Item 1. Business
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONTAINED IN ITEM 1. - "BUSINESS" ITEM 2.
Item 2. Properties
FACILITIES
We do not own any real property and currently lease all of our existing facilities. We lease our Houston office that is housed in a freestanding building of approximately 48,000 square feet. On November 30, 1999 the building was acquired by a Corporation owned by the Chairman, Chief Executive Officer and President of the Company and a new lease was signed which expires on December 1, 2004.
Our Dallas office is a space of approximately 8,960 square feet. The Dallas facility lease term began July 2000 and expires in July 2003.
Item 3.
Item 3. Legal Proceedings
We are party to litigation and claims which management believes are normal in the course of our operations; while the results of such litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our results of operations or financial position.
On February 1, 2000, a competitor brought a suit against our wholly-owned subsidiary Stratasoft, Inc. in ESHARE TECHNOLOGIES, INC. AND INVENTIONS, INC. V STRATASOFT, INC., Cause No. 1 99-CV-2303 for the United States District Court for the Northern District of Georgia. The plaintiff alleges infringement of certain patents owned by the competitor and is seeking a permanent injunction to prevent Stratasoft, Inc. from manufacturing, selling, offering for sale or using the alleged infringing products covered by patents owned by Eshare Technology, Inc. et al, as well as unspecified monetary damages. The suit is in its early stages of discovery, and therefore we are unable to determine the ultimate costs of this matter. We believe that this suit is without merit and intend to vigorously defend such action, however the case is currently scheduled for mediation in the immediate future. We have no assurance that mediation will result in a settlement on terms that are acceptable to us.
On May 17, 2000, Jack B. Corey ("Corey") filed a lawsuit against the Company styled JACK B. COREY V ALLSTAR SYSTEMS, INC., Cause No. 2000-24796, in the District Court of Harris County, Texas, 113th Judicial District, in which he sought a temporary restraining order, temporary and permanent injunctions to enjoin the Company's sale of certain assets to Amherst Technologies, L.L.C. ("Amherst"), and damages based on alleged shareholder oppression. The Court denied Corey's Application for Temporary Restraining Order and, after hearing, denied his request for a temporary injunction. On June 22, 2000, Corey filed his First Amended Original Petition and Application for Permanent Injunction, seeking to permanently enjoin the sale of assets which had already been consummated and to assert a cause of action for shareholder oppression based on alleged failures to provide Corey, a Company shareholder, notices relating to the shareholders' meeting held to approve the sale of assets to Amherst. The Company has answered and denied all claims and intends to vigorously contest Corey's claims. The case is set for trial on June 18, 2001. In addition to the claims he has asserted in the above-described lawsuit, Corey has verbally asserted claims in conversations with the Company's representatives and attorneys that the Company made various alleged misrepresentations regarding the Company's initial public offering that affected Corey's ability and intention to sell his Company shares. Corey verbally claims to have been damaged in the approximate amount of $1,337,500 but has not initiated litigation to pursue his verbal claims. Subsequently, Corey verbally offered a settlement of all matters for substantially less than his claimed damage amount. Should Corey initiate litigation to pursue his claims, the Company intends to vigorously contest those claims, however the Company will give consideration to offers to settle such matter if such a settlement is deemed to be in the best interest of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's shares were traded on the NASDAQ Small Cap Market under the symbol "ALLS" prior to July 11, 2000. Upon the change of our corporate name on July 11, 2000, our stock began trading under the symbol "ISEC".
High Low Fiscal 1999 First quarter 2.1875 1.00 Second quarter 2.875 1.0625 Third quarter 1.75 1.0625 Fourth quarter 1.875 1.00
Fiscal 2000 First quarter 5.00 1.375 Second quarter 3.50 1.938 Third quarter 2.438 1.563 Fourth quarter 1.688 0.625
As of March 16, 2001, there were 45 shareholders of record. Management estimates that there are approximately 890 beneficial holders of our common stock. We have never declared or paid any cash dividends on our Common Stock. On March 16, 2001, the closing sales price of our Common Stock as reported by NASDAQ was $ 1.063 per share. We currently anticipate that we will retain all earnings for use in our business operations. The payment of dividends is prohibited under our credit agreements, unless approved by the lenders.
Item 6.
Item 6. Selected Financial Data
The following sets forth the selected data of the company for the five years ended December 31, 2000.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements, including the Notes thereto, included elsewhere in this Annual Report on Form 10-K.
Overview
I-Sector Corporation ("I-Sector"), formerly Allstar Systems, Inc., has historically been engaged in the business of providing its customers with solutions to their information and communications technology needs. Through 1999, our revenue was historically derived through four primary areas of business, IT Services, CTI Software, Computer Products and Telecom Systems, each of which were historically been reported as a separate segment. During the year ended December 31, 1999 we discontinued our Telecom Systems business and during the quarter ended March 31, 2000 we discontinued our Computer Products business. We sold both Telecom Systems and Computer Products businesses in separate transactions during the first quarter of 2000. After the sale of these two businesses, in July 2000, we separated what had been the IT Services business into three separate businesses, each of which is a wholly-owned subsidiary corporation. One of these subsidiary companies is IT Staffing, Inc. ("IT Staffing"), which had already been operated as a wholly-owned subsidiary. We contributed the remaining components of the former IT Services business to two newly formed wholly-owned corporations, Allstar Computer Services, Inc. ("ACS") and Synergy Helpdesk Solutions, Inc. ("Synergy"). In July 2000, we formed another wholly-owned subsidiary, Internetworking Sciences, Inc. ("INX"), a professional services organization that focuses on the design, deployment and support of large-scale network infrastructure requirements. In October 2000 INX acquired certain assets of an unrelated professional service company in the Dallas area, which had a similar focus, and subsequently underwent a legal name change to Internetwork Experts, Inc. Our CTI Software business was not affected by the sale of the Computer Products and Telecom Systems business units, however we are now referring to this segment by its corporate name, "Stratasoft" rather than "CTI Software" as we have in the past. We market our services businesses in Texas from locations in the Houston and Dallas-Fort Worth metropolitan areas. Stratasoft markets its products worldwide through a direct sales force and an authorized dealer network. By operating through these highly focused wholly-owned subsidiaries, we believe that we will offer better customer service, and improve our financial performance. During the year ended December 31, 2000, ACS, Synergy, INX and IT Staffing produced 13.6%, 24.3%, 10.2% and 6.8% of total revenues, while Stratasoft produced 36.3% of total revenues. Gross margin varies substantially between each of these business segments. Over the past three years gross margin in the previously existing, but continuing, service businesses has ranged between 37.9% and 19.0% and gross margin for Stratasoft has ranged between 46.4% to 50.8%.
On March 16, 2000 we entered into an agreement whereby we agreed to sell the ongoing business operations of our Computer Products business, together with certain key assets of our IT Services business located in El Paso, Texas. Under the terms of the sale we received for the sale of the operations of the Computer Products business cash consideration of $14,779, plus the possibility of receiving a future payment of up to $500 from an escrow account. A gain on disposal of the Computer Products business, including an estimate of the operating results from the measurement date, March 16, 2000, to the closing date of the sale, May 19, 2000, of $914, and estimates for impairment of assets caused by the disposal decision of $2,820, totaling $3,734 (net of taxes of $2,607) has been recognized in the year ended December 31, 2000. Our income from discontinued operations of the Computer Products business was $302 and $1,343 and 132 (net of taxes of $156 and $688 and $68) in 2000, 1999 and 1998, respectively. We retained accounts receivable related to the Computer Products business of $20,266, net of reserves, fixed assets of $255 and liabilities related to the Computer Products business. The accounts receivable collected were used to repay all remaining liabilities of the Computer Products Division. Fixed assets were redeployed in the continuing operations. The sale of Computer Products closed on May 19, 2000, after shareholder and other required consents were obtained.
On November 2, 1999, we approved a plan to sell or close our Telecom Systems Division. The sale was finalized on March 16, 2000. Under the terms of the sale we received for the sale of the inventory and operations of Telecom Systems $250 cash. Additionally, the purchaser assumed all of our telephone equipment warranty obligations up to a maximum of $30, which was reached in October 2000. All future warranty costs incurred by the purchaser will be billed to us at an agreed upon rate. An estimate of the cost of future telephone equipment warranty obligations of $95 is included at December 31, 2000 in the balance sheet caption "Net liabilities related to discontinued operations". A disposal loss, including an estimate of the operating results from the measurement date, November 2, 1999 to the closing date of the sale of $580, and estimates for impairment of assets caused by the disposal decision of $558, totaling $1,138 (net of an income tax saving of $586) was recognized. Our loss from discontinued operations (net of income tax savings of $159 and $505) was $310 and $981 in 1998 and 1999, respectively. We retained accounts receivable of $1.4 million, net of reserves, fixed assets of $30 and liabilities related to the Telecom Division. Accounts receivable, net of reserves, is $0 at December 31, 2000. Fixed assets were redeployed in the continuing operations. The accounts receivable collected were used to repay all remaining liabilities of the Telecom Division.
