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, 1997 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: (978) 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 __XX__ 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 registrant's Common Stock held by non- affiliates of the registrant based upon the closing sale price of the Common Stock on March 24, 1998 was approximately $394,921 based on the average of the closing bid and asked quotations of the Common Stock in the over the counter market. The number of shares held by nonaffiliates was 1,159,500. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of par value $ .0143 common stock outstanding as of March 24, 1998 was 3,792,308. Portions of the registrant's definitive Proxy Statement for its Annual Meeting of the stockholders to be held on May 11, 1998 (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 customer accounted for 20% and 15% of sales for the years ended December 31, 1997 and 1995, respectively. No other customers accounted for more than 10% of sales in each of the years ended December 31, 1997, 1996 and 1995. Approximately 33%, 22% and 25% of sales during the years ended December 31, 1997, 1996 and 1995, respectively, were from international sales. The Company's backlog as of December 31, 1997 and December 31, 1996 was $588,247 and $ 246,416, respectively. As of December 31, 1997, the Company had 13 full-time and 6 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 ---- ------ ----------- 1997 $693,481 33% 1996 $493,491 22% 1995 $696,933 25% 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 1997, no matters were 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 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 ---- --- 1997 1st Quarter .25 .02 2nd Quarter .25 .02 3rd Quarter .25 .02 4th Quarter .25 .02 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 As of March 24, 1998, there were approximately 820 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 - -------------------------------- The following table summarizes certain financial data which are qualified by more detailed financial statements included herein. 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Sales $2,097,454 $2,216,978 $2,824,912 $4,050,844 $2,648,143 Income (Loss) from operations (130,842) (94,578) (48,310) 241,076 141,365 Net Income (Loss) (129,606) (95,633) (57,504) 203,009 109,379 Net Income (Loss) per Common share (0.034) (0.025) (0.015) 0.053 0.029 Weighted average shares outstanding 3,790,122 3,784,566 3,731,425 3,830,875 3,793,058 Total Assets 936,784 1,052,450 1,049,046 1,222,490 970,286 Long Term Obligations -0- -0- 1,230 8,728 75,324 Stockholders' equity 545,733 660,255 731,517 777,826 494,266 Cash Dividends Per Share -0- -0- -0- -0- -0- Item 7 - Management's Discussion and Analysis of Financial Condition - -------------------------------------------------------------------- and Results of Operation ------------------------ 1997 Compared with 1996 ----------------------- Sales for 1997 decreased from the corresponding period of 1996 by $ 0.1 million or 5%, to $2.1 million. This decrease was primarily due to a decrease in overall sales volume. Domestic sales in 1997 were $ 1.4 million or 67% of total sales, compared to $ 1.7 million or 78% of total sales in 1996. International sales in 1997 were $0.7 million or 33% of total sales, compared to $ 0.5 million or 22% of total sales in 1996. The Company believes that the decrease in overall sales is due to declining domestic sales. Gross profit for 1997 decreased from the corresponding period of 1996 by $0.05 million, or 5%, to $0.9 million. As a percentage of total sales, gross profit remained steady at 41% for 1997 and 1996. 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 1997 increased from the corresponding period of 1996 by approximately $ 0.01 million or 1% to $ 0.8 million. As a percentage of total sales, selling and marketing expenses increased to 38% for 1997 compared to 36% for 1996. The increase is primarily due to changes in marketing staff. General and administrative expenses for 1997 decreased from the corresponding period of 1996 by $.01 million, or 6% to $0.18 million. As a percentage of total sales, G & A expenses remained steady at 8.7% for 1997 and 1996. The decrease of G & A expenses are a result of changes in office staff. Research and development expenses for 1997 decreased from the corresponding period of 1996 by $.011 million, or 36% to $.02 million. As a percentage of total sales, R & D expenses decreased to 0.95% for 1997 compared to 1.4% for 1996. The decrease of R & D expenses are a result of a decrease in product development costs. Loss from operations for 1997 as compared to the same period of 1996 increased by $ .03 million. As a percentage of total sales, operating losses increased to 6.2% for 1997 compared to 4.3% for 1996. The operating losses are a result of the factors indicated above. 