SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-9646
MEGATECH CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2461059
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (IRS. Employer identification No.)
incorporation of organization)
555 Woburn Street, Tewksbury, Massachusetts 01876
- ----------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 937-9600
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value .0143
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 10, 1997 was $ 303,105 based on the average of the
closing bid and asked Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by
The number of shares of par value $.0143 common stock outstanding as of March
10, 1997 was 3,788,808.
Portions of the registrant's definitive Proxy Statement for its Annual Meeting
of the stockholders to be held on May 12, 1997 (the "Proxy Statement") are
incorporated by reference into Part III.
PART I
Item 1 - Description of Business
- --------------------------------
(a) General Development of Business
-------------------------------
Megatech Corporation (Megatech or the Company) was established in 1970
and is engaged in the production and sale of educational training programs and
equipment in the energy power and transportation areas sold domestically and
internationally to educational institutions and government agencies.
Megatech manufactures educational training equipment which consist of
modular technology workstations which are designed to provide students with
hands-on experience working with various technologies such as: automotive,
environmental, fiber-optic, microwave, laser, alternate energies, electronic,
personal computer kits and multi-media. In conjunction with the educational
equipment, Megatech produces over 200 video training programs and student
manuals which enable students to follow a self-paced self-guided program to
learn the technologies described above.
The Company competes with a number of major suppliers of school training
equipment and several small single product line companies through the
uniqueness of its products, and the quality of its training programs. Most of
the sales to states, cities, towns and school districts are the results of
having submitted sealed bids and having been awarded the sale based on being
the lowest bidder, directly or through independent sales rep organizations.
There were two customers which accounted for 26% of total sales for the
year ended December 31, 1996. One international customer accounted for 15% and
28% of total sales for the years ended December 31, 1995 and 1994,
respectively. No other customer accounted for more than 10% sales in each of
the years ended December 31, 1996, 1995 and 1994.
Approximately 22%, 25% and 48% of sales during the years ended December
31, 1996, 1995 and 1994, respectively, were from international sales.
The Company's backlog as of December 31, 1996 and December 31, 1995 was $
246,416 and $ 339,382, respectively.
As of December 31, 1996, the Company had 12 full-time and 8 part-time
employees, in addition to it's independent domestic and international sales rep
organizations.
(b) Financial Information About Industry Segments
---------------------------------------------
N/A
(c) Narrative Description of Business
---------------------------------
See (a) above.
(d) Financial Information About Foreign and Domestic Operations and Exports
Sales
-----------------------------------------------------------------------
The Company presently has no operations in foreign countries.
Export sales of the Company were as follows:
--------------------------------------------
Percent of
Year Amount Total Sales
---- ---------- -----------
1996 $ 493,491 22%
1995 $ 696,933 25%
1994 $1,933,039 48%
Most of these sales are made upon receipt of Irrevocable Letters of
Credit or prepayments.
Item 2 - Properties
- -------------------
The Company's administrative, sales and marketing, research and
development, and manufacturing facility is located in Tewksbury, Massachusetts
and consists of approximately 20,000 square feet under a lease with a related
party, that will expire in November 1999, and renewable for an additional five
years. The current facility will accommodate twice the current production
levels. There is ample expansion capability beyond the current capacity for
additional square footage for manufacturing.
Item 3 - Legal Proceedings
- --------------------------
None
Item 4 - Submission of Matters to a Vote of Security Holders:
- -------------------------------------------------------------
During the fourth quarter of 1996, No matters was submitted to a vote of
the security holders through the solicitation of proxies or otherwise.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholders
Matters
- ---------------------------------------------------------------------------
The Company's Common Stock is traded in the over-the-counter market,
National Association of Security Dealers through the NASD OTC electronic
bulletin board under the symbol MGTC. The following table sets forth the
periods indicated, the closing high and low Bid Quotations of the Common Stock
in the over-the-counter market. These Quotations represent prices between
dealers, do not include retail markup, markdowns or commissions and do not
necessarily represent actual transactions.