A significant portion of our selling, general and administrative expenses relate to personnel costs, some of which are variable and others of which are relatively fixed. Our variable personnel costs are substantially comprised of sales commissions, which are typically calculated based upon our gross profit on a particular sales transaction and thus generally fluctuate with our overall gross profit. The remainder of our selling, general and administrative expenses are relatively more fixed and, while still somewhat variable, do not vary with increases in revenue as directly as do sales commissions. We account for wages and related taxes and employee benefits paid to technical staff as a cost of service provided and therefore such costs are a component of cost of goods sold, gross profit and gross margin. As a certain component of total technical staff wages and related costs are of a fixed nature, gross margin will vary to the extent that revenues fluctuate from period to period.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data derived from our consolidated statements of operations. Percentages shown in the table below are percentages of total company revenue, except for each individual segment's gross profit, selling, general and administrative expenses, and operating income, which are percentages of the respective segment's revenue.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 (Dollars in thousands)
Revenue. Total revenue decreased $846 (4.4%) to $18,329 in 2000 from $19,175 in 1999.
Total 2000 ACS revenue which comprised 13.6% of total revenues compared to 19.0% in 1999, decreased $1,153 (31.6%) to $2,491 in 2000 from $3,644 in 1999. The decrease in revenue is attributable to the reorganization of our former IT Services Division into wholly-owned subsidiaries, each of which have a particular market focus, and one of which is ACS, together with the loss of revenue from certain customers and the loss of certain categories of revenue after the sale of the Computer Products Division.
Total 2000 Synergy revenue which comprised 24.3% of total revenues compared to 38.2% in 1999, decreased $2,863 (39.1%) to $4,455 in 2000 from $7,318 in 1999. The decrease in revenue is attributable to the reorganization of our former IT Services Division into wholly-owned subsidiaries, each of which have a particular market focus, and one of which is Synergy, together with the loss of revenue from certain customers and the loss of certain categories of revenue after the sale of the Computer Products Division.
Total 2000 INX revenue comprised 10.2% of total revenues. INX was newly formed in July, 2000 to meet the needs of customers in the area of large-scale network infrastructure requirements. INX exerted intense efforts to introduce itself to the market in Dallas and Houston and to form customer relationships. In October, 2000 INX acquired an established service business in Dallas. The purchase included an established customer list, seven engineers and two sales staff members.
Total 2000 IT Staffing revenue, which comprised 6.8% of total revenues compared to 6.2% in 1999, increased $51 (4.3%) to $1,242 in 2000 from $1,191 in 1999. Of the various components of our former IT Services Division, IT Staffing revenue was least affected by the sale of the Computer Products Division. The increased revenue is a result of increased selling efforts and new customer relationships.
Revenue from Stratasoft, which comprised 36.3% of total revenue in 2000, compared to 22.5% in 1999, increased $2,342 (54.2%) to $6,660 in 2000 from $4,318 in 1999. The increased revenues from Stratasoft were primarily the result of better recognition of Stratasoft products in the market place, the expansion of the sales staff and dealer network and to increased advertising and marketing efforts.
The Corporate segment includes both costs related to the operation of the corporate entity that are not allocated to any subsidiary company, plus certain operations that are not on-going because of the sale of the Computer Products Division (see discussion at Item 1. "Disposition of Computer Products Business"), and including installation revenues that were related to a certain customer of our Computer Products Division and revenue from our former El Paso branch office, which ceased because of the sale of the Computer Products Division. Corporate revenue, which comprised 9.0% of total revenues in 2000 compared to 14.1% in 1999, decreased by $1,064 (39.3%) in 2000 to $1,640 compared to $2,704 in 1999. The decrease in 2000 was due to $1,078 decrease in revenues from the El Paso branch office, offset by $76 higher installation revenues for that certain customer of our Computer Products Division in spite of the loss of the customer in May, 2000 due to the sale of the Computer Products Division.
Gross Profit. Gross profit decreased $2,129 (32.4%) to $4,448 in 2000 from $6,577 in 1999, while gross margin decreased to 24.3% in 2000 from 34.3% in 1999.
ACS gross profit decreased by $609 (54.4%) to $511 in 2000 compared to $1,120 in 1999. Gross margin rates for ACS were 20.5% in 2000 as compared to 30.7% in 1999. ACS's cost of service consists primarily of labor cost. Labor has a more fixed nature such that higher levels of service revenue produce higher levels of gross margin while lower levels of service revenue produce lower gross margin. In periods when service revenue decreases, it becomes more important to manage labor cost in order to prevent erosion of gross margin. Subsequent to the separation of the IT Services segment into wholly-owned subsidiary companies in July 2000, ACS experienced lower labor utilization related to lower revenue. In addition to the billable technical staff utilization issue, ACS had a single large project on which gross profit margin was about 12% below normal levels, which negatively impacted the overall margin.
Synergy gross profit decreased by $1,417 (62.6%) to $845 in 2000 compared to $2,262 in 1999. Gross margin rates decreased to 19.0% in 2000 as compared to 30.9% in 1999. As with ACS our cost of service is labor intensive. Labor has a more fixed nature such that higher levels of service revenue produce higher gross margin while lower levels of service revenue produces less gross margin. In periods when service revenue decreases, it becomes more important to manage labor cost in order to prevent erosion of gross margin. As with ACS, after the restructuring and separation of the IT Service segment in to wholly-owned subsidiary companies, Synergy experienced lower labor utilization related to lower revenue.
INX gross loss was $(43) for a gross margin rate of (2.3%). Since INX was formed in July, 2000, there is no history for comparison. As a newly-formed start-up operation, INX had to have billable technical staff in place in order to be able to market their services, but was unable to utilize that technical staff sufficiently to cover their labor cost.
IT Staffing gross profit decreased by $70 (17.5%) to $329 in 2000 compared to $399 in 1999. Gross margin rates for IT Staffing were 26.5% in 2000 as compared to 33.5% in 1999. The decrease in gross margin percentages was primarily due to a contract with a major customer which limits the billable rates for that particular customer, which more than offset a positive impact related to higher levels of higher margin placement fees for permanent placements as compared to the year earlier period.
The gross profit for Stratasoft increased by $895 (40.8%) to $3,087 in 2000 from $2,192 in 1999. Gross margin rates for Stratasoft were 46.4% in 2000 as compared to 50.8% in 1999. The decreased gross margin was primarily due to inventory markdowns along with increased travel costs for technical staff traveling nationally and internationally for project installations. Gross margin was also negatively impacted by the mix of sales with a higher proportion of total systems sales, which include a hardware component, as compared to software only sales, which do not have a hardware cost of goods component. The lower gross margin rates were offset by volume increases due primarily to higher revenues in 2000, thereby producing increased gross profit.
Corporate gross profit decreased by $873 (144.5%) to $(269) in 2000 compared to $604 in 1999 as revenue decreased by 39.3%. Gross margin rates for the Corporate segment were (16.4%) in 1999 as compared to 22.3% in 1999. The El Paso service business that was sold on May 19,2000 produced gross profit of $558 in 1999 as compared to a gross loss of $(48) in 2000, a decrease of $606. We experienced certain costs related to winding up our service operations in the El Paso branch office that negatively impacted gross profit. Augmenting those results, the gross margin on installations for the customer that was lost in the Computer Products Division sale produced a gross loss of $(235) in 2000 as compared to gross profit of $46 in 1999, a decrease of $281.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3,299 (49.5%) to $9,970 in 2000 from $6,671 in 1999. As a percentage of total revenue, selling, general and administrative expenses for continuing operations increased to 54.4% in 2000 from 34.8% in 1999.
Of the $3,299 increase, $1,687 was attributable to Stratasoft. Stratasoft incurred increased sales compensation of $379, accompanied by increased payroll taxes, employee benefits, and advertising expense, all of which is consistent with increased revenues of 54.2%. Additionally, Stratasoft's bad debt expense increased $393, primarily due to more conservative reserve and write off policies and legal expense increased $551, primarily due to patent infringement litigation. Adding to the increase from Stratasoft, INX, the new subsidiary contributed $935 of the increase. Selling, general and administrative expenses totaling $677 from the Corporate Segment represents the remaining increase and effective beginning in July 2000 certain of these costs were no longer allocated out to the operating segments.
