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, 2001 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 [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 registrant's Common Stock held by non-
affiliates of the registrant based upon the
closing sale price of the Common Stock on March 4, 2002 was approximately
$178,511 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 2,550,158. 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 4, 2002 was 3,840,558.
Portions of the registrant's definitive Proxy Statement for its Annual
Meeting of the stockholders to be held on May 13, 2002 (the "Proxy
Statement") are incorporated by reference into Part III.
1
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements as defined under the
federal securities laws. Actual results could vary materially. Factors that
could cause actual results to vary materially are described herein and in
other documents. Readers should pay particular attention to the
considerations described in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Readers should also carefully review the risk factors
described in the other documents the Company files from time to time with
the Securities and Exchange Commission.
PART 1
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 61% and 63% of sales for
the years ended December 31, 2001 and 2000, respectively, and one customer
which accounted for 36% of sales for the year ended December 31, 1999. No
other customers accounted for more than 10% of sales in each of the years
ended December 31, 2001, 2000 and 1999.
Approximately 11%, 28% and 39% of sales during the years ended
December 31, 2001, 2000 and 1999, respectively, were from international
sales.
The Company's backlog as of December 31, 2001 and 2000 was $178,554
and $216,434, respectively. During March, 2002, the Company received from
Snap On Corporation approximately $2.5 million in orders to be delivered in
sixteen weeks.
As of December 31, 2001, the Company had 9 full-time and 0 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
2
(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
-------------------------------
2001 $198,323 0.11%
2000 $571,127 28%
1999 $699,214 39%
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 which expired in November, 1999. The company
leased the facility on a tenant at will basis from December, 1999 to
December, 2001. On January 1, 2002, the lease was extended for five years
at $10,000 per month for two years, and $11,667 per month for the following
three years. The current facility will accomodate 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 2001, no matters were submitted to a
vote of the security holders through the solicitation of proxies or
otherwise.
3
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
------------
2001 1st Quarter .16 .11
2nd Quarter .08 .08
3rd Quarter .04 .04
4th Quarter .07 .07
2000 1st Quarter .50 .12
2nd Quarter .50 .12
3rd Quarter .31 .09
4th Quarter .16 .07
1999 1st Quarter .31 .06
2nd Quarter .50 .13
3rd Quarter .44 .13
4th Quarter .38 .13
As of March 4, 2002, there were approximately 845 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.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Sales $1,766,579 2,075,724 1,794,553 $1,844,782 $2,097,454
Income (Loss) from operations 5,383 73,378 1,992 (99,081) (130,842)
Net Income (Loss) 2,104 67,712 1,593 (99,535) (129,606)
Net Income (Loss)per Common
share 0.001 0.018 0.001 (0.026) (0.034)
Weighted average shares
outstanding 3,827,951 3,813,719 3,805,239 3,792,308 3,790,122
Total Assets 625,011 700,821 795,247 788,374 936,784
Long Term Obligations 37,500 -0- 37,500 -0- -0-
Stockholders' equity 485,387 481,019 412,880 410,287 545,733
Cash Dividends Per Share -0- -0- -0- -0- -0-
4
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation
2001 Compared with 2000
Sales for 2001 decreased from the corresponding period of 2000 by
$0.31 million or 15%, to $1.8 million. This decrease was primarily due to a
decrease in international sales. Domestic sales in 2001 were $1.6 million
or 89% of total sales, compared to $ 1.5 million or 72% of total sales in
2000. International sales in 2001 were $0.2 million or 11% of total sales,
compared to $0.6 million or 28% of total sales in 2000. The Company is
expecting international sales to increase dramatically in the year 2002.
Gross profit for 2001 decreased from the corresponding period of 2000
by $0.03 million, or 3%, to $1.0 million. As a percentage of total sales,
gross profit was 58% and 50% for 2001 and 2000, respectively. The increase
in gross profit margin as a percentage of sales is due to a decrease in
material costs and labor costs. Material costs decreased due to better
purchasing decisions, better negogiations, and improved internal purchasing
procedures. Labor costs have decreased due to changes in production
staffing, namely, higher quality staff at a higher hourly cost but lower
overall cost. 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 2001 increased from the
corresponding period of 2000 by approximately $ 0.04 million or 5% to $ 0.8
million. As a percentage of total sales, selling and marketing expenses
increased to 46% for 2001 compared to 37% for 2000. The increase is
primarily due to changes in marketing staff and increased commissions.
Commissions as a percentage of sales increased to 28% in 2001 from 21% in
2000. This is due to an increase in sales to Snap On Corporation which
increased to 48% in 2001 from 33% in 2000.
