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 September 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 November 13, 2001
3,849,525 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)
September 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,191 $ 8,346
Accounts receivable, net 3,894 4,473
Accounts receivable - affiliates 278 303
Accounts receivable - other 36 141
Inventory 1,004 774
Income taxes receivable 863 863
Cost and estimated earnings
in excess of billings 798
Other current assets 292 233
----------- -----------
Total current assets 12,356 15,133
Property and equipment 1,298 1,579
Other assets 1,464 430
----------- -----------
Total $ 15,118 $ 17,142
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,438 $ 1,892
Billings in excess of cost
and estimated earnings 503
Accrued expenses 2,349 1,635
Net liabilities related to
discontinued operations 872 869
Deferred service revenue 126 136
Short term debt 179
----------- -----------
Total current liabilities 5,964 5,035
Deferred credit - stock warrants 195 195
Long term debt 467
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 September 30, 2001
and December 31, 2000 44 44
Additional paid in capital 10,185 10,182
Unearned equity compensation (1)
Treasury stock (591,800 and 399,800
shares, at cost) at September
30, 2001 and December 31, 2000 (1,187) (992)
Retained earnings (550) 2,679
----------- -----------
Total stockholders' equity 8,492 11,912
----------- -----------
Total $ 15,118 $ 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 September 30,
2001 2000
---- ----
Total revenue $ 6,529 $ 4,173
Cost of sales and services 4,697 3,314
----------- -----------
Gross profit 1,832 859
Selling, general and administrative expenses 2,703 3,282
----------- -----------
Operating loss (871) (2,423)
Interest income and other income (116) (100)
----------- -----------
Loss from continuing operations before
benefit for income taxes (755) (2,323)
Benefit for income taxes (708)
----------- -----------
Net loss from continuing operations (755) (1,615)
Discontinued Operations:
Loss on disposal (1,095)
----------- -----------
Net loss $ (755) $ (2,710)
=========== ===========
Net (loss) income per share:
Basic and diluted:
Net loss from continuing operations $ (0.20) $ (0.40)
Loss on disposal 0.00 (0.27)
---------- -----------
Net loss per share $ (0.20) $ (0.67)
========== ===========
Weighted average shares outstanding:
Basic and diluted 3,853,607 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)
Nine Months Ended September 30,
2001 2000
---- ----
Total revenue $ 17,107 $ 14,386
Cost of sales and services 12,684 10,407
----------- -----------
Gross profit 4,423 3,979
Selling, general and administrative expenses 8,450 7,544
----------- -----------
Operating loss (4,027) (3,565)
Interest income and other income (273) (135)
----------- -----------
Loss from continuing operations before
benefit for income taxes (3,754) (3,430)
Benefit for income taxes (179) (1,075)
----------- -----------
Net loss from continuing operations (3,575) (2,355)
Discontinued Operations:
Net income from discontinued operations,
net of taxes 300
Gain on disposal, net of taxes 346 3,392
----------- -----------
Net (loss) income $ (3,229) $ 1,337
=========== ===========
Net (loss) income per share:
Basic and diluted:
Net loss from continuing operations $ (0.92) $ (0.58)
Net income from discontinued operations 0.07
Gain on disposal 0.09 0.84
---------- -----------
Net (loss) income per share $ (0.83) $ 0.33
========== ===========
Weighted average shares outstanding:
Basic and diluted 3,901,783 4,048,672
=========== ===========
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2001 2000
---- ----
Net (loss) income $ (3,229) $ 1,337
Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities:
Net income from discontinued operations (300)
Gain on disposal of discontinued operations (346) (3,392)
Depreciation and amortization 380 376
Deferred tax provision (179) (2,233)
Changes in assets and liabilities that provided
(used) cash:
Accounts receivable, net 579 30,622
Accounts receivable - affiliates and other 130 (44)
Inventory (164) (82)
Cost and estimated earnings in excess of
billings (798)
Other current assets (59) 181
Other assets 137 29
Accounts payable 546 (19,901)
Accrued expenses 714 (1,758)
Income taxes payable (521)
Billings in excess of cost and estimated
earnings (503)
Deferred service revenue (10) (143)
----------- -----------
Net cash (used in) provided by continuing
operating activities (2,802) 4,171
Net cash provided by discontinued operations 3 852
----------- -----------
Net cash (used in) provided by operating
activities (2,799) 5,023
Cash flows from investing activities:
Acquisition costs (50)
Capital expenditures (636) (333)
Proceeds from sale of discontinued operations 525 15,029
----------- -----------
Net cash (used in) provided by continuing
operations (161) 14,696
Net cash provided by discontinued operations 279
----------- -----------
Net cash (used in) provided by investing
activities: (161) 14,975
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (195) (14)
Net decrease in notes payable (15,869)
----------- -----------
Net cash provided by (used in)
financing activities: (195) (15,883)
----------- -----------
Net (decrease) increase in cash and cash
equivalents (3,155) 4,115
Cash and cash equivalents at beginning of period 8,346 4,647
----------- -----------
Cash and cash equivalents at end of period $ 5,191 $ 8,762
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 0 $ 375
=========== ===========
Cash paid for taxes $ 0 $ 1,009
=========== ===========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Intangible assets acquired through note
payable $ 646 $
============= ============
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:
Allstar Solutions, Inc. ("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.
