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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21479
I-SECTOR CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0515249
(State of incorporation) (I.R.S. Employer Identification No.)
6401 SOUTHWEST FREEWAY
HOUSTON, 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 14, 2000
4,049,525 shares outstanding
<PAGE>
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
2000 1999
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,762 $ 4,647
Accounts receivable, net 5,630 37,726
Accounts receivable - affiliates 467 423
Inventory 962 7,442
Deferred taxes 2,400 836
Other current assets 181 384
------- -------
Total current assets 18,402 51,458
Property and equipment 1,252 2,280
Other assets 149 178
------- -------
Total $ 19,803 $ 53,916
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ $ 15,869
Accounts payable 1,786 21,687
Accrued expenses 2,138 3,896
Net liabilities related
to discontinued operations 1,051 199
Income taxes payable 1,383
Deferred service revenue 97 240
------- -------
Total current liabilities 6,455 41,891
Deferred credit - stock warrants 195 195
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued
Common stock:
$.01 par value, 15,000,000 shares authorized,
4,441,325 and 4,442,325 shares issued at
September 30, 2000 and December 31, 1999 44 44
Additional paid in capital 10,037 10,037
Unearned equity compensation (1) (1)
Treasury stock (391,800 and 381,800 shares,
at cost) at September 30, 2000 and
December 31, 1999 (986) (972)
Retained earnings 4,059 2,722
------- -------
Total stockholders' equity 13,153 11,830
------- -------
Total $ 19,803 $ 53,916
======= =======
See notes to consolidated financial statements
<PAGE>
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30,
2000 1999
---- ----
Total revenue $ 4,173 $ 4,920
Cost of sales and services 3,314 3,038
-------- -------
Gross profit 859 1,882
Selling, general and administrative expenses 3,282 1,725
-------- -------
Operating (loss) income (2,423) 157
Interest expense (income), including other income (100) (19)
-------- --------
(Loss) income from continuing operations before
(benefit) provision for income taxes (2,323) 176
(Benefit) provision for income taxes (708) 60
-------- -------
Net (loss) income from continuing operations (1,615) 116
Discontinued Operations:
Net income from discontinued operations,
net of taxes 216
Loss on disposal, net of taxes (1,095)
-------- -------
Net (loss) income $ (2,710) $ 332
======== =======
Net (loss) income per share:
Basic and diluted:
Net (loss) income from continuing
operations $ (0.40) $ 0.03
Net income from discontinued operations 0.05
Loss on disposal, net of taxes (0.27)
------- -------
Net (loss) income per share $ (0.67) $ 0.08
======= =======
Weighted average shares outstanding:
Basic and diluted 4,048,525 4,169,125
========== ==========
See notes to consolidated financial statements
<PAGE>
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Nine Months Ended September 30,
2000 1999
---- ----
Total revenue $ 14,386 $ 13,754
Cost of sales and services 10,407 8,792
------- ------
Gross profit 3,979 4,962
Selling, general and administrative expenses 7,544 5,033
------- ------
Operating loss (3,565) (71)
Interest expense (income), net of other income (135) (4)
------- ------
Loss from continuing operations before
benefit for income taxes (3,430) (67)
Benefit for income taxes (1,075) (3)
------- ------
Net loss from continuing operations (2,355) (64)
Discontinued Operations:
Net income (loss) from discontinued
operations, net of taxes 300 (28)
Gain on disposal, net of taxes 3,392
------- ------
Net income (loss) $ 1,337 $ (92)
======= ======
Net income (loss) per share:
Basic and diluted:
Net loss from continuing operations $ (0.58) $ (0.01)
Net income (loss) on discontinued
operations 0.07 (0.01)
Gain on disposal, net of taxes 0.84
-------- -------
Net income (loss) per share $ 0.33 $ (0.02)
======== =======
Weighted average shares outstanding:
Basic and diluted 4,048,672 4,169,023
========= =========
See notes to consolidated financial statements
<PAGE>
I-SECTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2000 1999
---- ----
Net loss from continuing operations $ (2,355) $ (64)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 376 453
Deferred tax provision (2,233)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable, net 32,096 2,415
Accounts receivable - affiliates (44) (83)
Inventory (82) (1,505)
Other current assets 181 213
Other assets 29
Accounts payable (19,901) 3,258
Accrued expenses (1,758) (4)
Income taxes payable (521)
Deferred service revenue (143) (61)
--------- --------
Net cash provided by continuing operating
activities 5,645 4,622
Net operating activities from discontinued
activities 14,407 325
--------- --------
Net cash provided by operating activities 20,052 4,947
Cash flows from investing activities:
Proceeds from sale of fixed assets 279
Capital expenditures (333) (477)
--------- --------
Net cash used in investing activities: (54) (477)
--------- --------
Cash flows from financing activities:
Purchase of treasury stock (14)
Net decrease in notes payable (15,869) (3,220)
--------- --------
Net cash used in financing activities: (15,883) (3,220)
--------- --------
Net increase in cash and cash equivalents 4,115 1,250
Cash and cash equivalents at beginning of period 4,647 2,538
--------- --------
Cash and cash equivalents at end of period $ 8,762 $ 3,788
========= ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 375 $ 754
========= ========
Cash paid for taxes $ 1,009 $ 0
========= ========
See notes to consolidated financial statements
<PAGE>
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"), formerly Allstar
Systems, Inc., has historically been engaged in the sale and service of computer
and telecommunication hardware and software products in the United States.
During 1995, I-Sector formed and incorporated Stratasoft, Inc., ("Stratasoft") a
wholly owned subsidiary, to create and market software related to the
integration of computer and telephone technologies. In January 1997, I-Sector
formed IT Staffing Inc. ("IT Staffing"), a wholly owned subsidiary, to provide
temporary and permanent placement services of information technology
professionals. In March 1998, I-Sector formed Allstar Systems Rio Grande, Inc.,
a wholly owned subsidiary, to engage in the sale and service of computer
products in western Texas and New Mexico. In July 2000, the shareholders
approved the name change from Allstar Systems, Inc. to I-Sector Corporation in
order to better communicate the business purpose and mission of the Company,
that of owning, operating or investing in companies which are expected to
benefit from the manner in which the Internet is changing commerce and
communications. Recently, in July 2000 I-Sector formed and incorporated two new
wholly owned corporations, Synergy Helpdesk Solutions, Inc. ("Synergy") and
Allstar Computer Service, Inc. ("ACS") and contributed certain operating assets
associated with its previously reported IT Services segment to such
corporations. Also in July 2000, I-Sector formed and incorporated a new wholly
owned subsidiary, Internetworking Sciences Corporation ("INX") to meet the needs
of customers in the area of large-scale network infrastructure requirements that
are Cisco centric. Subsequent to September 30, 2000, INX acquired certain assets
of Internetwork Experts, Inc. along with the right to use that name and changed
its name to Internetwork Experts, Inc. ("INX").
