UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended February 28, 1999
Commission File Number 0-22382
SECTOR COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 56-1051491
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 250, McLean, Va. 22102
(Address of principal executive office)
(703) 761-1500
(Issuer's Telephone Number)
Securities Registered Pursuant of Section 12(b) of the Act: None
Securities Registered Pursuant of Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. [ ]
The issuer had operating revenues of $1,356,368 for the year ended February 28,
1999.
This report contains a total of 70 pages. The Exhibit Index appears on page 68.
As of February 28, 1999, there were 2,695,531 shares of the issuer's common
stock outstanding. The aggregate market value of the 2,197,511shares of the
issuer's voting stock held by non-affiliates was $511,477 based on the low bid
price on that date as reported by the NASD Electronic Bulletin Board. The sum
excludes the shares held by officers, directors, and stockholders whose
ownership exceeded 10% of the outstanding shares at February 28, 1999, in that
such persons may be deemed affiliates of the Company. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
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SECTOR COMMUNICATIONS, INC.
FORM 10-KSB
February 28, 1999
PART I........................................................................3
ITEM 1. Business.............................................................3
ITEM 2. Properties..........................................................17
ITEM 3. Legal Proceedings...................................................17
ITEM 4. Submission of Matters to vote of Security Holders...................19
PART II......................................................................19
ITEM 5. Market for Common Equity and Related Stockholder Matters............19
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................22
ITEM 7. Financial Statements................................................33
ITEM 8. Changes In and Disagreements With Accounting and
Financial Disclosure............................................59
PART III.....................................................................59
ITEM 9. Directors, Executive Officers, Promoters, and Control
Persons: Compliance With Section 16(a) of the Exchange Act........59
ITEM 10. Executive Compensation.............................................62
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.....63
ITEM 12. Certain Relationships and Related Transactions.....................64
PART IV......................................................................65
ITEM 13. Exhibits and Reports on Form 8-K...................................65
SIGNATURES...................................................................67
EXHIBIT INDEX................................................................68
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PART I
ITEM 1. Business
OVERVIEW
Sector Communications, Inc. ("the Company") was incorporated in the state of
Nevada on March 19, 1990. The Company had revenues of $1,356,368 for the year
ended February 28, 1999.
Sector Bulgaria
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Global Communications Group, Inc. (Global) was incorporated in the state of
Texas in 1993. A branch of the company was registered in the Republic of
Bulgaria subsequent to the signing of a five (5) year Joint Activity Agreement
("JAA") with Bulgaria's government-owned state telecommunications monopoly, the
Bulgarian Telecommunications Company-PLC (the "BTC"), on January 26, 1994. On
February 14, 1997, the Company entered into a new ten (10) year JAA with the
BTC. As part of this new agreement, a new wholly-owned, Bulgarian subsidiary
company, Sector-Bulgaria, EOOD (hereinafter referred to as "Sector BG") was
created under which all business is now being done.
The JAA called for Sector BG and the BTC to unite their efforts in order to
provide substantially upgraded telecommunications services to the hotel and
resort industry in the country. As a well developed part of the national
economy, this industry sector is playing a strategic role in Bulgaria's rapid
conversion from central planning and state ownership to a more privatized and
market-driven economy.
The JAA identifies two basic needs that Sector BG's activities must address in
order to meet the demands of its customers:
o Provide direct, automatic, international dialing to the guests of
client hotels;
o Deliver upgraded local telephone service to individual business
customers through the installation of optical fiber cabling and
high-speed digital transmission equipment.
In addition, Sector BG has undertaken the challenge to provide complete
equipment upgrades at the customers' premises through the installation of
state-of-the-art digital PBXs, call accounting systems, new telephone sets and
other services.
Since early 1995, Sector BG has provided telecommunication services to a select
group of hotels in the Bulgarian capital of Sofia and in Plovdiv, the country's
second largest city and a traditional fair and exhibition center. Sector BG has
constructed five optical cable routes in Sofia with a total length of 12
kilometers creating an infrastructure that is able to support future additional
customers and further expansion.
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Services Provided, Markets and Overall Strategy
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Sector Bulgaria currently operates in the Republic of Bulgaria, a country with a
population of approximately 8,775,000 and a total area of 110,910 square
kilometers (slightly larger than the state of Tennessee). It is well known among
tourist operators, having the unique combination of natural resources,
historical past, traditional architecture and fine cuisine.
Bulgaria possesses an almost unbroken line of beautiful beaches along its 300
kilometer Black Sea coast. Hundreds of hotels are clustered around the two
biggest cities, Varna and Bourgas, in several resort areas - St. Constantin,
Golden Sands and Albena to the north and Sunny Beach, Elenite and Dyuni to the
south. A three to four hour drive transfers the tourist to Alpine surroundings
in the mountain resorts of Pamporovo and Borovetz - well known ski centers in
Western Europe.
The capital of Bulgaria, Sofia, is a large industrial and business center at the
foot of the Vitosha mountain - a picturesque natural park and a convenient ski
center half an hour away from the city. Plovdiv, Bulgaria's second largest city,
has become an international fair and exhibition center with major events in the
spring and autumn and many other events throughout the year. Varna and Bourgas
are industrial and tourist centers with ports on the Black Sea.
There are two characteristic aspects of the Bulgarian telecommunication
infrastructure: the heritage of the communist past and the recent tendencies to
modernization. In the early nineties, democratic Bulgaria inherited from the
former totalitarian communist state a telecommunication infrastructure with
technically obsolete, poorly maintained and worn out electromechanical switching
systems. Long distance transmission was analog, based on antiquated FDM
multiplex systems and microwave relays. The local loop was in no better
condition. The only telephone instrument in use was the ubiquitous rotary dial
phone.
There were great anomalies and discrepancies between the general statistics data
and the actual network development and service quality. The 1995 CIA World Fact
Book reports that Bulgaria's telephone system consists of approximately
2,600,000 telephones or 29 phones per 100 persons, that 67% of the households in
Sofia have telephones, that automatic telephone service is available in most
villages, that two thirds of the lines are residential etc. These ostensibly
attractive statistics disguise the severe problems of Bulgaria's antiquated
telecommunication system. The waiting list for telephone service in the bigger
cities is still hopelessly long, the quality of transmission poor, the static
and distortion in local loop circuits renders them useless for anything but
voice grade and low bit-rate data services.
Growth and socioeconomic change have come about in Bulgaria in the aftermath of
the end of the communist regime. New and increased demands are being placed upon
Bulgaria's inadequate telecommunications infrastructure placing additional
stress on the Bulgarian public telephone operator's ability to supply its users
with the required capacity. This in turn, is causing the users to operate in an
environment which lacks critical communications capabilities. This situation is
further exacerbated by the poor financial health of Bulgaria's balance of
payments and hard currency reserves which are inadequate to invest in and
modernize such important areas as its telecommunications infrastructure.
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A typical example of Bulgaria's attempt to modernize its telecommunications
infrastructure is the Digital Overlay Network (DON) project of the BTC. Its
major goal is to significantly upgrade the national long distance network by
creating a digital transmission and switching overlay of the existing analog
environment thus creating the backbone of further network upgrades.
Even with the completion of the DON, compared to western standards, Bulgaria
lags considerably behind. For Bulgaria's most visible and demanding users, such
as international four and five star rated hotels, large sea and mountain resorts
with traditional international business and tourist flow, foreign and domestic
companies, embassies, and trading houses, requiring constant and efficient
access to international and long distance communications, the inability to offer
sufficient quality in all segments of the connection, be it switched-voice,
facsimile or data, mean a potential loss of business revenue, inability to
obtain timely critical business and other information, and a frustrated user
population.
Sector BG currently has contracts to provide services to a select group of
hotels in Sofia and Plovdiv. Sector BG has constructed five optical fiber cable
routes in Sofia with a total length of 12 kilometers (6 fibers), creating an
infrastructure for future cost effective connection of additional customers and
further expansion.
Sector BG offers to its customers the following basic services:
o upgrading of the local loop to optical and direct connection to the
international gateway switch through the Sector BG operated private
network;
o worldwide dialing access;
o complete telecommunication equipment upgrade in the customer's
premises including, installation of new modern PBX(s), call accounting
systems, new telephone sets, and other services.
Sector BG's strategy is to expand the optical fiber cable construction in Sofia
and Plovdiv and to provide international and national long distance direct
dialing to additional hotels, western businesses, banks and embassies. New
services will also be developed to enrich and diversify the types of products
available to the customer, e.g. debit card calling, Internet access, Reuters
access, credit card validation, etc., based on the near-infinite transmission
capacities of the optical fiber and related equipment. This strategy and the
implementation of such an expansion of the network services is highly dependent
upon the ability of the company to secure adequate financing and contract with
new customers -- the assurance of which is highly uncertain.
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.
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Sector BG's customers, present and/or potential, represent the most lucrative
market segments: 1) the hotel and resort industry, and 2) business users. Both
of these markets demand a high quality of service (QoS) and at the same time are
able to afford the higher premiums to procure these services.
Sources and Availability of Materials
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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 UK-based
subcontractor companies are retained to provide certain technical equipment and
services including:
o engineering support for proprietary computer and telecommunications
equipment;
o cable route surveys, coordination with the BTC and local authorities
on permit and license issues, construction and laying of the optical
fiber cable including testing and documentation;
o call logging equipment and billing service support;
o digital transmission telecommunication equipment.
All three Bulgarian companies are leaders in their specific business domains and
Sector BG has a well established relationship with each. Should it be necessary
to obtain new or additional subcontractors, Sector BG has an adequate number of
alternative local and international equipment and service vendors. There exist,
however, many political and regulatory risks in Bulgaria which could seriously
impact the ability of the Company to obtain required contractual services or to
retain its own employees.
Description of the Network
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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.
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Sector BG supports a remote control and customer service center in its office
and switch room in Sofia. It assists its hotel customers administration in
resolving any dialing and billing problems of its guests. Emergency services to
its customers is provided on a 24 hour basis.
A centralized billing system issues monthly bills to the customers that are
matched to the records of the hotel call logger.
Government Regulation and Operating Agreements
- -----------------------------------------------
The telecommunications sector of Bulgaria was initially based on the legal and
regulatory framework of the Soviet Union. Under this system, the Ministry of
Posts and Telecommunications was given the monopoly over all telecommunications
services, including television and broadcasting. Article 16 of the Bulgaria's
Constitution stated that "...posts, telegraph, telephones, radio and
television...are state property only." The Ministry is responsible for planning
and coordinating policies concerning telecommunications services.