High Low
---- ----
1996 1st Quarter 3.25 2.25
2nd Quarter 2.75 1.00
3rd Quarter 1.00 .25
4th Quarter .25 .02
1995 1st Quarter 2.50 1.75
2nd Quarter 2.00 1.75
3rd Quarter 3.25 2.00
4th Quarter 3.25 3.25
1994 1st Quarter .10 .06
2nd Quarter .50 .06
3rd Quarter 1.75 .50
4th Quarter 2.50 1.75
As of December 31, 1996, there were approximately 827 Shareholders based
upon the number of record holders as of that date. The Company has paid no cash
dividends since it's inception in 1970. At the present time, the Company
intends to retain all potential earnings for future growth of the business.
Item 6 - Selected Financial Data
- --------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Sales $ 2,216,978 $ 2,824,912 $ 4,050,844 $ 2,648,143 $ 2,286,221
Income (Loss) from operations (94,578) (48,310) 241,076 141,365 73,890
Net Income (Loss) (95,633) (57,504) 203,009 109,379 31,637
Net Income (Loss) per Common share (0.025) (0.015) 0.053 0.029 0.008
Weighted average shares outstanding 3,784,566 3,731,425 3,830,875 3,793,058 3,746,058
Total Assets 1,052,450 1,049,046 1,222,490 970,286 1,184,138
Long Term Obligations -0- 1,230 8,728 75,324 58,597
Stockholders' equity 660,255 731,517 777,826 494,266 384,887
Cash Dividends Per Share -0- -0- -0- -0- -0-
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
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1996 Compared with 1995
-----------------------
Sales for 1996 decreased from the corresponding period of 1995 by $ 0.6
million or 22%, to $2.2 million. This decrease was primarily due to a decrease
in overall sales volume. Domestic sales in 1996 were $ 1.7 million or 78% of
total sales, compared to $ 2.1 million or 75% of total sales in 1995.
International sales in 1996 were $0.5 million or 22% of total sales, compared
to $ 0.7 million or 25% of total sales in 1995. The Company believes that the
decrease in overall sales is due to declining sales in Technology Education and
International sales.
Gross profit for 1996 decreased from the corresponding period of 1995 by
$0.3 million, or 25%, to $0.9 million. As a percentage of total sales, gross
profit was 41% for 1996 as compared to 43% in 1995. The decrease in gross
margins is due to lower overall sales, and higher sales in resale type items,
which typically have lower margins to be competitive. Currently, there are no
known future increases in costs of materials, labor or other price increases
which could have an effect on sales other than normal inflation increases.
Selling and marketing expenses for 1996 decreased from the corresponding
period of 1995 by approximately $ 0.2 million or 18% to $ 0.8 million. As a
percentage of total sales, selling and marketing expenses increased to 36% for
1996 compared to 34% for 1995. The increase is primarily due to lower overall
sales.
General and administrative expenses for 1996 decreased from the
corresponding period of 1995 by $.05 million, or 23% to $0.19 million. As a
percentage of total sales, G & A expenses decreased to 8.7% for 1996 compared
to 8.8% for 1995. The decrease of G & A expenses are a result of reduction in
office staff.
Research and development expenses for 1996 decreased from the
corresponding period of 1995 by $.025 million, or 44% to $.03 million. As a
percentage of total sales, R & D expenses decreased to 1.4% for 1996 compared
to 2% for 1995. The decrease of R & D expenses are a result of a reduction in
staff.
Loss from operations for 1996 as compared to the same period of 1995
increased by $ .04 million. As a percentage of total sales, operating losses
increased to 4.2% for 1996 compared to 1.6% for 1995. The operating losses are
a result of the factors indicated above.
1995 Compared with 1994
-----------------------
Sales for 1995 decreased from the corresponding period of 1994 by $1.2
million or 43.4%, to $ 2.8 million. This decrease was primarily due to a
decrease in international sales volume.
International sales in 1995 were $0.7 million or 25% of total sales,
compared to $1.9 million or 48% of total sales in 1994. The Company believes
that the decrease in international sales is primarily due to poor economic
conditions and postponed orders from Mexico.