The condensed consolidated financial statements presented herein as of and
for the three and nine months ended September 30, 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, 1999 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.
Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities- ("SFAS No. 133").
SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management does not believe the adoption of SFAS
No. 133 will have a material impact on its financial position and the results of
operations and cash flows..
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101, as amended, in the fourth quarter of
fiscal 2000. The Company does not expect the adoption of SAB 101 to have a
material effect on its financial position or results of operations.
<PAGE>
2. DISCONTINUED OPERATIONS
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 stockholder approval was obtained and
other required conditions of closing were satisfied. Under the terms of the
agreement, I-Sector received a cash purchase price at closing of approximately
$16,440, including $1,952 attributable to inventory and $279 attributable to
equipment, plus the contingent right to receive up to $500 in proceeds from an
escrow account established to satisfy the Company's liability for any breaches
of the Company's representations and warranties under the agreement. The cash
purchase price was subject to certain post-closing adjustments that resulted in
a credit to the purchaser of approximately $384. The transaction was recognized
for financial reporting purposes in the quarter ended March 31, 2000 and pretax
income from the discontinued operations of the Computer Products Division (net
of taxes of $156) was $302 for the three months ended March 31, 2000. In the
quarter ended March 31, 2000, a gain on disposal of $5,091 (net of taxes of
$2,625) was recognized, which included an estimated loss of $604 (net of taxes
of $311) for the operating results from the measurement date, March 16, 2000 to
the closing date of the sale, as well as a loss on the equipment sold of $352
(net of taxes of $181) and estimates for the impairment of assets caused by the
disposal decision of $2,593 (net of taxes of $1,336). During the quarter ended
June 30, 2000, I-Sector revised its estimates relating to the impairment of
assets and recognized a loss on disposal of $387 (net of taxes of $199). During
the quarter ended September 30, 2000, I-Sector again revised its estimates
relating to the impairment of assets and recognized a loss on disposal of $969
(net of taxes of $500). I-Sector retained accounts receivable attributable to
the Computer Products Division, which, at September 30, 2000, was approximately
$1,293, net of reserves. I-Sector also retained fixed assets of $255 and
liabilities related to the Computer Products Division. Fixed assets that were
not sold are being redeployed in the continuing operations. The balance sheet
caption "Net liabilities related to discontinued operations" at September 30,
2000 includes $984,000 of estimated expenses relating to the disposal. Revenue
for the Computer Products Division for the three and nine month periods ending
September 30, 2000 through the date of disposition was $120 and $49,333,
respectively and $44,611 and $132,826 for the same periods in 1999. 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 nine months ended September 30, 1999 and 2000 and for
the period from April 1, 2000 to May 19, 2000 was $566, $237 and $62,
respectively. 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 revenue of
$1,305 and $942 and an operating loss of $244 and $720 in the nine months ended
September 30, 1999 and 2000, respectively. The El Paso services business has
been included through the close date of May 19, 2000 in the continuing
operations (as a part of the Corporate segment) for the nine months ended
September 30, 2000.
On November 2, 1999, I-Sector approved a plan to sell or close its Telecom
division. This was the measurement date. The sale was finalized on March 16,
2000. Under the terms of the sale I-Sector received $250 cash and the ability to
obtain restricted stock in the purchaser contingent upon the performance of the
acquired operations during a period ending six months after the closing date.
Additionally, the purchaser assumed all telephone equipment warranty obligations
of I-Sector up to a maximum of $30. Any excess warranty costs incurred by the
purchaser will be billed to I-Sector at an agreed upon rate. Loss from
discontinued operations (net of tax benefit of $354) was $687 for the nine
months ended September 30, 1999. A disposal loss, including an estimate of the
operating results from the measurement date, November 2, 1999 to the closing
date of the sale, as well as estimates for impairment of assets caused by the
disposal decision were recognized at December 31, 1999. During the nine months
ended September 30, 2000, I-Sector revised its estimate of the loss on disposal
and recorded an additional loss (net of tax benefit of $65) of $127. I-Sector
has retained accounts receivable of approximately $218, net of reserves, at
September 30, 2000, related to the Telecom Division. The Revenue for the Telecom
Division for the three and nine month periods ending September 30, 2000 through
the date of disposition, March 16, 2000, was $0 and $752, respectively, and $704
and $3,164 for the same periods in 1999.
3. INCENTIVE STOCK PLANS
In September 1996 I-Sector adopted the 1996 Incentive Stock Plan (the
"Incentive Plan"') and the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan"). Under the Incentive Plan, I-Sector's Compensation Committee
may grant up to 442,500 shares of common stock, which have been reserved for
issuance to certain key employees of I-Sector. 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.
<PAGE>
Historically the Director Plan provided for a one-time option by newly
elected directors to purchase up to 5,000 shares of common stock, after which
each director was entitled to receive an option to purchase up to 2,000 common
shares upon each date of reelection to I-Sector's Board of Directors. On May 2,
2000, the I-Sector Board of Directors amended the Non-Employee Director Stock
Option Plan to provide for the issuance of options to purchase 5,000 shares of
common stock to each Non-employee Director upon his election as a director. In
addition, the Board of Directors authorized the issuance of 5,000 shares to each
of the Non-employee Directors, who was serving as a director at that date, as
additional compensation for prior periods, each such additional option to be
issued at the time of that Director's next election as an I-Sector director.
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. The Incentive Plan stock option grants
will vest ratably over the five-year period from the date of issuance.
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 options, stock appreciation
rights, restricted stock, performance units and performance shares, other
stock-based awards and cash bonuses in accordance with the provisions of the
plan. All employees, including officers, and consultants and non-employee
directors 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).
The number of options outstanding and the exercise price under each of the
three Plans were as follows at September 30, 2000:
1996 2000
Exercise Price Director Plan Incentive Plan Incentive Plan
$1.063 190,012
$1.375 4,500
$1.500 28,000 192,640 14,100
$1.563 17,020
$1.750 9,000 1,900
$2.188 5,000
$2.266 35,800
$2.313 32,471
$2.938 400
$6.000 8,000 0
--------- --------- ---------
Total granted 37,000 414,072 87,771
========= ========= =========
In addition, incentive awards in the form of restricted stock were granted
for 14,286 shares that would have vested ratably over the two-year period ending
July 7, 1999, and 50,000 shares, which would have vested ratably over the
five-year period ending May 20, 2004. During the quarter ended June 30, 1999
I-Sector exchanged restricted stock awards for 62,086 shares for stock option
grants on 126,172 shares at an exercise price of $1.06 per share. The stock
option grants vest over the same period as the exchanged restricted stock
awards. As of September 30, 2000, I-Sector had restricted stock awards
outstanding for 1,200 shares.
