<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 November 30, 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 No
--- ---
As of November 30, 1996 there were outstanding 40,825,274 shares of the
Company's common stock. As described in Note 8 to the financial statements,
effective June 18, 1996, the Company reverse split its common stock 5.909635
shares for each share outstanding on that date and immediately after the reverse
stock split issued a stock dividend of 1.25 shares for each post-split share.
The impact of these equity transactions reduced the number of outstanding shares
of common stock by approximately 15,877,072 shares to 9,761,468 shares. All
amounts per share, number of common shares and capital accounts in this Form
10-QSB have been restated to give retroactive effect to the reverse stock split
and stock dividend.
<PAGE>
SECTOR COMMUNICATIONS, INC.
REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of
November 30, 1996, February 29, 1996 and
December 31, 1995 ............................................ 1
Condensed consolidated statements of
operations for the three and nine month
periods ended November 30, 1996 and 1995 ..................... 2
Condensed consolidated statement of
stockholders' equity for the two month period
ended February 29, 1996 and the nine month
period ended November 30, 1996 ............................... 3
Condensed consolidated statement of cash
flows for the nine month period ended
November 30, 1996 ............................................ 4
Notes to condensed consolidated financial statements ......... 5
Item 2. Management's Discussion and Analysis ................. 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................... 28
Item 5. Other Information ................................... 28
Item 6. Exhibits and Reports on Form 8-K..................... 29
SIGNATURES ................................................... 30
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30 February 29 December 31
1996 1996 1995
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Current Assets
Cash $ 117,987 $ 22,429 $ 96,927
Accounts Receivable, net 617,827 348,427 214,768
Marketable Securities (Note 7) 170,026 - -
Related Party Receivables (Note 3) 44,044 - -
Notes Receivable (Note 4) 257,178 - -
Prepaid Expenses and Deposits 195,202 23,840 821
------------ ------------ -----------
Total Current Assets 1,402,264 394,696 312,516
------------ ------------ -----------
Fixed Assets 2,178,535 1,975,797 1,975,798
Accumulated Depreciation ( 915,211) ( 569,939) ( 507,645)
------------ ------------ -----------
Net Book Value 1,263,324 1,405,858 1,468,153
------------ ------------ -----------
Other Assets
Investment in DBE (Note 2) 1,100,000 - -
Intangible Assets, net (Note 6) 7,588,173 - -
Capitalized Mining Claim Costs 2,240,000 - -
------------ ------------ -----------
Total Other Assets 10,928,173 - -
------------ ------------ -----------
Total Assets $13,593,761 $ 1,800,554 $ 1,780,669
============ ============ ===========
Current Liabilities
Accounts Payable $ 1,201,815 $ 826,382 $ 706,304
Short Term Borrowing (Note 7) 300,710 - -
Deferred Revenue 295,000 - -
Due to Related Parties 124,104 - -
------------ ------------ -----------
Total Current Liabilities 1,921,629 826,382 706,304
Rent Deposit 12,248 - -
Convertible Debentures, net of
unamortized issuance costs of
$131,941 (Note 8) 918,059
Loan Payable (Note 9) 4,023,540 3,774,426 3,718,728
------------ ------------ -----------
Total Liabilities 6,875,476 4,600,808 4,425,032
------------ ------------ -----------
Commitments and Contingencies
(Note 12) - - -
Stockholders' Equity: (Note 10)
Preferred Stock - - -
Common Stock 40,825 300 300
Additional Paid In Capital 12,196,471 - -
Retained Deficit (5,360,633) (2,581,889) (2,489,883)
Cumulative Foreign Currency
Translation ( 158,378) ( 218,665) ( 154,780)
------------ ------------ -----------
Total Stockholders' Equity 6,718,285 (2,800,254) (2,644,363)
------------ ------------ -----------
Total Liabilities and Stockholders'
Equity $13,593,761 $ 1,800,554 $ 1,780,669
============ ============ ===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
1
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30 November 30 November 30 November 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Telecommunication Revenue $ 96,807 $ 643,236 $ 679,128 $ 1,748,238
Software Sales & Maintenance 193,787 - 193,787 -
----------- ----------- ----------- -----------
290,594 643,236 872,915 1,748,238
Cost of Sales 106,866 518,253 636,671 1,635,920
----------- ----------- ----------- -----------
Gross Profit 183,728 124,983 236,244 112,318
Gold Exploration Costs 117,603 - 356,939 -
Software Development Costs 140,480 - 140,480 -
Compensation Expense Related
to Stock Grants (Note 10) - - 407,916 -
Sales, General & Administrative 1,145,806 111,099 1,620,145 566,914
----------- ----------- ----------- -----------
Operating Income (Loss) (1,220,161) 13,884 (2,289,236) ( 454,596)
Interest Expense ( 97,884) ( 88,466) ( 265,241) ( 267,429)
Other Income (Expense) 12,718 ( 55) 26,555 1,531
Other Fees & Charges (Note 12) ( 251,638) - ( 251,638) -
Foreign Exchange Gain (Loss) ( 64,098) ( 1,300) 816 1,288
----------- ----------- ----------- -----------
Net (Loss) $(1,621,063) $( 75,937) $(2,778,744) $( 719,206)
=========== =========== =========== ===========
Net Loss Per Share $( 0.04) $( 0.01) $( 0.12) $( 0.09)
=========== =========== =========== ===========
Weighted Average Shares 36,277,630 8,784,291 23,508,394 8,068,321
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
2
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid In Accumulated Translation
Shares Amount Capital Deficit Adjustments Total
----------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,000 $ 300 $ - $( 2,489,883) $( 154,780) $( 2,644,363)
Translation Adjustments ( 63,885) ( 63,885)
Net Loss ( 92,006) ( 92,006)
Balance, February 29, 1996 1,000 300 - ( 2,581,889) ( 218,665) ( 2,800,254)
(Unaudited)
Restatement of stockholders'
equity due to the acquisition
of Global Communications Group,
Inc. (Note 1) 23,637,540 23,339 3,879,325 - - 3,902,664
----------- ------------ ------------- ------------- ------------- -------------
Restated balance,
February 29, 1996 (Unaudited) 23,638,540 23,639 3,879,325 ( 2,581,889) ( 218,665) 1,102,410
Reverse stock split and stock
dividend (Note 10) (14,638,540) ( 14,639) 14,639 - - -
Common Stock issued in the
acquisition of: (Note 2)
Global Communications
Group Inc. 17,000,000 17,000 ( 17,000) - - -
HIS Technology AG and
Mountain Software AG 12,808,529 12,809 7,088,385 - - 7,101,194
Sale of common stock in an
offshore private placement 983,736 984 749,016 - - 750,000
Issuance of restricted stock
to certain officers, directors
and employees (Note 10) 933,332 933 406,983 - - 407,916
Exercise of stock purchase warrant 76,147 76 60,440 - - 60,516
Exercise of stock option (Note 11) 23,530 23 14,683 - 14,706
Translation Adjustments 60,287 60,287
Net Loss ( 2,778,744) (2,778,744)
----------- ------------ ------------- ------------- ------------- -------------
Balance, November 30, 1996 40,825,274 $ 40,825 $ 12,196,471 $( 5,360,633) $( 158,378) $ 6,718,285
=========== ============ ============= ============= ============= =============
(Unaudited)
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
3
<PAGE>
SECTOR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
November 30,1996
----------------
<S> <C>
Cash Flows From Operating Activities:
Net Loss $(2,778,744)
Adjustments to Reconcile Net Loss to
Net Cash Provided By Operating Activities:
Depreciation and Amortization 419,652
Compensation Portion of Restricted Stock Grants (Note 10) 407,916
Change in Assets and Liabilities, Net
of Effect of Acquisitions:
(Increase) Decrease in Assets
Accounts Receivable ( 112,621)
Repayment of Related Party Receivable 25,745
Prepaid Expenses and Deposits ( 83,669)
(Decrease) Increase in Liabilities
Accounts Payable 103,921
Related Party Payable 24,681
Deferred Revenue 295,000
Accrued Interest on Loan Payable 249,114
Rent Deposit 12,248
-----------
Net Cash Used By Operating Activities (1,436,757)
-----------
Cash Flows From Investing Activities:
Purchase of Fixed Assets ( 14,226)
Proceeds from the Sale of Marketable
Securities (Note 5) 1,930,000
Payment for the Acquisition of Histech ( 700,000)
Payment for the Acquisition of Sector AG ( 12,000)
Cash Balances of Histech and Mountain 36,587
Cash Balance of Sector Received in the
Reverse Acquisition 62,022
Loan Provided to Atcall ( 257,178)
Proceeds from Short Term Borrowing 486,259
Repayment of Short Term Borrowing ( 300,000)
Payment for the Investment in DBE (1,050,000)
-----------
Net Cash Provided By Investing Activities 181,464
-----------
Cash Flows From Financing Activities:
Proceeds from the Sale of Convertible Debentures 911,745
Proceeds from the Exercise of Warrants 60,516
Proceeds from the Sale of Common Stock 250,000
-----------
Net Cash Provided By Financing Activities 1,222,261
-----------
Effect of Exchange Rate Changes on Cash 128,590
-----------
Net Increase in Cash 95,558
Cash - February 29, 1996 22,429
-----------
Cash -November 30, 1996 $ 117,987
===========
Supplemental Cash Flow Information:
Cash Paid For:
Interest $ 333
===========
Taxes $ -
===========
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
4
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
On June 18, 1996, Sector Communications, Inc. ("Sector"), formerly Aurtex, Inc.,
acquired all the outstanding capital stock of Global Communications Group, Inc.
("Global") as described in Note 2. For accounting purposes, this acquisition
has been treated as a recapitalization of Sector with Global as the acquirer in
a reverse acquisition. Prior to the acquisition of Global, Sector was a
development stage enterprise as defined by Statement of Accounting Standards
No. 7 "Development Stage Enterprises".
