SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended May 31, 1997
Commission File Number 0-22382
SECTOR COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 56-1051491
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 250, McLean, VA 22102
Address of principal executive offices
(703) 761-1500
Issuer's Telephone Number
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 [ ]
As of May 31, 1997 there were 44,898,066 shares of the Registrant's Common Stock
outstanding.
<PAGE>
SECTOR COMMUNICATIONS, INC.
REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page
PART I ---- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet -
May 31, 1997 (unaudited) and February 28, 1997................3
Consolidated statement of operations -
three month periods (unaudited) ended
May 31, 1997 and 1996.........................................4
Consolidated statement of cash flows -
three month periods (unaudited) ended
May 31, 1997 and 1996.........................................5
Notes to consolidated financial statements (unaudited).............6
Item 2. Management's Plan of Operations...............................10
PART II ---- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................14
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
May 31, February 28,
1997 1997
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 157,016 $ 80,096
Accounts Receivable, net of provision for
doubtful accounts of $79,498 and $50,678 601,828 618,845
Marketable Securities - 21,762
Related Party Receivables - 32,198
Receivable on Sale of Securities 429,000 1,000,000
Notes Receivables129,707 143,110
Prepaid Expenses and Deposits 114,809 117,426
----------- -----------
Total Current Assets 1,432,360 2,013,437
----------- -----------
PROPERTY AND EQUIPMENT 2,202,521 2,170,846
Accumulated Depreciation (1,165,063) (1,060,696)
----------- -----------
Net Book Value 1,037,458 1,110,150
----------- -----------
OTHER ASSETS
Intangible Assets, net 5,276,391 5,350,447
Capitalized Mining Claim Costs 1,036,523 1,036,523
Deposits 41,953 41,953
----------- -----------
Total Other Assets 6,354,867 6,428,923
----------- -----------
TOTAL OTHER ASSETS $ 8,824,685 $ 6,428,923
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,279,480 $ 1,218,867
Short-Term Borrowing - 12,028
Deferred Revenue 424,602 449,254
Due to Related Parties 480,792 474,021
---------- -----------
Total Current Liabilities 2,184,874 2,154,170
Rent Deposit 12,248 12,248
----------- ------------
TOTAL LIABILITIES 2,197,122 2,166,418
----------- -----------
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding -
Common Stock, $.001 par value; 50,000,000 shares
authorized, 44,898,066 shares issued and outstanding 44,898 44,898
Additional Paid-in Capital 13,116,354 13,116,354
Retained Deficit (6,405,861) (5,658,196)
Cumulative Foreign Currency Translation Adjustment (127,828) (116,964)
------------ ------------
Total Stockholders' Equity 6,627,563 7,386,092
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,824,685 $ 9,552,510
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
May 31, May 31,
1997 1996
<S> <C> <C>
REVENUE
Telecommunication Revenue $ 250,684 $ 477,655
Software Sales & Maintenance 372,711 -
------------ -----------
623,395 477,655
COST OF SALES 371,388 386,280
------------ ------------
GROSS PROFIT 252,007 91,375
------------ ------------
OPERATING EXPENSES
Gold Exploration Costs 29,864 -
Software Development Costs 237,919 -
Sales, General & Administrative 766,786 71,441
------------ -------------
Total Operating Expenses 1,034,569 71,441
------------ -------------
(Loss) Income From Operations (782,562) 19,934
------------ -------------
OTHER INCOME (EXPENSE)
Interest Expense (612) (83,340)
Other Income (Expense) 25,235 1,464
Foreign Exchange Gain (Loss) 10,274 38,308
------------ -------------
Total Other Income (Expense) 34,897 (43,568)
------------ -------------
Loss Before Provision for Income Taxes (747,665) (23,634)
Provision for Income Taxes - -
------------ ------------
Net Loss $ (747,665) $ (23,634)
============ =============
Loss per share $ (0.017) $ (0.003)
============= ==============
Weighted Average of Number of Shares Outstanding 44,898,066 9,192,439
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
May 31, May 31,
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (747,665) $ (23,634)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 204,760 93,469
Change in Assets and Liabilities, Net
of Effect of Acquisition:
(Increase) Decrease in Assets
Accounts Receivable 17,017 (195,830)
Repayment of Related Party Receivable 32,198
Prepaid Expenses and Deposits 4,617 (22,337)
Receivable on Sale of Securities 571,000
(Decrease) Increase in Liabilities