Operating Loss. Operating loss increased $5,428 to an operating loss of $5,522 in 2000 from a loss of $94 in 1999 due primarily to the increase in selling, general and administrative expenses of $3,299 and the decrease in gross profit of $2,129 in 2000. The operating loss for the Corporate Segment increased $1,622 to an operating loss of $1,992 in 2000 compared to an operating loss of $370 in 1999. ACS's operating loss of $729 in 2000 compares to $34 operating income in 1999, an increase of $763. Synergy's operating loss of $1,101 in 2000 compares to income of $75 in 1999, a decrease of $1,176. INX experienced an operating loss of $978 in 2000. For Stratasoft, the operating income of $232 in 1999 decreased $792 to a loss of $560 in 2000.
Interest expense (income)). Interest expense (income) decreased $216 (939.1%) to income of $(239) in 2000 compared to $(23) in 1999. Subsequent to the sale of the Computer Products Division cash balances were invested in interest bearing overnight deposits.
Net loss from continuing operations. Net loss from continuing operations, after an income tax provision totaling $1,548 (reflecting an effective tax rate of 29.3% for 2000), was $3,735 in 2000 compared to a loss of $69 in 1999.
Discontinued operations. During 2000 we sold the Computer Products Division and as a consequence, the operations of the Computer Products Division are reported as discontinued operations. We experienced net income on the operations of the Computer Products Division prior to the measurement date, March 16, 2000, of $302 in 2000, net of tax of $156 and a gain on disposal of $3,734, net of taxes of $2,607. The loss on disposal of the Telecom Division of $1,138 (net of taxes of $586) was recognized at December 31, 1999. During the year ended December 31, 2000 additional expenses related to the disposal of the Telecom Division was recognized of $344 (net of taxes of $240). The income from discontinued operations in 1999 was $362, net of taxes of $183.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 (Dollars in thousands)
Revenue. Total revenue increased $2,897 (17.8%) to $19,175 in 1999 from $16,278 in 1998.
Total 1999 ACS revenue which comprised 19.0% of total revenues compared to 24.3% in 1998, decreased $314 (7.9%) to $3,644 in 1999 from $3,958 in 1998. The decrease in revenue is attributable to decreased sales to existing customers.
Total 1999 Synergy revenue which comprised 38.2% of total revenues compared to 42.6% in 1998, increased $385 (5.6%) to $7,318 in 1999 from $6,933 in 1998. The increase in revenue is attributable to increased sales to existing customers and to new customers.
Total 1999 IT Staffing revenue which comprised 6.2% of total revenues compared to 5.3% in 1998, increased $321 (36.9%) to $1,191 in 1999 from $870 in 1998. The increase in revenue is attributable to increased sales to existing customers and to new customers.
Revenue from Stratasoft, which comprised 22.5% of total revenue in 1999, compared to 19.0% in 1998, increased $1,223 (39.5%) to $4,318 in 1999 from $3,095 in 1998. The increased revenues from Stratasoft were primarily the result of sales to new customers and the expansion of geographic market.
The Corporate segment includes both costs related to the operation of the corporate entity that are not allocated to any subsidiary company, plus certain operations which are not on-going because of the sale of the Computer Products Division, see discussion at Item 1, "Disposition of Computer Products Business" and including installation revenues that were related to a certain customer of our Computer Products Division and revenue from our former El Paso branch office, both of which are included in the Corporate segment because both ceased in 2000 due to the sale of the Computer Products Division. Corporate revenue, which comprised 14.1% of total revenues in 1999 compared to 8.8% in 1998, increased by $1,282 (90.2%) in 1999 to $2,704 compared to $1,422 in 1998. The increase in 1999 was due to an increase of $421 of installation revenues for that certain customer of our Computer Products Division and to an $861 increase in revenues from the El Paso branch office.
Gross Profit. Gross profit increased $877 (15.4%) to $6,577 in 1999 from $5,700 in 1998, while gross margin decreased to 34.3% in 1999 from 35.0% in 1998.
ACS gross profit increased by $318 (39.7%) to $1,120 in 1999 compared to $802 in 1998. Gross margin rates for ACS were 30.7% in 1999 as compared to 20.3% in 1998. Our cost of service is labor intensive. The increase in gross profit is attributable to the increased gross margin rates resulting from better management of the labor pool.
Synergy gross profit decreased by $363 (13.8%) to $2,262 in 1999 compared to $2,625 in 1998. Gross margin rates for IT Services were 30.9% in 1999 as compared to 37.9% in 1998. As with ACS, our cost of service is labor intensive. It is very important to manage labor cost in order to prevent erosion of gross margin. One of our major customers required us to have certain technicians assigned to them although they were not fully utilized, thereby eroding our gross margins.
IT Staffing gross profit increased by $29 (7.8%) to $399 in 1999 compared to $370 in 1998. Gross margin rates for IT Staffing were 33.5% in 1999 as compared to 42.5% in 1998. The increase in gross profit is commensurate with the increase in revenues as discussed above.
The gross profit for Stratasoft increased by $700 (46.9%) to $2,192 in 1999 from $1,492 in 1998. Gross margin rates for Stratasoft were 50.8% in 1999 as compared to 48.2% in 1998. This increase was due primarily to higher revenues coupled with lower system installation costs, relative to revenue, reflecting improved productivity and efficiency due to improved software installation and customization tools introduced in 1998.
Corporate gross profit increased by $193 (47.0%) to $604 in 1999 compared to $411 in 1998. Gross margin rates for the Corporate segment were 22.3% in 1999 as compared to 28.9% in 1999. The El Paso service business, which is included in the Corporate segment because it was sold in 2000 along with the Computer Products Division, which was acquired during 1998 and did not reflect a full year of operations, increased its gross profit contribution by $418 to $558 in 1999 as compared to $140 in 1998.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $440 (6.2%) to $6,671 in 1999 from $7,111 in 1998. As a percentage of total revenue, selling, general and administrative expenses for continuing operations decreased to 34.8% in 1999 from 43.7% in 1998. The dollar decrease is primarily attributable to the closing of some branch offices opened in 1998 and the reduction of sales compensation $150 resulting from using the sales force of the Computer Products Division to sell for ACS and Synergy. Administrative salaries were reduced $349 and office expenses were reduced $76 by the closing of those branch offices. Stratasoft's sales compensation increased $106 and administrative salaries increased $25, which was commensurate with their increased sales volume
Operating loss. The operating loss decreased $1,317 to an operating loss of $94 in 1999 from a loss of $1,411 in 1998 due primarily to the increase in sales volume of $2,897, which produced an increase in gross profit of $877. The operating loss for ACS decreased $913 to operating income of $34 in 1999 compared to an operating loss of $879 in 1998. For Stratasoft, the operating loss decreased $613 to income of $232 in 1999 from an operating loss of $381 in 1998. Synergy's operating income decreased $46 to $75 in 1999 from $121 in 1998. IT Staffing's operating loss increased $39 to $65 in 1999 from $26 in 1998. The operating loss of the Corporate segment increased $124 to $370 in 1999 from $246 in 1998.
Interest Expense (Income). Interest expense (income) increased $18 (43.9%) to income of $(23) in 1999 compared to income of $(41) in 1998.
Net loss from continuing operations. Net loss from continuing operations, after an income tax provision totaling $2 (reflecting an effective tax rate of 2.8% for 1999 compared to 32.8% for 1998), decreased $851 (92.5%) to a loss of $69 in 1999 compared to a loss of $920 in 1998.
Discontinued operations. We sold the Telecom Division in 1999 and the Computer Products Division in 2000. As a consequence, the operations of both of these businesses are reported as discontinued operations for all periods presented. We experienced net income on the operations of the Computer Products Division of $1,343 in 1999, net of a tax benefit of $688 and a loss from operations of Telecom of $981, net of a tax benefit of $505. The loss on disposal of the Telecom Division of $1,138 (net of taxes of $586) was recognized at December 31, 1999. The loss from discontinued operations in 1998 was $178, net of taxes of $92.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial information for each of our last eight quarters and, in the opinion of management, includes all adjustments (consisting of only normal recurring adjustments) which the company considers necessary for a fair presentation of the information set forth therein. Our quarterly results may vary significantly depending on factors such as the timing of large customer orders, timing of new product introductions, adequacy of product supply, variations in our product costs, variations in our product mix, promotions, seasonal influences and competitive pricing pressures. Furthermore, we generally have experienced a higher volume of product orders in our computer products business segment in the fourth quarter, which we attribute to year-end capital spending by some of our customers. Any decrease in the number of year-end orders we experience may not be offset by increased revenues in our first three quarters. The results of any particular quarter may not be indicative of results for the full year or any future period.
