<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 18, 1996
Sector Communications, Inc.
(Exact name of registrant as specified in its charter)
Commission File Number: 0-22382
Nevada 56-1051491
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7601 Lewinsville Road, Suite 200, McLean, Va. 22102
(Address of principal executive offices)
(703) 761-1500
Registrant's telephone number
<PAGE>
Item 1. Changes in Control of Registrant
--------------------------------
On June 18, 1996, the Registrant completed a stock purchase and share exchange
and related transactions (collectively the "Share Exchange") pursuant to a Stock
Purchase and Exchange Agreement (the "Agreement") among the Registrant and the
holders of all the capital stock of Global Communications Group, Inc. (the
"Global Stockholders"). The Registrant acquired all of the issued and
outstanding shares of capital stock of Global in exchange for the issuance by
the Registrant of an aggregate of 17,000,000 shares of common stock, par value
$0.001 per share of the Registrant ("Registrant Common Stock") to the Global
Stockholders.
As a result of the completion of the Share Exchange, a change in the control of
the Registrant has occurred. In connection with the Share Exchange, the Global
Stockholders acquired the beneficial ownership of approximately 57% of the
issued and outstanding shares of Registrant Common Stock. The amount of
consideration paid by the Registrant in the Share Exchange was determined
through arms-length negotiations between the Registrant and the Global
Stockholders, based upon the business, financial condition, operations,
management and prospects of the Registrant and Global Communications Group, Inc.
("Global").
Immediately prior to closing of the Agreement, the Registrant took the following
actions:
(i) The Registrant amended its Amended and Restated Articles of
Incorporation to make effective a one for 5.909635 reverse split of the
shares of Registrant Common Stock issued and outstanding;
(ii) The Registrant amended its Amended and Restated Articles of
Incorporation to change the name of the Registrant from Aurtex, Inc. to
Sector Communications, Inc.
(iii) The Registrant declared a stock dividend of 1.25 shares of Registrant
Common Stock for each post-split share of Registrant Common Stock.
Item 2. Acquisition or Disposition of Assets
------------------------------------
By means of the Share Exchange, the Registrant acquired all of the issued and
outstanding capital stock of Global on June 18, 1996. The manner of and
consideration for the acquisition are described above in Item 1 of this Current
Report on Form 8-K.
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
-------------------------------------------------------------------
(a) Financial Statements of Business Acquired and Pro Forma Financial
Information:
(i) Sector Communications, Inc. Pro Forma Condensed Financial Statements for
the year ended February 29, 1996.
(ii) Global Communications Group, Inc. financial statements for the two years
ended December 31, 1995 and 1994.
(b) Exhibits
Exhibit
Number Description
- ------ -----------
10.01 Stock Purchase and Exchange Agreement with Global Communications Group,
Inc., Dated April 19, 1996. (Incorporated herein by reference to Exhibit
10.10 of the Registrant's Form 10-KSB for the year ended February 29,
1996).
10.01 Amendment No. 1 to the Stock Purchase and Exchange Agreement with Global
Communications Group, Inc., Dated April 19, 1996. (Incorporated herein
by reference to Exhibit 10.11 of the Registrant's Form 10-KSB for the
year ended February 29, 1996).
10.02 Debt Repayment Agreement (Incorporated herein by reference to Exhibit
10.12 of the Registrant's Form 10-KSB for the year ended February 29,
1996).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sector Communications, Inc.
/s/ Theodore J. Georgelas
- -------------------------------------
Theodore J. Georgelas
President and Chief Executive Officer
Date: November 18, 1996
3
<PAGE>
SECTOR COMMUNICATIONS, INC.
PRO FORMA FINANCIAL INFORMATION
On June 18, 1996, Sector Communications, Inc. (the "Company") acquired all the
outstanding capital stock of Global Communications Group, Inc. ("Global")in
exchange for 17,000,000 shares of its common stock to the shareholders of
Global. For accounting purposes, the acquisition is being treated as a
recapitalization of Sector Communications, Inc. with Global being treated as the
acquiring entity in a reverse acquisition.
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. Collectively, the impact of these two
equity transactions was to effectuate a reverse stock split of one for each
2.6265 shares of the Company's common stock. All amounts per share, number of
common shares and capital accounts in the pro forma financial statements have
been restated to give retroactive effect to the reverse stock split and stock
dividend.