The unaudited condensed consolidated balance sheet as of November 30, 1996 and
the condensed consolidated statements of operations for the three and nine month
periods ended November 30, 1996, and the condensed consolidated statements of
stockholders' equity and cash flows for the nine months ended November 30, 1996
are those of Sector and its subsidiaries (collectively the "Company"). All
significant intercompany accounts and transactions have been eliminated.
The financial statements presented for periods prior to the acquisition of
Global present the financial position and results of operations solely of
Global, and do not include the financial position or results of operations of
Sector or any of its subsidiaries. As such, the unaudited balance sheet as of
February 29, 1996, the audited balance sheet as of December 31, 1995 and the
unaudited statements of operations for the three and nine month periods ended
November 30, 1995 reflect the financial position and results of operations of
only Global. The December 31, 1995 balance sheet was derived from the audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
The equity section of the February 29, 1996 balance sheet has been restated, as
required by purchase accounting in a reverse acquisition to reflect the par
value of Sector's (the legal acquirer) outstanding common stock and the
accumulated deficit of Global (the accounting acquirer). The remaining amount,
totaling $3,879,325, as shown below, was offset to additional paid in capital.
5
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 1: Summary of Significant Accounting Policies (continued)
<TABLE>
<CAPTION>
Additional
Common Stock Accumulated Paid In
Shares Amount Deficit Capital Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Global Balance, February 29, 1996 1,000 $ 300 $(2,581,889) $ - $(2,800,254)
Sector Balance, February 29, 1996 23,638,540 23,639 (9,586,585) 12,487,952 2,925,006
----------- ----------- ----------- ----------- -----------
Difference 23,637,540 23,339 (7,004,696) 12,487,952 5,287,930
Consolidating Adjustments 1,000 300 4,422,807 (8,608,627) (4,185,520)
----------- ----------- ----------- ----------- -----------
Restated Balance, February 29, 1996 23,638,540 $ 23,639 $(2,581,889) $ 3,879,325 $ 1,102,410
=========== =========== =========== =========== ===========
</TABLE>
The unaudited financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in the annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations. The Company believes that
the disclosures made are adequate to make the information presented not
misleading. In the opinion of management of the Company, all adjustments
necessary for a fair presentation of such financial statements have been
included.
The financial statements should be read in conjunction with the audited
financial statements and notes included in the Company's February 29, 1996
annual report filed on Form 10-KSB, and its Form 8-K, as amended, dated June 18,
1996 and Schedule 14C Information Statement filed with the Commission on July
10, 1996, concerning the acquisition of Global, and the Form 8-K, dated
September 18,1996 concerning the acquisition of HIS Technologies AG and Mountain
Software AG.
Foreign Currency Translation
- ----------------------------
In accordance with the provisions of Statement of Accounting Standard No. 52,
"Foreign Currency Translations" ("SFAS No. 52") the assets and liabilities of
the Company's subsidiaries located outside the United States are generally
translated at the rates of exchange in effect at the balance sheet date. Gains
and losses resulting from foreign currency transactions are recognized currently
in income and those resulting from translation of financial statements, with the
exception of entities operating in highly inflationary economies, as Global does
in Bulgaria, are accumulated in a separate component of stockholders' equity.
In highly inflationary economies, SFAS No. 52 requires that the use of
historical exchange rates to translate nonmonetary items and current exchange
rates to translate monetary items. The effect of exchange rate changes is
reflected in net loss.
6
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 2: Acquisitions
During the nine months ended November 30, 1996, in addition to the acquisition
of 100% of the capital stock of Global, the Company also purchased 100% of the
outstanding capital stock of Sector Communications AG ("Sector AG"), effectively
acquired 80% of HIS Technologies AG ("Histech") and acquired 100% of Mountain
Software AG ("Mountain").
Global Communications Group, Inc.
- ---------------------------------
On June 18, 1996, the Company acquired 100% of the outstanding common stock of
Global Communications Group, Inc. ("Global") in exchange for the issuance of
17,000,000 shares of unregistered Company common stock to the shareholders of
Global. As a result of the completion of the share exchange, a change in the
control of the Company occurred, the shareholders of Global acquired the
beneficial ownership of approximately 57% of the issued and outstanding shares
of the Company's common stock. Of the 17,000,000 shares, 8,225,000 were issued
in accordance with the provisions of Regulation S of the Securities Act of 1933.
In anticipation of the above acquisition, on June 18, 1996, the Company amended
its Amended and Restated Articles of Incorporation to make effective a one for
5.909635 reverse split of the shares of the Company's common stock issued and
outstanding, amended its Amended and Restated Articles of Incorporation to
change the name of the Company from Aurtex, Inc. to Sector Communications, Inc.,
and declared a stock dividend of 1.25 shares of Company common stock for each
post-split share of Company common stock outstanding.
Sector Communications AG
- ------------------------
Effective July 31, 1996, the Company acquired 100% of the outstanding capital
stock of Sector AG from Murray Services, Ltd. ("Murray") for a cash payment of
$12,000. As of acquisition date, Sector AG had no assets or liabilities.
Sector AG was acquired to hold the equity interests acquired by the Company of
Histech and Mountain.
As of the date of acquisition, Murray beneficially owned 1,000,000 shares of the
Company's common stock, representing less than a 5% interest in the Company.
These shares were being held at that time for Murray by Telecom Partners Ltd
("Telecom"), and were received by Telecom in connection with the Company's
acquisition of Global. Hugo Wyss, a director of Sector AG and Histech, is also
a director of Murray.
7
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
HIS Technologies AG and Mountain Software AG
- --------------------------------------------
On August 12, 1996, the Company entered into a Definitive Agreement with
Histech, the holders of 100% of the outstanding capital stock of Histech (the
"Histech Stockholders"), and Mountain for the purchase, through it's wholly
owned subsidiary, Sector AG, of an 80% capital stock interest in Histech, the
purchase of 100% of the capital stock of Mountain and for the subsequent merger
of Mountain into Histech.
Effective August 23, 1996, Sector AG, acquired 54.45% of the issued and
outstanding shares of capital stock of Histech from two Histech Shareholders,
Joan Brown and Aledo Services Ltd. and 100% of the issued and outstanding shares
of capital stock of Mountain from Simon Brown, the sole shareholder of Mountain,
in exchange for the issuance of a total of 9,846,154 shares and 1,712,375 shares
of the Company's common stock, respectively.
As a part of this Agreement, the Company also purchased 3,428 shares of
previously unissued Histech capital stock, such shares representing a 25.55%
capital stock interest for $1,200,000.
The Company also issued 1,250,000 shares of common stock and a warrant for the
purchase of 1,250,000 shares of it's common stock at an exercise price of $0.79
per share, expiring three years from the date of issue, as a fee to KAV
Kapitalangleger Verlag-AG ("KAV") for services performed in connection with this
transaction. Hugo Wyss a director of Sector AG and the Chairman of the Board of
Directors of Histech, is also a director of Aledo Services Ltd. ("Aledo")
The shares issued above have not been registered under the Securities Act, but
were issued in accordance with Regulation S and bear a legend to such effect.
The shares issued to Joan Brown, Aledo and Simon Brown bear additional legends
limiting their sale or transfer in accordance with the Agreement. These shares
become available for sale or transfer on a quarterly basis, with 10% of the
total shares issued available for transfer each quarter, beginning in November
1996, until all such shares are freely tradeable.
The acquisition of Histech and Mountain were accounted for as purchases and the
excess of the cost over the fair value of net assets acquired were $6,109,028
and $849,265, respectively.
No amount is shown in the accompanying financial as minority interest due to
Histech's minority interest being a debit balance.
8
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 2: Acquisitions (continued)
Proforma Disclosure
- -------------------
The following table presents, on an unaudited pro forma basis, the combined
results of operations of the Company as though the acquisitions of Global,
Sector AG, Histech and Mountain were made on March 1, 1996.
Net Sales $ 1,125,326
Net Loss (2,241,993)
Net Loss per Share ( 0.06)
The pro forma results of operations do not purport to be indicative of the
results that would have been obtained if the combined operations had been
conducted during the period presented and is not intended to be a projection of
future results which may occur.
dbe Software, Inc.
- ------------------
On June 17, 1996, the Company entered into a Definitive Investment and Option to
Merge Agreement, as amended, with dbe Software, Inc. ("DBE") for the acquisition
of up to 100% of DBE.
The agreement provided for the Company to acquire up to 100% of the outstanding
capital stock of DBE. The first stage provided that the Company purchase
previously unissued equity of DBE representing a 20% capital stock interest for
$1,500,000 (the "Investment"), of which $1,100,000 has been paid during the
period May through November 1996.
The Company has renegotiated its Agreement with DBE. It has agreed to convert
the $1,100,000 investment made to date in DBE into a 14.667% equity ownership
interest in DBE, and has agreed to waive its option to purchase 100% of the
equity of DBE.
The Company accounts for the investment in DBE using the cost method.
9
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 3: Related Party Receivables and Transactions
Related party receivables at November 30, 1996 are as follows:
Amounts due from two officers of Histech. These cash
advances bear no interest and are due on demand. $ 44,044
Unsecured promissory note receivable from a director
and shareholder, bearing interest at 8% per annum.
The Company has previously established a reserve
for the full amount of this note. 191,978
Reserve for potential uncollectability ( 191,978)
----------
Total $ 44,044
==========
During the three month period ended November 30, 1996, the Company has accrued
$80,000 for consulting fees incurred for services provided by MCG Management
Consulting Group, S.A. ("MCG"). This agreement was canceled on November 26,
1996. One of the principles of MCG is also a director of Sector AG and the
Chairman of the Board of Directors of Histech.
Note 4: Notes Receivable
Notes receivable at November 30, 1996 are as follows. Both of these notes are
currently due and in default.
