Mega (MGINQ) 10QSB/A 2003 Q1 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1O-QSB/A

(Amendment No. 1)

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from             to             

Commission file number: 000-17510

MEGA GROUP, INC.

(Exact name of small business issuer as specified in its charter)

NEW YORK	14-1653446
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1730 Rhode Island Ave., N.W. Suite 415, Washington, DC 20036

(Address of principal executive offices)

(202) 296-9594

(Issuer’s telephone number)

N/A

(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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requires for the past 90 days.    Yes  ¨    No  x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 9,359,303 shares of common stock (including 75,302 shares held of record by our wholly-owned subsidiary), as of August 1, 2003.

Transitional Small Business Disclosure Format (Check one):    Yes  ¨    No  x

This Form 10-QSB/A (Amendment No. 1) is being filed to amend and restate the information disclosed in Item 1 of Part I of the Form 10-QSB filed on May 14, 2003, for the three months ended March 31, 2003 to record the 1999 and 2000 stock transactions with Small Business Investment Corporation of America, Inc. using the purchase method of accounting. The Company previously accounted for these transactions as a pooling of interests in its financial statements for the year ended December 31, 2000.

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.

Mega Group, Inc. and Subsidiary

Consolidated Balance Sheet

(Unaudited)

	March 31, 2003 (as restated)
Assets
Current assets
Cash	$	2,594
Marketable securities		2,792
Accounts receivable		30,000
Loans receivable		20,738
Loan financing costs, net		7,900
Total current assets		64,024
Property and equipment
Office furniture and equipment		25,663
Less: Accumulated depreciation and amortization		(17,299	)
Net property and equipment		8,364
Total assets	$	72,388

The accompanying Notes to Financial Statements are an integral part of these financial statements

F-1

Mega Group, Inc. and Subsidiary

Consolidated Balance Sheet

(Unaudited)

	March 31, 2003 (as restated)
Liabilities and Deficiency in Stockholders’ Equity
Current liabilities
Current portion of long-term debt		1,099,149
Accounts payable and accrued expenses		730,915
Accrued wages		512,171
Accrued interest		254,186
Due to stockholders		128,252
Total current liabilities		2,724,673
Commitments and contingencies
Deficiency in stockholders’ equity
Preferred stock, cumulative 8%, $1 par value per share, 400,000 shares authorized, 10,000 shares issued and outstanding		10,000
Common stock, $0.016 par value per share, 25,000,000 shares authorized, 9,359,303 shares issued and outstanding		149,749
Additional paid-in capital		245,849
Accumulated deficit		(3,058,186	)
Accumulated other comprehensive income		303
Total deficiency in stockholders’ equity		(2,652,285	)
Total liabilities and deficiency in stockholders’ equity	$	72,388

The accompanying Notes to Financial Statements are an integral part of these financial statements

F-2

Mega Group, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

Three Months Ended March 31,	2002			2003
Revenue	$	—		$	—
Operating expenses
Compensation and benefits		37,500			75,000
Other selling, general and administrative expenses		17,139			82,093
Depreciation and amortization		692			41,979
Total operating expenses		55,331			199,072
Loss from operations		(55,331	)		(199,072	)
Other income (expense)
Interest income		219			45
Interest expense		(29,662	)		(39,908	)
Total		(29,443	)		(39,863	)
Net loss	$	(84,774	)	$	(238,935	)
Basic and diluted net loss per common share:
Basic and diluted net loss per common share	$	(0.01	)	$	(0.03	)
Basic and diluted weighted average common shares used to compute net loss per common share		8,056,912			9,359,303

The accompanying Notes to Financial Statements are an integral part of these financial statements.

F-3

Mega Group, Inc. and Subsidiary

Consolidated Statements of Comprehensive Loss

(Unaudited)

Three Months Ended March 31,	2002			2003
Net loss	$	(84,774	)	$	(238,935	)
Decrease in unrealized loss on marketable securities, net of tax		50			1,767
Other comprehensive income		50			1,767
Comprehensive loss	$	(84,724	)	$	(237,168	)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

F-4

Mega Group, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31, 2002				Three Months Ended March 31, 2003
Cash flows from operating activities
Net loss	$	(84,774	)		$	(238,935	)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization		692				41,979
Interest paid by shareholder on Company’s behalf		—				986
Increase (decrease) in
Bank overdraft		897				—
Accounts payable and accrued expenses		6,586				(1,326	)
Accrued wages		37,500				58,437
Accrued interest		23,005				35,504
				��
Net cash used by operating activities		(16,094	)			(103,355	)
Cash flows from investing activities
Purchase of marketable securities		(323	)			—
Purchase of property and equipment		—				(523	)
Loans made to affiliates, net		(930	)			(834	)
Net cash used by investing activities		(1,253	)			(1,357	)
Cash flows from financing activities
Principal payments on debt		(17,272	)			(11,284	)
Debt proceeds		6,404				114,559
Advances from stockholder		11,115				—
Net cash provided by financing activities		247				103,275
Net decrease in cash		(17,100	)			(1,437	)
Cash—beginning of period		17,100				4,031
Cash—end of period	$	—			$	2,594
Supplemental cash flow information
Actual cash payments for:
Interest	$	6,657			$	986
Noncash investing and financing activities
Payment made by shareholder on notes payable on behalf of the Company	$	—			$	10,300
Loan financing costs accrued not yet paid	$	—			$	47,500

