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U. S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1 to
Form 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE
ACT
For the transition period from _____________ to _________
Commission file number 33-90344
Sigma Alpha Group, Ltd.
(Exact name of small business issuer as specified in its charter)
Delaware 23-2498715
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1341 North Delaware Avenue, Philadelphia, PA 19125
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (215) 425-8682
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes (X) No ( )
Check if the disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ________
The Registrant's revenues for its most recent fiscal year were: $350,000
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The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the average closing bid and asked prices of the
Registrant's Common Stock in the over-the-counter market on October 17, 1997,
was approximately $22,227,000. Shares of voting stock held by each officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
As of October 17, 1997 20,234,924 shares of Common Stock, $.001 par value were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes ( ) No (X)
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PART I
ITEM 1. BUSINESS
General Background
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") 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 1993 through early 1995, the Company's management attempted to
develop valuable contacts in the Southeast Asia region, particularly in 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. In April 1995, the Company acquired an
80% interest in Global Telecommunications of Delaware, Inc. ("Global"), an
entity that was formed to complete development of wireless telecommunication
technology.
During 1996, management discontinued plans to reestablish its music
industry operations and all other proposed ventures in Southeast Asia with the
exception of the continued development and marketing of telecommunication
products.
The Company's Telecommunications Products
The Company is presently developing wireless telecommunication products
that utilize radio frequencies transmitted by FM radio stations. Management
believes that a need exists in second and third world developing countries that
lack developed telecommunication infrastructures such as China, for
telecommunication products that communicate information in an economically
feasible manner without the need for intensive capital investment. The Company
is developing a process that utilizes FM radio frequencies to provide a voice
paging network without the significant investment capital requirements of
traditional telecommunication and cellular infrastructure.
The primary product the Company intends to produce which will utilize this
patent pending technology is a hand held Digital Voice Pager ("Digital Voice
Pager" or "Digital Voice Paging System") which will allow subscribers to
receive actual voice messages through the pager. The Company also has
developed a Stock Market Information Receiver ("SIR") which allows subscribers
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to receive a scrambled analog FM radio signal that is transmitted by a
commercial FM radio station over their excess bandwidth. The SIR allows a
subscriber to receive stock market information from the stock exchange in
China, which is special programming transmitted by the Chinese radio stations.
Global commercialized the SIR in China during 1996; however, the Company
suspended the SIR program to conserve resources for development of its Digital
Voice Paging System (see"Stock Information Receiver"). As of October 29, 1997,
the Company's Digital Voice Paging System was still under development and no
testing of the related technology had been performed.
Commercialization of the Company's Digital Voice Paging System also
requires access to existing FM radio stations broadcasting in the
respective marketplaces. The Company believes that only minimal modification
to existing FM radio station transmitters is necessary to utilize the Company's
Digital Voice Paging System. The Company expects to use a joint
venture approach to market the Digital Voice Paging System, joining forces with
local companies that have better knowledge of local market conditions and are
better positioned to educate radio station owners regarding the advantages of
the Company's products. The Company expects the joint ventures to lease the
use of the radio station's FM-SCA channels at a cost competitive with other
potential users of SCA channels in the area.
The Company's Digital Voice Paging technology utilizes FM-SCA channels
available on all FM radio frequencies worldwide. In the United States, the
Federal Communications Commission ("FCC") considers FM-SCA channels to be part
of the total FM frequency allocated to a radio station and therefore does not
separately license or regulate FM-SCA channels. The Company believes that
regulators in the foreign markets it plans to enter take a similar position in
their countries to that of the FCC regarding the licensing and regulation of
FM-SCA channels. The Company plans to rely on its local joint venture partners
to facilitate access to and use of FM-SCA channels in the local markets. There
can be no assurance that the Company will be successful in this regard.
The Technology
The Company's Digital Voice Pager will utilize voice compression
technology, digital signal processing ("DSP") technology, and an FM
broadcasting technique known as Subsidiary Communication Authorization ("SCA")
broadcasting, which has been in existence for more than two decades. The
combined product utilizing the integration of the FM-SCA, DSP and digital voice
compression technologies will provide a voice paging service through existing
FM broadcasting stations. The system will be designed to deliver fast and
reliable voice messages to the whole FM station's coverage area through the
addition of simple SCA encoding boxes to existing FM transmitters. The system
will utilize the excess bandwidth that a radio station does not use in
transmitting its regular FM radio broadcasts. Accordingly, the implementation
of the Digital Voice Pager System will not require the purchase or lease of new
radio frequencies from government entities.
Cellular phone and pager systems typically require a large spectrum of
frequencies to be dedicated to their services. Clear frequencies, particularly
frequencies allocated to cellular phones and pagers, may be difficult to obtain
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due to the rapid expansion of cellular and paging services. Even when
bandwidth has been made available, technology considerations typically
associated with operating these newly available frequencies have costs which,
in the Company's opinion, are prohibitively high. However, within that area of
the radio frequency spectrum associated with FM broadcasting (i.e. the band
from 88 MHz to 108 MHz), there is a portion of bandwidth within each FM channel
known as the FM SCA bandwidth which is not required for transmitting the main
FM station broadcast signal, and which the Company believes has not been fully
utilized.
The 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 the FM SCA bandwidth. Similar to the
United States, FM radio stations in China and most other foreign countries 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 their commercial (main
channel) programming. The remaining SCA portion of the base band signal from
54 kHz to 100 kHz, or close to 50% of the available FM channel spectrum
resource, is not required for broadcasting the main FM station signal.
FM SCA has been used in the United States and other developed countries
for background music without commercial interruption, reading services for the
blind, stock market, sports, and weather reports, and educational and religious
applications. As a result, the use of in-place FM transmission systems to
provide a wide coverage paging application may in some instances be limited due
to previous user allocation. This is not the case, however, in emerging growth
nations. Chinese, Latin American, and other foreign FM radio stations have
actively been pursuing the use of this FM SCA bandwidth to generate significant
revenues for operations.
Recent advancements in the state-of-the-art for digital voice compression
and digital signal processing make it feasible for an FM SCA channel to support
an individualized subscription service such as a paging network. The Company
is taking full advantage of these technological advancements in its
implementation of the Digital Voice Paging System. The Company believes that
the combination of FM SCA, DSP and digital voice compression presents a unique
opportunity to implement an effective paging system in a relatively short time
with low capital investment costs.
Digital Voice Paging System
The Company believes that the demand for personal telecommunication
devices has increased drastically in the past decade in China, Latin America
and other emerging markets, with the major market growth focused on two
products: cellular mobile phones and paging systems. Cellular phone networks
require extensive 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 network encompassing a large coverage area
which the Company believes China and other emerging markets presently lack.
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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.
Character or alphanumeric 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 upon its
market research, that alphanumeric paging systems present significant problems,
particularly in China, due to the number and complexity of Chinese characters
(in excess of 13,000). 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 and
Latin America 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 pager use in China is
expected to continue to increase rapidly into the next century.
The Company believes that its Digital Voice Paging System will possess
significant advantages over existing numeric, alphanumeric and character pagers
by allowing a subscriber to receive and play on a hand held Digital Voice
Pager, a voice message from the actual party trying to reach the subscriber.
The Digital Voice Paging System will not require the subscriber to have access
to a telephone to receive a message. Moreover, the Digital Voice Paging System
does not require large pools of typists to transcribe messages. This ensures
message privacy and eliminates translation errors resulting from dialect
differences that the Company believes are currently being experienced in the
Chinese pager market. The Digital Voice Paging System also eliminates
significant investments required for establishing the network and hardware of
other pager systems.
The Digital Voice Paging System allows a designated FM radio station to
provide a service that transmits a message to the owner of a Digital Voice
Pager in the actual voice of the person generating the message. In order to
implement a Digital Voice Paging System, hardware containing the Company's
proprietary software will be integrated into the FM radio station's
transmitter. This provides the broadcast path for the individualized voice
pages. The Digital Voice Paging System provides paging that coexists with, but
does not interfere with the FM radio station's existing commercial broadcasts.
Therefore, a very short start-up time is needed to set up a voice paging
service.
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A subscriber to the paging system must first buy a hand held Digital
Voice Pager from the radio station or other retail outlet and then pay a
monthly subscription fee for the paging service. Once a subscriber's account
has been established, callers can leave voice messages for the subscriber by
calling the paging system's central phone number and entering the subscriber's
personal identification number. The calling party's message is then digitized,
compressed and transmitted by the radio station's FM transmitter to the
specific Digital Voice Pager subscriber.
Digital Voice Paging System Equipment Description
The Digital Voice Paging System consists of two major parts, a base
station and a number of hand held Digital Voice Pagers.
Base Station
The base station features accessory equipment built around an existing FM
radio transmitter and includes a Pager Terminal (also referred to as a call
processor) and an SCA Generator. The Pager Terminal automatically answers
incoming telephone calls, prompts the caller for the subscriber's personal
identification number and records actual voice messages like a standard
voicemail system. Voice messages are digitally compressed into a compact
paging message and a destination pager address is appended. The messages are
then forwarded to the SCA Generator for modulation and mixing with the FM
station main channel programming. This composite signal is then broadcast
through the existing FM transmitter. With the use of existing FM transmitters,
the Company believes that its system installation costs are several orders of
magnitude less than traditional paging systems. The cost of a base station is
expected to be approximately $130,000, including installation and training.
Digital Voice Pager
The Digital Voice Pager receives the FM signal, extracts the FM SCA
portion of the signal, decodes the message, and stores all messages that are
addressed to it. An audible or vibrating signal alerts the user that a message
has been received. Upon playback the user listens to the message in the
caller's actual voice. Operation of the Digital Voice Pager will be similar to
a compact personal message recorder enabling the user to easily play back
messages, fast forward and rewind through messages, lock messages in storage,
and delete messages.
Stock Information Receiver
Global has identified FM SCA technology concerning the distribution of
stock market information in the Chinese market place. Global has a working
relationship with several Chinese radio stations and as a result of their
requests, Global 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.
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The Company believes, based on discussions with Chinese radio stations, in the
past, 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.
Global's SIR system is designed to allow the radio station to install
a computer with the Company's proprietary software at the FM transmitter and
broadcast the information in a scrambled form, which is then unscrambled at the
subscriber's SIR. Management believes that the SIR will decrease the risk of
piracy and allow radio 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 his/her monthly
subscription fee. Management 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. Management believes that these additional markets
include corporate communications to select employees, sports information
dissemination, weather reporting services, educational courses, and special
programming.
In June 1996, Global received its first order for SIR units from Pearl
River Economic Radio, an affiliate of Radio Guangdong, in China. However,
Global has discontinued manufacturing the first generation of SIR units ("SIR
100") due to certain "locking" problems that limited the reception of stock
market information programming in a percentage of such units. Consequently,
it will be necessary to complete the development of a second generation of SIR
units ("SIR 200") designed to improve upon the performance of the SIR 100.
Global has expended approximately $1,600,000 in developing the SIR system.
In July 1997, the Company determined that the expected cost of continuing
Global's activities directed toward development, production and sale of the SIR
200 product line was higher than originally anticipated. As a result, the
Company concluded that its limited capital resources would not allow for the
funding of Global's continued development of the SIR system in parallel with
the Company's core business strategy of developing and commercializing its
Digital Voice Pager technology. The Company currently intends to complete the
development of the Digital Voice Pager before devoting significant additional
funds to an SIR program. Management continues to believe that the SIR system
could possibly be developed into a commercially successful product for the
Chinese market. However, significant capital resources will be required to
complete development of the SIR 200 and to commercialize the product.
Therefore, the Company has decided to evaluate strategic alternatives for
Global's SIR program that will minimize the need for the Company's capital
resources. Alternatives to be evaluated include, but are not limited to, joint
venture arrangements and royalty/licensing arrangements.
On October 15, 1997, the Company's Board of Directors determined that it
was necessary to record a special charge of $687,000 as a provision for write-
down of assets and other accruals relating to the Company's decision to
temporarily suspend Global's SIR program. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations" for further details of this special charge.
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Production and Manufacturing Plans
The Company does not presently intend to establish its own manufacturing
facilities to produce its Digital Voice Pager and future products. Instead the
Company 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 intends to
ship ASIC and other component parts to contract manufacturers abroad to
assemble the Digital Voice Pager and future products. Since the Company will
not operate its own manufacturing facilities, it will be dependent upon the
ability of contract manufacturers to manufacture and assemble products in
accordance with specifications provided by the Company. In the event that the
contractors 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 and abroad 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
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 projections that indicate paging users in
China will continue to expand at rapid rates. Similar growth projections exist
for pager markets in many other populous developing countries. The Company
plans to be a significant part of this growing worldwide paging market using FM
SCA technology.
Based on Global's experience marketing the SIR system in China, the
Company plans to refocus its marketing strategy on the development of joint
venture relationships with local companies in specified target areas. The
Company intends to seek out joint venture partners who are experienced with
marketing, distribution and regulatory issues related to the paging industry
and radio station operations, as well as the economic, cultural and political
environments in their respective areas. The Company believes that a joint
venture approach will result in a rapid deployment of its products in multiple
areas throughout the world.
The marketing strategy of each joint venture will vary, depending on the
circumstances in each geographic area. However, several elements of the
strategy are likely to be the same. It will be important for the joint
ventures to educate radio stations regarding their ability to generate
significant additional revenues by utilizing the Company's technology with
their available FM SCA band. In addition, emphasis will focus on their ability
to generate these revenues without the need for significant investment capital
and highlight the advantages of the Company's Digital Voice Paging System
compared to traditional paging systems currently in use. The joint ventures
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also will be responsible to market voice pager services to local subscribers
and implement support and service personnel needed to run a paging service.
Each joint venture will determine the best method of sales and distribution for
their operation, directly to the subscriber, through retail electronic outlets,
or through the radio stations themselves.
The Company is currently researching prospective joint venture partners in
various target markets. Although no final joint venture terms have been
established yet, the Company expects that such ventures are likely to take the
form of that proposed in a letter of intent the Company signed with the Batista
Group in Brazil during April 1997. The letter of intent provides for the
formation of a joint venture between the Company and the Batista Group for the
purpose of marketing, selling and distributing the Company's Digital Voice
Pager and other telecommunication products in Central and South America
pursuant to the terms of a definitive joint venture agreement to be negotiated
between the parties. The joint venture agreement is expected to provide that
the Batista Group will have a 51% interest in the joint venture and the Company
will own the remaining 49% interest. The Batista Group will be responsible for
marketing, distribution and sale of products in the countries. The Company
will produce and sell Digital Voice Pagers to the joint venture in addition to
supplying its Digital Voice Paging System and other product technology together
with technical training and marketing support. The capital requirements of the
joint venture will be funded by each party based upon their ownership interest
in the joint venture. The joint venture is expected to receive all or a
significant part of the monthly subscription revenue paid by Digital Voice
Pager subscribers.
The Company believes the advantages associated with its Digital Voice
Paging System as compared to tone-only pagers, numeric pagers, and alphanumeric
and character pagers will allow the Company to successfully market its
products. However, there can be no assurance that the Company's products will
be successfully received in those market places the Company chooses to target.
The Company believes the price of its Digital Voice Pager will be competitive
with existing alphanumeric/text pagers in use around the world.
Patents and Trade Secrets
In January 1996, the Company filed a patent application for protection of
the Digital Voice Pager technology under United States patent laws. The
Company also has filed similar patent applications in numerous foreign
countries around the world. In September 1997, the Company was notified that
its patent application was approved by government authorities in South Africa.
There can be no assurance as to the ultimate success of the Digital Voice Pager
patent application in the United States or any other foreign country.
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.
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Government Regulations
The Company's proposed operations relate to conduct of operations in China
and other foreign countries. Accordingly, the Company's 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.
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 telecommunications 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 voice pagers and related products.
Research and Development
Research and development expenditures were approximately $445,000 and
$434,000 for the years ended July 31, 1997 and 1996, respectively for the
Company's Digital Voice Pager and Global's SIR products.
The Company does not currently have internal research and development
capabilities. Therefore, it relies on contractual relationships with third
party engineering and development firms to develop the Company's products to
its specifications. Generally, such contracts provide for payments to be made
by the Company on a time and material basis. On large contracts, a maximum
limit typically is placed on the amount the Company will be required to pay.
However, periodic modifications to such contracts may increase the maximum
amount to be paid. During the years ended July 31, 1997 and 1996, costs
aggregating approximately $391,000 and $392,000, respectively, were incurred
for product research and development work performed by third parties.
Management believes that significant progress has been made on the
development of the Digital Voice Pager. The Company's development contractors
have in the past experienced delays in connection with the development of the
Digital Voice Pager. At this time, completion of a production ready prototype
of the first generation of the Digital Voice Pager is expected within the next
twelve months. During that time, the Company and its development contractors
expect to complete the product engineering and development process and conduct
exhaustive testing of the prototypes. The Company is dependent upon the
success of its development contractors in developing the Digital Voice Pager.
The inability of, and/or delay by such contractors in performing such
developmental services could have a material adverse effect on the Company.
