<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 May 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 May 31, 1996 there were outstanding 25,638,540 shares of the Company's
Common Stock. As described in Note 4 to the financial statements, effective
June 18, 1996, the Company reverse split it's 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 on the outstanding number of shares of
Common Stock at May 31, 1996 was to reduce that number by approximately
15,877,072 shares to 9,761,468 shares. All amounts per share, numbers of common
shares and capital accounts in this Form 10-QSB have not 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
Balance sheets May 31, 1996 (unaudited)
and February 28, 1996 ...................................................... 1
Statements of operations for the three
month periods ended May 31, 1996 and 1995,
and the period from May 19, 1990 (inception)
to May 31, 1996 (unaudited) ................................................ 2
Statement of stockholders' equity for the
period from March 19, 1990 (inception) to
February 28, 1995 and the three month period
ended May 31, 1996 (unaudited) ............................................. 4
Statements of cash flows for the three month
periods ended May 31, 1996 and 1995, and the
period From May 19, 1990, (inception) to
May 31, 1996 (unaudited) ................................................... 5
Notes to unaudited financial statements .................................... 6
Item 2. Management's Plan of Operations .................................... 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 13
SIGNATURES ................................................................. 13
<PAGE>
<TABLE>
<CAPTION>
SECTOR COMMUNICATIONS, INC.
BALANCE SHEET
May 31, February 28,
1996 1996
------------ ------------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets:
Cash $ 62,022 $ 345,177
Investments, at cost (Note 3) 443,425 443,425
Note Receivable - Related Party - -
Note Receivable - -
Deposits and Prepaid Expenses 111,271 119,390
------------ ------------
Total Current Assets 616,718 907,992
Investments, at cost (Note 2) 550,000 -
Equipment, Net of Accumulated Depreciation of $ 47,581
and $ 38,773, respectively 53,860 62,668
Capitalized Mining Claim Costs 2,240,000 2,240,000
------------ ------------
Total Assets $ 3,460,578 $ 3,210,660
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 182,444 $ 185,607
Due to Stockholders and Affiliated Entities 100,691 100,047
------------ ------------
Total Current Liabilities 283,135 285,654
------------ ------------
Commitments and Contingencies - -
Stockholders' Equity: (Note 4)
Preferred stock, $.001 per share par value,
5,000,000 shares authorized, no shares
issued and outstanding - -
Common stock, $.001 per share par value,
50,000,000 shares authorized, 25,638,540 and
23,638,540 shares issued and outstanding, respectively 25,639 23,639
Additional Paid in Capital 12,985,952 12,487,952
Accumulated Deficit (9,834,148) (9,586,585)
------------ ------------
Total Stockholders' Equity 3,177,443 2,925,006
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,460,578 $ 3,210,660
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND 1995, AND THE
CUMULATIVE PERIOD FROM INCEPTION, MARCH 19, 1990 TO MAY 31, 1996
<TABLE>
<CAPTION>
Cumulative
From
Three Three March 19, 1990
Months Ended Months Ended Date of
May 31, 1996 May 31, 1995 Inception
------------ ------------ --------------
<S> <C> <C> <C>
Aurtex Gold Assay System Development Costs $ - $ 147,520 $ 2,239,093
Gold Exploration Costs 18,097 162,249 3,154,175
General and Administrative Costs 235,762 385,176 4,563,901
------------ ----------- ---------------
Total Operating Costs 253,859 694,945 9,957,169
Equity in Loss of Pangold S.A. - - 31,595
Allowance for Possible Writedown of Notes Receivable - 333,898
Interest Expense, related parties 643 936 93,047
Interest and Other Income (6,939) (23,989) (306,541)
Gain on the Sale of Marketable Securities - - (275,020)
------------ ----------- ---------------
Net Loss $ (247,563) $ (671,892) $ (9,834,148)
============ =========== ===============
Net Loss per Share $ (0.01) $ (0.03) $ (0.77)
============ =========== ===============
Weighted Average Common Shares Outstanding 24,143,941 19,715,151 12,732,403
============ =========== ===============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 31, 1996, AND THE
CUMULATIVE PERIOD FROM INCEPTION, MARCH 19, 1990 TO FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid In
Shares Amount Capital
------------ ------------ ------------
<S> <C> <C> <C>
Issuance of common stock on March 19, 1990. 2,000,000 $ 2,000 $ (1000)
Merger with Adcom Systems, Inc. on December
4, 1992 accounted for as a recapitalization,
effective March 19, 1990, inception. 411,780 412 (84,691)
Issuance of Preferred Stock in connection
with the transfer mining claims on August
9, 1991, and converted to common stock
simulantaneous with the merger with
Adcom Systems, Inc. on December 4, 1992. 8,010,000 8,010 (7,260)
Sale of Preferred Stock in private offering
between January 1 and February 14, 1992,
and converted to common stock simultaneous
with the merger with Adcom Systems, Inc. 187,870 188 563,420
Sale of 327,000 Series C Warrants on
January 1, 1992. 3,270
Sale of Preferred Stock in private offering
between March 1 and September 23, 1992,
and converted to common stock simultaneous
with the merger with Adcom Systems, Inc. 516,343 516 1,548,514
Sale of 522,000 Series B Warrants and 3,342,000
Series C Warrants between June 12 and
September 16, 1992. 38,640
Common stock to be issued in connection
with the merger of Adcom Systems, Inc. 749,995 750 19,500
Sale of common stock in a private offering
between June 15 and August 31, 1993. 2,191,600 2,192 4,381,008.4
Exercise of Stock Options between
April 30, 1993 and January 31, 1994. 605,000 605 29,645
Exercise of Series B Warrants and Series C
Warrants between May 13, 1993 and
February 28, 1994. 1,223,281 1,223 1,652,038
Conversion of accrued salaries to common
stock on June 30, 1993. 62,500 63 124,938
Receipt of stock subscription
Series C Warrants issued to two directors
on November 1, 1993 43,500
Sale of common stock in a private financing
between May 10 and July 15, 1994. 1,831,623 1,832 3,266,588
Stock issued for services in connection with a
private financing in June 1994 42,857 43 (43)
Exercise of Warrants In June of 1994 739,691 740 738,951
Exercise of Stock Options In August and
December of 1994 1,090,000 1,090 53,410
Other 20,000 20 (20)
Stock issued to an officer as compensation 200,000 200 20,800
Stock Issued to Baga as up-front
placement fee 3,000,000 3,000 (3,000)
Exercise of stock options on
date and date 300,000 300 14,700
Sale of common stock in a private financing 456,000 456 85,044
Net loss, Inception to February 29, 1996
------------ -------- ---------------
Balances at February 29, 1996 23,638,540 23,639 12,487,952
Sale of common stock in a private financing 2,000,000 2,000 498,000
Net loss
------------ -------- ---------------
Balances at May 31, 1996 (Unaudited) 25,638,540 $ 25,639 $ 12,985,952
============ ======== ===============
</TABLE>
<TABLE>
<CAPTION>
Stock
Accumulated Subscriptions
Deficit Receivable Total
------------ ------------ ------------
<S> <C> <C> <C>
Issuance of common stock on March 19, 1990. $ $ $ 1,000
Merger with Adcom Systems, Inc. on December
4, 1992 accounted for as a recapitalization,
effective March 19, 1990, inception. (84,279)
Issuance of Preferred Stock in connection
with the transfer mining claims on August
9, 1991, and converted to common stock
simulantaneous with the merger with
