<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended August 31, 1996
Commission File Number 0-22382
SECTOR COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 56-1051491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 250, McLean, VA 22102
Address of principal executive offices
(703) 761-1500
Issuer's Telephone Number
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 preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
As of August 31, 1996 there were outstanding 34,001,353 shares of the Company's
common stock. As described in Note 8 to the financial statements, effective
June 18, 1996, the Company reverse split its common stock 5.909635 shares for
each share outstanding on that date and immediately after the reverse stock
split issued a stock dividend of 1.25 shares for each post-split share. The
impact of these equity transactions reduced the number of outstanding shares of
common stock by approximately 15,877,072 shares to 9,761,468 shares. All
amounts per share, number of common shares and capital accounts in this Form 10-
QSB have been restated to give retroactive effect to the reverse stock split and
stock dividend.
<PAGE>
SECTOR COMMUNICATIONS, INC.
REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets
August 31, 1996, February 29, 1996 and
December 31, 1995 ...................................................... 1
Condensed consolidated statements of
operations for the three and six month
periods ended August 31,1996 and 1995 .................................. 2
Condensed consolidated statement of
stockholders' equity for the two months
ended February 29, 1996 and the six month
period ended August 31, 1996 ........................................... 3
Condensed consolidated statement of cash
flows for the six month period ended
August 31, 1996 ........................................................ 4
Notes to condensed consolidated financial statements ................... 5
Item 2. Management's Discussion and Analysis ........................... 19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........... 27
Item 5. Other Information ............................................. 28
Item 6. Exhibits and Reports on Form 8-K............................... 29
SIGNATURES ............................................................. 30
i
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31 February 29 December 31
1996 1996 1995
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current Assets
Cash $ 750,395 $ 22,429 $ 96,927
Accounts Receivable, net 644,619 348,427 214,768
Related Party Receivables (Note 3) 238,961 - -
Notes Receivable (Note 4) 252,192 - -
Prepaid Expenses and Deposits 163,703 23,840 821
----------- ----------- -----------
Total Current Assets 2,049,870 394,696 312,516
----------- ----------- -----------
Fixed Assets 2,173,045 1,975,797 1,975,798
Accumulated Depreciation ( 816,333) ( 569,939) ( 507,645)
----------- ----------- -----------
Net Book Value 1,356,712 1,405,858 1,468,153
----------- ----------- -----------
Other Assets
Investment in DBE (Note 2) 500,000 - -
Intangible Assets, net (Note 6) 8,106,184 - -
Capitalized Mining Claim Costs 2,240,000 - -
----------- ----------- -----------
Total Other Assets 10,845,184 - -
----------- ----------- -----------
Total Assets $14,252,766 $ 1,800,554 $ 1,778,669
=========== =========== ===========
Current Liabilities
Accounts Payable $ 1,402,624 $ 826,382 $ 706,304
Payable - Histech (Note 3) 300,000 - -
Short Term Borrowing (Note 7) 114,451 - -
Due to Related Parties 99,423 - -
----------- ----------- -----------
Total Current Liabilities 1,916,498 826,382 706,304
----------- ----------- -----------
Rent Deposit 12,248 - -
Loan Payable (Note 8) 3,941,106 3,774,426 3,718,728
----------- ----------- -----------
Total Liabilities 5,869,852 4,600,808 4,425,032
----------- ----------- -----------
Commitments and Contingencies
(Note 11) - - -
Stockholders' Equity: (Note 9)
Preferred Stock - - -
Common Stock 34,001 300 300
Additional Paid In Capital 12,128,523 - -
Retained Deficit (3,739,570) (2,581,889) (2,489,883)
Cumulative Foreign Currency
Translation ( 40,040) ( 218,665) ( 154,780)
----------- ----------- -----------
Total Stockholders' Equity 8,382,914 (2,800,254) (2,644,363)
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity $14,252,766 $ 1,800,554 $ 1,780,669
=========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
1
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31 August 31 August 31
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Telecommunications Revenue $ 104,642 $ 533,737 $ 582,321 $1,105,002
Cost of Sales:
Services and Fees 57,412 559,315 357,579 945,632
Depreciation 86,113 86,113 172,226 172,036
----------- ---------- ----------- ----------
Gross Profit (Loss) ( 38,883) ( 111,691) 52,516 ( 12,666)
Gold Exploration Costs 239,336 - 239,336 -
Compensation Expense Related
to Stock Grants (Note 9) 407,916 - 407,916 -
General and Administrative 389,551 222,418 474,339 455,814
----------- ---------- ----------- ----------
Operating Loss (1,075,686) ( 334,109) (1,069,575) ( 468,480)
Interest Expense ( 84,017) ( 88,637) ( 167,357) ( 178,963)
Interest and Other Income 12,343 664 13,837 1,586
Foreign Exchange Gain 26,606 1,251 64,914 2,587
----------- ---------- ----------- ----------
Net (Loss) $(1,120,754) 420,831) $(1,157,681) 643,270)
=========== ========== =========== ==========
Net Loss Per Share $( 0.04) $( 0.06) $( 0.07) $( 0.07)
=========== ========== =========== ==========
Weighted Average Shares 25,159,314 7,506,224 17,134,549 9,192,439
=========== ========== =========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
2
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid In Accumulated Translation
Shares Amount Capital Deficit Adjustments Total
------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,000 $ 300 $ - $( 2,489,883) $ ( 154,780) $( 2,644,363)
------------- ---------- ------------ ------------ ------------ ------------
Translation Adjustments ( 63,885) ( 63,885)
Net Loss ( 92,006) ( 92,006)
------------- ---------- ------------ ------------ ------------ ------------
Balance, February 29, 1996 1,000 300 - ( 2,581,889) ( 218,665) ( 2,800,254)
(Unaudited)
Restatement of stockholders'
equity due to the acquisition
of Global Communications Group,
Inc. (Note 1) 23,637,540 23,339 3,879,325 - - 3,902,664
------------- ---------- ------------ ------------ ------------ ------------
Restated balance,
February 29, 1996 (Unaudited) 23,638,540 23,639 3,879,325 ( 2,851,889) ( 218,665) 1,102,410
Reverse stock split and stock
dividend (Note 9) (14,638,540) ( 14,639) 14,639 - - -
Common Stock issued in the
acquisition of: (Note 2)
Global Communications
Group Inc. 17,000,000 17,000 ( 17,000) - - -
HIS Technology AG and
Mountain Software AG 6,084,285 6,084 7,095,560 - - 7,101,644
Sale of common stock in an
offshore private placement 983,736 984 749,016 - - 750,000
Issuance of restricted stock
to certain officers, directors
and employees (Note 9) 933,332 933 406,983 - - 407,916
Translation Adjustments 178,625 178,625
Net Loss ( 1,157,681) (1 ,1 57,681)
------------- ---------- ------------ ------------ ------------ ------------
Balance, August 31, 1996 34,001,353 $ 34,001 $ 12,128,523 $(3,739,570) $( 40,040) $ 8,382,914
(Unaudited) ============= =========== ============= =========== ============ ===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
3
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
August 31
1996
-----------
<S> <C>
Cash Flows From Operating Activities:
Net Loss $(1,157,681)
Adjustments to Reconcile Net Loss to
Net Cash Provided By Operating Activities:
Depreciation and Amortization 191,837
Compensation Portion of Restricted
Stock Grants (Note 9) 407,916
Change in Assets and Liabilities, Net
of Effect of Acquisitions:
(Increase) Decrease in Assets
Accounts Receivable ( 139,413)
Prepaid Expenses and Deposits ( 52,170)
Decrease (Increase) in Liabilities
Accounts Payable 4,730
Accrued Interest on Loan Payable 166,680
Rent Deposit 12,248
-----------
Net Cash Used By Operating Activities ( 565,853)
-----------
Cash Flows From Investing Activities:
Purchase of Fixed Assets ( 8,736)
Proceeds from the Sale of Marketable
Securities (Note 5) 1,930,000
Payment for the Acquisition of Histech ( 400,000)
Payment for the Acquisition of Sector AG ( 12,000)
Cash Balances of Histech and Mountain 36,587
Cash Balance of Sector Received in the
Reverse Acquisition 62,022
Loan Provided to Atcall ( 252,192)
Payment for the Investment in DBE ( 450,000)
-----------
Net Cash Provided By Investing Activities 905,681
-----------
Cash Flows From Financing Activities:
Proceeds from the Sale of Common Stock 250,000
-----------
Net Cash Provided By Financing Activities 250,000
-----------
Effect of Exchange Rate Changes on Cash 138,138
-----------
Net Increase in Cash 727,966
Cash - February 29, 1996 22,429
-----------
Cash -August 31, 1996 $ 750,395
===========
Supplemental Cash Flow Information:
Cash Paid For:
Interest $ -
===========
Taxes $ -
===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
4
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
On June 18, 1996, Sector Communications, Inc. ("Sector"), formerly Aurtex, Inc.,
acquired all the outstanding capital stock of Global Communications Group, Inc.