4. SEGMENT INFORMATION
I-Sector has six reportable segments: ACS, Synergy, INX, IT Staffing,
Stratasoft and Corporate. 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. The installations for
this customer ceased when the Computer Products Division was sold on May 19,
2000. The combined ACS, Synergy and IT Staffing, plus the El Paso service
business and the service operations related to that certain customer were
previously reported as the IT Services segment prior to the quarter ended June
<PAGE>
30, 2000. 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 operations and helpdesk solutions consulting
services. IT Staffing provides IT professionals to work on temporary
assignments, recruiting services and placements. INX provides professional
services in the area of large-scale network infrastructure requirements that are
Cisco centric. Stratasoft, reported prior to the quarter ended June 30, 2000, as
the CTI Software segment, produces software products that facilitate telephony
and computer integration primarily for telemarketing and call center
applications. 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. The tables below show the results of the six reportable segments:
For the quarter ended September 30, 2000:
<TABLE>
<CAPTION> IT
ACS Synergy INX Staffing Stratasoft Corporate Elimination Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 571 $ 841 $ 700 $ 334 $ 1,779 $ (41) $ (11) $ 4,173
Cost of sales and services 511 735 735 250 1,015 79 (11) 3,314
------ ------ ------ ------ ------ ------ ------ -----
Gross profit (loss) 60 106 (35) 84 764 (120) 0 859
Selling, general and
administrative expenses 330 360 327 138 1,139 988 0 3,282
------ ------ ------ ------ ------ ------ ------ -----
Operating loss $ (270) $ (254) $ (362) $ (54) $ (375) $(1,108) $ 0 2,423)
====== ====== ====== ====== ====== ====== ======
Interest expense (income), net of
other income (100)
------
Loss before benefit for income tax (2,323)
Benefit for income tax (708)
------
Net loss from continuing operations (1,615)
Net loss on disposal, net of taxes (1,095)
------
Net loss $(2,710)
======
Accounts receivable, net $ 700 $ 1,016 $ 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 quarter ended September 30, 1999:
Total revenue $ 926 $ 1,838 $ 0 $ 269 $ 1,329 $ 558 $ 0 $ 4,920
Cost of sales and services 586 1,163 0 189 623 477 0 3,038
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 340 675 0 80 706 81 0 1,882
Selling, general and
administrative expenses 276 548 0 113 524 264 0 1,725
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ 64 $ 127 $ 0 $ (33) $ 182 $ (183) $ 0 157
====== ======= ====== ====== ====== ====== ======
Interest expense (income), net of
other income (19)
------
Income before benefit for income tax 176
Provision for income tax 60
------
Net income from continuing operations 116
Net income from
discontinued operations, net of tax 216
------
Net income $ 332
======
Accounts receivable, net $ 1,571 $ 704 $ 0 $ 133 $ 916 $ 693 $ 0 $ 4,017
====== ====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 28,461
------
Total accounts receivable, net $32,478
======
</TABLE>
For the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
IT
ACS Synergy INX Staffing Stratasoft Corporate Elimination Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 1,955 $ 3,725 $ 700 $ 970 $ 5,424 $ 1,623 $ (11) $14,386
Cost of sales and services 1,551 2,899 735 722 2,841 1,670 (11) 10,407
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 404 826 (35) 248 2,583 (47) 0 3,979
Selling, general and
administrative expenses 864 1,474 327 312 2,947 1,620 0 7,544
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ (460) $ (648) $ (362) $ (64) $ (364) $(1,667) $ 0 (3,565)
====== ====== ====== ====== ====== ====== ======
Interest expense (income), net of
other 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 discontinued operations,
net of tax 300
------
Net gain on disposal, net of taxes 3,392
------
Net income $ 1,337
======
Accounts receivable, net $ 700 $ 1,016 $ 266 $ 279 $ 803 $ 1,055 $ 0 $ 4,337
====== ====== ====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 1,293
------
Total accounts receivable, net $ 5,630
======
For the nine months ended September 30, 1999:
Total revenue $ 2,741 $ 5,836 $ 0 $ 775 $ 2,924 $ 1,478 $ 0 $13,754
Cost of sales and services 1,856 3,960 0 497 1,367 1,112 0 8,792
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 885 1,876 0 278 1,557 366 0 4,962
Selling, general and
administrative expenses 828 1,764 0 365 1,469 607 0 5,033
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) $ 57 $ 112 $ 0 $ (87) $ 88 $ (241) $ 0 (71)
====== ====== ====== ====== ====== ====== ======
Interest expense (income), net of
other income (4)
------
Loss before benefit for income tax (67)
Benefit for income tax (3)
------
Net loss from continuing operations (64)
Net loss from discontinued operations,
net of tax (28)
------
Net loss $ (92)
======
Accounts receivable, net $ 1,571 $ 704 $ 0 $ 133 $ 916 $ 693 $ 0 4,017
====== ====== ====== ====== ====== ====== ======
Accounts receivable retained from
discontinued operations, net 28,461
------
Total accounts receivable, net $32,478
======
<FN>
I-Sector has previously allocated the cost of its corporate department to its
operating subsidiaries. Beginning in the quarter ended September 30, 2000 that
department is included in the Corporate segment.
</FN>
</TABLE>
5.EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing 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.
The potentially dilutive options totaling 148,733 and 214,360 shares for
the three and nine months ended September 30, 2000 and 67,559 shares for the
three and nine months ended September 30, 1999, respectively, calculated under
the treasury stock method, were not used in the calculation of diluted earnings
per share since the effect of potentially dilutive securities in computing a
loss per share on continuing operations is antidilutive.
There were warrants to purchase 176,750 shares of common stock for the nine
months ended September 30, 2000 and 1999 which were not included in computing
the effect of dilutive securities because the inclusion would have been
antidilutive.
6.LITIGATION
On February 1, 2000, a competitor brought a suit against I-Sector
Corporation's wholly owned subsidiary Stratasoft, Inc. in 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
unspecified monetary damages. I-Sector believes that this suit is without merit
and intends to vigorously defend such action.
On May 16, 2000, Jack B. Corey ("Corey") filed suit against the Company in
JACK B. COREY V. ALLSTAR SYSTEMS, INC., Cause No. 2000-24796, in the District
Court of Harris County, Texas, 113th Judicial District, seeking to enjoin the
sale of its computer product division and certain other assets to Amherst
Technologies, and for unspecified damages. On May 17, 2000, a state court denied
Corey's Application for Temporary Restraining Order and on May 22, 2000, a
second state court denied his Application for a Temporary Injunction and for
Expedited Discovery as moot. The present pleadings lack specificity as to
Corey's claim for damages and it is unclear at this time whether Corey will
pursue such a claim. However, the Company strongly denies that it engaged in any
improper conduct with regard to the asset sale and intends to vigorously defend
any claim that might be pursued by Corey.