Liquidity and Capital Resources
Historically, we have satisfied our cash requirements principally through borrowings under our lines of credit and through operations. We maintained a cash position sufficient to pay only our immediately due obligations and expenses. Subsequent to the sale of the Computer Products Division we had sufficient cash on hand to meet our requirements and have not had to rely on our line of credit. We have invested our excess cash in interest bearing overnight deposits. Our working capital was $9,800, $9,567 and $10,098 at December 31, 1998, 1999 and 2000, respectively. The increase in working capital during 2000 is primarily due to the collection of receivables related to the discontinued operations of the Computer Products and the Telecom businesses. The decreases in working capital during 1999 and 1998 were primarily attributable to increases in our accounts payable as a result of product costs attributable to our revenue growth, primarily in the discontinued Computer Products business. The proceeds of the sale of the Computer Products business were used to pay off our line of credit and at December 31, 2000 we had no outstanding interest bearing borrowings. Our total collateral base was $2,340 at December 31, 2000. At December 31, 2000, we had a $10,000 credit facility with our primary lender.
Cash Flows
Operating activities provided net cash totaling $5,540 and $2,612 during 2000 and 1999, respectively, and used net cash totaling $10,831 during 1998. During 2000, net cash provided by operations resulted from decreases in accounts receivable which were offset by reductions in accounts payable and accrued expenses. During 1999, net cash provided by operations resulted from increases in accounts payable which offset our increase in accounts receivable. During 1998, net cash was used by operations due primarily to a net loss, a large increase in accounts receivable and an increase in inventory, which was offset somewhat by an increase in accounts payable and accrued expenses.
Accounts receivable increased $10,543 and $1,488 during 1998 and 1999, respectively and decreased $30,763 during 2000. Inventory decreased $603 and $160 in 1999 and 2000, respectively, and increased $3,797 in 1998.
Investing activities used cash totaling $1,764 and $276 during 1998 and 1999, respectively and provided cash of $14,048 during 2000. Our investing activities that used cash during these periods were primarily related to capital expenditures related to new offices, an expanded work force and upgrading of computing equipment and our management information systems. In 2000, investing activities primarily related to the proceeds from the sale of the Computer Products business. During the next twelve months, we do not expect to incur material capital expenditures.
Financing activities provided cash totaling $13,552 in 1998 and used cash totaling $227 and $15,889 during 1999 and 2000, respectively. The primary source of cash from financing activities in 1998 and 1999 has been borrowings on our lines of credit. The lines of credit have been used principally to satisfy our cash requirements, including financing increases in accounts receivable and inventory. During 2000 we used the proceeds of the sale of the Computer Products business to pay off our line of credit. During 1998,1999, and 2000 we used $834, $138 and $20, respectively to repurchase shares that were held in treasury at the end of 2000.
Asset Management
Our cash flow from operations has been affected primarily by the timing of our collection of accounts receivable. We have typically sold our products and services on short-term credit terms and seek to minimize our credit risk by performing credit checks and conducting our own collection efforts. We had accounts receivable, net of allowance for doubtful accounts of $38,341 and $4,473 (including $34,444 and $775 relating to discontinued operations) at December 31, 1999 and 2000, respectively
We attempt to manage our inventory in order to minimize the amount of inventory held for resale and the risk of inventory obsolescence and decreases in market value. We attempt to maintain a level of inventory required to reach only our near term requirements by relying on the ready availability of products from our principal suppliers.
Credit Facilities
On February 27, 1998 we entered into a credit agreement with Deutsche Financial Services ("DFS") for a revolving line of credit (the "DFS Facility") which is our principal source of liquidity. On May 19, 2000, the day of the closing on the sale of the Computer Products Division, the credit facility was amended to decrease the total credit available under the facility from $30,000 to $3,000 subject to borrowing base limitations which are generally computed as a percentage of various classes of eligible accounts receivable and qualifying inventory. Credit available under this facility for floor plan financing of inventory from approved manufacturers (the "Inventory Line") is $3,000. Borrowings under the Inventory Line accrue interest at the prime rate plus 5% on outstanding balances over 40 days. Inventory Line borrowings are reflected in accounts payable on the accompanying balance sheets. For purposes of calculating interest charges the minimum prime rate under the DFS Facility is 7.0%. At December 31, 2000, we had $4 outstanding on the Inventory Line and had total credit availability of $1,311.
This agreement, which continues in full force and effect for 36 months or until terminated by 30 day written notice from the lender and may be terminated upon 90 days notice by us, subject to a termination fee, is collaterized by substantially all of our assets. The agreement contains restrictive covenants which, among other things, require us to maintain a minimum tangible net worth. The terms of the agreement also prohibit the payment of dividends and limit the purchase of our common stock, and other similar expenditures, including advances to related parties.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133, as amended was adopted on January 1, 2000. The Company has no derivative instruments as defined by SFAS No. 133 and as a result the adoption of SFAS No. 133 had no impact on the consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We incur certain market risks related to interest rate variations because we hold floating rate debt. Based upon the average amount of debt outstanding during 2000, a one-percent increase in interest rates paid by us on our debt would have resulted in an increase in interest expense of approximately $42 for the year.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Independent Auditors' Report 24
Consolidated Balance Sheets at December 31, 1999 and 2000 25
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000 26
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000 27
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 28
Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1999 and 2000 29
INDEPENDENT AUDITORS' REPORT
To the Stockholders of I-Sector Corporation.:
We have audited the accompanying consolidated balance sheets of I-Sector Corporation and subsidiaries ("I-Sector") as of December 31, 1999 and 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of I-Sector's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of I-Sector as of December 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Houston, Texas
March 16, 2001
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 2000 (In thousands, except share and par value amounts)
See notes to consolidated financial statements.
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (In thousands, except share and per share amounts)
See notes to consolidated financial statements
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (In thousands, except share and per share amounts)
See notes to consolidated financial statements.
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (In thousands, except share and per share amounts)
See notes to consolidated financial statements.
I-SECTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (In thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
I-Sector Corporation and subsidiaries ("I-Sector") is engaged in the business of providing computer services and of selling associated hardware and telephony software products in the United States. I-Sector operates from five wholly-owned subsidiaries:
Allstar Computer Services, Inc. ("ACS") provides customers with on-site and carry-in computer repair, application support and operating system and network migration services.
Internetwork Experts, Inc. ("INX") is a professional services organization that focuses on the design, deployment and support of large-scale networking infrastructure requirements that are Cisco centric. INX's areas of practice include network design, implementation, turnkey support, security audits and firewall design, network infrastructure management and network infrastructure consulting services.
IT Staffing, Inc. ("IT Staffing") provides temporary and permanent placement services of IT professional personnel.
Stratasoft, Inc. ("Stratasoft") creates and markets software related to the integration of computer and telephone technologies.
Synergy Helpdesk Solutions, Inc. ("Synergy") provides customers with turn-key outsourced IT helpdesk solutions, technical staff augmentation for IT helpdesk operations and helpdesk solutions consulting services.
A substantial portion of I-Sector's sales and services are authorized under arrangements with product manufacturers. I-Sector's operations are dependent upon maintaining its approved status with such manufacturers. Should I-Sector's approved status lapse, revenues and gross profit could be adversely affected.
I-Sector's significant accounting policies are as follows:
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of I-Sector and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Inventory - Inventory consists primarily of dialers, personal computers and components and is valued at the lower of cost or market with cost determined on the first-in first-out method.
Property and Equipment - Property and equipment are recorded at cost. Expenditures for repairs and maintenance are charged to expense when incurred, while expenditures for betterments are capitalized. Disposals are removed at cost less accumulated depreciation with the resulting gain or loss reflected in operations in the year of disposal.
Property and equipment are depreciated over their estimated useful lives ranging from five to ten years using the straight-line method. Depreciation expense totaled $833, $790 and $699 for the years ended December 31, 1998, 1999 and 2000, respectively.
Intangible Assets - Intangible assets are being amortized over their estimated useful lives of five years (see Note 5).
Impairment of Long-Lived Assets - I-Sector records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
Income Taxes - I-Sector accounts for income taxes under the liability method, which requires, among other things, recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in I-Sector's consolidated financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and the recognition of available tax carryforwards.
Earnings per Share -Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the periods. Diluted net income per share is computed based upon the weighted-average number of common shares plus the assumed issuance of common shares for all potentially dilutive securities using the treasury stock method (See Note 13).
Revenue Recognition - Revenue from the sale of products is recognized when the product is shipped. Service income is recognized as the services are earned. Revenues resulting from installations of equipment for which duration is in excess of three months are recognized using the percentage-of-completion method. The percentage of revenue recognized on each contract is based on the most recent cost estimate available. Revisions of estimates are reflected in the period in which the facts necessitating the revisions become known; when a contract indicates a loss, a provision is made for the total anticipated loss.
