UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: May 31, 2000 Commission File Number: 0-22382
SECTOR COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Nevada 56-1051491
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7601 Lewinsville Road, Ste 250, McLean, VA 22102
------------------------------------------------
(Address of principal executive offices) (Zip Code)
(703) 761-1500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 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. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer/s
classes of common stock as of the last practicable date:
Number of Shares of Common Stock outstanding at May 31, 2000: 17,193,805
<PAGE>
SECTOR COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets.............................................2-3
Statements of Operations...................................4
Statements of Cash Flows...................................5-6
Notes of Consolidated Financial Statements (Unaudited).....7
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations..................12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................19
Signature Page.................................................20
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
May 31, February 29,
2000 2000
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(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 137,565 $ 170,607
Accounts Receivable, net of provision for
doubtful accounts of $17,778 and $18,148 304,452 391,681
Prepaid Expenses 18,275 30,597
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Total Current Assets 460,292 592,885
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PROPERTY AND EQUIPMENT 2,042,939 2,019,960
Accumulated Depreciation ( 1,825,567) ( 1,803,610)
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Net Book Value 217,372 216,350
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OTHER ASSETS
Deposits 28,332 28,289
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TOTAL ASSETS $ 705,996 $ 837,524
============= ============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET (continued)
May 31, February 29,
2000 2000
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(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,807,473 $ 1,818,732
Debentures Payable 263,952 263,952
Deferred Revenue 186,717 203,878
Due to Related Parties 167,612 180,355
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Total Current Liabilities 2,425,754 2,466,917
Rent Deposit 12,248 12,248
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TOTAL LIABILITIES 2,438,002 2,479,165
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Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 5,000,000
shares authorized, no shares issued and
outstanding - -
Common Stock, $.001 par value; 40,000,000
shares authorized, 17,193,805 shares issued
and outstanding 17,194 17,194
Additional Paid-in Capital 14,376,350 14,376,351
Accumulated Deficit (15,838,090) (15,748,015)
Cumulative Foreign Currency Translation Adjustment ( 287,460) ( 287,171)
------------- ------------
Total Stockholders' Equity ( 1,732,006) ( 1,641,641)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 705,996 $ 837,524
============= ============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31,
2000 1999
------------ ------------
REVENUE
Telecommunication Revenue $ 135,249 $ 145,697
Software Sales & Maintenance 93,334 52,540
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228,583 198,237
COST OF SALES 64,386 116,777
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GROSS PROFIT 164,197 81,460
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OPERATING EXPENSES
Software Development Costs 8,009 41,957
Sales, General & Administrative 240,829 251,419
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Total Operating Expenses 248,838 293,376
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Loss From Operations ( 84,641) ( 211,916)
OTHER INCOME (EXPENSE)
Interest (Expense) ( 5,279) ( 37,851)
Other Income (Expense) ( 155) 111,388
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Loss Before Provision for Income Taxes ( 90,075) ( 138,379)
Provision for Income Taxes - -
------------ ------------
Net Loss $( 90,075) $( 138,379)
============ ===========
Net Loss Per Share $( 0.01) $( 0.01)
============ ===========
Weighted Average Common Shares Outstanding 17,193,805 13,922,028
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31,
2000 1999
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $( 90,075) $( 138,379)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 23,249 85,381
Amortization of Discount and Loan Costs - 47,407
Change in Assets and Liabilities:
(Increase) Decrease in Assets
Accounts Receivable 87,229 188,442
Prepaid Expenses and Deposits 12,322 23
(Decrease) Increase in Liabilities
Accounts Payable ( 11,259) 145,691
Related Party Payable ( 12,743) ( 124,158)
Deferred Revenue ( 17,161) -
----------- ------------
Net Cash Provided (Used) by Operating
Activities ( 8,438) 204,407
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets ( 24,386) ( 36,509)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock - 100,000
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Effect of Exchange Rate Changes on Cash ( 218) ( 227,734)
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Net (Decrease) Increase in Cash ( 33,042) 40,164
Cash - March 1, 170,607 181,877
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Cash - May 31, $ 137,565 $ 222,041
========== ============
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ - $ -
=========== ============
Taxes $ - $ -
=========== ============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31, 2000 AND 1999
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Period ended May 31, 1999:
-------------------------
Common stock totaling 2,425,000 shares was issued in settlement of accounts
payable aggregating $97,000.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
------------------------
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Certain reclassifications have been
made to the prior period to conform to the current period's
presentation.
For further information refer to the financial statements and
footnotes included in the Registrant's Annual Report on form 10-KSB
for the period ended February 29, 2000.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full fiscal year
ending February 28, 2001.
The unaudited consolidated balance sheet as of May 31, 2000 and the
consolidated statements of operations and cash flows for the three
month periods ended May 31, 2000 and 1999 are those of Sector
Communications, Inc. ("Sector") and its subsidiaries (collectively the
"Company"). All significant intercompany accounts and transactions
have been eliminated.
b) Loss Per Share
-------------------
Loss per share is based on the weighted average number of shares of
common stock outstanding during the period.