Reform in telecommunications in Bulgaria began in 1991. It is part of the
general tendencies in Europe in this field and covers three domains: structure,
jurisdiction and technology. The reform aims at a gradual ousting of state
monopoly in telecommunications by establishing government regulation and a
competitive telecommunications service market.
The Committee of Post and Telecommunications ("CPT") is the regulatory body for
telecommunications, mobile phone, satellite and cable TV operators in Bulgaria.
It is a state organization which has no say over the economic aspects of the
main national operator the Bulgarian Telecommunications Company LTD ("BTC")
which holds the monopoly on basic network services, satellite communications,
all long-distance and international telephone and telex services.
The CPT sets the development strategy for the telecommunication infrastructure,
approves bids, tenders and grants licenses to operating entities. The CPT's
stated goal is to drive forward the liberalization of the telecommunications
market through licensing and privatization. Bulgaria intends to follow the
general recommendations of the European Union's Green Paper on
Telecommunications and the Uruguay Round of GATT negotiations regarding
liberalization of the telecommunications sector. Bulgaria's government has
undertaken a plan to sell through a tender process a controlling interest in the
BTC.
On September 21, 1993, Global Communications Group, Inc. ("Global") executed a
Memorandum of Understanding with the BTC to provide a closed, private, long
distance traffic network for the hotel and resort industry in the Republic of
Bulgaria. Global and the BTC then executed a JAA on January 26, 1994 which
enabled Global to provide end-to-end international carrier switched service to
terminate all switched voice traffic from the hotels in Bulgaria.
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On July 8, 1996, the BTC unilaterally and unexpectedly terminated the JAA and
prohibited Global from accessing the state-owned long-distance switching network
and effectively terminated Global's ability to provide its core service -
international long-distance access. Although the Company considered the BTC's
actions both illegal and unjustifiable, it entered into negotiations with the
BTC to effect a settlement.
On February 14, 1997, the Company entered into its a ten (10) year Joint
Activity Agreement ("JAA-2") with the BTC to provide an enhanced group of
services to its customers. As part of this new agreement, which replaces the
original five (5) year JAA, a new, wholly-owned, Bulgarian subsidiary company,
Sector-Bulgaria, EOOD (referred to hereinafter as "Sector BG") was created. All
business is being done as Sector BG and existing contracts and agreements are
being modified to reflect the new operating structure. Ultimately, it is
anticipated that all of the assets and liabilities of Global will be assigned to
Sector BG.
As a result of the political changes in Bulgaria that took place in the
beginning of 1997 the JAA-2 was further amended and coordinated 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 aspect
of special access circuits and interconnection, international dialing, call
accounting and billing and op[tical 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,
the Company expects the BTC, among other things, to reexamine its policies
regarding (i) the services that may be provided by foreign owned international
common carriers, and (ii) the provision of international switched voice services
outside of the traditional settlement rate and proportionate return regimes. The
implementation of the WTO Agreement may also make it easier for foreign carriers
with market power in their home markets to offer Bulgarian and foreign customers
end-to-end services to the disadvantage of Sector BG, which may face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such end-to-end services.
Competition
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Virtually all markets for telecommunications services are extremely competitive,
and the Company expects that competition will intensify in the future. In each
of the markets in which it offers telecommunications services, the Company faces
significant competition from carriers with greater market share and financial
resources. The Company competes in Bulgaria with the government provider, which
has historically monopolized the local telecommunications market. A continuing
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trend toward business combinations and alliances in the telecommunications
industry and Bulgaria's move to privatize its telecommunications system may
create significant new competitors to the Company. Many of the Company's
existing and potential competitors have financial, personnel and other resources
significantly greater than those of the Company. Other potential competitors
include foreign telephone companies, wireless telephone companies, electric
utilities, microwave carriers and private networks of large end users. In
addition, the Company competes with equipment vendors and installers and
telecommunications management companies with respect to certain portions of its
business.
For most of the Company's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography, and network
size. Sector BG's objective is to be one of the most responsive service
providers, particularly when providing customized communications services.
Sector BG's array of communications facilities and international relationships,
together with its engineering and operations capability, provide Sector BG with
considerable flexibility in tailoring cost-effective communications services to
meet its customers' requirements. Ownership of this network will allow Sector BG
to implement complex permanent and temporary communications circuits to and from
locations throughout Bulgaria. Sector BG relies on its decentralized management
structure and the local orientation of its operations and personnel to
distinguish itself from larger, less personalized operations. In addition,
Sector BG's understanding of Bulgaria's telecommunications technical and
regulatory issues has often allowed Sector BG to provide prompt solutions to the
diverse communications needs of its customers. No assurance can be given,
however, that the Company's strategies will be successful.
The Company may also be subject to additional competition due to the development
of new technologies and increased availability of domestic and international
transmission capacity. For example, even though fiber-optic networks, such as
that of the Company, are now widely used for long distance transmission, it is
possible that the desirability of such networks could be adversely affected by
changing technology. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by the Company. The Company cannot predict
which of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
Dependence on major customers
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The Company currently provides services to a limited base of 9 customers and
therefore relies heavily on the business from each. Sector BG's five largest
customers accounted for greater than 80% of total revenues for the year ended
February 28, 1999. No single customer, however, accounted for more than 50% 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.
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Tariffs
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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. The Leva exchange rate has been pegged to the German Mark (on a
1:1 basis) and has such the previous wide fluctuations in the value of the
currency have been reduced to the stable level afforded by the Mark. This
stability has been established by a currency control board that was mandated by
an agreement between the government of Bulgaria and the International Monetary
Fund.
Employees
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At February 28, 1999, Sector BG had approximately 9 full time employees in
Bulgaria. The technical staff consists of three highly qualified system
engineers and a service technician that perform network planning and
engineering, as well as the maintenance functions of Sector BG's Network
facilities and the five hotel PBXs. Sector BG uses independent contractors for
cable construction, call logger installation and for other functions as
necessary. Three employees are responsible for customer billing and accounting.
The remainder of the employees perform administrative and logistical tasks.
Sector Communications AG
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As of February 28, 1999, Sector has reduced by 100% the total amount of goodwill
carried on its balance sheet with respect to its investment and interest in
HIS/Ideous. Please see item 6, Management Discussion and Analysis, for further
information concerning HIS/Ideous. Any reading of the descriptive material
herein with respect to HIS/Ideous must be read in context of such a write-down
of the asset.
NOTE: All references in this filing either to Histech or Ideous refer to the
same entity and products. The trade name of Histech has been changed to Ideous
with no effect on the ownership of the company or products resulting from such
change
On July 31, 1996, the Company acquired 100% of the outstanding capital stock of
Sector Communications AG ("Sector AG") from Murray Services, Ltd. ("Murray") for
the purpose of holding the equity interests acquired by the Company in
Switzerland, namely HIS Technologies AG and Mountain Software AG. At the time
that Sector AG was acquired it had neither assets nor liabilities. Sector AG now
holds the Company's equity investment in Histech, however, it currently has no
operating budget, revenues nor employees.
HIS Technologies AG, Mountain Software AG
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On August 12, 1996 Sector entered into a Definitive Agreement with the
shareholders of Histech (now known as Ideous effective January 1999) and
Mountain Software AG ("Mountain") whereby the Company's wholly owned subsidiary,
Sector AG, would acquire 80% of the capital interest in Histech and 100% of
Mountain.
Effective August 23, 1996, Sector AG acquired 54.45% of the capital stock of
Histech from two Histech shareholders, Joan Brown and Aledo Services, Ltd.
("Aledo"), and 100% of the stock of Mountain from Simon Brown, the sole
shareholder of Mountain, in exchange for 9,846,154 shares and 1,712,375 shares
of the Company's common stock, respectively. The Company also purchased 3,428
shares of previously unissued Histech shares representing a 25.55% interest for
$1,200,000. The Company anticipates that Mountain may be merged into Histech at
some future date. Hugo Wyss, a director of Sector AG and the Chairman of the
Board of Directors of Histech, is also a director of Aledo.
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As compensation for services performed in this transaction, the Company issued
1,250,000 shares of common stock and warrants for the purchase of 1,250,000
shares of common stock at an exercise price of $0.79 per share, expiring three
years from the date of issue, to KAV Kapitalangleger Verlag AG ("KAV").
On February 18, 1997, the Company entered into an agreement (the "Peacetime
Agreement") with Peacetime Communications, Ltd.; Emerald Capital, Inc.; and
Wallington Investment, Ltd. ("Wallington"), whereby the Company canceled
obligations to Peacetime, Emerald and Wallington in the aggregate amount of
approximately $4,080,000 and obtained additional financing in the amount of
$1,000,000 (or less, at the Company's discretion) through the sale of 25% of its
ownership in Histech; all of the Company's interests in DBE Software, Inc.
("DBE"); and 1,000,000 shares of the Company's common stock. Peacetime received
2,417 shares of the common stock of Histech representing 18% of the total
outstanding shares of Histech and the Company's entire claim to 145,745 shares
of DBE common stock representing 14.594% of the outstanding DBE common stock.
The DBE common stock has been placed into escrow pursuant to an escrow agreement
executed concurrently with the Agreement. Upon the receipt of one million
dollars, the escrow agent shall transfer the Company's interest in DBE to
Peacetime. In the event that less than one million dollars is drawn by the
Company, a percentage of the Company's interest in DBE, which is proportionate
to the amount of capital provided to the Company, shall be delivered to
Peacetime with the remainder of the DBE interest returned to the Company.
Emerald and Wallington each received 134 shares of Histech common stock
(representing 1% of the total number of outstanding shares of Histech) and
500,000 shares of the Company's common stock.
As of February 28, 1999, the full amount of the one million dollars had been
funded as agreed and the total number of DBE shares held in escrow has been
transferred to Peacetime.
OVERVIEW
HIS Technologies AG (hereinafter interchangeably "Histech" or "Ideous") is a
Swiss corporation founded in 1996. Histech is an independent software vendor
that develops and markets enterprise automation software solutions for managing
distributed computer systems in multivendor, multiplatform computing
environments.
Histech's products are used by information systems professionals whose
organizations rely on the performance of their computing resources to conduct
business. Histech is committed to the quality of the products and services it
provides to its customers and continually invests in research and development to
maintain the quality of its software products.
Histech initially introduced its systems management products for Digital
Equipment Corporation's OpenVMS operating system, but is currently adapting its
major products to also run on the Microsoft Windows NT and Unix operating
systems. Histech is also developing a new line of products that will operate
simultaneously across all three environments. There can be no assurance,
however, that the products will be delivered on schedule or that more
competitive products will not be released by the competitors of the Company.
