As filed with the Securities and Exchange Commission on August 30, 1996
Registration No. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
SIGMA ALPHA GROUP, LTD.
(Name of small business Issuer in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
6799
----------------------
(Primary Standard Industrial Classification Code Number)
23-2498715
----------------------
(I.R.S. Employee Identification No.)
--------------------
1341 North Delaware Avenue
Philadelphia, Pennsylvania 19125
(215) 425-8682
(Address and telephone number of principal executive offices and
principal place of business)
--------------------
Peter S. Pelullo, President
Sigma Alpha Group, Ltd.
1341 North Delaware Avenue
Philadelphia, Pennsylvania 19125
(215) 425-8682
(Name, address and telephone number of agent for service)
Copies of all communications to:
Anthony M. Collura, Esq.
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
(212) 779-8600
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: [X]
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Proposed
Maximum Maximum
Title of Each Class of Offering Aggregate Amount of
Securities to be Amount to Price Offering Registration
Registered (2) be Registered Per Share(1) Price (1) Fee
================================================================================
================================================================================
Common Stock, $.001 Par Value 2,500,000 $2.00 $5,000,000 $1,724.13
================================================================================
Common Stock Underlying 100,000 $2.00 $ 200,000 $ 68.97
Common Stock Purchase
Warrant
================================================================================
Total 2,600,000 $2.00 $5,200,000 $1,793.10
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
herein.
(2) Includes such additional number of Shares as may become issuable by reason
of anti-dilution provisions pursuant to Rule 416.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
ii
<PAGE>
SIGMA ALPHA GROUP, LTD.
Cross-Reference Sheet to Prospectus on Form S-1
Furnished Pursuant to Item 501(b) of Regulation S-K
Item From S-1 Caption Location in Prospectus
- ---- ---------------- ----------------------
1. Forepart of the Registration Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus Outside Front Cover Page
3. Summary Information, Risk Prospectus Summary; Selected Financial
Factors and Ratio of Earnings Data; Risk Factors
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Securityholders Resales by Selling Securityholders
8. Plan of Distribution Cover Page; Resales by Selling
Securityholders
9. Description of Securities Description of Securities;
to be Registered Shares Eligible for Future Sale
10. Interest of Named Experts Experts and Legal Matters
and Counsel
11. Information with Respect to Business; Description of
the Registrant Securities; Financial Statements;
Selected Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Certain Transactions;
Management; Price Range of Common
Stock Dividend Policy; Principal
Shareholders
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act Liabilities
iii
<PAGE>
[TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE]
[RED HERRING LEGEND]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
iv
<PAGE>
DATED AUGUST 30, 1996 SUBJECT TO COMPLETION
PROSPECTUS
- ----------
SIGMA ALPHA GROUP, LTD.
2,500,000 SHARES OF COMMON STOCK
Sigma Alpha Group, Ltd. (the "Company") is offering hereby up to 2,500,000
shares of its Common Stock, $.001 par value, (the "Common Stock" or "Shares")
during the sixty day period commencing on the date of the Prospectus (subject to
extension for an additional 30 days in the sole discretion of the Company.)
Shares of the Company's Common Stock are quoted on the OTC Bulletin Board (the
"Bulletin Board") under the symbol "SGAL". On August 27, 1996 the last sale
price of the Common Stock as reported on the Bulletin Board was $2.375.
This Prospectus also relates to the possible resale of up to 100,000
shares of the Company's Common Stock issuable upon exercise of a Common Stock
Purchase Warrant (the "Warrant") by a selling securityholder ("Selling
Securityholder"). The Warrant is exercisable until August 31, 1999 at a price of
$2.00 per Share. The Selling Securityholder may effect the sale of its shares
from time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Common Stock, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. See "Resales By Selling Securityholders".
THESE SECURITIES ARE HIGHLY SPECULATIVE. THEY INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. THEY SHOULD BE PURCHASED ONLY BY
PERSONS WHO CAN AFFORD TO SUSTAIN A TOTAL LOSS OF THEIR ENTIRE INVESTMENT
(SEE "RISK FACTORS" - PAGE 9 AND "DILUTION".)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Total Price to the Public(1) Commissions(2) Proceeds to the
Issuer(2)
- --------------------------------------------------------------------------------
Per Share $2.00 $.20 $1.80
- --------------------------------------------------------------------------------
Total Maximum $5,000,000 $500,000 $4,500,000
================================================================================
(See Notes on Following Page)
SIGMA ALPHA GROUP, LTD.
1341 North Delaware Avenue
Philadelphia, PA 19125
(215) 425-8682
The date of this Prospectus is August 30, 1996
<PAGE>
[Inside Front Cover]
(1) The Company intends to offer the Shares directly to the public through its
officers and directors on a "best efforts-no minimum basis". The Company may
also offer the Shares through broker/dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD"), who will receive a commission
of up to $.10 per Share sold. Payment for the Shares shall be made by check or
money order payable to the Company and must be delivered to the Company along
with a duly executed subscription agreement in the form attached hereto to 1341
North Delaware Avenue, Philadelphia, PA 19125.
(2) The figures for Commissions and Net Proceeds to Issuer assumes that a 10%
commission will be paid on all Shares sold in this Offering and does not reflect
the payment of expenses in connection with this Offering estimated at $100,000.
The Company currently plans to offer the Shares for sale in the state of
New York and possibly in foreign countries. No assurances can be given that the
Shares will in fact be available for offer and sale in any such jurisdictions.
The Company may also seek to offer and sell the Units in other jurisdictions.
CAVEATS
THE OFFERING IS MADE SUBJECT TO WITHDRAWAL, CANCELLATION, OR MODIFICATION BY THE
COMPANY WITHOUT NOTICE. THE COMPANY RESERVES THE RIGHT, IN ITS SOLE DISCRETION,
TO REJECT ANY AND ALL SUBSCRIPTIONS, AND NO SUBSCRIPTION WILL BE EFFECTIVE UNTIL
ACCEPTED BY THE COMPANY
ADDITIONAL INFORMATION
With respect to the securities offered hereby, the Company has filed with
the principal office of the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act of 1933, as amended (the "Securities Act"). For purposes
hereof, the term "Registration Statement" means the original Registration
Statement and any and all amendments thereto. This Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto, to which reference hereby is made. Each statement made in this
Prospectus concerning a document filed as an exhibit to the Registration
Statement is not necessarily complete and is qualified in its entirety by
reference to such exhibit for a complete statement of its provisions. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934 (the "Exchange Act") and in accordance therewith files reports and
other information with the Commission. Any interested party may inspect the
Registration Statement and its exhibits and other reports and information filed
by the Company with the Commission without charge, or obtain a copy of all or
any portion thereof, at prescribed rates, at the public reference facilities of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Registration Statement and exhibits
may also be inspected at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York 10048.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHEN
OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION CONTAINED IN THIS
PROSPECTUS REFLECT A TWO FOR ONE STOCK SPLIT EFFECTIVE MAY 10, 1991 AND A ONE
FOR THREE REVERSE STOCK SPLIT EFFECTIVE OCTOBER 21, 1992.
THE COMPANY
Sigma Alpha Group, Ltd. (the "Company") was incorporated under the Laws of
the Commonwealth of Pennsylvania in February 1988 and commenced operations in
June 1989, as the successor-in-interest of Sigma Sound Studios, Inc. ("Sigma
Sound"). The Company became publicly held upon its merger in January, 1991 with
Fabulous Mergers, Inc., an inactive public company incorporated in Nevada.
Pursuant to the terms of the merger, Fabulous Mergers, Inc., as the surviving
corporation, changed its name to Sigma Alpha Entertainment Group, Ltd., and was
subsequently reincorporated in Delaware. In 1995 the Company changed its name to
the Sigma Alpha Group, Ltd.
In April 1995 the Company acquired 80% of Global Telecommunications of
Delaware, Inc. ("Global"), a company engaged in the development and marketing of
certain technology pertaining to telecommunication products including a digital
voice information pager ("Voice Pager") and a stock market information receiver
("SIR") to be sold in the People's Republic of China ("China"). Since April
1995, the Company has spent approximately $963,000 in developing Global's
products and technologies. All references to the Company's products and
technologies in this Prospectus relate to products and processes being developed
by Global. The Voice Pager is designed to allow for the development and
implementation of an inexpensive and effective paging system in countries which
lack substantial telecommunication system infrastructures such as China and
other emerging markets. The Company's paging system will utilize existing FM
radio frequencies to transmit voice messages directly to a subscriber's hand
held Voice Pager. The Voice Pager stores a digital voice message for playback
immediately upon demand by the subscriber. The Company intends to market and
sell Voice Pagers directly to radio stations in China who will then resell the
Voice Pager along with paging services to local subscribers. The Company
believes that with minimal capital investment, Chinese and other emerging
market's radio stations can modify their existing FM Radio transmitters to
implement the Company's Voice Pager system and create a Voice Paging service
that reduces problems associated with traditional beepers, numeric pagers and
alphanumeric pagers currently in use in China. Traditional beepers and numeric
paging systems require a paging subscriber to have ready access to a telephone
to return or retrieve a message. The Company believes that the lack of easy
access to telephones throughout China negatively effects the use of beepers and
numeric pagers in China. Chinese character pagers allow for a subscriber to
receive a message consisting of numerals and characters that have been input by
typists at a central station. The Company believes that its Voice Pager
technology affords significant advantages over Chinese character pagers which
require the entry of complex and numerous Chinese characters in order for
messages to be received correctly. Traditional beepers, numeric pagers and
alphanumeric and Chinese character pagers are currently marketed in China. The
Chinese Ministry of Posts and Telecommunications has reported that approximately
25,000,000 pagers were in service in China at the end of 1995. The Company
believes that its Voice Pager will be competitively priced with Chinese
character pagers presently marketed in China.
3
<PAGE>
The Company expects that engineering prototypes of the Voice Pager will be
available in October, 1996 and production prototypes in January, 1997. The
Company believes that additional funding of approximately $2,000,000 will be
necessary in order to meet the foregoing timetable. Accordingly there can be no
assurance that the Company will meet its milestones.
The Company's SIR system allows for the transmission of stock market
information through FM radio frequencies to a subscriber's hand held SIR
receiver. The information is transmitted to the SIR in a "scrambled" format and
is "unscrambled" by the SIR's proprietary technology. The Company understands
that Chinese radio stations currently offer unscrambled stock market information
services to subscribers. The Company has been advised that a problem exists in
China regarding the sale of unauthorized receivers that can pirate the stock
market information transmitted by a radio station without the payment of any
fees. The Company believes its SIR system is more secure than existing stock
market receivers and reduces the possibility that information could be pirated
without the payment of monthly fees. In June 1996 the Company received its first
order for SIR from an affiliate of Radio Guangdong for 10,000 SIR units. The
Company expects to deliver units related to such order in September 1996.
Significant funding will be required to complete the development of the
Voice Pager and SIR technology and market same. The Company intends to utilize
proceeds raised from this Offering to continue to fund the development,
manufacture and marketing of the Voice Pager and SIR Technologies. There can be
no assurance, however, that the Company will be able to raise sufficient proceed
to successfully develop, manufacture and market its products (see "Business").
The Company's offices are located at 1341 N. Delaware Avenue, Philadelphia,
Pennsylvania 19125. The Company's telephone number is (215) 425-8682.
Securities Outstanding
Prior to Offering(1) Shares of Common Stock 16,058,604
Shares of Series A Preferred Stock 177,606
Shares of Series B Preferred Stock 664,110
Shares of Series C Preferred Stock 97,459
Securities Outstanding
After Offering(1) 18,759,728 shares of Common Stock and all shares of
Preferred Stock outstanding prior to Offering.
Use of Proceeds: The Company intends to use the net proceeds of $4,400,000
raised in this Offering for the further development of its
Voice Pager and SIR products, the acquisition of Voice
Pager and SIR raw materials and inventories and for general
working capital purposes.
Risk Factors: An investment in the Company's securities involves a high
degree of risk. For a discussion of certain risk factors
effecting the Company, see "Risk Factors".
4
<PAGE>
OTC Common Stock
Bulletin Board
Symbol: SGAL
(1) Unless indicated to the contrary, all references in this Prospectus to the
Company's outstanding securities do not give effect to (i) 2,358,332 Shares
reserved for issuance upon exercise of outstanding warrants and options
(including 100,000 Shares issuable upon exercise of the Warrant); and (ii)
Shares reserved for issuance pursuant to the Company's employee stock option
plan.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected financial information of
the Company and is qualified in its entirety of the more detailed Financial
Statement elsewhere and Note thereto indicated in this Prospectus.
<TABLE>
<CAPTION>
For the Years Ended July 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of
Operating Data
Sales $ -- $ -- $ 666,000 $ 347,000 $ 34,000
Cost of Sales -- -- 337,000 343,000 445,000
----------- ----------- ----------- ----------- -----------
Gross Profit (Loss) -- -- 329,000 4,000 (411,000)
----------- ----------- ----------- ----------- -----------
Operating Expenses 51,000 417,000 1,651,000 1,275,000
General and
Administrative
Expenses 1,993,000 1,213,000 2,382,000 3,521,000 2,936,000
----------- ----------- ----------- ----------- -----------
Total Operating
Expenses and General
and Administrative
Expenses 1,993,000 1,264,000 2,799,000 5,172,000 4,211,000
----------- ----------- ----------- ----------- -----------
Loss from Continuing
Operations before
Other Income
(Expense) (1,993,000) (1,264,000) (2,470,000) (5,168,000) (4,622,000)
Other Income
(Expense) (193,000) (295,000) (565,000) (259,000) (278,000)
----------- ----------- ----------- ----------- -----------
Loss from Continuing
Operations (2,186,000) (1,559,000) (3,035,000) (5,427,000) (4,900,000)
Income (Loss) from
Discontinued
Studio Operations -- -- -- 4,000 (155,000)
Extraordinary Gain 710,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net (Loss) $(1,476,000 $(1,559,000) $(3,035,000) $(5,423,000) $(5,055,000)
=========== =========== =========== =========== ===========
(Loss) Per Share:
Cont. Operations $ (.23) $ (.21) $ (45) $ (.19) $ (.95)
Discont. Operations -- -- -- -- (.03)
Extraordinary Gain .07 -- -- -- --
----------- ----------- ----------- ----------- -----------
Loss Per Share $ (.16) $ (21) $ (.45) $ (1.19) $ (.98)
=========== =========== =========== =========== ===========
Weighted Average
Number of
Common Stock
Outstanding 9,444,000 7,378,000 6,751,000 4,554,000 5,141,000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
As of July 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total Assets $ 1,728,000 $ 40,000 $ 30,000 $ 876,000 $ 1,981,000
Working Capital
(Deficit) $ 1,204,000 $(6,762,000 $(5,850,000) $(4,111,000) $(3,649,000)
Long Term Debt $ -- $ 29,00 $ 29,000 $ 171,000 $ 93,000
Total Stockholders'
Equity (Deficiency) $ 1,304,000 $(6,770,000) $ (5,851,00) $(3,832,000) $(2,446,000)
</TABLE>
7
<PAGE>
Statement of Operating Data
Nine Months Ended Nine Months Ended
April 30, 1996 April 30, 1995
------------------ --------------
Sales $ --- $ ---
Cost --- ---
Total Operating Expenses 1,874,000 1,700,000
Loss from Continuing Operations
Before Other Income (Expense) (1,874,000) (1,700,000)
Extraordinary Gain 52,000 433,000
Net (Loss) (1,823,000) (1,300,400)
Net Loss Per Share (.13) (.14)
Weighted Average Number 13,798,000 9,318,000
of Common Stock Outstanding
Balance Sheet Data
April 30, 1996
Unaudited
Actual Pro Forma (1) As Adjusted (1)(2)
------ ------------- ------------------
Total Assets 159,000 1,867,000 6,267,000
Working Capital (Deficit) (301,000) 1,407,000 5,807,000
Long Term Debt -- -- --
Total Stockholder's
Equity (173,000) 1,535,000 5,935,000
(Deficit)
(1) Pro Forma Information gives effect to the Company's receipt of net proceeds
of $1,708,000 from the exercise of warrants during the period May 1, 1996
through July 31, 1996.
(2) Gives effect to the net proceeds to be received by the Company on the sale
of all 2,500,000 Shares offered hereby.
8
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE A
HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO
LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE INVESTOR SHOULD, PRIOR
TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS ALL
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
1. Significant Accumulated Deficit and Operating Losses.
The Company has incurred significant losses from operations since its
inception and has accumulated a deficit of approximately $17,919,000 and
$19,742,000 respectively through July 31, 1995 and April 30, 1996 respectively.
The Company reported net losses of approximately $1,476,000, $1,559,000 and
$3,035,000 respectively for the years ended July 31, 1995, 1994 and 1993 and a
net loss for the nine month period ended April 30, 1996 of $1,823,000. All of
the Company's losses prior to 1995 related to its failed attempts to engage in
the music and recording industry. The Company's recent losses relate to
corporate overhead, administrative expenses and other expenses, including
expenses incurred in developing the Company's Voice Pager and SIR technologies.
While the Company believes that it will begin to generate revenues in fiscal
1997, there can be no assurance that if such revenues are generated, they will
be sufficient to allow the Company to operate profitably. The Company's ability
to generate sufficient revenue in the future will be dependent upon many factors
including the successful development of the Company's technology, the Company's
ability to effectively compete with existing products in China and other
markets, the degree of competition faced by the Company, the Company's ability
to respond to changes in economic and regulatory conditions in China and other
foreign markets and the ability of Chinese and other radio stations to
successfully market the use of the Company's products in China and other foreign
market places. There can be no assurance that the Company will generate
sufficient revenues to generate positive cash flow or operating income.
2. Recent Attempts to Reorganize Business.
Recently the Company has decided to focus its efforts exclusively on the
development, manufacture and sale of the Voice Pager and SIR products as well as
other technologies which may develop therefrom. In the recent past the Company
attempted to reorganize its business through the entry into agreements and
letters of intent to acquire a Chinese air conditioner manufacturer and
establish a joint venture to manufacture silk products. The Company terminated
these agreements and a number of other non-binding memorandum agreements
regarding other proposed ventures in Southeast Asia and Europe. Since the
Company has only recently been involved in its current business it will be
subject to all the risks inherent in attempting to establish relatively new
business ventures as well as the risks associated with engaging in business
operations in China and other foreign jurisdictions. These risks include the
potential inability of the Company to efficiently operate the business, the need
for substantial
9
<PAGE>
working capital, and the absence of an existing operating history. There can be
no assurance that the Company will either generate sufficient proceeds or
operate its business effectively.
3. Need for Further Financing.
The Company intends to rely upon the proceeds derived from the sale of the
Shares to fund its business plans and further the development of its technology
as well as market its products. The Company believes that a minimum of
$2,000,000 is necessary to finalize development of the Voice Pager and fill
existing orders for SIR units. There can be no assurance that any of the Shares
will be sold. Moreover, there is no minimum number of Shares which must be sold
in order for an investor's subscription to be accepted by the Company. In the
event that a minimum of $2,000,000 is not raised through the sale of the Shares,
the Company will be required to seek out additional sources of capital and/or
debt financing in order to raise the funds necessary to consummate its plans.
The Company presently has no binding commitments and/or agreements to secure
such funding. Accordingly there can be no assurance that such financing would be
available or if available on terms acceptable to the Company. In the event
additional or acceptable financing is unavailable the Company would not be able
to extend its operations.
4. Lack of Experience in Existing Business
The Company lacks any substantial prior expertise in the
telecommunications industry. Accordingly, the Company will be required to rely
upon its relationship with Chinese and other radio stations to assist the
Company in the marketing and sale of the Company's products. The Company intends
to engage consultants to review operations of its businesses and provide advice
to the Company regarding the efficiencies of such operations.
5. Lack of Customers and Limited Supplier.
The Company currently has only one order for its SIR products and does not
have any orders for its Voice Pager. Accordingly the Company will be required to
seek out customers for its products in order to successfully operate its
business. Since the Company's products represent new technologies, there is no
proven market which exists for its products. Therefore the Company will be
required to establish with the Chinese and other radio stations the superiority
and advantages that the Company's products possess over existing technologies.
However there is no assurance that the Company will be successful in this
regard.
The Company currently relies on a limited number of suppliers of
components and other parts for its SIR and proposed Voice Pager systems. The
Company intends to rely on one manufacturer for application specific integrated
circuits for its products. Failure or delay by the Company's suppliers in
fulfilling its anticipated needs would adversely affect the Company's ability to
deliver and market its products. The Company may have difficulty in obtaining
alternative suppliers due to, among other things, possible material shortage or
possible lack of adequate purchasing power.
10
<PAGE>
6. Evolving Market; New Product Development; Technological Obsolescence.
The telecommunication and pager markets are characterized by evolving
industry requirements which may result in product or technology obsolescence. As
a result, certain companies may be developing technologies or products of which
the Company is unaware which may be functionally similar, or superior, to some
or all of those offered by the Company. As a result of the above, the ability of
the Company to compete will depend on its ability to adapt, enhance and improve
its existing products and technology and, if necessary, to develop and introduce
to the marketplace in a timely and cost-competitive manner new products and
technology. There can be no assurance that the Company will be able to compete
successfully, that its competitors or future competitors will not develop
technologies or products that render the Company's products and technology
obsolete or less marketable or that the Company will be able to successfully
enhance its products or technology or adapt them satisfactorily. In addition,
the Company's success will depend upon its current and proposed technologies and
products meeting acceptable cost and performance criteria in the marketplace.
There can be no assurance that technologies and products will meet applicable
price or performance objectives or that unanticipated technical or other
problems will not occur which would result in increased costs or material
delays. Also, there can be no assurance that new technologies will not be
developed in the near future by the Company or its competitors which would
render the Company's products obsolete. See "Business".
New product development efforts are subject to all of the risks inherent
in the development of new technology and products (including unanticipated
delays, expenses, technical problems or difficulties, as well as the possible
insufficiency of funding to complete development). There can be no assurance as
to when, or whether, the Voice Pager will be successfully developed. No
assurance can be given that prototypes and final products can be developed
within a reasonable development schedule, if at all. There can be no assurance
that the Company will have sufficient economic or human resources to complete
such development in a timely manner, or at all, or that it could enter into
economically reasonable arrangements for the completion of such products by
third parties.
7. Product Protection and Infringement.
The Company intends to rely on a combination of patents, trade secret,
copyright and trademark laws, together with non-disclosure agreements, to
establish and protect proprietary rights in its products. In January 1996 the
Company filed an application for a U.S. Patent on its Voice Pager. There can be
no assurance that such patent will be issued or if issued that it will afford
the Company's product adequate protection. Although the issuance of a United
States Patent entitles the owner to a statutory presumption of validity, that
presumption is not conclusive as to validity or the scope or other
enforceability of the claims therein. The validity and enforceability of a
patent can be challenged by litigation after its issuance, and, if the outcome
of such litigation is adverse to the owner of the patent, other parties may be
free to use the subject matter covered by the patent. Moreover, the cost of
defending patents against infringing uses could require substantial expenditures
which the Company may be unable to
11
<PAGE>
afford. There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate to prevent misappropriation of its
technology or the independent development by others of similar technology. In
addition, the laws of China and other countries where the Company may attempt to
engage in business may not protect the Company's proprietary rights to the same
extent as do the laws of the United States. There can be no assurance that
unauthorized parties will not attempt to copy aspects of the Company's products
or obtain and use information that the Company regards as proprietary.
8. Competition.
The Company's products compete with those of numerous well-established
companies which design, manufacture or market beepers, numeric pagers and
alphanumeric pager systems and products. All of these companies have
substantially greater financial, technical, personnel and other resources than
the Company and have established reputations for success in the development,
licensing, sale and service of their products and technology. Certain of these
competitors may also have the financial resources necessary to enable them to
withstand substantial price competition or downturns in the market for
integrated security systems and related products.
9. Challenges of Growth.
Should the Company successfully raise funds in this Offering and
successfully achieve market acceptance for its Voice Pager and SIR products in
China and other foreign markets, of which there can be no assurance, the Company
anticipates a period of rapid growth that is expected to place a strain on the
Company's administrative, financial and operational resources. The Company's
ability to manage any staff and facilities growth effectively may require it to
continue to improve its operations, financial and management controls, reporting
systems and procedures, install new management information and control systems
and to train, motivate and manage its employees. There can be no assurance that
the Company will install such management information and control systems in an
efficient and timely manner or that the new systems will be adequate to support
the Company's operations. If the Company's management is unable to manage growth
effectively, the Company could experience significant delays or unforeseen costs
in the transition of its technology and research and development activities,
which delays or costs could have a material adverse impact on the Company's
prospects or result of operations.
10. Reliance upon Chinese Radio Station Owners.
Successful implementation of the Company's Voice Pager and SIR products
require access by users to FM radio frequencies. Accordingly, the Company has
concentrated its marketing efforts on Chinese and other radio stations by
explaining the benefits of the Company's products as compared to competing
products and the ability of radio stations to generate revenue from a portion of
their FM signals which are currently underutilized. The Company must also
convince radio stations to invest funds necessary to adapt their existing FM
12
<PAGE>
radio transmitters to accommodate the Company's technology and establish support
and marketing departments necessary to operate a pager information business.
There can be no assurance that the Company will be successful in this regard.
11. Implementation of Technology.
Existing Chinese FM radio transmitters have not yet been used to
commercially transmit messages and other information in the manner in which the
Company's Voice Pager and SIR products require. Accordingly the implementation
of the Company's Voice Pager and SIR products requires existing FM radio
transmitters to undergo various technical changes, operational changes and
improvements. There can be no assurance that the Company's technology will be
able to deliver to subscribers commercially marketable stored voice messages or
stock information services. In addition, delayed delivery of new technology is
not uncommon in the telecommunications industry. There can be no assurance that
the Company's suppliers will be able to meet completion and delivery target
dates for the Company's Voice Pager or SIR units. To the extent that components
required to deliver the Company's products are unavailable the implementation of
the Company's technology will be delayed, adversely affecting the Company's
financial condition and results of future operations.
12. Dependence on Contract Manufacturers.
The Company will rely on contract manufacturers to produce the Company's
Voice Pager and SIR products. Therefore, the Company will be dependent upon such
contract manufacturers to timely produce the Company's products based upon the
Company's specifications. There can be no assurance that such contract
manufacturers will perform to the Company's satisfaction or be responsive to the
needs of the Company's customers.
13. Foreign Operations.
The Company's existing operations currently relate to the conduct of
operations in China. The Company may also seek to establish business in other
foreign countries. These operations will be subject to the risks of conducting
business internationally, including the possible instability of foreign
governments, changes in regulatory requirements, difficulties in obtaining
foreign licenses, as well as other general barriers and restrictions in relation
to compliance with foreign laws. In addition, any future revenues generated by
the Company upon successful consummation of its planned activities would be
subject to currency fluctuations which could negatively affect the Company.
Furthermore, the laws of various jurisdictions where the Company intends to
establish its business activities may not recognize or permit the assertion of
certain claims with respect to violation of securities laws which are commonly
recognized in the United States. Accordingly, should the Company be in violation
of any such securities laws, shareholders may be unable to seek and/or obtain
redress with respect to such violations against assets of the Company's
operations located in international jurisdictions.
13
<PAGE>
14. Dependence Upon Key Personnel.
The Company is substantially dependent upon the continued services of
Peter Pelullo, its Chairman and President and Michael Yang, the President of the
Company's subsidiary Global. Mr. Pelullo has entered into an employment
agreement with the Company which expires in 2001. Mr. Yang has entered into an
employment agreement with Global which expires in 1998. The loss of the services
of Mr. Pelullo or Mr. Yang through incapacity or otherwise would have a material
adverse effect upon the Company's business and prospects. To the extent that the
services of Mr. Pelullo and/or Mr. Yang become unavailable, the Company will be
required to retain other qualified personnel, and there can be no assurance that
it will be able to recruit and hire qualified persons upon acceptable terms. The
Company does not possess key person life and disability insurance on the life of
Mr. Pelullo or Mr. Yang.
15. No Underwriter.
The Shares are being offered by the Company and may also be offered by
broker-dealers. The Company has not retained an underwriter to assist in
offering the Shares. The officers and directors of the Company have limited
experience in the offer and sale of securities consequently, these individuals
may be unable to effect the sale of the Shares even with the assistance of
broker-dealers. In the event an underwriter is retained by the Company, the
offering of the Company's Shares would be suspended until such time as the
Company's Registration Statement, including this Prospectus, was amended to
reflect such retention. The Registration Statement would then require additional
review and clearances by the Securities and Exchange Commission, the National
Association of Securities Dealers, Inc. (the "Association") and state regulatory
authorities. The Company could be expected to incur significant additional legal
and accounting costs if further review were required to be undertaken by
government authorities. There is no assurance the Company and broker-dealers are
capable of selling all, or any, of the Shares offered or that a sufficient
number of Shares will be sold to fund the Company's plans. The Company believes
that a minimum of $2,000,000 is necessary in order to complete the development
of the Voice Pager and market the Company's products. (See "Terms of Offering").