("Global") as described in Note 2. For accounting purposes, this acquisition
has been treated as a recapitalization of Sector with Global as the acquirer in
a reverse acquisition. Prior to the acquisition of Global, Sector was a
development stage enterprise as defined by Statement of Accounting Standards No.
7 "Development Stage Enterprises".
The unaudited condensed consolidated balance sheet as of August 31, 1996 and the
condensed consolidated statements of operations for the three and six month
periods ended August 31, 1996, and the condensed consolidated statements of
stockholders' equity and cash flows for the six months ended August 31, 1996 are
those of Sector and its subsidiaries (collectively the "Company"). All
significant intercompany accounts and transactions have been eliminated.
The financial statements presented for periods prior to the acquisition of
Global, present the financial position and results of operations solely of
Global, and do not include the financial position or result of operations of
Sector or any of its subsidiaries. As such, the unaudited balance sheet as of
February 29, 1996, the audited balance sheet as of December 31, 1995 and the
unaudited statements of operations for the three and six month periods ended
August 31, 1995 reflect the financial position and results of operations of only
Global. The December 31, 1995 balance sheet was derived from the audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
The equity section of the February 29, 1996 balance sheet has been restated, as
required by purchase accounting in a reverse acquisition to reflect the par
value of Sector's (the legal acquirer) outstanding common stock and the
accumulated deficit of Global (the accounting acquirer). The remaining amount,
totaling $3,879,325, as shown below, was offset to additional paid in capital.
5
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
Additional
Common Stock Accumulated Paid In
Shares Amount Deficit Capital Total
------------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Global Balance, February 29, 1996 1,000 $ 300 $(2,581,889) $ - $(2,800,254)
Sector Balance, February 29, 1996 23,638,540 23,639 (9,586,585) 12,487,952 2,925,006
---------- ------- ----------- ----------- -----------
Difference 23,637,540 23,339 (7,004,696) 12,487,952 5,287,930
Consolidating Adjustments 1,000 300 4,422,807 (8,608,627) (4,185,520)
---------- ------- ----------- ----------- -----------
Restated Balance, February 29, 1996 23,638,540 $23,639 $(2,581,889) $ 3,879,325 $ 1,102,410
========== ======= =========== =========== ===========
</TABLE>
The unaudited financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in the annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations. The Company believes that
the disclosures made are adequate to make the information presented not
misleading. In the opinion of management of the Company, all adjustments
necessary for a fair presentation of such financial statements have been
included.
The financial statements should be read in conjunction with the audited
financial statements and notes included in the Company's February 29, 1996
annual report filed on Form 10-KSB, and its Form 8-K, as amended, dated June 18,
1996 and Schedule 14C Information Statement filed with the Commission on July
10, 1996, concerning the acquisition of Global, and the Form 8-K, dated
September 18,1996 concerning the acquisition of HIS Technologies AG and Mountain
Software AG.
Foreign Currency Translation
- ----------------------------
In accordance with the provisions of Statement of Accounting Standard No. 52,
"Foreign Currency Translations" ("SFAS No. 52") the assets and liabilities of
the Company's subsidiaries located outside the United States are generally
translated at the rates of exchange in effect at the balance sheet date. Gains
and losses resulting from foreign currency transactions are recognized currently
in income and those resulting from translation of financial statements, with the
exception of entities operating in highly inflationary economies, as Global does
in Bulgaria, are accumulated in a separate component of stockholders' equity.
In highly inflationary economies, SFAS No. 52 requires that the use of
historical exchange rates to translate nonmonetary items and current exchange
rates to translate monetary items. The effect of exchange rate changes is
reflected in net loss.
6
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 2: ACQUISITIONS
During the six months ended August 31, 1996, in addition to the acquisition of
100% of the capital stock of Global, the Company also purchased 100% of the
outstanding capital stock of Sector Communications AG ("Sector AG"), effectively
acquired 80% of HIS Technologies AG ("Histech")and acquired 100% of Mountain
Software AG ("Mountain").
Global Communications Group, Inc.
- ---------------------------------
On June 18, 1996, the Company acquired 100% of the outstanding common stock of
Global Communications Group, Inc. ("Global") in exchange for the issuance of
17,000,000 shares of unregistered Company common stock to the shareholders of
Global. As a result of the completion of the share exchange, a change in the
control of the Company occurred, the shareholders of Global acquired the
beneficial ownership of approximately 57% of the issued and outstanding shares
of the Company's common stock. Of the 17,000,000 shares, 8,225,000 were issued
in accordance with the provisions of Regulation S of the Securities Act of 1933.
In anticipation of the above acquisition, on June 18, 1996, the Company amended
its Amended and Restated Articles of Incorporation to make effective a one for
5.909635 reverse split of the shares of the Company's common stock issued and
outstanding, amended its Amended and Restated Articles of Incorporation to
change the name of the Company from Aurtex, Inc. to Sector Communications, Inc.,
and declared a stock dividend of 1.25 shares of Company common stock for each
post-split share of Company common stock outstanding.
Sector Communications AG
- ------------------------
Effective July 31, 1996, the Company acquired 100% of the outstanding capital
stock of Sector AG from Murray Services, Ltd. ("Murray") for a cash payment of
$12,000. As of acquisition date, Sector AG had no assets or liabilities.
Sector AG was acquired to hold the equity interests acquired by the Company of
Histech and Mountain.
As of the date of acquisition, Murray beneficially owned 1,000,000 shares of the
Company's common stock, representing less than a 5% interest in the Company.
These shares were being held at that time for Murray by Telecom Partners Ltd
("Telecom"), and were received by Telecom in connection with the Company's
acquisition of Global. Hugo Wyss, a director of Sector AG and Histech, is also
a director of Murray.
