UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: August 31, 2000 Commission File Number: 0-22382
SECTOR COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Nevada 56-1051491
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7601 Lewinsville Road, Ste 250, McLean, VA 22102
------------------------------------------------
(Address of principal executive offices) (Zip Code)
(703) 761-1500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer/s
classes of common stock as of the last practicable date:
Number of Shares of Common Stock outstanding at August 31, 2000: 17,368,805
<PAGE>
SECTOR COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets............................................ 2-3
Statements of Operations.................................. 4
Statements of Cash Flows.................................. 5-6
Notes to Consolidated Financial Statements (Unaudited).... 7
ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations..................12
PART II OTHER INFORMATION
ITEM 1 - Changes In Securities................................ 21
ITEM 2 - Legal Proceedings.................................... 22
ITEM 5 - Other information.................................... 23
ITEM 6. Exhibits and Reports on Form 8-K..................... 24
Signature Page................................................ 24
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
August 31, February 28,
2000 2000
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 201,105 $ 170,607
Accounts Receivable, net of provision for
doubtful accounts of $30,163 and $18,148 204,337 391,681
Loans receivable 300,000 -
Prepaid Expenses 11,281 30,597
------------ ------------
Total Current Assets 716,723 592,885
------------ ------------
PROPERTY AND EQUIPMENT 1,841,448 2,019,960
Accumulated Depreciation ( 1,598,459) ( 1,803,610)
------------ ------------
Net Book Value 242,989 216,350
------------ ------------
OTHER ASSETS
Deposits 30,887 28,289
------------ ------------
TOTAL ASSETS $ 990,599 $ 837,524
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET (continued)
August 31, February 28,
2000 2000
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses 1,753,505 1,818,732
Debentures Payable 263,952 263,952
Deferred Revenue 179,885 203,878
Due to Related Parties 158,269 180,355
------------ ------------
Total Current Liabilities 2,355,611 2,466,917
Rent Deposit 12,248 12,248
------------ ------------
TOTAL LIABILITIES 2,367,859 2,479,165
------------ ------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 5,000,000
shares authorized, no shares issued and
outstanding - -
Common Stock, $.001 par value; 500,000,000 and
40,000,000 shares authorized, 17,368,805 and
17,193,805 shares issued and outstanding 17,369 17,194
Common stock subscribed 400,000 -
Additional Paid-in Capital 14,409,075 14,376,351
Accumulated Deficit (15,921,339) (15,748,015)
Cumulative Foreign Currency Translation
Adjustment ( 282,365) ( 287,171)
------------ ------------
Total Stockholders' Equity ( 1,377,260) ( 1,641,641)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 990,599 $ 837,524
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
-------------------------- ----------------------------
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUE
Telecommunication Revenue $ 93,963 $ 160,003 $ 229,212 $ 305,700
Software Sales and Maintenance 115,168 107,844 208,502 160,384
----------- ----------- ----------- ------------
209,131 267,847 437,714 466,084
COST OF SALES 51,115 116,744 115,501 233,521
----------- ----------- ----------- ------------
GROSS PROFIT 158,016 151,103 322,213 232,563
----------- ----------- ----------- ------------
OPERATING EXPENSES
Software Development Costs 3,153 46,723 11,162 88,680
Sales, General and Administrative 246,942 148,925 487,771 400,344
----------- ----------- ----------- ------------
Total Operating Expenses 250,095 195,648 498,933 489,024
----------- ----------- ----------- ------------
Loss From Operations (92,079) ( 44,545) (176,720) (256,461)
OTHER INCOME (EXPENSE)
Interest (Expense) ( 5,279) ( 26,889) ( 10,558) ( 64,740)
Other Income (Expense) 14,109 ( 8,034) 13,954 103,354
----------- ----------- ----------- ------------
Loss Before Provision for Income Taxes (83,249) ( 79,468) (173,324) (217,847)
Provision for Income Taxes - - - -
----------- ----------- ----------- ------------
Net Loss $ (83,249) $ ( 79,468) $ (173,324) $ (217,847)
=========== ============ =========== ============
Loss Per Share $ ( 0.01) $ ( 0.01) $ ( 0.01) $ ( 0.01)
=========== ============ =========== ============
Weighted Average Number of Shares
Outstanding 17,328,859 17,193,805 17,261,332 15,557,916
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31,