16. OTC Bulletin Board.
The Company's Common Stock is currently quoted on the OTC Bulletin Board.
The OTC Bulletin Board is an NASD sponsored and operated inter-dealer automated
quotation system for equity securities not included on the NASDAQ System. The
OTC Bulletin Board has only recently been introduced as an alternative to "pink
sheets" trading of over-the-counter securities. Consequently, liquidity and
stock price of the Company's securities in the secondary market may be adversely
affected.
14
<PAGE>
17. No Assurance of Continued Public Market.
There is no assurance that a regular trading market for the Company's
securities will continue after the Overseas Offering. The market price of the
Company's Common Stock may be subject to significant volatility and purchasers
of the Company's securities may not be in a position to sell such securities at
prices related to the price at which purchases were made.
18. Penny Stock Regulations.
The Securities Enforcement Penny Stock Act of 1990 requires specific
disclosure to be made available in connection with trades in the stock of
companies defined as "penny stocks. The Commission has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on NASDAQ and any equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operation for three years; (ii) net tangible
assets of at least $5,000,000, if such issuer has been in continuous operation
for less than three years; or (iii) average annual revenue of at least
$6,000,000, if such issuer has been in continuous operation for less than three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risk associated therewith as well as
the written consent of the purchaser of such security prior to engaging in a
penny stock transaction. The regulations on penny stocks may limit the ability
of the purchasers of the Company's securities to sell their securities in the
secondary marketplace. The Company's Shares are currently considered a penny
stock.
19. Control by Management.
The Company's management owns a significant portion of the Company's
outstanding Common Stock (approximately 33% prior to completion of the Offering
and 29% after giving effect to the sale of 2,500,000 shares in the Offering) and
will be able to materially influence the election of future Company directors
and otherwise control the Company.
20. Shares Eligible for Future Sale.
Approximately 9,109,868 outstanding shares of the Company's Common Stock
are restricted securities, as that term is defined in Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). Absent
registration under the Securities Act or the availability of an exemption under
the Securities Act, the sale of such shares is subject to Rule 144. In general,
under Rule 144, subject to the satisfaction of certain other conditions, a
person, including an affiliate of the Company, who has beneficially owned
restricted shares of Common Stock for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class, if
the Common Stock is quoted on NASDAQ or a stock exchange, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
presently is
15
<PAGE>
not and who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least three years is entitled to sell such shares under Rule
144, without regard to any of the volume limitations described above. There are
722,972 of such restricted shares currently outstanding. The future sale by
holders of restricted stock and shares issued upon exercise of the Warrant and
other outstanding warrants and options, may have an adverse effect on the market
price of the Company's Shares.
21. Possible Effects of Certain Articles of Incorporation and Bylaw
Provisions.
The Company's Articles of Incorporation and Bylaws contain provisions that
may discourage acquisition bids for the Company. Upon completion of the Overseas
Offering, the Company will have substantial authorized but unissued capital
stock available for issuance. The Company's Articles of Incorporation contain
provisions which authorize the Board of Directors, without the consent of
stockholders, to issue additional shares of Common Stock and issue shares of
Preferred Stock in series, including establishment of the voting powers,
designation, preferences, limitations, restrictions and relative rights of each
series of Preferred Stock.
22. Absence of Cash Dividends.
The Board of Directors does not anticipate paying cash dividends on the
Common Stock for the foreseeable future and intends to retain any future
earnings to finance the growth of the Company's business. Payment of dividends,
if any, will depend, among other factors, on earnings, capital requirements and
the general operating and financial conditions of the Company. See "Dividend
Policy."
23. Potential Future Dilution.
In order to consummate its business plans and commence the Ventures, the
Company may be required to issue significant additional shares of its Common
Stock and other securities. Moreover, the Company had outstanding as of the date
of this Prospectus (i) 177,606 shares of Series A Preferred Stock, (ii) 664,110
of Series B Preferred Stock (iii) 97,459 shares of Series C Preferred Stock; and
(iv) warrants to purchase an aggregate of up to an additional 2,358,332 shares
of Common Stock. Each share of Series A, Series B and Series C Preferred Stock
will be automatically converted into one share of Common Stock on August 31,
1996, April 30, 1998 and April 30, 1998, respectively, if they have not been
previously redeemed by the Company. In addition all Series A, B and C Preferred
Shares shall be automatically converted into one share of Common Stock once
$5.00 per share has been paid as a dividend or distribution to preferred
holders. The Company may, at its option, redeem all of the Preferred Shares by
either the payment of cash or through the issuance of Common Stock at different
rates depending upon when the redemption is made (see "Description of
Securities"). The maximum number of Common Stock issuable upon the Company's
election to redeem the (i) Series A Preferred Stock is 355,212 Common Stock;
(ii) Series B Preferred Stock is 1,535,275 Common Stock; and (iii) Series C
Preferred Stock is 243,647 Common Stock. The maximum number of shares issuable
16
<PAGE>
upon redemption by the Company of the Series A, B and C Preferred Stock
(2,134,134) and the 2,358,332 shares issuable upon exercise of all of the
warrants represents approximately 28% of the Company's outstanding shares of
stock (16,058,604) as of the date of this Prospectus. Presently preferred
shareholders are entitled to one vote for every five preferred shares which they
own. Upon conversion of preferred shares into Common Stock, the preferred
shareholders will be afforded one vote for every share of Common Stock owned.
Assuming that the maximum number of shares of Common Stock were issued in order
to redeem the preferred shares, the preferred shareholders voting power would
increase from its present level of 426,827 shares or 3% of the total outstanding
votes as of the date of this Prospectus to 2,134,134 shares or 12% of
outstanding votes. In addition the 2,358,332 shares issuable upon exercise of
all of outstanding warrants (without giving effect to Preferred Share
conversions) would represent 13% of the outstanding shares of Common Stock after
giving effect to such exercise. In the event the maximum number of Common Stock
were issued to redeem the Preferred Shares (2,134,134 Shares) and all
outstanding warrants were exercised (2,358,332) shares, an aggregate of
4,492,466 additional Shares would be issued which Shares would represent 22% of
the issued and outstanding shares (20,551,070) of the Company's Common Stock.
Accordingly, the percentage of the Company owned by purchasers in this Offering,
as well as existing shareholders, will be substantially reduced and their
respective voting power over the Company significantly diluted upon the
conversion of preferred shares into Common Stock and the exercise of the
warrants. In addition, further dilution will occur in the event the Company
issues additional shares of its securities in connection with the consummation
of its business plans described above.
24. Priority of Preferred Common Stock.
The Company has outstanding an aggregate of 177,606 shares of Series A
Preferred Stock; 664,110 shares of Series B Preferred Stock; and 97,459 shares
of Series C Preferred Stock in satisfaction and retirement of certain
liabilities and accrued compensation. The Company's Common Stock is subordinated
to the Series A, Series B and Series C Preferred Stock in regard to liquidation
rights and dividend payments. Shares of Series C Preferred Stock are superior to
shares of Series A and B Preferred Stock as well as the Company's Common Stock.
All shares of outstanding Series C Preferred Stock are owned by the Company's
President, Peter S. Pelullo. The Company may issue additional shares of Series
A, Series B and Series C Preferred Stock in the future in order to retire
additional liabilities. The existence of outstanding shares of Series A, Series
B and Series C Preferred Stock adversely effect holders of Common Stock upon the
liquidation of the Company and will otherwise preclude the Company from paying
dividends to Common Stock holders until all past dividends on Preferred Shares
have been paid in full.
25. Possible Contingent Liability.
In connection with the modification of certain warrants in January 1996, a
potential claim may be made that the Company did not have an adequate basis for
an exemption for the issuance of such revised warrants under the Securities Act.
In such event, the transaction could be
17
<PAGE>
considered integrated with offers and/or sales made by Selling Securityholders
of the Company pursuant to a December 12, 1995 definitive Prospectus, subjecting
the Company to potential liability for sales of unregistered securities. The
owner of the warrant prior to the January 1996 modification has agreed to
release the Company from any and all claims regarding this matter.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the National Association of
Securities Dealers, Inc., over-the-counter market on the OTC Bulletin Board (the
"Bulletin Board") under the symbol "SGAL".
The following table sets forth, for the periods indicated, the high and
low bid prices per share of Common Stock as reflected in the Bulletin Board. All
prices have been adjusted to reflect a 2 for 1 stock split which was effective
May 10, 1991, and a 1 for 3 reverse stock split effective October 21, 1992.
Fiscal Year Ended July 31,
1993
High Bid Low Bid
-------- -------
First Quarter 1 1/4
Second Quarter 1 1/2 5/8
Third Quarter 2 3/8 1
Fourth Quarter 1 7/8 1 1/4
Fiscal Year Ended July 31,
1994
High Bid Low Bid
-------- -------
First Quarter 1 1/2 1/8
Second Quarter 7/8 1/16
Third Quarter 1 7/8 5/8
Fourth Quarter 3 1/8 1
Fiscal Year Ended July 31,
1995
High Bid Low Bid
-------- -------
First Quarter 1 7/8 7/8
Second Quarter 3 1/8 1 11/16
Third Quarter 4 15/16 2 7/8
Fourth Quarter 5 7/8 4 3/4
19
<PAGE>
Fiscal Year Ended July 31, 1996
High Bid Low Bid
-------- -------
First Quarter 6 5.25
Second Quarter 5.875 3.125
Third Quarter 5.125 4.25
The above quotations reflect inter-dealer prices, and do not include
retail mark-up, mark-downs or commissions and may not necessarily represent
actual transactions.
On August 27, 1996, the last sale price of the Company's Common Stock as
reported on the Bulletin Board was $2.375 per share.
As of August 23, 1996, the Company estimates that it had approximately 136
stockholders of record. Such number of record holders was derived from the
stockholder list maintained by the Company's transfer agent, American Stock
Transfer & Trust Co., and does not include list beneficial owners of the Company
whose shares are held in the names of various dealers and clearing agencies
DIVIDEND POLICY
The Company has never declared or paid any cash dividends and does not
intend to do so for the foreseeable future. The Company currently intends to
retain all earnings, if any, to finance the continued development of its
business. Any future payment of dividends will be determined solely in the
discretion of the Company's Board of Directors.
USE OF PROCEEDS
The Company intends to utilize the net proceeds received from this
Offering, estimated to be $4,400,000 for the further development of the
Company's technology, the acquisition of raw materials and inventory for the
Voice Pager and SIR units as well as other general corporate and working capital
purposes. The Company currently intends to use approximately $1,500,000 for the
purchase of raw materials and inventory for the Voice Pager and SIR units,
$2,400,000 for general working capital purposes and $500,000 for the further
development of its products. Pending the utilization by the Company of funds for
the foregoing purposes, the Company intends to invest the net proceeds of this
Offering in investment grade, interest bearing securities, primarily with
maturities of one year or less.
The Company believes that the net proceeds of this Offering and interest
earned thereon, together with existing resources will be sufficient to fund the
Company's activities for the next 24 months. However, there can be no assurance
that the Company will not require additional
20
<PAGE>
funds in order to successfully consummate its acquisition plans. The Company
intends to utilize the proceeds, if any, from the exercise of any warrants for
general working capital purposes as well as continued expansion plans.
The foregoing represents the Company's best estimate of its allocation of
net proceeds generated in this Offering based upon the current state of its
business operations, its current plans and current economic and industry
conditions. These proposed expenditures are subject to reallocation among the
categories listed above or to new categories. Any such changes will be made at
the discretion of the Board of Directors of the Company. If the forecasted
estimates of expenditures are inadequate, additional sums may be drawn from
working capital. Conversely, any amount which is over-estimated will be retained
and used as general working capital.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1996, and as adjusted to give effect to the sale of 2,500,000 shares
offered hereby and the utilization of net proceeds from such sales as described
in "Use of Proceeds.
April 30, 1996 April 30, 1996
Actual As Adjusted (1)
------------- ---------------
Current Liabilities $ 332,000 $ 332,000
Long Term Debt ---- ----
Stockholders' Equity 14,000 17,000
Common Stock $.001 par value
50,000,000 shares authorized;
14,106,000 shares issued and
outstanding; 16,656,000 shares
outstanding as adjusted
Additional Paid for Capital 14,856,000 19,354,000
Preferred Stock
Series A, $5.00 convertible,
$.001 par value; authorized,
750,000 shares; issued and
outstanding, 178,000 shares at
April 30, 1996 and July 31,
1995. ---- ----
Series B, $5.00 convertible,
$.001 par value; authorized,
800,000 shares; issued and
outstanding, 664,000 shares
at April 30, 1996 and
726,000 shares at July 31,
1995 1,000 1,000
Series C, $5.00 convertible,
$.001 par value; authorized,
109,000 shares; issued and
outstanding, 97,000 shares
at April 30, 1996 and
109,000 shares at July 31,
1995. ---- ----
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<PAGE>
Additional Paid in Capital 4,698,000 4,698,000
Accumulated Earnings (Deficit) (19,742,000) (20,342,000)
Total Stockholders Equity
(Deficit) (173,000) 4,227,000
(1) Assumes payment of a 10% commission on the sale of all Shares and the
payment of $100,000 in estimated expenses of the Offering. Does not assume the
exercise of any outstanding warrants or options.
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<PAGE>
DILUTION
As of April 30, 1996, the Company had a net negative tangible book value
(total tangible assets less total liabilities) of $(245,000) or $(.02) per share
of Common Stock. After giving effect to the sale of 2,500,000 shares of Common
Stock offered hereby and the receipt of the net proceeds therefrom, the pro
forma net tangible book value of the Company will be approximately $4,155,000 or
$.25 per share of Common Stock. This represents an immediate dilution of $1.75
for each share of Common Stock purchased by public investors and an immediate
increase of $.27 per share to existing shareholders. There can be no assurance
that any or all of the shares offered will be sold. In the event less than all
of the shares are sold the Company's book value will be lower and investors will
experience greater dilution. The following table which illustrates this dilution
does not assume any exercise of any outstanding warrants or options.
Public offering price per share............ $2.00
Net tangible book value per
share at April 30, 1996................... (245,000)
Increase in net tangible book value
per share of Common Stock
attributable to public investors....... 4,400,000
---------
Pro forma net tangible book value
per share after Offering............... 4,155,000
=========
Dilution per share to public
investors............................. $1.75
24
<PAGE>
The following table summarizes as of August 21, 1996, the differences
between existing stockholders and public investors with respect to the number
and percentage of shares of Common Stock purchased from the Company, the total
consideration and percentage of total consideration paid to the Company and the
average consideration per share paid (at an assumed initial public offering
price of $2.00 per share):
Average Price
Shares Purchased Total Consideration Per Share
------------------- ------------------- ------------
Number Percent Amount Percent
------ ------- ------ -------
Existing stockholders 16,058,064 87% 17,352,537 78% 1.08
Public Investors 2,500,000 13% 5,000,000 22% 2.00
---------- ---- ---------- ---- ----
Total 18,558,604 100% 22,352,537 100% 1.20
========== ==== ========== ==== ====
The foregoing tables assume no exercise of outstanding warrants and
options on or after August 21, 1996. As of that date there were 2,358,332
outstanding options or warrants to purchase shares of Common Stock. To the
extent these options and warrants are exercised, there will be further dilution
to the investors in this Offering.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as and for each of the five years in
the period ended July 31, 1995 have been derived from the audited financial
statements of the Company. This information should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus and "Management's Discussion and Analysis or Plan of Operation." The
selected data for the nine months ended April 30, 1996 and 1995 are unaudited,
but in the opinion of management of the Company, includes all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the Company's financial results for such periods.
<TABLE>
<CAPTION>
Financial Results For the Years Ended July 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of
Operating Data
Sales $ -- $ -- $ 666,000 $ 347,000 $ 34,000
Cost of Sales -- -- 337,000 343,000 445,000
----------- ----------- ----------- ----------- -----------
Gross Profit (Loss) -- -- 329,000 4,000 (411,000)
----------- ----------- ----------- ----------- -----------
Operating Expenses 51,000 417,000 1,651,000 1,275,000
General and
Administrative
Expenses 1,993,000 1,213,000 2,382,000 3,521,000 2,936,000
----------- ----------- ----------- ----------- -----------
Total Operating
Expenses and General
and Administrative
Expenses 1,993,000 1,264,000 2,799,000 5,172,000 4,211,000
----------- ----------- ----------- ----------- -----------
Loss from Continuing
Operations before
Other Income
(Expense) (1,993,000) (1,264,000) (2,470,000) (5,168,000) (4,622,000)
Other Income
(Expense) (193,000) (295,000) (565,000) (259,000) (278,000)
----------- ----------- ----------- ----------- -----------
Loss from Continuing
Operations (2,186,000) (1,559,000) (3,035,000) (5,427,000) (4,900,000)
Income (Loss) from
Discontinued
Studio Operations -- -- -- 4,000 (155,000)
Extraordinary Gain 710,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net (Loss) $(1,476,000) $(1,559,000) $(3,035,000) $(5,423,000) $(5,055,000)
=========== =========== =========== =========== ===========
(Loss) Per Share:
Cont. Operations $ (.23) $ (.21) $ (.45) $ (.19) $ (.95)
Discont. Operations -- -- -- -- (.03)
Extraordinary Gain .07 -- -- -- --
----------- ----------- ----------- ----------- -----------
Loss Per Share $ (.16) $ (.21) $ (.45) $ (1.19) $ (.98)
Weighted Average
Number of Common
Stock Outstanding 9,444,000 7,378,000 6,751,000 4,554,000 5,141,000
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
As of July 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total Assets $1,728,000 $ 40,000 $ 30,000 $ 876,000 $ 1,981,000
Working Capital
(Deficit) $1,204,000 $(6,762,000) $(5,850,000) $(4,111,000) $(3,649,000)
Long Term Debt $ -- $ 29,000 $ 29,000 $ 171,000 $ 93,000
Total Stockholders'
Equity (Deficiency) $1,304,000 $(6,770,000) $(5,851,000) $(3,832,000) $(2,446,000)
</TABLE>
27
<PAGE>
Statement of Operating Data
Nine Months Ended Nine Months Ended
April 30, 1996 April 30, 1995
------------------ -----------------
Sales $ --- $ ---
Cost --- ---
Total Operating Expenses 1,874,000 1,700,000
Loss from Continuing Operations
Before Other Income (Expense) (1,874,000) (1,700,000)
Extraordinary Gain 52,000 433,000
Net (Loss) (1,823,000) (1,300,400)
Net Loss Per Share (.13) (.14)
Weighted Average Number 13,798,000 9,318,000
of Common Stock Outstanding
Balance Sheet Data
April 30, 1996 Unaudited
--------------------------------------------------
Actual Pro Forma (1) As Adjusted (1)(2)
------ ------------- ------------------
Total Assets 159,000 1,867,000 6,267,000
Working Capital (Deficit) (301,000) 1,407,000 5,807,000
Long Term Debt -- -- --
Total Stockholder's Equity
(Deficit) (173,000) 1,535,000 5,935,000
(1) Pro Forma Information gives effect to the Company's receipt of net proceeds
of $1,708,000 from the exercise of warrants during the period from May 1, 1996
through July 31, 1996.
(2) Gives effect to the net proceeds to be received by the Company on the sale
of all 2,500,000 Shares offered hereby.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following discussion should be read in conjunction with the Company's
consolidated Financial Statements appearing elsewhere in this Prospectus.
GENERAL OPERATIONS
From 1993 through early 1995 the Company's management attempted to develop
valuable contacts in the Southeast Asia region, particularly in the China, in an
effort to establish distribution and agency arrangements that would link
Southeast Asian and U.S.-based recording companies and artists and other
business ventures in Southeast Asia and Austria. In April 1995 the Company
acquired an 80% interest in Global Telecommunications of Delaware, Inc.
("Global"), an entity which at such time was attempting to complete development
of the Voice Pager technology.
NINE MONTHS ENDED APRIL 30, 1996
VS. NINE MONTHS ENDED APRIL 30, 1995
RESULTS OF OPERATIONS
For the nine months ended April 30, 1996, the Company incurred a net loss
of $1,823,000 on revenues of $2,000. This compares to a net loss of $1,304,000
on revenues of $5,000 for the nine months ended April 30, 1995. The $519,000
increase in the net loss for the nine month period is attributed to an increase
in operating expenses of $174,000 and a decrease in the extraordinary gain on
extinguishment of debt of $381,000 offset by a decrease in interest expense of
$22,000 and an increase in interest income of $17,000.
Operating expenses for the nine months ended April 30, 1996 were
$1,874,000 compared to $1,700,000 for the nine months ended April 30, 1995, a
$174,000 increase. The difference can be attributed to a decrease in officers'
compensation of $193,000; an increase in other salaries and payroll costs of
$50,000; a decrease in consulting fees of $116,000; a decrease in professional
fees of $234,000; an increase in research and development costs of $390,000; an
increase in travel of $173,000; and an increase of $104,000 in other expenses.
The variances are attributed to the following components: a decrease in
officers' compensation and consulting fees relates to the issuance of 2,010,000
Shares and 1,083,000 shares of the Company's Common Stock, valued at $201,000
and $108,000 respectively during the nine months ended April 30, 1995; other
salaries and payroll costs increased because the Company hired a controller and
administrative staff; professional fees decreased due to the issuance of 267,000
shares of the Company's Common Stock, valued at $267,000 for services related to
the Subscription Agreement during the nine months ended April 30, 1995, which
was offset by increases in attorney/accountant expenses related to registration
statements during the nine months ended April 30, 1996; research and development
increased as a result of the operations of Global; travel expenses increased as
a result of increased travel to Europe and
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Southeast Asia to pursue and implement the finalization of the Underwriting
Agreement (as defined and discussed in the Company's Annual Report on Form
10-KSB for the year ended July 31, 1995), other joint venture opportunities, and
field testing for the Voice Pager and SIR; other expenses increased as a result
of increased directors' fees from the issuance of 200,000 Common Stock valued at
$150,000, auto lease expenses of $19,000, taxes primarily from payroll taxes in
the amount of $26,000, and these increases were offset by decreases in meals and
entertainment related to cost containment policies of $85,000, and rent
resulting from the issuance of 50,000 shares of the Company's Common Stock,
valued at $50,000 for lease obligations during the nine months ended April 30,
1995.
THREE MONTHS ENDED APRIL 30, 1996
VS. THREE MONTHS ENDED APRIL 30, 1995
RESULTS OF OPERATIONS
For the three months ended April 30, 1996, the Company incurred a net loss
of $422,000 on revenues of $1,000. This compares to a net loss of $733,000 on
revenues of $1,000 for the three months ended April 30, 1995. The $311,000
decrease in the net loss for the three month period is attributed to a decrease
in operating expenses of $614,000 and a decrease in the extraordinary gain on
extinguishment of debt of $208,000.
Operating expenses for the three months ended April 30, 1996 were $440,000
compared to $1,054,000 for the three months ended April 30, 1995, a $614,000
decrease. The difference can be attributed to a decrease in officers'
compensation of $191,000; an increase in other salaries and payroll costs of
$23,000; a decrease in consulting fees of $113,000; a decrease in professional
fees of $292,000; an increase in research and development costs of $33,000; an
increase in travel expenses of $48,000; and a decrease in other expenses of
$122,000. The variances are attributed to the following components: the decrease
in officers' compensation and consulting fees relates to the issuance of
2,010,000 and 1,083,000 shares of the Company's Common Stock, valued at $201,000
and $108,000 respectively, during the three months ended April 30, 1995; other
salaries and payroll costs relates to the hiring of a controller and
administrative staff; professional fees decreased due to the issuance of 267,000
shares of the Company's Common Stock, valued at $267,000 for services related to
the Subscription Agreement; research and development costs increased as a result
of the operations of Global; travel increased due to field testing in China and
financing prospects in Europe; and other expenses decreased as a result of a
decrease in meals and entertainment expenses from cost containment policies in
the amount of $63,000, and rent resulting from the issuance of 50,000 shares of
the Company's Common Stock, valued at $50,000 for lease obligations during the
three months ended April 30, 1995.
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LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1996, the Company had a working capital deficit of $301,000.
During the quarter, the Company conducted activities directed toward the
research and development of the SIR and Voice Pager.
As amended on January 12, 1996, the Company issued warrants ("CSP
Warrants") to purchase 400,000 Common Stock at an exercise price of $2.50 per
share. Of the 400,000 CSP Warrants, 177,000 were exercised as of April 30, 1996.
As amended on January 12, 1996, the Company also issued to Mid-West
Financial Consultants Corporation ("Mid-West") warrants ("P.A. Warrants") to
purchase 1,666,667 Common Stock at an exercise price of $2.50 share. The P.A.
Warrants expire on August 31, 1996.
The Company has registered all of the Shares issued pursuant to the
Underwriting Agreement and all of the Shares underlying the warrants under the
Securities Act.
As of April 30, 1996, the Company maintained a cash balance of $10,000.
From May 1, 1996 through July 31, 1996, the Company received approximately
$1,708,000 in proceeds from the exercise of outstanding warrants. Management
estimates that an additional $2,000,000 will be needed to fully fund the Company
to the point where the Company may be generating positive cash flow. There can
be no assurance, however, that (i) the Company will be able to fund the
Company's working capital requirements without the sale of the Shares or the
exercise of outstanding warrants and/or other financing and (ii) the Company
will be successful in marketing its SIR or Voice Pager products during Fiscal
1996 and/or generate positive cash flow.
Management is relying upon the proceeds of the Offering as well as the
exercise of outstanding warrants in order to provide the financing necessary to
complete the funding of the Company's plan and meet the Company's working
capital needs. There can be no assurance, however, that any of the Shares in
this Offering will be sold or that warrants will be exercised.
YEAR ENDED JULY 31, 1995
VS. YEAR ENDED JULY 31, 1994
RESULTS OF OPERATIONS
For the year ended July 31, 1995, the Company incurred a net loss of
$1,476,000 on revenues of $6,000. This compares to a net loss of $1,559,000 on
revenues of $26,000 for the year ended July 31, 1994. The $83,000 decrease in
net loss for the year is attributed to an increase of $780,000 in general and
administrative expenses offset by the cancellation of $710,000 in debt which was
an extraordinary gain realized during fiscal 1995 relating to the settlement of
certain outstanding debt and offset by a $113,000 decrease in interest expense.
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For the year ended July 31, 1994, new artists' development costs were
$51,000. The Company produced demonstration tapes for new artists, but was
unable to secure any distribution arrangements for such artists. During the year
ended July 31, 1995 the Company did not expend any funds in new artist
development costs.
General and administrative expenses for the year ended July 31, 1995 were
$1,993,000 as compared to $1,213,000 for the year ended July 31, 1994, a
$780,000 increase. The difference can be attributed to an increase of $53,000 in
officers' compensation, an increase of $97,000 in consulting fees, a $66,000
increase in professional fees and an increase of $580,000 in other expenses. The
variances are attributed to the following components: the increase in officers'
compensation relates to the issuance of 2,010,000 shares of Common Stock valued
at $201,000 and offset by salary reductions related to the retirement of the
Company's former Chairman of the Board in April, 1995; consulting fees increased
due to the issuance of 1,083,000 Common Stock valued at $108,000; professional
fees increased due to attorney/accountant expenses related to joint venture
transactions and debt settlement; and the $580,000 in other expenses related to
travel to Europe and Southeast Asia to pursue and implement the finalization of
the Underwriting Agreement and other joint venture opportunities, as well as
research and development costs related to Global Telecommunications of Delaware,
Inc.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1995, the Company had working capital of $1,204,000. During
the quarter ended July 31, 1995, the Company conducted no operations except for
activities directed toward reorganization of the Company's debt, and the
research and development of Global's digital Voice Pager.
On October 10, 1994, the Company entered into an agreement with Mid-West
regarding the proposed sale of 3,000,000 shares of the Company's Common Stock in
an off-shore transaction at $2.00 per share. As of October 24, 1995 the Company
has received $3,500,000 from Mid-West as an advance against the underwriting
agreement with Mid-West. In addition, during the first quarter of 1995, the
Company sold 300,000 shares of its Common Stock in an off-shore private
placement unrelated to the Overseas Offering and received $240,000.
As of July 31, 1995, the Company has received an aggregate of $917,000
under a subscription agreement (the "Subscription Agreement") with Dragon
Finance Limited ("Dragon"). The Subscription Agreement provided for the sale by
the Company of a total of 12,371,512 shares of Common Stock for an aggregate
purchase price of $11,800,000. The Subscription Agreement was terminated on
March 15, 1995. In May 1995, the Company authorized the issuance of an aggregate
of 150,000 shares of Common Stock to Dragon in consideration for $917,000 and in
satisfaction of all obligations which may have been owed by the Company to
Dragon. In addition, the Company had authorized 267,000 shares of Common Stock
to Mid-West in February, 1995, valued at $267,000 pursuant to an amendment of
the
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Subscription Agreement. The Company has recorded this as a cost of capital and
has reduced additional paid in capital accordingly.