7
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS
(UNAUDITED)
AUGUST 31, 1996
HIS Technologies AG and Mountain Software AG
- --------------------------------------------
On August 12, 1996, the Company entered into a Definitive Agreement with
Histech, the holders of 100% of the outstanding capital stock of Histech (the
"Histech Stockholders"), and Mountain for the purchase, through it's wholly
owned subsidiary, Sector AG, of an 80% capital stock interest in Histech, the
purchase of 100% of the capital stock of Mountain and for the subsequent merger
of Mountain into Histech.
Effective August 23, 1996, Sector AG, acquired 54.45% of the issued and
outstanding shares of capital stock of Histech from two Histech Shareholders,
Joan Brown and Aledo Services Ltd. and 100% of the issued and outstanding shares
of capital stock of Mountain from Simon Brown, the sole shareholder of Mountain,
in exchange for the issuance of a total of 4,118,094 shares and 716,191 shares
of the Company's common stock, respectively. As provided for in the Agreement,
the Company is required to issue an additional 5,728,060 and 996,184 shares of
its common stock as purchase price adjustments to the two Histech shareholders
and Simon Brown respectively, since the average bid price of the Company's
common stock during the last ten trading days of October 1996 was less than
$2.25 per share.
As a part of this Agreement, the Company also purchased for cash 3,428 shares of
previously unissued Histech capital stock, such shares representing a 25.55%
capital stock interest in Histech for a $1,200,000. The final payment of
$300,000 for the purchase of this interest was made on September 18, 1996. The
Company has accrued as a current liability this final payment and has
consolidated Histech as though it owned a full 80% interest at August 31, 1996.
The Company also issued 1,250,000 shares of common stock and a warrant for the
purchase of 1,250,000 shares of it's common stock at an exercise price of $0.79
per share, expiring three years from the date of issue, as a fee to KAV
Kapitalangleger Verlag-AG ("KAV") for services performed in connection with this
transaction. Hugo Wyss a director of Sector AG and the Chairman of the Board of
Directors of Histech is also a director of Aledo Services Ltd.
The shares of issued above have not been registered under the Securities Act,
but were issued in accordance with Regulation S and bear a legend to such
effect. The shares issued to Joan Brown, Aledo Services and Simon Brown bear
additional legends limiting their sale or transfer in accordance with the
Agreement. These shares become available for sale or transfer on a quarterly
basis, with 10% of the total shares issued available for transfer each quarter,
beginning in November 1996, until all such shares are freely tradeable.
8
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 2: ACQUISITIONS (CONTINUED)
The acquisition of Histech and Mountain were accounted for as purchases and the
excess of the cost over the fair value of net assets acquired were $6,435,634
and $849,265, respectively. No results of operations of either Histech or
Mountain was included in the operations of the Company due to the acquisitions
occurring at the end of the Company's reporting period.
No amount is shown in the accompanying financial as minority interest due to
Histech's minority interest being a debit balance.
Proforma Disclosure
- -------------------
The following table presents, on an unaudited pro forma basis, the combined
results of operation of the Company as though the acquisitions of Global, Sector
AG, Histech and Mountain were made on March 1, 1996.
Net Sales $ 834,732
Net Loss ( 629,097)
Net Loss per Share ( 0.02)
The pro forma results of operations do not purport to be indicative of the
results that would have been obtained if the combined operations had been
conducted during the period presented and is not intended to be a projection of
future results which may occur.
dbe Software, Inc.
- ------------------
On June 17, 1996, the Company entered into a Definitive Investment and Option to
Merge Agreement, as amended, with dbe Software, Inc. ("DBE") for the acquisition
of up to 100% of DBE.
The agreement provides for the Company to acquire up to 100% of the outstanding
capital stock of DBE. The first stage provides that the Company purchase
previously unissued equity of DBE representing a 20% capital stock interest for
$1,500,000 (the "Investment"), of which $900,000 has been paid during the period
May through November 1996. The Company has agreed to invest the remaining
amount, $200,000 in November and $400,000 in December of 1996. Should the
Company not make the full Investment on the specified dates, DBE has the option
to terminate the agreement and convert all amounts previously invested into an
unsecured promissory note bearing interest at 6% per annum, with all principal
and accrued interest due and payable on April 30, 2001.
9
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 2: ACQUISITIONS (CONTINUED)
Upon full payment of the Investment, the Company will receive an option to
acquire, by merger, the remaining 80% of the outstanding capital stock directly
from the DBE shareholders on or before August 17, 1997. The consideration paid
in the merger of the remaining 80% interest will be an aggregate of $10,600,000.
Each of the individual DBE shareholders, subject to certain conditions, shall
have the right to receive in lieu of a cash payment, their portion of the
purchase price in Company common stock.
The Company is accounting for it's investment in DBE using the cost method.
NOTE 3: RELATED PARTY RECEIVABLE
Related party receivables at August 31, 1996 are as follows:
Amounts due from two officers of Histech. These
cash advances bear no interest and are due on
demand $ 69,789
Amount receivable from an individual who was
the former shareholder of Mountain, is an
officer of Histech and a shareholder of the
Company. 169,172
Unsecured promissory note receivable from a
director and shareholder, bearing interest at
8% per annum. The Company has previously
established a reserve for the full amount of
this note. 194,110
Reserve for potential uncollectability ( 194,110)
----------
Total $ 238,961
==========
10
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 4: NOTES RECEIVABLE
Notes receivable at August 31, 1996 are as follows. Both of these notes are
currently due and in default.
Promissory note receivable from Atcall, Inc.,
bearing interest at 8% per annum. This note
is personally guaranteed by the president of
Atcall. Repayment of this note was demanded
on the note's due date, October 23, 1996. The
Company is currently considering its alternatives
in collecting the outstanding balance. $ 252,192
Unsecured promissory note receivable from
Combined Metals Reduction Company, bearing
interest at 10%. The Company has previously
established a reserve for the full amount of
this note. 136,575
Reserve for potential uncollectability ( 136,575)
----------
Total $ 252,192
==========
NOTE 5: INVESTMENT
During the six months ended August 31, 1996, the Company sold, in several
transactions, the remaining 1,671,852 shares of Northfield Minerals Inc. ("NFM")
it held to a shareholder of the Company for $1,930,000. This same shareholder
acquired common stock from the Company during the six months ended August 31,
1996 as described in Note 9.
Due to the acquisition of Global, as described in Note 2, being accounted for as
a reverse acquisition in the accompanying financial statements, the gain on the
sale of the NFM common stock of $1,486,575 was accounted for as a purchase price
adjustment and a corresponding increase in stockholders' equity.
11
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 6: INTANGIBLE ASSETS
Intangible assets at August 31, 1996 are as follows:
Intangible assets related to the acquisition
of Histech (Note 2) $ 6,435,634
Intangible assets related to the acquisition
of Mountain (Note 2) 849,265
Intellectual property and distribution
rights acquired by Histech prior to its
acquisition by the Company 821,285
-----------
Total $ 8,106,184
===========
The intangible asset recorded for intellectual property and distribution rights
which were acquired by Histech based on an agreement, as amended, dated May 1,
1996, between Histech and HIS Software AG.