The following unaudited pro forma combined balance sheet and statement of
operations for the year ended February 29, 1996 gives effect to the combination
of the Company and Global. The pro forma statement of operations assumes that
the combination took place at the beginning of the period presented. The pro
forma information has been prepared by the management of the Company based on
the historical financial statements of Sector Communications, Inc. for the year
ended February 29, 1996 included in the Company's February 29, 1996 annual
report filed on Form 10-KSB and of Global Communications Group, Inc. ("Global")
for the year ended December 31, 1995 filed herewith.
These pro forma statements may not be indicative of the results that actually
would have occurred if the combination had been effect on the dates indicated or
which may be obtained in the future.
4
<PAGE>
SECTOR COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Pro Forma
Sector Global Adjustment Total
------------ ------------ ---------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 345,177 $ 96,927 $ $ 442,104
Accounts Receivable - 214,768 214,768
Investments 443,425 - 1,486,575 (2) 1,930,000
Other Current Assets 119,390 821 120,211
---------- ---------- -----------
Total Current Assets 907,992 312,516 2,707,083
---------- ---------- -----------
Fixed and Other Assets
Fixed Assets 101,441 1,975,798 2,077,239
Accumulated Depreciation ( 38,773) ( 507,645) ( 546,418)
---------- ---------- -----------
Net Book Value 62,668 1,468,153 1,530,821
Capitalized Mining Claim
Costs 2,240,000 - 2,240,000
---------- ---------- -----------
Total Fixed and Other Assets 2,302,668 1,468,153 3,770,821
---------- ---------- -----------
Total Assets $3,210,660 $1,780,669 $ 6,477,904
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 185,607 $ 171,909 $ $ 357,516
Disputed Accounts Payable - 534,395 534,395
Due to Stockholders and
Related Entities 100,047 - 100,047
---------- ---------- -----------
Total Current Liabilities 285,654 706,304 991,958
Loan Payable - 3,718,728 3,718,728
---------- ---------- -----------
Total Liabilities 285,654 4,425,032 4,710,686
---------- ---------- -----------
Stockholders' Equity
Preferred Stock - - -
Common Stock 9,000 (1) 300 16,700 (3) 26,000
Additional Paid in
Capital 12,502,591 (1) - 1,486,575 (2) 4,385,881
(9,603,285)(3)
Accumulated Deficit (9,586,585) (2,489,883) 9,586,585 (3) (2,489,883)
Cumulative Foreign Currency
Translation Adjustment - ( 154,780) ( 154,780)
---------- ---------- -----------
Total Stockholders' Equity 2,925,006 (2,644,363) 1,767,218
---------- ---------- -----------
Total Liabilities and
Stockholders' Equity $3,210,660 $1,780,669 $ 6,477,904
========== ========== ===========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
5
<PAGE>
SECTOR COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Pro Forma
Sector Global Adjustment Total
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Sales $ $ 2,169,664 $ $ 2,169,664
----------- ----------- -----------
Cost of Sales
Services and Fees - 1,439,633 1,439,633
Materials - 39,840 39,840
Depreciation - 381,120 381,120
----------- ----------- -----------
Total Cost of Sales - 1,860,593 1,860,593
----------- ----------- -----------
Gross Profit - 309,071 309,071
----------- ----------- -----------
Aurtex Gold Assay System
Development Costs 359,319 - 359,319
Gold Exploration Costs 522,981 - 522,981
General and Administrative 1,192,498 983,754 2,176,252
----------- ----------- -----------
Total Operating Costs 2,074,798 983,754 3,058,522
----------- ----------- -----------
Loss From Operations (2,074,798) ( 674,683) (2,749,481)
----------- ----------- -----------
Other Income (Expense)
Equity in the Loss of
Pangold SA ( 15,922) - ( 15,922)
Allowance for Write down
of Notes Receivable ( 333,898) - ( 333,898)
Interest Expense
- Related Party ( 3,158) ( 348,643) ( 351,801)
- Other - ( 448) ( 448)
Interest and Other Income 52,904 7,623 60,527
Gain On Sale of Marketable
Securities 275,020 - 275,020
Exchange Gain - 1,640 1,640
----------- ----------- -----------
Total Other Income or
(Expense) ( 25,054) ( 339,828) ( 364,882)
----------- ----------- -----------
Net Loss $(2,099,852) $(1,014,511) $(3,114,363)
=========== =========== ===========
Net Loss Per Share $ 0.12
======
Weighted Average Shares 25,293,219
===========
</TABLE>
See notes to unaudited pro forma condensed financial statements.