As of July 31, 1995, the Company had liabilities of $424,000, and assets
of $1,728,000, compared to $6,810,000 in liabilities and $40,000 in assets as of
July 31, 1994. Funds used to reduce the Company's outstanding debt were received
from the Overseas Offering and other financings. As of July 31, 1994, a
significant amount of the Company's liabilities consisted of accrued wages owed
the officers, past due accounts payable, judgments and tax proceedings. During
1995, liabilities of $867,000 were reduced by the issuance of 175,000 shares of
Series A, $5 Convertible Preferred Stock for debt owed. Also liabilities of
$3,628,000 were reduced by the issuance of 726,000 shares of Series B, $5
Convertible Preferred Stock. Additionally, $906,000 of compensation accrued on
behalf of the President of the Company, was satisfied by the issuance of 108,759
shares of Series C, $5 Convertible Preferred Stock and the payment of $350,000.
The Company also recognized an extraordinary gain on the extinguishment of debt
of $710,000 during the year ended July 31, 1995, related to trade payables,
taxes payable and accrued expenses.
As of July 31, 1995, the Company had outstanding liabilities of
$424,000, which included judgments and tax assessments against it aggregating
$314,000. Management has been attempting to work out settlements of these
matters and believes that it will be able to satisfactorily resolve such
obligations. However, there can be no assurance that the Company will be
successful in this regard (see "Business - Legal Proceedings"). The Company's
ability to achieve any portion of its plan of operations depends upon its
ability to secure sufficient proceeds from this Offering.
FISCAL YEAR 1994 VS. FISCAL YEAR 1993
RESULTS OF OPERATIONS
The Company did not generate any material revenues during the fiscal year
ended July 31, 1994. During the fiscal year ended July 31, 1993 the Company
generated approximately $666,000 in total revenues. During the 1994 fiscal year
the Company was unable to place any of its artists with record distributing
companies or to raise sufficient financing to continue to fund the Company's
record operations. Accordingly, materially all of the Company's operations were
curtailed. During fiscal 1993 the Company reported $337,000 in cost of sales
generating a gross profit of $329,000. During the 1994 fiscal year the Company
had approximately $50,000 in new artists development costs and approximately
$1,000 in marketing and promotion costs as compared to $417,000 in operating
expenses in 1993. The Company's operating activities during the period were
extremely limited due to its financial situation.
General and administrative expenses were $1,213,000 during the 1994 year
and included approximately $328,000 for consulting services. 1993 fiscal year
general and administrative expenses totaled $2,381,000 of which $480,000 were
consulting fees. The decrease in such expenses resulted from the Company's
reduced operations and accrual of officers salaries. 1994
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net losses decreased by approximately $1,476,000 as compared to fiscal 1993
primarily as a result of reduced activities.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended July 31, 1994, the Company had a working
capital deficit of $6,762,000. During the fiscal year ended July 31, 1993, the
working capital deficit was $5,850,000. The increase in the working capital
deficit was the result of the Company having less funds to support its cost
structure. During the period the Company produced no records, however, the
Company did create master recordings on one artist but did not have sufficient
funding to properly promote the artist.
During the fiscal year ended July 31, 1994, the Company received
approximately $449,000 under a Subscription Agreement which expired and was
terminated in 1995. The Company also received approximately $166,000 in advances
of which $27,000 represented advances from officers. The advances from officers
were repaid during the period.
FISCAL YEAR 1993 VS. FISCAL YEAR 1992
RESULTS OF OPERATION
Revenues increased by approximately $313,000 in fiscal year 1993 from
$429,000 in fiscal year 1992. The increase in revenues reflected the sale of
albums from the one Company artist whose records were being distributed by
PolyGram Holding, Inc. ("PolyGram") pursuant to an agreement with the Company.
In August, 1991, the Company entered an exclusive distribution agreement with
PolyGram ("PolyGram Agreement"). The term of the PolyGram Agreement was for
eighteen (18) months with an option to renew for two one-year periods. The
distribution services rendered by PolyGram included, among other things,
billing, collecting and bearing credit risks, distribution and placement of
recordings produced by the Company, the distribution of certain marketing
materials, inventory control, warehousing and customary "label" services, i.e.,
a substantial portion of those services typically performed by a "record
company." Pursuant to the terms of the PolyGram Agreement the Company was
responsible for, among other things, inventory shrinkage, sales returns and cost
of record masters. Album sales have a higher unit price than record sales, which
represented the primary source of revenues for fiscal year 1992. Revenues for
the period were primarily generated during the first six (6) months of the
fiscal year prior to the termination of the PolyGram Agreement. Licensing fees
decreased by $6,000 in fiscal year 1993 to $76,000.
In February, 1993, PolyGram determined not to exercise its option to renew
its agreement with the Company and exercised its rights to assume the contract
of the one Company artist for which PolyGram was distributing records. Costs of
record sales and distributions decreased by $6,000 to $337,000 in fiscal year
1993 from $343,000 in fiscal year 1992. The decrease was primarily the result of
the Company reducing its activities subsequent to termination of the PolyGram
agreement. New artists development costs decreased by
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approximately $730,000 to $261,000 in fiscal year 1993 from $991,000 in fiscal
year 1992. This decrease also reflected the lack of activity by the company in
developing new artists as a result of the termination of the PolyGram agreement.
Marketing and promotional costs decreased by $504,000 to $156,000 in
fiscal year 1993 from $660,000 in fiscal year 1992. This decrease was also
attributable to the Company's lack of activity in marketing and promotion
subsequent to the termination of the PolyGram agreement.
General and administrative expenses decreased by $1,139,000 to $2,382,000
in fiscal year 1993 from $3,521,000. The decrease was primarily due to the
decrease in the number of shares of Common Stock issued to consultants and the
material decrease in the valuation of such shares. Other expenses totaling
$463,000 included $61,000 in rent expense, $94,000 related to issuance of Common
Stock to employees in lieu of salaries and $52,000 in telephone expenses. In
April 1993, the Company relocated its offices and lowered its annual rent to
approximately $25,000 from approximately $65,000. The interest expense decreased
by $18,000 to $323,000 in fiscal year 1993 from $341,000 in fiscal year 1992.
During the period the Company continued to incur interest expense on its
outstanding loans.
LIQUIDITY AND CAPITAL RESOURCES
During the period ended July 31, 1993, the Company had a working capital
deficit of $5,850,000. During the fiscal year ended July 31, 1992, the Company
had a working capital deficit of $4,111,000. The increase in working capital
deficit is the result of the significant capital needs which the Company was
required to maintain in advance of generating record revenues, and the fact that
after the termination of the PolyGram agreement the Company's revenues
substantially ceased.
During the period the Company received approximately $250,000 which was
accounted for as "Common Stock Subscribed" relating to the proposed sale of the
Company's Common Stock. These funds were received pursuant to a subscription
agreement with Dragon for the purchase of an aggregate of 12,371,512 shares of
the Company's Common Stock (the "Subscription Agreement") for an aggregate
purchase price of $11,800,000. The Subscription Agreement expired and was
terminated in 1995 and the Company issued 150,000 shares of its Common Stock to
the subscriber in satisfaction of all obligations which may have been owed to
such subscriber. Since the subscriber did not meet its payment obligations
pursuant to the Subscription Agreement, the Company elected not to extend such
Agreement. The Company also received advances totalling approximately $595,000,
of which approximately $235,000, represented advances from officers of the
Company.
During fiscal year 1993, the Company continued to try to develop new
artists and raise additional equity in order to place its existing artists with
other large record distributing companies. However, it was not successful in
this effort.
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BUSINESS
GENERAL BACKGROUND
The Company was incorporated under the Laws of the Commonwealth of
Pennsylvania in February 1988 and commenced operations in June 1989, as the
successor-in-interest of Sigma Sound Studios, Inc. ("Sigma Sound") a recording
studio owned and operated by Joseph Tarsia, the former Chairman of the Company.
In 1987, Sigma Sound purchased the assets of Alpha International Recording
Studios, Inc. ("Alpha International"), a recording studio owned and operated by
Peter Pelullo, the Chief Executive Officer, President and Chairman of the
Company's Board.
The Company became publicly held upon its merger in January, 1991 with
Fabulous Mergers, Inc., an inactive public company incorporated in Nevada.
Pursuant to the terms of the merger, Fabulous Mergers, Inc., as the surviving
corporation, changed its name to "Sigma Alpha Entertainment Group, Ltd., and was
subsequently reincorporated in Delaware. In 1995 the Company changed its name to
Sigma Alpha Group, Ltd.
From 1989 through 1993 the Company was primarily engaged in the
acquisition, production, marketing and distribution of recorded music. The
Company's principal product related to urban, dance and contemporary hit
radio/album oriented rock singles and albums. The Company also operated a
professional recording, engineering and production facility and a music
publishing division. Since inception, the Company incurred cumulative losses
from operations. As a result of the Company's inability to generate sufficient
revenues from operations or to secure funding through financing transactions,
the Company suspended, materially all of its operations in 1993. Since 1993, the
Company has maintained a skeleton staff at its administrative office to support
the efforts of its principal executive officers and certain consultants towards
reorganizing the Company's finances and business plan.
From 1993 through early 1995 the Company's management attempted to develop
valuable contacts in the Southeast Asia region, particularly in the China, in an
effort to establish distribution and agency arrangements that would link
Southeast Asian and U.S.-based recording companies and artists and other
business ventures in Southeast Asia and Austria. In April 1995 the Company
acquired an 80% interest in Global Telecommunications of Delaware, Inc.
("Global"), an entity which at such time was attempting to complete development
of the Voice Pager technology.
During 1996 Management discontinued its plans to reestablish its music
industry operations and all other proposed ventures in South East Asia and
Austria with the exception of the continued development and marketing of
telecommunication products developed by Global. Recently, the Company changed
its name to Sigma Alpha Group, Ltd. to reflect this new business focus.
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THE COMPANY'S TELECOMMUNICATIONS PRODUCTS
The Company is presently developing wireless telecommunication products
which utilize radio frequencies transmitted by FM radio stations. Management
believes that a need exists in second and third world developing countries which
lack developed telecommunication infrastructures such as China, for
telecommunication products which communicate information in an economically
feasible manner without the need for intensive capital investment. The Company
has filed a U.S. patent application on a process which utilizes FM radio
frequencies to allow for implementation of a voice paging network without the
significant investment capital requirements associated with traditional
telecommunication and cellular infrastructure. The first two products which the
Company intends to introduce which will utilize this process is a hand held
Voice Information Pager ("Voice Pager") which will allow for subscribers to
receive voice messages through a hand held pager and a Stock Market Information
Receiver (SIR) which will allow subscribers to receive scrambled information
directly from the stock exchange. Implementation of the Company's products
requires access to existing FM radio stations which currently transmit FM radio
broadcasts to the Chinese market place. The Company believes that only minimal
modification to existing FM transmitters is necessary in order to utilize the
Company's products. The Company has commenced the marketing of the Voice Pager
and SIR units to Chinese and other radio stations. The Company's goal is to
educate station owners as to the advantages that the Company's products possess
over competitive products and the ability of radio stations to generate revenues
through the use of a portion of their FM radio frequencies which are currently
underutilized, without incurring substantial capital expenditures.
From April 1995 through July 31, 1996 the Company has spent approximately
$963,000 on the research and development of the Voice Pager and SIR Products. In
June, 1996 the Company has received an initial order for 10,000 SIR units from
an affiliate of Radio Guangdong and expects to deliver such units in September
1996. The Company believes that an engineering prototype of the Voice Pager will
be available in September, 1996 and a production prototype in January, 1997. The
Company believes that approximately $2,000,000 will be needed to complete
development of the Voice Pager so that commercial production can commence.
THE TECHNOLOGY
The Company's Voice Pager will utilize digital signal processing ("DSP")
technology, originally developed for use in military applications and one FM
broadcasting technology, Sub Carrier Administration ("SCA"), which has been in
existence for in excess of two decades. The combined product utilizing an
integration of a FM/SCA/DSP technologies will provide a voice paging service
through an existing FM broadcasting station network. The system will be designed
to deliver fast and reliable voice messages to the whole FM stations' coverage
area with the addition of simple SCA encoding boxes to existing FM transmitters.
The system will utilize the unused bandwidth which a radio station does not
utilize while transmitting its regular FM radio broadcasts. Accordingly the
implementation of the Voice Pager System will not require the purchase of new
radio frequencies from government entities.
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Cellular phone and pager systems typically require that a large spectrum
of frequencies be dedicated to their services. Clear frequencies, particularly
frequencies allocated to cellular phones and pagers, may be difficult to obtain
due to the rapid expansion of cellular and paging services. Even when bandwidth
has been made available, technology considerations typically associated with
operating at these newly available frequencies have costs which are
prohibitively high. However, within that area of the radio frequency spectrum
associated with FM broadcasting, i.e. the band from 88 to 108 MHz, there is a
portion of bandwidth within each FM channel which is not required for
transmitting the main FM station broadcast signal, and which the Company
believes has not been fully utilized.
Management of the Company understands, based on discussions with FM radio
stations, that a demand exists for more efficient utilization of their allotted
frequency resource including this available "excess" bandwidth. In China, like
the United States, FM radio stations are granted government licenses to operate
an FM radio signal within an assigned range of frequency. A typical FM station
is assigned a bandwidth of 100 KHz. An FM station will take up to a maximum of
53 KHz for the main FM stereo broadcasting station, and less for a monaural
station. The remaining portion of the baseband signal from 54 KHz to 99 KHz,
approximately 50% of the available FM channel spectrum resource, is not required
for broadcasting the main FM station signal.
Radio stations have traditionally leased frequencies in the "excess"
bandwidth to other users through various subcarrier based systems. One such
service is known as Sub-Carrier Administration (SCA) which is available in China
and the United States. SCA has been used in the United States for over forty
years for background music without commercial interruption, reading services for
the blind, stock market, sports and weather information, and educational and
religious applications. SCA has also been used for data transmission, having the
ability to reliably support a data rate of 4,800 bits/second or higher.
As a result, the use of in-place FM transmission systems to provide wide
coverage paging applications may in some instances be limited due to previous
user allocation (e.g., weather information, stock market information, or other
type of data transfer). The ability of a paging system to transmit data over the
excess portion of an FM channel, via an FM station infrastructure providing wide
coverage, is a function of the amount of bandwidth that is available. The paging
system operator is otherwise limited in the amount and speed of data transfer by
the bandwidth. The use of a narrow bandwidth with voice paging systems is
usually not desirable due to the amount of data to be transmitted, but may in
fact be necessary.
Chinese FM radio stations have actively pursued the use of excess
bandwidth to generate revenues for operations. Such uses have been traffic
reports, stock information and data transmission.
DSP had been in the military domain for quite some time, it was recently
made available to commercial applications after the end of the Cold War. DSP
allows for the lengths of a voice message to be compressed for storage and
transmission to a hand held Voice Pager. This
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technology as utilized by the Company will compress the voice messages for
storage at the main paging base station before it is transmitted to an
individual Voice Pager where the message is decompressed for playback by a
subscriber. The Company believes that the combination of SCA and DSP presents a
unique opportunity to implement an effective paging system in a relatively short
time with low capital investment costs.
THE DIGITAL VOICE INFORMATION PAGER
The Company believes that the demand for personal telecommunication
devices has increased drastically in the past decade in China, with the major
market growth focused on two products: cellular mobile phones and paging
systems. Cellular phone networks require intensive front end investment for
their initial implementation, and continuous investment to increase the number
of cells in order to maintain an acceptable user density level per cell, since
the density level grows with the increase in numbers of subscribers. Cellular
phone networks also require a developed telephone infrastructure net
encompassing a large coverage area which the Company believes China presently
lacks.
Traditional paging systems, on the other hand, require less investment but
typically provide a one way message service in numbers or characters. The first
generation pager was a beeper-based system which "beeped" when a number
associated with a specific pager was accessed. Subsequently, numerical based
pagers were developed, capable of transmitting a telephone number to a hand held
pager device. Both of these systems are "notification" based in that no actual
message is sent. The individual carrying the pager needs to call a telephone
number to receive the particular message. The Company believes that this
presents a problem to users in countries with a low per capita number of
telephones and underdeveloped telecommunication infrastructures such as China.
Accordingly, users of beepers or numeric pagers in China may not have ready
access to a telephone to receive their messages. Chinese character pagers on the
other hand are not "notification" based as they provide a subscriber with an
actual character message. These pagers allow subscribers to receive and store
messages consisting of both letters and numbers. The Company believes, based
solely upon its internal research, that as a result of the number and complexity
of Chinese characters (in excess of 13,000), significant problems exist
regarding the use of Chinese character pagers in the Chinese marketplace. These
problems include the need for large pools of typists who possess the skills
needed to translate different Chinese dialects with accuracy and speed into
correct chinese characters for transmission to Chinese character pagers. In
addition, substantial investment is required in China and other marketplaces to
establish the network and to purchase the necessary hardware to operate a paging
system.
The use of beepers, numeric pagers and alphanumeric pagers in China has
grown at tremendous rates. Based upon information from the Chinese Ministry of
Post and Telecommunications subscribers to pager services in China rose from
approximately 400,000 in 1990 to approximately 25,000,000 in 1995. The New China
News Agency has reported that pagers use in China is expected to continue to
increase rapidly into the next century.
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The Company believes that its Voice Pager system will possess significant
advantages over existing Chinese beeper, numeric, alphanumeric and Chinese
character pagers by allowing for a subscriber to receive and play on a hand held
Voice Pager a voice message from the actual party trying to reach the
subscriber. The Voice Pager system will not require the subscriber to have
access to a telephone to receive a message. Moreover, the Voice Pager System
does not require large pools of typists to enter Chinese characters and
eliminates translation errors from dialect differences that currently are
experienced in the Chinese pager market as well as eliminate significant
investments required for other pager systems.
The Voice Pager system allows the owner of a designated FM radio station
to transmit a message to the owner of a Voice Pager in the actual voice of the
person generating the message. In order to implement a Voice Paging system,
hardware containing the Company's software would be connected at the base
station of the radio station's FM transmitter. A customer to the paging system
would buy the hand held Voice Pager from the radio station and in addition pay a
monthly subscription fee for the paging service. Once a customer account is
established the customer receives a designated account number which is
referenced when someone wants to leave a voice message. The message is called in
to a central phone number held by the radio station for its customers. The
calling party receives a signal to enter the Voice Pager customer account number
and begins leaving a voice message. The calling parties message is then
digitized, compressed and transmitted by the radio stations FM transmitter to
the specific Voice Pager customer.
The Voice Pager system provides a paging system which is adaptable to
existing FM radio transmitters. The Voice Pager system utilizes the "excess"
bandwidth of an FM radio Station's signal and will not interfere with the radio
station's broadcast of its regular programming. The Company believes that a
maximum of $30,000 in capital investment and equipment purchases are required in
order to upgrade existing FM radio transmitters to fully utilize the Company's
Voice Pager Technology. Since the Voice Pager system provides paging which is
"piggy-backed" to an existing FM transmission, a very short start-up time is
needed to set up a paging service. The Company believes that such a system is
inexpensive when compared to the extensive transmitter network required for
prior art paging systems.
VOICE PAGER SYSTEM AND EQUIPMENT DESCRIPTION
The Voice Pager system consists of two major parts, a base station and a
hand held pager.
BASE STATION
The base station features accessory equipment built around an existing FM
radio transmitter and includes an Automatic Call Distributor ("ACD") to receive
and distribute the incoming calls of messages from subscribers. Messages will be
automatically handled through a DSP processor to compress messages into digital
form for storage at the base station and for retrieval and transmission through
the SCA channel in FM broadcasting.
40
<PAGE>
VOICE PAGER
The Voice Pager will include the following modules:
(1) SCA Module
----------
The SCA Module will receive the main body of the voice message at a
data stream of 4,800 bits per second and then pass it to the DSP
Module for processing.
(2) DSP and Storage Modules
-----------------------
The date stream received from the SCA Module will be stored, it will
be decompressed into audible voice form and transferred over to the
user when it is called upon through a speaker or an ear phone. The
Voice Pager will have the capacity to store and playback messages.
(3) Power Module
------------
The power supply for the Voice Pager will consist of two AAA
batteries or a single AA battery.
STOCK INFORMATION RECEIVER
The Company believes that its Voice Pager technology has other market
applications in addition to its use to establish a Voice Pager system. The
Company has identified one such market application for its technology concerning
the distribution of a stock market information in the Chinese market place. The
Company has a working relationship with several Chinese radio stations and as a
result of their requests, the Company developed a stock market information
receiver ("SIR"). The SIR is a radio receiver designed to receive a scrambled
analog FM radio signal transmitted by an FM radio station's transmitter over
their excess bandwidth. The SIR allows a subscriber to receive stock market
information from the stock exchange in China which is transmitted by Chinese
radio stations.
Currently certain Chinese radio stations sell a stock market information
device to interested subscribers. Subscribers pay a fee to the radio station to
purchase the device and a monthly fee to receive the radio transmission. The
Company believes, based on discussion with Chinese radio stations, that
unauthorized receivers have appeared in the Chinese market. These devices allow
unauthorized users to pirate the radio station's signal without paying a monthly
subscription fee.
The Company's SIR system is designed to allow the radio station to install
a computer with the Company's software at the FM transmitter and broadcast the
information in a scrambled form which is then unscrambled at the subscribers SIR
through a proprietary chip designed by the Company. The Company believes the SIR
will decrease the risk of piracy and allow stations to better maintain their
subscription revenue streams. In addition, the SIR system will allow the radio
station to remotely turn off an SIR receiver if the subscriber has not paid
41
<PAGE>
his/her monthly subscription fee. The Company believes its SIR system has
additional applications and can be used wherever there is a market demand for
one way communications that can be received by a select receiver and turned off
at the source of the signal. The Company believes these additional markets
include corporate communications to select employees, sports information
dissemination and weather reporting services.
In June 1996 the Company received an initial order for 10,000 SIR units
from an affiliate of Radio Guangdong. The Company has begun the production of
these SIR units through various subcontractors and will begin delivery of these
units in September 1996.
PRODUCTION AND MANUFACTURING PLANS
The Company does not presently intend to establish its own manufacturing
facilities in order to produce its Voice Pager and SIR products. Instead the
Company's plans to contract manufacture custom made Application Specific
Integrated Circuits ("ASIC") and masked Central Processing Units ("CPU"). In
addition, the Company will purchase the various component parts necessary to
produce finished products from a variety of vendors. The Company has entered
into an agreement with a California based semi-conductor manufacturer to produce
an ASIC which will integrate all components and modules necessary to manufacture
the Company's final products. The Company intends to ship ASIC and other
component parts to contract manufacturers in China to assemble the Voice Pager
and stock information receiver units. The Company has identified a suitable
contract manufacturer to assemble the Company's Voice Pager and SIR products.
The SIR units necessary to fill the Radio Guangdong order are currently being
manufactured by a subcontractor located in China. Since the Company will not
operate its own manufacturing facilities, the Company will depend upon the
ability of subcontract manufacturers to manufacture and assemble products in
accordance with specifications provided by the Company. In the event that
subcontractors are unable to meet these specifications or experience delays in
delivering products to the Company, the Company's business would be adversely
affected.
The Company may in the future seek to establish its own manufacturing
facilities and/or form joint ventures with manufacturers in China in order to
manufacture and assemble the Company's products. In such event the Company may
need further financing to implement such manufacturing plans. There can be no
assurance that financing will be available to the Company at such time or if
available on terms acceptable to the Company.
MARKETING
The Company's initial marketing efforts have been targeted to Chinese
radio stations. The Company's strategy is to educate radio stations as to the
possibility of generating significant revenues while utilizing the excess
bandwidth of their FM signal through use of the Company's technology without the
requirement for significant investment capital. The Company's goal is to explain
the perceived advantages of the Company's products as opposed to existing paging
systems currently in use in China. The Company's marketing plan centers on the
sale of Voice
42
<PAGE>
Pagers and SIR units directly to the radio stations. The radio stations will be
responsible to market Voice Pager and SIR services to local subscribers and
implement support and service personnel needed to run a paging and information
service. The benefit of this plan is that the Company will not be required to
act as a paging company or information provider in China. The Company believes
that radio stations possess greater financial strength and contacts at
broadcasting and other government levels in order to properly promote Voice
Pager and SIR use within the Chinese market place.
According to statistics of the Chinese Ministry of Post and
Telecommunications the number of paging subscribers in China has grown from
approximately 400,000 in 1990 to approximately 25,000,000 at the end of 1995.
The New China News Agency reported that it projects that paging users in
mainland China will continue to expand at rapid rates. The Company believes that
the advantages associated with it's Voice Pager system as opposed to beepers,
numeric pagers, alphanumeric and Chinese character pagers which are currently
used in China, will allow the Company to successfully market it products.
However there can be no assurance that the Company's products will be
successfully received in China or other marketplaces. The Company believes that
the price of its Voice Pager will be competitive with existing Chinese character
pagers in use in China.
The Company also intends to market its SIR to Chinese radio stations by
educating such stations as to the ability of the Company's system to reduce the
possibility of pirating the station's services thereby protecting the station's
subscriber revenue streams. The Company also believes that the ability to turn
off SIR units if a subscriber has not paid his monthly fees will be deemed a
significant advantage to radio stations. The Company believes that the price of
its SIR unit is competitive with other receivers on the market which do not
offer the Company's security features.
PATENTS AND TRADE SECRETS
In January 1996 the Company filed a patent application for protection of
the Voice Pager product under Unites States patent laws. There can be no
assurance as to the ultimate success of the Voice Pager patent application.
Furthermore, even if a patent is issued to the Company there can be no assurance
that such patent will not be circumvented and/or invalidated by competitors of
the Company. Further, the enforcement of patent rights often requires the
institution of litigation against infringers, which litigation is often costly
and time consuming. The Company also intends to rely on trade secrets, know how
and continuing technological advancement to establish a competitive position in
the marketplace. There can be no assurance that the Company will be able to
adequately protect its technology from competitors in the future.
GOVERNMENT REGULATIONS
The Company's proposed operations relate to conduct of operations in China
and Hong Kong. Accordingly upon receipt of necessary funding to commence its
ventures, the Company's
43
<PAGE>
operations will be subject to the risks of conducting business internationally,
including possible instability in foreign governments, changes in regulatory
requirements, difficulties in obtaining foreign licenses, as well as other
general barriers and restrictions in relation to compliance with foreign laws.
Moreover, certain of the Company's proposed plans concern operations in Hong
Kong. Pursuant to an existing treaty between the Government of the United
Kingdom and the Peoples Republic of China, Hong Kong will revert and become part
of China in July 1997. The Company is uncertain as to the impact that such a
change in government would have upon its proposed venture operations in Hong
Kong.
COMPETITION
The Company's products compete with those of numerous well-established
companies which design, manufacture or market beepers, numeric pagers and
alphanumeric pager systems and products. All of these companies have
substantially greater financial, technical, personnel and other resources than
the Company and have established reputations for success in the development,
licensing, sale and service of their products and technology. Certain of these
competitors may also have the financial resources necessary to enable them to
withstand substantial price competition or downturns in the market for
integrated security systems and related products.
EMPLOYEES
The Company maintained its work force largely intact through September
1993. However, because of its inability to raise sufficient financing, the
Company began to decrease its work force and during the first part of fiscal
1994, all employees were released. As of August 27, 1996, the Company has 7
employees consisting of its Chief Executive Officer and a Chairman of the Board,
a Principal Financial Officer, Secretary, Controller, President of Global and
administrative staff.
OFFICES
The Company leases its offices pursuant to a written lease expiring in
1999. The Company's administrative offices consist of 3,233 square feet, at an
annual rent of $25,864 per year subject to certain customary increases. See
"Certain Relationships and Related Transactions."
Global currently operates from a leased facility in corporate offices in
Philadelphia, Pennsylvania and Princeton Junction, New Jersey.
LEGAL PROCEEDINGS
As of August 27, 1996, the Company had approximately 10 judgments related
to accounts payable totalling approximately $58,000. The City of Philadelphia
maintains a judgment in the amount of approximately $16,000 against the Company.
Management had been actively negotiating and working out settlements with
respect to judgments and tax assessments and
44
<PAGE>
believes that the Company will be able to satisfy such obligations over a period
of time. There can be, however, no assurances that acceptable agreements will be
reached in this regard.
