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, 1999 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)
(Former name, former address and former fiscal year,
if change since last report.)
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 Outstanding
Date At August 31, 1999
Common Stock 17,193,805
<PAGE>
SECTOR COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets.............................................2
Statements of Operations...................................3
Statements of Cash Flows...................................4
Notes of Consolidated Financial Statements (Unaudited).....5
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations..................10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................19
Signature Page.................................................19
<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
August31, February 28,
1999 1999
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ASSETS (unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 230,547 $ 181,877
Accounts Receivable, net of provision for
doubtful accounts of $17,000 230,259 494,563
Prepaid Expenses 47,518 22,343
------------ ---------------
Total Current Assets 508,324 698,783
------------ --------------
PROPERTY AND EQUIPMENT 2,112,377 2,145,722
Accumulated Depreciation ( 1,763,009) ( 1,696,918)
------------ -------------
Net Book Value 349,368 448,804
------------ --------------
OTHER ASSETS
Other Assets - 22,581
Deposits 27,630 28,041
------------- --------------
Total Other Assets 27,630 50,622
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TOTAL OTHER ASSETS $ 885,322 $ 1,198,209
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses 1,739,526 1,797,216
Debentures Payable, Net of Discount of
$0 and $56,309 263,952 207,643
Deferred Revenue 320,200 335,105
Due to Related Parties 138,733 182,891
------------ --------------
Total Current Liabilities 2,462,411 2,522,855
Rent Deposit 12,248 12,248
------------ --------------
TOTAL LIABILITIES 2,474,659 2,535,103
------------ --------------
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 17,193,805 and 10,922,655
shares issued and outstanding 17,194 10,923
Additional Paid-in Capital 14,376,350 14,185,622
Accumulated Deficit (15,582,321) (15,364,474)
Cumulative Foreign Currency Translation Adjustment ( 400,560) ( 168,965)
------------- ---------------
Total Stockholders' Equity ( 1,589,337) ( 1,336,894)
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 885,322 $ 1,198,209
============ ==============
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
------------ ----------- ----------- -------------
REVENUE
<S> <C> <C> <C> <C>
Telecommunication Revenue $ 160,003 $ 157,352 $ 305,700 $ 361,328
Software Sales and Maintenance 107,844 89,162 160,384 195,570
----------- ------------ ----------- ----------
267,847 246,514 466,084 556,898
COST OF SALES 116,744 128,807 233,521 267,646
----------- ----------- ----------- ----------
GROSS PROFIT 151,103 117,707 232,563 289,252
--------- ----------- ----------- ---------
OPERATING EXPENSES
Gold Exploration Costs - 691 - 3,353
Software Development Costs 46,723 78,136 88,680 206,532
Sales, General and Administrative 148,925 372,201 400,344 1,005,983
--------- ----------- ---------- -
Total Operating Expenses 195,648 451,028 489,024 1,215,868
--------- ----------- ---------- ----------
Loss From Operations ( 44,545) ( 333,321) (256,461) ( 926,616)
---------- ------------ ---------- ---------
OTHER INCOME (EXPENSE)
Interest (Expense) ( 26,889) ( 81,462) ( 64,740) (107,287)
Other Income (Expense) ( 8,034) 2,411 103,354 6,074
------------- ----------- ----------- ---------
Total Other Income (Expense) ( 34,923) ( 79,051) 38,614 (101,213)
------------ ------------- ----------- ---------
Loss Before Provision for Income Taxes ( 79,468) ( 412,372) (217,847) (1,027,829)
Provision for Income Taxes - - - -
----------- ----------- ------------ ----------
Net Loss $ ( 79,468) $( 412,372) $ (217,847) $(1,027,829)
=========== =========== ============= ============
Loss Per Share $ ( 0.01) $( 0.07) $ ( 0.01) $( 0.18)
=========== =========== ============ ===========
Weighted Average Number of Shares
Outstanding 17,193,805 6,058,225 15,557,916 5,715,730
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SECTOR COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (217,847) $(1,027,829)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 168,448 392,660
Amortization of Discount and Loan Costs 78,889 94,300
Change in Assets and Liabilities
(Increase) Decrease in Assets
Accounts Receivable 264,304 201,759
Prepaid Expenses and Deposits (25,175) (15,355)
(Decrease) Increase in Liabilities
Accounts Payable 39,310 (183,479)
Related Party Payable (44,158) 31,739
Deferred Revenue -- (78,932)
----------- -----------
Net Cash Provided (Used) By Operating Activities 263,771 (585,137)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (75,879) (21,478)
Notes and Loans Receivable -- 87,500
----------- -----------
Net Cash Provided by Investing Activities (75,879) 66,022
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock 100,000
Sale of Debentures -- 430,000
----------- -----------
100,000 430,000
----------- -----------
Effect of Exchange Rate Changes on Cash (239,222) 155,511
----------- -----------
Net Increase in Cash 48,670 66,396
CASH - MARCH 1, 181,877 128,911
----------- -----------
CASH - AUGUST 31, $ 230,547 $ 195,307
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Interest $ - $ -
=========== ===========
Taxes $ - $ -
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED AUGUST 31,
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
Period Ended August 31, 1999:
Common stock totaling 2,425,000 shares was issued in settlement of accounts
payable aggregating $97,000.