Promissory note receivable from Atcall, Inc.,
bearing interest at 8% per annum. This note
is personally guaranteed by the president of
Atcall. Repayment of this note was demanded
on the note's due date, October 23, 1996.
Subsequent to November 30, 1996, the Company
agreed to restructure payment of this amount to
be payable $25,000 per month plus interest. $ 257,178
Unsecured promissory note receivable from
Combined Metals Reduction Company, bearing
interest at 10%. The Company has previously
established a reserve for the full amount of
this note. 136,575
Reserve for potential uncollectability ( 136,575)
----------
Total $ 257,178
==========
10
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 5: Investment
During the nine months ended November 30, 1996, the Company sold, in several
transactions, the remaining 1,671,852 shares of Northfield Minerals Inc. ("NFM")
it held to a shareholder of the Company for $1,930,000. This same shareholder
acquired common stock from the Company during the nine months ended November 30,
1996 as described in Note 10.
Due to the acquisition of Global, as described in Note 2, being accounted for as
a reverse acquisition in the accompanying financial statements, the gain on the
sale of the NFM common stock of $1,486,575 was accounted for as a purchase price
adjustment and a corresponding increase in stockholders' equity.
Note 6: Intangible Assets
Intangible assets at November 30, 1996 are as follows:
Intangible assets related to the acquisition
of Histech (Note 2) $ 6,109,028
Intangible assets related to the acquisition
of Mountain (Note 2) 849,265
Intellectual property and distribution
rights acquired by Histech prior to its
acquisition by the Company, net of foreign
currency exchange fluctuations 827,203
-----------
7,785,496
Amortization of intangible assets and
intellectual property and distribution rights ( 197,323)
-----------
Total $7,588,173
===========
The intangible asset recorded for intellectual property and distribution rights
which were acquired by Histech based on an agreement, as amended, dated May 1,
1996, between Histech and HIS Software AG.
The excess purchase price over the fair value of the net assets acquired of
Histech and Mountain will be amortized on a straight line basis over twenty
years. Costs related to the acquisition of the intellectual property and
distribution rights purchase by Histech are amortized over the estimated useful
life of five years.
11
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 7: Short Term Borrowing
At November 30, 1996, the Company's short term borrowing consisted of the
following:
Line of credit provided to Histech by a Swiss
bank for up to approximately $125,000 (150,000
Swiss francs), bearing interest at 5.25%,
cancelable on 30 days notice. This line of
credit is collateralized by the Company's
marketable securities. $ 100,052
Unsecured promissory note payable, due February
17, 1997, bearing interest at 10%. 200,658
---------
Total $ 300,710
========
On January 17, 1997, the Company entered into a funding agreement which modified
the terms of the unsecured promissory note described above. Under this new
agreement, the Company received an additional $150,000, canceled the unsecured
promissory note for $200,000 and issued a new promissory note in the amount of
$350,000. This new promissory note is secured by the Company's ownership
interest in Histech, bears interest at 8% and is due on January 17, 1998. This
new promissory note also gives the holder the option, at any time prior to the
due date, to convert the note into a 2.33335% ownership interest in Histech, or
into unregistered shares of Company common stock at a 30% discount off the
closing bid price on the date of conversion.
The Company has also entered into a new funding agreement as of January 17, 1997
which will provide an additional $350,000. This new agreement is more fully
described in Note 13, Subsequent Events.
Note 8: Convertible Debentures
On October 13, 1996, the Company closed an offshore private placement in
accordance with Regulation S of the Securities Act of 1933, in which it sold
$1,050,000 of 10% convertible debentures ("Debentures") for net proceeds of
$911,745. This offshore private placement was arranged by Greystone Capital,
Ltd.
The Debentures bear interest at 10% per annum and are due and payable on August
30, 1999, if not converted earlier. Interest is payable at the option of the
Company either quarterly in cash or at maturity in shares of Company common
stock.
12
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 8: Convertible Debentures (continued)
The principal amount of the Debentures, along with any accrued interest, is
convertible, at the holders option any time 45 days after the closing date into
shares of Company common stock at a conversion price for each share of Company
common stock ranging from 70.0% to 72.5% of the average closing bid price of
Company common stock for the five days immediately preceding the conversion
date.
Costs of $138,255 incurred in connection with the issuance of these debentures
are being amortized over the life of the debentures. Unamortized issuance costs
will be charged to additional paid in capital as debentures are converted into
capital stock.
The persons to whom the Debentures were sold are as follows.
<TABLE>
<CAPTION>
Amount of Investor
Investor Investment Address
- -------------------------------------------- ---------- -------------
<S> <C> <C>
UHF Endowment Ltd $500,000 Liechtenstein
Paril Holding 200,000 Switzerland
Guarantee & Finance Corp. 100,000 Panama
FT Trading Company 100,000 England
AI International Corporate
Holdings, Ltd. 150,000 England
--------
Total $1,050,000
=========
</TABLE>
Subsequent to November 30, 1996, $525,000 of these debentures were converted
into 1,718,287 shares of freely tradable Company common stock.
Note 9: Loan Payable
Financing for the development of Global's telecommunications network and start-
up operations was provided by a financing agreement and promissory note between
Global and a privately held company (PHC). The note, as amended, provides for a
line of credit in the maximum principal sum of $3,200,000, of which $3,181,588
has been drawn at November 30, 1996. The outstanding principal balance bears
interest at an adjustable rate equal to two hundred basis points plus the prime
rate as reported by the Wall Street Journal. Such rate is adjusted on the first
business day each month according to the prime rate prevailing on the last day
of the immediately preceding week.
The note provides for payment to PHC of 80% of any and all earnings of Global
before interest, depreciation and amortization which shall be applied first to
any expense owing to PHC; then to payment of accrued and unpaid interest; and
then to payment of principal.
13
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 9: Loan Payable (continued)
The note is secured by all Global's assets including without limitation: I) all
inventory; ii) all accounts, contract rights and general intangibles; iii) all
machinery, equipment, fixtures, vehicles, furniture, tools, books and records
(including customer lists and computer programs); and iv) an assignment of all
rights under certain agreements.
In connection with the acquisition of Global, the Company and PHC have entered
into a Debt Repayment Agreement concerning the promissory note between the
Company and PHC. This Debt Repayment Agreement provides for the Company to
assume and pay in full the debt to PHC, which shall be due and payable in full
three years from the closing date of the Stock Purchase Agreement. PHC has
agreed that the debt may be repaid in full at any time on or prior to the
maturity date by the issuance to PHC of three million shares of unregistered
common stock of the Company.
Note 10: Stockholders' Equity
Common Stock
- ------------
During May 1996, the Company, in an offshore private financing in accordance
with Regulation S of the Securities Act of 1933, issued 761,468 shares of
Company common stock for a net sales price of $500,000. The proceeds of this
financing were used to fund the Company's initial investment in Histech
described in Note 2. On July 12, 1996, the Company sold an additional 222,222
shares of its common stock, in an offshore private financing in accordance with
Regulation S of the Securities Act of 1933, for net sales proceeds of $250,000.
Proceeds totaling $500,000 were received from these offerings from the same
shareholder of the Company to which the Company sold its NFM common stock
described in Note 3.
Effective June 18, 1996, the Board of Directors approved the issuance of 500,000
shares of unregistered common stock to the Company's President pursuant to his
employment agreement, 150,000 shares of unregistered common stock to each of two
employees pursuant to employment agreements, and 166,666 shares of unregistered
common stock to each of two directors of the Company. All these shares, except
those issued to the two employees, were fully vested upon issuance. The shares
issued to the two employees vest 50,000 shares on the date of grant, and 50,000
shares in April 1997 and 1998. In November 1996, a stock grant for 150,000
shares, including the vested portion, was rescinded by mutual agreement between
one of the above
14
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 10: Stockholders' Equity (continued)
employees and the Company, as part of a severance agreement. As such, the
impact of these shares is not shown in the accompanying financial statements.
On July 19, 1996, the Board of Directors approved the issuance of 50,000 shares
of unregistered common stock to a new director of the Company along with a
warrant for the purchase of 300,000 shares.
Reverse Stock Split and Stock Dividend
- --------------------------------------
On May 15, 1996, the Board of Directors of the Company adopted a resolution
authorizing amendments to the Company's Articles of Incorporation approving a
reverse split of the Company's outstanding Common Stock, par value $0.001 per
share on the basis of one new share of common stock of the Company for each
5.909635 shares of presently outstanding Common Stock. The Amendment was
approved by written consent, dated May 15, 1996, of the holders of approximately
52% of the outstanding shares of the Company's common stock.
Also on May 15, 1996, the Board of Directors of the Company adopted a resolution
approving a stock dividend of the Company's common stock on the basis of 1.25
shares of common stock of the Company for one shares of outstanding common stock
immediately after the reverse stock split described above.
Effective June 18, 1996, the Company reverse split its common stock one share
for every 5.909635 currently outstanding shares and issued a stock dividend of
1.25 shares of post reverse split common stock for each share of common stock
outstanding immediately after the reverse stock split but prior to the issuance
of shares of common stock to the shareholders of Global described in Note 2, and
the grant of unregistered stock to certain of the Company's officers, directors
and employees. The par value of the Company's common stock and the authorized
number of shares were not changed.
15
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 10: Stockholders' Equity (continued)
Warrants
- --------
As of November 30, 1996, the Company has warrants outstanding for the purchase
of 3,876,588 shares of common stock. A summary of warrant transactions during
the nine months ended November 30, 1996 is as follows:
<TABLE>
<CAPTION>
Number
of Shares
Granted Exercisable Exercise
Number November 30 Price
----------- ------------ ---------
<S> <C> <C> <C>
Balance, March 1, 1996 2,421,771 2,421,771 $0.79
Warrant canceled ( 95,183) (95,183) 0.79
Warrant granted to KAV (Note 2) 1,250,000 1,250,000 0.79
Warrant granted to a director 300,000 100,000 $2.25 to
$4.00
Warrant exercised ( 76,147) (76,147) 0.79
--------- ---------
Balance, November 30, 1996 3,800,441 3,600,441
========= =========
</TABLE>
The warrant granted to a director vests for the purchase of one-third of the
shares on the date of grant, with the remaining shares vesting one-third on each
of the first and second anniversary dates of the grant. The warrants granted to
KAV described in Note 2 were issued in accordance with Regulation S of the
Securities Act of 1933.
