UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended February 28, 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 (I. R. S. Employer
incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 250, McLean, Va. 22102
(Address of principal executive office)
(703) 761-1500
(Issuer's Telephone Number)
Securities Registered Pursuant of Section 12(b) of the Act: None
Securities Registered Pursuant of Section 12(g) of the Act: Common Stock, $0.001
Par Value
Check whether the issuer (1) 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10- KSB. [ ]
The issuer had operating revenues of $1,258,713 for the year ended February 28,
1997.
This report contains a total of 37 pages. The Exhibit Index appears on page 44.
As of February 28, 1997, there were 44,898,066 shares of the issuer's common
stock outstanding. The aggregate market value of the 40,685,373 shares of the
issuer's voting stock held by non-affiliates was $13,349,878 based on the last
price on that date as reported by the Nasdaq Stock Market. The sum excludes the
shares held by officers, directors, and stockholders whose ownership exceeded
10% of the outstanding shares at February 28, 1997, in that such persons may be
deemed affiliates of the Company. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
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SECTOR COMMUNICATIONS, INC.
FORM 10-KSB
February 28, 1997
PART I .......................................................................3
ITEM 1. Business.............................................................3
ITEM 2. Properties..........................................................18
ITEM 3. Legal Proceedings...................................................18
ITEM 4. Submission of Matters to vote of Security Holders...................19
PART II .....................................................................20
ITEM 5. Market for Common Equity and Related Stockholder Matters ...........20
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 21
ITEM 7. Financial Statements................................................31
ITEM 8. Changes In and Disagreements With Accounting and Financial
Disclosure..........................................................33
PART III ....................................................................35
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons:
Compliance With Section 16(a) of the Exchange Act..................35
ITEM 10. Executive Compensation.............................................36
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.....38
ITEM 12. Certain Relationships and Related Transactions.....................39
PART IV .....................................................................41
ITEM 13. Exhibits and Reports on Form 8-K...................................41
SIGNATURES...................................................................43
EXHIBIT INDEX................................................................44
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PART I
ITEM 1. BUSINESS
Overview
Sector Communications, Inc. ("the Company") was incorporated in the state of
Nevada on March 19, 1990, and since inception, the Company has had no operating
revenues, and has accumulated a deficit of $4,402,697 through February 28, 1997.
Formerly a gold exploration and development company -- the Company still has an
interest in gold-related assets -- the Company changed its corporate strategy
and focus in 1996 to concentrate its energies and efforts on building the
Company into an international telecommunications and software company. This was
accomplished through the acquisition of already existing companies and products.
As more fully described below, the Company completed the following transactions.
As a first step in the transformation from gold exploration to technology, the
Company completed the acquisition of 100% of Global Communications Group, Inc.
("Global") as well as an option to purchase the assets and liabilities of Global
Communications Technologies, Inc. The Company also entered into agreements with
HIS Technologies AG ("Histech") and DBE Software, Inc. ("DBE") whereby it
acquired a percentage of the outstanding common stock in each respective
company. Additionally, the Company also effected a reverse stock split, declared
a stock dividend, and changed its corporate name.
CHANGE OF THE NAME OF THE COMPANY
The Board of Directors of the Company adopted a resolution authorizing an
amendment to the Company's Amended and Restated Articles of Incorporation to
change the name from "Aurtex, Inc." to "Sector Communications, Inc." Approval of
the Amendment by the stockholders was obtained by written consents in lieu of a
meeting, dated May 15, 1996, of the holders of a majority of the voting power of
the outstanding shares of the Company's Common Stock.
The Company adopted the name Aurtex, Inc. when it was engaged in the business of
mineral exploration and developing its Gold Assay System. The Company will no
longer be primarily involved in that business and the Board of Directors felt
that it would be more appropriate for the Company to adopt a corporate name
which relates to its new core business.
GLOBAL COMMUNICATIONS GROUP, INC. / SECTOR-BULGARIA, EOOD
On June 18, 1996, the Company finalized the Stock Purchase and Exchange
Agreement with Global that was entered into on April 19, 1996. Under the
Agreement, the Company issued 17,000,000 post-reverse split shares of
unregistered Company common stock in exchange for 100% of the issued and
outstanding capital stock of Global. As a part of this Agreement, the Company
also received an option to purchase the assets and liabilities of another
company affiliated with Global's shareholders, Global Communications
Technologies, Inc. ("Global Tech"). This option is set to expire on June 18,
1997.
OVERVIEW
Global was incorporated in the state of Texas in 1993. A branch of the company
was registered in the Republic of Bulgaria subsequent to the signing of a five
(5) year Joint Activity Agreement ("JAA") with Bulgaria's government-owned state
telecommunications monopoly, the Bulgarian Telecommunications Company-PLC (the
"BTC"), on January 26, 1994. On February 14, 1997, the Company entered into a
new ten (10) year JAA with the BTC. As part of this new agreement, a new
wholly-owned, Bulgarian
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subsidiary company, Sector-Bulgaria, EOOD (hereinafter referred to as "Sector
BG") was created under which all business is now being done.
The JAA called for Sector BG and the BTC to unite their efforts in order to
provide substantially upgraded telecommunications services to the hotel and
resort industry in the country. As a well developed part of the national
economy, this industry sector is playing a strategic role in Bulgaria's rapid
conversion from central planning and state ownership to a more privatized and
market-driven economy.
The JAA identifies two basic needs that Sector BG's activities must address in
order to meet the demands of its customers:
o Provide direct, automatic, international dialing to the guests of client
hotels;
o Deliver upgraded local telephone service to individual business customers
through the installation of optical fiber cabling and high-speed digital
transmission equipment.
In addition, Sector BG has undertaken the challenge to provide complete
equipment upgrades at the customers' premises through the installation of
state-of-the-art digital PBXs, call accounting systems, new telephone sets and
other services.
Since early 1995, Sector BG has provided telecommunication services to a select
group of hotels in the Bulgarian capital of Sofia and in Plovdiv, the country's
second largest city and a traditional fair and exhibition center. Sector BG has
constructed five optical cable routes in Sofia with a total length of 12
kilometers creating an infrastructure that is able to support future additional
customers and further expansion.
Services Provided, Markets and Overall Strategy
Sector Bulgaria currently operates in the Republic of Bulgaria, a country with a
population of approximately 8,775,000 and a total area of 110,910 square
kilometers (slightly larger than the state of Tennessee). It is well known among
tourist operators, having the unique combination of natural resources,
historical past, traditional architecture and fine cuisine.
Bulgaria possesses an almost unbroken line of beautiful beaches along its 300
kilometer Black Sea coast. Hundreds of hotels are clustered around the two
biggest cities, Varna and Bourgas, in several resort areas - St. Constantin,
Golden Sands and Albena to the north and Sunny Beach, Elenite and Dyuni to the
south. A three to four hour drive transfers the tourist to Alpine surroundings
in the mountain resorts of Pamporovo and Borovetz - well known ski centers in
Western Europe.
The capital of Bulgaria, Sofia, is a large industrial and business center at the
foot of the Vitosha mountain - a picturesque natural park and a convenient ski
center half an hour away from the city. Plovdiv, Bulgaria's second largest city,
has become an international fair and exhibition center with major events in the
spring and autumn and many other events throughout the year. Varna and Bourgas
are industrial and tourist centers with ports on the Black Sea.
There are two characteristic aspects of the Bulgarian telecommunication
infrastructure: the heritage of the communist past and the recent tendencies to
modernization. In the early nineties, democratic Bulgaria inherited from the
former totalitarian communist state a telecommunication infrastructure with
technically obsolete, poorly maintained and worn out electromechanical switching
systems. Long distance transmission was analog, based on antiquated FDM
multiplex systems and microwave relays. The local loop was in no better
condition. The only telephone instrument in use was the ubiquitous rotary dial
phone.
There were great anomalies and discrepancies between the general statistics data
and the actual network
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development and service quality. The 1995 CIA World Fact Book reports that
Bulgaria's telephone system consists of approximately 2,600,000 telephones or 29
phones per 100 persons, that 67% of the households in Sofia have telephones,
that automatic telephone service is available in most villages, that two thirds
of the lines are residential etc. These ostensibly attractive statistics
disguise the severe problems of Bulgaria's antiquated telecommunication system.
The waiting list for telephone service in the bigger cities is still hopelessly
long, the quality of transmission poor, the static and distortion in local loop
circuits renders them useless for anything but voice grade and low bit-rate data
services.
Growth and socioeconomic change have come about in Bulgaria in the aftermath of
the end of the communist regime. New and increased demands are being placed upon
Bulgaria's inadequate telecommunications infrastructure placing additional
stress on the Bulgarian public telephone operator's ability to supply its users
with the required capacity. This in turn, is causing the users to operate in an
environment which lacks critical communications capabilities. This situation is
further exacerbated by the poor financial health of Bulgaria's balance of
payments and hard currency reserves which are inadequate to invest in and
modernize such important areas as its telecommunications infrastructure.
A typical example of Bulgaria's attempt to modernize its telecommunications
infrastructure is the Digital Overlay Network (DON) project of the BTC. Its
major goal is to significantly upgrade the national long distance network by
creating a digital transmission and switching overlay of the existing analog
environment thus creating the backbone of further network upgrades.
Even with the completion of the DON, compared to western standards, Bulgaria
lags considerably behind. For Bulgaria's most visible and demanding users, such
as international four and five star rated hotels, large sea and mountain resorts
with traditional international business and tourist flow, foreign and domestic
companies, embassies, and trading houses, requiring constant and efficient
access to international and long distance communications, the inability to offer
sufficient quality in all segments of the connection, be it switched-voice,
facsimile or data, mean a potential loss of business revenue, inability to
obtain timely critical business and other information, and a frustrated user
population.
Sector BG currently has contracts to provide services to a select group of
hotels in Sofia and Plovdiv. Sector BG has constructed five optical fiber cable
routes in Sofia with a total length of 12 kilometers (6 fibers), creating an
infrastructure for future cost effective connection of additional customers and
further expansion.
Sector BG offers to its customers the following basic services:
o upgrading of the local loop to optical and direct connection to the
international gateway switch through the Sector BG operated private network;
o worldwide dialing access;
o complete telecommunication equipment upgrade in the customer's premises
including, installation of new modern PBX(s), call accounting systems, new
telephone sets, and other services.
Sector BG's strategy is to expand the optical fiber cable construction in Sofia
and Plovdiv and to provide international and national long distance direct
dialing to additional hotels, western businesses, banks and embassies. New
services will also be developed to enrich and diversify the types of products
available to the customer, e.g. debit card calling, Internet access, Reuters
access, credit card validation, etc., based on the near-infinite transmission
capacities of the optical fiber and related equipment. This strategy and the
implementation of such an expansion of the network services is highly dependent
upon the ability of the company to secure adequate financing and contract with
new customers -- the assurance of which is highly uncertain.
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Sector BG also expects to extend these services to the major Black Sea resort
areas clustered around the cities of Varna and Bourgas, as well as the popular
mountain ski centers of Borovetz and Pamporovo.
Sector BG's customers represent the most lucrative market segments: 1) the hotel
and resort industry, and 2) business users. Both of these markets demand a high
quality of service (QoS) and at the same time are able to afford the higher
premiums to procure these services. Sector BG invoices its customers based on US
dollars. Payments are collected in the local currency at the daily exchange rate
in order to minimize currency translation and devaluation risk.
Sources and Availability of Materials
The materials and vendors necessary for Sector BG to continue operations are
available from many sources. Sector BG foresees no shortage of supplies or
difficulties in acquiring materials and vendors necessary to conduct its
business as presently conducted.
Sector BG relies heavily on its own expertise. Three local and one US-based
subcontractor companies are retained to provide certain technical equipment and
services including:
o engineering support for proprietary computer and telecommunications
equipment;
o cable route surveys, coordination with the BTC and local authorities on
permit and license issues, construction and laying of the optical fiber
cable including testing and documentation;
o call logging equipment and billing service support;
o digital transmission telecommunication equipment.
All three Bulgarian companies are leaders in their specific business domains and
Sector BG has a well established relationship with each. Should it be necessary
to obtain new or additional subcontractors, Sector BG has an adequate number of
alternative local and international equipment and service vendors. There exist,
however, many political and regulatory risks in Bulgaria which could seriously
impact the ability of the Company to obtain required contractual services or to
retain its own employees.
Description of the Network
Sector BG has installed five Mitel SX 2000 Light PBXs in five hotels in the
cities of Sofia and Plovdiv and has expanded or upgraded most of the remaining
PBXs in the remaining hotels to which Sector BG provides service. Call logging
and accounting equipment and interfaces to the hotel information systems are
provided to every customer. Five PBXs, four Mitel SX 2000 and one Northern
Telecom Meridian 1, are connected via optical fiber directly to Sector BG's
Concentrator Tandem in Sofia. The remaining hotel customers are temporarily
connected by leased local lines awaiting the construction of the optical cable
route. Currently, all Sector BG's hotel customer's PBXs retain their traditional
interface to the PSTN for local, national, long distance and incoming
international calls.
Sector BG supports a remote control and customer service center in its office
and switch room in Sofia. It assists its hotel customers administration in
resolving any dialing and billing problems of its guests. Emergency services to
its customers is provided on a 24 hour basis.
A centralized billing system issues monthly bills to the customers that are
matched to the records of the hotel call logger.
Government Regulation and Operating Agreements
The telecommunications sector of Bulgaria was initially based on the legal and
regulatory framework of the Soviet Union. Under this system, the Ministry of
Posts and Telecommunications was given the
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monopoly over all telecommunications services, including television and
broadcasting. Article 16 of the Bulgaria's Constitution stated that "...posts,
telegraph, telephones, radio and television...are state property only." The
Ministry is responsible for planning and coordinating policies concerning
telecommunications services.
Reform in telecommunications in Bulgaria began in 1991. It is part of the
general tendencies in Europe in this field and covers three domains: structure,
jurisdiction and technology. The reform aims at a gradual ousting of state
monopoly in telecommunications by establishing government regulation and a
competitive telecommunications service market.
The Committee of Post and Telecommunications ("CPT") is the regulatory body for
telecommunications, mobile phone, satellite and cable TV operators in Bulgaria.
It is a state organization which has no say over the economic aspects of the
main national operator the Bulgarian Telecommunications Company LTD ("BTC")
which holds the monopoly on basic network services, satellite communications,
all long-distance and international telephone and telex services.
The CPT sets the development strategy for the telecommunication infrastructure,
approves bids, tenders and grants licenses to operating entities. The CPT's
stated goal is to drive forward the liberalization of the telecommunications
market through licensing and privatization. Bulgaria intends to follow the
general recommendations of the European Union's Green Paper on
Telecommunications and the Uruguay Round of GATT negotiations regarding
liberalization of the telecommunications sector. Bulgaria's government announced
earlier this year that it would offer 25% of the BTC for sale in an effort to
spur privatization and raise cash to pay for the country's $10 billion foreign
debt.
On September 21, 1993, Global Communications Group, Inc. ("Global") executed a
Memorandum of Understanding with the BTC to provide a closed, private, long
distance traffic network for the hotel and resort industry in the Republic of
Bulgaria. Global and the BTC then executed a JAA on January 26, 1994 which
enabled Global to provide end-to-end international carrier switched service to
terminate all switched voice traffic from the hotels in Bulgaria.
On July 8, 1996, the BTC unilaterally and unexpectedly terminated the JAA and
prohibited Global from accessing the state-owned long-distance switching network
and effectively terminated Global's ability to provide its core service -
international long-distance access. Although the Company considered the BTC's
actions both illegal and unjustifiable, it entered into negotiations with the
BTC to effect a settlement.
On February 14, 1997, the Company entered into its current ten (10) year Joint
Activity Agreement ("JAA-2") with the BTC to provide an enhanced group of
services to its customers. As part of this new agreement, which replaces the
original five (5) year JAA, a new, wholly-owned, Bulgarian subsidiary company,
Sector-Bulgaria, EOOD (referred to hereinafter as "Sector BG") was created. All
business is being done as Sector BG and existing contracts and agreements are
being modified to reflect the new operating structure. Ultimately, it is
anticipated that all of the assets and liabilities of Global will be assigned to
Sector BG.
The JAA-2 is currently being updated with the BTC to reflect the latest changes
in the PSTN - the installation of a state of the art international gateway
switch, which allows the termination with the BTC of all international traffic
with sufficient quality rather than leasing special circuits and terminating it
to other private operators. Sector BG plans to continue to develop the fiber
optic loop and act as an agent of its customers in their relations with the BTC
to deliver traditional and future telecommunications services to them.
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In February 1997, Bulgaria entered into a World Trade Organization Agreement
(the "WTO Agreement") that should have the effect of liberalizing the provision
of switched voice telephone and other telecommunications services in many
foreign countries beginning January 1, 2003. As a result of the WTO Agreement,
the Company expects the BTC, among other things, to reexamine its policies
regarding (i) the services that may be provided by foreign owned international
common carriers, and (ii) the provision of international switched voice services
outside of the traditional settlement rate and proportionate return regimes. The
implementation of the WTO Agreement may also make it easier for foreign carriers
with market power in their home markets to offer Bulgarian and foreign customers
end-to-end services to the disadvantage of Sector BG, which may face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such end-to-end services.
Competition
Virtually all markets for telecommunications services are extremely competitive,
and the Company expects that competition will intensify in the future. In each
of the markets in which it offers telecommunications services, the Company faces
significant competition from carriers with greater market share and financial
resources. The Company competes in Bulgaria with the government provider, which
has historically monopolized the local telecommunications market. A continuing
trend toward business combinations and alliances in the telecommunications
industry and Bulgaria's move to privatize its telecommunications system may
create significant new competitors to the Company. Many of the Company's
existing and potential competitors have financial, personnel and other resources
significantly greater than those of the Company. Other potential competitors
include foreign telephone companies, wireless telephone companies, electric
utilities, microwave carriers and private networks of large end users. In
addition, the Company competes with equipment vendors and installers and
telecommunications management companies with respect to certain portions of its
business.
For most of the Company's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography, and network
size. Sector BG's objective is to be one of the most responsive service
providers, particularly when providing customized communications services.
Sector BG's array of communications facilities and international relationships,
together with its engineering and operations capability, provide Sector BG with
considerable flexibility in tailoring cost-effective communications services to
meet its customers' requirements. Ownership of this network will allow Sector BG
to implement complex permanent and temporary communications circuits to and from
locations throughout Bulgaria. Sector BG relies on its decentralized management
structure and the local orientation of its operations and personnel to
distinguish itself from larger, less personalized operations. In addition,
Sector BG's understanding of Bulgaria's telecommunications technical and
regulatory issues has often allowed Sector BG to provide prompt solutions to the
diverse communications needs of its customers. No assurance can be given,
however, that the Company's strategies will be successful.
The Company may also be subject to additional competition due to the development
of new technologies and increased availability of domestic and international
transmission capacity. For example, even though fiber-optic networks, such as
that of the Company, are now widely used for long distance transmission, it is
possible that the desirability of such networks could be adversely affected by
changing technology. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by the Company. The Company cannot predict
which of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
Dependence on major customers
The Company currently provides services to a limited base of customers and
therefore relies heavily on
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the business from each. Sector BG's five largest customers accounted for 77% of
total revenues for the year ended February 28, 1997. No single customer,
however, accounted for more than 21% of all revenues generated. Sector BG is
actively working to increase both its customer base and the types of services
that it provides in order to reduce the dependence on any single customer.
Tariffs
The tariff structure of the BTC is slowly undergoing changes that are trying to
reflect the transition to a market economy while still providing social credit
to subscribers with poor financial status, which constitutes the majority of the
telecommunications users in Bulgaria. Tariffs, both international and domestic
are approved by the government and are defined in the local currency - the
Bulgarian Leva. Sector BG's current practice of charging its customers in U.S
dollars allows Sector BG to recognize increased profit margins due to the
inflationary environment surrounding the Leva, and to realize tariff
conservatism due to the social pressure of the low standard of living in
Bulgaria.
Effective July 1, 1996, the BTC introduced a new tariff structure. Sector BG's
average blended carrier revenue and expense rates are $2.058 and $1.438,
respectively, leaving a $0.62 gross profit. These amounts were calculated based
on a Leva to US dollar exchange rate of 156 Leva for each US dollar. At February
28, 1997 the conversion rate was 1,955 Lev to the dollar. If the Lev continues
its devaluation against the US dollar there will be a corresponding increase in
gross profit to Sector BG. There have been numerous tariff adjustments since
July 1996 with the approximate effective weighted tariff rate currently at $1.00
per minute.
Employees
At April 30, 1997, Sector BG had 11 full time employees in Bulgaria. The
technical staff consists of three highly qualified system engineers and a
service technician that perform network planning and engineering, as well as the
maintenance functions of Sector BG's Network facilities and the five hotel PBXs.
