U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 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
(State or other jurisdiction of incorporation or organization)
23-2498715
(IRS Employer Identification No.)
1341 North Delaware Avenue, Philadelphia, PA 19125
(Address of principal executive offices)
(X) (215) 425-8682
(Issuer's telephone number)
______________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
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 ( )
Outstanding shares issued or to be issued of each of the registrant's
class of common stock $.001 par value per share as of December 5, 1997 were
20,244,924.
SIGMA ALPHA GROUP, LTD.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at
October 31, 1997 (unaudited) and
July 31, 1997 (audited) 3-4
Consolidated Statements of Operations
for the three months ended October 31,
1997 and 1996 (unaudited) 5
Consolidated Statement of Stockholders'
Equity for the three months ended
October 31, 1997 (unaudited) 6
Consolidated Statements of Cash Flows
for the three months ended October 31,
1997 and 1996 (unaudited) 7-8
Notes to Consolidated Financial
Statements (unaudited) 9-10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 11-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Events 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I. - FINANCIAL INFORMATION
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Rounded to Nearest Thousand)
October 31, July 31,
1997 1997
----------- ----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 667,000 $1,688,000
Inventory 78,000 78,000
Prepaid expenses and other current assets 19,000 20,000
--------- ---------
764,000 1,786,000
--------- ---------
PROPERTY AND EQUIPMENT, NET 48,000 48,000
--------- ---------
OTHER ASSETS
Goodwill 38,000 42,000
Patent 36,000 22,000
--------- ---------
74,000 64,000
--------- ---------
TOTAL ASSETS $ 886,000 $1,898,000
========= =========
<FN>
See accompanying notes
3
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Rounded to Nearest Thousand)
October 31, July 31,
1997 1997
----------- -----------
(Unaudited) (Audited)
LIABILITIES
CURRENT LIABILITIES
Accounts payable - trade $ 343,000 $ 190,000
Accrued taxes, other than income taxes 51,000 52,000
Accrued wages - officers 22,000 21,000
Accrued expenses and other current
liabilities 106,000 111,000
---------- ----------
TOTAL CURRENT LIABILITIES 522,000 374,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
PREFERRED STOCK
SERIES B, $5.00 CONVERTIBLE, $.001 par value;
authorized, 800,000 shares; issued and
outstanding, 0 shares at October 31, 1997
664,000 shares at July 31, 1997. - 1,000
ADDITIONAL PAID-IN CAPITAL - 3,321,000
COMMON STOCK, $.001 par value; authorized
50,000,000 shares; issued and outstanding,
20,235,000 shares at October 31, 1997 and
18,907,000 at July 31, 1997 20,000 19,000
ADDITIONAL PAID-IN CAPITAL 25,634,000 22,313,000
WARRANTS OUTSTANDING 428,000 428,000
ACCUMULATED DEFICIT (25,718,000) (24,558,000)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 364,000 1,524,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 886,000 $ 1,898,000
========== ==========
<FN>
See accompanying notes
4
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Rounded to Nearest Thousand)
THREE MONTHS ENDED
OCTOBER 31,
----------------------
1997 1996
---------- ---------
SALES $ - $ 219,000
COST OF SALES - 212,000
---------- ---------
GROSS PROFIT - 7,000
---------- ---------
OPERATING EXPENSES:
Officers' compensation 251,000 339,000
Other salaries and payroll costs 52,000 19,000
Consulting fees 217,000 74,000
Professional fees 64,000 56,000
Research and development 379,000 28,000
Travel 127,000 102,000
Other 86,000 108,000
---------- ---------
TOTAL OPERATING EXPENSES 1,176,000 726,000
---------- ---------
LOSS FROM OPERATIONS (1,176,000) (719,000)
---------- ---------
OTHER INCOME
Interest income 16,000 10,000
---------- ---------
NET LOSS $(1,160,000) $ (709,000)
========== =========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 19,128,000 16,242,000
NET LOSS PER COMMON SHARE $ (0.06) $ (0.04)
========== ==========
<FN>
See accompanying notes
5
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED OCTOBER 31, 1997
(Rounded to Nearest Thousand)
PREFERRED STOCK "SERIES B"
---------------------------------
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
--------- ------- -----------
BALANCES, JULY 31, 1997 664,000 $ 1,000 $ 3,321,000
Three months ended October 31,
1997 (unaudited):
Conversion to common stock (664,000) (1,000) (3,321,000)
--------- ------ ----------
BALANCES, OCTOBER 31, 1997 - $ - $ -
========= ====== ==========
COMMON STOCK
------------------------------------------------------------