The Company has incurred research and development costs of $1,049,000 on
the Digital Voice Pager through October 17, 1997, including $321,000 incurred
during the year ended July 31, 1997. The Company also expects to incur an
estimated $1,000,000 of additional research and development costs to complete
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development of the first generation of the Digital Voice Pager. Management is
aware, however, that there can be no assurances that the Digital Voice Paging
System will be developed into a commercially viable product, or if developed,
that it can be successfully marketed.
Employees
The Company has eight employees, all of whom are full time, consisting of
its Chief Executive Officer and Chairman of the Board, President, Chief
Operating Officer, Vice President of Finance and Chief Accounting Officer,
Secretary, Investor Relations Manager, Controller, and administrative staff.
Recent Developments
Letter of Intent to Acquire General Atronics Corporation
On October 15, 1997 the Company signed a letter of intent to acquire all
of the outstanding capital stock of General Atronics Corporation and its
subsidiaries ("GAC") for $6,000,000 in cash and 1,000,000 shares of the
Company's common stock. The purchase agreement also provides for future
contingent consideration of up to $6,000,000 and up to 1,000,000 shares of the
Company's common stock in the event that GAC achieves certain minimum levels of
signed contracts for sales commitments. The acquisition is contingent on the
Company's ability to raise sufficient funds to finance the initial cash
requirements.
GAC is a high technology communications company that specializes in the
application of real-time digital signal processing to high frequency and ultra-
high frequency data modems, tactical digital telephones and communications
systems. GAC functions primarily as a subcontractor for larger defense
contractors who build communication systems for U.S. and foreign defense
forces. GAC's 1996 revenues were $18,805,000.
Management expects to operate GAC as a largely independent subsidiary
without significantly changing its operations. However, the Company expects to
take full advantage of the outstanding technical resources available within GAC
to help develop the Company's technologies on a more timely basis. In
addition, GAC offers the Company a stable and consistently profitable operation
with excellent marketing contacts in foreign countries. The Company also
expects to be able to help GAC develop new marketing opportunities and
commercial applications of its technology.
The Company is currently attempting to raise sufficient equity capital to
pay for the initial cash outlay required to purchase GAC. Management is aware,
however, that there can be no assurances that the Company will be able to
secure sufficient funds from its financing efforts to complete the acquisition
of GAC. In addition, there can be no assurance that the Company will be able
to negotiate a definitive acquisition agreement acceptable to the Company and
GAC's shareholders. As a result of these significant uncertainties, it is
management's opinion that the acquisition of GAC is not yet probable.
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Key Additions to Management
Michael P. McAndrews was appointed President of the Company effective
October 1, 1997. Prior to joining the Company, Mr. McAndrews had been in
several senior marketing positions in Motorola's Two-Way Paging and Cellular
Phone divisions since 1992. See Item 9, "Directors, Executive Officers,
Promoters and Control Persons."
David C. Bryan was appointed Senior Vice President and Chief Operating
Officer of the Company in July 1997. Prior to joining the Company, Mr Bryan
spent 18 years with GAC. See Item 9, "Directors, Executive Officers, Promoters
and Control Persons."
James M. Boyd, Jr. was appointed Vice President of Finance and Chief
Accounting Officer in February 1997, replacing Scott McPherson who left the
Company to pursue other opportunities. Prior to joining the Company, Mr. Boyd
spent 15 years with Sun Company, Inc. in a variety of financial management
positions. See Item 9, "Directors, Executive Officers, Promoters and Control
Persons."
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 1341 N. Delaware Avenue, Suite
408, Philadelphia, Pennsylvania 19125, which the Company leases pursuant to a
written lease expiring in 1999. The rent for the 3,233 square feet of office
space is $29,100 per year subject to certain customary increases.
ITEM 3. LEGAL PROCEEDINGS
In April 1997 the Company settled an action instituted by Josephberg,
Grosz & Company, Inc. ("JGC") in the United States District Court for the
Southern District of New York for specific performance of a contract which
JGC claimed entitles them to receive 15,000 shares of the Company's Common
Stock or in the alternative the sum of $66,000. The Company settled the claim
("JGC Action") through the issuance of 7,500 shares of the Company's restricted
common stock, which was subsequently registered by the Company under the
Securities Act of 1933, as amended.
As of October 10, 1997, the Company had several judgments related to
accounts payable and taxes payable, the aggregate amount of which is not
material to the Company's results of operations and cash flows. Management has
been negotiating actively and attempting to work out settlements with respect
to these judgments and tax assessments.
In September 1997, Global Telecommunications of Delaware, Inc. ("Global")
the Company's 80 percent owned subsidiary, was served with a Summons and
Complaint by a former supplier of electronic parts in the U.S. District Court
for the Eastern District of Pennsylvania.. The Complaint seeks specific
performance of a contract and plaintiff claims they are entitled to receive
approximately $106,000 from Global. Global has filed an answer to the
complaint denying complainant's right to receive any monetary compensation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended July 31, 1997.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the National Association of
Securities Dealers, Inc., over-the-counter market on the OTC Bulletin Board
under the symbol "SGAL."
The following table sets forth the high and low bid prices per share of
Common Stock as quoted by National Quotation Bureau, Inc. for the years
July 31, 1997 and 1996.
<TABLE>
Fiscal Year Ended July 31, 1996
_______________________________
<CAPTION>
High Bid Low Bid
________ _______
<S> <C> <C>
Quarter ended
October 31, 1995 $ 6 $5 1/4
January 31, 1996 5 15/16 2 1/8
April 30, 1996 5 1/4 4 1/8
July 31, 1996 4 7/8 2 3/8
Fiscal Year Ended July 31, 1997
_______________________________
<CAPTION>
High Bid Low Bid
________ _______
<S> <C> <C>
Quarter ended
October 31, 1996 $3 1/8 $1 1/2
January 31, 1997 2 11/16 2 1/16
April 30, 1997 3 2 3/16
July 31, 1997 2 1/2 1 27/32
The above prices presented are bid prices, which represent prices between
broker dealers and do not include retail mark-ups, mark-downs or commissions to
the dealer. The prices also may not necessarily reflect actual transactions.
On October 23, 1997 the closing price for the Company's common stock was $2.00
per share.
As of October 17, 1997 the Company had 220 shareholders of record of its
Common Stock. 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 the list of beneficial owners of the Company
whose shares are held in the names of various dealers and clearing agencies.
The Company's transfer agent has advised the Company that it has in excess of
300 record and beneficial owners of its common shares.
14
<PAGE>
Dividends
To date, the Company has not declared or paid any cash dividends and does
not intend to do so for the foreseeable future. The Company intends to retain
all earnings, if any, to finance the continued development of its business.
Any future payment of dividends will be determined solely by the discretion of
the Company's Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated Financial Statements appearing elsewhere in this report.
General Operations
__________________
Sigma Alpha Group, Ltd. ("the Company") is pursuing a business strategy of
bringing new telecommunications technology to China and other developing
countries. During the year ended July 31, 1997, the Company and its 80% owned
subsidiary, Global Telecommunications of Delaware, Inc. ("Global") (together,
"Sigma Alpha") conducted activities directed toward the research and develop-
ment of a digital voice pager ("Digital Voice Pager") and the development,
production and sale of Global's Stock Information Receiver ("SIR") system in
China.
Year Ended July 31, 1997
vs. Year Ended July 31, 1996
________________________
Results of Operations
For the year ended July 31, 1997 ("Fiscal 1997"), the Sigma Alpha incurred
a net loss of $4,450,000 on revenues of $350,000 compared to a net loss of
2,189,000 on revenues of $2,000 for the year ended July 31, 1996 ("Fiscal
1996"). The increase in the net loss of $2,261,000 was primarily due to a
$687,000 provision for write-down of assets and other accruals in Fiscal 1997,
as well as higher officers' compensation ($482,000), other salaries and payroll
costs ($112,000), consulting fees ($666,000), professional fees ($82,000),
travel ($91,000) and other operating expenses ($97,000).
Sigma Alpha recognized operating revenue from Global's telecommunication
business operations for the first time in Fiscal 1997 with the sale of
approximately 12,500 of Global's SIR 100 units, which generated $348,000 of
revenue and $34,000 of gross profit all in the first half of Fiscal 1997.
However, as further described above, the Company has temporarily suspended
Global's SIR program and as a result, no revenues were incurred in the second
half of Fiscal 1997 (see "Stock Information Receiver").
The Company's Board of Directors determined that it was necessary to
record a special charge relating to the Company's decision to temporarily
suspend activities directed toward development, production and sale of its SIR.
The Company concluded that its limited capital resources would not allow for
the continued development of the SIR system in parallel with the Company's core
15
<PAGE>
business strategy of developing and commercializing its Digital Voice Pager
technology. The Company is currently evaluating several strategic alternatives
for the SIR program; however, it is more likely than not that the Company will
incur significant losses on Global's SIR program regardless of which
alternative is selected. As a result, the Company recorded a pretax provision
for loss of $687,000 in Fiscal 1997. The components of the provision are as
follows:
Write-down of assets:
Inventory $ 513,000
Accounts receivable (net) 37,000
Fixed assets (net) 73,000
Prepaid expenses and other
current assets 26,000
Accrual for loss on purchase commitments 38,000
_________
Total provision $ 687,000
_________
Global's inventory was written down to estimated net realizable value
($78,000) and all other SIR assets were written off entirely. It is reasonably
possible that a further write-down of the inventory may be necessary if Global
is unable to utilize the inventory in future products and/or sell the inventory
at or above net realizable value.
For Fiscal 1997, officers' compensation was $1,022,000 as compared to
$540,000 for Fiscal 1996, an increase of $482,000, or 89%. The increase was
primarily due higher compensation received by the Company's Chairman in the
form of (1) 1,250,000 shares of the Company's restricted common stock valued at
$188,000 by an independent expert, (2) $106,000 of accumulated but unpaid
vacation pay since the inception of the Chairman's employment contract with the
Company, (3) $49,000 of compensation resulting from retirement of the Company's
Series C preferred stock, and (4) scheduled increases in the Chairman's salary.
The increase was also attributable to higher salaries for other officers.
For Fiscal 1997, other salaries and payroll costs were $243,000 as
compared to $131,000 for Fiscal 1996, an increase of $112,000, or 85%. The
increase was attributable to higher payroll taxes and higher non-officer
salaries. For Fiscal 1997, consulting fees were $985,000 as compared $319,000
for Fiscal 1996, an increase of $666,000, or 209%. The increase was primarily
due to the adoption of FASB Statement 123 which valued common stock warrants
granted to investment banking consultants at $379,000. The increase in
consulting fees was also attributable to several new consulting agreements
entered during Fiscal 1997 to assist the Company in raising more equity
capital. Directors' fees declined $38,000, or 70%, in Fiscal 1997 due to the
absence of common stock granted to the outside directors in Fiscal 1996.
Professional fees increased $82,000, or 55%, in Fiscal 1997 due to higher legal
fees, which resulted primarily from the Company's expanded efforts to finance
its operations, including $67,000 incurred to the Company's securities counsel.
For Fiscal 1997, marketing expenses were $123,000 as compared to none for
Fiscal 1996 as a result of marketing activities associated with the sale of
Global's SIR units in China. Travel expenses increased $91,000, or 25%, in
Fiscal 1997 also due to activities associated with the sale of Global's SIR
16
<PAGE>
units in China and travel resulting from efforts to raise equity capital.
Other operating expenses were $366,000 for Fiscal 1997 as compared to $269,000
for Fiscal 1996, and increase of $97,000, or 36%. The increase was primarily
attributable to higher advertising costs and filing fees.
Liquidity and Capital Resources
At July 31, 1997, the Company had working capital of $1,412,000 (including
a cash balance of $1,688,000) as compared to working capital of $924,000
(including a cash balance of $1,173,000) at July 31, 1996. The working capital
increase of $488,000 largely reflects the sale of 2,625,000 shares of Sigma
Alpha common stock for $4,725,000 net of commissions, partially offset by
operating expenses and the provision for write-down of assets and other
accruals, which reduced working capital by $614,000.
In April 1995, the Company entered into a Separation Agreement with Joseph
Tarsia, the former Chairman of the Board of Directors of the Company (the
"Former Chairman"). At the time of the Former Chairman's separation, he held
1,740,063 shares of the Company's common stock and the Company owed the Former
Chairman and certain parties related to the Former Chairman a total of
$2,038,000 ("Debt Due the Former Chairman"). In conjunction with the Former
Chairman's separation from the Company, Kathleen Patten, a third party investor
(the "Third Party"), purchased all of the Former Chairman's shares of common
stock in the Company for $417,000. In addition to the Former Chairman's stock,
the Third Party also acquired all of the Debt Due the Former Chairman. The
Third Party then agreed to release the Company of all obligations and claims
under the Debt Due the Former Chairman in consideration for payment by the
Company of $61,000 in cash and 395,000 shares of the Company's Series B
Preferred Stock. The Preferred Stock was valued at $1,977,000, the difference
between the total face value of the Debt Due the Former Chairman assumed by the
Third Party and the $61,000 cash payment. In accordance with the terms of the
Former Chairman's Separation Agreement, the Company is contingently liable to
pay the Former Chairman up to a maximum of $2,000 per week until such time that
the Third Party has completed making all payments to the Former Chairman
required under the terms of the Third Party's agreement with the Former
Chairman. Pursuant to the Separation Agreement, amounts paid by the Company to
the Former Chairman were $17,750 and $18,750 in the years ended July 31, 1997
and 1996, respectively. In addition, $61,750 has been accrued as of July 31,
1997, which represents the estimated maximum liability to the Former Chairman
in the event that the Third Party fails to perform. As of October 29, 1997, the
Third Party had not completed making all required payments to the Former
Chairman. See Note 7 to the Consolidated Financial Statements.
As of October 17, 1997, the Company maintained a cash balance of $760,000.
Management is aware that additional funding will be required within the next
three months in order to achieve its primary objectives. In addition to the
estimated $6,000,000 that will be required to purchase GAC, the Company expects
that approximately $1,500,000 will be required to complete the first generation
of the Digital Voice Paging System. Upon commercialization of the Digital
Voice Paging System, the Company expects that at least $20 million will be
required in the second half of calendar 1998 to fund production and marketing
of Digital Voice Pagers.
17
<PAGE>
The Company is actively trying to raise the required funds. Effective
August 18, 1997, the Company filed a registration statement to register
5,000,000 shares of the Company's common stock at $2.00 per share. In October
1997, the Company chose to terminate the offer as sufficient demand did not
exist for the Company's securities at that time. The Company declined the
only subscription tendered to purchase its common stock under the registration
statement as the amount of funds under such subscription would not materially
assist the Company in its operations. The Company has undertaken efforts to
raise additional equity capital through alternate sources, primarily private
placements to institutional investors.
The Company's ability to achieve its plan of operations is dependent on
its ability to secure sufficient proceeds from financing efforts. There can be
no assurances that such funding will be generated or available, or if
available, on terms acceptable to the Company. In addition, management is
aware that there can be no assurances that the Digital Voice Pager will be
developed into a commercially viable product or that the Company will be able
to negotiate a definitive acquisition agreement acceptable to the Company and
GAC's shareholders.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1. Such consolidated financial
statements are hereby incorporated by reference into this Item 7.