The following reflects the amounts relating to uncompleted contracts at December 31, 1999 and 2000:
Costs incurred on uncompleted contracts $ 441 $ 135 Estimated earnings 473 361
914 496 Less: Billings to date 1,529 999
Billings in excess of cost and estimated earnings $ 615 $ 503
Credit Risk - The Company extends credit to its customers in the normal course of business and generally does not require collateral or other security. The Company performs ongoing credit evaluations of its customers' financial condition and historically has not incurred significant credit losses. Earnings are charged with a provision for doubtful accounts based on a current review of the collectibility of the accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts.
Research and Development Costs - Expenditures relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged to expense were approximately $200 in the years ended December 31, 1998, 1999 and 2000, respectively.
Employee Stock Based Compensation - I-Sector recognizes compensation expense for stock options and other stock based non-employee compensation awards based on the fair value of the equity instrument at the measurement date. Awards of stock options and other stock based employee incentive plans measure the cost of the equity instrument using the intrinsic value method (See Note 12).
Comprehensive Income - I-Sector had no comprehensive income items to report for all periods presented.
Recently Issued Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133, as amended, was adopted by I-Sector on January 1, 2001. I-Sector had no derivative instruments as defined by SFAS No. 133, and as a result, on the date of the adoption this standard had no impact on the financial position, results of operations or cash flows of I-Sector.
Fair Value of Financial Instruments - I-Sector's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and notes payable for which the carrying values approximate fair values given the short-term maturity of the instruments. It is not practicable to estimate the fair values of related-party receivables due to the nature of the instruments.
Cash and Cash Equivalents - Cash and cash equivalents include any highly liquid securities with an original maturity of three months or less when purchased.
Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications - The accompanying consolidated financial statements for the years presented have been reclassified to give effect to certain changes in presentation.
2. DISCONTINUED OPERATIONS
On November 2, 1999, I-Sector approved a plan to sell or close its Telecom Division. This is the measurement date. I-Sector entertained offers to acquire a significant portion of the assets of the Telecom Division and to assume any ongoing operations of the division. A sale was finalized on March 16, 2000. Under the terms of the sale I-Sector received $250 cash. Additionally, the purchaser assumed all telephone equipment warranty obligations of I-Sector up to a maximum of $30, all of which was consumed by October, 2000. Future warranty costs incurred by the purchaser will be billed to I-Sector at an agreed upon rate. An estimate of future warranty costs of $95 is included at December 31, 2000 in the balance sheet caption "Net liabilities related to discontinued operations". A disposal loss, including an estimate of the operating results from the measurement date, November 2, 1999 to the closing date of the sale of $580, and estimates for impairment of assets caused by the disposal decision of $558, totaling $1,138 (net of income tax savings of $586), was recognized in 1999. The disposal loss includes an operating loss of $284 (net of income tax savings of $146) from the measurement date to December 31, 1999. I-Sector recognized additional losses of $344 (net of taxes of $240) in the year 2000. Pretax loss from discontinued operations (net of tax savings of $159, $505 and $0) was $310, $981, and $0 in 1998, 1999 and 2000 respectively. I-Sector retained accounts receivable of approximately $1,400, net of reserves, fixed assets of $30 and liabilities related to the Telecom Division, but has no net retained receivables at December 31, 2000. Fixed assets were redeployed in the continuing operations. The balance sheet caption "Net liabilities related to discontinued operations" contains $294 of estimated future expenses relating to the wind-up of the Telecom Division at December 31, 2000. Revenue for the Telecom Division for the years ended December 31, 1998, 1999 and 2000 was $7,499, $3,975 and $0, respectively. The Company allocated interest expense to its various divisions on a proportional basis based on accounts receivable. Interest expense allocated to the Telecom Division for the year ended December 31, 1998 and for the period from January 1, 1999 to November 2, 1999 was $32 and $69, respectively. The Company has allocated interest expense from November 2, 1999 to the disposal date of March 16, 2000 of $20 both of which were included in the loss on disposal in 1999.
On March 16, 2000, I-Sector entered into an agreement to sell certain assets of and the ongoing operations of its Computer Products Division. The sale transaction closed on May 19, 2000 after shareholder and other required consents were obtained. Under the terms of the sale, I-Sector received $14,529 plus $250 as reimbursement of certain selling costs. Proceeds of the sale were used to retire debt under our existing credit facility. Pretax income from the discontinued operations of the Computer Products Division (net of taxes of $156) was $302 for the period from January 1 to March 16, 2000, the measurement date, $1,343 and $132 (net of taxes of $688 and $68) for the years ended December 31, 1999 and 1998, respectively. A gain on disposal of $3,734 (net of taxes of $2,607), which includes operating results from the measurement date, March 16, 2000 to the closing date of the sale, as well as a loss on equipment sold of $352 (net of taxes of $144) and estimates for the impairment of assets caused by the disposal decision of $2,820 (net of taxes of $1,156) have been recognized in the year ended December 31, 2000. I-Sector retained accounts receivable of $20,266, net of reserves, and has retained receivables related to the Computer Products Division of $775 at December 31, 2000, fixed assets of $255 and liabilities related to the Computer Products Division. Fixed assets which were not sold have been redeployed in the continuing operations. The balance sheet caption "Net Liabilities related to discontinued operations" contains $575 of estimated future expenses related to the winding up of the Computer Products Division, and include amounts related to the collection of accounts receivable and settlement of pending litigation and to settlements with employees terminated as a result of the sale. Revenue for the Computer Products Division for the years ended December 31, 1998, 1999 and 2000 were $143,396, $182,642 and $29,323 (net of $5,772 after the measurement date and included in the gain on sale), respectively. The Company allocates interest expense to its various divisions on a proportional basis based on accounts receivable. Interest expense allocated to the Computer Products Division for the years ended December 31, 1998, 1999 and 2000 for the period from April 1, 2000 to May 19, 2000 was $360, $671 and $62. In connection with the sale of the Computer Products Division, I-Sector also sold the El Paso portion of the IT Services business. The El Paso branch office portion of the IT Services business accounted for revenues of $935, $2,012 and $955 for the years ended December 31, 1998, 1999, and 2000, respectively. For financial reporting presentation the El Paso services business was included in the continuing operations for the year ended December 31, 2000.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1999 and 2000:
1999 2000
Accounts receivable $ 4,125 $ 4,438 Accounts receivable retained - discontinued operations 34,444 775 Allowances for doubtful accounts (228) (740)
Total $ 38,341 $ 4,473
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1999 and 2000:
1999 2000
Equipment $ 512 $ 459 Computer equipment 4,067 2,787 Furniture and fixtures 507 439 Leasehold improvements 203 383 Vehicles 27 27 5,316 4,095 Accumulated depreciation and amortization (3,036) (2,516) Total $ 2,280 $ 1,579
5. ACQUISITION
On October 27, 2000, INX acquired certain assets and liabilities of Internetwork Experts, Inc., a professional services firm focused on the architecture, design, implementation and support of high-end network infrastructure. The purchase price was $225 in cash and assumed liabilities of $116. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets and liabilities acquired based on fair values at the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired was approximately $341, which has been allocated to a customer list and service agreements. These intangible assets are being amortized over their estimated useful lives of five years. Amortization expense and accumulated amortization was $16 for the year ended December 31, 2000. INX also is contingently liable for future payments to the former owner based on the level of service revenues generated within a specified period of time and within certain ranges for the customers included on the customer list acquired.
6. CREDIT ARRANGEMENTS
On February 27, 1998 I-Sector entered into a credit agreement with a commercial finance company. On May 19, 2000, the day of the closing on the sale of the Computer Products Division, the credit facility was amended to decrease the total credit available under the facility from $30,000 to $3,000 subject to borrowing base limitations that are generally computed as a percentage of qualifying inventory. Credit available under this facility for floor plan financing of inventory from approved manufacturers (the "Inventory line") is $3,000. Borrowings under the Inventory line accrue interest at the prime rate plus 5% on outstanding balances over 40 days. Inventory line borrowings are reflected in Accounts payable on the accompanying balance sheets. For purposes of calculating interest charges the minimum prime rate under the amended facility is 7.0%. At December 31, 2000, I-Sector had $4 outstanding on the Inventory Line and had total credit availability of $1,311.
This agreement, which continues in full force and effect for 36 months or until terminated by 30 day written notice from the lender and may be terminated upon 90 days notice by I-Sector, subject to a termination fee, is collateralized by substantially all of I-Sector's assets. The agreement contains restrictive covenants, which, among other things, require specific ratios of current assets to current liabilities and debt to tangible net worth and require I-Sector to maintain a minimum tangible net worth. The terms of the agreement also prohibit the payment of dividends and limits the purchase of I-Sector common stock, and other similar expenditures, including advances to related parties.
