UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-QSB
(Mark One)
| x | | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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
| ITEM 2. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. |
Results of Operations
Some of the statements contained or incorporated by reference in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. Forward-looking statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” and similar words or phrases. Accordingly, these statements involve estimates, assumptions, and uncertainties. Any forward-looking statements are qualified in their entirety by reference to the factors, including risk factors, discussed in this report or incorporated by reference. Because the factors discussed in this report or incorporated by reference could cause actual results or outcomes to differ materially from those expressed in forward-looking statements, you should not over-rely on forward-looking statements. Further, each forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect later events or circumstances as they occur.
We believe that our financial condition and results of operations included in this report are not indicative of our future prospects. During the past two years we have been in transition. We discontinued our insurance agency business and acquired the Small Business Investment Corporation of America, Inc. (“SBICOA”). Our planned operations will initially include:
Business and Community Development Lending
We propose to operate as a specialized financial institution, known as a Community and Individual Investment Corporation (“CIIC”), under an initiative of the U.S. Department of Housing and Urban Development (“HUD”). CIICs are for-profit, resident-owned, non-bank “banks” that, in the words of HUD, “serve an important function by making business and housing loans in low- and moderate-income communities”. CIICs may use HUD funds to provide community development and business loans, business start-up or expansion loans, and rental housing rehabilitation loans.
We propose to acquire, or become licensed to operate as, a Small Business Investment Company (“SBIC”) or a New Markets Venture Capital Company (“NMVCC”), under initiatives of the U.S. Small Business Administration (“SBA”). SBICs and NMVCCs provide SBA-guaranteed debt financing or equity capital to small-business concerns and developmental venture capital financing to concerns in low-income areas.
We propose to support community-based financing, through other financial institutions, by making direct investments, providing loan guarantees and other credit enhancements, and purchasing loans. We intend to provide technical assistance to lenders and borrowers and to assist banks in complying with the requirements of the Community Reinvestment Act.
Investment Referral Services
We expect to package, service, and advise closed-end investment companies and other savings and investment programs that will permit community- and faith-based equity participation in these efforts.
Business Strategic Planning and Financial Consulting Services
Finally, we propose to provide fee-based financial consulting services to local governments throughout the United States.
1
Liquidity and Capital Resources
Since October 11, 2000, through SBICOA, we have sustained our operations substantially through private borrowings. On July 15, 2002, we entered into a loan and security agreement with Matah Holdings, L.L.C. (“Matah”), a nonaffiliated lender. The agreement provided us with a working capital facility under which we had the right to borrow up to $500,000 and as of December 31, 2002 we had borrowed $300,000. In January 2003, the Company obtained an additional loan from Matah for $100,000 and was granted an extension on the existing loans until April 15, 2003. The agreement also called for 50,000 shares of the Company’s common stock to be issued to Matah as additional consideration for the $100,000 loan. The Company has accrued $47,500 of loan financing costs related to these shares based on their fair market value at the date of the agreement. The shares were not issued as of June 30, 2003. In April 2003, the Company obtained an additional loan from Matah for $60,000 and was granted an extension on the existing loans until July 15, 2003. By agreement dated August 6, 2003, the Company was granted a further extension on the existing loans until March 31, 2004. 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. The borrowings are personally guaranteed by our chairman of the board of directors, chief executive officer, and principal shareholder, John H. Brown, and by our secretary-treasurer, director, and principal shareholder, Joyce L. Brown.
Our business plan referred to above calls for a capitalization of at least $30,000,000. Accordingly, we are now undercapitalized. We intend to satisfy any liquidity needs during the foreseeable future by engaging in one or more public or non-public equity financings. The nature of our business and proposed business does not require any significant product research and development, purchase or sale of plant and equipment, or changes in the number of employees. In the event that we are unable to raise significant funds, we may be unable to make required payments as they become due and may be unable to fully execute our business plan. We estimate that we have sufficient liquidity to satisfy our cash requirements until at least March 2004 due primarily to a $300,000 unconditional loan commitment letter issued on August 6, 2003 by Matah which expires on March 31, 2004. We expect to satisfy any liquidity needs during the foreseeable future by engaging in one or more public or non-public equity financings.
As of June 30, 2003, we had a deficiency in stockholders’ equity of approximately $2,824,000 and a working capital deficiency of approximately $2,832,000. In addition, we are in default on certain notes payable and other obligations and are involved in significant litigation involving past business dealings. Although interest rates and the amount outstanding under our credit facility may vary, based on current interest rates and assuming that our debt levels do not change from the date of completion of our current public offering, servicing all of our outstanding debt at June 30, 2003 set forth below, will require first-year payments of approximately $294,576.
