SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20949
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended August 31, 1998
Commission File Number 0-22382
SECTOR COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 56-1051491
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 250, McLean VA 22102
Address of principal executive offices
(703) 761-1500
Issuer's Telephone Number
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
As of August 31, 1998, there were 1,211,998 shares of the Registrant's Common
Stock outstanding.
SECTOR COMMUNICATIONS, INC.
REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I ------ FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet -
August 31, 1998 (unaudited) and February 28, 1998 2
Consolidated statement of operations -
Three and six-month periods (unaudited) ended
August 31, 1998 and 1997 4
Consolidated statement of cash flows -
Three and six-month periods (unaudited) ended
August 31, 1998 and 1997 5
Notes to Consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis 12
PART II ----- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
August 31, February 28,
1998 1998
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents ................................................... $ 195,307 $ 128,911
Accounts Receivable, net of provision for doubtful
accounts of $11,326 and $38,097 ........................................... 299,251 501,010
Notes Receivable ............................................................ 37,500 125,000
Prepaid Expenses ............................................................ 61,001 45,646
Total Current Assets ...................................................... 593,059 800,567
PROPERTY AND EQUIPMENT ......................................................... 2,232,795 2,211,317
Accumulated Depreciation .................................................... (1,642,586) (1,476,444)
Net Book Value .............................................................. 590,209 734,873
OTHER ASSETS
Intangible Assets, net ...................................................... 4,780,091 4,974,345
Deposits .................................................................... 42,482 42,482
Other Assets ................................................................ 49,700
----------- -----------
Total Other Assets ........................................................ 4,872,273 5,016,827
TOTAL ASSETS .............................................................. $ 6,055,541 $ 6,552,267
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
August 31,
February 28,
1998
1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> ................................................................................................... <C> <C>
Accounts Payable and Accrued Expenses ............................................................ $ 1,506,232 $ 1,689,711
Debentures Payable, net of discount of $181,000 .................................................... 319,000
Deferred Revenue ................................................................................... 219,487 298,419
Due to Related Parties ............................................................................. 267,524 235,785
------------ ------------
Total Current Liabilities ........................................................................ 2,312,243 2,223,915
Rent Deposit .......................................................................................... 12,248 12,248
------------ ------------
TOTAL LIABILITIES ................................................................................ 2,324,491 2,236,163
------------ ------------
Commitments and Contingencies ......................................................................... -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding ..................................................... -- --
Preferred Stock, Series A $.001 per share, no shares
issued and outstanding ........................................................................... -- --
Common Stock, $.001 par value; 40,000,000 shares
authorized, 1,211,645 and 917,952 shares
issued and outstanding (See Note 10) ............................................................. 1,211 918
Additional Paid-in Capital ......................................................................... 14,023,429 13,729,709
Retained Deficit ................................................................................... (10,272,442) (9,244,613)
Cumulative Foreign Currency Translation Adjustment ................................................. (21,148) (169,910)
------------ -----------
Total Stockholders' Equity ....................................................................... 3,731,050 4,316,104
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................................... $ 6,055,541 $6,552,267
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> ................................... <C> <C> <C> <C>
REVENUE
Telecommunication Revenue .......... $ 157,352 $ 195,542 $ 361,328 $ 446,226
Software Sales and Maintenance ..... 89,162 288,432 195,570 661,143
----------- ----------- ----------
246,514 483,974 556,898 1,107,369
COST OF SALES ......................... 128,807 250,966 267,646 622,354
----------- ----------- ----------- -----------
GROSS PROFIT .......................... 117,707 233,008 289,252 485,015
----------- ----------- ----------- -----------
OPERATING EXPENSES
Gold Exploration Costs ............. 691 27,219 3,353 57,083
Software Development Costs ......... 78,136 177,748 206,532 415,667
Sales, General and Administrative .. 372,201 803,198 1,005,983 1,569,984
----------- ----------- ----------- -----------
Total Operating Expenses ......... 451,028 1,008,165 1,215,868 2,042,734
----------- ----------- ----------- -----------
Loss From Operations .................. (333,321) (775,157) (926,616) (1,557,719)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Income .................... ( 81,462) (612) (107,287) ( 1,224)
Other Income (Expense) ............. 2,411 ( 5,113) 6,074 20,122
Foreign Exchange Gain (Loss) ....... - ( 13,896) - ( 3,622)
----------- ----------- ----------- -----------
Total Other Income (Expense) ..... ( 79,051) ( 19,621) (101,213) 15,276
----------- ----------- ----------- -----------
Loss Before Provision for Income Taxes (412,372) (794,778) (1,027,829) (1,542,443)
Provision for Income Taxes ............ -- -- --
----------- ----------- ----------- -----------
Net Loss .............................. $ (412,372) $ (794,778) $(1,027,829) $(1,542,443)
=========== =========== =========== ===========
Loss Per Share ..................... $( 0.34) $( 0.88) $ (0.90) $ (1.71)
=========== =========== =========== ===========
Weighted Average Number of Shares
Outstanding ........................ 1,211,645 907,092 1,143,146 902,527
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC .....