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. SUBSEQUENT EVENT
On October 27, 2000, INX acquired certain assets and liabilities of
Internetwork Experts, Inc., a Dallas professional services firm that was also
focused on the architecture, design, implementation and support of high-end
network infrastructure for service providers and large enterprises. The
transaction is being accounted for as a purchase of certain of the assets of
Internetwork Experts by INX. The combined entity is a wholly owned subsidiary of
I-Sector Corporation. INS subsequently went through a legal name change to
Internetwork Experts, Inc. ("INX"). The seller received a cash purchase price of
$200,000 plus a right to further payments contingent upon attaining certain
Cisco designations within 6 months and upon performance of the acquired
operations.
<PAGE>
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") historically engaged in the business of
providing its customers with solutions to their information and communications
technology needs. Historically, our revenue was derived through four primary
areas of business, IT Services, CTI Software, Computer Products and Telecom
Systems, each of which had historically been reported as a segment. We recently
sold our Telecom Systems and Computer Products businesses. After the sale of
these businesses, we separated what was 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 since its inception in
January, 1997. In July, 2000 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"). Also in July, 2000 we formed another wholly owned company,
Internetworking Sciences Corporation ("INX"), which operates in the IT services
business sector. Subsequent to Sepember 30, 2000, INX acquired certain assets of
Internetwork Expert, Inc., along with the right to use its name, and began
operating as Internetwork Expert, Inc. (INX). Our CTI Software business was not
affected by the recent 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 four locations in the Houston, Dallas-Fort
Worth, Austin and San Antonio metropolitan areas. Stratasoft markets its
products worldwide through a direct sales force and an authorized dealer
network.
On March 16, 2000 we entered into separate agreements whereby (i) we sold
certain key assets of, and the ongoing business operations of, our Telecom
Systems business and (ii) 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. 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 $16.4 million, plus the possibility of receiving
a future payment of up to $500,000 from an escrow account. The terms of the
agreement also included possible future cash payments contingent upon future
performance of the operations being sold. We recognized a gain of approximately
$3.7 million, net of taxes, on the sale. We retained the other assets of our IT
Services business, which provides a variety of services related to the use of
information technology, and, as discussed above, contributed those assets to
newly formed wholly owned subsidiaries. By operating through these highly
focused wholly owned subsidiaries, we believe that we will offer better customer
service and improve our financial performance. We also retained our Stratasoft
business, which develops and markets telecommunications software. During the
quarter ended September 30, 2000, Stratasoft produced 42.6% of total revenue
while ACS, IT Staffing and Synergy contributed 13.7%, 8.0% and 20.2% of revenue,
respectively. INX, our newly formed subsidiary, contributed 16.8% of our
revenue. Our Corporate segment, which includes operations that are not on-going
because of the sale of the Computer Products Division, comprised the remaining
(0.1)% of revenue.
We believe the sale of our Computer Products Division provided sufficient
cash to initiate a fundamental change in our business strategy that will allow
us to deploy our liquid capital in endeavors that we believe will ultimately
result in improved stockholder value. We believe we will produce more rapid
growth, and better financial performance, by the separation of our various
information technology services into focused, specialized companies with each
led by a separate management team with personal financial incentives tied to
their company's financial performance. Additionally, we plan to continue to
expand our Stratasoft business through our wholly owned subsidiary, Stratasoft,
Inc.
<PAGE>
We also intend to pursue starting, acquiring or investing in, including
taking significant stakes in, other companies that we expect to benefit from the
manner in which the Internet is changing commerce and communications. Targeted
businesses are expected to include B2B E-Commerce product or services sales
companies, companies providing IT services related to network, Web development
and other Internet related IT services, and companies involved in the enabling
of E-Commerce and E-Business.
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 operations and helpdesk solutions consulting
services. IT Staffing continues its established business placing IT
professionals on temporary assignments and permanent placements. 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.
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.
Our cost of services for each of our service businesses is primarily
comprised of labor. Labor has a more 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.
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.
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 more fixed and, while still somewhat
variable, do not vary with increases in revenue as directly as do sales
commissions.
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.
<PAGE>
Three Months Ended September 30, 2000 Compared To Three Months Ended
September 30, 1999 (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, 2000 and 1999. The discussion below
relates only to our continuing operations, unless otherwise noted.
Three months ended September 30,
2000 1999
---- ----
Amount % Amount %
------ --- ------ ---
Revenue
ACS $ 571 13.7 $ 926 18.8
Synergy 841 20.2 1,838 37.4
INX 700 16.8 0 0.0
IT Staffing 334 8.0 269 5.5
Stratasoft 1,779 42.6 1,329 27.0
Corporate (41) (0.1) 558 11.3
Elimination (11) (0.2) 0 0.0
------- ----- ------- -----
Total revenue 4,173 100.0 4,920 100.0
Gross profit (loss):
ACS 60 10.5 340 36.7
Synergy 106 12.6 675 36.7
INX (35) (5.0) 0 0.0
IT Staffing 84 25.1 80 29.7
Stratasoft 764 42.9 706 53.1
Corporate (120) 292.7) 81 14.5
Elimination 0 0.0 0 0.0
------- ----- ------- -----
Total gross profit 859 20.6 1,882 38.3
Selling, general and administrative
expenses:
ACS 330 57.8 276 29.8
Synergy 360 42.8 548 29.8
INX 327 46.7 0 0.0
IT Staffing 138 41.3 113 42.0
Stratasoft 1,139 64.0 524 39.4
Corporate 988 241.0 264 47.3
------- ----- ------- -----
Total selling, general and
administrative
Expenses 3,282 78.6 1,725 35.1
Operating income (loss):
ACS (270) (47.3) 64 6.9
Synergy (254) (30.2) 127 6.9
INX (362) (51.7) 0 0.0
IT Staffing (54) (16.2) (33) (12.3)
Stratasoft (375) (21.1) 182 13.7
Corporate (1,108) (270.2) (183) (32.8)
------- ----- ------- -----
Total operating loss (2,423) (58.1) 157 3.2
Interest expense (income) net of
other income (100) (2.4) (19) (0.4)
------- ----- ------- -----
Loss before benefit for income taxes (2,323) (55.7) 176 3.6
Benefit for income taxes (708) (17.0) 60 1.2
------- ----- ------- -----
Net loss from continuing operations (1,615) (38.7) 116 2.4
Discontinued operations:
Net loss from discontinued operations 216 4.4
Loss on disposal (1,095) (26.2) 0 0.0
------- ----- ------- -----
Net loss $ (2,710) (64.9) $ 332 6.7
======= ===== ======= =====
I-Sector has previously allocated the cost of its corporate department to its
operating subsidiaries. Beginning in the quarter ended September 30, 2000 that
department is included in the Corporate segment.
<PAGE>
TOTAL REVENUE. Total revenue decreased by $747 (15.2%) to $4,173 in 2000
from $4,920 in 1999.
ACS revenue decreased by $355 (38.3%) to $571 in 2000 from $926 in 1999. As
a percentage of total revenue ACS revenue decreased to 13.7% in 2000 from 18.8%
in 1999. The decrease in ACS revenue was primarily attributable to issues
related 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.