The excess purchase price over the fair value of the net assets acquired of
Histech and Mountain will be amortized on a straight line basis over twenty
years. Costs related to the acquisition of the intellectual property and
distribution rights purchase by Histech are amortized over the shorter of the
estimated useful life of five
NOTE 7: SHORT TERM BORROWING
Histech, a subsidiary of the Company, has a short term line of credit with a
Swiss bank for borrowing up to $124,500 (150,000 Swiss francs) at 5.25%,
cancelable on 30 days notice. At August 31, 1996, the Company has borrowed
$114,451 under this short term agreement.
12
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 8: LOAN PAYABLE
Financing for the development of Global's telecommunications network and start-
up operations was provided by a financing agreement and promissory note between
Global and a privately held company (PHC). The note, as amended, provides for a
line of credit in the maximum principal sum of $3,200,000, of which $3,181,588
has been drawn at August 31, 1996. The outstanding principal balance bears
interest at an adjustable rate equal to two hundred basis points plus the prime
rate as reported by the Wall Street Journal. Such rate is adjusted on the first
business day each month according to the prime rate prevailing on the last day
of the immediately preceding week.
The note provides for payment to PHC of 80% of any and all earnings of Global
before interest, depreciation and amortization which shall be applied first to
any expense owing to PHC; then to payment of accrued and unpaid interest; and
then to payment of principal.
The note is secured by all Global's assets including without limitation: i) all
inventory; ii) all accounts, contract rights and general intangibles; iii) all
machinery, equipment, fixtures, vehicles, furniture, tools, books and records
(including customer lists and computer programs); and iv) an assignment of all
rights under certain agreements.
In connection with the acquisition of Global, the Company and PHC have entered
into a Debt Repayment Agreement concerning the promissory note between the
Company and PHC. This Debt Repayment Agreement provides for the Company to
assume and pay in full the debt to PHC, which shall be due and payable in full
three years from the closing date of the Stock Purchase Agreement. PHC has
agreed that the debt may be repaid in full at any time on or prior to the
maturity date by the issuance to PHC of three million shares of unregistered
common stock of the Company.
13
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 9: STOCKHOLDERS' EQUITY
Common Stock
- ------------
During May 1996, the Company, in an offshore private financing in accordance
with Regulation S of the Securities Act of 1933, issued 761,468 shares of
Company common stock for a net sales price of $500,000. The proceeds of this
financing were used to fund the Company's initial investment in Histech
described in Note 2. On July 12, 1996, the Company sold an additional 222,222
shares of its common stock, in an offshore private financing in accordance with
Regulation S of the Securities Act of 1933, for net sales proceeds of $250,000.
Proceeds totaling $500,000 was received from these offerings from the same
shareholder of the Company to which the Company sold its NFM common stock
described in Note 3.
Effective June 18, 1996, the Board of Directors approved the issuance of 500,000
shares of unregistered common stock to the Company's President pursuant to his
employment agreement, 150,000 shares of unregistered common stock to each of two
employees pursuant to employment agreements, and 166,666 shares of unregistered
common stock to each of two directors of the Company. All these shares, except
those issued to the two employees were fully vested upon issuance. The shares
issued to the two employees vest 50,000 shares on the date of grant, and 50,000
shares in April 1997 and 1998.
Subsequent to August 31, 1996, the stock grant for 150,000 shares, including the
vested portion, was rescinded by mutual agreement between one of the above
employees and the Company, as part of a severance agreement. As such, the
impact of these shares is not shown in the accompanying financial statements.
On July 19, 1996, the Board of Directors approved the issuance of 50,000 shares
of unregistered common stock to a new director of the Company along with a
warrant for the purchase of 300,000 shares.
Reverse Stock Split and Stock Dividend
- --------------------------------------
On May 15, 1996, the Board of Directors of the Company adopted a resolution
authorizing amendments to the Company's Articles of Incorporation approving a
reverse split of the Company's outstanding Common Stock, par value $0.001 per
share on the basis of one new share of common stock of the Company for each
5.909635 shares of presently outstanding Common Stock. The Amendment was
approved by written consent, dated May 15, 1996, of the holders of approximately
52% of the outstanding shares of the Company's common stock.
14
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 9: STOCKHOLDERS' EQUITY (CONTINUED)
Also on May 15, 1996, the Board of Directors of the Company adopted a resolution
approving a stock dividend of the Company's common stock on the basis of 1.25
shares of common stock of the Company for one shares of outstanding common stock
immediately after the reverse stock split described above.
Effective June 18, 1996, the Company reverse split its common stock one share
for every 5.909635 currently outstanding shares and issued a stock dividend of
1.25 shares of post reverse split common stock for each share of common stock
outstanding immediately after the reverse stock split but prior to the issuance
of shares of common stock to the shareholders of Global described in Note 2, and
the grant of unregistered stock to certain of the Company's officers, directors
and employees. The par value of the Company's common stock and the authorized
number of shares were not changed.
Warrants
- --------
As of August 31, 1996, the Company has warrants outstanding for the purchase of
3,876,588 shares of common stock. A summary of warrant transactions during the
six months ended August 31, 1996 is as follows:
<TABLE>
<CAPTION>
Number
of Shares
Granted Exercisable Exercise
Number August 31 Price
----------- ------------ --------------
<S> <C> <C> <C>
Balance, March 1, 1996 2,421,771 2,421,771 $0.79
Warrant canceled ( 955,183) 0.79
Warrant granted to KAV (Note 2) 1,250,000 1,250,000 0.79
Warrant granted to a director 300,000 100,000 $2.25 to $4.00
--------- ---------
Balance, August 31, 1996 3,876,588 3,676,588
========= =========
</TABLE>
The warrant granted to a director vests for the purchase of one-third of the
shares on the date of grant, with the remaining shares vesting one-third on each
of the first and second anniversary dates of the grant. The warrants granted to
KAV described in Note 2 were issued in accordance with Regulation S of the
Securities Act of 1933.
15
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 10: STOCK OPTION PLANS
At August 31, 1996, the Company has options outstanding for the purchase of
480,000 shares under the 1994 Stock Plan. A summary of option transactions
during the six months ended August 31, 1996 is as follows:
<TABLE>
<CAPTION>
Number
of Shares
Granted Exercisable Exercise
Number August 31 Price
--------- ------------ ---------
<S> <C> <C> <C>
Balance, March 1, 1996 150,000 150,000 $1.39
Options canceled (150,000) (150,000) 1.39
Options granted to two employees 300,000 100,000 1.06
Option granted to an employee 180,000 60,000 1.62
-------- --------
Balance, August 31, 1996 480,000 160,000
======== ========
</TABLE>
The options granted during the six months ended August 31, 1996, all vest for
the purchase of one-third of the shares on the date of grant, with the remaining
shares vesting one-third on each of the first and second anniversary dates of
employment.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
The Company has entered into several noncancelable operating lease agreements
for office space. Some of these agreements contain renewal options and/or
defined rent escalation provisions. The minimum lease payments under these
lease agreements for each of the next five years ending February 28 are as
follows:
<TABLE>
<CAPTION>
Minimum Minimum
Lease Sublease Net
Payments Payments Payments
---------- ---------- ---------
<S> <C> <C> <C>
1997 $ 254,849 $ 158,134 $ 96,715
1998 367,067 251,623 115,444
1999 374,853 257,269 117,584
2000 353,363 242,201 111,162
2001 322,706 212,694 110,012
---------- ---------- --------
$1,672,838 $1,121,921 $550,917
========== ========== ========
</TABLE>
16
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 11: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into noncancelable sublease agreements on terms similar
to its original lease for office space at its McLean, Virginia location with
DBE, a company which the Company is acquiring an equity interest in, as
described in Note 2, and G&S International, a company of which the Company's
president is a manager/member of, for approximately 49% and 20% of its space,
respectively.