6
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO-FORMA CONDENSED FINANCIAL STATEMENTS
Note 1 - Common Stock
As previously described, effective June 18, 1996, the Company effectuated a
reverse split of its Common Stock, one share for each 5.909635 shares of
outstanding on that date. Immediately after the reverse stock split the Company
issued a stock dividend of 1.25 shares for each post-split share. The effect on
the Company's February 28, 1996 capital structure was as follows:
Shares of common stock issued and
outstanding on February 29, 1996 23,638,540
Impact on outstanding shares of reverse
stock split (19,638,540)
Impact of stock dividend 5,000,000
------------
Restated shares of common stock issued and
outstanding on February 29, 1996 9,000,000
============
Note 2 - Investment
In connection with the acquisition of Global by the Company, the recorded amount
of the Company's investment in Northfield Minerals, Inc. common stock was
increased by $1,486,575 to reflect this asset's fair market value. This
increase was based on the price received by the Company in the investments
subsequent sale.
Note 3 - Acquisition of Global
The equity section of Sector's proforma condensed balance sheet, as required by
purchase accounting in a reverse acquisition, reflects the par value of Sector's
(the legal acquirer) outstanding equity securities, as adjusted for the reverse
stock split and stock dividend described in Note 1, and the accumulated deficit
of Global (the accounting acquirer). The remaining amount, totaling $9,603,285,
after purchase price adjustments and adjustments to Global's common stock, as
shown in the following table, was charged against additional paid in capital.
Par value of the shares of Sector common stock
issued to the Global shareholders $( 17,000)
Elimination of Global's stated capital 300
Elimination of Sector's accumulated deficit ( 9,586,585)
------------
Net adjustment to additional paid in capital $ 9,603,285
============
Note 4 - Earnings Per Share
Pro-forma earnings per common share is computed using the number of common
shares outstanding after adjustment for shares issued for the acquisition of
Global as though all shares issued had been outstanding for the entire period
presented.
7
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
FINANCIAL STATEMENT
DECEMBER 31, 1995 AND 1994
8
<PAGE>
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
GLOBAL COMMUNICATIONS GROUP, INC:
We have audited the accompanying balance sheet of Global Communications Group,
Inc. as of December 31, 1995 and 1994 and the related statements of operations,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Communications Group,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has at various times been prevented from
continuing its business. The Company is also currently operating in a highly
inflationary economy. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 10. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Merdinger, Fruchter, Rosen & Corso P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
May 17, 1996
October 22, 1996 as to
Note 3, Note 10 and Note 11
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
BALANCE SHEET
DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 96,927 $ 167,962
Accounts Receivable 214,768 161,676
Other Current Assets 821 -
----------- -----------
Total Current Assets 312,516 329,638
----------- -----------
Fixed Assets 1,975,798 1,989,650
Accumulated Depreciation ( 507,645) ( 156,129)
----------- -----------
Net Book Value 1,468,153 1,833,521
----------- -----------
Total Assets $ 1,780,669 $ 2,163,159
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 167,375 $ 246,144
Accounts Payable in Dispute 534,395 -
Taxes Payable 4,534 28,539
Other Payables - 22,155
----------- -----------
Total Current Liabilities 706,304 296,838
NON-CURRENT LIABILITIES
Loan Payable (Including Accrued Interest) 3,718,728 3,270,085
----------- -----------
Total Liabilities 4,425,032 3,566,923
----------- -----------
STOCKHOLDERS' DEFICIT
Common Stock, No Par Value; 2000 Shares
Authorized, 200 Shares Issued and Outstanding 300 300
Retained Deficit (2,489,883) (1,475,372)
Cumulative Foreign Currency Translation
Adjustment ( 154,780) 71,308
----------- -----------
Total Stockholders' Deficit (2,644,363) (1,403,764)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 1,780,669 $ 2,163,159
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 2 -
10
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
SALES $ 2,169,664 $ 450,977
----------- -----------
COST OF SALES
Services and Fees 1,439,633 -
Materials 39,840 3,569
Depreciation 381,120 156,129
----------- -----------
Total 1,860,593 159,698
----------- -----------
Gross Profit 309,071 291,279
General and Administrative Expenses 983,754 650,856
----------- -----------
(Loss) from Operations ( 674,683) ( 359,577)
----------- -----------
OTHER INCOME OR (EXPENSE)
Interest Income 5,911 383
Interest (Expense) ( 349,091) ( 123,539)
Other 1,712 729
Exchange Gain 1,640 -
Development Stage Costs - ( 979,738)
----------- -----------