Synergy revenue decreased by $997 (54.2%) to $841 in 2000 from $1,838 in
1999. As a percentage of total revenue Synergy revenue decreased to 20.2% in
2000 from 37.4% in 1999. The decrease in Synergy revenue was primarily
attributable to issues related 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.
INX revenue was $700 for the quarter and represent 16.8% of total revenue.
INX was newly formed in July, 2000 to meet the needs of customers in the area of
large-scale network infrastructure requirements that are Cisco centric. INX
exerted intense efforts to introduce itself to the market in Dallas and Houston
and form customer relationships. Subsequent to the third quarter, INX acquired
an established service business in Dallas. The purchase included an established
customer list, seven engineers and two sales staff members.
IT Staffing revenue increased by $65 (24.2%) to $334 in 2000 from $269 in
1999. As a percentage of total revenue IT Staffing revenue increased to 8.0% in
2000 from 5.5% 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.
Stratasoft revenue increased by $450 (33.9%) to $1,779 in 2000 from $1,329
in 1999. Stratasoft revenue, as a percentage of total revenue, increased to
42.6% in 2000 from 27.0% in 1999. The increase in Stratasoft revenue was due to
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 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, 2000.
Corporate revenue decreased by $599 (107.3%) to $(41) in 2000 from $558 in 1999.
Revenue in 2000 is negative because of credits issued to customers. As a
percentage of total revenue Corporate revenue decreased to (0.1)% in 2000 from
11.3% in 1999. The El Paso branch office service business had revenue of $1 and
$416 in the quarters ended September 30, 2000 and 1999, respectively.
Installation revenue for the certain customer of the Computer Products Division
(also discontinued effective May 19, 2000) contributed revenue of $(40) and $141
in the quarters ended September 30, 2000 and 1999, respectively.
GROSS PROFIT. Gross profit decreased by $1,023 (54.4%) to $859 in 2000 from
$1,882 in 1999. Gross margin decreased to 20.6% in 2000 from 38.3% in 1999.
ACS gross profit decreased by $280 (82.4%) to $60 in 2000 from $340 in
1999. Gross margin for ACS decreased to 10.5% in 2000 from 36.7% in 2000. ACS
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, ACS experienced lower labor utilization related to lower revenue. In
addition to the billable technical staff utilization issue, ACS had a single
large project during the quarter on which gross profit margin was about 12%
below normal levels, which negatively impacted the overall margin..
<PAGE>
Synergy gross profit decreased by $569 (84.3%) to $106 in 2000 from $675 in
1999 as revenue decreased by 54.2%. Gross margin decreased to 12.6% in 2000 from
36.7% in 1999. As with ASC our cost of service is labor intensive. Labor has a
more fixed nature such that higher levels of service revenue produces 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 into wholly owned
subsidiary companies, Synergy experienced lower labor utilization related to
lower revenue.
INX gross loss was $35 and 5.0% of revenue. Since INX was formed in July,
2000, there is no history for comparison. As a newly formed start-up operation,
it had to have billable technical staff in place in order to be able to market
their services, but was unable to utilize that technical staff sufficiently to
cover their labor cost.
IT Staffing gross profit increased by $4 (5.0%) to $84 in 2000 from $80 in
1999 as revenue increased by 24.2%. Gross margin decreased to 25.1% in 2000 from
29.7% in 1999. The increase in gross profit was primarily due to an increase in
the revenue. The decrease in gross margin percentages was primarily due to a
contract with a major customer which limits the 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.
Stratasoft gross profit increased by $58 (8.2%) to $764 in 2000 from $706
in 1999 as revenue increased by 33.9%. Gross margin for Stratasoft decreased to
42.9% in 2000 from 53.1% in 1999. The decreased gross margin was primarily due
to inventory markdowns along with increased travel costs for technical staff
traveling 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.
Corporate gross profit decreased by $201 (248.1%) to a loss of $120 in 2000
from a gross profit of $81 in 1999 as revenue decreased by 107.3%. Gross margin
decreased to (292.7%) in 2000 from 14.5% in 1999. The El Paso service business
that was sold on May 19, 2000 produced gross profit of $19 in 2000 as compared
to a gross profit of $71 in the same quarter in 1999. 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 $57 in 2000 as compared to a gross profit
of $9 in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,557 (90.3%) to $3,282 in 2000 from
$1,725 in 1999. As a percentage of revenue, these expenses increased by 43.5%,
to 78.6% of revenue in 2000 from 35.1% of revenue in 1999. Overall, our spending
was up primarily related to organizing the new subsidiary companies, hiring new
members of management for these new companies, and expanding the sales marketing
staff in the new companies. In addition, legal fees related to both collection
efforts and litigation were higher than historical levels and higher than
expected. Selling, general and administrative expenses include $142 and $120 of
depreciation in the quarters ended September 30, 2000 and 1999, respectively.
During the third quarter, we identified issues related to the collectability of
certain accounts receivable accounts and realized a higher than normal bad debt
expense for the quarter in the amount of $500. Corporate selling, general and
administrative expenses increased by $724 (274.2%) to $988 in 2000 from $264 in
1999 primarily due to the administrative costs associated with billing and
collecting of the installation revenue to wind up services for the customer lost
in the sale of the Computer Products Division and because costs related to the
maintenance of the corporate organization, including executive management
compensation, corporate-level insurance, legal, director and investor relations
expenses, which were previously allocated out to the operating segments, are now
included in the Corporate segment beginning in the third quarter. Of this
increase in Corporate selling, general and administrative expense, $160 was
primarily bad debt expense related to the certain customer for which
installation revenue ceased because of the sale of the Computer Products
Division.
OPERATING LOSS FROM CONTINUING OPERATIONS. Our operating loss increased by
$2,580 (1,643.3%) to a loss of $2,423 in 2000 from a profit of $157 in 1999 due,
principally, to the decrease in a Corporate operating loss of $1,108, Synergy
operating loss of $254, ACS operating loss of $270, INX operating loss of $362
and Stratasoft increase in selling, general and administrative expense of
$615.
<PAGE>
INTEREST EXPENSE (INCOME), NET OF OTHER INCOME. Interest expense (expense),
net of other income, decreased by $81 to $(100) in 2000 compared to $(19) in
1999, primarily due to the reduction of notes payable and investment of
available cash.
DISCONTINUED OPERATIONS. On November 2, 1999 we approved a plan to sell or
close our Telecom Systems Division. A sale of certain assets of the division and
its ongoing operations closed on March 16, 2000. As a consequence of these
events, the operations of Telecom Systems are reported as discontinued
operations. The loss on discontinued operations related to Telecom Systems in
the quarter ended September 30, 1999 was $281, net of a tax benefit of $145. For
the quarter ended September 30, 2000 the loss on disposal related to Telecom
Systems was $127, net of a tax benefit of $65, which was primarily the result of
increased charges related to the carrying value of accounts receivable accounts
and inventory.
