U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/1-A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of
The Securities Exchange Act of 1934
MEGA HOLDING CORP.
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(Name of Small Business Issuer in its charter)
New York 13-2793653
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(State or other jurisdiction (I.R.S. Employer ID No.)
of incorporation or organization)
278A New Dorp Lane, Staten Island. New York 10306
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (718) 667-9117
Securities to be registered under Section 12(b) of the Act: None
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Not applicable Not Applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock. $.01 par value
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Title or Class
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MEGA HOLDING CORP.
Form 10SB
Table of Contents
Page
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PART I
Item 1. Description of Business 2
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results of Operations 9
Item 3. Description of Property 12
Item 4. Security Ownership of Certain Beneficial
Owners and Management 12
Item 5. Directors, Executive Officers, Promoters
and Control Persons 13
Item 6. Executive Compensation 14
Item 7. Certain Relationships and Related Transactions 15
Item 8. Description of Securities
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Stockholder Matters 16
Item 2. Legal Proceedings 17
Item 3. Changes in and Disagreements with Accountants 17
Item 4. Recent Sales of Unregistered Securities 17
Item 5. Indemnification of Directors and Officers 17
PART F/S
Financial Statements F-1
PART III
Item 1. Index to Exhibits 17
Item 2. Description of Exhibits 17
Signature Page 18
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Item 1. DESCRIPTION OF BUSINESS
General
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The Company has been in the mortgage brokerage business since 1987, has been
involved in providing business and financial consulting services since 1970 and
retains a royalty interest in a coal mine that it acquired in 1973 and sold in
1980.
Mortgage Brokerage
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Since 1987, the Company has been licensed by the New York State Banking
Department as a mortgage broker, dealing in both residential and commercial
mortgages. The Company also conducts commercial mortgage brokerage business
throughout the United States on a co-brokerage basis with brokers who are
licensed to do business in such states. The Company's fees for its service as a
mortgage broker vary with each transaction. The fees are computed as a
percentage (point) of the amount of the mortgage. The number of points charged
varies with each transaction depending on a variety of factors such as, the
applicant's credit, value of the property and term and type of mortgage loan and
range from 1% of the principal mortgage amount to 3% of the principal mortgage
amount.
The Company has used a number of banks and other lending institutions to
place its mortgages, including Greenpoint Bank, Ford Consumer Finance and
Republic National Bank. These mortgages generally carry a fixed rate of interest
and are self-amortizing. For the nine months ended May 31, 1997 and the fiscal
years ended August 31, 1996 and 1995, the Company earned mortgage revenues of
$-0-, $6,909 and $13,938, respectively, all of which were generated from
residential mortgages originated in the State of New York. The principal amounts
of the mortgages brokered during the foregoing periods were $-0-, $280,000 and
$550,000, respectively.
The Company does not advertise its mortgage brokering services; rather, it
receives most of its business from referrals from professionals such as
attorneys and accountants.
Business and Financial Consulting Services
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The Company provides business and consulting services. Such services
include advice on how to structure and conduct private offerings of securities,
mergers and acquisitions and other strategic business advisory services. Most of
the Company's clients use a combination of these services and the Company
receives fees for such services. The Company may refer clients to financial
institutions (banking and other lenders and/or investment institutions). Often
the Company's fees are taken as stock in the client company or the fees are a
combination of cash and stock. In addition, the Company may begin a relationship
with a client on an advisory basis and subsequently proceed to provide
acquisition or financing services to the client.
In the process of providing financial consulting activities, the Company
typically performs due diligence and assists the client in preparing a business
plan, which plan would typically include an analysis of the client's business,
its history, the market for its products, the competitive environment in which
the client operates and a break down of how funds from a potential private
placement of its securities will be used. The Company does not raise funds for
clients; however, the Company may refer clients to financial institutions such
as banking and other lenders and/or investment institutions.
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Rule 504 Offerings.
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One method of financing recommended by the Company to clients who are
seeking to raise up to $1,000,000 is an offering of stock pursuant to the
exemption from registration under the Securities Act of 1933 (the "Act")
provided by Rule 504 of Regulation D under the Act. Under Rule 504, a company
that is not an investment company, a blank check company (i.e., a company that
has no specific business) or a company subject to the reporting requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), can raise up to
$1,000,000 in any 12 month period. Rule 504 does not require investors to
purchase the stock with investment intent. Accordingly, provided that a company
sells its stock in one or more jurisdictions that permit the sale without
requiring investment intent on the part of the investor, the shares can be sold
to investors without resale restrictions.
Consulting services provided by the Company with regard to Rule 504
offerings include educating the client on the availability, benefits and
restrictions of raising funds through the sale of stock under Rule 504 and
introducing the client to attorneys, accountants and underwriters. The Company
also assists the client in finding registered broker dealers to make a market in
the client's stock. For its services, the Company may receive cash and/or shares
of the client's stock. The Company generally plans to spin-off some or all of
the shares transferred from such clients to its shareholders. Spin-offs require
registration under the Act (see "Spin-offs" below).
To date, the Company has provided consulting services to three companies
that have attempted to raise funds through Rule 504 offerings: Fleetclean
Systems, Inc. ("FSI"), DALUZ, Inc. ("DI") and Southeast Tire Recycling, Inc.
("STR").
FSI is a manufacturer and distributor of truck washing equipment and
chemicals. FSI, with the assistance of Castle Securities Corp., offered up to
150,000 shares of its Common Stock at a price of $5.00 per share on a "best
efforts only" basis. 20,000 shares were sold. That offering expired on May 20,
1997; however, FSI is in the process of determining whether to reopen this
offering. As of April 30, 1996, FSI had total assets of approximately $608,700,
total liabilities of approximately $483,500 and, for the four months then ended,
total revenues of approximately $312,000 and a profit of approximately $3,000.