General and administrative expenses for 2001 increased from the
corresponding period of 2000 by $.02 million, or 12% to $0.18 million. The
increase in general and administrative expenses is the result of changes in
office staff. As a percentage of total sales, general and administrative
expenses increased to 10% in 2001 compared to 8% in 2000.
Research and development expenses for 2001 decreased from the
corresponding period of 2000 by $.02 million or 52%. As a percentage of
sales, R & D expenses decreased to 1% of sales in 2001 compared to 2% of
sales in 2000.
Income from operations for 2001 as compared to the same period of
2000 decreased by $ .07 million. As a percentage of total sales, net income
decreased to 0.1% for 2001, compared to 3% for 2000. Operating income is
the result of the factors indicated above.
2000 Compared with 1999
Sales for 2000 increased from the corresponding period of 1999 by $
0.28 million or 16%, to $2.1 million. This increase was primarily due to an
increase in overall sales volume. Domestic sales in 2000 were $1.5 million
or 72% of total sales, compared to $ 1.1 million or 61% of total sales in
1999. International sales in 2000 were $0.6 million or 28% of total sales,
compared to $ 0.7 million or 39% of total sales in 1999. The Company
believes that the increase in overall sales is due to increased domestic sales.
Gross profit for 2000 increased from the corresponding period of 1999
by $0.29 million, or 38%, to $1.0 million. As a percentage of total sales,
gross profit was 50% and 42% for 2000 and 1999, respectively. 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 2000 increased from the
corresponding period of 1999 by approximately $ 0.2 million or 36% to $ 0.8
million. As a percentage of total sales, selling and marketing expenses
increased to 37% for 2000 compared to 32% for 1999. The increase is
primarily due to changes in marketing staff and increased commissions.
General and administrative expenses for 2000 decreased from the
corresponding period of 1999 by $.01 million, or 4% to $0.16 million. The
decrease in G & A expenses is the result of changes in office staff. As a
percentage of total sales, G & A expenses decreased to 7.7% in 2000
compared to 9.3% in 1999.
Research and development expenses for 2000 increased from the
corresponding period of 1999 by $.01 million or 61%. As a percentage of
sales, R & D expenses increased to 2% of sales in 2000 compared to 1% of
sales in 1999.
5
Income from operations for 2000 as compared to the same period of
1999 increased by $ .07 million. As a percentage of total sales, operating
income increased to 3.5% for 2000 compared to .11% for 1999. Operating
income is the result of the factors indicated above.
Liquidity and capital resources
Working capital at December 31, 2001 was $443,988 as compared to
$397,809 in working capital at December 31, 2000. The increase was
attributable to the net income for the year ended December 31, 2001 and the
extension of short term debt to long term status.
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%. There were no borrowings outstanding on this line at
December 31, 2001.
Capital expenditures totaled approximately $17,000 in 2001 and
$27,000 in 2000. No material purchase or capital commitments exist at
December 31, 2001.
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 2002.
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
None
6
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
Commissions paid to a related entity for the years ended December 31,
2001, 2000 and 1999 were approximately $7,700, $1,800, and $12,000,
respectively.
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. The lease expired in November, 1999 and the
Company leased the facility on a tenant at will basis from December,1999 to
December, 2001. On January 1, 2002, the lease was extended for five years
at $10,000 per month for two years, and $11,667 per month for thefollowing
three years.
7
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:
Report of Independent Certified Public Accountants 9
Balance sheet at December 31, 2001 and 2000 10
Statement of operations for the years
ended December 31, 2001, 2000 and 1999 11
Statement of Stockholders' equity for the years
ended December 31, 2001, 2000 and 1999 12
Statement of cash flows for the years
ended December 31, 2001, 2000 and 1999 13
Notes to Financial Statements 14
2. Schedules for the years ended December 31, 2001,
2000 and 1999
Schedule II - Valuation and Qualifying Accounts 19
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:
None
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, 2001.
8
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, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for the years ended
December 31, 2001, 2000 and 1999. 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 auditing standards
generally accepted in the United States of America. 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, 2001 and 2000, and the results of its
operations and its cash flows for the years ended December 31, 2001, 2000
and 1999 in conformity with accounting principles generally accepted in the
United States of America.
Our audits, referred to above, also include the financial schedules
listed in the Index at Item 14(a)(2). In our opinion, based on our audit,
such financial schedules present fairly the information required to be set
forth therein.
SULLIVAN BILLE, P.C.