On December 17, 1996, the Board of Directors extended the expiration date of
warrants for the purchase of 2,127,844 shares of Company common stock for one
year, to December 31, 1997. In consideration for this one year extension, these
warrants were further amended to add a provision allowing the Company the
option, should the average closing bid price of the Company's common stock
exceed $1.25 per share for more than five consecutive trading days, to either
require the warrant holder to exercise their warrant within sixty days of
receipt of notice from the Company of such, or allow the Company to repurchase
the warrant for $0.05 per share.
Note 11: Stock Option Plans
At November 30, 1996, the Company has options outstanding for the purchase of
480,000 shares under the 1994 Stock Plan. A summary of option transactions
during the nine months ended November 30, 1996 is as follows:
16
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 11: Stock Option Plans (continued)
<TABLE>
<CAPTION>
Number
of Shares
Granted Exercisable Exercise
Number November 30 Price
--------- ------------ ----------
<S> <C> <C> <C>
Balance, March 1, 1996 150,000 150,000 $ 1.39
Options canceled (150,000) (150,000) 1.39
Options exercised ( 23,530) (23,530) 1.06
Options granted 480,000 160,000 1.06-1.62
Options canceled (126,470) (126,470) 1.06
-------- --------
Balance, November 30, 1996 330,000 110,000
======== ========
</TABLE>
The options granted during the nine months ended November 30, 1996, all vest for
the purchase of one-third of the shares on the date of grant, with the remaining
shares vesting one-third on each of the first and second anniversary dates of
employment.
Note 12: Commitments and Contingencies
Operating Leases
- ----------------
The Company has entered into several noncancelable operating lease agreements
for office space. Some of these agreements contain renewal options and/or
defined rent escalation provisions. The minimum lease payments under these
lease agreements for each of the next five years ending February 28 are as
follows:
<TABLE>
<CAPTION>
Minimum Minimum
Lease Sublease Net
Payments Payments Payments
---------- ---------- ---------
<S> <C> <C> <C>
1997 $ 254,849 $ 158,134 $ 96,715
1998 367,067 251,623 115,444
1999 374,853 257,269 117,584
2000 353,363 242,201 111,162
2001 322,706 212,694 110,012
---------- ---------- --------
$1,672,838 $1,121,921 $550,917
========== ========== ========
</TABLE>
The Company has entered into noncancelable sublease agreements on terms similar
to its original lease for office space at its McLean, Virginia location with
DBE, a company which the Company is acquiring an equity interest in, as
described in Note 2, and G&S International, a company of which the Company's
president is a manager/member of, for approximately 49% and 20% of its space,
respectively. At November 30, 1996, the Company has $14,423 in rent due it from
G&S International, all of which was paid in December 1996.
17
<PAGE>
SECTOR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 12: Commitments and Contingencies (continued)
Operating Agreement with Bulgarian Telecommunications Company, Ltd.
- -------------------------------------------------------------------
The Joint Activity Agreement with Bulgarian Telephone Company ("BTC"), signed
January 24, 1994, was unilaterally and without prior notice declared terminated
by BTC on July 8, 1996. The BTC then disconnected Global's digital link to
international carrier services, thus suspending the carrier services provided by
the Company to the hotel and resort industry. Global is, however, still
receiving revenue from non-carrier based shared revenue agreements.
The Company believes that the alleged termination of the agreement is invalid
and in violation of the agreement with BTC. The essence of the dispute which
has resulted in the termination of the agreement, and disconnection of the link
to the BTC, concerns payment and respective service obligations connected with
the agreement. The agreement provides that disputes be settled, first by a
mutual commitment to deploy efforts in good faith negotiations toward a friendly
settlement, and failing settlement that each party has recourse to international
arbitration within the framework of the International Chamber of Commerce.
The Company has elected at this time to employ good faith negotiations to settle
the dispute. In that regard, the Company made a payment during September 1996
to the BTC of $300,000 to account for any undisputed tariffs and fees and is
attempting to negotiate a resumption of service and/or a new agreement. In the
opinion of management, a new revised agreement will be executed in January, 1997
to be followed by immediate resumption of our carrier services. (See page 20 of
Item 6, Management Discussion and Analysis).
The Company has incurred fees and other charges related to the termination of
its service by the BTC and the non-payment of disputed amounts due the BTC.
Provision has been made for these charges and all such amounts will be settled
in connection with the signing of the new agreement.
Note 13: Subsequent Events
On December 31, 1996, the Vienna Property Exploration License and Option to
Purchase Agreement expired due to nonpayment of $255,000 due by that date. The
Company has received notice informing it that it is in default of this Agreement
and has until January 31, 1997 to cure this matter. The Company is negotiating
with the property owner to reinstate and extend this Agreement. The Company has
capitalized $100,000 of costs as mining claim costs related to this property.
On January 17, 1997, the Company entered into a funding agreement with a
shareholder under which the Company received an additional $350,000 in exchange
for its promissory note. This new promissory note is secured by the Company's
ownership interest in Histech, bears interest at 8% and is due on January 17,
1998. This promissory note also gives the holder the option, at any time prior
to the due date, to convert the note into a 2.33335% ownership interest in
Histech or into unregistered shares of Company common stock at a 30% discount
off the closing bid price on the date of conversion.
18
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
During 1996, the Company changed its corporate strategy and focus, and
concentrated its energies and efforts on building the Company into an
international provider of telecommunications services and computer software
products. Through the acquisition of existing companies and products, the
Company began its transition from that of gold exploration to technology
production and marketing.
As a first step in this process, the Company, on June 18, 1996, reverse split
its stock and changed its name and trading symbol to reflect its new identity.
Also on June 18, 1996 the Company acquired 100% of the outstanding capital stock
of Global Communications Group, Inc. ("Global") in exchange for the issuance of
17,000,000 shares of Company common stock to the shareholders of Global, as
described in note 2 to the financial statements. Global, as described below,
operates a private optical fiber telecommunications network in the cities of
Sofia and Plovdiv in the Republic of Bulgaria.
In the opinion of management, with the resumption of carrier services expected
in January 1997, Global is expected at that time to become a profitable business
operation. Furthermore, management has commenced negotiations with
international financing sources for a multi-fold expansion of Global's network.
Effective August 31, 1996, the Company completed its acquisition of an 80%
equity interest in HIS Technologies AG and 100% of Mountain Software AG. Based
in Zurich, HIS Technologies AG specializes in the development, sales and support
of software products.
On June 19, 1996, the Company entered into a Definitive Agreement for the
acquisition DBE Software, Inc., located in Virginia. DBE Software, Inc. is a
software development and marketing company, specializing in database management
tools designed to work with relational database management software (RDBMS)
products from IBM, Oracle, Computer Associates, and other major providers. This
Definative Agreement was significantly modified, as described in note 2 to the
financial statements, on January 16, 1997.
Global Communications Group, Inc.
- ---------------------------------
On July 18, 1996, the Company acquired 100% of the capital stock interest of
Global Communications Group, Inc. ("Global"). Following the acquisition of
Global, the Company began integrating the operations of Global into those of the
Company and establishing plans for expanding Global's operations to additional
customers along the previously laid fiber cable and to other areas in the
Republic of Bulgaria.
19
<PAGE>
Global has undertaken to be the sole private provider of direct-dial
international long distance telephone service for the hotel/resort industry,
banking industry, foreign embassies and western businesses in the cities of
Sofia and Plovdiv in the Republic of Bulgaria. This is the first step in a
series of related telecommunications development projects planned for Bulgaria.
To date, Global has made a substantial investment in fiber optic cable,
telecommunications equipment, and related infrastructure in accordance with its
agreement with the Bulgarian Telecommunications Company ("BTC").
Growth of Global's operation is anticipated in four areas: (i) increased call
volume of existing customers, (ii) broadened customer base along the existing
network in Sofia and Plovdiv, (iii) broadened customer base along new segments
of the network, and (iv) expanding the concept to other Eastern European
countries.
As more fully described below and in note 12 to the financial statements, Global
has recently experienced periods when its access to long-distance service was
denied due to what management believes to be arbitrary and illegal acts of
individuals connected with the BTC. The State Prosecutor's office in Sofia,
Bulgaria has supported the Company's position in these matters and has issued
orders for the BTC to fully restore Global's operations. Since the termination
of access to international carrier services, executive management of the Company
has held numerous face-to-face meetings with the Chairman of the Board and
Executive Director of the BTC and with the President of the Committee of Posts
and Telecommunications ("CPT"). And, as a result of those meetings, the
Company's management believes a new revised agreement will be effective in
January 1997 and international carrier services will be restored. As of the
date of this filing a new 10 year agreement with the BTC has been negotiated and
approved by the Company, the BTC and the CPT. The last approval, from the
Office of Privatization, is expected shortly. The new agreement will be in the
form of a Joint Activity between the Company, the BTC and Bulbank (the Bulgarian
state owned foreign exchange bank). Under the terms of the new agreement, the
Company will receive 100% of the "shared revenue" generated by its customers and
35% of the profits generated by "carrier revenue". All of the Company's
Bulgarian expenses will be paid before carrier revenue is apportioned.
HIS Technologies AG and Mountain Software AG
- --------------------------------------------
Effective August 31, 1996, the Company acquired an 80% interest in HIS
Technologies AG ("Histech"). Histech specializes in systems and network
management tools designed primarily for, but not limited to, use with computers
using Digital Equipment Corporation's ("Digital") OpenVMS operating system.