ADDITIONAL
NUMBER OF PAID-IN WARRANTS ACCUMULATED
SHARES AMOUNT CAPITAL OUTSTANDING DEFICIT
---------- ------- ----------- ----------- ------------
BALANCES,
JULY 31, 1997 18,907,000 $19,000 $22,313,000 $ 428,000 $(24,558,000)
Three months
ended October
31, 1997
(unaudited):
Preferred Series
B conversion 1,328,000 1,000 3,321,000 - -
Net loss - - - - ( 1,160,000)
---------- ------ ---------- -------- -----------
BALANCES,
OCTOBER 31,
1997 20,235,000 $20,000 $25,634,000 $ 428,000 $(25,718,000)
========== ====== ========== ======== ===========
<FN>
See accompanying notes
6
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Rounded to Nearest Thousand)
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,160,000) $ (709,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation of property and
equipment and amortization of
goodwill and patent 9,000 9,000
Issuance of common stock for
officers' compensation - 188,000
(Increase) decrease in:
Accounts receivable - (219,000)
Inventory - ( 82,000)
Prepaid expenses and other current
assets 1,000 ( 6,000)
Increase (decrease) in:
Accounts payable 153,000 119,000
Accrued taxes, other than income taxes (1,000) -
Accrued wages - officers 1,000 ( 24,000)
Accrued expenses and other current
liabilities (5,000) 19,000
---------- ---------
Net cash used in operating activities (1,002,000) (705,000)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of patent (16,000) ( 2,000)
Purchase of equipment (3,000) ( 11,000)
---------- ---------
Net cash used in investing activities (19,000) ( 13,000)
---------- ---------
<FN>
See accompanying notes
7
SIGMA ALPHA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Rounded to Nearest Thousand)
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
1997 1996
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loans payable $ - $ ( 16,000)
Proceeds from issuance of common stock - 601,000
Commission on common stock issuance - ( 24,000)
Repurchase of Series C preferred stock - (120,000)
---------- ---------
Net cash provided by financing
activities - 441,000
---------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (1,021,000) (277,000)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,688,000 1,173,000
---------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 667,000 $ 896,000
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period:
Interest $ - $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Common stock issued in retirement of
Series B Preferred stock $ 3,322,000 $ -
Common stock issued in retirement of
Series A Preferred stock $ - $ 882,000
<FN>
See accompanying notes
8
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 1 - INTERIM PERIODS
The unaudited information has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management reflects
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended July 31, 1997.
Certain amounts for the three months ended October 31, 1996 have been
reclassified to conform to the presentation for the three months ended October
31, 1997.
The results of operations for the three-month periods ended October 31, 1997
and 1996 are not necessarily indicative of operating results for the full year.
NOTE 2 - BUSINESS ACTIVITIES
During the three months ended October 31, 1997, Sigma Alpha Group, Ltd. (the
"Company") conducted activities directed toward the research and development of
its digital voice pager.
NOTE 3 - METHOD OF ACCOUNTING
The Company prepares its financial statements on the accrual method of
accounting, recognizing income when earned and expenses when incurred.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company has development agreements with several vendors who are working on
key components and subsystems for the Company's Digital Voice Pager. As of
October 31, 1997, there were two significant development agreements under which
the Company had paid an aggregate of $771,000 against contract limits
aggregating $929,000. Management expects to continue to utilize vendors, where
appropriate, to help develop its products.
NOTE 5 - PREFERRED STOCK
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. The Company no longer has any
preferred stock outstanding.
9
SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
NOTE 6 - INCOME TAXES
There is no income tax benefit for operating losses for the three months ended
October 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 asset will not be
realized through future taxable income.
NOTE 7 - NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of shares
outstanding, without assumed conversion of the warrants and stock options,
which are considered to be common stock equivalents, since the effect on net
loss per share would be anti-dilutive.