Adcom Systems, Inc. on December 4, 1992. 750
Sale of Preferred Stock in private offering
between January 1 and February 14, 1992,
and converted to common stock simultaneous
with the merger with Adcom Systems, Inc. 563,608
Sale of 327,000 Series C Warrants on
January 1, 1992. 3,270
Sale of Preferred Stock in private offering
between March 1 and September 23, 1992,
and converted to common stock simultaneous
with the merger with Adcom Systems, Inc. 1,549,030
Sale of 522,000 Series B Warrants and 3,342,000
Series C Warrants between June 12 and
September 16, 1992. 38,640
Common stock to be issued in connection
with the merger of Adcom Systems, Inc. (20,250) (0)
Sale of common stock in a private offering
between June 15 and August 31, 1993. 4,383,200
Exercise of Stock Options between
April 30, 1993 and January 31, 1994. 30,250
Exercise of Series B Warrants and Series C
Warrants between May 13, 1993 and
February 28, 1994. 1,653,261
Conversion of accrued salaries to common
stock on June 30, 1993. 125,000
Receipt of stock subscription 20,250 20,250
Series C Warrants issued to two directors
on November 1, 1993 43,500
Sale of common stock in a private financing
between May 10 and July 15, 1994. 3,268,420
Stock issued for services in connection with a
private financing in June 1994 0
Exercise of Warrants In June of 1994 739,691
Exercise of Stock Options In August and
December of 1994 54,500
Other 0
Stock issued to an officer as compensation 21,000
Stock Issued to Baga as up-front
placement fee 0
Exercise of stock options on
date and date 15,000
Sale of common stock in a private financing 85,500
Net loss, Inception to February 29, 1996 (9,586,585) (9,586,585)
-------------- ------------ --------------
Balances at February 29, 1996 (9,586,585) 0 2,925,006
Sale of common stock in a private financing 500,000
Net loss (247,563) (247,563)
-------------- ------------ --------------
Balances at May 31, 1996 (Unaudited) $ (9,834,148) $ 0 $ 3,177,443
============== ============ ==============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND 1995, AND THE
CUMULATIVE PERIOD FROM INCEPTION, MARCH 19, 1990 TO MAY 31, 1996
<TABLE>
<CAPTION>
Cumulative
From
Three Three March 19, 1990
Months Ended Months Ended Date of
May 31, 1996 May 31, 1995 Inception
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (247,563) $ (671,892) $ (9,834,148)
Adjustments to Reconcile Net Loss to
Cash Flow Used In Operations:
Depreciation 8,808 13,903 117,508
Gain on the Sale of Marketable Securities (275,020)
Loss on the Disposal of Equipment 65,699
Allowance for Uncollectable Notes Receivable 333,898
Accrued Interest Income on Restricted Marketable
Securities, Treasury Bills and Notes Receivable (14,789) (76,742)
Equity in Loss of Pangold S.A. 31,595
Write Down of Prior Years Mining Claim Costs 913,027
Compensation Portion of Restricted Stock and Warrant Grants 64,500
Decrease (Increase) in Deposits and Prepaid Expenses 8,119 (9,455) (117,271)
Increase (Decrease) in Accounts Payable (3,162) 15,548 (73,368)
Increase in Due to Shareholder and Affliated Entities 643 81 143,748
----------- ----------- -------------
Cash Flows Used In Operating Activities (233,155) (666,604) (8,706,574)
----------- ----------- -------------
Cash Flows From Investing Activities:
Redemption (Purchase) of Treasury Bill - - 0
Increase in Capitalized Mining Claim Costs - - (2,634,810)
Loan to Combined Metals Reduction Company (125,000)
Purchase of Equipment - - (281,567)
Proceeds from the Disposal of Equipment 44,500
Investment in Pangold S.A. - (175,000) (700,000)
Proceeds from the Sale of Marketable Securities 500,000
Investment in dbe Software, Inc. (Note 2) (50,000) (50,000)
Investment in HIS Technologies, AG (Note 2) (500,000) (500,000)
Purchase of Adcom Systems, Inc. - - (84,279)
----------- ----------- -------------
Cash Flows Used In Investing Activities (550,000) (175,000) (3,831,156)
----------- ----------- -------------
Cash Flows From Financing Activities:
Proceeds From Notes Payable - Stockholder - - 781,767
Repayment of Notes Payable - Stockholder - - (25,000)
Increase of Notes Receivable - Related Parties - - (705,000)
Repayment of Notes Receivble - Stockholder - - 532,365
Proceeds From the Sale of Common Stock, Net 500,000 - 9,460,758
Proceeds From the Sale of Series B and Series C Warrants - - 41,910
Proceeds From the Exercise of Series B Warrants - - 1,433,264
Proceeds From the Exercise of Series C Warrants - - 539,997
Proceeds From the Exercise of Options - - 99,750
Receipt of Stock Subscription - - 439,941
----------- ----------- -------------
Cash Flows (Used In) Provided By Financing Activities 500,000 0 12,599,752
----------- ----------- -------------
(Decrease) Increase in Cash (283,155) (841,604) 62,022
Cash, Beginning of Period 345,177 1,485,239 0
----------- ----------- -------------
Cash, End of Period $ 62,022 $ 643,635 $ 62,022
=========== =========== =============
</TABLE>
(Continued)
<PAGE>
SECTOR COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND 1995, AND THE
CUMULATIVE PERIOD FROM INCEPTION, MARCH 19, 1990 TO MAY 31, 1996
<TABLE>
<CAPTION>
Cumulative
From
Three Three March 19, 1990
Months Ended Months Ended Date of
May 31, 1996 May 31, 1995 Inception
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Noncash financing activities involving
the assumption of liabilities and issuance
of capital stock in connection with the
transfer of the mining claims as follows:
Issuance of capital stock $ 750
Assumption of liabilities 517,467
------------
Capitalized mining claim costs 518,217
============
Receipt of marketable securities in connection
with the sale of 250,000 units $ 750,000
Transfer of marketable securities to stockholder in
satisfaction of a note payable (750,000)
------------
$ 0
============
Issuance of capital stock in exchange for a
reduction in the amount due to a stockholder $ 140,000
============
Issuance of common stock in receipt of
notes receivable $ 20,250
============
Issuance of 62,500 shares of common stock in
exchange for a reduction in the amount due
to individual stockholders. $ 125,000
============
Cash paid for interest $ 0 $ 0 $ 5,324
============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1996
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The balance sheet of Sector Communications, Inc. (the "Company") as of May 31,
1996; and the related statements of operations and cash flows for the three
month periods ended May 31, 1996 and 1995, and for the period from May 19, 1990
(inception) to May 31, 1996; and the statement of stockholders' equity for the
three month period ended May 31, 1996 are unaudited. In the opinion of
management of the Company, all adjustments necessary for a fair presentation of
such financial statements have been included.
The February 29, 1996 balance sheet was derived from the audited financial
statements. 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.
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.
Change in Name of the Company
- -----------------------------
Effective June 18, 1996, the name of the Company was changed from Aurtex, Inc.
to Sector Communications, Inc. and its trading symbol on the SmallCap tier of
the Nasdaq Stock Market was changed to SECT.
Approval of the amendment to the Company's Amended and Restated Articles of
Incorporation to change the name was obtained by written consents in lieu of a
meeting, dated May 15, 1996, by the holders of a majority of the voting power of
the outstanding shares of the Company's Common Stock.
6
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1996
Note 2: Acquisitions
Global Communications Group, Inc.