Gross profit for 1995 decreased from the corresponding period of 1994 by
$0.6 million, or 46%, to $1.2 million. As a percentage of total sales, gross
profit was 43% for 1995 as compared to 44% in 1994. The decrease in gross
margins is due to the larger overhead connected with the move to the new
facility, lost production times incurred during the move and price increases
from our vendors due to inflation. Currently, there are no known future
increases in costs of materials, labor or other price increases which could
have an effect on revenues other than normal inflation increases.
Selling and marketing expenses for 1995 decreased from the corresponding
period of 1994 by $ 0.2 million or 23% to $1 million. As a percentage of total
sales, selling and marketing expenses increased from 29% for 1994 to 34% for
1995. The decrease is primarily a result of lower sales commissions which were
due to the decreased international sales. The company does not anticipate this
decrease in international sales to continue, as more concentrated effort has
been dedicated to pursue new markets.
General and administrative expenses for 1995 decreased from the
corresponding period of 1994 by $.02 million, or 6.5% to $0.2 million. As a
percentage of total sales, G & A expenses increased from 6.5% for 1994 to 8.8%
for 1995. The decrease of G & A expenses are a result of reduction in staff and
was offset by an increase in office rent and professional services costs.
Research and development expenses for 1995 decreased from the
corresponding period of 1994 by $.04 million, or 65% to $.06 million. As a
percentage of total sales, R & D expenses decreased from 2.3% for 1994 to 2%
for 1995. The decrease of R & D expenses are a result of a reduction in R & D
staff.
Operating income (loss) for 1995 as compared to the same period of 1994
decreased by $0.3 million and is a result of the factors indicated above.
Liquidity and capital resources
-------------------------------
Working capital at December 31, 1996 was $556,219 as compared to $606,550
in working capital at December 31, 1995. The decrease was primarily
attributable to the net loss for the year ended December 31, 1996.
The Company maintains a $ 200,000 line-of-credit agreement with a bank,
($500,000 on December 31, 1995). The line is collateralized by a security
interest in substantially all assets of the Company. Interest is payable
monthly at the bank's prime rate plus 1.5%. There were no borrowings
outstanding on this line at December 31, 1996 and 1995.
There is no long term debt or notes payable outstanding at December 31,
1996.
In 1995, capital expenditures totaled approximately $90,400. No material
purchase or capital commitments exist at December 31, 1996.
The Company believes that cash generated from operations, together with
the existing sources of debt financing, will be sufficient to meet foreseeable
cash requirements through 1997.
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
Financial statements and schedules together with the auditors' reports
thereon are referred to Part IV and are attached hereto.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
- ------------------------------------------------------------------------
1. Disagreements with Accountants on Accounting and Financial
Disclosure:
None
2. Changes in Registrant's Certifying Accountants
(As noted on Form 8-K filed January 10, 1997):
(a) On January 2, 1997, the Registrant appointed the accounting
firm of Sullivan Bille, P.C. as independent accountants for
the year ended December 31, 1996 to replace Gordon,
Harrington & Osborn, P.C., effective with such appointment.
Gordon, Harrington & Osborn, P.C. declined to stand for
reelection due to the amount of the audit fees for the year
ended December 31, 1996. The Registrant's Board of Directors
approved the selection of Sullivan Bille, P.C. as new
independent accountants upon the recommendation of the
Registrant's management. Management has not consulted with
Sullivan Bille, P.C. on any accounting, auditing or reporting
matter.
(b) During the two most recent fiscal years and interim period
subsequent to December 31, 1995, through January 2, 1997,
there have been no disagreements with Gordon, Harrington &
Osborn, P.C. on any matter of accounting principles or
practices, financial statement or auditing scope or procedure
or any reporting events.
(c) Gordon, Harrington & Osborn, P.C.'s report on the financial
statements for the past two years contained no adverse
opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty audit scope or accounting
principles.
(d) The registrant has provided Gordon, Harrington & Osborn, P.C.
with a copy of this disclosure and has requested that Gordon,
Harrington & Osborn, P.C. furnish it with a letter addressed
to the SEC stating whether it agreed with the above
statements. (A copy of Gordon, Harrington & Osborn, P.C.'s
letter to the SEC is filed as Exhibit 16 to the Amended Form
8-K).