Total Other Income (Expense) ( 339,828) (1,102,165)
----------- -----------
Net (Loss) $(1,014,511) $(1,461,742)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 3 -
11
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $( 1,014,511) $ (1,461,742)
Adjustments to Reconcile Net Loss to
Net Cash Provided By Operating Activities:
Depreciation and Amortization 381,120 156,129
(Increase) Decrease in Assets
Accounts Receivable ( 55,839) ( 164,495)
Other Current Assets ( 865) -
Increase (Decrease) in Liabilities
Accounts Payable 497,056 250,843
Accrued Interest 348,643 188,497
Taxes Payable ( 23,289) 29,037
Other Payables ( 21,786) 6,747
------------ ------------
Net Cash Provided (Used) By Operating
Activities 110,529 ( 994,984)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fixed Assets ( 124,381) ( 2,024,344)
------------ ------------
Net Cash (Used) By Investing Activities ( 124,381) ( 2,024,344)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of Loan 100,000 3,081,588
------------ ------------
Net Cash Provided By Financing Activities 100,000 3,081,588
------------ ------------
Effect of Exchange Rate Changes on Cash ( 157,183) 103,237
------------ ------------
NET (DECREASE) INCREASE IN CASH ( 71,035) 165,497
CASH - JANUARY 1, 167,962 2,465
------------ ------------
CASH - DECEMBER 31, $ 96,927 $ 167,962
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 447 $ 1,393
============ ============
Income Taxes $ - $ -
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4 -
12
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
STATEMENT OF RETAINED DEFICIT
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Retained Deficit - January 1, $(1,475,372) $( 13,630)
Net (Loss) (1,014,511) (1,461,742)
----------- -----------
Retained Deficit - December 31, $(2,489,883) $(1,475,372)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 5 -
13
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. History and Combination
-----------------------
The financial statements include the accounts of the Company's
Texas facility and its Bulgarian Representative Office. The
Representative Office is the Operational office. All material
interoffice balances and transactions have been eliminated.
The Company was incorporated in the State of Texas August, 1993.
Its primary purpose is to be the sole provider, in conjunction
with the Bulgarian Telecommunications Company, Ltd., of a closed
private international long distance telephone network for the
hotel industry in Bulgaria. Additional agreements have allowed the
Company to offer similar services to the banks and embassies in
Bulgaria. Operations commenced August 1, 1994.
b. Foreign Currency Translation
----------------------------
The accounts of the Company's foreign branch are translated from
Bulgarian Leva into U.S. Dollars for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange
rate during the year. The gains or losses, net of applicable
deferred taxes, resulting from such translations are included in
stockholders' equity. Gains or losses resulting from foreign
currency transactions are included in "Other Income".
c. Property and Equipment
----------------------
Property and equipment are stated at cost and capitalized.
Expenditures for maintenance, repairs and renewals are charged to
expense. The cost and accumulated depreciation of assets retired,
sold or otherwise disposed of are eliminated from the accounts and
resulting gains or losses, if any, are reflected through the
statement of income.
Depreciation is computed over the estimated useful lives using the
straight-line method.
<TABLE>
<CAPTION>
Estimated useful lives are as follows:
<S> <C>
Furniture and Fixtures 4 years
Equipment, Vehicles and Other 5 years
Fibre Network 20 years
</TABLE>
- 6 -
14
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Income Taxes
------------
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The liability
method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the reported amount of assets and liabilities
and their tax bases.
e. Accounts Receivable
-------------------
The Company bills its customers in U.S. dollars and accounts
receivable determined to be uncollectible have been written off to
expense.
f. Use of Estimates
----------------
The preparation of the Company's financial statements in
conformity with generally accepted accounting standards required
the Company's management to make estimates and assumptions that
affect the amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
g. Impact of Recently Issued Accounting Standards
----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued a
new statement titled "Accounting for Impairment of Long-Lived
Assets" ("FAS 121"). This standard is effective for year beginning
after December 15, 1995 and would change the method of determining
impairment of long-lived assets. Although the Company has not
performed a detailed analysis of the impact of this new standard
on the Company's financial statements, the Company does not
believe that adoption of the new standard will have a material
effect on the financial statements.
