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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 September 30, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________to____________________
Commission file number 000-17510
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MEGA GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
NEW YORK 14-1653446
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1730 Rhode Island Ave., N.W. Suite 415, Washington, DC 20036
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(Address of principal executive offices)
(202) 296-9594
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(Issuer's telephone number)
N/A
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(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: 8,833,605 shares of
common stock, as of November 14, 2001.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
================================================================================================
September 30, December 31,
2001 2000
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Assets
CURRENT ASSETS
Cash $ 21,197 $ 26,383
Restricted cash - 9,345
Marketable securities 1,752 80,000
Accrued interest 1,544 819
Note receivable 16,113 16,113
Loans receivable - affiliates 64,063 44,668
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TOTAL CURRENT ASSETS 104,669 177,328
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PROPERTY AND EQUIPMENT
Computer equipment 10,683 10,683
Office furniture and equipment 13,695 13,695
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TOTAL 24,378 24,378
Less: Accumulated depreciation and amortization (13,372) (10,372)
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NET PROPERTY AND EQUIPMENT 11,006 14,006
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TOTAL ASSETS $ 115,675 $ 191,334
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The accompanying Notes to Financial Statements are an integral part of
these financial statements.
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MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
================================================================================================
September 30, December 31,
2001 2000
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LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 708,534 $ 677,371
Accounts payable and accrued expenses 858,944 711,223
Accrued interest 125,632 48,013
Loans payable - stockholder 45,241 -
Loans payable - affiliates 3,683 3,403
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TOTAL CURRENT LIABILITIES 1,742,034 1,440,010
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LONG-TERM DEBT, NET OF CURRENT PORTION 59,097 87,594
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TOTAL LIABILITIES 1,801,131 1,527,604
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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 10,000
Common stock, $0.016 par value per share, 25,000,000
shares authorized, 8,056,912 shares issued and
outstanding 128,911 128,911
Additional paid-in capital 3,463,013 3,463,013
Accumulated deficit (5,286,245) (4,877,444)
Accumulated other comprehensive income (loss) (1,135) (60,750)
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TOTAL DEFICIENCY IN STOCKHOLDERS' EQUITY (1,685,456) (1,336,270)
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TOTAL LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY $ 115,675 $ 191,334
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The accompanying Notes to Financial Statements are an integral part of
these financial statements.
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MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================================
Nine Months Three Months
Ended Ended
September September 30,
30, 2001 2001
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REVENUE $ 2,858 $ -
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OPERATING EXPENSES
Compensation and benefits 88,474 10,991
Other selling, general and administrative expenses 196,883 54,146
Depreciation and amortization 3,000 1,000
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TOTAL OPERATING EXPENSES 288,357 66,137
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(LOSS) FROM OPERATIONS (285,499) (66,137)
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OTHER INCOME (EXPENSE)
Interest income 941 57
Interest (expense) (77,620) (26,199)
Realized (loss) on sale of marketable securities (85,567) (6,541)
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TOTAL OTHER INCOME (EXPENSE) (162,246) (32,683)
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(LOSS) BEFORE BENEFIT FOR INCOME TAXES (447,745) (98,820)
BENEFIT FOR INCOME TAXES 39,544 20,144
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NET (LOSS) $ (408,201) $ (78,676)
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NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss per common share - basic and diluted $ (.05) $ (.01)
Weighted average common shares - basic and diluted 8,056,912 8,056,912
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The accompanying Notes to Financial Statements are an integral part of
these financial statements.
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MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
================================================================================================
Nine Months Three Months
Ended September Ended September
30, 2001 30, 2001
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NET (LOSS) $ (408,201) $ (78,676)
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UNREALIZED GAIN ON MARKETABLE SECURITIES 13,792 16,818
RECLASSIFICATION OF PREVIOUSLY UNREALIZED
LOSS ON MARKETABLE SECURITIES TO REALIZED 85,567 6,541
TAX PROVISION (39,744) (19,744)
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OTHER COMPREHENSIVE INCOME 59,615 3,615
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COMPREHENSIVE (LOSS) $ (348,586) $ (75,061)
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The accompanying Notes to Financial Statements are an integral part of
these financial statements.