At August 31, 1996, the Company has $3,026 in rent due it from G&S
International.
Operating Agreement with Bulgarian Telecommunications Company, Ltd.
- -------------------------------------------------------------------
The Joint Activity Agreement with Bulgarian Telephone Company ("BTC"), signed
January 24, 1994, was unilaterally and without prior notice declared terminated
by BTC on July 8, 1996. The BTC then disconnected Global's digital link to
international carrier services, thus suspending the carrier services provided by
the Company to the hotel and resort industry. Global is, however, still
receiving revenue from non-carrier based shared revenue agreements.
The Company believes that the alleged termination of the agreement is invalid
and in violation of the agreement with BTC. The essence of the dispute which
has resulted in the termination of the agreement, and disconnection of the link
to the BTC, concerns payment and respective service obligations connected with
the agreement. The agreement provides that disputes be settled, first by a
mutual commitment to deploy efforts in good faith negotiations toward a friendly
settlement, and failing settlement that each party has recourse to international
arbitration within the framework of the International Chamber of Commerce.
The Company has elected at this time to employ good faith negotiations to settle
the dispute. In that regard, it has, subsequent to August 31, 1996, made a
payment to the BTC of $300,000 to account for any undisputed tariffs and fees
and is attempting to negotiate a resumption of service and/or a new agreement.
In the opinion of management, a new revised agreement will be executed in
December 1996, to be followed by immediate resumption of our carrier services.
17
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
NOTE 12: SUBSEQUENT EVENT
On October 13, 1996, the Company closed an offshore private placement in
accordance with Regulation S of the Securities Act of 1933, in which it sold
$1,050,000 of 10% convertible debentures ("Debentures") for net proceeds of
$911,745. This offshore private placement was arranged by Greystone Capital,
Ltd.
The Debentures bear interest at 10% per annum and are due and payable on August
30, 1999, if not converted earlier. Interest is payable at the option of the
Company either quarterly in cash or at maturity in shares of Company common
stock.
The principal amount of the Debentures, along with any accrued interest, is
convertible, at the holders option any time 45 days after the closing date into
shares of Company common stock at a conversion price for each share of Company
common stock ranging from 70.0% to 72.5% of the average closing bid price of
Company common stock for the five business days immediately preceding the
conversion date.
The persons to whom the Debentures were sold are as follows.
<TABLE>
<CAPTION>
Amount of Investor
Investor Investment Address
- ---------------------------- ---------- -------------
<S> <C> <C>
UHF Endowment Ltd $500,000 Liechtenstein
Paril Holding 200,000 Switzerland
Guarantee & Finance Corp. 100,000 Panama
FT Trading Company 100,000 England
AI International Corporate
Holdings, Ltd. 150,000 England
----------
Total $1,050,000
==========
</TABLE>
The Company believes that all such persons are not U.S. Persons as defined in
Regulation S of the Securities Act of 1933, as amended.
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During 1996, the Company changed its corporate strategy and focus, and
concentrated its energies and efforts on building the Company into an
international provider of telecommunications services and computer software
products. Through the acquisition of existing companies and products, the
Company began its transition from that of gold exploration to technology
production and marketing.
As a first step in this process, the Company, on June 18, 1996, reverse split
its stock and changed its name and trading symbol to reflect its new identity.
Also on June 18, 1996 the Company acquired 100% of the outstanding capital stock
of Global Communications Group, Inc. ("Global") in exchange for the issuance of
17,000,000 shares of Company common stock to the shareholders of Global, as
described in note 2 to the financial statements. Global, as described below,
operates a private optical fiber telecommunications network in the cities of
Sofia and Plovdiv in the Republic of Bulgaria.
In the opinion of management, with the resumption of carrier services expected
in December 1996. Global is expected at that time to become a profitable
business operation. Furthermore, management has commenced negotiations with
international financing sources for a multi-fold expansion of Global's network.
Effective August 31, 1996, the Company completed its acquisition of an 80%
equity interest in HIS Technologies AG and 100% of Mountain Software AG. Based
in Zurich, HIS Technologies AG specializes in the development, sales and support
of software products.
On June 19, 1996, the Company entered into a Definitive Agreement for the
acquisition DBE Software, Inc., located in Virginia. DBE Software, Inc. is a
software development and marketing company, specializing in database management
tools designed to work with relational database management software (RDBMS)
products from IBM, Oracle, Computer Associates, and other major providers.
Global Communications Group, Inc.
- ---------------------------------
On July 18, 1996, the Company acquired 100% of the capital stock interest of
Global Communications Group, Inc. ("Global"). Following the acquisition of
Global, the Company began integrating the operations of Global into those of the
Company and establishing plans for expanding Global's operations to additional
customers along the previously laid fiber cable and to other areas in the
Republic of Bulgaria.
19
<PAGE>
Global has undertaken to be the sole private provider of direct-dial
international long distance telephone service for the hotel/resort industry,
banking industry, foreign embassies and western businesses in the cities of
Sofia and Plovdiv in the Republic of Bulgaria. This is the first step in a
series of related telecommunications development projects planned for Bulgaria.
To date, Global has made a substantial investment in fiber optic cable,
telecommunications equipment, and related infrastructure in accordance with its
agreement with the Bulgarian Telecommunications Company ("BTC").
Growth of Global's operation is anticipated in four areas: (i) increased call
volume of existing customers, (ii) broadened customer base along the existing
network in Sofia and Plovdiv, (iii) broadened customer base along new segments
of the network, and (iv) expanding the concept to other Eastern European
countries.
As more fully described below and in note 11 to the financial statements, Global
has recently experienced periods when its access to long-distance service was
denied due to what management believes to be arbitrary and illegal acts of
individuals connected with the BTC. The State Prosecutor's office in Sofia,
Bulgaria has supported the Company's position in these matters and has issued
orders for the BTC to fully restore Global's operations. Since the termination
of access to international carrier services, executive management of the Company
has held numerous face-to-face meetings with the Chairman of the Board and
Executive Director of the BTC and with the President of the Committee of Posts
and Telecommunications. And, as a result of those meetings the Company's
management believes a new revised agreement will be effective in December 1996
and international carrier services will be restored.
HIS Technologies AG and Mountain Software AG
- --------------------------------------------
Effective August 31, 1996, the Company acquired an 80% interest in HIS
Technologies AG ("Histech"). Histech specializes in systems and network
management tools designed primarily for, but not limited to, use with computers
using Digital Equipment Corporation's ("Digital") OpenVMS operating system.
Concurrent with the Company's acquisition of Histech, the Company acquired 100%
of Mountain Software AG ("Mountain") for shares of the Company's common stock.
Mountain, owned and operated by one of Histech's founders, developed and held
exclusive rights to a suite of system management utilities, the "X-Series", sold
by Histech and its distributors. The "X-Series" products have since been
enhanced and have been renamed to the "HIS-MaestroSeries" for sales around the
world.