PART III
Item 10 - Directors, Executive Officers of the Registrant
- ---------------------------------------------------------
The information required with respect to the Directors and the Executive
Officers of the Company is incorporated herein by reference to "Executive
Officers" in the Proxy Statement and is incorporated herein by reference.
Item 11 - Executive Compensation
- --------------------------------
The information required with respect to executive compensation of the
Company is incorporated herein by reference to "Executive Officer Compensation"
in the Proxy Statement and is incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this item with respect to security ownership
and management and certain beneficial owners of the Company is incorporated by
reference to the caption "Stock Ownership of Directors, Executive Officers and
Principal Stockholders" contained in the Proxy Statement and is incorporated
herein by reference.
The Company knows of no arrangements, including any pledge by any person
of securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company. The Company also knows of no
agreements among its shareholders which relate to voting or investment power of
its shares of Common Stock.
Item 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
The Company has signed an agreement with Cramer Production Company, Inc.
(Cramer) of Norwood, Massachusetts, to produce a series of instructional video
tapes supporting modular technology programs offered by the Company. An
officer/shareholder of Cramer is director of the Company. Cramer is responsible
under the agreement for all video production and video cassette reproduction.
The videotapes rae exclusively marketed by Company. The Company provides
scripts for the modules, technical representatives, program materials and is
also responsible for packaging, design and promotion. Purchases from Cramer
under this agreement were approximately $ 28,900, $ 51,900 and $70,500 for the
years ended December 31, 1996, 1995 and 1994, respectively.
During the year ended December 31, 1996, sales to a related entity, an
officer of the Company, who is also the sales representative for a specific
territory, were approximately $ 63,200 and commissions paid to the same entity
were approximately $ 15,900. There were no significant transactions during the
year ended December 31, 1995 and 1994.
The Company has entered into a lease agreement for its Tewksbury,
Massachusetts facility with Lorig Corporation, which is owned by members of the
family of an officer and majority stockholder of the Company. The Company
believes the lease agreement is either favorable or comparable to others based
on a market value of the facility.
PART IV
Item 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K
- ---------------------------------------------------------------------------
Page
----
a) The following documents are filed as a part of this Report:
1. Financial Statement:
Reports of Independent Certified Public Accountants 10
Balance sheet at December 31, 1996 and 1995 12
Statement of operations for the years ended December 31,
1996, 1995 and 1994 13
Statement of Stockholders' equity for the years ended
December 31, 1996, 1995 and 1994 14
Statement of cash flows for the years ended December 31,
1996, 1995 and 1994 15
Notes to Financial Statements 16
2. Schedules for the years ended December 31, 1996, 1995 and 1994
Schedule II - Valuation and Qualifying Accounts 23
All other schedules called for under Regulation S-X are not
submitted because they are not applicable or not required, or
because the required information is included in the
Consolidated financial statements and notes thereto.
3. Exhibits:
The following exhibits are filed herewith:
27.1 Financial data schedule 25
b) Reports on Form 8-K:
None
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Stockholders of
Megatech Corporation
We have audited the accompanying balance sheet of Megatech Corporation
as of December 31, 1996, and the statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Megatech
Corporation as of December 31, 1996, and the results of its operations and its
cash flows for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
Our audit, referred to above, also includes the 1996 financial
schedules listed in the Index at Item 14(a)(2). In our opinion, based on our
audit, such 1996 financial schedules present fairly the information required to
be set forth therein.
/s/ SULLIVAN BILLE, P.C.
Tewksbury, Massachusetts
February 12, 1997
Gordon,--------------------- Richard Hart Harrington, CPA
Harrington Kenneth J. Osborn, CPA
& Osborn, P.C. Michael P. Rurack, CPA
- ---------------------------- Denise S. Roy, CPA
Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Stockholders of
Megatech Corporation
We have audited the accompanying balance sheet of Megatech Corporation
as of December 31, 1995, and the statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 consolidated 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 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
Megatech Corporation as of December 31, 1995, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1994 in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the Index
at Item 14(a)(2) are presented for the purposes of additional analysis and are
to a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ GORDON, HARRINGTON & OSBORN, P.C.