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (173,324) $ (217,847)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 47,704 168,448
Allowance for doubtful accounts 12,844 -
Amortization of Discount and Loan Costs - 78,889
Common stock issued for services 32,900 -
Change in Assets and Liabilities
(Increase) Decrease in Assets
Accounts Receivable 174,500 264,304
Prepaid Expenses and Deposits 16,728 ( 25,175)
Loans receivable (300,000) -
(Decrease) Increase in Liabilities
Accounts Payable ( 65,227) 39,310
Related Party Payable ( 22,086) ( 44,158)
Deferred Revenue ( 23,993) -
------------ -----------
Net Cash Provided (Used) By Operating Activities (299,954) 263,771
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets ( 75,922) ( 75,879)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock - 100,000
Common Stock Subscribed 400,000 -
------------ -----------
400,000 100,000
------------ -----------
Effect of Exchange Rate Changes on Cash 6,374 ( 239,222)
------------ -----------
Net Increase in Cash 30,498 48,670
CASH - MARCH 1, 170,607 181,877
------------ -----------
CASH - AUGUST 31, $ 201,105 $ 230,547
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ - $ -
=========== ===========
Taxes $ - $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31,
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Period ended August 31, 2000:
Common stock totalling 175,000 shares was issued for services. These shares
have been valued at $32,900.
Period Ended August 31, 1999:
Common stock totaling 2,425,000 shares was issued in settlement of accounts
payable aggregating $97,000.
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
---------------------
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have
been included. Certain reclassifications have been made to the
prior period to conform to the current period's presentation.
For further information refer to the financial statements and
footnotes included in the Registrant's Annual Report on form
10-KSB for the period ended February 29, 2000.
The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full
fiscal year ending February 28, 2001.
The unaudited consolidated balance sheet as of August 31, 2000
and the consolidated statements of operations and cash flows for
the six and three month periods ended August 31, 2000 and 1999
are those of Sector Communications, Inc. ("Sector") and its
subsidiaries (collectively the "Company"). All significant
inter-company accounts and transactions have been eliminated.
b) Loss Per Share
--------------
Loss per share is based on the weighted average number of shares
of common stock outstanding during the period.
On July 1, 1999, the Company effected a 5 for 1 stock split. All
share and per share amounts presented in the financial statements
give retroactive effect to this stock split.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2000 AND 1999
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
August 31, February 29,
2000 2000
------------ ------------
Fiber Network $ 157,837 $ 157,837
Equipment 1,541,099 1,724,832
Furniture and Fixtures 52,444 47,223
Vehicles and Other 90,068 90,068
------------ -----------
1,841,448 2,019,960
Less: Accumulated Depreciation 1,598,459 (1,803,610)
------------ -----------
$ 242,989 $ 216,350
============ ===========
Depreciation expense for the six-month periods ended August 31, 2000
and 1999 was $47,704 and $168,448, respectively and for the three
month periods ended August 31, 2000 and 1999 was $24,455 and $83,067,
respectively.
NOTE 3 - WARRANTS
At August 31, 2000, all of the Company's outstanding common stock
purchase warrants expired as follows:
Number Exercise Date of
of Shares Price Exercisable Expiration
--------- ---------- ----------- ----------
10,000 $ 22.50 2/28/97 6/30/00
10,000 30.00 7/20/97 6/30/00
10,000 40.00 7/20/98 6/30/00
------
30,000
======
NOTE 4 - STOCK OPTION PLANS
A summary of stock option transactions for the period ended August 31,
2000 are as follows:
Outstanding, Beginning 5,312,458
Granted 175,000
---------
Outstanding, Ending 5,487,458
=========
Exercisable, Ending 5,487,458
=========
-8-
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2000 AND 1999
NOTE 5- STOCKHOLDERS' EQUITY
On August 8, 2000, the authorized number of common shares was
increased to 500,000,000 shares.
On June 22, 2000, the Company issued 175,000 shares of common stock
for directors' compensation. These shares have been valued at $32,900.
The Company has received $400,000 in common stock subscriptions. The
common stock to be issued is based on 70% of the 5-day average price
preceding the receipt of the funds. The number of shares to be issued
totals 2,134,449 shares.