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A substantial portion of Histech's net revenues is derived from user license
fees sold through distributors. Histech's license agreements generally do not
impose minimum sale obligations on the distributors and, accordingly, the
distributors have no obligation to sell Histech's products. In addition, Histech
has no control over the shipping dates or volumes of systems sold through its
distributors and therefore there can be no assurance that any distributor will
ship Histech's products in the future. Failure of Histech's distributors to
achieve significant sales and fluctuations in the timing and volume of such
sales could have a materially adverse effect on Histech's and therefore
Histech's operating results and financial condition.
Market
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Over the last 25 years, systems management has evolved from simply monitoring
resource usage in a single mainframe to automated management of client/server
applications across the information system enterprise. This includes the
monitoring and management of mainframes, servers, networks and applications from
disparate vendors across a myriad of platforms.
The explosive growth of computing resources throughout the enterprise poses new
challenges for systems management. Organizations are increasingly dependent on
information systems for their moment-to-moment operations. If systems fail to
deliver service to the internal end user, there can be an immediate impact on
external customers and the bottom line.
Applications become increasingly complex as they support more business functions
and are distributed across the enterprise on downsized platforms. Today's
computing environment includes mainframes, minicomputers, workstations and LANs
spread throughout the organization.
Along with the task of supporting this complex, mission-critical resource,
corporate MIS departments are under continuous pressure to reduce all the costs
associated with information systems and their management -- hardware, software,
networks and personnel.
The growing diversity of the enterprise computing environment contributes to
other features of the current market. While IBM's dominance of the MIS
organization is eroding, customers are concerned with protecting their
investment in their information systems. This in turn is driving the emergence
of often conflicting standards for systems management, such as SNMP, DCE and
various emerging object-oriented strategies like CORBA, OLE, DCOM, etc. In an
effort to reduce training costs and increase efficiencies, there is a
customer-driven trend toward consolidating the installed vendor base and
standardizing on as few products as possible.
Despite recent acquisitions, a smaller field of software vendors has been slow
to deliver significant integration among system management tools while the
market continues to demand out-of-the-box interoperability of diverse products.
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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
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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.
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.
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HIS-SuperPassword - User password synchronization. Set-and-forget solution for
multinode password synchronization. Changes any passwords in the network,
creates and distributes a rules database, monitors listeners and views any
HIS-SuperPassword files on a server node. Provides a secure level of password
functionality not found in other OpenVMS products.
HIS-FDM - File and disk management. Brings a network-wide file and disk manager
with a Windows-style user interface and functionality to the OpenVMS file
system, plus much more. HIS-FDM can copy directory trees between devices (even
over the network) undelete files, edit files on remote nodes, compress/
decompress files, view binary contents of files or execute a file by double
clicking on the icon.
HIS-ProcessEye - Process control and monitor. Dynamically monitors and controls
OpenVMS network processes. Allow systems mangers to change priority, search for
runaway processes and track performance of any process on the network.
HIS-Security - Security monitor. HIS-Security combines a graphical interface and
standard DECnet client/server communications to provide a powerful security
management system.
HIS-RAP (Remote Access Platform) - Provides users with the ability to run
applications on remote nodes without the need to log onto those nodes. Controls
access to applications through a simple-to-use user-specific menu system. Hides
the network topology from the end-user and eliminates the need to install and
manage application software on every node.
HIS-UAF Administrator - Extends the user account administration task to include
the administration of Digital's ALL-IN-1, MAILworks and DDS profiles in addition
to OpenVMS accounts.
HIS-UAF Administrator UNIX Server/HIS-UAF Administrator Windows NT Server -
Allows systems managers to control and manage user accounts for OpenVMS, UNIX
and Windows NT on the same network. A graphical interface provides a clear
overview of all users and their related accounts cross platform via the
subscribers records stored in the HIS-UAF X.500 database. Help-desk operators
can use HIS-UAF Administrator for assisting a user who has a specific problem
e.g. forgotten passwords, account names etc. Reduces the need for staff to learn
different administration tools across different applications and operating
systems.
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.
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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 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.
Competition
- -----------
The computer software industry is highly competitive. There are many larger
software vendors that have substantially greater financial and technical
resources than Histech; in the future, these companies may develop and market
products similar to those offered by Histech. Competitive products are currently
offered by a number of independent software companies. The most important
consideration for customers of systems and network management software are
product and product line capability, integration, on-going product enhancement,
ease of installation and use, reliability and quality of technical support,
documentation and training, name recognition, vendor experience and stability,
and, to a lesser extent, price. The Company believes that it competes favorably
in these areas although the dynamic nature of the software industry could
quickly place Histech and its products at a competitive disadvantage.
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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.
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.
Mining 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.
The Company has ceased entirely all mining exploration operations and has
relinquished any rights or title it may have had to previous mining claims. No
value has been retained on the Company's Balance sheet with respect to the
mining exploration activities or equipment.
Employees
- ---------
At February 28, 1999, the Company, in addition to the staff employed by its
subsidiaries, had no full-time and two part-time employees. The Company 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.
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ITEM 2. Properties
Office Facilities
- -----------------
At February 28, 1999, the Company leased the following facilities:
Lease Approximate
Location Primary Use Sq. Footage Expiration
-------- ----------- ----------- ----------
McLean, VA Corporate Office 12,943 March 2003
San Francisco, CA Corporate Office 1,300 July 1999
Englewood, CO Corporate Office 3,664 September 2000
At April 30, 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
The Company is committed under non-cancelable operating lease agreements for
office space at the above locations and has subleased the entire California and
Colorado locations and substantial portions of the McLean location on terms
similar to its master leases.
ITEM 3. Legal Proceedings
On November 8, 1996, Symark International, Inc. ("Symark") filed a complaint
against Ideous 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
Ideous' motion to dismiss the action for improper venue on the ground that the
forum selection clause in the contract between Ideous and Symark specified the
courts of the Canton of Zurich, Switzerland for the resolution of disputes
between Ideous 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 lawsuit arose from disputes between Ideous 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
Ideous had attempted to engage Symark in "unfair and unlawful acts and practices
17
<PAGE>
and unfair competition" with Ideous and another distributor, Raxco, and also had
made disparaging remarks to Symark's customers. Ideous' 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 Ideous' products as
Symark's own. Ultimately, Ideous terminated the Agreement. Symark sought to
recover unspecified damages and believes the damages are in excess of $50,000.
The Company strongly believed that there is no merit to the allegations in the
Symark complaint and intended to vigorously defend itself in this action.
In December 1999, each party to the actions agreed to withdraw all pending
actions against the other parties.
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 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, plaintiffs seek punitive damages for not delivering the
shares to them. In the fourteenth cause of action, the plaintiffs seek damages
for not delivering the shares to them. In the fourteenth cause of action, the
plaintiffs seek 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 twelve 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.
The complaint was dismissed without prejudice as to the Company in February
2000. Motions by the Company are currently pending requesting fees and costs
incurred in defending this action.
Plaintiffs have filed a motion for sanctions, which is currently pending. The
Company expects to withdraw its motion in exchange for a dismissal with
prejudice and withdrawal of Plaintiffs' motions, in accordance with a written
representation by Plaintiffs' counsel dated March 31, 2000.
18
<PAGE>
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, 1999
and 1998. Judgment was rendered against the Company for approximately $42,000,
plus costs and fees, in September 1998. The parties settled for $15,000 on March
30, 2000.
A former employee of Ideous filed suit against Ideous for wrongful termination.
Judgment was entered against Ideous in the amount of $110,850. An appeal is
pending. The full amount has been accrued in the financial statements.
Svensson vs. Sector Communications, Inc. was filed in U.S. District Court for
the Eastern District ov Virginia, Case Number 98-1751-A. The case alleged that
broker fees were due in connection with a financing transaction. The plaintiff
sought $1,750,000 in monetary damages and 400,000 shares of stock.
USIS International Capital Corp. vs. Sector Communications, et al. was filed in
the Supreme Court of New York in August 1998. The plaintiff alleged that a
former officer and director had engaged in breach of contract, fraud,
misrepresentation, insider trading and stock manipulation. The plaintiff is
seeking $2,500,000 in monetary damages. The suit by USIS has been dismissed with
prejudice at no cost to the Company.
ITEM 4. Submission of Matters to vote of Security Holders
No matters were brought to a vote of the Security Holders during the quarter
ended February 28, 1999.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
- ---------------------------
The Company's common stock traded on the NASDAQ Small Cap Market until December
3, 1998 when it was delisted. Since that time, it has traded on the NASD
Electronic Bulletin Board under the symbol "SECT". The following table sets
forth the high and low bid price for each quarter of the last two years.
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<PAGE>
The quotations represent prices between dealers in securities, do not include
retail markup, markdowns or commissions and may not necessarily represent the
actual transactions.
Quarter Ended High Low
------------- ---- ---
February 28, 1999 0.28 0.21
November 30, 1998 0.84 0.62
August 31, 1998 1.46 1.40
May 31, 1998 2.00 2.62
February 28, 1998 2.62 2.62
November 30, 1997 4.68 4.68
August 31, 1997 10.93 9.37
May 31, 1997 21.87 18.75
Approximate Number of Equity Security Holders
- ---------------------------------------------
At Febuary 28, 1999 there were approximately 331 active holders of record of the
Company's common stock. The Company believes that many additional holders of the
Company common stock are unidentified because their shares are held by brokers
in nominee accounts or "street name". The number of beneficial owners holding
stock in nominee or "street name" is estimated by the Company to be
approximately 750 .
Reverse Stock Split
- -------------------
On , July 22, 1997, the Board of Directors of the Company adopted a resolution
authorizing amendments to the Company's Amended and Restated Articles of
Incorporation approving a reverse split of the Company's outstanding Common
Stock, par value $0.001 per share on the basis of one new share of common stock
of the Company for each 40 shares of outstanding Common Stock. The amendment was
approved at the Annual Meeting of Stockholders held on October 21, 1997. This
action did not change the par value of the common stock of $0.001 per share or
the number of authorized shares of the common stock.
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
The Company has not paid cash dividends on its common stock and presently has no
intentions to do so. The Company expects to retain any future earnings to fund
operations for the foreseeable future.
20
<PAGE>
Recent Issuance of Common Stock
- -------------------------------
On January 5, 1998, FT Trading, based in London, England, purchased 250 shares
of the Company's Series A 8% Convertible Preferred Stock, $.001 par value (the
"Series A Preferred"), for $250,000 in a private placement pursuant to
Regulation S under the Securities Act of 1933, as amended (the "Securities
Act"). Concerned that the holder of the shares of the Series A Preferred may
have been selling shares of the Common Stock, thereby lowering the market price
of the Common Stock, on March 18, 1998, the Company gave the holder notice of
its intention to redeem on April 2, 1998 all 250 shares of the Series A
Preferred for $312,500, which action terminated the holder's right to convert.