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.
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 nine months ended September 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:
September 30, December 31,
2001 2000
Costs incurred on uncompleted contracts $ 195 $ 135
Estimated earnings 1,275 361
------- -------
1,470 496
Less: Billings to date 672 999
------- -------
Cost and estimated earnings in excess of billings $ 798
=======
Billings in excess of cost and estimated earnings $ 503
=======
Accounting Pronouncements In June, 2001, Statement of Accounting Standards
("SFAS"), SFAS No. 141, "Business Combinations" was approved by the Financial
Accounting Standards Board ("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. The adoption of this
statement had no effect on I-Sector's consolidated financial position or its
results of operations.
In June, 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.
In August, 2001, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" was approved by the FASB. SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed of". SFAS No. 144 requires recognition of an impairment
loss, measured as the difference between the carrying amount and the fair value
of the asset, only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows. The Company is required to
implement SFAS No. 144 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 nine month periods ended September 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 nine months ended June 30, 2001 and 2000.
The balance sheet caption "Net Liabilities related to discontinued
operations" contains $872 and $869 at September 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 September 30, 2001, I-Sector had $677 outstanding under the Inventory
line.
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 of 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. Subsequent to September 30, 2001 I-Sector and DFS
mutually agreed to terminate their relationship. I-Sector is in process of
evaluating its credit facility needs and is in discussion with other parties
regarding the establishment of another credit facility.
On September 27, 2001 Stratasoft, a subsidiary of I-Sector, signed a note
payable to a third party for $725 payable in monthly installments through
February, 2007. The note does not bear interest and I-Sector has imputed
interest at 5.5% to record the debt and related patent asset. In connection with
this note payable, I-Sector has reported short-term debt maturing within one
year of $179 and long-term debt of $467. Stratasoft has granted a security
interest in its pending patent application and the next two patent applications
filed by Stratasoft.
4. SEGMENT INFORMATION
I-Sector operates through four subsidiary corporations, each of which is
focused on a specific area of the information and/or communications technology
industry:
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, turnkey IT
project implementation and consultation and turnkey sales and
installation of certain highly specialized IT products.
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
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.
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.
