FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
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, TEXAS 77074
Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (713) 795-2000
Allstar Systems, Inc.
(Former name, former address, and former fiscal year, if changed since last
report)
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___
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.01 par value per share As of August 14, 2001
3,877,625 shares outstanding
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
June 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,440 $ 8,346
Accounts receivable, net 4,891 4,473
Accounts receivable - affiliates 281 303
Accounts receivable - other 80 141
Inventory 692 774
Income taxes receivable 863 863
Other current assets 161 233
--------- --------
Total current assets 12,408 15,133
Property and equipment 1,289 1,579
Other assets 420 430
--------- --------
Total $ 14,117 $ 17,142
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,086 $ 1,892
Billings in excess of cost and
estimated earnings 573 503
Accrued expenses 2,208 1,635
Net liabilities related to
discontinued operations 660 869
Deferred service revenue 115 136
------- --------
Total current liabilities 4,642 5,035
Deferred credit - stock warrants 195 195
Commitments and contingencies
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, 4,441,325
and 4,442,325 shares issued at
June 30, 2001 and December 31, 2000 44 44
Additional paid in capital 10,185 10,182
Unearned equity compensation (1)
Treasury stock (559,900 and 399,800
shares, at cost)at June 30, 2001
and December 31, 2000 (1,154) (992)
Retained earnings 205 2,679
--------- ----------
Total stockholders' equity 9,280 11,912
--------- ----------
Total $ 14,117 $ 17,142
========= =========
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended June 30,
2001 2000
---- ----
Total revenue $ 5,738 $ 4,228
Cost of sales and services 4,326 3,494
--------- ---------
Gross profit 1,412 734
Selling, general and administrative
expenses 2,735 1,951
--------- ---------
Operating loss (1,323) (1,217)
Interest income (61) (50)
--------- ---------
Loss from continuing operations before
benefit for income taxes (1,262) (1,167)
Benefit for income taxes (179) (386)
--------- ---------
Net loss from continuing operations (1,083) (781)
Discontinued Operations:
Gain (loss) on disposal 346 (387)
--------- ---------
Net loss $ (737) $ (1,168)
========= =========
Net (loss) income per share:
Basic and diluted:
Net loss from continuing
operations $ (0.27) $ (0.20)
Gain (loss) on disposal 0.08 (0.09)
--------- ---------
Net loss per share $ (0.19) $ (0.29)
========= =========
Weighted average shares outstanding:
Basic and diluted 3,905,944 4,048,525
========= ==========
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Total revenue $ 10,578 $ 10,212
Cost of sales and services 7,987 7,093
-------- ---------
Gross profit 2,591 3,119
Selling, general and administrative
expenses 5,747 4,260
-------- ---------
Operating loss (3,156) (1,141)
Interest income (157) (35)
-------- ---------
Loss from continuing operations before
benefit for income taxes (2,999) (1,106)
Benefit for income taxes (179) (367)
-------- ---------
Net loss from continuing operations (2,820) (739)
Discontinued Operations:
Net income from discontinued
operations, net of taxes 301
Gain on disposal, net of taxes 346 4,486
-------- ---------
Net (loss) income $ (2,474) $ 4,048
======== =========
Net (loss) income per share:
Basic and diluted:
Net loss from continuing
operations $ (0.72) $ (0.18)
Net income from discontinued
operations 0.07
Gain on disposal 0.09 1.11
--------- ---------
Net (loss) income per share $ (0.63) $ 1.00
========= =========
Weighted average shares outstanding:
Basic and diluted 3,926,002 4,048,965
========= =========
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Net (loss) income $ (2,474) $ 4,048
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Net income from discontinued
operations (302)
Gain on disposal of discontinued
operations (346) (4,486)
Depreciation and amortization 300 260
Deferred tax provision (179) 37
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable, net (418) 21,332
Accounts receivable - affiliates
and other 83 (39)
Inventory 212 286
Other current assets 72
Other assets 60 16
Accounts payable (806) (17,059)
Accrued expenses 573 (1,774)
Income taxes payable 277
Billings in excess of cost and
estimated earnings 70
Deferred service revenue (21) (149)
--------- ---------
Net cash (used in) provided by
continuing operating activities (2,874) 2,447
Net cash (used in) provided by
discontinued operations (209) 825
--------- ---------
Net cash (used in) provided by
operating activities (3,083) 3,272
Cash flows from investing activities:
Acquisition costs (50)
Capital expenditures (136) (89)
Proceeds from sale of discontinued
operations 525 15,029
--------- ---------
Net cash provided by continuing operations 339 14,940
Net cash provided by discontinued operations 279
--------- ---------
Net cash provided by investing
activities: 339 15,219
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock (162) (14)
Net decrease in notes payable (15,869)
--------- ---------
Net cash used in financing activities: (162) (15,883)
--------- ---------
Net (decrease) increase in cash and
cash equivalents (2,906) 2,608
Cash and cash equivalents at beginning
of period 8,346 4,647
--------- ---------
Cash and cash equivalents at end of period $ 5,440 $ 7,255
========= =========
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 0 $ 375
========= =========
Cash paid for taxes $ 0 $ 0
========= =========
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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's operations are
conducted through four segments:
o Allstar provides customers with turn-key outsourced IT helpdesk
solutions, helpdesk solutions consulting services, on-site and carry-in
computer repair, application support and operating system, network
migration services and technical staff augmentation for IT helpdesk
operations.
o 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.
o IT Staffing, Inc. ("IT Staffing") provides temporary and permanent
placement services of IT professional personnel.
o Stratasoft, Inc. ("Stratasoft") creates and markets software related to
the integration of computer and telephone technologies.