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MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================================
Nine Months Ended September 30, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (408,201)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED BY
OPERATING ACTIVITIES
Realized loss on sale of marketable securities 85,567
Depreciation and amortization 3,000
Benefit for income taxes (39,744)
Court judgment increasing long-term debt 5,817
Seizure of cash in litigation 9,345
(INCREASE) DECREASE IN
Accrued interest (725)
INCREASE (DECREASE) IN
Accounts payable and accrued expenses 147,721
Accrued interest 77,619
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NET CASH USED BY OPERATING ACTIVITIES (119,601)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (45,307)
Proceeds from sale of marketable securities 137,347
Loans made to affiliates, net (19,395)
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NET CASH USED BY INVESTING ACTIVITIES 72,645
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CASH FLOWS FROM FINANCING ACTIVITIES
Debt proceeds 30,000
Principal payments of debt (33,151)
Loans from stockholder 45,241
Loans from affiliate 280
Preferred dividends (600)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 41,770
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NET DECREASE IN CASH (5,186)
CASH - BEGINNING OF PERIOD 26,383
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CASH - END OF PERIOD $ 21,197
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The accompanying Notes to Financial Statements are an integral part of
these financial statements.
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MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Nine Months Ended September 30, 2001
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SUPPLEMENTAL CASH FLOW INFORMATION
Actual cash payments for:
Income taxes $ 200
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Interest $ --
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The accompanying Notes to Financial Statements are an integral part of
these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. INTERIM FINANCIAL The financial statements have been prepared
PRESENTATION by the Company without audit and are subject
to year-end adjustment. Certain information
and footnote disclosures normally included
in 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 interim statements should
be read in conjunction with the most recent
audited financial statements filed by the
Company on Form 10-KSB with the Securities
and Exchange Commission. The 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 nine months
ended September 30, 2001 and three months
ended September 30, 2001 are not necessarily
indicative of results to be achieved for the
full fiscal year.
2. RECENT In June 2001, the Financial Accounting
ACCOUNTING Standards Board issued Statements of
PRONOUNCEMENTS Financial Accounting Standards (SFAS) as
follows:
No. 141, BUSINESS COMBINATIONS
No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS
No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS
SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting
for business combinations and requires that
all such transactions be accounted for by
the purchase method. In addition, SFAS No.
141 requires that intangible assets be
recognized as assets apart from goodwill and
that they meet specific criteria described
in the Standard. This Standard is
applicable to all business combinations
initiated after June 30, 2001 and all
business combinations accounted for using
the purchase method for which the date of
acquisition is July 1, 2001 or later.
Management will follow the Standard in
accounting for all future business
combinations and does not believe that
adoption will have any significant impact on
the Company's financial statements.
SFAS No. 142 eliminates the requirement to
amortize goodwill and requires that other
intangible assets be separated into assets
that have a finite useful life and those
with an indefinite useful life. Intangible
assets with a finite useful life are to be
amortized over that useful life. Intangible
assets with an indefinite life are to be
measured for impairment annually, or more
frequently if circumstances indicate
impairment may have occurred. With respect
to goodwill, the Standard
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requires that it be measured annually for
impairment under a defined two-step process
that begins with an estimation of the fair
value of a "reporting unit," which is
defined in the Standard. The first step in
the process is a screening for impairment
and the second step measures the amount of
impairment, if any. Upon initial adoption
of SFAS No. 142, the change is to be
reported on the financial statements as a
change in accounting principle with the
cumulative effect reported in the statement
of income in the period of adoption. The
Standard is required to be applied starting
with fiscal years beginning after December
15, 2001, with early application permitted
for entities with fiscal years beginning
after March 15, 2001. The Company expects
to adopt this new Standard with its fiscal
year beginning January 1, 2002. The Company
has no goodwill or other intangible assets
and does not believe that adoption of the
Standard will have any impact on its
financial statements.
SFAS No. 143 requires that asset retirement
obligations be recognized as a liability in
the period in which it is incurred at its
fair value if a reasonable estimate can be
made. The associated asset retirement costs
are capitalized as part of the carrying
amount of the long-lived asset. The
Standard requires that the liability be
discounted and accretion expense be
recognized. SFAS No. 143 is effective for
financial statements issued for fiscal years
beginning after June 15, 2001, with earlier
application permitted. The Company does not
have any asset retirement obligations as of
September 30, 2001, and does not believe
that this new Standard will have any impact
upon its financial statements when adopted.