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. Liquidity and capital resources ------------------------------- Working capital at December 31, 1997 was $452,364 as compared to $556,219 in working capital at December 31, 1996. The decrease was attributable to the net loss for the year ended December 31, 1997. The Company maintains a $ 200,000 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%. Borrowings outstanding on this line were $25,000 at December 31, 1997. There were no borrowings outstanding at December 31, 1996. There is no long term debt or other notes payable outstanding at December 31, 1997. Capital expenditures totaled approximately $13,000 in 1997 and $5,000 in 1996. No material purchase or capital commitments exist at December 31, 1997. 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 1998. Item 7a - Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------- Not appicable. 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 are 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 $ 30,200, $ 28,900 and $51,900 for the years ended December 31, 1997, 1996 and 1995, respectively. During the years ended December 31, 1997 and 1996, sales to a related entity were approximately $500 and $63,200. Commissions paid to the same entity were approximately $26,000 and $15,900, respectively. There were no such transactions for the year ended December 31, 1995. 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, 1997 and 1996 12 Statement of operations for the years ended December 31, 1997, 1996 and 1995 13 Statement of Stockholders' equity for the years ended December 31, 1997, 1996 and 1995 14 Statement of cash flows for the years ended December 31, 1997, 1996 and 1995 15 Notes to Financial Statements 16 2. Schedules for the years ended December 31, 1997, 1996 and 1995 Schedule II - Valuation and Qualifying Accounts 22 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 24 b) Reports on Form 8-K: The Company filed no Reports on Form 8-K with the Securities and Exchange Commissions during the quarter ended December 31, 1997. 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, 1997 and 1996, and the statements of operations, stockholders' equity and cash flows for the years then ended. 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 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 audits provide 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, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. Our audit, referred to above, also includes the 1997 and 1996 financial schedules listed in the Index at Item 14(a)(2). In our opinion, based on our audit, such 1997 and 1996 financial schedules present fairly the information required to be set forth therein. /s/ SULLIVAN BILLE, P.C. Tewksbury, Massachusetts February 12, 1998 [Gordan, Harrington & Osborn, P.C. Letterhead] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- To the Board of Directors and Stockholders of Megatech Corporation We have audited the accompanying statements of operations, stockholders' equity and cash flows of Megatech Corporation for the year ended December 31, 1995. 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 statements of operations, stockholders' equity and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations, stockholders' equity and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statements of operations, stockholders' equity and cash flows. We believe that our audit of the statements of operations, stockholders' equity and cash flows provide a reasonable basis for our opinion. In our opinion, the statements of operations, stockholders' equity and cash flows referred to above present fairly, in all material respects, the results of operations and cash flows of Megatech Corporation for the year ended December 31, 1995 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 purpose of additional analysis and are not 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/ Gordan, Harrington & Osborn North Andover, MA February 23, 1996 MEGATECH CORPORATION ==================== BALANCE SHEET, DECEMBER 31, 1997 AND 1996 - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- A S S E T S =========== CURRENT ASSETS: Cash and cash equivalents $ 55,026 $ 90,770 Accounts receivable: Trade (less allowance for doubtful accounts: 1997, $11,070; 1996, $11,580) 335,891 407,169 Affiliate 355 50,945 Other 20,435 2,024 Inventories 409,551 380,379 Prepaid expenses 22,157 17,127 -------------------------- Total current assets 843,415 948,414 PROPERTY AND EQUIPMENT - Net 85,703 96,370 OTHER ASSETS 7,666 7,666 -------------------------- TOTAL $ 936,784 $ 1,052,450 ========================== 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 - bank $ 25,000 Accounts payable: Trade 258,179 $ 309,562 Affiliate 15,204 8,701 Accrued commissions 46,558 32,622 Other accrued liabilities 46,110 40,058 Current obligation under capital lease 1,252 -------------------------- Total current liabilities 391,051 392,195 -------------------------- STOCKHOLDERS' EQUITY: Common stock, authorized, 5,000,000 shares of $.0143 par