Accounts Payable 60,613 (51,845)
Related Party Payable 6,771 -
Deferred Revenue (24,652) -
Accrued Interest on Loan Payable - 83,340
------------- ------------
Net Cash Provided (Used) by Operating Activities 124,659 (116,837)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (31,675) (923)
Decrease in Marketable Securities 21,762 -
Loans Receivable 13,403 -
------------- ------------
Net Cash Provided (Used) by Investing Activities 3,490 (923)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES - -
------------- ------------
Effect of Exchange Rate Changes on Cash (51,229) 185,215
------------- -------------
Net Increase (Decrease) in Cash 76,920 67,455
Cash - March 1, 80,096 22,429
------------- -------------
Cash - May 31, $ 157,016 $ 89,884
============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ - $ -
============= ============
Taxes $ - $ -
============= ============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
Certain reclassifications have been made to the prior period to
conform to the current period's presentation.
For further information refer to the financial statements and
footnotes included in the Registrant's Annual Report on form
10-KSB for the period ended February 28, 1997.
The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full
fiscal year ending February 28, 1998.
On June 18, 1996, Sector Communications, Inc. ("Sector"), formerly
Aurtex, Inc., acquired all the outstanding capital stock of Global
Communications Group, Inc. ("Global"). For accounting purposes,
this acquisition has been treated as a recapitalization of Sector
with Global as the acquirer in a reverse acquisition.
The unaudited condensed consolidated balance sheet as of May 31,
1997 and the condensed consolidated statements of operations and
cash flows for the three months ended are those of Sector and its
subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated.
The financial statements presented for periods prior to the
acquisition of Global present the financial position and results
of operations solely of Global, and do not include the financial
position or results of operations of Sector or any of its
subsidiaries. As such, the unaudited statements of operations and
cash flows for the three months ended May 31, 1996 reflect the
results of operations of only Global.
The accompanying consolidated financial statements as of May 31,
1997 and for the three months then ended include the accounts of
Sector and its subsidiaries. Such subsidiaries are as follows:
Global Communications, Inc., 100% owned
Sector Communications AG 100% owned
HIS Technologies AG 60% owned
Mountain Software AG 100% owned
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
b) Loss Per Share
Loss per share is based on the weighted average number of shares
of common stock outstanding during the period.
c) Foreign Currency Translation
In accordance with the provisions of Statement of Accounting
Standard No. 52, "Foreign Currency Translations" ("SFAS No. 52")
the assets and liabilities of the Company's subsidiaries located
outside the United States are generally translated at the rates of
exchange in effect at the balance sheet date. Gains and losses
resulting from foreign currency transactions are recognized
currently in income and those resulting from translation of
financial statements, with the exception of entities operating in
highly inflationary economies, as Global does in Bulgaria, are
accumulated in a separate component of stockholders' equity. In
highly inflationary economies, SFAS No. 52 requires that the use
of historical exchange rates to translate nonmonetary items and
current exchange rates to translate monetary items. The effect of
exchange rate changes is reflected in net loss.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
May 31, February 28,
1997 1997
------------ ----------
Fiber Network $ 157,837 $ 157,837
Equipment 1,907,393 1,875,718
Furniture and Fixtures 47,223 47,223
Vehicles and Other 90,068 90,068
------------ ----------
2,202,521 2,170,846
Less: Accumulated
Depreciation (1,165,063) (1,060,696)
----------- -----------
$ 1,034,458 $ 1,110,150
=========== ===========
Depreciation expense for the three months ended in May 31, 1997
and 1996 was $106,287 and $86,113, respectively.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the three month period ended November 30, 1996, the Company
accrued $80,000 for consulting fees incurred for services provided
by MCG Management Consulting Group, S.A. ("MCG"). This agreement
was canceled on November 26, 1996. One of the principles of MCG is
also a director of Sector AG and the Chairman of the Board of
Directors of Histech. This liability remains unpaid as of May 31,
1997.