On July 1, 1999, the Company effected a 5 for 1 stock split. All share
and per share amounts presented in the financial statements give
retroactive effect to this stock split.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2000 AND 1999
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
May 31, February 29,
2000 2000
------------ -----------
Fiber Network $ 157,837 $ 157,837
Equipment 1,749,218 1,724,832
Furniture and Fixtures 45,816 47,223
Vehicles and Other 90,068 90,068
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2,042,939 2,019,960
Less: Accumulated Depreciation (1,825,567) (1,803,610)
----------- -----------
$ 217,372 $ 216,350
============ ===========
Depreciation expense for the three-month periods ended May 31, 2000
and 1999 was $23,249 and $85,381, respectively.
NOTE 3 - WARRANTS
At May 31, 2000, the Company has outstanding common stock purchase
warrants as follows:
Number Exercise Date of
of Shares Price Exercisable Expiration
--------- ---------- ----------- ----------
10,000 $ 22.50 2/28/97 6/30/00
10,000 30.00 7/20/97 6/30/00
10,000 40.00 7/20/98 6/30/00
------
30,000
======
NOTE 4 - STOCK OPTION PLANS
A summary of stock option transactions for the period ended May 31,
2000 are as follows:
Outstanding, Beginning 5,312,458
Granted -
---------
Outstanding, Ending 5,312,458
=========
Exercisable, Ending 5,312,458
=========
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2000 AND 1999
NOTE 5- STOCKHOLDERS' EQUITY
In May 1999, the Company issued 2,425,000 shares of common stock in
settlement of accounts payable aggregating $97,000.
In May 1999, the Company sold 3,846,150 shares of common stock to two
purchasers for cash proceeds of $100,000.
On July 1, 1999, the Company effected a 5 for 1 stock split. All share
and per share amounts presented in the financial statements give
retroactive effect to this stock split.
NOTE 6- COMMITMENTS AND CONTINGENCIES
1) A former employee of Ideous filed suit against Ideous for
wrongful termination. Judgement was entered against Ideous in the
amount of $110,850. An appeal is pending. The full amount has
been accrued in the financial statements.
2) An individual has filed suit against the Company, also naming
Worldwide Plumbing Supply, Inc. ("Worldwide") and Allan Kline.
The suit alleges that Mr. Kline represented that he was the
Prisident of Sector and would sell 35,000 shares of Company
Common Stock to the plaintiff for $20,000. The plaintiff also
alleges that Mr. Kline told the plaintiff that Worldwide was the
parent of Sector. The plaintiff issued a check to Worldwide and
it was cashed. Worldwide has filed an answer. The Company
maintains that it has no knowledge of Worldwide and that Allan
Kline is not the President of Sector. The Company denies each
allegation, believes the suit as it relates to the Company is
without merit, and intends to defend itself vigorously. The
plaintiff seeks the return of $20,000.
3) Agricola Metals, Inc. filed a suit against the Company seeking
$31,136. The plaintiff alleges that it had a consulting contract
with the Company and is owed this amount pursuant to said
contract. The Company has filed an answer and denies each and
every allegation.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2000 AND 1999
NOTE 7 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As of May 31,
2000, the Company has a working capital deficit of $1,965,462 and an
accumulated deficit of $15,838,090. 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 conditions and results of
operation.
NOTE 8 - SEGMENT INFORMATION
The Company's foreign operations are conducted by Global, Sector
Bulgaria and Ideous.
May 31, May 31,
2000 1999
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Revenues from external customers:
Telecommunications $ 135,249 $ 145,697
Software 93,334 52,540
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$ 228,583 $ 198,237
============= =============
Interest expense:
Corporate $ 5,279 $ 37,851
============= =============
Depreciation and amortization:
Telecommunications $ 20,124 $ 73,668
Software 3,125 6,713
Corporate - 5,000
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$ 23,249 $ 85,381
============= ==============
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SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 2000 AND 1999
NOTE 8 - SEGMENT INFORMATION (Continued)
May 31, May 31,
2000 1999
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Segment profit (loss) before taxes:
Telecommunications $ ( 7,033) $ 75,365
Software ( 37,763) ( 52,186)
Corporate ( 45,279) ( 161,558)
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$ ( 90,075) $ ( 138,379)
============= =============
Segment assets:
Telecommunications $ 347,124 $ 579,264
Software 313,998 339,165
Corporate 44,847 62,061
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$ 705,996 $ 980,490
============ ==============
Expenditure for segment assets:
Telecommunications $ 24,386 $ 33,268
Software - 3,241
Corporate - -
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$ 24,386 $ 36,509
============= =============
The following geographic area data for trade revenues is based on
product or service delivery location and property, plant, and
equipment is based on physical location.
May 31, May 31,
2000 1999
------------- -------------
Revenues from external customers:
United States $ - $ -
Switzerland 93,334 52,540
Bulgaria 135,249 145,697
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$ 228,583 $ 198,237
============= =============
Segment assets:
Switzerland $ 313,998 $ 339,165
Bulgaria 347,124 579,264
United States 44,874 62,061
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$ 705,996 $ 980,490
============= =============
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<PAGE>
Item 2. 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 Bulgarian Telecommunications Company (BTC); (v)
unexpected results of litigation filed against Sector; and (vi) the possibility
of one or more of the markets in which Sector competes being affected by
variations in political, economic or other factors such as monetary policy,
legal and regulatory changes or other external factors over which Sector has no
control.
