UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 1O-QSB
---------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM_____ TO_____
COMMISSION FILE NUMBER: 000-17510
MEGA GROUP, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEW YORK 14-1653446
(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification No.)
1730 RHODE ISLAND AVE., N.W. SUITE 415, WASHINGTON, DC 20036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(202) 296-9594
(ISSUER'S TELEPHONE NUMBER)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requires for the past 90 days. Yes [ ] No [X]
Indicate by check mare whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APLLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date: 9,516,959 shares of common stock (including 75,302 shares held
of record by our wholly-owned subsidiary), as of July 15, 2006.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
MEGA GROUP, INC. AND SUBSIDIARY
INDEX
-----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets- June 30, 2004 (Unaudited) and December 31, 2003 1
Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, 2004 and 2003 2
Consolidated Statements of Operations (Unaudited) Six Months Ended June 30, 2004 and 2003 3
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2004 and 2003 4
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
ITEM 3. Controls and Procedures 8
PART II. OTHER INFORMATION 9
SIGNATURES 11
MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
----------- -----------
ASSETS
Cash and cash equivalents $ $ 6,622
Other assets 2,099 2,099
----------- -----------
Total current assets 2,099 8,721
Equipment, net of accumulated depreciation of $20,553 and $19,459,
respectively 5,110 6,204
----------- -----------
TOTAL ASSETS $ 7,209 $ 14,925
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Accounts payable and accrued liabilities $ 1,133,528 $ 904,711
Accrued interest 237,195 177,129
Due to shareholders and officers, including convertible notes payable
of $15,000 281,054 276,888
Notes payable 645,000 645,000
----------- -----------
TOTAL CURRENT LIABILITIES 2,296,777 2,003,728
----------- -----------
STOCKHOLDERS' DEFICIT
Preferred stock, cumulative 8%, $1 par value per share, 400,000
shares authorized, 10,000 shares issued and outstanding with a
liquidation preference of $1 per share 10,000 10,000
Common stock, $0.016 par value per share, 25,000,000 shares
authorized, 9,333,625 shares issued and outstanding 149,338 149,338
Additional paid-in capital 245,849 245,849
Accumulated deficit (2,694,755) (2,393,990)
----------- -----------
Total stockholders' deficit (2,289,568) (1,988,803)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 7,209 $ 14,925
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
1
MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
REVENUE $ -- $ 14,500
----------- -----------
OPERATING EXPENSES
Compensation and benefits 86,250 75,000
Other selling, general and administrative 34,966 59,350
Depreciation 547 8,613
----------- -----------
TOTAL OPERATING EXPENSES 121,763 142,963
----------- -----------
LOSS FROM OPERATIONS (121,763) (128,463)
----------- -----------
OTHER EXPENSE
Interest expense to stockholders and officers 7,091 5,008
Interest expense 25,025 38,297
----------- -----------
TOTAL OTHER EXPENSE 32,116 43,305
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (153,879) (171,768)
PROVISION FOR INCOME TAXES -- --
----------- -----------
Net loss $ (153,879) $ (171,768)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Basic and diluted net loss per common share $ (0.02) $ (0.02)
=========== ===========
Basic and diluted weighted average common shares 9,333,625 9,359,303
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
2
MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
REVENUE $ -- 14,500
----------- ===========
OPERATING EXPENSES
Compensation and benefits 172,500 150,000
Other selling, general and administrative 62,939 141,443
Depreciation 1,094 50,592
----------- -----------
TOTAL OPERATING EXPENSES 236,533 342,035
----------- -----------
LOSS FROM OPERATIONS (236,533) (327,535)
OTHER EXPENSE
Interest expense to stockholders and officers 14,182 11,600
Interest expense 50,050 69,801
----------- -----------
TOTAL OTHER EXPENSE 64,232 81,401
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (408,936)
(300,765)
PROVISION FOR INCOME TAXES -- --
----------- -----------
Net loss $ (300,765) (408,936)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Basic and diluted net loss per common share $ (0.03) (0.04)
=========== ===========
Basic and diluted weighted average common shares 9,333,625 9,359,303
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