In lieu of the redemption, Firstimpex, based in Geneva, Switzerland, purchased
the 250
shares of the Series A Preferred from FT Trading for the redemption price on the
condition that the Company restore the conversion right and issue to Firstimpex
375,000 shares of 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 366,665 shares of
the Common Stock based on a conversion price of $0.45 per share. On May 13,
1998, Firstimpex converted the remaining 85 shares of the Series A Preferred
into 300,220 shares of Common Stock based on the alternative conversion price of
$0.283125 per share, which represented the average of the closing bid prices
during the five trading days preceding the conversion date.
In connection with the sale of its 6% convertible debentures, the Company issued
150,000 shares of Common Stock to each of two purchasers.
The Company issued 126,530 shares of Common Stock to retire $39,014 of debt owed
to a related party.
On January 25, 1999, the Company and five Director/Officers of the Company
agreed that the Company would issue 2,425,000 shares to these individuals as
payment for services rendered to the Company. The shares, when issued, will be
valued at $97,000. This liability has been reflected in the financial statements
at February 28, 1999.
Issuance of Convertible Debentures
- ----------------------------------
On April 15, 1998, the Company sold $500,000 in principal amount of its 6%
Convertible Promissory Notes due July 30, 1999 (the "Notes") pursuant to
Regulation S under the Securities Act for net proceeds of $430,000. In addition,
the two purchasers, Amex Corp. Limited and Danvers Investment Corp., each a
British Virgin Island corporation, with an address in Zurich, Switzerland, each
received 150,000 shares of Common Stock. These shares have been valued at
$255,000 and are recorded as discount on debt in the financial statements. The
discount is being amortized over the life of the notes. Upon conversion, any
unamortized discount attributable to the conversion amount is charged to
additional paid in capital.
21
<PAGE>
Effective May 26, 1998, each holder has the full right to convert its Note in
the principal amount of $250,000, plus accrued interest (at the rate of 6% per
annum), in whole or in part, into shares of Common Stock at a conversion price
equal to the lesser of (1) $2.98 (which was 80% of the closing bid prices of the
Common Stock on April 15, 1998) or (2) 80% of the average closing bid prices of
the Common Stock for the five trading days immediately preceding the conversion
date.
During the year ended February 28, 1999, the holders of the notes elected to
convert an aggregate of $236,048 principal amount of notes into 4,386,000 shares
of common stock. Unamortized discount amounting to $99,144 has been charged to
additional paid in capital upon conversion.
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 Bulgarian Telecommunications Company (BTC); (v)
unexpected results of litigation filed against Sector; and (vi) the possibility
of one or more of the markets in which Sector competes being affected by
variations in political, economic or other factors such as monetary policy,
legal and regulatory changes or other external factors over which Sector has no
control.
As a software developer and vendor, 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
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.
22
<PAGE>
As discussed below, the software sales and maintenance revenues of its
subsidiary, HIS Technologies, AG, (HIS) have declined significantly. HIS, in the
opinion of Sector management, does not have sufficient capital available to it
to meaningfully continue its operations in the foreseeable future. Sector will
not make available to HIS any additional capital nor commit to seek on behalf of
HIS such additional capital. We have encouraged the management of HIS to pursue
third-party sources for such capital with the understanding that we will
consider any meaningful offers from others to facilitate the investment by them
of such capital into HIS. Such an investment source, if one were available,
would undoubtedly insist upon a substantial dilution of the ownership position
which Sector maintains in HIS. There can be absolutely no assurance that such a
possible source of capital for HIS will be found and, consequently, we expect
that the continued operation of HIS as a viable entity is in jeopardy.
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, 1999 Compared to the year ended February 28, 1998
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 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 $218,592 or 25.1% from 871,097
for the year ended February 29, 1998 ("fiscal 1998") to $652,505 for fiscal
1999. The reduction in revenue was the result of the general recession occurring
in Bulgaria as well as the loss of a portion of the customer base previously
maintained.
Software Sales and Maintenance - Sector's software sales and maintenance revenue
decreased by $968,583 or 57.9% from $1,672,446 for fiscal 1998 to $703,863 for
fiscal 1999 (all figures are net of payments to third party distributors). The
decrease in sales for fiscal 1999 was attributable to 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.
23
<PAGE>
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 decreased by $660,628 or 53.3% from
$1,238,944 for fiscal 1998 to $578,316 for fiscal 1999. Most of the decrease was
attributable to the decrease in costs associated with the distribution and sale
of the Histech's HIS new software products caused by the substantial decrease in
the revenues associated with such sales..
Software Development Costs - Software development costs consisted primarily of
salaries, related benefits, consultants fees and other costs. Sector's software
development costs decreased by $248,663 or 34.2% from $727,226 for fiscal 1998
to $478,563 for fiscal 1999. The decrease was attributable to the lack of
available capital to HIS to adequately fund its software development needs.
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 $1,381,554 or 44.2% from $3,127,864 for fiscal
1998 to $2,138,927 for fiscal 1999. 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. To continue to operate Sector at the currently reduced
level of operating expenses may severely impact the ability of Sector to
continue as a viable on-going concern.
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 1999.
Interest Expense - Interest expense for fiscal 1999 increased by $142,614 as
compared to the expense in fiscal 1998. The increase in interest expense was
primarily result of the issuance of convertible debentures early in fiscal 1999
as described elsewhere in this report.
24
<PAGE>
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 had previously decided to curtail any
future gold exploration activities and has relinquished any rights it may have
previously had to its mining claims.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999, 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
$430,000 (see the sections "Recent Issuances of Common Stock" and "Issuance of
Convertible Notes" in Item 5 to this Report) and (ii) 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.
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 Small Cap Market
has occurred. Sector is currently listed on the NASDAQ Over the Counter
Electronic Bulletin Board. (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
28,1999.
25
<PAGE>
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 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.
26
<PAGE>
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 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 portingefforts 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.
27
<PAGE>
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 19998. Management believes that
Sector's success depends upon continued expansion of its international
operations. Sector currently has sales offices in Bulgaria ,and Switzerland and
Benelux and product development groups in Switzerland and the United Kingdom.
Sector has resellers in North America and Europe.Any iInternational 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.
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 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.
28
<PAGE>
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 orthe growth of its telecommunications service businesss 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 cwould 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 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 as in the past experienced delays in the development of its
products telecommunications services and there can be no assurance that Sector
will not experience further delays in connection with its current product
developmentservice 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 product business development efforts and its
porting efforts to a relatively small number of products and operating
systemsservices. 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.
29
<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.
30
<PAGE>
The year 2000 risk is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. As a result, computer systems and/or software used by
many companies and governmental agencies may need to be upgraded to comply with
year 2000 requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
Based upon an internal assessment, the Company believes that its software
programs, both those developed internally and purchased from material outside
vendors, are year 2000 compliant. The Company began assessing its state of year
2000 readiness during or before July, 1999; this included reviewing the year
2000 compliance of the following:
- Currently used "shelf software" (software from retail outlets)
- Third party software vendors
- Third party hardware vendors
The Company will continue to require its vendors of material hardware and
software to provide assurances of their year 2000 compliance.
To date, the Company has not incurred significant expenses in identifying and
evaluating year 2000 compliance issues. Review of the Year 2000 issues was
undertaken by current directors at no charge to the Company. At this time, the
Company does not possess the information necessary to estimate the potential
costs of future revisions to software relating to any of the operations of its
subsidiary companies, meaning the foreign operations referenced in this filing.
Neither does the Company possess the necessary information to evaluate whether
the replacement of third-party software, hardware, or services (if any) are
mandated because they are non-year 2000 compliant. Although the Company believes
that its software programs are either already year 2000 compliant or will be
within a reasonable time, failure to identify non year 2000 compliant software
could have a material and adverse effect on the company's business, results of
operations, and financial condition.
The Company is not currently aware of any significant year 2000 compliance
problems relating to software systems used by it that would have a material and
adverse effect on business, results of operations, and financial condition.
However, there can be no assurance that the company will not discover year 2000
compliance problems in its third-party software that might require a substantial
investment to correct. The Company's potential inability to fix such hardware or
software on a timely basis could result in lost revenues, increased operating
costs, and other business interruptions, any of which could have a material and
adverse effect on the company's business, results of operations, and financial
condition.
31
<PAGE>
Failure to adequately address year 2000 compliance issues in the Company's
proprietary software or third-party software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, there can be no
assurance that utility companies, Internet network companies, Internet access
companies, third-party service providers and others outside the Company's
control will be year 2000 compliant. The failure by these entities to be year
2000 compliant could result in a systemic failure beyond the Company's control
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent the Company's subsidiaries from providing
services. Such failure would have a material and adverse effect on the company's
business, results of operation, and financial condition.
Contingency Plan
- ----------------
Although the Company continues to evaluate its software for possible year 2000
compliance issues, the company believes that its software programs (purchased
from material outside vendors), are already year 2000 or will be within a
reasonable time. Therefore, the Company does not have a formal contingency plan
for a major Year 2000 problem. The Company's inability to locate or correct a
significant year 2000 problem, if one exists, could result in an interruption in
or a failure of certain normal business activities or operations. Additionally,
Year 2000 problems may affect subsystems of the Company's subsidiaries and the
networks of such subsidiaries and such failure could cause customers to seek
alternate providers for Internet access. This could require the Company to incur
significant unanticipated expenses to remedy and could divert the Company
management's time and attention, either of which could have a material and
adverse effect on business, results of operations and financial condition.
To date the Company has not experienced any problems resulting from Year 2000
computer issues; any such issues were resolved prior to January 1, 2000.
Sector's Officers and Directors have spent the last two years working on legal
cases brought against the Company by actions of previous board members and
Officers. Almost all litigation has been terminated.
In, or about September 1998, Andreas Tobler became President and CEO of the
Company. In December, 1998, Mohamed A. Hadid was elected Chairman of the
company. James T. Zelloe was elected secretary.
The board of Directors consisted of Theodore J. Georgelas, Geoffrey Button,
Dennis Nebbe, James T. Zelloe, Andreas Tobler, Jeff Shear, and Mohamed A. Hadid.
In early to mid-1998, some members of the Board were working with the general
counsel of the company on a proposed merger of the company with a jewelry
organization in New York. Their efforts collapsed, the Company was removed from
the Nasdaq small cap market list and placed in the Nasdaq Bulletin Board. Dennis
Nebbe resigned from the Board of Directors. Shortly thereafter, Jeff Shear
resigned.