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. The
sale transaction was reported in the quarter ended March 31, 2000. For the
quarter ended September 30, 2000 the loss on disposal related to Computer
Products was $969, net of tax benefit of $500, which was primarily the result of
increased charges related to the carrying value of accounts receivable accounts
and inventory together with increased expense accruals related to winding down
the operations of Computer Products..
NET LOSS. Net loss on continuing operations, after a benefit for income
taxes totaling $708 (reflecting an effective tax rate of 30.5% in 2000 compared
to 33.0% in 1999), increased by $1,731 to $1,615 in 2000 compared to a profit of
$116 in 1999. The Company also had a net loss from discontinued operations of
$216, net of taxes of $114, in the quarter ended September 30, 1999.
Additionally, a loss on disposal of $1,095 (net of taxes of $566) was recognized
in the quarter ended September 30, 2000.
<PAGE>
Nine Months Ended September 30, 2000 Compared To Nine Months
Ended September 30, 1999
(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 30, 2000 and 1999. Likewise the discussion
below relates only to our continuing operations, unless otherwise noted.
Nine months ended September 30,
2000 1999
---- ----
Amount % Amount %
------ --- ------ ---
Revenue
ACS $ 1,955 13.6 $ 2,741 19.9
Synergy 3,725 25.9 5,836 42.4
INX 700 4.9 0 0.0
IT Staffing 970 6.7 775 5.6
Stratasoft 5,424 37.7 2,924 21.3
Corporate 1,623 11.3 1,478 10.8
Elimination (11) (0.1) 0 0.0
------- ----- ------- -----
Total revenue 14,386 100.0 13,754 100.0
Gross profit:
ACS 404 20.7 885 32.3
Synergy 826 22.2 1,876 32.1
INX (35) (5.0) 0 0.0
IT Staffing 248 25.6 278 35.9
Stratasoft 2,583 47.6 1,557 53.2
Corporate (47) (2.9) 366 24.8
Elimination 0 0.0 0 0.0
-------- ----- ------- -----
Total gross profit 3,979 27.7 4,962 36.1
Selling, general and administrative
expenses:
ACS 864 44.2 828 30.2
Synergy 1,474 39.6 1,764 30.2
INX 327 46.7 0 0.0
IT Staffing 312 32.2 365 47.1
Stratasoft 2,947 54.3 1,469 50.2
Corporate 1,619 99.8 607 41.1
-------- ----- ------- -----
Total selling, general and
administrative
Expenses 7,543 52.4 5,033 36.6
Operating income (loss):
ACS (460) (23.5) 57 (2.1)
Synergy (648) (17.4) 112 (0.1)
INX (362) (51.7) 0 0.0
IT Staffing (64) (6.6) (87) (11.2)
Stratasoft (364) (6.7) 88 3.0
Corporate (1,666) (102.6) (241) (16.3)
-------- ----- ------- -----
Total operating loss (3,565) (24.8) (71) (0.5)
Interest expense, net of interest
income (135) (0.1) (4) 0.0
-------- ----- ------- -----
Loss before benefit for income taxes (3,430) (23.8) (67) (0.5)
Benefit for income taxes (1,075) (7.5) (3) (0.0)
-------- ----- ------- -----
Net loss from continuing operations (2,355) (16.4) (64) (0.5)
Discontinued operations:
Net income (loss) from discontinued
operations 300 2.1 (28) 0.2
Gain on disposal 3,392 23.6 0 0.0
-------- ----- ------- -----
Net income (loss) $ 1,337 9.3 $ (92) (0.7)
======== ===== ======= =====
I-Sector has previously allocated the cost of its corporate department to its
operating subsidiaries. Beginning in the quarter ended September 30, 2000 that
department is included in the Corporate segment.
<PAGE>
TOTAL REVENUE. Total revenue increased by $632 (4.6%) to $14,386 in 2000
from $13,754 in 1999.
ACS revenue decreased by $786 (28.7%) to $1,955 in 2000 from $2,741 in
1999. As a percentage of total revenue ACS revenue decreased to 13.6% in 2000
from 19.9% in 1999. The decrease in ACS revenue was attributable to issues
related to the reorganization 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.
Synergy revenue decreased by $2,111 (36.2%) to $3,725 in 2000 from $5,836
in 1999. As a percentage of total revenue Synergy revenue decreased to 25.9% in
2000 from 42.4% in 1999. The decrease in Synergy revenue was attributable to
issues related to the reorganization 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.
INX revenue was $700 and 4.9% of total revenue for the nine month period.
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 an intense effort to introduce itself to the market in Dallas and
Houston and form customer relationships. Subsequent to the third quarter, INX
acquired an established network professional services business in Dallas. The
purchase included an established customer list, seven engineers and two sales
staff members.
IT Staffing revenue increased by $195 (25.2%) to $970 in 2000 from $775 in
1999. As a percentage of total revenue IT Staffing revenue increased to 6.7% in
2000 from 5.6% in 1999. 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.
Stratasoft revenue increased by $2,500 (85.5%) to $5,424 in 2000 from
$2,924 in 1999. Stratasoft revenue, as a percentage of total revenue, increased
to 37.7% in 2000 compared to 21.3% in the same nine month period of 1999. The
increase in Stratasoft revenue was due to both better recognition of Stratasoft
products in the market place, to 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 which are not on-going because of the sale of the Computer Products
Division, including prior period installations revenue that were related to a
certain customer of our Computer Products Division and revenue from our former
El Paso branch office, which was eliminated as part of the sale of the Computer
Products Division. As these operations have ceased or are winding up we expect
an insignificant amount of revenue in the quarter ending December 31, 2000.
Corporate revenue increased by $145 (9.8%) to $1,623 in 2000 from $1,478 in
1999. As a percentage of total revenue Corporate revenue increased to 11.3% in
2000 from 10.8% in 1999. The El Paso branch office service business had revenue
of $951 and $1,305 in the nine months ended September 30, 2000 and 1999,
respectively. The El Paso service business has been included in the Corporate
segment of the continuing operations for the nine months ended September 30,
2000 through the sale of these assets which occurred on May 19, 2000.
Installation revenue for the certain customer of the Computer Products Division
(also discontinued effective May 19, 2000) contributed revenue of $754 and $173
in the nine months ended September 30, 2000 and 1999, respectively.
GROSS PROFIT. Gross profit decreased by $983 (19.8%) to $3,979 in 2000 from
$4,962 in 1999. Gross margin decreased to 27.7% in 2000 from 36.1% in 1999.
ACS gross profit decreased by $481 (54.4%) to $404 in 2000 from $885 in
1999 as revenue decreased by 28.7%. ACS cost of service is labor intensive.
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 our former IT Services Division into
wholly owned subsidiary companies in July 2000, ACS experienced lower labor
utilization related to lower revenue. In addition, gross profit was impacted by
increased employee benefit costs for technical staff related to changing from a
partially self-funded health insurance plan to a fully funded plan.
