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 ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No XX
---- ----
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 7, 2003 was approximately $629,638 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 2,737,558.
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 7, 2003 was 3,886,958.
Portions of the registrant's definitive Proxy Statement for its Annual
Meeting of the stockholders to be held on May 12, 2003 (the "Proxy
Statement") are incorporated by reference into Part III.
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 I
Item 1 - Description of Business
--------------------------------
(a) General Development of Business
-------------------------------
Megatech Corporation, established in 1970, provides instructional
programs, along with training equipment, as a turnkey system for the
transportation industry. The company has developed and marketed a
comprehensive line of automotive trainers for schools, the military,
government and industry. Megatech has sold automotive/ technology modules to
over 4000 schools in the United States thereby establishing excellent brand
recognition throughout the country. In addition, Megatech has exported to
well over 20 nations around the world.
Megatech Corporation entered new markets in 2002 with several market
building projects either completed or in process. The Company is providing
the first component of a new Basic Knowledge and Skills training program at
Aberdeen Proving Grounds, which is the first large scale military project
the
2
Company has secured in years. In addition, the Company has developed Ford
Motor Company's first complete electricity and electronics training program
which will be used worldwide in the Ford Factory Training Centers,
Maintenance Light Repair Programs, and Ford Asset programs. Snap On
Corporation, one of the largest automotive tool manufacturers in the U.S.,
has an agreement with Megatech to market Megatech trainers to the
transportation industry, government, and public education. Through Snap On
Tools International, Megatech provided five state of the art training
programs shipped in 2002 and 2003 to the national colleges of Venezuela and
is negotiating an additional contract for 13 more schools.
There was one customer which accounted for 88% of sales for the year
ended December 31, 2002, and two customers which accounted for 61% and 63%
of sales for the years ended December 31, 2001 and 2000, respectively.
Approximately 58%, 11% and 28% of sales during the years ended December 31,
2002, 2001 and 2000, respectively, were from international sales.
The Company's backlog as of December 31, 2002 and 2001 was $1,610,020
and $178,554, respectively. This includes approximately $1 million in orders
from Snap On Corporation which were shipped in February, 2003. The Company
expects to fill all orders (unless cancelled) of its current backlog during
the 2003 fiscal year.
In addition to it's independent domestic and international sales rep
organization, as of December 31, 2002, the Company had 14 full-time and 2
part-time employees, of which 9 were engaged in production activities, 5 in
sales and marketing, and 2 in general and administrative.
(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
---- ------ -----------
2002 $1,767,891 58%
2001 $ 198,323 11%
2000 $ 571,127 28%
Most of these sales are made upon receipt of Irrevocable Letters of Credit
or prepayments.
3
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 five
year lease with a related party which expires in December, 2006. 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 2002, 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
---- ---
2002 1st Quarter 0.14 0.10
2nd Quarter 0.26 0.26
3rd Quarter 0.28 0.28
4th Quarter 0.16 0.16
2001 1st Quarter 0.16 0.11
2nd Quarter 0.08 0.08
3rd Quarter 0.04 0.04
4th Quarter 0.07 0.07
2000 1st Quarter 0.50 0.12
2nd Quarter 0.50 0.12
3rd Quarter 0.31 0.09
4th Quarter 0.16 0.07
4
As of March 7, 2002, there were approximately 841 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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Sales $3,052,238 $1,766,579 $2,075,724 $1,794,553 $1,844,782
Income (Loss) from operations 110,831 5,383 73,378 1,992 (99,081)
Net Income (Loss) 101,131 2,104 67,712 1,593 (99,535)
Net Income (Loss) per Common share 0.026 0.001 0.018 0.001 (0.026)
Weighted average shares outstanding 3,856,948 3,827,951 3,813,719 3,805,239 3,792,308
Total Assets 1,116,489 625,011 700,821 795,247 788,374
Long Term Obligations -0- 37,500 -0- 37,500 -0-
Stockholders' equity 594,381 485,387 481,019 412,880 410,287
Cash Dividends Per Share -0- -0- -0- -0- -0-
Item 7 - Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operation
--------------------
2002 Compared with 2001
Sales for 2002 increased from the corresponding period of 2001 by $1.3
million or 73% to $3.1 million. The increase was due to an increase in
international sales. Domestic sales were $1.3 million or 42% of total sales,
compared to $1.6 million or 89% of total sales in 2001. International sales
in 2002 were $1.8 million or 58% of total sales, compared to $.2 million or
11% of total sales in 2001. The increase in international sales is
attributable to sales through Snap On International of training equipment
and programs to the national Colleges of Venezuela. Overall, sales to Snap
On Corporation increased to 88% in 2002 compared to 49% in 2001.