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 September 30, 2001:
IT
Allstar INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 1,682 $ 2,876 $ 288 $ 1,687 $ (4) $ $ 6,529
Cost of sales and services 1,181 2,516 164 841 (5) 4,697
------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 501 360 124 846 1 1,832
Selling, general and
administrative expenses 772 729 186 715 301 2,703
------ ------ ------ ------ ------ ------ ------
Operating (loss) income $ (271) $ (369) $ (62) $ 131 $ (300) $ (871)
====== ====== ====== ====== ====== ======
Interest (income) (116)
------
Loss before benefit for income tax (755)
Benefit for income tax ------
Net loss from continuing operations (755)
Net gain on disposal, net of taxes ------
Net loss $ (755)
======
Accounts receivable, net $ 1,052 $ 2,107 $ 158 $ 574 $ (2) $ 0 3,889
====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 5
------
Total accounts receivable, net $ 3,894
======
For the quarter ended September 30, 2000:
Total revenue $ 1,412 $ 700 $ 334 $ 1,779 $ (41) $ (11) $ 4,173
Cost of sales and services 1,246 735 250 1,015 79 (11) 3,314
------ ------ ------ ------ ------ ------ ------
Gross profit 166 (35) 84 764 (120) 0 859
Selling, general and
administrative expenses 690 327 138 1,139 988 0 3,282
------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ (524) $ (362) $ (54) $ (375) $(1,108) $ 0 (2,423)
====== ====== ====== ====== ====== ======
Interest income (100)
------
Loss before benefit
for income tax (2,323)
Benefit for income tax (708)
------
Net loss from continuing operations (1,615)
Loss on disposal, net of taxes (1,095)
------
Net loss $(2,710)
======
Accounts receivable, net $ 1,716 $ 266 $ 279 $ 803 $ 1,055 $ 0 $ 4,119
====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 1,511
------
Total accounts receivable, net $ 5,630
======
For the nine months ended September 30, 2001:
IT
Allstar INX Staffing Stratasoft Corporate Elimination Consolidated
Total revenue $ 4,076 $ 7,239 $ 866 $ 4,959 $ (6) $ (27) $ 17,107
Cost of sales and services 3,245 6,554 525 2,377 (5) (12) 12,684
------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 831 685 341 2,582 (1) (15) 4,423
Selling, general and
administrative expenses 2,453 2,121 570 2,114 1,207 (15) 8,450
------ ------ ------ ------ ------ ------ ------
Operating (loss) income $ (1,622) $ (1,436) $ (229) $ 468 $ (1,208) $ 0 (4,027)
======= ======= ====== ====== ====== ======
Interest (income) (273)
------
Loss before benefit for income tax (3,754)
Benefit for income tax (179)
------
Net loss from continuing operations (3,575)
Net gain on disposal 346
------
Net loss $ (3,229)
======
For the nine months ended September 30, 2000:
Total revenue $ 5,680 $ 700 $ 970 $ 5,424 $ 1,623 $ (11) $ 14,386
Cost of sales and services 4,450 735 722 2,841 1,670 (11) 10,407
------ ------ ------ ------ ------ ------ ------
Gross profit 1,230 (35) 248 2,583 (47) 0 3,979
Selling, general and
administrative expenses 2,338 327 312 2,947 1,620 0 7,544
------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ (1,108) $ (362) $ (64) $ (364) $ (1,667) $ 0 (3,565)
====== ====== ====== ====== ====== ======
Interest (income) (135)
------
Loss before benefit
for income tax (3,430)
Benefit for income tax (1,075)
------
Net loss from continuing operations (2,355)
Net income from discontinuing operations,
net of taxes 300
Gain on disposal, net of taxes 3,392
------
Net income $ 1,337
======
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 0 and 835 potentially dilutive options for the three and nine
months ended September 30, 2001. Potentially dilutive options of 148,733 and
214,360 for the three and nine month periods ended September 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 alleged infringement of
certain patents owned by the competitor and was 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
Technologies, Inc. et al, as well as unspecified monetary damages. Stratasoft
settled the patent infringement lawsuit on September 27, 2001 for a cash payment
and a note payable in exchange for a patent licensing cross-licensing agreement.
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.
7. NOTE PAYBLE
On September 27, 2001 the Company signed a note payable to a third party
for $725 payable in monthly installments through February, 2007. The note does
not have a stated interest rate. The Company has imputed interest at 5.5% to
record the debt. The Company has reported short-term debt of $179 and long-term
debt of $467 related to this note payable. The Company has granted a security
interest in its pending patent application and the next two patent applications
filed.
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:
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, turnkey IT
project implementation and consultation and turnkey sales and
installation of certain highly specialized IT products.
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
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.
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 September 30, 2001,
Allstar, INX and IT Staffing produced 25.8%, 44.0% and 4.4% of total revenues,
while Stratasoft produced 25.9% 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 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 September 30, 2001 Compared To Three Months Ended September
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 September 30, 2001 and 2000. The discussion below
relates only to our continuing operations, unless otherwise noted.
