mr.
Hennessy's responsibilities include the general management of Stratasoft, Inc.
From July 1991 to January 1996, Mr. Hennessy was employed by Inter-Tel,
Incorporated, a 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.
Family Relationships
There are no family relationships among any of the directors and
executive officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Number of Number of Known Failure
Name of Reporting Person Late Reports Transactions To File
Chadwick, Donald R 1 6
Item 11. Executive Compensation
Summary Compensation Table. The following table reflects compensation for
services to the Company for the years ended December 31, 2000, 1999 and 1998 of
(i) the Chief Executive Officer of the Company and (ii) the three most highly
compensated executive officers of the Company who were serving as executive
officers at the end of 2000 and whose total annual salary and bonus exceeded
$100,000 in 2000 (the "Name Executive Officers").
Annual Compensation Long Term Compensation
Awards
Name and Principal Year Salary Bonus Other Number of
Annual Restricted Securities
Compensation Stock Underlying
(1) Awards Options (2)
Position
James H. Long (3) 2000 $150,000
Chief Executive 1999 150,000
Officer 1998 150,000 $80,200 2,400
William R. Hennessy 2000 91,034 59,686
President, Stratasoft, 1999 85,000 55,856 10,000
Inc. (4) 1998 84,637 3,000 7,500
(1) Amounts exclude the value of perquisites and personal benefits because
the aggregate amount thereof did not exceed the lesser of $50,000 or
10% of the Named Executive Officer's total annual salary and bonus.
(2) The number of securities underlying options shown for 1998 includes
options originally issued in 1997 and repriced during 1998 and options
newly issued in 1998.
(3) Company has made personal loans to Mr. Long from time to time. See Item
13. Certain Relationships and Related Transactions "Certain
Transactions".
(4) Includes compensation based upon gross profit realized.
Stock Options
Under the Company's 1996 Incentive Stock Option Plan (the "Incentive
Stock Option Plan") options to purchase shares of the Common Stock may be
granted to executive officers and other employees. As of December 31, 2000,
409,012 shares were reserved for issuance upon exercise of outstanding options
and 33,488 were reserved and remained available for future grants pursuant to
the Incentive Stock Option Plan. During 2000, options to purchase 15,100 shares
of Common Stock were granted to the Named Executive Officers under the Incentive
Stock Option Plan
Options Granted in Last Fiscal Year. The following table provides information
concerning stock options granted to the Named Executive Officers during the year
ended December 31, 2000.
Potential
Potential Realizable
Realizable Value at
Number of Percent of Value at Assumed
Shares of Total Assumed Annual Annual Rate
Common Options Rate of Stock of Stock
Stock Granted to Exercise Price Price
Underlying Employees or Base Appreciations Appreciations
Options in Fiscal Price Expiration for Option for Option
Granted Year ($/share) Date Term 5% (1) Term 10% (1)
None
(1) Actual gains, if any, on stock option exercises are dependent on future
performance of the Common Stock. No appreciation in the price of the Common
Stock will result in no gain.
Aggregated Option Exercises and Year-End Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-the
Acquired Value Options at money Options at
on Exercise Realized December 31, 2000 December 31, 2000
Exercisable Unexercisable Exercisable Unexerciable
James H. Long 0 0 960 1,440 $0 $0
William R. Hennessy 0 0 8,800 9,200 $0 $0
The Named Executive Officers held 109,646 options that were exercisable
at December 31, 2000, none were exercised during 2000 and there were 0
in-the-money unexercised options at December 31, 2000.
Employment Agreements
Each of the Named Executive Officers of the Company has entered into an
employment agreement (collectively, the "Executive Employment Agreements") with
the Company. Under the terms of their respective agreements, Messrs. Long,
McCully, Otto and Hennessy are entitled to an annual base salary of $150,000,
$75,000, $100,000 and $85,000, respectively, plus other bonuses, the amounts and
payment of which are within the discretion of the Compensation Committee. The
Executive Employment Agreements may be terminated by the Company or by the
executive officer at any time by giving proper notice. The Executive Employment
Agreements generally provide that the executive officer will not, for the term
of his employment and for the period ranging from twelve to eighteen months
following the end of such Named Executive Officer's employment with the Company,
solicit any of the Company's employees or customers or otherwise interfere with
the business of the Company.
Item 12. Security Ownership
Security Ownership of Management
The following table sets forth, as of March 16, 2000 the number of
shares of Common Stock owned by each Director, each Named Executive Officer, as
defined in "Executive Compensation," and all Directors and Executive Officers as
a group.
Title of Class Name of Amount and Nature of Percent
Beneficial Owner Beneficial Owner (1) of Class
Common Stock James H. Long 2,058,800 51.6%
Common Stock Donald R. Chadwick 110,503 (2) 2.8%
Common Stock William R. Hennessey 8,800 (3) *
Common Stock Thomas N. McCully 14,960 (4) *
Common Stock All officers and directors 2,193,063 54.9%
(1) Beneficial owner of a security includes any person who shares voting or
investment power with respect to or has the right to acquire beneficial
ownership of such security within 60 days.
(2) Includes 69,686 shares which may be acquired upon exercise of currently
exercisable options and 517 shares owned by his spouse for which Mr.