- ---------------------------------
On June 18, 1996, the Company acquired 100% of the capital stock of Global
Communications Group, Inc. ("Global") pursuant to a Stock Purchase and Exchange
Agreement (the "Agreement") between the Company and the holders of all the
capital stock of Global Communications Group, Inc. (the "Global Stockholders")
in exchange for the issuance by the Company of an aggregate of 17,000,000 shares
of its post-split common stock to the Global Stockholders. As a result of the
completion of this acquisition, a change in the control of the Company occurred
and the Global Stockholders acquired the beneficial ownership of approximately
57% of the issued and outstanding shares of Company's common stock.
Immediately prior to closing of the Agreement, the Company took the following
actions:
(a) The Company amended its Amended and Restated Articles of Incorporation to
make effective a one for 5.909635 reverse split of the shares of Company
common stock issued and outstanding as described further in Note 4;
(b) The Company amended its Amended and Restated Articles of Incorporation to
change the name of the Company from Aurtex, Inc. to Sector Communications,
Inc.
(c) The Company declared a stock dividend of 1.25 shares of Company common
stock for each post-split share of Company common stock as described
further in Note 4.
dbe Software, Inc.
- ------------------
On June 17, 1996, the Company entered into a Definitive Investment and Option to
Merge Agreement (the "Agreement") 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 in two stages. The first stage provides that the Company
purchase previously unissued capital stock of DBE representing a 20% capital
stock interest for $1,500,000 (the "Investment"). During May, June and July
1996, the Company invested $500,000 of this amount and, as required by the
Agreement, plans to provide the remaining $1,000,000 on August 17, 1996.
7
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1996
Note 2: Acquisitions(continued)
Should the Company not provide DBE with the full amount of the Investment on or
before August 17, 1996, the Agreement will be terminated and any amounts
provided to DBE shall be converted into an unsecured promissory note bearing
interest at 6% per annum, with all prinicpal and accrued interest due and
payable on April 30, 2001.
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 beginning upon full payment of the Investment,
anticipated to be August 17, 1996 and ending on 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 Agreement also provides for a contingent payment of unregistered Company
common stock to be made to the DBE shareholders based on certain percentages and
achieved levels of sales for a one year period, beginning on the first day of
the second quarter following the date of closing of the second stage.
HIS Technologies AG
- -------------------
On April 18, 1996 the Company entered into a Letter of Intent for the
acquisition of up to 80% of the capital interest in HIS Technologies AG
("Histech"), and on May 27, 1996 entered into a Memorandum of Understanding
("MOU") with Histech in order to clarify certain matters to be contained in a
Definitive Agreement. The Company and Histech are in the process of preparing a
definitive agreement, but have not yet executed one.
The Company is accounting for this investment in DBE and Histech using the cost
method.
Note 3: Investment
Subsequent to May 31, 1996, the Company sold a total of 691,845 shares of
Northfield Minerals, Inc. common stock it held to a stockholder of the Company
for $650,000 in two separate transactions. The market value of the remaining
921,272 shares of restricted Northfield common stock held by the Company has a
market value on July 23, 1996 of approximately $1,275,000 based on the quoted
bid price on the Toronto Stock Exchange.
8
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1996
Note 4: Stockholders' Equity
Common Stock
- ------------
During May 1996, the Company, in an offshore private financing, issued 761,468
shares of Company Common Stock (2,000,000 pre-split/dividend) 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 post-
split/dividend common stock, in an offshore private financing to a current
shareholder of the Company, for net sales proceeds of $250,000.
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 Amended and Restated Articles of
Incorporation approving a reverse split of the Company's outstanding Common
Stock, par value $0.001 per share on the basis of one new share of common stock
of the Company for each 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.
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 it's 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 effect on the Company's capital structure of these
transactions is shown in the table below. The par value of the Company's common
stock and the authorized number of shares were not changed.
9
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 31, 1996
Note 4: Stockholders' Equity (continued)
The impact of the above transactions on the number of shares of common stock
outstanding is as follows:
<TABLE>
<S> <C>
Shares of common stock issued and outstanding
on February 29, 1996 23,638,540
Issuance of additional shares in a Regulation S
offering in May 1996 2,000,000
-----------
Outstanding shares of common stock at May 31, 1996 25,638,540
Impact on outstanding shares of reverse stock split (21,300,110)
Impact of stock dividend 5,423,038
-----------
Shares of outstanding common stock at May 31, 1996
retroactively adjusted for the reverse stock split
and stock dividend 9,761,468
Issuance to Global Communications Group, Inc.
stockholders effective June 18, 1996 17,000,000
Issuance to officers and employees under employment
agreements 800,000
Issuance to directors 333,336
-----------
Shares of common stock issued and outstanding
on June 18, 1996 27,894,804
===========
</TABLE>
Warrants
- --------
Effective June 18, 1996, all outstanding warrants to acquire Common Stock were
adjusted to entitle the holders thereof to purchase proportionately fewer shares
of Company common stock at the proportionately higher exercise price of $0.79
per share.
Note 5: Stock Option Plans
At May 31, 1996, the Company had no options outstanding.
Effective June 18, 1996, the Company granted options for the purchase of 150,000
shares of post split common stock at $1.125 per share, the closing bid price on
that day, under the Company's 1994 Stock Plan to each of two employees. Both
these options vested for the purchase of 50,000 shares on June 17, 1996, with
the remaining shares vesting 50,000 shares on each of June 17, 1997 and June 17,
1998.
10
<PAGE>
Item 6. Management's Plan of Operations
During 1996, the Company changed its corporate strategy and focus and decided to
concentrate its energies and efforts on building the Company into an
international telecommunications and software company through the acquisition of
already existing companies and products, and begin its transition from that of
being a gold exploration company.
On July 18, 1996, the Company acquired 100% of the capital stock interest of
Global Communications Group, Inc. ("Global") and as a part of this acquisition
acquired an option to purchase the assets and liabilities of Global
Communications Technologies, Inc. for one dollar. 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.
Global has experienced periods when its service was disconnected due to what
management believes to be arbitrary and illegal acts of individuals connected
with the Bulgarian Telephone Company (the "BTC"). The State Prosecutors office
in Sofia, Bulgaria has supported the Company's position in these matters and
issued orders for the BTC to restore Global's operations. As of July 24, 1996,
Global's operations have again been subjected to such arbitrary and illegal
suspension by these individuals connected with the BTC. The Company expects
that service will be reinstated shortly.
The Company has entered into a definitive agreement with DBE as described in
Note 2 to the financial statements. The Company has entered into a Letter of
Intent and Memorandum of Understanding with Histech. The Company and Histech
have not yet have entered into, but is in the process of finalizing a definitive
agreement.
The Company also plans to continue expending significant efforts to locate
additional acquisitions and strategic partners.
The Company intends to fund the expansion of Global and the purchase of the
equity interests in Histech and DBE by raising additional equity capital. The
Company has a verbal commitment, from an offshore investment group, of which a
shareholder of Global is a part, for $5,500,000 of which the Company has
received $750,000. The Company is also negotiating with other sources in its
efforts to obtain funding.
The Company's capital requirements under its agreements with Histech and DBE
require the Company to provide these companies with a total of $3,000,000
through August 1996, of which $1,000,000 has already been provided. Upon
completion of these initial capital investments the Company will own 30% and 20%
capital stock interests in Histech and DBE, respectively.