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31,
<S> <C> <C> <C> <C> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ....................................... $(1,027,829) $(1,542,443)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and Amortization ................ 392,660 408,437
Amortization of Discount and Insurance Costs . 94,300 --
Change in Assets and Liabilities
(Increase) Decrease in Assets
Accounts Receivable ...................... 201,759 267,063
Repayment of Related Party Receivable .... -- 32,198
Prepaid Expenses and Deposits ............ (15,355) 23,288
Receivable on Sale of Securities ......... -- 971,000
(Decrease) Increase in Liabilities
Accounts Payable ......................... (183,479) 12,961
Related Party Payable .................... 31,739 (4,202)
Deferred Revenue ......................... ( 78,932) (174,055)
----------- -----------
Net Cash Provided (Used) By Operating Activities .. (585,137) (5,753)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets ....................... (21,478) (34,889)
Decrease in Marketable Securities .............. -- 21,762
Notes and Loans Receivable ..................... 87,500 56,798
Net Cash Provided by Investing Activities ......... 66,022 43,671
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Debentures ............................. 430,000 -
Effect of Exchange Rate Changes on Cash ........... 155,511 (35,619)
Net Increase in Cash .............................. 66,396 2,299
CASH - ............................................ 128,911 80,096
----------- -----------
CASH - AUGUST 31, ................................. $ 195,307 $ 82,395
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ ................................. -- $ --
=========== ===========
Taxes ........................................ $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31,
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Period Ended August 31, 1998:
Common stock totalling 25,306 shares was issued to retire a debt of
$39,013.
Common stock totalling 75,000 shares was issued in connection with the
preferred stock conversion described in Note 7.
Common stock totalling 60,000 shares was issued in connection with the
placement of the convertible debentures described in Note 8. A discount of
$255,000 has been ascribed to these shares.
Period Ended August 31, 1997:
Common stock totalling 1,000,000 shares was issued in connection with a Februar
y 28, 1997 debt reduction
agreement.
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles
for interim financial information and with the instructions
to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only
of normal recurring adjustments) considered necessary for a
fair presentation have been included.Certain
reclassifications have been made to the prior period to
conform to the current period's presentation.
For further information refer to the financial statements
and footnotes included in the Registrant's Annual Report on
form 10-KSB for the period ended February 28, 1998.
The results of operations for any interim period are not
necessarily indicative of the results to be expected for
the full fiscal year ending February 28, 1999.
The unaudited consolidated balance sheet as of August 31,
1998 and the consolidated statements of operations and cash
flows for the three and six month periods ended August 31,
1998 and 1997 are those of Sector Communications, Inc.
("Sector") and its subsidiaries (collectively the
"Company"). All significant intercompany accounts and
transactions have been eliminated.
The accompanying consolidated financial statements as of
August 31, 1998 and for the three and six months then ended
include the accounts of Sector and its subsidiaries.