Period Ended August 31, 1998:
Common stock totaling126,530 shares was issued to retire a debt of $39,013.
Common stock totaling 375,000 shares was issued in connection with the
preferred stock conversion described in Note 7.
Common stock totaling 300,000 shares was issued in connection with the
placement of the convertible debentures described in Note 8. A discount of
$255,000 has been ascribed to these shares.
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, 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 28, 1999.
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 29, 2000.
The unaudited consolidated balance sheet as of August 31, 1999
and the consolidated statements of operations and cash flows for
the six and three month periods ended August 31, 1999 and 1998
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.
- 6 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1999
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
August 31, February 28,
1999 1999
------------ ------------
Fiber Network $ 157,837 $ 157,837
Equipment 1,817,249 1,850,594
Furniture and Fixtures 47,223 47,223
Vehicles and Other 90,068 90,068
------------- ------------
2,112,377 2,145,722
Less: Accumulated Depreciation 1,763,009 (1,696,918)
------------ -----------
$ 349,368 $ 448,804
============ ============
Depreciation expense for the six-month periods ended August 31, 1999
and 1998 was $168,448 and $164,795, respectively and for the three
month periods ended August 31, 1999 and 1998 was $83,067 and $81,567,
respectively.
NOTE 3 - WARRANTS
At August 31, 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
-------
30,000
- 7 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1999
NOTE 4 - STOCK OPTION PLANS
A summary of stock option transactions for the period ended August 31,
1999 are as follows:
Outstanding, Beginning 3,311,000
Granted Under the 1999 Non-cash
compensation Plan at
Exercise Prices of
$0.0312 - $0.0438 1,188,958
---------
Outstanding, Ending 4,499,958
=========
Exercisable, Ending 4,499,958
=========
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 period
indicated has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Risk Free Interest Rate 5.25%
Life of the Options 5 years
Expected Dividend Yield -0-
Expected Volatility 262%
Weighted Fair Value of Options Granted $0.04
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:
Three Months Ended August 31,
-------------------------------
1999 1998
--------- -----------
Net Loss $(284,576) $(1,110,563)
Net Loss Per Basic Share ( 0.02) ( 0.19)
Weighted Average Option Price Per Share
Granted $ 0.04 $ -
Exercised - -
Cancelled - -
Outstanding at End of Period 0.25 6.83
Exercisable at End of Period 0.25 6.83
Weighted Average Remaining Life
Of Options Outstanding 55 months 91 months
- 8 -
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1999
NOTE 5- STOCKHOLDERS' EQUITY
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 - DEBENTURES PAYABLE
On April 15, 1998, the Company sold $500,000 in principal amount of
its 6% Convertible Promissory Notes due July 30, 1999 (the "Notes")
pursuant to Regulation S under the Securities Act for net proceeds of
$430,000. In addition, the two purchasers, Amex Corp. Limited and
Danvers Investment Corp., each a British Virgin Island corporation,
with an address in Zurich, Switzerland, each received 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.
NOTE 6- DEBENTURES PAYABLE (Continued)
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.