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.
The condensed consolidated financial statements presented herein as of and
for the three and six months ended June 30, 2001 and 2000 are unaudited;
however, all adjustments which are, in the opinion of management, necessary for
a fair presentation of the financial position, results of operations and cash
flows for the periods covered have been made and are of a normal, recurring
nature. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year-end. The results of the interim periods are
not necessarily indicative of results for the full year. The consolidated
balance sheet at December 31, 2000 is derived from audited consolidated
financial statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Although
management believes the disclosures are adequate, certain information and
disclosure normally included in the notes to the financial statements has been
condensed or omitted as permitted by the rules and regulations of the Securities
and Exchange Commission.
Reclassifications - Certain amounts in the consolidated financial
statements presented herein have been reclassified to conform to current year
presentation.
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 revenue and expense during the reporting period. Actual results could differ
from these estimates.
Revenue Recognition - Revenue from the sale of products is recognized when
the product is shipped. Service income is recognized as the services are
performed. Revenues resulting from installations of equipment for which the
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 June 30,
2001 and December 31, 2000:
Costs incurred on uncompleted contracts $ 212 $ 135
Estimated earnings 1,108 361
------ ------
1,320 496
Less: Billings to date 747 999
------ ------
Billings in excess of cost and
estimated earnings $ 573 $ 503
====== ======
Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") 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 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 has no
derivative instruments as defined by SFAS No. 133.
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
FASB. SFAS No. 141 requires the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Any resulting goodwill and
certain intangible assets will remain on the balance sheet and not be amortized.
On an annual basis, and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. I-Sector is required to implement SFAS No. 141 on
July 1, 2001. The adoption of this statement had no effect on I-Sector's
consolidated financial position or its results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or its results of
operations.
2. DISCONTINUED OPERATIONS
On November 2, 1999, I-Sector approved a plan to sell or close its Telecom
Division. A sale was finalized on March 16, 2000. Under the terms of the sale
I-Sector received $250. 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 was recorded during 2000. 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, and recognized no additional losses in the
three or six month periods ended June 30, 2001.
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 I-Sector's 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.
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. Additional gain of $525 (related to a contingency clause which was settled
in May 2001) was recognized in the quarter ended June 30, 2001. Taxes of $179
related to this gain were offset against a valuation reserve established due to
recurring losses. I-Sector retained accounts receivable of $20,266, net of
reserves, and has retained receivables related to the Computer Products Division
of $3 and $775 at June 30, 2001 and December 31, 2000, respectively. In
connection with the sale of the Computer Products Division, I-Sector also sold
the El Paso portion of the IT Services business. For financial reporting
presentation the El Paso services business was included in the continuing
operations for the three and six months ended June 30, 2001 and 2000.
The balance sheet caption "Net Liabilities related to discontinued
operations" contains $660 and $869 at June 30, 2001 and December 31, 2000,
respectively, of estimated future expenses related to the winding up of the
Telecom Division and 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.
3. CURRENT DEBT OBLIGATIONS
On February 27, 1998 I-Sector entered into a credit agreement with Deutsche
Financial Services ("DFS") for a revolving line of credit (the "DFS Facility"),
which historically was its 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 June 30, 2001, I-Sector had $18 outstanding on the Inventory Line and
had total credit availability of $1,721.
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 collaterized
by substantially all I-Sector's assets. The agreement contains restrictive
covenants, which, among other things, require the company 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. I-Sector is not in
compliance with a certain covenant for which it subsequently received a waiver.
As part of the waiver the credit availability has been reduced to $750,000
through October 15, 2001. I-Sector does not believe the reduction of
availability is a hindrance to its operations as the credit facility has been in
limited use since the discontinuation of its Computer Products Division.
I-Sector is in process of evaluating its credit facility needs and is in
discussion with DFS regarding modifying, or perhaps terminating, its
relationship.
4. SEGMENT INFORMATION
During March, 2001, I-Sector decided to merge a wholly-owned subsidiary (Synergy
Helpdesk Solutions, Inc.) into another wholly-owned subsidiary, Allstar Computer
Products, Inc., and, subsequent to the merger to change the name of the
resulting wholly-owned subsidiary to Allstar Solutions, Inc. ("Allstar"). The
merger was completed in June 2001. As a result of this decision, the segments
previously reported as ACS and Synergy have been combined and reported as
Allstar. 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, as well as the company's
corporate level expenses that are not allocated to the subsidiaries. The
installations for the certain customer ceased when the Computer Products
Division was sold on May 19, 2000. The accounting policies of the business
segments are the same as those for I-Sector. 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 and are shown in the
Elimination column in the following table.