DI is a start-up marketing company with approximately $225,400 in total
assets as of October 31, 1996, that is marketing a self-help package of books,
video tapes and audio tapes based upon the book, "Psychic For Life Home Study
Program," written by James T. Weiss, DI's President. DI offered up to 150,000
shares of its Common Stock at a price of $5.00 per share on a "best efforts
only" basis. The offering closed on April 30, 1997. DI sold 80,000 shares.
STR is involved in collection and processing of used tires into useful
byproducts. STR, in a series of offering under Rule 504 raised in excess of
$750,000.
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Reverse Acquisitions.
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The Company also has been involved in purchasing, selling and brokering
"shell" companies for reverse acquisitions. A shell company is a corporation
that, for one reason or another, no longer has substantive business operations,
but has many shareholders and issued and outstanding shares, many of which
shares are free trading or eligible to be free trading under Rule 144 of the
Act. In a reverse acquisition, the shareholders of a private corporation with an
existing or proposed business, exchange all of the shares of the private company
for a significant number (generally between 85% and 95%) of the shell company's
shares of stock. In form, the shell company acquires 100% of the stock of the
private company but, in substance, the shareholders of the private company have
acquired control of the shell company. Reverse acquisitions are attractive to a
private company that is seeking a trading market for its securities without
having to undergo the time-consuming and costly process of filing a registration
statement with the Securities and Exchange Commission (the "Commission") and
without having to find an underwriter willing and capable of selling its shares
to the public. The trading market enhances the ability of the private company
(now a subsidiary of the shell company) to raise funds. Such funds are often
raised through Rule 504 offerings (see "Rule 504 Offerings" above).
Where the Company acquires control of a shell company, it purchases a
majority block of stock of the shell company from some or all of the shell
company's principal stockholders. The Company then "cleans up" the shell
company; it reviews and updates the company's corporate books, revives the
company's corporate charter (if voided) and, where necessary, files back tax
returns and pays any back taxes. Once the shell company has been cleaned up, the
Company seeks private companies for potential reverse acquisitions.
The Company finds shell companies and private companies seeking to effect
reverse acquisitions through the business contacts of its executive officers and
from professionals, primarily accountants.
During the fiscal years ended August 31, 1996 and 1995, and for the nine
months ended May 31, 1997, the Company was involved in the following four
reverse acquisitions:
1. In April 1994, the Company was engaged by a foreign business consultant
to find, evaluate and perform due diligence on shell companies for reverse
acquisitions by the consultant's client companies. The Company located two shell
companies, Parkway Capital Corporation and Hiawatha Oil and Gas Corporation (see
paragraph numbers 2 and 5 below for information on Hiawatha Oil and Gas
Corporation). For its services, the Company received fees of approximately
$190,000. From these fees, the Company was required to pay all the expenses,
professional and otherwise related to the reverse acquisitions. The Company
netted approximately $95,000 from these transactions.
2. In September 1994, for an aggregate of $30,000, the Company received
approximately 6% of the shares of Parkway Capital Corporation, which changed its
name to QCS Corporation ("QCS"), acquired by the foreign business consultant. In
February 1995, QCS effected a reverse acquisition with QCS Development Company
S.A., a company in the business of catalogue computer software. Following the
reverse acquisition, the Company owned approximately 2.0% of the outstanding
shares of QCS. As of June 30, 1996, QCS, on a consolidated basis, had total
assets of approximately $2,607,000 and total liabilities of approximately
$1,325,000 and, for the year then ended, QCS had total revenues of approximately
$1,039,000 and a net loss of approximately $2,712,000.
3. In January 1995, the Company acquired approximately 52% of the
outstanding shares of Sherman Goelz & Associates, Inc., which changed its name
to First Nordic Equity Partners Corp. ("FNEP"), for an aggregate of $32,000. In
May 1995, FNEP effected a reverse acquisition with First Nordic Equity Partners
Corp., a company in the business of industrial machinery. Following the reverse
acquisition, the Company owned approximately 8.0% of the outstanding shares of
FNEP. The Company has no current financial information on FNEP.
4
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4. In August 1995, the Company acquired approximately 51% of the
outstanding shares of Major League Enterprises Inc., which changed its name to
ARXA International Energy Inc. ("ARXA"), for an aggregate of $19,000. In
November 1995, ARXA effected a reverse acquisition with ARXA International
Energy Inc., a company in the business of oil and gas exploration. Following the
reverse acquisition, the Company owned approximately 5.5% of the outstanding
shares of ARXA. As of April 30, 1996, ARXA, on a consolidated basis, had total
assets of approximately $881,000 and total liabilities of approximately $262,000
and, for the quarter then ended, ARXA had total revenues of approximately $1,200
and a net loss of approximately $148,000.
5. In January 1996, the Company acquired approximately 52% of the
outstanding shares of Hiawatha Oil and Gas Corporation, which changed its name
to Hiawatha Industry Internet Corporation ("HIIC"), for an aggregate of $40,000.
In August 1996, HIIC effected a reverse acquisition with Hiawatha Industry
Internet Corporation, a company in the business of merchandising computer
software. Following the reverse acquisition, the Company owned approximately
5.0% of the outstanding shares of HIIC. As of June 30, 1996, HIIC, on a
consolidated basis, had total assets of approximately $321,000, total
liabilities of approximately $701,000 and, for the nine months then ended, HIIC
had total revenues of approximately $104,000 and a net loss of approximately
$843,000.
Spin-Off Transactions.
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One of the potential problems with dealing with shell companies is the
inability to be completely certain that there are no undisclosed problems or
liabilities that may be inherited by the new shareholders of a private company
that acquires control of a shell company in a reverse acquisition. To alleviate
this potential problem and still provide a trading market for corporate clients,
the Company plans to do spin-off transactions. In a spin-off transaction, one
company ("Company A") acquires stock of another company ("Company B"). Company A
then distributes shares of Company B to Company A's shareholders. Assuming
Company A has a significant number of shareholders, following a spin-off
transaction, Company B will have a significant number of shareholders.
