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 fiscal year ended February 28, 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 (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, $.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. |_|
This report contains a total of 74 pages. The Exhibit Index appears on page 63.
As of May 29, 1998, there were 1,213,998 shares of the issuer's Common Stock
outstanding. The aggregate market value of the 1,187,644 shares of the issuer's
voting stock held by non-affiliates was $1,633,011 based on the closing sales
price of $ 1.375 on that date as reported by the Nasdaq Small cap Market. The
sum excludes the shares held by officers and directors, at May 29, 1998, in that
such persons may be deemed affiliates of the registrant. 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, 1998
PART I........................................................................3
ITEM 1. Business............................................................3
ITEM 2. Properties.........................................................18
ITEM 3. Legal Proceedings..................................................19
ITEM 4. Submission of Matters to vote of Security Holders..................20
PART II......................................................................21
ITEM 5. Market for Common Equity and Related Stockholder Matters...........21
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................23
ITEM 7. Financial Statements...............................................31
ITEM 8. Changes in and Disagreements with Accounting and Financial
Disclosure ........................................................55
PART III.....................................................................57
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons:
Compliance With Section 16(a) of the Exchange Act..................57
ITEM 10. Executive Compensation.............................................58
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.....60
ITEM 12. Certain Relationships and Related Transactions.....................62
PART IV......................................................................62
ITEM 13. Exhibits and Reports on Form 8-K...................................62
SIGNATURES...................................................................64
EXHIBIT INDEX................................................................65
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PART I
ITEM 1. Business
Corporate Overview
Sector Communications, Inc. (the "Company") was incorporated in the State of
Nevada on March 19, 1990 and has accumulated a deficit of $9,244,613 through
February 28, 1998. The Company and its subsidiaries are collectively
referred to herein as "Sector".
Formerly only a gold exploration and development company, Sector changed its
corporate strategy and focus in 1996 to concentrate its energies and efforts on
building Sector into an international telecommunications and software company.
This was effected through the acquisition of already existing companies and
products.
Whenever reference is made in this Report to shares of Sector's Common Stock,
$.001 par value (the "Common Stock"), such reference gives effect to the
combined one-for-50 reverse stock splits effective December 2, 1997. See the
section "Reverse Stock Splits" in Item 5 to this Report.
Sector Bulgaria
Telecommunications Overview
Global Communications Group, Inc. ("Global") was incorporated in the State of
Texas in 1993. On June 18, 1996, Sector acquired 100% of the outstanding common
stock of Global in exchange for the issuance of 340,000 shares of the Common
Stock. A branch of Global was registered in the Republic of Bulgaria subsequent
to the signing of a five-year Joint Activity Agreement (the "JAA") with
Bulgaria's government-owned state telecommunications monopoly, the Bulgarian
Telecommunications Company-PLC (the "BTC"), on January 26, 1994. On February 14,
1997, Global entered into a new ten-year JAA with the BTC (the "JAA-2"). As part
of this new agreement, a new wholly-owned, Bulgarian subsidiary company,
Sector-Bulgaria, EOOD ("Sector BG"), was created through which all business is
now being conducted. Ultimately, it is anticipated that all of the assets of
Global will be assigned to Sector BG.
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. Local management believes that this industry
sector, as a well developed part of the national economy, 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; and
o Deliver upgraded local telephone service to individual business customers
through the installation of optical fiber cabling and high-speed digital
transmission equipment.
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o 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 (six fibers) creating an infrastructure that, in the opinion of
Sector BG management, 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).
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 park and a convenient ski center
are 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.
Local management believes that 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 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 and that two thirds of the lines are residential. These ostensibly
attractive statistics disguise, in the opinion of local management, 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 is poor, and the static and distortion in local loop circuits
renders them useless for anything but voice grade and low bit-rate data
services.
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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 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; and
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 and credit card validation, 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 Sector BG to secure adequate financing and contract with new
customers -- the assurance of which is highly uncertain.
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)
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and at the same time are able to afford the higher premiums to procure these
services. Sector BG invoices its customers based on U.S. 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 U.S.-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; and
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, in its opinion, 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 Sector BG 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 service 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.
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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 monopoly over all telecommunications
services, including television and broadcasting. Article 16 of 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. The reform aimed at a
gradual ousting of the state monopoly in telecommunications by establishing
government regulation and a competitive telecommunications service market.
The Committee of Posts and Telecommunications (the "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 i.e., the (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 has
announced 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 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 the 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 Global considered the BTC's actions
both illegal and unjustifiable, it entered into negotiations with the BTC to
effect a settlement. See the section "Sector BG" in this Item 1 to this Report
for information as to the terms of the settlement resulting in the transfer to
Sector BG and the execution of the JAA-2.
As a result of the political changes in Bulgaria that took place in the
beginning of 1997, the JAA-2 was further amended and co-ordinated with the new
management of the BTC and EBRD to take its final and current form in September
1997. By virtue of this last agreement with the BTC, Sector BG acts as an agent
of a group of selected customers in their relations with the BTC in the
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aspect of special access circuits and interconnection, international dialing,
call accounting and billing and optical cable construction.
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,
Sector 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.
Telecommunications Competition
Virtually all markets for telecommunications services are extremely competitive,
and Sector BG expects that competition will intensify in the future. In each of
the markets in which it offers telecommunications services, Sector BG faces
significant competition from carriers with greater market share and financial
resources. Sector BG 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 Sector BG. Many of Sector BG's existing
and potential competitors have financial, personnel and other resources
significantly greater than those of Sector BG. Other potential competitors
include foreign telephone companies, wireless telephone companies, electric
utilities, microwave carriers and private networks of large end users. In
addition, Sector BG competes with equipment vendors and installers and
telecommunications management companies with respect to certain portions of its
business.
For most of Sector BG's communications services, the factors which local
management deems 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 Sector BG's strategies will
be successful.
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Sector BG 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 Sector BG, 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 Sector BG. Sector BG 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
Sector BG currently provides services to a limited base of nine customers and,
therefore, relies heavily on the business from each. Sector BG's five largest
customers accounted for 93% of total revenues for the year ended February 28,
1998 ("fiscal 1998"). No single customer, however, accounted for more than 45%
of all revenues generated. Sector BG is actively working to retain its customer
base and diversify the types of services that it provides in order to reduce the
dependence on any single customer or type of service.
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 March 1, 1997, the BTC introduced a new tariff structure. Sector BG's
average blended carrier revenue and expense rates are $2.19 and $1.32,
respectively, leaving a $0.87 gross profit. A currency board was introduced in
Bulgaria from June 1, 1997, with the aim of leading to stable and predictable
financial operations.
Employees
At April 30, 1998, 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.
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Sector Communications AG
HIS Technologies AG, Mountain Software 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 Sector in Switzerland,
namely HIS Technologies AG ("Histech") and Mountain Software AG ("Mountain"). 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.
On August 12, 1996, the Company entered into a definitive agreement with the
shareholders of Histech and Mountain whereby Sector'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 186,923 shares and 34,247 shares of the
Common Stock, respectively. Sector AG also purchased 3,428 shares of previously
unissued Histech shares representing a 25.55% interest for $1,200,000.
Management anticipates that Mountain may be merged into Histech at some future
date. Hugo Wyss, a director of Sector AG and the 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
25,000 shares of the Common Stock and a warrant expiring July 18, 1999, for the
purchase of 25,000 shares of the Common Stock at an exercise price of $39.50 per
share, to KAV Kapitalangleger Verlag AG ("KAV"). KAV has assigned the warrant to
Global Portfolio Management Ltd.
On February 18, 1997, the Company entered into an 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 20,000 shares of the 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 $1,000,000 the escrow agent
shall transfer the Company's interest in DBE to Peacetime. In the event that
less than $1,000,000 is drawn by the Company, a percentage of Sector'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 10,000 shares of the Common Stock.
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Software Overview
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 ("Digital'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 new products will be developed, that the products will be
delivered on schedule or that more competitive products will not be released by
the competitors of Sector.
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
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.
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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 and DCOM. Histech
management believes that, 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.
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.
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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 or account names. Reduces the need for the user's 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.
Account GENEOUS - Provides true Enterprise-wide sophisticated multiplatform user
account management on Windows NT, Open VMS, and various UNIX variants using an
intutitive Windows-based interface. Account GENEOUS supports the concurrent
manipulation of many thousands of accounts across multiple platforms using a few
simple commands. Use of Account GENEOUS is controlled by strong authorization
and encryption technology. Many large customers of Histech have been using
Account GENEOUS for several months with great success.
Password GENEOUS - Provides rule-based multi-platform password synchronization
on Windows NT, Open VMS and various UNIX variants. Password GENEOUS is a true
"set-and-forget" Enterprise System Management tool that can transparently
synchronize passwords across hundreds of hosts running disparate operating
systems. The rules database allows the system managers to determine exactly
which accounts to synchronize and allows Password GENEOUS's operation to be
completely transparent to users.
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.
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
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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.
Software 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. Management believes that Histech 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. No research and
development costs were capitalized for fiscal 1998.
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, 1998, Histech employed eight persons (two as full-time
contractors), including sales, marketing and related activities; product
development and customer support; management, administration and finance. Of
such employees, four are employed in Switzerland,
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three 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.
Gold Exploration
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 April 15, 1997, the Company's interest in the Exploration License and Option
Agreement expired. Any and all costs and expenses associated with the
exploratory work performed by and/or on behalf of the Company with respect to
the Vienna Project have been expensed either previously or with in the
preparation of the financial statements accompanying this Report.
Ketchum Project
Seven years of geological investigation, sampling and exploratory drilling led
to what the Company believed was 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 led 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% had a gold concentration in excess of 10 ppb. The drill hole results
suggested that a large volume of mineralized rock continued to significant depth
beneath the surface soil anomalies. To date, however, the high-grade zones
appear to be somewhat discontinuous and a minable volume of economic grade has
not yet been discovered.
For the 1996 exploration season, the Company engaged the services of Agricola
Metals Company, a principal of which is a stockholder 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 were held and/or which were located in an
environmentally sensitive area where it would be difficult to obtain the
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necessary permits for exploration and development of the property were dropped.