In 2004, the Company is obligated under a defaulted $60,000 note payable, unsecured, bearing interest at 12.5%, due June 2003, to make principal and accrued interest payments of approximately $77,000. In 2004, the Company also is obligated to make principal and interest payments in the aggregate amount of $136,000 pursuant to note payable in default to an individual for a cash loan, unsecured, bearing interest at 12%. In addition, during 2004, the Company is obligated to make principal and interest payments of approximately $22,000 under an unsecured note payable in default to a stockholder and officer bearing interest at 15%, due December 2003.
On October 11, 2000, as a condition of its acquisition of SBICOA, its 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 Herman Adler v. Mega Group, et al., claim described in the “Legal Proceedings” disclosure in our 10-KSB filed March 7, 2003). 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
2
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 intent of our management is to direct Mega Group into new business lines providing financial services to currently underserved ethnic minorities through alliances with churches and other organizations serving those groups. We intend in the near term to obtain additional equity funding and to obtain additional debt financing to pursue these new lines of business and to provide the funds to satisfy its current obligations. The extent to which we can raise additional equity and financing and achieve profitable operations from new business activities will determine if we can continue as a going concern.
Management believes it will be successful in obtaining additional equity and debt financing, but no assurances can be given in this regard. As a result of our deficiencies in stockholders’ equity and working capital and default on certain of our obligations, our independent accountants have qualified our audited financials to indicate that these conditions raise substantial doubt about our ability to continue as a going concern.
Results of Operations
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
During the six months ended June 30, 2003, our cash position decreased from $4,031 at December 31, 2002 to $287 at June 30, 2003. During the same six month period ended June 30, 2003, we realized a net loss of $412,032 after revenue of $14,500 and ongoing expenses in the total amount of $342,035 and interest expense in the amount of $84,645 compared to a net loss of $210,645 after revenues of $0, ongoing operating expenses in the total amount of $150,731 and interest expense of $59,647 during the six months ended June 30, 2002.
| ITEM 3. | | CONTROLS AND PROCEDURES. |
Within the 90 days prior to the filing date of this quarterly report, our principal executive officer and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. They have advised us that, based on that evaluation, they concluded that our disclosure controls and procedures are effective to ensure that material information relating to us, and our consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls since the date of their evaluation. Our principal executive officer and principal financial officer identified no significant deficiencies and material weaknesses requiring corrective action.
3
PART II. OTHER INFORMATION
| ITEM 1. | | LEGAL PROCEEDINGS. |
We are a respondent in a civil action, for confirmation of an arbitration award captioned Herman Adler v. Mega Group, Inc., et al., which commenced on November 15, 1999, in the Supreme Court for the County of Albany, New York. The petitioner, now deceased, was the former owner of an insurance agency which we purchased in 1985. He claimed that the Company failed to honor the payment terms of the agency purchase agreement. On December 15, 1999, an arbitrator rendered, and on March 7, 2000 the arbitrator modified, an award in favor of the petitioner and against the Company in the amount of $157,381. On January 8, 2001, the Supreme Court confirmed the arbitration award and entered judgment against the Company for $168,808 including costs and interest. Judgment was also entered as against various individuals who had guaranteed the Company’s obligation to petitioner. The judgment creditor restrained the Company from making any sale, assignment, transfer, or interference with any property in which the Company has an interest until the judgment is satisfied or vacated. The awarded amount is included in the current portion of long-term debt and related costs and interest are included in accounts payable and accrued expenses on the accompanying June 30, 2003 Balance Sheet.
We are the defendant in a civil action for money damages, for breach of a computer financing agreement, captioned First State Bank v. Mega Group, Inc., in the Supreme Court for the County of Saratoga, New York. On December 14, 2000, the Supreme Court entered judgment against the Company in the amount of $48,000. The judgment creditor restrained the Company from making any sale, assignment, transfer, or interference with any property in which the Company has an interest until the judgment is satisfied or vacated. The judgment amount is included in the current portion of long-term debt on the accompanying June 30, 2003 Balance Sheet.