Tewksbury, Massachusetts
February 27, 2002
9
MEGATECH CORPORATION
BALANCE SHEET, DECEMBER 31, 2001 AND 2000
2001 2000
--------------------------
A S S E T
CURRENT ASSETS:
Cash and cash equivalents $ 64,138 $ 27,585
Accounts receivable:
Trade (less allowance for doubtful
accounts: 2001, $6,200; 2000,
$14,075) 254,061 332,577
Other 3,697 7,763
Inventories 216,506 243,827
Prepaid expenses 7,710 5,859
--------------------------
Total current assets 546,112 617,611
PROPERTY AND EQUIPMENT - Net 71,233 75,544
OTHER ASSETS 7,666 7,666
--------------------------
TOTAL $ 625,011 $ 700,821
==========================
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:
Accounts payable - trade $ 50,160 $ 95,381
Accrued liabilities:
Salaries and wages 24,396 21,061
Commissions 210 8,820
Other 27,358 42,635
Customer advanced payments 14,405
Current portion of long-term debt 37,500
Total current liabilities 102,124 219,802
LONG-TERM DEBT 37,500
--------------------------
STOCKHOLDERS' EQUITY:
Common stock, authorized, 5,000,000
shares of $.0143 par value;
issued and outstanding:
2001, 3,840,558 shares;
2000, 3,815,408 shares 54,920 54,560
Additional paid-in capital 4,016,948 4,015,044
Deficit (3,586,481) (3,588,585)
--------------------------
Stockholders' equity - net 485,387 481,019
--------------------------
TOTAL $ 625,011 $ 700,821
==========================
See notes to financial statements.
10
MEGATECH CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
--------------------------------------
SALES $1,766,579 $2,075,724 $1,794,553
COST OF SALES 750,163 1,029,285 1,034,245
--------------------------------------
GROSS PROFIT 1,016,416 1,046,439 760,308
--------------------------------------
OPERATING EXPENSES:
Selling and marketing 814,005 777,660 569,882
General and administrative 180,262 160,464 166,726
Research and development 16,766 34,937 21,708
--------------------------------------
Total operating expenses 1,011,033 973,061 758,316
--------------------------------------
INCOME FROM OPERATIONS 5,383 73,378 1,992
OTHER EXPENSE - Net 3,279 5,666 399
--------------------------------------
NET INCOME $ 2,104 $ 67,712 $ 1,593
======================================
NET INCOME PER SHARE - Basic and
diluted $ .001 $ .018 $ .001
======================================
See notes to financial statements.
11
MEGATECH CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK ADDITIONAL
--------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY - NET
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 3,792,308 $54,230 $4,013,947 $(3,657,890) $410,287
ISSUANCE OF COMMON STOCK 20,000 286 714 1,000
NET INCOME FOR THE YEAR 1,593 1,593
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 3,812,308 54,516 4,014,661 (3,656,297) 412,880
ISSUANCE OF COMMON STOCK 3,100 44 383 427
NET INCOME FOR THE YEAR 67,712 67,712
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 3,815,408 54,560 4,015,044 (3,588,585) 481,019
ISSUANCE OF COMMON STOCK 25,150 360 1,904 2,264
NET INCOME FOR THE YEAR 2,104 2,104
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 3,840,558 $54,920 $4,016,948 $(3,586,481) $485,387
=================================================================
See notes to financial statements.
12
MEGATECH CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,104 $ 67,712 $ 1,593
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Non-cash charges to net income:
Depreciation and amortization 20,834 17,546 19,092
Common stock awarded as compensation 2,264 427 1,000
Loss on sale of property and equipment 3,225
Decrease (increase) in current assets:
Accounts receivable 82,582 (56,370) (168,319)
Inventories 27,321 113,835 42,206
Prepaid expenses (1,851) (1,498) 1,103
Increase (decrease) in current liabilities:
Accounts payable (45,221) 18,189 (86,537)
Accrued liabilities (34,957) (180,754) 53,317
--------------------------------------
Net cash provided by (used in) operating activities 53,076 (20,913) (133,320)
CASH FLOWS USED IN INVESTING ACTIVITIES - Additions to
property and equipment (16,523) (27,359) (15,903)
CASH FLOWS FROM FINANCING ACTIVITIES - Proceeds from
issuance of long-term debt 37,500
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 36,553 (48,272) (111,723)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,585 75,857 187,580
--------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 64,138 $ 27,585 $ 75,857
======================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,417 $ 3,437 $ 839
Taxes paid 696 404 351
See notes to financial statements.
13
MEGATECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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 11%, 28% and 39% of sales during the years ended December 31,
2001, 2000 and 1999, respectively, were from international sales.
There were two customers that accounted for 61% and 63% of sales for
the years ended December 31, 2001 and 2000, respectively, and one customer
that accounted for 36% of sales for the year ended December 31, 1999. No
other customers accounted for more than 10% of sales in each of the years
ended December 31, 2001, 2000 and 1999.