In August 1996 the Company was served with a Summons and Complaint in an
action instituted by Josephberg, Franz & Company, Inc. ("JGC") in the United
States District Court for the Southern District of New York. The Complaint seeks
specific performance of contract which JGC claims entitles them to receive
15,000 shares of the Company's Common Stock or in the alternative the sum of
$66,000. The Company is in the process of preparing an answer to the complaint
denying JGC's right to receive such shares or any monetary compensation.
45
<PAGE>
MANAGEMENT
Directors and Officers
The following table sets forth the name and ages of all directors and
officers of the Company and their positions in the Company:
Position(s)
Name Age with Company Director Since
- ---- --- ------------ --------------
Peter S. Pelullo 44 President, June 1989
Chief (Class Two)
Executive
Officer,
Chairman of
the Board, Chief
Financial
Officer and
Director
Scott McPherson 35 Principal
Financial Officer
Ernest J. Cimadamore 34 Secretary
John N. D'Anastasio 48 Director June 1991
(Class Three)
Robert S. Sannelli 50 Director June 1991
(Class Three)
The Board of Directors is divided into three classes; first class,
second class and third class, with the term of one class expiring each year. The
term of each class is three years. The term of each class has expired.
Therefore, all current directors serve until their successors are duly elected
and qualified. Vacancies in the board are filled by majority vote of the
remaining directors. The executive officers of the Company are elected by, and
serve at the discretion of, the Board of Directors.
The business experience during the past five years or more of each
director and executive officer of the Company is as follows:
Peter S. Pelullo became President, Chief Executive Officer and Chief
Financial Officer of the Company in 1991. In 1995 Mr. Pelullo was appointed as
the Company's Chairman of the Board. Mr. Pelullo has been involved in the music
industry since 1976, when he formed Philadelphia-based Alpha International
Recording Studios, Inc. ("Alpha International"). Mr. Pelullo also founded Philly
World Records in 1982 to establish domestic and
46
<PAGE>
international record distribution networks. Mr. Pelullo created a promotional
team which has successfully marketed artists such as Anita Baker, Teddy
Pendergrass, Levert, The Whispers, and NQW Edition, and record companies
including Capitol Records, Manhattan, EMI, Atlantic and Elektra have
subcontracted the services of this team to market their acts. In 1986, Philly
World Records was sold to Magnolia Sound, while Alpha International was retained
in order to focus on studio operations and the formation of a new record
company. Alpha International merged with Sigma Sound in 1987, creating Sigma
Alpha Group Entertainment Group, which became a public company in 1991.
Scott A. McPherson was appointed as Principal Financial and Accounting
Officer of the Company on August 14, 1995. From November 1994 through July 21,
1995 Mr. McPherson was employed by the accounting firm of Cogen Sklar LLP, the
Company's current independent accountants. During Mr. McPherson's employment
with Cogen Sklar he was the manager of audits conducted by Cogen Sklar on the
Company's financial statements as of July 31, 1994 and for each of the three
years in the period ended July 31, 1994, and was instrumental in bringing the
Company current on all filings required under the Securities and Exchange Act of
1934. Prior to Mr. McPherson's association with Cogen Sklar, he was a manager in
the accounting firm of Glickman, Berkovitz, Levinson and Weiner where he served
as a manager with the responsibility for auditing a number of public companies.
Mr. McPherson is a certified public accountant in Pennsylvania and Florida. Mr.
McPherson received a Bachelors Degree in Accounting and Law from Clarkson
University, Potsdam, New York in 1983.
John N. D'Anastasio has been the President of D'Anastasio Corp., a real
estate development company, since 1986. Prior thereto, Mr. D'Anastasio was
President of South Philly Productions from 1979 through 1981, and has been
involved with the entertainment industry for approximately thirty years. Mr.
D'Anastasio received a Bachelor of Arts Degree in Economics and Accounting from
Villanova University in 1968.
Ernest J. Cimadamore became secretary of the Company in 1990. Mr.
Cimadamore was employed by Alpha International from 1981 to 1993 where he
oversaw marketing sales and promotions of the Company's music products. Mr.
Cimadamore attended Temple University where he studied business.
Robert S. Sannelli has served, since 1986, as the director of operations
and vice President of D'Anastasio Corp., a real estate development company of
which John D'Anastasio is President. Prior thereto, Mr. Sannelli was employed as
director of operations by Philly World Records. Mr. Sannelli holds a B.S. degree
in Accounting from Rutgers University, where he graduated Summa Cum Laude in
1975.
SIGNIFICANT EMPLOYEES
Michael Yang is the Chairman and founder of Global Telecommunications,
Inc., and the President of Global Telecommunications of Delaware, Inc. He has
over 20 years experience in business development, management, data processing,
communications and engineering. Mr. Yang is also a director of several joint
venture companies in China and Indonesia. Mr. Yang has expertise in the
following areas: business, planning, development and management; systems
integration; international marketing, venture planning, setup and management;
and product development.
Ying Dong was hired on October 9, 1995 as Controller of the Company. Miss
Dong has experience with the Bank of Communication, New York Branch and China
National Textile Import and Export Corporation. Miss Dong received a Bachelors
of Arts in International Business from Shanghai International Business College
Shanghai, China in 1991. Miss Dong completed her Masters of Business
Administration in Finance from Temple University
47
<PAGE>
Philadelphia, Pennsylvania in December, 1995. Miss Dong is fluent in Mandarin
and Shanghainese as native languages.
The Company intends to hire an investor relations person, who at this time
has not been selected by the Company.
48
<PAGE>
EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation paid or accrued to
the Company's most highly compensated executive officers during the fiscal years
ended July 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
======================================================================================================================
Long-Term
Compensation
==================================
Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (d) (e) (f) (g) (h) (i)
Name and Principal Other Annual Restricted LTIP All Other
Position Year Salary ($)(1) Bonus($) Compensation($) Stock Options Payouts ($) Compensation
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter S. Pelullo 1995 344,000 26,000(8)
Chief Executive 1994 312,000 16,000(3)
Officer Chairman
of the Board 1993 284,000 27,000(4) $200,000
Joseph D. Tarsia 1995 125,000 3,000(9)
Former Chairman of 1994 313,000 5,000(6)
the Board(2)
1993 284,000 13,000 (7) $200,000
======================================================================================================================
</TABLE>
(1) In fiscal year 1993,neither Mr. Pelullo nor Mr. Tarsia were paid any
compensation. In fiscal year 1994, Mr. Pelullo was paid $55,456 and Mr.
Tarsia received no compensation. In fiscal year 1995, Mr. Pelullo was paid
$723,733 of which $379,732 represented the payment of prior years accrued
salaries and Mr. Tarsia received no payments. All compensation not paid in
1993 and 1994 was accrued. Accordingly salaries accrued on behalf of Mr.
Pelullo for the 1993 and 1994 fiscal years were $189,167 and $262,125
respectively. In July 1995, $543,795 in accrued compensation due Mr.
Pelullo was retired in exchange for 108,759 shares of Series C Preferred
Stock. Salaries accrued on behalf of Mr. Tarsia for 1993, 1994 and 1995
were $289,167, $317,583 and $125,000 respectively. In 1995, Mr. Tarsia
released the Company from all amounts owed to him. These amounts were
however assigned to the party who purchased Mr. Tarsia's shares in the
Company and were subsequently retired through the issuance of 683,000
Series B Preferred Shares and the payment of $106,000 to such party (see
"Employment Agreements").
(2) Mr. Tarsia resigned his position with the Company in 1995.
(3) Represents $8,000 in auto expense, $5,000 in travel allowance and $3,000 in
health benefits. (4) Represents $16,000 in auto expense, $5,000 in travel
allowance and $6,000 in health benefits.
(6) Represents $5,000 in travel allowance.
(7) Represents $5,000 in auto expense, $5,000 in travel allowance and $3,000 in
health benefits.
(8) Represents $8,000 in auto expense, $5,000 in travel allowance and $13,000
in health benefits.
(9) Represents $3,000 in travel allowance.
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<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
For the Year Ended July 31, 1995
<TABLE>
<CAPTION>
==========================================================================================
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or
Name Granted (#) Fiscal Year Base Price ($/Sh) Expiration Date
==========================================================================================
==========================================================================================
<S> <C> <C> <C> <C>
Scott McPherson 25,000 Common Stock(1) 62.5% $5.75 August 14, 1997
5,000 Common Stock(2) 12.5% Mkt Price on 8/14/96 August 14, 1998
5,000 Common Stock(3) 12.5% Mkt Price on 8/14/97 August 14, 1999
5,000 Common Stock(4) 12.5% Mkt Price on 8/14/98 August 14, 2000
=========================================================================================
</TABLE>
(1) Exercisable beginning August 14, 1995 (2) Exercisable beginning August 14,
1996 (3) Exercisable beginning August 14, 1997 (4) Exercisable beginning August
14, 1998
Aggregated Option/SAR in Last Fiscal Year
and FY-End Option/SAR Values
For the Year Ended July 31, 1995
<TABLE>
<CAPTION>
=====================================================================================
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-End ($)
at FY-End (#) (1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scott McPherson 0 0 25,000/15,000 0
=====================================================================================
</TABLE>
50
<PAGE>
COMPENSATION PLANS
With the exception of compensation in the form of certain health, medical
and similar benefits paid pursuant to plans that do not discriminate in favor of
officers or directors of the Company and are available generally to all
employees who have been employed by the Company for three months, the Company
has no plans pursuant to which cash or non-cash compensation was paid or
distributed during the fiscal years ended July 31, 1994 and 1993, or is proposed
to be paid or distributed in the future, to the individuals and group specified
under "Cash Compensation" above, except as noted below.
EMPLOYMENT ARRANGEMENTS
The Company entered into employment agreements (the "Agreements") with
Peter S. Pelullo (the "Executive") on September 1, 1991. The Agreement was
effective as of April 11, 1991. Pursuant to the provisions of the Agreements, as
amended, which continues for a period of fifteen years (the "Term") unless
earlier terminated in accordance with their terms, the Executive is entitled to
a base salary, initially $250,000 per year, and a bonus based upon the Company's
net profits, if any, an automobile allowance of $1,500 per month as well as
health insurance and-other benefits generally available to the Company's
executives. The Agreement also provides that, upon termination of the Executive
by the Company without cause or the Executive's resignation for "Good Reason" as
defined in the Agreement, the Executive will be entitled to receive his base
salary plus executive bonuses prescribed by the Agreements for the longer of
four years or the balance of the Term. In addition, the Company shall maintain
in full force and effect, for the longer of the four years or the balance of the
Term, all employee benefit plans and programs in which the Executive was
entitled to participate immediately prior to termination or resignation for Good
Reason. For purposes of this provision, "Good Reason" is defined to include (i)
a material change in the nature or scope of the Executive's responsibilities,
duties or authority, (ii) failure by the Company to comply with the Agreements
or to obtain the assumption of the Agreements by any successor to the Company,
(iii) the removal of the Executive as directors of the Company (iv) ill health
of the Executive or a member of his family, or any other compelling personal
circumstance, which in the sole discretion of Executive makes his continued
employment impossible or inappropriate; and (v) a change in control of the
Company. The Company's Board authorized a 15% increase in Mr. Pelullo's salary
as well as a bonus equal to 10% of the net profits of the Company to Mr.
Pelullo. The Board also authorized an additional bonus in the amount of
1,250,000 shares of Common Stock. The salary increase and net profit bonus
became effective upon the Company's receipt of $2,400,000 in additional capital.
On July 22, 1995, Mr. Pelullo received options to purchase 500,000 shares at a
price of $3.875.
As of April 27, 1995 the Company entered into a separation agreement with
Joseph D. Tarsia ("Separation Agreement"), regarding Mr. Tarsia's resignation
from the Board of Directors of the Company and as the Company's Treasurer. Mr.
Tarsia released the Company from any and all obligations, liabilities, claims
and debts due to Mr. Tarsia under his employment agreement with the Company
51
<PAGE>
(approximately $1.1 million), including but not limited to, any and all unpaid
compensation and benefits due to him thereunder. The Company released and
indemnified Mr. Tarsia from any and all claims, liabilities and debts
(collectively "Claims") arising under any agreements with the Company and from
Mr. Tarsia's actions as an officer and director of the Company. In accordance
with the Separation Agreement the Company agreed to pay Mr. Tarsia up to $2,000
per week until such time that certain obligations are paid to Mr. Tarsia by the
party who purchased Mr. Tarsia's shares in the Company (1,740,063 shares) as
well as other debt (approximately $960,000) owed by the Company to Mr. Tarsia
and his affiliates. The Company also acknowledged the assignment to such party
of Mr. Tarsia's $1,100,000 accrued compensation claims. All of the foregoing
debt was subsequently converted into 395,430 shares of the Company's Series B
Preferred Stock. Peter Pelullo was appointed as Chairman of the Board of
Directors of the Registrant replacing Mr. Tarsia.
The Company entered into an employment agreement with Scott A. McPherson
(the "McPherson Agreement") on July 24, 1995, which was effective as of August
14, 1995. Pursuant to the provisions of the McPherson Agreement, which continues
for a period of three years unless earlier terminated in accordance with its
terms, Mr. McPherson is entitled to a base salary of $85,000 during the first
year with an increase of 4% (or such amount as approved by the President and
CEO) each year thereafter, as well as health insurance and other benefits
generally available to the Company's executives. As consideration for entering
into the McPherson Agreement, the Company issued to Mr. McPherson 5,000 shares
of restricted Common Stock which shall be held at the Company offices and
released to Mr. McPherson after two years from the date of the McPherson
Agreement, provided Mr. McPherson has not terminated his employment prior to
that time. The Company also granted Mr. McPherson the option to purchase 25,000
shares of Common Stock at the market price as of the date his employment
commenced. In addition, after each year of employment the Company shall grant
Mr. McPherson a minimum additional option to purchase 5,000 shares of Common
Stock at the then current market price. Such options shall remain in effect for
two years from the date of the grant except upon termination of Mr. McPherson's
employ, in which case he shall have 30 days to exercise his options before they
are canceled. In addition Mr. McPherson shall be reimbursed for his professional
licensing fees and continuing professional education expenses necessary to
maintain his certified public accounting licenses in Florida and Pennsylvania,
as well as any professional association dues. The Agreement also provides that,
upon termination of Mr. McPherson by the Company without cause or Mr.
McPherson's resignation for "Good Reason" as defined in the McPherson Agreement,
Mr. McPherson will be entitled to receive his base salary for the lesser of two
months or a term mutually agreed between the Company and Mr. McPherson. In
addition, the Company shall maintain in full force and effect, for the same time
period, all employee benefit plans and programs in which Mr. McPherson was
entitled to participate immediately prior to termination or resignation for Good
Reason. For purposes of this provision, "Good Reason" is defined to include (i)
a material change in the nature or scope of Mr. McPherson's responsibilities,
duties or authority, (ii) failure by the Company to comply with the McPherson
Agreement or to obtain the assumption of the Agreement by any successor to the
Company, (iii) ill health of Mr. McPherson or a member of his family, or any
other compelling personal circumstance, which in the sole discretion of Mr.
McPherson makes his continued employment impossible or inappropriate; and (iv) a
change in control of the Company.
52
<PAGE>
Global, a subsidiary of the company, entered into an employment agreement
with Michael Yang (the "Yang Agreement") on October 18, 1995. Pursuant to the
terms of the Yang Agreement, which continues for a period of three years unless
earlier termination occurs in accordance with its terms, Mr. Yang shall receive
a base salary of $100,000 per year with a yearly 4% increase. The Yang Agreement
provides for a bonus of 25% of the Company's net profits that exceed 20% of the
Company's gross revenues on a before tax basis. The Yang Agreement also provides
for termination without cause or for "Good Reason" as defined therein. Mr. Yang
will be paid for the lesser of two months after termination or a mutually agreed
date under this provision.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Stock Option Plan") was approved by
a majority of the Company's stockholders in November 1991. The Stock Option Plan
is intended to qualify, in part, as an incentive stock option plan under Section
422 of the Internal Revenue Code (the "Code") and in part as a non-qualified
stock option plan, and to provide an incentive to those directors, key employees
of the Company and its subsidiaries and certain other persons who are
contributing materially to the Company's progress. As of the date of this
Prospectus no options have been issued under the Stock Option Plan.
The Stock Option Plan is administered by a committee of the Board of
Directors, none of whom has received a discretionary grant or award under any
stock plan of the Company during one year prior to serving on the committee.
The Stock Option Plan terminates in November 2001, unless terminated
sooner by the Board of Directors. A total of 5,000,000 shares of Common Stock
have been reserved for issuance under the Stock Option Plan. The Board of
Directors may terminate, modify or suspend the Stock Option Plan. The Board of
Directors may not, however, without the approval of the stockholders of the
Company, (i) increase the maximum number of shares of Common Stock which may be
issued under the Stock Option Plan, except pursuant to a stock split, stock
dividend or similar transaction; (ii) change the provisions of the Stock Option
Plan relating to the establishment of the option exercise price; (iii) extend
the period during which options may be granted under the Stock Option Plan,
except for non-qualified options; (iv) materially modify the benefits accruing
to employees participating under the Stock Option Plan; or (v) materially modify
the requirements as to eligibility for participation in the Stock Option Plan.
Since the adoption of the Stock Option Plan, no options have been granted
thereunder.
COMMITTEES OF THE BOARD
The Board of Directors has established separate compensation, audit and
nominating committees. However there have been no meetings of such committees as
of the date of this Prospectus.
53
<PAGE>
COMPENSATION OF DIRECTORS
Outside directors receive payments of $200 per month plus reasonable costs
and expenses of travel and lodging for attendance at director's meetings. During
fiscal 1996, directors Sannelli and D'Anastasio received 100,000 shares each and
options to purchase 250,000 shares each at a price of $3.875.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, the Company's
Articles of Incorporation and the Company's Bylaws contain provisions for
indemnification of officers, directors, employees and agents of the Company. The
Company's Bylaws require the Company to indemnify such persons to the full
extent permitted by Delaware law. Each person will be indemnified in any
proceeding if he acted in good faith and in a manner which he reasonably
believed to be in, or not opposed to the best interests of the Company.
Indemnification would cover expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement.
The Company's Bylaws also provide that the Company may purchase and
maintain insurance on behalf of any present or past director or officer insuring
against any liability asserted against such person incurred in the capacity of
director or officer or arising out of such status, whether or not the Company
would have the power to indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such court.
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PRINCIPAL SHAREHOLDERS.
The following table sets forth, as of August 21, 1996, certain information
with respect to ownership of the Company's Common Stock by the record and
beneficial ownership by each person known to the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, and each of the Company's
directors and officers, and by all officers and directors as a group. Unless
otherwise specified, the individuals listed possess sole voting and investment
power with respect to the shares indicated as owned by him.
<TABLE>
<CAPTION>
Amount and Percent of Class
Nature of Giving Effect
Beneficial Title of to Completion
Name and Address Position Ownership Class of Offering(1)
- ---------------- -------- --------- ----- --------------
<S> <C> <C> <C> <C>
Peter S. Pelullo Director, Chairman 5,500,063 (2) Common 29.6%
1341 N. Delaware Ave. Chief Executive Officer
Philadelphia, PA 19125 and President
Joseph D. Tarsia Former Chairman 1,740,063 (3) Common 9.4
1341 N. Delaware Ave. and Treasurer
Philadelphia, PA 19125
Kathleen Patten 1,668,751 (4) Common 9.0
John Patten
5 Saddlehill Road
Far Hills, NJ 07931
Robert S. Sannelli Director 375,000 (6) Common 2.1
c/o D'Anastasio Corp.
4300 Haddonfield Rd.
Suite 111
Pennsauken, NJ 08109
John N. D'Anastasio Director 375,000 (7 Common 2.1
4300 Haddonfield Rd
Suite 111
Pennsauken, NJ 08109
Ernest J. Cimadamore Secretary 0 Common **
3162 Denfield Place
Philadelphia, PA 19145
Jacob Der Hagopian 1,500,000 Common 8.1
1341 N. Delaware Avenue
Philadelphia, PA 19125
Scott McPherson Principal
1341 N. Delaware Ave. Financial and
Philadelphia, PA 19125 Accounting Officer 30,000(5) Common **
Mid-West Financial
Consultants Corp.
Neutorgasse 12
A-1010 Vienna Austria 3,918,598 Common 21.1
All officers and 6,280,063 Common 33.8%
directors as a group (5 persons)
</TABLE>
- --------------------
** Less than 1%
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<PAGE>
(1) Based upon an aggregate of 18,558,604 shares of Common Stock outstanding
including the sale of 2,500,000 shares of stock in this Offering.
(2) Does not give effect to Mr. Pelullo's ownership of 97,459 shares of the
Company's Series C Preferred Stock (See "Description of Securities - Series C
Preferred Stock"). Does not give effect to the ownership by the Pel Family
Irrevocable Trust of 17,500 Common Stock and the Gray Hill Trust of 32,500
Common Stock. The beneficiaries of the Grey Hill Trust include the children of
Peter S. Pelullo, as well as the children of Mr. Pelullo's five brothers and
sisters. The beneficiaries of the Pel Irrevocable Family Trust include the
children and spouse of certain of Mr. Pelullo's siblings. Neither Mr. Pelullo
nor his wife are trustees of the trusts. Mr. Pelullo does not possess the
ability to vote and/or transfer any of the shares owned by Gray Hill Trust
and/or the Pel Family Irrevocable Trust. Gives effect to the issuance of
1,250,000 shares of Common Stock to Mr. Pelullo for raising equity capital. Also
gives effect to options for 500,000 shares of Common Stock at an exercise price
of $3.875 per share which expires July, 2006. (see "Employment Agreements").
(3) The Company has been advised by Mr. Tarsia that all of his shares have been
sold. However, such shares are still listed on the Company's transfer records as
owned by Mr. Tarsia. The Company has been advised that 1,400,000 of such shares
are beneficially owned by Kathleen N. Patten. Ms. Patten owns of record an
additional 110,500 shares of the Company's Common Stock (see Note 4 below).
(4) Reflects Kathleen Patten's ownership of 1,510,000 Common Stock as set forth
above, as well as John Patten's ownership of 158,751 Common Stock. Mr. Patten
also owns 664,000 shares of the Company's Series B Preferred Shares. Mr. and
Mrs. Patten disclaim beneficial ownership of each others shares in the Company.
(5) Reflects the ownership of an option to purchase 25,000 shares at $5.75 per
share through August 14, 1997. Does not include 5,000 shares of Common Stock
deliverable to Mr. McPherson in August 1997 or the right to acquire options to
purchase an aggregate of 10,000 additional shares of Common Stock at the end of
each year of Mr. McPherson's employment with the Company at market prices in
effect at such time and options for 5,000 shares of Common Stock at $2.75 per
share expiring on August 14, 1998.
(6) Gives effect to options to purchase 250,000 shares of Common Stock at an
exercise price of $3.875 per share which expires in July 2006.
(7) Gives effect to options to purchase 250,000 shares of Common Stock at an
exercise price of $3.875 per share which expires in July 2006.
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<PAGE>
RESALES BY SELLING SECURITYHOLDERS
This Prospectus relates to the proposed resale by the Selling Securityholder
of up to 100,000 shares issuable upon conversion of the Warrant. The following
table sets forth as of August 27, 1996 certain information with respect to the
entity for whom the Company is registering the Shares for sale to the public
except as footnoted below. The Selling Securityholder has served as the
Company's securities counsel since January 1995. The Company will not receive
any of the proceeds from the sale of the Common Stock. If the Warrant is
exercised, the Company would receive $200,000.
Names of Selling Common Stock Beneficially Common Stock Offered
Security Holders Owned Prior to August, 1996 By Beneficial Owner
- ---------------- --------------------------- -------------------
Silverman, Collura
& Chernis, P.C. 100,000(1) 100,000(1)
(1) Represents shares of Common Stock underlying a Warrant exercisable through
August 31, 1999, at an exercise price of $2.00 per share.
The Selling Securityholder may effect the sale of their shares from time to
time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Common Stock, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
The Company is not aware of any agreements, undertakings or arrangements with
any Underwriters or broker-dealers regarding the sale of Selling
Securityholder's securities. The Selling Securityholder may effect such
transactions by selling the Shares, as applicable, directly to purchasers or to
or through broker-dealers which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholder, and/or the purchasers of their
Shares, as applicable, for which such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The Selling
Securityholder and any broker-dealers that act in connection with the sale of
their Shares might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act.
The Company has notified the Selling Securityholder of the prospectus
delivery requirements for sales made pursuant to this Prospectus and that, if
there are material changes to the stated plan of distribution, a post-effective
amendment with current information would need to be filed before offers are made
and no sales could occur until such amendment is declared effective.
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<PAGE>
CERTAIN TRANSACTIONS
In August 1996, the Company authorized the issuance of 1,250,000 shares of
Common Stock to Peter S. Pellulo, the Company's President, in consideration for
services rendered in raising equity capital.
In July 1996, the Company authorized the issuance of 500,000 stock options to
Peter S. Pellulo, the Company's President, 250,000 options to Robert S. Sanelli,
a director of the Company and 250,000 options to John N. D'Anastasio, a director
of the Company. These options are exercisable at a price of $3.875 per share and
expire in July 2006.
In July 1995 the Company authorized the issuance of an aggregate of 108,759
shares of Series C Preferred Stock to the Company's President Peter S. Pelullo.
In consideration of the issuance of such shares, Mr. Pelullo agreed to retire an
aggregate of $543,795 in accrued compensation due him (See "Description of
Securities - Series C Preferred Stock"). In October 1995 the Company redeemed
8,800 Series C shares through the payment to Mr. Pelullo of $44,000, and in
November 1995 redeemed 2,500 Series C shares through the payment to Mr.
Pelullo of $12,500.
During the first quarter of fiscal 1992, a bank foreclosed on a loan and
received a judgment against the Company, its former Chairman Joseph Tarsia and
its President Peter S. Pelullo on notes payable to the bank by the Company which
totalled $1,054,000. An agreement was reached with the bank whereby the
Company's engineering and recording facility was sold by the bank to a newly-
formed company owned by the spouse of the Company's former Chairman called Sigma
Sound Services, Inc. ("Services"). As part of these arrangements, the Company
and its President remained as guarantors on $450,000. The Company's former
Chairman and his spouse became obligated for $600,000 to the bank and Services
became directly obligated to the bank for $450,000. In addition, the Company,
its former Chairman and its President guaranteed the repayment of the $450,000
obligation of Services to the bank and the Company became obligated to Services
for the principle amount of $450.000. See "Note 13 to Notes to Consolidated
Financial Statements." In April, 1995 the Company and its President were
released as guarantors and the obligation was settled.
The Company rented the studio which housed its recording facility from a
corporation owned by the spouse of the Company's former Chairman. Such
arrangement ceased in October 1991 when the recording facility was sold to a
corporation owned by the former Chairman's spouse. The amount of rent owed is
$89,435, which has been accrued. In April, 1995 this amount was settled and the
Company has been released of any further obligation related thereto.
From October 1991, when the Company's recording facility was sold, the
Company rented the facility to record their artists' music. The total amount of
the rent was approximately $110,000 of which $86,000 has been accrued. In April,
1995 this amount was settled and the Company has been released of any further
obligations related thereto.
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<PAGE>
The Company borrowed $0 and $27,000 from its President during the fiscal
years ended July 31, 1995 and 1994, and repaid $0 and $27,000 during those
years. The balance of the loans bearing interest at a rate of 12% per annum was
$0 as of July 31, 1995 and 1994. During 1995 a loan in the amount of $13,000
from Med Sound, Inc., a company controlled by the Company's President was repaid
through the payment of cash. During July 31, 1994 a loan in the amount of
$32,191 from Susan Gehrke, the sister-in-law of the Company's President was
satisfied through the payment of $32,191 in cash.
The Company also borrowed funds from its former Chairman prior to August 1,
1994. The balance of the loans bearing interest at 12% per annum was $0 and
$307,000 as of July 31, 1995 and 1994. The accrued interest on the loans was $0
and $56,000 (see "Executive Compensation").
The Company entered into a consulting agreement ("Consulting Agreement") for
a period of three years commencing April 1, 1993 with Jacob Der Hagopian (the
"Consultant"). The Consultant agreed to provide consulting services to the
Company in the areas of general corporate finance, business plan development,
corporate reorganization, communication, and negotiations. Pursuant to the
consulting agreement, the Company issued 350,000 shares of its Common Stock as
consideration for Mr. Der Hagopian's entry into the consulting agreement and
agreed to pay a weekly retainer of $2,500 subject to increases based upon future
financing and/or revenues. As of August 1, 1994 the weekly retainer payable to
Mr. Der Hagopian was increased to $4,000. The Company has accrued the unpaid
portion of this retainer. The Company also agreed to reimburse the Consultant
for any out of pocket expenses. The Consulting Agreement may be terminated for
cause or amended upon the mutual written consent of the parties. If the Company
elects to terminate the Agreement, any money due or required to be paid shall be
accelerated and payable upon termination. The Company's Board authorized a three
year extension of the Consulting Agreement and a 5% increase in Mr. Der
Hagopian's consulting fee commencing upon receipt by the Company of substantial
additional equity.