The Company's spin-off transactions are intended to be structured as
follows: For each transaction, the Company will create a new wholly-owned
subsidiary ("Subsidiary A"). Pursuant to a reverse acquisition, the private
company will become a wholly-owned subsidiary of Subsidiary A. As a result of
the reverse acquisition, the former shareholders of the private company will own
between 91% and 95% of Subsidiary A's issued and outstanding shares of Common
Stock and the Company will own between 5% and 9% of Subsidiary A's issued and
outstanding Common Stock. Thereafter, the Company will spin-off approximately
85% of its holding of Subsidiary A's stock to its stockholders, retaining
approximately 15% of its holdings of Subsidiary A's stock. In essence, the
Company anticipates retaining between approximately 1/2 and 3/4% of the Common
Stock of Subsidiary A after the Company makes its distribution to its
shareholders.
Spin-off transactions will require registration under the Act. Accordingly,
before the Company can distribute the shares of Subsidiary A to its
shareholders, the Company will be required to file a registration statement with
the Commission and have the registration statement declared effective by the
Commission.
Before agreeing to conduct a spin-off transaction, the Company will conduct
standard due diligence on the private corporation, including a review of the
private company's corporate and tax records, material agreements, audited
financial statements and background of the private company's executive
management. The Company anticipates that it will not conduct spin-off
transactions with start-up companies unless they have substantial gross assets,
experienced management and a well-developed business plan.
5
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The Company has two spin-off candidates at present:
1. Southern Security Bank Corp., a commercial bank in Hollywood, Florida,
which has obtained approval from the State of Florida and Federal Banking
Authorities to become a bank holding company.
2. Phoenix Energy Corp., an oil and gas company located in Texas. The Company
is awaiting receipt of certified financial statements.
As a result of the foregoing activities, especially the proposed spin-off
transactions, the Company could be deemed to be an "underwriter" as that term is
defined under the Act. Under federal securities laws, other laws and court
decisions with respect to underwriters' liabilities and limitations on the
indemnification of underwriters, an underwriter is subject to substantial
potential liability for misstatements or omissions of material facts in
prospectuses and other communications with respect to offerings in which it is
deemed to have acted as an underwriter.
Korean Project.
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The Company, in conjunction with certain others (collectively,
"Consultants"), entered into an agreement ("YU Agreement") with YU Corporation
pursuant to which Consultants would provide management services related to a
proposed construction project in Korea. Consultants were instrumental in
introducing YU Corporation to Lehrer McGovern Bovis ("LMB"). YU Corporation, in
conjunction with Bovis International, Inc., an affiliate of LMB, has entered
into an agreement with the Korean Veterans Association, a Korean corporation,
pursuant to which YU Corporation will act as project manager for the
"Twenty-First Century United Freedom Bridge," a planned multi-use memorial to
the Korean-United States collaboration in resolving the Korean conflict. The
memorial, as currently proposed, will include a convention center, a 600 room
hotel, a sky tower and memorial, and a multi-purpose stadium.
Pursuant to the YU Agreement, for this introduction, the Consultants are
entitled to receive a consulting fee equal to one half of one percent of the
greater of the gross cost of the project or the gross amount of the working
charges covering all phases of the project. The Company is entitled to 25% of
any fee to be paid to Consultants.
Government Program Consulting
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The Company also assists clients in obtaining funding and other benefits
from federal and state programs. In this regard, the Company has been retained
by a power boat company to assist it in obtaining a credit line from the Rhode
Island Economic Development Corporation ("RIEDC"). RIEDC provides financing, tax
incentives, training grants and other benefits. The Company's fee will be
$10,000 and 2% of any credit line established. The Company also has been
retained by a hotel resort to assist it in obtaining a loan guarantee from the
Rural Economic and Community Development Business and Cooperative Services
("RECDBCS"), a Division of the United States Department of Agriculture. RECDBCS
provides business loan guarantees. The Company's fee will be $20,000 and 2% of
any loan guarantee obtained for the hotel resort.
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Colorado Coal Mine Royalties
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In 1973, the Company purchased a coal mine located in Palisades, Colorado.
In 1980, the Company disposed of its interest in the mine to Powderhorn
International, Inc. ("Powderhorn"), a professional mine operator, retaining a
royalty interest. In September 1994, a dispute with Powderhorn relating to the
royalty was resolved. As a result of such settlement, Powderhorn is required to
pay the Company royalties totaling $624,044 at the rate of $12,750 per annum,
payable on January 1st of each year as a non-production royalty through the year
2043. As of May 31, 1997, the balance of the additional royalties totaled
$585,794. In addition, the Company is to receive a royalty ("Production
Royalties") of four and one-quarter cents ($.0425) per ton of coal for each ton
over 300,000 tons produced per year, which royalty is due and payable in January
of each year. During the fiscal years ended August 31, 1996 and 1995,
respectively, the Company received Production Royalties of $2,914 and $-0-.
Competition
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The Company encounters significant competition in all aspects of its
business and competes directly with many other mortgage brokers, mortgage
companies, banks and investment banking and financial consulting firms, most of
which have significantly greater financial and personnel resources than the
Company and most of which are more widely known than the Company. Such other
companies may offer their clients a more extensive range of financial services,
have substantially greater financial resources and may have greater operating
efficiency than the Company. In addition, many of the companies with which the
Company competes are able to dedicate significant resources to advertising,
active solicitation of potential clients and distribution of investment research
publications. The Company also competes with a number of small and regional
mortgage brokers, mortgage companies, banks and investment firms which may offer
a wider range of services than the Company.
Marketing
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Business consulting and mortgage banking revenues and sales activities are
generated by the Company's executive officers through personal contacts. The
Company conducts no advertising. All its clients come from referrals from former
clients, from attorneys and accountants who have been involved in transactions
with the Company on behalf of clients or other brokers, and, from time to time,
various banks with which the Company does business.