North Andover, Massachusetts
February 23, 1996
30 Massachusetts Avenue, North Andover, MA 01845-3413
Tel. (508) 689-0601 * Fax (508) 794-0077
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Affiliated Conference of Practicing Accountants International, Inc.
MEGATECH CORPORATION
BALANCE SHEET, DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents $ 90,770 $ 55,578
Accounts receivable:
Trade (less allowance for doubtful accounts of $11,580) 407,169 531,429
Affiliate 50,945
Other 2,024 2,967
Inventories 380,379 327,336
Prepaid expenses 17,127 5,539
---------------------------
Total current assets 948,414 922,849
PROPERTY AND EQUIPMENT - Net 96,370 118,531
OTHER ASSETS 7,666 7,666
---------------------------
TOTAL $ 1,052,450 $ 1,049,046
===========================
L I A B I L I T I E S A N D
S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Note payable $ 37,000
Accounts payable:
Trade $ 309,562 239,589
Affiliate 8,701
Accrued commissions 32,622 14,849
Other accrued liabilities 40,058 21,885
Current obligation under capital lease 1,252 2,976
---------------------------
Total current liabilities 392,195 316,299
---------------------------
NON-CURRENT OBLIGATION UNDER CAPITAL LEASE 1,230
---------------------------
STOCKHOLDERS' EQUITY:
Common stock, authorized, 5,000,000 shares of $.0143 par
value; issued and outstanding, 1996, 3,788,808 shares;
1995, 3,761,558, shares 54,180 53,790
Additional paid-in capital 4,034,824 4,010,843
Deficit (3,428,749) (3,333,116)
---------------------------
Stockholders' equity - net 660,255 731,517
---------------------------
TOTAL $ 1,052,450 $ 1,049,046
===========================
See notes to financial statements.
MEGATECH CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
SALES $ 2,216,978 $ 2,824,912 $ 4,050,844
COST OF SALES 1,299,326 1,608,867 2,271,862
-------------------------------------------
GROSS PROFIT 917,652 1,216,045 1,778,982
-------------------------------------------
OPERATING EXPENSES:
Selling and marketing 788,010 957,730 1,177,815
General and administrative 192,746 250,021 266,627
Research and development 31,474 56,604 93,464
-------------------------------------------
Total operating expenses 1,012,230 1,264,355 1,537,906
-------------------------------------------
INCOME (LOSS) FROM OPERATIONS (94,578) (48,310) 241,076
-------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 6 40 2,055
Interest expense (1,189) (4,036) (6,588)
Other 128 (5,198) (2,026)
-------------------------------------------
Other expense - net (1,055) (9,194) (6,559)
-------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (95,633) (57,504) 234,517
PROVISION FOR INCOME TAXES 31,508
-------------------------------------------
NET INCOME (LOSS) $ (95,633) $ (57,504) $ 203,009
===========================================
NET INCOME (LOSS) PER SHARE $ (.025) $ (.015) $ .053
===========================================
See notes to financial statements.
MEGATECH CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK ADDITIONAL
--------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY - NET
--------- -------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1993 3,651,358 $ 52,214 $ 3,920,673 $ (3,478,621) $ 494,266
ISSUANCE OF COMMON STOCK 3,200 46 5,554 5,600
STOCK OPTIONS EXERCISED 14,000 200 10,300 10,500
COMPENSATION 64,451 64,451
NET INCOME FOR THE YEAR 203,009 203,009
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 3,668,558 52,460 4,000,978 (3,275,612) 777,826
STOCK OPTIONS EXERCISED 93,000 1,330 8,070 9,400
COMPENSATION 7,096 7,096
STOCK OPTIONS TERMINATED (5,301) (5,301)
NET LOSS FOR THE YEAR (57,504) (57,504)
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 3,761,558 53,790 4,010,843 (3,333,116) 731,517
ISSUANCE OF COMMON STOCK 5,250 75 5,990 6,065
STOCK OPTIONS EXERCISED 22,000 315 2,985 3,300
COMPENSATION 15,363 15,363
STOCK OPTIONS TERMINATED (357) (357)
NET LOSS FOR THE YEAR (95,633) (95,633)
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 3,788,808 $ 54,180 $ 4,034,824 $ (3,428,749) $ 660,255
===================================================================
See notes to financial statements.