In February 1997, the FASB issued Statement 128, "Earnings Per Share,"
which establishes standards for computing and presenting earnings per share.
Statement 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. When adopted, Statement 128 will require restatement of prior
periods' earnings per share. The Company expects to adopt Statement 128
effective in its fiscal quarter ended January 31, 1998, and does not expect
this adoption to have a material effect on the Company's net loss per share.
10
PART I. ITEM 2. 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 products to emerging world markets. During
the quarter ended October 31, 1997, the Company conducted activities directed
toward the research and development of its digital voice pager ("Digital Voice
Pager"). The Company continues to make progress toward such development in
accordance with its plans.
Recent Developments
- -------------------
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 letter of intent 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. 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.
In October 1997, Michael P. McAndrews was appointed President of the
Company. Prior to joining the Company, Mr. McAndrews held several senior
marketing positions in Motorola's 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.
Three Months Ended October 31, 1997
v. Three Months Ended October 31, 1996
- --------------------------------------
Results of Operations
For the three months ended October 31, 1997 ("Fiscal 1Q98"), the Company
incurred a net loss of $1,160,000 on no sales compared to a net loss of
$709,000 on sales of $219,000 for the three months ended October 31, 1996
("Fiscal 1Q97").
11
In Fiscal 1Q97, Global Telecommunications of Delaware, Inc. ("Global"),
the Company's 80-percent owned subsidiary, recognized $219,000 of revenue from
the sale of approximately 7,800 of its stock information receiver ("SIR")
units. However, in August 1997 the Company temporarily suspended Global's SIR
program after concluding 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 Digital Voice Pager
technology. Since no SIR units were sold in Fiscal 1Q98 and since the Digital
Voice Pager is still under development, the Company had no operating revenues
in Fiscal 1Q98.
The $451,000 increase in the net loss for the quarter was primarily due to
higher research and development costs, consulting fees, other salaries and
payroll costs, and travel expenses, partially offset by lower officers'
compensation and reductions in other operating expenses.
Research and development costs increased $351,000 due to costs incurred in
Fiscal 1Q98 to vendors that are developing certain aspects of the Digital Voice
Pager. Consulting fees increased $143,000 in Fiscal 1Q98 primarily due to fees
paid in Fiscal 1Q98 to investment bankers and other consultants who assisted
the Company in raising equity capital and developing strategic alliances.
Other salaries and payroll costs increased $33,000 in Fiscal 1Q98 due to higher
salaries, payroll taxes and medical benefits. Travel expenses increased
$25,000 in Fiscal 1Q98 due to increased travel related to raising equity
capital and meeting with vendors that are developing certain aspects of the
Digital Voice Pager.
Officers' compensation decreased $88,000 in Fiscal 1Q98 due to the absence
of $188,000 of the Company's common stock issued to the Company's Chief
Executive Officer in Fiscal 1Q97. This decrease was partially offset by
regularly scheduled salary increases for existing officers and the addition of
salaries paid to a new Chief Operating Officer and a new President beginning in
July 1997 and October 1997, respectively. Other operating expenses decreased
$22,000 due to the absence of marketing expenses incurred in Fiscal 1Q97 for
marketing Global's SIR units in China.
Liquidity and Capital Resources
At October 31, 1997, the Company had working capital of $242,000
(including a cash balance of $667,000) as compared to working capital of
$1,412,000 (including a cash balance of $1,688,000) at July 31, 1997. The
working capital decrease of $1,170,000 largely reflects the use of cash in
operations during Fiscal 1Q98.
As of December 5, 1997, the Company maintained a cash balance of $338,000.
Management is aware that significant additional funding will be required within
the next few months in order to achieve its primary objectives. 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.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Registrant's Annual Report on
Form 10-KSB for the year ended July 31, 1997.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
None
Item 6. Exhibits and Reports on Form 8-K
None
Exhibit - 27. Financial Data Schedule
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 15, 1997
SIGMA ALPHA GROUP, LTD.
(REGISTRANT)
By: s/James M. Boyd, Jr.
--------------------
James M. Boyd, Jr.
Vice President of Finance
and Chief Accounting Officer
14