In February 1995 the Company's Board authorized the issuance of 2,009,937
shares of Common Stock to Peter Pelullo, the Company's President and Chairman
1,083,333 shares of Common Stock to Jacob Der Hagopian, a consultant to the
Company,10,000 shares of Common Stock to Robert Sannelli, a director of the
Company, 10,000 shares of Common Stock to John D'Anastasio, a director of the
Company, and 10,000 shares of Common Stock to Robert Schrock, a former director
of the Company. The shares were issued for services rendered at a per share
price of $.10.
As of April 25, 1995 the Company acquired 80% of the outstanding securities
of Global Telecommunications of Delaware, Inc. ("Global") pursuant to the terms
of an agreement ("Global Agreement") with the shareholders of Global. At the
time of the acquisition Global was newly formed company which has no operating
revenues or material assets. The Company acquired its interest in Global in
exchange for 100,000 shares of the Company's Common Stock and the Company's
agreement to issue up to an additional 300,000 shares subject to Global
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<PAGE>
achieving specified sales and revenue performance objectives over a five year
period. The Global purchase price was negotiated on an arms length basis. The
Company considered various factors in reaching an agreement with Global's
shareholders on the purchase price for Global. These factors included
projections presented to the Company by Global regarding the potential results
of Global's operations once its products were fully developed and marketed.
Global intends to develop and market telecommunication products, including the
Voice Pager. Subsequent to the Company's acquisition of its interest in Global,
certain members of the Registrant's current Board of Directors were appointed as
board members of Global. Michael Yang continues to serve as Global's President.
Global intends to establish marketing facilities in China and Southeast Asia
during fiscal year 1996 and enter into agreements with manufacturing facilities.
In October 1995 the Company entered into a consulting agreement with Joseph
Fanelli, a cousin of the Company's president ("Fanelli Agreement"). The Fanelli
Agreement requires Mr. Fanelli to identify and solicit indications of interest
from third parties in connection with the development, marketing, sale and
financing of the Digital Voice Pager and related telecommunications products.
Mr. Fanelli is entitled to receive $1,800 per week during the six month term of
the agreement. Furthermore, upon the consummation of a transaction with a third
party introduced to the Company by Mr. Fanelli and within one year from the date
of the Fanelli Agreement, Mr. Fanelli shall receive such additional compensation
as agreed to by the Company based upon the nature of and the benefits to the
Company of such transaction. Under the terms of the Fanelli Agreement, Mr.
Fanelli is entitled to receive reimbursement of all reasonable expenses which
are authorized by the Company. The Fanelli Agreement also provides that Mr.
Fanelli shall not during his engagement under the agreement and for a period of
two years thereafter, directly or indirectly compete with the Company or its
affiliates.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
par value, and 2,000,000 shares of Preferred Stock, $.001 par value ("Preferred
Stock"). The Company's Board has designated 750,000 shares of Preferred Stock as
Series A, $5.00 convertible Preferred Stock ("Series A Preferred Stock"),
800,000 shares of Series B $5.00 convertible Preferred Stock ("Series B
Preferred Stock") and 108,759 shares of Series C $5.00 Convertible Preferred
Stock ("Series C Preferred Stock").
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share on all matters
to be voted upon by the Company's stockholders. Stockholders do not have
cumulative voting rights in the election of directors. Subject to preferences
that may be applicable to any shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. The Company has not paid, and does not presently intend to pay,
dividends on its Common Stock. In the event of a liquidation, dissolution or
winding up of the Company, the
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<PAGE>
holders of Common Stock are entitled to share ratably in all assets, remaining
after payment of liabilities, subject to prior distribution rights of holders of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are validly authorized and issued and are fully paid and
non-assessable, and the shares of Common Stock to be issued upon completion of
the Overseas Offering will be validly authorized and issued, fully paid and
non-assessable.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of undesignated Preferred
Stock. The Board of Directors will have the authority to issue the undesignated
Preferred Stock from time to time in one or more series and to establish the
rights, preferences, privileges and restrictions granted to or imposed upon any
unissued shares of undesignated Preferred Stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the stockholders. Any future issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock. As of the date of this
Prospectus the Company's Board designated 750,000 shares of Series A Preferred
Stock, 800,000 shares of Series B Preferred Stock and 108,759 shares of Series C
Preferred Stock. The Company has utilized shares of its Preferred Stock to
satisfy outstanding obligations owed to the Company's creditors. As of the date
of this Prospectus, the Company had issued a total of (i) 177,606 shares of
Series A Preferred Stock to fourteen creditors in consideration of the
satisfaction and cancellation of $881,663 in liabilities; (ii) 741,237 shares of
Series B Preferred Stock in consideration of the retirement of $3,706,180 in
debt by one creditor; and (iii) 108,759 shares of Series C Preferred Stock in
consideration of the cancellation of $543,795 in accrued compensation due the
Company's President, Peter S. Pelullo. The Company also paid an aggregate of
approximately $126,805 in cash to the Series B holder to fully retire all
outstanding liabilities owed to such creditor. Subsequently, 77,127 shares of
Series B and 11,300 shares of Series C stock were redeemed by the Company.
SERIES A PREFERRED STOCK
The holders of Series A Preferred Stock are entitled to receive, in
preference to holders of shares of Common Stock or any other capital stock of
the Company junior to Series A Preferred, dividends, when, as and if declared by
the Company provided however that no dividends may be declared on any of the
foregoing securities until such time that holders of the Series A Preferred
Stock have received aggregate dividends or other distributions equaling $5.00
per share. For each five shares of Series A Preferred Stock the holder shall be
entitled to one vote on all matters submitted to security holders of the
Company. Preferred Shareholders shall possess a liquidation preference right
over shares of Common Stock and Junior Securities in an amount equal to $5.00
per share. The Company, in its sole discretion, may redeem all, but not less
than all of the Series A Preferred Shares at a price of $6.35 per share prior to
August 31,
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1996. The Company has the further option to redeem Series A Preferred Shares by
the issuance of 2 shares of Common Stock for each share of Series A Preferred
Stock prior to August 31, 1996. Notwithstanding the foregoing each share of
Series A Preferred Stock shall be automatically converted into one share of
Common Stock of the Company upon the earlier of (i) August 31, 1996; or (ii)
once $5.00 per share has been paid as a dividend or other distribution to the
holders of the Series A Preferred Stock.
SERIES B PREFERRED STOCK
Series B Preferred Shares are eligible for issuance to creditors who have
agreed to accept in satisfaction of their debt a maximum of 3% in cash and the
balance through the issuance of Series B Preferred Shares. The holders of Series
B Preferred Stock are entitled to receive, in preference to holders of shares of
Common Stock or any other capital stock of the Company junior to Series B
Preferred, dividends, when, as and if declared by the Company provided however
that no dividends may be declared on any of the foregoing securities until such
time that holders of the Series B Preferred Stock have received aggregate
dividends or other distributions equaling $5.00 per share. Shares of Series B
Preferred Stock are superior to the Company's Series A Preferred hares and
common shares. For each five shares of Series B Preferred Stock the holder shall
be entitled to one vote on all matters submitted to securityholders of the
Company. Series B Preferred shareholders shall possess a liquidation preference
right over shares of Common Stock and Series A Preferred Stock in an amount
equal to $5.00 per share. The Company, in its sole discretion, may redeem all,
but not less than all of the Series B Preferred Shares for shares of the
Company's Common Stock or cash as follows: (i) From May 1, 1996 to April 30,
1997 at a price of $5.50 per share or by the issuance of 2.5 common shares for
each Preferred share; or (ii) from May 1, 1997 to April 30, 1998 at a price of
$6.10 per share or by the issuance of two common shares for each Preferred
share. Notwithstanding the foregoing each share of Series B Preferred Stock
shall be automatically converted into one share of Common Stock of the Company
(i) after April 30, 1998 or (ii) once $5.00 per share has been paid as a
dividend or other distribution to the holders of the Series B Preferred Stock.
SERIES C PREFERRED STOCK
Series C Preferred Shares are eligible for issuance to individuals who are
owed compensation by the Company. The holders of Series C Preferred Stock are
entitled to receive, in preference to holders of shares of Common Stock, Series
A Preferred Stock, Series B Preferred Stock or any other capital stock of the
Company junior to Series C Preferred Stock, dividends, when, as and if declared
by the Company provided however that no dividends may be declared on any of the
foregoing securities until such time that holders of the Series C Preferred
Stock have received aggregate dividends or other distributions equaling $5.00
per share. Shares of Series C Preferred Stock are superior to the Company's
Series A Preferred Stock, Series B Preferred Stock and Common Stock. For each
five shares of Series C Preferred Stock the holder shall be entitled to one vote
on all matters submitted to securityholders of the Company. Series C Preferred
Shareholders shall possess a liquidation preference right over shares of Common
Stock
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and Series A Preferred Stock and Series B Preferred Stock in an amount equal to
$5.00 per share. The Company, in its sole discretion, may redeem the Series C
Preferred Shares for shares of the Company's Common Stock or cash as follows:
(i) From May 1, 1996 to April 30, 1997 at a price of $5.50 per share or by the
issuance of 2.5 common shares for each Preferred share; or (ii) from May 1, 1997
to April 30, 1998 at a price of $6.10 per share or by the issuance of two common
shares for each Preferred share. Notwithstanding the foregoing each share of
Series C Preferred Stock shall be automatically converted into one share of
Common Stock of the Company (i) after April 30, 1998; or (ii) once $5.00 per
share has been paid as a dividend or other distribution to the holders of the
Series C Preferred Stock.
WARRANT
In August 1996 the Company issued to Silverman, Collura & Chernis, P.C. a
warrant to purchase up to 100,000 shares of the Company's Common Stock at an
exercise price of $2.00 per share subject to adjustment in certain circumstances
described below (the "Warrant"). The Warrant is exercisable through August 31,
1999, subject to extension in the sole discretion of the Company. The Warrant is
not redeemable by the Company. The Shares issuable upon exercise of the Warrant
are subject to adjustments upon certain events, including the declaration by the
Company of a stock split, the reclassification, subdivision or combination of
outstanding shares of Common Stock into a greater or lesser number of shares. In
such event, the exercise price of the Warrant may be adjusted accordingly.
The Warrant may be exercised, in whole or in part, upon surrender of the
Warrant Certificate representing the Warrant on or prior to the expiration date
of the Warrant accompanied by payment of the exercise price of the Warrant. The
holders of the Warrant will not have the rights or privileges of holders of
common shares until the Warrant is exercised. The Company has agreed to register
the shares of Common Stock underlying the Warrant under the Securities Act.
POSSIBLE ANTI-TAKEOVER EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The Company has significant shares of authorized but unissued capital stock.
One of the effects of the existence of authorized but unissued capital stock may
be to enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby to protect the continuity of the
Company's management. If in the due exercise of its fiduciary obligations, for
example, the Board of Directors were to determine that a takeover proposal was
not in the Company's best interests, such shares could be issued by the Board of
Directors without stockholder approval in one or more private placements or
other transactions that might prevent or render more difficult or costly the
completion of the takeover transaction by diluting the voting or other rights of
the proposed acquiror or insurgent stockholder or stockholder group, by creating
a substantial voting block in institutional or other hands that might undertake
to support the position of the incumbent Board of Directors, by effecting an
acquisition that might complicate or preclude the takeover, or otherwise. In
this regard, the Company's Articles of
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Incorporation grant the Board of Directors broad power to establish the rights
and preferences of the authorized and unissued Preferred Stock, one or more
series of which could be issued entitling holders to vote separately as a class
on any proposed merger or share exchange, to convert Preferred Stock into a
large number of shares of Common Stock or other securities, to demand redemption
at a specified price under prescribed circumstances related to a change in
control, or to exercise other rights designed to impede a takeover.
CERTAIN CHARTER AND BYLAWS PROVISIONS
LIMITATION OF LIABILITY
The Company's Amended Certificate of Incorporation and Amended and Restated
Bylaws limit the liability of directors and officers to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a corporation
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, including gross negligence, except liability for (i) breach
of the directors' duty of loyalty; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption, and
(iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not permit a corporation to eliminate a director's
duty of care, and this provision of the Company's Amended and Restated
Certificate of Incorporation has no effect on the availability of equitable
remedies, such as injunction or rescission, based upon a director's breach of
the duty of care.
The Company's Amended and Restated Certificate of Incorporation authorizes
the Company to purchase and maintain insurance for the purposes of
indemnification. At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent for which indemnification
will be required or permitted under the Company's Amended and Restated
Certificate of Incorporation, Amended and Restated Bylaws or indemnification
agreements. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.
CORPORATION TAKEOVER PROVISIONS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
stockholder became an interested stockholder, unless (i) the corporation has
elected in its original certificate of incorporation not to be governed by
Section 203 (the Company did not make such an election) (ii) the business
combination was approved by the Board of Directors of the corporation before the
other party to the business combination became an interested stockholder (iii)
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upon consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to render or vote stock held by
the plan) or, (iv) the business combination was approved by the Board of
Directors of the corporation and ratified by two-thirds of the voting stock
which the interested stockholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an "interested stockholder" involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as a stockholder who,
together with affiliates and associates, owns (or, within three years prior, did
own) 15% or more of a Delaware corporation's voting stock. Section 203 could
prohibit or delay a merger, takeover or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
STOCKHOLDER MEETINGS AND OTHER PROVISIONS
Under the Amended and Restated By-laws, special meetings of the stockholders
of the Company may be called only by the Company's President or by the Company's
President and Secretary at the request of a majority of the members of the Board
of Directors. Stockholders are required to comply with certain advance notice
provisions with respect to any nominations of candidates for election to the
Company's Board of Directors or other proposals submitted for stockholder vote.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, NY 10005-1303.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
approximately 18,558,605 shares of Common Stock. In addition upon exercise in
full of the warrants an additional 2,358,000 shares of Common Stock will be
outstanding. 9,448,736 of these shares, including shares sold in this Offering
will be freely tradeable without restriction or further registration under the
Securities Act except for any shares purchased by an "affiliate" of the Company,
which will be subject to the limitations of Rule 144 promulgated under the
Securities Act ("Rule 144"). The balance of outstanding shares may not be
publicly sold unless they are
65
<PAGE>
registered under the Securities Act or is sold pursuant to an applicable
exemption from registration, inducing an exemption pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares of Common Stock for at
least two years, including persons who are "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock of
the Company (shares immediately after the Offering assuming no exercise of the
Over-Allotment Option), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding a sale by such person. Sales
under Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. Under Rule 144, however, a person who has held shares of Common Stock
for a minimum of three years and who is not, and for the three months prior to
the sale of such shares has not been, an affiliate of the company is free to
sell such shares without regard to the volume, manner-of-sale and certain other
limitations contained in Rule 144.
TERMS OF THE OFFERING
The Company hereby offers the right to subscribe at $2.00 per share for up to
2,500,000 shares of its Common Stock, $.001 par value, through its officers and
directors with the possible assistance of broker-dealers who are members of the
National Association of Securities Dealers, Inc. and to compensate such
broker-dealers, if any, in a maximum amount of $.20 per Share.
As of the date of this Prospectus, no underwriter has been retained by the
Company in connection with the sale of the securities being offered hereby. In
the event that an underwriter is retained or a broker-dealer who can be deemed
an underwriter is retained by the Company, an amendment to the Company's
Registration Statement will be filed with the Securities and Exchange Commission
delaying this Offering.
METHOD OF SUBSCRIBING
Persons may subscribe to this Offering by filling in and signing the
Subscription Agreement and delivering it, prior to the expiration date (as
defined below), to the Company. The subscription price of $2.00 per Share must
be paid in cash or by check, bank draft or postal or express money order payable
in United States dollars to the order of the Company. Certificates for the
Shares subscribed will be issued as soon as practicable after subscriptions have
been accepted by the Company.
EXPIRATION DATE
The subscription offer will expire at 5:00 p.m., New York time, on _________
__, 1996, 90 days from the date of this Prospectus (or at 5:00 p.m. New York
time on ________ __, 1996, 150 days from the date of this Prospectus, if
extended by the Company), or on such
66
<PAGE>
earlier date. Subscribers may therefore not have the use of their funds for a
period of up to 150 days from the date of this Prospectus.
RIGHT TO REJECT
The Company reserves the right to reject any subscription in its sole
discretion for any reason whatsoever and to withdraw this Offering at any time
prior to acceptance by the Company of the subscriptions received.
LEGAL MATTERS
Certain legal matters in connection with the Overseas Offering are being
passed upon for the Company by Silverman, Collura & Chernis, P.C. ("SCC"), 381
Park Avenue South, Suite 1601, New York, New York 10016. SCC is the beneficial
owner of the Warrant which entitles it to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $2.00 per share. See "Description
of Securities - Warrant".
EXPERTS
The financial statements included in this Registration Statement have been
audited by Cogen Sklar LLP (formerly Cogen, Sklar, Levick), independent
certified public accountants, for the periods and to the extent as set forth in
their report appearing elsewhere herein, and are included in reliance upon such
report and upon the authority of said firm as experts in accounting and
auditing.
67
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sigma Alpha Entertainment Group, Ltd.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Sigma Alpha
Entertainment Group, Ltd. and subsidiaries as of July 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sigma Alpha
Entertainment Group, Ltd. and subsidiaries as of July 31, 1995 and 1994, and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ COGEN SKLAR LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
September 11, 1995
F-1
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1995 AND 1994
(Rounded to Nearest Thousand)
ASSETS 1995 1994
---------- ----------
CURRENT ASSETS
Cash and equivalents $1,423,000 $ 17,000
Receivable from underwriting 198,000 --
Prepaid expenses and other current assets 7,000 2,000
---------- ----------
1,628,000 19,000
PROPERTY AND EQUIPMENT 26,000 21,000
GOODWILL 74,000 --
---------- ----------
TOTAL ASSETS $1,728,000 $ 40,000
========== ==========
LIABILITIES
CURRENT LIABILITIES
Note payable to banks $ 50,000 $ 250,000
Current portion of long-term debt -- 533,000
Notes payable to officers -- 307,000
Notes payable to others -- 1,161,000
Accounts payable - trade 173,000 1,064,000
Due to distributor -- 265,000
Taxes, other than income taxes 76,000 353,000
Accrued wages - officers -- 1,782,000
Accrued interest 31,000 633,000
Accrued expenses and other current liabilities 94,000 433,000
---------- ----------
424,000 6,781,000
LONG-TERM DEBT - net of current portion -- 29,000
---------- ----------
TOTAL LIABILITIES 424,000 6,810,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY ( DEFICIENCY)
PREFERRED STOCK
SERIES A, $5.00 CONVERTIBLE, $.001 par value;
authorized, 750,000 shares; issued and
outstanding, 178,000 shares at July 31, 1995. -- --
SERIES B, $5.00 CONVERTIBLE, $.001 par value;
authorized, 800,000 shares; issued and
outstanding, 726,000 shares at July 31, 1995. 1,000 --
SERIES C, $5.00 CONVERTIBLE, $.001 par value;
authorized, 109,000 shares; issued and
outstanding, 109,000 shares at July 31, 1995. -- --
ADDITIONAL PAID-IN CAPITAL 5,054,000 --
COMMON STOCK, $.001 par value; authorized
50,000,000 shares; issued and outstanding,
12,837,000 shares at July 31, 1995 and
7,381,000 shares at July 31, 1994. 13,000 7,000
COMMON STOCK SUBSCRIBED 1,499,000 699,000
ADDITIONAL PAID-IN CAPITAL 12,664,000 9,017,000
ACCUMULATED DEFICIT (17,919,000) (16,443,000)
---------- ----------
1,312,000 (6,720,000)
LESS: UNEARNED FUTURE COMPENSATION 8,000 50,000
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 1,304,000 (6,770,000)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $1,728,000 $ 40,000
---------- ----------
========== ==========
See auditor's report and notes to consolidated financial statements.
F-2
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1995 AND 1994
(Rounded to Nearest Thousand)
1995 1994
----------- -----------
SALES $ -- $ --
COST OF SALES -- --
----------- -----------
GROSS PROFIT -- --
----------- -----------
OPERATING EXPENSES:
New artist development costs -- 50,000
Marketing and promotion -- 1,000
----------- -----------
-- 51,000
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Officers' compensation 678,000 625,000
Other salaries and payroll costs -- 16,000
Consulting fees 425,000 328,000
Professional fees 168,000 102,000
Other 722,000 142,000
----------- -----------
1,993,000 1,213,000
----------- -----------
TOTAL OPERATING EXPENSES AND GENERAL AND
ADMINISTRATIVE EXPENSES 1,993,000 1,264,000
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE OTHER
INCOME (EXPENSE) AND EXTRAORDINARY GAIN (1,993,000) (1,264,000)
----------- -----------
OTHER INCOME (EXPENSE)
Licensing fees and other 6,000 26,000
Interest expense (208,000) (321,000)
Interest income 9,000 --
----------- -----------
(193,000) (295,000)
----------- -----------
LOSS BEFORE EXTRAORDINARY GAIN (2,186,000) (1,559,000)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 710,000 --
----------- -----------
NET LOSS $(1,476,000) $(1,559,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 9,444,000 7,378,000
=========== ===========
NET LOSS PER COMMON SHARE
Net loss before extraordinary gain $ (.23) $ (.21)
Extraordinary gain on extinguishment of debt .07 --
----------- -----------
NET LOSS PER SHARE $ (.16) $ (.21)
=========== ===========
See auditor's report and notes to consolidated financial statements.
F-3
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JULY 31, 1995 AND 1994
(Rounded to Nearest Thousand)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------
COMMON ADDITIONAL
NUMBER OF STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SUBSCRIBED CAPITAL DEFICIT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, AUGUST 1, 1993 7,310,000 $ 7,000 $ 250,000 $ 9,016,000 $(14,884,000)
Year ended July 31, 1994
Common stock subscriptions -- -- 449,000 -- --
Issuances of common stock
For consulting and other services 38,000 -- -- 1,000 --
For interest expense 33,000 -- -- -- --
Net loss -- -- -- -- (1,559,000)
------------ ------------ ------------ ------------ ------------
BALANCES, JULY 31, 1994 7,381,000 7,000 699,000 9,017,000 (16,443,000)
Year ended July 31, 1995
Common stock subscription, net of $2,500,000
receivable -- -- 3,717,000 -- --
Issuances of common stock --
Under subscription agreement 1,517,000 2,000 (2,917,000) 2,915,000 --
For cash 533,000 1,000 -- 262,000 --
For interest 75,000 -- -- 25,000 --
For professional services 13,000 -- -- 2,000 --
For officers and directors 2,085,000 2,000 -- 206,000 --
For lease obligation 50,000 -- -- 50,000 --
For acquisition 100,000 -- -- 80,000 --
For consulting 1,083,000 1,000 -- 107,000 --
Net loss -- -- -- -- (1,476,000)
------------ ------------ ------------ ------------ ------------
BALANCES, JULY 31, 1995 12,837,000 $ 13,000 $ 1,499,000 $ 12,664,000 $(17,919,000)
============ ============ ============ ============ ============
</TABLE>
See auditor's report and notes to consolidated financial statements.
F-4
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
YEAR ENDED JULY 31, 1995
(Rounded to Nearest Thousand)
PREFERRED STOCK "SERIES A"
--------------------------
ADDITIONAL
PAID-IN
NUMBER OF SHARES AMOUNT CAPITAL
---------------- --------- -----------
BALANCES, JULY 31, 1994 -- $ -- $ --
Year ended July 31, 1995
Issuance of preferred stock
For professional services 3,000 -- 15,000
For conversion of debt 175,000 -- 867,000
-------- --------- -----------
BALANCES, JULY 31, 1995 178,000 -- $ 882,000
======== ========= ===========
PREFERRED STOCK "SERIES B"
--------------------------
ADDITIONAL
PAID-IN
NUMBER OF SHARES AMOUNT CAPITAL
---------------- --------- -----------
BALANCES, JULY 31, 1994 -- $ -- $ --
Year ended July 31, 1995
Issuance of preferred stock
For conversion of debt 726,000 1,000 3,628,000
-------- --------- -----------
BALANCES, JULY 31, 1995 726,000 $ 1,000 $ 3,628,000
======== ========= ===========
PREFERRED STOCK "SERIES C"
--------------------------
ADDITIONAL
PAID-IN
NUMBER OF SHARES AMOUNT CAPITAL
---------------- --------- -----------
BALANCES, JULY 31, 1994 -- $ -- $ --
Year ended July 31, 1995
Issuance of preferred stock
For deferred compensation 109,000 -- 544,000
-------- --------- -----------
BALANCES, JULY 31, 1995 109,000 $ -- $ 544,000
======== ========= ===========
See auditor's report and notes to consolidated financial statements.
F-5
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1995 AND 1994
(Rounded to Nearest Thousand)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,476,000) $(1,559,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary gain on extinguishment of debt (710,000) --
Depreciation of property and equipment 8,000 7,000
Amortization of goodwill 6,000 --
Amortization of unearned compensation 42,000 190,000
Issuance of common stock for consulting, compensation
and other expenses 393,000 1,000
Issuance of preferred stock for professional services 15,000 --
compensation
Increase in:
Prepaid expenses and other current assets (5,000) --
Increase (decrease) in:
Accounts payable - trade (76,000) (3,000)
Due to distributor (8,000) --
Taxes, other than income taxes (154,000) 123,000
Accrued expenses and other current liabilities (148,000) 977,000
----------- -----------
Net cash used in operating activities (2,113,000) (264,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (13,000) --
----------- -----------
Net cash used in investing activities (13,000) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net principal payments on notes payable, bank (6,000) --
Net principal payments on long-term debt (80,000) (111,000)
Proceeds from notes payable to others -- 139,000
Repayments on note payable to others (165,000) (196,000)
Proceeds from common stock subscribed 3,520,000 449,000
Proceeds from issuance of common stock 263,000 --
Proceeds from loans payable from officers -- 27,000
Repayments of loans payable from officers -- (27,000)
----------- -----------
Net cash provided by financing activities 3,532,000 281,000
----------- -----------
NET CHANGES IN CASH AND EQUIVALENTS 1,406,000 17,000
CASH AND EQUIVALENTS - BEGINNING OF YEAR 17,000 --
----------- -----------
CASH AND EQUIVALENTS - END OF YEAR $ 1,423,000 $ 17,000
=========== ===========
</TABLE>
See auditor's report and notes to consolidated inancial statements.
F-6
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JULY 31, 1995 AND 1994
(Rounded to Nearest Thousand)
1995 1994
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year:
Interest $ -- $ 4,000
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Preferred stock Series A issued for conversion of debt $ 859,000 $ --
Preferred stock Series B issued for conversion of debt 3,635,000 --
Preferred stock Series C issued for conversion of debt 544,000 --
Common stock issued for acquisition of subsidiary 80,000 --
Common stock subscribed 198,000 --
---------- -------
See auditor's report and notes to consolidated financial statements.
F-7
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Sigma Alpha Entertainment Group, Ltd. (the "Company") was incorporated under the
laws of the Commonwealth of Pennsylvania in February 1988 and commenced
operations in June 1989, as the successor-in-interest of Sigma Sound Studios,
Inc. ("Sigma Sound"). In 1987, Sigma Sound purchased the assets of Alpha
International Recording Studios, Inc. ("Alpha International"). The Company
became publicly held upon its merger in January 1991 with Fabulous Mergers,
Inc., an inactive public company incorporated in Nevada. Pursuant to the terms
of the merger, Fabulous Mergers, Inc., as the surviving corporation, changed its
name to Sigma Alpha Entertainment Group, Ltd., and was subsequently
reincorporated in Delaware.
During the period from 1991 through 1993 the Company was primarily engaged in
the acquisition, production, marketing and distribution of recorded music. The
Company's principal product related to urban, dance and contemporary hit
radio/album oriented rock singles and albums. The Company also operated a
professional recording, engineering and production facility and a music
publishing division.
Since inception, the Company incurred cumulative losses from operations. As a
result of the Company's inability to generate sufficient revenues from
operations or to secure funding through financing transactions, materially all
of the Company's operations were suspended. Since 1993, the Company has
maintained a skeleton staff at its administrative office to support the efforts
of its principal executive officers and certain consultants towards reorganizing
the Company's finances and business plan.
Management has been successful in reorganizing the Company's finances during the
year ended July 31, 1995 by reducing its outstanding liabilities through
settlements with vendors and the issuance of Preferred Series B stock.