MEGATECH CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (95,633) $ (57,504) $ 203,009
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash charges to net income (loss):
Depreciation and amortization 27,586 25,392 18,379
Compensation funded by stock options 15,006 1,795 64,451
Stock options exercised 9,100
Common stock awarded as compensation 6,065 5,600
Increase in other assets (2,033)
Decrease (increase) in current assets:
Accounts receivable 74,258 (85,954) (162,094)
Inventories (53,043) 180,757 (103,116)
Prepaid expenses (11,588) 12,238 (1,852)
Increase (decrease) in current liabilities:
Accounts payable 78,674 (65,336) (26,126)
Accrued liabilities 35,946 (36,022) 8,064
-------------------------------------
Net cash provided by (used in) operating activities 77,271 (26,667) 15,415
-------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES -
Additions to property and equipment (5,425) (90,429) (22,925)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (2,954) (2,142) (1,541)
Principal payments on notes payable (37,000) (23,635) (11,753)
Proceeds from issuance of common stock 3,300 9,400 1,400
-------------------------------------
Net cash used in financing activities (36,654) (16,377) (11,894)
-------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,192 (133,473) (19,404)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55,578 189,051 208,455
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 90,770 $ 55,578 $ 189,051
=====================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,189 $ 4,036 $ 6,588
Taxes paid 187 20,038 13,962
See notes to financial statements.
MEGATECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------
1. OPERATIONS
Megatech Corporation is engaged in the production and sale ofeducational
training programs in the energy, power and transportation areas which
are sold domestically and internationally to educational institutions
and government agencies. Inherent in the line of business in which the
Company is engaged, is the risk of product line obsolescence due to
technological advances. There also exists the risk that certain
customers, such as governmental agencies, which are funded by tax
revenues, may be subject to budget reductions. The Company grants
credit to its customers. Approximately 22%, 25% and 48% of sales
during the years ended December 31, 1996, 1995 and 1994, respectively,
were from international sales.
There were two customers which accounted for 26% of sales for the year
ended December 31, 1996. One customer accounted for 15% and 28% of
sales for the years ended December 31, 1995 and 1994, respectively. No
other customers accounted for more than 10% of sales in each of the
years ended December 31, 1996, 1995 and 1994.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
-------------------
Revenue from product sales are recognized upon shipment. Revenue for
maintenance and service and other revenues are recognized as the
services are performed.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash and all highly liquid investments with original maturities of
three months or less.
Inventories
-----------
Inventories are valued at the lower of cost (first-in-first-out method)
or market.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation and
amortization are computed principally on the straight-line method for
financial accounting purposes, and accelerated methods for tax
purposes, over the estimated useful lives of the assets.
Leasehold improvements are amortized on the straight-line method over
their respective lives or the lease terms, whichever is shorter.
Costs of maintenance and repairs are charged to expense while costs of
significant renewals and betterments are capitalized.
Income Taxes
------------
Amounts in the financial statements related to income taxes are
calculated using the principles of Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes" (SFAS 109).
Under SFAS 109, prepaid and deferred taxes reflect the impact of
temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized
for tax purposes as well as tax credit carryforwards and loss
carryforwards. These deferred taxes are measured by applying currently
enacted tax rates. A valuation allowance is used to reduce deferred
tax assets when it is "more likely than not" that some portion or all
of the deferred tax assets will not be realized.