Three months ended September 30,
--------------------------------
2001 2000
---- ----
Amount % Amount %
------ ------ ------ ------
Revenue
Allstar $ 1,682 25.8 $ 1,412 33.8
INX 2,876 44.0 700 16.8
IT Staffing 288 4.4 334 8.0
Stratasoft 1,687 25.9 1,779 42.6
Corporate (4) (0.1) (41) (1.0)
Elimination 0.0 (11) (0.2)
-------- ------- -------- -------
Total revenue 6,529 100.0 4,173 100.0
Gross profit (loss):
Allstar 501 29.8 166 11.8
INX 360 12.5 (35) (5.0)
IT Staffing 124 43.1 84 25.1
Stratasoft 846 50.1 764 42.9
Corporate 1 25.0 (120) (292.7)
Elimination 0.0 0 0.0
-------- ------- -------- -------
Total gross profit 1,832 28.1 859 20.6
Selling, general and administrative expenses:
Allstar 772 45.9 690 48.9
INX 729 25.3 327 46.7
IT Staffing 186 64.6 138 41.3
Stratasoft 715 42.4 1,139 64.0
Corporate 301 7,525.0 988 2,410.0
Elimination 0.0 0 0.0
-------- ------- -------- -------
Total selling, general and administrative
Expenses 2,703 41.4 3,282 78.6
Operating (loss) income:
Allstar (271) (16.1) (524) (37.11)
INX (369) (12.8) (362) (51.7)
IT Staffing (62) (21.5) (54) (16.2)
Stratasoft 131 7.8 (375) (21.1)
Corporate (300) 7,500.0) (1,108)(2,702.4)
-------- ------- -------- -------
Total operating (loss) income (871) (13.3) (2,423) (58.1)
Interest (income) and other income (116) (1.8) (100) (2.4)
-------- ------- -------- -------
Loss before benefit for income taxes (755) (11.5) (2,323) (55.7)
Benefit for income taxes 0.0 (708) (17.0)
-------- ------- -------- -------
Net loss from continuing operations (755) (11.5) (1,615) (38.7)
Discontinued operations:
Gain (loss) on disposal 0.0 (1,095) (26.2)
-------- ------- -------- -------
Net loss $ (755) (11.5) $ (2,710) (64.9)
======== ======= ======== =======
TOTAL REVENUE. Total revenue increased by $2,356 (56.5%) to $6,529 in 2001
from $4,173 in 2000.
Allstar revenue increased by $270 (19.1%) to $1,682 in 2001 from $1,412 in
2000. As a percentage of total revenue Allstar revenue decreased to 25.8% in
2001 from 33.8% in 2000. The increase in Allstar revenue was primarily
attributable to issues in 2000 related to the loss of revenue from certain
customers after the sale of the Computer Products Division. Additionally, in
2001, Allstar's product revenues increased by $400 to $414 in 2001 as compared
to $14 in 2000.
INX revenue increased by $2,176 (310.9%) to $2,876 in 2001 as compared to
$700 in 2000, its initial quarter of operation. As a percentage of total revenue
INX revenue increased to 44.0% in 2001 from 16.8% in 2000. 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 decreased by $46 (13.8%) to $288 in 2001 from $334 in
2000. As a percentage of total revenue IT Staffing revenue decreased to 4.4% in
2001 from 8.0% in 2000. IT Staffing experienced a reduction in the scope of a
contract with its largest customer in the quarter ended September 30, 2001.
Stratasoft revenue decreased by $92 (5.2%) to $1,687 in 2001 from $1,779 in
2000. Stratasoft revenue, as a percentage of total decreased to 25.9% in 2001 as
compared to 42.6% in 2000.
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 September 30, 2001.
Corporate revenue decreased by $(37) (90.2%) to $(4) in 2001 from $(41) in 2000.
As a percentage of total revenue Corporate revenue decreased to (0.1)% in 2001
from (1.0)% in 2000. The negative revenues for the Corporate segment result from
credits issued to customers.