In April 1995, the Company acquired 80% of Global Telecommunications of
Delaware, Inc. ("Global"). Global is a newly formed entity which intends to
develop and market certain technology and design rights pertaining to
telecommunication products, including a digital voice pager ("Voice Pager") in
the People's Republic of China ("PRC"). Significant funding will be required to
complete the development of the Voice Pager technology and to market same. In
April 1995 the Company entered into a stock exchange agreement ("China Cool
Agreement") to acquire 100% of the outstanding shares of China Cool Air Holding,
Ltd. ("China Cool") in exchange for 2,000,000 shares of the Company's common
stock. China Cool is a recently formed entity which owns a 60% joint venture
interest in Hangzhou Dongbao Electric Appliance Co., Ltd. ("HD Electric"), a
joint venture enterprise organized under the laws of the PRC. China Cool was
required to contribute approximately $8,000,000 to HD Electric by April 30,
1995, which contribution has not yet been made. In January 1995 HD Electric
acquired substantially all of the assets of a Chinese Company engaged in the
design, manufacture and sale of light commercial and household air conditioner
units in China. HD Electric also intends to establish a manufacturing line for
vehicle air conditioners. The closing of the China Cool Agreement is subject to
receipt of an extension of the date by which China Cool is required to
contribute approximately $8,000,000 to HD Electric. The Company will be required
to arrange funding of China Cool's contribution to HD Electric, of which there
can be no assurances.
F-8
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
Cash Equivalents
The Company considers certificates of deposit, money market funds and all other
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Concentration of Credit Risk
The Company maintains its cash balances in several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Company up to $100,000. During the year the Company may have cash balances in
these institutions in excess of the limits. At July 31, 1995, balances were in
excess of insurable amounts by approximately $977,000.
Property and Equipment
Property and equipment are recorded at cost. Fixtures and equipment are
depreciated primarily using the declining balance method over the estimated
useful lives of 3 - 10 years.
Research and Development
Expenditures for research, development and engineering of products are expensed
as incurred.
Income Taxes
The Company has adopted FASB Statement No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Net Loss Per Share
Net loss per share is based upon the weighted average number of shares
outstanding, without assumed conversion of the warrants and stock options, which
are considered to be common stock equivalents, since the effect on net loss per
share would be anti-dilutive.
New Authoritative Pronouncements
The Financial Accounting Standards Board issued FAS 119, "Disclosure About
Derivative Financial Investments and Fair Value of Financial Instruments" and
FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". These statements are not applicable to the Company at
this time.
Reclassification
Due to a reverse 1 for 3 stock split during the year ended July 31, 1993, the
par value of the share reduction amounting to $14,000 was transferred from par
value of common stock to additional paid-in capital as of August 1, 1993.
F-9
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 2 - MANAGEMENT'S PLANS FOR FINANCIAL REORGANIZATION
From 1989 to 1993, the Company was involved in different facets of the music
recording and publishing business. The Company incurred significant cumulative
losses from operations since its inception and was unable to generate either
sufficient revenues from operations or secure funding through financing
transactions. Accordingly, by fiscal 1993, the Company suspended materially all
of its operations. Since 1993, the Company has maintained a skeleton staff at
its administrative office to support the efforts of its principal executive
officers and certain consultants towards reorganizing the Company's finances and
business plan.
Management has been successful in reorganizing the Company's finances by
reducing outstanding liabilities by $6,386,000 from $6,810,000 at July 31, 1994
to $424,000 at July 31, 1995. Additionally, the Company is expecting to receive
$2,500,000 by November 30, 1995 from the Overseas offering (see Note 3). The
Company intends to utilize a portion of the proceeds received from the Overseas
offering to continue to fund the development of the Voice Pager as well as to
consummate the China Cool Agreement.
Subscription Agreement
As of July 31, 1994, the Company entered into a subscription agreement requiring
the subscriber to purchase 12,371,512 shares of the Company's common stock for
$11,800,000. The Company received $917,000. The subscription agreement was
terminated on March 15, 1995 and the Company's Board of Directors issued the
subscriber 150,000 shares of the Company's common stock in consideration for the
$917,000.
Underwriting Agreement
As of October 10, 1994, the Company entered into a firm Underwriting Agreement
whereby the Underwriter agreed to purchase from the Company 3,000,000 shares of
common stock at $2 per shares by June 30, 1995. In consideration the Underwriter
is to receive 100,000 shares of the Company's common stock upon execution of the
agreement, 100,000 shares upon the Company receiving $3,000,000 from the sale of
the shares and an additional 100,000 shares upon the Company receiving the
remaining $3,000,000 from the sale of shares. The shares related to this
Underwriting Agreement will be issued pursuant to Regulation S. As of July 31,
1995, 1,100,000 shares have been issued; of which 1,000,000 shares were issued
to the Underwriter at $2 per share from common stock subscribed and 100,000
shares were issued as consideration. Subsequent to July 31, 1995, and related to
the $3,302,000 of funds received by the Company as of July 31, 1995, 600,000
shares were issued of which 500,000 shares were issued to the underwriter at $2
per share from common stock subscribed and 100,000 were issued as consideration.
The Company is currently seeking to register all shares issued pursuant to the
Underwriting Agreement under the Securities Act of 1933, as amended. The Company
filed a Registration Statement ("Registration Statement") with the Securities
and Exchange Commission in this regard.
NOTE 3 - RECEIVABLE FROM UNDERWRITER
The receivable from underwriting consists of amounts due from the Underwriting
Agreement (see Note 2). As of July 31, 1995, $2,698,000 of the total $6,000,000
was receivable from the underwriter. Subsequent to July 31, 1995, $198,000 was
collected and the remaibning $2,500,000 is expected to be received by November
30, 1995.
F-10
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 4 - ACQUISITIONS AND PENDING ACQUISITIONS
In April 1995, the Company acquired 80% of Global. Global is a newly formed
entity which intends to develop and market certain technology and design rights
pertaining to telecommunication products, including a Voice Pager in the PRC.
Significant funding will be required to complete the development of the Voice
Pager technology and to market same. The acquisition of Global is reflected as
goodwill of $80,000 and represents the cost of Global in excess of the fair
value of net assets acquired, which is being amortized on the straight-line
basis over five years. Research and development costs incurred during the year
ended July 31, 1995 amounted to $82,000. The Company has recorded 100% of the
loss for the year ended July 31, 1995 since there is no obligation of the
minority interest to fund its share of the loss.
In April 1995, the Company entered into the China Cool Agreement to acquire 100%
of the outstanding shares of China Cool in exchange for 2,000,000 shares of the
Company's common stock. China Cool is a recently formed entity which owns a 60%
joint venture interest in HD Electric, a joint venture enterprise organized
under the laws of the PRC. China Cool was required to contribute approximately
$8,000,000 to HD Electric by April 30, 1995, which contribution has not yet been
made. In January 1995, HD Electric acquired substantially all of the assets of a
Chinese Company engaged in the design, manufacture and sale of light commercial
and household air conditioner units in China. HD Electric also intends to
establish a manufacturing line for vehicle air conditioners. The closing of the
China Cool Agreement is subject to receipt of an extension of the date by which
China Cool is required to contribute approximately $8,000,000 to HD Electric.
The Company will be required to arrange funding of China Cool's contribution to
HD Electric. As of the present date, the Company has not received any extension
of such date and has not procured any commitment regarding the $8,000,000
funding. There can be no assurance that an extension of such date will be
received or that such funding will be available or if available on terms
acceptable to the Company. Based upon the current state of affairs, the Company
does not believe that it is probable that the Company will raise the needed
$8,000,000 funding and therefore the Company does not believe that the
acquisition of China Cool is probable.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1995 1994
-------- --------
Equipment $ 48,000 $ 36,000
Furniture and fixtures 12,000 11,000
Automotive equipment 18,000 18,000
Equipment under capital leases 64,000 64,000
-------- --------
142,000 129,000
Less accumulated depreciation and
amortization 116,000 108,000
-------- --------
$ 26,000 $ 21,000
======== ========
NOTE 6 - RELATED PARTY TRANSACTIONS
Guarantees
The Company's Chairman has provided personal guarantees in connection with
certain business agreements.
Loans
The Company borrowed $27,000 from its Chairman during the year ended July 31,
1994 and repaid $27,000 during that year.
The Company also borrowed $121,000 during the year ended July 31, 1994 from its
former Chairman, leaving a balance of $307,000 due to the former Chairman at
July 31, 1994. The balance of the loans bear interest at 12%. As of April 27,
1995, the Company entered into a separation agreement with its former Chairman
(see Note 11) and this obligation was satisfied in full.
F-11
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 6 - RELATED PARTY TRANSACTIONS
Sub-lease and Consulting Agreements
The Company subleases its office space from a related party controlled by
Salvatore Pelullo, the brother of the Chairman of the Company pursuant to a
formal lease agreement.
The Company also entered into a consulting agreement with this related party
effective December 16, 1992. The term was twelve months with an automatic
renewal on a month-to-month basis. The Company issued 50,000 shares of its
common stock and agreed to pay $30,000 on the effective date of the agreement.
As of July 31, 1995, the Company has fulfilled its obligation. Additionally, the
Company has agreed to pay $25,000 for consulting services related to the
reorganization of the Company. The Company has paid $17,000 pursuant to this
agreement as of July 31, 1994. During the year ended July 31, 1995, the Company
issued an additional 50,000 shares in fulfillment of its obligation under this
agreement.
The Company entered into a three year agreement with a consultant (stockholder)
as of April 1, 1993. The consultant was to receive $2,500 per week through July
31, 1993 and 350,000 shares of the Company's common stock and $3,000 per week
thereafter. During 1995, the Company raised the consultant's payment to $4,000
per week. As of July 31, 1995 the balance due the consultant was approximately
$24,000.
NOTE 7 - INCOME TAXES
There is no income tax benefit for operating losses for the years ended July 31,
1995 and 1994 due to the following:
o Current tax benefit -the operating losses cannot be carried back to earlier
years.
o Deferred tax benefit - the deferred tax assets were offset by a valuation
allowance. Management believes that a valuation allowance is considered
necessary since it is more likely than not that the deferred tax asset will
not be realized through future taxable income.
The components of the net deferred tax assets (liabilities) are as follows:
1995 1994
----------- -----------
Net operating loss carryforwards $ 6,423,000 $ 5,948,000
Contribution carryforwards 5,000 5,000
Research and development 27,000 --
Valuation allowance (6,455,000) (5,953,000)
----------- -----------
$ -- $ --
=========== ===========
The use of net operating loss carryforwards is limited when there has been a
substantial change in ownership (as defined) during a three year period. Because
of the recent and contemplated changes in common stock, options and warrants,
such a change may occur in the future. In this event, the use of net operating
losses each year would be restricted to the value of the Company on the date of
such change multiplied by the federal long-term tax exempt rate ("annual
limitation"); unused annual limitations may then be carried forward without this
limitation.
At July 31, 1995 the Company had net operating loss carryforwards of
approximately $18,891,000 which if not used, will expire primarily during the
years 2005 through 2010.
F-12
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 8 - NOTE PAYABLE TO BANKS
1995 1994
-------- --------
Note payable, bank, accruing interest at 11.5%
Principal was due January 15, 1991 $ 50,000 $ 50,000
Note payable, bank, accruing interest at 11%
Terms of note have expired -- 200,000
-------- --------
$ 50,000 $250,000
======== ========
The note payable and related accrued interest of approximately $29,000 were
satisfied in full in September 1995 for a cash payment of $20,000.
NOTE 9 - LONG-TERM DEBT
Note payable, bank, principal due December
31, 1999, accruing interest at 12.5% $ -- $ 29,000
Note payable, bank, in monthly installments
plus interest at prime plus 1-1/2%
through March 6, 1995 -- 82,000
Obligations under capital leases for equip-
ment through February 1993 -- 24,000
Note payable, related party, bearing
interest at 12% -- 337,000
Accrued rent due former Chairman -- 90,000
-------- --------
-- 562,000
Less current portion -- 533,000
-------- --------
$ -- $ 29,000
======== ========
NOTE 10 - NOTES PAYABLE, OTHERS
Notes payable, others consist of notes payable issued to individuals and
companies ranging in amounts from $5,000 to $517,000. The interest rates on
these notes ranged from 7.5% to 14%. During the year ended July 31, 1995, all of
these obligations from the prior year of $1,161,000 were satisfied in full
either through cash payments, issuance of Preferred Series A shares or Preferred
Series B shares.
F-13
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Leases
Most of the Company's operations use leased facilities and equipment consisting
of administrative offices and transportation and office equipment. Some of the
operating leases contain provisions for lease renewal, and also require payments
of taxes, maintenance, insurance and other occupancy expenses.
The following is a schedule of future minimum rental payments for all
noncancelable operating leases that have initial or remaining lease terms in
excess of one year at July 31, 1995:
Year Ending July 31,
--------------------
1996 $26,000
1997 26,000
1998 26,000
1999 17,000
-------
$95,000
=======
Rent expense for operating leases in 1995 and 1994 was $21,000 and $31,000,
respectively.
Employment Agreements
The Company agreed, effective April 1991, to pay the Chairman $250,000,
increasing 10% per year cumulatively, plus bonuses equal to 5% of pre-tax income
and certain fringe benefits, through the year 2001. Upon his death or
disability, the Company is to pay his annual salary for the lesser of eight
years or the balance of the term, or, upon termination without cause or
resignation for "good reason", his annual salary plus certain fringe benefits
for four years or the balance of the term.
Separation Agreement
As of April 27, 1995, the Company entered into a Separation Agreement with the
former Chairman of the Board. The Company was released of all obligations,
claims and debts due him. These obligations, claims and debts were assumed by a
third party in consideration for $61,000 in cash and 395,000 Preferred Series B
shares of the company valued at $1,977,000. In addition, the third party also
agreed to purchase the former Chairman's shares (1,740,063) in the Company. In
accordance with the Separation Agreement, the Company agreed to pay up to $2,000
per week until such time that these obligations (due April 1996) are paid to the
former Chairman by the third party. The compensation paid by the Company was
$6,000 and an additional $33,000 was accrued as of July 31, 1995, which
represents the maximum liability by the Company to the former Chairman in the
event the third party fails to perform.
Legal Proceedings
The Company is a defendant in a number of legal proceedings which occurred
because of its inability to pay creditors and lenders. The Company has judgments
of approximately $186,000 as well as tax judgements of approximately $86,000
totaling $272,000 outstanding. Those cases in which the ultimate settlements are
known or estimated have been accrued in the financial statements.
NOTE 12- CAPITAL STOCK, WARRANTS AND OPTIONS
Common Stock
On February 8, 1995, the Company's Board of Directors approved the issuance of
267,000 shares of common stock to the Underwriter which assisted the Company in
negotiations related to the July 31, 1994 subscription agreement.
F-14
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 12- CAPITAL STOCK, WARRANTS AND OPTIONS (Continued)
As of October 4, 1994, the Company entered into a subscription agreement with
the Underwriter requiring the subscriber to purchase 300,000 shares of the
Company's common stock at $.80 per share, pursuant to Regulations. During the
year ended July 31, 1995, proceeds of $240,000 were received and 300,000 shares
of common stock were issued subject to this agreement.
In February 1995, the Board authorized 2,010,000 shares of common stock to the
President of the Company, 30,000 shares to three outside members of the Board of
Directors and 1,083,000 shares of common stock to an outside consultant in
consideration for $201,000, $3,000 and $108,000, respectively, in recognition
for services. Additionally, 75,000 shares of common stock were issued for
interest, 13,000 shares for professional fees and 50,000 shares for a lease
commitment obligation, in consideration for $25,000, $2,000 and $50,000,
respectively.
In May 1995, the Board authorized an additional 15,000 shares of common stock
each to three outside members of the Board of Directors, in consideration for a
total of $4,500 for services rendered.
Stock Option Plan
The Company, with stockholder approval, has adopted a Stock Option Plan (the
"Plan") which provides for the granting of options to officers, key employees,
artists, consultants and others. Options to purchase the Company's common stock
may be made for a term of up to ten years at the fair market value at the time
of the grant. Incentive options granted to a ten percent or more stockholder may
not be for less than 110% of fair market value nor for a term of more than five
years. The aggregate fair market value of the stock for which an employee may be
granted incentive options which are first exercisable in any calendar year shall
not exceed $100,000. The Company has reserved a total of 5,000,000 shares for
issuance under the Plan. No options have been granted under this plan through
July 31, 1995. The Plan terminates in November 2001, unless terminated earlier
by the Board of Directors.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, $.001
par value, in one or more series. On August 17, 1993, the Board of Directors
designated 750,000 shares as Series A $5.00 convertible preferred stock with
preferences over common as to dividends and in liquidation. Commencing either
August 31, 1996 or once $5.00 per share has been paid as a dividend, each share
of preferred stock shall be converted into one share of common stock. As of July
31, 1995, 178,000 shares of Preferred A were issued to stockholders and certain
trade creditors in lieu of debt and professional services, in consideration for
$15,000 in professional services and $867,000 for conversion of debt.
As of March 16, 1995, the Board of Directors designated 800,000 shares of Series
B, $5 convertible preferred stock to have preference over common stock and
Preferred A stock for liquidation or dividends. The Company has issued one
investor 726,000 shares of Series B, $5 Convertible Preferred Stock in
consideration for assuming $3,628,000 of debt of the Company. The Company has
also paid the investor an aggregate amount of $108,000 and owes an additional
$7,000 as of July 31, 1995, pursuant to the terms of the Preferred Series B
Stock, which includes a provision for the payment of three percent of the debt
assumed by the investor to be paid in cash.
As of June 7, 1995, the Board of Directors designated 109,000 shares of Series
C, $5 Convertible Preferred Stock to have preference over common stock and
Preferred Series A and B stock for liquidation or dividends. The Company has
issued the President of the Company 109,000 shares of Series C, $5 Convertible
Preferred Stock in consideration for $544,000 of deferred compensation.
F-15
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND 1994
NOTE 12- CAPITAL STOCK, WARRANTS AND OPTIONS (Continued)
Warrants and Options
The Company had reserved 1,000,000 shares of its authorized common stock for its
500,000 Class A Redeemable Warrants (the "Class A and B Warrants) which were
exercisable at $2.50 and $3 per share through September 1992 and 1994,
respectively. These warrants were originally issued by Fabulous Mergers (Note 1)
whose underwriter received 5,000 warrants to purchase 5,000 shares of common
stock and 50,000 Class B Warrants at an exercise price of $3.21 per warrant
exercisable for a four year period commencing September 27, 1990. The
unexercised warrants expired as of September 27, 1994 therefore the Company is
no longer reserving 1,000,000 shares of its authorized common stock.
Additionally, in prior years the Company has issued options for 400,000 shares
of common stock. As of July 31, 1995, the outstanding options are for 50,000
shares and are exercisable at $15 per share and expire November 16, 1996. During
March 1995, 233,000 shares of common stock were issued upon the exercise of
options. The options were exercised at a price of $.10 per share for $23,000.
The remaining options for 117,000 shares have expired.
NOTE 13 - EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
The Company recognized an extraordinary gain on the extinguishment of debt of
$710,000 during the year ended July 31, 1995, relating to the settlement of
trade payables, taxes payable and accrued expenses in the aggregate amount of
$906,000. The funds used to reduce the Comapny's outstanding debt were received
from the Overseas Offering and other financings.
F-16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sigma Alpha Entertainment Group, Ltd.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Sigma Alpha
Entertainment Group, Ltd. and subsidiary as of July 31, 1994, 1993 and 1992 and
the related consolidated statements of operations, stockholders' deficiency, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sigma Alpha
Entertainment Group, Ltd. and subsidiary as of July 31, 1994, 1993 and 1992, and
the results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant losses
during the years, an excess of current liabilities over current assets, a
stockholders' deficiency at July 31, 1994 and other factors that raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
COGEN SKLAR LEVICK
Bala Cynwyd, Pennsylvania
November 29, 1994
F-1
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JULY 31, 1994, 1993 AND 1992
(Rounded to Nearest Thousand)
<TABLE>
<CAPTION>
ASSETS 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 17,000 $ -- $ --
Accounts receivable - trade, less allowance
for doubtful accounts of $32,000 in 1992 -- -- 4,000
Inventories -- -- 26,000
Advances to artists -- -- 375,000
Prepaid expenses and other current assets 2,000 2,000 21,000
---------- ---------- ----------
19,000 2,000 426,000
PROPERTY AND EQUIPMENT 21,000 28,000 450,000
---------- ---------- ----------
TOTAL ASSETS $ 40,000 30,000 876,000
========== ========== ==========
LIABILITIES
CURRENT LIABILITIES
Note payable to banks $ 250,000 250,000 $ 250,000
Current portion of long-term debt 533,000 644,000 514,000
Notes payable to officers 307,000 307,000 220,000
Notes payable to others 1,161,000 1,218,000 937,000
Accounts payable - trade 1,064,000 1,067,000 952,000
Due to distributor 265,000 265,000 387,000
Taxes, other than income taxes 353,000 230,000 209,000
Accrued wages - officers 1,782,000 1,202,000 625,000
Accrued interest 633,000 419,000 278,000
Accrued expenses and other current
liabilitie4s 433,000 250,000 165,000
---------- ---------- ----------
6,781,000 5,852,000 4,537,000
LONG TERM DEBT - net of current portion 29,000 29,000 171,000
---------- ---------- ----------
TOTAL LIABILITIES 6,810,000 5,881,000 4,708,000
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
CONVERTIBLE PREFERRED STOCK SERIES A,
$.001 par value; 750,000 shares
authorized, none issued and outstanding. - - -
COMMON STOCK, $.001 par value; 50,000,000
shares authorized; 7,381,000 shares in
1994; 7,310,000 shares in 1993 and
5,519,000 shares in 1992 issued and
outstanding 21,000 21,000 16,000
---------- ---------- ----------
COMMON STOCK SUBSCRIBED 699,000 250,000 --
ADDITIONAL PAID-IN CAPITAL 9,003,000 9,002,000 8,549,000
ACCUMULATED DEFICIT (16,443,000 (14,884,000) (11,849,000)
---------- ---------- ----------
(6,720,000) (5,611,000) (3,284,000)
LESS: UNEARNED FUTURE COMPENSATION 50,000 240,000 548,000
---------- ---------- ----------
TOTAL STOCKHOLDERS' DEFICIENCY (6,770,000) (5,851,000) (3,832,000)
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 40,000 $ 30,000 $ 876,000
========== ========== ==========
</TABLE>
See auditor's report and notes to consolidated financial statements.
F-2
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1994, 1993 AND 1992
(Rounded to Nearest Thousand)
1994 1993 1992
------------ ------------ --------
SALES $ - $ 666,000 $ 347,000
COST OF SALES - 337,000 343,000
------------ ----------- -----------
GROSS PROFIT - 329,000 4,000
------------ ----------- -----------
OPERATING EXPENSES:
New artist development costs 50,000 261,000 991,000
Marketing and promotion 1,000 156,000 660,000
------------ ----------- -----------
51,000 417,000 1,651,000
------------ ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Officers' compensation 625,000 968,000 517,000
Other salaries and payroll costs 16,000 366,000 485,000
Consulting fees 328,000 480,000 1,635,000
Professional fees 102,000 105,000 397,000
Other 142,000 463,000 487,000
------------ ------------ -----------
1,213,000 2,382,000 3,521,000
------------ ----------- -----------
TOTAL OPERATING EXPENSES AND GENERAL AND
ADMINISTRATIVE EXPENSES 1,264,000 2,799,000 5,172,000
------------ ----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
OTHER INCOME (EXPENSE) (1,264,000) (2,470,000) (5,168,000)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Licensing fees and other 26,000 76,000 82,000
Interest expense (321,000) (323,000) (341,000)
Loss on asset disposition - (318,000) -
------------ ----------- -----------
(295,000) (565,000) (259,000)
------------ ------------ -----------
LOSS FROM CONTINUING OPERATIONS (1,559,000) (3,035,000) (5,427,000)
OPERATING INCOME FROM DISCONTINUED
STUDIO OPERATIONS - - 4,000
------------ ----------- -----------
NET LOSS $(1,559,000) $(3,035,000) $(5,423,000)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 7,378,000 6,751,000 4,554,000
============ ============ ============
INCOME (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations $(.21) $(.45) $(1.19)
Discontinued studio operations - - -
----- ----- ------
NET LOSS PER SHARE $(.21) $(.45) $(1.19)
===== ===== ======
See auditor's report and notes to consolidated financial statements.
F-3
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED JULY 31, 1994, 1993 AND 1992
(Rounded to Nearest Thousand)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------------
COMMON ADDITIONAL
NUMBER OF STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SUBSCRIBED CAPITAL DEFICIT
------ ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCES, JULY 31, 1991 11,106,000 $11,000 $ - $3,969,000 $ (6,426,000)
Adjustment to reflect retroactive
effect of reverse stock split of
3 for 1 during year ended July 31, 1993
for shares outstanding at July 31, (7,404,000) - - - -
Year ended July 31, 1992
Issuances of common stock
For cash, less related costs of $140572,000 2,000 - 1,787,000 -
For conversion of debt 177,000 - - 472,000 -
For consulting and other services 1,068,000 3,000 - 2,090,000 -
NET LOSS - - - - (5,423,000)
--------- ------- -------- ---------- -------------
BALANCES, JULY 31, 1992 5,519,000 16,000 - 8,549,000 (11,849,000)
Year ended July 31, 1993
Common stock subscription - - 250,000 - -
Issuances of common stock
For officers' compensation 1,333,000 4,000 - 396,000 -
For consulting and other services 444,000 1,000 - 53,000 -
For interest expense 14,000 - - 4,000 -
NET LOSS - - - - (3,035,000)
--------- ------- -------- ---------- -------------
BALANCES, JULY 31, 1993 7,310,000 21,000 250,000 9,002,000 (14,884,000)
Year ended July 31, 1994
Common stock subscriptions - - 449,000 - -
Issuances of common stock
For consulting and other services 38,000 - - 1,000 -
For interest expense 33,000 - - - -
NET LOSS - - - - (1,559,000)
--------- ------- -------- ---------- -------------
BALANCES, JULY 31, 1994 7,381,000 $21,000 $699,000 $9,003,000 $ (16,443,000)
========= ======= ======== ========== =============
</TABLE>
See auditor's report and notes to consolidated financial statements.
F-4
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1994, 1993 AND 1992
(Rounded to Nearest Thousand)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,559,000) $(3,035,000) $(5,423,000)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization of property
and equipment 7,000 9,000 67,000
Amortization of unearned compensation 190,000 348,000 207,000
Loss on asset disposition -- 318,000 --
Issuance of common stock for services provided 1,000 13,000 1,266,000
Issuance of common stock for officers' compensation 400,000 --
Issuance of common stock for interest -- 4,000 --
(Increase) decrease in:
Accounts receivable - trade -- 4,000 107,000
Inventories -- 26,000 103,000
Prepaid expenses and other current assets -- 19,000 (2,000)
Increase (decrease) in:
Accounts payable - trade (3,000) 115,000 265,000
Due to distributor -- (122,000 (3,000)
Taxes, other than income taxes, payable 123,000 21,000 42,000
Advances to artists -- 375,000 335,000
Accrued expenses and other current liabilities 977,000 914,000 487,000
---------- --------- -----------
Net cash used in operating activities (264,000) (591,000) (2,549,000)
---------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment -- (15,000) (1,000)
---------- --------- -----------
Net cash used in operating activities -- (15,000) (1,000)
---------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net principal payments on long-term debt (111,000) (12,000) (7,000)
Net borrowings under notes payable to banks -- -- 29,000
Proceeds from notes payable to others 139,000 360,000 720,000
Repayments on note payable to others (196,000) (79,000) (160,000)
Proceeds from common stock subscribed 449,000 250,000 --
Proceeds from issuance of common stock -- -- 1,933,000
Proceeds from loans payable from officers 27,000 235,000 631,000
Repayments of loans payable from officers (27,000) (148,000) (596,000)
---------- --------- -----------
Net cash provided by financing activities 281,000 606,000 2,550,000
---------- --------- -----------
NET CHANGE IN CASH AND EQUIVALENTS 17,000 -- --
CASH AND EQUIVALENTS, BEGINNING OF YEAR -- -- --
CASH AND EQUIVALENTS, END OF YEAR $ 17,000 -- $ --
---------- --------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 4,000 $ 178,000 $ 247,000
========== ========= ===========
</TABLE>
See auditor's report and notes to consolidated financial statements.