NOTE 2 - FIXED ASSETS
Fixed assets consisted of the following at December 31, 1994 and
1995
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Fibre Network $ 157,838 $ 169,049
Equipment 1,682,249 1,721,361
Furniture and Fixtures 45,643 45,224
Vehicles and Other 90,068 54,016
---------- ----------
1,975,798 1,989,650
Less: Accumulated Depreciation ( 507,645) ( 156,129)
---------- ----------
$1,468,153 $1,833,521
========== ==========
</TABLE>
- 7 -
15
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 3 - LOAN PAYABLE
Financing for the development of the telecommunications network
and start-up operations was provided by a financing agreement and
promissory note between the Company and a privately held company
(PHC) dated January 31, 1994 and amended August 15, 1994. The
note, as amended, provides for a line of credit to the Company in
the maximum principal sum of $3,200,000. 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 maturity date of the note is
January 31, 1996. Interest is due on the maturity date.
The note provides for payment to PHC of 80% of any and all
earnings of the Company before interest, depreciation and
amortization (EBIDA) which shall be applied first to any expense
owing from the Company to PHC; then to payment of accrual and
unpaid interest; and then to payment of principal.
Notwithstanding the above, the Company shall pay to PHC the entire
remaining principal balance of the note, plus accrued but unpaid
interest on the earlier of:
a) January 31, 1996; or
b) The date the entire indebtedness is accelerated upon the
occurrence of a default under the note.
The note is secured by all the Company'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
to the following agreements: 1) Memorandum of Understanding, dated
September 21, 1993 between the Company and the Bulgarian
Telecommunications Company, Ltd. (BTC), 2) International Service
Agreement, dated December 28, 1993 between the Company and BTC,
and 3) International Service Agreement dated December 28, 1993
between the Company and IDB Worldcom, a unit of IDB Communications
Group, Inc.
At December 31, 1995 and 1994, the loan payable amount is
comprised of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Principal $3,181,588 $3,081,588
Accrued Interest 537,140 188,497
---------- ----------
Total $3,718,728 $3,270,085
========== ==========
</TABLE>
- 8 -
16
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 3 - LOAN PAYABLE (continued)
As further described in Note 11, Subsequent Events, the Company
has entered into a Stock Purchase and Exchange Agreement (the
"Agreement"). Pursuant to the Agreement, the acquiring company,
Sector Communications, Inc. ("Sector"), agreed to assume and pay
in full the debt to PHC, which shall be due and payable in full
three years from the closing date under the Agreement. PHC has
agreed 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 fully paid and non-assessable shares of Common Stock of Sector.
Subsequent to the balance sheet date, the Company and PHC are
under common control.
NOTE 4 - INCOME TAXES
At December 31, 1995, the Company had net carryforward losses in
excess of 2.4 million dollars. A valuation allowance equal to the
tax benefit for deferred taxes has been established due to the
uncertainty of realizing the benefit of the tax carryforward.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets and liabilities at December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred Tax Assets
Loss Carryforwards $ 846,560 $ 501,626
Foreign Currency Translation
Adjustment 52,625 -
---------- ----------
899,185 501,626
Deferred Tax Liabilities
Foreign Currency Translation
Adjustment - ( 24,245)
---------- ----------
899,185 477,381
Less: Valuation Allowance ( 899,185) ( 477,381)
---------- ----------
Net Deferred Tax Assets $ - $ -
========== ==========
</TABLE>
- 9 -
17
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 4 - INCOME TAXES (continued)
<TABLE>
<CAPTION>
Net operating loss carryforwards expire as follows:
<S> <C>
2008 $ 13,630
2009 1,461,742
2010 1,014,511
----------
$2,489,883
==========
</TABLE>
NOTE 5 - ACCOUNTS PAYABLE IN DISPUTE
The Company has disputed a significant portion of its accounts
payable to a major vendor. The Company feels that it has been
overbilled for services provided. It is management's opinion that
the Company will prevail in this matter.