11
<PAGE>
Liquidity
- ---------
As described above, the Company has received a private placement equity
commitment for $5,500,000 from an offshore investment group, of which includes a
shareholder of Global with $750,000 received by the Company. The Company
believes that with the proceeds from this commitment and/or other sources of
equity financing and its current assets, primarily 921,272 shares of Northfield
Minerals, Inc. common stock it will be able to meet its investment commitments
and maintain its current and planned operations for at least the next twelve
months, including the exploration of its Ketchum and Vienna projects described
below. Should the Company's plans change, it will need to raise additional
funds for the acquisition of existing companies or products, expand Global's
telecommunications network, and/or for working capital. The Company will
attempt to raise capital as necessary, however no assurance can be given that
the necessary financing will be available, or if available, that such financing
can be secured on terms acceptable to the Company. If the Company cannot raise
the necessary financing, the Company will sell additional shares of Northfield
common stock it holds to the extent it is able to sell such shares. If adequate
funding is not available to the Company, it may be required to curtail its
business activities accordingly, cease certain operations or expansion plans,
sell certain equity investments, seek out strategic partners or attempt to be
acquired.
Gold Exploration Activities
- ---------------------------
The Company is conducting exploration activities on its Vienna Property and
Ketchum Property.
Vienna Property - Gold exploration activities at the Vienna Property during the
- ---------------
1996 exploration season will included exploration drilling in the Webfoot zone
area of known mineralization. The Company has engaged the services of Lodestone
Group of Englewood, Colorado to direct a gold exploration surface drilling
program to test the Webfoot vein system. Lodestone has completed drilling one
of three scheduled exploration holes and is waiting for the assay results.
The Webfoot zone is the best known of the three large mineralized zones on the
property. On that basis and the results of the drilling program the Company
will decide whether to pay approximately $290,000 by August 31, 1996 to extend
the Exploration License and Option to Purchase Agreement for an additional three
year feasibility period. The Company has the right at the end of the feasibility
period to purchase the property for a payment of $3,500,000 on or before April
15, 1999.
The Company does not have a proven or probable reserve at its Vienna project.
Furthermore, there can be no assurances that the these claims may actually host
an economically minable gold deposit, or that the necessary funding to begin
production could be obtained.
12
<PAGE>
Ketchum Project - The Company has engaged the services of Agricola Metals
- ---------------
Company, a principal of which is a shareholder of the Company, to direct a gold
exploration drilling program which is scheduled to begin in late July, 1996 with
the results available in late August.
The Company also plans to continue to perform the necessary tasks to ensure that
future exploration permits are granted and that good title to the unpatented
mining claims is maintained.
The Company does not have a proven or probable reserve at its Ketchum Project.
Furthermore, there can be no assurances that these claims may actually host an
economically minable gold deposit, or that the necessary funding to begin
production could be obtained.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ----------------------------------------
<S> <C>
10.1 Amendment No. 2 to the Global Communications
Group, Inc. Stock Purchase and Exchange
Agreement
10.2 DBE Definitive Investment and Option to
Merger Agreement
</TABLE>
(b) Reports on Form 8-K:
On July 3, 1996, an 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.
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.
July 22, 1996 /s/ Theodore Georgelas
------------------------
Theodore Georgelas
President and Chief
Executive Officer
13
<PAGE>
Sector Communications, Inc.
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- --------- ---------------------------------------------- ----
<S> <C> <C>
10.1 Amendment No. 2 to the Stock Purchase and
Exchange Agreement with Global Communications
Group, Inc. 15
10.2 DBE Definitive Investment and Option to Merger
Agreement 17
</TABLE>
14
<PAGE>
AMENDMENT NO. 2 TO STOCK PURCHASE AND EXCHANGE AGREEMENT
--------------------------------------------------------
This AMENDMENT NO. 2 TO STOCK PURCHASE AND EXCHANGE AGREEMENT is made and
entered into as of June 14, 1996 among Aurtex, Inc., a Nevada Corporation
("Parent") and the person and entities listed as "Shareholders" on the signature
page hereof (the "Shareholders") who are all of the shareholders of Global
Communications Group, Inc., a Texas corporation ("Company").
RECITALS
--------
A. The parties have previously entered into a Stock Purchase and Exchange
Agreement dated April 19, 1996 (the "Stock Purchase Agreement") pursuant to
which the Parent is to acquire all of the issued and outstanding capital stock
of the Company from the shareholders in exchange for shares of the Common Stock,
$0.001 par value, of Parent (Parent Common Stock"). All capitalized terms used
herein which are not defined herein shall have the meaning given them in the
stock Purchase Agreement.
B. The parties wish to amend the Stock Purchase Agreement to reflect the
changes in the stock ownership of the Company and the allocations of the Parent
Common Stock, all on the terms and conditions set forth herein.
AGREEMENT
---------
1. Exhibits A and B of the Stock Purchase Agreement shall be hereby amended
to read in their entirety as follows:
EXHIBIT A
SHAREHOLDERS OF GLOBAL COMMUNICATIONS GROUP, INC.
-------------------------------------------------
<TABLE>
<CAPTION>
a) Name b) Number of Global Shares
---- -----------------------
<S> <C> <C>
Telecom Partners, Ltd 941.18
Arnold Salinas 19.61
Angel Stoicher 31.37
Charles Petrov 7.84
--------
</TABLE>
1,000.00
=========
EXHIBIT B
SHARE OF AURTEX TO BE RECEIVED
------------------------------
<TABLE>
<CAPTION>
a) Name b) Number of Global Shares
---- -----------------------
<S> <C> <C>
Telecom Partners, Ltd 16,000,000
Arnold Salinas 333,333
Angel Stoicher 533,322
Charles Petrov 133,288
------------
17,000,000
============
</TABLE>
15
<PAGE>
2. Except as specifically provided herein, the Stock Purchase Agreement
shall not be amended or modified and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this AMENDMENT NO. 2 TO
THE STOCK PURCHASE AND EXCHANGE AGREEMENT to be executed as of the date first
written above.
PARENT:
AURTEX, INC.
By:
---------------------
Theodore Georgelas
President and Chief Executive Officer
SHAREHOLDERS:
TELECOM PARTNERS, LTD.
By:
---------------------
Mohamed A. Hadid, Co-Chairman
- --------------------------
Arnold Salinas
- --------------------------
Angel Stoicher
- --------------------------
Charles Petrov
16
<PAGE>
DEFINITIVE INVESTMENT AND OPTION TO MERGE AGREEMENT
---------------------------------------------------
THIS DEFINITIVE INVESTMENT AND OPTION TO MERGE AGREEMENT (the "Agreement")
made this 19th day of June, 1996, by and between DBE SOFTWARE, INC., a Delaware
corporation ("DBE"), and SECTOR COMMUNICATIONS, INC. (formerly known as AURTEX,
INC.), a Nevada corporation ("Sector").
WITNESSETH:
WHEREAS, Sector desires to purchase from DBE, and DBE desires to sell to
Sector, shares of its authorized but previously unissued Common Stock
representing twenty percent (20%) of the total outstanding shares on a fully
diluted basis; and
WHEREAS, Sector desires to acquire an option from DBE, and DBE desires to
grant such option to Sector, for DBE to be merged into Sector or a wholly owned
subsidiary of Sector on the terms more particularly set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties and promises set forth herein, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties intending to be legally bound hereby, agree as
follows:
ARTICLE I
EQUITY INVESTMENT
1.1 Stock Subscription. Sector hereby subscribes for and agrees to
------------------
purchase two hundred ten thousand eight hundred sixty-two (210,862) shares of
authorized but unissued DBE Common Stock, par value One Cent ($0.01) per share,
which shares shall represent twenty percent (20%) of the outstanding Common
Stock (on a fully diluted
17
<PAGE>
basis, assuming the exercise of all the outstanding warrants and options) of DBE
following the purchase by Sector (the "Company Stock"), and agrees to pay for
the Company Stock a total purchase price of One Million Five Hundred Thousand
Dollars ($1,500,000) (the "Purchase Price"), payable as follows:
1.1.1 Two Hundred Thousand Dollars ($200,000) cash (the "Initial
Payment") shall be paid to DBE upon execution hereof by Sector and DBE (the
"Closing Date") as a deposit towards the Company Stock. The Initial Payment
shall be reduced by any funds Sector has previously advanced to DBE prior to
the date of this Agreement;
1.1.2. Three Hundred Thousand Dollars ($300,000) cash shall be paid
within thirty (30) days following the Closing Date (the "Second Payment") as
a deposit towards the Company Stock; and
1.1.3. The balance of the Purchase Price, in the amount of One Million
Dollars ($1,000,000) (the "Balance"), shall be paid to DBE on or before sixty
(60) days from the Closing Date.