18
<PAGE>
SIGMA ALPHA GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
A. Independent Auditors' Report F-1
B. Consolidated Balance Sheets at July 31, 1997
and 1996 F-2 to F-4
C. Consolidated Statements of Operations for the
years ended July 31, 1997 and 1996 F-5
D. Consolidated Statements of Stockholders' Equity
for the years ended July 31, 1997 and 1996 F-6 to F-9
E. Consolidated Statements of Cash Flows for the
years ended July 31, 1997 and 1996 F-10 to F-11
F. Notes to Consolidated Financial Statements F-12 to F-27
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Sigma Alpha Group, Ltd.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Sigma Alpha
Group, Ltd. and subsidiaries as of July 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, 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 Group,
Ltd. and subsidiaries as of July 31, 1997 and 1996, 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
October 16, 1997
F-1
<PAGE>
</TABLE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<CAPTION>
1997 1996
__________ __________
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $1,688,000 $1,173,000
Inventory 78,000 119,000
Prepaid expenses and other current assets 20,000 20,000
_________ _________
1,786,000 1,312,000
_________ _________
PROPERTY AND EQUIPMENT, NET 48,000 80,000
_________ _________
OTHER ASSETS
Goodwill 42,000 58,000
Patent 22,000 9,000
_________ _________
64,000 67,000
_________ _________
TOTAL ASSETS $1,898,000 $1,459,000
========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
F-2
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<CAPTION>
1997 1996
___________ _________
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Loan payable $ - $ 16,000
Accounts payable - trade 190,000 231,000
Accrued taxes, other than income taxes 52,000 7,000
Accrued wages - officers 21,000 40,000
Accrued expenses and other current
liabilities 111,000 94,000
_________ _________
TOTAL LIABILITIES 374,000 388,000
_________ _________
COMMITMENTS AND CONTINGENCIES
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
F-3
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<CAPTION>
1997 1996
________ _______
<S> <C> <C>
STOCKHOLDERS' EQUITY
PREFERRED STOCK
SERIES A, $5.00 CONVERTIBLE, $.001 par value;
authorized, 750,000 shares; issued and
outstanding, 0 shares at July 31, 1997 and
178,000 shares at July 31, 1996 - -
SERIES B, $5.00 CONVERTIBLE, $.001 par value;
authorized, 800,000 shares; issued and
outstanding, 664,000 shares at July 31,
1997 and 1996 1,000 1,000
SERIES C, $5.00 CONVERTIBLE, $.001 par value;
authorized, 109,000 shares; issued and
outstanding, 0 shares at July 31, 1997 and
97,000 shares at July 31, 1996 - -
ADDITIONAL PAID-IN CAPITAL 3,321,000 4,690,000
COMMON STOCK, $.001 par value; authorized
50,000,000 shares; issued and outstanding,
18,907,000 shares at July 31, 1997 and
14,809,000 at July 31, 1996 19,000 15,000
WARRANTS OUTSTANDING 428,000 2,000
ADDITIONAL PAID-IN CAPITAL 22,313,000 16,471,000
ACCUMULATED DEFICIT (24,558,000) (20,108,000)
__________ __________
TOTAL STOCKHOLDERS' EQUITY 1,524,000 1,071,000
__________ __________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,898,000 $ 1,459,000
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
F-4
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<CAPTION>
1997 1996
__________ _________
<S> <C> <C>
SALES $ 348,000 $ -
COST OF SALES 314,000 -
__________ _________
GROSS PROFIT 34,000 -
__________ _________
OPERATING EXPENSES:
Officers' compensation 1,022,000 540,000
Other salaries and payroll costs 243,000 131,000
Consulting fees 985,000 319,000
Directors' fees 16,000 54,000
Professional fees 230,000 148,000
Marketing expenses 123,000 -
Research and development 445,000 434,000
Travel 449,000 358,000
Provision for write-down of assets and
other accruals 687,000 -
Other 366,000 269,000
_________ _________
TOTAL OPERATING EXPENSES 4,566,000 2,253,000
_________ _________
LOSS FROM CONTINUING OPERATIONS BEFORE OTHER
INCOME (EXPENSE) AND EXTRAORDINARY GAIN (4,532,000) (2,253,000)
_________ _________
OTHER INCOME (EXPENSE)
Royalties 2,000 2,000
Interest income 80,000 21,000
Interest expense - (21,000)
_________ _________
82,000 (2,000)
_________ _________
LOSS BEFORE EXTRAORDINARY GAIN (4,450,000) (2,251,000)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT - 62,000
_________ _________
NET LOSS $(4,450,000) $(2,189,000)
========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 17,519,000 13,848,000
NET LOSS PER COMMON SHARE
Net loss before extraordinary gain $ (0.25) $ (0.16)
Extraordinary gain on extinguishment of debt - -
_________ _________
NET LOSS PER COMMON SHARE $ (0.25) $ (0.16)
========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
F-5
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
COMMON STOCK
____________________________________________________________
<CAPTION>
COMMON ADDITIONAL
NUMBER OF STOCK WARRANTS PAID-IN
SHARES AMOUNT SUBSCRIBED OUTSTANDING CAPITAL
__________ _______ __________ ___________ __________
<S> <C> <C> <C> <C> <C>
BALANCES,
AUGUST 1, 1995 12,837,000 $13,000 $1,499,000 $- $12,664,000
Year ended
July 31, 1996
Issuance of
common stock:
Under
subscription,
agreement 850,000 1,000 (1,499,000) - 1,498,000
Under
underwriting
agreement 33,000 - - - 100,000
Interest 9,000 - - - 1,000
Directors fees 200,000 - - - 50,000
Warrant
Exercise, net
of commission
of $42,000 880,000 1,000 - - 2,158,000
Warrants issued
For services - - - 2,000 -
__________ ______ _________ __________ ___________
BALANCES,
JULY 31, 1996 14,809,000 $15,000 $ - $2,000 $16,471,000
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
F-6
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'S EQUITY
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
COMMON STOCK
___________________________________________________________
<CAPTION>
COMMON ADDITIONAL
NUMBER OF STOCK WARRANTS PAID-IN
SHARES AMOUNT SUBSCRIBED OUTSTANDING CAPITAL
__________ ______ __________ ___________ __________
<C> <C> <C> <C> <C>
BALANCES,
JULY 31, 1996 14,809,000 $15,000 $ - $ 2,000 $16,471,000
Year ended
July 31, 1997:
Issuance of
common stock 2,625,000 3,000 - - 5,247,000
Commissions - - - - (525,000)
Officer's
compensation 1,255,000 1,000 - - 199,000
Consulting fees 32,000 - - - 65,000
Preferred Series
A conversion 178,000 - - - 882,000
Settlement of
lawsuit 8,000 - - - 18,000
Warrants issued
for cash - - - 3,000 -
Warrants issued
for services - - - 423,000 (44,000)
__________ ______ _________ ___________ __________
BALANCES,
JULY 31, 1997 18,907,000 $19,000 $ - $428,000 $22,313,000
========== ====== ========= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEFICIT
___________________
<S> <C>
BALANCE, AUGUST 1, 1995 $(17,919,000)
Net loss (2,189,000)
___________
BALANCE JULY 31, 1996 (20,108,000)
Net loss (4,450,000)
___________
BALANCE JULY 31, 1997 $(24,558,000)
===========
</TABLE>
[FN]
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<TABLE>
PREFERRED STOCK "SERIES A"
___________________________________
<CAPTION>
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
________ _______ ________
<S> <C> <C> <C>
BALANCES, AUGUST 1, 1995 AND
JULY 31, 1996 178,000 $ - $ 882,000
Year ended July 31, 1997:
Conversion to common stock (178,000) - (882,000)
________ _______ ________
BALANCES, JULY 31, 1997 - $ - $ -
======== ======= ========
</TABLE>
<TABLE>
PREFERRED STOCK "SERIES B"
__________________________________
<CAPTION>
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
_________ _______ ________
<S> <C> <C> <C>
BALANCES, AUGUST 1, 1995 726,000 $ 1,000 $3,628,000
Year ended July 31, 1996
Issuance of preferred stock
for conversion of debt 15,000 - 77,000
Repurchase of shares for
retirement (77,000) - (385,000)
________ _______ _________
BALANCES, JULY 31, 1996 AND 1997 664,000 $ 1,000 $3,321,000
======== ======= =========
</TABLE>
[FN]
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<TABLE>
PREFERRED STOCK "SERIES C"
_____________________________________
<CAPTION>
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
________ _______ __________
<S> <C> <C> <C>
BALANCES, AUGUST 1, 1995 109,000 $ - $ 544,000
Year ended July 31, 1996
Repurchase of shares for
retirement (12,000) - (57,000)
________ _______ _________
BALANCES, JULY 31, 1996 97,000 - 487,000
Year ended July 31, 1997
Repurchase of shares for
retirement (97,000) - (487,000)
________ _______ _________
BALANCES, JULY 31, 1997 - $ - $ -
======== ======= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<CAPTION>
1997 1996
___________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,450,000) $(2,189,000)
Adjustments to reconcile net loss
to net cash flows used in operating
activities:
Provision for write-down of assets
and other accruals 687,000 -
Extraordinary gain on extinguishment
of debt - (62,000)
Depreciation of property and
equipment and amortization of
goodwill and patent 46,000 34,000
Amortization of unearned compensation - 8,000
Issuance of common stock for:
Directors fees - 50,000
Officer compensation 200,000 -
Consulting fees 65,000 -
Settlement of lawsuit 18,000 -
Issuance of warrants for services 379,000 2,000
(Increase) decrease in:
Receivable from underwriting - 198,000
Accounts receivable (143,000) -
Inventory (472,000) (119,000)
Prepaid expenses and other current
assets (26,000) (13,000)
Increase (decrease) in:
Accounts payable 65,000 107,000
Taxes, other than income taxes 45,000 (56,000)
Accrued wages - officers (19,000) 40,000
Accrued expenses and other current
liabilities (23,000) (2,000)
_________ _________
Net cash used in operating activities (3,628,000) (2,002,000)
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of patent and trademark (16,000) (10,000)
Purchase of equipment (66,000) (71,000)
_________ _______
Net cash used in investing activities (82,000) (81,000)
_________ _______
<FN>
The accompanying notes are an integral part of these consolidated financial
statements
F-10
</TABLE>
<PAGE>
<TABLE>
SIGMA ALPHA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997 AND 1996
(Rounded to Nearest Thousand)
<CAPTION>
1997 1996
_________ __________
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable - 16,000
Repayment of loans payable (16,000) -
Proceeds from issuance of common stock 5,250,000 2,300,000
Commission on issuance of common stock (525,000) (41,000)
Repurchase of Preferred Series B stock - (385,000)
Repurchase of Preferred Series C stock (487,000) (57,000)
Proceeds from issuance of warrants 3,000 -
_________ _________
Net cash provided by financing activities 4,225,000 1,833,000
_________ _________
NET CHANGE IN CASH AND EQUIVALENTS 515,000 (250,000)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,173,000 1,423,000
_________ _________
CASH AND EQUIVALENTS, END OF YEAR $1,688,000 $1,173,000
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year:
Interest $ - $ 21,000
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Series B Preferred Stock issued for
conversion of debt $ - $ 77,000
Common stock issued for conversion
of debt $ - $ 1,000
Common stock issued for retirement
of Series A Preferred Stock $ 882,000 $ -
Common stock warrants issued for
legal costs of preparing
registration statement $ 44,000 $ -
<FN>
The accompanying notes are an integral part of these consolidated financial
statements
F-11
</TABLE>
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS
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") a recording studio owned and operated by 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 the Company's Chief Executive Officer and current Chairman of the
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.
In April 1995, the Company acquired an 80% interest in Global
Telecommunications of Delaware, Inc. ("Global"), an entity which was formed to
complete development of a Digital Voice Pager ("Digital Voice Pager")
technology. During 1996, management discontinued its plans to reestablish its
music industry operations and changed its business activities to focus
exclusively on the development and commercialization of wireless
telecommunication products which utilize radio frequencies transmitted by FM
radio stations.
During the year ended July 31, 1997, Global began selling its first product, a
stock information receiver ("SIR"), in China. 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. However, the Company
has discontinued manufacturing the first generation of SIR units due to certain
locking problems that affected a percentage of such units. See Note 3 for
further information regarding a provision for write-down of assets and other
accruals related to the SIR program.
The Company's current plan of operations largely consists of the development of
its Digital Voice Pager technology and the subsequent marketing of Digital
Voice Paging Systems to developing nations. Completion of a production ready
prototype of the first generation of the Digital Voice Pager is expected within
the next twelve months. The Company will require additional funds to carry out
this plan of operations. Management believes that the Company has available
sources to carry out the plan of operations and to fund its operating expenses
during the year ended July 31, 1998.
F-12
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
___________________________
The consolidated financial statements include the accounts of the Company and
all wholly-owned and 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 or the Securities Investor Protection Corporation up to $100,000.
During the year the Company may have cash balances in these institutions in
excess of these limits. At July 31, 1997, balances were in excess of insurable
amounts by approximately $1,556,000.
Estimates
_________
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Accordingly actual results may differ from those
estimates.
Fair Value of Financial Instruments
___________________________________
The Company's financial instruments consist primarily of cash and equivalents,
accounts receivable, accounts payable, and accrued expenses. These balances, as
presented in the financial statements as of July 31, 1997 and 1996, approximate
their fair value because of their short maturities.
Inventory
_________
Inventory is stated at the lower of cost or market determined on a first-in,
first-out basis and consists of component parts for the SIR. The Company
recorded a write-down of the SIR inventory to its net realizable value in the
year ended July 31, 1997 (see Note 3).
Property and Equipment
______________________
Property and equipment are recorded at cost. Fixtures and equipment are
depreciated primarily using the declining balance and straight line methods
over the estimated useful lives of 3 to 10 years.
F-13
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
Goodwill
________
The Company amortizes goodwill on a straight-line basis over a 5 year period.
Goodwill in the consolidated financial statements relates to the Company's
1995 acquisition of an 80% interest in Global. Recoverability of such goodwill
is evaluated based on the estimated expected future cash flows from the future
commercialization of Global's technology in relation to the net book
value of the goodwill. Amortization recorded was $16,000 in each of the years
ended July 31, 1997 and 1996. Accumulated amortization was $38,000 and $22,000
at July 31, 1997 and 1996, respectively.
Minority Interest
_________________
As of July 31, 1997, Global had incurred net losses aggregating $1,921,000 in
excess of the Company's equity interest in Global. Management believes it is
more likely than not that the receivable from the minority interest will not be
recoverable and therefore, the Company has recorded 100% of Global's losses.
Patent
______
Global has filed patent applications for its Voice Pager technology in the
United States and numerous foreign countries. The costs of its patent
applications are amortized on a straight line basis over a 5 year period.
Amortization recorded was $3,000 and $1,000 in the years ended July 31, 1997
and 1996, respectively. Accumulated amortization was $4,000 and $1,000 at July
31, 1997 and 1996, respectively.
Research and Development Expenses
_________________________________
Research and development expenditures are expensed as incurred and totaled
approximately $445,000 and $434,000 for the years ended July 31, 1997 and 1996,
respectively.
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 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 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 common stock warrants and options,
both of which are considered to be common stock equivalents, because the effect
on net loss per share would be anti-dilutive.
F-14
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
Accounting for Stock-Based Compensation
_______________________________________
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the stock
on the date of the grant over the amount the employee is required to pay to
acquire the stock (the intrinsic value method under Accounting Principles Board
Opinion 25). Such amount, if any, is accrued over the related vesting period,
as appropriate.
Effective August 1, 1996, the Company implemented Financial Accounting
Standards Board ("FASB") Statement 123, "Accounting for Stock-Based
Compensation," which encourages employers to account for stock-based
compensation awards based on their fair value on their date of grant. The fair
value method was used to value common stock warrants issued in transactions
with other than employees during the year ended July 31, 1997. Entities may
choose not to apply the new accounting method for options issued to employees
but instead, disclose in the notes to the financial statements the pro forma
effects on net income and earnings per share as if the new method had been
applied. The Company has adopted the disclosure-only approach to Statement 123
for options issued to employees. See Note 9.
Recently Issued Accounting Pronouncements
_________________________________________
During February 1997, the FASB issued Statement 128, "Earnings Per Share,"
which establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required "primary" EPS with a
presentation of "basic" EPS. For entities with complex capital structures, the
statement requires the dual presentation of both "basic" EPS and "diluted" EPS
on the face of the statement of operations. Under this new standard, "basic"
EPS is computed based on weighted average shares outstanding and excludes any
potential dilution. "Diluted" EPS reflects potential dilution from the
exercise or conversion of securities into common stock and is similar to the
currently required "fully diluted" EPS. Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. Adoption
of Statement 128 is not expected to have a material effect on the Company's
loss per share.
During June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. The reporting and display requirements of Statement
130 are effective for fiscal years beginning after December 15, 1997. The
Company presently intends to comply with this statement for its year ended July
31, 1999.
F-15
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
During June 1997, the FASB issued Statement 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and related disclosures about products and
services, geographic areas and major customers. The reporting and disclosure
requirements of Statement 131 are effective for periods beginning after
December 15, 1997. The Company presently intends to comply with this statement
for its year ended July 31, 1999.
Reclassifications
_________________
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
NOTE 3 - PROVISION FOR WRITE-DOWN OF ASSETS AND OTHER ACCRUALS
On October 15, 1997 the Company's Board of Directors determined that it was
necessary to record a special charge of $687,000 as a provision for write-down
of assets and other accruals relating to the Company's decision to temporarily
suspend activities directed toward development, production and sale of Global's
Stock Information Receiver ("SIR"), a product developed for certain Chinese
radio stations. The Company concluded that its limited capital resources would
not allow for the continued development of the SIR system in parallel with the
Company's core business strategy of developing and commercializing its Voice
Pager technology. The Company is currently evaluating several strategic
alternatives for the SIR program; however, it is more likely than not that the
Company will incur significant losses on the SIR program regardless of which
alternative is selected. As a result, the Company recorded a pretax provision
for loss of $687,000 in the quarter ended July 31, 1997. There was no tax
benefit recognized as a result of recording the provision due to the Company's
tax position (see Note 6). The components of the provision are as follows:
Write-down of assets:
Inventory $ 513,000
Accounts receivable (net) 37,000
Fixed assets (net) 73,000
Prepaid expenses and other
current assets 26,000
Accrual for loss on purchase commitments 38,000
_________
Total provision $ 687,000
_________
Global's inventory was written down to estimated net realizable value
($78,000) and all other SIR assets were written off entirely.
F-16
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
July 31 July 31
1997 1996
_______ _______
<S> <C> <C>
Equipment $ 87,000 $ 92,000
Molds - 28,000
Automotive equipment 18,000 18,000
Furniture and fixtures 11,000 11,000
Equipment under capital lease 64,000 64,000
_______ _______
180,000 213,000
Less accumulated depreciation 132,000 133,000
_______ _______
$ 48,000 $ 80,000
======= =======
</TABLE>
Depreciation expense was $26,000 for the year ended July 31, 1997 and $17,000
for the year ended July 31, 1996.