Such subsidiaries are as follows:
Global Communications, Inc. 100% owned
HIS Technologies AG 60% owned
Mountain Software AG 100% owned
b) Loss Per Share
Loss per share is based on the weighted average number of
shares of common stock outstanding during the period.
c) Foreign Currency Translation
In accordance with the provisions of Statement of
Accounting Standard No. 52, "Foreign Currency Translations"
("SFAS No. 52") the assets and liabilities of the Company's
subsidiaries located outside the United States are
generally translated at the rates of exchange in effect at
the balance sheet date. Gains and losses resulting from
foreign currency transactions are recognized currently in
income and those resulting from translation of financial
statements, with the exception of entities operating in
highly inflationary economies, as Global does in Bulgaria,
are accumulated in a separate component of stockholders'
equity. In highly inflationary economies, SFAS No. 52
requires that the use of historical exchange rates to
translate nonmonetary items and current exchange rates to
translate monetary items. The effect of exchange rate
changes is reflected in net loss.
- 7 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
May 31, February 28,
1998 1998
Fiber Network $ 157,837 $ 157,837
Equipment 1,916,192 1,916,192
Furniture and Fixtures 68,698 47,220
Vehicles and Other 90,068 90,068
------------- ------------
2,232,795 2,211,317
Less: Accumulated Depreciation (1,642,586) (1,476,444)
----------- -----------
$ 590,209 $ 734,873
========== ============
Depreciation expense for the six month periods ended August
31, 1998 and 1997 was $164,795 and $210,116, respectively,
and for the three month periods ended August 31, 1998 and
1997 was $81,567 and $103,829, respectively.
NOTE 3 - INTANGIBLE ASSETS
Intangible assets at August 31, 1998 are as follows:
Intangible assets related to the acquisition
of Histech $ 4,286,922
Intangible assets related to the acquisition
of Mountain 595,959
Intellectual property and distribution rights
acquired by Histech prior to its acquisition
by Sector, net of foreign currency
exchange fluctuations. 771,590
5,654,471
Amortization of intangible assets and intellectual
property and distribution rights 874,380
Total $ 4,780,091
===========
The intangible asset recorded for intellectual property and
distribution rights was acquired by Histech based on an
agreement, as amended, dated May 1, 1996, between Histech
and HIS Software AG.
The excess purchase price over the fair value of the net
assets acquired of Histech and Mountain will be amortized
on a straight-line basis over twenty years. Costs related
to the acquisition of the intellectual property and
distribution rights purchase by Histech are amortized over
the estimated useful life of five years.
- 8 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
NOTE 4 - WARRANTS
At August 31, 1998, the Company has reserved 36,000 shares
of common stock for issuance upon the exercise of the
currently outstanding warrants. The exercise prices and
expiration dates of the warrants are as follows:
Number Exercise Date Date of
of Shares Price Exercisable Expiration
----------- ---------- ----------- ----------
2,000 $112.50 2/28/97 6/30/00
2,000 150.00 7/20/97 6/30/00
2,000 200.00 7/20/98 6/30/00
5,000 39.50 2/28/97 7/18/99
25,000 39.50 2/28/97 7/18/99
-----------
36,000
NOTE 5 - STOCK OPTION PLANS
At August 31, 1998, the Company has options outstanding for
the purchase of 26,200 shares under the 1994 Stock Plan, at
exercise prices ranging from $18.75 to $81.25 per share.
21,200 options are exercisable as of August 31, 1998. There
were no option transactions during the period March 1
through August 31, 1998.
NOTE 6 - SECTOR COMMUNICATIONS AG
Sector Communications AG was dissolved in July of 1997. At
the time of its dissolution it had no operating budget,
revenues nor employees. The Company acquired 100% of the
outstanding capital stock of Sector Communications AG
("Sector AG") on July 31, 1996, 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. Equity interests in HIS Technologies AG and
Mountain Software AG are now held directly by Sector.
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized an issue of Series A 8%
Cumulative Convertible Preferred Stock. The preferred stock
may be converted into Common Stock at the lesser of (i) 75%
of the five-day average closing bid price immediately
preceding the conversion date or (ii) the closing bid price
on the date of purchase of the preferred stock (the
"Closing Date"). Up to and including the 100th day
following the Closing Date, the Company shall have the
right to redeem any or all of the shares for 125% of the
purchase price, plus accrued dividends.