20
<PAGE>
Concurrent with the Company's acquisition of Histech, the Company acquired 100%
of Mountain Software AG ("Mountain") for shares of the Company's common stock.
Mountain, owned and operated by one of Histech's founders, developed and held
exclusive rights to a suite of system management utilities, the "X-Series", sold
by Histech and its distributors. The "X-Series" products have since been
enhanced and have been renamed to the "HIS-MaestroSeries" for sales around the
world.
Histech's revenues are derived principally from two sources: (i) product license
fees for the use of the Company's software products and (ii) service fees for
maintenance, consulting services and training related to the Company's software
products. Histech is represented by partners and distributors in 13 countries
worldwide. The Company recently began shipping a new software product, HIS OPC
Agent, that allows users of Hewlett-Packard Corporation's ("HP") OpenView
network management software running on UNIX workstations to also monitor and
manage systems running Digital's OpenVMS operating system. On October 30 of this
year, the Company announced that Histech had signed a cross-marketing agreement
with HP to jointly promote this new software. Management estimates there are
8,000 potential customers currently supporting networks of systems using both
Digital Equipment Corp's OpenVMS and HP's OpenView products. With an average
estimated installation price of $25,000, management values this segment of the
market at approximately $200 million dollars.
The Company plans to release a new software product in the first quarter of 1997
for use on Digital OpenVMS, Microsoft Windows NT and UNIX based networks. This
product will facilitate monitoring system integrity and security across all
three networks from a single workstation.
DBE Software, Inc.
- ------------------
The Company has entered into a definitive agreement with DBE Software, Inc. as
described in note 2 to the financial statements. DBE is a software development,
distribution and marketing company, specializing in database management tools
designed to work with relational database management software ("RDBMS") products
from IBM, Oracle, Computer Associates, and other major providers.
DBE's revenues are derived principally from three sources: (i) product license
fees for the use of the Company's software products, (ii) service fees for
maintenance, consulting services and training related to the Company's software
products, and (iii) royalties and distribution fees derived from the sales of
software products licensed from and distributed for third-party developers.
21
<PAGE>
DBE's flagship product, DB-Examiner, is a powerful expert system for use with
the largest RDBMS's such as Oracle and DB2 from IBM. DB-Examiner analyzes
database structures and identifies inconsistencies that could adversely affect
data integrity and system performance. DBE has also entered into agreements with
other software development firms to represent their products in the US.
Typically, these are "best of breed" products that complement DBE's own
products.
RESULTS OF OPERATIONS
Three Months Ended November 30, 1996 Compared to the Three Months Ended November
30, 1995; and Nine Months Ended November 30, 1996 Compared to the Nine Months
Ended November 30, 1995
Effective August 31, 1996, the Company began recording the sales and maintenance
revenue of its 80% owned subsidiary, Histech. No revenue related to Histech's
operations was recorded prior to that time, since the acquisition of Histech was
accounted for as a purchase, effective August 31, 1996.
Telecommunication Revenue - The Company earns all of its telecommunications
- -------------------------
revenue from (i) providing direct-dial services for international long distance
calls to twelve hotels and resorts in the cities of Sofia and Plovdiv in
Bulgaria; (ii) from the integration, installation, and maintenance of customer-
owned digital phone systems; and (iii) from usage-based percentages of Company-
owned digital phone systems through shared revenue agreements with some of its
customers.
The Company's telecommunications revenue decreased by $546,429 from $643,236 for
the three months ended November 30, 1995 to $96,807 for the three months ended
November 30, 1996; and decreased by $1,069,110 from $1,748,238 for the nine
months ended November 30, 1995 to $679,128 for the nine months ended November
30, 1996. It should also be noted that telecommunication revenue decreased by
$373,037 from $477,679 for the three months ended May 31, 1996 to $104,642 for
the three months ended August 31, 1996; and remained relatively constant with
the three month period ended August 31, 1996, with telecommunication revenue of
$95,807 for the three month period ended November 30, 1996. These decreases in
revenue are due primarily to the Bulgarian Telephone Company ("BTC"), without
prior notice or cause, unilaterally terminating the Company's Joint Activity
Agreement on July 8, 1996. On that date the BTC disconnected Global's digital
link to international carrier services, thus suspending the majority of the
services provided by the Company to its customers. As such, no revenue is
currently being earned by the Company from its customers from outgoing
international long distance calls. Even though the digital link has not yet
been reestablished, the Company is still receiving revenue from some of its
customers under non-carrier based shared revenue agreements.
22
<PAGE>
As described above, the Company expects in January 1997 that it will have
entered into a new operating agreement with the BTC and that revenues will
increase to levels experienced prior to a majority of its services being
discontinued.
Software Sales and Maintenance - During the three months ended November 30,
- ------------------------------
1996, the Company recorded $193,787 in software sales and maintenance, net of
payments to third party distributors, generated exclusively by its 80% owned
subsidiary, Histech as follows:
Software Sales $ 134,461
Software Maintenance 267,326
---------
Subtotal 401,787
Deferred Software Maintenance (208,000)
---------
Total Recognized Revenue 193,787
=========
Histech utilized the service of software distributors for the sales of its
products in geographic regions which it has no sales force. During the three
months ended November 30, 1996, approximately 40% of sales were generated by
software distributors.
Histech recently began shipping a new software product, HIS OPC Agent, that
allows users of Hewlett Packard Corporation's Open View network management
software running in Unix workstations to also monitor and manage systems running
Digital Equipment Corporation's OpenVMS operating system.
Histech plans to release several new software products in the first and second
quarters of 1997 for use on Digital OpenVMS, Microsoft Windows NT and various
version of Unix-based corporate networks. These products will facilitate the
concurrent monitoring of system integrity and security across all three networks
from a single Windows NT workstation.
Costs of Sales - The majority of the Company's costs of sales for the three and
- --------------
nine months ended November 30. 1996 relate to costs associated with
telecommunication revenues as shown below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30 November 30 November 30 November 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Global Communications $ 43,639 $518,253 $573,444 $1,635,920
Histech 63,227 - 63,227 -
-------- -------- -------- ----------
Total $106,866 $518,253 $636,671 $1,635,920
======== ======== ======== ==========
</TABLE>
Global's costs of sales decreased by $474,614 from $518,253 for the three months
ended November 30, 1995 to $43,639 for the three months ended November 30, 1996;
and decreased by $1,062,476 from $1,635,920 for the nine months ended November
30, 1995 to $573,446 for the nine months ended November 30, 1996. These
decreases, as described above, are due primarily to the BTC unilaterally
23
<PAGE>
terminating Global's Joint Activity Agreement on July 8, 1996 which disconnected
Global's digital link to international carrier services.
It should be noted that, as shown below, that costs of sales as a percentage of
telecommunications revenues has significantly declined for both the three and
nine month periods ended November 30, 1996 compared to the three and nine month
periods ended November 30, 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30 November 30 November 30 November 30
1996 1995 1996 1995
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Cost of Sales as a
Percent of Revenue 45% 81% 84% 94%
</TABLE>
This decline is due in part to, as described above, the disconnection of
Global's digital link at the BTC, but is also due to changes in the way Global
rerouted its international outgoing traffic during 1995 and 1996. Between June
1995 and April 1996, Global rerouted all of its traffic directly through the
BTC, and stopped utilizing the services of other companies to carry its traffic,
resulting in lower per minute costs.
Costs of sales related to software products and maintenance are comprised
primarily of commissions and distribution payments. These costs were 33% of
software sales and maintenance revenue for the three month period ended
November 30, 1996.
Software Development Costs - Software development costs consists primarily of
- --------------------------
salaries, related benefits, consultants fees and other costs. Histech has
incurred approximately $262,000 of software development costs in 1996 of which
$140,480 were incurred during the three months ended November 30, 1996.
The increase in costs during the three month period ended November 30, 1996 over
costs incurred prior to the acquisition of Histech by the company is primarily
attributable to increased staffing to support the development of Histech's new
distributed system management product, HISmon, and the continued improvement
(i.e. new versions) of existing products. The Company believes that a
significant level of software development costs will be required to remain
competitive and expects such costs will increase in the future, although such
costs may decline as a percentage of total revenue to the extent revenue
increases.
Sales, General and Administrative Expense - consists primarily of personnel
- -----------------------------------------
costs, including salaries, benefits and bonuses and related costs for
management, finance and accounting, legal and other professional services.
General and administrative expenses are detailed in the following table by
individual company below.
24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30 November 30 November 30 November 30
1996 1995 1996 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
General and Administrative
Global Communications $ 143,337 $111,099 $ 306,241 $566,914
Histech 539,125 - 573,207 -
Sector Communications 463,344 - 740,697 -
---------- -------- ---------- --------
Total $1,145,806 $222,418 $1,620,145 $455,814
========== ======== ========== ========
</TABLE>
Only the costs of Sector Communications, Inc. incurred since the it acquired
Global on June 18, 1996 in a reverse acquisition are included in the
accompanying financial statements.
General and administrative costs at Global declined dramatically for the three
month and nine month periods ended November 30, 1996 compared to the three and
nine month periods ended November 30, 1995. This decline was due primarily to
additional costs incurred by Global during 1995 related to start up operations,
marketing, U.S. based administrative costs and other costs. Management expects
that Global's general and administrative costs, not taking into consideration
any expansion of the current network, to remain at current levels.
Sales, general and administrative costs of Histech consist primarily of salaries
and related costs, fees, marketing expenses, depreciation and the amortization
of intangible assets. Management of Histech believes that as new products are
introduced into the market in the future, significant marketing costs will be
incurred to successfully promote these products.