1.2. Conversion to Note. In the event Sector shall fail to pay the Second
------------------
Payment or the Balance as required herein, Sector's Option to merge under this
Agreement shall be terminated and the Initial Payment, Second Payment and any
other amounts paid to DBE as a deposit towards the Company Stock shall be
converted to an unsecured loan to DBE (evidenced by a promissory note executed
by DBE) bearing interest at six percent (6%) per annum, with all principal and
18
<PAGE>
accrued interest due and payable on April 30, 2001, and Sector shall have no
further right, title or interest in the Company Stock or any further rights
under this Agreement.
1.3. DBE Shareholders. A list of the shareholders, option holders and
----------------
warrant holders (hereinafter referred to as "Holders") of DBE, with the number
of shares, options or warrants held by each such Holder as of May 15, 1996 is
attached hereto as Exhibit A. The Company Stock to be issued upon payment in
full of the Purchase Price shall equal, at the Closing Date, twenty (20%)
percent of the total outstanding Common Stock of DBE, assuming the exercise of
all such outstanding warrants and options.
1.4. Director. Upon payment in full of the Purchase Price upon the
--------
terms and conditions specified herein and so long as Sector shall own the
Company Stock, Sector shall have the right to name the greater of one director
or one-quarter (1/4) of the number of directors then constituting the Board of
Directors of DBE, it being understood that the Board of Directors of DBE will be
expanded on or before such time to include at least three (3) directors.
ARTICLE II
OPTION TO MERGE
2.1. Option to Merge. Subject to Sector complying in all respects
---------------
with its obligation to purchase the Company Stock pursuant to the terms and
conditions specified in Article I hereof, DBE hereby grants an option to Sector
(the "Option") for DBE to be merged into Sector (or a wholly-owned subsidiary of
Sector) (the "Merger") solely on the terms and conditions specified in this
Article II. It is
19
<PAGE>
understood and agreed that the Merger must be consummated and effective on or
before August 19, 1997 but such date may be extended to not later than October
19, 1997 if (a) any DBE stockholder has opted to receive shares of Sector Common
Stock pursuant to (S)2.5 hereof, (b) a registration statement as contemplated by
(S)2.6 hereof has been filed prior to July 19, 1997 and (c) Sector is diligently
pursuing obtaining the effectiveness of such registration statement; provided,
however, that if such registration statement is not declared effective after
August 19, 1997 and before October 19, 1997, Sector shall, if it is in
compliance with all of the other terms and conditions of this Article II, still
have the right to consummate the Merger on or before October 19, 1997 for the
consideration specified in (S)2.4 hereof. For purposes of this Agreement, the
date that the Merger shall be effective shall be hereinafter referred to as the
"Merger Date." Sector understands that strict compliance shall be required with
each and every provision of this Article II in order for the Option to be
exercised and the Merger to be consummated, it being understood that the Merger
cannot be consummated unless such strict compliance has been achieved.
2.2. Merger. At least sixty (60) days prior to August 19, 1997,
------
Sector shall deliver written notice to DBE of its intent to exercise the Option.
Upon the effectiveness of the Merger, DBE shall merge with and into Sector or a
wholly-owned subsidiary thereof, as designated by Sector. On the Merger Date
and the issuance of the appropriate documentation by the state authorities
having jurisdiction thereof, the separate existence of DBE shall cease, and
20
<PAGE>
Sector (or its subsidiary) shall survive and shall succeed to all the rights,
privileges, immunities, and franchises, and all the property, real, personal,
and mixed, of DBE without the necessity for any separate transfer. Sector or
its subsidiary shall thereafter be responsible and liable for all liabilities
and obligations of DBE, and neither the rights of creditors nor any liens on the
property of DBE shall be impaired by the Merger.
2.3. Plan of Merger. Upon the exercise of the Option, the Parties
--------------
agree to enter into and adopt a Plan of Merger (and/or an Agreement and Plan of
Merger) consistent with the terms hereof which prescribes the terms and
conditions of the Merger, the method of carrying it into effect, and the
consideration to be received for the shares of DBE Common Stock and the options
and warrants to acquire shares of DBE Common Stock. The Plan of Merger shall be
submitted for the approval of the stockholders of DBE (and, if applicable, the
stockholders of Sector or the subsidiary of Sector) in the manner provided by
applicable law and, subject to any applicable fiduciary duties and fiduciary
limitations, DBE and Sector shall use their best efforts to obtain the necessary
approval of such stockholders so voting.
2.4. Consideration Paid in Merger. The consideration to be paid in
----------------------------
the Merger shall be an aggregate of Ten Million Six Hundred Thousand Dollars
($10,600,000) in cash, which shall be paid to an independent exchange agent (the
"Agent") selected by DBE prior to the Merger, such amount to be allocated solely
among the stockholders of DBE (other than Sector and its transferees, if any)
and the option
21
<PAGE>
and warrant holders of DBE, as of the record date fixed by the DBE Board of
Directors for determination of entitlement to such consideration (collectively,
the "Record Holders"). The amount to be paid to each optionholder or warrant
holder shall assume the exercise of each outstanding option or warrant with such
holder receiving the difference between the per share price to be received by
the Record Holders who are stockholders and the exercise price of their
respective option or warrant.
2.5. Option to Take Sector Stock. Each of the Record Holders who is
---------------------------
a stockholder of DBE shall have the right, at his or her sole option, to receive
in lieu of the cash payment to which such Record Holder is entitled shares of
Sector Common Stock; for these purposes, the value of the Sector Common Stock
shall be determined by the average of the closing bid price of Sector Common
Stock on the NASDAQ Small Cap Market or other market in which such Common Stock
is traded beginning sixty-one (61) calendar days prior to the Merger and ending
on the date three (3) business days prior to the Merger. After the Merger, each
Record Holder so desiring to obtain Sector Common Stock shall surrender
certificates for shares of DBE Common Stock to Sector or to its duly appointed
agent, in such manner as Sector shall require. On receipt of such share
certificates, Sector shall issue and exchange therefor certificates for shares
of Sector Common Stock representing the number of shares of such stock to which
such Record Holder is entitled as provided above. 2.6. Registered Stock.
----------------
Any Sector Common Stock to be issued under (S)2.5 hereof shall be registered for
issuance and resale under the Securities Act of 1933
22
<PAGE>
on a Registration Statement on the appropriate form filed with the Securities
and Exchange Commission ("SEC"). On or before July 19, 1997, Sector shall
prepare and file at its sole cost and expense the appropriate form and any other
documents required by the Securities Act of 1933 and the rules and regulations
thereunder. Sector shall cause such registration statement to be declared
effective on or before the Merger Date. DBE shall furnish Sector all
information concerning DBE as may be reasonably requested in connection with the
filing of the Registration Statement.