The Company issued 2,425,000 shares of common stock in settlement of
accounts payable aggregating $97,000.
In May 1999, the Company sold 3,846,150 shares of common stock to two
purchasers for cash proceeds of $100,000.
On July 1, 1999, the Company effected a 5 for 1 stock split. All share
and per share amounts presented in the financial statements give
retroactive effect to this stock split.
NOTE 6- COMMITMENTS AND CONTINGENCIES
1) A former employee of Ideous filed suit against Ideous for wrongful
termination. Judgement was entered against Ideous in the amount of
$110,850. An appeal is pending. The full amount has been accrued in
the financial statements.
2) An individual has filed suit against the Company, also naming
Worldwide Plumbing Supply, Inc. ("Worldwide") and Allan Kline. The
suit alleges that Mr. Kline represented that he was the Prisident of
Sector and would sell 35,000 shares of Company Common Stock to the
plaintiff for $20,000. The plaintiff also alleges that Mr. Kline told
the plaintiff that Worldwide was the parent of Sector. The plaintiff
issued a check to Worldwide and it was cashed. Worldwide has filed an
answer. The Company maintains that it has no knowledge of Worldwide
and that Allan Kline is not the President of Sector. The Company
denies each allegation, believes the suit as it relates to the Company
is without merit, and intends to defend itself vigorously. The
plaintiff seeks the return of $20,000.
3) Agricola Metals, Inc. filed a suit against the Company seeking
$31,136. The plaintiff alleges that it had a consulting contract with
the Company and is owed this amount pursuant to said contract. The
Company has filed an answer and denies each and every allegation.
4) The Company is named a defendant in an action alleging non-payment of
legal services and expenses in the amount of $12,500. The Company
believes some loss may be probable and has accrued this amount in the
financial statements.
-9-
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2000 AND 1999
NOTE 7 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As of August
31, 2000, the Company has a working capital deficit of $1,638,888 and
an accumulated deficit of $15,921,339. Based upon the Company's plan
of operation, the Company estimates that existing resources, together
with funds generated from operations will not be sufficient to fund
the Company's working capital. The Company is actively seeking
additional equity financing. There can be no assurances that
sufficient financing will be available on terms acceptable to the
Company or at all. If the Company is unable to obtain such financing,
the Company will be forced to scale back operations which would have
an adverse effect on the Company's financial conditions and results of
operation.
NOTE 8 - SEGMENT INFORMATION
The Company's foreign operations are conducted by Global, Sector
Bulgaria and Ideous.
August 31, August 31,
2000 1999
----------- ------------
Revenues from external customers:
Telecommunications $ 229,212 $ 305,700
Software 208,502 160,384
----------- ------------
$ 437,714 $ 466,084
=========== ============
Interest expense:
Corporate $ 10,558 $ 64,740
=========== ============
Depreciation and amortization:
Telecommunications $ 41,732 $ 147,489
Software 5,972 13,243
Corporate - 7,716
----------- ------------
$ 47,704 $ 168,448
=========== ============
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<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2000 AND 1999
NOTE 8 - SEGMENT INFORMATION (Continued)
August 31, August 31,
2000 1999
----------- ------------
Segment profit (loss) before taxes:
Telecommunications $( 35,467) $ 52,692
Software ( 24,589) ( 73,261)
Corporate ( 113,268) ( 197,278)
----------- ------------
$ ( 173,324) $( 217,847)
=========== ============
Segment assets:
Telecommunications $ 361,546 $ 549,755
Software 217,889 282,335
Corporate 411,164 53,232
----------- ------------
$ 990,599 $ 885,322
========== ===========
Expenditure for segment assets:
Telecommunications $ 66,408 $ 53,102
Software 415 22,777
Corporate 9,099 -
----------- ------------
$ 75,922 $ 75,879
=========== ============
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.
August 31, August 31,
2000 1999
----------- ------------
Revenues from external customers:
United States $ - $ -
Switzerland 208,502 160,384
Bulgaria 229,212 305,700
----------- ------------
$ 437,714 $ 466,084
=========== ============
Segment assets:
Switzerland $ 217,889 $ 282,335
Bulgaria 361,546 549,755
United States 411,164 53,232
----------- ------------
$ 990,599 $ 885,322
=========== ============
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
NOTE REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS:
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.