Government Regulations
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Mortgage brokers are regulated on a state by state basis. As a mortgage
broker in the State of New York, the Company is licensed by the New York State
Banking Department. The Company is required to provide specific disclosures and
follow specific procedures with regard to all mortgage applicants. The Company
is also required to keep and maintain specific records of all mortgage
transactions. The Company is subject to periodic examination by the New York
State Banking Department to assure compliance with its requirements.
On residential loans, where the Company is not licensed in a particular
state and the loan is effected through a third party lender, the Company would
sign a referral co-broker agreement with the borrower. This agreement must be
fully disclosed to all parties. Commercial loans do not require licensing.
7
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Management does not believe that the Company's business and financial
consulting activities require the Company to register as a broker-dealer under
federal or state securities laws because the Company does not believe that it
comes within the definition of either a "broker" or a "dealer" as those terms
are defined in the rules and regulations under the Exchange Act. The Company's
most significant activities are as a merchant banker, operating in an advisory
capacity for acquisitions - particularly reverse acquisitions - and arranging
for customers' financing, as opposed to actually raising the money for such
customers. The Company does not have a base of investors to whom it presents a
customer as a possible investment vehicle; rather, the Company may refer the
customer to a broker-dealer or other entity which may decide to raise the money
for that customer. For both services - advising on reverse acquisitions and
referring customers to capital-raising entities - the Company may receive fees
consisting of cash and/or stock. The Company believes that these activities,
separately and together, do not rise to the level of being either a broker or a
dealer. The Company is not a "broker" because it does not effect securities
transactions for the account of others in any manner. The Company is not a
"dealer" because the Company's activities consist of acting only as an advisor,
and do not consist of buying and selling securities in the traditional sense:
any securities received by the Company are received as a fee for services
rendered as opposed to being acquired from the issuer.
If the Company were deemed to be a broker or a dealer it would be subject
to extensive regulation under federal and state laws. The principal purpose of
regulation and discipline of broker-dealers is the protection of customers and
the securities markets rather than protection of creditors and stockholders of
broker-dealers. The Commission is the federal agency charged with administration
of the federal securities laws. Much of the regulation of broker-dealers,
however, has been delegated to self-regulatory organizations, such as the
National Association of Securities Dealers, Inc. (the "NASD") and national
securities exchanges. The NASD most likely would be the Company's primary
self-regulatory organization if the Company were deemed to be a broker or a
dealer. These self-regulatory organizations adopt rules (which are subject to
approval by the Commission) which govern the industry and conduct periodic
examinations of member broker-dealers. Broker-dealers are also subject to
regulation by state securities commissions in the states in which they are
registered. The regulations to which broker-dealers are subject cover all
aspects of the securities business, including net capital requirements, sales
methods, trading practices among broker-dealers, capital structure of securities
firms, record keeping and the conduct of directors, officers and employees. The
Commission and the self-regulatory bodies may conduct administrative proceedings
which can result in censure, fine, suspension or expulsion of a broker-dealer,
its officers or employees. If the Company were deemed to be a broker or dealer
by the Commission or any state securities commission, the Company would not be
in compliance with requisite federal or state laws and regulations or the
regulations of self-regulatory bodies and the Company's business would be
materially and adversely affected.
Employees
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As of September 15, 1997, the Company employed seven full-time employees at
its office located in Staten Island, New York consisting of five executives and
two staff members.
Seasonality
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The Company's business and revenues are determined by consummation of
contemplated transactions and, thus, are not seasonal.
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History of the Company
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Mega Holding Corp. was incorporated in the State of New York under the name
"Serina-Denise Associates, Inc." on March 31, 1970 and changed its name to Mega
Holding Corp. in October 1973.
In November 1981, Real-Med Industries, Inc., a publicly held corporation,
acquired all of the Company's issued and outstanding shares in exchange for
Real-Med shares and changed its name to Mega Energy Corp. In May 1983, Mega
Energy Corp., changed its name to Megatron Holding Corp. ("Megatron"). In
February 1987, certain shareholders of Megatron returned 32% of their respective
shares of Megatron to Megatron, agreed to a 1-for-20 reverse stock split and, in
exchange for such shares, received an equivalent number of the Company's shares,
which Company shares represented all of the Company shares held by Megatron.
In June 1988, Interactive Businesses, Inc., a Delaware corporation
("Interactive") issued a total of 3,615,000 of its authorized but unissued
common shares to acquire all of the issued and outstanding shares of the
Company. Thereafter, certain shareholders of Interactive donated their
Interactive shares to Interactive's Treasury, and received in exchange
therefore, the equivalent number of shares of the Company held by Interactive,
representing 100% of Interactive's holdings in the Company.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes appearing subsequently under the caption "Financial
Statements".
Cautionary Statement on Forward-Looking Statements
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From time to time, the Company makes written statements that may constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") or by the Commission in its rules, regulations
and releases. The Company desires to take advantage of the "safe harbor"
provisions in the PSLRA for forward-looking statements made from time to time,
including, but not limited to, the forward-looking statements relating to the
Company contained in this Form 10SB registration statement. The Company cautions
readers that any such forward-looking statements made by or on behalf of the
Company are based on management's current expectations and beliefs but are not
guarantees of future performance. Actual results could differ materially from
those expressed or implied in the forward-looking statements.
Results of Operations
Nine Months Ended May 31, 1997 Compared to Nine Months Ended May 31, 1996
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Revenues for the nine months ended May 31, 1997 decreased $270,311 or 64.0%
when compared to the nine months ended May 31, 1996. During the nine months
ended May 31, 1997, the Company generated $139,040 (91.6%) of its revenues from
business and financial consulting services, $12,750 (8.4%) of its revenues from
its mining royalty interest, and $ -0- of its revenues from mortgage brokering
activities. During the nine months ended May 31, 1996, the Company generated
$398,203 (94.3%) of its revenues from business and consulting services, $15,664
(3.7%) of its revenues from its mining royalty interest, and $8,234 (2.0%) of
its revenues from mortgage brokering activities.