2.7. Contingent Consideration in Merger. Not later than sixteen
----------------------------------
(16) months after the Merger Date, Sector shall distribute to the Record Holders
newly-issued, unregistered (but otherwise freely transferable) shares of Common
Stock of Sector (based upon the average of the closing bid price of such stock
for thirty (30) trading days preceding the date of payment) in an aggregate
amount (the "Contingent Payment") that is equal to:
2.7.1. Forty-five percent (45%) of gross revenues (including
maintenance revenues) from products owned by DBE on the Merger Date
during the one (1) year period commencing upon the first day of the
second fiscal quarter following the Merger Date ("Contingent Year"). For
these purposes, DBE product sales shall include the sale of those
products which are owned by DBE as of the Merger Date;
2.7.2. Twenty percent (20%) of the gross revenues (including
maintenance revenues) during the Contingent Year
23
<PAGE>
for those products which DBE does not own but has a license or right to
distribute, providing, however:
2.7.3. There shall be no Contingent Payment due if the total sales
volume generated by DBE during the Contingent Year does not exceed Ten
Million Dollars ($10,000,000). There shall be no limit to the amount of
the Contingent Payment. All calculations of the Contingent Payment
amount shall be computed in accordance with generally accepted
accounting principles and the report thereof shall be prepared by
Sector's independent certified public accountant, subject to audit by
representatives selected by DBE prior to the Merger Date; in the event
that such audit reveals a reported variance of more than two percent
(2%), such audit shall be at the expense of Sector.
2.7.4. There shall be no option to receive cash in lieu of Sector
Common Stock for the Contingent Payment.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DBE.
3.1. Representations and Warranties of DBE. DBE represents, warrants
-------------------------------------
and covenants, as the case may be, to Sector, and confirms that Sector is
relying upon the accuracy of each and every one of such representations and
warranties and upon the performance of each and every one of such covenants as
follows, each of which shall be true and correct on the date of this Agreement
and on and as of the
24
<PAGE>
Merger Date as though such representations and warranties had been made on and
as of both such dates.
3.2. Organization. DBE is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware, has the
corporate power to own, lease and operate its property and to carry on its
business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including intangible assets), financial
condition, results of operations or prospects ("Material Adverse Effect") of
DBE. DBE has previously delivered to Sector a true and correct copy of the
charter documents of DBE, as amended to date.
3.3. Authority. DBE has the corporate power to enter into this
---------
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by the Board of Directors of DBE. This
Agreement constitutes a valid and binding obligation of DBE enforceable in
accordance with its terms. The execution and delivery of this Agreement by DBE
does not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under:
(i) any provision of the Certificate of Incorporation, as amended, or Bylaws of
DBE; or (ii) any material
25
<PAGE>
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to DBE or its properties or assets
other than any such conflicts, violations, defaults, terminations, cancellations
or accelerations which would not have a Material Adverse Effect on DBE. DBE
believes there are no necessary consents, waivers and approvals of third parties
material to the operations of DBE that are required to be obtained by DBE in
connection with the execution and delivery of this Agreement by DBE and the
performance of the obligations hereunder or thereunder prior to the Closing
Date.
3.4. Capital Structure. The authorized capital stock of DBE is 100
-----------------
shares of Preferred Stock, no par value, and 2,000,000 shares of Common Stock,
$0.01 par value. As of May 15, 1996, 754,449 shares of DBE Common Stock were
validly issued and outstanding, fully paid, and nonassessable and no shares of
Preferred Stock were issued and outstanding, and, since that date through the
Closing Date, no additional shares of Capital Stock of DBE have been issued. As
of the date of this Agreement, except for warrants and options to acquire an
aggregate of 89,000 shares of DBE Common Stock, there are no outstanding
warrants, options, agreements, convertible or exchangeable securities or other
commitments pursuant to which DBE is or may become obligated to issue, sell,
purchase, retire or redeem any shares of capital stock or other securities.
3.5. DBE Financial Statements. DBE has made available true and
------------------------
complete copies of its unaudited financial statements for the
26
<PAGE>
year ended December 31, 1995 (the "DBE Financial Statements"). The unaudited
financial statements of DBE present fairly, in all material respects, the
financial position of DBE as at the dates thereof and the results of its
operations and cash flows for the periods then ended; and are, in all material
respects, in accordance with the books of account and records of DBE.
3.6. No Undisclosed Liabilities. DBE does not have any material
--------------------------
liabilities, either accrued or contingent (whether or not required to be
reflected in financial statements in accordance with GAAP, and whether due or to
become due, which individually or in the aggregate: (a) have not been reflected
in DBE Financial Statements; (b) are not normal or recurring liabilities
incurred since December 31, 1995 in the ordinary course of business consistent
with past practices; or (c) disclosed on Exhibit B attached hereto and made a
part hereof).
3.7. Absence of Certain Changes or Events. Since the date of the DBE
------------------------------------
Financial Statements, DBE has conducted its businesses only in the ordinary
course and in a manner consistent with past practice and, since such date, there
has not been (i) any damage, destruction or loss (whether or not covered by
insurance) with respect to DBE having a Material Adverse Effect on DBE; (ii) any
material change by DBE in its accounting methods, principles or practices to
which Sector has not previously consented in writing; (iii) any revaluation by
DBE of any of its assets having a Material Adverse Effect on DBE, including,
without limitation, writing down the value of capitalized software or inventory
or writing off notes or accounts receivable
27
<PAGE>
other than in the ordinary course of business; or (iv) any other action or event
that would have required the consent of Sector pursuant to Section 6 had such
action or event occurred after the date of this Agreement and had a Material
Adverse Effect on DBE.
3.8. Title of Properties; Absence of Liens and Encumbrances;
-------------------------------------------------------
Condition of Equipment. DBE has good and marketable title to its assets, free
- ----------------------
and clear of any liens or encumbrances. DBE owns or possesses all rights and
licenses necessary to develop, market and sell in an unrestricted manner its
software products or other intellectual property and except as listed on Exhibit
C attached hereto and made a part hereof, DBE has not granted any rights or
licenses to any third party to develop, market or sell such products except
those listed on Exhibit C and DBE shall provide an updated list as of the
Merger. No claims relating to its software products have been made against DBE
and to DBE's knowledge no such claim has been threatened and no basis exists for
any such claim and no person has infringed or materially violated DBE's rights
in any of its intellectual property. To the best of DBE's knowledge, the
conduct of the business of DBE does not conflict with any patents, patent
rights, licenses, trademarks, trademark rights, trade names, trade name rights
or copyrights of others. Also, to the best of DBE's knowledge, all the
equipment owned or leased by DBE is, taken as a whole: (i) adequate for the
conduct of the business of DBE consistent with its past practice; (ii) suitable
for the uses to which it is currently employed; (iii) in good operating
condition, subject to normal wear and tear; (iv) reasonably maintained; and (v)
28
<PAGE>
not obsolete, dangerous or in need of renewal or replacement, except for renewal
or replacement in the ordinary course of business.
3.9. Agreements, Contracts and Commitments. To the best of DBE's
-------------------------------------
knowledge, DBE has not breached, or received in writing any claim or threat that
it has breached, any of the terms or conditions of any material agreement,
contract or commitment ("Material Contracts") to which it is a party in such a
manner as would permit any other party to cancel or terminate the same or would
permit any other party to seek material damages from DBE thereunder. Each
Material Contract is in full force and effect and, except as otherwise
disclosed, is not subject to any material default thereunder of which DBE is
aware by any party obligated to DBE pursuant thereto. DBE has provided Sector
with an opportunity to review true and complete copies of all Material Contracts
to which it is a party or by which it may be bound.
3.10. Litigation. There is no action, suit or proceeding, claim,
----------
arbitration or investigation pending, or as to which DBE has received any notice
of assertion nor, to DBE's knowledge, is there a reasonable basis to expect such
notice of assertion against DBE which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay any of the transactions contemplated
by this Agreement or which could reasonably be anticipated to have a Material
Adverse Effect on DBE taken as a whole.