Sector BG uses independent contractors for cable construction, call logger
installation and for other functions as necessary. Three employees are
responsible for customer billing and accounting. The remainder of the employees
perform administrative and logistical tasks.
Sector Communications AG
On July 31, 1996, the Company acquired 100% of the outstanding capital stock of
Sector Communications AG ("Sector AG") from Murray Services, Ltd. ("Murray") for
the purpose of holding the equity interests acquired by the Company in
Switzerland, namely HIS Technologies AG and Mountain Software AG. At the time
that Sector AG was acquired it had neither assets nor liabilities. Sector AG now
holds the Company's equity investment in Histech, however, it currently has no
operating budget, revenues nor employees.
HIS Technologies AG, Mountain Software AG
On August 12, 1996 Sector entered into a Definitive Agreement with the
shareholders of Histech and Mountain Software AG ("Mountain") whereby the
Company's wholly owned subsidiary, Sector AG, would acquire 80% of the capital
interest in Histech and 100% of Mountain.
Effective August 23, 1996, Sector AG acquired 54.45% of the capital stock of
Histech from two Histech shareholders, Joan Brown and Aledo Services, Ltd.
("Aledo"), and 100% of the stock of Mountain from Simon Brown, the sole
shareholder of Mountain, in exchange for 9,846,154 shares and 1,712,375 shares
of the Company's common stock, respectively. The Company also purchased 3,428
shares of previously unissued Histech shares representing a 25.55% interest for
$1,200,000. The Company anticipates that Mountain may be merged into Histech at
some future date. Hugo Wyss, a director of Sector AG and the
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Chairman of the Board of Directors of Histech, is also a director of Aledo.
As compensation for services performed in this transaction, the Company issued
1,250,000 shares of common stock and warrants for the purchase of 1,250,000
shares of common stock at an exercise price of $0.79 per share, expiring three
years from the date of issue, to KAV Kapitalangleger Verlag AG (" KAV").
On February 18, 1997, the Company entered into an agreement (the "Peacetime
Agreement") with Peacetime Communications, Ltd.; Emerald Capital, Inc.; and
Wallington Investment, Ltd. ("Wallington"), whereby the Company canceled
obligations to Peacetime, Emerald and Wallington in the aggregate amount of
approximately $4,080,000 and obtained additional financing in the amount of
$1,000,000 (or less, at the Company's discretion) through the sale of 25% of its
ownership in Histech; all of the Company's interests in DBE Software, Inc.
("DBE"); and 1,000,000 shares of the Company's common stock. Peacetime received
2,417 shares of the common stock of Histech representing 18% of the total
outstanding shares of Histech and the Company's entire claim to 145,745 shares
of DBE common stock representing 14.594% of the outstanding DBE common stock.
The DBE common stock has been placed into escrow pursuant to an escrow agreement
executed concurrently with the Agreement. Upon the receipt of one million
dollars, the escrow agent shall transfer the Company's interest in DBE to
Peacetime. In the event that less than one million dollars is drawn by the
Company, a percentage of the Company's interest in DBE, which is proportionate
to the amount of capital provided to the Company, shall be delivered to
Peacetime with the remainder of the DBE interest returned to the Company.
Emerald and Wallington each received 134 shares of Histech common stock
(representing 1% of the total number of outstanding shares of Histech) and
500,000 shares of the Company's common stock.
Overview
HIS Technologies AG (hereinafter "Histech") is a Swiss corporation founded in
1996. Histech is an independent software vendor that develops and markets
enterprise automation software solutions for managing distributed computer
systems in multivendor, multiplatform computing environments.
Histech's products are used by information systems professionals whose
organizations rely on the performance of their computing resources to conduct
business. Histech is committed to the quality of the products and services it
provides to its customers and continually invests in research and development to
maintain the quality of its software products.
Histech initially introduced its systems management products for Digital
Equipment Corporation's OpenVMS operating system, but is currently adapting its
major products to also run on the Microsoft Windows NT and Unix operating
systems. Histech is also developing a new line of products that will operate
simultaneously across all three environments. There can be no assurance,
however, that the products will be delivered on schedule or that more
competitive products will not be released by the competitors of the Company.
A substantial portion of Histech's net revenues is derived from user license
fees sold through distributors. Histech's license agreements generally do not
impose minimum sale obligations on the distributors and, accordingly, the
distributors have no obligation to sell Histech's products. In addition, Histech
has no control over the shipping dates or volumes of systems sold through its
distributors and therefore there can be no assurance that any distributor will
ship Histech's products in the future. Failure of Histech's distributors to
achieve significant sales and fluctuations in the timing and volume of such
sales could have a materially adverse effect on Histech's and therefore
Histech's operating results and financial condition.
Market
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Over the last 25 years, systems management has evolved from simply monitoring
resource usage in a single mainframe to automated management of client/server
applications across the information system enterprise. This includes the
monitoring and management of mainframes, servers, networks and applications from
disparate vendors across a myriad of platforms.
The explosive growth of computing resources throughout the enterprise poses new
challenges for systems management. Organizations are increasingly dependent on
information systems for their moment-to-moment operations. If systems fail to
deliver service to the internal end user, there can be an immediate impact on
external customers and the bottom line.
Applications become increasingly complex as they support more business functions
and are distributed across the enterprise on downsized platforms. Today's
computing environment includes mainframes, minicomputers, workstations and LANs
spread throughout the organization.
Along with the task of supporting this complex, mission-critical resource,
corporate MIS departments are under continuous pressure to reduce all the costs
associated with information systems and their management -- hardware, software,
networks and personnel.
The growing diversity of the enterprise computing environment contributes to
other features of the current market. While IBM's dominance of the MIS
organization is eroding, customers are concerned with protecting their
investment in their information systems. This in turn is driving the emergence
of often conflicting standards for systems management, such as SNMP, DCE and
various emerging object-oriented strategies like CORBA, OLE, DCOM, etc. In an
effort to reduce training costs and increase efficiencies, there is a
customer-driven trend toward consolidating the installed vendor base and
standardizing on as few products as possible.
Despite recent acquisitions, a smaller field of software vendors has been slow
to deliver significant integration among system management tools while the
market continues to demand out-of-the-box interoperability of diverse products.
In the face of these market dynamics, traditional approaches to systems
management -- which focus on managing discrete components such as CPUs,
subsystems, devices and networks -- cannot meet the challenge of managing
service levels for complex distributed systems.
Histech is focused on delivering the next generation of automated systems
management products needed to respond to these challenges although no assurance
can be given that such a focus will result in a viable, competitive products or
products.
Histech's strategy focuses on the business needs of large companies with
strategic development of distributed information technologies. Histech hopes to
deliver a comprehensive solution aimed at helping customers gain proactive
command and control of their distributed computing environment. Certain
functions of entire enterprises can be managed and automated from a central
point-of-control, regardless of the devices, operating systems, network standard
and platforms it contains.
Products
Histech's initial products operated only with the OpenVMS operating system.
Histech's future success will depend, in significant part, on its ability to
develop new features and functionality for existing products and port its
products to and distribute products for other operating systems, such as
Microsoft Windows NT and Unix. There can be no assurance that Histech's current
and future porting efforts will be successful.
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Histech currently offers the following core products for use with the OpenVMS
operating system: HIS-Remote, HIS-UAF Maestro, HIS-Queues, HIS-SuperPassword,
HIS-FDM, HIS-ProcessEye, HIS-Security, HIS-RAP, HIS-UAF Administrator, and the
HIS-Agent for OpenView. These products offer many features that are not
available from other commercial OpenVMS applications.
HIS-Remote - Provides the launch point for all HIS System Management products.
It enables the distribution and installation of software on remote nodes, runs
remote applications, and helps to organize the desktop.
HIS-UAF Maestro - User account management. HIS-UAF Maestro is an OpenVMS system
management product designed to simplify and greatly reduce the amount of time
required for account management. Supports both VAX and AXP-Alpha platforms.
Works with accounts, disk quotas, identifiers, mail profiles, and network and
proxy accounts. Provides template support and bulk account creation and
duplication. Features comprehensive report generation including custom report
creation.
HIS-Queues - Printer and Job Queue Management. Manages queues network-wide using
a unique drag-and-drop graphical user interface. Makes printer and batch queue
management as easy as clicking a button.
HIS-SuperPassword - User password synchronization. Set-and-forget solution for
multinode password synchronization. Changes any passwords in the network,
creates and distributes a rules database, monitors listeners and views any
HIS-SuperPassword files on a server node. Provides a secure level of password
functionality not found in other OpenVMS products.
HIS-FDM - File and disk management. Brings a network-wide file and disk manager
with a Windows-style user interface and functionality to the OpenVMS file
system, plus much more. HIS-FDM can copy directory trees between devices (even
over the network) undelete files, edit files on remote nodes, compress/
decompress files, view binary contents of files or execute a file by double
clicking on the icon.
HIS-ProcessEye - Process control and monitor. Dynamically monitors and controls
OpenVMS network processes. Allow systems mangers to change priority, search for
runaway processes and track performance of any process on the network.
HIS-Security - Security monitor. HIS-Security combines a graphical interface and
standard DECnet client/server communications to provide a powerful security
management system.
HIS-RAP (Remote Access Platform) - Provides users with the ability to run
applications on remote nodes without the need to log onto those nodes. Controls
access to applications through a simple-to-use user-specific menu system. Hides
the network topology from the end-user and eliminates the need to install and
manage application software on every node.
HIS-UAF Administrator - Extends the user account administration task to include
the administration of Digital's ALL-IN-1, MAILworks and DDS profiles in addition
to OpenVMS accounts.
HIS-UAF Administrator UNIX Server/HIS-UAF Administrator Windows NT Server -
Allows systems managers to control and manage user accounts for OpenVMS, UNIX
and Windows NT on the same network. A graphical interface provides a clear
overview of all users and their related accounts cross platform via the
subscribers records stored in the HIS-UAF X.500 database. Help-desk operators
can use HIS-UAF Administrator for assisting a user who has a specific problem
e.g. forgotten passwords, account names etc. Reduces the need for staff to learn
different administration tools across different applications and operating
systems.
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HIS-OpenView Agent - The HIS OpenVMS Agent for Hewlett-Packard's OpenView
IT/Operations product provides transparent integration of Digital's proprietary
OpenVMS operating system into that enterprise management frameworks. OpenVMS
systems can consistently be monitored and controlled from a central HP OpenView
IT/O management station located anywhere in the network. All OpenVMS related
information is clearly identified and a dedicated OpenVMS operator can be
defined with specific responsibility areas and management tasks. This product
uses a combination of agent- and message-based capabilities to extend reach and
scalability to any level of the enterprise.
Customer Support and Product Maintenance
Histech offers product maintenance, which includes maintenance and updating of
product capabilities to accommodate changes in a customer's hardware and
software. An initial period of one year of maintenance is included in all of
Histech's software licenses after which Histech offers optional maintenance
renewals. Histech also provides extensive computer-supported problem solving
capabilities over the telephone for its customers as part of their maintenance
contracts. Histech believes that support of its customers and products is very
important, and it continually attempts to improve its support systems and
techniques.
Consulting, Education and Computer Services
Consulting and educational services with regard to the application of Histech
products are provided to customers on a fee basis.
Marketing and Customers
Histech sells its products in Switzerland and in the Benelux countries through
its own internal sales force. In the rest of Europe and in North America,
Histech's products are sold through its distributor channels.
Histech's largest distributor, Raxco, Inc., was founded in 1977, and is
headquartered in Rockville, Maryland. Raxco was one of the first vendors to
provide system management solutions for Digital Equipment Corporation platforms
and its reputation for quality products and long-term support has been proven
globally.
Raxco maintains a global presence with offices in the United States, United
Kingdom, and the Netherlands and owns distributors in several other countries.
Raxco's customer list features 49 of the Fortune 50 most profitable companies
and numbers over 25,000 customers worldwide. The July 1995 edition of Software
Magazine listed Raxco as a Top 100 Software Vendor, and has also been named the
winner of 7 Target Awards from Digital News & Review. For the year ended
February 28, 1997, Raxco, Inc. (US) accounted for 11% of Histech's revenues,
while Raxco UK accounted for 15%.
The process of configuring Histech's products to meet the specific hardware and
software requirements of the environments in which they will be used is rapid;
consequently, shipments are generally made within one week of the time the order
is received. In addition, Histech offers its customers the opportunity to use
its products on a trial basis such that upon final acceptance by the customer,
full installation has already been completed. Accordingly, Histech has no
significant backlog of orders at any time.
Histech's customers are generally large corporate and government organizations
including industrial companies, commercial banks, insurance companies,
communications companies, retailers, transportation companies, utilities, health
care and educational institutions, and federal, state and local governments. No
customer accounted for greater than 10% of Histech's revenues in 1996.
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Competition
The computer software industry is highly competitive. There are many larger
software vendors that have substantially greater financial and technical
resources than Histech; in the future, these companies may develop and market
products similar to those offered by Histech. Competitive products are currently
offered by a number of independent software companies. The most important
consideration for customers of systems and network management software are
product and product line capability, integration, on-going product enhancement,
ease of installation and use, reliability and quality of technical support,
documentation and training, name recognition, vendor experience and stability,
and, to a lesser extent, price. The Company believes that it competes favorably
in these areas although the dynamic nature of the software industry could
quickly place Histech and its products at a competitive disadvantage.
Research and Development
The computer hardware and software industries are characterized by rapid
technological change, which requires a continuing high level of expenditures for
the development and maintenance of software products. It is customary for
modifications to be made to a software product as experience with its use grows
or as changes in manufactures' hardware and software so require. In 1996 the
Company incurred approximately $327,000 of software development costs aimed at
both enhancing the existing products and adding several new ones. No R&D costs
were capitalized for the year ended February 28, 1997.
Proprietary Rights
Histech relies on confidentiality and non-competition agreements with its
employees in order to protect its proprietary know-how and employs various
methods to protect the software, concepts, ideas and documentation of it
proprietary technology. Such methods, however, may not afford complete
protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to Histech's know-how or software,
concepts, ideas and documentation. Histech does not sell or transfer title to
its products to customers. The products are licensed on a "right-to- use" basis
pursuant to a perpetual license, which is nontransferable and restricts use of
the products to the customer's internal purposes on specified computers at
specified sites.
Employees
As of February 28, 1997 Histech employed twelve persons (five as full-time
contractors), including sales, marketing and related activities; product
development and customer support; management, administration and finance. Of
such employees, seven are employed in Switzerland, four are employed in the
United Kingdom, and one is employed in Benelux. Histech believes that its
employee relations are good and anticipates hiring additional employees in the
future.
DBE Software, Inc.
On June 17, 1996, the Company entered into a Definitive Investment and Option to
Merge Agreement, with DBE Software, Inc. ("DBE"). This agreement allowed the
Company, at its option, to acquire up to 100% of the outstanding capital stock
of DBE in two stages. The first stage provided that the Company purchase
previously unissued equity of DBE representing a 20% capital stock interest for
$1,500,000 of which $1,100,000 was paid during the period of May through June
16, 1996.
On January 17, 1997, the Company renegotiated its Agreement with DBE and
converted its $1,100,000 investment into a 14.594% equity ownership interest and
agreed to waive its option to purchase any additional equity of DBE.
On February 18, 1997, the Company divested itself of its 14.594% ownership
interest in DBE in
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accordance with the Peacetime Agreement.
Krissos Resources, Inc.
Effective May 31, 1996, the Company transferred certain assets, liabilities and
obligations of its gold business to Krissos Resources, Inc. ("Krissos"), a newly
formed, wholly owned subsidiary of the Company. Historically, the Company's
principal activities have been conducting surface and exploration drilling on
its gold exploration projects located in Idaho.
Vienna Project
On October 18, 1994, The Company entered into an Exploration License and Option
Agreement to acquire a 100% interest in 43 patented and 13 unpatented mining
claims encompassing approximately 850 acres of the historic Vienna district in
central Idaho. This district has produced an estimated two million ounces of
silver and an undefined amount of gold since 1880.
During 1994 and 1995, the Company began investigation of the Vienna Project in
central Idaho with the objective of taking what was a historic silver-producing
district and evaluating the gold potential. The Company's geologists identified
seven highly-altered zones, identified as Webfoot A & B, Vienna A & C, and
Solace A, B and C.
The Company's preliminary evaluation program during the 1995 exploration season
was relatively short due to an exceptionally heavy winter. As a result no
exploration drilling was conducted. The 1995 exploration program consisted of
analysis and assay of core that was drilled by previous operators from
underground in the Webfoot Mine (one of three main historic mines in the
district), surface trenching and geological mapping through the district, and
preliminary petrographic and metallurgical studies. At the time, the Company's
geologist felt, that despite the limited nature of the results to date (the
interpretations are considered preliminary because of the lack of surface
drilling information), that the property appears to hold considerable promise
for hosting a moderate-sized (100,000 to 200,000 ounce) gold ore body. Channel
sampling and the previous underground drilling in the 600-foot level of the
Webfoot Mine confirm an approximate 100 to 150 foot width of ore averaging 0.04
oz/ton gold. Surface trenching at Webfoot showed that material of similar grade
continued upward for 100 to 700 feet to the surface. The width of the ore-grade
material at the surface is slightly narrower, averaging about 10 to 29 feet.
Two other mineralized zones have been identified by the Company's geologist at
Solace and Vienna. Although these zones were the focus of considerable
underground mining in the past, most of the workings on these zones are
presently inaccessible. Therefore only limited underground information from
Solace and Vienna exists. Surface trenching returned encouraging results,
including 35 feet averaging 0.04 oz/ton gold at Vienna and 60 feet averaging
0.05 oz/ton at Solace.
The Webfoot zone appears to be the largest of the mineralized zones on the
property and has a fairly well understood geometry and orientation. On that
basis, the services of the Lodestone Group of Englewood, Colorado have been
engaged to direct a gold exploration surface drilling program to test the
Webfoot vein system.
The Company does not have a proven or probable reserve at its Vienna project.
Furthermore, there can be no assurances that the these claims may actually host
an economically minable gold deposit, or that the necessary funding to begin
production could be obtained.
Effective May 15, 1997, the Company relinquished its option rights to the Vienna
Project believing that the exploration results to-date did not justify the
significant additional funding needed to extend its
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option agreement.
Ketchum Project
Seven years of geological investigation, sampling and exploratory drilling have
led to what the Company believes is the discovery of an extensive low-grade
epithermal gold system on the Waldemar-Lindgren-Watterson claims (the "Ketchum
Project") in central Idaho.
Grassroots exploration began in central Idaho in 1988 and eventually lead to
staking 576 unpatented claims. Encouragement was initially obtained from gold
assays of 1 to 2 ppm from in and around the historic lead-silver workings in the
area. Subsequent soil surveying delineated several promising targets not related
to the historic workings.
During the 1991 to 1994 field exploration seasons, 40 reverse circulation holes
were drilled, totaling 29,080 feet. Of the samples recovered from these holes,
55% have a gold concentration in excess of 10 ppb. The drill hole results
suggest that a large volume of mineralized rock continues to significant depth
beneath the surface soil anomalies. So far however, the high-grade zones appear
to be somewhat discontinuous and a minable volume of economic grade has not yet
been discovered.
Both surface work and drilling have led to a detailed understanding of the
geology of the claim block. Most of the area is underlain by Wood River
sandstone; along the western edge of the claim block, the sedimentary section is
intruded by a tertiary stock. This rock package is locally overlain in
uncomfortable contact by tertiary volcanic rocks. Although it is difficult to
find definitive cross-cutting relationships to indicate the relative ages of
base-metals and gold-arsenic mineralization, geologic relationships suggest that
the base-metal mineralization is Cretaceous in age, and may relate in a broad
sense to emplacement of the Idaho batholith, which gold-arsenic mineralization
is tertiary in age, probably coinciding in age with Challis volcanism.
Company geologists decided to focus on areas where the sandstone is in contact
with volcanic rocks. Targets of this sort stem from the notion that gold-bearing
hydrothermal solutions may have risen and ponded beneath the volcanic section
due to a drop in permeability. Although geologic relationships suggest that the
uncomfortable contact between sandstone and the overlying volcanics are
throughout the property, these geologists have singled out two localities in the
current claim block as the most promising in this regard, and hence are a more
favorable host rock for gold.
For the 1996 exploration season, the Company engaged the services of Agricola
Metals Company, a principal of which is a shareholder of the Company, to direct
a gold exploration drilling program in one of these two areas. Results of this
exploration were inconclusive with more testing deemed necessary to determine if
any viable ore-bearing deposits exist. No plans have been established to conduct
future exploration at this time.