The reduction in the number of unpatented claims was 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 assurance that these claims may actually host an
economically minable gold deposit, or that the necessary funding to begin
production could be obtained. The Company has determined that its interests in
the Ketchum claims have little provable value and has, consequently, reduced to
zero the carried value of such claims for financial reporting purposes.
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. 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
Because 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
Management is of the opinion that the materials and vendors necessary for the
Company to continue its exploration activities are available from many sources.
Management also 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's engagement in exploring for gold is subject to various Federal,
state and local provisions regarding environmental and ecological matters. Many
of the Company's exploration activities were conducted on public lands. The
Forest Service of the United States Department of Agriculture 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
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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 the Company's operations.
Gold Assay System
The Company has the world wide right to make, sell and use the Gold Assay System
although there are currently no efforts being made to produce or sell the system
or to determine the market for such a system. Sector ceased research and
development efforts related to the Gold Assay System in 1995. Sector believes
that there is little if any marketable value in its right of ownership of the
Gold Assay System.
General Corporate
Employees
At May 29, 1998, the Company, in addition to the staff employed by its
subsidiaries, had two full-time and two part-time employees. Sector also uses
independent contractors and consultants as necessary.
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. A significant portion of the administrative work of Sector is
performed through the offices of Geoffrey A. Button, its President and Chief
Executive Officer, through his offices in England.
ITEM 2. Properties
Mining Claim Properties
Sector's mining claim properties are described in the "Mining Claim Properties"
section of Item 1 to this Report.
Office Facilities
At May 29, 1998, Sector 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
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At May 29, 1998, 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
Sector 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
1. 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 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 that 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 (the "Symark Agreement") between them. 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
Symark Agreement, primarily by failing to pay license fees and by representing
Histech's products as Symark's own. Ultimately, Histech terminated the Symark
Agreement.
Symark is seeking injunctive relief and monetary damages to be proved at trial.
As of the date of this Report, the Company is in discussions with Symark which,
if successful, would lead to a cessation of legal efforts by each party and the
resumption of a distributor relationship with Symark in the United States.
Although management is optimistic that these discussions will achieve the
desired result, there can be no assurance, absent a written binding agreement,
that this will occur.
2. On February 7, 1997, Alfred Hasler, Adrian Stanga, Lucie Vonesch and Lloyd
Kim, as plaintiffs, instituted an action in the Superior Court of California,
County of Santa Clara, against
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S. Allan Kline, a former director of the Company (until January 17, 1997),
Biomyne, Inc. ("Biomyne"), Biomyne Technology Company ("BTC"), Aurtex, Inc.
("Aurtex"), the Company, Biomyne Exploration Company ("BEC"), Biomyne North
Company ("BNC"), San Jose National Bank, Hugo Wyss and currently unknown
defendants. The Company, however, did not become aware of the action until March
11, 1998 and has engaged California counsel to defend it. In the complaint the
four plaintiffs allege that they are limited partners of BEC and, in the case of
Mr. Hasler, also a limited partner of BTC, and that their sixteen causes of
action (of which four include the Company as a defendant) arise from their
investments on one or both limited partnerships. In the third cause of action,
plaintiffs allege that in 1989 BEC solicited limited partnerships interests and
represented that the funds would be used for drilling for gold on BEC claims in
Nevada and instead diverted the funds to BNC for the development of BNC's claims
in Idaho. Plaintiffs, who allegedly invested $300,000 in BEC, seek $3,000,000 in
damages for the benefits and profits they were not able to derive from the Idaho
claims. Plaintiffs allege earlier in the complaint and in the fourth cause of
action, that Biomyne sold the Idaho claims to Aurtex, which they believe was
acquired by the Company, but in fact is the Company by its former name as
correctly alleged in the seventh cause of action. In the fourth cause of action,
plaintiffs are seeking over $3,000,000 in damages as the value of the shares in
the Company to which they believe they are entitled. In the seventh cause of
action, the plaintiffs seek punitive damages for not delivering the shares to
them. In the 14th cause of action, plaintiffs seeks damages in excess of
$3,000,000 plus punitive damages as a result of the defendents intentionally not
delivering the shares resulting from the transfer by Biomyne to the Company. The
Company on June 2, 1998 answered the complaint, denying any liability and
pleading 12 affirmative defenses. Based on its current knowledge, management is
of the opinion that, if any liability can be established by the plaintiffs, it
is that of the other defendants and not that of the Company.
3. During the 3rd quarter of 1997 an action was filed by The Lodestone Group
Inc. ("Lodestone") in the District Court of Arapahoe County, Colorado. The suit
claims approximately $42,000 is owed to Lodestone by the Company for work
performed pursuant to a contract between Lodestone and the Company wherein
Lodestone was to manage the administration of various exploratory activities
with respect to the mining claims of the Company in Idaho. The amounts billed
are, in the belief of the Company, far in excess of the contractually stipulated
amount and that there was no corporate authorization for any additional work to
be performed by Lodestone. In the opinion of management the suit is without
merit and its outcome will have no materially adverse impact on the Company.
ITEM 4. Submission of Matters to Vote of Security Holders
No matters were brought to a vote of the holders of the Common Stock, the sole
voting security, during the quarter ended February 28, 1998.
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PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Common Stock trades on the Nasdaq SmallCap Market tier of The Nasdaq Stock
Market Inc. under the symbol "SECT". The following table sets forth the high and
low sales price (adjusted for the 1 for 50 combined reverse stock splits
effected in the quarter ended February 28, 1998) for each quarter since the
Company's listing on Nasdaq, as reported by Nasdaq.
Quarter Ended High Low
------------- ---- ---
May 31, 1995 73.77 57.46
August 31, 1995 110.82 53.36
November 30, 1995 73.88 41.04
February 29, 1996 61.56 36.94
May 31, 1996 65.67 49.25
August 31, 1996 106.25 50.00
November 30, 1996 56.25 28.13
February 28, 1997 26.55 15.65
May 31, 1997 35.95 15.65
August 31, 1997 14.05 9.40
November 30, 1997 7.80 3.15
February 28, 1998 2.63 2.12
Nasdaq Listing
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). For transactions
covered under Rule 15g-9, the broker-dealer must make a suitability
determination of the purchaser and receive the purchaser's written agreement to
the transaction prior to the sale. In addition, broker-dealers, particularly if
they are market makers in the Common Stock, have to comply with the disclosure
requirements of Rules 15g-2, 15g-3, 15g-4, 15g-5 and 15g-6 under the Exchange
Act unless the transaction is exempt under Rule 15g-1.
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Holders
At May 29, 1998, there were 296 holders of record of the Common Stock. The
Company believes that many additional holders of the 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, based on the number of sets of proxy
material requested in connection with the October 21, 1997 Annual Meeting of
Stockholders, to be approximately 750.
Reverse Stock Splits
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 or the number of authorized shares of the Common Stock from
50,000,000.
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.
Dividends
The Company has not paid cash dividends on its Common Stock and, in view of its
losses and cash requirements, has no intentions to do so. The Company expects to
retain any future earnings to fund operations for the foreseeable future.
Recent Issuances 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 restored the conversion right and issued
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
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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 the 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.
As a result of the conversions and issuance described in the preceding paragraph
and the issuances described under "Issuance of Convertible Notes," the Company
issued an aggregate of 268,377 shares of the Common Stock.
Issuance of Convertible Notes
On April 15, 1998, the Company sold $500,000 in principal amount of its
Convertible Promissory Notes due July 30, 1999 (the "Notes") pursuant to
Regulation S under the Securities Act. 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 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) $2.88 (which was 80% of the closing bid price
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. See the section "Possible Change In Control" in Item 11 to this
Report.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sector includes 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 assurance as to 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 products
and services; (iii) the impact of any unusual items resulting from ongoing
evaluations of Sector's business strategies; (iv) requirements imposed on Sector
and its competitors by the 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, Sector 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. Sector's future success will depend significantly on its
ability to develop additional advanced products more rapidly and less
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expensively than its existing and potential competitors, to persuade its
customers to license Sector'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 Sector will be
able to accomplish this successfully. Many of Sector's existing and potential
competitors have substantially greater financial, technical, marketing, sales
and distribution resources than Sector. There can be no assurance that Sector
will be able to compete successfully or that competition will not have a
material adverse effect on Sector's operating results and financial condition.
Any substantial decrease in Sector's revenues will materially and adversely
affect its operating results because most of Sector's manpower and other
expenses are fixed and cannot be adjusted rapidly to compensate for a
substantial decrease in revenues.
Results of Operations
The year ended February 28, 1998 Compared to the year ended February 28, 1997
Telecommunication Revenue - Sector earns all of its telecommunications revenue
from Sector BG (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 Sector BG-owned digital phone systems through shared revenue
agreements with some of its customers.
Sector's telecommunications revenue increased by $111,604 or 14.9% from $751,493
for the year ended February 29, 1997 ("fiscal 1997") to $871,097 for fiscal
1998.
Software Sales and Maintenance - Sector's software sales and maintenance revenue
increased by $1,165,226 or 229.7% from $507,220 for fiscal 1997 to $1,672,446
for fiscal 1998 (all figures are net of payments to third party distributors).
The increase in sales for fiscal 1998 was attributable to the development and
release of new product lines and new versions of Histech's software products, as
well as for Histech's sales being included for a full year (the prior years
results reflected a six month period of sales).
Histech utilized the services of software distributors for the sales of its
products in geographic regions which it has no sales force. During fiscal 1998,
approximately 75% of its sales were generated by software distributors.
Costs of Sales - The Cost of Sales of Sector increased by $342,772 or 38.2% from
$896,171 for fiscal 1997 to $1,238,944 for fiscal 1998. Most of the increase was
attributable to the increase in costs associated with the distribution and sale
of Histech's new software products.
Software Development Costs - Software development costs consisted primarily of
salaries, related benefits, consultants fees and other costs. Sector's software
development costs increased by $521,392 or 253.3% from $205,834 for fiscal 1997
to $727,226 for fiscal 1998. The increase was attributable to the reflection of
a full year of software development (the prior year's results reflected a
six-month period of software development) and the increased manpower devoted to
new software development.