In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS. This Standard
establishes a single accounting model for
long-lived assets to be disposed of by sale
and resolves other implementation issues
involving long-lived assets that are
impaired or are to be disposed of. The
Standard is effective for fiscal years
beginning after December 15, 2001, with
early application permitted. The Company is
considering the effects of this new standard
and does not believe that it will have any
significant effect on its financial
statements when adopted.
3. CONSULTING On February 7, 2001, the Company entered
AGREEMENT into a consulting agreement with the
Emmanuel Temple Church and Emmanuel
Community Services Corporation (Emmanuel)
whereby, among other things, the Company
will assist Emmanuel in restructuring its
debt. Compensation under the agreement is
contingent on the completion of the debt
restructuring. The total compensation under
the agreement is $96,000, none of which has
been recognized as of September 30, 2001.
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4. LONG-TERM DEBT The Company is obligated to a bank under a
term note for $14,620 as of December 31,
2000 and September 30, 2001, which is
included in the current portion of long-term
debt on the accompanying balance sheets.
Due to the Company's failure to make all
scheduled payments under the note and
financial covenant violations, the
obligation is callable by the bank on
demand. On March 29, 2001, the bank
demanded immediate and full payment of the
indebtedness and notified the guarantors of
its intent to enforce the guaranties. As of
November 9, 2001, the bank has successfully
enforced guaranties against certain of the
guarantors.
The Company entered into promissory notes
for $20,000 and $10,000 dated July 17, 2001
and August 6, 2001, respectively. The notes
are unsecured, bear interest at 12.5%, and
are due on September 15, 2001 and October 5,
2001, respectively. Principal on each of
the notes was paid in full on October 16,
2001.
On October 6, 2001 the Company received the
proceeds from a $60,000 promissory note.
The note is unsecured, bears interest at
12.5%, and is due on October 6, 2002.
5. STOCK PURCHASE During the second quarter of 2001, the
OPTIONS Company granted two of its directors
options, exercisable until June 30, 2006, to
purchase a total of 200,000 shares of the
Company's common stock for $.50 per share.
During the third quarter of 2001, the
Company granted a promissory note holder
options to purchase 60,000 shares of the
Company's common stock for $.50 per share,
of which options to purchase 40,000 and
20,000 shares are exercisable until July 17,
2003 and August 6, 2003, respectively.
Subsequent to September 30, 2001, the
Company granted a promissory note holder
options, exercisable until October 6, 2003,
to purchase 120,000 shares of the Company's
common stock for $.50 per share. Because
the exercise price under these stock
purchase options is higher than the grant
date fair market value of a share of the
Company's common stock, the options are
non-compensatory.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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 nine months ended September 30, 2001 and the year ended December 31,
2000, we have been in transition. During these periods, we discontinued
our insurance agency business, acquired the Small Business Investment
Company of America, Inc. and commenced the implementation of a new business
plan and operation.
During the nine months ended September 30, 2001, our cash position
decreased from $26,383 at December 31, 2000 to $21,197 at September 30,
2001. During the same nine months, we realized a net loss of $408,201
after revenues of $2,858, ongoing expenses in the total amount of $325,492,
and a realized loss from the sale of marketable securities in the amount of
$85,567.
During the three months ended September 30, 2001, we realized a net
loss of $78,676 after generating no revenues, but incurring ongoing
expenses in the total amount of $72,135 and the realized loss on the
sale of marketable securities in the amount of $6,541.
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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There were no material developments in any litigation to which we were a
party. Please refer to our 10-KSB filed March 27, 2001 for current
litigation matters.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
None.
(b) REPORTS ON FORM 8-K.
We did not file any reports on Form 8-K during the period covered
by this report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEGA GROUP, INC.
Date: November 14, 2001 /s/ John H. Brown
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John H. Brown, Chief Executive Officer
Date: November 14, 2001 /s/ Nelson H. Beebe
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Nelson H. Beebe, Chief Financial
Officer and Treasurer
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