- 9 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sector includes certain estimates, projections and other forward-looking
statements in its reports, presentations to analysts and others and other
material disseminated to the public. There can be no assurance as to future
performance and actual results may differ materially from those in the
forward-looking statements. Factors that could cause actual results to differ
materially from estimates or projections contained in forward-looking statements
include: (i) the effects of vigorous competition in the markets in which Sector
operates; (ii) the cost of entering new markets necessary to provide products
and services; (iii) the impact of any unusual items resulting from ongoing
evaluations of Sector's business strategies; (iv) requirements imposed on Sector
and its competitors by the Bulgarian Telecommunications Company (BTC); (v)
unexpected results of litigation filed against Sector; and (vi) the possibility
of one or more of the markets in which Sector competes being affected by
variations in political, economic or other factors such as monetary policy,
legal and regulatory changes or other external factors over which Sector has no
control.
RESULTS OF OPERATIONS
Telecommunication Revenue - Sector continues to earn all of its
telecommunications revenue from Sector BG (i) providing direct-dial services for
international long distance calls to a select group of hotels and resorts in the
cities of Sofia and Plovdiv in Bulgaria; (ii) from the sales, integration,
installation, and maintenance of customer-owned digital phone systems (primarily
through its distributor agreement with Mitel); and (iii) from usage-based
percentages of Sector BG-owned digital phone systems through shared revenue
agreements with some of its customers.
Sector's telecommunications revenue increased by $ 2,651 or 1.68% from
$157,352 for the three months ended on August 31 1998 to $160,003 for the same
period ended August 31, 1999. Management believes the increase in revenue was
the result of an increase of the customer base previously maintained.
Software Sales and Maintenance - Sector's software sales and maintenance
revenue increased by $18,682 or 20.95% from $89,162 for the three months ended
on August 31 1998 to $107,844 for the same period ended August 31, 1999 (all
figures are net of payments to third party distributors). Management believes
the increase in sales for the three months ending August 31, 1999 was the result
of more increases in sales, however, 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 $12,063 or 9.36%
from $128,807 for the three months ended on August 31 1998 to $116,744 for the
same period ended August 31, 1999. Most of the decrease was attributable to the
decrease in costs associated with the distribution and sale of the HIS new
software products caused by the long term decrease in the revenues associated
with such sales.
10
<PAGE>
Software Development Costs - Software development costs consisted primarily
of salaries, related benefits, consultants fees and other costs. Sector's
software development costs decreased by $31,413 or 40.2% from $78,136 for the
three months ended on August 31 1998 to $46,723 for the same period ended August
31, 1999. The decrease was attributable to the lack of available capital to HIS
to adequately fund its software development needs.
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 $255,380 or 56.62% from $451,028 for
the three months ended on August 31 1998 to $195,648 for the same period ended
August 31, 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.
Management expects Sector's general and administrative costs, exclusive of
any addition of new employees, to remain at or below the levels experienced in
the three months ended on August 31 1998.
Interest Expense - Interest expense for the three month period ending
August 31, 1999 decreased by $54,573 as compared to the expense in the same
three month period in 1998. The decrease in interest expense was primarily
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.
Gold Exploration Costs and Activities - In connection with the change in
Sector's strategic direction, Management had previously decided to curtail any
significant future gold exploration activities and has relinquished any rights
it may have previously had to its claims in the Ketchum Project. Management does
not expect Sector to incur significant costs in the future related to any gold
exploration properties or other gold exploration related activities
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 (See Note 6 to
the Financial Statements herein). Additionally, the Company sold 3,846,150
shares in May 1999 to two purchasers for cash proceeds of $100,000; and (ii)
sales revenue generated from the Company's subsidiaries.
11
<PAGE>
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. There can be no assurance that the Company will be successful in
its efforts to obtain adequate capital nor if any such additional capital is
made available to the Company that it will be on terms and conditions that are
not extremely dilutive to the present holders of the Common Stock.
Discontinuance of the listing of the Common Stock on the NASDAQ Small Cap Market
has occurred. Sector is currently listed on the NASDAQ Over the Counter Bulletin
Board.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. There are certain important
factors that could cause results to differ materially from those in the
forward-looking statements contained in the above discussion. Among such
important factors are (i) the timely creation of versions of Sector's products
for the Microsoft Windows NT and Unix operating systems, (ii) the impact of
Microsoft Windows NT, Unix and other operating systems on the Open VMS market
upon which Sector's current products are dependent, (iii) the reliance on
distributors to continue reselling Sector's products, (iv) the ability of Sector
to successfully expand the distribution of its products through new and unproven
channels, including resellers, integrators, distributors and direct sales, (v)
the risks associated with Sector's engineering effort needed to develop products
for Microsoft Windows NT and Unix, (vi) the impact of competitive products and
pricing, (vii) the uncertainty of the labor market and local regulations in
Switzerland, Bulgaria and the United Kingdom, (vii) Sector's ability to hire and
retain research and development personnel with appropriate skills in a highly
competitive labor market, and (viii) such risks and uncertainties as are
detailed from time to time in the Company's public reports, including this
Report.