F-5
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JULY 31, 1994, 1993 AND 1992
(Rounded to Nearest Thousand)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property and equipment additions by capital leases $ - $ - $ 17,000
====== ======== ===========
Property and equipment repossessed, net book value $ - $ - $ 439,000
Notes payable, bank forgiven - - (749,000)
Long-term debt forgiven - - (206,000)
Long-term debt affiliated company, assumed - - 450,000
Note payable officer forgiven - - (129,000)
Sales taxes assumed by studio - - (36,000)
------ -------- -----------
Debt forgiveness involving a
principal stockholder $ - $ - $ (231,000)
====== ======== ===========
Stock issued for accounts and notes payab$e, othe $ - $ - $ 472,000
====== ======== ===========
Write off deferred offering costs against additional
paid-in capital upon surrender of stock warrants $ - $ - $ 73,000
====== ======== ===========
Estimated liability for sales returns offset
against amounts due from distributors $ - $ - $ 222,000
====== ======== ===========
Accrued rent forgiven upon disposition of leasehold
improvements $ - $110,000 $ -
====== ======== ===========
</TABLE>
See auditor's report and notes to consolidated financial statements.
F-6
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
History of the Business
The Company and its wholly-owned subsidiary, Alpha International Record Company
("Alpha") were incorporated in February 1988. In December 1990, the Company
merged with Fabulous Mergers, Inc. ("Fabulous Mergers"), an inactive public
company with no operations. As part of the transaction with Fabulous Mergers,
the Company's preferred stock in the amount of $456,000 was converted into notes
payable to officers with interest at the prime rate.
For accounting purposes, the transaction with Fabulous Mergers has been treated
as a recapitalization of the Company and an investment in the Company's common
shares by Fabulous Mergers' stockholders in exchange for the net assets of
Fabulous Mergers. Costs related to the transaction approximated Fabulous
Mergers' net assets of $50,000.
In the above transaction, Fabulous Mergers was the surviving corporation and
changed its name to Sigma Alpha Entertainment Group, Ltd. The Company
reincorporated itself by merger from Nevada to Delaware at a meeting of
stockholders in November 1991 at which time the authorized common shares were
increased to 50,000,000 at $.001 par value.
Nature of the Business
The Company was primarily engaged in the acquisition, production, marketing and
distribution of recorded music. The Company's principal product-related
activities were black urban, dance and contemporary hit radio/album oriented
rock ("Top Forty") singles and albums. The Company's recorded music business
consisted primarily of the acquisition of rights and the marketing and
distribution of tapes and compact discs ("CDs").
As of August 26, 1991, the Company entered into an exclusive distribution
agreement covering the United States, its territories and possessions and U.S.
military facilities (as defined) throughout the world, through normal retail
channels (as defined) with PolyGram Holding, Inc. ("PolyGram"). The term of the
agreement was 18 months with options to renew for two one year periods. The
distribution services to be rendered by PolyGram included, among other things,
billing, collecting and bearing credit risk, distribution and placement of
certain marketing materials, inventory control, warehousing and customary
"label" services, i.e. a substantial portion of those services typically
performed by a "record company". The Company was responsible for, among other
things, inventory shrinkage of up to 2%, sales returns, product manufacture,
artwork, packaging, marketing and promotion (excluding PolyGram's staff and
overhead costs) and the cost of record masters. PolyGram was to receive
distribution fees of 18 1/2% on the first $25,000,000 of sales, 17 1/2% on the
next $25,000,000 and 16 1/2% thereafter, plus a 2% fee for returns. This
agreement expired on February 28, 1993.
PolyGram also had the option exercisable for a minimum $175,000 per album, upon
the attainment of album sales of 100,000 units, to obtain the exclusive
recording services of the Company's artist. PolyGram exercised this option for
one artist. Upon exercise of this option (the "License Option"), PolyGram
purchased all of the existing inventory of all Products (as defined) embodying
the performance of artist (the "Licensed Artist") at cost. The Company was to
receive specified royalties of Licensed Artists, pursuant to this License Option
and the related agreements to furnish the services of the Licensed Artist.
F-7
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
The operating assets of the studios were sold in 1989 and 1991 (See Note 13).
The remaining business is, therefore, recently organized and its operations
encompass all of the risks inherent in the establishment of a new business
enterprise, including a limited operating history with significant competition
possessing substantially greater resources. In addition, the Company's record
sales for 1992 and 1993 were through PolyGram.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany transactions and
accounts have been eliminated in consolidation.
Cash Equivalents
The Company considers certificates of deposit, money market funds and all other
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Revenue Recognition
Revenues from record sales are recognized at the time of shipment, less a
provision for future returns for unsold items which may be received from retail
outlets for periods up to six months.
Royalties and record sales outside the United States are recognized when
collection is considered probable.
Due to the distributor reflects items such as withheld reserves, distribution
fees, discounts and manufacturing costs resulting in a net payable due to the
distributor.
Inventories
Inventories of records, tapes and compact discs, including returns, are stated
at the lower of cost (first-in, first-out method) or estimated net realizable
value.
New Artist Development and Advances to Artists
The cost of record masters incurred by the Company (the cost of musical talent,
engineering, directing, mixing, use of equipment to record and produce the
master, studio facility charges and cash advances to artists) which may only be
recouped out of future royalties earned are written off as incurred (by
permanently fully reserving artists' advances) and are reported in the statement
of operations as new artist development costs until evidence exists of past
performance and current popularity for a given artist which, in the opinion of
management, sufficiently provides a sound basis for estimating recoverability
for these costs. Thereafter, such costs are deemed to be, and are recorded as
assets which are charged to expense as royalties are earned by the artist. Any
portion of such assets not considered fully recoverable from future royalties to
be earned under the artist's contract are charged to expense when the loss
becomes evident by a further reserve to artists' advances. In accordance with
generally accepted accounting principles applicable to the industry, such
advances to each artist are evaluated individually and an allowance or write-off
is made to reduce the unrecouped portion based upon the Company's prior
experience, the current economic environment and experience of other enterprises
in the same business. In future periods, they will be charged to expense either
as royalties or as a reserve for nonrecoupment, based upon their ultimate
recoverability. When management decides to terminate an artist, the related
asset and reserve are written off.
F-8
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Fixtures and equipment are
depreciated primarily using the declining balance method over the estimated
useful lives of 3 to 10 years. Leasehold improvements are amortized over the
lesser of the lease term or the useful life of the asset.
Net Loss Per Share
Net loss per share is based upon the weighted average number of shares
outstanding.
NOTE 2 - MANAGEMENT'S PLANS FOR FINANCIAL REORGANIZATION
Basis of Presentation
The Company's consolidated financial statements have been presented on the basis
that it is a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
Since inception, the Company incurred cumulative losses from operations. Unable
to generate sufficient revenues from operations or to secure funding through
financing transactions, the Company was caused to substantially curtail the
scope of its operations in fiscal year 1992, and during fiscal 1993, materially
all operations had effectively been suspended. The Company's operations were
first subject to material curtailment when during fiscal 1992, the Company's
recording, engineering and production facility was foreclosed upon by the
Company's principal lender and sold in foreclosure proceedings to a corporation
owned by the spouse of the Company's Chairman. Operations were further curtailed
when during fiscal 1993, the Company's sole distribution agreement expired
without renewal and the distributor exercised an option to acquire from the
Company exclusive recording rights relating to the Company's principal recording
artist.
Recognizing the inherent risks of the capital intensive nature of the recording
industry, management has attempted to reorganize the Company and to develop a
plan of operation that would profitably deploy the significant collective
talents and expertise of its management in the recording industry.
With the assistance of certain investment banking advisors, management has,
since 1993, attempted to develop valuable contacts in the Southeast Asia region,
particularly in the People's Republic of China ("PRC"), in an effort to
establish distribution and agency arrangements that would link far eastern and
U.S. - based recording companies and artists. Management believes that
profitable opportunities may be available should the Company be able to arrange
access to the Southeast Asia region for certain U.S. - based recording companies
or artists. Conversely, management also believes that profitable opportunities
may be available should the Company be able to arrange access to U.S. recording
and distribution sources for certain Southeast Asian musicians and recording
artists. Management is aware, however, that there can be no assurances that
these arrangements can be arranged, or even if developed, would be subject to
profitable commercializations.
The pursuit of these opportunities in the record and entertainment industry
remain one of the principal objectives of the Company.
In addition to opportunities in the record and entertainment industry, the
Company has been introduced to a number of business owners and entrepreneurs in
the PRC and Southeast Asia that have expressed an interest in undertaking
certain joint ventures or other business opportunities with the Company for the
purpose of gaining access to the U.S. capital markets.
During the first quarter of fiscal year 1995, the Company entered into a series
of non-binding agreements for various joint ventures in the Southeast Asia area,
principally Hong Kong and the Republic of China. Some of the agreements involve
entertainment projects and others relate to other business activities including
a proposed real estate project. Each of the agreements requires a significant
amount of financing, and no assurance can be given that the Company will be able
to obtain the required financing.
F-9
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 2 - MANAGEMENT'S PLANS TO FOR FINANCIAL REORGANIZATION (CONTINUED)
Subscription Agreements
As of July 31, 1994 the Company entered into a subscription agreement which
requires the subscriber to purchase 12,371,512 shares of the Company's common
stock for $11,800,000. The Company has received $699,000 as of July 31, 1994.
The agreement expires December 30, 1994. Subsequent to July 31, 1994, an
additional $175,000 was received as common stock subscribed.
As of October 4, 1994 the Company entered into a subscription agreement which
requires the subscriber to purchase 300,000 shares of the Company's common stock
at $.80 per share.
Underwriting Agreement
As of October 10, 1994 the Company entered into a firm underwriting agreement,
whereby the underwriter agrees to purchase from the Company 3,000,000 common
shares at $2 per share. In consideration the underwriter is to receive 100,000
shares of the Company's common stock upon execution of the agreement, 100,000
shares upon the Company receiving $3,000,000 from the sale of shares and an
additional 100,000 shares upon the Company receiving the remaining $3,000,000
from the sale of shares.
Management believes that its ability to achieve any portion of its plan depends
entirely upon its ability to secure sufficient proceeds from financing
transactions that will permit a broad-based financial reorganization of the
Company, including the restructuring and compromise of existing liabilities.
Management has had discussions with its trade and other creditors and is
confident that a financial reorganization is possible. Management also believes
that during the next year in the event the underwriting agreement is
successfully completed and the approximate $6,000,000 in proceeds are generated
therefrom, the Company will have the reasonable capability of removing the
threat of discontinuance of its business operations which presently exists due
to the Company's substantial working capital deficit:
NOTE 3 - RELATED PARTY TRANSACTIONS
Sale of Studio Operations Assets See note 13 for sale to the Company's Chairman.
Guarantees
The Company's Chairman and its President have provided personal guarantees in
connection with certain loans and business agreements.
Loans
The Company borrowed $27,000, $114,000 and $364,000 from its President during
the years ended July 31, 1994, 1993 and 1992, and repaid $27,000, $148,000 and
$354,000 during those years. The balance of the loans bearing interest at a rate
of 12% per annum was $-0-, $-0-, and $34,000 as of July 31, 1994, 1993 and 1992.
The Company also borrowed $121,000, and $267,000 from the Chairman during the
years ended July 31, 1993 and 1992, and repaid $-0-, and $363,000 in those
years. The balance of the loans bearing interest at 12% per annum was $307,000,
$307,000 and $186,000 as of July 31, 1994, 1993 and 1992. There are no formal
terms of repayment.
The accrued interest on both loans was $56,000, $21,000, and $68,000 as of July
31, 1994, 1993 and 1992.
Sub-lease and Consulting Agreements
The Company subleases its office space from a related party controlled by the
brother of the President of the Company pursuant to an oral arrangement. (See
Note 6)
The Company also entered into a consulting agreement with this related party
effective December 16, 1992. The term was twelve months with an automatic
renewal on a month-to-month basis. The Company issued 50,000 shares of its
common stock and agreed to pay $30,000 on the effective date of the agreement.
Additionally, the company has agreed to pay $25,000 upon funding of a plan of
reorganization. The Company has paid $17,000 pursuant to this agreement as of
July 31, 1994.
F-10
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 3 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company entered into one year agreement with a consultant as of April 1,
1992. The consultant was to receive $2,500 per week and 200,000 shares of the
Company's common stock. This amount has been paid in full and the common shares
were issued, as of July 31, 1994. The Company entered into a three year
agreement with the same consultant as of April 1, 1993. The consultant was to
receive $2,500 a week through July 31, 1993 and 350,000 shares of the Company's
common stock and $3,000 per week thereafter. The Company has paid the consultant
$141,000 and issued the common shares as of July 31, 1994. The Company owed
$175,000 as of July 31, 1994 pursuant to this agreement, to the consultant.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1994 1993 1992
-------- -------- ------
Leasehold improvements $ - $ - $397,000
Equipment 36,000 36,000 155,000
Furniture and fixtures 11,000 11,000 66,000
Automotive equipment 18,000 18,000 60,000
Equipment under capital lease 64,000 64,000 -
--------- --------- --------
129,000 129,000 678,000
Less:Accumulated depreciation and
amortization 108,000 101,000 228,000
--------- --------- --------
$ 21,000 $ 28,000 $450,000
========= ========= ========
NOTE 5 - INCOME TAXES
The company has adopted FASB Statement No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
The use of net operating loss carryforwards is limited when there has been a
substantial change in ownership (as defined) during a three year period. Because
of the recent and contemplated changes in common stock, options and warrants,
such a change may occur in the future. In this event, the use of net operating
losses each year would be restricted to the value of the Company on the date of
such change multiplied by the federal long-term tax exempt rate ("annual
limitation"); unused annual limitations may then be carried forward without this
limitation.
At July 31, 1994 the Company had net operating loss carryforwards of
approximately $16,200,000, which if not used, will expire primarily during the
years 2005 through 2009.
The Company is delinquent in filing its Federal and State income and franchise
tax returns for the years ended July 31, 1993 and July 31, 1994.
F-11
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
Most of the Company's operations use leased facilities and equipment consisting
of administrative offices and transportation and office equipment. Some of the
operating leases contain provisions for lease renewal, and also require payment
of taxes, maintenance, insurance and other occupancy expenses.
The following is a schedule of future minimum rental payments required for all
non-cancelable operating leases that have initial or remaining lease terms in
excess of one year at July 31, 1994:
YEAR ENDING
JULY 31,
--------
1995 $ 31,000
1996 26,000
1997 26,000
1998 26,000
1999 17,000
--------
$126,000
Rent expense for operating leases in 1994, 1993 and 1992 was $31,000, $61,000
and $91,000, respectively.
Employment Agreements
The Company agreed, effective April 1991, to pay two officers $250,000 per year
each, increasing 10% per year cumulatively, plus bonuses equal to 5% of pre-tax
income and certain fringe benefits, through the year 2001. Upon their death or
disability, the Company is to pay their annual salaries for the lesser of 8
years or the balance of the term, or, upon termination without cause or
resignation for "good reason", their annual salaries plus certain fringe
benefits for four years or the balance of the term.
Legal Proceedings
The Company is defendant in a number of legal proceedings which occurred because
of its inability to pay trade creditors and lenders. The Company has judgements
of approximately $1,015,000 outstanding against it. Those cases in which the
ultimate settlement is known or estimatable have been accrued in the financial
statements. The aggregate claims in excess of amounts accrued at July 31, 1994
were not significant.
F-12
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 7 - NOTE PAYABLE TO BANKS
1994 1993 1992
--------- ---------- ---------
Note payable, bank, accruing
interest at 11.5%. Principal was
due January 15, 1991 $ 50,000 $ 50,000 $ 50,000
Note payable, bank, accruing interest at
11%. Terms of note have expired 200,000 200,000 20,000
-------- --------- --------
$250,000 $250,000 $250,000
======== ======== ========
NOTE 8 - LONG-TERM DEBT
1994 1993 1992
---------- ---------- ----------
Equipment note payable in monthly
installments, plus interest at 11.75%$ - $ - $ 3,000
Auto note payable in monthly
installments, plus interest at 12.5% - - 8,000
Note payable bank, principal due
December 31, 1999 accruing interest
at 12.5% 29,000 29,000 29,000
Note payable bank in monthly
installments, plus interest at prime
plus 1 1/2% through March 6, 1995 82,000 82,000 82,000
Obligations under capital leases for
equipment through February, 1993 24,000 22,000 23,000
Note payable related party, bearing 337,000 450,000 450,000
interest at 12% (See Note 13)
Accrued rent due Chairman 90,000 90,000 90,000
--------- --------- ---------
562,000 673,000 685,000
Less: Current portion 533,000 644,000 514,000
--------- --------- ---------
$ 29,000 $ 29,000 $171,000
========= ========= ========
The Company is in default on one of its bank notes and its obligations under
capital leases.
NOTE 9 - NOTES PAYABLE, OTHERS
Notes payable, others consists of notes payable issued to individuals and
companies ranging in amount from $5,000 to $517,500. The interest rates on these
notes payable range from 7.5% to 14%. The Company is in default on all of these
loans.
F-13
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1994, 1993 AND 1992
NOTE 10- CAPITAL STOCK, WARRANTS AND OPTIONS
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, $.001
par value, in one or more series. On August 17, 1993, the Board of Directors
designated 750,000 shares as Series A $5.00 convertible preferred stock with
preferences as to dividends and in liquidation. Commencing either August 31,
1996 or once $5.00 per share has been paid as a dividend, each share of
preferred stock shall be converted into one share of common stock.
Warrants
The Company has reserved 1,000,000 of its authorized common shares for its
500,000 Class A Redeemable Warrants and 500,000 Class B Redeemable Warrants (the
"Class A and B Warrants") which are exercisable at $2.50 and $3 per share
through September 1992 and 1994, respectively. These warrants were originally
issued by Fabulous Mergers (Note 1) whose underwriter received 5,000 warrants to
purchase 5,000 shares of common stock and 50,000 Class B Warrants at an exercise
price of $3.21 per warrant exercisable for a four year period commencing
September 27, 1990. The unexercised warrants expired as of September 27, 1994.
In connection with a $150,000 loan to the Company in August 1990, the Company
issued to the lender 40,000 warrants, each of which entitles the warrantholder
to purchase one share of the Company's common stock at the lesser of $1.25 per
share or one-half the per share price of any offering of the Company's common
stock. The warrants expired in August 1993.
Additionally, the Company has issued options for 283,000 shares of common stock.
The options are exercisable at prices ranging from $.10 to $15.00. These options
expire between June 30, 1995 and November 16, 1996.
Stock Option Plan
The Company, with stockholder approval, has adopted a Stock Option Plan (the
"Plan") which provides for the granting of options to officers, key employees,
artists, consultants and others. Options to purchase the Company's common stock
may be made for a term of up to ten years at the fair market value at the time
of grant. Incentive options granted to a ten percent or more stockholder may not
be for less than 110% of fair market value nor for a term of more than five
years. The aggregate fair market value of the stock for which an employee may be
granted incentive options which are first exercisable in any calendar year shall
not exceed $100,000. The Company has reserved a total of 5,000,000 shares for
issuance under the Plan. No options have been granted under this plan through
July 31, 1994. The Plan terminates in November 2001, unless terminated earlier
by the Board of Directors.
Conversion of Indebtedness
During the year ended July 31, 1992, the Company converted $472,000, in notes
and accounts payable into 177,000 shares of common stock.
Shares issued for Services
The Company issued 38,000, 444,000 and 1,068,000 shares of common stock, during
the years ended July 31, 1994, 1993 and 1992 in consideration for $1,000,
$54,000 and $2,093,000 of consulting and other services.
Additionally, the Board of Directors authorized 667,000 shares of common stock
each to be issued to the President and Chairman during the year ended July 31,
1993. These shares were valued at a total of $400,000.
Shares issued for Interest
In lieu of paying $1,000 and $4,000 interest on indebtedness, the Company issued
33,000 and 14,000 shares of common stock to the loan holders during the year
ended July 31, 1994 and 1993.
F-14
<PAGE>
SIGMA ALPHA ENTERTAINMENT GROUP, LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1994, 1993 AND 1992
NOTE 11 - STOCK SPLIT
During the year ended July 31, 1993 the stockholders of the Company authorized a
reverse 1 for 3 stock split. As a result of the split, 7,404,000 shares of
common stock were redeemed. All references in the accompanying financial
statements to the number of shares and loss per share amounts for 1993 and 1992
have been restated to reflect the reverse stock split.
NOTE 12 - UNEARNED FUTURE COMPENSATION
During the year ended July 31, 1992, the Company issued 760,000 shares of common
stock for $630,000 of consulting services to be performed over a three year
period into the year ending July 31, 1995.
Additionally, during the year ended July 31, 1992, the Company issued 250,000
shares of common stock to employees for $125,000 of employment services to be
performed over a 16 month period.
NOTE 13 - DISCONTINUED OPERATIONS AND RESTATEMENT
During September and October 1991, a bank commenced foreclosure proceedings
against the Company's Chairman and his wife under a mortgage and entered
judgment against the Company, its Chairman and its President on notes payable to
the bank by the Company which totalled $925,000, as well as notes payable owed
by the Chairman of $129,000, the proceeds of which had been loaned by the
Chairman of the Company.
As a result of the foreclosure proceedings, an agreement was reached whereby the
bank sold studio assets that were collateralizing the notes payable for $600,000
to a newly formed company owned by the Chairman's spouse, Sigma Sound Services,
Inc. ("Services"). As part of these arrangements, the Company and its Chairman
were relieved of their prior obligations totalling $1,054,000 and Services
became directly liable to the bank in this amount. Additionally, Services
assumed certain capital lease and sales tax obligations totalling $66,000. As
part of the agreement the company became obligated for $450,000 representing
both its obligation to Services and guarantee of $450,000 to the bank. The
$129,000 owed to the Chairman at July 31, 1991 is included in the $450,000 owed
to Services under these arrangements.
The debt forgiveness of $670,000 including sales tax due of $36,000 and certain
lease obligations amounting to $30,000 assumed by Services, less the net book
value of the assets of $439,000 resulted in a credit of $231,000, which was
previously reported as a gain on sale of studio under discontinued operations.
Since the debt forgiveness involved the Company's Chairman and his spouse and
the Chairman was also a principal stockholder, the 1992 financial statements
have been restated to reflect the $231,000 as a credit to additional paid-in
capital. The effect of this restatement on the 1992 statement of operations is
summarized as follows:
1 9 9 2
----------------------------
As Reported As Restated
Income from discontinued studio operations $ 235,000 $ 4,000
Net loss $(5,192,000) $(5,423,000)
Income (loss) per share of common stock
Continuing operations $ (1.19) $ (1.19)
Discontinued studio operations .05 --
----------- -----------
$ (1.14) $(1.19)
F-15
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Rounded to Nearest Thousand)
April 30, July 31,
1996 1995
----------- ---------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 10,000 $1,423,000
Accounts receivable 2,000 -
Receivable from underwriting - 198,000
Prepaid expenses and other current assets 19,000 7,000
--------- ---------
31,000 1,628,000
PROPERTY AND EQUIPMENT 56,000 26,000
OTHER ASSETS
Goodwill 62,000 74,000
Patent 10,000 -
--------- ---------
72,000 74,000
--------- ---------
TOTAL ASSETS $ 159,000 $1,728,000
========= =========
See accompanying notes
3
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Rounded to Nearest Thousand)
April 30, July 31,
1996 1995
----------- ---------
(Unaudited) (Audited)
LIABILITIES
CURRENT LIABILITIES
Note payable, bank $ - $ 50,000
Loan payable 91,000 -
Accounts payable - trade 134,000 173,000
Taxes, other than income taxes 7,000 76,000
Accrued wages - officers 29,000 -
Accrued interest - 31,000
Accrued expenses and other current
liabilities 71,000 94,000
--------- ---------
TOTAL LIABILITIES 332,000 424,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
SERIES A, $5.00 CONVERTIBLE, $.001 par value;
authorized, 750,000 shares; issued and
outstanding, 178,000 shares at April 30,
1996 and July 31, 1995. - -
SERIES B, $5.00 CONVERTIBLE, $.001 par value;
authorized, 800,000 shares; issued and
outstanding, 664,000 shares at April 30,
1996 and 726,000 shares at July 31, 1995. 1,000 1,000
SERIES C, $5.00 CONVERTIBLE, $.001 par value;
authorized, 100,000 shares; issued and
outstanding, 97,000 shares at April 30,
1996 and 109,000 shares at July 31, 1995. - -
ADDITIONAL PAID-IN CAPITAL 4,698,000 5,054,000
COMMON STOCK, $.001 par value; authorized
50,000,000 shares; issued and outstanding,
14,106,000 shares at April 30, 1996 and
12,837,000 at July 31, 1995. 14,000 13,000
COMMON STOCK SUBSCRIBED - 1,499,000
ADDITIONAL PAID-IN CAPITAL 14,856,000 12,664,000
ACCUMULATED DEFICIT (19,742,000) (17,919,000)
---------- ----------
(173,000) 1,312,000
LESS: UNEARNED FUTURE COMPENSATION 0 8,000
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (173,000) 1,304,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 159,000 $ 1,728,000
========== ==========
See accompanying notes
4
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Rounded to Nearest Thousand)
NINE MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- ----------------------
1996 1995 1996 1995
--------- --------- ---------- ---------
SALES $ - $ - $ - $ -
COST OF SALES - - - -
--------- --------- ---------- ---------
GROSS PROFIT - - - -
--------- --------- ---------- ---------
OPERATING EXPENSES:
Officers' compensation 392,000 585,000 130,000 321,000
Other salaries and
payroll costs 50,000 - 23,000 -
Consulting fees 230,000 346,000 67,000 180,000
Professional fees 129,000 363,000 20,000 312,000
Research and
development 390,000 - 33,000 -
Travel 277,000 104,000 96,000 56,000
Other 406,000 302,000 71,000 186,000
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 1,874,000 1,700,000 440,000 1,054,000
--------- --------- --------- ---------
LOSS FROM CONTINUING
OPERATIONS BEFORE OTHER
INCOME AND EXTRAORDINARY
GAIN (1,874,000) (1,700,000) (440,000) (1,054,000)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Royalties 2,000 5,000 1,000 1,000
Interest expense (20,000) (42,000) - 95,000
Interest income 17,000 - - -
--------- --------- --------- ----------
(1,000) (37,000) 1,000 96,000
--------- --------- --------- ----------
LOSS BEFORE
EXTRAORDINARY GAIN (1,875,000) (1,737,000) (439,000) (958,000)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT 52,000 433,000 17,000 225,000
--------- --------- --------- ---------
NET LOSS $(1,823,000)$(1,304,000) $ (422,000) $ (733,000)
========== ========= ========= ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 13,798,000 9,318,000 14,063,000 10,489,000
NET LOSS PER COMMON SHARE
Net loss before
extraordinary gain $ (0.13) $ (0.19) $ (0.03) $ (0.09)
Extraordinary gain on
extinguishment of debt 0.00 0.05 0.00 0.02
---------- --------- --------- ---------
NET LOSS PER SHARE $ (0.13) $ (0.14) $ (0.03) $ (0.07)
========== ========= ========= =========
See accompanying notes
5
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED APRIL 30, 1996
(Rounded to Nearest Thousand)
COMMON STOCK
--------------------------------------------------------------
COMMON ADDITIONAL
NUMBER OF STOCK PAID -IN ACCUMULATED
SHARES AMOUNT SUBSCRIBED CAPITAL DEFICIT
---------- ------- ---------- ----------- ------------
BALANCES,
JULY 31, 1995 12,837,000 $13,000 $1,499,000 $12,664,000 $(17,919,000)
Nine months ended
April 30,
1996
(Unaudited):
Issuances of
common stock
Under
subscription
agreement 884,000 1,000 (1,499,000) 1,600,000 -
For interest 8,000 - - 1,000 -
Directors fees 200,000 - - 150,000 -
Warrant
exercise 177,000 - - 441,000 -
Net loss - - - - (1,823,000)
---------- ------ --------- ---------- -----------
BALANCES, APRIL
30, 1996 14,106,000 $14,000 $ - $14,856,000 $(19,742,000)
========== ====== ========= ========== ==========
See accompanying notes
6
<PAGE>
PREFERRED STOCK "SERIES A"
-----------------------------------
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
-------- ------- --------
BALANCES, JULY 31, 1995
AND APRIL 30, 1996 178,000 $ - $ 882,000
======== ======= ========
PREFERRED STOCK "SERIES B"
----------------------------------
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
--------- ------- --------
BALANCES, JULY 31, 1995 726,000 $ 1,000 $3,628,000
Nine months ended April 30, 1996
Issuance of preferred stock
for conversion of debt 15,000 - 75,000
Repurchase of shares for
retirement (77,000) - (374,000)
-------- ------- ---------
BALANCES, APRIL 30, 1996 664,000 $ 1,000 $3,329,000
======== ======= =========
PREFERRED STOCK "SERIES C"
-------------------------------------
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
-------- ------- ----------
BALANCES, JULY 31, 1995 109,000 $ - $ 544,000
Nine months ended April 30, 1996
Repurchase of shares for
retirement (12,000) - (57,000)
-------- ------- ---------
BALANCES, APRIL 30, 1996 97,000 $ - $ 487,000
======== ======= =========
See accompanying notes
7
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Rounded to Nearest Thousand)
NINE MONTHS ENDED
APRIL 30,
--------------------------
1996 1995
----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,823,000) $(1,304,000)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Extraordinary gain on extinguishment
of debt (52,000) (433,000)
Depreciation of property and
equipment and amortization of
goodwill 24,000 6,000
Amortization of unearned compensation 8,000 39,000
Issuance of preferred stock for
professional services - 15,000
Issuance of common stock for:
Board of Directors 150,000 3,000
Consulting - 108,000
Interest - 25,000
Lease obligation - 50,000
Officers' compensation - 201,000
Professional services - 2,000
Subscription services - 267,000
(Increase) decrease in:
Accounts receivable (2,000) -
Receivable from underwriting 198,000 -
Prepaid expenses and other current
assets (12,000) -
Increase (decrease) in:
Accounts payable 1,000 (63,000)
Taxes, other than income taxes (56,000) (81,000)
Accrued expenses and other current
liabilities 1,000 218,000
--------- --------
Net cash used in operating activities (1,563,000) (947,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of patent (10,000) -
Purchase of equipment (42,000) (1,000)
--------- -------
Net cash used in investing activities (52,000) (1,000)
--------- -------
See accompanying notes
8
<PAGE>
SIGMA ALPHA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Rounded to Nearest Thousand)
NINE MONTHS ENDED
APRIL 30,
-----------------------
1996 1995
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net principal payments on long-term debt $ - $ (78,000)
Principal payments on notes payable
to others - (165,000)
Proceeds from loans payable 91,000 -
Proceeds from issuance of common stock 542,000 263,000
Proceeds from common stock subscribed - 1,287,000
Repurchase of Preferred Series B stock (374,000) -
Repurchase of Preferred Series C stock (57,000) -
--------- ---------
Net cash provided by financing activities 202,000 1,307,000
--------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (1,413,000) 359,000
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,423,000 17,000
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 10,000 $ 376,000
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the six months:
Interest $ 20,000 $ -
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Preferred stock Series A issued for
conversion of debt $ - $ 867,000
Preferred stock Series B issued for
conversion of debt $ 75,000 $2,608,000
Common stock issued for conversion
of debt $ 1,000 $ 80,000
See accompanying notes
9
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND 1995
NOTE 1 - INTERIM PERIODS
The unaudited information has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management reflects
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Form 10-KSB
for the year ended July 31, 1995.