29
<PAGE>
3.11. Taxes. All tax returns and reports with respect to DBE
-----
required by law to be filed under the laws of any jurisdiction, domestic or
foreign, have been duly and timely filed (or appropriate extensions therefor
have been obtained) and all taxes, fees, interest, penalties and other
governmental charges of any nature which were required to have been paid or
provided for in DBE's financial statements. DBE has no knowledge of any
material unpaid taxes or any actual or threatened assessments of deficiencies or
additional taxes or other governmental charges or any basis for such a claim
against DBE. DBE has no knowledge of any tax audit or investigation by any
taxing or other authority in connection with any of its fiscal years and no
knowledge of any such audit or investigation currently threatened, and there are
no tax liens on any of the assets or properties of DBE.
3.12. Employment Agreements. DBE is not a party to any employment
---------------------
contract with any of its officers, directors or employees.
ARTICLE IV
REPRESENTATIONS, WARRANTIES, COVENANTS OF SECTOR.
4.1. Representations, Warranties, Covenants of Sector. Sector
------------------------------------------------
represents and warrants to DBE, except as otherwise disclosed in the Sector SEC
Reports (as defined below) as follows, each of which shall be true and correct
on the date of execution hereof and on and as of the Closing Date and Merger
Date as though such representations and warranties had been made on and as of
such dates:
4.2. Organization of Sector. Sector is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of
30
<PAGE>
Nevada, has the corporate power to own, lease and operate its property and to
carry on its business as now being conducted and as proposed to be conducted,
and is duly qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a Material Adverse Effect on Sector.
4.3. Authority. Sector has all requisite corporate power and
---------
authority to own and lease its properties, to carry on its business as now
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action. This Agreement has been duly executed and
delivered by Sector and constitutes the valid and binding obligations of Sector,
enforceable in accordance with its terms. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of a benefit
under: (a) any provision of the Articles of Incorporation or bylaws of Sector;
or (b) any material mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Sector or its
properties or assets other than any such conflicts, violations, defaults,
terminations, cancellations or
31
<PAGE>
accelerations which would not have a Material Adverse Effect on Sector.
4.4. SEC Documents; Sector Financial Statements. Sector has
------------------------------------------
previously furnished DBE with true and complete copies of its (i) Annual Report
on Form 10-K for the years ended February 28, 1994 and 1995 as filed with the
Commission, (ii) Quarterly Reports on Form 10-Q for the quarters ended May 31,
1995, and August 31, 1995 and November 30, 1995 as filed with the Commission,
(iii) proxy statement related to its 1995 Annual Meeting of Shareholders, and
(iv) all other reports (and any amendments thereto) filed with the Commission
since the filing of its Form 10-K for the year ended February 28, 1995 that
Sector was required to file with the Commission pursuant to the Securities
Exchange Act of 1934 and the rules and regulations of the Commission thereunder
since that date (the documents referred to in clauses (i) through (iv) being
referred to herein collectively as the "SEC Reports"). As of their respective
dates, the SEC Reports complied in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission thereunder
applicable to such SEC Reports. As of their respective dates, the SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited financial statements and unaudited interim financial
statements of Sector included in the SEC Reports comply in all material respects
with applicable accounting requirements and with
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the published rules and regulations of the Commission with respect thereto. The
financial statements included in the SEC Reports have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto); present
fairly, in all material respects, the financial position of Sector as at the
dates thereof and the results of its operations and cash flows for the periods
then ended subject, in the case of the unaudited interim financial statements,
to normal year-end audit adjustments, any other adjustments described therein
and the fact that certain information and notes have been condensed or omitted
in accordance with the Exchange Act and the rules promulgated thereunder; and
are, in all material respects, in accordance with the books of account and
records of Sector.
4.5. Governmental Approval. No consent, approval, order or
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authorization of, or registration, declaration or filing with, any Governmental
Entity, is required by or with respect to Sector in connection with the
execution and delivery of this Agreement by Sector or the consummation by Sector
of the transactions contemplated hereby, except for: (i) the filing of a Form
8-K with the SEC within 15 days after the payment of the Balance; (ii) any
filings as may be required under applicable Federal or state securities laws and
the laws of any foreign country (to the extent that any Sector Common Stock is
to be issued in connection with the Merger); and (iii) such other consents,
authorizations, filings, approvals and registrations
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which if not obtained or made would not have a Material Adverse Effect on
Sector.
ARTICLE V
CONDUCT OF BUSINESS
5.1. Covenants as to Conduct of Business by DBE. In
------------------------------------------
consideration of Sector entering into this Agreement, DBE hereby covenants and
agrees that from the date of this Agreement and continuing until the earliest of
(a) August 19, 1997, (b) any termination of this Agreement or (c) the failure of
Sector to comply with any of its obligations under Article I hereof within the
time period specified therein, DBE shall carry on its business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, to pay its debts and taxes when due subject to good faith disputes
over such debts or taxes, to pay or perform other obligations when due, and, to
the extent consistent with such business, use all reasonable efforts consistent
with past practices and policies to preserve intact DBE's present business
organizations, keep available the services of its present officers and key
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealing with DBE,
to the end that DBE's goodwill and ongoing businesses shall be unimpaired. DBE
shall use its best efforts to:
(a) maintain insurance coverage and its books, accounts and records in
the usual manner consistent with prior practices;
(b) comply in all material respects with all laws, ordinances and
regulations applicable to DBE;
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(c) maintain and keep its properties and equipment in good repair,
working order and condition, ordinary wear and tear excepted;
(d) perform in all material respects its obligations under all
contracts and commitments to which it is a party or by which it is
bound, in each case other than where the failure to so maintain, comply
or perform, either individually or in the aggregate, would result in a
Material Adverse Effect. DBE shall not permit DBE to enter into any
agreement or take any action which would have a Material Adverse Effect
on DBE. DBE shall promptly notify Sector if any event, agreement or
occurrence has had a Material Adverse Effect on DBE; and
(e) permit Sector to inspect at all reasonable times and upon
reasonable notice any sales results of DBE or any financial results of
DBE.