In addition to the factors described above, factors that may contribute to
future fluctuations in quarterly operating results include, but are not limited
to: (i) the development and introduction of new operating systems that require
additional development efforts; (ii) the introduction or enhancement of products
by Sector or its competitors; (iii) changes in the pricing policies of Sector or
its competitors; (iv) increased competition; (v) technological changes in
computer and telecommunications systems and environments; (vi) the ability of
Sector to timely develop, introduce and market new products and services; (vii)
Sector's quality control of products and services sold; (vii) Sector's market
readiness to deploy systems management products for distributed computing
environments; (ix) Sector's market readiness to deploy new telecommunications
services; (x) market acceptance of new services, products and product
enhancements; (xi) customer order deferrals in anticipation of new products and
product enhancements; (xii) Sector's success in expanding its sales and
marketing programs; (xiii) personnel changes; (xiv) foreign currency exchange
rates; (xv) mix of products sold; and (xvi) general economic conditions.
12
<PAGE>
Sector's future revenues will also be difficult to predict. Accordingly,
any significant shortfall of revenues in relation to management's expectations
or any material delay of customer orders would have an immediate adverse effect
on its business, operating results and financial condition. As a result of all
of the foregoing factors, management believes that period-to-period comparisons
of Sector's results of operations are not and will not necessarily be meaningful
and should not be relied upon as any indication of future performance.
Management of Growth; Dependence on Key Personnel. In the future, Sector
will be required to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis and to expand, train and
manage its employee work force. There can be no assurance that Sector will be
able to effectively manage such growth. Its failure to do so would have a
material adverse effect on its business, operating results and financial
condition. Competition for qualified sales, technical and other qualified
personnel is intense and there can be no assurance that Sector will be able to
attract, assimilate or retain additional highly qualified employees in the
future. If Sector is unable to hire and retain such personnel, particularly
those in key positions, its business, operating results and financial condition
would be materially adversely affected. Sector's future success also depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on its business, operating
results and financial condition. Additions of new and departures of existing
personnel, particularly in key positions, can be disruptive and can result in
departures of existing personnel, which could have a material adverse effect on
Sector's business, operating results and financial condition.
Uncertainty in Developing Products for New Operating Systems. Sector's
software products operate primarily on the Open VMS operating system. Sector's
current product development activities are primarily directed towards developing
new products for the Windows NT and UNIX operating systems, developing
enhancements to its current products and porting new products and enhancements
to other operating systems. Sector has made and intends to continue to make
substantial investments in porting its products to new operating systems and
Sector's future success will depend on its ability to successfully accomplish
such ports.
The process of porting existing products and product enhancements to, and
developing new products for, new operating systems requires a substantial
capital investment, the devotion of substantial employee resources and the
cooperation of the owners of the operating systems to which the products are
being ported or developed. For example, the added focus on porting and
development work for the Windows NT market has required, and will require,
Sector to hire additional personnel with expertise in the Windows NT environment
as well as devote its engineering resources to these projects. The diversion of
engineering personnel to this area may cause Sector to be delayed in its other
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
13
<PAGE>
internally develop their own products. In particular, the failure to receive a
source license to certain portions of the operating system, either from the
operating system owner or a licensee thereof, would prevent Sector from porting
its products to, or developing products for, such operating system. There can be
no assurance that Sector's current or future porting efforts will be successful
or, even if successful, that the operating system to which Sector elects to port
to or develop products will achieve or maintain market acceptance. The failure
of Sector to port its products to new operating systems or to select those
operating systems that achieve and maintain market acceptance could have a
material adverse effect on Sector's business, operating results and financial
condition.