Histech's revenues are derived principally from two sources: (i) product license
fees for the use of the Company's software products
20
<PAGE>
and (ii) service fees for maintenance, consulting services and training related
to the Company's software products. Histech is represented by partners and
distributors in 13 countries worldwide. The Company recently began shipping a
new software product, HIS OPC Agent, that allows users of Hewlett-Packard
Corporation's ("HP") OpenView network management software running on UNIX
workstations to also monitor and manage systems running Digital's OpenVMS
operating system. On October 30 of this year, the Company announced that Histech
had signed a cross-marketing agreement with HP to jointly promote this new
software. Management estimates there are 8,000 potential customers currently
supporting networks of systems using both Digital Equipment Corp's OpenVMS and
HP's OpenView products. With an average estimated installation price of $25,000,
management values this segment of the market at approximately $200 million
dollars.
The Company plans to release a new software product in the first quarter of 1997
for use on Digital OpenVMS, Microsoft Windows NT and UNIX based networks. This
product will facilitate monitoring system integrity and security across all
three networks from a single workstation.
DBE Software, Inc.
- ------------------
The Company has entered into a definitive agreement with DBE Software, Inc. as
described in note 2 to the financial statements. DBE is a software development,
distribution and marketing company, specializing in database management tools
designed to work with relational database management software ("RDBMS") products
from IBM, Oracle, Computer Associates, and other major providers.
DBE's revenues are derived principally from three sources: (i) product license
fees for the use of the Company's software products, (ii) service fees for
maintenance, consulting services and training related to the Company's software
products, and (iii) royalties and distribution fees derived from the sales of
software products licensed from and distributed for third-party developers.
DBE's flagship product, DB-Examiner, is a powerful expert system for use with
the largest RDBMS's such as Oracle and DB2 from IBM. DB-Examiner analyzes
database structures and identifies inconsistencies that could adversely affect
data integrity and system performance. DBE has also entered into agreements with
other software development firms to represent their products in the US.
Typically, these are "best of breed" products that complement DBE's own
products.
21
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1996 COMPARED TO THE THREE MONTHS ENDED AUGUST 31,
1995; AND SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO THE SIX MONTHS ENDED
AUGUST 31, 1995.
Net Revenues - The Company earns all of its telecommunications revenue from (i)
- ------------
providing direct-dial services for international long distance calls to a twelve
hotels and resorts in the cities of Sofia and Plovdiv in Bulgaria; (ii) from the
integration, installation, and maintenance of customer-owned digital phone
systems; and (iii) from usage-based percentages of Company-owned digital phone
systems through shared revenue agreements with four hotels.
The Company's telecommunications revenue decreased by $429,095 from $533,737 for
the three months ended August 31, 1995 to $104,642 for the three months ended
August 31, 1996; and decreased by $522,681 from $1,105,002 for the six months
ended August 31, 1995 to $582,321 for the six months ended August 31, 1996. It
should also be noted that revenue also decreased by $373,037 from $477,679 for
the three months ended May 31, 1996 to $104,642 for the three months ended
August 31, 1996. These decreases in revenue are due primarily to the Bulgarian
Telephone Company ("BTC"), without prior notice or cause, unilaterally
terminating the Company's Joint Activity Agreement on July 8, 1996. On that
date the BTC disconnected Global's digital link to international carrier
services, thus suspending the majority of the services provided by the Company
to its customers. As such, no revenue is currently being earned by the Company
from its customers from outgoing international long distance calls. Even though
the digital link has not yet been reestablished, the Company is still receiving
revenue from its customers under non-carrier based shared revenue agreements.
No revenue has been recorded related to software sales and maintenance from
Histech, since the acquisition of Histech was accounted for as a purchase
effective August 31, 1996.
Costs of Sales - Services and Fees - The Company's costs of sales, excluding
- ----------------------------------
depreciation, decreased by $501,903 from $559,315 for the three months ended
August 31, 1995 to $57,412 for the three months ended August 31, 1996; and
decreased by $588,053 from $945,632 for the six months ended August 31, 1995 to
$357,579 for the six months ended August 31, 1996. These decreases, as
described above, are due primarily to the BTC unilaterally terminating Global's
Joint Activity Agreement on July 8, 1996 which disconnected Global's digital
link to international carrier services.
22
<PAGE>
It should be noted that, as shown below, that fees and services as a percentage
of telecommunications revenues has significantly declined for both the three and
six month periods ended August 31, 1996 compared to the three and six month
periods ended August 31, 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31 August 31 August 31
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fees and Services as a
Percent of Revenue 55% 105% 61% 86%
</TABLE>
This decline is due in part to, as described above, the disconnection of
Global's digital link at the BTC, but is also due to changes in the way Global
rerouted its international outgoing traffic during 1995 and 1996. Between June
1995 and April 1996, Global rerouted all of its traffic directly through the
BTC, and stopped utilizing the services of other companies to carry its traffic,
resulting in lower per minute costs.
Exploration Costs - In order to accurately determine the best course to take for
- -----------------
the ultimate divesture of its gold assets, the Company incurred exploration
costs, as more fully described below of $239,336 during the three month period
ended August 31, 1996. No comparable costs for such activities are shown in the
statement of operations for the three or six months ended August 31, 1995.
During 1995, the Company did however conducted gold exploration activities, but
due to the nature of the acquisition of Global as a reverse acquisition, the
historic financial statements are those only of Global and not of Sector,
formerly Aurtex. The reader is referred to the Company's February 29, 1996 10-
KSB for details concerning exploration costs incurred during its year ended
February 28, 1996. The Company incurred approximately $257,000 in total
exploration costs during the six months ended August 31, 1996, of which
approximately $17,000 was incurred prior to the reverse acquisition of Global,
and as such is not shown in the statement of operations as expense.
Because management now believes it has sufficient information from the
exploration efforts conducted recently to properly evaluate various
possibilities of divestiture of the mineral properties, the Company does not
expect to incur significant costs in the future related to its gold exploration
properties or other gold exploration related activities.
General and Administrative Expense - consists primarily of personnel costs,
- ----------------------------------
including salaries, benefits and bonuses and related costs for management,
finance and accounting, legal and other professional services. General and
administrative expenses are detailed in the following table by individual
company below.
23
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31 August 31 August 31 August 31
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
General and Administrative
Global Communications $ 78,116 $222,418 $162,904 $455,814
Sector Communications 311,435 - 311,435 -
-------- -------- -------- ---------
Total $389,551 $222,418 $474,339 $455,814
======== ======== ======== =========
</TABLE>
Only the costs of Sector Communications, Inc. incurred since the it acquired
Global on June 18, 1996 in a reverse acquisition are included in the
accompanying financial statements. For the three months ended August 31, 1996
the general and administrative costs incurred by Sector Communications, Inc.
consolidated with the operations of Sector Communications, AG, its 100% owned
Swiss subsidiary (collectively "Sector") were $311,435.
General and administrative costs at Global declined dramatically for the three
month and six month periods ended August 31, 1996 compared to the three and six
month periods ended August 31, 1995. This decline was due primarily to
additional costs incurred by Global during 1995 related to start up operations,
marketing, U.S. based administrative costs and other costs. Management expects
that Global's general and administrative costs, not taking into consideration
any expansion of the current network, to remain at current levels.