NOTE 5 - LOAN PAYABLE
The loan payable had no terms of repayment or interest. The loan was repaid in
full in September 1996.
NOTE 6 - INCOME TAXES
There is no income tax benefit for operating losses for the years ended July
31, 1997 and 1996 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
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.
F-17
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1997 1996
_________ _________
<S> <C> <C>
Net operating loss carryforwards $8,725,000 $7,113,000
Research and development 275,000 30,000
Contribution carryforwards 6,000 6,000
Incorporation costs - 1,000
Valuation allowance (9,006,000) (7,150,000)
_________ _________
$ - $ -
========= =========
</TABLE>
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 rate ("annual
limitation"); unused annual limitations may then be carried forward without
this limitation. Also, in the event the business enterprise of the loss
corporation is not continued for the two year period commencing on the change
date, the net operating loss carryforwards may no longer be available.
At July 31, 1997 the Company had net operating loss carryforwards of
approximately $24,236,000, which if not used will expire primarily during the
years 2005 through 2012. The Company also has a research and development
credit carryforward of $6,000 and a contribution carryforward of $16,000 as of
July 31, 1997.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
______
Most of the Company's operations use leased facilities and equipment consisting
of administrative offices, office equipment and automobiles. Some of the
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 for all non-
cancelable operating leases that have initial or remaining lease terms in
excess of one year at July 31, 1997:
F-18
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Year Ending
July 31,
___________
<S> <C> <C>
1998 $48,000
1999 37,000
2000 5,000
_______
$90,000
=======
</TABLE>
Rent expense for operating leases in the years ended July 31, 1997 and 1996 was
$49,000 and $64,000, respectively.
Employment Agreements
_____________________
Effective in April 1991, the Company agreed to pay the Chairman an annual
salary of $250,000, increasing 10% per year cumulatively, plus annual bonuses
equal to 5% of pretax 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. On
November 14, 1995, the Chairman's agreement was extended 5 years to the year
2006 by the Board of Directors. On July 22, 1996, the Board of Directors
authorized a 15% increase in the Chairman's salary and a provision to increase
his bonus from 5% of pretax income to 10%.
Effective in February 1997, the Company hired a Vice President of Finance and
Chief Accounting Officer (" VP of Finance") to replace the former Chief
Accounting Officer and agreed to pay the VP Finance $90,000 per year for three
months increasing to $95,000 per year after the three months and increasing
5%, 6% and 7% cumulatively and respectively for each of the three years, plus
certain fringe benefits. As consideration for entering into the agreement the
Company will issue the VP of Finance 5,000 shares of the Company's restricted
common stock two years from the date of the agreement, provided that the VP of
Finance has not terminated employment prior to that time. The fair market
value of the stock at the date of grant was approximately $12,000. For the
year ended July 31, 1997, the Company accrued approximately $3,000 for the
amount vested in the stock as of the year end. Additionally, the Company
issued the VP of Finance options to purchase 25,000 shares of common stock at
the market price as of the date of the commencement of his employment, and
minimum options after each year of employment to purchase 10,000 shares of
common stock at the market price on the anniversary date of the agreement. The
options remain in effect for two years from the date of the grant.
F-19
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
Effective in July 1997, the Company hired a Senior Vice President and Chief
Operating Officer ("COO") and agreed to pay the COO $125,000 per year
increasing 5%, 6% and 7% cumulatively for each of the next three years, plus
certain fringe benefits. In addition, the Company issued the COO options to
purchase 350,000 shares of common stock at a price of $2.00 per share, the
market price on the date the COO's employment with the Company commenced. The
options vest over a three year period and remain in effect for ten years from
the date of the grant.
Effective in October 1997, the Company hired a President and agreed to pay him
$240,000 per year increasing 9%, 10% and 10% cumulatively for each of the next
three years, plus certain fringe benefits. In addition, the Company issued the
President options to purchase 500,000 shares of common stock at a price of
$2.00 per share, the market price on the date the President's employment with
the Company commenced. The options vest over a three-year period and remain in
effect for ten years from the date of the grant. The President also is
entitled to annual bonus options to purchase 100,000 shares of common stock at
the market price on the anniversary date of the agreement. The bonus options
vest immediately upon grant and remain in effect for ten years from the date of
the grant.
Separation Agreement
____________________
As of April 27, 1995, the Company entered into a Separation Agreement with the
former Chairman of the Board of Directors of the Company (the "Former
Chairman"). The Company was released of all obligations, claims and debts due
the Former Chairman. These obligations, claims and debts were assumed by
a third party (the "Third Party") in consideration for $61,000 in cash and
395,000 shares of the Company's Series B Preferred Stock valued at $1,977,000.
In addition, the Third Party agreed to purchase the Former Chairman's 1,740,063
shares of the Company's common stock. In accordance with the terms of the
Separation Agreement, the Company agreed to pay to the Former Chairman up to
$2,000 per week until such time that these obligations are paid to the Former
Chairman by the Third Party (currently estimated to be December 31, 1997).
The compensation paid by the Company to the Former Chairman was $17,750 and
$18,750 in the years ended July 31, 1997 and 1996, respectively. In addition,
$61,750 has been accrued as of July 31, 1997, which represents the estimated
maximum liability to the Former Chairman in the event that the Third Party
fails to perform.
Development Agreements
______________________
The Company does not currently have internal research and development
capabilities. Therefore, it relies on contractual relationships with third
party engineering and development firms to develop the Company's products to
its specifications. Generally, such contracts provide for payments to be made
by the Company on a time and material basis. On large contracts, a maximum
limit typically is placed on the amount the Company will be required to pay.
However, periodic modifications to such contracts may increase the maximum
amount to be paid by the Company. As of July 31, 1997, there were two
F-20
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
significant development contracts outstanding under which the Company had paid
an aggregate of $690,000 against contract limits aggregating $929,000.
Management expects to continue its development work under such contractual
arrangements.
Legal Proceedings
_________________
As of July 31, 1997, the Company had several judgments outstanding against it
related to accounts payable and taxes payable, the aggregate amount of which is
not material to the Company's results of operations and cash flows. Management
has been negotiating actively and attempting to work out settlements with
respect to these judgments and tax assessments.
In September 1997, Global Telecommunications of Delaware, Inc. ("Global") the
Company's 80 percent owned subsidiary, was served with a Summons and Complaint
by a former supplier of electronic parts in the U.S. District Court for the
Eastern District of Pennsylvania. The Complaint seeks specific performance of a
contract and plaintiff claims they are entitled to receive approximately
$106,000 from Global. Global has filed an answer to the complaint denying
complainant's right to receive any monetary compensation.
In August 1996, the Company was served with a Summons and Complaint. The
Complaint sought specific performance of a contract and entitled the plaintiff
to receive 15,000 shares of the Company's common stock or alternatively
$66,000. In May 1997, the Company's Board of Directors authorized the issuance
of 7,500 shares of its restricted common stock valued at $18,000 to the
Plaintiff in settlement of this complaint. These shares were subsequently
registered in the Company's registration statement dated August 18, 1997.
NOTE 8 - RELATED PARTY TRANSACTIONS
Effective April 1, 1993, the Company entered into a three year agreement with a
consultant who is also a stockholder of the Company. The consultant received
350,000 shares of the Company's common stock, and consulting fees of $2,500 per
week. Since then, the consultant's fees have increased to $5,000 per week and
the contract has been extended to 1999. As of July 31, 1997 all payments due
the consultant were current. As of July 31, 1996 the balance due the
consultant was approximately $34,000.
NOTE 9 - STOCKHOLDERS' EQUITY
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 convertible preferred stock with
preferences over common as to dividends and liquidation. During the year ended
July 31, 1995, the Company issued 178,000 of such shares to stockholders and
certain trade creditors in consideration for professional services ($15,000)
and conversion of debt ($867,000). On August 31, 1996, each share of Series A
preferred stock was converted into one share of common stock.
F-21
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
On 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 Series A preferred stock as to dividends and liquidation. The
Company issued to one investor 741,000 shares of the Series B preferred stock
in consideration for the investor assuming $3,706,000 of debt of the Company.
Pursuant to the terms of the Series B preferred stock which required the
Company to pay 3% of the debt assumed, the Company paid to the investor an
aggregate amount of $115,000 in cash. During the year ended July 31, 1996, the
Company repurchased approximately 77,000 shares of Preferred Series B for
approximately $385,000. As a result, the investor returned approximately
$12,000 in cash to the Company for three percent of the debt assumed on the
77,000 shares repurchased. On September 2, 1997, the Company redeemed the
remaining 664,000 shares of Series B preferred stock for the Company's common
stock on a two for one basis, or an aggregate of 1,328,000 common shares.
On 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
Series A and Series B preferred stocks for dividends and liquidation. The
Company issued to the Chairman of the Company 109,000 shares of Series C
preferred tock in consideration for $544,000 of deferred compensation. During
the year ended July 31, 1996, the Company retired approximately 12,000 shares
of Series C preferred stock for approximately $57,000. During the year ended
July 31, 1997, the Company retired the remaining 97,000 shares of Series C
preferred stock for $536,000, of which $49,000 was reflected as additional
compensation to the Chairman pursuant to the terms of the Series C preferred
stock agreement.
Common Stock
____________
In November 1995, the Company sold 33,334 shares if its common stock under a
subscription agreement at a price of $3.00 per share.
In November 1995, the Company's Board of Directors authorized a 33% increase in
the Chairman's stock position upon the next substantial receipt of funding. In
August 1996, the Board approved the issuance of 1,250,000 shares of restricted
common stock for the Chairman's equity financing efforts. The shares were
valued at $188,000, or $.15 per share, by an independent expert. The valuation
discount compared to market value principally reflects the significant
restrictions placed on the Chairman's ability to resell the shares.
In January 1996, 100,000 shares of the Company's common stock were issued to
each of the two outside members of the Board of Directors valued at $50,000 in
recognition of services.
Pursuant to a registration statement dated September 6, 1996 which registered
2,500,000 shares of the Company's common stock at $2.00 per share, the Company
raised $4,490,000, net of commissions, during the year ended July 31, 1997.
On February 18, 1997, the Board of Directors authorized the issuance of 32,600
shares of the Company's common stock with a fair market value of $65,000 to be
issued to a consultant in consideration for services rendered to the Company.
F-22
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
On February 18, 1997, the Board of Directors authorized the issuance of 5,000
shares of the Company's common stock with a fair market value of $12,000 to be
issued to the former Chief Accounting Officer of the Company in lieu of the
5,000 shares of the Company's common stock forfeited under the terms of his
employment contract as a result of his leaving Sigma Alpha prior to completing
two years of service.
In June 1997, the Company sold 125,000 unregistered shares of its common stock
for $235,000, net of commissions. These shares were subsequently registered in
the Company's registration statement dated August 18, 1997.
Warrants
________
From time to time, the Board of Directors of the Company may issue warrants to
purchase its common stock to parties other than employees and directors.
Warrants may be issued as an incentive to help the Company achieve its goals,
or in consideration for cash or services rendered to the Company, or a
combination of the above.
In December 1995, the Company issued warrants to purchase 400,000 shares of its
common stock at a price of $2.50 per share. Such warrants were exercised at
that time generating $1,000,000 in capital for the Company.
In December 1995, the Company issued warrants to purchase 1,666,667 shares of
its common stock at a price of $2.50 per share. Of these warrants, 480,000
were exercised during the year ended July 31, 1996 generating $1,158,000 (net
of Commissions) in capital for the Company. The remaining 1,186,667 warrants
expired in August 1996.
In December 1995, the Company issued to a consultant warrants to purchase
10,000 shares of the Company's common stock for $.01 per share in consideration
for services rendered to the Company valued at $2,000. This warrant expires
December 15, 1997.
Effective August 1, 1996, the Company adopted FASB Statement 123, "Accounting
for Stock-Based Compensation," which requires compensation cost associated with
warrants issued to other than employees to be valued based on the fair value of
the warrants. Such fair value was estimated using the Black-Scholes model with
the following assumptions: no dividend yield, expected volatility of 0%, and a
risk-free interest rate of 5.5%. The following is a detailed list of the
Company's common stock warrants issued during the year ended July 31, 1997.
- In August 1996, the Company issued to its SEC counsel warrants to
purchase 100,000 shares of the Company's common stock at a price of
$2.00 per share in consideration for services rendered. These
Warrants expire on August 31, 1999. The Black-Scholes model valued
these warrants at $44,000.
- On December 16, 1996, the Company issued to its investment banker
warrants to purchase 300,000 shares of the Company's common stock at
an exercise price of $2.00 per share in consideration for $3,000 and
services rendered. These warrants expire in December 2001. The Black-
Scholes model valued these warrants at $294,000.
F-23
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
- On February 5, 1997, the Company issued to a consultant warrants to
purchase 300,000 shares of the Company's common stock at an exercise
price of $3.00 per share in consideration for $3,000 and services
rendered. These warrants expire in February 2001. The Black-Scholes
model valued these warrants at $3,000, the consideration paid.
- On May 1, 1997, the Company issued to a consultant warrants to purchase
25,000 shares of the Company's common stock at an exercise price of
$3.50 per share for services to be rendered between May 1, 1997 and
October 31, 1997. These warrants expire on April 30, 1998. The Black-
Scholes model valued these warrants at zero.
- On May 1, 1997, the Company issued to a consultant warrants to purchase
100,000 shares of the Company's common stock at an exercise price of
$3.00 per share for services to be rendered to the Company as Chairman
of an advisory board established by the Board of Directors. These
warrants expire on May 1, 2002. The Black-Scholes model valued these
warrants at zero.
- On May 8, 1997, the Company issued to a consultant warrants to
purchase 500,000 shares of the Company's common stock at an exercise
price of $2.40 per share for services to be rendered to the Company
between May 8, 1997 and May 8, 1998. Warrants representing the
consultants right to purchase 250,000 of such shares became exercisable
immediately upon execution of the consulting agreement and expire on
May 8, 2000. The Black-Scholes model valued these warrants at $85,000.
Warrants representing the consultants right to purchase the 250,000
share balance become exercisable commencing on the date the Company's
securities are listed on the NASDAQ Small-Cap Market and expire three
years from that date. These warrants were assigned a zero value due to
the contingent nature of their issuance.
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,
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, 1997. The Plan terminates in November 2001, unless
terminated earlier by the Board of Directors.
F-24
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
Stock Options
_____________
The Company's Board of Directors periodically authorizes the issuance of
options to purchase the Company's common stock to employees and members of the
Board of Directors. These options may be exercised at the fair market value of
the common stock on the date of the grant and generally carry such other terms
as are outlined in the Company's stock option plan. During the years ended
July 31, 1997 and 1996, the following stock options were granted:
- On August 14, 1995, the Company granted the former Chief Accounting
Officer the option to purchase 25,000 shares of the Company's common
stock at $5.75 per share, the market price on the date of grant.
Pursuant to the former Chief Accounting Officer's employment agreement,
on August 14, 1996, he was granted options to purchase another 5,000
shares at $2.75 per share, the market price on the date of grant. On
March 30, 1997, all 30,000 options previously granted to the former
Chief Accounting Officer expired without being exercised pursuant to the
terms of his employment contract.
- On July 22, 1996, the Board of Directors authorized 250,000 options to
purchase shares of the Company's common stock at $3.875 per share, which
represents the fair market value of the common stock as of that date, to
be awarded to each of two outside members of the Board of Directors.
- Also on July 22, 1996, the Board of Directors authorized 500,000 options
to purchase shares of the Company's common stock at $3.875 per share,
which represents the fair market value of the common stock as of that
date, to be awarded to the Chairman of the Company.
- In November 1996, 16,667 options to purchase the Company's common stock
at a price of $15.00 per share expired.
- On February 10, 1997, 25,000 options were granted to the Company's Vice
President of Finance,the terms of which are further described in Note 7.
- On February 18, 1997, 250,000 options were granted to the Company's
Chairman.
- On February 18, 1997, 50,000 options were granted to each of the two
outside members of the Company's Board of Directors.
- On March 10, 1997, 10,000 options were granted to the Company's Manager
of Investor Relations.
- In July 1997, 350,000 options were granted to the Company's newly hired
Senior Vice President and Chief Operating Officer, the terms of which
are further described in Note 7.
The following additional stock options have been granted since July 31, 1997:
- In October 1997, 500,000 options were granted to the Company's newly
hired President, the terms of which are further described in Note 7.
F-25
<PAGE>
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
The following table summarizes activity for stock options outstanding during
the years ended July 31, 1997 and 1996:
Wtd Avg Price
Shares Price Per Share Per Share
___________________________________________________________________________
Options Outstanding, 7/31/95 16,667 $15.00 $15.00
Options granted 1,025,000 $3.88 - $ 5.75 $ 3.92
Options cancelled - - -
___________________________________________________________________________
Options outstanding, 7/31/96 1,041,667 $3.88 - $15.00 $ 4.10
Options granted 740,000 $2.00 - $ 2.75 $ 2.20
Options canceled (46,667) $2.75 - $15.00 $ 8.73
___________________________________________________________________________
Options outstanding, 7/31/97 1,735,000 $2.00 - $ 3.88 $ 3.16
___________________________________________________________________________
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for the issuance of its stock
options. Accordingly, no compensation cost has been recognized for its stock
options issued during the years ended July 31, 1997 and 1996. Had compensation
cost for the Company's issuance of stock options been determined based on the
fair value at grant dates for options consistent with the method of FASB
Statement 123, "Accounting for Stock-Based Compensation," the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below. Fair value amounts were estimated using the Black-Scholes
model with the following assumptions: no dividend yield, expected volatility of
0%, and a risk-free interest rate of 5.5%.