For the quarter ended June 30, 2001:
IT
Allstar INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 1,178 $ 2,646 $ 339 $ 1,590 $ 1 $ (16) $ 5,738
Cost of sales and services 982 2,326 207 826 (14) (1) 4,326
------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 196 320 132 764 15 (15) 1,412
Selling, general and
administrative expenses 741 783 191 653 382 (15) 2,735
------ ------ ------ ------ ------ ------ ------
Operating (loss) income $ (545) $ (463) $ (59) $ 111 $ (367) $ 0 (1,323)
====== ====== ====== ====== ====== ======
Interest (income) (61)
------
Loss before benefit for income tax (1,262)
Benefit for income tax (179)
------
Net loss from continuing operations (1,083)
Net gain on disposal, net of taxes 346
------
Net loss $ (737)
======
Accounts receivable, net $ 812 $ 1,856 $ 232 $ 1,992 $ (4) $ 0 4,888
====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 3
------
Total accounts receivable, net $ 4,891
======
For the quarter ended June 30, 2000:
Total revenue $ 1,979 $ 0 $ 315 $ 1,172 $ 762 $ 0 $ 4,228
Cost of sales and services 1,601 0 231 674 988 0 3,494
------ ------ ------ ------ ------ ------ ------
Gross profit 378 0 84 498 (226) 0 734
Selling, general and
administrative expenses 841 0 70 747 293 0 1,951
------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ (463) $ 0 $ 14 $ (249) $ (519) $ 0 (1,217)
====== ====== ====== ====== ====== ======
Interest income (50)
------
Income before benefit
for income tax (1,167)
Benefit for income tax (386)
------
Net loss from continuing operations (781)
Loss on disposal, net of taxes (387)
------
Net loss $(1,168)
======
Accounts receivable, net $ 1,588 $ 0 $ 136 $ 1,670 $ 752 $ 0 $ 4,146
====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 10,536
------
Total accounts receivable, net $14,682
======
For the six months ended June 30, 2001:
IT
Allstar INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 2,394 $ 4,363 $ 578 $ 3,272 $ (2) $ (27) $10,578
Cost of sales and services 2,063 4,038 361 1,537 0 (12) 7,987
------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 331 325 217 1,735 (2) (15) 2,591
Selling, general and
administrative expenses 1,681 1,392 383 1,399 907 (15) 5,747
------ ------ ------ ------ ------- ------ ------
Operating (loss) income $(1,350) $(1,067) $ (166) $ 336 $ (909) $ 0 (3,156)
====== ====== ====== ====== ====== ======
Interest (income) (157)
------
Loss before benefit for income tax (2,999)
Benefit for income tax (179)
------
Net loss from continuing operations (2,820)
Net gain on disposal 346
------
Net loss $(2,474)
======
For the six months ended June 30, 2000:
Total revenue $ 4,267 $ 0 $ 636 $ 3,645 $ 1,664 $ 0 $10,212
Cost of sales and services 3,205 0 472 1,825 1,591 0 7,093
------ ------ ------ ------ ------ ------ ------
Gross profit 1,062 0 164 1,820 73 0 3,119
Selling, general and
administrative expenses 1,649 0 174 1,808 629 0 4,260
------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ (587) $ 0 $ (10) $ 12 $ (556) $ 0 (1,141)
====== ====== ====== ====== ====== ======
Interest (income) (35)
------
Income before benefit
for income tax (1,106)
Benefit for income tax (367)
------
Net loss from continuing operations (739)
Net income from discontinuing operations,
net of taxes 301
Gain on disposal, net of taxes 4,486
------
Net income $ 4,048
======
5. EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based on the weighted-average number of shares
outstanding during each period and the assumed exercise of dilutive stock
options and warrants less the number of treasury shares assumed to be purchased
from the proceeds using the average market price of the Company's common stock
for each of the periods presented.
There were no potentially dilutive options for the three and six months
ended June 30, 2001. Potentially dilutive options of 211,660 and 266,082 for the
three and six month periods ended June 30, 2000 were not used in the calculation
of diluted earnings per share since the effect is antidilutive.
Warrants to purchase 176,750 shares of common stock were not included in
computing diluted earnings per share for all periods presented because the
inclusion would have been antidilutive.
6. LITIGATION
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
intends to vigorously defend such action.
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 materially adverse effect on its results of
operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
I-SECTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's consolidated financial statements,
including the notes thereto included elsewhere in this Form 10-Q and the
Company's Form 10-K, previously filed with the Securities and Exchange
Commission.