In August 1995, after careful consideration and review of the Ketchum claim
block, the number of unpatented claims held at the Ketchum Property were reduced
by 397 from 656 to 259. Claims on which it was believed little potential of
containing a minable gold deposit was held and/or which were located in an
environmentally sensitive area where it would be difficult to obtain the
necessary permits for exploration and development of the property were dropped.
The reduction in the number of unpatented claims is also consistent with the
objective to reduce costs since there is an annual rental payment requirement of
$100 per claim on unpatented claims.
The Company does not have a proven or probable reserve at its Ketchum Project.
Furthermore, there can be no assurances that these claims may actually host an
economically minable gold deposit, or that the necessary funding to begin
production could be obtained.
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Title To Mining Claim Properties
The Company's Idaho properties consist, to a large extent, of unpatented mining
claims upon unappropriated federal land pursuant to procedures established by
the federal and state laws. Interests in the perfected unpatented mining claims
on public land are subject to the fee title of the United States of America. The
Company believes that it has taken all actions necessary to perfect its
interests in the mining claims under Federal statutes and regulations and
intends to continue to perform the necessary work and filings as required. There
can be no assurance however that the interest of the Company in its mining
claims will not be subject to contest.
The Company does not have title opinions on its unpatented mining claims or
leased properties and, therefore, has not identified potential adverse claimants
nor has it quantified the risk that any adverse claimant may successfully
contest all or a portion of its title to the claims. Furthermore, the validity
of all unpatented mining claims is dependent upon inherent uncertainties such as
the sufficiency of the discovery of minerals, proper posting and marking of
boundaries, and possible conflicts with other claims not determinable from
descriptions of record.
Availability of Mineral Deposits; Competition and Markets
Since many companies are engaged in the exploration of mineral properties, and
may have substantially greater financial resources than the Company, The Company
may be at a disadvantage with respect to some of its competitors in the
acquisition and development of mining properties and companies.
Sources and Availability of Raw Materials
The materials and vendors necessary for the Company to continue its exploration
activities are available from many sources. The Company foresees no shortage of
supplies or difficulties in acquiring materials and vendors necessary to conduct
its business as presently conducted.
Environmental and Regulatory Matters
The Company is engaged in exploring for gold and is subject to various Federal,
state and local provisions regarding environmental and ecological matters. Many
of the Company's exploration activities are conducted on public lands. The U. S.
D. A. Forest Service extensively regulates exploration activities conducted in
National Forests where most of the Company's claims are located. All operations
of the Company involving the exploration for minerals are subject to existing
laws and regulations adopted by Federal, state and local governmental
authorities. Requirements imposed by any such authorities could be costly, time
consuming, and may delay operations. Future legislation and regulations,
including those designed to protect the environment, as well as future
interpretations of existing laws and regulations, may require substantial
increases in equipment and operating costs to the Company and may cause delays,
interruptions, or a termination of operations. While to date, environmental
requirements have not had a material effect on the Company's operations, the
Company cannot accurately predict or estimate the impact of any future laws or
regulations, or future interpretations of existing laws and regulations, on its
operations.
Gold Assay System
The Company has the world wide right to make, sell and use the Gold Assay System
although there are no efforts being made to produce or sell the system or to
determine the market for such a system. The Company ceased research and
development efforts related to the Gold Assay System in 1995.
EMPLOYEES
At April 30, 1997, the Company, in addition to the staff employed by its
subsidiaries, had two full-time
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and three part-time employees. The Company also uses independent contractors and
consultants, as necessary, and anticipates hiring additional employees in the
future.
PRINCIPAL OFFICE
The Company is a Nevada corporation with its executive offices located at 7601
Lewinsville Road, Suite 250, McLean, Virginia 22102. Its telephone number is
(703) 761-1500.
ITEM 2. PROPERTIES
MINING CLAIM PROPERTIES
The Company's mining claim properties are described in the "Mining Claim
Properties" section of Item 1.
Office Facilities
At April 30, 1997, the Company leased the following facilities:
Lease Approximate
Location Primary Use Sq. Footage Expiration
-------- ----------- ----------- ----------
McLean, VA Corporate Office 12,943 March 2003
San Francisco, CA Corporate Office 1,300 July 1999
Englewood, CO Corporate Office 3,664 September 2000
At April 30, 1997, the Company's subsidiaries leased the following facilities:
Lease Approximate
Location Primary Use Sq. Footage Expiration
-------- ----------- ----------- ----------
Zurich, Switzerland Corporate Office 3,488 June 2000
Sofia, Bulgaria Corporate Office 2,500 January 2001
The Company is committed under non-cancelable operating lease agreements for
office space at the above locations and has subleased the entire California and
Colorado locations and substantial portions of the McLean location on terms
similar to its master leases.
ITEM 3. LEGAL PROCEEDINGS
On November 8, 1996 Symark International, Inc. ("Symark") filed a complaint
against HIS Technologies AG ("Histech") and its managing director, Robert
Scherpenhuijzen, in the Superior Court of the State of California for the County
of Los Angeles. On December 3, 1996, the action was removed to the United States
District Court for the Central District of California. On March 21, 1997, the
District Court granted Histech's motion to dismiss the action for improper venue
on the ground that the forum selection clause in the contract between Histech
and Symark specified the courts of the Canton of Zurich, Switzerland for the
resolution of disputes between Histech and Symark. On April 18, 1997 Symark
served notice of its appeal to the Ninth Circuit Court of Appeals of the
dismissal of its lawsuit. The appeal is now pending before the Ninth Circuit.
The focus of this case thus far has been on the procedural issue of whether the
case should be dismissed for improper venue because of the forum selection
clause. The Company anticipates the appeal will be decided by approximately the
first quarter of next year.
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The lawsuit arose from disputes between Histech and Symark concerning their
respective rights and obligations under the License and Reseller Agreement dated
August 1, 1995 between them (the "Agreement"). Symark contended that Histech had
attempted to engage Symark in "unfair and unlawful acts and practices and unfair
competition" with Histech and another distributor, Raxco, and also had made
disparaging remarks to Symark's customers. Histech's position is that Symark's
allegations are baseless, and that Symark has breached the Agreement, primarily
by failing to pay license fees and by representing Histech's products as
Symark's own. Ultimately, Histech terminated the Agreement.
Symark is seeking injunctive relief and monetary damages to be proved at trial.
ITEM 4. Submission of Matters to vote of Security Holders
No matters were brought to a vote of the Security Holders during the quarter
ended February 28, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on The Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol "SECT". The following table sets forth the
high and low sales price for each quarter since the Company's listing on Nasdaq,
as reported by the Nasdaq Stock Market.
The quotations represent prices between dealers in securities, do not include
retail markup, markdowns or commissions and may not necessarily represent the
actual transactions.
Quarter Ended High Low
- ------------- ----
May 31, 1995 0.78 0.44
August 31, 1995 0.87 0.41
November 30, 1995 0.81 0.31
February 29, 1996 0.50 0.28
May 31, 1996 0.56 0.31
August 31, 1996 2.38 1.00
November 30, 1996 1.63 0.56
February 28, 1997 0.72 0.28
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
At March 31, 1997 there were 289 holders of record of the Company's common
stock. The Company believes that many additional holders of the Company common
stock are unidentified because their shares are held by brokers in nominee
accounts or "street name". The number of beneficial owners holding stock in
nominee or "street name" is estimated by the Company to be approximately 750.
REVERSE STOCK SPLIT AND STOCK DIVIDEND
On May 15, 1996, the Board of Directors of the Company adopted a resolution
authorizing amendments to the Company's Amended and Restated Articles of
Incorporation approving a reverse split of the Company's outstanding Common
Stock, par value $0.001 per share on the basis of one new share of common stock
of the Company for each 5.909635 shares of presently outstanding Common Stock.
The Amendment was approved by written consent, dated May 15, 1996, of the
holders of approximately 52% of the outstanding shares of the Company's common
stock.
Also on May 15, 1996, the Board of Directors of the Company adopted a resolution
approving a stock dividend of the Company's common stock on the basis of one
share of common stock of the Company for 4.727708 shares of presently
outstanding common stock immediately prior to the reverse stock split described
above (1.25 shares for every share of outstanding common stock immediately after
the reverse stock split).
Effective June 18, 1996, the Company reverse split its common stock one share
for every 5.909635 currently outstanding shares. The Company also issued a stock
dividend of 1.25 shares of post reverse split common stock for each share of
common stock outstanding immediately after the reverse split (but prior to the
issuance of shares of common stock to the shareholders of Global and the grant
of unregistered stock to certain of the Company's officers, directors and
employees). The par value of the Company's common stock and the authorized
number of shares did not change.
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The Company has not paid cash dividends on its common stock and presently has no
intentions to do so. The Company expects to retain any future earnings to fund
operations for the foreseeable future.
RECENT ISSUANCE OF COMMON STOCK
On February 18, 1997, the Company issued 500,000 shares of common stock each to
Wallington Investment, Ltd. and Emerald Capital, Inc. pursuant to the Peacetime
Agreement. The sales of the securities described above were made in reliance
upon exemptions from the registration requirements of the Securities Act of 1933
for transactions not involving a public offering. The certificates for the
securities bear a legend accordingly.
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sector Communications, Inc. and its subsidiaries ("Sector") include certain
estimates, projections and other forward-looking statements in its reports,
presentations to analysts and others, and other material disseminated to the
public. There can be no assurances of future performance and actual results may
differ materially from those in the forward-looking statements. Factors that
could cause actual results to differ materially from estimates or projections
contained in forward-looking statements include: (i) the effects of vigorous
competition in the markets in which Sector operates; (ii) the cost of entering
new markets necessary to provide seamless services; (iii) the impacts of any
unusual items resulting from ongoing evaluations of Sector's business
strategies; (iv) requirements imposed on Sector and its competitors by the
Bulgarian Telecommunications Company ("BTC"); (v) unexpected results of
litigation filed against Sector; and (vi) the possibility of one or more of the
markets in which Sector competes being affected by variations in political,
economic or other factors such as monetary policy, legal and regulatory changes
or other external factors over which Sector has no control.
As a software developer and vendor, the Company believes that its ability to
compete successfully depends on a number of factors, including product
performance and functionality, the cost of internal product development versus
the cost of obtaining licensed products from outside vendors, time-to-market and
the cost of on-going maintenance. The Company's future success will depend
significantly on its ability to develop additional advanced products more
rapidly and less expensively than its existing and potential customers, to
persuade such customers to license the Company's products rather than to develop
their own systems management products, and to adapt its products to run on the
Microsoft Windows NT and Unix operating systems. There can be no assurance that
the Company will be able to accomplish this successfully. Many of the Company's
existing and potential competitors have substantially greater financial,
technical, marketing, sales and distribution resources than the Company. There
can be no assurance that the Company will be able to compete successfully or
that competition will not have a material adverse effect on the Company's
operating results and financial condition.
Any substantial decrease in the Company's revenues will materially and adversely
affect its operating results since most of the Company's manpower and other
expenses are fixed and cannot be adjusted rapidly to compensate for a
substantial decrease in revenues.
OVERVIEW
During the year ended February 28, 1997, the Company changed its corporate
strategy and focus, concentrating its energies and efforts on building the
Company into an international provider of telecommunications services and
computer software products. Through the acquisition of existing companies and
products, the Company began its transition from that of gold exploration to
technology production and marketing.
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As a first step in this process, the Company, on June 18, 1996, reverse split
its stock and changed its name and trading symbol to reflect its new identity.
Also on June 18, 1996 the Company acquired 100% of the outstanding capital stock
of Global Communications Group, Inc. ("Global") in exchange for the issuance of
17,000,000 shares of Company common stock to the shareholders of Global, as
described in note 2 to the financial statements. Global, as described below,
operates a private optical fiber telecommunications network in the cities of
Sofia and Plovdiv in the Republic of Bulgaria.
In conjunction with the acquisition of Global, the Company also received an
option to purchase the assets and liabilities of another company affiliated with
Global's shareholders, Global Communications Technologies, Inc. ("Global Tech").
The Company is currently in the process of conducting due diligence in regards
to this option which is set to expire on June 18, 1997. To date, no
determination has been made as to whether the option will be exercised.
As part of a new Joint Activity Agreement signed with the Bulgarian
Telecommunications Company-LTD ("BTC"), a new wholly-owned, Bulgarian subsidiary
company, Sector-Bulgaria, EOOD ("Sector BG") was created. All business is being
done as Sector BG and existing contracts and agreements are being modified to
reflect the operating structure. All assets and liabilities of Global will
ultimately be transferred to Sector BG.
With the resumption of carrier services, Sector BG is once again a profitable
business operation. Furthermore, management has commenced negotiations with
international financing sources for a multi-fold expansion of Sector BG's
network. There can be no assurances, however, that these negotiations will be
successful.
Effective August 31, 1996, the Company completed its acquisition of an 80%
equity interest in HIS Technologies AG ("Histech") and 100% of Mountain Software
AG ("Mountain"). Based in Zurich, Switzerland, Histech and Mountain (which was
subsequently merged into Histech) specialize in the development, sales and
support of software products.
On June 19, 1996, the Company entered into a Definitive Agreement for the
acquisition DBE Software, Inc. ("DBE"), located in Virginia. DBE is a software
development and marketing company, specializing in database management tools
designed to work with relational database management software (RDBMS) products
from IBM, Oracle, Computer Associates, and other major providers. This
Definitive Agreement was significantly modified, as described in note 3 to the
financial statements, on January 16, 1997.
On February 18, 1997, the Company entered into an agreement (the "Peacetime
Agreement") with Peacetime Communications, Ltd.; Emerald Capital, Inc.; and
Wallington Investment, Ltd. ("Wallington"), whereby the Company canceled
obligations to Peacetime, Emerald and Wallington in the aggregate amount of
approximately $4,080,000 and obtained additional financing in the amount of
$1,000,000 through the sale of 25% of its ownership in Histech; all of the
Company's interests in DBE Software, Inc. ("DBE"); and 1,000,000 shares of the
Company's common stock. Peacetime received 2,417 shares of the common stock of
Histech representing 18% of the total outstanding shares of Histech and the
Company's entire claim to 145,745 shares of DBE common stock representing
14.594% of the outstanding DBE common stock. The DBE common stock has been
placed into escrow pursuant to an escrow agreement executed concurrently with
the Agreement. Emerald and Wallington each received 134 shares of Histech common
stock (representing 1% of the total number of outstanding shares of Histech) and
500,000 shares of the Company's common stock.
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Sector BG
Sector BG has undertaken to be the sole private provider of direct-dial
international long distance telephone service for the hotel/resort industry,
banking industry, foreign embassies and western businesses in the cities of
Sofia and Plovdiv in the Republic of Bulgaria. This is the first step in a
series of related telecommunications development projects planned for Bulgaria.
To date, Sector BG and Global have made a substantial investment in fiber optic
cable, telecommunications equipment, and related infrastructure in accordance
with its agreement with the BTC.
Growth of Sector BG's operation is anticipated in four areas: (i) increased call
volume of existing customers, (ii) broadened customer base along the existing
network in Sofia and Plovdiv, (iii) broadened customer base along new segments
of the network, and (iv) expanding the concept to other Eastern European
countries.
As more fully described below and in note 15 to the financial statements, Sector
BG recently experienced periods when its access to long-distance service was
denied due to what management believed was arbitrary and illegal acts of
individuals connected with the BTC. The State Prosecutor's office in Sofia,
Bulgaria supported the Company's position in these matters and had issued orders
for the BTC to fully restore Sector BG's operations. Following the termination
of access to international carrier services, executive management of the Company
held numerous face-to-face meetings with the Chairman of the Board and Executive
Director of the BTC and with the President of the Committee of Posts and
Telecommunications ("CPT"). As a result of those meetings, a new revised
agreement went into effect on February 21, 1997 in the form of a Joint Activity
Agreement between the Company and the BTC. Under the terms of the new agreement,
the Company will receive 100% of the "shared revenue" generated by its customers
and 35% of the profits generated by "carrier revenue". All of the Company's
Bulgarian expenses will be paid before carrier revenue is apportioned.
HIS Technologies AG and Mountain Software AG
Effective August 31, 1996, the Company acquired an 80% interest in HIS
Technologies AG ("Histech"). Histech specializes in systems and network
management tools designed primarily for, but not limited to, use with computers
using Digital Equipment Corporation's ("Digital") OpenVMS operating system.
Concurrent with the Company's acquisition of Histech, the Company acquired 100%
of Mountain Software AG ("Mountain") for shares of the Company's common stock.
Mountain, owned and operated by one of Histech's founders, developed and held
exclusive rights to a suite of system management utilities, the "X-Series", sold
by Histech and its distributors. The "X-Series" products have since been
enhanced and have been renamed to the "HIS-MaestroSeries" for sales around the
world.
Histech's revenues are derived principally from two sources: (i) product license
fees for the use of the Company's software products and (ii) service fees for
maintenance, consulting services and training related to the Company's software
products. Histech is represented by partners and distributors in 13 countries
worldwide.
As described above, the Company, on February 18, 1997, entered into the
Peacetime Agreement whereby it disposed of 25% of its interests in Histech in
order to cancel existing obligations and obtain additional financing. This
reduced the Company's ownership interest to 60% of the total outstanding Histech
common stock.
DBE Software, Inc.
The Company entered into a definitive agreement with DBE Software, Inc. as
described in note 3 to the
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financial statements. DBE is a software development, distribution and marketing
company, specializing in database management tools designed to work with
relational database management software (" RDBMS") products from IBM, Oracle,
Computer Associates, and other major providers.
In order to cancel existing obligations, obtain additional financing and
maintain the liquidity of the Company, it was decided by Management to sell the
Company's entire equity interest in DBE. On February 18, 1997, the Company, as
described above, entered into the Peacetime Agreement whereby it disposed of
100% of its claim of 145,745 shares of DBE common stock representing 14.594% of
the outstanding DBE common stock.
RESULTS OF OPERATIONS
The year ended February 28, 1997 Compared to the year ended February 29, 1996
TELECOMMUNICATION REVENUE - The Company earns all of its telecommunications
revenue from (i) providing direct-dial services for international long distance
calls to a select group of 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 $1,411,148 from $2,162,641
for the year ended February 29, 1996 to $751,493 for the year ended February 28,
1997. This decrease in revenue is due primarily to the Bulgarian Telephone
Company ("BTC") unilaterally terminating the Company's Joint Activity Agreement,
without prior notice or cause, on July 8, 1996. On that date the BTC
disconnected Sector BG's digital link to international carrier services, thus
suspending the majority of the services provided by the Company to its
customers. As such, no revenue was earned by the Company from its customers from
outgoing international long distance calls during the period July 8, 1996
through February 14, 1997 when the new JAA went into effect. During the period
that the digital link was not in operation, the Company continued to receive
revenue from some of its customers through non-carrier based shared revenue
agreements.
The Company expects that the new operating agreement with the BTC will result in
revenues increasing to levels experienced prior to the majority of its services
being discontinued.
SOFTWARE SALES AND MAINTENANCE - Effective August 31, 1996, the Company began
recording the sales and maintenance revenue of its majority 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 period ended February 28, 1997, the Company recorded $507,220 in
software sales and maintenance, net of payments to third party distributors,
generated exclusively by its 80% owned subsidiary, Histech as follows:
Software Sales and Maintenance...................$ 1,367,220.
Deferred Software Maintenance......................(860,000.)
---------
Total Recognized Revenue...........................$ 507,220.
==========
Histech utilized the services of software distributors for the sales of its
products in geographic regions which it has no sales force. During the period
ended February 28, 1997, approximately 58% of sales were generated by software
distributors.
COSTS OF SALES - The majority of the Company's costs of sales for the year ended
February 28, 1997
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relate to costs associated with telecommunication revenues as shown below.
Year Ended
February 28 February 29
1997 1996
Sector BG / Global $ 726,945 $ 2,076,845
Histech 169,226 --
------- ----------
Total $ 896,171 $ 2,076,845
========= ===========
Sector BG's costs of sales decreased by $1,349,240 from $2,076,845 for the year
ended February 29, 1996 to $726,945 for the year ended February 28, 1997. This
decrease is due primarily to the BTC unilaterally terminating Sector BG's Joint
Activity Agreement on July 8, 1996 which disconnected Sector BG's digital link
to international carrier services.
Costs of sales related to software products and maintenance are comprised
primarily of commissions and distribution payments. These costs were 34% of
software sales and maintenance revenue for the period ended February 28, 1997.
Software Development Costs - Software development costs consists primarily of
salaries, related benefits, consultants fees and other costs. Histech has
incurred approximately $327,000 of software development costs in fiscal 1997 of
which $206,000 was incurred subsequent to Histech being acquired by the Company
and prior to the period ending date of February 28, 1997.