OVERVIEW
Sector continued operations during the quarter which were in keeping with its
strategy to advance and develop in underdeveloped markets. The Company directed
efforts toward expansion of its subsidiary business in Bulgaria and successfully
obtained cable television license rights (See Part II, Item 5, Other
Information) which it may use to develop new revenue streams. Although a formal
plan for exploitation of the licenses has not yet been developed and the
financial impact of the licenses cannot be estimated, the Company believes its
licensing activities are positive developments which will bolster its reputation
within the telecommunications industry and, more particularly, within Bulgaria.
During August, the Company made effective a change in its capital structure (See
Part II, Item 1, Changes In Securities) to allow it to issue an increased number
of shares of common stock. Management's intent was to establish a reserve of
common stock to be used for acquisition of other companies and for satisfaction
of agreements which bring necessary capital funding to the Company. During the
same month, the Company secured a Letter of Intent (See Part II, Item 5, Other
Information) to acquire several corporations. Although the Company has not
completed its due diligence and cannot consider the transactions probable as of
this date, management believes acquisition of other corporations may allow it to
expand its base of operations and ultimately yield favorable results.
-12-
<PAGE>
RESULTS OF OPERATIONS (For the 3 months ended August 31, 2000 v. 1999)
Telecommunication Revenue - Sector continues to earn all of its
telecommunications revenue from Sector BG (i) providing direct-dial services for
international long distance calls to a select group of hotels 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 $66,040 or 41.3% from $160,003
for the three months ended on August 31, 1999 to $93,963 for the same period
ended August 31 ,2000. Management believes the decrease in revenue was the
result of a decrease in the number of hotels who have contracted for services
from Sector and a decrease in overall occupancy of its hotel customers.
Management does not anticipate a further decline in revenue during the upcoming
quarter and estimates that revenue levels for the upcoming quarter will remain
stable.
Software Sales and Maintenance Revenue - Sector's software sales and maintenance
revenue increased by $7,324 or 6.8% from $107,844 for the three months ended on
August 31, 1999 to $115,168 for the same period ended August 31, 2000 (all
figures are net of payments to third party distributors). Management believes
the increase in sales for the three months ending August 31, 2000, was
attributable to normal variations in sales revenue from period to period. The
Company continues to be affected by the lack of capital available to HIS to (1)
fund an adequate level of sales and marketing expense and (2) fund the software
and development expense necessary to upgrade existing product lines or to
develop new applications.
Costs of Sales - The Cost of Sales of Sector decreased by $65,629 or 56.2% from
$116,744 for the three months ended on August 31, 1999 to $51,115 for the same
period ended August 31, 2000. The majority of the decrease was attributable to
(1) the decrease in costs associated with payments due to the BTC resulting from
the lower revenues (2) a decrease in other variable expenses associated with the
lower revenue levels and (3) to reduced depreciation charges of fixed assets.
Management does not anticipate additional reductions and estimates that Costs of
Sales for the upcoming quarter will remain stable.
Gross Profit - Gross profit is calculated as revenues less the cost of revenues.
Sector's gross profit increased $6,913 or 4.6% from $151,103 from the three
month period ending August 31, 1999 to $158,016 for the quarter ending August
31, 2000. Management considers the increase marginal and expects its gross
profit to remain stable during the upcoming quarter.
Software Development Costs - Software development costs consisted primarily of
salaries, related benefits, consultants fees and other costs. Sector's software
development costs decreased by $43,570 or 93.3% from $46,723 for the three
months ended on August, 1999 to $3,153 for the same period ended August 31,
2000. The decrease was attributable the lack of capital available to HIS/Ideous
to fund a higher level of software development costs. Management believes
software development costs will remain stable during the upcoming quarter.
-13-
<PAGE>
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 increased by $98,017 or 65.8% from $148,925 for the three
months ended on August 31, 1999 to $246,942 for the same period ended August 31,
2000. This increase in operating expense was primarily the result of increased
costs of operations related to the HIS/Ideous offices in Zurich which arose
because of moderately increased revenue levels, but there were also increases
experienced because of startup of an office in Los Angeles, California and
issuance of shares as directors' compensation. Management expects operating
expenses to remain stable during the upcoming quarter, unless the Company
proceeds with acquisition or other development plans; in such instance,
operating expenses would be expected to rise in accordance with the costs
incurred for implementation of such plans, the dollar figures for which cannot
presently be estimated.