GROSS PROFIT. Gross profit increased by $973 (113.7%) to $1,832 in 2001
from $859 in 2000. Gross margin increased to 28.1% in 2001 from 20.6% in 2000.
Allstar gross profit increased by $335 (201.8%) to $501 in 2001 from $166
in 2000. Gross margins for Allstar increased to 29.8% in 2001 from 11.8% 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 increased by $395 (1128.6%) to $360 in 2001 from a gross
loss of $35 in 2000, it's initial quarter of operations. Gross margins for INX
increased to 12.5% of revenue in 2001 from (5.0%) in 2000. As a newly formed
start-up operation in 2000, 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 increased in 2001.
IT Staffing gross profit increased by $40 (47.6%) to $124 in 2001 from $84
in 2000 as revenue decreased by 13.8%. Gross margin increased to 43.1% in 2001
from 25.1% 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 normally produce lower gross
margins than do permanent placements, particularly in 2000 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 $82 (10.7%) to $846 in 2001 from $764
in 2000 as revenue decreased by 5.2%. Gross margin for Stratasoft increased to
50.1% in 2001 from 42.9% in 2000. 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 $121 (100.8%) to gross profit of $1 in
2001 from a gross loss of $120 in 2000 as revenue increased from $(41) in 2000
to $(4) in 2001. Gross margin increased to 25.0% in 2001 from (292.7%) in 2000.
The gross margin on installations for the customer that was lost in the Computer
Products Division sale produced a gross profit of $1 in 2001 as compared to a
gross loss of $(120) in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $579 (17.6%) to $2,703 in 2001 from $3,282
in 2000. As a percentage of revenue, these expenses decreased by 37.2%, to 41.4%
of revenue in 2001 from 78.6% of revenue in 2000. Overall, our spending was up
in 2001 primarily related expanding the sales marketing staff in the new
companies ($1,192, of which $810 was for INX which was formed in the 2000
quarter). Bad debt expense increased by $83 in 2001 as compared to 2000.
Corporate selling, general and administrative expenses decreased by $68 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 AND OTHER INCOME. Interest income decreased by $55 to $45
in 2001 compared to $100 in 2000. Other income increased to $71 in 2001 compared
to $0 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 September 30, 2001 and 2000, respectively,
the loss on disposal related to Computer Products was $0 in 2001 as compared to
a loss on disposal of $1,095 in 2000, net of taxes of $0 and $566, respectively.
NET LOSS. The net loss was $755 in the quarter ended September 30, 2001
which was comprised of a loss of $755 (after a benefit for income taxes of $0)
on continuing operations. The net loss in the quarter ended September 30, 2000
was a loss of $2,710, comprised of a loss of $1,615 on continuing operations,
after a benefit for income taxes totaling $708 and a loss on disposal of $1,095,
after a benefit for income taxes of $566.
Nine Months Ended September 30, 2001 Compared To Nine Months Ended September 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 nine months ended September 31, 2001 and 2000. The discussion below
relates only to our continuing operations, unless otherwise noted.