Overview
I-Sector Corporation ("I-Sector"), formerly Allstar Systems, Inc., is
engaged in the business of providing its customers with solutions to their
information and communications technology needs. Currently, I-Sector operates
through four subsidiary corporations, each of which is focused on a specific
area of the information and/or communications technology industry:
o Allstar Solutions, Inc. ("Allstar") helps its clients achieve high
quality cost effective solutions in myriad areas of areas of
information technology. Allstar provides solutions that include
project-based or outsourced information technology support, turn-key
IT project implementation and consultation and turn-key sales and
installation of certain highly specialized IT products.
o Internetwork Experts, Inc. ("INX") focuses on the design, deployment
and support of networking infrastructure. INX provides professional
services for customers that have large-scale network infrastructure
requirements that are Cisco centric. The areas of practice for INX
include network design, implementation, turnkey support, security
audits and firewall design, network infrastructure management and
network infrastructure consulting services
o IT Staffing, Inc. ("IT Staffing") places IT professionals on
temporary assignments and permanent placements, focusing mainly in
the area of software development and programming. IT Staffing
employees dedicated customer account managers and professional
technical recruiters who together provide a highly selective and
confidential recruiting process for clients.
o Stratasoft, Inc. ("Stratasoft") develops and markets proprietary
software that integrates business telephone systems and networked
computer systems. Stratasoft's basic products are sometimes
customized to suit a customer's particular needs and are sometimes
bundled with computer hardware supplied by us at the customer's
request. Stratasoft products include software for call center
management, both in-bound and out-bound, as well as interactive voice
response software.
We market our professional services businesses primarily in Texas from
locations in the Houston and Dallas-Fort Worth metropolitan areas. Stratasoft
markets its software products worldwide through a direct sales force and an
authorized dealer network. During the three months ended June 30, 2001, Allstar,
INX and IT Staffing produced 20.5%, 46.1% and 5.9% of total revenues, while
Stratasoft produced 27.7% of total revenues. Gross margin varies substantially
between each of these business segments.
Our ability to attract and retain qualified professional and technical
personnel is critical to the success of all of our services businesses. The most
significant portion of the costs associated with the delivery of services is
personnel costs. Therefore, in order to be successful, our billable rates must
be in excess of the personnel costs and our margin is dependent upon maintaining
high utilization of our service personnel. In addition, the competition for high
quality personnel has generally intensified, causing both our and other service
provider's personnel costs to increase. In markets where we do not maintain
branch offices, we often subcontract for necessary technical personnel.
A significant portion of our cost of services for each of our service
businesses is comprised of labor. Labor has a somewhat fixed nature such that
higher levels of service revenue produces higher gross margin while lower levels
of service revenue produces less gross margin. Management of labor cost is
important in order to prevent erosion of gross margin.
A significant portion of our selling, general and administrative expenses
in all of our businesses 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 selling, general and
administrative expenses are relatively fixed and, while still somewhat variable,
do not vary with increases in revenue as directly as do sales commissions.
Historically, through 1999, our revenue was derived through four primary
areas of business, each of which was reported as a reportable segment: IT
Services, CTI Software, Computer Products and Telecom Systems. 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. We retained accounts receivable
and inventory related to the businesses that were sold. A disposal loss (net of
taxes), including an estimate of the operating results from the measurement
date, November 2, 1999 to the closing date of the sale of Telecom Systems was
recognized at December 31, 1999. The sale of Computer Products closed on May 19,
2000 after stockholder approval was obtained and other conditions to closing
were satisfied. The terms of the agreement included cash consideration of $14.8
million, plus the possibility of receiving a future payment of up to $500,000
from an escrow account. The terms of the agreement also included possible future
cash payments contingent upon future performance of the operations being sold.
We recognized a gain of approximately $4.9 million, net of taxes, in the quarter
ended March 31, 2000, but recognized losses in the quarters ended June 30, 2000
and September 30, 2000 which reduced the gain on the sale to $3.7 million, net
of taxes. In the quarter ended June 30, 2001 we recognized additional gain of
$346, net of tax, related to a payment for the funds that had been held in
escrow.
Special notice regarding forward-looking statements
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
relating to future events or our future financial performance including, but not
limited to, statements contained in Item 2. - "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned that any statement that is not a statement of historical fact,
including but not limited to, statements which may be identified by words
including, but not limited to, "anticipate," "appear," "believe," "could,"
"estimate," "expect," "hope," "indicate," "intend," "likely," "may," "might,"
"plan," "potential," "seek," "should," "will," "would," and other variations or
negative expressions thereof, are predictions or estimations and are subject to
known and unknown risks and uncertainties. Numerous factors, including factors
which we have 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 the company's annual
report on Form 10-K, as filed with the Securities and Exchange Commission
including matters set forth in Item 1.- "Factors Which May Affect The Future
Results Of Operations," which could cause actual events, performance or results
to differ materially from those indicated by such statements.
Three Months Ended June 30, 2001 Compared To Three Months Ended June 30, 2000
(Dollars in thousands)
The following table sets forth, for the periods indicated, certain
financial data derived from our unaudited consolidated statements of operations
for the three months ended June 30, 2001 and 2000. The discussion below relates
only to our continuing operations, unless otherwise noted.