The increase in costs during the period ended February 28, 1997 over costs
incurred prior to the acquisition of Histech by the company is primarily
attributable to increased staffing to support the development of Histech's new
distributed system management product, HISmon, and the continued improvement
(i.e. new versions) of existing products. The Company believes that a
significant level of software development costs will be required to remain
competitive and expects such costs will increase in the future.
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.
Year Ended
February 28 February 29
General & Administrative 1997 1996
---- ----
Sector BG / Global $ 453,995 $ 658,113
Histech 1,433,369 -
Sector Communications 1,177,504 -
----------- ---------
Total $ 3,064,868 $ 658,113
=========== =========
Only the costs of Sector Communications, Inc. incurred since the it acquired
Sector BG on June 18, 1996 in a reverse acquisition are included in the
accompanying financial statements.
General and administrative costs at Sector BG/Global declined dramatically for
the year ended February 28, 1997 compared to the year ended February 29, 1996.
This decline was due primarily to additional costs incurred by Sector BG/Global
related to start up operations, marketing, U.S. based administrative costs and
other costs. Management expects that Sector BG's general and administrative
costs, not taking into consideration any expansion of the current network, to
remain at current levels.
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
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believes that as new products are introduced into the market in the future,
significant marketing costs will be incurred to successfully promote these
products.
General and administrative costs for Sector for the period ended February 28,
1997 include approximately $180,000 of nonrecurring consulting fees,
professional fees and employee severance payments. Management expects Sector's
general and administrative costs, exclusive of the addition of new employees and
of the above non-recurring costs, to remain at current levels.
Interest Expense - Interest expense for the year ended February 28, 1997
remained relatively consistent when compared to the year ended February 29,
1996. The loan balance has remained constant at $3,181,588 since the final draw
of $100,000 in May of 1995. During these periods, the Company incurred interest
expense primarily related to the loan payable described in note 11 to the
financial statements for the development of Sector BG/Global's
telecommunications network and start-up operations.
In connection with the acquisition of Global, the Company entered into a Debt
Repayment Agreement under which the Company assumed and agreed to pay in full
the debt, which was to be due and payable-in-full three years from the closing
date of the Stock Purchase Agreement. This Agreement also granted the Company
the option to repay this debt in full, at any time on or prior to the maturity
date, by the issuance of three million shares of unregistered common stock of
the Company to the note holder. Pursuant to the Peacetime Agreement described
above, the debt was canceled effective February 28, 1997.
The Company expects that interest expense may increase in the future to the
degree it continues to borrow funds in order to implement its capital
expenditure plans.
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 $454,347 during
the period ended February 28, 1997. No comparable costs for such activities are
shown in the statement of operations for the year ended February 29, 1996.
During 1995, the Company did 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 Sector BG/Global and not of Sector,
formerly Aurtex. The reader is referred to the Company's February 29, 1996
10-KSB for details concerning exploration costs incurred during its year ended
February 29, 1996. The Company incurred approximately $471,000 in total
exploration costs during the year ended February 28, 1997, of which
approximately $17,000 was incurred prior to the reverse acquisition of Sector
BG, and as such is not shown in the statement of operations as expense. In
addition, previously capitalized costs related to the Vienna Project in the
amount of $100,000 were expensed during the period.
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 - During the summer of 1996, a modest drilling program was
completed by the Company under the direction of the Lodestone Group for the
purpose of evaluating the Webfoot sector of the Company's Vienna Property. Three
diamond core exploration holes were drilled. These exploration holes averaged
500 feet in length and cut the vein system approximately 250 feet beneath the
surface.
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Several long intercepts of ore grade resulted (the best was 113 ft of 0.071
ounces of gold per ton), however, metallurgical investigation is needed to
determine whether this ore is economically minable. The Company relinquished its
option rights with respect to the Vienna property effective May 15, 1997.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended February 28, 1997, the Company financed its operations and
acquisitions primarily through (i) funds it received from the sale of 983,690
shares of its common stock in offshore private placements in accordance with
Regulation S of the Securities Act of 1933 for net sales proceeds of $750,000,
(ii) from the sale of 1,671,852 shares of Northfield Minerals Inc. common stock
for $2,080,000 as described in note 7 to the financial statements and from an
offshore private placement, described in note 10 to the financial statements, in
which it sold $1,050,000 of 10% convertible debentures for net proceeds of
$911,745.
The Company is currently experiencing negative cash flow from operations but
management believes, that with the reinstatement of full communications services
in Bulgaria and increased sales by Histech, that operating cash flow will
improve. In October 1996, the Company received $911,745 from debenture
financing, most of which was used by the Company to complete the acquisition of
Histech ($300,000), provide additional investment to DBE ($200,000) and make a
payment to the BTC ($300,000). Even with these funds, the addition and projected
improvements in operations and cash flows from Sector BG 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, and the $1MM financing described above, 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. The Company previously received a $5,500,000 commitment, under
which it has received $1,250,000, including $500,000 received on January 17,
1997 as described below. The Company anticipates receiving no additional funding
from this commitment. On January 17, 1997, the Company entered into two funding
agreements, one of which modified the terms of the $200,000 unsecured promissory
note described above. Under these new agreements, the Company received an
additional $500,000, canceled the unsecured promissory note for $200,000 and
issued two new promissory notes in the amount of $350,000 each. These new
promissory notes were secured by the Company's ownership interest in Histech,
bore interest at 8% and were due on January 14, 1998. These notes were canceled
pursuant to the Peacetime Agreement as described above.
Pursuant to the Peacetime Agreement described above, Peacetime canceled and
discharged all of the outstanding debt that was assumed by the Company,
including all outstanding principal and accrued interest totaling approximately
$4,080,000.
The Company had no commitments for material capital expenditures as of February
28, 1997.
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FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. There are certain important
factors that could cause results to differ materially from those in the
forward-looking statements contained in the above discussion. Among such
important factors are (i) the timely creation of versions of the Company's
products for the Microsoft Windows NT and Unix operating systems, (ii) the
impact of Microsoft Windows NT, Unix and other operating systems on the OpenVMS
market upon which the Company's current products are dependent, (iii) the
reliance on distributors to continue reselling the Company's products, (iv) the
ability of the Company to successfully expand the distribution of its products
through new and unproven channels, including resellers, integrators,
distributors and direct sales, (v) the risk associated with the Company's
engineering effort needed to develop products for Microsoft Windows NT and Unix,
(vi) the impact of competitive products and pricing, (vii) the uncertainty of
the labor market and local regulations in Switzerland, Bulgaria and the UK,
(vii) the Company's ability to hire and retain research and development
personnel with appropriate skills in a highly competitive labor market, and
(viii) such risks and uncertainties as are detailed from time to time in the
Company's SEC reports and filings, including this Form 10-KSB for the 1997
fiscal year.
In addition to the factors described above, factors that may contribute to
future fluctuations in quarterly operating results include, but are not limited
to: (i) development and introduction of new operating systems that require
additional development efforts; (ii) introduction or enhancement of products by
the Company or its competitors; (iii) changes in pricing policies of the Company
or its competitors; (iv) increased competition; (v) technological changes in
computer and telecommunications systems and environments; (vi) the ability of
the Company to timely develop, introduce and market new products and services;
(vii) quality control of products and services sold; (vii) market readiness to
deploy systems management products for distributed computing environments; (ix)
market readiness to deploy new telecommunications services; (x) market
acceptance of new services, products and product enhancements; (xi) customer
order deferrals in anticipation of new products and product enhancements; (xii)
the Company's success in expanding its sales and marketing programs; (xiii)
personnel changes; (xiv) foreign currency exchange rates; (xv) mix of products
sold; and (xvi) general economic conditions
The Company's future revenue will also be difficult to predict. Accordingly, any
significant shortfall of revenue in relation to the Company's expectations or
any material delay of customer orders would have an immediate adverse effect on
its business, operating results and financial condition. As a result of all of
the foregoing factors, Sector believes that period-to-period comparisons of the
Company's results of operations are not and will not necessarily be meaningful
and should not be relied upon as any indication of future performance
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL. In the future, the Company
will be required to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis and to expand, train and
manage its employee work force. There can be no assurance that the Company will
be able to effectively manage such growth. Its failure to do so would have a
material adverse effect on its business, operating results and financial
condition. Competition for qualified sales, technical and other qualified
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain additional highly qualified employees in
the future. If the Company is unable to hire and retain such personnel,
particularly those in key positions, its business, operating results and
financial condition would be materially adversely affected. The Company's future
success also depends in significant part upon the continued service of its key
technical, sales and senior management personnel. The loss of the services of
one or more of these key employees could have a material adverse effect on its
business, operating results and financial condition. Additions of new and
departures of existing personnel, particularly in key positions, can be
disruptive and can result in departures of existing personnel, which could have
a material adverse effect on the Company's business,
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operating results and financial condition
Uncertainty in Developing Products for New Operating Systems. Sector's products
operate primarily on the OpenVMS operating system. Sector's current product
development activities are primarily directed towards developing new products
for the Windows NT and UNIX operating systems, developing enhancements to its
current products and porting new products and enhancements to other operating
systems. Sector has made and intends to continue to make substantial investments
in porting its products to new operating systems and the Company's future
success will depend on its ability to successfully accomplish such ports.
The process of porting existing products and product enhancements to, and
developing new products for, new operating systems requires a substantial
capital investment, the devotion of substantial employee resources and the
cooperation of the owners of the operating systems to which the products are
being ported or developed. For example, the added focus on porting and
development work for the Windows NT market has required, and will require the
Company, to hire additional personnel with expertise in the Windows NT
environment as well as devote its engineering resources to these projects. The
diversion of engineering personnel to this area may cause the Company to be
delayed in its other product development efforts. Furthermore, operating system
owners have no obligation to assist in these porting or development efforts, and
may instead choose to enter into agreements with other third party software
developers or internally develop their own products. In particular, the failure
to receive a source license to certain portions of the operating system, either
from the operating system owner or a licensee thereof, would prevent the Company
from porting its products to or developing products for such operating system.
There can be no assurance that the Company's current or future porting efforts
will be successful or, even if successful, that the operating system to which
the Company elects to port to or develop products will achieve or maintain
market acceptance. The failure of the Company to port its products to new
operating systems or to select those operating systems that achieve and maintain
market acceptance could have a material adverse effect on the Company's
business, operating results and financial condition
Risks Associated With International Operations. International revenue (from
sales outside the United States and Canada) accounted for a significant
percentage of Sector's total revenues for 1997. The Company believes that its
success depends upon continued expansion of its international operations. Sector
currently has sales offices in Bulgaria, Switzerland and Benelux and product
development groups in Switzerland and the UK. Sector has resellers in North
America and Europe. International expansion may require the Company to establish
additional foreign offices, hire additional personnel and recruit additional
international resellers. This may require significant management attention and
financial resources and could adversely affect the Company's operating margins.
To the extent the Company is unable to effect these additions efficiently and in
a timely manner, its growth, if any, in international sales will be limited, and
its business, operating results and financial condition could be materially and
adversely affected. There can be no assurance that the Company will be able to
maintain or increase international market demand for its products
As of February 28, 1997, Sector had engineers and contractors employed by its
Swiss subsidiary located in Zurich and London who perform certain product
development work. The Company's Bulgarian subsidiary operates autonomously from
Sofia. These international operations subject Sector to a number of risks
inherent in developing products outside of the United States, including the
potential loss of developed technology, imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations and lower levels of intellectual property protection.
The Company's international business will also involve a number of additional
risks, including lack of acceptance of localized products, cultural differences
in the conduct of business, longer accounts
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receivable payment cycles, greater difficulty in accounts receivable collection,
seasonality due to the slow-down in European business activity during the
Company's third fiscal quarter, unexpected changes in regulatory requirements
and royalty and withholding taxes that restrict the repatriation of earnings,
tariffs and other trade barriers, and the burden of complying with a wide
variety of foreign laws. The Company's international sales will be generated
primarily through its international distributors and are expected to be
denominated in local currency, creating a risk of foreign currency translation
gains and losses. To the extent profit is generated or losses are incurred in
foreign countries, the Company's effective income tax rate may be materially and
adversely affected. In some markets, localization of the Company's products is
essential to achieve market penetration. The Company may incur substantial costs
and experience delays in localizing its products, and there can be no assurance
that any localized product will ever generate significant revenue. There can be
no assurance that any of the factors described herein will not have a material
adverse effect on the Company's future international sales and operations and,
consequently, its business, operating results and financial condition
The Company's future financial performance will depend in large part on the
continued growth in the number of companies adopting systems management
solutions for their client/server computing environments. There can be no
assurance that the market for storage management software and services will
continue to grow. If the systems management software and services market or the
long-distance access market fails to grow or grows more slowly than the Company
currently anticipates, or in the event of a decline in unit price or demand for
the Company's systems management products or telecommunications services, as a
result of competition, technological change or other factors, the Company's
business, operating results and financial condition would be materially and
adversely affected. During recent years, segments of the computer industry have
experienced significant economic downturns characterized by decreased product
demand, production over capacity, price erosion, work slowdowns and layoffs. The
Company's financial performance may, in the future, experience substantial
fluctuations as a consequence of such industry patterns, general economic
conditions affecting the timing of orders, and other factors affecting capital
spending. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, operating results and financial
condition
Rapid Technological Change and Requirement for Frequent Product Transitions. The
market for the Company's products is characterized by rapid technological
developments, evolving industry standards and rapid changes in customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render the Company's existing products obsolete and unmarketable. As a result,
the Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce in
a timely manner, new products that keep pace with technological developments and
emerging industry standards. Customer requirements include, but are not limited
to, product operability and support across distributed and changing
heterogeneous hardware platforms, operating systems, relational databases and
networks. For example, as certain of the Company's customers start to utilize
Windows NT or other emerging operating platforms, it will be necessary for the
Company to enhance and port its products or develop new products to operate on
such platforms in order to meet these customers' requirements. There can be no
assurance that the Company's products will achieve market acceptance or will
adequately address the changing needs of the marketplace or that the Company
will be successful in developing and marketing enhancements to its existing
products or new products incorporating new technology on a timely basis. Sector
has in the past experienced delays in product development, and there can be no
assurance that the Company will not experience further delays in connection with
its current product development or future development activities. If the Company
is unable to develop and introduce new products, or enhancements to existing
products, in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition will be materially and adversely affected. Because the Company has
limited resources, the Company must restrict its product development efforts and
its porting efforts to a
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relatively small number of products and operating systems. There can be no
assurance that these efforts will be successful or, even if successful, that any
resulting products or operating systems will achieve market acceptance
The Company may also be subject to additional competition due to the development
of new technologies and increased availability of domestic and international
transmission capacity. For example, even though fiber-optic networks, such as
that of the Company, are now widely used for voice and data transmission, it is
possible that the desirability of such networks could be adversely affected by
changing technology. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by the Company. The Company cannot predict
which of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The Company's
success depends upon its proprietary technology. The Company will rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements to establish and protect its proprietary
rights. The Company does not have any patents material to its business and has
no patent applications filed. As part of its confidentiality procedures, the
Company will generally enter into non-disclosure agreements with its employees,
distributors and corporate partners, and license agreements with respect to its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. Policing unauthorized use of the
Company's products is difficult and although the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem. The Company will make source code
available for certain of its products and the provision of such source code may
increase the likelihood of misappropriation or other misuses of the Company's
intellectual property. In selling its products, the Company will also rely in
part on "shrink wrap" licenses that are not signed by licensees and, therefore,
may be unenforceable under the laws of certain jurisdictions. In addition,
effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. There can be no assurance that the Company's
protection of its proprietary rights, including any patent that may be issued,
will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
any patents issued to the Company or other intellectual property rights
Sector is not aware that any of its products infringes the proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim such infringement by the Company with respect to current or future
products. The Company expects that software product developers will increasingly
be subject to such claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in the
industry segment overlaps. Any such claims, with or without merit, could result
in costly litigation that could absorb significant management time, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Such claims might require the Company to enter into royalty
or license agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Combined Company or at all, which could
have a material adverse effect upon the Company's business, operating results
and financial condition.
Page 31
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Independent Accountants' Report ................................... 33
Financial Statements
Balance Sheets................................................ 34
Statements of Operations...................................... 35
Statements of Stockholders' Equity............................ 36
Statements of Cash Flows...................................... 37
Notes to Financial Statements................................. 39
Page 32
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SECTOR COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheet of SECTOR
COMMUNICATIONS, INC. of February 28, 1997 and February 29, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SECTOR
COMMUNICATIONS, INC. as of February 28, 1997 and February 29, 1996, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 18, 1997
Page 33
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 80,096 $ 22,429
Accounts Receivable, net of provision for
doubtful accounts of $50,678 and $-0- 618,845 348,427
Marketable Securities (Note 9) 21,762 -
Related Party Receivables (Note 5) 32,198 -
Receivable on Sale of Securities (Note 14) 1,000,000 -
Notes Receivables (Note 6) 143,110 -
Prepaid Expenses and Deposits 117,426 23,840
------------- --------------
Total Current Assets 2,013,437 394,696
------------ -------------
PROPERTY AND EQUIPMENT (Note 4) 2,170,846 1,975,797
Accumulated Depreciation (1,060,696) (569,939)
------------ ------------
Net Book Value 1,110,150 1,405,858
------------ -----------
OTHER ASSETS
Intangible Assets, net (Note 8) 5,350,447 -
Capitalized Mining Claim Costs 1,036,523 -
Deposits 41,953 -
------------- ---------------
Total Other Assets 6,428,923 -
------------- ---------------
TOTAL OTHER ASSETS $ 9,552,510 $ 1,800,554
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,218,867 $ 826,382
Short-Term Borrowing (Note 9) 12,028 -
Deferred Revenue 449,254 -
Due to Related Parties 474,021 -
-------------- ---------------
Total Current Liabilities 2,154,170 826,382
Rent Deposit 12,248 -
Loan Payable (Note 11) - 3,774,426
---------------- ------------
TOTAL LIABILITIES 2,166,418 4,600,808
------------- ------------
Commitments and Contingencies (Note 17)
STOCKHOLDERS' EQUITY (Note 12)
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 44,898 300
Additional Paid-in Capital 13,116,354 -
Retained Deficit (5,658,196) (2,581,889)
Cumulative Foreign Currency Translation Adjustment (116,964) (218,665)
-------------- -------------
Total Stockholders' Equity 7,386,092 (2,800,254)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,552,510 $ 1,800,554
============= ============
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
Page 34
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
---- ----
<S> <C> <C>
REVENUE
Telecommunication Revenue $ 751,493 $ 2,162,641
Software Sales & Maintenance 507,220 -
------------ -------------
1,258,713 2,162,641
COST OF SALES 896,171 2,076,485
------------ -----------
GROSS PROFIT 362,542 86,156
------------ -------------
OPERATING EXPENSES
Gold Exploration Costs 554,347 -
Software Development Costs 205,834 -
Compensation Expense Related to
Stock Grants (Note 12) 407,916 -
Sales, General & Administrative 2,978,034 658,113
----------- ------------
Total Operating Expenses 4,146,131 658,113
----------- ------------
Loss From Operations (3,783,589) (571,957)
----------- ------------
OTHER INCOME (EXPENSE)
Interest Expense (341,115) (356,348)
Other Income (Expense) 37,084 (1,184)
Impairment of Claim Costs (1,036,500) -
Other Fees & Charges (Note 15) (236,636) -
Foreign Exchange Gain (Loss) (14,083) 5,871
------------ -------------
Total Other Income (Expense) (1,591,250) (351,661)
----------- ------------
Loss Before Provision for Income Taxes and
Extraordinary Item (5,374,839) (923,618)
Provision for Income Taxes - -
------------- --------------
Loss Before Extraordinary Item (5,374,839) (923,618)
Extraordinary Item
Gain on Extinguishment of Debt
(Net of Income Tax Benefit of $0) (See Notes 11 and 14) 2,298,532 -
----------- --------------
Net Loss $(3,076,307) $ (923,618)
=========== ==============
Loss Per Share:
Loss Before Extraordinary Item $ (0.19) $ (0.11)
Extraordinary Item 0.08 -
-------------- ----------------
Net Loss Per Share $ (0.11) $ (0.11)
============== ===============
Weighted Average Common Shares Outstanding 28,209,462 8,293,233
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
Page 35
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
-------------------- Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustments Total
------ ------ ------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,000 $ 300 $ - $(2,489,883) $ (154,780) $(2,644,363)
Translation Adjustments (63,885) (63,885)
Net Loss - - - (92,006) - (92,006)
----------- ------------ --------- ------------ ------------- ----------
Balance, February 29, 1996 1,000 300 - (2,581,889) (218,665) (2,800,254)
Restatement of Stockholders' Equity
Due to the Acquisition of Global
Communications Group, Inc. 23,637,540 23,339 3,879,325 - - 3,902,664
----------- ------------ --------- ------------ ------------- ----------
Restated Balance,
February 29, 1996 23,638,540 23,639 3,879,325 (2,581,889) (218,665) 1,102,410
Reverse Stock Split and
Stock Dividend (14,638,540) (14,639) 14,639 - - -
Common Stock Issued in the
Acquisition of:
Global Communications Group, Inc. 17,000,000 17,000 (17,000) - - -
HIS Technology AG and
Mountain Software AG 12,808,529 12,809 7,088,385 - - 7,101,194
Sale of Common Stock in an
Offshore Private Placement 983,736 984 749,016 - - 750,000
Issuance of Restricted Stock
to Certain Officers, Directors
and Employees 933,332 933 406,983 - - 407,916
Exercise of Stock Purchase Warrant 76,147 76 60,440 - - 60,516
Exercise of Stock Option 23,530 23 14,683 - - 14,706
Conversion of Debentures 4,072,792 4,073 919,883 - - 923,956
Translation Adjustments - - - - 101,701 101,701
Net Loss - - - (3,076,307) - (3,076,307)
----------- ------------ --------- ------------ ------------- ----------
Balance, February 28, 1997 44,898,066 $ 44,898 $13,116,354 $(5,658,196) $(116,964) $ 7,386,092
=========== ============ ========== ============ ============== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
Page 36
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,076,307) $ (923,618)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 665,643 378,913
Compensation Portion of Restricted Stock Grants 407,916 -
Reserve for Bad Debt 119,000 -
Gain on Extinguishment of Debt (2,298,532) -
Impairment of Claim Costs 1,036,500 -
Write Off of Lease Cost 100,000 -
Change in Assets and Liabilities, Net
of Effect of Acquisitions:
(Increase) Decrease in Assets
Accounts Receivable (113,639) (114,608)
Repayment of Related Party Receivable 37,591 -
Prepaid Expenses and Deposits (47,846) (16,635)
Receivable on Sale of Securities (1,000,000) -
(Decrease) Increase in Liabilities
Accounts Payable 120,973 141,313
Related Party Payable 374,598 -
Deferred Revenue 449,254 -
Accrued Interest on Loan Payable 305,574 356,348
Rent Deposit 12,248 -
------------ ----------
Net Cash Used By Operating Activities (2,907,027) (178,287)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (6,537) (124,381)
Proceeds From the Sale of Marketable Securities 2,930,000 -
Payment for the Acquisition of Histech (1,200,000) -
Payment for the Acquisition of Sector AG (12,000) -
Cash Balances of Histech and Mountain 36,587 -
Cash Balance of Sector Received in the Reverse Acquisition 62,022 -
Loan Provided to Atcall (262,110) -
Proceeds from Loan Payable - 100,000
Proceeds from Short-Term Borrowing 986,259 -
Repayment of Short Term Borrowing (300,000) -
Payment for the Investment in DBE (1,050,000) -
----------- ------------
Net Cash Provided by Investing Activities 1,184,221 (24,381)
----------- ------------
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
Page 37
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
February 28, February 29,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the Sale of Convertible Debentures 911,745 -
Proceeds from the Exercise of Warrants 60,516 -
Proceeds from the Sale of Common Stock 750,000 -
------------ ------------
Net Cash Provided by Financing Activities 1,722,261 -
----------- ------------
Effect of Exchange Rate Changes on Cash 58,212 120,339
------------- ------------
Net Increase (Decrease) in Cash 57,667 (82,329)
Cash - March 1 22,429 104,758
------------- ------------
Cash - February 28, $ 80,096 $ 22,429
============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ 333 $ 447
============= =============
Taxes $ - $ -
============= ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Common stock totalling 4,072,792 shares was issued in conversion of net debt
proceeds of $911,745.