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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
Sector.
Operating Expenses- Operating expenses consisted primarily of personnel costs,
including salaries, benefits and bonuses and related costs for management,
finance and accounting, legal and other professional services. Total operating
expenses of Sector decreased by $229,179 or 5.5% from $4,146,131 for fiscal 1997
to $3,916,952 for fiscal 1998. Sector's increase in software development costs
($521,392) and sales, general and administrative expenses ($149,830) was more
than offset by a reduction in gold exploration costs of $492,485 and a reduction
in compensation expenses related to stock grants of $407,916.
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 believes that as new products are
introduced into the market in the future, significant marketing costs will be
incurred to successfully promote these products.
Management expects Sector's general and administrative costs, exclusive of any
addition of new employees, to remain at or below the levels experienced in
fiscal 1998.
Interest Expense - Interest expense for fiscal 1998 decreased by $338,663 as
compared to the expense in fiscal 1997. The reduction in interest expense was a
result of the retirement of the "Peacetime Debt" as described in the Company's
Annual Report for fiscal 1997.
Management expects that interest expense could increase in the future to the
degree Sector borrows funds in order to finance any continuing operating cash
flow deficits and implements any capital expenditure plans.
Gold Exploration Costs and Activities - In connection with the change in
Sector's strategic direction, Management has decided to curtail any significant
future gold exploration activities. Although Sector has expensed entirely its
remaining gold assets (principally the claims in the Ketchum Project), it
renewed, in August 1997, for one year its claim rights with the Bureau of Land.
Management is currently evaluating options to determine the possibilities of
divestiture and or discontinuance of Sector's mineral properties. Management
does not expect Sector to incur significant costs in the future related to its
gold exploration properties or other gold exploration related activities.
Liquidity and Capital Resources
During fiscal 1998, the Company financed Sector's operations primarily through
(i) funds it received from the sale of securities in offshore private placements
in accordance with Regulation S of the Securities Act for net sales proceeds of
$210,000 (see the sections "Recent Issuances of
25
<PAGE>
Common Stock" and "Issuance of Convertible Notes" in Item 5 to this Report) and
(ii) sales revenue generated from the Company's subsidiaries.
Sector is currently experiencing negative cash flow from operations. The funding
of future operations will require further infusions of capital.
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 Common
Stock. Although discussions are on-going with various potential sources of
additional capital, 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
(see the section "Nasdaq Listing" in Item 5 to this Report) may adversely impact
the Company's ability to obtain future financing.
Sector had no commitments for material capital expenditures as of February 28,
1998.
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 Sector'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 Sector's current products are dependent, (iii) the reliance on
distributors to continue reselling Sector's products, (iv) the ability of Sector
to successfully expand the distribution of its products through new and unproven
channels, including resellers, integrators, distributors and direct sales, (v)
the risks associated with Sector'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 United Kingdom, (vii) Sector'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 public reports, including this
Report.
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) the development and introduction of new operating systems that require
additional development efforts; (ii) the introduction or enhancement of products
by Sector or its competitors; (iii) changes in the pricing policies of Sector or
its competitors; (iv) increased competition; (v) technological changes in
computer and telecommunications systems and environments; (vi) the ability of
Sector to timely develop, introduce and market new products and services; (vii)
Sector's quality control of products and services sold; (vii) Sector's market
readiness to deploy systems management products for distributed computing
environments; (ix) Sector's market readiness to deploy new
26
<PAGE>
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) Sector'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.
Sector's future revenues will also be difficult to predict. Accordingly, any
significant shortfall of revenues in relation to management'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, management believes that period-to-period comparisons of
Sector'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, Sector 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 Sector 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 Sector will be able to attract,
assimilate or retain additional highly qualified employees in the future. If
Sector 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. Sector'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
Sector's business, operating results and financial condition.
Uncertainty in Developing Products for New Operating Systems. Sector's software
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 Sector'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,
Sector 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 Sector to be delayed in its other
product development efforts. Furthermore, operating
27
<PAGE>
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
Sector from porting its products to, or developing products for, such operating
system. There can be no assurance that Sector's current or future porting
efforts will be successful or, even if successful, that the operating system to
which Sector elects to port to or develop products will achieve or maintain
market acceptance. The failure of Sector 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 Sector'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 fiscal 1998. Management believes that
Sector's 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 United Kingdom.
Sector has resellers in North America and Europe. International expansion may
require Sector 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 Sector's operating margins. To the extent that Sector 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 Sector will be able to maintain or increase international market
demand for its products.
As of February 28, 1998, the Company's Swiss subsidiary employed engineers and
contractors 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 and services 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.
Sector'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 receivable payment cycles, greater
difficulty in accounts receivable collection, seasonality due to the slow-down
in European business activity during Sector's second 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. Sector'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, Sector's effective income tax rate may
be materially and adversely affected. In some markets, localization of Sector's
products is essential to achieve market
28
<PAGE>
penetration. Sector 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
Sector's future international sales and operations and, consequently, its
business, operating results and financial condition.
Sector'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 Sector currently anticipates, or
in the event of a decline in unit price or demand for Sector's systems
management products or telecommunications services, as a result of competition,
technological change or other factors, Sector'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. Sector'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 Sector's business,
operating results and financial condition.
Rapid Technological Change and Requirement for Frequent Product Transitions. The
market for Sector'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 Sector's existing products obsolete and unmarketable. As a result,
Sector's future success will depend 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 Sector's customers start to
utilize Windows NT or other emerging operating platforms, it will be necessary
for Sector 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 Sector's products will achieve market acceptance or will
adequately address the changing needs of the marketplace or that Sector 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 the development of its products and there can be no
assurance that Sector will not experience further delays in connection with its
current product development or future development activities. If Sector 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, Sector's business, operating results and financial
condition will be materially and adversely affected. Because Sector has limited
resources, Sector must restrict its product development efforts and its porting
efforts to a relatively small number of products and operating systems. There
can be no
29
<PAGE>
assurance that these efforts will be successful or, even if successful, that any
resulting products or operating systems will achieve market acceptance.
Sector 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 Sector, 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 Sector. Sector 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. Sector's success
depends upon its proprietary technology. Sector will rely on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect its proprietary rights. Sector
does not have any patents material to its business and has no patent
applications filed. As part of its confidentiality procedures, Sector 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 Sector's
products or technology without authorization, or to develop similar technology
independently. Policing unauthorized use of Sector's products is difficult and
although Sector is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. Sector 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 Sector's intellectual property. In selling
its products, Sector 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 Sector's protection of its proprietary rights,
including any patent that may be issued, will be adequate or that Sector's
competitors will not independently develop similar technology, duplicate
Sector's products or design around any patents issued to Sector 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 Sector with respect to current or future products.
Sector expects that software product developers will increasingly be subject to
such claims as the number of products and competitors in Sector'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 Sector's business, operating results and financial
condition. Such claims might require Sector to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to Sector or at all,
30
<PAGE>
which could have a material adverse effect upon Sector's business, operating
results and financial condition.
ITEM 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Independent Accountant's Report...............................................32
Financial Statements
Balance Sheets..........................................................33
Statements of Operations................................................34
Statements of Stockholder's Equity......................................35
Statements of Cash Flows................................................36
Notes to Financial Statements...........................................38
31
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
SECTOR COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheets of SECTOR
COMMUNICATIONS, INC. of February 28, 1998 and 1997, 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 consolidated financial position of SECTOR
COMMUNICATIONS, INC. as of February 28, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company has suffered recurring losses from operations
and its limited capital resources raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 18. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 2, 1998
32
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
FEBRUARY 28
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 128,911 $ 80,096
Accounts Receivable, net of provision for
doubtful accounts of $38,097 and $50,678 501,010 618,845
Marketable Securities -- 21,762
Related Party Receivables -- 32,198
Receivable on Sale of Securities -- 1,000,000
Notes Receivables 125,000 143,110
Prepaid Expenses and Deposits 45,646 117,426
------------ ------------
Total Current Assets 800,567 2,013,437
------------ ------------
PROPERTY AND EQUIPMENT 2,211,317 2,170,846
Accumulated Depreciation (1,476,444) (1,060,696)
------------ ------------
Net Book Value 734,873 1,110,150
------------ ------------
OTHER ASSETS
Intangible Assets, net 4,974,345 5,350,447
Capitalized Mining Claim Costs -- 1,036,523
Deposits 42,482 41,953
------------ ------------
Total Other Assets 5,016,827 6,428,923
------------ ------------
TOTAL OTHER ASSETS $ 6,552,267 $ 9,552,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,689,711 $ 1,218,867
Short-Term Borrowing -- 12,028
Deferred Revenue 298,419 449,254
Due to Related Parties 235,785 474,021
------------ ------------
Total Current Liabilities 2,223,915 2,154,170
Rent Deposit 12,248 12,248
------------ ------------
TOTAL LIABILITIES 2,236,163 2,166,418
------------ ------------
Commitments and Contingencies (Note 17)
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding -- --