Year Ended July 31
1997 1996
____________ ____________
Loss before extraordinary gain As reported $(4,450,000) $(2,251,000)
Pro forma $(5,116,000) $(3,732,000)
Net loss As reported $(4,450,000) $(2,189,000)
Pro forma $(5,116,000) $(3,670,000)
Net loss per share before As reported $(0.25) $(0.16)
extraordinary gain Pro forma $(0.29) $(0.27)
Net loss per share As reported $(0.25) $(0.16)
Pro forma $(0.29) $(0.27)
F-26
<PAGE>
NOTE 10 - EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
The Company recognized an extraordinary gain on the extinguishment of debt of
$62,000 during the year ended July 31, 1996 relating to the settlement of trade
payables, taxes payable, and accrued expenses in the aggregate amount of
$129,000. The funds used to reduce the Company's outstanding debt were
received from equity financing.
NOTE 11 - SUBSEQUENT EVENT
The Company filed a registration statement dated August 18, 1997 to register
5,000,000 shares of the Company's common stock at $2.00 per share. In October
1997, the Company chose to decline all subscriptions that had been tendered to
purchase common stock under the registration statement, and allowed the
registration statement to expire. The Company has undertaken efforts to raise
additional equity capital through alternative sources.
F-27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names and ages of all directors and
officers of the Company and their positions in the Company:
<TABLE>
<CAPTION>
Position(s)
Name Age with Company Director Since
____ ___ ____________ ______________
<S> <C> <C> <C>
Peter S. Pelullo 45 Chief June 1989
Executive Officer, (Class Two)
Chairman of the
Board, Chief
Financial Officer
and Director
Michael P. McAndrews 36 President
David C. Bryan 42 Senior Vice
President and
Chief Operating
Officer
James M. Boyd, Jr. 41 Vice President of
Finance and Chief
Accounting Officer
Ernest J. Cimadamore 35 Secretary
John N. D'Anastasio 49 Director June 1991
(Class Three)
Robert J. Sannelli 52 Director June 1991
(Class Three)
</TABLE>
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.
19
<PAGE>
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. In October 1997, Mr. Pelullo
relinquished the title of President of the Company with the appointment of
Michael P. McAndrews to that position. 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
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 NEW Edition, and record companies
including Capitol Records, Manhattan, EMI, Atlantic and Elektra have
subcontracted 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 was merged with Sigma Sound in 1987 creating Sigma Alpha
Entertainment Group, Ltd., which became a public company in 1991. Since
becoming the Company's Chairman in 1995, Mr. Pelullo has been instrumental in
divesting the Company's interests in the recording industry and spearheading
its entry into the telecommunications field, while liquidating substantially
all of the Company's debt. More recently, he has actively sought to strengthen
the Company's senior management team with the addition a new President, Chief
Operating Officer and Vice President of Finance.
Michael P. McAndrews was appointed President of the Company effective
October 1, 1997. Prior to joining the Company, Mr. McAndrews had been in
several senior marketing positions in Motorola's Two-Way Paging and Cellular
Phone divisions since 1992. During his tenure at Motorola, Mr. McAndrews helped
conceive and develop a number of wireless communications products, including
the StarTAC TM cellular phone and the PageWriter TM 2000 two-way pager. Mr.
McAndrews also spent several years in charge of Motorola's cellular phone
marketing activities for Japan. In addition to Motorola, Mr. McAndrews has held
positions at DuPont and General Electric. Mr. McAndrews holds a bachelors
degree in electrical engineering from Princeton University and an MBA from
Harvard Business School.
David C. Bryan was appointed Senior Vice President and Chief Operating
Officer of the Company in July 1997. Prior to joining the Company, Mr Bryan
spent 18 years with General Atronics Corporation ("GAC"), a company engaged in
the development and manufacturing of military RF communication and
telecommunication systems and products. In his most recent position, Mr. Bryan
was GAC's Director of Business Development. From 1993 to 1997, Mr. Bryan was
GAC's Director of Advanced Systems and from 1990 to 1993, he was General
Manager of GAC's Electron Tube Operation. Mr. Bryan holds a bachelors degree
in electrical engineering from Bucknell University, a masters degree in
electrical engineering from Villanova University and an MBA from Temple
University.
James M. Boyd, Jr. was appointed Vice President of Finance and Chief
Accounting Officer in February 1997 replacing the Company's former Chief
Accounting Officer who resigned to pursue other opportunities. Prior to
20
<PAGE>
joining the Company, Mr. Boyd spent 15 years with Sun Company, Inc. ("Sun") a
public company engaged in petroleum refining and marketing. Mr. Boyd has
extensive experience in financial and external reporting areas including the
preparation of annual, quarterly and current reports required to be filed with
the Securities and Exchange Commission. In his most recent position, Mr. Boyd
managed Sun's Credit Department and, from 1991 to 1996, he managed Sun's
worldwide accounting for petroleum inventories. Mr. Boyd was formerly a senior
accountant with Price Waterhouse. Mr. Boyd is a certified public accountant in
Pennsylvania. He holds a bachelors degree in accounting from the University of
Delaware and an MBA from Drexel University.
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.
John N. D'Anastasio has been the President of D'Anastasio Corp., a real
estate development company, since 1986. Mr. D'Anastasio received a Bachelor of
Arts Degree in Economics and Accounting from Villanova University.
Robert J. Sannelli has served since 1986 as director of operations and
Vice President of D'Anastasio Corp., a real estate development company of which
John D'Anastasio is President. Mr. Sannelli holds a Bachelor of Science Degree
in Accounting from Rutgers University, where he graduated Summa Cum Laude.
Significant Employees
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 Bachelor
of Arts in International Business from Shanghai International Business College
in Shanghai, China in 1991. Miss Dong has completed her Masters of Business
Administration in Finance from Temple University. Miss Dong is fluent in
Mandarin and Shanghainese as native languages.
21
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth cash compensation paid or accrued to the
Company's most highly compensated executive officers whose total annual salary
and bonus exceeded $100,000 during the fiscal years ended July 31, 1997, 1996
and 1995.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-term
Compensation
__________________
Awards
__________________
(A) (B) (C) (D) (E) (F) (G)
Year Other Annual Restricted
Name and Principal Ended Salary Bonus Compensation Stock Options
Position July 31 ($) ($) ($) ($)
__________________ ____ ________ _____ ____________ __________ _______
<S> <C> <C> <C> <C> <C> <C>
Peter S. Pelullo 1997 581,000(1) 29,000(4) 188,000 250,000
Chief Executive 1996 389,000(2) 51,000(4) 625,000 500,000
Officer, Chairman 1995 344,000(3) 27,000(4)
of the Board
</TABLE>
<TABLE>
<CAPTION>
Long-term
Compensation
____________
Payouts
____________
(A) (B) (H) (I)
Year
Name and Principal Ended LTIP All Other
Position July 31 Payouts Compensation
($)
__________________ ____ ____________ ____________
<S> <C> <C>
Peter S. Pelullo 1997 49,000(5)
Chief Executive 1996
Officer, Chairman 1995
of the Board
</TABLE>
(1) During the year ended July 31, 1997, Mr. Pelullo was paid salaries of
$480,000, including $22,000 representing the payment of accrued but
unpaid salaries from the prior year. In addition, Mr. Pelullo was paid
$106,000 for his accumulated but unpaid vacation pay since the
inception of his employment contract with the Company. As of July 31,
1997, accrued but unpaid compensation due Mr. Pelullo was $17,000.
(2) During the year ended July 31, 1996, Mr. Pelullo was paid salaries of
$365,000. As of July 31, 1996, accrued but unpaid compensation due Mr.
Pelullo was $24,000.
22
<PAGE>
(3) During the year ended July 31, 1995, Mr. Pelullo was paid $724,000 of
which $380,000 represented the payment of accrued but unpaid salaries
from prior years. In July 1995, $544,000 in accrued compensation due
Mr. Pelullo was retired in exchange for approximately 109,000 shares of
Series C Preferred Stock.
(4) Other annual compensation for Mr. Pelullo consists of the following:
Year Ended July 31
1997 1996 1995
_______ _______ _______
Auto expense $16,000 $38,000 $16,000
Travel allowance 5,000 5,000 5,000
Health benefits 8,000 8,000 6,000
_______ _______ _______
Totals $29,000 $51,000 $27,000
_______ _______ _______
(5) During the year ended July 31, 1997, the Company retired the remaining
approximately 97,000 shares of Series C preferred stock for $536,000,
of which $49,000 was reflected as additional compensation to the
Chairman pursuant to the terms of the Series C preferred stock
agreement.
<TABLE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
For the Year Ended July 31, 1997
<CAPTION>
(A) (B) (C) (D) (E)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Name Granted (#) Fiscal Year Base Price ($/Sh) Date
____ ____________ ____________ _________________ ______________
<S> <C> <C> <C> <C>
Peter S. Pelullo 250,000 shs. 39% 2.3750 Feb. 18, 2007
common stock
David C. Bryan 350,000 shs. 55% 2.0000 July 14, 2007
comm. stk.(1)
James M. Boyd,Jr. 25,000 shs. 4% 2.4375 Feb. 10, 1999
common stock
(1) Of Mr. Bryan's options, 50,000 vested upon his employment by the
Company. The remaining options vest on the following dates if he is
still employed by the Company on such dates:
100,000 shares July 14, 1998
200,000 shares July 14, 1999
</TABLE>
23
<PAGE>
<TABLE>
Aggregated Option/SAR in Last Fiscal Year
and FY-End Option/SAR Values
For the Year Ended July 31, 1997
<CAPTION>
(A) (B) (C) (D) (E)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
____ _______________ ___________ _____________ ______________
<S> <C> <C> <C> <C>
Peter S. Pelullo 0 0 750,000 (1) 0
David C. Bryan 0 0 50,000 (1) 0
300,000 (2) 0
James M. Boyd,Jr. 0 0 25,000 (1) 0
(1) exercisable
(2) unexercisable
</TABLE>
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, 1997 and 1996, 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 Agreements were
effective as of April 11, 1991. Pursuant to the provisions of the Agreements,
as amended, which continue 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
24
<PAGE>
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 director of the Company (iv) ill health of the Executive or a member of his
family, or any other compelling circumstance, which in the sole discretion of
the Executive makes his continued employment impossible or inappropriate; and
(v) a change in control of the Company. In August 1996, the Company's Board of
Directors authorized a bonus for Mr. Pelullo in the amount of 1,250,000 shares
of the Company's restricted common stock. In February 1997, the Board granted
to Mr. Pelullo options to purchase 250,000 shares of the Company's common stock
at $2.375 per share, the market price on the date of the grant.
Effective February 10, 1997, the Company hired James M. Boyd, Jr. as its
Vice President of Finance and Chief Accounting Officer to replace the former
Chief Accounting Officer. The Company agreed to pay Mr. Boyd $90,000 per year
for three months increasing to $95,000 per year after the three months and
increasing 5%, 6% and 7% cumulatively and respectively for each of the three
years, plus certain fringe benefits. As consideration for entering into the
agreement the Company will issue to Mr. Boyd 5,000 shares of the Company's
restricted common stock two years from the date of the agreement, provided that
Mr. Boyd has not terminated employment prior to that time. Additionally, the
Company issued to Mr. Boyd options to purchase 25,000 shares of common stock at
$2.4375 per share, the market price as of the date of the commencement of his
employment, and minimum options after each year of employment to purchase
10,000 shares of common stock at the market price on the anniversary date of
the agreement. The options remain in effect for two years from the date of the
grant, except upon termination, in which case Mr. Boyd will have 30 days to
exercise the options before they are canceled.
Effective July 14, 1997, the Company hired David C. Bryan as its Senior
Vice President and Chief Operating Officer and agreed to pay Mr. Bryan $125,000
per year increasing 5%, 6% and 7% cumulatively for each of the next three
years, plus certain fringe benefits. In addition, the Company issued Mr. Bryan
options to purchase 350,000 shares of common stock at a price of $2.00 per
share. The options vest over a three year period and remain in effect for ten
years from the date of the grant.
Effective October 1, 1997, the Company hired Michael P. McAndrews as its
President and agreed to pay him $240,000 per year increasing 9%, 10% and 10%
cumulatively for each of the next three years, plus certain fringe benefits.
In addition, the Company issued to Mr. McAndrews options to purchase 500,000
shares of common stock at a price of $2.00 per share. The options vest over a
three year period and remain in effect for ten years from the date of the
grant. The President also is entitled to annual bonus options to purchase
100,000 shares of common stock at the market price on the anniversary date of
the agreement. The bonus options vest immediately upon grant and remain in
effect for ten years from the date of the grant.
Stock Option Plan
25
<PAGE>
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
July 31, 1997, 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 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 the 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 July 31, 1997.
Compensation of Directors
Prior to January 1997, outside directors received payments of $200 per
month plus reasonable costs and expenses of travel and lodging for attendance
at director's meetings. Effective in January 1997, such payments were increase
to $1,000 per month. During the year ended July 31, 1997, directors
D'Anastasio and Sannelli each received options to purchase 50,000 shares of
common stock at a price of $2.375, the market price on the date of the grant.
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 reasonable
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.
26
<PAGE>
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 proceeding) is asserted by
such director, officer, or controlling person in connection with registered
securities, 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 questions 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.
27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 17, 1997, 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 named executive 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 them.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Title of Percent of
Name and Address Position Ownership Class (1) Class
________________ ________ ___________ ________ __________
<S> <C> <C> <C> <C>
Peter S. Pelullo Director, 5,750,000(2) Common 27.4%
1341 N. Delaware Ave. Chairman,
Philadelphia, PA 19125 and Chief
Executive
Officer
Joseph D. Tarsia Former 1,740,063(3) Common 8.6
1341 N. Delaware Ave. Chairman
Philadelphia, PA 19125 and Treasurer
Kathleen Patten 2,374,297(4) Common 11.7
John Patten
5 Saddlehill Road
Far Hills, NJ 07931
Jacob Der Hagopian 1,500,000 Common 7.4
1341 N. Delaware Ave.
Philadelphia, PA 19125
John N. D'Anastasio Director 425,000(5) Common 2.1
4300 Haddonfield Road
Suite 111
Pennsauken, NJ 08109
Robert J. Sannelli Director 425,000(6) Common 2.1
4300 Haddonfield Road
Suite 111
Pennsauken, NJ 08109
All officers and 6,800,000(7) Common 31.2%
directors as a group
(7 persons)
</TABLE>
28
<PAGE>
(1) Based upon an aggregate of 20,234,924 shares of common stock
outstanding plus options to purchase common stock, where appropriate.
(2) Gives effect to options to purchase 750,000 shares of common stock
exercisable within 60 days (see "Employment Agreements").
(3) The Company's transfer records indicate that Mr. Tarsia owns 1,740,063
shares of the Company's common stock. However, the Company has been
advised by Mr. Tarsia that all of his shares have been sold to Kathleen
Patten. Therefore, the Company has concluded that such shares are
beneficially owned by Ms.Patten (see Note 4 below).
(4) Reflects Kathleen Patten's ownership of 1,740,063 shares of common
stock as set forth in Note 3 above, as well as John Patten's ownership
of 631,234 shares of common stock. Mr. and Mrs. Patten disclaim
beneficial ownership of each others shares in the Company.
(5) Gives effect to options to purchase 300,000 shares of common stock
exercisable within 60 days.
(6) Gives effect to options to purchase 300,000 shares of common stock
exercisable within 60 days.
(7) Gives effect to options to purchase 1,550,000 shares of common stock
exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, the Company signed a letter of intent to acquire 100
percent of the capital stock of General Atronics Corporation ("GAC") and 100
percent of the capital stock of General Atronics Realty Corporation ("GARC")
not owned by GAC. The Company's Senior Vice President and Chief Operating
Officer, David C. Bryan, owns approximately 3% of the GAC and GARC capital
stock the Company plans to buy. Based on the terms of the letter of intent
which are equally applicable to all shareholders of GAC and GARC, Mr. Bryan
will receive approximately $180,600 and 30,100 shares of the Company's common
stock when the acquisition is completed. In addition, Mr. Bryan could receive
as much as an additional $180,600 and 30,100 shares of the Company's common
stock if GAC meets certain performance targets.
In July 1997, 350,000 options were granted to David Bryan, the Company's
newly hired Senior Vice President and Chief Operating Officer. The exercise
price of the options is $2.00 per share, the market price on the date the COO's
employment with the Company commenced. The options vest over a three year
period and remain in effect for ten years from the date of the grant.
In October 1997, 500,000 options were granted to Michael McAndrews, the
Company's newly hired President. The exercise price of the options is $2.00 per
share, the market price on the date the President's employment with the Company
commenced. The options vest over a three year period and remain in effect for
ten years from the date of the grant.