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Business and financial consulting services revenues decreased by $259,163
(65.1%) primarily because the Company is concentrating its efforts on spin-off
companies rather than acquiring and reselling shell companies. In the early
stages of this transition, revenues will decrease before increasing again.
Revenues from the Company's mining royalty interest decreased by $2,914 (22.9%)
due to a decrease in the extraction of coal in excess of the agreed upon 300,000
tons. The Company, therefore, received an additional royalty of $.0425 per ton
in excess of the 300,000 tons during the interim period. Due to the transition,
mortgage brokering activity revenues also decreased in the amount of $8,234.
Cost of sales for the nine months ended May 31, 1997 increased by $1,983
(2.8%) when compared to the nine months ended May 31, 1996. General and
administrative expenses however, decreased by $153,485 (57.9%) for the nine
months ended May 31, 1997 when compared to the nine months ended May 31, 1996
primarily due to a decrease in commissions of $167,806 (80.9%). This decrease in
commissions is directly attributable to the decrease in revenues. Additionally,
office expense, payroll & associated costs, professional fees, and taxes
increased while travel and entertainment expenses decreased by $10,951 (202.2%);
$5,549 (100.0%); $4,725 (370.6%); $9,477 (542.8%); and $9,319 (49.9%),
respectively. While office expenses, payroll & associated costs, and
professional fees increased as a result of continuing operations, taxes
increased due to penalties incurred on prior year's taxes Is this for the prior
year or prior years, in which case it should be prior years'. The decrease in
travel and entertainment expenses for the same period were an indirect result of
the current business transition taking place.
As a percentage of sales, cost of sales decreased from 52.8% for the nine
months ended May 31, 1997 to 17.6% for the nine months ended May 31, 1996 and
general and administrative expenses decreased from 80.3% for the nine months
ended May 31, 1997 to 65.2% for the nine months ended May 31, 1996. These
percentage decreases are attributable to the Company showing lower revenues for
the nine months ended May 31, 1997 as compared to the nine months ended May 31,
1996.
Marketable securities and restricted securities at May 31, 1997 both
increased when compared to May 31, 1996 due to the acquisition and appreciation
of various securities during the interim period. Accordingly, the nine months
period ended May 31, 1997 had shown an unrealized holding loss whereas the nine
month period ended May 31, 1996 had no holding gain or loss. This occurrence was
due to the securities acquired after May 31, 1996 appreciating in value by
August 31, 1996 but then decreasing in value for the nine months ended May 31,
1997.
The Company gains interests in other companies by acquiring shares of such
companies' stocks. The Company acquires these securities with the intent to
resell them within the next twelve months. The Company's marketable securities
for the nine months ended May 31, 1997 increased $194,542 from the same period
in the prior fiscal year. This increase is attributable to two factors: (1) the
Company acquired securities with a market value of $116,488 during the 1997
period; and (2) these securities appreciated in value allowing the Company to
show an unrealized holding gain of $78,054 at the end of the 1997 period.
Management classifies these marketable securities as trading securities because
the Company purchases these securities principally for the purpose of reselling
them in the near term. The securities are, therefore, reported on the balance
sheet at fair market value with any unrealized holding gains and losses included
in current earnings. As a result, for the nine months ended May 31, 1997, the
Company's net loss increased $143,014 (167.2%) when compared to the nine months
ended May 31, 1996.
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Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31, 1995
- --------------------------------------------------------------------------------
Revenues for the fiscal year ended August 31, 1996 increased $470,944 or
233.6% when compared to the fiscal year ended August 31, 1995. During the fiscal
year ended August 31, 1996, the Company generated $649,944 (96.6%) from business
and financial consulting services, $15,664 (2.3%) from its mining royalty
interest and $6,909 (1.1%) from mortgage brokering activities. During the fiscal
year ended August 31, 1995, the Company generated $174,885 (86.8%) from business
and financial consulting services, $12,750 (6.3%) from its mining royalty
interest and $13,938 (6.9%) from mortgage brokering activities.
Business and financial consulting services revenues increased $475,059
(271.6%) due to the Company concentrating its efforts in this area. Mining
royalties increased between periods by $2,914 (22.9%) due to the extraction of
coal in excess of the agreed upon 300,000 tons. The Company received an
additional royalty of $.0425 per ton in excess of the 300,000 tons ($2,914).
Mortgage brokering revenues decreased $7,029 (50.4%) due to a lower level of
real estate activity by the Company.
Cost of sales and general and administrative expenses for the fiscal year
ended August 31, 1996 increased by $51,011 (129.4%) and $135,396 (58.1%),
respectively, when compared to the fiscal year ended August 31, 1995. The
increase in the cost of sales is due primarily to the acquisition of additional
shell entities for the purpose of reselling them for a profit. General and
administrative expenses increased primarily due to an increase in commissions of
$116,828 (105%). The increase in commissions is directly proportionate to the
increases in business and financial consulting revenues.
As a percentage of sales, cost of sales decreased from 19.6% in fiscal 1995
to 13.4% in fiscal 1996, general and administrative expenses decreased from
115.6% in fiscal 1995 to 54.8% in fiscal 1996 and commissions expense decreased
from 55.2% in fiscal 1995 to 33.9% in fiscal 1996.
The Company gains interest in other companies by acquiring shares of such
companies' stocks. The Company acquires these securities with the intent to sell
them within the next twelve months. The Company's marketable securities for the
year ended August 31, 1996 increased $218,747 from the prior year. This increase
is attributable to two factors: (1) the Company acquired securities for $116,413
during the fiscal year ended August 31, 1996; and (2) these securities
appreciated in value allowing the Company to show an unrealized holding gain of
$102,334 at the end of the 1996 fiscal year. Management classifies these
marketable securities as trading securities because the Company purchases these
securities principally for the purpose of selling them in the near term. The
securities are therefore reported on the balance sheet at fair market value with
any unrealized holding gains and losses included in current earnings.