The weighted-average interest rate for borrowings under all credit arrangements in effect during 1998, 1999 and 2000 was 7.53%, 7.13%, and 7.93% respectively. Interest expense was $441, $969 and $385 for the years ended December 31, 1998, 1999 and 2000 respectively.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998, 1999 and 2000 consisted of the following:
The total provision for income taxes during the years ended December 31, 1998, 1999 and 2000 varied from the U.S. federal statutory rate due to the following: 1998 1999 2000
Federal income tax at statutory rate $ (466) $ (24) $(1,796) Nondeductible expenses 26 22 17 State income taxes 3 Valuation allowance 231 Other (13) Total provision (benefit) from continuing operations$ (450) $ (2) $(1,548)
Net deferred tax assets computed at the statutory rate related to temporary differences at December 31, 1999 and December 31, 2000 were as follows:
1999 2000 Net deferred tax assets: Accounts receivable $ 172 $ 251 Closing and severance costs 76 391 Deferred service revenue (41) 30 Inventory 43 134 Amortization of intangibles (23) Net operating loss carryforwards 586 Total current deferred tax assets 836 783 Less Valuation allowance (783) Total $ 836 $ 0
Due to the company's recurring losses, a valuation allowance was established for the deferred tax assets at December 31, 2000.
At December 31, 2000, I-Sector had no net operating loss carry forwards.
8. ACCRUED EXPENSES
Accrued liabilities consisted of the following as of December 31, 1999 and 2000:
1999 2000
Sales tax payable $1,530 $ 121 Accrued employee benefits, payroll and other related costs 1,506 860 Accrued interest 1 Accrued supplier fee 404 Accrued warranty costs 182 238 Other 273 416 Total $3,896 $ 1,635
9. RELATED-PARTY TRANSACTIONS
I-Sector has from time to time made payments on behalf of Allstar Equities, Inc. ("Equities"), which is wholly-owned by the principal stockholder of I-Sector, and I-Sector's principal stockholder for taxes, property and equipment. On December 1, 1999, a note receivable was signed by Equities for $336 in 60 monthly payments of $7. The note bears interest at 9%. Equities made twelve payments in advance and at December 31, 2000 the Company's receivables from Equities amounted to $204. The principal amounts as of December 31, 1999 and December 31, 2000 are classified as Accounts receivable - affiliates based on the expectation of repayment within one year. At December 31, 1999 and December 31, 2000, I-Sector's receivables from these affiliates amounted to approximately $281 and $303, respectively.
(See Note 11 related to lease commitments to equities.)
In connection with the sale of the Computer Products Division, a member of I-Sector's Board of Directors received a finders fee of $350.
10. SHAREHOLDERS' EQUITY
Holders of I-Sector's common stock are entitled to one vote per share on all matters to be voted on by shareholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of I-Sector ("the Board"). Upon any liquidation or dissolution of I-Sector, the holders of common stock are entitled, subject to any preferential rights of the holders of preferred stock, to receive a pro rata share of all of the assets remaining available for distribution to shareholders after payment of all liabilities.
I-Sector's Board authorized the purchase of common stock of I-Sector from time to time in the open market to be held in treasury for the purpose of, but not limited to, fulfilling any obligations arising under I-Sector's stock option plans. At December 31, 2000, 399,800 shares were held in treasury under these authorizations.
I-Sector issued 14,286, 63,500 and 1,000 common shares of restricted stock in 1997, 1998 and 1999, respectively, and cancelled 14,500, 62,086 and 1,000 common shares of restricted stock during 1998, 1999 and 2000 respectively. The restricted shares have par value of $0.01 per share. The remaining 1,200 shares, valued at $1.563, vest ratably at the end of each one year period over a five year period from the date of issuance.
I-Sector issued warrants to purchase 176,750 common shares at $9.60 per share to underwriters in connection with its public offering of common stock. The warrants expire on July 7, 2002.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases - I-Sector subleases office space from Equities. In 1999, I-Sector renewed its office lease for a five year period with monthly rental payments of $38 plus certain operating expenses through December 1, 2004. Rental expense under this agreement amounted to approximately $390, $395 and $452 during years ended December 31, 1998, 1999 and 2000 respectively.
Additionally, minimum annual rentals on other operating leases amount to approximately, $154 in 2001, $145 in 2002, $91 in 2003, $0 in 2004, $0 in 2005 and $0 in years thereafter. Amounts paid during the years ended December 31, 1998, 1999 and 2000 under such agreements totaled approximately $509, $766 and $296 respectively.
I-Sector maintains a 401(k) savings plan wherein I-Sector matches a portion of the employee contribution. In addition, I-Sector has a discretionary matching fund based on the net profitability of I-Sector. All full-time employees who have completed 90 days of service with I-Sector are eligible to participate in the plan. Declaration of the discretionary portion of the matching fund is the decision of the Board of Directors. I-Sector has made no additional contributions to the plan for the years ended December 31, 1998, 1999, or 2000. Under the standard I-Sector matching program, I-Sector's match was $45, $64 and $46 for the years ended December 31, 1998, 1999 and 2000, respectively.
I-Sector is party to litigation and claims which management believes are normal in the course of its operations; while the results of such litigation and claims cannot be predicted with certainty, I-Sector believes the final outcome of such matters will not have a material adverse effect on its financial position, results of operations or cash flows.
On February 1, 2000, a competitor brought a suit against our wholly-owned subsidiary Stratasoft, Inc. in ESHARE TECHNOLOGIES, INC. AND INVENTIONS, INC. V STRATASOFT, INC., Cause No. 1 99-CV-2303 for the United States District Court for the Northern District of Georgia. The plaintiff alleges infringement of certain patents owned by the competitor and is seeking a permanent injunction to prevent Stratasoft, Inc. from manufacturing, selling, offering for sale or using the alleged infringing products covered by patents owned by Eshare Technology, Inc. et al, as well as unspecified monetary damages. The suit is in its early stages of discovery, and therefore I-Sector is unable to determine the ultimate costs of this matter. I-Sector believes that this suit is without merit and intend to vigorously defend such action, however the case is currently scheduled for mediation in the immediate future. I-Sector has no assurance that mediation will result in a settlement on terms that are acceptable to us.
On May 17, 2000, Jack B. Corey ("Corey") filed a lawsuit against the Company styled JACK B. COREY V ALLSTAR SYSTEMS, INC., Cause No. 2000-24796, in the District Court of Harris County, Texas, 113th Judicial District, in which he sought a temporary restraining order, temporary and permanent injunctions to enjoin the Company's sale of certain assets to Amherst Technologies, L.L.C. ("Amherst"), and damages based on alleged shareholder oppression. The Court denied Corey's Application for Temporary Restraining Order and, after hearing, denied his request for a temporary injunction. On June 22, 2000, Corey filed his First Amended Original Petition and Application for Permanent Injunction, seeking to permanently enjoin the sale of assets which had already been consummated and to assert a cause of action for shareholder oppression based on alleged failures to provide Corey, a Company shareholder, notices relating to the shareholders' meeting held to approve the sale of assets to Amherst. The Company has answered and denied all claims and intends to vigorously contest Corey's claims. The case is set for trial on June 18, 2001. In addition to the claims he has asserted in the above-described lawsuit, Corey has verbally asserted claims in conversations with the Company's representatives and attorneys that the Company made various alleged misrepresentations regarding the Company's initial public offering that affected Corey's ability and intention to sell his Company shares. Corey verbally claims to have been damaged in the approximate amount of $1,337,500 but has not initiated litigation to pursue his verbal claims. Subsequently, Corey verbally offered to a settlement of all matters for substantially less than his claimed damage amount. Should Corey initiate litigation to pursue his claims, the Company intends to vigorously contest those claims, however the Company will give consideration to offers to settle such matter if such a settlement is deemed to be in the best interest of the Company.
12. STOCK OPTION PLANS
Under the 1996 Incentive Stock Plan (the "Incentive Plan"') and the 1996 Non-Employee Director Stock Option Plan (the "Director Plan"). I-Sector's Compensation Committee may grant up to 442,500 shares of common stock, which have been reserved for issuance to certain employees of I-Sector. At December 31, 2000 33,488 shares were available for future grant under the Incentive Plan. The Incentive Plan provides for the granting of incentive awards in the form of stock options, restricted stock, phantom stock, stock bonuses and cash bonuses in accordance with the provisions of the plan. Additionally, no shares may be granted after the tenth anniversary of the Incentive Plan's adoption. I-Sector has reserved for issuance, under the Director Plan, 100,000 shares of common stock, subject to certain antidilution adjustments of which 28,000 were available for future grants at December 31, 2000. The Director Plan provides for a one-time option by newly elected directors to purchase up to 5,000 common shares, after which each director is entitled to receive an option to purchase up to 2,000 common shares upon each date of re-election to I-Sector's Board of Directors. Options granted under the Director Plan and the Incentive Plan have an exercise price equal to the fair market value on the date of grant and generally expire ten years after the grant date.