General and administrative costs for Sector increased by $185,991 for the three
month period ended November 30, 1996 compared to the three month period ended
August 31 1996. Of this increase, approximately $145,000 is attributable to
nonrecurring consulting fees and employee severance payments. Management
expects Sector's general and administrative costs, exclusive of the above
nonrecurring costs, to remain at current levels.
Interest Expense - Interest expense for the three and nine months periods ended
- ----------------
November 30, 1996 remained relatively consistent with compared to the three and
nine month periods ended November 30, 1995. The loan balance has remained
constant at $3,181,588 since the final draw of $100,000 in May of 1995. During
these periods, the Company incurred interest expense primarily related to the
loan payable described in note 9 to the financial statements for the development
of Global's telecommunications network and start-up operations.
In connection with the acquisition of Global, the Company entered into a Debt
Repayment Agreement under which the Company assumed and agreed to pay in full
the debt, which shall be due and payable in full three years from the closing
date of the Stock Purchase
25
<PAGE>
Agreement. This Agreement also granted the Company the option to repay this debt
in full, at any time on or prior to the maturity date, by the issuance of three
million shares of unregistered common stock of the Company to the note holder.
The Company expects that interest expense will increase in the future to the
degree it continues to borrow funds in order to implement its capital
expenditure plans.
Gold Exploration Costs and Activities - In order to accurately determine the
- -------------------------------------
best course to take for the ultimate divesture of its gold assets, the Company
incurred exploration costs, as more fully described below of $117,603 during the
three month period ended November 30, 1996. No comparable costs for such
activities are shown in the statement of operations for the three or nine months
ended November 30, 1995. During 1995, the Company did however conducted gold
exploration activities, but due to the nature of the acquisition of Global as a
reverse acquisition, the historic financial statements are those only of Global
and not of Sector, formerly Aurtex. The reader is referred to the Company's
February 29, 1996 10-KSB for details concerning exploration costs incurred
during its year ended February 28, 1996. The Company incurred approximately
$374,000 in total exploration costs during the nine months ended November 30,
1996, of which approximately $17,000 was incurred prior to the reverse
acquisition of Global, and as such is not shown in the statement of operations
as expense.
In connection with the change in the Company's strategic direction the Company
has decided to curtail any significant future gold exploration activities. The
Company is currently evaluating options to determine the possibilities of
divestiture and or discontinuance of its mineral properties described below.
Management believes it has sufficient information from the exploration efforts
conducted recently to properly evaluate various possibilities of divestiture of
the mineral properties, the Company does not expect to incur significant costs
in the future related to its gold exploration properties or other gold
exploration related activities.
Vienna Project - During the summer of 1996, a modest drilling program was
- --------------
completed by the Company under the direction of the Lodestone Group for the
purpose of evaluating the Webfoot sector of the Company's Vienna Property.
Three diamond core exploration holes were drilled. These exploration holes
averaged 500 feet in length and cut the vein system approximately 250 feet
beneath the surface. Several long intercepts of ore grade resulted. (The best
was 113 ft of 0.071 ounces of gold per ton.) However, metallurgical
investigation is needed to determine whether this ore is economically minable.
The Company has not yet paid the approximately $255,000 due by December 31, 1996
and has received notice informing the Company that it is in default of the
Exploration License and Option to Purchase Agreement
26
<PAGE>
and has until January 31, 1997 to cure this matter. The Company is currently
negotiating with the property owner to reinstate and extend this Agreement.
Ketchum Project - A minor drilling program, consisting of one exploration drill
- ---------------
hole of 403 feet was conducted under the direction of Agricola Metals Company, a
principal of which is a shareholder of the Company, to explore that part of the
Wood River formation immediately under the challis volcanics in the Rooks Creek
East area of the Company's unpatented claim block. According to Agricola Metals
Company, the drill core showed mineralization of the Wood River in this sector.
However, faulting prevented the drilling from reaching the critical zone.
Further surface investigation, and a modest drilling program, will be needed to
determine whether a deposit exists in this location.
Liquidity and Capital Resources
During the nine month period ended November 30, 1996, the Company financed its
operations and acquisitions primarily through (i) funds it received from the
sale of 983,690 shares of its common stock in offshore private placements in
accordance with Regulation S of the Securities Act of 1933 for net sales
proceeds of $750,000, (ii) from the sale of 1,671,852 shares of Northfield
Minerals Inc. common stock for $2,080,000 as described in note 5 to the
financial statements and from an offshore private placement, described in note 8
to the financial statements, in which it sold $1,050,000 of 10% convertible
debentures for net proceeds of $911,745.
The Company is currently experiencing negative cash flow from operations but
management believes, that with the expected reinstatement of Global's services
and increased sales of Histech, that operating cash flow will improve
significantly. In October 1996, the Company received $911,745 from debenture
financing, most of which was used by the Company to complete the acquisition of
Histech ($300,000), provide additional investment to DBE ($200,000) and make a
payment to the BTC ($300,000) as described in note 12 to the financial
statements. Even with these funds, the addition and projected improvements in
operations and cash flows from Global and Histech, and the curtailment of gold
exploration activities, the funding of future operations may require further
infusion of capital. Based on its current and projected operating levels, the
Company believes that it will have sufficient liquid assets to maintain
operations for at least the next twelve months.
If additional funds are raised by the Company through the issuance of equity
securities, securities convertible into or exercisable for equity securities, or
an equity securities exchange, the percentage ownership of the then current
stockholders of the Company will be reduced. The Company may issue preferred
stock with rights,
27
<PAGE>
preferences or privileges senior to those of the Company's common stock. The
Company previously received a $5,500,000 commitment, under which it has received
$1,250,000, including the $500,000 received on January 17, 1997 described below.
The Company anticipates receiving no additional funding from this commitment. On
January 17, 1997, the Company entered into two funding agreements, one of which
modified the terms of the $200,000 unsecured promissory note described above.
Under these new agreements, the Company received an additional $500,000,
canceled the unsecured promissory note for $200,000 and issued two new
promissory notes in the amount of $350,000 each. These new promissory notes are
secured by the Company's ownership interest in Histech, bear interest at 8% and
are due on January 14, 1998. Each new promissory note also gives the holder the
option, at any time prior to the due date, to convert the note into a 2.33335%
ownership interest in Histech, or into unregistered shares of Company common
stock at a 30% discount off the closing bid price on the date of conversion.
The Company had no commitments for material capital expenditures as of November
30, 1996.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risk and
uncertainties. Such forward-looking statements reflect the Company's current
views with respect to future events and financial performance, including
statements in the following section concerning the timing and amount of
revenues, the level of expenses incurred and the sufficiency of cash and other
resources to fund operations. Actual results could differ materially from those
projected in the forward-looking statements as a result of the Company's ability
to obtain adequate additional financing as needed, the uncertainties of new
product development and introduction, sales growth, competitive pressures, and
other risks.
PART II
Item 1. Legal Proceedings.
On November 11, 1996, HIS Technologies, AG, an 80% owed subsidiary of the
Company, and its president, Robert Scherpenhuijzen were served with a complaint
filed by Symark International, Inc. ("Symark") alleging unfair competition;
interference with advantageous economic relations; and price tampering. This
complaint was filed in the Superior Court of the State of California for the
County of Los Angeles. Since the date of Symark filing this complaint, Histech
has successfully motioned the California courts, had this complaint moved to
Federal court, and has filed a motion in Federal court, expected to be heard in
January 1997, to have this complaint dismissed.
28
<PAGE>
Histech has also filed suit against Symark in Switzerland for slander. The Swiss
courts have granted Histech a temporary retraining order injunction against
Symark with respect to statements made by Symark on their Internet home page.
The Company expects to have a hearing in Swiss court in February 1997 with
respect to the temporary restraining order.
Symark seeks to recover unspecified damages and believes the damages are in
excess of $ 50,000. The Company strongly believes that there is no merit to the
allegations contained in the Symark complaint and intends to vigorously defend
itself in this action.
Item 5. Other Information.
On September 26, 1996, the Board of Directors approved the Letter Agreement with
MCG Management Consulting Group, S.A. ("MCG") providing for among other things
that MCG, effective October 14, 1996, will be the Manager in charge of certain
of the Company's operations. The Board of Directors canceled this Agreement on
November 26, 1996. One of the principles of MCG is Hugo Wyss. Hugo Wyss is a
director of Sector AG and the Chairman of the Board of Directors of Histech.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
- ------ -----------------------------------------------------------
10.1 Amendment No. 2 to the Global Communications Group, Inc. Stock
Purchase and Exchange Agreement (Incorporated herein by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the quarter ended May
31, 1996.)
10.2 DBE Definitive Investment and Option to Merge Agreement (Incorporated
herein by reference to Exhibit 10.2 of the Company's Form 10-QSB for
the quarter ended May 31, 1996.)
10.3 Definitive Agreement, dated August 12, 1996, between HIS Technologies
AG, Simon Brown, Joan Brown, Robert Scherpenhuijzen, Nicholas de
Smith, Aledo Services Ltd, Mountain Software AG, Sector
Communications, AG and Sector Communications, Inc. (Incorporated
herein by reference to Exhibit 10.01 of the Company's Form 8-K dated
September 18, 1996.)
10.4 Purchase Agreement between Murray Services Ltd BVI and Sector
Communications, Inc. (Incorporated herein by reference to Exhibit
10.02 of the Company's Form 8-K dated September 18, 1996.)
29
<PAGE>
10.5 Agreement with KAV Kapitalangleger Verlag AG. Incorporated herein by
reference to Exhibit 10.03 of the Company's Form 8-K dated September
18, 1996.)
10.6 Promissory Note Agreement between ATCALL, Inc. and Sector
Communications, Inc. for $250,000, dated July 23, 1996. (Incorporated
herein by reference to Exhibit 10.2 of the Company's Form 10-QSB for
the quarter ended August 31, 1996.)