As a result of all of the foregoing, the Company realized net income of
$243,874 for the fiscal year ended August 31, 1996 compared to a net loss of
$70,829 for the fiscal year ended August 31, 1995.
11
<PAGE>
Liquidity and Capital Resources
- ----------------------------------
As of May 31, 1997, the Company's current assets exceeded its current
liabilities by $75,489; however, only $8,346 of current assets was cash with the
remainder being comprised of various receivables.
Historically, the Company has financed its operations through cash flow
from operations. Due to the current operating cash flow, the Company has no need
to maintain any external funding sources.
As of May 31, 1997, the Company had no material commitments for capital
expenditures.
During the nine months ended May 31, 1997, and the fiscal years ended
August 31, 1996 and 1995, the value of fees received by the Company in the form
of stock was $ -0-, $60,500, and $29,000, respectively, of which $-0-, $10,000,
and $10,000, respectively are in stock which contain restrictive legends with
regard to transfer. To date, the amounts received in stock are minimal, thus
having no material effect on the Company's liquidity and overall financial
position. In the future, the Company plans to continue distributing to its
shareholders most of the stock that it receives in other entities. If the fees
received are more so in the form of stock than cash, and continue to be
distributed to the Company's shareholders, the Company's liquidity may be
adversely affected. However, management anticipates, but cannot assure, that the
cash portion of fees received and the proceeds from the sale of stock not
distributed to the Company's shareholders will be sufficient to meet the
Company's anticipated cash flow needs. Where the Company receives shares with
restrictions on transfer, the Company will be required to hold such shares
indefinitely and will only be able to sell such shares if and when the shares
are registered or an exemption from registration is available, and if and when a
market for such securities develops. Accordingly, such shares will not be able
to be used to meet cash flow needs.
At May 31, 1997 and August 31, 1996, royalties due from Powderhorn
International represented 27.3% and 25.6% of the Company's total assets,
respectively. Based upon Powderhorn's prior history in payment of like kind
transaction, management believes that all royalties will be collected on a
timely basis.
Item 3. Description of Properties
The Company maintains its principal executive offices at 278A New Dorp
Lane, Staten Island, NY in an approximately 1,300 square foot office facility
pursuant to a lease originally entered into in January, 1984, and thereafter
renewed periodically. The current renewal term expires on January 31, 1999. The
annual rental is $8,400 per annum ($700 per month) plus tenant's proportionate
share of Real Estate Taxes and escalations for the subject premises in the
amount of $602.29 per month for a total annual rental of $15,627.48.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The table on the following page sets forth information as of May 20, 1997,
with respect to (1) any person known by the Company to own beneficially more
than 5% of the Company's Common Stock; (2) the Company's Common Stock
beneficially owned by each officer and director of the Company, and; (3) the
total of the Company's Common Stock beneficially owned by the Company's officers
and directors as a group.
12
<PAGE>
Name and Address Shares
of Beneficial Owner Beneficially Owned Percent
- ------------------- ------------------ -------
Thomas M. Abate 1,715,489(1) 47.5%
231 Clarke Avenue
Staten Island, NY 10306
James D. Paulsen 907,084(1) 25.1%
511 East 80th Street
New York, NY 10021
T.G.J. & Associates 542,084(1) 15.0%
618 74th Street
Brooklyn, New York 11209
Emco Enterprises 230,000(2) 6.4%
1388 Paterson Plane Road
Secaucus, NJ 07094
Silvio Codispoti 126,000 3.5%
115 Sylvia Street
Staten Island, NY 10312
John Catricola 140,000 3.9%
79 Belfast Avenue
Staten Island, NY 10306
Nancy Montanaro 42,000 1.2%
88 Rivington Avenue
Staten Island, NY 10314
John M. Seroor 102,500 2.8%
11 Emerson Road
Somerset, NJ 08873
All Officers and Directors
As a Group (6 Persons) 2,490,989(1) 68.9%
(1) T.G.J. & Associates ("TGJ") is owned and controlled by Messrs. Abate
and Paulsen and by Gerald Chabert. All of the shares owned by TGJ have been
included in the number of shares listed as owned by Messrs. Abate and Paulsen
and by all officers and directors as a group.
(2) Emco Enterprises is controlled by Greg Marinelli.
Item 5. Directors. Executive Officers, Promoters and Control Persons
Name Age Position
- ---- --- --------
Thomas M. Abate 60 President and a Director
James D. Paulsen 58 Executive Vice President,
Secretary and a Director
John M. Seroor 67 Treasurer and Director
Silvio Codispoti 54 Senior Vice President
John Catricola 52 Vice President
Nancy Montanaro 24 Assistant Secretary
13
<PAGE>
THOMAS M. ABATE, has been President and Director of the Company from its
inception (March 1970) and has served as Chairman of the Board of Directors of
Megatron Holding Corp. (OTC) from 1983 to 1987. He was the Manhattan Area
Manager of the U.S. Treasury Department, SB Division from 1974 to 1984. Mr.
Abate received a B.S. in Finance from Wagner College.
JAMES D. PAULSEN, has been Executive Vice President and Director of the
Company since 1991, and has been associated with the Company from its inception.
He was an officer of AIG Risk Management, Inc. and American Home Assurance Co.
from 1977 to 1991. He is a graduate of The City University of New York and The
College of Insurance.
SILVIO CODISPOTI, has been Senior Vice President of the Company since 1992.
From, 1961 to 1991, he was a Vice President, Commercial Lending with National
Westminster Bank, USA. Mr. Codispoti is a graduate of Bernard M. Baruch College
of the City University of New York where he earned an MS in Accounting and BBA
in Finance.
JOHN CATRICOLA, has been Vice President of the Company since 1992. From
1985 to 1992, he was Vice President of Promote Personnel, Inc. He was President
of JAC Associates, Inc. from 1982 to 1985 and prior to 1982 he was associated
with various brokerage firms. Mr. Catricola is a graduate of The New York
Institute of Finance.Should it be indicated that he has left?