Preferral Stock, Series A $.001 per shares issued
and outstanding -- --
Common Stock, $.001 par value; 40,000,000 shares
authorized 917,962 and 14,898,066 shares issued
and outstanding 918 44,898
Additional Paid-in Capital 13,729,709 13,116,354
Retained Deficit (9,244,613) (5,658,196)
Cumulative Foreign Currency Translation Adjustment (169,910) (116,964)
------------ ------------
Total Stockholders' Equity 4,316,104 (7,386,092)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,552,267 $ 9,552,510
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
33
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28,
1998 1997
----------- -----------
REVENUE
Telecommunication Revenue $ 871,097 $ 751,493
Software Sales & Maintenance 1,672,446 507,220
----------- -----------
2,543,543 1,258,713
COST OF SALES 1,238,944 896,171
----------- -----------
GROSS PROFIT 1,304,599 362,542
----------- -----------
OPERATING EXPENSES
Gold Exploration Costs 61,862 554,347
Software Development Costs 727,226 205,834
Compensation Expense Related to
Stock Grants -- 407,916
Sales, General & Administrative 3,127,864 2,978,034
----------- -----------
Total Operating Expenses 3,916,952 4,146,131
----------- -----------
Loss From Operations (2,612,353) (3,783,589)
----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense (2,452) (341,115)
Other Income (Expense) 56,042 37,084
Impairment of Claim Costs (1,036,523) (1,036,500)
Other Fees & Charges -- (23,636)
Foreign Exchange Gain (Loss) 8,869 (14,083)
----------- -----------
Total Other Income (Expense) (974,064) (1,591,250)
----------- -----------
Loss Before Provision for Income Taxes and
Extraordinary Item (3,586,417) (5,374,839)
Provision for Income Taxes -- --
----------- -----------
Loss Before Extraordinary Item (3,586,417) (5,374,839)
Extraordinary Item
Gain on Extinguishment of Debt
(Net of Income Tax Benefit of $0) -- 2,298,532
----------- -----------
Net Loss $(3,586,417) $(3,076,307)
=========== ===========
Loss Per Share:
Loss Before Extraordinary Item $ (3.90) $ (9.53)
Extraordinary Item -- 4.02
----------- -----------
Net Loss Per Share $ (3.90) $ (5.45)
=========== ===========
Weighted Average Common Shares Outstanding 917,962 564,189
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
34
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
--------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance,
March 1, 1996 -- $ -- $ 23,638,540 $ 23,639 $ 3,879,325
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
Sale of Common Stock in an
Offshore Private Placement -- -- 983,736 984 749,016
Issuance of Restricted Stock
to Certain Officers, Directors and Employees -- -- 933,332 933 406,983
Exercise of Stock Purchase Warrant -- -- 76,147 76 60,440
Exercise of Stock Option -- -- 23,530 23 14,683
Conversion of Debentures -- -- 4,072,792 4,073 919,883
Translation Adjustments -- -- -- -- --
Net Loss -- -- -- -- --
--------- ---------- ------------ ------------ -----------
Balance, February 28, 1997 -- -- 44,898,066 44,898 13,116,354
Sale of Common Stock -- -- 1,000,000 1,000 358,375
Sale of Preferred Stock 250 -- -- -- 250,000
Costs of Issuance -- -- -- -- (40,000)
Reserve Stock Split -- -- (44,980,104) (44,980) 44,980
Translation Adjustments -- -- -- -- --
Net Loss -- -- -- -- --
--------- ---------- ------------ ------------ -----------
Balance February 28, 1998 250 $ -- 917,962 918 13,729,709
========= ========== ============ ============ ===========
<CAPTION>
Cumulative
Accumulated Translation
Deficit Adjustments Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance,
March 1, 1996 $ (2,581,889) $ (218,665) $ 1,102,410
Reverse Stock Split and
Stock Dividend -- -- --
Common Stock Issued in the
Acquisition of:
Global Communications Group, Inc. -- -- --
HIS Technology AG and
Mountain Software AG -- -- 7,101,194
Sale of Common Stock in an
Offshore Private Placement -- -- 750,000
Issuance of Restricted Stock
to Certain Officers, Directors and Employees -- -- 407,916
Exercise of Stock Purchase Warrant -- -- 60,516
Exercise of Stock Option -- -- 14,706
Conversion of Debentures -- -- 923,956
Translation Adjustments -- 101,701 101,701
Net Loss (3,076,307) -- (3,076,307)
------------ ------------ ------------
Balance, February 28, 1997 (5,658,196) (116,964) 7,386,092
Sale of Common Stock -- -- 359,375
Sale of Preferred Stock -- -- 250,000
Costs of Insurance -- -- (40,000)
Reserve Stock Split -- -- --
Translation Adjustments -- (52,946) (52,946)
Net Loss (3,586,417) -- (3,586,417)
------------ ------------ ------------
Balance February 28, 1998 (9,244,613) (169,910) 4,316,104
------------ ------------ ------------
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
35
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
FEBRUARY 28
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,586,417) $(3,076,307)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 807,417 665,643
Compensation Portion of Restricted Stock Grants -- 407,916
Reserve for Bad Debt 12,581 119,000
Gain on Extinguishment of Debt -- (2,298,532)
Impairment of Claim Costs 1,036,523 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 117,835 (113,639)
Repayment of Related Party Receivable 32,198 37,591
Prepaid Expenses and Deposits 71,251 (47,846)
Receivable on Sale of Securities 1,000,000 (1,000,000)
(Decrease) Increase in Liabilities
Accounts Payable 470,844 120,973
Related Party Payable (238,286) 374,598
Deferred Revenue (150,835) 449,254
Accrued Interest on Loan Payable -- 305,574
Rent Deposit -- 12,248
----------- -----------
Net Cash Used By Operating Activities (426,889) (2,907,027)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (40,471) (6,537)
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
Repayment (Loan) Provided to Atcall 60,512 (262,110)
Decrease in Marketable Securities 21,762 --
Proceeds from Short-Term Borrowing -- 986,259
Repayment of Short Term Borrowing (12,028) (300,000)
Payment for the Investment in DBE -- (1,050,000)
----------- -----------
Net Cash Provided by Investing Activities 29,775 1,184,221
----------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
36
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
FEBRUARY 28,
1998 1997
---------- ----------
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 210,000 750,000
---------- ----------
Net Cash Provided by Financing Activities 210,000 1,722,261
---------- ----------
Effect of Exchange Rate Changes on Cash 138,299 58,212
---------- ----------
Net Increase in Cash 48,815 57,667
Cash - March 1 80,096 22,429
---------- ----------
Cash - February 28, $ 128,911 $ 80,096
========== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ -- $ 333
========== ==========
Taxes $ -- $ --
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
For the Year Ended February 28, 1997:
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.
37
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
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.
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 sheets as of February 28, 1998 and 1997 and
the consolidated statements of operations, stockholders' equity and
cash flows for the years then ended are those of Sector and its
subsidiaries (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated.
The financial statements presented for periods prior to the
acquisition of Global present the financial position and results of
operations solely of Global, and do not include the financial
position or results of operations of Sector or any of its
subsidiaries.
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 is shown in the financial statements as deferred
revenue.
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.
38
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 2 - NATURE OF OPERATIONS (Continued)
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
intellectual 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 intellectual property and
distribution rights are being amortized using the straight-line
method over five years.
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.
39
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 2 - NATURE OF OPERATIONS (Continued)
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. Retroactive effect has been given
to reverse stock splits.
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.
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).
40
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 3 - ACQUISITIONS (Continued)
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.
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.
41
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 3 - ACQUISITIONS (Continued)
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).
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.
42
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 3 - ACQUISITIONS (Continued)
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).
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 accrued on March 1, 1996.
Net Sales $ 1,511,124
-----------
Net Loss $(1,271,463)
-----------
Net Loss per Share $ (0.045)
-----------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
February 28, February 28,
1998 1997
----------- -----------
Fibre Network $ 157,837 $ 157,837
Equipment 1,916,192 1,875,718
Furniture and Fixtures 47,223 47,223
Vehicles and Other 90,068 90,068
----------- -----------
2,211,317 2,170,846
Less: Accumulated
Depreciation (1,476,444) (1,060,696)
----------- -----------
$ 734,873 $ 1,110,150
=========== ===========
Depreciation expense for the years ended in 1998 and 1997 was
$414,870 and $418,117 respectively.
NOTE 5 - RELATED PARTY RECEIVABLES AND TRANSACTIONS
During the three month period ended November 30, 1996, the Company
accrued $80,000 for consulting fees incurred for services provided by
MCG Management Consulting Group, S.A. ("MCG"). This agreement was
canceled on November 26, 1996. One of the principles of MCG is also a
director of Sector AG and the Chairman of the Board of Directors of
Histech. This liability remains unpaid as of February 28, 1998.
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.
43
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 6 - NOTES RECEIVABLE
Notes receivable at February 28, 1998 and 1997 are as follows:
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. A settlement in the
amount of $125,000 was reached for the
payment of the note in February, 1998 $ 125,000 $ 262,110
Reserve for potential uncollectibility - (119,000)
----------- ----------
$ 125,000 $ 143,110
=========== ==========
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
Intangible assets at February 28, 1998 and 1997 are as follows:
Intangible assets related to the
acquisition of Histech (Note 3) $4,286,922 $ 4,286,922
Intangible assets related to the
acquisition of Mountain (Note 3) 595,959 595,959
Intellectual property and distribution
rights acquired by Histech prior to its
acquisition by the Company, net of
foreign currency exchange fluctuations. 763,382 759,498
---------- -----------
5,646,243 5,642,379
Amortization of intangible assets and
intellectual property and distribution
rights (671,918) (291,932)
---------- -----------
Total $4,974,345 $ 5,350,447
========== ===========
44
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 8 - INTANGIBLE ASSETS (Continued)
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.
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.
45
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 10 - CONVERTIBLE DEBENTURES (Continued)
The persons to whom the Debentures were sold are as follows:
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
===========
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, 1998.
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
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 preceeding 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.
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.
46
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
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 mutual 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.
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).
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 or the number of authorized shares of the Common
Stock from 50,000,000.
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 for50
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.
Fiscal Year 1997 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.
47
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
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.
Recent Issuances 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.
As a result of the conversions and issuance described in the
preceding paragraph and the issuances described in note 19, the
Company issued an aggregate of 268,377 shares of the Common Stock.
48
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Warrants
At February 28, 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 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
======
The exercise prices of outstanding warrants have been recalculated to
give effect to the 1998 and 1997 respective stock splits.
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.
Warrants to purchase a total of 2,095,680 pre-split shares expired
during the year ended February 28, 1998.
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.
49
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SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 13 - STOCK OPTION PLANS (Continued)
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 shares 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.
On March 5, 1998, the Company granted to a Director a 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 March 5,
1998 and 100,000 shares on March 5, 1999. The director resigned prior
to February 28, 1998 and the unvested options totaling 200,000
shares have been cancelled.