Risks Associated With International Operations. International revenue (from
sales outside the United States and Canada) accounted for a significant
percentage of Sector's total revenues for fiscal 1999. Management believes that
Sector's success depends upon continued expansion of its international
operations. Sector currently has sales offices in Bulgaria and Switzerland. Any
International expansion may require Sector to establish additional foreign
offices, hire additional personnel and recruit additional international
resellers. This may require significant management attention and financial
resources and could adversely affect Sector's operating margins. To the extent
that Sector is unable to effect these additions efficiently and in a timely
manner, its growth, if any, in international sales will be limited, and its
business, operating results and financial condition could be materially and
adversely affected. There can be no assurance that Sector will be able to
maintain or increase international market demand for its products. Sector, as
noted earlier cannot and will not expand or contribute further to any
maintenance of the operations of its HIS subsidiary in Switzerland.
As of August 31, 1999, 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
14
<PAGE>
products is essential to achieve market penetration. Sector may incur
substantial costs and experience delays in localizing its products, and there
can be no assurance that any localized product will ever generate significant
revenue. There can be no assurance that any of the factors described herein will
not have a material adverse effect on Sector's future international sales and
operations and, consequently, its business, operating results and financial
condition.
Sector's future financial performance will depend in large part on the
growth of its telecommunications service business in Eastern Europe as well as
its ability to expand horizontally the scope of its business activities in that
region. As a result of competition, technological change or other factors,
Sector's business, operating results and financial condition could be materially
and adversely affected.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for Sector's products is characterized by rapid
technological developments, evolving industry standards and rapid changes in
customer requirements. The introduction of products embodying new technologies,
the emergence of new industry standards or changes in customer requirements
could render Sector's existing products obsolete and unmarketable. As a result,
Sector's future success will depend upon its ability to continue to enhance
existing products, respond to changing customer requirements and develop and
introduce, in a timely manner, new products that keep pace with technological
developments and emerging industry standards. There can be no assurance that
Sector's products or services will achieve market acceptance, or will adequately
address the changing needs of the marketplace or that Sector will be successful
in developing and marketing enhancements to its existing products or new
products incorporating new telecommunication technology on a timely basis.
Sector has in the past experienced delays in the development of its
telecommunications services and there can be no assurance that Sector will not
experience further delays in connection with its current service offering or
future service development activities. If Sector is unable to develop and
introduce new products, or enhancements to existing products, in a timely manner
in response to changing market conditions or customer requirements, Sector's
business, operating results and financial condition will be materially and
adversely affected. Because Sector has limited resources, Sector must restrict
its business development efforts to a relatively small number of products and
services. There can be no assurance that these efforts will be successful or,
even if successful, that any resulting products or operating systems will
achieve market acceptance.
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.
15
<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.
16
<PAGE>
Part II - Other Information
Item 2 - Legal Proceedings.
The Company is party to the following Legal Proceedings:
A. Indira Shetty v. World Wide Plumbing et al.
1. Supreme Court of the State of New York, county of Queens
2. Filed August 30, 1999
3. Defendants - World-wide Plumbing Supply, Inc, Allan Kline, and Sector
Communications, Inc.
4. 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.
5. Plaintiff seeks his $ 20,000.00.
This case is presently being litigated.
B Svennson v. Sector Communications, Inc.
1. U.S. District Court for the Eastern District of Virginia
2. Filed December 8, 1988
3. Ebbe Svennson is the Plaintiff. Sector Communications, Inc is the defendant
4. This is an action brought by Svennson to recover fees allegedly owed to him
by Sector. It was Plaintiff's contention that he met with S. Allan Kline
and others, and was hired to obtain funds and broker transactions with
European investors. 5. $ 1,750,000 and 400,00 shares of Sector common
stock.
17
<PAGE>
Defendant Sector Communications, Inc., contested each and every allegation and
was prepared for trial. Plaintiff dismissed said action in June, 1999.
C. USIS International Capital Corp. v. Sector Communications, Inc and S. Allan
Kline
1. Supreme court of the State of New York, County of New York
2. Filed August 14, 1998
3. USIS International Capital Corp. (Plaintiff); Sector Communications, Inc
and S. Allan Kline (Defendants)
4. Plaintiff alleged breach of contract, fraud, misrepresentation, stock
manipulation and insider trading violations.
5. $2,500,000.
Defendant Sector Communications, Inc. motioned the Court for dismissal for
Plaintiff's failure to properly serve the complaint upon it; the Court granted
an order to serve the complaint and appear and Plaintiff thereafter failed to
comply; the Court dismissed the lawsuit on September 28, 1999.
18
<PAGE>
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)
By /s/ Theodore Georgelas
--------------------------
President, and Director
19
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