We are a defendant in a civil action for money damages captioned Verizon Yellow Pages v. Mega Group, Inc., which commenced on January 31, 2003, and is pending in the Supreme Court for the County of Albany, New York. The plaintiff seeks to recover $20,000 for past due advertisement charges, attorneys fees, costs and interest. We vigorously dispute the charges, and a motion for summary judgment has been asserted by the plaintiff.
We commenced an action on March 13, 2003, against our former counsel, attorney Stephen Pechenik, and his law firm, Pechenik & Curro, PC, which is pending in the Supreme Court for the County of Saratoga, New York. In our complaint, we allege professional malpractice in relation to the entry of judgment in a matter captioned Halton v. Mega which was litigated in the Supreme Court for the County of Saratoga, New York, and for certain material misrepresentations which were made by our former counsel at the time of the sale of certain of our assets to Mega Personal Lines. The defendants’ answer was served in May 2003. Discovery has commenced.
We are one of several defendants in a civil action for money damages captioned Mega Personal Lines, Inc. v Mega Group, Inc., et al., which was commenced on March 27, 2003. In this action commenced by Mega Personal Lines (AMPL), as against Mega Group, Inc., Stephen Pechenik and Pechenik & Curro, PC, MPL seeks to recover based upon material misrepresentations which were made at the time of the sale of certain Mega Group assets to MPL. The same allegations of negligent misrepresentation have been made against both Mega Group and its former counsel. We anticipate an answer which (1) denies any wrongdoing, (2) asserts a counterclaim for unjust enrichment and (3) cross-claims against co-defendants Steve Pechenik and Pechenik & Curro, PC for indemnification.
We are a defendant in other pending lawsuits which, in the view of our management, are not material to our financial statements or the results of our operations.
| ITEM 2. | | CHANGES IN SECURITIES. |
None.
4
| ITEM 3. | | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
| ITEM 5. | | OTHER INFORMATION. |
None.
| ITEM 6. | | EXHIBITS AND REPORTS ON FORM 8-K. |
(a) EXHIBITS.
31.1—Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 305 of the Sarbanes-Oxley Act of 2002.
31.2—Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 305 of the Sarbanes-Oxley Act of 2002.
32.1—Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)REPORTS ON FORM 8-K.
Form 8-K filed on April 4, 2003, Item 5. Other Events; Form 8-K filed on August 13, 2003, Item 5. Other Events.
5
PART I. FINANCIAL INFORMATION
| ITEM 1. | | FINANCIAL STATEMENTS. |
Mega Group, Inc. and Subsidiary
Consolidated Balance Sheet (Unaudited)
| | | June 30, 2003
| |
Assets | | | | |
Current assets | | | | |
Cash | | $ | 287 | |
Marketable securities | | | 4,121 | |
Accounts receivable | | | 39,500 | |
Loans receivable | | | 21,622 | |
Deposits | | | 2,099 | |
| | |
|
|
|
Total current assets | | | 67,629 | |
| | |
|
|
|
Property and equipment | | | | |
Office furniture and equipment | | | 25,663 | |
Less: Accumulated depreciation and amortization | | | (18,012 | ) |
| | |
|
|
|
Net property and equipment | | | 7,651 | |
| | |
|
|
|
Total assets | | $ | 75,280 | |
| | |
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-1
Mega Group, Inc. and Subsidiary
Consolidated Balance Sheet (Unaudited)
| | | June 30, 2003
| |
Liabilities and Deficiency in Stockholders’ Equity | | | | |
Current liabilities | | | | |
Bank overdraft | | $ | 3,643 | |
Current portion of long-term debt | | | 1,145,807 | |
Accounts payable and accrued expenses | | | 729,937 | |
Accrued wages | | | 587,171 | |
Accrued interest | | | 293,237 | |
Due to stockholder | | | 139,538 | |
| | |
|
|
|
Total current liabilities | | | 2,899,333 | |
| | |
|
|
|
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, $.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 | | | (3,231,283 | ) |
Accumulated other comprehensive income | | | 1,632 | |
| | |
|
|
|
Total deficiency in stockholders’ equity | | | (2,824,053 | ) |
| | |
|
|
|
Total liabilities and deficiency in stockholders’ equity | | $ | 75,280 | |
| | |
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Mega Group, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
| | | Three Months
Ended June
30, 2002
| | | Three Months
Ended June
30, 2003
| | | Six Months Ended June 30, 2002
| | | Six Months Ended June 30, 2003
| |
Revenue | | $ | | | | $ | 14,500 | | | $ | | | | $ | 14,500 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Operating expenses | | | | | | | | | | | | | | | | |
Compensation and benefits | | | 37,500 | | | | 75,000 | | | | 75,000 | | | | 150,000 | |