Common stock totalling 29,808,529 shares was issued in connection with the
acquisition of subsidiaries.
Common stock totalling 933,332 shares was issued as compensation to employees.
Debt aggregating approximately $4,780,000 was cancelled in connection with the
sale by the Company of certain of its investments.
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
Page 38
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 1 - NATURE OF OPERATIONS
The Company, incorporated on March 19, 1990 in the state of
Nevada, and its subsidiaries are currently engaged primarily
in the telecommunications and computer software development
and sales industries. The operating activities of the Company
are based in the countries of Bulgaria and Switzerland.
Prior to changing its corporate strategy, the Company had
been involved in the business of gold exploration and
development and was a development stage enterprise as defined
by Statement of Financial Accounting Standards No. 7
"Development Stage Enterprises".
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
On June 18, 1996, Sector Communications, Inc. ("Sector"),
formerly Aurtex, Inc., acquired all of the outstanding
capital stock of Global Communications Group, Inc. ("Global")
as described in Note 3. For accounting purposes, this
acquisition has been treated as a recapitalization of Sector
with Global as the acquirer in a reverse acquisition.
The consolidated balance sheet as of February 28, 1997 and
the consolidated statements of operations, stockholders'
equity and cash flows for the year ended February 28, 1997
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 statements of
operations and cash flows for the year ended February 29,
1996 reflect the results of operations of only Global.
The equity section of the February 29, 1996 balance sheet has
been restated, as required by purchase accounting in a
reverse acquisition to reflect the par value of Sector's (the
legal acquirer) outstanding common stock and the accumulated
deficit of Global (the accounting acquirer). The remaining
amount, totaling $3,879,325, was offset to additional paid in
capital.
b) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
c) Deferred Revenue
The Company bills in advance for software maintenance
contracts. Revenue is recognized as earned over the life of
the contracts. Unearned revenue, net of related commission
expense, is shown in the financial statements as deferred
revenue.
Page 39
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 2 - NATURE OF OPERATIONS (Continued)
d) Property and Equipment
Property and equipment are stated at cost. Expenditures for
maintenance, repairs and renewals are charged to expense,
whereas major additions are capitalized. The cost and
accumulated depreciation of assets retired, sold or otherwise
disposed of are eliminated from the accounts and resulting
gains or losses, if any, are reflected through the statement
of income. Property and equipment includes assets covered by
capital leases with corresponding obligations recorded under
debt.
Depreciation is computed over the estimated useful lives
using the straight-line method.
e) Use of Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting standards
required the Company's management to make estimates and
assumptions that affect the amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
f) Foreign Currency Translation
In accordance with the provision of Statement of Accounting
Standards 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 the use of historical
exchange rates to translate nonmonetary items and current
exchange rates to translate monetary items. The effect of
exchange rate changes in highly inflationary economies is
reflected in net loss.
g) Goodwill
Goodwill represents the cost in excess of fair market value
of net assets acquired and also the costs related to the
acquisition of intellectural property and distribution
rights. Costs in excess of fair market value are being
amortized using the straight-line method over twenty years.
Costs related to the intellectural property and distribution
rights are being amortized using the straight-line method
over five years.
Page 40
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 2 - NATURE OF OPERATIONS (Continued)
h) Capitalized Mining Claim Costs
Prior to the change in the Company's corporate strategy, the
Company capitalized all costs directly associated with
acquisition, exploration and development of specific
properties until the land area of interest to which these
costs related are put into operation, or when the property is
sold or abandoned, or when an impairment in value has been
determined.
i) Loss Per Share
Loss per share has been calculated based upon the weighted
average number of shares outstanding and does not include the
shares issuable on exercise of the outstanding options or
warrants, since such inclusion would be anti-dilutive.
j) Income Taxes
Income taxes are provided for based on the liability method
of accounting pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". The
liability method requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of temporary differences between the reported
amount of assets and liabilities and their tax bases.
k) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" encourages, but
does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
l) Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", was issued
(SFAS No. 121). SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has
adopted this statement and has determined that an impairment
loss needs to be recognized for its capitalized mining costs.
m) Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued a new statement titled "Earnings Per Share" (SFAS No.
128). This statement is effective for both interim and annual
periods ending after December 15, 1997 and specifies the
computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common
stock or potential common stock. After the effective date,
all prior-period EPS data presented shall be restated to
conform with the provisions of SFAS No. 128.
Page 41
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 3 - ACQUISITIONS
During the year ended February 28, 1997, in addition to the
acquisition of 100% of the capital stock of Global, the
Company also purchased 100% of the outstanding capital stock
of Sector Communications AG ("Sector AG"), effectively
acquired 80% of HIS Technologies AG ("Histech") and acquired
100% of Mountain Software AG ("Mountain"). On February 28,
1997, the Company disposed of 20% of HIS Technologies AG (25%
of its holdings). (See Note 14).
Global Communications Group, Inc.
On June 18, 1996, the Company acquired 100% of the
outstanding common stock of Global Communications Group, Inc.
("Global") in exchange for the issuance of 17,000,000 shares
of unregistered Company common stock to the shareholders of
Global. As a result of the completion of the share exchange,
a change in the control of the Company occurred and the
shareholders of Global acquired the beneficial ownership of
approximately 57% of the issued and outstanding shares of the
Company's common stock. Of the 17,000,000 shares, 8,225,000
were issued in accordance with the provisions of Regulation S
of the Securities Act of 1933.
In anticipation of the above acquisition, on June 18, 1996,
the Company amended its Amended and Restated Articles of
Incorporation to make effective a one for 5.909635 reverse
split of the shares of the Company's common stock issued and
outstanding, amended its Amended and Restated Articles of
Incorporation to change the name of the Company from Aurtex,
Inc. to Sector Communications, Inc., and declared a stock
dividend of 1.25 shares of Company common stock for each
post-split share of Company common stock outstanding.
Sector Communications AG
Effective July 31, 1996, the Company acquired 100% of the
outstanding capital stock of Sector AG from Murray Services,
Ltd. ("Murray") for a cash payment of $12,000. As of the
acquisition date, Sector AG had no assets or liabilities.
Sector AG was acquired to hold the equity interests acquired
by the Company in Histech and Mountain.
As of the date of acquisition, Murray beneficially owned
1,000,000 shares of the Company's common stock, representing
less than a 5% interest in the Company. These shares were
being held at that time for Murray by Telecom Partners Ltd.
("Telecom"), and were received by Telecom in connection with
the Company's acquisition of Global. A director of Sector AG
and Histech is also a director of Murray.
Page 42
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 3 - ACQUISITIONS (Continued)
HIS Technologies AG and Mountain Software AG
On August 12, 1996, the Company entered into a Definitive
Agreement with Histech, the holders of 100% of the
outstanding capital stock of Histech (the "Histech
Stockholders"), and Mountain for the purchase, though its
wholly owned subsidiary, Sector AG, of an 80% capital stock
interest in Histech, the purchase of 100% of the capital
stock of Mountain and for the eventual merger of Mountain
into Histech.
Effective August 23, 1996, Sector AG acquired 54.45% of the
issued and outstanding shares of capital stock of Histech
from two Histech Shareholders, Joan Brown and Aledo Services,
Ltd. ("Aledo") and 100% of the issued and outstanding shares
of capital stock of Mountain from Simon Brown, the sole
shareholder of Mountain, in exchange for the issuance of a
total of 9,846,154 shares and 1,712,375 shares of the
Company's common stock, respectively. Hugo Wyss, a director
of Sector AG and the Chairman of the Board of Directors of
Histech, is also a director of Aledo.
As a part of this Agreement, the Company also purchased 3,428
shares of previously unissued Histech capital stock, such
shares representing a 25.55% capital stock interest, for
$1,200,000.
The Company also issued 1,250,000 shares of common stock and
a warrant for the purchase of 1,250,000 shares of its common
stock at an exercise price of $0.79 per share, expiring three
years from the date of issue, as a fee to KAV Kapitalangleger
Verlag-AG ("KAV") for services performed in connection with
this transaction.
The shares issued above have not been registered under the
Securities Act, but were issued in accordance with Regulation
S and bear a legend to such effect. The shares issued to Joan
Brown, Aledo and Simon Brown bear additional legends limiting
their sale or transfer in accordance with the Agreement.
These shares become available for sale or transfer on a
quarterly basis, with 10% of the total shares issued
available for transfer each quarter, beginning in November
1996, until all such shares are freely tradeable.
The acquisition of Histech and Mountain were accounted for as
purchases and the excess of the cost over the fair value of
net assets acquired were $6,109,028 and $849,265,
respectively.
On February 28, 1997, the Company disposed of a portion of
its investment in Histech. (See Note 14).
Proforma Disclosure
The following table presents, on an unaudited proforma basis,
the combined results of operations of the Company as though
the acquisitions of Global, Sector AG, Histech and Mountain
occured on March 1, 1996.
Net Sales $ 1,511,124
===========
Net Loss $(1,271,463)
===========
Net Loss per Share $ (0.045)
============
Page 43
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 3 - ACQUISITIONS (Continued)
The proforma results of operations do not purport to be
indicative of the results that would have been obtained if
the combined operations had been conducted during the period
presented and is not intended to be a projection of future
results which may occur.
dbe Software, Inc.
On June 17, 1996, the Company entered into a Definitive
Investment and Option to Merge Agreement, as amended, with
dbe Software, Inc. ("DBE") for the acquisition of up to 100%
of DBE.
The agreement provided for the Company, at its option, to
acquire up to 100% of the outstanding capital stock of DBE.
The first stage provided that the Company purchase previously
unissued equity of DBE representing a 20% capital stock
interest for $1,500,000 (the "Investment"), of which
$1,100,000 had been paid during the period May 1996 through
January 16, 1997.
On January 17, 1997, the Company renegotiated its Agreement
with DBE. It converted the $1,100,000 investment made to date
in DBE into a 14.667% equity ownership interest in DBE and
agreed to waive its option to purchase any additional equity
of DBE.
On February 28, 1997, the Company disposed of its investment
in DBE (See Note 14).
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
February 28, February 29,
1997 1996
---- ----
Fibre Network $ 157,837 $ 157,837
Equipment 1,875,718 1,682,249
Furniture and Fixtures 47,223 45,643
Vehicles and Other 90,068 90,068
------------ -------------
2,170,846 1,975,797
Less: Accumulated
Depreciation (1,060,696) (569,939)
----------- ------------
$ 1,110,150 $ 1,405,858
=========== ===========
Depreciation expense for the years ended in 1997 and 1996 was
$418,117 and $378,913, respectively.
Page 44
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 5 - RELATED PARTY RECEIVABLES AND TRANSACTIONS
Related party receivables at February 28, 1997 are as
follows:
Amount due from an officer of Histech. This advance bears no
interest and is due on demand. $ 32,198
=========
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 February 28, 1997.
On January 27, 1997, the Company cancelled a note due to the
Company from a shareholder and former director in the amount
of $191,978. The Company previously established a reserve for
the full amount of this note.
NOTE 6 - 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. $ 262,110
Reserve for potential uncollectibility (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 $ 143,110
===========
</TABLE>
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.
Page 45
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 7 - INVESTMENT
During the year ended February 28, 1997, the Company sold, in
several transactions, the remaining 1,671,852 shares of
Northfield Minerals, Inc. ("NFM") it held to a shareholder of
the Company for $1,930,000. This same shareholder acquired
common stock from the Company during the year ended February
28, 1997 as described in Note 12.
Due to the acquisition of Global, as described in Note 3,
being accounted for as a reverse acquisition in the
accompanying financial statements, the gain on the sale of
the NFM common stock of $1,486,575 was accounted for as a
purchase price adjustment and a corresponding increase in
stockholders' equity.
NOTE 8 - INTANGIBLE ASSETS
<TABLE>
<S> <C>
Intangible assets at February 28, 1997 are as follows:
Intangible assets related to the acquisition
of Histech (Note 3) $ 4,286,922
Intangible assets related to the acquisition
of Mountain (Note 3) 595,959
Intellectual property and distribution rights acquired by
Histech prior to its acquisition by the Company, net of
foreign currency exchange fluctuations. 759,498
------------
5,642,379
Amortization of intangible assets and intellectual property
and distribution rights (291,932)
------------
Total $ 5,350,447
===========
</TABLE>
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 intangible assets related to the acquisition of Histech
and Mountain have been adjusted due to the disposition of a
portion of the investment. (See Note 3 and Note 14).
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.
Page 46
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 9 - SHORT TERM BORROWING
At February 27, 1997, the Company's short term borrowing
consisted of the following:
Line of credit provided to Histech by a
Swiss bank for up to approximately
$125,000 (150,000 Swiss francs), bearing
interest at 5.25%, cancelable on 30 days
notice. This line of credit is
collateralized by the Company's
marketable securities. $ 12,028
===========
NOTE 10 - CONVERTIBLE DEBENTURES
On October 13, 1996, the Company closed an offshore private
placement in accordance with Regulation S of the Securities
Act of 1933, in which it sold $1,050,000 of 10% convertible
debentures ("Debentures") for net proceeds of $911,745. This
offshore private placement was arranged by Greystone Capital,
Ltd.
The Debentures bore interest at 10% per annum and were due
and payable on August 20, 1999, if not converted earlier.
Interest was payable at the option of the Company either
quarterly in cash or at maturity in shares of the Company
common stock.
The principal amount of the Debentures, along with any
accrued interest, was convertible, at the holders option any
time 45 days after the closing date into shares of Company
common stock at a conversion price for each share of Company
stock ranging from 70.0% to 72.5% of the average closing bid
price of Company common stock for five days immediately
preceding the conversion date.
Costs of $138,255 incurred in connection with the issuance of
these debentures were being amortized over the life of the
debentures. Unamortized issuance costs were charged to
additional paid in capital as debentures were converted into
capital stock.
The persons to whom the Debentures were sold are as follows:
<TABLE>
<S> <C> <C>
UHF Endowment Ltd. $ 500,000 Liechtenstein
Paril Holding 200,000 Switzerland
Guarantee & Finance Corp. 100,000 Panama
FT Trading Company 100,000 England
AI International Corporate Holdings, Ltd. 150,000 England
------------
Total $ 1,050,000
===========
</TABLE>
As of February 28, 1997, the principal amount of all these
debentures was converted into 4,072,792 shares of freely
tradable common stock. Unamortized issuance costs of $126,044
have been charged to additional paid in capital. Accrued
interest totaling $25,928 remains unpaid as of February 28,
1997.
Page 47
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 11 - LOAN PAYABLE
Financing for the development of Global's telecommunications
network and start-up operations was provided by a financing
agreement and promissory note between Global and Peacetime
Communications, Ltd. ("Peacetime"). The note, as amended,
provided for a line of credit in the maximum principal sum of
$3,200,000, of which $3,181,588 had been drawn at February
28, 1997. The outstanding principal balance bore interest at
an adjustable rate equal to two hundred basis points plus the
prime rate as reported by the Wall Street Journal. Such rate
was adjusted on the first business day each month according
to the prime rate prevailing on the last day of the
immediately preceding week.
In connection with the acquisition of Global, the Company and
Peacetime entered into a Debt Repayment Agreement concerning
the promissory note between the Company and Peacetime. This
Debt Repayment Agreement provided for the Company to assume
and pay in full the debt to Peacetime, which was due and
payable in full three years from the closing date of the
Stock Purchase Agreement.
Pursuant to a Long Term Retirement and Funding Agreement
dated February 28, 1997, further described in Note 14,
Peacetime cancelled and discharged all of the outstanding
debt that was assumed by the Company, including all
outstanding principal and accrued interest, aggregating
approximately $4,080,000.
NOTE 12 - STOCKHOLDERS' EQUITY
Common Stock
During May 1996, the Company, in an offshore private
financing in accordance with Regulation S of the Securities
Act of 1933, issued 761,468 shares of Company common stock
for a net sales price of $500,000. The proceeds of this
financing were used to fund the Company's initial investment
in Histech described in Note 3. On July 12, 1996, the Company
sold an additional 222,222 shares of its common stock, in an
offshore private financing in accordance with Regulation S of
the Securities Act of 1933, for net sales proceeds of
$250,000. Proceeds totaling $500,000 were received from these
offerings from the same shareholder of the Company to which
the Company sold its NFM common stock described in Note 7.
Effective June 18, 1996, the Board of Directors approved the
issuance of 500,000 shares of unregistered common stock to
the Company's President pursuant to his employment agreement,
150,000 shares of unregistered common stock to each of two
employees pursuant to employment agreements, and 166,666
shares of unregistered common stock to each of two directors
of the Company. All of these shares, except those issued to
the two employees, were fully vested upon issuance. The
shares issued to the two employees vest 50,000 shares on the
date of grant, and 50,000 shares in April 1997 and 1998. In
November 1996, a stock grant for 150,000 shares, including
the vested portion, was rescinded by mututal agreement
between one of the above employees and the Company, as part
of a severance agreement. As such, the impact of these shares
is not shown in the accompanying financial statements.