A summary of stock option transactions are as follows:
(all amounts and prices have been adjusted for the fiscal 1998
reverse stock splits)
Years Ended February 28,
------------------------
1998 1997
---- ----
Outstanding, Beginning 24,200 3,000
Granted Under the 1994 Stock Plan at
an Exercise Price of $53.125 Per Share - 3,000
Granted Under the 1994 Stock Plan at
an Exercise Price of $81.25 Per Share - 3,600
Granted Under the 1994 Stock Plan at
an Exercise Price Ranging from
$18.75 to $45.00 Per Share 6,000 20,000
Expired or Canceled Under the 1994
Stock Plan (4,000) (5,400)
------- -------
Outstanding, Ending 26,200 24,200
======= =======
Exercisable, Ending 21,200 10,200
======= =======
50
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
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.
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.
51
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 14 - DISPOSITION OF ASSETS (Continued)
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.
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.
52
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
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, 1998, the Company had net carryforward losses of
approximately $15,700,000. 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.
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, 1998 and 1997 are as
follows:
1998 1997
----------- -----------
Deferred Tax Assets
Loss Carryforwards $ 5,338,000 $ 4,114,000
Less: Valuation Allowance (5,338,000) (4,114,000)
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ===========
Net operating loss carryforwards expire starting in 2005 through
2012.
53
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 17 - COMMITMENTS AND CONTINGENCIES
1) 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
-------- -------- --------
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
2003 87,126 -- 87,126
The Company has entered into noncancelable sublease agreements on
terms similar to its original lease for office space at its McLean,
Virginia 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, 1998 and 1997 the Company had $45,136 and $7,598 in rent due it
from G&S International.
2) 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.
54
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 17 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
The Company is in discussions with Symark which, if successful, would
lead to a cessation of legal efforts by each party and the resumption
of a distributor relationship with Symark in the United States.
Although management is optimistic that these discussions will achieve
the desired results, there can be no assurance, absent a written
binding agreement, that this will occur.
3) On February 7, 1997, Alfred Hasler, Adrian Stanga, Lucie Vonesch and
Lloyd Kim, as plaintiffs, instituted an action in the Superior Court
of California, County of Santa Clara, against S. Allan Kline, a
former director of the Company (until January 17, 1997), Biomyne,
Inc. ("Biomyne"), Biomyne Technology Company ("BTC"), Aurtex, Inc.
("Aurtex"), the Company, Biomyne Exploration Company ("BEC"), Biomyne
North Company ("BNC"), San Jose National Bank, Hugo Wyss and
currently unknown defendants. The Company, however, did not become
aware of the action until March 11, 1998 and has engaged California
counsel to defend it. In the complaint the four plaintiffs allege
that they are limited partners of BEC and, in the case of Mr. Hasler,
also a limited partner of BTC, and that their sixteen causes of
action (of which four include Sector as a defendant) arise from their
investments in one or both limited partnerships. In the third cause
of action, plaintiffs allege that in 1989 BEC solicited limited
partnership interests and represented that the funds would be used
for drilling for gold on BEC claims in Nevada and instead diverted
the funds to BNC for the development of BNC's claims in Idaho.
Plaintiff's who allegedly invested $300,000 in BEC, seek $3,000,000
in damages for the benefits and profits they were not able to derive
from the Idaho claims. Plaintiffs allege earlier in the complaint and
in the fourth cause of action that Biomyne sold the Idaho claims to
Aurtex, which they believe was acquired by the Company, but in fact
is the Company by its former name as correctly alleged in the seventh
cause of action. In the fourth cause of action, plaintiffs are
seeking over $3,000,000 in damages as the value of the shares in the
Company to which they believe they are entitled. In the seventh cause
of action, plaintiffs seek punitive damages for not delivering the
shares to them. In the 14th cause of action, the plaintiffs seeks
damages for not delivering the shares to them. In the 14th cause of
action, the plaintiffs seeks damages in excess of $3,000,000 plus
punitive damages as a result of the defendants intentionally not
delivering the shares resulting from the transfer by Biomyne to the
Company. The Company, on June 2, 1998, answered the complaint denying
any liability and pleading 12 affirmative defenses. Based on its
current knowledge, management is of the opinion that, if any
liability can be established by the plaintiffs, it is that of the
other defendants and not that of the Company.
4) During the 3rd quarter of 1997 an action was filed by The Lodestone
Group Inc. ("Lodestone") in the District Court of Arapahoe County,
Colorado. The suit claims approximately $42,000 is owned to Lodestone
by the Company for work performed pursuant to a contract between
Lodestone and the Company wherein Lodestone was to manage the
administration of various exploratory activities with respect to the
mining claims of the Company in Idaho. The amounts billed are, in the
belief of the Company, far in excess of the contractually stipulated
amount and that there was no corporate authorization for any
additional work to be performed by Lodestone. In the opinion of
management the suit is without merit and its outcome will have no
materially adverse impact on the Company. The amounts billed have
been included in accounts payable as of February 20, 1998 and 1997.
5) 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 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 customer s and
institutional accredited investors (as such term is defined in Rule
501 (a) under the Securities Act).
55
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
NOTE 18 - GOING CONCERN
The accompaning consolidated financial statements have been prepared
assuming the company will continue as a going concern. As of February
28, 1998, the Company has a working capital deficit of 1,423,348 and
an accumulated deficit of 9,244,613. Based upon the Company's plan of
operation, the Company estimates that existing resources, together
with funds generated from operations will not be sufficient to fund
the Company's working capital. The Company is actively seeking
additional equity financing. There can be no assurances that
sufficient financing will be available on terms acceptable to the
Company or at all. If the Company is unable to obtain such financing,
the Company will be forced to scale back operations which would have
an adverse effect on the Company's financial condition and results of
operation.
NOTE 19 - SUBSEQUENT EVENTS
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. 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 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) $2.88 (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.
56
<PAGE>
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
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 as of May 29, 1998. All directors are
elected to serve until their successors are elected and qualified and all of
officers are elected to serve at the discretion of the Board. 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.
Name Age Position
---- --- --------
Theodore J. Georgelas 51 Chairman of the Board of Directors
Geoffrey A. Button 49 President and Chief Executive Officer
Jeff Shear 56 Director
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. In December 1997, Geoffrey A.Button was elected as the
President and designated as the Chief Executive Officer. 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. 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 the Company's Board on July 19, 1996 and was elected
as a Vice President and designated as its Chief Operating Officer on February 3,
1997. In December 1997 Mr. Button was elected as the President and designated as
the Chief Executive Officer of the Company. 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.
Jeff Shear has been a director of the Company since March 31, 1993. Since
1988 he has been president of Shea Kershman Laboratories, 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.
57
<PAGE>
Family Relationship
There are no family relations among the directors and executive officers of the
Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than 10% of Common Stock, to file with the
Securities and Exchange Commission initial reports of beneficial ownership and
reports of changes in beneficial ownership of the Common Stock. Officers,
directors and greater than 10% stockholders 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 fiscal 1998.
ITEM 10. Executive Compensation
Summary Compensation Table
The following table sets forth the compensation paid during each of the three
fiscal years ended February 28, 1998 to (1) each person who served as the Chief
Executive Officer of the Company during fiscal 1998 and (2) each other executive
officer of the Company who received cash compensation of salary and bonus of
more than $100,000 during fiscal 1998.
Summary Compensation Table
- --------------------------------------------------------------------------------
Annual Compensation Long-term Compensation
- --------------------------------------------------------------------------------
Restricted
Stock
Name Year Salary Bonus Awards(#) Options(#)
- --------------------------------------------------------------------------------
Theodore Georgelas (1) 1998 $ 80,000 0 0 0
1997 $120,000 $82,500 10,000 0
- --------------------------------------------------------------------------------
Geoffrey Button 1998 $ 16,000 0 0 0
1997 $ 72,000 0 0 20,000
- --------------------------------------------------------------------------------
(1) On January 17, 1996, Mr. Theodore J. Georgelas was elected Chairman of the
Board, President and Chief Executive Officer 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 and completion of the then reverse stock
split, the Company issued to Mr. Georgelas, in connection with his employment
agreement, 10,000 fully vested shares of the Common Stock. None of the above
shares of the Common Stock have been registered under the Securities Act by the
Company; however, the shares do have piggyback registration rights.
Additionally, Mr. Georgelas received a bonus in the form of warrants to purchase
5,000 shares of the Common
58
<PAGE>
Stock at $39.50 per share. The market value per share on the date of grant was
$5,000 yielding a net bonus of $82,500. The warrant expires July 18, 1999.
Effective January 1, 1998, the salary of Mr. Georgelas was reduced to $60,000
coincident with his relinquishment of the officerships of President and Chief
Executive Officer.
(2) Mr. Button's salary was increased from $72,000 to $120,000 effective January
1, 1998 coincident with his assumption of the duties as the President and Chief
Executive Officer of the Company.
Option/SAR Grants Table
The Company has never granted any stock appreciation rights ("SARS").
There were no options granted in fiscal 1998 to either of the officers named in
the Summary Compensation Table.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
There were no stock options exercised during fiscal 1998 and, as indicated in
the preceding section, the Company has never granted any stock appreciation
rights.
The following table shows certain information with respect to each officer named
in the Summary Compensation Table as to option values as of February 28, 1998:
AGGREGATED FY-END OPTION VALUE
- ------------------------------------------------------------------------
Number Of
Unexercised Value Of
Securities Unexercised In-
Underlying Options The-Money Option
At FY-End (#) AT FY-End ($)
Exercisable/Un- Exercisable/Un-
Name exercisable exercisable
- ------------------------------------------------------------------------
Theodore J. Georgelas 5,000/0 0/0
- ------------------------------------------------------------------------
Geoffrey A. Button 14,000/6,000 0/0
- ------------------------------------------------------------------------
* Based on a closing sales price of $2,625 per share on February 28, 1998, none
of the outstanding options were in-the-money.
Long Term Incentive Plans
The Company has no pension plan in effect and has no stock option plan,
restricted stock plan, stock appreciation rights nor any other long-term
incentive plan under which grants or awards may be made in the fiscal year
ending March 31, 1999 or thereafter.