29
<PAGE>
In February 1997, the Company authorized the issuance of 250,000 stock
options to Peter S. Pelullo, the Company's Chairman and Chief Executive
Officer, 50,000 options to John N. D'Anastasio, a director of the Company, and
50,000 options to Robert J. Sannelli, a director of the Company. These options
are exercisable at a price of $2.375 per share and expire in February 2007.
In August 1996, the Company authorized the issuance of 1,250,000 shares
of restricted common stock to Peter S. Pelullo, the Company's Chairman and
Chief Executive Officer, in consideration for services rendered valued at
$188,000.
In July 1996, the Company authorized the issuance of 500,000 stock options
to Peter S. Pelullo, the Company's Chairman and Chief Executive Officer,
250,000 options to John N. D'Anastasio, a director of the Company, and 250,000
options to Robert J. Sannelli, 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 Chairman and Chief
Executive Officer, 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. Pursuant to the terms of the Series C Preferred Stock
agreement, the Company redeemed an aggregate of 11,300 shares of Series C
Preferred Stock at a price of $5.00 per share through the payment to Mr.
Pelullo of a total of $56,500 during the year ended July 31, 1996. The
remaining 97,459 shares of Series C Preferred Stock were redeemed by the
Company at a price of $5.50 per share through the payment to Mr. Pelullo of a
total of $536,019 during the year ended July 31, 1997, of which $48,726 was
reflected as additional compensation to Mr. Pelullo.
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
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 both parties. If the Company elects to terminate the
Agreement, any money due or required to be paid shall be accelerated and
payable upon termination. In August 1996, the Company's Board of Directors
authorized a three year extension of the Consulting Agreement and a $200 per
week increase in Mr. Der Hagopian's consulting fee to $4,200 per week
commencing upon receipt by the Company of substantial additional equity, which
the Company received. In April 1997, the Board of Directors authorized an $800
per week increase in Mr. Der Hagopian's consulting fee to $5,000 per week.
Total consulting fees paid to Mr. Der Hagopian were $232,000 and $60,000 during
the year ended July 31, 1997 and during the period from August 1, 1997 to
October 29, 1997, respectively.
30
<PAGE>
In April 1995, the Company acquired 80% of Global Telecommunications of
Delaware, Inc. ("Global"). At the time of the acquisition, Global was a newly
formed company which had no operating revenues, and its assets consisted
principally of technology and design rights associated with a digital voice
pager system. The Company acquired its interest in Global from Global
Telecommunications, Inc., a New Jersey company owned by Michael Yang, 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 of the Company's common
stock subject to Global achieving specified sales and revenue performance
objectives over a five year period. The Global purchase price was negotiated
on an arms length basis after considering various factors including projections
presented to the Company by Mr. Yang regarding potential results of Global's
operations once its products were fully developed and marketed. Prior to
August 1997, Michael Yang served as Global's President pursuant to a the terms
of a consulting agreement that paid him $8,000 per month. Mr. Yang's position
as President of Global and his consulting agreement with Global were terminated
in August 1997. As a result, Mr. Yang's relationship to the Company consists
only of his ownership (through Global Telecommunications, Inc.) of a 20%
interest in Global and 100,000 shares of the Company's restricted common stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits marked with an * are filed herewith. All other
exhibits were previously filed by the Company:
3(i) Articles of Incorporation (a)
3(ii) Bylaws (a)
10.1 Amendment to Employment Agreement between Registrant and Joseph
Tarsia (b)
10.2 Form of Agreement between Global Telecommunications of Delaware, Inc.
and Guangdong Radio Station - Pearl River Stock Market Radio (c)
10.3 Employment Agreement with James M. Boyd, Jr. *
10.4 Employment Agreement with David C. Bryan *
10.5 Employment Agreement with Michael P. McAndrews *
10.6 Separation Agreement between the Registrant and Joseph Tarsia (a)
21.1 Subsidiaries of the Registrant
(i) Global Telecommunications of Delaware, Inc. (80% owned -
incorporated in Delaware))
27.1 Financial data schedule *
Incorporated by reference from the Company's (a) Form S-18 Registration
Statement on Form S-18 (File No. 32881-NY), (b) Form S-1 Registration Statement
on Form S-1 (File No. 33-90344), (c) Reports on Form 8-K dated June 12, 1996,
and July 9, 1996.
Reports on Form 8-K
(a) The Company filed a Form 8-K on November 4, 1996. The report
disclosed in Item 5, agreements entered with radio stations in
China pursuant to which the radio stations agreed to purchase 16,000
SCA Radios.
(b) The Company filed a Form 8-K on December 18, 1996. The report
disclosed in Item 5 that the Company entered into a corporate
financing agreement with Pennsylvania Merchant Group, Ltd. ("PMG")
under which PMG will provide strategic advisory and corporate finance
services to the Company for a minimum of one year.
31
<PAGE>
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
SIGMA ALPHA GROUP, LTD.
By: s/Peter S. Pelullo
_____________________
Peter S. Pelullo
Chief Executive Officer
Dated: June 29, 1998
In accordance with Section 13 or 15(d) of the Exchange Act, this report
has been signed below by the following person on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
_________ _____ ____
s/Peter S. Pelullo Chief Executive Officer June 29, 1998
Peter S. Pelullo and Chairman of the Board
s/James M. Boyd, Jr. Vice President of Finance June 29, 1998
James M. Boyd, Jr. and Chief Accounting
Officer
s/John N. D'Anastasio Director June 29, 1998
John N. D'Anastasio
s/Robert J. Sannelli Director June 29, 1998
Robert J. Sannelli
</TABLE>
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-START> Aug-01-1996
<PERIOD-END> Jul-31-1997
<CASH> 1,688,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 78,000
<CURRENT-ASSETS> 1,786,000
<PP&E> 180,000
<DEPRECIATION> 132,000
<TOTAL-ASSETS> 1,898,000
<CURRENT-LIABILITIES> 374,000
<BONDS> 0
0
1,000
<COMMON> 19,000
<OTHER-SE> 1,504,000
<TOTAL-LIABILITY-AND-EQUITY> 1,898,000
<SALES> 348,000
<TOTAL-REVENUES> 350,000
<CGS> 314,000
<TOTAL-COSTS> 4,566,000
<OTHER-EXPENSES> (80,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,450,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,450,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,450,000)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
EMPLOYMENT AGREEMENT WITH JAMES M. BOYD, JR.
EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 7th
day of February, 1997 by and between Sigma Alpha Group Ltd. (the "Company" or
"SGAL"), a Delaware corporation, and James M. Boyd, Jr. (the "Executive" or
"Vice President of Finance/Chief Accounting Officer").
Background
The Executive is to be employed by the Company as Vice President of
Finance/Chief Accounting Officer. The parties desire to set forth herein, as
well as confirm, the terms and conditions of the Executive's employment by the
Company after the date of this Agreement. Accordingly, in consideration of
the mutual covenants and agreements set forth herein and the mutual benefits to
be derived herefrom, and intending to be legally bound hereby, the Company and
the Executive agree as follows:
1. Employment.
(a) Duties. The Company shall employ the Executive, on the terms
set forth in this Agreement, as its Vice President of Finance/Chief Accounting
Officer. The Executive accepts such employment with the Company and shall
perform such duties as are assigned to him hereunder, devoting his best efforts
to the performance and fulfillment of his duties and to the advancement of the
interests of the Company. Subject only to the general direction, of the
Company's Board of Directors (the "Board"), the Chairman of the Company and
such other persons designated by the Chairman of the Company. The Executive
shall have responsibility to assist the management team in making decisions
related to day to day operation of the Company, to assist in preparation of a
business plan for the financial future of the Company and to exercise his
judgement in the execution of his responsibilities.
At no time will the Executive engage in any activity that conflicts with
the business of the Company or significantly distracts his attention from the
affairs of the Company.
Nothing contained herein shall be construed, however, to prevent the
Executive from accruing or managing, for his own account and benefit, stocks,
bonds, securities, real estate, commodities or other forms of investments.
(b) Place of Performance. In connection with his employment by
the Company, the Executive shall be based at the Company's principal executive
offices located in the greater Philadelphia area, except for required travel on
Company business. The Company shall furnish Executive with office space,
stenographic assistance and such other facilities and services as shall be
suitable to Executive's position and adequate for the performance of his duties
hereunder.
2. Term. The Executive's employment in accord herewith is effective
February 10, 1997 under this Agreement, and shall continue from the date hereof
(the "Commencement/Confirmation Date") and shall, unless sooner terminated in
accordance with the provisions hereof, continue uninterrupted for a period of
three (3) years from the Commencement/Confirmation Date (the "Term").
<PAGE>
3. Compensation.
(a) Base Salary. During the Term the Executive shall be entitled
to receive an annual salary (the "Base Salary") payable in installments at such
times as the Company customarily pays its other Executive employees (but in any
event no less often than monthly and calculated as follows:
(1) The Base Salary for the first year following the
Commencement/Confirmation Date shall be $90,000 per year which shall be
increased to $95,000 per year after the first three months of employment.
(2) for each year thereafter, the Company shall increase the
Base Salary respectively by not less than (i) Five percent (5%), Six percent
(6%) and Seven percent (7%) or (ii) such amount as approved by the Company
Board of Directors and CEO. Each such increase shall be cumulative so that the
Base Salary for each succeeding year shall include the prior year's increase.
The Base Salary, as adjusted, and the Executive's benefit coverage then in
effect shall continue to be paid and provided to the Executive during any
period of physical or mental incapacity for a maximum period of 180 days unless
the Executive's employment is terminated as hereinafter provided.
(b) Health Insurance and Other Benefits. During the Term the
Executive shall be entitled to all employees benefits offered by the Company to
its senior executives and key management employees, including, all pension,
profit sharing, retirement, stock bonus, stock option, expense reimbursement,
and Company Credit Card. Also, any hospitalization insurance, major medical
insurance, medical reimbursement, or any other benefit plan or arrangement
established and maintained by the Company shall include the Executive. The
Company presently does not have a plan for hospitalization and major medical
therefore the Executive shall be entitled to reimbursement of these coverages
for the executive and his spouse and children which shall be equivalent in
value to Blue Cross/Blue Shield coverage.
(b) Reimbursement of expenses. The Executive shall be reimbursed
bi-weekly for all items of travel, entertainment and miscellaneous expenses
which the executive reasonably incurs in connection with the performance of his
duties hereunder, provided that the executive submit to the Company such
statements and other evidence supporting said expenses as the Company may
reasonably require. The Executive shall also be reimbursed for his
professional licensing fees and continuing professional education expenses
necessary to maintain his certified public accounting license in Pennsylvania,
as well as any professional association dues.
4. Vacations. The Executive shall be entitled to the number of paid
vacation days in each calendar year determined by the Company, but not less
than two (2) weeks the first year and three (3) weeks the second and third year
in any calendar year (prorated hereunder for less than the entire year in
accordance with the number of days in such calendar year during which he is so
employed.) The Executive shall also be entitled to all paid holidays given by
the Company to its Employees.
5. Equity Interest in Company. The Company shall arrange for issuance
to the Executive as of the Commencement Date shares of the Company's common
stock bearing restrictions.
<PAGE>
a) Common Stock
The Company shall arrange for issuance of 5,000 shares of common
stock carrying a Rule 144 legend as consideration for entering into this
agreement. The shares of common stock shall be held at the Company offices and
released to the Executive after two years from the date of this Agreement. In
the event the Executive terminates his employment with the Company prior to the
initial two years the Executive shall forfeit his rights to the common stock.
b) Stock Options
The Company shall grant the Executive an option to purchase 25,000
shares of common stock at the current market price as of the date his
employment commences. In addition after each year of employment, the Company
shall grant the Executive a minimum additional option to purchase 10,000 shares
of common stock at the then current market price. All stock options shall
remain in effect for a period of two years from the date of the grant except
upon termination of the Executive's employment, in which case he shall have 30
days to exercise the stock options for which he is entitled, thereafter the
stock options shall be canceled.
6. Termination of Employment.
(a) Death or Total Disability. In the event of the death of the
Executive during the Term, this Agreement shall terminate as of the date of the
Executive's death and the Company shall pay to such person as the Executive
shall designate in a written notice filed with the Company, or if no such
person shall be designated, to his estate as a lump sum death benefit, two
months of the Executive's Base Salary as in effect on the date of the
Executive's death in addition to any other payments to which Executive's estate
or beneficiaries may be entitled to receive under any pension or employee
benefit plan maintained by the Company. In the event of the Total Disability
(as that term is defined below) of the Executive for a two (2) month period
during the Term, the Company shall have the right to terminate this Agreement
by giving the Executive thirty (30) days prior written notice thereof, and upon
the expiration of such thirty (30) day period, the Executive's employment under
this Agreement shall terminate. If the Executive shall resume his duties
within thirty (30) days after receipt of such a notice of termination and
continue to perform such duties for four (4) consecutive weeks thereafter, this
Agreement shall continue in full force and effect, without any reduction in
Base Salary, and other benefits, and the notice of termination shall be
considered null and void and of no effect.
Upon termination of this Agreement under this Section 6(a), the Company
shall have no further obligations or liabilities under this Agreement, except
to pay to the Executive's estate or the Executive, as the case may be.
The term "Total Disability", as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent unbiased
medical doctor selected by the Company renders the Executive unable or
incompetent to carry out the duties and responsibilities of the Executive under
this Agreement at the time the disabling condition was incurred.
<PAGE>
(b) Discharge for Cause. The Company may discharge the Executive
for Cause and thereby immediately terminate his employment under this
Agreement. For purposes of this Agreement the Company shall have "Cause" to
terminate the Executive's employment if the Executive, in the reasonable
judgment of the Company, (i) willfully fails to perform any reasonable
directive of the Company's business (other than any such failure resulting from
the Executive's Total Disability, as defined in subsection (a), above); (ii)
materially breaches any of his agreements, duties, or obligations under this
Agreement; (iii) embezzles or converts to his own use any funds of the Company
or any client or customer of the Company; (iv) destroys or converts to his own
use any property of the Company, without the Company's consent; () is convicted
of a felony; (vi) is adjudicated an incompetent; or (vii) is habitually
intoxicated or is addicted to a controlled substance (as that term is defined
in the law) or any drug whatsoever. For purposes of this subsection, the
Executive shall not be deemed to have "willfully" failed to perform any
reasonable directive of the Company unless in any such failure to perform the
Executive lacked good faith and a reasonable belief that such failure was in
the best interest of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause unless and until the
Executive has received five (5) days prior written notice ("Dismissal Notice")
of such termination. In the event the Executive does not dispute such
determination within fifteen (15) days after receipt of the Dismissal Notice,
the Executive's employment hereunder shall be terminated on the 16th Day.
In the event that the Executive disputes such determination that Cause
exists for suspending his employment hereunder, the Executive shall serve the
Company with written notice of such dispute ("Dispute Notice") within fifteen
(15) days after receipt of the Dismissal Notice. Within fifteen (15) days
thereafter, the Executive shall, in accordance with the Rules of the American
Arbitration Association (AAA) (including but not limited to subpoena power,
medical examination, all pre-trial discovery, attorney with motions and
petitions, and), file a petition with the AAA for arbitration of the dispute
before three (3) arbitrators, the costs thereof to be shared equally by the
Executive and the Company unless an order of the AAA provides otherwise. In
the event the Executive serves a Dispute Notice upon the Company, the Executive
shall continue to receive one-half (1/2) of his Base Salary from the Company
and the other one-half (1/2) of the Base Salary shall be placed in an interest-
bearing escrow account mutually agreeable to the parties. In the event the AAA
determines that Cause existed for the termination, the escrowed funds and
accrued interest shall be paid to the Company, and the Executive's employment
hereunder shall be terminated forthwith. However, in the event the AAA
determines that the Executive was terminated without Cause, the escrowed funds
and accrued interest shall be paid to the Executive in addition to the
reasonable legal costs incurred by the Executive. During the period of the
arbitration, the Executive shall be relieved of all duties to be performed on
behalf of the Company. The parties covenant and agree that the decision of the
AAA shall be final and binding and hereby waive their right to appeal
therefrom. The decision of the Arbitrators shall be entered of record in a
court of competent jurisdiction. Once it has been finally determined that the
Company has discharged the Executive for Cause, the Company shall have no
further obligations or liabilities under this Agreement. This does not waive
any claim which the Company may have against the Executive for damages.
<PAGE>
(c) Severance without Cause or for Good Reason.
De-Facto Termination.
(1) In the event that the Executive's employment is
terminated by the Company without Cause, as defined in subparagraph (b), above,
for a reason other than death or Total Disability, or the Executive shall
resign for "Good Reason, as defined below,
(i) the Executive's Base Salary on the exact basis
described in "Section 3. Compensation" of this Contract as then in effect shall
continue to be paid for the lesser period of six (6) months or for such term as
mutually agreed between the Company and the Executive; and
(ii) the Company shall maintain in effect, for the
continued benefit of the Executive, for the same period described in paragraph
6c (1) (i) all of the employee benefit plans and programs in which the
Executive was entitled to participate immediately prior to the Executive's
continued participation provided same is possible under the general terms and
provisions of such benefit plans and programs or reimburse the Executive for
the equivalent value of the premiums for same. Moreover, during the payment
period the Company shall provide the Executive with such reasonable
administrative and secretarial support services as may be necessary or
appropriate in order to assist the Executive in finding new employment or the
Executive may select an outplacement service to be paid for by the Company at a
cost not to exceed $5,000.00.