3
MEGA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $ (300,765) $ (408,936)
ADJUSTMENT TO RECONCILE CHANGES IN NET ASSETS TO NET CASH FLOW
FROM OPERATING ACTIVITIES
Depreciation 1,094 50,592
ACCRETION OF DISCOUNT AND OTHER 4,166 1,753
EFFECT OF CHANGES IN NON-CASH WORKING CAPITAL BALANCES
Account receivables -- (9,500)
Other Assets -- (2,099)
Accounts payable and accrued liabilities 228,817 134,776
Accrued interest 60,066 74,535
----------- -----------
Net cash flow from operating activities (6,622) (158,879)
----------- -----------
CASH FLOW USED IN INVESTING ACTIVITIES
Purchase of property, equipment and other -- (2,241)
CASH FLOW FROM FINANCING ACTIVITIES
Debt proceeds -- 181,736
Payments on debt to stockholders and officers -- (21,484)
----------- -----------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES -- 160,252
----------- -----------
Change in cash and cash equivalents (6,622) (648)
----------- -----------
Cash and cash equivalents, beginning of period 6,622 4,031
----------- -----------
CASH AND CASH EQUIVALENTS, END PERIOD $ -- $ 3,383
=========== ===========
CASH PAID FOR INTEREST $ -- $ --
=========== ===========
CASH PAID FOR TAXES $ -- $ --
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
4
MEGA GROUP, INC. AND SUBSIDIARY
NOTED TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
1. NATURE OF The consolidated financial statements include the
BUSINESS accounts of the Mega Group, Inc., a New York corporation
and its wholly owned subsidiary, Small Business
Investment Corporation of America, Inc. (SBICOA), an
Oregon corporation (collectively, the Company). All
significant inter-company transactions and accounts have
been eliminated in the consolidated financial
statements. The Company's current business plan is to
provide diversified financial services to ethnic
communities and faith-based entities in the United
States and to operate as a specialized financial
institution providing loans and investments for
businesses in low and moderate income communities.
2. INTERIM The accompanying unaudited consolidated financial
FINANCIAL statements of the Company have been prepared in
PRESENTATION accordance with accounting principles generally accepted
in the United States of America for interim financial
information and with the instructions to From 10-QSB.
Accordingly, they do not include all the information
required for complete financial statements. In the
opinion of management, all adjustments and
reclassifications considered necessary for a fair
presentation have been included. All such adjustments
are of a normal recurring nature. Operating results for
the six month periods ended June 30, 2004 are not
necessarily indicative of the results that may be
expected for the year ending December 31, 2004 or any
other period. The enclosed unaudited consolidated
financial statements should be read in conjunction with
the consolidated financial statements and footnotes
thereto incorporated by reference in the Company's
Annual Report on Form 10-KSB for the year ended December
31, 2003.
NET LOSS PER Basic net loss per common share is calculated by
COMMON dividing the net loss attributable to common
SHARE stockholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per
share is calculated using the weighted average number of
common shares plus dilutive common stocks equivalents
outstanding during the period. Anti-dilutive common
stock equivalents are excluded. Common stock equivalents
are stock options.
STOCK OPTION The Company adopted the fair-value recognition provision
ACCOUNTING of SFAS No. 123 (as revised in 2004 and referred to as
"SFAS No. 123R") Accounting for Stock-based
Compensation. SFAS 123R generally eliminates variable
accounting and requires companies to recognize in the
income statement over the vesting period of the options
an estimate of expense based on the fair value of those
options, typically as of the date of grant.
5
MEGA GROUP, INC. AND SUBSIDIARY
NOTED TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
2. INTERIM
FINANCIAL
PRESENTATION,
CONTINUED
STOCK OPTION In June 2001, the Company granted one of its directors
ACCOUNTING, options, exercisable until June 30, 2006 or until 30
CONTINUED days prior to the commencement of any registered public
offering of its equity securities, whichever comes
first, to purchase a total of 100,000 shares of its
common stock for $.50 per share. The Company has
estimated the value of these options to be insignificant
based on the Black-Scholes model with the following
assumptions: expected life: 2.9 years; Volatility: 0.0%;
Risk-free interest rate: 5.0% and dividend yield: 0.0%.