Three months ended June 30,
---------------------------
2001 2000
---- ----
Amount % Amount %
------ ------ ------ ------
Revenue
Allstar $ 1,178 20.5 $ 1,979 46.8
INX 2,646 46.1 0 0.0
IT Staffing 339 5.9 315 7.5
Stratasoft 1,590 27.7 1,172 27.7
Corporate 1 0.0 762 18.0
Elimination (16) (0.2) 0 0.0
------ ------ ------ ------
Total revenue 5,738 100.0 4,228 100.0
Gross profit (loss):
Allstar Systems, Inc. 196 16.6 378 19.1
INX 320 12.1 0 0.0
IT Staffing 132 38.9 84 26.7
Stratasoft 764 48.1 498 42.5
Corporate 15 1500.0 (226) (29.7)
Elimination (15) (0.9) 0 0.0
------ ------ ------ ------
Total gross profit 1,412 24.6 734 17.4
Selling, general and administrative
expenses:
Allstar 741 62.9 841 42.5
INX 783 29.6 0 0.0
IT Staffing 191 56.3 70 22.2
Stratasoft 653 41.1 747 63.7
Corporate 382 382.0 293 38.5
Elimination (15) (93.8) 0 0.0
------ ------ ------ ------
Total selling, general
and administrative
Expenses 2,735 47.7 1,951 46.1
Operating (loss) income:
Allstar (545) (46.3) (463) (23.4)
INX (463) (17.5) 0 0.0
IT Staffing (59) (17.4) 14 4.4
Stratasoft 111 7.0 (249) (21.2)
Corporate (367) (367.0) (519) (68.1)
------ ------ ------ ------
Total operating (loss) income (1,323) (23.1) (1,217) (28.8)
Interest (income) (61) (1.1) (50) (1.2)
------ ------ ------ ------
Loss before benefit for income taxes (1,262) (22.0) (1,167) (27.6)
Benefit for income taxes (179) (3.1) (386) (9.1)
------ ------ ------ ------
Net loss from continuing operations (1,083) (18.9) (781) (18.5)
Discontinued operations:
Gain (loss) on disposal 346 6.1 (387) (9.1)
------ ------ ------ ------
Net loss $ (737) (12.8) $(1,168) (27.6)
====== ====== ====== ======
TOTAL REVENUE. Total revenue increased by $1,510 (35.7%) to $5,738 in 2001
from $4,228 in 2000.
Allstar revenue decreased by $801 (40.5%) to $1,178 in 2001 from $1,979 in
2000. As a percentage of total revenue Allstar revenue decreased to 20.5% in
2001 from 46.8% in 2000. The decrease in ACS revenue was primarily attributable
to issues related to the loss of revenue from certain customers after the sale
of the Computer Products Division.
INX revenue was $2,646 for the quarter and represented 46.1% of total
revenue. INX was newly formed in July 2000 to meet the needs of customers in the
area of large-scale network infrastructure requirements that are Cisco centric.
INX is focused primarily on penetrating the market in Dallas and Houston and on
forming customer relationships.
IT Staffing revenue increased by $24 (7.6%) to $339 in 2001 from $315 in
2000. As a percentage of total revenue IT Staffing revenue decreased to 5.9% in
2001 from 7.5% in 2000. IT Staffing experienced a change in its mix of revenue
sources such that permanent placements, which produce higher gross margin,
increased to 21.5% of its total revenues in 2001 from 11.1% in 2000. Temporary
placements decreased to 78.5% in 2001 from 88.9% in 2000.
Stratasoft revenue increased by $418 (35.7%) to $1,590 in 2001 from $1,172
in 2000. Stratasoft revenue, as a percentage of total revenue remained
consistent at 27.7% in both 2001 and 2000. The increase is attributed to
increased international sales.
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 and including prior period installation revenue that was 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. As these operations have ceased or are winding up we expected an
insignificant amount of revenue in the quarter ending June 30, 2001. Corporate
revenue decreased by $761 (99.9%) to $1 in 2001 from $762 in 2000 to $1 in 2001.
As a percentage of total revenue Corporate revenue decreased to (0.0)% in 2001
from 18.0% in 2000. The El Paso branch office service business had revenue of $0
and $230 in the quarters ended June 30, 2001 and 2000, respectively.
Installation revenue for the certain customer of the Computer Products Division
(also discontinued effective May 19, 2000) contributed revenue of $1 and $532 in
the quarters ended June 30, 2001 and 2000, respectively.
GROSS PROFIT. Gross profit increased by $678 (92.4%) to $1,412 in 2001 from
$734 in 2000. Gross margin increased to 24.6% in 2001 from 17.4% in 2000.
Allstar gross profit decreased by $182 (48.1%) to $196 in 2001 from $378 in
2000. Gross margin for Allstar decreased to 16.6% in 2001 from 19.1% in 2000.
Allstar cost of service consists primarily of labor cost. Labor has a more fixed
nature such that higher levels of service revenue produces higher levels of
gross margin while lower levels of service revenue produces 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, Allstar experienced lower labor utilization related to lower revenue.
INX gross profit was $320 and 12.1% of revenue. Since INX was formed in
July 2000, there is no history for comparison. As a newly formed start-up
operation, it had to have billable technical staff in place in order to be able
to market their services, but was unable to fully utilize that technical staff,
but its utilization rate has increase as compared to the quarter ended March 31,
2001 when it had gross margin of $4 and 0.2% of revenue.