10.7 Amendment to the DBE Definitive Investment and Option to Merger
Agreement, dated June 19, 1996. (Incorporated herein by reference to
Exhibit 10.2 of the Company's Form 10-QSB for the quarter ended August
31, 1996.)
10.8 Second Amendment to the DBE Definitive Investment and Option to Merger
Agreement, dated June 19, 1996. (filed herewith).
10.9 Sample Form of Debenture, dated October 13, 1996. (filed herewith)
10.10 Promissory note with Emerald Capital, dated October 13, 1996. (filed
herewith)
10.11 Promissory note with Emerald Capital, dated January 17, 1997. (filed
herewith)
10.12 Promissory note with Wallington Investment, Ltd, dated January 17,
1997.
(b) Reports on Form 8-K:
On November 20, 1996, an Item 2 Form 8-K was filed by the Company related to the
acquisition of 80% of the outstanding capital stock of HIS Technologies AG and
100% of the outstanding capital stock of Mountain Software AG by the Company.
Also on November 20, 1996, the Company filed a Form 8-K/A amending an 8-K filed
on July 3, 1996 concerning the acquisition by the Company of Global
Communications Group, Inc. to include the information required by Item 7 of Form
8-K.
On December 9, 1996, an Item 4 Form 8-K was filed by the Company concerning the
change it its certified public accountants from Stark Tinter & Associates to
Merdinger, Fruchter, Rosen & Corso.
30
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
January 19,1996 /s/ Theodore Georgelas
-----------------------
Theodore Georgelas
President and Chief
Executive Officer
31
<PAGE>
Sector Communications, Inc.
Exhibit Index
Exhibit
Number Description Page
- --------- ------------------------------------------------- ----
10.8 Second Amendment to the DBE Definitive
Investment and Option to Merger Agreement. 33
10.9 Sample Form of Debenture, dated October 13, 1996. 34
10.10 Promissory note with Emerald Capital,
dated October 13, 1996. (filed herewith) 41
10.11 Promissory Note with Emerald Capital,
dated January 17, 1997 (filed herewith) 42
10.12 Promissory Note with Wallington Investment,
Ltd, dated January 17, 1997 (filed herewith). 44
32
<PAGE>
EXHIBIT 10.8
[Sector Communications, Inc. Letterhead]
Mr. Paul Sterbutzel
Mr. Liuz Siqueria January 16, 1997
DBE Software, Inc.
Suite 200
7601 Lewinsville Road
McLean, Va. 22102
RE: Modification of Investment and Option to Merge Agreement
Dear Paul and Luiz:
Pursuant to our pervious discussions, DBE and Sector Communications, Inc.
have previously agreed that the Investment and Option to Merge Agreement
previously entered into between the two companies will be modified in the
following fashion:
1. The $1,100,000 previously lent to DBE by Sector will be converted into a
14.66% ownership of the outstanding shares of the common stock of DBE;
2. The note will contain provisions whereby wither DBE or Sector may convert
the outstanding principal and accrued interest due under the note into
14.667% of the number of shares issued and outstanding as of today's date.
Such percentage ownership, if converted, will be subject to the same
dilution in the future as may be imposed upon any and all other
shareholders of DBE.
3. The option to purchase any additional shares of the common stock of DBE
will be terminated immediately.
4. Sector will no longer have the right to designate a board member of DBE.
All other terms and conditions of the Agreement will be null and void and
of no further force nor effect.
If the foregoing is acceptable to you please indicate as such by affixing
your signatures where indicated below.
Sincerely, Accepted and Agreed:
/s/ Theodore J. Georgelas /s/ Paul Sterbutzel
- ------------------------- -------------------
Theodore J. Georgelas Paul Sterbutzel
President and CEO
/s/ Luiz Siqueria
-----------------
Luiz Siqueria
33
<PAGE>
EXHIBIT 10.9
FORM OF DEBENTURE
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE OFFERED OR SOLD IN THE UNITED STATES (AS DEFINED IN REGULATION S UNDER
THE ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS
DEFINED IN REGULATION S UNDER THE ACT) EXCEPT PURSUANT TO REGISTRATION
UNDER THE ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
ACT AND APPLICABLE STATE SECURITIES LAWS.
No. _______ US $[AMOUNT]
SECTOR COMMUNICATIONS, INC.
10.0% CONVERTIBLE DEBENTURE DUE AUGUST 30, 1999
THIS DEBENTURE is one of a duly authorized issue of Debentures of Sector
Communications, Inc., a corporation duly organized and existing under the laws
of the State of Nevada (the "Company") designated as its 10.0% Convertible
Debenture Due August 30,1999, in an aggregate principal amount not exceeding Two
Million (U.S. $2,000,000).
FOR VALUE RECEIVED, the Company promises to pay to [note holder], the
registered holder hereof and its successors and assigns (the "Holder"), the
principal sum of [note amount] (US $ xxx,xxx) on August 30, 1999 (the "Maturity
Date"), and to pay interest on the principal sum outstanding, at the rate of 10%
per Annum due and payable upon conversion in cash or stock at the Company's
option. Accrual of interest shall commence on the date hereof and shall continue
until payment in full of the outstanding principal sum has been made or duly
provided for. The interest so payable will be paid to the person in whose name
this Debenture (or one or more predecessor Debentures) is registered on the
records of the Company regarding registration and transfers of the Debentures
(the "Debenture Register; provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions of the Offshore
Securities Subscription Agreement dated as of September 19, 1996 between the
Company and [note holder](the "Subscription Agreement"). The principal of, and
interest on, this Debenture are payable in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts, at the address last appearing on the Debenture
Register of the Company as designated in writing by the Holder hereof from time
to time. The Company will pay the outstanding principal of and all accrued and
unpaid interest due upon
34
<PAGE>
this Debenture on the Maturity Date, less any amounts required by law to be
deducted or withheld, to the Holder of this Debenture as of the tenth (10th) day
prior to the Maturity Date and addressed to such Holder at the last address
appearing on the Debenture Register. The forwarding of such check shall
constitute a payment of outstanding principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Debenture
to the extent of the sum represented by such check plus any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand Dollars
(US$10,000) and integral multiples thereof. The Debentures are exchangeable for
an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holders surrendering the same but not less
than U.S. $10,000. No service charge will be charged for such registration or
transfer or exchange.
2. The Company shall be entitled to withhold from all payments of principal
of, and interest on, this Debenture any amounts required to be withheld under
the applicable provisions of the United States income tax or other applicable
laws at the time of such payments.
3. The Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged in the U.S.
only in compliance with the Securities Act of 1933, as amended (the "Act") and
applicable state securities laws. Prior to due presentment for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
for all other purposes, whether or not this Debenture be overdue, and neither
the Company nor any such agent 60 be affected or bound by notice to the
contrary. Any holder of this Debenture, electing to exercise the right of
conversion set forth in Section 4(a)hereof, in addition to the requirements set
forth in Section 4(a), is also required to give the Company (i) written
conformation that it is not a U.S. Person and the Debenture is not being
converted on behalf of a U.S. Person ("Notice of Conversion") or (ii) an opinion
of U.S. counsel satisfactory to the Company to the effect that the Debenture and
shares of common stock issuable upon conversion thereof have been registered
under the 1933 Act or are exempt from such registration. In the event a Notice
of Conversion or opinion of counsel is not provided the Holder hereof will not
be entitled to exercise the right to convert the Debentures pursuant to Section
4(a) herein.
35
<PAGE>
4. (a) The Holder of Debenture is entitled, at its option, at anytime
commencing 45 days after issue hereof to convert any or all of the original
principal amount of Debenture and accrued interest into shares of common stock,
$.Ol par value per share, of the Company (the "Common Stock'), at a conversion
price for each share of Common Stock equal to 72.5% of the average closing bid
price of the Common Stock for the five (5) business days immediately preceding
the conversion date as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") (the "Conversion Price"). Such
conversion shall be effectuated by surrendering the Debentures to be converted
(to the Company) with the form of conversion notice attached hereto as Exhibit
I, executed by the Holder of this Debenture evidencing. such Holder's intention
to convert this Debenture or a specified portion (as above provided) hereof, and
accompanied by proper assignment hereof in blank. Accrued but unpaid interest
shall be subject to conversion at the Company's option. No fractional shares or
scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded to the nearest whole share, with the
fraction paid in cash at the discretion of the Company. The date on which
notice of conversion is given shall be deemed to be the date on which the Holder
has delivered this Debenture, with the conversion notice duly executed, to the
Company or, if earlier, the date set forth in such notice of conversion if the
Debenture is received by the Company within five (5) business days thereafter.
(b) Notwithstanding the provisions of paragraph 4(a) hereof if the Conversion
Price shall be less than $.50 as reported on NASDAQ, the Company may, at its
sole option, exercised by five days prior written notice to the Holder redeem
that portion of the principal amount of the Debentures not previously noticed
for conversion in accordance with the provisions set forth in Section 4(a)
hereof, for 127.5% of the principal balance plus accrued interest in cash to be
paid within ten days of the notice therein. For example:
If the amount to be converted is the full $4 million and the Conversion Price is
S.20 then instead of converting the Debenture to 20,000,000 shares of Company
stock the Debentures, at the option of the Company could he converted into
8,000,000 shares of stock (representing 40% of the full conversion shares).
Therefore 60% of the principal amount times 127.5% (totaling $3 Million) plus
accrued interest on the $4 million could be paid in cash by the Company.
(c) Notwithstanding the provisions of paragraph 4(a) hereof, at any time on
and after 120 days from the date of the issuance of the Debentures, if the
average of the closing bid price for the Company's common shares for 5
Consecutive trading days shall be in excess of US $2.50 as reported on NASDAQ,
the Company may, at its sole option, exercised by five days prior written notice
thereof to the holder require the Holder of the Debentures to convert that
portion of the principal amount of the Debenture, not previously converted in
36
<PAGE>
accordance with the procedures set forth in Section 4(a) hereof, except that for
purposes of Section 4(a)(I) the conversion date shall be the date specified in
the Company's notice to Holder.