3. INVENTORIES
Inventories consisted of the following:
December 31,
-----------------------
1996 1995
--------- ---------
Raw Material $ 357,045 $ 216,359
Finished Goods 23,334 110,977
-----------------------
Total $ 380,379 $ 327,336
=======================
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
-----------------------
1996 1995
--------- ---------
Machinery and equipment $ 245,052 $ 244,058
Office equipment 110,520 106,089
Leasehold improvements 69,776 69,776
Automobile 26,944 26,944
-----------------------
Total 452,292 446,867
Less accumulated depreciation and amortization 355,922 328,336
-----------------------
Property and equipment - net $ 96,370 $ 118,531
=======================
The useful lives employed for computing depreciation and amortization on
principal classes of property and equipment are as follows:
Class Description Years
----------------- -----
Machinery and equipment 5 - 7
Office equipment 5 - 7
Leasehold improvements 10
Automobile 5
5. LINE-OF-CREDIT
The Company has a $200,000 ($500,000 at 1995) line-of-credit agreement
with a bank. The line is collateralized by a security interest in
substantially all assets of the Company. Interest is payable monthly
at the bank's prime rate plus 1.5%. There were no borrowings
outstanding on this line at December 31, 1996 and 1995.
6. NOTE PAYABLE
Note payable of $37,000 at December 31, 1995 consisted of a non-interest
bearing note payable to Spectra Investments Ltd, Inc., with an initial
instalment of $20,000, due in January 1993, and the balance due in
quarterly payments at 5% of sales of certain products through November
1995. Any balance remaining outstanding at November 1995 was due and
payable in full on that date. This note was collateralized by the
assets purchased from Diagnostics Products, Co. The note was paid in
full during the year ended December 31, 1996.
7. LEASE AGREEMENTS
The Company leases its office, research and production facility in
Tewksbury, Massachusetts from a related party, under a five- year
operating lease which expires in November 1999. Under the terms of the
lease, the Company is responsible for all operating expenses and
maintenance costs. Rent expense under this lease was approximately
$95,700, $92,300 and $3,800 for the years ended December 31, 1996,
1995 and 1994, respectively. The future minimum lease payments due
under the lease are as follows:
Year Ended
December 31, Amount
------------ ---------
1997 $ 100,417
1998 105,417
1999 100,833
Total $ 306,667
The Company leased its former office and production facility in
Billerica, Massachusetts under an operating lease which expired in
April 1995. Rental expense for this operating lease was $22,540 and
$84,703, for the years ended December 31, 1995 and 1994, respectively.
The Company has two capital lease agreements to lease certain office
equipment. The Company has recognized the principal value of the
leases as fixed assets, in the amount of $8,668, less $6,068 and
$4,334 of accumulated depreciation at December 31, 1996 and 1995,
respectively. The final lease payments aggregating $1,230 are due in
1997 when the leases expire.
8. INCOME TAXES
The provision for income taxes at December 31, 1994 consisted of state
income taxes of $31,508.
The differences between the provision for income taxes and income taxes
using the U.S. Federal income tax rate of 34% is as follows:
December 31,
--------------------------
1996 1995 1994
----- ---- ----
U.S Federal income tax rate (34%) (34%) 34%
Reduction to statutory rates 12.29 17.84 (2.10)
Net operating loss carryforward (deduction) 15.83 10.96 (39.82)
State income tax - net of federal tax benefit 8.50
Compensation- stock options 3.92 3.04 12.16
Other 1.96 2.16 .69
-------------------------
Effective tax rate 0.00% 0.00% 13.43%
=========================
The Company has available federal net operating loss carryforwards of
approximately $3,006,000 expiring through December 2011 and state
operating loss carryforwards of approximately $73,800 expiring through
December 2001.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
---------------------------
1996 1995
----------- -----------
Deferred income tax assets:
Federal and state net operating loss carryforwards $ 1,029,200 $ 1,010,670
Allowance for doubtful accounts, reserves and accruals 47,140 11,548
---------------------------
Total deferred income tax assets 1,076,340 1,022,218
Deferred income tax liabilities - tax over book depreciation (3,560) (8,762)
Valuation allowance for deferred tax assets (1,072,780) (1,013,456)
---------------------------
Net recognized deferred income tax benefit $ -0- $ -0-
===========================
9. RELATED PARTY TRANSACTIONS
The Company has an agreement with Cramer Production Company, Inc.