Except as expressly contemplated by this Agreement, without the prior
written consent of Sector, such consent not to be unreasonably withheld, DBE
shall not:
(a) Sell, lease or otherwise dispose of all or substantially all of
its properties or assets or any of DBE's internally developed software
---
or other intellectual property, except in the ordinary course of
business;
(b) Transfer to any person or entity or otherwise extend, amend or
modify any rights to DBE's software products or intellectual property or
enter into grants to future patent rights, other than licenses and
grants of rights (including,
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without limitation, distribution rights) in connection with the sale of
systems, goods or services entered into in the ordinary course of
business consistent with past practices;
(c) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to the business of DBE, or enter into any joint ventures,
partnerships or agreements with respect thereto; provided, however, that
the foregoing shall not be construed as placing any limitation on the
unrestricted right of DBE to acquire software products;
(d) Violate, amend or otherwise modify the terms of any of the
Material Contracts to which DBE is a party in a way that would have a
Material Adverse Effect;
(e) Commence a lawsuit other than: (i) for the routine collection of
bills; or (ii) in such cases where DBE in good faith determines that
failure to commence suit would result in the material impairment of a
valuable aspect of DBE's business;
(f) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu
of or in substitution
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for shares of Common Stock of DBE, or repurchase or otherwise acquire,
directly or indirectly, any shares of its capital stock, except from
former employees, directors and consultants in accordance with
agreements providing for the purchase of Common Stock in connection with
any termination of service to DBE or otherwise;
(g) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(h) Incur any indebtedness for borrowed money (other than ordinary
course trade payables or pursuant to the existing credit facility) in
excess of Two Hundred Thousand ($200,000) or guarantee any such
indebtedness or issue or sell any debt securities of DBE or guarantee
any debt securities of others;
(i) Adopt or amend any employee benefit or stock purchase or option
plan, enter into any employment contract, pay any special bonus or
special remuneration to any director or employee, increase the salaries
or wage rates of its employees other than in the ordinary course, or
grant any severance or termination pay: (i) to any director or officer;
or (ii) to any other employee who are presently Stockholders;
(j) Revalue any of its assets, including without limitation, writing
down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(k) Pay, discharge or satisfy in an amount in excess of Fifty Thousand
Dollars ($50,000) except in connection with trade
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payables (in any one case or in the aggregate), any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) or any liability reflected on DBE's balance sheet as of the
Closing Date;
(l) Make or change any material election in respect of taxes, adopt or
change any accounting method in respect of taxes, enter into any closing
agreement, or settle any claim or assessment in respect of taxes, or
consent to any waiver of the limitation period applicable to any claim
or assessment in respect of taxes;
(m) Make any expenditure, repay any amounts, or enter into any contact
or agreement to expend more than Fifty Thousand Dollars ($50,000) other
than as specifically authorized above; and
(n) Take, or agree in writing or otherwise to make, any of the actions
described in Section 7 (a) through (m) above, or any action which would
make any of the representations or warranties of DBE contained in this
Agreement untrue or incorrect or prevent DBE from performing or cause
DBE not to perform its covenants hereunder.
ARTICLE VI
TERMINATION
6.1. Mutual Agreement. This Agreement may be terminated and
----------------
abandoned at any time by the mutual written consent of DBE and Sector.
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6.2. Disputes. In the event of a dispute under this Agreement, in
--------
addition to all other available remedies, the prevailing party shall be entitled
to an award of its costs and reasonable attorneys' fees in connection herewith.
6.3. Jurisdiction. The parties hereto agree that exclusive
------------
jurisdiction of any dispute hereunder shall lie in the Circuit Court of Fairfax
County, Virginia and in the United States District Court for the Eastern
District of Virginia.
6.4. Remedies. In the event (i) DBE shall fail to deliver the Cash
--------
Stock to Sector or (ii) DBE otherwise breaches this Agreement, Sector may, at
its sole option, but not as its exclusive remedy: (a) seek specific performance
of DBE's obligations hereunder, or (b) pursue all other available remedies at
law or in equity.
ARTICLE VII
GENERAL PROVISIONS
7.1. Assignment. Neither party may assign, by operation of law or
----------
otherwise, all or any portion of its rights or duties under this Agreement
without the prior written consent of the other party, which consent may be
withheld in the absolute discretion of the party being asked to give consent.
7.2. Confidentiality. Neither party shall, without the consent of
---------------
the other parties hereto, issue a press release or otherwise publicize the
transactions contemplated by this Agreement or otherwise disclose the nature or
contents of this Agreement on or prior to the Closing Date, except as otherwise
required by applicable law, regulation or NASD requirement. No information,
documents or
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reports provided to or obtained by either party in connection with this
transaction shall be disclosed to any nonparty, except as required in carrying
out the transactions contemplated hereby. In the event this Agreement is
terminated as permitted herein, each party shall return to the other party
(without retaining copies) all such documents, information and reports.
7.3. Expenses. Except as otherwise expressly provided herein, the
--------
parties will each pay their own costs and expenses, including legal and
accounting expenses, related to the transactions provided for herein,
irrespective of when incurred.
7.4. Notices. Any notice or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given on the date of service if served personally, or five days after the date
of mailing if mailed, by first class mail, registered or certified, postage
prepaid and addressed as follows:
If to Sector, to: Sector, Inc.
7601 Lewinsville Road, Suite 250
McLean, Virginia 22102
ATTENTION: Ted Georgelas, President
Telephone Number: (703) 821-1540,
Ext. 570
Fax Number: (703) 893-3426
with a copy to: Haas & Dennis, P.C.
1749 Old Meadow Road, Suite 300
McLean, Virginia 22102
ATTENTION: Robert W. Haas, Esquire
Telephone Number: (703) 827-4050
Fax Number: (703) 734-3046
If to DBE, to: Sector Communications, Inc.
7601 Lewinsville Road, Suite 200
McLean, Virginia 22102
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ATTENTION: Luiz Siqueira, President
Telephone Number: (703) 847-9500
Fax Number: (703) 556-0089
with a copy to: Tucker, Flyer & Lewis, P.C.
1615 L Street, N.W.
Suite 400
Washington, D.C. 20036-5612
ATTENTION: Jack L. Lewis, Esquire
Telephone Number: (202) 452-8600
Fax Number: (202) 429-3231
Or at such other address as a party has designated by notice in writing to the
other party in the manner provided by this Section.
7.5. Entire Agreement. This Agreement between the parties hereto:
----------------
(a) constitutes the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both written and oral, between the parties with respect to the subject matter
hereof; (b) is not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise, except as otherwise specifically provided. This Agreement may only
be amended by written instrument signed by the parties.
7.6. Survival of Terms. All warranties, representations and
-----------------
covenants contained in this Agreement and any certificate or other instrument
delivered by or on behalf of the parties pursuant to this Agreement shall
survive the Closing Date.
7.7. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Virginia.
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7.8. Severability. In the event that any provision of this
------------
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
7.9. Headings. The headings appearing at the beginning of several
--------
Sections contained herein have been inserted for identification and reference
purposes and shall not themselves determine the construction or interpretation
of this Agreement.
7.10. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which when taken together
shall constitute one and the same instrument. Any signature required hereunder
may be by facsimile.
7.11. Mutual Contributions. The parties to this Agreement and their
--------------------
counsel have mutually contributed to its drafting; therefore, the rule that a
document shall be construed against the drafting party is waived in this case.
7.12. Further Assurances. The parties hereto shall execute and
------------------
deliver or cause to be executed and delivered, such supplements hereto and such
further instruments as may be reasonably required for
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carrying out the intention of the parties to, or facilitating the performance of
this Agreement, including, among others, the Plan of Merger, Stockholders'
consents thereto and Certificates of Merger.
7.13. DBE Major Stockholders' Commitment to Vote. By their consent
------------------------------------------
below, the undersigned DBE Stockholders, who collectively own more than eighty
percent (80%) of the issued and outstanding shares of Common Stock of DBE on the
date of this Agreement, hereby agree (i) to vote their shares of DBE Common
Stock to implement the terms hereof and (ii) to ensure that prior to the Merger
Date the shares of Common Stock subject to this (S)7.13 shall constitute a
majority of the shares of capital stock of DBE entitled to vote on the Merger.
Any transferees or assignees of such Stockholders' shares shall be subject to
such agreement to vote, and a legend to that effect shall be placed upon any
certificates representing the Common Stock of DBE held by such Stockholders.
IN WITNESS WHEREOF, the parties have caused
this Agreement to be executed as of the day and year first above written.
SECTOR COMMUNICATIONS, INC.
By:
--------------------------
Theodore Georgelas,
President
DBE SOFTWARE, INC.
By:
--------------------------
Luiz Siqueira, President
The provisions of (S)7.13 of the foregoing DEFINITIVE INVESTMENT AND OPTION TO
MERGE AGREEMENT are hereby CONSENTED AND AGREED TO:
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- -------------------------------
Paul T. Sterbutzel
- -------------------------------
Luiz Siqueira
- -------------------------------
Jorge Marmion Stus
44