IT Staffing gross profit increased by $48 (57.1%) to $132 in 2001 from $84
in 2000 as revenue increased by 7.6%. Gross margin increased to 38.9% in 2001
from 26.7% in 2000. IT Staffing's gross margin is influenced by the mix of
revenues. As discussed above, IT Staffing had higher revenues from permanent
placements in 2001 as compared to 2000, and permanent placements contribute much
higher gross margins. Revenues from temporary placements decreased as a
percentage of total revenues, and these revenues produce lower gross margins
than do permanent placements, particularly because a large percentage of the
revenues for temporary placements were attributed to a contract with a major
customer that limits the rates for that particular customer.
Stratasoft gross profit increased by $266 (53.4%) to $764 in 2001 from $498
in 2000 as revenue increased by 35.7%. Gross margin for Stratasoft increased to
48.1% in 2001 from 42.5% in 2000. The increased gross profit is consistent with
the increased sales volume. Gross margin is also impacted by the mix of sales
between systems sales, which include a hardware component, as compared to
software only sales, which do not have a hardware cost of goods component.
Corporate gross profit increased by $241 (106.6%) to gross profit of $15 in
2001 from a gross loss of $226 in 2000 as revenue decreased from $762 in 2000 to
$1 in 2001. Gross margin increased to 1500% in 2001 from (29.7%) in 2000. The El
Paso service business that was sold on May 19, 2000 produced gross profit of $4
in 2001 as compared to a gross loss of $183 in the same quarter in 2000. We
experienced certain costs related to winding up our service operations in the El
Paso branch office that negatively impacted gross profit in 2000. Augmenting
those results, the gross margin on installations for the customer that was lost
in the Computer Products Division sale produced a gross profit of $12 in 2001 as
compared to a gross loss of $43 in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $784 (40.2%) to $2,735 in 2001 from $1,951
in 2000. As a percentage of revenue, these expenses increased by 1.6%, to 47.7%
of revenue in 2001 from 46.1% of revenue in 2000. Overall, our spending was up
primarily related to hiring new members of management for the new subsidiary
companies ($146, of which $97 was for INX which was newly formed and had no
operations in 2000), and expanding the sales marketing staff in the new
companies ($587, of which $362 was for INX which was newly formed and had no
operations in 2000). Bad debt expense decreased by $178 in 2001 as compared to
2000. Corporate selling, general and administrative expenses increased by $232
in 2001 as compared to 2000 because costs related to the maintenance of the
corporate organization, including executive management compensation,
corporate-level insurance, depreciation, legal, director and investor relations
expenses, which were previously allocated out to the operating segments, and
which are now included in the Corporate segment, were allocated to the Computer
Products Division in 2000.
INTEREST INCOME. Interest income increased by $11 to $61 in 2001 compared
to $50 in 2000.
DISCONTINUED OPERATIONS. On March 16, 2000 we entered into an agreement to
sell certain assets of, and the ongoing operation of, our Computer Products
Division. The sale transaction closed on May 19, 2000. As a consequence of these
events, the operations of Computer Products are reported as discontinued
operations. For the quarters ended June 30, 2001 and 2000, respectively, the
gain on disposal related to Computer Products was $346 in 2000 as compared to a
loss on disposal of $387, net of taxes of $179 and $199.
NET LOSS. The net loss was $737 in the quarter ended June 30, 2001 which
was comprised of a loss of $1,083 (after a benefit for income taxes of $179) on
continuing operations offset by a $346 (net of tax of $179) gain on disposal.
The net loss in the quarter ended June 30, 2000 was a loss of $1,168, comprised
of a loss of $781 on continuing operations, after a benefit for income taxes
totaling $386 and a loss on disposal of $387, after a benefit for income taxes
of $199.
Six Months Ended June 30, 2001 Compared To Six Months Ended June 30, 2000
(Dollars in thousands)
The following table sets forth, for the periods indicated, certain
financial data derived from our unaudited consolidated statements of operations
for the three months ended March 31, 2001 and 2000. The discussion below relates
only to our continuing operations, unless otherwise noted.