- 9 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
NOTE 7 - STOCKHOLDERS' EQUITY (continued)
Common Stock
Fiscal Year 1998 Reverse Stock Split
On July 22, 1997, the Board of the Company authorized an
amendment to the Company's Amended and Restated Articles of
Incorporation approving a reverse stock split of the
outstanding shares of the Common Stock on the basis of one
new share of the Common Stock for each 40 shares of
outstanding Common Stock. The Amendment was approved at the
Annual Meeting of Stockholders held on October 21, 1997.
Such action did not change the par value of the Common
Stock of $.001 per share of the number of authorized shares
of the Common Stock from 50,000.
On November 18, 1997, the Board authorized a reverse stock
split of the Common Stock of one share for every 1.25
outstanding shares. The par value of the Common Stock did
not change, but the number of authorized shares was reduced
from 50,000,000 to 40,000,000. The two reverse stock
splits, which had the combined effect of a 1 for 50 reverse
stock split, as well as the reduction of the authorized
shares, became effective with the filing of an amendment in
Nevada on December 2, 1997.
Recent Issuance of Common Stock
On January 5, 1998, FT Trading, based in London, England,
purchased 250 shares of the Company's Series A 8%
Convertible Preferred Stock, $.001 par value (the "Series A
Preferred"), for $250,000 in a private placement pursuant
to Regulation S under the Securities Act of 1933, as
amended (the "Securities Act"). Concerned that the holder
of the shares of the Series A Preferred may have been
selling shares of the Common Stock, thereby lowering the
market price of the Common Stock, on March 18, 1998, the
Company gave the holder notice of its intention to redeem
on April 2, 1998 all 250 shares of the Series A Preferred
for $312,500, which action terminated the holder's right to
convert. In Lieu of the redemption, Firstimpex, based in
Geneva, Switzerland, purchased the 250 shares of the Series
A Preferred from FT Trading for the redemption price on the
condition that the Company restore the conversion right and
issue to Firstimpex 75,000 shares of the Common Stock,
which issuance was effected on April 5, 1998 simultaneously
with the restoration of the conversion right. On the same
day, Firstimpex converted 165 shares of the Series A
Preferred into 73,333 shares of the Common Stock based on a
conversion price of $2.25 per share. On May 13, 1998,
Firstimpex converted the remaining 85 shares of the Series
A Preferred into 60,044 shares of Common Stock based on the
alternative conversion price of $1.415625 per share which
represented the average of the closing bid prices during
the five trading days preceding the conversion date.
In connection with the sale of its 6% Convertible Notes,
the Company issued 30,000 shares of its Common Stock to
each of the two purchasers.
The Company issued 25,306 shares of Common Stock to retire
debt owed to a related party in the amount of $39,013.
- 10 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1998
NOTE 8 - DEBENTURES PAYABLE
On April 15, 1998, the Company sold $500,000 in principal
amount of its 6% Convertible Promissory Notes due July 30,
1999 (the "Notes") pursuant to Regulation S under the
Securities Act for net proceeds of $430,000. In addition,
the two purchasers, Amex Corp. Limited and Danvers
Investment Corp., each a British Virgin Island corporation,
with an address in Zurich, Switzerland, each received
30,000 shares of the Common Stock.
Effective May 26, 1998, each holder has the full right to
convert its Note in the principal amount of $250,000, plus
accrued interest (at the rate of 6% per annum), in whole or
in part, into shares of the Common Stock at a conversion
price equal to the lesser of (1) $2.98 (which was 80% of
the closing bid prices of the Common Stock on April 15,
1998) or (2) 80% of the average closing bid prices of the
Common Stock for the five trading days immediately
preceding the conversion date.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Currently the Company does not meet certain of the Nasdaq
maintenance requirements. If the Common Stock is delisted
from the Nasdaq Smallcap Market because of the Company's
inability to meet the Nasdaq maintenance requirements, its
price quotations would either be reported in the OTC
Bulletin Board or in the pink sheets. In addition, if the
bid price continues to be below $5.00 per share, the
security would then become subject to Rule 15g-9
promulgated under the exchange Act, which Rule imposes
additional sales practices requirements on a broker-dealer
which sells Rule 15g-9 securities to persons other than the
broker-dealer's established customers and institutional
accredited investors (as such term is defined in Rule
501(a) under the Securities Act).