(2) For purposes of this Section 6(c), "Good Reason" shall
mean:
(i) an assignment to the Executive of any duties
inconsistent with, or a material change in the nature or scope of, the
Executive's responsibilities, authority or duties;
(ii) the failure by the Company to comply with the
provisions of this Agreement or the failure of the Company to obtain the
assumption of the commitment to perform this Agreement by any successor
corporation;
(iii) ill health of the Executive or a member of his
family, or any other compelling personal circumstance which, in the mutual
discretion of the Executive, and the President of the Company makes the
Executive's continued employment hereunder impossible, or inappropriate, and
(iv) a change in control of the Company. For purposes
of this subsection, a "change in control" shall be deemed to have occurred if
(1) individuals who were directors of the Company immediately prior to a
Control Transaction shall cease, within two years of such Control Transaction,
to constitute a majority of the Board (or of the board of directors of any
successor to the Company or to all or substantially all of its assets), or (2)
any entity, person or Group other than the Company in a transaction or series
of transactions that result in such entity, person or group directly or
indirectly owning beneficially 51% or more of the outstanding shares.
<PAGE>
As used herein, "Control Transaction" shall be (1) any tender offer
for or acquisition of capital stock of the Company, (2) any merger,
consolidation, or sale of all or substantially all of the assets of the Company
which has been approved by the stockholders, (3) any contested election of
directors of the Company, or (4) any combination of the foregoing which results
in a change in voting power sufficient to elect a majority of the Board. As
used herein, "Group" shall mean persons who act in concert as described in
Section 123(d) and/or 14(d)(2) of the Securities Exchange Act of 1934, as
amended.
(c) Resignation. The Executive may voluntarily terminate his
employment under this Agreement without Good Reason, as defined in subsection
(c), above, by giving the Company thirty (30) days prior written notice
thereof, and upon the expiration of such thirty (30) day period, the
Executive's employment under this Agreement shall terminate, and the Company
shall have no further obligations or liabilities under this Agreement except to
pay the Executive the portion, if any, that remains unpaid of the Base Salary
and unpaid accrued prorated vacation for the period up to the date of
termination. Resignation as defined herein must be in written form to the
Board, witnessed and signed by for the Executive.
6. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking
other employment or otherwise.
7. Miscellaneous.
(a) Notices. Any notice, demand or communication required or
permitted under this Agreement shall be in writing and shall either be hand-
delivered to the other party or mailed to the addresses set forth below by
registered or certified mail, return receipt-requested. Notice shall be deemed
to have been given when so hand-delivered or when so deposited in the U.S.
Mail, properly addressed to the other party. The addresses are:
To the Company: Peter S. Pelullo
Chairman/CEO
Sigma Alpha Group,Ltd.
1341 N. Delaware Avenue
Phila., PA 19125
To the Executive: James M. Boyd, Jr.
7 Lone Beech Lane
Glen Mills, PA 19342
The foregoing addresses may be changed at any time by notice given in the
manner herein provided.
(b) Integration; Modification. This Agreement constitutes the
entire understanding and agreement between the Company and the Executive
regarding its subject matter and supersedes all prior negotiations and
agreements, whether oral or written, between them with respect to its subject
matter. This Agreement may not be modified except by a written agreement
signed by the Executive and a duly authorized officer of the Company.
<PAGE>
(c) Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, executors,
successors, and assigns, except that this Agreement may not be assigned by the
Executive. In the event the Company fails to obtain an express agreement from
any successor (whether direct or indirect) to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place, such failure shall be a
breach of this Agreement and shall entitle the Executive to a continuation of
compensation from the Company in an amount equal to payment for a period of 6
months; and it shall be on the same terms as he would be entitled to under
Section 7(c) as if he terminated his employment for Good Reason, except for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the date of termination (along with increased
compensation).
(d) Waiver of Breach. No waiver by either party of any condition
or of the breach by the other of any term or covenant contained in this
agreement, whether by conduct or otherwise, in any one or more instances shall
be deemed or construed as a further or continuing waiver of any such condition
or breach or a waiver of any other condition, or the breach of any other term
or covenant set forth in this Agreement. Moreover, the failure of either party
to exercise any right hereunder shall not bar the later exercise thereof.
(e) Governing Law and Interpretation. This Agreement shall be
governed by the internal laws of the Commonwealth of Pennsylvania.
(f) Headings. The headings of the various sections and paragraphs
have been included herein for convenience only and shall not be considered in
interpreting this Agreement.
(g) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company, its subsidiaries and affiliates by its duly
authorized officer on the date first above written.
SIGMA ALPHA GROUP, LTD.
By:
s/Peter S. Pelullo
__________________
Peter S. Pelullo, Chairman/CEO
s/James M. Boyd, Jr.
___________________
James M. Boyd, Jr.
EMPLOYMENT AGREEMENT WITH DAVID C. BRYAN
EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 2nd
day of July, 1997 by and between Sigma Alpha Group, Ltd., a Delaware
corporation ("Company"), and David C. Bryan ("Executive").
WHEREAS, Company desires to employ Executive as its Senior Vice
President/Chief Operating Officer and Executive desires to be employed by
Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment and Term. Company hereby employs Executive and
Executive hereby accepts employment for a term commencing on July 18, 1997 and
continuing until July 18, 2000, unless sooner terminated as provided for in
this Agreement. Company and Executive have the option to renegotiate this
Agreement beyond the three-year period. Executive hereby warrants and
represents to Company that he is free to enter into this Agreement and is not a
party to any agreement, written or otherwise, or bound by any restrictions,
which limit or restrict him from entering into this Agreement or performing the
services, duties and responsibilities called for hereunder.
2. Duties.
2.1 Executive shall perform the duties of the Senior Vice
President/Chief Operating Officer of the Company and such additional executive
duties of Company and its affiliates as may be, from time to time, requested of
him by the Company's Board of Directors or the Chairman and/or Chief Executive
Officer of the Company.
2.2 Executive shall devote his full professional time and best
efforts to the performance of his duties and responsibilities hereunder to
advance the interests of the Company and shall not during the term of this
Agreement (as defined in Section 1 hereof) be employed, involved or otherwise
engaged in, either directly or indirectly, any other employment for gain,
profit or other pecuniary advantage, without prior written consent of Company.
At no time shall Executive engage in any activity that conflicts with the
business of the Company or its affiliates. Nothing set forth in this section
2.2 shall be construed to prevent Executive from (i) acting as a member of
Board of Trustees or a member of Board of Directors of any other corporation,
or as a member of the Board of Trustees of any organization or entity which is
not a competitor of the Company or (ii) devoting of such of Executive's time
and attention to philanthropic, charitable, civic, community or other
activities or endeavors as Executive shall reasonably determine but only to the
extent that Executive's pursuance of any activities or endeavors does not
materially and adversely effect the Executive's ability to perform and
discharge Executive's duties and objectives to the Company hereunder.
<PAGE>
2.3 Except for required travel on Company business, Executive
shall perform his duties and responsibilities at the Company's principal
executive offices located in the greater Philadelphia area. The Company shall
furnish Executive with office space, secretarial assistance, a personal
computer, and such other facilities and services as shall be suitable to
Executive's position and adequate for the performance of his duties hereunder.
3. Compensation. For all duties and responsibilities to be performed
and/or assumed by Executive hereunder, Executive shall be entitled to receive
an annual salary as set forth below ("Base Salary"). The Base Salary, less any
sums required to be withheld by law, shall be payable in equal monthly
installments or such other more frequent regular installments as the Company
may, from time to time, determine. For purposes hereof, Base Salary shall be:
3.1.1 For the twelve-month period commencing with the date
hereof, the Base Salary shall be One Hundred Twenty and Five Thousand Dollars
($125,000).
3.1.2 For each year thereafter, the Base Salary shall be
increased by an amount determined by the Board of Directors but in no event
less than (i) five percent (5%) after the first year, six percent (6%) after
the second year and seven percent (7%) after the third year and each year
thereafter upon mutual agreement to extend the term. Each percentage increase
for a particular year shall be based on the Base Salary for the immediately
preceding year.
4. Fringe Benefits. Company shall pay for or provide Executive with
the following benefits:
4.1 For the first year, Executive shall be entitled to three (3)
weeks paid vacation to be used at the Executive's discretion. Thereafter,
Executive shall be entitled to four (4) weeks paid vacation during each full
year of this Agreement to be used at the Executives discretion. Vacation time
shall accrue on a pro-rata basis during each year of this Agreement. Any
unused vacation shall be cumulative from year to year unless otherwise agreed
upon by the parties.
4.2 Health and hospitalization insurance established and
maintained by the Company for its senior executives and key management
personnel. Since the Company presently does not have, in effect, a plan for
health and hospitalization insurance, Company shall reimburse Executive for all
COBRA payments made by Executive to his previous employer for health and
hospitalization coverage for Executive and his family. Thereafter, Company
shall either secure and maintain health and hospitalization insurance for
Executive and his dependents or reimburse Executive for coverage comparable to
Pennsylvania Blue Shield/Blue Cross for Executive and his immediate family.
4.3 Such other employee benefits maintained by the Company for
its senior executives and key management employees, including, all pension,
profit sharing, retirement, stock bonus and stock option plans, to the extent
Executive is eligible to participate pursuant to the terms and conditions of
such plans.
<PAGE>
4.4 Executive shall be reimbursed in a timely manner for all
items of travel, entertainment and miscellaneous expenses which Executive
reasonably incurs in connection with the performance of his duties hereunder,
provided that the Executive submits to the Company such statements and other
evidence supporting said expenses as the Company my reasonably require.
Executive, when traveling on Company business, shall be permitted to fly first
class on all domestic flights and business class on all international flights.
5. Stock Options.
5.1 As part of Executive's compensation for services to be
rendered hereunder, Executive shall have the right and option to purchase from
Company voting common stock in Company ("Option"). The total number of shares
available to Consultant under this Option is Three Hundred and Fifty Thousand
Shares (350,000) at a purchase price of Two Dollars ($2.00) per share ("Option
Shares"). The Option Shares are available for purchase in installments as
listed in Column A below and each installment shall become vested on the
corresponding date listed in Column B, as follows:
Column A Column B
Number of Shares Date Option Shares
Available for Purchase Become Vested
50,000 Upon the commencement of
Executive's employment
pursuant to the terms of
this Agreement
100,000 July 14, 1998
200,000 July 14, 1999
In order for the Option Shares to become vested as provided for above,
Executive must be employed by the Company under the terms of this Agreement as
of the vesting date set forth in Column B above.
5.2 Except as otherwise provided for below, the term of the
Option granted shall remain in effect for ten (10) years from the date on which
such Option Shares become vested. If the Executive's employment with the
Company is terminated by the Company for Cause (as defined herein) or by the
act of Executive, the Executive's right to exercise vested Option Shares shall
cease and become null and void within thirty (30) days of the date employment
terminated, except as otherwise provided in Section 5.3 hereof. All unvested
Option Shares will terminate immediately as of the date of such termination of
employment. In the event the Company receives, accepts and consummates a
tender offer for all of its outstanding common stock prior to the vesting of
the Option Shares, the vesting rights shall be accelerated so as to allow
Executive to exercise the Option to purchase all of the Option Shares
immediately prior to the consummation of such tender offer.
5.3 Notwithstanding anything in this Section 5 to the contrary,
if the Executive's employment is terminated for Cause, as set forth in Section
6.3, the Company shall have the right to terminate and withdraw any vested or
unvested Options under this Agreement.
<PAGE>
5.4 The purchase price of the Option Shares shall be paid in full
upon the exercise of the Option, and Company shall not be required to deliver
certificates for such Option Shares until payment has been made. In addition
to, and at the time of payment of the purchase price for such Option Shares,
Executive shall be responsible for all federal and state withholding or other
employment taxes applicable to the taxable income of such Executive and any
other fees resulting from the exercise of the Executive.
5.5 Each share of Option Stock purchased pursuant to the terms
hereof shall carry all appropriate registration and/or restrictions on sale and
notices as determined from time to time by Company's securities counsel.
Executive shall cooperate with Company and Company's counsel in complying with
all applicable securities laws.
6. Termination of Employment. The employment of Executive and
Company's liability and obligations hereunder shall terminate as follows:
6.1 This Agreement shall terminate immediately upon the death of
Executive. In such event, Company shall pay to such person as Executive may
designate in a written notice filed with the Company, or if no such person
shall be designated, to Executive's estate, a lump sum death benefit in an
amount equal to twelve (12) months of Executive's Base Salary as in effect on
the date of Executive's death and double indemnity in event Executive's death
occurs while traveling on Company business.
6.2 This Agreement shall terminate immediately upon the
Disability of Executive. Disability shall exist if due to a mental or physical
condition, Executive is determined to be unable to perform his duties and
responsibilities hereunder for a continuous period of two (2) months.
Disability shall be conclusively established by written certification by two
(2) licensed, disinterested physicians selected as mutually agreed upon between
Company and Executive. In the event the two (2) physicians disagree, a third
physician shall be selected by the two physicians to break such impasse. The
costs associated with the determination of Disability shall be borne equally
between Company and Executive. In the event of Disability, Executive shall be
entitled to receive his Base Salary in accordance with Section 3 for a period
of six (6) months following the onset of Disability.
6.3 The Company may discharge the Executive for Cause and thereby
immediately terminate his employment under this Agreement. For purposes of
this Agreement, Company shall have "Cause" to terminate the Executive's
employment if the Executive, in the reasonable judgment of the Company:
6.3.1 Willfully fails to perform any reasonable directive of
the Company's Board of Directors, Chairman or Chief Executive Officer.
6.3.2 Materially breaches any of the agreements, duties,
responsibilities or obligations under this Agreement.
6.3.3 Embezzles or converts to his own use any funds or
property of the Company or any client or customer of the Company.
6.3.4 Is convicted of a felony or any crime involving
larceny, embezzlement or moral turpitude.
<PAGE>
6.4 In the event that Executive's employment is terminated by the
Company without Cause, as defined in Section 6.3, above, for a reason other
than death or Disability, or Executive shall resign for "Good Reason", as
defined below, then, in such event:
6.4.1 Executive's Base Salary, as defined in Section 3 as
then in effect, shall continue to be paid for a period of six (6) months
("Payment Period").
6.4.2 Company shall maintain in effect during the Payment
Period, for the continued benefit of the Executive, all of the employee benefit
plans and programs in which the Executive was entitled to participate
immediately prior to the Executive's termination provided same is possible
under the general terms and provisions of such benefit plans and programs.
Moreover, during the Payment Period the Company shall provide the Executive
with such reasonable administrative and secretarial support services as may be
necessary or appropriate in order to assist Executive in finding new employment
or Executive may select an out-placement service to be paid for by the Company
at a cost not to exceed Five Thousand Dollars ($5,000).
For purposes of this Section 6.4, "Good Reason" shall mean:
(i) An assignment to the Executive of any duties inconsistent
with, or a material change in the nature or scope of, Executive's
responsibilities, authority or duties hereunder.
(ii) Failure by the Company to comply with the provisions of
this Agreement.
(iii) Ill health of Executive or a member of his family, or
any other compelling personal circumstance which, in the mutual discretion of
the Executive, and the Chairman of the Company makes the Executive's continued
employment hereunder impossible, or inappropriate.
6.5 Executive may voluntarily terminate his employment under this
Agreement without Good Reason, as defined in Section 6.4 above, by giving the
Company ninety (90) days prior written notice thereof, and upon the expiration
of such ninety (90) day period, Executive's employment under this Agreement
shall terminate, and Company shall have no further obligation or liabilities
under this Agreement except to pay the Executive the portion, if any, that
remains unpaid of the Base Salary and unpaid accrued prorated vacation for the
period up to the date of termination. Resignation as defined herein must be in
written form to the Board, witnessed and signed by the Executive.
7. Surrender of Books and Records. Executive acknowledges that all
lists, books, records, literature, products and any other materials owned by
Company or its affiliates or used by them in connection with the conduct of
their business, shall at all times remain the property of Company and its
affiliates and that upon termination of employment hereunder, irrespective of
the time, manner or cause of said termination, Executive will surrender to
Company and its affiliates all such lists, books, records, literature, products
and other materials.
<PAGE>
8. Miscellaneous.
8.1 Any notice, demand or communication required or permitted
under this Agreement shall be in writing and shall be sufficient when delivered
personally, or three (3) days after mailing by registered or certified mail,
return receipt requested, or the next day if sent by nationally recognized
overnight courier with proof of delivery, in each case postage prepaid,
addressed as follows:
If to the Company:
Sigma Alpha Group, Ltd.
1341 N. Delaware Avenue
Philadelphia, PA 19125
Attn.: Peter S. Pelullo, Chairman/CEO
If to the Executive:
David C. Bryan
252 Chamounix Circle
St. Davids, PA 19087
The foregoing addressees may be changed at any time by notice given in the
manner herein provided.