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

F-5

Mega Group, Inc. and Subsidiary

Notes to Consolidated Financial Statements

1.      Nature of Business	The consolidated financial statements include the accounts Business of the Mega Group, Inc., a New York corporation and its wholly owned subsidiary, Small Business Investment Corporation of America, Inc. (SBICOA), an Oregon corporation (collectively, the Company). All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements. The Company’s current business plan is to provide diversified financial services to ethnic communities and faith-based entities in the United States and to operate as a specialized financial institution providing loans and investments for businesses in low and moderate income communities.
2.      Interim Financial Presentation	The consolidated financial statements have been prepared by the Company without audit and are subject to year-end adjustment. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated interim statements should be read in conjunction with the most recent audited consolidated financial statements filed by the Company on Form 10-KSB with the Securities and Exchange Commission. The consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) which, in the opinion of management are necessary to present fairly the Company’s financial position, results of operations and cash flows. Results of operations for the three months ended March 31, 2003 are not necessarily indicative of results to be achieved for the full fiscal year.
3.      Notes Payable	In April 2003, the Company obtained an additional loan from Matah for $60,000 and the due date on all of the existing loans was extended until July 15, 2003. These loans are subject to the same terms and conditions as the original Loan and Security Agreement dated July 15, 2002, as amended, as disclosed in the Company’s 2002 annual financial statements.
4.      Financial Condition	The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2003, the Company has a deficiency in stockholders’ equity of approximately $2,652,000 and a working capital deficiency of approximately $2,661,000. In addition, the Company is in default on certain notes payable and other obligations and is involved in significant litigation involving past business dealings. The intent of the Company’s management is to direct it into new business lines providing financial services to currently underserved ethnic minorities through alliances with churches and other organizations serving those groups. The Company intends in the near term to obtain additional equity funding to pursue these new lines of business. On May 2, 2002, the Company entered into a non-binding letter of intent with an underwriter to engage in a firm-commitment registered public offering of 1,500,000 units, each unit consisting of one share of its common stock and a warrant to purchase one additional share of its common stock, representing 35% of its equity fully diluted, at an offering price currently estimated at $6.00 per unit. The letter of intent is subject to various conditions and to the execution of formal written underwriting documents. In June 2003, the letter of intent was rescinded. The Company is now conducting a best efforts no minimum public offering.

F-6

4.      Financial Condition (continued)	On October 11, 2000, as a condition of the reverse acquisition of Mega by SBICOA, Mega’s president, Steven Gregory, agreed to indemnify the Company, SBICOA, and its respective directors, shareholders, affiliates, and certain other associated persons (collectively, the Indemnitee Group) and to hold the Indemnitee Group harmless from and against all claims or liabilities relating to its business, including all litigation claims then being asserted against the Company (other than the Adler claim described in Note 8). Mr. Gregory’s agreement is subject to certain conditions, among them that (i) it is effective until not later than October 11, 2004, (ii) it is contingent on the successful completion of a securities offering by the Company, and (iii) his obligation shall be satisfied only by his delivery to the Company of such number of its common shares owned by him, valued for this purpose at $2.50 per share, as shall be equal to the amount of any claim settled or finally determined. Mr. Gregory has granted the Indemnitee Group a security interest in his shares to secure his obligation.
	The Company’s ability to continue as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis until the offering can be completed. The Company has taken steps to reduce its cash expenditures including: deferring the payment of its officer’s salaries, negotiating favorable terms in order to defer payments to certain vendors, and minimizing its general and administrative expenses. This plan assumes no subsequent unfavorable changes in the terms of the Company’s notes payable in which the Company is currently in default. To the extent that any of the note holders pursue their rights under the notes, the Company’s cash flow position could be materially affected. As of August 7, 2003, the Company has $40,000 remaining under its working capital loan facility with Matah. In addition, the maturity date of the $500,000 facility was extended until March 31, 2004. Finally, on August 6, 2003, the Company executed an unconditional commitment letter with Matah to extend an additional credit facility of $300,000. This facility is due and payable on March 31, 2004. Management believes that these actions will enable the Company to generate sufficient cash flow to meet its obligations on a timely basis until the offering can be completed, but no assurances can be given in this regard.
5.      Related Party Transactions	Due to stockholder: The Company owes its president $128,252 at March 31, 2003. The obligation is the result of payments made by the president on the Company’s behalf. Such payments covered certain debt requirements as well as operating expenses.