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.
14
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. 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,
--------------------
2001 2000
--------------------
Raw material $119,082 $146,722
Work in Process 37,096 8,993
Finished goods 60,328 88,112
--------------------
Total 216,506 $243,827
===================
15
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
----------------
2001 2000
---- ----
Machinery and equipment $245,855 $245,855
Office equipment 143,827 140,938
Leasehold improvements 69,776 69,776
Automobiles 58,399 44,765
--------------------
Total 517,857 501,334
Less accumulated depreciation and
amortization 446,624 425,790
--------------------
Property and equipment - net $ 71,233 $ 75,544
====================
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
Automobiles 5
5. LINE OF CREDIT
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%. There were no borrowings outstanding on this line at December 31,
2001 and 2000.
6. LONG-TERM DEBT
Long-term debt of $37,500 at December 31, 2001, classified as current
at December 31, 2000,consisted of 8% convertible notes payable. Interest
is payable quarterly and the outstanding principle balance was originally
due June 2001 and has been extended to June 2003. The notes are
convertible at the option of the holder into shares of the Company's common
stock at a conversion rate of $1 per share. If at anytime prior to the
notes maturity date or conversion by the holder, the Company's common stock
has market price of at least $2 for five consecutive trading days, the
notes are convertible at the option of the Company into shares of the
Company's common stock at a conversion rate of $1 per share.
16
7. LEASE AGREEMENTS
The Company originally leased its office, research and production
facility in Tewksbury, Massachusetts from a related party, under a five-
year operating lease which expired in November 1999. The Company leased
the facility on a tenant-at-will basis through December 31, 2001. The
Company now leases the facility under a five-year operating lease expiring
December 2006. The Company is responsible for all operating expenses and
maintenance costs. Rent expense was approximately $85,000 for each of the
years ended December 31, 2001, 2000 and 1999.
Based on the lease currently in effect, the future minimum rental
commitment is as follows:
Year Ended
December 31, Amount
------------ ------
2002 $120,000
2003 120,000
2004 140,000
2005 140,000
2006 140,000
--------
Total $660,000
========
8. INCOME TAXES
The Company has available federal net operating loss carryforwards of
approximately $541,700 expiring through December 2018 and state operating
loss carryforwards of approximately $233,100 expiring through December 2003.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
----------------------
2001 2000
----------------------
Deferred income tax assets:
Federal and state net operating loss carryforwards $ 207,600 $ 209,900
Allowance for doubtful accounts, reserves and accruals 31,500 31,400
----------------------
Total deferred income tax assets 239,100 241,300
Deferred income tax liabilities - tax over book depreciation
Valuation allowance for deferred tax assets (6,100) (5,000)
(233,000) (236,300)
----------------------
Net recognized deferred income tax benefit $ -0- $ -0-
======================
9. RELATED PARTY TRANSACTIONS
Commissions paid to a related entity were approximately $7,700,
$1,800 and $12,000 during the years ended December 31, 2001, 2000 and 1999,
respectively.
17
10. EMPLOYEE BENEFIT PLAN
The Company has 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. There was no contribution during the year ended December 31,
2001. The matching contribution for the years ended December 31, 2000 and
1999 were approximately $5,400 and $4,400, respectively.
11. NET INCOME PER SHARE
Basic net income per share has been computed using the weighted
average number of common shares outstanding.
Diluted net income per share gives effect to all dilutive potential
common shares that were outstanding during the period. None of the
convertible debt or options outstanding at period end were included in the
diluted net income per share calculation for the years ended December 31,
2001, 2000 and 1999, since they were anti-dilutive.
The weighted average number of shares outstanding is as follows:
Year Ended Number of
December 31, Shares
-------------------------
2001 3,825,951
2000 3,813,719
1999 3,805,239
18
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, 1999:
Reserve for obsolescence $10,000 $ -0- $-0- $ -0- $10,000
Allowance for doubtful accounts $10,166 $ -0- $-0- $ 232 $ 9,934
Year Ended December 31, 2000:
Reserve for obsolescence $10,000 $ -0- $-0- $ -0- $10,000
Allowance for doubtful accounts $ 9,934 $4,141 $-0- $14,075
Year Ended December 31, 2001:
Reserve for obsolescence $10,000 $ -0- $-0- $ -0- $10,000
Allowance for doubtful accounts $14,075 $ -0- $-0- $7,875 $ 6,200
19
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: March 29, 2002
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/ Henry P. Ingwersen
Henry P. Ingwersen, Director
By: /s/ Varant Z. Basmajian
Varant Z. Basmajian, Director
Date: March 29, 2002
20