- 11 -
Item 2. Management's Discussion and Analysis
Results of Operations
The following is management's discussion and analysis of certain
significant factors which have affected the financial position and operating
results of Sector Communications, Inc. (the "Company") and its subsidiaries
during the three and six months ended August 31, 1998 as compared with the three
and six months ended August 31, 1997.
Telecommunication Revenue
Global Communications Group, Inc. (Global"), the Company's subsidiary,
derives all of its telecommunications revenue from Global's Bulgarian subsidiary
(1) providing direct-dial services for international long distance calls to a
select group of hotels in the cities of Sofia and Plovdiv in Bulgaria; (2) from
the integration, installation and maintenance of customer-owned digital phone
systems; and (3) from usage-based percentages of company-owned digital phone
system through shared revenue agreements with some of its customers.
Telecommunication revenue decreased by $38,190 or 20% from $ 195,542 in
the three months ended August 31, 1997 to $157,352 in the three months ended
August 31, 1998. Telecommunication revenue decreased by $84,898 or 19% from
$446,226 in the six months ended August 31, 1997 to $361,328 in the six months
ended August 31, 1998. These decreases were due to a cross-the-board decrease in
the use of hotel phones in Bulgaria by international travelers for purposes
other than faxing. Management believes that such travelers are increasingly
using cellular or mobile telephones instead to make their calls. In the event
that this is a local trend, management is looking to offset this loss of revenue
by the Bulgarian subsidiary exploring Internet and Intranet usage of its
installed system. Assuming that this is a trend, there can be no assurance that
these offsetting efforts will be successful.
Software Sales and Maintenance Revenue
Software sales and maintenance revenue from HIS Technologies AG ("Histech")
decreased by $199,270 or 69% from $288,432 in the three months ended August 31,
1997 to $89,162 in the three months ended August 31, 1998. Software sales and
maintenance revenue from Histech decreased by $495,573 or 75% from $661,143 in
the six months ended August 31, 1997 to $195,570 in the six months ended August
31, 1998.
-12-
Cost of Sales
Costs of sales decreased by $122,159 or 49% from $ 250,966 in the three
months ended August 31, 1997 to $128,807 in the three months ended August 31,
1998. Cost of sales decreased by $354,708 or 57% from $622,354 in the six months
ended August 31, 1997 to $267,646 in the six months ended August 31, 1998. The
decreases were due to the decrease in the revenues of the Company and its
subsidiaries.
Software Development Costs
Histech's software development costs decreased by $99,612 or 56% from
$177,748 in three months ended August 31, 1997 to $78,136 in the three months
ended August 31, 1998. Histech's software development costs decreased by
$209,135 or 50% from $415,667 in the six months ended August 31, 1997 to
$206,532 in the six months ended August 31, 1998. These decreases were due to
the unavailability of funds to finance the Company's research and development
operations.
Management believes that a significant level of software development
costs will be required by Histech to remain competitive and expects such costs
will increase in the future if the funding for such increased costs is available
to the Company, as to which funding there can be no assurance.
Selling, General and Administrative Expense
This expense decreased by $430,997 or 54% from $ 803,198 in the three
months ended August 31, 1997 to $372,201 in the three months ended August 31,
1998. The selling, general and administrative expense decrease by $564,001 or
36% from $1,569,984 in the six months ended August 31, 1997 to $1,005,983 in the
six months ended August 31, 1998. These decreases were due to the lower
revenues.
Net Loss
The net loss decreased by $382,406 or 48% from $ 794,778 in the three
months ended August 31, 1997 to $412,372 in the three months ended August 31,
1998 as a result of the reasons described above. The net loss decreased by
$514,614 or 33% from $1,542,443 in the six months ended August 31, 1997 to
$1,027,829 in the six months ended August 31, 1998 for the reasons described
above.
-13-
Liquidity and Capital Resources
The Company is experiencing negative cash flow from operations. The
funding of future operations will require further infusions of capital or
seeking new sources of revenue.