On July 19, 1996, the Board of Directors approved the
issuance of 50,000 shares of unregistered common stock to a
new director of the Company along with a warrant for the
purchase of 300,000 shares.
Page 48
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
During the period December 1, 1996 to February 28, 1997,
debentures in the principal amount of $1,050,000 were
converted into 4,072,792 shares of freely tradeable common
stock. (See Note 10).
Reverse Stock Split and Stock Dividend
On May 15, 1996, the Board of Directors of the Company
adopted a resolution authorizing amendments to the Company's
Articles of Incorporation approving a reverse split of the
Company's outstanding Common Stock, par value $0.001 per
share on the basis of one new share of common stock of the
Company for each 5.909635 shares of presently outstanding
Common Stock. The Amendment was approved by written consent,
dated May 15, 1996, of the holders of approximately 52% of
the outstanding shares of the Company's common stock.
Also on May 15, 1996, the Board of Directors of the Company
adopted a resolution approving a stock dividend of the
Company's common stock on the basis of 1.25 shares of common
stock of the Company for each share of outstanding common
stock immediately after the reverse stock split described
above.
Effective June 18, 1996, the Company reverse split its common
stock one share for every 5.909635 currently outstanding
shares and issued a stock dividend of 1.25 shares of post
reverse split common stock for each share of common stock
outstanding immediately after the reverse stock split but
prior to the issuance of shares of common stock to the
shareholders of Global described in Note 3, and the grant of
unregistered stock to certain of the Company's officers,
directors and employees. The par value of the Company's
common stock and the authorized number of shares were not
changed.
Warrants
At February 28, 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 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
===========
The exercise price of outstanding warrants at February 29,
1996 was $0.30. This price was recalculated to $0.79 to give
effect to the reverse stock split and subsequent stock
dividend described above and in Note 3.
Page 49
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
On December 17, 1996, the Board of Directors extended the
expiration date of warrants for the purchase of 2,083,746
shares of Company common stock for one year, to December 31,
1997. In consideration for this one year extension, these
warrants were further amended to add a provision allowing the
Company the option, should the average closing bid price of
the Company's common stock exceed $1.25 per share for more
than five consecutive trading days, to either require the
warrant holder to exercise their warrant within sixty days of
receipt of notice from the Company of such, or allow the
Company to repurchase the warrant for $0.05 per share.
NOTE 13 - STOCK OPTION PLANS
Under the 1991 and 1994 Stock Plans, the Company can grant
incentive stock options, nonstatutory stock options, and
purchase rights to officers, key employees, consultants and
directors of the Company at a price not less than the fair
market value at the date of the grant.
In July 1995, the Board of Directors amended the 1994 Stock
Plan increasing the number of shares authorized for issuance
under such plan by 3,000,000 to 4,000,000 shares and
increased the number of shares for which options can be
granted to any one participant from 150,000 to 450,000 per
year. The adoption of both these amendments to the 1994 Stock
Plan was approved by a majority of the shareholders at the
Annual Meeting held on August 7, 1995.
At February 28, 1997, the Company has options outstanding for
the purchase of 330,000 shares under the 1994 Stock Plan.
On June 17, 1996, the Company granted to an employee an
incentive stock option for the purchase of 150,000 shares of
the Company's common stock at $1.0625 per share under the
Company's 1994 Stock Plan. Such option vested 50,000 shares
on the date of the grant, with the remaining shares vesting
50,000 shares on June 17, 1997 and 50,000 shares on June 17,
1998.
On July 14, 1996, the Company granted to an employee an
incentive stock option for the purchase of 180,000 shares of
the Company's common stock at $1.625 per share under the
Company's 1994 Stock Plan. Such option vested 60,000 shares
on the date of the grant, with the remaining shares vesting
60,000 shares on July 19, 1997 and 50,000 shares on July 19,
1998. The employee left the Company's employ prior to
February 28, 1997 and the unvested options were cancelled in
February 1997.
On February 3, 1997, the Company granted to an employee an
incentive stock option for the purchase of 700,000 shares of
the Company's common stock at prices ranging from $.375 to
$.90 per share under the Company's 1994 Stock Plan. Such
options vested 300,000 shres on the date of the grant, with
the remaining shares vesting 200,000 shares on February 3,
1998 and 200,000 shares on February 3, 1999.
On February 21, 1997, the Company granted to an employee an
incentive stock option for the purchase of 300,000 shares of
the Company's common stock at prices ranging from $.375 to
$.90 per share under the Company's 1994 Stock Plan. Such
options vested 100,000 shares on the date of the grant, with
the remaining shares vesting 100,000 shares on February 21,
1998 and 100,000 shares on February 21, 1999.
Page 50
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 13 - STOCK OPTION PLANS (Continued)
A summary of stock option transactions are as follows:
Outstanding, Beginning 150,000
Granted Under the 1994 Stock Plan at
an Exercise Price of $1.0625 Per Share 150,000
Granted Under the 1994 Stock Plan at
an Exercise Price of $1.625 Per Share 180,000
Granted Under the 1994 Stock Plan at
an Exercise Price Ranging from
$.375 to $.90 Per Share 1,000,000
Expired or Canceled Under the 1994
Stock Plan (270,000)
-----------
Outstanding, Ending 1,210,000
===========
Exercisable, Ending 510,000
===========
NOTE 14 - DISPOSITION OF ASSETS
On February 18, 1997, the Company entered into an agreement
(the "Agreement") with Peacetime Communications, Ltd., a
British Virgin Islands corporation ("Peacetime"), Emerald
Capital, Inc., a British Virgin Islands corporation
("Emerald") and Wallington Investment, Ltd., a British Virgin
Island corporation ("Wallington"), whereby the Company
canceled obligations to Peacetime, Emerald and Wallington in
the aggregate amount of approximately $4,780,000 and obtained
additional financing in the amount of $1,000,000 through the
sale of 25% of the Company's equity holdings in HIS
Technologies AG ("Histech"), a Swiss Corporation, all of the
Company's interests in DBE Software, Inc., a Delaware
corporation, ("DBE"), and 1,000,000 shares of the Company's
common stock (collectively the "Securities").
The $4,080,000 debt due to Peacetime arose when Global on one
side and Peacetime entered into the Financing Agreement
described in Note 11. The Company agreed to assume the Global
Financing debt when the Company entered into a Stock Purchase
and Exchange Agreement with the Shareholders of Global
Communications Group, Inc. A Debt Repayment Agreement among
the Company, Global Texas and Peacetime was entered into on
June 14, 1996 (the "Debt Repayment Agreement") whereby the
Company memorialized its agreement to assume to pay in full
the Global Financing Debt within three years from the closing
date of the Stock Purchase and Exchange Agreement.
The remaining debt that was discharged arose on January 21,
1997 when the Company signed Promissory Notes with Emerald
and Wallington in the amounts of $350,000 each.
Page 51
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 14 - DISPOSITION OF ASSETS (Continued)
The Company obtained 80% of the outstanding shares of Histech
in August 1996. The Company, though its wholly owned
subsidiary, Sector Communications AG, a Swiss Corporation,
entered into a Definitive Agreement dated August 12, 1996
among Histech, and certain of HIS shareholders (the "Selling
Shareholders") whereby Sector acquired a 25.55% equity
interest in Histech from Histech and an additional 54.45%
equity interest in Histech from the Selling Shareholders.
The Company obtained an interest in DBE when it entered into
a Definitive Investment and Option to Merge Agreement with
DBE in May 1996 (the "DBE Agreement") whereby the Company
advanced $1,100,000 to DBE. The DBE Agreement was amended by
a subsequent letter on January 16, 1997 whereby the Company
was to receive 145,745 shares of DBE common stock
representing a 14.594% equity stake in DBE in return for the
$1,100,000 previously advanced by the Company to DBE. In
October 1993, the Chairman and CEO of the Company personally
purchased 38,700 shares of DBE common stock.
The Securities are apportioned among Peacetime, Emerald and
Wallington as follows:
Peacetime purchased 2,417 shares of common stock of Histech,
which represents 18% of the total outstanding shares of
Histech, and has agreed to immediately make available one
million dollars ($1,000,000) (the "Additional Funding") to
the Company to draw upon on an as needed basis for a period
of six months in return for the assignment to Peacetime of
the Company's entire claim to 145,745 shares, representing
14.594% of the outstanding common stock, of DBE. The DBE
common stock has been placed into escrow pursuant to an
escrow agreement (the "Escrow Agreement") executed
simultaneously with the Agreement. The Escrow Agreement
provides that Sector shall transfer its entire claim to
145,745 shares, representing 14.594% of the outstanding
common stock, of DBE to an Escrow Agent. Upon Sector's
receipt of one million dollars, the Escrow Agent shall
transfer Sector's interest in DBE to Peacetime. In the event
that less than one million dollars is made available to
Sector, a percentage of Sector's interest in DBE which is
proportionate to the amount of capital provided to Sector
shall be delivered to Peacetime with the remainder of the DBE
interest returned to Sector.
Emerald and Wallington each is to receive 500,000 shares of
Sector Communications, Inc. common stock and 134 shares of
HIS common stock, which represents 1% of the total number of
outstanding shares of HIS. Wallington previously held 945,000
shares of the Company's common stock.
NOTE 15 - JOINT ACTIVITY AGREEMENT
The Company signed a new Joint Activity Agreement with the
Bulgarian Telecommunications Company dated February 14, 1997.
The new 10 year agreement replaces a 5 year contract (between
the BTC and the Company's wholly owned subsidiary Global
Communications Group, Inc.) that had been unilaterally
terminated by the BTC on July 8, 1996. Along with extending
the term of the Company's engagement, the new agreement,
which went into effect February 21st, also expands greatly
the type of services that the Company can provide to its
customers.
Page 52
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 15 - JOINT ACTIVITY AGREEMENT (Continued)
The Company has installed a private, high-speed fiber optic
network in Bulgaria's capital city of Sofia and now provides
international long-distance services to customers in Sofia,
Plovdiv, and other areas. Phase I of the network is already
providing switched voice traffic to a select group of luxury
hotels and resorts. Phase II will add additional fiber- optic
cable to the network and will expand the Company's service
area to the Black Sea coast.
The Company will continue to handle the daily operations for
the new joint venture from their offices in Bulgaria's
capital city of Sofia.
The Company has incurred fees and other charges related to
the termination of its service by the BTC and the non-payment
of disputed amounts due the BTC. Provision has been made for
these charges and all amounts have been settled in connection
with the signing of the new agreement.
NOTE 16 - INCOME TAXES
The components of the provision for income taxes is as
follows:
Current Tax Expense
U.S. Federal $ -
State and Local -
--------
Total Current -
--------
Deferred Tax Expense
U.S. Federal -
State and Local -
--------
Total Deferred -
--------
Total Tax Provision from Continuing Operations $ -
========
The reconciliation of the effective income tax rate to the
Federal statutory rate is as follows:
Federal Income Tax Rate (34.0)%
Deferred Tax Charge (Credit) -
Effect of Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
----------
Effective Income Tax Rate 0.0%
==========
At February 28, 1997, the Company had net carryforward losses
of approximately $12,100,000. A valuation allowance equal to
the tax benefit for deferred taxes has been established due
to the uncertainty of realizing the benefit of the tax
carryforward.
Page 53
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 16 - INCOME TAXES (Continued)
Deferred tax assets and liabilities reflect the net tax
effect of temporary differences between the carrying amount
of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and
liabilities at February 28, 1997 are as follows:
Deferred Tax Assets
Loss Carryforwards $ 4,114,000
Less: Valuation Allowance (4,114,000)
Net Deferred Tax Assets $ -
==============
Net operating loss carryforwards expire starting in 2005
through 2012.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into several noncancelable operating
lease agreements for office space. Some of these agreements
contain renewal options and/or defined rent escalation
provisions. The minimum lease payments under these lease
agreements for each of the next five years ending February 28
are as follows:
Minimum Minimum
Lease Sublease Net
Payments Payments Payments
-------- -------- --------
1998 384,318 251,825 132,493
1999 396,533 257,478 139,055
2000 383,661 242,414 141,247
2001 331,036 207,875 123,161
2002 261,641 177,740 83,901
The Company has entered into noncancelable sublease
agreements on terms similar to its original lease for office
space at its McLean, Virigina location with DBE (See Note 3
and 14) and G&S International, a company of which the
Company's president is a manager/member of, for approximately
49% and 20% of its space, respectively. At February 28, 1997
the Company has $7,598 in rent due it from G&S International.
Page 54
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 17 - COMMITMENTS AND CONTINGENCIES (Continued)
On November 8, 1996, Symark International, Inc. ("Symark")
filed a complaint against Histech and its managing director,
Robert Scherpenhuijzen, in the Superior Court of the State of
California for the County of Los Angeles. On December 3,
1996, the action was removed to the United States District
for the Central District of California. On March 21, 1997,
the District Court granted Histech's motion to dismiss the
action for improper venue on the ground that the forum
selection clause in the contract between Histech and Symark
specified the courts of the Canton of Zurich, Switzerland for
the resolution of disputes between Histech and Symark. On
April 18, 1997, Symark served notice of its appeal to the
Ninth Circuit of Appeals of the dismissal of its lawsuit. The
appeal is now pending before the Ninth Circuit.
The focus of this case thus far has been on the procedural
issue whether the case should be dismissed for improper venue
because of the forum selection clause. The Company
anticipates the appeal will be decided by approximately the
first quarter of next year.
The lawsuit arose from disputes between Histech and Symark
concerning their respective rights and obligations under the
License and Reseller Agreement dated August 1, 1995 between
them (the "Agreement"). Symark contended that Histech had
attempted to engage Symark in "unfair and unlawful acts and
practices and unfair competition" with Histech and another
distributor, Raxco, and also had made disparaging remarks to
Symark's customers. Histech's position is that Symark's
allegations are baseless, and that Symark has breached the
Agreement, primarily by failing to pay license fees and by
representing Histech's products as Symark's own. Ultimately,
Histech terminated the Agreement.
Symark seeks to recover unspecified damages and believes the
damages are in excess of $50,000. The Company strongly
believes that there is no merit to the allegations in the
Symark complaint and intends to vigorously defend itself in
this action.
NOTE 18- As described in Note 1, substantially all of the Company's
operations take place in the countries of Switzerland and
Bulgaria and the majority of its identifiable assets are
located in Bulgaria and Switzerland.
NOTE 19 - SUBSEQUENT EVENTS
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.
The Company has subsequently received $521,931 of the amount
due under the agreement described in Note 14 and expects that
the remaining amount of $478,069 will also be received.
Page 55
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL
DISCLOSURE
Pursuant to a letter dated December 9, 1996, the Company informed Stark Tinter &
Associates ("Stark Tinter") that it would no longer engage Stark Tinter as the
independent auditors to audit the Company's financial statements. The Board of
Directors unanimously approved the engagement of Merdinger, Fruchter, Rosen and
Corso, P.C. as the Company's independent auditors.
No disagreements between the Company and Stark Tinter regarding any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure occurred in connection with the audits of the years ending
February 28, 1995 and 1996, or during the period from February 28, 1996 to
December 9, 1996.
The reports of Stark Tinter on the Company's financial statements for the years
ended February 28, 1996 and 1995 were unqualified.
Merdinger, Fruchter, Rosen and Corso, P.C. has been the independent auditors for
Global Communications Group, Inc., a company acquired by the Company in June
1996, for the years ended December 31, 1995 and 1994.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table lists the names, ages, and positions of the executive
officers and directors of the Company that served during the year ending
February 28, 1997. All officers and directors have been appointed to serve until
their successors are elected and qualified. Additional information regarding the
business experience, length of time served in each capacity, and other matters
relevant to each individual is set forth following the table.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Theodore J. Georgelas 50 President, Chief Executive Officer and
Chairman of the Board of Directors
Geoffrey A. Button 48 Vice President, Chief Operating Officer
and director
Roger Hedin (resigned February 28, 1997) 36 Former Vice President and director
S. Allan Kline (resigned January 17, 1997) 76 Former outside director
Jeff Shear 55 Outside Director
</TABLE>
Theodore J. Georgelas became President and Chief Executive Officer effective
January 17, 1996, and was elected as Chairman of the Board of Directors of the
Company at that time. Mr. Georgelas has been the Manager/Member of G & S
International L.C. (developers of commercial, retail, industrial and residential
properties both domestically and internationally) for at least the last six
years. He serves on the Executive Committee and Board of United Bankshares, Inc.
and is Chairman of the Board of one of its subsidiaries, United Bank (Virginia).
He is a cofounder of a cellular telephone business in Delaware and a cofounder
of DBE Software, Inc., a software company marketing a database utility
programming tool.
Geoffrey A. Button joined Sector's board on July 19, 1996 and was appointed Vice
President and Chief Operating Officer on February 3, 1997. Prior to joining the
Company, he was an independent real estate and financing consultant. Prior to
1996, he was executive Director of Wyndham Investments Limited, a property
holding company of Allied Domecq Pension Funds. He has also been on the board of
Duke Realty Investments Inc. since 1993 and is a member of that board's audit
and compensations committees.
Roger Hedin was a director of the Company from March 31, 1993 to November 1,
1993 and again from February 16, 1995 until February 28, 1997. He also served as
vice president of the Company from January 1996 until February 28, 1997. Mr.
Hedin has been involved with private businesses in Europe for the past eight
years and prior to that was active in a corporate development division of ASEA
in Sweden.
S. Allan Kline was a founder of Aurtex, Inc. and served as a director from its
inception on March 19, 1990 until January 17, 1997. Since 1988, he has been a
director and is currently the president of Biomyne, Inc., a corporation which is
the general partner of both Biomyne North Company. He is also a general partner
of Biomyne Technology Company, which owns 100% of the capital stock of Biomyne
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Inc., and which is a limited partner in Biomyne North Company. Biomyne North
Company holds 3,049,681 shares of common stock of the Company. Mr. Kline is a
director of Xicor, Inc., a company in the semiconductor business, and was
formerly on the board of Senetek PLC, an English company engaged in sponsored
research in the life sciences and biotechnology fields.
JEFF SHEAR has been a director of the Company since March 31, 1993. Since 1988
he has been president of Shear Kershman Labs, a consulting company for new
products for food and pharmaceutical companies. He was formerly chairman and
chief executive officer of Pharmaceutical Delivery Systems, a company which
manufactured and marketed pharmaceuticals.
Subsequent to the year ending February 28, 1997, Mr. C. Donald Johnson, an
international corporate lawyer by profession, joined Sector's Board of
Directors. He is currently the President of Global Markets, Inc., an
international trade and investment company which focuses on the newly emerging
markets in South Asia and Eastern Europe. Prior to 1994, he served as a U.S.
Congressman representing the 10th District of the State of Georgia. During his
congressional tenure, Mr. Johnson's principal areas of interest included budget
reform, national security, international trade, and economic and technology
policies.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive a monthly fee of $ 2,000,
and are reimbursed for out-of-pocket expenses incurred in their capacity as
members of the Board of Directors. As part of his compensation as director, Mr.
Button received warrants, granted on July 19, 1996, to purchase 100,000 shares
of common stock at $2.25 per share, 100,000 shares at $3.00 per share and
100,000 shares at $4.00 per share.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company. Officers, directors and greater than
10% shareholders are required by the Securities and Exchange Commission to
furnish the Company with copies of all section 16(a) reports they file. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners were complied
with for the year ended February 28, 1997 and were filed in a timely manner with
the exception of one 10% shareholder, Joan Brown, who despite being notified of
the reporting requirement of Section 16, has failed to file a Form 3.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the current Chief Executive
Officer of the Company in the fiscal year ended February 28, 1997. The table
includes compensation paid to Mr. Grabowski, Mr. Silver and Mr. Schultz all of
whom also served in such capacity during the fiscal years ended February 29,
1996 and February 28, 1995. No other Executive officers of the Company received
cash compensation of salary and bonus of more than $100,000 due such fiscal year
as an executive officer.
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Summary Compensation Table
Annual Compensation Long-term Compensation
------------------- ----------------------
Restricted
Stock
Name Year Salary Bonus Awards (#) Options (#)
- ---- ---- ------ ----- ---------- -----------
Theodore Georgelas (1) 1997 $120,000 $82,500 500,000 0
President and CEO
Armin Grabowski (2) 1996 14,000 0 0 0
Former President and CEO
Douglas Silver (3) 1996 124,000 0 0 0
Former President and CEO
Trevor Schultz (4) 1996 130,150 0 0 0
Former President and CEO
- ---------------
(1) On January 17, 1996, Mr. Theodore J. Georgelas was appointed Chairman of the
Board of Directors and President and CEO of the Company. Mr. Georgelas'
annual base salary is $120,000. On June 17, 1996, upon the purchase of 100%
of the outstanding capital stock of Global Communications Group, Inc. and
completion of the reverse stock split, the Company issued to Mr. Georgelas,
in connection with his employment agreement, 500,000 fully vested shares of
post split Company common stock. None of the above shares of Company Common
Stock have been registered by the Company, however, the shares do hold
piggyback registration rights. Additionally, Mr. Georgelas received a bonus
in the form of warrants to purchase 250,000 shares of the Company's common
stock at $0.79 per share. The market value per share on the date of grant
was $1.12 yielding a net bonus of $82,500. The warrant expires July 18,
1999.