Gross profit for 2002 increased from the corresponding period of 2001
by $.9 million or 86% to $1.9 million. As a percentage of sales, gross
profit was 62% and 58% for 2002 and 2001, respectively. The increase in
gross profit margin as a percentage of sales is due to increased efficiencies
associated with higher sales volume. Decreases in materials costs and
overhead costs were offset slightly by an increase in labor costs. Materials
were $657,000 in 2002 or 22% compared to $460,000 or 26% in 2001. Labor was
$359,000 or 12% in 2002 compared to $179,000 or 10% in 2001. Overhead was
$146,000 or 4% in 2002 compared to $111,000 or 6% in 2001.
Selling and marketing expenses increased from the corresponding period
of 2002 by $.8 million or 94% to $1.6 million. As a percentage of sales,
selling and marketing expenses was 52% and 46% for 2002 and 2001,
respectively. The increase in selling and marketing expenses is due to
higher
5
commission expense, salaries and rent. Commission expense in 2002 was 36% of
sales compared to 28% in 2001.
General and administrative expenses were fairly steady in 2002 and
2001 at $.18 million. Major general and administrative expenses include
salaries, rent, audit, accounting and directors expenses. As a percentage of
sales, general and administrative expenses decreased to 6% of sales in 2002
compared to 10% in 2001. This is due to general and administrative expenses
remaining relatively steady despite increased sales.
Research and development expenses were stable in 2002 and 2001 at
$16,000 or 1% of sales.
The net income for the year ended December 31, 2002 was $101,131 or 3%
of sales, compared to $2,104 or .1% of sales for the previous year. The
increase is the result of the items discussed above.
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 negotiations 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.
6
Research and development expenses for 2001 decreased from the
corresponding period of 2000 by $.02 million or 52%. As a percentage of
sales, research and development 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 .1% for 2001 compared to 3% for 2000. Operating income is the
result of the factors indicated above.
Liquidity & Working Capital
---------------------------
As of December 31, 2002, the Company had cash and cash equivalents of
$30,327 compared to $64,138 at December 31, 2001. During 2002, the Company
used $89,984 in cash to fund operating activities. The Company used $40,702
for property and equipment acquisitions, and borrowed $96,875 against the
Company's line of credit.
The Company maintains a $ 275,000 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 $100,000 at December 31,
2002. There were no borrowings outstanding on this line at December 31,
2001.
Capital expenditures totaled approximately $41,000 in 2002 and $17,000
in 2001. No material purchase or capital commitments exist at December 31,
2002.
Working capital at December 31, 2002 was $503,149 compared to $443,988
at December 31, 2001. The increase is the result of the net income for the
year less the reclassification of long term debt to current.
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 2003.
Item 7a - Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------
Not applicable.
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
7
2. Changes in Registrant's Certifying Accountants
None
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 and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
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.
We do not maintain any plans, pursuant to which we may grant equity
awards to employees or other persons.
Item 13 - Certain Relationships and Related Transactions
--------------------------------------------------------
Commissions paid to a related entity for the years ended December 31,
2002, 2001 and 2000 were approximately $1,700, $7,700 and $1,800,
respectively. The Company has entered into a five year lease agreement for
its Tewksbury, Massachusetts facility with Lorig Corporation, which is owned
by members of the family of an officer and major 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 expires in
2006.
Item 14 - Controls and Procedures
---------------------------------
Our Chief Executive Officer/Chief Financial Officer has concluded,
based on his evaluation within 90 days of the filing date of this report,
that our disclosure controls and procedures are effective to ensure
8
that information required to be disclosed in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. There have been no significant
changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the previously
mentioned evaluation.
PART IV
Item 15 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K
---------------------------------------------------------------------------
a) The following documents are filed as a part of this Report:
1. Financial Statement: Page
----
Report of Independent Certified Public Accountants 12
Balance sheet at December 31, 2002 and 2001 13
Statement of operations for the years ended
December 31, 2002, 2001 and 2000 14
Statement of stockholders' equity for the years ended
December 31, 2002, 2001 and 2000 15
Statement of cash flows for the years ended
December 31, 2002 2001 and 2000 16
Notes to Financial Statements 17
2. Schedules for the years ended December 31, 2002, 2001 and 2000
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:
99.1 Certification required under Section 1350 of Chapter 63 of
Title 18 of the United States Code.