5. No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rate, and in the coin
currency, herein prescribed except to the extent said Debenture has been
converted pursuant to the terms hereof.
6. The Company hereby expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, notice of
acceleration or intent to accelerate, bringing of suit and diligence in taking
any action to collect amounts called for hereunder and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder.
7. The Company agrees to pay all reasonable costs and expenses, including
reasonable attorneys' fees, which may be incurred by the Holder in collecting
any amount due under this Debenture due to Company's default.
8. If one or more of the following described "Events of Default" shall
occur:
(a) The Company shall default in the payment of principal or interest on this
Debenture; or
(b) Any of the representations or warranties made by the Company herein, in
the Subscription Agreement, or in any certificate or financial or other
written statements heretofore or hereafter furnished by or on behalf of
the Company in connection with the execution and delivery of this
Debenture or the Subscription Agreement shall be false or misleading in
any material respect at the time made; or
(c) The Company shall fail to perform or observe, in any material respect, any
other covenant term, provision, condition, agreement or obligation of the
Company under this Debenture and such failure shall continue uncured for a
period of seven (7) days after notice from the Holder of such failure; or
37
<PAGE>
(d) The Company shall (1)become insolvent; (2) admit in writing its liability
to pay its debts generally as they mature; (3) make an assignment for the
benefit of creditors or commence proceedings for its dissolution; or (4)
apply for or consent to the appointment of a trustee, liquidator or
receiver for its or for a substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the Company or
for a substantial part of its property or business without its consent and
shall not be discharged within (30) days after such appointment; or
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of the
whole or any substantial portion of the properties or assets of the
Company and shall not be dismissed within thirty (30) days thereafter; or
(g) Any money judgment, writ or warrant of attachment, or similar process in
excess of Two Hundred Fifty Thousand ($250,000) Dollars in the aggregate
shall be entered or filed against the Company or any of its properties or
other assets and shall remain unpaid, unvacated, unbonded or unstayed for
a period of thirty (30) days or in any event later than five (5) days
prior to the date of any proposed sale thereunder; or
(h) Bankruptcy, reorganization, solvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief
of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within thirty (30)
days after such instruction of the Company shall by any action or answer
approve of, consent to, or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed in any
such proceeding; or
(i) The Company shall have its Common Stock delisted from an exchange or over-
the-counter market.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period
38
<PAGE>
of grace, enforce any and all of the Holder's rights and remedies provided
herein or any other rights or remedies afforded by law.
9. This Debenture represents a general unsecured obligation of
the Company. No recourse shall be had for the payment of the principal of or
the interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or of any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
10. The Holder of this Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon exercise thereof except under circumstances which will not result
in a violation of the Act or any applicable state Blue Sky law or similar laws
relating to the sale of securities.
11. In case any provision of this Debenture is held by a court of competent
jurisdiction to be excessive in scope or otherwise invalid or unenforceable,
such provision shall be adjusted rather than voided, if possible, so that it is
enforceable to the maximum extent possible, and the validity and enforceability
of the remaining provisions of the Debenture will not in any way be affected or
impaired thereby.
12. This Debenture, and the agreements referred to in this Debenture
constitute the full and entire understanding and agreement between the Company
and the Holder with respect to the subject hereof. Neither this Debenture nor
any term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Holder.
39
<PAGE>
13. This Debenture shall be governed by and construed in accordance with the
laws of Virginia.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated:________________
SECTOR COMMUNICATIONS, INC.
By: /s/ Theodore J. Georgelas
-------------------------
Title: President and CEO
-----------------
40
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EXHIBIT 10.10
This shall acknowledge that Sector Communications, Inc. has received two hundred
thousand dollars ($200,000) from Emerald Capital on 19 November 1996 as a loan.
Sector Communications, Inc. hereby guarantees the repayment of this loan on or
before 17 February 1996 to include interest at the rate of ten percent (10%) per
annum (calculated as $55.56 per day commencing from 11/19/96).
Sector Communications, Inc.
/s/ Theodore J. Georgelas
- -------------------------
Theodore J. Georgelas
President
41
<PAGE>
Exhibit 10.11
PROMISSORY NOTE
---------------
Date: January 17, 1997 County of Fairfax
Commonwealth of Virginia
THIS PROMISSORY NOTE made as of the day first above written by and
between Sector Communications, Inc. (hereinafter referred to as "Maker") and
Emerald Capital, Inc. (hereinafter referred to as "Payee").
WHEREAS, as of the date first hereinabove written Payee has advanced as
a loan to Maker the sum of Three Hundred and Fifty Thousand Dollars
($350,000,000);
NOW, THEREFORE, on or before one year from the date first above written
the undersigned Maker promises to pay to the order of the Payee, at such place
as the Payee may designate from time to time the principal sum of THREE HUNDRED
AND FIFTY THOUSAND DOLLARS ($350,000.00) together with interest thereon computed
at an interest rate of eight percent (8.00%) compounded on an annual basis (but
payable only at the maturity of this Note) on the balance of the note that
remains unpaid.
Prior to the date of repayment of this Promissory note or until such
time as this note may be converted as provided in the next succeeding paragraph,
the Maker shall provide to Payee a security interest in its ownership of HIS
Technologies, AG as further security for the fulfillment of Maker's obligations
that arise from this Promissory Note.
During the one year period commencing on the date first above written
the Payee shall have the option to convert the principal sum of this note
together with any and all accrued but unpaid interest into either of the
following:
1. A 2.33335% ownership interest in HIS Technologies, AG to be
represented by the transfer of shares representing such interest
from Maker to Payee; or,
2. Shares of the Maker to be issued in an amount of shares equivalent
to the sum of the principal plus accrued interest on this note if
such shares were issued at a 30% discount to the
42
<PAGE>
closing bid price for the shares of Maker on the day preceding the
date of the notice of conversion.
It is expressly agreed that if default be made in the payment of
principal and/or interest under this Note when and as the same shall become due
and payable, and the said default shall continue for a period of five days
thereafter, then and in that event a late payment penalty equal to one and
one-half percent (1.5%) of the payment due shall be automatically assessed
against the Maker for each and every month for which payment has not been made
by the fifth (5th) day after such payment is due.
This Note may be prepaid in full, or any portion hereof, without penalty
provided that Maker shall give Payee thirty (30) days advance notice of its
intention to so prepay. During this thirty day period Payee shall have the right
to exercise the conversion privileges described above or, in the absence of such
exercise during the thirty day period shall forever waive and release its rights
to such conversion.
This Note shall be governed in all respects by the laws of the
Commonwealth of Virginia and shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
personal representatives, successors and assigns.
Witness the following signature:
WITNESS: MAKER:
Sector Communications, Inc.
By:
/s/ Anthony J. Georgelas /s/ Theodore J. Georgelas
- ---------------------------------- --------------------------------
Theodore J. Georgelas
President and CEO
Date: 1/17/97
43
<PAGE>
Exhibit 10.12
PROMISSORY NOTE
---------------
Date: January 17, 1997 County of Fairfax
Commonwealth of Virginia
THIS PROMISSORY NOTE made as of the day first above written by and
between Sector Communications, Inc. (hereinafter referred to as "Maker") and
Wallington Investment, Ltd. (hereinafter referred to as "Payee").
WHEREAS, as of the date first hereinabove written Payee has advanced as
a loan to Maker the sum of Three Hundred and Fifty Thousand Dollars
($350,000,000);
NOW, THEREFORE, on or before one year from the date first above written
the undersigned Maker promises to pay to the order of the Payee, at such place
as the Payee may designate from time to time the principal sum of THREE HUNDRED
AND FIFTY THOUSAND DOLLARS ($350,000.00) together with interest thereon computed
at an interest rate of eight percent (8.00%) compounded on an annual basis (but
payable only at the maturity of this Note) on the balance of the note that
remains unpaid.
Prior to the date of repayment of this Promissory note or until such
time as this note may be converted as provided in the next succeeding paragraph,
the Maker shall provide to Payee a security interest in its ownership of HIS
Technologies, AG as further security for the fulfillment of Maker's obligations
that arise from this Promissory Note.
During the one year period commencing on the date first above written
the Payee shall have the option to convert the principal sum of this note
together with any and all accrued but unpaid interest into either of the
following:
1. A 2.33335% ownership interest in HIS Technologies, AG to be
represented by the transfer of shares representing such interest
from Maker to Payee; or,
2. Shares of the Maker to be issued in an amount of shares equivalent
to the sum of the principal plus accrued interest on
44
<PAGE>
this note if such shares were issued at a 30% discount to the
closing bid price for the shares of Maker on the day preceding the
date of the notice of conversion.
It is expressly agreed that if default be made in the payment of
principal and/or interest under this Note when and as the same shall become due
and payable, and the said default shall continue for a period of five days
thereafter, then and in that event a late payment penalty equal to one and
one-half percent (1.5%) of the payment due shall be automatically assessed
against the Maker for each and every month for which payment has not been made
by the fifth (5th) day after such payment is due.
This Note may be prepaid in full, or any portion hereof, without penalty
provided that Maker shall give Payee thirty (30) days advance notice of its
intention to so prepay. During this thirty day period Payee shall have the right
to exercise the conversion privileges described above or, in the absence of such
exercise during the thirty day period shall forever waive and release its rights
to such conversion.
This Note shall be governed in all respects by the laws of the
Commonwealth of Virginia and shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
personal representatives, successors and assigns.
Witness the following signature:
WITNESS: MAKER:
Sector Communications, Inc.
By:
/s/ Anthony J. Georgelas /s/ Theodore J. Georgelas
- ---------------------------------- --------------------------------
Theodore J. Georgelas
President and CEO
Date: 1/21/97
45
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<PERIOD-START> SEP-01-1996 SEP-01-1995
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