(2) Mr. Armin Grabowski, who was appointed Chairman of the Board of Directors,
President and CEO of the Company on November 22, 1995 resigned from the
Board of Directors as well as all of his positions in the Company effective
January 1, 1996 because of increased commitments in Germany.
(3) Mr. Silver's employment with the Company began on June 1, 1995. At that time
he was appointed President and Chief Executive Officer, and elected to the
Board of Directors of the Company. In connection with the appointment of Mr.
Grabowski, Mr. Silver stepped down as the Company's Chief Executive Officer
and as a director but remained President. Mr. Silver resigned as President
on December 1, 1995. In connection with Mr. Silver's resignation, the
Company entered into a Severance Agreement with him and he received payment
of $50,000 in full satisfaction of any potential severance obligations the
Company had under his Employment Agreement. This amount is included in the
above summary compensation table. The unvested portion of Mr. Silver's
outstanding stock option was canceled upon his resignation, and the vested
portion expired, unexercised on February 29, 1996.
(4) Mr. Schultz's employment with the Company began in December of 1993. He was
appointed as President and Chief Executive Officer, and elected to the Board
of Directors on January 5, 1994. On May 1, 1995, Mr. Trevor Schultz resigned
as President, Chief Executive Officer and as a Director of the Company for
personal reasons. Concurrent with Mr. Schultz's resignation, the Company
entered into a Consulting Agreement with him which provided for, among other
things, a severance payment of $104,720 on May 1, 1995, which amount is
included in the above summary compensation table, and for monthly payments
of $6,000 during the consulting period. Mr. Schultz was paid monthly
payments totaling $18,000 during the year ended February 29, 1996. The
Consulting Agreement also provided that all stock options granted to Mr.
Schultz which were not exercised on May 1, 1995 become fully exercisable and
that the Company register on a Form S-8 registration statement the common
stock issuable on the exercise of unexercised options held by Mr. Schultz.
Mr. Schultz purchased 300,000 shares through the exercise of his stock
options during the year ended February 29, 1996. The Consulting Agreement
terminated when Mr. Schultz obtained full time employment.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the Common Stock ownership information as of
February 28, 1997, and is adjusted for the reverse stock split and stock
dividend described in this document, with respect to (i) each person known to
the Company to be the beneficial owner of more than 5% of the Company's Common
Stock; (ii) each director of the Company; and (iii) all directors, executive
officers and designated stockholders of the Company as a group. This information
as to beneficial ownership was furnished to the Company by or on behalf of the
persons named. Unless otherwise indicated, each has sole voting and investment
power with respect to the shares beneficially owned.
Shares of Company Common Stock Beneficially Owned
Number of Percentage
Beneficial Owner Shares of Total
- ---------------- --------- --------
Telecom Partners Ltd. 16,000,000 (1) *
1350 Beverly Road, #115-339
McLean, VA 22102
S. Allan Kline 3,223,391 (2) 7.16%
1415 Bay Laurel Drive
Menlo Park, CA
Biomyne North Company 3,049,681 (3) 6.78%
c/o S. Allan Kline
1415 Bay Laurel Drive
Menlo Park, CA
Theodore Georgelas 851,000 (4) 1.89%
7601 Lewinsville Road
Suite 250
McLean, VA 22102
Jeff Shear 172,377 (5) *
1421 Wildhorse Parkway
Chesterfield, MO 63005
Roger Hedin 166,666 (6) *
c/o Ebbe Svensson
Henrik Smithsgatan 3
211 56 Malmo, Sweden
Geoff Button 655,000 (7) 1.46%
The Millhouse
Chicksgrove
Salisbury, Wilts SP3 6LY, UK
Joan Brown 5,384,800 11.97%
Isle of Man, UK
All Officers and Directors 4,212,723 9.36%
as a group (6 persons) (2,3,4,5,6,7)
- ------------
* - represents less than 1%.
(1) Shares received effective June 18, 1996, in exchange for 100% of the capital
stock interest in Global Communications Group, Inc. acquired by the Company
on that date. These shares were subsequently reissued to the following
persons or entities: Jeff Finley (1,000,000), Keith Finley (1,000,000),
Murray Services, Ltd. (1,000,000), Private Equity Investors, Ltd.
(1,000,000), Northern Capital Corporation, Ltd.
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(1,000,000), Azimud, Ltd. (1,000,000), Ayala Financial Holding Limited
(918,000), Dahlia Financial Limited (1,080,000), Silver Creek Investments,
Ltd. (1,188,000), Wallington Investments, Ltd. (945,000), Maroon Bell
Holding, Ltd. (1,100,000), Rover Enterprises, Ltd. (1,100,000), Western
Slopes, Ltd. (1,100,000), Brentwood Financial, Ltd. (1,100,000), Vicente
Holdings, Ltd. (1,100,000), H. E. Sheikh Faisal Alhegelan (600,000). None of
the above described persons or entities are known to the Company to be a
beneficial owner of more than 5% of the Company's Common Stock.
(2) Consists of 173,710 shares of Common Stock held directly by Mr. Kline and
3,049,681 shares of Common Stock held by Biomyne North Company on May 15,
1996. Biomyne Technology Company, of which Mr. Kline is a general partner,
is the sole shareholder of Biomyne, Inc. Biomyne Inc. is the general partner
of Biomyne North Company. Mr. Kline is the president and a director of
Biomyne, Inc. Mr. Kline was granted 166,666 shares of Common Stock effective
June 18, 1996, which grant was rescinded prior to the issuance of these
shares by mutual agreement between Mr. Kline and the Company.
(3) Biomyne North Company, a limited partnership, holds 3,049,681 shares of
Common Stock received as part consideration for the transfer of its mining
claims to the Company on August 9, 1991.
(4) Consists of 500,000 shares of Common Stock received by Mr. Georgelas on June
18, 1996; 1,000 shares purchased on June 18, 1996 and 100,000 shares
purchased on January 31, 1997 and held directly by him; and assumes exercise
of presently exercisable warrants to purchase 250,000 shares at $0.79 per
share.
(5) Consists of 166,666 shares of Common Stock received by Mr. Shear on June 18,
1996 held directly by him and the right to purchase of 5,711 shares issuable
on the exercise of a presently exercisable warrant.
(6) Consists of 166,666 shares of Common Stock received by Mr. Hedin on June 18,
1996 and held directly by him.
(7) Consists of 50,000 shares granted by the Company on July 19, 1996 and 5,000
of Common Stock purchased by Mr. Button on July 26, 1996 and held by him
directly and assumes exercise of a vested stock option to purchase 300,000
shares at $0.32 per share and the exercise of a presently exercisable
warrants, granted on July 19, 1996, to purchase 100,000 shares at $2.25 per
share, 100,000 shares at $3.00 per share and 100,000 shares at $4.00 per
share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of the date of the acquisition of Sector AG, Murray Services, Ltd. ("Murray")
beneficially owned 1,000,000 shares of the Company's common stock, representing
less than a 5% interest in the Company. These shares were being held at that
time for Murray by Telecom Partners Ltd. ("Telecom") and were received by
Telecom in connection with the Company's acquisition of Global. Mr. Hugo Wyss, a
director of both Sector AG and Histech, is also a director of Murray.
On February 18, 1997, the Company entered into an agreement (the "Peacetime
Agreement") with Peacetime Communications, Ltd. ("Peacetime"); Emerald Capital,
Inc. ("Emerald"); and Wallington Investment, Ltd. ("Wallington"), whereby the
Company canceled obligations to Peacetime, Emerald and Wallington in the
aggregate amount of approximately $4,080,000 and obtained additional financing
in the amount of $1,000,000 (or less, at the Company's discretion) through the
sale of 25% of its ownership in Histech; all of the Company's interests in DBE
Software, Inc. ("DBE"); and 1,000,000 shares of the Company's common stock.
Under this Agreement, Wallington received 134 shares of Histech common
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<PAGE>
stock (representing 1% of the total number of outstanding shares of Histech) and
500,000 shares of the Company's common stock. Wallington previously held 945,000
shares of the Company's common stock.
The Company currently subleases 49% of its leased office space to DBE at the
face rate of the lease apportioned by square footage (approximately $9,100 per
month). The Chairman and CEO of the Company owns 38,700 shares of DBE common
stock purchased in October 1993 prior to the Company's investment of $1.1M in
DBE.
On August 23, 1996, Sector AG acquired 54.45% of the capital stock of Histech
from two Histech shareholders, Joan Brown and Aledo Services, Ltd. ("Aledo"),
and 100% of the stock of Mountain from Simon Brown, the sole shareholder of
Mountain, in exchange for 9,846,154 shares and 1,712,375 shares of the Company's
common stock, respectively. The Company also purchased 3,428 shares of
previously unissued Histech shares representing a 25.55% interest for
$1,200,000. Hugo Wyss, a director of Sector AG and the Chairman of the Board of
Directors of Histech, is also a director of Aledo.
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<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K.
1. Current Report on Form 8-K dated December 13, 1996 regarding the change
in the Company's certifying accountant.
(b) EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation of the Company, as amended. (Incorporated
herein by reference to Exhibit 3.1 of the Registrant's Form 10-KSB for
the year ended February 28, 1993.)
3.2 Articles of Merger, amending the Registrant's Articles of
Incorporation. (Incorporated herein by reference to Exhibit 3.2 of the
Registrant's Form 10-KSB for the year ended February 28, 1993.)
3.3 Bylaws of the Company. (Incorporated herein by reference to Exhibit 3.3
of the Registrant's Form 10-KSB for the year ended February 28, 1993.)
10.1 1991 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Form 10-KSB for the year ended
February 28, 1993.)
10.2 1994 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 99 of the Registrant's Form S-8 Registration no. 33-76718,
dated March 18. 1994.)
10.3 Agreement for the transfer of the claims from Biomyne North Company.
(Incorporated herein by reference to Exhibit 10.2 of the Registrant's
Form 10-KSB for the year ended February 28, 1993.)
10.4 Exploration License and Option to Lease Agreement for five patented
lode claims known as the Taylor claims. (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Form 10-KSB for the year
ended February 28, 1993.)
10.5 License agreement for the technology with Biomyne Technology Company.
(Incorporated herein by reference to Exhibit 10.5 of the Registrant's
Form 10-KSB for the year ended February 28, 1993.)
10.6 Exploration license and option to purchase agreement for forty three
patented and thirteen unpatented lode mining claims , collectively
known as the Vienna Property. (Incorporated herein by reference to
Exhibit 10.8 of the Registrant's Form 10-QSB for the quarter ended
November 30, 1994.)
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10.8 Promissory Note Agreement with Mr. S. Allan Kline, Dated August 11,
1995. (Incorporated herein by reference to Exhibit 10.10 of the
Registrant's Form 10-KSB for the year ended February 28, 1995).
10.9 Employment Agreement with Mr. Theodore J. Georgelas, Dated January 15,
1996. (Incorporated herein by reference to Exhibit 10.9 of the
Registrant's Form 10-KSB for the year ended February 29, 1996)
10.10 Stock Purchase and Exchange Agreement with Global Communications Group,
Inc., Dated April 19, 1996. (Incorporated herein by reference to
Exhibit 10.10 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
10.11 Amendment No. 1 to the Stock Purchase and Exchange Agreement with
Global Communications Group, Inc. (Incorporated herein by reference to
Exhibit 10.11 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
10.12 Debt Repayment Agreement. (Incorporated herein by reference to Exhibit
10.12 of the Registrant's Form 10-KSB for the year ended February 29,
1996).
10.13 Distribution Agreement, Dated October 1, 1995, between HIS Software AG
and Raxco Inc.
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C., independent
auditors.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) to the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 29th day of May, 1997.
SECTOR COMMUNICATIONS, INC.
BY: /s/ Theodore J. Georgelas
---------------------------------
Theodore J. Georgelas, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: May 29, 1997 /s/ Theodore J. Georgelas
------------------------------------------
Theodore J. Georgelas, Chief Executive
Officer and Director
Date: May 29, 1997 /s/ Geoffrey Button
--------------------------------------------
Geoffrey Button, Vice President, Chief
Operating Officer and Director
Date: May 29, 1997 /s/ Jeff Shear
-------------------------------------------
Jeff Shear, Director
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
10.13 Distribution Agreement, Dated October 1, 1995, between HIS
Software AG and Raxco Inc.........................................XX
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.,
independent auditors............................................. XX
Page 65
Exhibit 10.13
DISTRIBUTION AGREEMENT
This Agreement, dated October 1, 1995 between
HIS Software AG
Binzstrasse 7
8045 Zurich
Switzerland
(hereafter called HIS),
and
RAXCO INC.
2440 Research Boulevard, Suite 200
Rockville, MD 20850
U S A
(hereafter called "REP")
set forth the terms and conditions by which REP is authorized to market. sell
and support specific Products in a
specific Territory.
DECLARATIONS:
HIS agrees to develop and maintain the Products to the best of its abilities and
to respond as quickly as possible to the requests and needs of REP.
REP agrees to use reasonable commercial efforts to distribute Products and
service to its customers and potential customers in a professional manner.
REP does not have the right to sublicense Products or in any way allow any
company to pay fees to REP for use of the Products without the express written
consent of HIS.
REP does not have any equity interest in HIS, its products, or ownership of the
right to Distribute Products.
DEFINITIONS:
Products: Proprietary computer software programs and related documentation
owned by HIS and specified in Schedule A.
Territory. REP is allowed to sublicense to the companies mentioned in
Schedule B to market sell and support Products in the specified
countries.
Distribute: Market, sell and support Products in the Territory.
<PAGE>
Commissions: Percentage of sales and maintenance fees kept by REP as specified
in Schedule C.
Price List: Product prices are specified in Schedule D
Quotas: Minimum sales and maintenance revenue levels that must be achieved
by REP as specified in Schedule E.
Licenses: HIS approved documents that REP customers must complete to lease,
rent or evaluate Products including but not limited to a Permanent
License, Annual Lease, Monthly Rental, Limited License, Site
License.
1. TERM
A. HIS grants REP a non-exclusive, nontransferable, non-assignable
authorization to license specified Products in the Territory. The
foregoing notwithstanding, the rights and obligations may be
kept/transferred by REP as a result of any corporate reorganization or
restructuring.
B. The term of this Agreement starts on October 1, 1995 and ends on
December 31, 1996. It can only be extended upon the written consent of
both parties.
C. This Agreement may be terminated immediately by either party through
written notice to the last known place of business for any material
breach of this Agreement by other party if such breach occurs prior to
the first anniversary of this Agreement and has not been cured within
thirty days after receipt of written notice of such breach.
D. This Agreement may be terminated by either party upon 90 days written
notice to the other party for a material breach of this Agreement
after the first anniversary , if such a breach has not been cured
within thirty days after receipt of written notice of such breach.
2. LICENSING
A. REP may use the form of License Agreement attached as Schedule F-1
(shrink-wrap) to license the Products in North America. All other
customers of Products must sign a HIS approved License Agreement. An
approved License Agreement is enclosed as Schedule F-2. License
Agreements which contain non-standard technical issues must be signed
by a Raxco and a HIS officer to be considered valid.
B. Each License Agreement shall be completely readable and shall contain
the correct data on Products, pricing and customers information.
C. REP agrees that all License Agreements for Products are the property
of HIS. REP agrees to provide HIS with one signed copy of all signed
original License Agreements and with identification of the customer
and products covered by each shrink-wrap agreement. REP may not
disclose sell or transfer these License Agreements to any other
entity.
D. REP may not sublicense or distribute Products without the express
written consent of HIS through others then those mentioned in Schedule
B.
3. PAYMENTS
<PAGE>
A. REP will remit HIS's portion of moneys received from customers of
Products to HIS within thirty days of the end of the calendar month in
which such funds are received. Failure to do so is a material breach
of this Agreement.
B. REP will pay a 10% late fee per month or portion of month on any
payments not transferred by REP to HIS with the end of the calendar
month in which such funds are received.
C. REP must pay all bank and transfer fees associated with the remitting
of money to HIS.
D. Payments shall be made in local currencies.
4. CONFIDENTIAL INFORMATION
A. REP agrees that Products are proprietary of HIS and contain trade
secrets of HIS. REP agrees to protect Products and confidential
information in its possession in the same manner as REP protects its
own confidential information and trade secrets but in no way should
protection be less than the general accepted standards for protecting
confidential information.
B. REP agrees to notify its employees, contractors and sub-distributors
that Products are proprietary to HIS and contain trade secrets of HIS.
C. Both parties agree not to disclose or cause to be disclosed, any
confidential information or proprietary information of the other
party.
D. Both parties agree that during the term of this agreement, and for one
year afterwards, they won't cowork (hire or do business in any kind of
cooperation) out of the scope of this agreement with employees or
affiliates of the other party, neither through their own operation nor
through any of their affiliates without prior consent of the other
party.
5. INDEMNITY
A. REP agrees to indemnify HIS from any and all claims. liability,
losses, costs, expenses, fees, damages, attorney fees or any other
settlements incurred by HIS arising out of the performance of REP's
undertakings pursuant to this agreement.
B. HIS agrees to indemnify REP from any and all claims, liabilities,
losses, costs, expenses, fees, damages, attorney fees or any other
settlements incurred by REP arising out of HIS's undertakings pursuant
to this agreement, including specifically any claim of patent,
copyright, trademark, trade secret or any other proprietary right of
any third party. REP will notify HIS of any such claim and cooperate
in the investigation and defense of the claim. This notification to
HIS will take place within 30 days after REP has received written
notice of such a claim.
C. Neither HIS nor REP will be liable for any lost profit, goodwill,
indirect, special or consequential damages of the other party.
6. HIS PROVIDES
A. HIS will provide REP with:
1. Executable version master tape/diskette/CD for each HIS Product.
2. Updates corrections and enhancements to Products as they become
generally available.
<PAGE>
3. Approved HIS License Agreement and License Schedule that can be
translated into the local language.
4. The necessary, amounts of technical support via telephone from its
office in Zurich, Switzerland, from 9 am to 5 p.m. local time. On
the request of HIS, REP sends printouts, dumps, traces, etc.
B. HIS warrants that the Products will operate in substantial accordance
with the Products documentation and that the Products do not infringe
any patent, copyright, trademark or trade secret or other proprietary
right of any other third party.
C. HIS agrees to make all reasonable efforts to quickly correct any and
all errors or defects REP submits to HIS in writing and after
duplication of the error or defect by HIS personnel.
D. HIS will deliver to REP two copies of all documentation for the
Products to each country mentioned in Schedule B at no charge for each
major new release of the Products. Any other copies requested by REP
must be paid by REP at HIS's costs plus shipping charges.
7. REP PROVIDES
A. As REP deems necessary REP will supply its own marketing and sales
materials at REP expense that are the same or better quality than HIS
material. REP may purchase HIS materials at HIS's cost price plus
shipping charges.
B. REP will provide Advertising, Public Relations, Direct Mail and other
Marketing efforts for Products in the Territory of professional
quality and appearance.
C. REP will pay all its own expenses for marketing, sales and support
material.
D. REP will reproduce HIS Product tapes/diskettes/CDs/documentation for
customers and prospective customers at REP expense.
E. REP will provide first level technical support to customers and
prospective customers of Products including installation assistance,
quality assurance of copies of Product tapes/diskettes/CDs,
determining customers problems and applying corrections, informing HIS
of Product errors and deficiencies, taking dumps and traces as
specified by HIS personnel and training customers personnel in the use
of the Products.
F. REP will not remove or alter HIS copyrights, tradenames and trademarks
on any and all materials, packaging and documentation for the Products
without HIS's prior written consent.
G. REP will pay all taxes, duties, bank transfers charges or any other
fees associated with the licensing of the Products.
H. REP will maintain complete and accurate records of all licenses and
fees for Products and send HIS customer names, addresses, contracts
and other important information. HIS may, audit those records in REP
offices upon 14 days written notice.
I. REP agrees not to charge any additional fees, charges, etc. in
connection with licensing and support of Products although REP may
charge separately for training, consulting or 24-hour-support. REP
shall not discount the Product from the then current Price List in
effect. Discounts for bundling more than one HIS Product together or
HIS Products together with REP's own products or for special marketing
promotions must stay in the limit of 20% of the original price
schedule. When bundling, the discount for HIS's Products may not be
greater than the ones for REP's own products. All divergent price
offers have to be agreed upon by HIS in advance by writing.