Administrative Costs and Other Costs - Management expects that Sector BG's
general and administrative costs, not taking into consideration any expansion of
the current network, to remain at current levels.
Management expects Sector's general and administrative costs, exclusive of any
addition of new employees, to remain consistent with the levels experienced in
the three months ended on August 31, 2000. If the Company proceeds with
acquisition or other development plans, however, domestic operating general and
administrative expenses would be expected to rise in accordance with the costs
incurred to administer the business elements of such plans, the dollar figures
for which cannot presently be estimated.
Interest Expense - Interest expense for the three month period ending August 31,
2000 decreased by $21,610 or 80.4% as compared to the same three month period in
1999. The decrease in interest expense was the result of the conversion of
convertible debentures issued in early in fiscal 1999. Management expects that
interest expense could increase in the future to the degree Sector borrows funds
in order to finance any continuing operating cash flow deficits and implements
any capital expenditure plans.
RESULTS OF OPERATIONS (For the 6 months ended August 31, 2000 v. 1999)
Telecommunications Revenue - Sector continues to earn all of its
telecommunications revenue from Sector BG (i) providing direct-dial services for
international long distance calls to a select group of hotels 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.
-14-
<PAGE>
For the six month period ending August 31, 2000, telecommunications revenue
decreased by $76,488 or 25% from $305,700. Management believes the decrease in
revenue was the result of a decrease in the number of hotels who have contracted
for services from Sector and a decrease in overall occupancy of its hotel
customers. Management does not anticipate a further decline in revenue during
the upcoming six months and estimates that revenue levels for the upcoming six
months will remain stable.
Software Sales and Maintenance Revenue - Sector's software sales and maintenance
revenue increased from $160,384 to $208,502 respectively or 30%. Management
believes the increase in sales for the six months ending August 31, 2000 was
attributable to normal variations in sales revenue from period to period. The
Company continues to be affected by the lack of capital available to HIS to (1)
fund an adequate level of sales and marketing expense and (2) fund the software
and development expense necessary to upgrade existing product lines or to
develop new applications.
Cost of Sales - The Cost of Sales of Sector decreased by $118,020 or 50.5% from
$233,521 for the six months ending August 31, 1999 to $115,501. The majority of
the decrease was attributable to (1) the decrease in costs associated with
payments due to the BTC resulting from the lower revenues (2) a decrease in
other variable expenses associated with the lower revenue levels and (3) to
reduced depreciation charges of fixed assets. Management does not anticipate
additional reductions in the Cost of Sales for the upcoming quarter and
estimates that Costs of Sales for the upcoming six months will remain stable.
Gross Profit - Gross profit is calculated as revenues less the cost of revenues.
Sector's gross profit increased $89,650 or 38.5% from $232,563 for the six month
period ending August 31, 1999 to $322,213 for the six month period ending August
31, 2000. The increase is considered natural as a result of the decreases
experienced in Costs of Sales as described herein. Management expects its gross
profit to remain consistent with current quarter levels; this would result in a
reduction for the upcoming six-month period.
Software Development Costs - Software development costs consisted primarily
of salaries, related benefits, consultants fees and other costs. Sector's
software development costs decreased by $77,518 or 87.4% from $88,680 to
$11,162. The decrease was attributable the lack of capital available to
HIS/Ideous to fund a higher level of software development costs. Management
believes software development costs will remain stable during the upcoming six
months.
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 increased $87,427 or 21.8% from $400,344 for the six months
ended August 31, 1999 to $487,771 for the same period ended August 31, 2000.
This increase in operating expense was primarily the result of increased costs
of operations related to the HIS/Ideous offices in Zurich which arose because of
moderately increased revenue levels. Management expects operating expenses to
remain stable during the upcoming six months, unless the Company proceeds with
acquisition or other development plans; in such instance, operating expenses
would be expected to rise in accordance with the costs incurred for
implementation of such plans, the dollar figures for which cannot presently be
estimated.