Other selling, general and administrative expenses | | | 57,210 | | | | 59,350 | | | | 74,348 | | | | 141,443 | |
Depreciation and amortization | | | 692 | | | | 8,613 | | | | 1,383 | | | | 50,592 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total operating expenses | | | 95,402 | | | | 142,963 | | | | 150,731 | | | | 342,035 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Loss from operations | | | (95,402 | ) | | | (128,463 | ) | | | (150,731 | ) | | | (327,535 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Other income (expense) | | | | | | | | | | | | | | | | |
Interest expense | | | (29,985 | ) | | | (44,737 | ) | | | (59,647 | ) | | | (84,645 | ) |
Interest income | | | 1 | | | | 103 | | | | 220 | | | | 148 | |
Realized loss on sale of marketable securities | | | (487 | ) | | | | | | | (487 | ) | | | | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total | | | (30,471 | ) | | | (44,634 | ) | | | (59,914 | ) | | | (84,497 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net loss | | $ | (125,873 | ) | | $ | (173,097 | ) | | $ | (210,645 | ) | | $ | (412,032 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Basic and diluted net loss per common share: | | | | | | | | | | | | | | | | |
Basic and diluted net loss per common share | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Basic and diluted weighted average common shares used to compute net loss per common share | | | 8,475,500 | | | | 9,359,303 | | | | 8,267,362 | | | | 9,359,303 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-3
Mega Group, Inc. and Subsidiary
Consolidated Statement of Comprehensive Loss (Unaudited)
| | | Three Months
Ended June 30,
2002
| | | Three Months
Ended June 30,
2003
| | | Six Months
Ended June 30,
2002
| | | Six Months
Ended June 30,
2003
| |
Net loss | | $ | (125,873 | ) | | $ | (173,097 | ) | | $ | (210,645 | ) | | $ | (412,032 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Decrease (increase) in unrealized loss on marketable securities, net of tax | | | (266 | ) | | | 1,329 | | | | (216 | ) | | | 3,096 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Other comprehensive income (loss) | | | (266 | ) | | | 1,329 | | | | (216 | ) | | | 3,096 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Comprehensive loss | | $ | (126,139 | ) | | $ | (171,768 | ) | | $ | (210,861 | ) | | $ | (408,936 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-4
Mega Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
| | | Six Months
Ended June 30,
2002
| | | Six Months
Ended June 30,
2003
| |
Cash flows from operating activities | | | | | | | | |
Net loss | | $ | (210,645 | ) | | $ | (412,032 | ) |
Adjustments to reconcile net loss to net cash used by operating activities | | | | | | | | |
Depreciation and amortization | | | 1,383 | | | | 50,592 | |
Realized loss on disposition of marketable securities | | | 487 | | | | | |
Common stock issued for payment of membership dues | | | 1,000 | | | | | |
Interest paid on by shareholder on Company’s behalf | | | | | | | 1,753 | |
(Increase) decrease in | | | | | | | | |
Accounts receivable | | | | | | | (9,500 | ) |
Deposits | | | | | | | (2,099 | ) |
Increase (decrease) in | | | | | | | | |
Bank overdraft | | | | | | | 3,643 | |
Accounts payable and accrued expenses | | | 60,587 | | | | (2,304 | ) |
Accrued wages | | | 75,000 | | | | 133,437 | |
Accrued interest | | | 46,266 | | | | 74,555 | |
| | |
|
|
| |
|
|
|
Net cash used by operating activities | | | (25,922 | ) | | | (161,955 | ) |
| | |
|
|
| |
|
|
|
Cash flows from investing activities | | | | | | | | |
Purchase of property and equipment | | | | | | | (523 | ) |
Purchase of marketable securities | | | (323 | ) | | | | |
Advances made on loans receivable | | | (1,470 | ) | | | (2,652 | ) |
Repayments made on loans receivable | | | | | | | 934 | |
| | |
|
|
| |
|
|
|
Net cash used by investing activities | | | (1,793 | ) | | | (2,241 | ) |
| | |
|
|
| |
|
|
|
Cash flows from financing activities | | | | | | | | |
Principal payments on debt | | | (27,242 | ) | | | (21,284 | ) |
Debt proceeds | | | 16,267 | | | | 181,736 | |
Loans from stockholders | | | 22,230 | | | | | |
| | |
|
|
| |
|
|
|
Net cash provided by financing activities | | | 11,255 | | | | 160,452 | |
| | |
|
|
| |
|
|
|
Net decrease in cash | | | (16,460 | ) | | | (3,744 | ) |
Cash—beginning of period | | | 17,100 | | | | 4,031 | |
| | |
|
|
| |
|
|
|
Cash—end of period | | $ | 640 | | | $ | 287 | |
| | |
|
|
| |
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-5
Mega Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (continued)
| | | Six Months
Ended June 30,
2002
| | Six Months
Ended June 30,
2003
|
Supplemental cash flow information | | | | | | |
Actual cash payments for interest | | $ | 10,381 | | $ | |