In May 2000, I-Sector adopted the 2000 Stock Incentive Plan (the "2000 Incentive Plan"). Under the 2000 Incentive Plan, I-Sector's Compensation Committee may grant up to the greater of 400,000 shares of common stock or 10% of the number of shares of common stock issued and outstanding on the first day of the then preceding calendar quarter. The 2000 Incentive Plan provides for the granting of incentive awards in the form of stock-based awards and cash bonuses in accordance with the provisions of the plan. All employees, including officers , and consultants and non-employee directs are eligible to participate in the 2000 Stock Incentive Plan. Generally, the Compensation Committee has the discretion to determine the exercise price of each stock option under the 2000 Incentive Plan, and they must be exercised within ten years of the grant date, except those classified as Incentive Stock Option ("ISO") grants to a 10% or greater stockholder. ISO options grants to a 10% or greater stockholder must be exercised within five years of the grant date. The exercise price of each ISO option grant may not be less than 100% of the fair market value of a share of common stock on the date of grant (110% in the case of a 10% or greater stockholder). At December 31, 2000 314,129 shares were available for future grant under the 2000 Incentive Plan.
During 1998, 1999 and 2000 I-Sector granted options to purchase 8,000, 9,000 and 35,000 common shares to its directors, respectively, which vest immediately, and 129,850, 216,872 and 94,671 common shares to its employees, respectively, which vest over five years.
The activity of employees in all plans is summarized below:
I-Sector applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for options granted under the Plans. Accordingly, no compensation expense has been recognized. Had compensation expense been recognized based on the Black-Scholes option pricing model value at the grant date for awards consistent with SFAS No. 123, I-Sector's net loss and loss per share would have been increased to the pro forma amounts shown below. For purposes of estimating the fair value disclosures below, the fair value of each stock option has been estimated on the grant date or the grant repricing date with a Black-Scholes option pricing model using the following weighted-average assumptions; dividend yield of 0%; expected volatility of 121% to 179%; risk-free interest rate of 6.0%; and expected lives of eight years from the original date of the stock option grants. The effects of applying SFAS No. 123 for pro forma disclosures are not likely to be representative of the effects on reported net income (loss) for future years.
1998 1999 2000 Net Income (loss): As reported $ (1,098) $ (845) $ (43) Pro forma $ (1,180) $ (923) $ (48) Earnings per share (basic and diluted ) As reported $ (0.25) $ (0.20) $ (0.01) Pro forma $ (0.27) $ (0.22) $ (0.01)
Employees affected by the sale of the Telecom Division on March 16, 2000 and of the Computer Products Division on May 19, 2000 (See Note 2) retained their respective stock option grants received prior to I-Sector's disposal of these divisions. In addition, certain affected employees were eligible and received stock options awards subsequent to their termination dates. The affected employee's awards will vest or continue to vest according to the periods specified in their respective stock option agreements, generally five years, contingent upon the employment with the respective division's acquiror. As a result of their termination from I-Sector, and the change in employee status, these awards were remeasured as of the respective sale dates or date of subsequent issuance. The fair values of each of these stock option awards was estimated using the Black-Scholes option pricing model using the following assumptions; dividend yield of 0%; expected volatility of 87.29% to 121.45%; risk free interest rate of 6% and an expected remaining life of 3 to 5 years. The fair values have been reflected as a component of Stockholder's equity at December 31, 2000 and are being recognized as compensation expense of the Discontinued operations over the estimated remaining vesting period. For the year ended December 31, 2000 $36 of compensation expense was recorded.
The activity of this non-employee group is summarized below:
Weighted Average Shares Exercise Price Transfer from Employee plan 133,220 $ 2.19 Grants during the year 58,271 2.27 Exercised during the year Canceled during the year (7,720) 1.66 Options outstanding December 31 183,771 $ 2.18 Options exercisable December 31 45,500 $ 1.87
Options outstanding price range $2.86 to $2.31 Weighted average fair value of options granted during the year $ 2.18 Options weighted average remaining life 3.85 years
13. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year were as follows:
The potentially dilutive options were not used in the calculation of diluted earnings per share for the year ended December 31, 1998, 1999 and 2000 since the effect of potentially dilutive securities in computing a loss per share is antidilutive.
There were warrants to purchase, 176,750 shares of common stock for 1998, 1999 and 2000, respectively, which were not included in computing the effect of dilutive securities because the inclusion would have been antidilutive.
There were 8,000, 37,600 and 48,344 options to purchase common stock for 1998, 1999 and 2000, respectively, which were not included in computing the effect of dilutive securities because the inclusion would have been antidilutive.
14. SEGMENT INFORMATION
I-Sector has five reportable segments: (1) ACS, (2) Synergy, (3) IT Staffing, (4) Stratasoft, (5) INX and (6) Corporate. ACS, Synergy and IT Staffing were previously reported as the IT Services segment. Corporate includes the operations of the Company's El Paso service operations which were sold on May 19, 2000, and service operations relating to computer installations for a certain customer. ACS provides customers with on-site and carry-in computer repair, application support and operating system and network migration services. Synergy provides customers with turnkey outsourced IT helpdesk solutions, technical staff augmentation for IT helpdesk operation and helpdesk consulting services. IT Staffing provides IT professionals to work on temporary assignments and does permanent placements. Stratasoft produces software products that facilitate telephony and computer integration primarily for telemarketing and call center applications. INX is a provider of network infrastructure professional services and a reseller of Cisco network infrastructure products. The accounting policies of the business segments are the same as those described in Note 1. I-Sector evaluates performance of each segment based on operating income. Management only views accounts receivable, and not total assets, by segment in their decision making. Intersegment sales and transfers are not significant. The tables below show the results of the five reportable segments:
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
NONE
PART III
Item 10.
Item 10. Directors and Executive Officers
Directors
James H. Long - Director, April 1983 to present.
James H. Long, age 42, is the founder of the Company and has served as Chairman of the Board, Chief Executive Officer and President since the Company's inception in 1983. Prior to founding the Company, Mr. Long served with the United States Navy in a technical position and was then employed by IBM in a technical position.
Donald R. Chadwick - Director, September 12, 1996 to present.
Donald R. Chadwick, age 57, has served as Secretary since February, 1992 and served as the Chief Financial Officer of the Company from February 1992 until December, 1999. As Chief Financial Officer, his duties included supervision of finance, accounting and controller functions within the Company.
Richard D. Darrell - Director, July 29, 1997 to present.
Richard D. Darrell, age 45, has been President of American Technology Acquisition Corporation, a company specializing in mergers, acquisitions, and divestitures of technology related companies since 1995. Prior to that, Mr. Darrell served as President and Chief Executive Officer of Direct Computer Corporation, a computer reseller and distribution company based in Dallas, Texas.
Jack M. Johnson, Jr. - Director, July 29, 1997 to present.
Jack M. Johnson, Jr., age 61, has been Managing General Partner of Winterman & Company, a general partnership that owns approximately 25,000 acres of real estate in Texas, which is used in farming, ranching, and oil and gas exploration activities, since 1996. Mr. Johnson is also President of Winco Agriproducts, an agricultural products company that primarily processes rice for seed and commercial sale. Mr. Johnson was previously the Chairman of the Board of the Lower Colorado River Authority, the sixth largest electrical utility in Texas, with approximately 1,700 employees and an annual budget of over $400 million. Mr. Johnson was previously Chairman of North Houston Bank, a commercial bank with assets of approximately $75 million. Mr. Johnson currently serves on the board of directors of Houston National Bank, a commercial bank located in Houston, Texas with assets of approximately $100 million; Security State Bank, a commercial bank in Anahuac, Texas with assets of approximately $60 million and Team, Inc. a publicly traded company which provides environmental services for industrial operations.
Mark T. Hilz - Director, June 24, 1999 to present.
Mark T. Hilz, age 42, is the President of Internetwork Experts, Inc. He has formerly served as Chief Executive Officer of Nichecast, Inc., a privately held internet services company. From 1990 to 1998, Mr. Hilz was founder, President and Chief Executive Officer of PC Service Source, Inc., a publicly-held distributor of personal computer hardware for the repair industry.
Executive Officers
The executive officers of the Company serve until resignation or removal by the Board of Directors. Set forth below is certain information about the Company's Executive Officers, other than James H. Long .