Synergy gross profit decreased by $1,050 (56.0%) to $826 in 2000 from
$1,876 in 1999 as revenue decreased by 36.2%. As with ASC, our cost of service
is labor intensive. Labor has a more fixed nature such that higher levels of
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service revenue produces higher gross margin while lower levels of service
revenue produces less gross margin. In periods when service revenue decreases,
it becomes more important for management of labor cost in order to prevent
erosion of gross margin. Subsequent to the separation of our former IT Services
Division into wholly owned subsidiary companies in July 2000, Synergy
experienced lower labor utilization related to lower revenue. In addition, gross
profit was impacted by increased employee benefit costs for technical staff
related to changing from a partially self-funded health insurance plan to a
fully funded plan.
INX gross loss was $35 and 5.0% of revenue. Since INX was formed in July,
2000, there is no history for comparison. Additionally, as a newly formed
start-up operation, it had to have billable technical staff in place in order to
be able to market their services, but was unable to utilize that technical staff
sufficiently to cover their labor cost.
IT Staffing gross profit decreased by $30 (10.8%) to $248 in 2000 from $278
in 1999 as revenue increased by 25.2%. The decrease in gross profit is primarily
due to a contract with a major customer, which limits the rates for that
particular customer. In addition, gross profit was impacted by increased
employee benefit costs for technical staff related to changing from a partially
self-funded plan to a fully funded plan.
Stratasoft gross profit increased by $1,026 (65.9%) to $2,583 in 2000 from
$1,557 in 1999. Gross margin for Stratasoft decreased to 47.6% in 2000 from
53.2% in 1999 but were in line with expectations for this business. The
decreased gross margin was primarily due to inventory markdowns along with
increased travel costs for technical staff traveling 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.
Corporate gross profit decreased by $413 (112.8%) to a loss of $47 in 2000
from profit of $366 in 1999 as revenue increased by 9.8%. Corporate gross margin
decreased to (2.9)% in 2000 from 24.8% in 1999. The El Paso service business,
which was sold on May 19, 2000, produced a gross loss of $7 in 2000 as compared
to a gross profit of $339 in the same nine months in 1999, a decrease in profits
of $346. We experienced certain costs related to winding up our service
operations in the El Paso branch office that negatively impacted gross profit.
The El Paso service business' gross profit was also impacted by the same costs
of changing from a partially self-funded employee health insurance plan to a
fully funded plan. Augmenting those results the gross margin on installations
for the customer that was lost in the Computer Products Division sale produced
gross profit of $42 in 2000 as compared to $27 in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2,511 (49.9%) to $7,544 in 2000 from
$5,033 in 1999. As a percentage of revenue, these expenses increased by 15.8%,
to 52.4% of revenue in 2000 from 36.6% of revenue in 1999. Selling, general and
administrative expenses include $425 and $362 of depreciation in the nine month
periods ended September 30, 2000 and 1999, respectively. Overall, our spending
was up primarily related to organizing the new subsidiary companies, hiring new
members of management for these new companies and expanding the sales and
marketing staff in the new companies. Additionally, legal fees relating to both
litigation and collection efforts, travel expenses and administrative
compensation for Stratasoft were higher than historical levels and higher than
expected. Selling, general and administrative expenses for the Corporate segment
increased by $1,012 (166.7%) to $1,619 in 2000 as compared to $607 in the same
nine month period of 1999 primarily because of the administrative costs
associated with billing and collecting of the installation revenue to wind up
services for the customer lost in the sale of the Computer Products Division.
Additionally, costs related to the maintenance of the corporate organization,
including executive management compensation, corporate-level insurance, legal,
director and investor relations expenses, which were previously allocated out to
the operating segments, are now included in the Corporate segment beginning in
the third quarter. Consolidated selling, general and administrative expenses
were also $132 higher in the nine month period of 2000 as compared to the same
period of 1999 due to costs related to changing our employee health insurance
plan from a partially self-funded plan to a fully funded plan. During the
quarter ended September 30, 2000, we identified issues related to the
collectability of certain accounts receivable accounts and realized a higher
than normal bad debt expense for the nine month period of 2000 in the
approximate amount of $900 higher as compared to the same period of 1999.
OPERATING LOSS FROM CONTINUING OPERATIONS. Our operating loss increased by
$3,494 (4921.1%) to $3,565 in 2000 from $71 in 1999 due, principally, to losses
experienced of $1,667 in 2000 in the Corporate segment attributable to the loss
of focus of the El Paso Service business that was sold in May 19, 2000.
Additionally, Synergy experienced a loss in the nine-month period of $648 in
2000 as compared to income of $112 in the same period of 1999 due to reduced
revenue and gross profit while being internally focused on reorganization.
Augmenting the El Paso loss, a $256 loss was experienced relating to an
installation contract with a customer from whom the revenue ceased with the sale
of the CPD division and $621 relating to corporate overhead. ACS experienced the
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same type of losses as Synergy with $460 in 2000 as compared to income of $57 in
the same nine-month period of 1999. INX, as a start up company experienced a
loss of $362. Stratasoft had a loss of $364 for the nine month period in 2000 as
compared to a income of $88 in the same period of 1999, a decrease of $452
attributable primarily to an increase in legal expense, travel expenses and
increased sales staff.
INTEREST EXPENSE (INCOME), NET OF OTHER INCOME. Interest expense (income),
net of other income, decreased by $131 to $(135) in 2000 compared to $4 in 1999.
The decrease in expense is attributable to both the reduction of notes payable
subsequent to the sale of the Computer Products Division and the investment of
available cash.
DISCONTINUED OPERATIONS. On November 2, 1999 we approved a plan to sell or
close our Telecom Systems Division. A sale of certain assets of the division and
its ongoing operations closed on March 16, 2000. As a consequence of these
events, the operations of Telecom Systems are reported as discontinued
operations. The company experienced a loss on disposal of $344 (net of taxes of
$177) in the nine months ended September 30, 2000 from this discontinued
operation. The loss on discontinued operations related to Telecom Systems in the
nine months ended September 30, 1999 was $687, net of a tax benefit of $354.
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, 2000 the company experienced net income on the
discontinued operations of the Computer Products Division of $301 (net of taxes
of $156) In addition, we experienced a gain on disposal of $3,736 (net of taxes
of $1,925) related to the transaction. The income from discontinued operations
related to Computer Products in the nine months ended September 30, 1999 was
$660, net of taxes of $340.
NET INCOME. Net income increased $1,429 to $1,337 in 2000 as compared to a
loss of $92 for the same nine-month period in 1999. Net loss on continuing
operations, after a benefit for income taxes totaling $1,075 (reflecting an
effective tax rate of 31.4% in 2000 compared to 4.5% in 1999), decreased by
$2,290 to a loss of $2,354 in 2000 compared to $64 in 1999. Net income on
discontinued operations was $300 (net of tax of $156) as compared to a lost of
$28 (net of tax benefit of $12) in 1999. Additionally, a gain on disposal of
$3,392, net of taxes of $1,748 was recognized in the nine months ended September
30, 2000.