32
<PAGE>
From late 1998 until the present, the Officers and the Board have been operating
the Company with extremely limited funds. In January, 1999, the Board of
Directors and Officers determined it was in the best interest if the Company to
preserve funds for litigation expenditures and other necessary expenses to keep
the Company as a functioning entity. The Board decided it was in the best
interest of the Company to pay the Officers and Directors with options for
Common stock, with the hope that the company could resolve all of the litigation
against it, and move into the future. Other than the officers, there were no
employees or other office staff working on the company's matters.
ITEM 7. Financial Statements
Index to Financial Statements
Independent Accountant's Report..........................................34
Financial Statements
Balance Sheets....................................................35
Statements of Operations..........................................36
Statements of Stockholder's Equity................................37
Statements of Cash Flows..........................................39
Notes to Financial Statements.....................................41
33
<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, 1999 and 1998, and the related consolidated
statements of operations, comprehensive income, 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 audits.
We conducted our audits 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 audits provide 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
SECTORCOMMUNICATIONS, INC. as of February 28, 1999 and 1998, 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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 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 15. 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
March 27, 2000
34
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
FEBRUARY 28,
1999 1998
----------- ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 181,877 $ 128,911
Accounts Receivable, net of provision for
doubtful accounts of $17,000 and $38,097 494,563 501,010
Notes Receivable -- 125,000
Prepaid Expenses 22,343 45,646
Total Current Assets 698,783 800,567
----------- ------------
PROPERTY AND EQUIPMENT 2,145,722 2,211,317
Accumulated Depreciation (1,696,918) (1,476,444)
----------- ------------
Net Book Value 448,804 734,873
----------- ------------
OTHER ASSETS
Intangible Assets, net - 4,974,345
Other Assets 22,581 -
Deposits 28,041 42,482
----------- ------------
Total Other Assets 50,622 5,016,827
----------- ------------
TOTAL ASSETS $ 1,198,209 $ 6,552,267
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,797,216 $ 1,609,711
Debentures Payable, Net of Discount
of $56,309 207,643 -
Deferred Revenue 335,105 298,419
Due to Related Parties 182,891 315,785
----------- ------------
Total Current Liabilities 2,522,855 2,223,915
Rent Deposit 12,248 12,248
----------- ------------
TOTAL LIABILITIES 2,535,103 2,236,163
----------- ------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value;
5,000,000 shares authorized, no
shares issued and outstanding - -
Preferred Stock, Series A $.001 par value,
and 250 shares issued and outstanding - -
Common Stock, $.001 par value; 40,000,000
shares authorized 10,922,655 and
4,589,810 shares issued and outstanding 10,923 4,590
Additional Paid-in Capital 14,185,622 13,726,037
Accumulated Deficit (15,364,474) (9,244,613)
Cumulative Foreign Currency Translation
Adjustment ( 168,965) ( 169,910)
----------- ------------
Total Stockholders' Equity (1,336,894) 4,316,104
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,198,209 $ 6,552,267
=========== ============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
35
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28,
1999 1998
----------- -----------
REVENUE
Telecommunication Revenue $ 652,505 $ 871,097
Software Sales & Maintenance 703,863 1,672,446
----------- -----------
1,356,368 2,543,543
COST OF SALES 578,316 1,238,944
----------- -----------
GROSS PROFIT 778,052 1,304,599
------------ ------------
OPERATING EXPENSES
Gold Exploration Costs 4,054 61,862
Software Development Costs 478,563 727,226
Sales, General & Administrative 1,750,710 3,127,864
----------- ----------
Total Operating Expenses 2,233,327 3,916,952
----------- ----------
Loss From Operations (1,455,275) (2,612,353)
----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense ( 120,482) ( 2,452)
Other Income (Expense) ( 57,763) 56,042
Impairment of Goodwill (4,583,583) -
Impairment of Claim Costs - (1,036,523)
Foreign Exchange Gain 97,242 8,869
----------- ------------
Total Other Income (Expense) (4,664,586) ( 974,064)
----------- ------------
Loss Before Provision for Income Taxes (6,119,861) (3,586,417)
Provision for Income Taxes - -
----------- -----------
Net Loss $(6,119,861) $(3,586,417)
=========== ===========
Loss Per Share:
Basic and Undiluted $ ( 0.71) $ ( 0.78)
============ ============
Weighted Average Common Shares Outstanding 8,589,193 4,589,810
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
36
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FEBRUARY 28, 1998 TO FEBRUARY 28, 1999
<TABLE>
<CAPTION>
Additional Currency
Preferred Stock Common Stock Paid-in Accumulated Translation
Shares Amount Shares Amount Capital Deficit Adjustments Total
------ ------ ------ ------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1997 - - 4,489,810 $ 4,490 $13,156,762 $(5,658,196) $( 116,964) $ 7,386,092
Sale of Common Stock - - 100,000 100 359,275 - - 359,375
Sale of Preferred Stock 250 - - - 250,000 - - 250,000
Costs of Issuance - - - - (40,000) - - (40,000)
Translation Adjustments - - - - - - (52,946) (52,946)
Net Loss - - - - - (3,586,417) - (3,586,417)
------- ------- --------- -------- --------- ----------- ----------- -----------
Balance, February 28, 1998 - 250 - 4,589,810 4,590 13,726,037 (9,244,613) ( 169,910) 4,316,104
Adjustment of Shares - - 11,765 12 (12) - - -
Shares issued to retire debt - - 126,530 126 38,888 - - 39,014
Shares issued in connection with
Preferred Stock Conversion - - 375,000 375 (375) - - -
Shares issued in conversion of
Preferred Stock (250) - 666,885 667 (667) - - -
Shares issued in connection with
Sale of Debentures - - 300,000 300 254,700 - - 255,000
Conversion of Debentures - - 4,386,000 4,386 132,518 - - 136,904
Satisfaction of Debt - - 466,665 467 34,533 - - 35,000
Foreign Currency
Translation Adjustments - - - - - - 945 945
Net Loss - - - - - (6,119,861) - (6,119,861)
------- ------- ----------- ------ ----------- ------------- ----------- ----------
Balance February 28, 1999 - $ - 10,922,655 $10,923 $14,185,622 $(15,364,474) $( 168,965) $(1,336,894)
======= ====== ========== ======= =========== ============ ============ ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
37
<PAGE>
SECTOR COMMUNICATIONS , INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended
February 28,
1999 1998
COMPREHENSIVE LOSS
Net loss $(6,119,861) $(3,586,417)
Foreign currency
translation adjustment 945 ( 52,946)
----------- -------------
COMPREHENSIVE LOSS $(6,118,916) $ (3,639,363)
=========== =============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
38
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
FEBRUARY 28
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
----------- ------------
Net Loss $(6,119,861) $(3,586,417)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 841,295 807,417
Reserve for Bad Debt 16,403 12,581
Amortization of Loan Costs and Discount 146,967 -
Impairments 4,583,583 1,036,523
Change in Assets and Liabilities, Net
of Effect of Acquisitions:
(Increase) Decrease in Assets
Accounts Receivable 27,544 130,416
Repayment of Related Party Receivable - 32,198
Prepaid Expenses and Deposits 18,451 71,780
Receivable on Sale of Securities - 1,000,000
(Decrease) Increase in Liabilities
Accounts Payable 187,505 470,844
Related Party Payable ( 58,881) 37,479
Deferred Revenue 36,686 ( 150,835)
----------- ------------
Net Cash Used By Operating Activities (320,308) ( 138,014)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (146,275) ( 40,471)
Repayment of Note87,500 60,512
Decrease in Marketable Securities - 21,762
Repayment of Short Term Borrowing - ( 12,028)
--------- ------------
Net Cash (Used) Provided by Investing Activities ( 58,775) 29,775
--------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the Sale of Convertible
Debentures 430,000 -
Proceeds from the Sale of Common Stock - 210,000
--------- ------------
Net Cash Provided by Financing Activities 430,000 210,000
--------- ------------
Effect of Exchange Rate Changes on Cash 2,049 (52,946)
--------- ------------
Net Increase in Cash 52,966 48,815
Cash - March 1 128,911 80,096
-------- ------------
Cash - February 28, $ 181,877 $ 128,911
========= ============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
39
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
FEBRUARY 28,
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ - $ -
============= =============
Taxes $ - $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
During the year ended February 28, 1999:
o $250,000 of preferred stock was converted into 666,885 shares of
common stock.
o 375,000 shares of common stock were issued in connection with the
preferred stock conversion.
o 593,195 shares of common stock were issued to retire an aggregate of
$74,014 of debt.
o 300,000 shares of common stock, valued at $255,000, were issued in
connection with the sale of convertible debentures.
o 4,386,000 shares of common stock were issued in the conversion of an
aggregate of $143,066 of debentures.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
40
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
NOTE 1 - NATURE OF OPERATIONS
Sector Communications, Inc., 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
Basis of Presentation
---------------------
The consolidated balance sheets as of February 28, 1999 and 1998 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 Company's subsidiaries are as follows:
Global Communications Group, Inc. ("Global")
Sector Bulgaria, Ltd. ("Sector Bulgaria")
Ideous Technologies, AG ("Ideous"), formerly HIS Technologies, AG
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured
levels at various times during the year.
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.
41
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Depreciation is computed using the straight-line method over the
estimated useful lives of 3 to 25 years.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting standards requires management to make estimates
and assumptions that affect the amounts of assets, liabilities and
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.
Foreign Currency Translation
----------------------------
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translations" 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
non-monetary items and current exchange rates to translate monetary
items. The effect of exchange rate changes in highly inflationary
economies is reflected in net loss.
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.
42
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The Company determined the capitalized costs to
be fully impaired at February 28, 1998.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, short-term borrowings and
advances from related parties approximate fair value due to the
relatively short maturity of these instruments.
Earnings Per Share
------------------
The computation of basic earnings per share ("EPS") is computed by
dividing income available to common stockholders by the weighted
average number of outstanding common shares during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect.
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.
Income Taxes
------------
Income taxes are provided for based on the liability method of
accounting pursuant to 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.
Stock-Based Compensation
------------------------
The Company has adopted the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.
43
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Assets
-----------------
Long-lived assets and certain identifiable intangibles to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and
used are recognized based on the fair value of the assets and
long-lived assets to be disposed of are reported at the lower carrying
among or fair value less cost to sell.