Six months ended June 30,
-------------------------
2001 2000
---- ----
Amount % Amount %
------- ------- ------ -------
Revenue
Allstar $ 2,394 22.6 $ 4,267 41.8
INX 4,363 41.2 0 0.0
IT Staffing 578 5.5 636 6.2
Stratasoft 3,272 30.9 3,645 35.7
Corporate (2) (0.0) 1,664 16.3
Elimination (27) (0.2) 0 0.0
------ ------- ------ -------
Total revenue 10,578 100.0 10,212 100.0
Gross profit (loss):
Allstar Systems, Inc. 331 13.8 1,062 24.9
INX 325 7.4 0 0.0
IT Staffing 217 37.5 164 25.8
Stratasoft 1,735 53.1 1,820 49.9
Corporate (2) 100.0 73 4.4
Elimination (15) (55.6) 0 0.0
------ ------- ------ -------
Total gross profit 2,591 24.5 3,119 30.5
Selling, general and administrative
expenses:
Allstar 1,681 70.2 1,649 38.6
INX 1,392 31.9 0 0.0
IT Staffing 383 66.3 174 27.4
Stratasoft 1,399 42.8 1,808 49.6
Corporate 907 45350.0 629 37.8
Elimination (15) (55.6) 0 0.0
------ ------- ------ -------
Total selling, general and
administrative
Expenses 5,747 54.3 4,260 41.7
Operating (loss) income:
Allstar (1,350) (56.4) (587) (13.8)
INX (1,067) (24.5) 0 0.0
IT Staffing (166) (28.7) (10) (1.6)
Stratasoft 336 10.3 12 0.3
Corporate (909) (45450.0) (556) (33.4)
------ ------- ------ -------
Total operating loss (3,156) (29.8) (1,141) (11.1)
Interest (income) (157) (1.5) (35) (0.3)
------ ------- ------ -------
Loss before benefit for income taxes (2,999) (28.3) (1,106) (10.8)
Benefit for income taxes (179) (1.7) (367) (3.6)
------ ------- ------ -------
Net loss from continuing operations (2,820) (26.6) (739) (7.2)
Discontinued operations:
Net income from discontinued
operations,
net of taxes 301 2.9
Gain on disposal 346 3.3 4,486 43.9
------ ------- ------ -------
Net (loss) income $(2,474) (23.3) $ 4,048 39.6
====== ======= ====== =======
TOTAL REVENUE. Total revenue decreased by $366 (3.6%) to $10,578 in 2001
From $10,212 in 2000.
Allstar revenue decreased by $1,873 (43.9%) to $2,394 in 2001 from $4,267
in 2000. As a percentage of total revenue Allstar revenue decreased to 22.6% in
2001 from 41.8% in 2000. The decrease in ACS revenue was primarily attributable
to issues related to the loss of revenue from certain customers after the sale
of the Computer Products Division.
INX revenue was $4,363 for the six months and represented 41.2% of total
revenue. INX was newly formed in July 2000 to meet the needs of customers in the
area of large-scale network infrastructure requirements that are Cisco centric.
INX exerted intense efforts to introduce itself to the market in Dallas and
Houston and form customer relationships.
IT Staffing revenue decreased by $58 (9.1%) to $578 in 2001 from $636 in
2000. As a percentage of total revenue IT Staffing revenue decreased to 5.5% in
2001 from 6.2% in 2000. IT Staffing experienced a change in its mix of revenue
sources such that permanent placements, which produce higher gross margin,
increased to 26.7% of its total revenues in 2001 from 10.2% in 2000. Temporary
placements decreased to 73.3% in 2001 from 89.8% in 2000.
Stratasoft revenue decreased by $373 (10.2%) to $3,272 in 2001 from $3,645
in 2000. Stratasoft revenue, as a percentage of total revenue, decreased to
30.9% in 2001 from 35.7% in 2000. In 2000 Stratasoft had one large contract
which contributed $580 in revenues but no such large contract occurred in 2001.
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 and including prior period installation revenue that was 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. As these operations have ceased or are winding up we expected an
insignificant amount of revenue in the six months ending June 30, 2001.
Corporate revenue decreased by $1,666 (100.1%) to $(2) in 2001 from $1,664 in
2000. Revenue in 2001 is negative because of credits issued to customers. As a
percentage of total revenue Corporate revenue decreased to (0.0)% in 2001 from
16.3% in 2000. The El Paso branch office service business had revenue of $(1)
and $941 in the six month periods ended June 30, 2001 and 2000, respectively.
Installation revenue for the certain customer of the Computer Products Division
(also discontinued effective May 19, 2000) contributed revenue of $0 and $723 in
the six month peiods ended June 30, 2001 and 2000, respectively.
GROSS PROFIT. Gross profit decreased by $528 (16.9%) to $2,591 in 2001 from
$3,119 in 2000. Gross margin decreased to 24.5% in 2001 from 30.5% in 2000.
Allstar gross profit decreased by $731 (68.8%) to $331 in 2001 from $1,062
in 2000. Gross margin for Allstar decreased to 13.8% in 2001 from 24.9% in 2000.
Allstar cost of service consists primarily of labor cost. Labor has a more fixed
nature such that higher levels of service revenue produces higher levels of
gross margin while lower levels of service revenue produces 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, Allstar experienced lower labor utilization related to lower revenue.
INX gross profit was $325 and 7.4% of revenue. Since INX was formed in July
2000, there is no history for comparison. As a newly formed start-up operation,
it 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 in the first three months of the period. INX gross
margins increased to 12.1% in the second three months of the period, but has not
yet achieved optimum utilization of its technical staff.
IT Staffing gross profit increased by $53 (32.3%) to $217 in 2001 from $164
in 2000 as revenue decreased by 9.1%. Gross margin increased to 37.5% in 2001
from 25.8% in 2000. IT Staffing's gross margin is influenced by the mix of
revenues. As discussed above, IT Staffing had higher revenues from permanent
placements in 2001 as compared to 2000, and permanent placements contribute much
higher gross margins.