The company filed the following reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended December
31, 2002:
Form 8-K filed November 12, 2002.
9
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 7, 2003
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 7, 2003
10
CERTIFICATION
I, Vahan V. Basmajian, President, Treasurer, and Chairman of the Board
of Megatech Corporation certify that:
1) I have reviewed this annual report on Form 10-K of Megatech
Corporation;
2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report;
3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4) I, the registrant's certifying officer, am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, is made known to
me by others within the registrant, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) I, the registrant's certifying officer, have disclosed, based on
my most recent evaluation, to the registrant's auditors and audit committee
of the registrant's board of directors (or persons performing the equivalent
functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6) I, the registrant's certifying officer, have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of my most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 7, 2003
/s/ Vahan V. Basmajian
------------------------------------
Vahan V. Basmajian
President, Treasurer & Chairman of
the Board
Principal Executive Officer
Principal Financial Officer
Principal Accounting Officer
11
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, 2002 and 2001, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2002,
2001 and 2000. 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, 2002 and 2001, and the results of its
operations and its cash flows for the years ended December 31, 2002, 2001
and 2000 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.
February 26, 2003
Tewksbury, Massachusetts
12
MEGATECH CORPORATION
BALANCE SHEET, DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents $ 30,327 $ 64,138
Accounts receivable:
Trade (less allowance for doubtful accounts of $6,200) 146,482 254,061
Other 8,643 3,697
Inventories 839,753 216,506
Prepaid expenses 52 7,710
---------- ----------
Total current assets 1,025,257 546,112
PROPERTY AND EQUIPMENT - Net 83,566 71,233
OTHER ASSETS 7,666 7,666
---------- ----------
TOTAL $1,116,489 $ 625,011
========== ==========
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 - line of credit $ 100,000
Accounts payable - trade 218,508 $ 50,160
Accrued liabilities:
Salaries and wages 35,365 24,396
Other 43,751 27,568
Customer advanced payments 90,109
Current portion of long-term debt 34,375
---------- ----------
Total current liabilities 522,108 102,124
---------- ----------
LONG-TERM DEBT 37,500
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, authorized, 5,000,000 shares of $.0143
par value; issued and outstanding: 2002, 3,885,958
shares; 2001, 3,840,558 shares 55,569 54,920
Additional paid-in capital 4,024,162 4,016,948
Deficit (3,485,350) (3,586,481)
---------- ----------
Stockholders' equity - net 594,381 485,387
---------- ----------
TOTAL $1,116,489 $ 625,011
========== ==========
See notes to financial statements.
13
MEGATECH CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
SALES $3,052,238 $1,766,579 $2,075,724
COST OF SALES 1,162,396 750,163 1,029,285
---------- ---------- ----------
GROSS PROFIT 1,889,842 1,016,416 1,046,439
---------- ---------- ----------
OPERATING EXPENSES:
Selling and marketing 1,577,331 814,005 777,660
General and administrative 185,410 180,262 160,464
Research and development 16,270 16,766 34,937
---------- ---------- ----------
Total operating expenses 1,779,011 1,011,033 973,061
---------- ---------- ----------
INCOME FROM OPERATIONS 110,831 5,383 73,378
OTHER EXPENSE - Net 9,700 3,279 5,666
---------- ---------- ----------
NET INCOME $ 101,131 $ 2,104 $ 67,712
========== ========== ==========
NET INCOME PER SHARE - Basic and diluted $ .026 $ .001 $ .018
========== ========== ==========
See notes to financial statements.
14
MEGATECH CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON STOCK ADDITIONAL
---------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY - NET
------ ------ ---------- ------- -------------
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
ISSUANCE OF COMMON STOCK 45,400 649 7,214 7,863
NET INCOME FOR THE YEAR 101,131 101,131
--------- ------- ---------- ----------- --------
BALANCE AT DECEMBER 31, 2002 3,885,958 $55,569 $4,024,162 $(3,485,350) $594,381
========= ======= ========== =========== ========
See notes to financial statements.