NANCY MONTANARO, has been Administrative Secretary of the Company since
1995. From January 1994 to January 1995, she was an associate for Dean Witter
Reynolds on the trading floor of The New York Commodities Exchange.
JOHN M. SEROOR, has been Treasurer & Director of the Company since its
inception. From 1963 to 1968 he was a chemist for the Food and Drug
Administration in Cincinnati, Ohio and Brooklyn, New York, and from 1968 to 1994
he was a quality control supervisor for Carter-Wallace, Inc. Mr. Seroor
graduated from the University of Connecticut where he earned a BA in Chemistry.
Item 6. Executive Compensation
The following table shows all the cash compensation paid by the Company as well
as certain other compensation paid during the fiscal years indicated, to the
Chief Executive Officer for such period in all capacities in which he served. No
other Executive Officer received total annual salary and bonus in excess of
$100,000.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted All
Name and Annual Stock Options LTIP Other
Principal Fiscal Salary Bonus Compen- Awards SARs Payouts Compen-
Position Year ($) ($) sation ($) (#) ($) sation
- ---------- ----- ------ ---- ------ ----- ------- ------ -------
Thomas M. 1996 (1) N/A N/A 0 0 0 0
Abate 1995 (2) N/A N/A 0 0 0 0
1994 (3) N/A N/A 0 0 0 0
14
<PAGE>
(1) Consists of 75,000 shares of QCS Corp. at fair market value $.50 per share;
46,000 shares of ARXA International Energy, Inc. at fair market value $.50
per share; 50,000 shares of Hiawatha Industries, Inc. (Restricted) no
market value.
(2) Consists of 20,000 shares of Capital Communications Corp. at fair market
value of $.50 per share; 40,000 shares of First Nordic Equity Partners
Corp. at fair market value $.10 per share; 30,000 shares of Republic
International Corp. at fair market value $.50 per share.
(3) Consists of 55,000 shares of AWEC Resources, Inc. at fair market value $.50
per share; 20,000 shares of Sherman Goelz & Associates at fair market value
$.10 per share.
The amount of securities distributed to Mr. Abate has been, and will
continue to be, determined by the Company's Board of Directors.
Item 7. Certain Relationships and Related Transactions
During the fiscal years ended August 31, 1996 and 1995 and during the six
months ended February 28, 1997, there were no transactions, and there are no
proposed transactions to which the Company was or is to be a party in which any
of its directors, executive officers, principal shareholders identified above
under Item 4 or any member of the immediate family of any such person has or is
to have direct or indirect material interest.
Item 8. Description of Securities
Common Stock
- ------------
The Company is authorized to issue twenty million (20,000,000) Shares of
Common Stock, $.01 par value per Share. Each outstanding Share of Common Stock
is entitled to one vote, either in person or by proxy, on all matters that may
be voted upon by the owners thereof at meetings of the stockholders.
At present, the holders of Common Stock (i) have equal ratable rights to
dividends from funds legally available therefor, when, and if declared by the
Board of Directors of the Company; (ii) are entitled to Share ratably in all of
the assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
non-cumulative vote per Share on all matters on which stockholders may vote at
all meetings of stockholders.
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT...........................................F-2
FINANCIAL STATEMENTS:
Balance Sheet.................................................F-3
Statement of Earnings.........................................F-4
Statement of Changes in Stockholders' Equity..................F-5
Statement of Cash Flows.......................................F-6
Notes to Financial Statements.........................F-7 to F-12
F-1
<PAGE>
Independent Accountant's Report
To the Board of Directors and Stockholders
of Mega Holding Corp.
We have audited the accompanying balance sheets of Mega Holding Corp. as of
August 31, 1996 and 1995, and the related statements of earnings, stockholders'
equity, and cash flows for the years ended August 31, 1996, 1995 and 1994. These
financial statements are the responsibility of Mega Holding Corp.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of Mega
Holding Corp. as of August 31, 1996 and 1995, and the results of their
operations, stockholders' equity, and their cash flows for the years ended
August 31, 1996, 1995 and 1994 in conformity with generally accepted accounting
principles.
McManus & Co., P.C.
Certified Public Accountants
Morris Plains, New Jersey
September 25, 1996
F-2
<PAGE>
MEGA HOLDING CORP.
BALANCE SHEET
ASSETS
August 31, May 31,
1996 1995 1997
(Audited) (Unaudited)
--------- -------- ----------
Current Assets:
Cash $ 4,682 $ 25,768 $ 8,346
Accounts Receivable 43,500 -- 41,028
Royalties Receivable (Note 2) 343 317 375
Notes Receivable (Note 3) 35,000 -- 34,500
------ ------ ------
Total Current Assets 83,525 26,085 84,249
Property and Equipment
Office Equipment at cost (Note 1) 51,415 51,048 51,415
Less: Accumulated Depreciation (31,360) (23,513) (32,556)
-------- -------- --------
Total Property, Plant, and Equipment 20,055 27,535 18,859
======== ======== ========
Investments and Other Assets:
Marketable Securities (Note 4) 218,747 -- 194,542
Notes Receivable (Note 3) 100,000 100,000 100,000
Restricted Securities at par value (Note 5) 30,000 -- 15,000
Royalties Receivable (Note 2) 154,868 155,211 154,493
------- ------- -------
Total Investments & Other Assets 503,615 255,211 464,035
------- ------- -------
Total Assets $ 607,195 $ 308,831 $ 567,143
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 6,257 $ 9,000 $ 3,674
Officer's Loan (Note 9) -- -- 4,500
Payroll Taxes Payable -- -- 586
Total Current Liabilities 6,257 9,000 8,760
----- ----- -----
Long - Term Liabilities:
Deferred Taxes (Note 8) 57,233 -- 72,168
------ ----- ------
Total Long - Term Liabilities 57,233 -- 72,168
------ ----- ------
Commitments and Contingent Liabilities (Note 7)
Stockholders' Equity:
Common Stock - $.01 par value
Authorized 20,000,000 shares
Issued 3,615,000 shares 36,150 36,150 36,150
Paid In Capital 488,616 488,616 488,616
Retained Earnings 18,939 (224,935) (38,551)
------- --------- --------
Total Stockholders' Equity 543,705 299,831 486,215
------- ------- -------
Total Liabilities and Stockholders' Equity $ 607,195 $ 308,831 $ 567,143
======= ======= =======
F-3
<PAGE>
MEGA HOLDING CORP.