Interest Expense - The slight decline in interest expense for the three and six
- ----------------
months periods ended August 31, 1996 compared to the three and six month periods
ended August 31, 1995 was due to a reduction in the interest rate on the loan,
and the final draw of $100,000 occurring in May of 1995. The loan balance has
remained constant at $3,181,588 since that final draw. During these periods, the
Company incurred interest expense primarily related to the loan payable
described in note 8 to the financial statements for the development of Global's
telecommunications network and start-up operations.
In connection with the acquisition of Global, the Company entered into a Debt
Repayment Agreement under which the Company assumed and agreed to pay in full
the debt, which shall be due and payable in full three years from the closing
date of the Stock Purchase Agreement. This Agreement also granted the Company
the option to repay this debt in full, at any time on or prior to the maturity
date, by the issuance of three million shares of unregistered common stock of
the Company to the note holder.
The Company expects that interest expense will increase in the future to the
degree it continues to borrow funds in order to implement its capital
expenditure plans.
24
<PAGE>
GOLD EXPLORATION ACTIVITIES
In connection with the change in the Company's strategic direction the Company
has decided to curtailed any significant future gold exploration activities.
The Company is currently evaluating options to determine the possibilities of
divestiture and or discontinuance of its mineral properties described below.
Vienna Project - During the summer of 1996, a modest drilling program was
- --------------
completed by the Company under the direction of the Lodestone Group, to evaluate
the Webfoot vein system at the Company's Vienna Property. Three diamond core
exploration holes were drilled along the trend of the Webfoot vein system.
These exploration holes averaged 500 feet in length and cut the vein
approximately 250 feet beneath the surface. Geological and metallurgical
studies of the drill core are still in progress, but the preliminary results of
the first phase drilling program are, according to the Lodestone Group,
encouraging. Based on the conclusions derived from the work in process and the
delivery of a final report from the Lodestone Group, the decision to pay
approximately $290,000 by December 31, 1996 to extend the Exploration License
and Option to Purchase Agreement for an additional three year feasibility period
will be made in late December.
Ketchum Project - A minor drilling program, consisting of one exploration drill
- ---------------
hole of 403 feet was conducted under the direction of Agricola Metals Company, a
principal of which is a shareholder of the Company, to explore the sedimentary
rocks immediately under the volcanics in the Rooks Creek East area of the
Company's unpatented claim block. Preliminary results are inconclusive and a
final report is expected from Agricola Metals Company in December 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended August 31, 1996, the Company financed its
operations and acquisitions primarily through (i) funds it received from the
sale of 983,690 shares of its common stock in offshore private placements in
accordance with Regulation S of the Securities Act of 1933 for net sales
proceeds of $750,000, and (ii) from the sale of 1,671,852 shares of Northfield
Minerals Inc. common stock for $2,080,000 as described in notes to the financial
statements.
The Company is currently experiencing negative cash flow from operations but
management believes, that with the reinstatement of Global's services, that
operating cash flow will improve significantly. In October 1996, the Company
received $911,745 from debenture financing described below, most of which was
used by the Company to complete the acquisition of Histech ($300,000), provide
additional investment to DBE ($200,000) and make a payment to the BTC ($300,000)
as described in note 12 to the financial statements and
25
<PAGE>
below. Even with these funds, the addition and projected improvements in
operations and cash flows from Global and Histech, and the curtailment of gold
exploration activities, the funding of future operations may require further
infusion of capital. Based on its current operating levels and additional
funding under its previously discussed financing commitment, the Company
believes that it will have sufficient liquid assets to maintain operations for
at least the next twelve months.
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 Company's
common stock. The Company previously received a $5,500,000 commitment, under
which as described above, $750,000 has been provided and from which the Company
anticipates receiving additional funding.
The Company had no commitments for material capital expenditures as of August
31, 1996.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risk and
uncertainties. Such forward-looking statements reflect the Company's current
views with respect to future events and financial performance, including
statements in the following section concerning the timing and amount of
revenues, the level of expenses incurred and the sufficiency of cash and other
resources to fund operations. Actual results could differ materially from those
projected in the forward-looking statements as a result of the Company's ability
to obtain adequate additional financing as needed, the uncertainties of new
product development and introduction, sales growth, competitive pressures, and
other risks.
26
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Written Consent in Lieu of a Special Meeting
- --------------------------------------------
The Board of Directors of the Company adopted a resolution authorizing
amendments (the "Amendment") to the Company's Amended and Restated Articles of
Incorporation approving a reverse split of the Company's outstanding Common
Stock, par value $0.001 per share ("Common Stock") on the basis of one new share
of Common Stock for each 5.909635 shares of presently outstanding Common Stock
(the "Reverse Stock Split") and to change the name of Aurtex to Sector
Communications, Inc. The Amendment to the Amended and Restated Articles of
Incorporation became effective on June 18, 1996 when the Company filed a
Certificate of Amendment to the Amended and Restated Articles of Incorporation
with the Secretary of State of Nevada. The Company obtained the written consent
of a majority of the shares of outstanding common stock on May 15, 1996.
Approval of the Amendment by the stockholders was obtained by written consent in
lieu of a special meeting of stockholders.
The Amendment was approved in accordance with Nevada General Corporation Law
(the "Nevada Law") which provides that the written consent of the holders of
outstanding shares of voting capital stock, having not less than the minimum
number of votes which would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted, may
be substituted for such a special meeting. Pursuant to Nevada Law, a majority
of the outstanding shares of voting capital stock entitled to vote thereon is
required in order to amend the Company's Amended and Restated Articles of
Incorporation. In order to eliminate the costs and management time involved in
holding a special meeting and in order to effect the Amendment as early as
possible in order to accomplish the purposes of the Company as hereafter
described, the Board of Directors of the Company voted to utilize the written
consent of the holders of a majority in interest of the voting capital stock of
the Company. The Board of Directors approved the Amendment in order to permit
the closing of the Stock Purchase and Exchange Agreement with Global, which
could not have been closed based on authorized capitalization of the Company
prior to the Reverse Stock Split.
At the close of business on May 15, 1996, there were outstanding 23,638,540
shares of Common Stock, the only shares of the Company entitled to vote. The
Amendment was approved by the written consent, dated May 15, 1996, of the
holders of approximately 52.4% of the outstanding shares of Common Stock as
follows.
27
<PAGE>
Written consent of 8,466,250 shares of pre-split Common Stock representing
approximately 35.8% of shares outstanding was given by Mr. S. Allan Kline, a
current director of the Company. Of these shares 8,010,000 pre-split shares are
held of record by Biomyne North Company, an Idaho limited partner who's general
partner is Biomyne, Inc., a Delaware corporation. Mr. Kline is the President of
Biomyne Inc. Mr. Kline held 456,250 pre-split shares directly on May 15, 1996.
Written consent of 3,915,684 pre-split shares of Common Stock, representing
approximately 16.6% of shares outstanding was given by an individual under
general powers of attorney previously granted to him by five stockholders of the
Company.
Annual Meeting of Stockholders
- ------------------------------
On August 19, 1996, the Company held its annual meeting of stockholders to vote
upon the election of directors.
At the annual meeting, Theodore Georgelas, Jeff Shear, S. Allan Kline, Roger
Hedin and Geoffrey Button were elected to serve as directors until the next
annual meeting. These individuals constitute the entire Board of Directors, and
with the exception of Mr. Georgelas, the Company's President and Chief Executive
Officer and Mr. Button, all served as directors during the year ended February
28, 1995. The results of the vote on the election of directors was as follows:
<TABLE>
<CAPTION>
Votes Votes
For Against
---------- -------
<S> <C> <C>
Theodore Georgelas 20,444,532 202,322
Jeff Shear 20,444,950 201,904
S. Allan Kline 20,444,950 201,904
Roger Hedin 20,445,331 201,523
Geoffrey Button 20,445,331 201,523
</TABLE>
ITEM 5. OTHER INFORMATION.