3. FINANCIAL As of June 30, 2004, the Company has a deficiency in
CONDITION stockholders' equity and a working capital deficit of
approximately $2,290,000. The Company has not been
successful to date in executing its business plan and
there are no guarantees that it will be successful in
implementing it in the future. The Company has not
generated significant revenue from its business plan and
has primarily relied upon contributions and loans from
shareholders to fund operations. The Company will
require significant new capital funding to implement the
business plan and to satisfy the Company's cash
requirements for the next twelve months. There are no
guarantees the Company's shareholders will continue to
fund operations or that there is a viable market for the
Company to raise the required capital. The Company is in
default on the majority of its debt and is significantly
delinquent on amounts owed to vendors and employees. The
Company will require capital funding in order to fund
the capital deficit. The Company is delinquent in all
required tax filings for the years ending December 31,
2003, 2004, and 2005.
The intent of the Company's management is to direct it
into new business lines providing financial services to
currently underserved ethnic minorities through
alliances with churches and other organizations serving
those groups. The Company intends in the near term to
obtain additional equity funding and to obtain
additional debt financing to pursue these new lines of
business and to provide the funds to satisfy its current
obligations. The extent to which the Company can raise
additional equity and financing and achieve profitable
operations from new business activities will determine
if the Company can continue as a going concern.
Management believes it will be successful in obtaining
additional equity and debt financing, but no assurances
can be given in this regard.
6
MEGA GROUP, INC. AND SUBSIDIARY
NOTED TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
4. RELATED PARTY The Company owes certain of our stockholders $281,054
TRANSACTIONS and $276,888 as of June 30, 2004 and December 31, 2003,
respectively of which $154,016 are notes payable and
$127,038 and $122,872 was for expenses paid by the
stockholder on the Company's behalf. The Company is in
default on all notes payable. The Company originally
owed a stockholder $139,538 (Stockholder Obligation) for
expenses paid on the Company's behalf. The Stockholder
Obligations has no specified terms for interest or
repayment. The Stockholder Obligation was discounted by
$25,000 based on a 6% discount rate during the year
ending December 31, 2003 based on the Company repaying
the stockholder in the year ending December 31, 2006.
The Stockholder Obligation is being amortized into the
liability through interest expense. For each of the
periods ending June 30, 2004 and 2003, the Stockholder
Obligation accreted by $4,166.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements. This management's discussion and analysis of
financial condition and results of operations and other portions of this report
include forward-looking statements such as: statements of the Company's goals,
intentions, and expectations; estimates of risks and of future costs and
benefits; and statements of the Company's ability to achieve financial and other
goals. These forward-looking statements are subject to significant uncertainties
because they are based upon: the amount and timing of future changes in market
behaviors and other economic conditions; future laws and regulations; and a
variety of other matters. Because of these uncertainties, the actual future
results may be materially different from the results indicated by these
forward-looking statements. In addition, the Company's past performance does not
necessarily indicate its future results.
GENERAL- SIX MONTHS ENDED JUNE 30, 2004 AND 2003
During the first six months of 2004 and 2003, we generated $0 and $14,500 of
revenue and we realized a net loss of $300,765 and $408,936, respectively. We
had operating expenses in the total amount of $236,533 and $327,535
respectively, and interest expense of $64,232 and $81,401, respectively. The
decrease in operating expenses was primarily a result of cost controlling
measures. Interest expense decreased as a result of payments made during the
year ended December 31, 2003. During the first six months of 2004 we sustained
operations substantially through private borrowings received in 2003.