-15-
<PAGE>
Administrative Costs and Other Costs - Management expects that Sector BG's
general and administrative costs, not taking into consideration any expansion of
the current network, to remain at current levels. Management expects Sector's
general and administrative costs, exclusive of any addition of new employees, to
remain consistent with the levels experienced in the six months ended on August
31, 2000. If the Company proceeds with acquisition or other development plans;
domestic operating general and administrative expenses would be expected to rise
in accordance with the costs incurred to administer the business elements of
such plans, the dollar figures for which cannot presently be estimated.
Interest Expense - Interest expense for the three month period ending August
31, 2000 decreased by $54,182 or 83.7% to $10,558 from $64,740. The decrease in
interest expense was the result of the conversion of convertible debentures
issued in early in fiscal 1999. Management expects that interest expense could
increase in the future to the degree Sector borrows funds in order to finance
any continuing operating cash flow deficits and implements any capital
expenditure plans.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ending August 31, 2000, the Company financed Sector's
operations primarily through sales revenue generated from the Company's
subsidiaries. The Company also received $400,000 in funding through a sale of
shares of its common stock under Regulation S (See Part II, Item 1, Changes In
Securities). Although the Company has in the past and is currently experience
negative cash flow from operations, the Company believes it will be able to meet
its basic capital demands during the next quarter through the receipt of the
remainder of the outstanding commitment for receipt of funds through its
Regulation S agreement. The funding of any expanded and/or 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. There can be no assurance that the Company will be successful in its
efforts to obtain adequate capital or 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 Company's common stock on the NASDAQ Small
Cap Market occurred previously; the Company's common stock presently trades
through the Over the Counter Bulletin Board.
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FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. There are certain important
factors that could cause results to differ materially from those in the
forward-looking statements contained in the above discussion. Among such
important factors are (i) the timely creation of versions of Sector's products
for the Microsoft Windows NT and Unix operating systems, (ii) the impact of
Microsoft Windows NT, Unix and other operating systems on the Open VMS market
upon which Sector's current products are dependent, (iii) the reliance on
distributors to continue reselling Sector's products, (iv) the ability of Sector
to successfully expand the distribution of its products through new and unproven
channels, including resellers, integrators, distributors and direct sales, (v)
the risks associated with Sector's engineering effort needed to develop products
for Microsoft Windows NT and Unix, (vi) the impact of competitive products and
pricing, (vii) the uncertainty of the labor market and local regulations in
Switzerland, Bulgaria and the United Kingdom, (vii) Sector's ability to hire and
retain research and development personnel with appropriate skills in a highly
competitive labor market, and (viii) such risks and uncertainties as are
detailed from time to time in the Company's public reports, including this
Report.
In addition to the factors described above, factors that may contribute to
future fluctuations in quarterly operating results include, but are not limited
to: (i) the development and introduction of new operating systems that require
additional development efforts; (ii) the introduction or enhancement of products
by Sector or its competitors; (iii) changes in the pricing policies of Sector or
its competitors; (iv) increased competition; (v) technological changes in
computer and telecommunications systems and environments; (vi) the ability of
Sector to timely develop, introduce and market new products and services; (vii)
Sector's quality control of products and services sold; (vii) Sector's market
readiness to deploy systems management products for distributed computing
environments; (ix) Sector's market readiness to deploy new telecommunications
services; (x) market acceptance of new services, products and product
enhancements; (xi) customer order deferrals in anticipation of new products and
product enhancements; (xii) Sector's success in expanding its sales and
marketing programs; (xiii) personnel changes; (xiv) foreign currency exchange
rates; (xv) mix of products sold; and (xvi) general economic conditions.
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.
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<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 Open VMS operating system. Sector's
current product development activities are primarily directed towards developing
new products for the Windows NT and UNIX operating systems, developing
enhancements to its current products and porting new products and enhancements
to other operating systems. Sector has made and intends to continue to make
substantial investments in porting its products to new operating systems and
Sector's future success will depend on its ability to successfully accomplish
such ports.