Stratasoft gross profit decreased by $85 (4.7%) to $1,735 in 2001 from
$1,820 in 2000 as revenue decreased by 10.2%. Gross margin for Stratasoft
increased to 53.1% in 2001 from 49.9% in 2000. The decreased gross profit is
consistent with the decreased sales volume. Gross margin is also impacted by the
mix of sales between systems sales, which include a hardware component, as
compared to software only sales, which do not have a hardware cost of goods
component.
Corporate gross profit decreased by $75 (102.7%) to a loss of $2 in 2001
from a gross profit of $73 in 2000 as revenue decreased by 100.1%. The El Paso
service business that was sold on May 19, 2000 produced gross loss of $15 in
2001 as compared to $26 in the same six months in 2000. 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 profit of $12 in 2001 as compared to $99 in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,487 (34.9%) to $5,747 in 2001 from
$4,260 in 2000. As a percentage of revenue, these expenses increased by 12.6%,
to 54.3% of revenue in 2001 from 41.7% of revenue in 2000. Overall, our spending
was up primarily related to hiring new members of management for the new
subsidiary companies ($388, of which $233 was for INX which was newly formed and
had no operations in 2000), and expanding the sales marketing staff in the new
companies ($844, of which $468 was for INX which was newly formed and had no
operations in 2000). Bad debt expense decreased by $103 in 2001 as compared to
2000. Corporate selling, general and administrative expenses increased by $418
in 2001 as compared to 2000 because costs related to the maintenance of the
corporate organization, including executive management compensation,
corporate-level insurance, depreciation, legal, director and investor relations
expenses, which were previously allocated out to the operating segments, and
which are now included in the Corporate segment, were allocated to the Computer
Products Division in 2000.
INTEREST INCOME. Interest income increased by $122 to $157 in 2001 compared
to interest expense of $35 in 2000, primarily due to the reduction of notes
payable and investment of available cash.
DISCONTINUED OPERATIONS. On March 16, 2000 we entered into an agreement to
sell certain assets of, and the ongoing operation of, our Computer Products
Division. The sale transaction closed on May 19, 2000. As a consequence of these
events, the operations of Computer Products are reported as discontinued
operations. For the six months ended June 30, 2001 and 2000, respectively, net
income from discontinued operations was $0 and $301 (net of taxes of $0 and
$156) and the gain on disposal related to the Computer Products Division was
$346 and $4,486, net of taxes of $179 and $2,313.
NET LOSS. The net loss was $2,474 in the six months ended June 30, 2001
which was comprised of a loss of $2,820 (after a benefit for income taxes of
$179) on continuing operations offset by a $346 (net of tax of $179) gain on
disposal. The net loss in the quarter ended June 30, 2000 was income of $4,048,
comprised of a loss of $739 on continuing operations, after a benefit for income
taxes totaling $367, offset by net income from discontinued operations of $301,
net of taxes of $156 and a gain on disposal of $4,486, after a provision for
income taxes of $2,313.
Liquidity and Capital Resources
Our working capital was $7,766 and $10,098 at June 30, 2001 and December
31, 2000, respectively. As of June 30, 2001, we had no outstanding debt and
available borrowing base of $1,721 under our Deutsche Financial Services credit
facility. We expect to satisfy our capital requirements from our existing cash
balances and collection of our accounts receivables.
Cash Flow
Operating activities used net cash totaling $3,083 during the six months
ended June 30, 2001. Operating activities used net cash during the period
primarily to fund operating losses of $2,474, an increase in accounts payable of
$806 and an increase in accounts receivable of $418. These uses of cash were
offset by cash provided by an decrease in inventory of $212, an increase in
accrued expenses of $573, a increase in billings in excess of cost and estimated
earnings of $70 and a non cash charge of depreciation of $301 which increased
the operating loss.
Investing activities provided cash totaling $339, comprised primarily of
the proceeds from the sale of discontinued operations of $525 offset by capital
expenditures of $136 during the six months ended June 30, 2001 and financing
activities used cash totaling $162.
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 $4,891 and
$4,473 at June 30, 2001 and December 31, 2000, respectively.
Current Debt Obligations
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 historically was 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 June 30, 2001, we had $18 outstanding on the Inventory Line and had
total credit availability of $1,721.
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. We are not in compliance with a certain covenant for which
we subsequently received a waiver. As part of the waiver our credit availability
has been reduced to $750,000 through October 15, 2001. We do not believe the
reduction of availability is a hindrance to our operations as the credit
facility has been in limited use since the discontinuation of our Computer
Products Division. We are in the process of evaluating our credit facility needs
and are in discussion with DFS regarding modifying, or perhaps terminating, our
relationship.
ITEM 3. 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 the six months ended June 30, 2001, a one-percent increase in interest
rates paid by us on our debt would not have resulted in an increase in interest
for the period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
We are party to other 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. We believe the final outcome of such
matters will not have a materially adverse effect on its results of operations
or financial position.
SIGNATURES
Pursuant to the requirements 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.
I-Sector Corporation.
August 14, 2001 By: /s/ JAMES H. LONG
-----------------
Date James H. Long, Chief Executive Officer,
President and Chairman of the Board
(Principal Financial and Accounting Officer)