Impact of the Year 2000 Issue
-----------------------------
During the period ended December 31, 1999, the Company conducted an
assessment of issues related to the year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize beyond December 31, 1999.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at February 28:
1999 1998
---------- ------------
Fibre Network $ 157,837 $ 157,837
Equipment 1,850,594 1,916,192
Furniture and Fixtures 47,223 47,223
Vehicles and Other 90,068 90,068
---------- ------------
2,145,722 2,211,317
Less: Accumulated
Depreciation (1,696,918) ( 1,476,444)
---------- ------------
$ 448,804 $ 743,873
=========== =============
Depreciation expense for the years ended in 1999 and 1998 was $373,251
and $414,870, respectively.
44
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
NOTE 4 - 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 was also a
director of Sector AG and the Chairman of the Board of Directors of
Histech. This liability remains unpaid as of February 28, 1999.
The Company has also been advanced funds from stockholders, directors,
officers, employees and other related parties. These advances amount
to $102,891 and $235,785 at February 28, 1999 and 1998, respectively.
NOTE 5 - NOTES RECEIVABLE
Notes receivable at February 28, 1999 and 1998 are as follows:
1999 1998
---- ----
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 was reached for the payment
of the note in February, 1998 $ - $ 125,000
======= ===========
During the year ended February 28, 1999, $37,500 was written off as
uncollectible.
NOTE 6 - INTANGIBLE ASSETS
Intangible assets at February 28, 1999 and 1998 are as follows:
1999 1998
---- ----
Goodwill $ - $ 4,882,881
Intellectual property and
distribution rights - 763,382
---------- -----------
- 5,642,379
Amortization of intangible assets
and intellectual property and
distribution rights - 671,918
---------- -----------
Total $ - $ 4,974,345
========== ===========
Goodwill has been amortized on a straight-line basis over twenty
years. Intellectual property and distribution rights have been
amortized over an estimated useful life of five years.
45
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
NOTE 6 - INTANGIBLE ASSETS (Continued)
At February 28, 1999, both the goodwill and intellectual property and
distribution rights have been determined to be fully impaired.
NOTE 7 - CONVERTIBLE DEBENTURES
On April 15, 1998, the Company sold $500,000 in principal amount of
its 6% Convertible Promissory Notes due July 30, 1999 (the "Notes")
pursuant to Regulation S under the Securities Act for net proceeds of
$430,000. In addition, the two purchasers, Amex Corp. Limited and
Danvers Investment Corp., each a British Virgin Island corporation,
with an address in Zurich, Switzerland, each received 150,000 shares
of Common Stock. These shares have been valued at $255,000 and are
recorded as discount on debt in the financial statements. The discount
is being amortized over the life of the notes. Upon conversion, any
unamortized discount attributable to the conversion amount is charged
to additional paid in capital.
Effective May 26, 1998, each holder has the full right to convert its
Note in the principal amount of $250,000, plus accrued interest (at
the rate of 6% per annum), in whole or in part, into shares of Common
Stock at a conversion price equal to the lesser of (1) $2.98 (which
was 80% of the closing bid prices of the Common Stock on April 15,
1998) or (2) 80% of the average closing bid prices of the Common Stock
for the five trading days immediately preceding the conversion date.
During the year ended February 28, 1999, the holders of the notes
elected to convert an aggregate of $236,048 principal amount of notes
into 4,386,000 shares of common stock. Unamortized discount amounting
to $99,144 has been charged to additional paid in capital upon
conversion.
NOTE 8- STOCKHOLDERS' EQUITY
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. This 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.
46
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
NOTE 8- STOCKHOLDERS' EQUITY (Continued)
On November 18, 1997, the Board authorized a reverse stock split of
the Common Stock of one share for every 1.25 outstanding shares. The
par value of the Common Stock did not change, but the number of
authorized shares was reduced from 50,000,000 to 40,000,000. The two
reverse stock splits, which had the combined effect of a 1 for 50
reverse stock split, as well as the reduction of the authorized
shares, became effective with the filing of an amendment in Nevada on
December 2, 1997.
Recent 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 375,000 shares of 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 366,665
shares of the Common Stock based on a conversion price of $0.45 per
share. On May 13, 1998, Firstimpex converted the remaining 85 shares
of the Series A Preferred into 300,220 shares of Common Stock based on
the alternative conversion price of $0.283125 per share, which
represented the average of the closing bid prices during the five
trading days preceding the conversion date.
In connection with the sale of its 6% convertible debentures, the
Company issued 150,000 shares of Common Stock to each of two
purchasers.
The Company issued 126,530 shares of Common Stock to retire $39,014 of
debt owed to a related party.
On January 25, 1999, the Company and five Director/Officers of the
Company agreed that the Company would issue 2,425,000 shares to these
individuals as payment for services rendered to the Company. The
shares, when issued, will be valued at $97,000. This liability has
been reflected in the financial statements at February 28, 1999.
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.
47
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 9- WARRANTS
At February 28, 1999, 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
25,000 7.90 2/28/97 7/18/99
125,000 7.90 2/28/97 7/18/99
-------
180,000
NOTE 10- STOCK OPTION PLANS
Under the 1991 and 1994 Stock Plans, the Company can grant incentive
stock options, non-statutory 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.
On June 17, 1996, the Company granted to an employee an incentive
stock option for the purchase of 15,000 shares of the Company's common
stock at $1.0625 per share under the Company's 1994 Stock Plan. Such
option vested 5,000 shares on the date of the grant, with the
remaining shares vesting 5,000 shares on June 17, 1997 and 5,000
shares on June 17, 1998.
On July 14, 1996, the Company granted to an employee an incentive
stock option for the purchase of 18,000 shares of the Company's common
stock at $1.625 per share under the Company's 1994 Stock Plan. Such
option vested 6,000 shares on the date of the grant, with the
remaining shares vesting 6,000 shares on July 19, 1997 and 6,000
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.
48
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 10- STOCK OPTION PLANS (Continued)
On February 3, 1997, the Company granted to an employee an incentive
stock option for the purchase of 70,000 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 30,000 shares on the
date of the grant, with the remaining shares vesting 20,000 shares on
February 3, 1998 and 20,000 shares on February 3, 1999.
On February 21, 1997, the Company granted to an employee an incentive
stock option for the purchase of 30,000 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 10,000 shares on the
date of the grant, with the remaining shares vesting 10,000 shares on
February 21, 1998 and 10,000 shares on February 21, 1999.
On March 5, 1998, the Company granted to a Director a stock option for
the purchase of 30,000 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 10,000 shares on the date of the grant, with
the remaining shares vesting 10,000 shares on March 5, 1998 and 10,000
shares on March 5, 1999. The director resigned prior to February 28,
1998 and the unvested options totaling 20,000 shares have been
cancelled.
On January 25, 1999, the Company granted to five Directors options to
purchase an aggregate of 3,180,000 shares of common stock, at an
exercise price of $0.0625 per share. The options vested immediately
and expire on January 25, 2004. The options were issued in connection
with services provided to the Company through the date of issuance.
49
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 10- STOCK OPTION PLANS (Continued)
A summary of stock option transactions are as follows:
Years Ended
February 28,
1999 1998
---------- ----------
Outstanding, Beginning 131,000 121,000
Granted Under the 1999 Non-cash
compensation Plan at
an Exercise Price of $0.0625 3,180,000 -
Granted Under the 1994 Stock Plan at
an Exercise Price Ranging from
$.375 to $.90 Per Share - 30,000
Expired or Canceled Under the 1994
Stock Plan - ( 20,000)
Outstanding, Ending 3,311,000 131,000
========= =========
Exercisable, Ending 3,311,000 106,000
========= =========
50
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 10 - STOCK OPTION PLANS (Continued)
The Company accounts for its stock option transactions under the
provisions of APB No. 25. The following pro forma information is based
on estimating the fair value of grants based upon the provisions of
SFAS No. 123. The fair value of each option granted during the periods
indicated has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Year Ended February 28,
1999 1998
--------- --------
Risk Free Interest Rate 5.50% 6.25%
Life of the Options 5 years 10 years
Expected Dividend Yield 0% 0%
Expected Volatility 262% 262%
Weighted Fair Value of Options
Granted $0.06 $0.37
Accordingly, the Company's pro forma net loss and net loss per share
assuming compensation cost was determined under SFAS No. 123 would
have been the following:
Year Ended February 28,
1999 1998
--------- --------
Net Loss $(6,459,187) $(3,789,385)
Net Loss Per Basic Share (0.75) (0.83)
Year Ended February 28,
1999 1998
--------- --------
Weighted Average Option Price
Per Share
Granted $ 0.06 $ 0.37
Exercised - -
Cancelled - 0.37
Outstanding at End of Period 0.32 6.83
Exercisable at End of Period 0.32 6.24
Weighted Average Remaining Life
Of Options Outstanding 60 months 97 months
51
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 11 - 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.
NOTE 12 - INCOME TAXES
The components of the provision for income taxes at February 28, 1999
and 1998 is as follows:
1999 1998
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)% (34.0)%
Deferred Tax Charge (Credit) - -
Effect of Valuation Allowance 34.0% 34.0%
State Income Tax, Net of Federal Benefit -
-------- ------
Effective Income Tax Rate 0.0% 0.0%
========= =======
52
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 12 - INCOME TAXES (Continued)
At February 28, 1999, the Company had net carry-forward losses of
approximately $21,000,000. 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 carry-forward.
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, 1999 and 1998 are as
follows:
1999 1998
--------------- -----------
Deferred Tax Assets
Loss Carry-forwards $7,140,000 $ 5,333,000
Less: Valuation Allowance (7,140,000) (5,338,000)
------------ -----------
Net Deferred Tax Assets $ - $ -
============ ============
Net operating loss carry-forwards expire starting in 2005 through
2019.
NOTE 13- COMMITMENTS AND CONTINGENCIES
1) Operating Leases
The Company has entered into a non-cancelable operating lease
agreement for office space. The agreement contains renewal options
and/or defined rent escalation provisions. The minimum lease payments
under these lease agreements are as follows:
Minimum Minimum
Lease Sublease
Payments Payments
February 28, 2000 $152,105 $ 61,119
2001 141,228 64,137
2002 145,465 67,404
2003 149,829 69,426
2004 25,216 11,684
---------- ----------
$613,843 $273,770
======== ========
53
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 13- COMMITMENTS AND CONTINGENCIES (Continued)
1) Operating Leases (Continued)
The Company has entered into cancelable and non-cancelable sublease
agreements on terms similar to its original lease for office space at
its McLean, Virginia location. Rent expense included in the statement
of operations for the years ended February 28, 1999 and 1998 was
$44,306 and $117,898, respectively.