The process of porting existing products and product enhancements to, and
developing new products for, new operating systems requires a substantial
capital investment, the devotion of substantial employee resources and the
cooperation of the owners of the operating systems to which the products are
being ported or developed. For example, the added focus on porting and
development work for the Windows NT market has required, and will require,
Sector to hire additional personnel with expertise in the Windows NT environment
as well as devote its engineering resources to these projects. The diversion of
engineering personnel to this area may cause Sector to be delayed in its other
product development efforts. Furthermore, operating system owners have no
obligation to assist in these porting or development efforts and may instead
choose to enter into agreements with other third party software developers or
internally develop their own products. In particular, the failure to receive a
source license to certain portions of the operating system, either from the
operating system owner or a licensee thereof, would prevent Sector from porting
its products to, or developing products for, such operating system. There can be
no assurance that Sector's current or future porting efforts will be successful
or, even if successful, that the operating system to which Sector elects to port
to or develop products will achieve or maintain market acceptance. The failure
of Sector to port its products to new operating systems or to select those
operating systems that achieve and maintain market acceptance could have a
material adverse effect on Sector's business, operating results and financial
condition.
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<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 1999. Management believes that
Sector's success depends upon continued expansion of its international
operations. Sector currently has sales offices in Bulgaria and Switzerland. Any
International expansion may require Sector to establish additional foreign
offices, hire additional personnel and recruit additional international
resellers. This may require significant management attention and financial
resources and could adversely affect Sector's operating margins. To the extent
that Sector is unable to effect these additions efficiently and in a timely
manner, its growth, if any, in international sales will be limited, and its
business, operating results and financial condition could be materially and
adversely affected. There can be no assurance that Sector will be able to
maintain or increase international market demand for its products. Sector, as
noted earlier cannot and will not expand or contribute further to any
maintenance of the operations of its HIS subsidiary in Switzerland.
As of August 31,2000, the Company's Swiss subsidiary employed engineers and
contractors located in Zurich who perform certain product development work. The
Company's Bulgarian subsidiary operates autonomously from Sofia. These
international operations subject Sector to a number of risks inherent in
developing products and services outside of the United States, including the
potential loss of developed technology, imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations and lower levels of intellectual property protection.
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.
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<PAGE>
Sector's future financial performance will depend in large part on the
growth of its telecommunications service business in Eastern Europe as well as
its ability to expand horizontally the scope of its business activities in that
region. As a result of competition, technological change or other factors,
Sector's business, operating results and financial condition could be materially
and adversely affected.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for Sector's products is characterized by rapid
technological developments, evolving industry standards and rapid changes in
customer requirements. The introduction of products embodying new technologies,
the emergence of new industry standards or changes in customer requirements
could render Sector's existing products obsolete and unmarketable. As a result,
Sector's future success will depend upon its ability to continue to enhance
existing products, respond to changing customer requirements and develop and
introduce, in a timely manner, new products that keep pace with technological
developments and emerging industry standards. There can be no assurance that
Sector's products or services will achieve market acceptance, or will adequately
address the changing needs of the marketplace or that Sector will be successful
in developing and marketing enhancements to its existing products or new
products incorporating new telecommunication technology on a timely basis.
Sector has in the past experienced delays in the development of its
telecommunications services and there can be no assurance that Sector will not
experience further delays in connection with its current service offering or
future service development activities. If Sector is unable to develop and
introduce new products, or enhancements to existing products, in a timely manner
in response to changing market conditions or customer requirements, Sector's
business, operating results and financial condition will be materially and
adversely affected. Because Sector has limited resources, Sector must restrict
its business development efforts to a relatively small number of products and
services. There can be no assurance that these efforts will be successful or,
even if successful, that any resulting products or operating systems will
achieve market acceptance.
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.
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<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 1 - Changes In Securities
On June 22, 2000, certificates representing 50,000 shares of the Company's
common stock, restricted under Rule 144, were issued to two directors as
compensation for their agreement to serve as directors; directors of the Company
each receive 25,000 shares of the Company's common stock, restricted under Rule
144, following their appointment.
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<PAGE>
On June 22, 2000, certificates representing 125, 000 shares of the Company's
common stock, restricted under Rule 144, were issued to five directors as annual
compensation; directors for the Company are to receive 25,000 shares of the
Company's common stock, restricted under Rule 144, together with such other
compensation as may be approved by the Board.