59
<PAGE>
Compensation of Directors
Directors who are not employees of Sector 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 a director, Mr. Button
received warrants, granted on July 19, 1996, to purchase 2,000 shares of the
Common Stock at $112.50 per share, 2,000 shares at $150.00 per share and 2,000
shares at $200.00 per share.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the Common Stock ownership information as of May
29, 1998, with respect to (i) each person known to the Company to be the
beneficial owner of more than 5% of the Common Stock; (ii) each director of the
Company; and (iii) all directors, and executive officers 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.
Beneficial Owner
and Address Number of Shares Percentage(1)
- ----------- ---------------- -------------
Firstempex 208,377 17.2
24 Route de Malagnov
1208 Geneve, Switzerland
Joan Brown 107,696 8.9
Isle of Man
United Kingdom
Theodore J. Georgelas(2) 17,020(3) 1.4
7601 Lewinsville Road
Suite 250
McLean, VA 22102
Geoffrey A. Button(4) 16,100(5) 1.3
The Millhouse
Chicksgrove
Salisbury, Wilts SP3 6LY
United Kingdom
Jeff L. Shear(6) 3,334 nil
1421 Wildhorse Parkway
Chesterfield, MO 63005
See officers and directors 36,754(7) 3.0
As a group (3 persons)
- ----------
60
<PAGE>
(1) The percentages computed in this column of the table are based upon
1,213,998 shares of the Common Stock outstanding as of May 29, 1998 and effect
is given, pursuant to Rule 13d-3(1) under the Exchange Act, to shares issuable
upon the exercise of the Common Stock purchase warrants and stock options
currently exerciseable or exercisable within 60 days of May 29, 1998.
(2) Mr. Georgelas is the Chairman of the Board and a director of the Company.
(3) The shares reported in the table include 5,000 shares issuable upon the
exercise at $39.50 per share of a Common Stock purchase warrant expiring July
18, 1999, which warrant is currently exercisable.
(4) Mr. Button is the President, the Chief Executive Officer and a director of
the Company.
(5) The shares reported in the table include (1) 6,000 shares issuable upon the
exercise at $18.75 per share of a stock option expiring February 2, 2007, (2)
4,000 shares issuable upon the exercise of a stock option expiring February 2,
2007 at $30.00 per share, (3) 4,000 shares issuable upon the exercise at $45.00
per share of a stock option expiring February 2, 2007 (4) 2,000 shares issuable
upon the exercise of a Common Stock purchase warrant expiring June 30, 2000 at
$112.50 per share and (5) 2,000 shares issuable upon the exercise at $150.00 per
share of a Common Stock purchase warrant expiring June 30, 2000. All of the
foregoing options and warrants are currently exercisable or will become
exercisable within 60 days of May 29, 1998. The shares reported in the table do
not include 2,000 shares issuable upon the exercise at $200.00 per share of a
Common Stock purchase warrant expiring June 30, 2000 which is not exercicsable
on May 29, 1998 or within 60 days thereafter.
(6) Mr. Shear is a director of the Company.
(7) The shares reported in the table reflect those reported in the text related
to Notes (3) and (5) and for the person as to whom Note (6) relates.
Possible Change in Control
As indicated in the section "Issuance of Convertible Debentures" in Item 5
to this Report, Amex Corp. Limited and Danvers Investment Corp. on April 15,
1998 acquired $500,000 in principal amount of the Notes and 60,000 shares of the
Common Stock. If either purchaser converted its Note at $2.30 per share (i.e.,
80% of $2.88), it would receive 108,695 shares of the Common Stock, in addition
to 30,000 shares already owned. If the alternative conversion price was
applicable (i.e., 80% of the average of the closing sales prices during the five
trading days preceding conversion) and such conversion price was $.50 per share,
the purchaser would receive 500,000 shares of the Common Stock, in addition to
the 30,000 shares already owned.
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ITEM 12. Certain Relationships and Related Transactions
The Company currently subleases 5,501 of its leased office space to DBE at the
face rate of these lease apportioned by square footage (approximately $9,272.78
per month). Theodore J. Georgelas, the Chairman of the Board of the Company,
owns 38,700 shares of DBE common stock purchased in October 1993 prior to the
Company's investment of $1,100,000 in DBE.
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation of Sector, as amended. (Incorporated
herein by reference to Exhibit 3.1 of the Company's Form 10-KSB
for the year ended February 28, 1993.)
3.2 Articles of Merger, amending the Company's Articles of
Incorporation. (Incorporated herein by reference to Exhibit 3.2
of the Company's Form 10-KSB for the fiscal year ended February
28, 1993.)
3.3 Bylaws of the Company. (Incorporated herein by reference to
Exhibit 3.3 of the Company's Form 10-KSB for the fiscal year
ended February 28, 1993.)
3.4 Certificate of Change in Number of Authorized Shares of Common
Stock filed in Nevada on November 26, 1997.
3.5 Certificate of Designations of Series A Convertible Preferred
Stock filed in Nevada on January 5, 1998.
4.1 Convertible Promissory Notes due July 30, 1999. (Incorporated by
reference to the Company's Report on Form 8-K filed on April 24,
1998.)
10.1 1991 Stock Plan of the Company. (Incorporated herein by reference
to Exhibit 10.1 of the Company's Form 10-KSB for the fiscal year
ended February 28, 1993.)
10.2 1994 Stock Plan of the Company. (Incorporated herein by reference
to Exhibit 99 of the Company's Registration Statement on Form
S-8, File No. 33-76718, filed 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
Company's Form 10-KSB for the fiscal year ended February 28,
1993.)
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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 Company's Form 10-KSB
for the fiscal 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
Company's Form 10-KSB for the fiscal 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 Company's Form 10-QSB for the
quarter ended November 30, 1994.)
10.8 Promissory Note Agreement with Mr. S. Allan Kline, dated August
11, 1995. (Incorporated herein by reference to Exhibit 10.10 of
the Company's Form 10-KSB for the fiscal 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 Company's Form 10-KSB for the fiscal 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 Company's Form 10-KSB for the
fiscal 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 Company's Form 10-KSB for the
fiscal year ended February 29, 1996).
10.12 Debt Repayment Agreement. (Incorporated herein by reference to
Exhibit 10.12 of the Company's Form 10-KSB for the fiscal year
ended February 29, 1996).
10.13 Distribution Agreement, dated October 1, 1995, between HIS
Software AG and Raxco Inc. (Incorporated herein by reference to
Exhibit 10.13 of the Company's Form 10-KSB for the fiscal year
ended February 28, 1997.)
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C., independent
auditors.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the quarter ended
February 28, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) to the Securities Exchange
Act of 1934, Sector has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on this 19th day of June, 1998.
SECTOR COMMUNICATIONS, INC.
BY: /s/ Theodore J. Georgelas
-------------------------------------
Theodore J. Georgelas, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Sector and in the
capacities and on the dates indicated.
Date: June 19, 1998 /s/ Theodore J. Georgelas
-------------------------------------
Director
Date: June 19, 1998 /s/ Geoffrey A. Button
-------------------------------------
Geoffrey A. Button, President and
Chief Executive Officer and Director
Date: June 19, 1998 /s/ Jeff Shear
-------------------------------------
Jeff Shear, Director
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SECTOR COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-KSB
EXHIBIT FILED WITH THE REPORT
Exhibit Page
Number Description Number
- ------ ----------- ------
3.4 Certificate of Change in Number of Authorized Shares of
Common Stock filed in Nevada on November 26, 1997..............66
3.5 Certificate of Designations of Series A Convertible
Preferred Stock filed in Nevada on January 5, 1997.............68
65
Exhibit 3.4
CERTIFICATE OF CHANGE IN NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK
OF
SECTOR COMMUNICATIONS, INC.
No. 4628-83
THEODORE J. GEORGELAS and JEFF SHEAR certify and declare as follows:
1. We are the Chairman of the Board and Secretary, respectively, of SECTOR
COMMUNICATIONS, INC., a Nevada corporation, duly organized under the laws of the
State of Nevada.
2. To effectuate the change in the total number of shares of Common Stock
that this corporation is authorized to issue under Article Fourth of the
Articles of Incorporation (the "Change"), and pursuant to NRS 78.207 and NRS
78.209, we certify and declare:
(a) The total number of shares of Common Stock that this corporation
is currently authorized to issue is 50,000,000 shares, par value $.001 per
share;
(b) The total number of shares of Common Stock that this corporation
shall be authorized to issue upon the effective date described below in this
certificate shall be 40,000,000 shares, par value $.001 per share;
(c) On or about the time of the Change, this corporation shall issue
to each holder, at the time of the Change, of Outstanding Common Stock in this
corporation, one new share of Common Stock in exchange for each 1.25 shares of
Common Stock such stockholders held prior to the Change (the "Exchange").
(d) Shareholders shall receive the payment of money, based upon the
fair market value of the outstanding Common Stock of this corporation at the
time of the Exchange, in lieu of any fractional shares of Common Stock in this
corporation such shareholders may otherwise be entitled to receive as a result
of the Exchange.
(e) Pursuant to NRS 78.207, the approval of stockholders was not
required for this Change;
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(f) The Change described herein shall be effective on December 2,
1997 at 12:01 a.m., P.S.T.
3. Pursuant to NRS 78.209, the provisions of the Articles of Incorporation
of this corporation shall be deemed amended as hereinabove provided.
4. Pursuant to NRS 78.207 and 78.209, the hereinabove amendment was
unanimously adopted by the Board of Directors of this corporation by consent
resolution dated November 18, 1997, setting forth the above change in the total
number of shares of Common Stock that this corporation is authorized to issue
and declaring its advisability.
IN WITNESS WHEREOF, we have hereunto set our hands this 26th day of
November, 1997, declaring and certifying that the facts stated above are true.
/s/ Theodore J. Georgelas
--------------------------------
Theodore J. Georgelas,
Chairman of the Board,
President
/s/ Jeff Shear
--------------------------------
Jeff Shear,
Secretary
67
Exhibit 3.5
CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL,
AND OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS,
LIMITATIONS, RESTRICTIONS, AND OTHER DISTINGUISHING CHARACTERISTICS OF SERIES
A 8% CONVERTIBLE PREFERRED STOCK
OF
SECTOR COMMUNICATIONS, INC.