Chadwick disclaims beneficial ownership and 300 shares owned by his
minor children for which Mr. Chadwick disclaims beneficial ownership.
(3) Includes 8,800 shares which may be acquired upon exercise of currently
exercisable options.
(4) Includes 9,760 shares which may be acquired upon exercise of currently
exercisable options.
(5) Includes 600 shares which may be acquired upon exercise of currently
exercisable options.
Security Ownership of Certain Beneficial Owners
Title of Class Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Owner Of Class
Common Stock Jack B. Corey 267,500 6.7%
37102 FM 149, P.O. Box 525
Pinehurst, TX 77362
Common Stock Peak 6 Capital Management L.L.C. (1) 205,300 5.1%
209 LaSalle Street, Suite 200
Chicago, Illinois 60604
Common Stock James H. Long 2,120,300 51.6%
6401 Southwest Freeway
Houston, Texas 77074
(1) As reported on Schedule 13D December 1, 2000.
Item 13. Certain Relationships and Related Transactions
Certain Transactions
The Company has from time to time made payments on behalf of Allstar
Equities, Inc. a Texas corporation ("Equities"), which is wholly-owned by James
H. Long, the Company's President and Chief Executive Officer, and on behalf of
Mr. Long, personally for taxes, property and equipment. Effective on December 1,
1999 a note payable by Equities was signed for $335,551 for 60 monthly
installments of $6,965. The note bears interest at 9% per year. At December 31,
2000, the Company's receivables from Equities amounted to approximately
$203,000. Additionally, from time to time the Company has made payments to
unrelated parties for transactions that should either wholly or partially
benefit Mr. Long and which should therefore be accounted for as indebtedness by
Mr. Long to the Company. The company records these transactions as a receivable
to be repaid by him. The balance of approximately $100,000 at December 31, 2000
is included in the balance sheet caption "Accounts receivable - affiliates".
The Company leases office space from Equities. On December 1, 1999
Equities purchased the building and executed a direct lease with the Company
with an expiration date of December 31, 2004. The new lease has rental rates of
$37,692 per month.
In August 1996, the Company retained an independent real estate
consulting firm to conduct a survey of rental rates for facilities in Houston,
Texas that are compatible to its Houston headquarters facility. Based upon this
survey, and additional consultations with representatives of the real estate
consulting firm, the Company believes that the rental rate and other terms of
the Company's sublease from Equities are at least as favorable as those that
could be obtained in an arms-length transaction with an unaffiliated third
party.
Directors' Compensation
Employee directors of the Company do not receive any additional
compensation for their services as a director of the Company. The Company pays
each independent director $1,000 for each Board meeting attended and $500 for
Committee meeting attended, along with reasonable out-of-pocket expenses
incurred by independent directors to attend Board and Committee meetings.
Independent directors are also entitled to receive options pursuant to the
Director Plan (See Note 12).
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 23
(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
3.3 Certificate of Amendment to Certificate of Incorporation Form 10-K filed Mar.
of Allstar Systems, Inc. 24, 2001
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.
10.2 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.
10.5 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. 2000 Incentive Stock Plan. DEF 14A Filed
Mar 14, 2000
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan. Exhibit 10.12 to Form
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
10.18 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
10.23 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
10.26 Agreement for Wholesale Financing, Business Financing Agreement Form 10-K filed Mar.
and related agreements and correspondence by and between DFS Financial 31, 1998
Services and Allstar Systems, Inc., dated February 27, 1998
10.29 Lease Agreement dated March 4, 1998 by and between The Rugby Form 10-K filed April
Group, Inc., and Allstar Systems, Inc. 12, 1999
10.32 Lease Agreement by and between Allstar Equities, Inc. and Allstar Form 10-K filed March
Systems, Inc. 28, 2000
10.33 Asset Purchase Agreement Between Amherst Computer Products Exhibit 2.1 to Form
Southwest, L.P., Amherst Technologies, L.L.C. and Allstar 8-K filed March 22,
Systems, Inc. dated March 16, 2000 2000
10.35 Promissory Note between James H. Long and Allstar Systems, Inc. Form 10-K filed March
dated December 1, 1999 28, 2000
10.36 Asset Purchase Agreement By and Between Internetworking Form 10-K filed Mar
Sciences Corporation and Internetwork Experts, Inc. 24, 2001
dated October 27, 2000
10.37 Lease Agreement By and Between Whitehall-Midway Park Form 10-K filed Mar
North, Ltd. and Allstar systems, Inc. dated July 31, 2000 24, 2001
21.1 List of Subsidiaries of the Company. Form 10-K filed Mar.
24, 2001
23.1 Independent Auditors' Consent of Deloitte & Touche LLP,. Form 10-K filed Mar.
24, 2001
99.1 Schedule II Valuation and Qualifying Accounts Form 10-K filed Mar.
24, 2001
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 16, 2000.
I-Sector Corporation.
(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 (Principal
Financial and Accounting Officer)
/s/ Donald R. Chadwick Secretary and Director
/s/ Mark T. Hilz Director
/s/ Richard D. Darrell Director
/s/ Jack M. Johnson Director