2) On November 8, 1996, Symark International, Inc. ("Symark") filed a
complaint against Ideous 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 Ideous' motion to
dismiss the action for improper venue on the ground that the forum
selection clause in the contract between Ideous and Symark specified
the courts of the Canton of Zurich, Switzerland for the resolution of
disputes between Ideous 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 lawsuit arose from disputes between Ideous 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 Ideous had attempted to engage Symark in "unfair and
unlawful acts and practices and unfair competition" with Ideous and
another distributor, Raxco, and also had made disparaging remarks to
Symark's customers. Ideous' 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 Ideous' products as
Symark's own. Ultimately, Ideous terminated the Agreement.
Symark sought to recover unspecified damages and believes the damages
are in excess of $50,000. The Company strongly believed that there is
no merit to the allegations in the Symark complaint and intended to
vigorously defend itself in this action.
In December 1999, each party to the actions agreed to withdraw all
pending actions against the other parties.
54
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 13- COMMITMENTS AND CONTINGENCIES (Continued)
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 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, plaintiffs
seek punitive damages for not delivering the shares to them. In the
fourteenth cause of action, the plaintiffs seek damages for not
delivering the shares to them. In the fourteenth cause of action, the
plaintiffs seek 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 twelve 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.
The complaint was dismissed without prejudice as to the Company in
February 2000. Motions by the Company are currently pending requesting
fees and costs incurred in defending this action.
55
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 13- COMMITMENTS AND CONTINGENCIES (Continued)
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, 1999 and 1998.
Judgement was rendered against the Company for approximately $42,000,
plus costs and fees, in September 1998. The parties settled for
$15,000 on March 30, 2000.
5) 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.
NOTE 14 - EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in
the future that were not included in the computation of diluted
earnings per share because their effect would have been antidilutive
are as follows:
February 28,
1999 1998
---------- ---------
Warrants 180,000 180,000
Options 3,311,000 131,000
---------- ---------
Total Shares 3,491,000 311,000
========== =========
NOTE 15 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As of February
28, 1999, the Company has a working capital deficit of 1,824,072 and
an accumulated deficit of 15,364,474. 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.
56
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 16 - SEGMENT INFORMATION
The Company's foreign operations are conducted by Global, Sector
Bulgaria and Ideous.
Years Ended February 28,
1999 1998
------------- -------------
Revenues from external customers:
Telecommunications $ 652,505 $ 871,097
Software 703,863 1,672,446
-------------- -------------
$ 1,356,368 $ 2,543,543
============= =============
Interest expense:
Corporate 120,482 $ 2,452
============== =============
Depreciation and amortization:
Telecommunications $ 335,367 $ 389,845
Software 485,928 396,564
Corporate 20,000 21,008
-------------- --------------
$ 841,295 $ 807,417
============== ============
Segment loss before taxes:
Telecommunications $ ( 244,434) $ ( 541,061)
Software (5,522,592) ( 758,064)
Corporate ( 352,835) (2,287,292)
-------------- ------------
$ (6,119,861) $ (3,586,417)
============= ===========
Segment assets:
Telecommunications $ 613,450 $ 935,961
Software 453,135 5,370,869
Corporate 131,624 245,437
-------------- -------------
$ 1,198,209 $ 6,552,267
============= ===========
Expenditure for segment assets:
Telecommunications $ 121,020 $ 28,068
Software 25,255 12,403
Corporate - -
-------------- -----------
$ 146,275 $ 40,471
============= ============
57
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999 and 1998
NOTE 16- SEGMENT INFORMATION (Continued)
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.
Years Ended February 28,
1999 1998
----------- -----------
Revenues from external customers:
United States $ - $ -
Switzerland 703,863 1,672,446
Bulgaria 652,505 871,097
----------- -----------
$ 1,356,368 $ 2,543,543
=========== =============
Segment assets:
Switzerland $ 453,135 $ 5,370,869
Bulgaria 613,450 935,961
United States 131,624 245,437
---------- --------------
$1,198,209 $ 6,552,267
========== ============
NOTE 17 - DEPENDENCE ON MAJOR CUSTOMERS
Sector Bulgaria currently provides services to a limited base of 9
customers and therefore relies heavily on the business from each. Its
five largest customers accounted for greater than 80% of total
revenues for the year ended February 28, 2000. No single customer,
however, accounted for more than 50% of all revenues generated. Sector
Bulgaria 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.
NOTE 18 - SUBSEQUENT EVENTS
On May 17, 1999, the Company issued 3,846,150 shares of common stock
to two purchasers for aggregate proceeds of $100,000.
The Company issued options to purchase an aggregate of 2,001,458
shares of common stock to officers and directors. The options are
exercisable at prices ranging from $0.0312 to $0.05 per share and
expire five years from date of grant.
The Company did not pay the outstanding principal balance of the
convertible debentures of $263,952 on the maturity date of July 30,
1999, nor did it pay the accrued interest. Per the terms of the notes,
interest accrues at 8% per year after July 20, 1999. As of the date of
this report, neither the principal nor the accrued interest has been
paid.
58
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons:
Compliance With Section 16(a) of the Exchange Act
The following table lists the names, ages, and positions of the executive
officers and directors of the Company that served during the year ending
February 28, 1999. All officers and directors have been appointed to serve until
their successors are elected and qualified. Additional information regarding the
business experience, length of time served in each capacity, and other matters
relevant to each individual is set forth following the table.
Name Age Position
---- --- --------
Andreas Tobler 49 President, CEO, Director
Mohamed Hadid 51 Chairman of the Board of Directors
Theodore J. Georgelas 53 VP, Director
Geoffrey A. Button 49 President/CEO, Director
(Resigned Pres/CEO 9-4-98)
James Zelloe 40 Secretary, Director
Jeff Shear (Resigned 10-19-98) 56 Outside Director
Andreas O. Tobler became President, CEO and a director on September 4, 1998. He
is a partner in and Managing Director of Online Capital GmbH. Since September
1998 he serves as a member of the Board of Directors of Senetek Plc. ("SNTKY"),
a UK/US based biotechnology company. In March 2000 he has become a member of the
Board of Directors of American Flower Exchange, Inc. From 1992 to 1998, Mr.
Tobler was a Managing Director at Cornerstone Financial Corporation, a New York
based financial advisory firm. From 1989 to 1991, Mr. Tobler was Managing
Partner of Royal Trust Bank (Switzerland). Prior to joining Royal Trust he
served as head of Corporate Finance for Citibank in Switzerland from 1987 to
1988. From 1982 to 1987, Mr. Tobler held various positions at Credit Suisse in
New York where his last assignment was to lead the banks effort in building a
capital markets department. From 1980 to 1982, Mr. Tobler was an associate at
the Swiss law firm Staehelin, Hafter & Partners. Mr. Tobler holds a law degree
from the University of Zurich, Switzerland, and a Masters degree from New York
University.
59
<PAGE>
Mohamed Hadid joined the board of directors on December 9, 1998. He has held a
number of senior management positions with a portfolio of companies, including
being the Founding Co-Chairman of Global Communications Group, and Co-Founder
and Director of Voice Powered Technology. Mr. Hadid formerly was the largest
single owner of the Ritz Carlton Hotels, with properties in Aspen, Colorado,
Washington, D.C., Houston, Texas and New York. Mr. Hadid has been responsible
for the development of over seven million square feet of commercial office
buildings in the greater Washington, D.C. area, with total value estimated to be
in excess of U.S. $2.7 billion. As a former director of Adams National Bank and
Advisory Board Director of National Enterprise Bank, Mr. Hadid was responsible
for structuring over U.S. $200,000,000.00 in financing for smallcap and emerging
public companies. Mr. Hadid was formerly served as interim Chairman of The
Entertainment Internet, Inc. He also formerly served as Managing Director of
Emerald Capital Corporation. Mr. Hadid holds a Bachelor of Science degree from
North Carolina State University, and attended graduate school at Massachusetts
Institute of Technology. On November 8, 1999, Mr. Hadid filed a voluntary
petition in the U.S. Bankruptcy Court for the Central District of California
seeking relief relating personal matters.
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 Button assumed the roles and
responsibility of President and Chief Executive Officer. On December 9, 1998,
Mr. Georgelas was named Vice President. 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 Sector's board on July 19, 1996 and was appointed Vice
President and Chief Operating Officer on February 3, 1997. In December 1997 Mr.
Button assumed the roles of President and Chief Executive Officer of the
Company. On September 4, 1998, Mr. Button was replaced as President and CEO by
Andreas Tobler. 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 Shear Kershman Labs, a consulting company for new
products for food and pharmaceutical companies. He was formerly chairman and
chief executive officer of Pharmaceutical Delivery Systems, a company which
manufactured and marketed pharmaceuticals.
60
<PAGE>
James Zelloe joined the board of directors in September 1998. He was elected
secretary in December 1998. He is an attorney with the law firm of Kunnirickal
and Zelloe. . He is a member of the Bars of the Commonwealth of Virginia and the
District of Columbia. He received a BS in Business Administration with a major
in Economics from Virginia Polytechnic Institute and State Unuiversity in 1981.
He was enrolled in a joint MA in Economics/JD program at Catholic University in
Washington, D.C.. He received his JD from the Columbus School of Law in 1984.
During his tenure at the University, he was a teaching assistant with the
Economics department, where he also lectured on his economic articles. He has
had a law practice in the Washington Metropolitan area (Virginia/Washington,
D.C.) since 1984. He is also on the Board of Directors of The Entertainment
Internet. He has been a member of the Board of Directors and an Officer of
Sector since 1998.
Compensation of Directors
- -------------------------
Directors who are not employees of the Company receive a monthly fee of $ 2,000,
and are reimbursed for out-of-pocket expenses incurred in their capacity as
members of the Board of Directors. As of September 1998, all director monthly
fees were terminated.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company. Officers, directors and greater than
10% shareholders are required by the Securities and Exchange Commission to
furnish the Company with copies of all section 16(a) reports they file. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners were complied
with for the year ended February 28, 1999.
61
<PAGE>
ITEM 10. Executive Compensation
The following table sets forth the compensation of the current Chief Executive
Officer of the Company in the fiscal year ended February 28, 1999.