Nine months ended September 30,
-------------------------------
2001 2000
---- ----
Amount % Amount %
------ ------ ------ ------
Revenue
Allstar $ 4,076 23.8 $ 5,680 39.5
INX 7,239 42.3 700 4.9
IT Staffing 866 5.1 970 6.7
Stratasoft 4,959 29.0 5,424 37.7
Corporate (6) (0.0) 1,623 11.3
Elimination (27) (0.2) (11) (0.1)
-------- -------- ------- -------
Total revenue 17,107 100.0 14,386 100.0
Gross profit (loss):
Allstar 831 20.4 1,230 21.7
INX 685 9.5 (35) (5.0)
IT Staffing 341 39.4 248 25.6
Stratasoft 2,582 52.1 2,583 47.6
Corporate (1) 16.7 (47) (2.9)
Elimination (15) (55.6) 0 0.0
-------- -------- ------- -------
Total gross profit 4,423 25.9 3,979 27.7
Selling, general and administrative expenses:
Allstar 2,453 60.2 2,338 41.2
INX 2,121 29.3 327 46.7
IT Staffing 570 65.8 312 32.2
Stratasoft 2,114 42.6 2,947 54.3
Corporate 1,207 (20,116.7) 1,620 99.8
Elimination (15) 55.6 0 0.0
-------- -------- -------- -------
Total selling, general and administrative
Expenses 8,450 49.4 7,544 52.4
Operating (loss) income:
Allstar (1,622) (39.8) (1,108) (19.5)
INX (1,436) (19.8) (362) (51.7)
IT Staffing (229) (26.4) (64) (6.6)
Stratasoft 468 9.4 (364) (6.7)
Corporate (1,208)(20,133.3) (1,667) (102.7)
-------- -------- -------- -------
Total operating loss (4,027) (23.5) (3,565) (24.8)
Interest (income) and other income (273) (1.6) (135) (0.1)
-------- -------- -------- -------
Loss before benefit for income taxes (3,754) (21.9) (3,430) (23.8)
Benefit for income taxes (179) (1.0) (1,075) (7.5)
-------- -------- -------- -------
Net loss from continuing operations (3,575) (20.9) (2,355) (16.4)
Discontinued operations:
Net income from discontinued operations,
net of taxes 300 2.1
Gain on disposal 346 2.0 3,392 23.6
-------- -------- -------- -------
Net (loss) income $ (3,229) (18.9) $ 1,337 9.3
======== ======== ======== =======
TOTAL REVENUE. Total revenue increased by $2,721 (18.9%) to $17,107 in 2001
from $14,386 in 2000.
Allstar revenue decreased by $1,604 (28.2%) to $4,076 in 2001 from $5,680
in 2000. As a percentage of total revenue Allstar revenue decreased to 23.8% in
2001 from 39.5% 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 increased by $6,539 (934.1%) to $7,239 in 2001 from $700 in
2000. As a percentage of total revenue, INX increased to 42.3% in 2001 from 4.9%
in 2000. 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 $104 (10.7%) to $866 in 2001 from $970 in
2000. As a percentage of total revenue IT Staffing revenue decreased to 5.1% in
2001 from 6.7% in 2000. IT Staffing experienced a change in its mix of revenue
sources such that permanent placements, which produce higher gross margin,
increased to 22.0% of its total revenues in 2001 from 8.9% in 2000. Temporary
placements decreased to 77.9% in 2001 from 91.1% in 2000.
Stratasoft revenue decreased by $465 (8.6%) to $4,959 in 2001 from $5,424
in 2000. Stratasoft revenue, as a percentage of total revenue, decreased to
29.0% in 2001 from 37.7% 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 nine months ending September 30, 2001.
Corporate revenue decreased by $1,629 (100.4%) to $(6) in 2001 from $1,623 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
11.3% in 2000. The El Paso branch office service business had revenue of $(1)
and $931 in the nine month periods ended September 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 $692 in the nine month periods ended September 30, 2001 and 2000,
respectively.
GROSS PROFIT. Gross profit increased by $444 (11.2%) to $4,423 in 2001 from
$3,979 in 2000. Gross margin decreased to 25.9% in 2001 from 27.7% in 2000.
Allstar gross profit decreased by $399 (32.4%) to $831 in 2001 from $1,230
in 2000. Gross margin for Allstar decreased to 20.4% in 2001 from 21.7% 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 increased by $720 (2057.1%) to $685 in 2001 from a gross
loss of $35 in 2000. Gross margin for INX increased to 9.5% in 2001 from (5.0)%
in 2000. INX was formed in July 2000 and therefore had only three months of
operations in 2000, as compared to nine months of operations in 2001. As a newly
formed start-up operation in 2000, 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 12.5% in the third three
months of the period, but have not yet achieved optimum utilization of its
technical staff.