15
MEGATECH CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 101,131 $ 2,104 $ 67,712
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Non-cash charges to net income:
Depreciation and amortization 25,634 20,834 17,546
Common stock awarded as compensation 7,863 2,264 427
Loss on sale of property and equipment 2,735
Changes in operating assets and liabilities:
Accounts receivable 102,633 82,582 (56,370)
Inventories (623,247) 27,321 113,835
Prepaid expenses 7,658 (1,851) (1,498)
Accounts payable 168,348 (45,221) 18,189
Accrued liabilities 27,152 (34,957) (180,754)
Customer advanced payments 90,109
--------- --------- ---------
Net cash provided by (used in) operating activities (89,984) 53,076 (20,913)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES - Additions to
property and equipment (40,702) (16,523) (27,359)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - net 100,000
Principal payments of long-term debt (3,125)
--------- --------- ---------
Net cash provided by financing activities 96,875
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (33,811) 36,553 (48,272)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 64,138 27,585 75,857
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,327 $ 64,138 $ 27,585
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,566 $ 3,417 $ 3,437
Taxes paid 480 696 404
See notes to financial statements.
16
MEGATECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
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
58%, 11% and 28% of sales during the years ended December 31, 2002, 2001 and
2000, respectively, were from international sales.
There was one customer that accounted for approximately 88% of sales for the
year ended December 31, 2002. There were two customers that accounted for
61% and 63% of sales for the years ended December 31, 2001 and 2000,
respectively. No other customers accounted for more than 10% of sales in
each of the years ended December 31, 2002, 2001 and 2000.
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.
17
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.
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,
----------------------
2002 2001
---- ----
Raw material $248,588 $119,082
Work in Process 31,765 37,096
Finished goods 559,400 60,328
-------- --------
Total $839,753 $216,506
======== ========
18
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
----------------------
2002 2001
---- ----
Machinery and equipment $ 16,391 $245,855
Office equipment 48,573 143,827
Leasehold improvements 70,226 69,776
Automobiles 63,175 58,399
-------- --------
Total 198,365 517,857
Less accumulated depreciation and amortization 114,799 446,624
-------- --------
Property and equipment - net $ 83,566 $ 71,233
======== ========
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 $275,000 (2001, $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 $100,000 at December 31,
2002. There were no borrowings outstanding on this line at December 31,
2001.
6. LONG-TERM DEBT
Long-term debt of $34,375 and $37,500 at December 31, 2002 and 2001,
respectively, classified as current at December 31, 2002, consists of 8%
convertible notes payable. Interest is payable quarterly and the outstanding
principle balance 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.
19
7. LEASE AGREEMENTS
The Company leases its office, research and production facility in
Tewksbury, Massachusetts from a related party, under a five- year operating
lease which expires December 2006. The Company is responsible for all
operating expenses and maintenance costs. Rent expense was approximately
$120,000 for the year ended December 31, 2002 and approximately $85,000 for
each of the years ended December 31, 2001 and 2000.
Based on the lease currently in effect, the future minimum rental commitment
is as follows:
Year Ended
December 31, Amount
------------ ------
2003 $120,000
2004 140,000
2005 140,000
2006 140,000
--------
Total $540,000
========
8. INCOME TAXES
The Company has available federal net operating loss carryforwards of
approximately $368,200 expiring through December 2018 and state operating
loss carryforwards of approximately $131,300 expiring through December 2003.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
------------------------
2002 2001
---- ----
Deferred income tax assets:
Federal and state net operating loss carryforwards $ 137,700 $ 207,600
Allowance for doubtful accounts, reserves and accruals 27,500 31,500
--------- ---------
Total deferred income tax assets 165,200 239,100
Deferred income tax liabilities - tax over book depreciation (3,200) (6,100)
Valuation allowance for deferred tax assets (162,000) (233,000)
--------- ---------
Net recognized deferred income tax benefit $ -0- $ -0-
========= =========
9. RELATED PARTY TRANSACTIONS
Commissions paid to a related entity were approximately $1,700, $7,700
and $1,800 during the years ended December 31, 2002, 2001 and 2000,
respectively.
20
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
were no contributions during the years ended December 31, 2002 and 2001. The
matching contribution for the year ended December 31, 2000 was approximately
$5,400.
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, 2002, 2001 and 2000,
since they were anti-dilutive.
The weighted average number of shares outstanding is as follows:
Year Ended Number of
December 31, Shares
------------ ---------
2002 3,856,948
2001 3,825,951
2000 3,813,719
21
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, 2000:
-----------------------------
Reserve for obsolescence $10,000 $ -0- $-0- $ -0- $10,000
Allowance for doubtful accounts $ 9,934 $4,141 $-0- $ -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
Year Ended December 31, 2002:
-----------------------------
Reserve for obsolescence $10,000 $ -0- $-0- $ -0- $10,000
Allowance for doubtful accounts $ 6,200 $ -0- $-0- $ -0- $ 6,200
22