Liquidity and Capital Resources
Our working capital was $11,947 and $9,567 at September 30, 2000 and
December 31, 1999, respectively. As of September 30, 2000, we had outstanding
borrowings of $244 and we had excess available borrowing base of $571 under our
Deutsche Financial Services credit facility. We used the proceeds from the sale
of our Computer Products Division and certain assets of IT services business
located in El Paso, Texas to repay $9,300 in debt, which represented all of our
secured debt, to Deutsche Financial Services ("DFS"). We expect to satisfy our
capital requirements from our existing cash balances, collection of our accounts
receivables and borrowings under our credit facilities.
Cash Flow
Operating activities provided net cash totaling $20,052 during the nine
months ended September 30, 2000. Operating activities provided net cash during
the period primarily because of cash provided by a decrease in accounts
receivable ($32,096) as well as proceeds from the sale of the Computer Products
Division of ($16,161) offset by a decrease in accounts payable ($19,901) and
accrued expenses ($1,758). The decrease in accounts payable was primarily the
result of normal payment of payables, which had swelled due to the higher level
of sales in the fourth quarter of 1999. The decrease in accrued liabilities
results from lower accruals for personnel costs resulting from the sale of the
Computer Products Division. The decrease in accounts receivable was primarily
the result of lower sales and ultimately a ceasing of sales in our discontinued
Computer Product Division and an increased emphasis on collections thereafter.
Investing activities used cash totaling $54 during the nine months ended
September 30, 2000 and consisted of proceeds of the sale of fixed assets related
to the sale of the Computer Products Division offset by capital expenditures.
Financing activities used cash totaling $15,883 primarily because
borrowings were reduced under our credit facility during the nine months ended
September 30, 2000.
<PAGE>
Asset Management
We had accounts receivable, net of allowance for doubtful accounts, of
$5,630 at September 30, 2000. The number of days' sales outstanding in accounts
receivable from our continuing operations was 67.60 days, which is higher than
the 60 days outstanding at December 31, 1999.
Current Debt Obligations
Historically, we have satisfied our cash requirements principally through
borrowings under our lines of credit and through operations. We maintain a cash
position sufficient to pay due obligations and expenses. Should the amount of
cash available fall below our immediate needs, we request advances under a
credit facility provided by the DFS facility.
On May 19, 2000, the day we closed the sale of our Computer Product
Division, we amended our DFS Facility to decrease the total credit available
under the facility from $30,000 to $10,000 subject to borrowing base limitations
that are generally computed as a percentage of various classes of eligible
accounts receivable and qualifying inventory. Credit available under the DFS
Facility for floor plan financing of inventory from approved manufacturers (the
"Inventory Line") is $5,000. Available credit under the DFS Facility, net of
Inventory Line advances, is $5,000, which is used primarily to carry accounts
receivable and for other working capital and general corporate purposes (the
"Accounts Line"). Borrowings under the Accounts Line bear interest at the
fluctuating prime rate minus 1.0% per annum. Under the Inventory Line, DFS pays
our inventory vendors directly, generally in exchange for negotiated financial
incentives. Typically, the financial incentives received are such that DFS does
not charge us interest until 40 days after the transaction is financed, at which
time we are required to either pay the full invoice amount of the inventory
purchased from corporate funds or to borrow under the Accounts Line for the
amount due to DFS. Inventory Line advances not paid within 40 days after the
financing date bear interest at the fluctuating prime rate plus 5.0%. For
purposes of calculating interest charges the minimum prime rate under the DFS
Facility is 7.0%.
The DFS Facility is collateralized by a security interest in substantially
all of our assets, including our accounts receivable, inventory, equipment and
bank accounts. Collections of our accounts receivable are required to be applied
through a lockbox arrangement to repay indebtedness to DFS; however, DFS has
amended the lockbox agreement to make such arrangements contingent upon certain
financial ratios. Provided we are in compliance with its debt to tangible net
worth covenant, we have discretion over the use and application of the funds
collected in the lockbox. If we exceed that financial ratio, DFS may require
that lockbox payments be applied to reduce our indebtedness to DFS. If in the
future DFS requires that all lockbox payments be applied to reduce our
indebtedness, we would be required to seek funding from DFS or other sources to
meet substantially all of our cash needs.
Under the DFS Facility we are required to maintain (i) a tangible net worth
of $10,000, defined under the agreement as book value of assets (excluding
intangibles such as receivables from officers, directors, employees,
stockholders and affiliates, net leasehold improvements, goodwill, prepaid
expenses, franchise fees and other similar items) less liabilities (ii) a ratio
of debt minus subordinated debt to tangible net worth of 4 to 1 and (iii) a
ratio of current tangible assets to current liabilities of not less than 1.25 to
1.
We have a $2,000 credit facility with IBM Credit Corporation (the "IBMCC
Facility") for the purchase of IBM branded inventory from certain suppliers.
Advances under the IBMCC Facility are typically interest free for 30 days after
the financing date for transactions in which adequate financial incentives are
received by IBMCC from the vendor. Within 30 days after the financing date, the
full amount of invoices for inventory financed through IBMCC is required to be
paid. Amounts remaining outstanding thereafter bear interest at the fluctuating
prime rate (but not less than 6.5%) plus 6.0%. IBMCC retains a security interest
in the inventory financed and is immediately terminable by either party.
Both of our borrowing facilities prohibit the payment of dividends unless
consented to by the lender.
<PAGE>
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, 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 $49 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 Atlanta Division. 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
On May 16, 2000, Jack B. Corey ("Corey") filed suit against the Company in
JACK B. COREY V. ALLSTAR SYSTEMS, INC., Cause No. 2000-24796, in the District
Court of Harris County, Texas, 113th Judicial District, seeking to enjoin the
sale of its computer product division and certain other assets to Amherst
Technologies, and for unspecified damages. On May 17, 2000, a state court denied
Corey's Application for Temporary Restraining Order and on May 22, 2000, a
second state court denied his Application for a Temporary Injunction and for
Expedited Discovery as moot. The present pleadings lack specificity as to
Corey's claim for damages and it is unclear at this time whether Corey will
pursue such a claim. However, the Company strongly denies that it engaged in any
improper conduct with regard to the sale of its assets and intends to vigorously
defend any claim that might be pursued by Corey.
We are party to other litigation and claims which management believes are
normal in the course of its operations; while the results of such litigation and
claims cannot be predicted with certainty. We believe the final outcome of such
matters will not have a materially adverse effect on its results of operations
or financial position.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
I-Sector Corporation.
November 14, 2000 By: /s/ JAMES H. LONG
-----------------
Date James H. Long, Chief Executive Officer,
President and Chairman of the Board
(Principal Financial and Accounting Officer)