If additional funds are raised by the Company through the issuance of
equity securities, or securities convertible into or exercisable for equity
securities, 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 Common Stock. Although as
indicated below the Company is attempting to implementing a plan to revitalize
the Company, there can be no assurance that the Company will be successful in
its efforts to obtain adequate capital nor if any such additional capital is
made available to the Company that it will be on terms and conditions that are
not extremely dilutive to the present holders of the Common Stock.
Discontinuance of the listing of the Common Stock on the Nasdaq SmallCap Market
because of the Company's failure to meet the Nasdaq maintenance requirements may
adversely impact the Company's ability to obtain future financing. A hearing
before a Nasdaq panel on continued listing is scheduled for October 22, 1998.
The plan encompasses the following:
1. A one-year bridge loan of $500,000 from a German investment bank to enable
the Company to continue to meet certain obligations while the rest of the plan
is being implemented. The lender will receive, as additional consideration, a
two-year warrant to purchase 100,000 shares of the Company's Common Stock, $.001
par value ("the Common Stock"), at $1.00 par share. The Lender may, in lieu of
receiving interest (at the rate of 12% per annum) at the maturity date, receive
a warrant to purchase 25,000 shares of the Common Stock at $1.00 per share.
2. The Company and Shilaat Corp., a New York corporation ("Shilaat"), will enter
into an agreement pursuant to which the Company would acquire all of the
outstanding shares of capital stock of Shilaat in exchange for $2,800,000 and
6,000,000 shares of the Common Stock. Shilaat is privately owned by Isaac Nussen
and George Weisz and its principal asset is the shares of Jarnow Corporation, a
New York corporation which is engaged in the wholesale jewelry manufacturing and
sales business. Shilaat will have the right to designate a majority of the Board
of Directors.
-14-
3. The Company will sell, pursuant to Regulation D under the Securities Act of
1933, as amended, not less than 250,000 nor more than 300,000 shares of Series B
Convertible Preferred Stock (the "Series B Shares") at $20 per share or
aggregate gross proceeds of $5,000,000 to $6,000,000. The Series B Preferred
Shares will be convertible into shares of the Common Stock at a conversion
prices equal to the lesser of (a) 100% of the average of the closing bid price
of the Common Stock during the five trading days preceding the closing date for
the sale of the Series B Shares and (b) 80% of the average of the closing bid
prices for the five trading days preceding the date of conversion, but in
neither (a) nor (b) may the conversion price be below $1.00 per share. The
Company has been advised that this offering can be closed promptly upon (x)
execution of the definitive agreement with Shilaat, (y) filing of the
Certificate of Designations with respect to the Series B Shares and (z)
execution of the related documentation with respect to the offering.
4. The Company will sell to a designee of Windsor Capital Fund IV the
outstanding shares of Global in consideration of (a) the surrender of 50,000
shares of the Common Stock, (b) the transfer of 10% of the outstanding shares of
Histech, thereby increasing the Company's ownership of Histech from 60% to 70%,
and (c) a royalty of 3% of Global's revenues up to a maximum of $500,000.
5. Stockholders' approval through a consent solicitation of (a) the issuance of
the shares of the Common Stock to Shilaat or its shareholders, (b) the issuance
of the shares of the Common Stock upon the conversion of the Series B Shares and
(c) the sale of Global.
There can be no assurance that the plan will be implemented and, if
implemented, implemented as described above and when such implementation will
occur.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risk and
views with respect to future events and financial performance. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the Company's ability to obtain adequate additional financing,
the Company's ability to implement the plan described above, the uncertainties
of new product development and introduction, sales, growth, competitive
pressures, uncertainties connected to the Bulgarian economy, and other risks
listed from time to time in the Company's periodic reports filed with the
Securities Exchange Commission, including, but not limited to, its Annual Report
on Form 10-KSB for the fiscal year ended February 28, 1998 (Forward-Looking
Statements section).
-15-
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1998 (the "Annual Report"). There
were no material developments during the quarter ended August 31, 1998 relating
to the litigation reported in the Annual Report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereinto duly
authorized.
SECTOR COMMUNICATIONS, INC.
(Registrant)
Date: October 20, 1998 By: Andreas O. Tobler
-----------------------------------
President and Chief Executive Officer