<PAGE>
NOTE 4 - NOTES RECEIVABLE
Notes receivable at February 28, 1997 are as follows: Both of
these notes are currently due and in default.
<TABLE>
<S> <C>
Promissory note receivable from Atcall, Inc., bearing interest at
8% per annum. This note is personally guaranteed by the president
of Atcall. Repayment of this note was demanded on the note's due
date, October 23, 1996. On January 20, 1997, the Company agreed to
restructure payment of this amount to be payable $25,000 per month
with a final balloon payment of $25,000, plus all accrued
interest. $ 248,707
Reserve for potential uncollectability (119,000)
Unsecured promissory note receivable from Combined Metals
Reduction Company, bearing interest at 10%. The Company has
previously established a reserve for the full amount of
this note. 136,575
Reserve for potential uncollectability (136,575)
----------
Total $ 129,707
Atcall, Inc. has made only one of its scheduled payments under the
restructured payment plan. The Company has established a reserve
for the potential uncollectibility of the note.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets at May 31, 1997 are as follows:
Intangible assets related to the acquisition
of Histech $ 4,286,922
Intangible assets related to the acquisition
of Mountain 595,959
Intellectual property and distribution rights
acquired by Histech prior to its acquisition
by the Company, net of foreign currency
exchange fluctuations. 791,446
5,674,327
Amortization of intangible assets and
intellectual property and distribution
rights (397,936)
------------
Total $ 5,276,391
===========
</TABLE>
<PAGE>
The intangible asset recorded for intellectual property and
distribution rights was acquired by Histech based on an
agreement, as amended, dated May 1, 1996, between Histech and
HIS Software AG.
The excess purchase price over the fair value of the net
assets acquired of Histech and Mountain will be amortized on a
straight-line basis over twenty years. Costs related to the
acquisition of the intellectual property and distribution
rights purchase by Histech are amortized over the estimated
useful life of five years.
NOTE 6 - WARRANTS
At May 31, 1997, the Company has reserved 3,895,680 shares of
common stock for issuance upon the exercise of the currently
outstanding warrants. The exercise prices and expiration dates
of the warrants are as follows:
Number Exercise Date Date of
of Shares Price Exercisable Expiration
--------- ----- ----------- ----------
2,083,746 $0.79 2/28/97 12/31/97
11,934 0.79 2/28/97 8/31/97
100,000 2.25 2/28/97 6/30/00
100,000 3.00 7/20/97 6/30/00
100,000 4.00 7/20/98 6/30/00
250,000 0.79 2/28/97 7/18/99
1,250,000 0.79 2/28/97 7/18/99
---------
3,895,680
NOTE 7 - STOCK OPTION PLANS
At May 31, 1997, the Company has options outstanding for the
purchase of 1,210,000 shares under the 1994 Stock Plan, at
exercise prices ranging from $.375 to $1.0625 per share. 510,000
options are exercisable as of May 31, 1997. There were no option
transactions during the period March 1 through May 31, 1997.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the three months ended May 31, 1997 compared to the three months
ended May 31, 1996.
Telecommunication Revenue
The Company earns all of its telecommunications revenue from (i) providing
direct-dial services for international long distance calls to twelve hotels and
resorts in the cities of Sofia and Plovdiv in Bulgaria; (ii) from the
integration, installation and maintenance of customer-owned digital phone
systems; and (iii) from usage-based percentages of Company-owned digital phone
systems through shared revenue agreements with some of its customers.