The results of operations for the nine month periods ended April 30, 1996 and
1995 are not necessarily indicative of operating results for the full year.
NOTE 2 - MANAGEMENT'S PLANS
At April 30, 1996, the Company had a working capital deficit of $301,000. During
the nine months ended April 30, 1996, the Company conducted activities directed
toward the research and development of Global Telecommunications of Delware,
Inc.'s ("GTD") Stock Information Receiver ("SIR") and Voice Information Pager
("VIP"), also sometimes referred to as the Digital Voice Pager ("DVP"). In
accordance therewith, the Company has provided cash advances of $724,000 as of
April 30, 1996 to GTD. Management believes that during the twelve month period
following April 30, 1996, in the event that the Common Stock Purchase Warrants
(See Note 4) are exercised on a timely basis, and the approximate $4,700,000 in
proceeds are generated therefrom, that the Company will be able to complete the
funding of GTD's SIR and VIP projects and continue to improve its financial
condition.
Subsequent to April 30, 1996, the Company entered into an agreement with a radio
station in China to sell 10,000 units of the SIR. Additionally, the Company has
entered into various agreements to begin the manufacturing of the SIR.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Development Agreement
On January 18, 1996, GTD an 80% owned subsidiary of the Company, entered into a
Development Agreement with Innotel, Inc. ("Innotel"). On or before March 15,
1996, Innotel was to deliver to GTD a VIP prototype for inspection,
demonstration, and field testing unless said term was extended by GTD. Upon
acceptance of the VIP prototype, GTD is obligated to pay Innotel up to $414,000
of which $346,000 has already been paid and is acknowledged as having been paid
by Innotel.
If the VIP prototype is not accepted within 60 days from the initial
notification of the completion of the prototype, GTD may terminate the Agreement
and Innotel will be required to return 10% of the proceeds previously paid for
the development of the prototype.
10
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND 1995
GTD has extended the date of delivery of the VIP prototype until July 12, 1996.
This is a result of the SIR project becoming a priority in order to meet the
needs of GTD's proposed customers.
Legal Proceedings
As of April 30, 1996, the Company had approximately 10 judgments related to
accounts payable totalling approximately $58,000 outstanding against it. The
City of Philadelphia maintains a judgment in the amount of approximately $16,000
against the Company. Management has been actively negotiating and working out
settlements with respect to judgments and tax assessments and believes that the
Company will be able to satisfy such obligations over a period of time provided
adequate funding is received from the warrants or other financing activities.
NOTE 4 - COMMON STOCK PURCHASE WARRANTS
The Company issued Common Stock Purchase Warrants ("CSP Warrants") to purchase
400,000 common shares at an exercise price of $2.50 per share. The CSP Warrants
expire on June 30, 1996. Of the 400,000 CSP Warrants, 177,000 have been
exercised as of April 30, 1996, and an additional 20,000 CSP Warrants were
exercised subsequent to April 30, 1996.
The Company also issued to Mid-West Financial Consultants Corporation
("Mid-West"), Warrants ("P.A. Warrants") to purchase 1,666,667 common shares at
an exercise price of $2.50 per share. The P.A. Warrants expire on June 30, 1996.
On December 29, 1995, the Company issued to Joseph Fanelli a Common Stock
Purchase Warrant ("Fanelli Warrant") to purchase 10,000 common shares at an
exercise price of $.01 per share. The Fanelli Warrant expires December 15, 1997.
NOTE 5 - EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
The Company recognized an extraordinary gain on the extinguishment of debt of
$52,000 during the nine months ended April 30, 1996, relating to accounts
payable and taxes payable in the aggregate amount of $119,000. The funds used to
reduce the Company's outstanding debt were received from the Underwriting
Agreement and other financings.
NOTE 6 - INCOME TAXES
There was no provision for income taxes for the nine months ended April 30, 1996
as the Company had a net operating loss for the period, and net operating loss
carryforwards which are expected to offset profits, if any for the year.
11
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 AND 1995
NOTE 7 - NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of shares
outstanding, without assumed conversion of the warrants and stock options, which
are considered to be common stock equivalents, since the effect on net loss per
share would be anti-dilutive.
NOTE 8 - RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with 1996
classifications. Such reclassifications had no effect on reported net income.
12
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Representative. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to anyone to whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
----
Additional Information.........................................................2
Prospectus Summary.............................................................3
Risk Factors...................................................................9
Dividend Policy...............................................................20
Use of Proceeds.............................................................. 20
Capitalization................................................................22
Dilution......................................................................24
Selected Financial Data.......................................................26
Management's Discussion and Analysis of
Financial Condition..........................................................29
Business......................................................................37
Management....................................................................47
Principal Shareholders........................................................56
Resales by Selling Securityholders............................................58
Certain Transactions..........................................................59
Description of Securities.....................................................61
Shares Eligible for Future Sale...............................................66
Legal Matters.................................................................68
Experts.......................................................................68
Financial Statements.........................................................F-1
--------------------
Until , 1996 all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may bered required to deliver
a Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
================================================================================
SIGMA ALPHA GROUP, LTD.
2,600,000
SHARES OF
COMMON STOCK
---------------
PROSPECTUS
---------------
August , 1996
================================================================================
68
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware and
Article 7 of the Company's Articles of Incorporation contain provisions for
indemnification of officers, directors, employees and agents of the Company. The
Articles of Incorporation require the Company to indemnify such persons in any
proceeding if he acted in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interest of the Company.
Indemnification would cover expenses, including attorney's fees, judgments,
fines and amounts paid in settlement.
The Company's By Laws also provided that the Company's Board of Directors
may cause the Company to purchase and maintain insurance on behalf of any
present or past director or officer insuring against any liability asserted
against such person incurred in the capacity of direct or officer or arising out
of such status, whether or not the Company would have the power to indemnify
such person. The Company may seek to obtain directors' and officers' liability
insurance.
Item 25. Other Expenses of Issuance and Distribution.
SEC Registration Fee $ 1,793
Printing $ 3,000*
Legal Fees and Expenses $15,000*
Accounting Fees and Expenses $ 2,000*
Miscellaneous Expenses (including travel
and promotional expenses) $10,000*
TOTAL $31,793*
*Estimated
The Selling Security Holders will not be paying any portion of the
foregoing expenses of issuance and distribution.
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth all shares of the $.001 par value
Common Stock of the Registrant sold by it within the past three years which were
not registered under the Securities Act of 1933, as amended (the "Act"). The
Registrant was incorporated as a Delaware corporation on September 8, 1989.
II-1
<PAGE>
The total number of outstanding shares of Common Stock, issued and
delivered by the Company as of August, 1996 was 16,058,604. The Company is also
required to issue an aggregate of 2,358,332 shares of Common Stock upon exercise
of all outstanding Common Stock Purchase Warrants.
Number Total
Date Name of Shares Consideration
- ---- ---- --------- -------------
3/92 Lynn Dixon 200,000 100,000
3/92 Richard & Karen Wilson 25,000 25,000
7/92 Lynn Dixon 333,333 166,667
7/92 Trinity American Corp. 333,333 166,667
7/92 Portfolio Publishers 500,000 382,495
7/92 Jay Starr & Associates 30,000 90,031
3/92 Haverford Advisors 50,000 25,000
3/92 Phillip Kendall 77,315 77,315
3/92 Samuel Rappaport 77,315 77,315
3/92 T&E Properties, Inc. 77,315 77,315
3/92 Malcolm Rosenberg 200,000 100,000
3/92 Jeff Scott 2,976 2,480
3/92 Helen Sgarlet 24,000 20,000
4/92 Murray Sternfeld 5,000 5,000
4/92 Ruth Aezen 17,916 14,930
4/92 Donna Dicrisco 5,672 4,560
4/92 Jacob Der Hagopian 200,000 100,000
5/92 Philip Kendall 50,000 25,000
5/92 Ernie Cimadamore 200,000 100,000
5/92 Angelo Capolupo 50,000 25,000
5/92 Gilbert White 9,199 7,666
5/92 Steve Cohen 2,500 2,500
5/92 Murray Sternfeld 5,000 5,000
6/92 Murray Sternfeld 5,000 5,000
6/92 James Saltzman 300,000 150,000
7/92 Murray Sternfeld 5,000 5,000
7/92 John Patten 333,334 166,667
10/92 Nachem Weberman 2,833 650
10/92 Michael Pontonio 333 100
10/92 Michael Pontonio 4,667 1,400
10/92 Sinai Malowicki 2,833 850
10/92 Paul Lindenblatt 1,427 425
10/92 Shaye Heimlich 2,233 670
9/92 Peter S. Pelullo 666,667 200,000
9/92 Joseph Tarsia 555,557 200,000
9/92 Murray Sternfeld 6,667 2,000
10/92 Murray Sternfeld 19,142 5,743
II-2
<PAGE>
10/92 Stacey Peltz 667 200
10/92 Lou Denton 333 100
8/92 Richard Kendall 8,333 2,500
8/92 Philip Kendall 8,333 2,500
8/92 Jacob Der Hagopian 350,000 35,000
7/92 Empire Management 50,000 5,000
8/93 Nachem Weberman 4,839 76
8/93 Quality Medical Consultants 1,000 16
8/93 Sinai Malowicki 4,839 76
8/93 Paul Lindenblatt 3,130 49
8/93 Shaye Heimlich 18,904 295
8/93 Murray Sternfeld 23,869 373
8/93 Mendel Klein 14,419 225
1/95 Crystal Clear Investments 50,000
2/95 Robert Sannelli 10,000
2/95 Robert Schrock 10,000
2/95 John D'Anastasio 10,000
2/95 Peter S. Pelullo 2,009,937
2/95 Jacob Der Hagopian 1,083,333
10/94 Cohen Consulting 5,000
1/95 Mid-West Financial
Consultants Corporation 267,000
10/94 Mid-West Financial
Consultants Corporation 100,000
10/94 Mid-West Financial
Consultants Corporation 300,000
4/95 Global
Telecommunications, Inc. 100,000
5/95 Dragon
Finance Limited 150,000
5/95 Robert Sannelli 15,000
5/95 Robert Schrock 15,000
5/95 John D'Anastasio 15,000
10/94 Mid-West Financial
Consultants Corporation 1,783,334
10/94 Mid-West Financial
Consultants Corporation 200,000
10/95 Vincent Locurcio 7,836
12/95 Robert Sanelli 100,000
12/95 John D'Anastasio 100,000
8/96 Peter Pelullo 1,250,000
II-3
<PAGE>
PREFERRED STOCK ISSUANCES
Date Shareholder Shares Issued
- ---- ----------- -------------
10/94 Terry Simon 2,500 Preferred A Shares
10/94 William Eells 25,000 Preferred A Shares
4/25/95 Saltzman Partners 111,334 Preferred A Shares
4/25/95 James Saltzman 3,352 Preferred A Shares
4/25/95 Vincent L. Curcio 6,649 Preferred A Shares
4/25/95 Paul Lindenblatt 1,700 Preferred A Shares
4/25/95 Murray Sternfeld 3,437 Preferred A Shares
4/25/95 Nachum Weberman 3,411 Preferred A Shares
4/25/95 Sinai Malowicki 3,408 Preferred A Shares
4/25/95 Flex-O-Craft 3,279 Preferred A Shares
4/25/95 Mike Pontonio 2,986 Preferred A Shares
4/25/95 Heimlich 250 Preferred A Shares
4/25/95 Haverford Advisors 1,540 Preferred A Shares
4/25/95 Bogatin Rubin 8,750 Preferred A Shares
4/95 John Patten 521,563 Preferred B Shares
7/95 John Patten 192,749 Preferred B Shares
7/95 Peter Pelullo 108,759 Preferred C Shares
The sales set forth above are exempt from Registration with the Securities
and Exchange Commission pursuant to Regulation S as transaction with non U.S.
persons or Section 4(2) as transactions by an Issuer not involving any public
offering in that said transactions involved the issuance and sale by the
Registrant of Shares of its Common Stock to financially sophisticated
individuals who are fully aware of the Registrant's activities, as well as its
business and financial condition, and purchased said securities for investment
purposes.
In December 1995, the Company issued the following Common Stock Purchase
Warrants to acquire shares of the Company's common stock:
1. Two warrants to acquire a maximum of 1,666,667 shares of the Company's
common stock to Hastings International Holdings, Ltd. ("Hastings");
2. Two warrants to acquire a maximum of 400,000 shares of the Company's
common stock to Roddy L. Munyon ("Munyon"); and
3. One warrant to acquire a maximum of 300,000 shares of the Company's
common stock to White Chapel Management, Ltd. ("White Chapel") and an
additional 300,000 shares of the Company's common stock.
4. In August 1996, the Company issued warrants to purchase 100,000 of the
Company's Common Stock to Silverman, Collura & Chernis, P.C., the
II-4
<PAGE>
Company's securities counsel since January 1995. These warrants are
exercisable at $2.00 per share and expire on August 31, 1999.
II-5
<PAGE>
Hastings, Munyon and White Chapel has represented to the Company that they
are Accredited Investors as such term is defined in Regulation D. In addition,
White Chapel and Hastings have represented that they are not U.S. Persons as
such terms are defined in Regulation S promulgated under the Act. The sale of
the foregoing warrants and shares are exempt from registration with the
Securities and Exchange Commission pursuant to Section 4(2), 4(6) and 3(b) as
transactions by an issuer not involving any public offering in that said
transactions involve the issuance and sale by the Registrant of its securities
to financially sophisticated individuals who are fully aware of the Registrant's
activities, as well as its business and financial condition and purchased said
investments for investment purposes. The securities are also exempt from
registration in accordance with the provisions of Regulation D promulgated under
the Act. The securities purchased by White Chapel and Hastings are also exempt
from registration in accordance with the provisions of Regulation S as
transactions with Non-U.S. Persons. In connection with the exercise of warrants
issued to Hastings, White Chapel received a commission equal to 10% of the
purchase price of warrants exercised by Hastings. In addition, White Chapel
received the foregoing White Chapel Warrants and shares of common stock.
In January 1996 the Warrants and Shares issued to Hastings and White
Chapel were terminated. In January 1996 the terms of warrants issued to Munyon
were amended and Munyon assigned one of the warrants to Mid-West. As amended
these warrants grant Munyon and Midwest to the right to acquire an aggregate of
up to 2,066,667 shares of the Registrant's common stock.
The Registrant has placed a restrictive legend on all of the certificates
representing the shares issued above and will give appropriate "stop transfer"
instructions to the Registrant's transfer agent, until such time as those shares
are registered pursuant to the Act, or a valid exemption from Registration
exists under the Act. Certain of such shares became eligible for sale under the
provisions of Rule 144 promulgated under the Act.
Item 27. Exhibits
The following exhibits marked with an * are included with this
Registration Statement. Except as otherwise indicated, all other listed exhibits
were filed with the Company's Form S-1 Registration Statement dated March 15,
1995 and Amendments thereto (File No. 33-90344):
1.1 Underwriting Agreement and Amendment between the Registrant and
Midwest Financial Consultants Corporation.
3(i) Articles of Incorporation(a)
3(ii) Bylaws(a)
4.1 Form of Warrant No. 1
4.2B Form of Warrant No. 2
4.3 Form of White Chapel Warrant
4.4 Form of Munyon Warrant, as amended
4.5 Form of Mid-West Warrant, as amended
II-6
<PAGE>
4.6 Form of Silverman, Collura & Chernis, P.C. Warrant*
5.1 Opinion of Silverman, Collura & Chernis, P.C., special counsel for
the Registrant, as to the legality of the securities being
registered.*
10.1 Amendment to Employment Agreement between the Registrant and Joseph
Tarsia.
10.3 Joint Venture Agreement between the Registrant, China Record Corp.
and Dragon International Investment, Ltd.
10.4 Memorandum of Agreement between the Registrant, Kogayashi
Suisakusho Ltd and Dragon International Investment, Ltd.
10.5 Memorandum of Agreement between the Registrant, Galkase Investment
Limited
10.6 Memorandum of Agreement between the Registrant and Multimax Group
Limited
10.7 Memorandum of Agreement between the Registrant and Global
Telecommunications
10.8 Letter of Intent between the Registrant and Sepp Schlaminger
Help-Verwaltungs-U BeteiligungsgesmbH, Albert Vogl, Kurt
Reichenberger and Helmut Presske
10.10 Agreement between the Registrant, Mid-West Financial Corporation
and Kurt Reichenberger
10.11 Stock Exchange Agreement between the Registrant, China Cool Air
Holdings Ltd. and the Shareholders of China Cool Air Holdings Ltd.
(b)
10.12 Agreement between the Registrant and Global Telecommunications Inc.
(b)
10.13 Separation Agreement between the Registrant and Joseph Tarsia (b)
10.14 Memorandum of Understanding with Kaidi Silk Co., Ltd.
10.15 Employment Agreement with Scott McPherson (c)
10.16 Form of Placement Agreement with White Chapel Management, Ltd.
10.17 Form of Financial Consulting Agreement with White Chapel
Management, Ltd.
10.18 Placement Agreement between the Registrant and Midwest Financial
Corporation
23.1 Consent of Cogen Sklar LLP, Independent Auditors.*
23.2 Consent of Silverman, Collura & Chernis, P.C. (included in the
opinion filed as Exhibit 5.1).*
Incorporated by reference from the Company's (a) Form S-18 Registration
Statement on Form S-18 (File No. 32881-NY), (b) the Company's Current Report on
Form 8K dated April 25, 1995 and (c) Annual report on Form 10KSB for the year
ended July 31, 1995. All other applicable exhibits are incorporated by reference
from the Company's Annual Reports on Form 10-KSB for the years ended July 31,
1994, 1993 and 1992.
Item 28. Undertakings.
(a) Rule 415 Offerings.
The undersigned issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
II-7
<PAGE>
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) Includes any additional or changed material information on
the plan of distribution.
provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) For determining liability under the Act, treat each post-effective
amendment as a new registration statement of the securities offered, and
the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at thee end of the offering.
(b) Equity offerings of non-reporting small business issuers.
(c) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Act, may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such court.
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-8
<PAGE>
POWER OF ATTORNEY
Each person whose signature appear below constitutes and appoints Peter
Pelullo his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and to take such actions in, and file with
the appropriate authorities in, whatever states said attorney-in-fact and agent
shall determine, such applications, statements, consents and other documents as
may be necessary or expedient to register securities of the Company for sale,
granting unto said attorney-in-fact and agent full power and authority to do so
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof and the Registrant hereby confers like
authority on its behalf.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, (the "Act") the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements of filing on Form S-1 and
authorized this registration statement to be signed on its behalf by the
undersigned, in the City of Philadelphia, State of Pennsylvania on August 29,
1996.
SIGMA ALPHA GROUP, LTD.
By: /s/ Peter S. Pelullo
-------------------------------
Peter S. Pelullo, President
POWER OF ATTORNEY
Each person whose signature appear below constitutes and appoints Peter
Pelullo his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and to take such actions in, and file with
the appropriate authorities in, whatever states said attorney-in-fact and agent
shall determine, such applications, statements, consents and other documents as
may be necessary or expedient to register securities of the Company for sale,
granting unto said attorney-in-fact and agent full power and authority to do so
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof and the Registrant hereby confers like
authority on its behalf.
In accordance with the requirements of the Act, this Registration
statement was signed by the following persons in the capacities and on the dates
stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Peter S. Pelullo President, Principal August 29, 1996
- ----------------------- Executive Officer,
Peter S. Pelullo Principal Financial
Officer, Principal
Accounting Officer
and Chairman of the Board
and as Power of Attorney
for Members of the Board
<PAGE>
/s/ Scott McPherson Principal Financial Officer August 29, 1996
- ----------------------- and Accounting Officer
Scott McPherson
/s/ John N. D'Anastasio
- -----------------------
John N. D'Anastasio Director August 29, 1996
/s/ Robert S. Sannelli
- ---------------------- Director August 29, 1996
Robert S. Sannelli
II-11
Warrant to Purchase 100,000
shares of Common Stock
SIGMA ALPHA GROUP, LTD.
Common Stock Purchase Warrant
August 29, 1996
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"1933 ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SHALL NOT BE TRANSFERRED,
SOLD, ASSIGNED OR HYPOTHECATED IN VIOLATION THEREOF UNTIL EITHER (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED EFFECTIVE UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAW OR (ii) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH SECURITIES WHICH
OPINION IS SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SECURITIES MAY
BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE 1933 ACT OR APPLICABLE STATE SECURITIES LAWS.
THIS CERTIFIES THAT Silverman, Collura & Chernis, P.C. (hereinafter
sometimes called the "Holder"), is entitled to purchase from Sigma Alpha Group,
Ltd. (the "Company"), at the price and during the periods as hereinafter
specified, the number of shares set forth above of the Company's common stock,
par value $.001 per share (the "Common Stock").
This Warrant, together with warrants of like tenor, is subject to
adjustment in accordance with P. 7 of this Warrant.
1. The rights represented by this Warrant shall be exercisable at any time
commencing on the date above-stated and expiring on August 31, 1999 (the
"Exercise Period"), at an exercise price of $2.00 per share (the "Exercise
Price"), subject to adjustment in accordance with P. 7. For purposes of the
adjustments under P. 7 hereof, the Per Share Exercise Price shall be deemed to
be $2.00, subject to further adjustment as provided in such P. 7. After the
expiration of the Exercise Period, the Holder shall have no right to purchase
any shares of Common Stock underlying this Warrant.
2. The rights represented by this Warrant may be exercised in whole or in
part at any time within the Exercise Period by (i) the surrender of this Warrant
(with the purchase form at the end hereof properly executed) at the principal
<PAGE>
executive office of the Company (or such other office or agency of the Company
as it may designate by notice in writing to the Holder at the address of the
Holder appearing on the books of the Company); and (ii) payment to the Company
of the Exercise Price then in effect for the number of shares of Common Stock
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any. This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date this Warrant is
surrendered and payment is made in accordance with the foregoing provisions of
this P. 2, and the person or persons in whose name or names the certificates for
shares of Common Stock shall be issuable upon such exercise shall become the
holder or holders of record of such shares of Common Stock at that time and
date.
3. The Company shall be obligated to register the shares of Common Stock
underlying this Warrant in accordance with the 1933 Act, as set forth in the
attached Registration Rights Agreement.
4. The Company covenants and agrees that all shares of Common Stock which
may be issued upon exercise of this Warrant will, upon issuance, be duly and
validly issued, fully paid and nonassessable and no personal liability will
attach to the Holder thereof. The Company further covenants and agrees that
during the Exercise Period, the Company will at all times have authorized and
reserved a sufficient number of shares of its Common Stock to provide for the
exercise of this Warrant.
5. The Warrant shall not entitle the Holder to any rights, including,
without limitation, voting rights, as a stockholder of the Company.
6. Neither this Warrant nor the shares of Common Stock issuable upon
exercise hereof have been registered under the 1933 Act nor under any state
securities law and shall not be transferred, sold, assigned or hypothecated in
violation thereof and without the consent of the Company. If permitted by the
foregoing, any such transfer, sale, assignment or hypothecation shall be
effected by the Holder surrendering this Warrant for cancellation at the office
or agency of the Company accompanied by an opinion of counsel satisfactory to
the Company and its counsel, stating that such transferee is a permitted
transferee under this P. 6 and that such transfer does not violate the 1933 Act
or such state securities laws.
7. The Exercise Price and Exercise Period in effect at any time and the
number and kind of securities purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the happening of certain
events as follows:
a. If the Company shall (i) subdivide or reclassify its outstanding shares
of Common Stock into a greater number of shares, (ii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, or (iii)
combine, exchange, subdivide or reclassify its outstanding shares of Common
Stock as part of any similar event or transaction not herein specified, the
2
<PAGE>
Exercise Price in effect at the time of the effective date or record date, as
the case may be, for such sale, or the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
b. Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to P. 7(a) above, the number of shares of Common Stock
purchasable upon exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of shares of Common Stock initially issuable upon
exercise of this Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as adjusted.
c. Notwithstanding any adjustment in the Exercise Price or the number or
kind of shares of Common Stock purchasable upon the exercise of this Warrant,
certificates for Warrants issued prior or subsequent to such adjustment may
continue to express the same price and number and kind of shares of Common Stock
as are initially issuable pursuant to this Warrant.
d. The Company may, but under no circumstances is obligated to, modify the
terms of this Warrant to extend the Exercise Period or to lower the Exercise
Price, at any time prior to the expiration of this Warrant.
8. This Warrant shall be governed by and in accordance with the laws of the
State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers and is to be dated August 29, 1996.
SIGMA ALPHA GROUP, LTD.
By /s/ Peter Pelullo
------------------------------
Peter Pelullo, President
3
[LETTERHEAD OF SILVERMAN, COLLURA & CHERNIS, P.C.]
August 30, 1996
Sigma Alpha Group, Ltd.
1341 North Delaware Avenue
Philadelphia, PA 19125
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Sigma Alpha Group, Ltd. (the "Company"), a
Delaware corporation, pursuant to a Registration Statement on Form S-1, as filed
with the Securities and Exchange Commission on August 30, 1996 (the
"Registration Statement"), covering 2,500,000 shares of the Company's Common
Stock, $.001 par value, and 100,000 shares of Common Stock underlying a Common
Stock Purchase Warrant (the "Securities").
In acting as counsel for the Company and arriving at the opinions as
expressed below, we have examined and relied upon originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination we have assumed the genuineness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of natural persons and the conformity to original documents of
all documents submitted to us as certified or photostated copies.
Based on the foregoing, and subject to the qualifications and limitations
set forth herein, it is our opinion that:
1. The Company has authority to issue the Securities in the manner
and under the terms set forth in the Registration Statement.
2. The Securities have been duly authorized and when issued,
delivered and paid for in accordance with their respective terms, will be
validly issued, fully paid and non-assessable.
<PAGE>
We express no opinion with respect to the laws other than those of the
State of New York and Federal Laws of the United States of America, and we
assume on responsibility as to the applicability thereto, the effect thereon, of
the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and it its use as part of the Registration Statement.
We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement. It is not to be used, circulated,
quoted or otherwise relied upon for any other purpose.
Very truly yours,
SILVERMAN, COLLURA & CHERNIS, P.C.
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm as "EXPERTS" and to the use of our
reports dated September 11, 1995 and November 29, 1994, in the Registration
Statement on Form S-1 and the related Prospectus of Sigma Alpha Group, Ltd.
COGEN SKLAR LLP
(formerly, Cogen Sklar Levick)
Bala Cynwyd, Pennsylvania
August 30, 1996