NOTE 6 - DEVELOPMENT STAGE COSTS
Prior to August 1, 1994, the Company was considered to be in the
development stage. Substantially, all of its efforts were expended
to establish a new business and operations had not commenced. For
the period January 1 through July 31, 1994, expenses incurred in
developing the new business totaled $979,738 and have been shown
separately in the 1994 income statement as "Developing Stage
Costs". Cumulative development costs from inception through August
31, 1994 totaled $993,368.
NOTE 7 - FOREIGN CURRENCY TRANSLATION
Net exchange gains or losses resulting from the translation of
assets and liabilities of the foreign representative office are
accumulated in a separate section of stockholders' equity titled
"Cumulative Foreign Currency Translation Adjustments".
An analysis of this account is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Balance at Beginning of Year $ 71,308 $ -
Translation Adjustments (226,088) 71,308
Related Income Tax Effect (net
of valuation allowance) - -
--------- --------
Balance at End of Year $(154,780) $ 71,308
========= =======
</TABLE>
- 10 -
18
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 8 - FOREIGN OPERATIONS
As described in Note 1, substantially all of the Company's
operations take place in the country of Bulgaria and substantially
all of its identifiable assets are located in Bulgaria.
NOTE 9 - CONCENTRATION OF SALES
Three of the Company's customers each accounted for more than 10%
of the Company's total revenue. Sales to these customers during
1995 and 1994 aggregated $1,185,503 and $271,577, respectively. At
December 31, 1995 and 1994, amounts due from those customers
included in trade accounts receivable were $88,479 and $87,910,
respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
a) Operating Agreement with Bulgarian Telecommunications Company,
--------------------------------------------------------------
Ltd.
----
The operating agreement with BTC, signed January 24, 1994, was
unilaterally and without prior notice declared terminated by BTC
on July 8, 1996. BTC then disconnected the Global digital link to
international carrier services, thus suspending the carrier
services provided by the Company to the hotel and resort industry,
although the Company is still receiving revenue from some of its
customers on 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 BTC, concerns payment
and respective service obligations connected with the agreement.
The agreement provides for a dispute settlement mechanism based on
the following:
(i) as a first step, on a mutual commitment to deploy efforts in
good faith negotiations toward a friendly settlement, and
failing settlement,
(ii) to entitle each party to have 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 offered
to make a payment to BTC on account for any undisputed tariffs and
fees and is attempting to negotiate a resumption of service and/or
a new agreement. However, there is no assurance that the new
agreement will be signed and service reconnected.
- 11 -
19
<PAGE>
GLOBAL COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)
b) Highly Inflationary Economy
---------------------------
Subsequent to the balance sheet date, the economy of Bulgaria has
been in a highly inflationary period. The Company has thus been
finding it difficult to collect current receivables from certain
of its customers. The Company intends to aggressively pursue
collection of its receivables to maintain adequate working
capital.
c) The Company has entered into a lease for office space expiring
April 1, 2001. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1996 $ 33,600
1997 33,600
1998 33,600
1999 33,600
2000 33,600
2001 8,400
--------
$176,400
========
</TABLE>
NOTE 11 - RELATED PARTY
Subsequent to the balance sheet date, the Company and the
privately held Company referred to in Note 3 (Loan Payable) are
under common control.
NOTE 12 - SUBSEQUENT EVENTS
On April 19, 1996, the Company entered into a Stock Purchase and
Exchange Agreement (the "Agreement") along with the Company's
shareholders (the "Shareholders") and Sector Communications, Inc.
("Sector").
Pursuant to the Agreement, Sector exchanged shares of its common
stock for the shares of the Company's common stock held by the
Shareholders. The Company has become a subsidiary of Sector.
Subsequent to the exchange of shares, the majority of the shares
of Sector are held by the former shareholders of the Company.
In connection with the above Agreement, the Company, Sector and
the privately held company ("PHC") referred to in Note 3 have
entered into a Debt Repayment Agreement covering the promissory
note between the Company and PHC, as described in Note 3. This
debt repayment agreement provides for Sector 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 common stock of Sector. The number of shares of Sector
common stock to be issued to PHC shall be subject to equitable
adjustment in the event of any future stock split, or the like,
with respect to the common stock of Sector.
- 12 -
20