value; issued and outstanding, 1997, 3,792,308 shares; 1996, 3,789,308, shares 54,230 54,187 Additional paid-in capital 4,049,858 4,034,817 Deficit (3,558,355) (3,428,749) -------------------------- Stockholders' equity - net 545,733 660,255 -------------------------- TOTAL $ 936,784 $ 1,052,450 ========================== See notes to financial statements. - ------------------------------------------------------------------------------- MEGATECH CORPORATION ==================== STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- SALES $2,097,454 $2,216,978 $2,824,912 COST OF SALES 1,227,910 1,299,326 1,608,867 -------------------------------------- GROSS PROFIT 869,544 917,652 1,216,045 -------------------------------------- OPERATING EXPENSES: Selling and marketing 798,965 788,010 957,730 General and administrative 181,428 192,746 250,021 Research and development 19,993 31,474 56,604 -------------------------------------- Total operating expenses 1,000,386 1,012,230 1,264,355 -------------------------------------- LOSS FROM OPERATIONS (130,842) (94,578) (48,310) -------------------------------------- OTHER INCOME (EXPENSE): Interest income 1,754 6 40 Interest expense (738) (1,189) (4,036) Other 220 128 (5,198) -------------------------------------- Other income (expense) - net 1,236 (1,055) (9,194) -------------------------------------- NET LOSS $ (129,606) $ (95,633) $ (57,504) ====================================== NET LOSS PER SHARE - Basic and diluted $ (.034) $ (.025) $ (.015) ====================================== See notes to financial statements. - ------------------------------------------------------------------------------- MEGATECH CORPORATION ==================== STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - ------------------------------------------------------------------------------- COMMON STOCK ADDITIONAL -------------------- PAID-IN STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY - NET - -------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 3,669,058 $52,467 $4,000,971 $(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 3,762,058 53,797 4,010,836 (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 3,789,308 54,187 4,034,817 (3,428,749) 660,255 ISSUANCE OF COMMON STOCK 3,000 43 406 449 COMPENSATION 14,875 14,875 STOCK OPTIONS TERMINATED (240) (240) NET LOSS FOR THE YEAR (129,606) (129,606) ---------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 3,792,308 $54,230 $4,049,858 $(3,558,355) $ 545,733 ================================================================ See notes to financial statements. - ------------------------------------------------------------------------------- MEGATECH CORPORATION ==================== STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(129,606) $(95,633) $ (57,504) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Non-cash charges to net loss: Depreciation and amortization 23,851 27,586 25,392 Compensation funded by stock options 14,635 15,006 1,795 Common stock awarded as compensation 449 6,065 Increase in other assets (2,033) Decrease (increase) in current assets: Accounts receivable 103,457 74,258 (85,954) Inventories (29,172) (53,043) 180,757 Prepaid expenses (5,030) (11,588) 12,238 Increase (decrease) in current liabilities: Accounts payable (44,880) 78,674 (65,336) Accrued liabilities 19,988 35,946 (36,022) ---------------------------------- Net cash provided by (used in) operating activities (46,308) 77,271 (26,667) ---------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES - Additions to property and equipment (13,184) (5,425) (90,429) ---------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit - net 25,000 Payments on capital lease obligation (1,252) (2,954) (2,142) Principal payments on notes payable (37,000) (23,635) Proceeds from issuance of common stock 3,300 9,400 ---------------------------------- Net cash provided by (used in) financing activities 23,748 (36,654) (16,377) ---------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35,744) 35,192 (133,473) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 90,770 55,578 189,051 ---------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 55,026 $ 90,770 $ 55,578 ================================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 756 $ 1,189 $ 4,036 Taxes paid 1,393 187 20,038 See notes to financial statements. - ------------------------------------------------------------------------------- MEGATECH CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 -------------------- 1. OPERATIONS Megatech Corporation is engaged in the production and sale of educational 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 33%, 22% and 25% of sales during the years ended December 31, 1997, 1996 and 1995, 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 20% and 15% of sales for the years ended December 31, 1997 and 1995, respectively. No other customers accounted for more than 10% of sales in each of the years ended December 31, 1997, 1996 and 1995. 