F-7

6.      Stock Options In accounting for stock options to employees, the Company follows the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, as opposed to the fair value method prescribed by Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123:

	Three Months Ended March 31,
	2002			2003
Net loss, as reported	$	(84,774	)	$	(238,935	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—			—
Pro-forma net loss	$	(84,774	)	$	(238,935	)
Earnings per share:
Basic and dilutive—as reported	$	(0.01	)	$	(0.03	)
Basic and dilutive—pro forma	$	(0.01	)	$	(0.03	)

	This disclosure is in accordance with Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure.
7.      Net loss per share	The following table sets forth the computation of basic and diluted net loss per share for the three month periods ended March 31, 2003 and 2002:

	March 31, 2003			March 31, 2002
Net loss	$	(238,935	)	$	(84,774	)
Preferred stock dividends		—			—
Net loss—basic	$	(238,935	)	$	(84,774	)
Weighted average shares—basic		9,359,303			8,056,912
Common shares issuable upon exercise of stock options		—			—
Weighted average shares diluted		9,359,303			8,056,912
Basic and diluted net loss per share	$	(0.03	)	$	(0.01	)

For the three month periods ended March 31, 2003 and 2002, 280,000 common shares issuable upon exercise of stock options were excluded from the dilutive calculation because the effect was anti-dilutive.

F-8

8.      Restatement

Subsequent to the filing of the Company’s March 31, 2003 Form 10-QSB, the Company discovered that its January 1, 2003 Additional paid-in capital and Accumulated deficit balances were misstated. The Company has restated the accompanying financial statements to record its 1999 and 2000 stock transactions with SBICOA using the purchase method of accounting. The Company previously accounted for these transactions as a pooling of interests in accordance with Accounting Principles Board Opinion No. 16 (APB 16) in its 10K-SB for the year ended December 31, 2000. The summary of the underlying transactions is as follows:

1)      On November 1, 1999, SBICOA purchased 776,693 shares, or approximately 53%, of Mega Group, Inc.’s outstanding common stock from Mega Group, Inc.’s president in exchange for a note payable to him for $80,000. A summary of the assets and liabilities of Mega Group, Inc. at the transaction date was as follows:

Cash	$	68,000
Accounts receivable		121,000
Other assets		321,000
Total Assets		510,000
Accounts payable and accrued expenses		457,000
Notes payable		1,128,000
Total Liabilities		1,585,000
Net liabilities acquired	$	1,075,000

This transaction was recorded as a purchase. Goodwill recorded related to the transaction was approximately $1,155,000 and was deemed to be impaired during 1999, and therefore, was written off.

2)      On October 11, 2000, Mega Group, Inc. issued 9,309,396 of its common stock, or approximately 86% of its common stock after the issuance, to the stockholders of SBICOA for 6,000 shares, or 100%, of the outstanding common stock of SBICOA. The purchase price for the transaction of approximately $3,258,000 was determined based upon the fair market value of the shares on the transaction date. A summary of the assets and liabilities of Mega Group, Inc. at the transaction date was as follows:

Cash	$	9,000
Accounts payable and accrued expenses		627,000
Notes payable		504,000
Total Liabilities		1,131,000
Net liabilities	$	1,122,000

For accounting purposes the Company has determined that SBICOA was the acquirer based on the following factors:

1)      SBICOA was in control of the majority of outstanding common stock following the transaction,

2)      operations of SBICOA became the continuing operations of the combined entity, and

3)      the management of SBICOA was to manage the continuing entity.

F-9

8.      Restatement (continued)	In light of SBICOA’s pre-existing 53% ownership of Mega Group, Inc., the Company recorded the October 11, 2000 share exchange as a downstream merger of the percent affected through the purchase of the minority interest of Mega Group, Inc. by SBICOA. Since Mega Group, Inc. was a non-operating entity on that day, the Company recorded the premium over net assets purchased as a reduction to Additional paid-in capital.
	Historical cumulative data presented are those of SBICOA (accounting acquirer) and includes its share of 53% of Mega Group, Inc. losses from November 1999 to October 2000. Following the October 2000 transaction, all (100%) of Mega Group, Inc. net losses are included in the historical cumulative data.
	The following table shows changes as a result of the restatement:

	March 31, 2003
	As previously presented			As restated
Total assets	$	72,388		$	72,388
Total liabilities		(2,724,673	)		(2,724,673	)
Deficiency in stockholders’ equity:
Preferred stock		(10,000	)		(10,000	)
Common stock		(149,749	)		(149,749	)
Additional paid-in capital		(3,544,718	)		(245,849	)
Accumulated Deficit		6,357,055			3,058,186
Accumulated other comprehensive income		(303	)		(303	)
Total deficiency in stockholders’ equity		2,652,285			2,652,285
Total liabilities and deficiency in stockholders’ equity	$	(72,388	)	$	(72,388	)

F-10

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report, as amended, to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 13, 2003	MEGA GROUP, INC.
	By:	/s/    JOHN H. BROWN
		John H. Brown Chief Executive Officer

Date: August 13, 2003	By:	/s/    MERRITT C. BROWN
		Merritt C. Brown Chief Financial Officer