<PAGE>
J. REP agrees to do business in a professional and ethical manner.
K REP will provide HIS by the twentieth day of every month a summary of
all sales results for the previous month (including company names), a
summary of all fees collected and information on quantity and name of
Products licensed. REP will provide HIS by the twentieth of every
month a forecast of trials and licenses expected in the next ninety
days, including company, names.
L. REP agrees to send it least one of their (Agent-)personnel to the HIS
office in Zurich for annual training on the Products at REP's expense.
There will be no charge for this annual training. HIS agrees to
conduct this training at REP's offices at a central location, if there
are at least six people to be trained together. Expenses will then be
shared: Training to the point of training at HIS's expenses, local
accommodation at REP's expenses.
8. TERMINATION
A. Either party can terminate this Agreement upon thirty days written
notice to the other party as consequence of a material breach in this
agreement if such breach is not corrected within thirty days after the
other party has received such notice.
B. REP can terminate this Agreement upon ninety days written notice.
C. This Agreement can be terminated upon ninety days written notice by
HIS, if REP fails to meet Quotas as specified in Schedule E. This
Agreement can be terminated immediately if either party ceases to do
business on a regular basis is declared bankrupt or insolvent. HIS can
also immediately terminate this agreement if REP will get a new owner
which is a competitor to HIS or in any way related to a competitor. If
REP fails to meet its quota this will be regarded as a breach to this
agreement.
D. Upon termination REP agrees to:
1. Return any and all information and materials relating to HIS or
Products to the last known address of HIS and notify HIS that REP
does not have any proprietary of confidential information in its
possession.
2. Immediately transfer to HIS all outstanding moneys owned to HIS.
3. Immediately cease to represent, license, support or collect moneys
for product.
E. HIS shall reimburse REP for any materials so returned if the materials
had been previously purchased and paid for by REP and in HIS's sole
judgment the materials are current and returned in reusable condition.
REP shall take actions necessary to terminate its listing as a
distributor of HIS in any professional directories and to cancel or
not renew any continuing advertising, such as signage, yellow pages
advertising.
F. Following termination of this Agreement for any reason whatsoever, REP
shall continue to make all reasonable efforts to collect any license
fees or royalties or other amounts due with respect to sublicenses of
Listed Products or sales of publications or Seminaries effected prior
to such termination and to remit the appropriate portion of all funds
collected with respect thereto to HIS.
G. Upon termination HIS will pick up all contractual support obligations.
9. NEW PRODUCTS
New products of HIS shall be offered at first to REP for licensing in
Schedule B stipulated territories.
<PAGE>
10. CHOICE OF JURISDICTION AND CHOICE OF LAW
A. Any disputes between parties emanating from this contract or being
connected therewith, direct or indirect, shall be judged by the
competent judge according to the normal standards of competency of
Zurich, Switzerland.
B. Only the Swiss law shall be applicable to this contract.
In witness whereof, the Parties have caused this Agreement to be duly executed
on their behalf effective from the date set forth above.
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ----------------------------- ---------------------------------
Vice President Director
<PAGE>
Schedule A: Products
VMS -Product Line
HIS Professional Series
X-UAFMaestro
X-UAFAdministrator
X-Queues
X-ProcessEYE
X-SuperPassword
X-Security (Module Report)
X-Remote
X-FDM
UAFMaestro
ProcessEYE
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ----------------------------- --------------------------
Vice President Director
<PAGE>
Schedule B: Marketing Territory
The companies where REP is authorized to give sublicenses to distribute the
products are:
U S A, Canada through RAXCO INC.
2440 Research Boulevard, Suite 200
Rockville, MD 20850
USA
United Kingdom through Raxco Ltd.
Centre Court
Meridian Business Park
Leicester, LE3 2WR
Great Britain
Benelux through Raxco B. V.
Kaap Hoorndref 46
3563 AV Utrecht
The Netherlands
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ----------------------------- ----------------------------
Vice President Director
<PAGE>
Schedule C: Commissions
Definitions
Sales: License Fees for License Agreements including Permanent Licenses
(first year maintenance included), Annual Leases, Monthly Rentals
or Upgrades.
Maintenance: Maintenance Fees for second and subsequent years on Permanent
Licenses and Upgrades.
Commission Schedules:
Schedule 1: REP will gain a 65% commission on all Sales and Maintenance.
Schedule 2: REP will gain a 60% commission on Sales and a 50% commission on
Maintenance.
Flat Amount: The amount which REP has to pay (independent of
commissions) for the right to go with Schedule 1.
Schedule 1 will be in effect for an initial period of 6 months (October 1,1995
till March 31, 1996). For the calculation all reported Sales till end of March
1996 will be considered.
REP has the option to vote for continuing Schedule 1 on April 1, 1996. The
chosen option will be in effect for one year; for every subsequent year the same
choice can be made on April 1 of the then current year. Should REP at the
specified date not vote for Schedule 1, Schedule 2 will be automatically in
effect.
Should REP select the option of Schedule 1 on April 1, 1996, a Flat Amount has
to be paid to HIS in the first week of April 1996. This Flat Amount equals the
amount of Sales during the first quarter of 1996. The Flat Amount shall be
adjusted, on an agreement between both parties to smooth out single high sales
during the said quarter. Should the calculated Flat Amount not be a minimum of
$200,000, HIS reserves the right to deny the selection for Schedule 1. In that
case the initial period will be prolonged till June 30, 1996 and the amount for
the Flat Amount newly calculated, based on the sales in the second quarter of
1996.
In any subsequent year that REP selects for continuing with Schedule 1, the Flat
Amount will be newly calculated based on the average Sales quarterly result in
the preceding year. Should the new Flat Amount be higher than the previous one,
the difference of the Flat Amount has to be paid to HIS in the first week of
April of that year.
Should REP opt to switch from Schedule 1 to Schedule 2 in any subsequent year,
the paid Flat Amount will be offset from there on against money due according to
Schedule 2 in the following months.
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ----------------------------- ----------------------------
Vice President Director
<PAGE>
Schedule D: Price List
Prices are according to specific pricelists for all countries. Variations from
these prices shall be determined by mutual agreement between REP and HIS.
The pricelists will be added for USA, Canada, United Kingdom and the Benelux
states not later than November 30, 1995.
For replacements of UIS-Manager with X-UAFMaestro special promotion prices (up
to 50% on original pricelist) are granted by HIS till May 30, 1996. Maintenance
prices on such replacements will be calculated on original prices.
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ----------------------------- ----------------------------
Vice President Director
<PAGE>
Schedule E: Quotas
Quotas (minimum sales levels) for the purposes of this Agreement shall be
defined as the remittance by REP to HIS of revenue resulting from new sales,
including License Fees for Annual Leases, Monthly Rentals, Permanent Licenses,
Upgrades, and Annual Lease Fees for any License Agreement and License Schedule,
but excluding Annual Maintenance and Extended Support fees.
Period: October 1, 1995 until December 31, 1996
Quota amount: Will be mutually agreed not later than by December 15,
1995
Period: January 1, 1997 until December 31, 1997
Quota amount: Will be mutually agreed not later than by September 30.
1996
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ---------------------------- --------------------------
Vice President Director
<PAGE>
Schedule F: Licenses
See the following pages for:
F-1: Shrink-wrap Agreement
F-2: HIS License Agreement
Accepted by RAXCO INC. Accepted by HIS Software AG
Rockville, November 29, 1995 Zurich, November 29, 1995
/s/ Robert E. Nolan /s/ Jules Marilus
- ----------------------------- -----------------------
Vice President Director
<PAGE>
Schedule F-1: Shrink-Wrap Agreement
NOTIFICATION OF COPYRIGHT
THESE COMPUTER SOFTWARE PRODUCT(S) (THE "SOFTWARE") AND ALL ACCOMPANYING
DOCUMENTATION AND OTHER MATERIALS (TOGETHER, THE "PRODUCT(S)") ARE COPYRIGHT(C)
1944 BY RAXCO, INC. ("LICENSOR"). THE PRODUCT(S) ARE PROPRIETARY TO LICENSOR AND
ARE PROTECTED BY COPYRIGHT AND TRADE SECRET LAWS AND INTERNATIONAL TREATY. YOUR
RIGHT TO COPY AND USE THE PRODUCT(S) IS GOVERNED IN ALL RESPECTS BY THE
FOLLOWING LICENSE AGREEMENT.
SOFTWARE LICENSE AGREEMENT
READ THIS AGREEMENT BEFORE BREAKING THE SEAL ON THE PRODUCT MEDIA. THIS
AGREEMENT IS A LEGAL CONTRACT BETWEEN YOU (THE END USER) AND LICENSOR GOVERNING
YOUR USE OF THE PRODUCT(S). BREAKING THE SEAL INDICATES YOUR ACCEPTANCE OF THIS
AGREEMENT. IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT, RETURN THE
COMPLETE PRODUCT(S), TOGETHER WITH THE UNOPENED DISTRIBUTION MEDIA, TO THE
LICENSOR, DEALER OR RESELLER FROM WHOM YOU OBTAINED IT, WITHIN FIVE (5) DAYS
AFTER THE LICENSE DATE FOR A FULL REFUND.
LICENSE
1. LICENSOR grants you the right to install and use the Software on the Central
Processing Unit(s) ("CPU(s)") identified on the purchase order or other
documentation relating to this License Agreement. You may make only as many
copies of the Software and accompanying materials as are necessary to
install and use the Product(s) on such CPU(s). You may not install or use
the Software on additional CPUs without first obtaining an additional
license from Licensor.
2. You may not sell, transfer, sublicense, lend, rent or lease the Product(s)
to third parties or allow third parties to use the PRODUCT(S) for any
reason.
3. You may not decompile, disassemble, reverse engineer, copy, transfer, or
otherwise use the Software other than as expressly permitted by this License
Agreement.
4. LICENSOR warrants and supports the operation of the Software only with the
hardware and operating software for which it was registered, as stated in
the documentation. Use of the Software with hardware and/or operating
software other than that for which it was designed is not supported by
LICENSOR and voids the warranties set forth below.
5. Use of the Software in conjunction with any non-LICENSOR product which
decompiles the Software or in any way creates a derivative or modified copy
of the Software is not an authorized use. Such unauthorized use is not
supported by LICENSOR and voids the warranties set forth below.
6. The terms of this License Agreement shall control and take precedence over
any conflicting term of any prior agreement between Licensor and You or any
purchase order by You.
LIMITED WARRANTY/LIMITATION OF REMEDIES
LICENSOR will replace, at no charge, defective media and product materials that
are returned within 30 days of the original date of license. LICENSOR warrants,
for a period of 30 days after the original date of license, that the Software
will perform in substantial compliance with the written materials accompanying
the software. If within 30 days of the original license, you report in writing a
significant defect in the Software to the LICENSOR, and LICENSOR is unable to
correct it within 30 days of the date you report the defect, you may return the
Product(s),
<PAGE>
and LICENSOR will refund the license fee. You agree that the only remedy
available to you will be a refund of the license fee of the Product(s).
THE FOREGOING WARRANTIES ARE IN LIEU OF OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE PRODUCT(S). IN NO EVENT
WILL LICENSOR OR ITS AUTHORIZED REPRESENTATIVES BE LIABLE TO YOU FOR DAMAGES,
INCLUDING ANY LOSS OF PROFITS, LOST SAVINGS, OR OTHER INCIDENTAL OR
CONSEQUENTIAL DAMAGES ARISING OUT OF YOUR USE OF OR INABILITY TO USE THE
SOFTWARE EVEN IF LICENSOR OR ITS AUTHORIZED REPRESENTATIVES HAVE BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES. LICENSOR AND ITS AUTHORIZED REPRESENTATIVES
WILL NOT BE LIABLE FOR ANY SUCH CLAIM BY ANY OTHER PARTY.
This limited warranty gives you specific legal rights. Some states provide other
rights, and some states do not allow excluding or limiting implied warranties or
limiting liability for incidental or consequential damages. As a result, the
above limitations and/or exclusions may not apply to you. Some jurisdictions
have statutory consumer provisions which may supersede this section of the
Agreement.
GENERAL
If any provision of this Agreement shall be unlawful, void or any reason
unenforceable, then that provision shall be deemed severable from this Agreement
and shall not affect the validity and enforceability of the remaining provisions
of this Agreement. This Agreement is governed by the substantive laws of the
State of Maryland, without regard to its rules governing conflicts of laws.
U.S. GOVERNMENT RESTRICTED RIGHTS
The Product(s) are provided with Restricted Rights. Use, duplication, or
disclosure by the Government is subject to restrictions as set forth in
subparagraph (c)(1)(ii) of The Rights in Technical Data and Computer Software
clause at DFARS 252.227-7013, or subparagraphs (c)(1) and (2) of the Commercial
Computer Software-Restricted Rights at 48 CFR 52.227-19, as applicable.
<PAGE>
Schedule F-2: HIS Software License Agreement
IMPORTANT: BEFORE COMMENCING USING THE HIS PRODUCTS, CAREFULLY READ THE
FOLLOWING TERMS AND CONDITIONS WHICH HAVE BEEN ACCEPTED BY YOUR COMPANY
("LICENSEE")
1. GRANT OF LICENSE. HIS Software AG ("HIS") hereby grants to Licensee ("You")
and You accept a nonexclusive license ("License") to use the HIS Products
delivered pursuant and subject to this Agreement. The HIS Products as
identified in the applicable purchase order consists of (a) computer modules
delivered in object code form only ("Programs"), (b) a user manual and
related printed documentation ("Documentation"), and (c) any entitled
updates ("Updates"). The Programs and Documentation (in EPS format) are
delivered on magnetic disk(s) or tape(s) ("Media").
You agree that You will not assign, sublicense or otherwise transfer Your
right under this Agreement without the prior written consent of HIS, and any
attempt to do so is void.
2. TERM. This Agreement is effective from the day HIS grants this License, and
continues until terminated. HIS may terminate this License if You fail to
comply with any term or condition of this Agreement. You agree upon such
termination to destroy the HIS Products together with all copies in any
form.
3. TITLE; CONFIDENTIALITY. You acknowledge that title and full ownership, trade
secrets, copyright, patent rights to the HIS Products furnished under this
Agreement remain with HIS, whether or not any portion thereof is or may be
validly copyrighted or patented. By accepting this License, You are only
granted limited license rights to use the HIS Products. You agree to treat
the HIS Products as HIS' proprietary information. You will take all
reasonable steps to protect the HIS products from disclosure to any third
party.
4. LIMITED USE. You may use the Programs only on and in conjunction with the
designated computer and the designated location noted on the applicable
purchase order. If You desire to use the Programs on an additional or a
different computer, or at another location, You must first obtain the
written consent of HIS, and pay the then current HIS transfer and/or upgrade
charges.
The HIS Products may only be used to process data which is the property of
the Licensee.
You agree not to copy the HIS products, in whole or in part, except for the
initial installation, and for backup purposes, unless HIS consents in
writing. In total no more than two (2) copies may be generated by You for
the authorized purposes, unless given written consent by HIS. You agree not
to modify, obscure, or delete any proprietary rights notices included in or
on the programs, Documentation, or Media, and You agree to include all such
notices on all copies.
You may not modify the HIS products or merge the HIS products into any other
computer programs. You may not reverse assemble or decompile the programs,
in whole or in part.
5. LIMITED WARRANTY. HIS warrants that it has the authority to grant this
License to You.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6. LIMITATION OF LIABILITY. HIS shall not be liable to You or any other party
for any amount in excess of the license fee paid by You for any direct
damages. In no case is HIS responsible for any indirect, incidental, or
consequential damages, such as, but not limited to, loss of anticipated
profits or benefits.
HIS agrees to defend and hold You harmless from and against any claim or
action by third party that the HIS Products as delivered by HIS infringe any
proprietary right of such third party, provided that (a) HIS is
<PAGE>
promptly notified of such matter and is permitted to defend and is
responsible for the settlement, and (b) You have not used the HIS Products
in contravention of this License or the Documentation.
7. SUPPORT AND UPDATES. For a period three hundred and sixty (360) days from
the delivery date of the Programs to You, HIS will provide extended software
support ("ESS"). Unless otherwise notified by HIS, ESS will consist of (a)
telephone hotline support, (b) Program error corrections, and (c) Updates,
except enhancements which are separately offered by HIS. ESS will
automatically renew at HIS' then current rates and terms for an annual
period, unless no less than thirty (30) days written notice of nonrenewal is
given by either party prior to the expiration of the applicable period.
HIS' sole obligation under this section shall be either to correct the
Programs, or, at HIS' option, to refund the license fee upon return of the
HIS Products.
8. GOVERNING LAW. This Agreement is to be governed by and interpreted in
accordance with the laws of Switzerland.
If any provision of this Agreement shall be declared invalid or
unenforceable, such provision shall be deemed to be deleted, and it shall
not affect the validity of any other term or provision of this Agreement.
9. TERMS OF PAYMENT. All license fees will be due net 30 days from date of the
receipt of an invoice. You agree to be responsible for and to pay any sales,
use, VAT, excise, withholding or any other taxes that may be imposed, based
on the use of the Products. Licensee agrees to make direct payments of such
taxes or reimburse HIS for payments it makes on behalf of Licensee.
10. WHOLE AGREEMENT. This Agreement is the complete and exclusive statement of
the Agreement between us; and supersedes any proposed or prior agreement,
oral or written, and any other communications between us relating to this
specific granted license and the related obligations; and may be modified or
supplemented only by a document signed by both parties to this Agreement.
11. SPECIAL TERMS. HIS will deliver the Source Code of Products to You free of
charge in case of bankruptcy, insolvency, or discontinuance of Product
support.
You agree that in such case You will only use the Source Code for Yourself
to provide You with adjustment and maintenance capabilities.
HIS SOFTWARE AG CUSTOMER:
Signature(s): Signature(s):
Name: Name:
Title: Title:
Date: Date:
HIS Software AG
LICENSE CONTRACT NO:
- --------------------
This license Contract is closed between HIS Software, AG, Binzstrasse 7, CH-8045
Zurich, Switzerland, and
<PAGE>
Kunde:
Address:
Type of Contract: Designation:
- ----------------- ------------
Licensed Producer Number of License- Annual
Products Users Fee ESS Fee
a
b
c
d
Location CPU/Cluster Delivery Acceptance
Type Date Deadline
a
b
c
d
HIS Software AG is bound to this offer until:
This License Contract, including the "License Agreement", represent all
agreements between HIS Software AG and the Customer. The Customer declares to
have read the "License Agreement" and to positively agree with its validity.
HIS SOFTWARE AG CUSTOMER:
Signature(s): Signature(s):
- ------------------------------------------------------------------------
Name: Name:
- ------------------------------------------------------------------------
Title: Title:
- ------------------------------------------------------------------------
Date: Date:
- ------------------------------------------------------------------------
SECTOR COMMUNICATIONS CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form 10-KSB Annual Report of Sector
Communications, Inc. for the year ended February 28, 1997, of our report dated
April 18, 1997, relating to the consolidated financial statements of Sector
Communications, Inc. which appear in such Form 10-KSB.
/s/ Merdinger, Fruchter, Rosen & Corso, P.C.
Merdinger, Fruchter, Rosen & Corso, P.C.
New York, New York
May 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of Sector Communications, Inc. as of February 28,
1996 and 1997, and the related consolidated statements of operations for the
years then ended, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000741012
<NAME> Sector Communications
<MULTIPLIER> 1
<CURRENCY> US Dollar
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Feb-28-1997
<PERIOD-START> Mar-01-1996
<PERIOD-END> Feb-28-1997
<EXCHANGE-RATE> 1
<CASH> 80,096
<SECURITIES> 21,762
<RECEIVABLES> 669,523
<ALLOWANCES> 50,678
<INVENTORY> 0
<CURRENT-ASSETS> 2,013,437
<PP&E> 2,170,846
<DEPRECIATION> (1,060,696)
<TOTAL-ASSETS> 9,552,510
<CURRENT-LIABILITIES> 2,154,170
<BONDS> 0
0
0
<COMMON> 44,898
<OTHER-SE> 7,341,194
<TOTAL-LIABILITY-AND-EQUITY> 9,552,510
<SALES> 0
<TOTAL-REVENUES> 1,258,713
<CGS> 896,171
<TOTAL-COSTS> 896,171
<OTHER-EXPENSES> 4,123,648
<LOSS-PROVISION> 22,483
<INTEREST-EXPENSE> 341,115
<INCOME-PRETAX> (5,374,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,374,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,298,532
<CHANGES> 0
<NET-INCOME> (3,076,307)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