Noncash investing and financing activities | | | | | | |
Payment made by shareholder on notes payable on behalf of the Company | | $ | | | $ | 20,819 |
| | |
|
| |
|
|
Loan financing costs accrued but not paid | | $ | | | $ | 47,500 |
| | |
|
| |
|
|
Common stock issued for payment of accrued wages | | $ | 41,543 | | $ | |
| | |
|
| |
|
|
Marketable securities exchanged for payment of accrued wages | | $ | 84 | | $ | |
| | |
|
| |
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-6
Mega Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
| 1. | | Natureof Business | | 1The consolidated financial statements include the accounts 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 six and three months ended June 30, 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 advance of $60,000 under the working capital loan facility from Matah Holdings, LLC (Matah) 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. As of June 30, 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 subsequently 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. |
F-7
Mega Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
| 4. | | Financial
Condition | | The accompanying financial statements have been prepared assuming the Company will continue as a going concern.
As of June 30, 2003, the Company has a deficiency in stockholders’ equity of approximately $2,824,000 and a working
capital deficiency of approximately $2,832,000. 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. The Company currently is
conducting a best-efforts, no minimum 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. |
| | |
| | | | | 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. |
F-8
Mega Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
| 4. | | Financial
Condition
(continued) | | 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 $139,538 at June 30, 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-9
Mega Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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: |
| | | Six Months
Ended June 30, 2002
| | | Six Months
Ended June 30, 2003
| |
Net loss, as reported | | $ | (210,645 | ) | | $ | (412,032 | ) |
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 | | $ | (210,645 | ) | | $ | (412,032 | ) |
| | |
|
|
| |
|
|
|
Earnings per share: | | | | | | | | |
Basic and dilutive—as reported | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | |
|
|
| |
|
|
|
Basic and dilutive—pro forma | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | |
|
|
| |
|
|
|
| | | | | This disclosure is in accordance with Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, that the Company has adopted in these financial statements. |
F-10
Mega Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
7. | | Net loss per
share | | The following table sets forth the computation of basic and diluted net loss per share for the six month periods ended June 30, 2003 and 2002: |
| | | Six Months
Ended June 30, 2002
| | | Six Months
Ended June 30, 2003
| |
Net loss, as reported | | $ | (210,645 | ) | | $ | (412,032 | ) |
Preferred stock dividends | | | — | | | | — | |
| | |
|
|
| |
|
|
|
Net loss—basic | | | (210,645 | ) | | | (412,032 | ) |
| | |
|
|
| |
|
|
|
Weighted average shares—basic | | | 8,267,362 | | | | 9,359,303 | |
| | |
|
|
| |
|
|
|
Common shares issuable upon exercise of stock options | | | — | | | | — | |
| | |
|
|
| |
|
|
|
Weighted average shares diluted | | | 8,267,362 | | | | 9,359,303 | |
| | |
|
|
| |
|
|
|
Basic and diluted net loss per share | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | |
|
|
| |
|
|
|
| For the six month periods ended June 30, 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-11
Mega Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
8. | | Recent Accounting
Pronounce- ments | | In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003.This pronouncement is not expected to have a material impact on the Company’s financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This statement affects the classification, measurement and disclosure requirements of certain freestanding financial instruments, including mandatorily redeemable shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Company for the third quarter of Fiscal 2003. This pronouncement is not expected to have a material impact on the Company’s financial position or results of operations |
F-12
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.
| | | | | MEGA GROUP, INC. |
| | | |
| Date: August 22, 2003 | | | | By: | | /s/ JOHN H. BROWN
|
| | | | | | | | | John H. Brown Chief Executive Officer |
| | | |
| Date: August 22, 2003 | | | | By: | | /s/ MERRITT C. BROWN
|
| | | | | | | | | Merritt C. Brown Chief Financial Officer |