During July, 2000, the Company agreed with Overseas Communications, Ltd. to sell
shares of its common stock to overseas investors through a Regulation S
subscription agreement. The Company agreed to receive up to $650,000 according
to its needs and to in exchange to sell its common stock with the number of
shares to issue to be calculated using an average of the strike price of the
Company's trading stock for the 5 trading days prior to the Company's receipt of
funds, discounted by thirty percent (30%). During the quarter, the Company
received $400,000 toward the Regulation S subscription; the Company must issue
2,134,449 shares in exchange therefor.
On August 8, 2000, the Company made effective a change in its capital structure
which authorizes it to issue five hundred million (500,000,000) shares of its
common stock through acceptance of a filing with the Nevada Secretary of State
on August 8, 2000; resolutions authorizing the change in capital structure were
made on July 25, 2000.
ITEM 2 - Legal Proceedings.
The Company is party to the following Legal Proceedings:
Indira Shetty v. World Wide Plumbing et al. v. Worldwide Plumbing Supply, Inc,
Allan Kline, and Sector Communications, Inc.
Supreme Court of the State of New York, County of Queens
Filed August 30, 1999 Case 19847-99
------------------------------------
Plaintiff alleges Allan Kline represented he was the President of Sector and
would sell Plaintiff 35,000 shares of stock for $20,000.00. Mr. Kline allegedly
told Plaintiff that World Wide Plumbing Supply, Inc. was the parent company of
Sector. Plaintiff issued a check to World-wide Plumbing and it was cashed. World
Wide is a an entity in the New York area and has filed an answer. Sector has no
knowledge of World Wide Plumbing and denies each and every allegation of
wrongdoing. Sector pled that Allan Kline was not the President of Sector and has
no knowledge of any of the facts. Plaintiff seeks recovery of his $ 20,000.00. A
loss is not believed to be probable or estimable in this case, as Sector
Communications, Inc. never received any funds from Plaintiff. This case is
presently being litigated.
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Kinsella Boesch Fujikawa & Towle, LLP v. Sector Communications, Inc.
Los Angeles Superior Court, Central District
Filed June 30, 2000 Case BC232756
----------------------------------
The Company is currently defending this action which alleges non-payment for
legal services rendered by Plaintiff and unpaid in the amount of $12,500,
inclusive of $1,339.20 of alleged costs. The Company takes a contrary position
to that of Plaintiff and answered the complaint by filing a general denial on
August 2, 2000. Plaintiff does not properly allege that it entered into a
written fee agreement with the Company. The Company takes the position that
claimant cannot prevail on any claims for its own attorneys fees allegedly
incurred in preparing or maintaining its claim against the Company, as such
claim is believed to be contrary to applicable law. The Company believes some
loss may be probable and presently estimates a loss of $1,000, in belief that
said sum represents an amount in excess of the reasonable value of the services
provided by the claimant. While the Company doubts the merits of claimant's
action, the outcome is uncertain and may materially and adversely affect the
financial condition of the Company if such outcome proves unfavorable.
ITEM 5 - Other information
During the quarter the Company entered into a letter of intent (LOI) which
allows it to conduct due diligence to determine whether it will acquire
Workseek.com and American Recruitment Conferences, Inc. private California
corporations, and Sunburst Acquisitions III, Inc., a public corporation
incorporated in Colorado, under terms included in the LOI. The Company commenced
its due diligence proceedings during the quarter; it is presently unable to
state whether the transactions are probable (whether they will be completed)
because the due diligence process has not been completed and the Board must
approve any acquisition agreement. The Company stated in a press release dated
August 29, 2000, that it will file Form 8-K with the Securities and Exchange
Commission and will subsequently file financials for the target corporations as
required.
During the quarter the Company secured licenses from the Telecommunications
State Commission of the Government of Bulgaria to become a cable TV operator;
the licenses cover construction, maintenance, and use of cable
telecommunications networks for radio and TV signals and the provision of a
range of services throughout the capital city of Sofia.
On August 10, 2000, the Company confirmed election of Michael J. Zwebner to its
Board of Directors. Mr. Zwebner currently serves as Chairman of the Board of
Directors of Talk Visual Corporation (OTC BB: TVCP) and as a director of The
Entertainment Internet, Inc. (EQS: EINI).
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ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Index
No. Description
-- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECTOR COMMUNICATIONS, INC.
(Registrant)
Dated: October 16, 2000 By /s/ Theodore Georgelas
--------------------------
President, and Director
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