Sector Communications, Inc., a corporation organized and existing under
the laws of the State of Nevada (the "Company"), hereby certifies that:
1. The Company is validly existing and incorporated under the laws of the
State of Nevada.
2. The Company's Articles of Incorporation, as amended, authorizes the
issuance of 5,000,000 shares of Preferred Stock, par value $.001 per share, and
expressly vests in the Board of Directors the authority provided therein to
issue any or all of such shares in one or more series, and by resolution or
resolutions the designation, number, full or limited voting powers, preferences
and relative, participating, optional and other special rights, and the
qualifications, limitations, restrictions, and other distinguishing
characteristics of each series to be issued. Currently, there are no designated
shares of Series A 8% Convertible Preferred Stock. The rights of the Holders of
the Series A 8% Convertible Preferred Stock shall rank senior to all issuance
and rights of the Holders of all other series of Preferred Stock, now existing
or hereafter issued by the Company, with respect to all preferences upon
liquidation.
3. Designation Of The Series. The Board of Directors of the Company,
pursuant to authority expressly vested in it as aforesaid, has adopted the
following, creating a Series A issue of Preferred Stock;
There shall be a series of convertible Preferred Stock designated as
"Series A 8% Convertible Preferred Stock." The shares of such series shall be
referred to herein as the "Series A Shares." Upon initial issuance by the
Company, the price per share of the Series A Shares shall be $1,000 (the
"Purchase Price"). The par value per share is $.001. The authorized number of
such Series A Shares is 250. The Series A Shares shall be senior in rank to all
other series of Preferred Stock, now existing or hereafter issued by the
Company.
A. Voting Rights. Except as otherwise required by law, the Holders
of the Series A Shares shall not be entitled to vote separately, as a series or
otherwise, on any matter submitted to a vote of the stockholders of the Company.
Notwithstanding the foregoing, without the prior written consent of the Holders
of the Series A Shares;
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(i) the Company shall not amend, alter, or repeal (whether by
amendment, merger, or otherwise) any of the provisions related to the Series A
Shares in its Certificate of Incorporation, as amended, any resolutions of the
board of directors or any instrument establishing and designating the Series A
Shares in determining the relative rights and preferences thereof so as to
affect any materially adverse change in the rights, privileges, powers, or
preferences of the Holders of Series A Shares; or
(ii) the Company shall not create or designate any additional
preferred stock senior in right as to dividends, voting rights, redemptions or
liquidation to the Series A Shares.
B. Dividends. A holder of the Series A Shares ("Holder") shall be
entitled to receive a 8% cumulative dividend payable annually in cash or in
freely trading shares of the Common Stock of the Company, at the Company's
option. Such dividends shall be payable at the time of each conversion, in
preference to dividends on the Common Stock or stock of any class ranking, as to
dividend rights, junior to the Series A Shares. If paid in Common Stock, the
number of shares of the Common Stock to be received shall be determined by
dividing the dollar amount of the dividend by the then applicable Market Price,
as of the dividend payment date. "Market Price" shall mean the lesser of (i) 75%
of the five day average daily closing bid price as reported by the Nasdaq Stock
Market, Inc. ("Nasdaq"), the OTC Bulletin Board, such national securities
exchange as the Common Stock may then be listed or, if none of the foregoing as
reported by the National Quotation Bureau, Inc. on the over-the-counter market,
for the five trading days immediately preceding the conversion date or (ii) 100%
of the closing bid price on the day the Purchase Price, less agreed deductions,
was received by the Company. Dividends shall be fully cumulative and shall
accrue (whether or not declared and whether or not there shall be funds legally
available for the payment of dividends), without interest, and shall be payable
at the time of each conversion.
C. Conversion Rights.
(i) Series A Shares. Upon the Company's receipt of a facsimile or
original of Holder's signed notice of conversion, the Company shall instruct its
transfer agent to issue one or more certificates representing that number of
shares of Common Stock into which the Series A Shares are convertible in
accordance with the provisions regarding conversion set forth in this Section
3.C. The Company's transfer agent shall act as Registrar and shall maintain an
appropriate ledger containing the necessary information with respect to each
Series A Share.
(ii) Conversion Date. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Series A Shares to be
converted together with a facsimile or original of the signed notice of
conversion which evidences Holder's intention to convert those Series A Shares
indicated. The date on which the notice of conversion is effective ("Conversion
Date") shall be deemed to be the date on which the Holder has delivered to the
Company a facsimile or original of the signed notice of conversion, as long as
the original Series A Shares to be converted are received by the Company or its
designated attorney within five business days thereafter. As long as the Series
A Shares to be converted are received by the Company within five business days
after it receives a facsimile or original of the signed notice of conversion,
the Company shall deliver to the Holder, or per the Holder's instructions, the
shares of Common Stock, without restrictive legend or
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stop transfer instructions, within three business days of receipt of the Series
A Shares to be converted.
(iii) Common Stock to be Issued With Restrictive Legend. Upon the
conversion of any Series A Shares and upon receipt by the Company or its
attorney of a facsimile or original of Holder's signed notice of conversion, the
Company shall instruct the Company's transfer agent to issue stock certificates
with restrictive legend or stop transfer instructions unless the shares are
registered under the Securities Act of 1933, as amended, or there is an
exemption from registration requirements thereof, in the name of Holder (or its
nominee) and in such denominations to be specified at conversion representing
the number of shares of Common Stock issuable upon such conversion, as
applicable. The Company warrants that no instructions, other than these
instructions, have been given or will be given to the transfer agent and that
the Common Stock shall otherwise be freely transferable on the books and records
of the Company.
(iv) Conversion Rate. Holder is entitled to convert the entire face
amount of the Series A Shares, plus accrued dividends, at the lesser of (i) 75%
of the five day average closing bid price, as reported by Nasdaq or one of the
other reporting entities specified in Section B hereof for the five trading days
immediately preceding the applicable Conversion Date or (ii) 100% of the closing
bid price of the Common Stock on the Closing Date (the "Conversion Price")...No
fractional shares or scrip representing fractions of shares will be issued on
conversion, but the number of shares issuable shall be rounded up or down, as
the case may be, to the nearest whole share.
The Series A Shares are subject to a mandatory, 24-month conversion
feature at the end of which all Series A Shares outstanding will be
automatically converted, upon the terms set forth in this section ("Mandatory
Conversion Date").
(v) Nothing contained in the Subscription Agreement for the purchase
of the Series A Shares shall be deemed to establish or require the payment of
interest to the Holder at a rate in excess of the maximum rate permitted by
governing law. In the event that the rate of interest required to be paid
exceeds the maximum rate permitted by governing law, the rate of interest
required to be paid thereunder shall be automatically reduced to the maximum
rate permitted under the governing law and such excess shall be returned with
reasonable promptness by the Holder to the Company.
(vi) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue the certificate of Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
stockholder of record on and after the conversion date. Upon surrender of any
Series A Shares that are to be converted in part, the Company shall issue to the
Holder a new Series A Shares equal to the unconverted amount, if so requested by
Holder.
(vii) In the event the Common Stock is not delivered per the written
instructions of the Holder, within five business days after the Conversion Date,
then in such event the Company shall pay to Holder, in cash or Common Stock at
the Company's option, one percent (1%) of the purchase price of the Series A
Shares being converted per each day after the tenth business day following the
Conversion Date that the Common Stock is not delivered.
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To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 3C is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 3C(vii) shall
not apply but instead the provisions of Section 3C(viii) shall apply.
The Company shall make any payments incurred under the Section 3C(vii) in
immediately available funds within three business days from the date of issuance
of the applicable Common Stock. Nothing herein shall limit a Holder's right to
pursue actual damages or cancel the notice of conversion for the Company's
failure to issue and deliver shares of Common Stock to the Holder within ten
(10) business days after the Conversion Date.
(viii) The Company shall at all times reserve and have available all
shares of the Common Stock necessary to meet conversion of the Series A Shares
by all Holders of the entire amount of Series A Shares then outstanding. If, at
any time Holder submits a notice of conversion and the Company does not have
sufficient authorized but unissued shares of Common Stock available to effect,
in full, a conversion of the Series A Shares (a "Conversion Default", the date
of such default being referred to herein as the ("Conversion Default Date"), the
Company shall issue to the Holder all of the shares of Common Stock which are
available, and the notice of conversion as to any Series A Shares requested to
be converted but not converted (the "Unconverted Series A Shares"), upon
Holder's sole option, may be deemed null and void. The Company shall provide
notice of such Conversion Default ("notice of conversion Default") to all
existing Holders of outstanding Series A Shares, by facsimile, within two
business days of such default (with the original delivered by overnight or two
day courier), and the Holder shall give notice to the Company by facsimile
within five business days of receipt of the original notice of conversion
Default (with the original delivered by overnight or two day courier) of its
election to either nullify or confirm the notice of conversion.
The Company agrees to pay to all Holders of outstanding Series A Shares
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Series A Shares held by each Holder where N = the
number of days from the Conversion Default Date to the date (the "Authorization
Date") that the Company authorizes a sufficient number of shares of Common Stock
to effect conversion of all remaining Series A Shares. The Company shall send
notice ("Authorization Notice") to each Holder of outstanding Series A Shares
that additional shares of Common Stock have been authorized, the Authorization
Date and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Holder's option, payable as follows: (i) in
the event Holder elects to take such payment in cash, cash payments shall be
made to such Holder of outstanding Series A Shares by the fifth day of the
following calendar month, or (ii) in the event Holder elects to take such
payment in stock, the Holder may convert such payment amount into shares of
Common Stock at the conversion rate set forth in Section 3C(iv) at anytime after
the 5th day of the calendar month following the month in which the Authorization
Notice was received, until the expiration of the mandatory 24-month conversion
period.
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Nothing herein shall limit the Holder's right to pursue actual damages for
the Company's failure to maintain a sufficient number of authorized shares of
Common Stock.