The Company's telecommunications revenue decreased by $226,971 from $477,655 for
the three months ended May 31, 1996 to $250,684 for the three months ended May
31, 1997. This decrease in revenue is due primarily to the Bulgarian Telephone
Company ("BTC"), without prior notice or cause, unilaterally terminating the
Company's Joint Activity Agreement on July 8, 1996. On that date the BTC
disconnected Global's digital link to international carrier services, thus
suspending the majority of the services provided by the Company to its
customers. The digital link was reestablished through a new Joint Activity
Agreement with the BTC dated February 14, 1997. Revenues from carrier services
have not recovered to their pre-disconnect levels but are expected to do so as
the Bulgarian economy recovers from its recent crises and our services are fully
re-connected to all our former customers.
Software Sales and Maintenance
Effective August 31, 1996, the Company began recording the software sales and
maintenance revenue of its 60% owned subsidiary, Histech. No revenue related to
Histech's operations was recorded prior to that time, since the acquisition of
Histech was accounted for as a purchase, effective August 31, 1996.
During the three months ended May 31, 1997, the Company recorded $372,711 in
software sales and maintenance, net of payments to third party distributors,
generated exclusively by its 60% owned subsidiary, Histech as follows:
Software Sales $ 255,020
Software Maintenance and Consulting 62,223
----------
Subtotal 317,243
Deferred Software Maintenance Recognized in
Current Period 55,468
Total Recognized Revenue $ 372,711
==========
<PAGE>
Histech utilizes the service of software distributors for the sales of its
products in geographic regions which it has no sales force. During the three
months ended May 31, 1997, approximately 40% of sales were generated through
distributors.
Histech plans to release several new software products in the third quarter of
1997 for use on Digital Open VMS, Microsoft Windows NT and various versions of
Unix-based corporate networks. These products will facilitate the administration
of user accounts and security across all three networks concurrently from a
single Windows NT workstation.
Cost of Sales
The majority of the Company's costs of sales for the three months ended May 31,
1997 relate to costs associated with telecommunication revenues as shown below.
Three Months Ended
May 31, May 31,
1997 1996
---------- --------
Global Communications $ 225,369 $ 386,280
Histech 146,019 -
---------- --------
Total $ 371,388 $ 386,280
========== ==========
Global's costs of sales decreased by $160,911 from $386,280 for the three months
ended May 31, 1996 to $225,369 for the three months ended May 31, 1997. This
decrease is due primarily to the Company reestablishing its carrier services in
the three month period ended May 31, 1997, which had been terminated in July,
1996 and reconnected in February of 1997.
It should be noted that, as shown below, costs of sales, as a percentage of
telecommunication revenues, has increased for the three month period ended May
31, 1997 compared to the three month period ended May 31, 1996.
Three Months Ended
May 31, May 31,
1997 1996
--------- -----
Cost of Sales, as a Percent of Revenue 90% 81%
This increase is due in part to increased costs incurred in reestablishing
Global's digital link at the BTC.
Costs of sales related to software products and maintenance are comprised
primarily of commissions and distribution payments. These costs were 39% of
software sales and maintenance revenue for the three month period May 31, 1997.
<PAGE>
Software Development Costs
Software development costs consist primarily of salaries, employee-related
benefits, consulting fees and other costs directly attributable to the
development of Histech's new distributed systems management products. The
Company believes that a significant level of development is required to remain
competitive and expects that such costs will continue to increase in the future,
although such costs may decline as a percentage of total revenue to the extent
that revenue increases.
Sales, General and Administrative Expense
Consists primarily of personnel costs, including salaries, benefits and bonuses
and related costs for management, finance and accounting, legal and other
professional services. General and administrative expenses are detailed in the
following table by individual company below.
Three Months Ended
May 31, May 31,
1997 1996
--------- -------
General and Administrative
Global Communications $ 121,507 $ 71,441
Histech 295,591 -
Sector Communications 349,688 -
---------
Total $ 766,786 $ 71,441
========= ========
Higher expenses for salaries, related costs and professional services were
primarily responsible for the increase in the sales, general and administrative
costs for Global for the period ended May 31, 1997 compared to the same period
in 1996.
Sales, general and administrative costs of Histech consist primarily of salaries
and related costs, fees, marketing expenses, depreciation and the amortization
of intangible assets. Management of Histech believes that as new products are
introduced into the market in the future, significant marketing costs will be
incurred to successfully promote these products.