Summary Compensation Table
Annual Compensation Long-term Compensation
--------------------- -------------------------
Restricted
Salary/ Stock
Name Year Fees Bonus Awards (#) Options(#)
- ------------------ --------- ------------ -------- ------------- -----------
Theodore Georgelas 1999 $40,000 0 15,000(1) 30,000
Geoffrey Button 1999 116,000 0 10,000(2) 25,000
Jeffrey Shear 1999 30,000 0 0 0
Donald Johnson 1999 20,000 0 0
Mohamed Hadid 1999 60,000 0 300,000(3) 300,000
James Zelloe 1999 2,000 0 10,000(4) 25,000
Andreas Tobler 1999 30,000 0 150,000(5) 150,000
(1) Stock awards valued at $3,000 and included in the Salary/Fees figure and
the 30,000 common share stock options exerciseable at the average of
bid/ask closing price as of 1/25/99.
(2) Stock award valued at $2,000 and included in the Salary/Fees figure and the
25,000 common share stock options exerciseable at the average of bid/ask
closing price as of 1/25/99.
(3) Stock awards valued at $60,000 and included in the Salary/Fees figure and
the 30,000 common share stock options exerciseable at the average of
bid/ask closing price as of 1/25/99.
(4) Stock awards valued at $2,000 and included in the Salary/Fees figure and
the 25,000 common share stock options exerciseable at the average of
bid/ask closing price as of 1/25/99.
(5) Stock awards valued at $30,000 and included in the Salary/Fees figure and
the 150,000 common share stock options exerciseable at the average of
bid/ask closing price as of 1/25/99.
(6) The stock options represent common shares of restricted stock. These shares
are reported in the financial statements, however, reflect a 5 for 1
forward split effected July 1, 1999.
62
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the Common Stock ownership information as of
February 28, 1999, and is adjusted for the reverse stock split, with respect to
(i) each person known to the Company to be the beneficial owner of more than 5%
of the Company's Common Stock; (ii) each director of the Company; and (iii) all
directors, executive officers and designated stockholders of the Company as a
group. This information as to beneficial ownership was furnished to the Company
by or on behalf of the persons named. Unless otherwise indicated, each has sole
voting and investment power with respect to the shares beneficially owned.
Shares of Company Common Stock Beneficially Owned
Percentage
Beneficial Owner Number of Shares of Total
- -------------------------------------- -------------------- -----------------
Cede & Co. 1,777,250(1) 66.5
P.O. Box 20
Bowling Green Station
New York, NY 10004
Andreas Tobler 300,000(2) 5.6
OnLine Capital GmbH
Unterer Graben 27, P.O. Box 407
8402 Winterthur, Switzerland
Mohamed Hadid 600,000(3) 11.2
31305 Highway 82
Aspen, CO 81611
Theodore Georgelas 57,020 (4) 1.0
7601 Lewinsville Road
Suite 250
McLean, VA 22102
Jeff Shear 3,334 *
1421 Wildhorse Parkway
Chesterfield, MO 63005
James Zelloe 35,000(5) *
203 W. Rosemont Ave.
Alexandria, VA 22301
Geoff Button 36,000 (6) *
The Millhouse
Chicksgrove
Salisbury, Wilts SP3 6LY, UK
All Officers and Directors 1,031,354 18.789(7)
as a group (6 persons)
63
<PAGE>
* - represents less than 1%.
(1) Represents shares held in street name by various broker-dealers.
(2) Includes common stock options to purchase 150,000 shares at the average
bid/ask price as of 1-25-99.
(3) Includes common stock options to purchase 300,000 shares at the average
bid/ask price as of 1-25-99.
(4) Includes common stock options to purchase 25,000 shares at the average
bid/ask price as of 1-25-99.
(5) Includes common stock options to purchase 25,000 shares at the average
bid/ask price as of 1-25-99.
(6) Includes common stock options to purchase 25,000 shares at the average
bid/ask price as of 1-25-99.
(7) If options were exercised the total shares owned by management would be
38.6%.
ITEM 12. Certain Relationships and Related 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 was also a director of Sector AG and the
Chairman of the Board of Directors of Histech. This liability remains unpaid as
of February 28, 1999.
The Company has also been advanced funds from stockholders, directors, officers,
employees and other related parties. These advances amount to $102,891 and
$235,785 at February 28, 1999 and 1998, respectively.
64
<PAGE>
PART IV
ITEM 13. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K.
1. Current Report on Form 8-K not filed during the last quarter of the
fiscal year.
(b) Exhibits
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended. (Incorporated
herein by reference to Exhibit 3.1 of the Registrant's Form 10-KSB for
the year ended February 28, 1993.)
3.2 Articles of Merger, amending the Registrant's Articles of
Incorporation. (Incorporated herein by reference to Exhibit 3.2 of the
Registrant's Form 10-KSB for the year ended February 28, 1993.)
3.3 Bylaws of the Company. (Incorporated herein by reference to Exhibit
3.3 of the Registrant's Form 10-KSB for the year ended February 28,
1993.)
10.1 1991 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Form 10-KSB for the year ended
February 28, 1993.)
10.2 1994 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 99 of the Registrant's Form S-8 Registration no. 33-76718,
dated March 18. 1994.)
10.3 Agreement for the transfer of the claims from Biomyne North Company.
(Incorporated herein by reference to Exhibit 10.2 of the Registrant's
Form 10-KSB for the year ended February 28, 1993.)
10.4 Exploration License and Option to Lease Agreement for five patented
lode claims known as the Taylor claims. (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Form 10-KSB for the year
ended February 28, 1993.)
10.5 License agreement for the technology with Biomyne Technology Company.
(Incorporated herein by reference to Exhibit 10.5 of the Registrant's
Form 10-KSB for the year ended February 28, 1993.)
65
<PAGE>
Exhibit
Number Description
- ------- -----------
10.6 Exploration license and option to purchase agreement for forty three
patented and thirteen unpatented lode mining claims , collectively
known as the Vienna Property. (Incorporated herein by reference to
Exhibit 10.8 of the Registrant's Form 10-QSB for the quarter ended
November 30, 1994.)
10.8 Promissory Note Agreement with Mr. S. Allan Kline, Dated August 11,
1995. (Incorporated herein by reference to Exhibit 10.10 of the
Registrant's Form 10-KSB for the year ended February 28, 1995).
10.9 Employment Agreement with Mr. Theodore J. Georgelas, Dated January 15,
1996. (Incorporated herein by reference to Exhibit 10.9 of the
Registrant's Form 10-KSB for the year ended February 29, 1996)
10.10 Stock Purchase and Exchange Agreement with Global Communications
Group, Inc., Dated April 19, 1996. (Incorporated herein by reference
to Exhibit 10.10 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
10.11 Amendment No. 1 to the Stock Purchase and Exchange Agreement with
Global Communications Group, Inc. (Incorporated herein by reference to
Exhibit 10.11 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
10.12 Debt Repayment Agreement. (Incorporated herein by reference to
Exhibit 10.12 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
27 Financial Data Schedule
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) to the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this ___ day of April, 2000.
SECTOR COMMUNICATIONS, INC.
BY: /s/ Mohamed Hadid
Mohamed Hadid, 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 the Company and in
the capacities and on the dates indicated.
Date: April , 2000 /s/ Mohamed Hadid
Mohamed Hadid, Chairman
Date: April , 2000 /s/ Theodore Georgelas
President and CEO
Date: April , 2000 /s/ James Zelloe
V.P.,Secretary/Treasuer, Director
67
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended. (Incorporated
herein by reference to Exhibit 3.1 of the Registrant's Form 10-KSB for
the year ended February 28, 1993.)
3.2 Articles of Merger, amending the Registrant's Articles of
Incorporation. (Incorporated herein by reference to Exhibit 3.2 of the
Registrant's Form 10-KSB for the year ended February 28, 1993.)
3.3 Bylaws of the Company. (Incorporated herein by reference to Exhibit
3.3 of the Registrant's Form 10-KSB for the year ended February 28,
1993.)
10.1 1991 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Form 10-KSB for the year ended
February 28, 1993.)
10.2 1994 Stock Plan of the Company. (Incorporated herein by reference to
Exhibit 99 of the Registrant's Form S-8 Registration no. 33-76718,
dated March 18. 1994.)
10.3 Agreement for the transfer of the claims from Biomyne North Company.
(Incorporated herein by reference to Exhibit 10.2 of the Registrant's
Form 10-KSB for the year ended February 28, 1993.)
10.4 Exploration License and Option to Lease Agreement for five patented
lode claims known as the Taylor claims. (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Form 10-KSB for the year
ended February 28, 1993.)
10.5 License agreement for the technology with Biomyne Technology Company.
(Incorporated herein by reference to Exhibit 10.5 of the Registrant's
Form 10-KSB for the year ended February 28, 1993.)
10.6 Exploration license and option to purchase agreement for forty three
patented and thirteen unpatented lode mining claims , collectively
known as the Vienna Property. (Incorporated herein by reference to
Exhibit 10.8 of the Registrant's Form 10-QSB for the quarter ended
November 30, 1994.)
10.8 Promissory Note Agreement with Mr. S. Allan Kline, Dated August 11,
1995. (Incorporated herein by reference to Exhibit 10.10 of the
Registrant's Form 10-KSB for the year ended February 28, 1995).
10.9 Employment Agreement with Mr. Theodore J. Georgelas, Dated January 15,
1996. (Incorporated herein by reference to Exhibit 10.9 of the
Registrant's Form 10-KSB for the year ended February 29, 1996)
68
<PAGE>
EXHIBIT INDEX (CONTINUED)
Exhibit
Number Description
- ------- -----------
10.10 Stock Purchase and Exchange Agreement with Global Communications
Group, Inc., Dated April 19, 1996. (Incorporated herein by reference
to Exhibit 10.10 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
10.11 Amendment No. 1 to the Stock Purchase and Exchange Agreement with
Global Communications Group, Inc. (Incorporated herein by reference to
Exhibit 10.11 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
10.12 Debt Repayment Agreement. (Incorporated herein by reference to
Exhibit 10.12 of the Registrant's Form 10-KSB for the year ended
February 29, 1996).
27 Financial Data Schedule
69
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> FEB-28-1999
<CASH> 181,877
<SECURITIES> 0
<RECEIVABLES> 511,563
<ALLOWANCES> 17,000
<INVENTORY> 0
<CURRENT-ASSETS> 698,783
<PP&E> 2,145,722
<DEPRECIATION> 1,696,918
<TOTAL-ASSETS> 1,198,209
<CURRENT-LIABILITIES> 2,522,855
<BONDS> 0
0
0
<COMMON> 10,923
<OTHER-SE> (1,347,817)
<TOTAL-LIABILITY-AND-EQUITY> 1,198,209
<SALES> 1,356,368
<TOTAL-REVENUES> 1,356,368
<CGS> 578,316
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,233,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,482
<INCOME-PRETAX> (6,119,861)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,119,861)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (6,119,861)
<EPS-BASIC> (0.71)
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