On September 26, 1996, the Board of Directors approved the Letter Agreement with
MCG Management Consulting Group, S.A. ("MCG") providing for among other things
that MCG, effective October 14, 1996, will be the Manager in charge of certain
of the Company's operations. The Board of Directors has the right to cancel
this Agreement on November 26, 1996.
One of the principles of MCG is Hugo Wyss. Hugo Wyss is a director of Sector AG
and the Chairman of the Board of Directors of Histech.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------ -----------------------------------------------------------
10.1 Amendment No. 2 to the Global Communications Group, Inc. Stock
Purchase and Exchange Agreement (Incorporated herein by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the quarter ended May
31, 1996.)
10.2 DBE Definitive Investment and Option to Merge Agreement (Incorporated
herein by reference to Exhibit 10.2 of the Company's Form 10-QSB for
the quarter ended May 31, 1996.)
10.3 Definitive Agreement, dated August 12, 1996, between HIS Technologies
AG, Simon Brown, Joan Brown, Robert Scherpenhuijzen, Nicholas de
Smith, Aledo Services Ltd, Mountain Software AG, Sector
Communications, AG and Sector Communications, Inc. (Incorporated
herein by reference to Exhibit 10.01 of the Company's Form 8-K dated
September 18, 1996.)
10.4 Purchase Agreement between Murray Services Ltd BVI and Sector
Communications, Inc. (Incorporated herein by reference to Exhibit
10.02 of the Company's Form 8-K dated September 18, 1996.)
10.5 Agreement with KAV Kapitalangleger Verlag AG. Incorporated herein by
reference to Exhibit 10.03 of the Company's Form 8-K dated
September 18, 1996.)
10.6 Promissory Note Agreement between ATCALL, Inc. and Sector
Communications, Inc. for $250,000, dated July 23, 1996. (filed
herewith)
10.7 Amendment to the Definitive Investment and Option to Merger Agreement,
dated June 19, 1996.
29
<PAGE>
(b) Reports on Form 8-K:
On July 3, 1996, and Item 1 and 2 Form 8-K was filed by the Company related to
the acquisition of 100% of the outstanding capital stock of Global
Communications Group, Inc. by the Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
November 19, 1996
-------------------------------
Theodore Georgelas
President and Chief
Executive Officer
30
<PAGE>
Sector Communications, Inc.
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- --------- ------------------------------------------------ ----
<S> <C> <C>
10.6 Promissory Note Agreement between ATCALL, Inc.
and Sector Communications, Inc. for $250,000,
dated July 23, 1996. 32
10.7 Amendment to the Definitive Investment and
Option to Merger Agreement, dated June 19, 1996. 34
</TABLE>
31
<PAGE>
Exhibit 10.6
PROMISSORY NOTE AGREEMENT
Date: 07/23/96 County of Fairfax
Commonwealth of Virginia
THIS PROMISSORY NOTE made as of the day first above written by and between
ATCALL, Inc. (hereinafter referred to as "Maker") and Sector Communications,
Inc.(hereinafter referred to as "Payee").
WHEREAS, as of the date first hereinabove written Payee has advanced as a
loan to Maker the sum of Two Hundred and Fifty Thousand Dollars ($250,000.00);
WHEREAS, simultaneously but independently herewith Payee is considering the
purchase of capital stock of the Maker in an amount equal to or greater that the
loan made herein to Payee;
NOW, THEREFORE, on or before the earlier to occur (1) Ninety (90) days from
the date first above written or, (2) the date upon which Maker and Payee may
consummate the possible capital stock purchase, the undersigned Maker promises
to pay to the order of the Payee, at such place as the Payee may designate from
time to time the principal sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS
($250,000.00) together with interest accrued thereon computed at an interest
rate of eight percent (8.00%) compounded on an annual basis (but payable only at
the maturity of this Note) on the balance of the note that remains unpaid.
The absolute obligation herein of the Maker to the Payee is in no way
dependent upon the decision of the Payee to invest in the capital stock of the
Maker.
For good and valuable consideration received the undersigned guarantor,
Khalid Alhegelan ("Guarantor"), guarantees that the payment from Maker to Payee
as described herein shall be made in a timely manner. If, upon notice from
Payee that a default exists in the payment to Payee, then upon receipt of such
notice and without any further action necessary upon the part of the Payee,
Guarantor shall promptly (and in any case within five (5) days of receipt of
such notice) pay to Payee any amounts that are stipulated as due in such notice.
It is expressly agreed that if default be made in the payment of principal
and/or interest under this Note when and as the same shall become due and
payable, and the said default shall continue for a period of five days
thereafter, then and in that event a late payment penalty equal to one and one-
half percent (1.5%) of the payment due and shall be automatically assessed
against Maker for each and every
32
<PAGE>
month for which payment has not been made by the fifth (5th) day after such
payment is due.
This Note may be prepaid in full, or any portion hereof, without penalty.
This Note shall be governed in all respects by the laws of the commonwealth
of Virginia and shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs. executors, administrators, personal
representatives, successors and assigns.
Witness the following signature and seal.
WITNESS: MAKER:
/s/ Geoffrey Button /s/ Khalid Alhegelan
- ------------------- --------------------
ATCALL, Inc.
GUARANTOR:
/s/ Khalid Alhegelan
--------------------
Khalid Alhegelan
33
<PAGE>
Exhibit 10.7
Sector Communications, Inc. Letterhead
October 22, 1996
Mr. Luiz Siqueira
President
DBE Software, Inc.
7601 Lewinsville Road, Suite 200
McLean, Va. 22102
RE: Amendment to the DEFINITIVE INVESTMENT AND OPTION TO MERGE AGREEMENT
Dear Luiz:
Pursuant to our recent discussions, DBE Software, Inc. ("DBE") and Sector
Communications, Inc. ("Sector") have mutually agreed that, notwithstanding the
payment provisions as outlined in the above-referenced Agreement, the payment
schedule is hereby revised as follows:
1. $200,000 of the balance owing will be payable on or before
November 1, 1996;
2. The balance of the amount owing will be payable on or before
December 31, 1996;
Your signature below will indicate your acceptance of the foregoing and
acknowledge that the Agreement is in full force and effect and in no way in
default as of the date of this letter.
Thank You.
Sincerely yours, AGREED AND ACCEPTED
/s/ Theodore J. Georgelas /s/ Luiz Siqueira
- ------------------------- ---------------------
Theodore J. Georgelas Luiz Siqueira
President President
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-END> AUG-31-1996
<PERIOD-START> MAR-01-1996
<CASH> 750,395
<SECURITIES> 0
<RECEIVABLES> 644,679
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,049,870
<PP&E> 2,173,045
<DEPRECIATION> 816,333
<TOTAL-ASSETS> 14,252,766
<CURRENT-LIABILITIES> 1,916,498
<BONDS> 0
0
0
<COMMON> 34,001
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,382,914
<SALES> 582,321
<TOTAL-REVENUES> 582,321
<CGS> 529,805
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,121,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,069,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,157,681)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