IT Staffing gross profit increased by $93 (37.5%) to $341 in 2001 from $248
in 2000 as revenue decreased by 10.7%. Gross margin increased to 39.4% in 2001
from 25.6% 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 $1 (0.0%) to $2,582 in 2001 from
$2,583 in 2000 as revenue decreased by 8.6%. Gross margin for Stratasoft
increased to 52.1% in 2001 from 47.6% in 2000. Gross margin is 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 $46 (97.9%) to a loss of $1 in 2001
from a gross loss of $41 in 2000 as revenue decreased by $1,629 The El Paso
service business that was sold on May 19, 2000 produced gross loss of $15 in
2001 as compared to $27 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 a loss of
$20 in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $906 (12.0%) to $8,450 in 2001 from $7,544
in 2000. As a percentage of revenue, these expenses decreased by 3.0%, to 49.4%
of revenue in 2001 from 52.4% of revenue in 2000. Overall, our spending was up
primarily related to increased sales compensation due to expanding the sales
marketing staff for the new subsidiary companies ($1,192, of which $810 was for
INX which was formed in July of 2000). Bad debt expense increased by $83 in 2001
as compared to 2000. Administrative wages decreased $569 in 2001 as compared to
2000 due to planned reductions in force. Promotional expenditures increased $130
and utility costs increased $53 in 2001 as compared to 2001.
INTEREST INCOME AND OTHER INCOME. Interest income and other income
increased by $138 to $273 in 2001 compared to interest expense of $135 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 nine months ended September 30, 2001 and 2000, respectively,
net income from discontinued operations was $0 and $300 (net of taxes of $0 and
$156) and the gain on disposal related to the Computer Products Division was
$346 and $3,392, net of taxes of $179 and $1,748.
NET LOSS. The net loss was $3,229 in the nine months ended September 30,
2001 which was comprised of a loss of $3,575 (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 September 30, 2000 was income of
$1,337, comprised of a loss of $2,355 on continuing operations, after a benefit
for income taxes totaling $1,075, offset by net income from discontinued
operations of $300, net of taxes of $156 and a gain on disposal of $3,392, after
a provision for income taxes of $1,748.
Liquidity and Capital Resources
Our working capital was $6,392 and $10,098 at September 30, 2001 and
December 31, 2000, respectively. As of September 30, 2001, we had short and long
term outstanding debt of $646. 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 $2,799 during the nine months
ended September 30, 2001. Operating activities used net cash during the period
primarily to fund operating losses of $3,229, an increase in inventory of $164,
an increase in other current assets of $59 and a decrease in billings in excess
of cost and estimated earnings of $1,301. These uses of cash were offset by cash
provided by a decrease in accounts receivable of $579, an increase in accounts
payable of $546, an increase in accrued expenses of $714, and a non cash charge
of depreciation of $380 which increased the operating loss.
Investing activities used cash totaling $161, comprised primarily of the
proceeds from the sale of discontinued operations of $525 offset by capital
expenditures of $636 during the nine months ended September 30, 2001 and
financing activities used cash totaling $195.
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 $3,894 and
$4,473 at September 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 September 30, 2001, we had $677 outstanding on the Inventory Line.
This agreement, which was terminated October 15, 2001, was collaterized by
substantially all of our assets, except for our patent assets, at September 30,
2001. The agreement contained restrictive covenants, which, among other things,
require us to maintain a minimum tangible net worth. The terms of the agreement
also prohibited 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 at September 30, 2001. As part of
the waiver our credit availability was reduced to $750,000 through October 15,
2001. Effective October 15,2001, by mutual agreement both parties agreed to
termination of the revolving line of credit. We do not believe the reduction of
availability or the termination of the agreement 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 other parties to
establish another credit line.
On September 27, 2001 Stratasoft, a subsidiary of I-Sector, signed a note
payable to a third party for $725 payable in monthly installments through
February, 2007. The note does not bear interest and we imputed interest at 5.5%
to record the debt. We reported short-term debt maturing within one year of $179
and long-term debt of $467 related to the note. Stratasoft granted a security
interest in its pending patent application and the next two patent applications
filed by Stratasoft.
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 nine months ended September 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. Stratasoft settled the
patent infringement lawsuit on September 27, 2001 for a cash payment and a note
payable in exchange for a patent cross-licensing agreement.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on August 8, 2001. At that
meeting the stockholders elected the slate of directors listed in its proxies
solicited for the meeting pursuant to Regulation 14. No other matters were voted
upon at the meeting.
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.
November 13, 2001 By: /s/ JAMES H. LONG
-----------------
Date James H. Long,
Chief Executive Officer, President and Chairman
of the Board (Principal Financial and Accounting
Officer)