RESULTS OF OPERATIONS
Telecommunication Revenue - Sector continues to earn 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 sales, integration,
installation, and maintenance of customer-owned digital phone systems (primarily
through its distributor agreement with Mitel); 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 decreased by $ 10,448 or 7.17% from
$145,697 for the three months ended on May 31,. 199 to $135,249 for the same
period ended May 31,2000. Management believes the decrease in revenue was the
result of a decrease in overall occupancy of its hotel customers.
Software Sales and Maintenance - Sector's software sales and maintenance
revenue increased by $40,794 or 77.64% from $52,540 for the three months ended
on May 31, 1999 to $93,334 for the same period ended May 31,2000 (all figures
are net of payments to third party distributors). Management believes the
increase in sales for the three months ending May 31, 2000 was the result of an
increase in the average size of each sale, The Company continues to be affected
by the lack of capital available to HIS to (1) fund an adequate level of sales
and marketing expense and (2) fund the software and development expense
necessary to upgrade existing product lines or to develop new applications.
Costs of Sales - The Cost of Sales of Sector decreased by $52,391 or 44.86%
from $116,777 for the three months ended on May 31, 1999 to $64,386 for the same
period ended May 31, 2000. Most of the decrease was attributable to the decrease
in costs associated with payments due to the BTC resulting from the lower
revenues and to reduced depreciation charges of fixed assets.
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<PAGE>
Software Development Costs - Software development costs consisted primarily
of salaries, related benefits, consultants fees and other costs. Sector's
software development costs decreased by $33,948 or 80.91% from $41,957 for the
three months ended on May 31, 1999 to $8,009 for the same period ended May
31, 2000. The decrease was attributable the lack of capital available to
HIS/Ideous to fund a higher level of software development costs.
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 $10,590 or 4.21% from $251,419 for the
three months ended on May 31, 1999 to $240,829 for the same period ended May 31,
2000. These reductions in operating expenses are expected to continue inasmuch
as Sector has substantially reduced its corporate overhead expenses.
Additionally, the HIS-related operating expenses have been substantially
reduced.
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.
Management expects Sector's general and administrative costs, exclusive of
any addition of new employees, to remain at or below the levels experienced in
the three months ended on May 31, 2000.
Interest Expense - Interest expense for the three month period ending May
31,2000 decreased by $32,572 as compared to the expense in the same three month
period in 1999. The decrease in interest expense was the result of the
conversion of convertible debentures issued in early in fiscal 1999.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ending May 31, 2000, the Company financed Sector's
operations primarily through sales revenue generated from the Company's
subsidiaries.
Sector has in the past and is currently experiencing negative cash flow
from operations. The funding of future operations will require further infusions
of capital.
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<PAGE>
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. 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 Small Cap Market
has occurred. Sector is currently listed on the NASDAQ Over the Counter Bulletin
Board.
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 Open VMS 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 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.
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<PAGE>
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 Open VMS 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
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<PAGE>
product development efforts. Furthermore, operating system owners have no
obligation to assist in these porting or development efforts and may instead
choose to enter into agreements with other third party software developers or
internally develop their own products. In particular, the failure to receive a
source license to certain portions of the operating system, either from the
operating system owner or a licensee thereof, would prevent 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 1999. Management believes that
Sector's success depends upon continued expansion of its international
operations. Sector currently has sales offices in Bulgaria and Switzerland. Any
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. Sector, as
noted earlier cannot and will not expand or contribute further to any
maintenance of the operations of its HIS subsidiary in Switzerland.
As of May 31, 2000, the Company's Swiss subsidiary employed engineers and
contractors located in Zurich 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.
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<PAGE>
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 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
growth of its telecommunications service business in Eastern Europe as well as
its ability to expand horizontally the scope of its business activities in that
region. As a result of competition, technological change or other factors,
Sector's business, operating results and financial condition could be materially
and adversely affected.
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. There can be no assurance that
Sector's products or services 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 telecommunication technology on a timely basis.
Sector has in the past experienced delays in the development of its
telecommunications services and there can be no assurance that Sector will not
experience further delays in connection with its current service offering or
future service 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 business development efforts to a relatively small number of products and
services. There can be no assurance that these efforts will be successful or,
even if successful, that any resulting products or operating systems will
achieve market acceptance.
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<PAGE>
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. If such agreements are
entered into they could have a material adverse effect upon Sector's business,
operating results and financial condition.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - LEGAL PROCEEDINGS.
No proceedings other than as previously disclosed.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
No. Description
-- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K on April 6, 2000 to report
the Company entered into a letter of intent with the owners of Kress EOOD and
Piero 97, confirming an agreement in principle to acquire the Bulgarian
companies.
Since the time of that 8-K filing, the parties have decided not to go
forward with the transaction.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECTOR COMMUNICATIONS, INC.
(Registrant)
By /s/ Theodore Georgelas
--------------------------
President, and Director
Date: July 18,2000
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