(ix) Certain Adjustments. In the event of any change in one or more
classes of capital stock of the Company by reason of any stock dividend, stock
split-up, recapitalization, reclassification, or combination, subdivision or
exchange of shares or the like, or in the event of the merger or consolidation
of the Company or the sale or transfer by the Company of all or substantially
all of its assets, then all liquidation preference, conversion and other rights
and privileges appurtenant to the Series A Shares shall be promptly and
appropriately adjusted by the Board of Directors of the Company so as to fully
protect and preserve the same (such preservation and protection to be to the
same extent and effect as if the subject event had not occurred, or the
applicable right or privilege had been exercised immediately prior to the
occurrence of the subject event, or otherwise as the case may be), it being the
intention that, following any such adjustment, the Holders of the Series A
Shares shall be in the same relative position with respect to their rights and
privileges as they possessed immediately prior to the event that precipitated
the adjustment.
(x) Costs. The Company shall pay all documentary, stamp, transfer or
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock upon conversion of any Series A Shares; provided that the Company
shall not be required to pay any taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificate for such shares
in a name other than that of the Holder of the Series A Shares in respect of
which such shares are being issued.
(xi) Concerning the Securities. The issuance, sale and delivery of
the Series A Shares have been duly authorized by all required corporate action
on the part of Company, and when issued, sold and delivered in accordance with
the terms hereof and thereof for the consideration expressed herein and therein,
will be duly and validly issued and enforceable in accordance with their terms,
subject to the laws of bankruptcy and creditors' rights generally. 3,200,000
shares of Common Stock issuable upon conversion of the Series A Shares have been
duly and validly reserved for issuance and, upon issuance shall be duly and
validly issued, fully paid, and non-assessable (the "Reserved Series A Shares").
Prior to conversion of all the Series A Shares, if at anytime the
conversion of all the Series A Shares results in an insufficient number of
Reserved Series A Shares being available to cover all the conversions and
exercises, then in such event, the Company will move to call and hold a
stockholder's meeting within 45 days of such event for the sole purpose of
authorizing additional Series A Shares to facilitate the conversions. In such an
event the Company shall: (1) recommend its current or future officers, directors
and other control people to vote their shares in favor of increasing the
authorized number of shares of Common Stock and (2) recommend to all
stockholders to vote their shares in favor of increasing the authorized number
of shares of Common Stock . Company represents and warrants that under no
circumstances will it deny or prevent Holder's right to convert the Series A
Shares as permitted under the terms of the Subscription Agreement or the
Registration Rights Agreement entered into between the Company and the Holders
of the Series A Shares.
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D. Redemption.
The Company shall have the right to redeem the Series A Series A
Shares in whole or in part, at any time as follows: Up to and including the
100th day following the purchase of the Series A Shares by Holder, the Company
shall have the right to redeem any or all of the Series A Shares for 125% of the
purchase price of the Series A Shares being redeemed, plus accrued dividends
thereon. Prior to sending a notice of conversion, the Holder has the right to
request a written notice from the Company as to whether or not the Company
intends to redeem or convert properly tendered Series A Shares. The Company must
give written notice to the Holder, via facsimile, of its redemption intention,
within five business days of the Company's receipt of such request from the
Holder. The Company's notice of redemption intent, either to redeem or not to
redeem, shall be binding for 10 business days from the date of receipt by the
Holder. If the Company fails to give written notice to Holder within five
business days of Company's receipt of a written request from Holder as to the
Company's redemption intention, such failure shall conclusively determine the
Company's intent not to redeem, and the Company may not give the Holder a notice
of redemption for 10 business days thereafter. Additionally, once Holder faxes
the Company a notice of conversion, the Company shall be restricted from
redeeming as to that conversion.
Redemption by the Company shall be effected by the Company notifying
the Holder by facsimile at the number listed in the subscription agreement for
the purchase of the Series A Shares as to the Company's intention to exercise
its right of redemption. The Company shall state in such notice the amount of
Series A Shares it intends to redeem, the amount that it will pay to effectuate
such redemption and the date by which the Holder must deliver the original
Series A Shares to be redeemed to the Escrow Agent. The Company shall give the
Holder at least 10 business days' advance notice of the above information. On or
before the date by which the Holder is to deliver the original Series A Shares
to the transfer agent for the Common Stock, the Company shall wire to the
transfer agent for the Common Stock that amount necessary to effect the
redemption. Once the transfer agent for the Common Stock is in receipt of the
original Series A Shares being redeemed and those funds necessary to effect the
redemption the transfer agent for the Common Stock shall wire those funds to the
Holder and cancel the original Series A Shares. With respect to that portion of
the Series A Shares being redeemed, provided sufficient funds are on deposit
with the transfer agent for the Common Stock on the redemption date as herein
described, then in such event, after the date of redemption, dividends shall
cease to accrue on those Series A Shares being redeemed and the Holder shall
have no further rights as to those Series A Shares being redeemed other than the
right to receive payments on the redemption date.
E. Liquidation.
(i) Series A Preference. Upon any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the Holders of
Series A Shares shall be entitled, before any distribution or payment is made
upon any shares of Common Stock or any Preferred Stock junior in rank to the
Series A Shares, to be paid an amount per share equal to the
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liquidation value described in this Section 3.E(i) (the "Liquidation Value").
The per share Liquidation Value of the Series A Shares on any date is equal to
the sum of the following:
(A) $1,000 plus
(B) an amount equal to any accrued and unpaid dividends
from the date of issuance of the Series A Shares.
Neither the consolidation nor merger of the Company with or into any other
corporation or other entities, nor the sale, transfer or lease of all or
substantially all of the assets of the Company shall itself be deemed to be a
liquidation, dissolution or winding-up of the Company within the meaning of this
Section 3.E. Notice of liquidation, dissolution, or winding-up of the Company
shall be mailed, by overnight courier, postage prepaid, not less than 20 days
prior to the date on which such liquidation, dissolution, or winding-up is
expected to take place or become effective, to the Holders of record of the
Series A Shares at their respective addresses as the same appear on the books of
the Company or supplied by them in writing to the Company for the purpose of
such notice, but no defect in such notice or in the mailing thereof shall affect
the validity of the liquidation, dissolution or winding-up.
(ii) General.
(A) All of the preferential amounts to be paid to the
Holders of the Series A Shares pursuant to Section 3D(i) shall be paid or set
apart for payment before the payment or setting apart for payment of any amount
for, or the distribution of any assets of the Company to, the Holders of the
Common Stock or any preferred stock junior in rank to the Series A Shares in
connection with such liquidation, dissolution or winding-up.
(B) After setting apart or paying in full the
preferential amounts aforesaid to the Holders of record of the issued and
outstanding Series A Shares as set forth in Section 3D(i), the Holders of record
of Common Stock and any preferred stock junior in rank to the Series A Shares
shall be entitled to participate in any distribution of any remaining assets of
the Company, and the Holders of record of the Series A Shares shall not be
entitled to participate in such distribution.
F. Reacquired Shares. Any Series A Shares redeemed, purchased,
converted, or otherwise acquired by the Company in any manner whatsoever shall
not be reissued as part of such Series A and shall be retired promptly after the
acquisition thereof. All such Series A Shares upon their retirement and the
filing of any certificate required in connection therewith pursuant to Nevada
Law shall become authorized but unissued shares of Preferred Stock.
G. Equality. All Series A Holders shall be subject to the same terms
and conditions as set forth herein. No Series A Holders shall be entitled to or
receive term that are more favorable than those given to any other Series A
Holder. In the event a Series A Holder is given or receives terms more favorable
than those given to or received by any other Series A
74
<PAGE>
Holder, then in such event all Series A Holders shall be given and entitled to
those more favorable terms.
H. Copies of Agreements, Instruments, Documents. Copies of any of
the agreements, instruments or other documents referred to in this Certificate
shall be furnished to any shareholder upon written request to the Company at its
principal place of business.
4. The statements contained in the foregoing, creating and designating the
said Series A issue of Preferred Stock and fixing the number, powers,
preferences and relative, optional, participating, and other special rights and
the qualifications, limitations, restrictions, and other distinguishing
characteristics thereof shall, upon the effective date of said series, be deemed
to be included in and be a part of the Restated Certificate of Incorporation, as
amended, of the Company pursuant to the provisions of Section 78.1955 of the
Nevada Revised Statutes.
IN WITNESS WHEREOF, this Certificate of Designation has been executed on
behalf of the Company by its Vice President and attested by its Secretary this
22nd day of December, 1997.
Signed and attested to on December 22, 1997.
SECTOR COMMUNICATIONS, INC.
By /s/ Theodore J. Georgelas
-------------------------------------
Vice President
Attest:
By /S/ Jeff Shear
-----------------------------
Secretary
STATE OF VIRGINIA ) SS.
COUNTY OF FAIRFAX )
On the 22nd day of December 1997, before me personally appeared Theodore J.
Georgelas, to me known and known to me to be the individual described in and who
executed the foregoing certificate and he thereupon acknowledged that he was the
Vice President of Sector Communications, Inc. and duly authorized to execute the
same on its behalf and that he executed the same as his free act and deed.
/s/ J. Michael Gettler
-------------------------------------
Notary Pubic
75
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Sector
Communications Inc. and is qualified in it's entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-1-1997
<PERIOD-END> FEB-28-1998
<CASH> 128,911
<SECURITIES> 0
<RECEIVABLES> 539,107
<ALLOWANCES> 38,097
<INVENTORY> 0
<CURRENT-ASSETS> 800,567
<PP&E> 2,211,317
<DEPRECIATION> 1,476,444
<TOTAL-ASSETS> 6,552,267
<CURRENT-LIABILITIES> 2,223,915
<BONDS> 0
0
0
<COMMON> 918
<OTHER-SE> 4,315,186
<TOTAL-LIABILITY-AND-EQUITY> 6,552,267
<SALES> 2,543,543
<TOTAL-REVENUES> 2,543,543
<CGS> 1,238,944
<TOTAL-COSTS> 1,238,944
<OTHER-EXPENSES> 3,916,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,452
<INCOME-PRETAX> (3,586,417)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,586,417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,586,417)
<EPS-PRIMARY> (3.90)
<EPS-DILUTED> (3.90)
</TABLE>