Interest Expense
Interest expense declined dramatically for the three month period ended May 31,
1997 as compared to the three month period ended May 31, 1996. This decrease
results from the extinguishing of the Company's long-term debt on February 28,
1997.
<PAGE>
Gold Exploration Costs and Activities
In order to accurately determine the best course to take for the ultimate
divestiture of its gold assets, the Company incurred exploration costs, as more
fully described below of $29,864 during the three month period ended May 31,
1997. No comparable costs for such activities are shown in the statement of
operations for the three months ended May 31, 1996. During 1996, the Company
did, however, conduct gold exploration activities, but due to the nature of the
acquisition of Global as a reverse acquisition, the historic financial
statements are those only of Global and not of Sector, formerly Aurtex. The
reader is referred to the Company's February 29, 1996 and February 28, 1997
10-KSB for details concerning exploration costs incurred during its years ended
February 29, 1996 and February 28, 1997. The Company incurred approximately
$18,000 in exploration costs in the three months ended May 31, 1996 which were
incurred prior to the reverse acquisition of Global, and as such are not shown
in the statement of operations as expense.
In connection with the change in the Company's strategic direction the Company
has decided to curtail any significant future gold exploration activities. The
Company is currently evaluating options to determine the possibilities of
divestiture and or discontinuance of its mineral properties described below.
Management believes it has sufficient information from the exploration efforts
conducted recently to properly evaluate various possibilities of divestiture of
the mineral properties, the Company does not expect to incur significant costs
in the future related to its gold exploration properties or other gold
exploration related activities.
Vienna Project
On April 15, 1997, the Vienna Property Exploration License and Option to
Purchase Agreement expired. The Company has written off previously capitalized
costs of $100,000 related to this property.
Ketchum Project
A minor drilling program, consisting of one exploration drill hole of 403 feet
was conducted under the direction of Agricola Metals Company, a principal of
which is a shareholder of the Company, to explore that part of the Wood River
formation immediately under the challis volcanics in the Rooks Creek East area
of the Company's unpatented claim block. According to Agricola Metals Company,
the drill core showed mineralization of the Wood River in this sector. However,
faulting prevented the drilling from reaching the critical zone. Further surface
investigation, and a modest drilling program, will be needed to determine
whether a deposit exists in this location.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended May 31, 1997, the Company financed its
operations primarily through funds it received pursuant to a debt retirement
agreement entered into on February 28, 1997.
The Company is currently experiencing negative cash flow from operations but
management believes that with the reinstatement of Global's services and
increased sales of Histech, that operating cash flow will improve significantly.
Even with these projected improvements in operations and cash flows from Global
and Histech, and the curtailment of gold exploration activities, the funding of
future operations may require further infusion of capital. Based on its current
and projected operating levels, the Company believes that it will have
sufficient liquid assets to maintain operations for at least the next twelve
months.
If additional funds are raised by the Company through the issuance of equity
securities, securities convertible into or exercisable for equity securities, or
an equity securities exchange, the percentage ownership of the then current
stockholders of the Company will be reduced. The Company may issue preferred
stock with rights, preferences or privileges senior to those of the Company's
common stock.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risk and
uncertainties. Such forward-looking statements reflect the Company's current
views with respect to future events and reflect the Company's current views with
respect to future events and financial performance, including statements in the
following section concerning the timing and amount of revenues, the level of
expenses incurred and the sufficiency of cash and other resources to fund
operations. Actual results could differ materially from those projected in the
forward-looking statements as a result of the Company's ability to obtain
adequate additional financing as needed, the uncertainties of new product
development and introduction, sales, growth, competitive pressures,
uncertainties connected to the Bulgaria economy, and other risks listed from
time to time in the Company's SEC Report included, but limited, to report on
Form 10-KSB, for year-ended 2/28/97 (FORWARD LOOKING STATEMENT SECTIONS).
<PAGE>
PART II----OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
<PAGE>
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.
July 21, 1997
/s/ Theodore Georgelas
--------------------------------
Theodore Georgelas
President and Chief
Executive Officer