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, -------------------- 1997 1996 ---- ---- Raw Material $199,841 $232,421 Finished Goods 209,710 147,958 -------------------- Total $409,551 $380,379 ==================== 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 31, -------------------- 1997 1996 ---- ---- Machinery and equipment $237,081 $245,052 Office equipment 117,319 110,520 Leasehold improvements 69,776 69,776 Automobile 32,632 26,944 -------------------- Total 456,808 452,292 Less accumulated depreciation and amortization 371,105 355,922 -------------------- Property and equipment - net $ 85,703 $ 96,370 ==================== 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. NOTE PAYABLE - BANK The Company has a $200,000 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%, 10% at December 31, 1997. Borrowings outstanding on this line were $25,000 at December 31, 1997. There were no borrowings outstanding at December 31, 1996. 6. 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 $85,000, $95,700 and $92,300 for the years ended December 31, 1997, 1996 and 1995, respectively. The future minimum lease payments due under the lease, as amended, are as follows: Year Ended December 31, Amount ------------ ------ 1998 $ 89,605 1999 85,709 -------- Total $175,314 ======== 7. INCOME TAXES The Company has available federal net operating loss carryforwards of approximately $3,108,400 expiring through December 2012 and state operating loss carryforwards of approximately $175,600 expiring through December 2002. Significant components of the Company's deferred tax assets and liabilities are as follows: December 31, ------------------------ 1997 1996 ---- ---- Deferred income tax assets: Federal and state net operating loss carryforwards $ 1,073,500 $ 1,029,200 Allowance for doubtful accounts, reserves and accruals 57,100 47,140 -------------------------- Total deferred income tax assets 1,130,600 1,076,340 Deferred income tax liabilities - tax over book depreciation (6,500) (3,560) Valuation allowance for deferred tax assets (1,124,100) (1,072,780) -------------------------- Net recognized deferred income tax benefit $ -0- $ -0- ========================== 8. 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 a 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 $30,200, $28,900 and $51,900 for the years ended December 31, 1997, 1996 and 1995, respectively. During the years ended December 31, 1997 and 1996, sales to a related entity were approximately $500 and $63,200. Commissions paid to the same entity were approximately $26,000 and $15,900, respectively. There were no such transactions during the year ended December 31, 1995. 9. EMPLOYEE BENEFIT PLAN During the year ended December 31, 1997, the Company adopted a SIMPLE IRA Plan (the Plan), which covers all employees who meet certain requirements. Under the terms of the Plan, the Board of Directors determines annually the amount of the matching contribution. The matching contribution for the year ended December 31, 1997 was $2,365. 10. NET LOSS PER SHARE Basic net loss per share has been computed in accordance with SFAS 128 using the weighted average number of common shares outstanding. The provisions and disclosure requirements for SFAS 128 were required to be adopted for interim and annual periods ending after December 15, 1997, with restatement of earnings per share for prior periods. Diluted net loss per share gives effect to all dilutive potential common shares that were outstanding during the period. The Company had a net loss for the years ended December 31, 1997, 1996 and 1995; therefore, none of the options outstanding at period end were included in the diluted net loss per share calculation for the years ended December 31,1997, 1996 and 1995, since they were anti-dilutive. The weighted average number of shares outstanding is as follows: Year Ended Number of December 31, Shares ------------ --------- 1997 3,790,122 1996 3,784,566 1995 3,731,875 11. STOCK OPTIONS PLANS 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 summarizes stock option activity: Stock Price Options Per Share ------- --------- 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 Expired or cancelled (34,000) .15 - 1.00 ------------------------ Outstanding at December 31, 1997 42,000 $1.00 - $2.75 ======================== Options exercisable at December 31, 1996 28,000 $1.00 - $2.75 ======================== 12. RECLASSIFICATION OF AMOUNTS Certain amounts in the financial statements for the years ended December 31, 1996 and 1995 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, 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 Year Ended December 31, 1997: - ----------------------------- Reserve for obsolescence $10,000 $-0- $-0- $-0- $10,000 Allowance for doubtful accounts $11,580 $-0- $-0- $510 $11,070 - ------------------------------------------------------------------------------------------------ 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: _____________________________