FINANCIAL CONDITION
Our cash position decreased from $6,622 at December 31, 2003 to $0 at June 30,
2004 primarily due to use of cash to fund operating expenses. We have applied a
100% valuation allowance for our net deferred tax assets of approximately
$4,267,000, which is primarily from our net operating loss carry-forward,
because the realization of the net deferred tax asset is likely not to be
realized as a result of either change in control limitations or lack of income
prior to expiration.
Our total liabilities increased from approximately $2,004,000 as of December 31,
2003 to approximately $2,297,000 as of June 30, 2004 as a result of withholding
payments to vendors, employees, and debt holders. As of June 30, 2004, the
Company has a deficiency in stockholders' equity and working capital of
approximately $2,290,000. In addition, the Company is in default on the majority
of our notes payable and is significantly delinquent in amounts owed to vendors
and employees. We have and will continue to primarily rely upon private debt
offerings and stockholder contributions to fund liquidity requirements. There is
no guarantee that stockholders will continue to fund operations or that there is
a viable market for us to raise equity or debt in the future. We plan to fund
the deficiency by implementation of our business plan and through additional
equity fundings.
As of June 30, 2004, the Company has no capital resources. The Company is
committed to pay approximately $138,000 as part of a non-cancelable lease
agreement over the next five years. The Company is in default or has debt coming
due in 2005 of approximately $799,000. Additionally, the Company has
approximately $237,000 of accrued and unpaid interest related to the debt
required to be paid in 2004. The Company plans to raise capital through equity
and debt means to fulfill these capital requirements. There is no guarantee that
there is a viable market for us to raise the required equity or debt in the
future.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management, under supervision and with the participation of its
Chief Executive Officer and Chief Financial Officer, evaluated as of the last
day of the period covered by this report, the effectiveness of the design and
operation of the Company's disclosure controls and procedures, as defined in
Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were adequate. There were no
significant changes in the Company's internal controls over financial reporting
(as defined in Rule 13a-15 under the Securities Act of 1934) for the period
ended June 30, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has entered into routine proceedings incidental to its business, and
does expect that these proceedings will have a material adverse effect on the
Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Note payable to a stockholder and officer, unsecured, bearing interest at 15%, due
January 2004. The Company is in default on this note, and accordingly, it is classified
as a current liability. $ 51,000
Note payable to a stockholder and officer, unsecured, bearing interest at 5%, due May
2004. The Company is in default on this note, and accordingly, it is classified as a
current liability. 2,500
Note payable to a stockholder and officer, unsecured, bearing interest at 15%, due
December 2003. The Company is in default on this note, and accordingly, it is classified
as a current liability. 61,402
Note payable to a stockholder and officer of the Company, unsecured, convertible into
common shares at a conversion price of $ 0.3333 per share due on January 2004, bearing
interest at 15%. The Company is in default on this note, and accordingly, it is
classified as a current liability. 15,000
-----------
Total amount payable to officers
129,902
Note payable to a stockholder of the Company for redemption of the
Company's common shares, unsecured, bearing interest at 6%, due June 15,
2000. The Company is delinquent in payments and accordingly is in default
on this note.
24,114
-----------
Total amount payable to stockholders and officers
154,016
Note payable to an individual for a cash loan, unsecured, bearing interest
at 12%. The Company is delinquent in payments and accordingly is in
default on this note.
100,000
Note payable, unsecured, bearing interest at 12.5%, due June 2003. The
Company is delinquent in payments and accordingly is in default on this
note.
60,000
Working capital notes payable to Matah Holding, LLC, bearing interest at 12%, due April
14, 2003. The Company is delinquent in payments and accordingly is in default on this
note. 485,000
-----------
TOTAL $ 799,016
===========
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit 99.1 (a), (b), 18 U.S.C Section 1350 Certifications
9
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Date: July 21, 2006 MEGA GROUP, INC.
By: /s/ JOHN H. BROWN
-----------------------
JOHN H. BROWN
CHIEF EXECUTIVE OFFICER
Date: July 21, 2006 By: /s/ JOYCE BROWN
-----------------------
JOYCE BROWN
CHIEF FINANCIAL OFFICER
10