Thomas N. McCulley - Vice President, Information Systems, September 1996 to present.
Thomas N. McCulley, age 54, has been the Vice President, Information Systems for the Company since July 1996. From January 1992 to June 1996, Mr. McCulley served as the Information Services Director for the Company. He has responsibility for management and supervision of the Company's Management Information Systems.
William R. Hennessy - President, Stratasoft, Inc., September 1996 to present.
William R. Hennessy, age 42, has served as the President of Stratasoft, Inc., the Company's wholly-owned subsidiary that was formed in 1995 to develop and market CTI Software, since joining the Company in January 1996. Mr. Hennessy's responsibilities include the general management of Stratasoft, Inc. From July 1991 to January 1996, Mr. Hennessy was employed by Inter-Tel, Incorporated, a telephone systems manufacturer and sales and service company, where he served as the Director of MIS and the Director of Voice and Data Integration for the central region.
Family Relationships
There are no family relationships among any of the directors and executive officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Number of Number of Known Failure Name of Reporting Person Late Reports Transactions To File
Chadwick, Donald R 1 6
Item 11.
Item 11. Executive Compensation
Summary Compensation Table. The following table reflects compensation for services to the Company for the years ended December 31, 2000, 1999 and 1998 of (i) the Chief Executive Officer of the Company and (ii) the three most highly compensated executive officers of the Company who were serving as executive officers at the end of 2000 and whose total annual salary and bonus exceeded $100,000 in 2000 (the "Name Executive Officers").
Annual Compensation Long Term Compensation Awards Name and Principal Year Salary Bonus Other Number of Annual Restricted Securities Compensation Stock Underlying (1) Awards Options (2) Position
James H. Long (3) 2000 $150,000 Chief Executive 1999 150,000 Officer 1998 150,000 $80,200 2,400
William R. Hennessy 2000 91,034 59,686 President, Stratasoft, 1999 85,000 55,856 10,000 Inc. (4) 1998 84,637 3,000 7,500
(1) Amounts exclude the value of perquisites and personal benefits because the aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the Named Executive Officer's total annual salary and bonus. (2) The number of securities underlying options shown for 1998 includes options originally issued in 1997 and repriced during 1998 and options newly issued in 1998. (3) Company has made personal loans to Mr. Long from time to time. See Item 13. Certain Relationships and Related Transactions "Certain Transactions". (4) Includes compensation based upon gross profit realized.
Stock Options
Under the Company's 1996 Incentive Stock Option Plan (the "Incentive Stock Option Plan") options to purchase shares of the Common Stock may be granted to executive officers and other employees. As of December 31, 2000, 409,012 shares were reserved for issuance upon exercise of outstanding options and 33,488 were reserved and remained available for future grants pursuant to the Incentive Stock Option Plan. During 2000, options to purchase 15,100 shares of Common Stock were granted to the Named Executive Officers under the Incentive Stock Option Plan
Options Granted in Last Fiscal Year. The following table provides information concerning stock options granted to the Named Executive Officers during the year ended December 31, 2000.
Potential Potential Realizable Realizable Value at Number of Percent of Value at Assumed Shares of Total Assumed Annual Annual Rate Common Options Rate of Stock of Stock Stock Granted to Exercise Price Price Underlying Employees or Base Appreciations Appreciations Options in Fiscal Price Expiration for Option for Option Granted Year ($/share) Date Term 5% (1) Term 10% (1)
None
(1) Actual gains, if any, on stock option exercises are dependent on future performance of the Common Stock. No appreciation in the price of the Common Stock will result in no gain.
Aggregated Option Exercises and Year-End Option Values
The Named Executive Officers held 109,646 options that were exercisable at December 31, 2000, none were exercised during 2000 and there were 0 in-the-money unexercised options at December 31, 2000.
Employment Agreements
Each of the Named Executive Officers of the Company has entered into an employment agreement (collectively, the "Executive Employment Agreements") with the Company. Under the terms of their respective agreements, Messrs. Long, McCully, Otto and Hennessy are entitled to an annual base salary of $150,000, $75,000, $100,000 and $85,000, respectively, plus other bonuses, the amounts and payment of which are within the discretion of the Compensation Committee. The Executive Employment Agreements may be terminated by the Company or by the executive officer at any time by giving proper notice. The Executive Employment Agreements generally provide that the executive officer will not, for the term of his employment and for the period ranging from twelve to eighteen months following the end of such Named Executive Officer's employment with the Company, solicit any of the Company's employees or customers or otherwise interfere with the business of the Company.
Item 12.
Item 12. Security Ownership
Security Ownership of Management
The following table sets forth, as of March 16, 2000 the number of shares of Common Stock owned by each Director, each Named Executive Officer, as defined in "Executive Compensation," and all Directors and Executive Officers as a group.
Title of Class Name of Amount and Nature of Percent Beneficial Owner Beneficial Owner (1) of Class
Common Stock James H. Long 2,058,800 51.6% Common Stock Donald R. Chadwick 110,503 (2) 2.8% Common Stock William R. Hennessey 8,800 (3) * Common Stock Thomas N. McCully 14,960 (4) * Common Stock All officers and directors 2,193,063 54.9%
(1) Beneficial owner of a security includes any person who shares voting or investment power with respect to or has the right to acquire beneficial ownership of such security within 60 days.
(2) Includes 69,686 shares which may be acquired upon exercise of currently exercisable options and 517 shares owned by his spouse for which Mr. Chadwick disclaims beneficial ownership and 300 shares owned by his minor children for which Mr. Chadwick disclaims beneficial ownership.
(3) Includes 8,800 shares which may be acquired upon exercise of currently exercisable options.
(4) Includes 9,760 shares which may be acquired upon exercise of currently exercisable options.
(5) Includes 600 shares which may be acquired upon exercise of currently exercisable options.
Security Ownership of Certain Beneficial Owners
Title of Class Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Owner Of Class
Common Stock Jack B. Corey 267,500 6.7% 37102 FM 149, P.O. Box 525 Pinehurst, TX 77362
Common Stock Peak 6 Capital Management L.L.C. (1) 205,300 5.1% 209 LaSalle Street, Suite 200 Chicago, Illinois 60604
Common Stock James H. Long 2,120,300 51.6% 6401 Southwest Freeway Houston, Texas 77074
(1) As reported on Schedule 13D December 1, 2000.
Item 13.
Item 13. Certain Relationships and Related Transactions
Certain Transactions
The Company has from time to time made payments on behalf of Allstar Equities, Inc. a Texas corporation ("Equities"), which is wholly-owned by James H. Long, the Company's President and Chief Executive Officer, and on behalf of Mr. Long, personally for taxes, property and equipment. Effective on December 1, 1999 a note payable by Equities was signed for $335,551 for 60 monthly installments of $6,965. The note bears interest at 9% per year. At December 31, 2000, the Company's receivables from Equities amounted to approximately $203,000. Additionally, from time to time the Company has made payments to unrelated parties for transactions that should either wholly or partially benefit Mr. Long and which should therefore be accounted for as indebtedness by Mr. Long to the Company. The company records these transactions as a receivable to be repaid by him. The balance of approximately $100,000 at December 31, 2000 is included in the balance sheet caption "Accounts receivable - affiliates".
The Company leases office space from Equities. On December 1, 1999 Equities purchased the building and executed a direct lease with the Company with an expiration date of December 31, 2004. The new lease has rental rates of $37,692 per month.
In August 1996, the Company retained an independent real estate consulting firm to conduct a survey of rental rates for facilities in Houston, Texas that are compatible to its Houston headquarters facility. Based upon this survey, and additional consultations with representatives of the real estate consulting firm, the Company believes that the rental rate and other terms of the Company's sublease from Equities are at least as favorable as those that could be obtained in an arms-length transaction with an unaffiliated third party.
Directors' Compensation
Employee directors of the Company do not receive any additional compensation for their services as a director of the Company. The Company pays each independent director $1,000 for each Board meeting attended and $500 for Committee meeting attended, along with reasonable out-of-pocket expenses incurred by independent directors to attend Board and Committee meetings. Independent directors are also entitled to receive options pursuant to the Director Plan (See Note 12).
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed as part of this report
(1) Consolidated Financial Statements - See Index to Consolidated Financial Statements on Page 23
(2) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, March 16, 2000.
I-Sector Corporation. (Registrant)
By:/s/ James H. Long James H Long, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity
/s/ James H. Long Chief Executive Officer, President and Chairman of the Board (Principal Financial and Accounting Officer)
/s/ Donald R. Chadwick Secretary and Director
/s/ Mark T. Hilz Director
/s/ Richard D. Darrell Director
/s/ Jack M. Johnson Director