(Cramer) of Norwood, Massachusetts to produce a series of
instructional video tapes supporting modular technology programs
offered by the Company. An officer/shareholder of Cramer is director
of the Company. Cramer is responsible under the agreement for all
video production and video cassette reproduction. The videotapes are
exclusively marketed by the Company. The Company provides scripts for
the modules, technical representatives, program materials and is also
responsible for packaging, design and promotion. Purchases from Cramer
under this agreement, included in cost of sales, were approximately
$28,900, $51,900 and $70,500 for the years ended December 31, 1996,
1995 and 1994, respectively.
During the year ended December 31, 1996, sales to a related entity were
approximately $63,200 and commissions paid to the same entity were
approximately $15,900. There were no such transactions during the year
ended December 31, 1995 and 1994.
10. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during
the respective period. The weighted average number of shares
outstanding is as follows:
Year Ended Number of
December 31, Shares
------------ ---------
1996 3,784,566
1995 3,731,425
1994 3,830,875
11. STOCK OPTIONS PLANS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." This new standard defines a
fair value based method of accounting for an employee stock option or
similar equity instrument. This statement gives entities a choice of
recognizing related compensation expense by adopting the new fair
value method or to continue to measure compensation using the
intrinsic value approach under Accounting Principles Board (APB)
Opinion No. 25, the former standard. If the former standard for
measurement is elected, SFAS No. 123 requires supplemental disclosure
to show the effects of using the new measurement criteria. This
statement is effective for the Company's 1996 fiscal year. The Company
will continue using the measurement prescribed by APB Option No. 25,
and accordingly, this pronouncement will not affect the Company's
financial position or results of operations.
The Company has issued stock options to various directors, officers,
employees and others under various stock option plans. Under the terms
of the plans, one third of the options become exercisable one year
from the date of grant, two thirds two years from the date of grant
and all options expire three years from the date of grant.
The following table summarized stock option activity:
Stock Price
Options Per Share
------- -------------
Outstanding at December 31, 1993 141,000 $ .75
Granted 57,000 .15 - 2.25
Expired or cancelled (36,000) .75
Exercised (14,000) .75
---------------------------
Outstanding at December 31, 1994 148,000 .15 - 2.25
Granted 42,000 1.00 - 2.75
Expired or cancelled (16,000) .15 - 2.25
Exercised (93,000) .15 - .75
---------------------------
Outstanding at December 31, 1995 81,000 .15 - 2.75
Granted 27,000 1.00
Expired or cancelled (10,000) .15
Exercised (22,000) .15
---------------------------
Outstanding at December 31, 1996 76,000 $ .15 - $2.75
===========================
Options exercisable at December 31, 1996 14,000 $1.00 - $2.75
===========================
12. RECLASSIFICATION OF AMOUNTS
Certain amounts in the financial statements for the years ended December
31, 1995 and 1994 have been reclassified to conform to current year
presentation.
--------------------
SCHEDULE II
MEGATECH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ---------- ------------------------- ---------- --------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- ---------- ---------- ---------- --------
Year Ended December 31, 1994:
Reserve for obsolescence $ 10,000 $-0- $-0- $-0- $ 10,000
Allowance for doubtful accounts $ 12,000 $-0- $-0- $400 $ 11,600
Year Ended December 31, 1995:
Reserve for obsolescence $ 10,000 $-0- $-0- $-0- $ 10,000
Allowance for doubtful accounts $ 11,600 $-0- $-0- $ 20 $ 11,580
Year Ended December 31, 1996:
Reserve for obsolescence $ 10,000 $-0- $-0- $-0- $ 10,000
Allowance for doubtful accounts $ 11,580 $-0- $-0- $-0- $ 11,580
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
MEGATECH CORPORATION
(Registrant)
By: /s/ Vahan V. Basmajian
-----------------------------------------------------
Vahan V. Basmajian, President, Treasurer and Director
Date:
----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
By: /s/ Vahan V. Basmajian
-----------------------------------------------------
Vahan V. Basmajian, President, Treasurer and Director
By: /s/ Ralph E. Hawes
-----------------------------------------------------
Ralph E. Hawes, Director
By: /s/ Dennis A. Humphrey
-----------------------------------------------------
Dennis A. Humphrey, Director & Clerk
By: /s/ Thomas J. Martin
-----------------------------------------------------
Thomas J. Martin, Director
Date:
----------------------------------