8.2 This Agreement constitutes the entire understanding and
agreement between Company and Executive regarding its subject matter and
supersedes all prior negotiations and agreements, whether oral or written,
between them with respect to its subject matter. This Agreement may not be
modified except by a written agreement signed by the Executive and the Company.
8.3 This Agreement shall be binding upon and inure to the benefit
of the parties and their respective heirs, executors, successors and assigns,
except that this Agreement may not be assigned by the Executive.
8.4 No waiver by either party of any condition or of the breach
by the other of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances shall be deemed or construed
as a further or continuing waiver of any such condition or breach or a waiver
of any other condition, or the breach of any other term or covenant set forth
in this Agreement. Moreover, the failure of either party to exercise any right
hereunder shall not bar the later exercise thereof.
8.5 This Agreement shall be governed by the statutes and common
laws of the Commonwealth of Pennsylvania, excluding it's choice of law statutes
or common law.
8.6 The headings of the various sections and paragraphs have been
included herein for convenience only and shall not be construed in interpreting
this Agreement.
8.7 If any provision of this Agreement shall be held invalid or
unenforceable, the remainder of this Agreement shall, nevertheless, remain in
full force and effect. If any provision is held invalid or unenforceable with
respect to particular circumstances, it shall, nevertheless, remain in full
force and effect in all other circumstances.
<PAGE>
8.8 This Agreement may be executed in several counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company by its duly authorized officer on the date first above
written.
ATTEST: SIGMA ALPHA
GROUP, INC.
s/Ernest Cimadamore s/Peter S. Pelullo
By: _______________________ By: __________________________
Ernest Cimadamore Peter S. Pelullo
Secretary Chairman/CEO
s/David C. Bryan
__________________________
David C. Bryan
EMPLOYMENT AGREEMENT WITH MICHAEL P. McANDREWS
EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 3rd
day of September, 1997 by and between Sigma Alpha Group, Ltd., a Delaware
corporation ("Company"), and Mike McAndrews ("Executive").
WHEREAS, Company desires to employ Executive as its President and
Executive desires to be employed by Company, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment and Term. Company hereby employs Executive and
Executive hereby accepts employment for a term commencing on October 1, 1997
and continuing until September 30, 2000, unless sooner terminated as provided
for in this Agreement. Company and Executive have the option to renegotiate
this Agreement beyond the three-year period. Executive hereby warrants and
represents to Company that he is free to enter into this Agreement and is not a
party to any agreement, written or otherwise, or bound by any restrictions,
which limit or restrict him from entering into this Agreement or performing the
services, duties and responsibilities called for hereunder.
2. Duties.
2.1 Executive shall perform the duties of the President of the
Company and such additional executive duties of Company and its affiliates as
may be, from time to time, requested of him by the Company's Board of Directors
or the Chairman and/or Chief Executive Officer of the Company. As President of
the Company, the Executive shall report to the Chairman/CEO of the Company.
2.1.1 The duties as President of the Company shall include but not
be limited to (i) having general and active management of the business of the
Company (ii) seeing that all orders and resolutions of the Board are carried
into effect, subject however, to the right of the directors to delegate any
specific powers, except such as may be by statute exclusively conferred on the
President, to any other officer or officers of the Company (iii) executing
bonds, mortgages and other contracts requiring a seal, under the seal of the
Company (iv) be Ex-Offico a member of all committees (v) have the general
powers and duties of supervision and management usually vested in the office of
President of the a Company (vi) assist the Board of Directors, Chairman/CEO in
formulating the business plan, goals and objectives for the Company's future
growth.
2.2 Executive shall devote his full professional time and best
efforts to the performance of his duties and responsibilities hereunder to
advance the interests of the Company and shall not during the term of this
Agreement (as defined in Section 1 hereof) be employed, involved or otherwise
engaged in, either directly or indirectly, any other employment for gain,
profit or other pecuniary advantage, without prior written consent of Company.
At no time
<PAGE>
shall Executive engage in any activity that conflicts with the business of the
Company or its affiliates. Nothing set forth in this section 2.2 shall be
construed to prevent Executive from (i) acting as a member of Board of Trustees
or a member of Board of Directors of any other corporation, or as a member of
the Board of Trustees of any organization or entity which is not a competitor
of the Company or (ii) devoting of such of Executive's time and attention to
philanthropic, charitable, civic, community or other activities or endeavors as
Executive shall reasonably determine but only to the extent that Executive's
pursuance of any activities or endeavors does not materially and adversely
effect the Executive's ability to perform and discharge Executive's duties and
objectives to the Company hereunder.
2.3 Except for required travel on Company business or unless
Company agrees otherwise, Executive shall perform his duties and
responsibilities at the Company's principal executive offices located in the
greater Philadelphia area. The Company shall furnish Executive with office
space, secretarial assistance, a personal computer, and such other facilities
and services as shall be suitable to Executive's position and adequate for the
performance of his duties hereunder.
2.4 Within one (1) year from the date of this Agreement, the
Company shall submit Executive's name for consideration to be appointed to the
Board of Directors of the Company; and support Executive's nomination for a
Board of Directors position at the next scheduled annual meeting of Company
shareholders.
3. Compensation. For all duties and responsibilities to be performed
and/or assumed by Executive hereunder, Executive shall be entitled to receive
an annual salary as set forth below ("Base Salary"). The Base Salary, less any
sums required to be withheld by law, shall be payable in equal monthly
installments or such other more frequent regular installments as the Company
may, from time to time, determine. For purposes hereof, Base Salary shall be:
3.1.1 For the twelve-month period commencing with the date
hereof, the Base Salary shall be Two Hundred and Forty Thousand Dollars
($240,000).
3.1.2 For each year thereafter, the Base Salary shall be
increased by an amount determined by the Board of Directors but in no event
less than (i) nine percent (9%) after the first year, ten percent (10%) after
the second year and each year thereafter upon mutual agreement to extend the
term. Each percentage increase for a particular year shall be based on the
Base Salary for the immediately preceding year.
4. Fringe Benefits. Company shall pay for or provide Executive with
the following benefits:
4.1 For the first year, Executive shall be entitled to three (3)
weeks paid vacation to be used at the Executive's discretion. Thereafter,
Executive shall be entitled to four (4) weeks paid vacation during each full
year of this Agreement to be used at the Executives discretion. Vacation time
shall accrue on a pro-rata basis during each year of this Agreement. Any
unused vacation shall be cumulative from year to year unless otherwise agreed
upon by the parties.
<PAGE>
4.2 Health and hospitalization insurance established and
maintained by the Company for its senior executives and key management
personnel. Since the Company presently does not have, in effect, a plan for
health and hospitalization insurance, Company shall reimburse Executive for all
COBRA payments made by Executive to his previous employer for health and
hospitalization coverage for Executive and his family. Thereafter, Company
shall either secure and maintain health and hospitalization insurance for
Executive and his dependents or reimburse Executive for coverage comparable to
Pennsylvania Blue Shield/Blue Cross for Executive and his dependents.
4.3 Such other employee benefits maintained by the Company for its
senior executives and key management employees, including, all pension, profit
sharing, retirement, stock bonus and stock option plans, to the extent
Executive is eligible to participate pursuant to the terms and conditions of
such plans.
4.4 Executive shall be reimbursed in a timely manner for all items
of travel, entertainment and miscellaneous expenses which Executive reasonably
incurs in connection with the performance of his duties hereunder, provided
that the Executive submits to the Company such statements and other evidence
supporting said expenses as the Company my reasonably require. Executive, when
traveling on Company business, shall be permitted to fly first class on all
domestic flights and business class on all international flights.
4.5 Executive shall be reimbursed in a timely manner for all
reasonable moving expenses actually incurred by Executive in relocating the
Executive and his family to the Philadelphia area ("Relocation Expenses"). The
Relocation Expenses shall include the cost of temporary residence, a moving
company and related expenses. The total Relocation Expenses for which
Executive shall be reimbursed shall not exceed $50,000 and shall be approved in
writing, in advance, by the Company. In addition, the Company will pay cost of
furnished 2-bedroom apartment in Philadelphia area (Residence Inn) for a period
of time prior to Executive establishing a Philadelphia area residence.
5. Stock Options.
5.1 As part of Executive's compensation for services to be
rendered hereunder, Executive shall have the right and option to purchase from
Company voting common stock in Company ("Option"). The total number of shares
available to Consultant under this Option is Five Hundred Thousand Shares
(500,000) at a purchase price per share based on the market price of Company
shares on the date of this Agreement (Option Shares"). The Option Shares are
available for purchase in installments as listed in Column A below and each
installment shall become vested on the corresponding date listed in Column B,
as follows:
Column A Column B
Number of Shares Date Option Shares
Available for Purchase Become Vested
125,000 Upon the commencement of
Executive's employment pursuant to
the terms of this Agreement
175,000 First anniversary date of
this agreement
200,000 Second anniversary date of
this agreement
<PAGE>
In order for the Option Shares to become vested as provided for above,
Executive must be employed by the Company under the terms of this Agreement as
of the vesting date set forth in Column B above.
5.2 Except as otherwise provided for below, the term of the
Option granted shall remain in effect for ten (10) years from the date on which
such Option Shares become vested. If the Executive's employment with the
Company is terminated by the Company for Cause (as defined herein) or by the
act of Executive, the Executive's right to exercise vested Option Shares shall
cease and become null and void within thirty (30) days of the date employment
terminated, except as otherwise provided in Section 5.3 hereof. All unvested
Option Shares will terminate immediately as of the date of such termination of
employment. In the event the Company receives, accepts and consummates a
tender offer for all of its outstanding common stock prior to the vesting of
the Option Shares, the vesting rights shall be accelerated so as to allow
Executive to exercise the Option to purchase all of the Option Shares
immediately prior to the consummation of such tender offer.
5.3 Notwithstanding anything in this Section 5 to the contrary,
if the Executive's employment is terminated for Cause, as set forth in Section
6.3, the Company shall have the right to terminate and withdraw any vested or
unvested Options under this Agreement.
5.4 The purchase price of the Option Shares shall be paid in full
upon the exercise of the Option, and Company shall not be required to deliver
certificates for such Option Shares until payment has been made. In addition
to, and at the time of payment of the purchase price for such Option Shares,
Executive shall be responsible for all federal and state withholding or other
employment taxes applicable to the taxable income of such Executive and any
other fees resulting from the exercise of the Executive.
5.5 Each share of Option Stock purchased pursuant to the terms
hereof shall carry all appropriate registration and/or restrictions on sale and
notices as determined from time to time by Company's securities counsel.
Executive shall cooperate with Company and Company's counsel in complying with
all applicable securities laws.
6. Termination of Employment. The employment of Executive and
Company's liability and obligations hereunder shall terminate as follows:
6.1 This Agreement shall terminate immediately upon the death of
Executive. In such event, Company shall pay to such person as Executive may
designate in a written notice filed with the Company, or if no such person
shall be designated, to Executive's estate, a lump sum death benefit in an
amount equal to twelve (12) months of Executive's Base Salary as in effect on
the date of Executive's death and double indemnity in event Executive's death
occurs while traveling on Company business.
6.2 This Agreement shall terminate immediately upon the
Disability of Executive. Disability shall exist if due to a mental or physical
condition, Executive is determined to be unable to perform his duties and
responsibilities hereunder for a continuous period of two (2) months.
Disability shall be conclusively established by written certification by two
(2) licensed, disinterested physicians selected as mutually agreed upon between
Company and Executive. In the event the two (2) physicians
<PAGE>
disagree, a third physician shall be selected by the two physicians to break
such impasse. The costs associated with the determination of Disability shall
be borne equally between Company and Executive. In the event of Disability,
Executive shall be entitled to receive his Base Salary in accordance with
Section 3 for a period of six (6) months following the onset of Disability.
6.3 The Company may discharge the Executive for Cause and thereby
immediately terminate his employment under this Agreement. For purposes of
this Agreement, Company shall have "Cause" to terminate the Executive's
employment if the Executive, in the reasonable judgment of the Company:
6.3.1 Willfully fails to perform any reasonable directive of
the Company's Board of Directors, Chairman or Chief Executive Officer.
6.3.2 Materially breaches any of the agreements, duties,
responsibilities or obligations under this Agreement.
6.3.3 Embezzles or converts to his own use any funds or
property of the Company or any client or customer of the Company.
6.3.4 Is convicted of a felony or any crime involving
larceny, embezzlement or moral turpitude.
6.4 In the event that Executive's employment is terminated by the
Company without Cause, as defined in Section 6.3, above, for a reason other
than death or Disability, or Executive shall resign for "Good Reason", as
defined below, then, in such event:
6.4.1 Executive's Base Salary, as defined in Section 3 as
then in effect, shall continue to be paid for a period of twelve (12) months
("Payment Period") or balance of Agreement whichever is longer.
6.4.2 Company shall maintain in effect during the Payment
Period, for the continued benefit of the Executive, all of the employee benefit
plans and programs in which the Executive was entitled to participate
immediately prior to the Executive's termination provided same is possible
under the general terms and provisions of such benefit plans and programs.
Moreover, during the Payment Period the Company shall provide the Executive
with such reasonable administrative and secretarial support services as may be
necessary or appropriate in order to assist Executive in finding new employment
or Executive may select an out-placement service to be paid for by the Company
at a cost not to exceed Five Thousand Dollars ($5,000).
For purposes of this Section 6.4, "Good Reason" shall mean:
(i) An assignment to the Executive of any duties inconsistent
with, or a material change in the nature or scope of, Executive's
responsibilities, authority or duties hereunder.
(ii) Failure by the Company to comply with the provisions of
this Agreement.
(iii) Ill health of Executive or a member of his family, or
any other compelling personal circumstance which, in the mutual discretion of
the Executive and the Chairman of the Company, makes the Executive's continued
employment hereunder impossible, or inappropriate.
<PAGE>
6.5 Executive may voluntarily terminate his employment under this
Agreement without Good Reason, as defined in Section 6.4 above, by giving the
Company ninety (90) days prior written notice thereof, and upon the expiration
of such ninety (90) day period, Executive's employment under this Agreement
shall terminate, and Company shall have no further obligation or liabilities
under this Agreement except to pay the Executive the portion, if any, that
remains unpaid of the Base Salary and unpaid accrued prorated vacation for the
period up to the date of termination. Resignation as defined herein must be in
written form to the Board, witnessed and signed by the Executive.
7. Surrender of Books and Records. Executive acknowledges that all
lists, books, records, literature, products and any other materials owned by
Company or its affiliates or used by them in connection with the conduct of
their business, shall at all times remain the property of Company and its
affiliates and that upon termination of employment hereunder, irrespective of
the time, manner or cause of said termination, Executive will surrender to
Company and its affiliates all such lists, books, records, literature, products
and other materials.
8. Miscellaneous.
8.1 Any notice, demand or communication required or permitted
under this Agreement shall be in writing and shall be sufficient when delivered
personally, or three (3) days after mailing by registered or certified mail,
return receipt requested, or the next day if sent by nationally recognized
overnight courier with proof of delivery, in each case postage prepaid,
addressed as follows:
If to the Company:
Sigma Alpha Group, Ltd.
1341 N. Delaware Avenue
Philadelphia, PA 19125
Attn.: Peter S. Pelullo, Chairman/CEO
If to the Executive:
Mike McAndrews
2020 Parkside Circle South
Boca Raton, FL. 33486
The foregoing addressees may be changed at any time by notice given in the
manner herein provided.
8.2 This Agreement constitutes the entire understanding and
agreement between Company and Executive regarding its subject matter and
supersedes all prior negotiations and agreements, whether oral or written,
between them with respect to its subject matter. This Agreement may not be
modified except by a written agreement signed by the Executive and the Company.
8.3 This Agreement shall be binding upon and inure to the benefit
of the parties and their respective heirs, executors, successors and assigns,
except that this Agreement may not be assigned by the Executive.
<PAGE>
8.4 No waiver by either party of any condition or of the breach
by the other of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances shall be deemed or construed
as a further or continuing waiver of any such condition or breach or a waiver
of any other condition, or the breach of any other term or covenant set forth
in this Agreement. Moreover, the failure of either party to exercise any right
hereunder shall not bar the later exercise thereof.
8.5 This Agreement shall be governed by the statutes and common
laws of the Commonwealth of Pennsylvania, excluding it's choice of law statutes
or common law.
8.6 The headings of the various sections and paragraphs have been
included herein for convenience only and shall not be construed in interpreting
this Agreement.
8.7 If any provision of this Agreement shall be held invalid or
unenforceable, the remainder of this Agreement shall, nevertheless, remain in
full force and effect. If any provision is held invalid or unenforceable with
respect to particular circumstances, it shall, nevertheless, remain in full
force and effect in all other circumstances.
8.8 This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and on
behalf of the Company by its duly authorized officer on the date first above
written.
ATTEST: SIGMA ALPHA GROUP, INC.
s/Ernest Cimadamore s/Peter S. Pelullo
By: _______________________ By: __________________________
Ernest Cimadamore Peter S. Pelullo
Secretary Chairman/CEO
s/Michael P. McAndrews
__________________________
Michael P. McAndrews