STATEMENT OF EARNINGS
For the Nine
For the Years Months Ended
Ended August 31, May 31
1996 1995 1994 1997 1996
(Audited) (Unaudited)
---------------------------- ------------------
Net Sales $659,767 $201,573 $344,223 $139,040 $409,351
Cost Of Sales 90,419 39,408 132,960 73,422 71,439
-------- -------- -------- -------- --------
Gross Profit 569,348 162,165 211,263 65,618 337,912
-------- -------- -------- -------- --------
General and Administrative
Expenses:
Advertising 500 552 -- 27 297
Commissions 228,094 111,266 73,190 39,520 207,326
Depreciation 7,847 9,006 4,147 1,196 5,885
Dues and Subscriptions 275 275 575 -- --
Executive Compensation 60,500 29,000 29,500 -- --
Licenses and Application Fees 1,153 74 1,219 504 500
Miscellaneous 7,611 8,793 337 3,227 4,854
Office Expense 6,722 10,954 11,463 16,368 5,417
Outside Services -- -- 1,845 -- --
Payroll & Associated Costs -- -- -- 5,549 --
Professional Fees 3,784 24,779 2,910 6,000 1,275
Rent 15,765 5,714 15,054 13,022 11,858
Taxes 1,746 3,885 440 11,223 1,746
Telephone and Utilities 7,910 8,872 7,288 5,644 7,288
Travel and Entertainment 26,483 19,824 2,713 9,373 18,692
-------- -------- -------- -------- --------
Total Operating Expenses 368,390 232,994 150,681 111,653 265,138
-------- -------- -------- -------- --------
Earnings/(Loss) Before Gains
on Marketable Securities,
Other Income, and Income Taxes 200,958 (70,829) 60,582 (46,035) 72,774
Unrealized Holding Gain/(Loss)
on Marketable Securities
(Note 4) 102,334 -- -- (24,205) --
-------- ------- -------- --------- --------
Other Income:
Royalties Income 317 -- -- 343 3,231
Interest Income 12,433 -- -- 12,407 12,433
-------- ------- -------- --------- --------
Total Other Income 12,750 -- -- 12,750 15,664
-------- ------- -------- --------- --------
Earnings Before Income Taxes 316,042 (70,829) 60,582 (57,490) 85,524
-------- --------- -------- --------- --------
Provision For Income Taxes 72,168 -- 7,853 -- 24,592
-------- --------- -------- --------- --------
Net Earnings $243,874 $(70,829) $ 52,729 $(57,490) $ 60,932
======== ========= ======== ========= ========
Net Earnings/(Loss) Per Share:
Net Earnings/(Loss) $ 0.07 $ (0.02) $ 0.01 $ (0.02) $ 0.02
Weighted Average Number of
Common Shares Outstanding 3,615,000 3,615,000 3,615,000 3,615,000 3,615,000
F-4
<PAGE>
MEGA HOLDING CORP.
STATEMENT OF CASH FLOWS
For the Nine
For the Years Months Ended
Ended August 31, May 31
1996 1995 1994 1997 1996
(Audited) (Unaudited)
---------------------------- ------------------
Cash Flow from Operating
Activities:
Net Income/(Loss) $243,874 $(70,829) $52,729 $(57,490) $60,932
Adjustments To Reconcile Net
Income/(Loss) To Net Cash
Provided/(Used) In Operating
Activities:
Depreciation 7,847 9,006 4,147 1,196 5,885
Unrealized Holding Gain
on marketable securities -- -- 24,205 -- --
(Increase)/Decrease in
accounts receivable (43,500) 64,803 1,832 2,472 (35,889)
(Increase)/Decrease in roy-
alties receivable (current) (26) -- -- (32) (26)
(Increase)/Decrease in roy-
alties receivable (long-term) 343 (155,528) -- 375 343
(Increase/(Decrease) in
accounts payable (2,743) 9,000 -- (2,583) (5,784)
Increase/(Decrease) in
payroll taxes payable -- -- -- 586 --
Increase/(Decrease) in
officer's loan payable -- -- -- 4,500 --
Increase/(Decrease) in
deferred taxes 57,233 (7,853) 7,853 14,935 24,492
-------- -------- ------ ------ --------
Total Adjustments (83,180) (80,572) 13,832 45,654 (10,979)
Net Cash provided/(used)
by Operating Activities 160,694 (151,401) 66,561 (11,836) 49,953
------- --------- ------ -------- -------
Cash Flow from Investing
Activities:
(Purchase)/Disposal of
property, plant & equipment (367) 66,933 (20,735) -- (367)
(Increase)/Decrease in
marketable securities (116,413) 814 -- -- --
(Increase)/Decrease in
restricted securities (30,000) -- -- 15,000 (30,000)
--------- ------ -------- ------ --------
Net Cash provided/(used)
by Investing Activities (146,780) 67,747 (20,735) 15,000 (30,367)
--------- ------ -------- ------ --------
Cash Flow from Financing
Activities:
(Increase)/Decrease in
notes & dividends receivable (35,000) -- -- 500 (35,000)
-------- ------ -------- ------ --------
Net Cash provided/(used) by
Financing Activities (35,000) -- -- 500 (35,000)
Net Increase/(Decrease) in Cash (21,086) (83,654) 45,826 3,664 (15,414)
Cash at the Beginning of the Year 25,768 109,422 63,596 4,682 25,768
-------- ------- -------- ------- ---------
Cash at the End of the Year $ 4,682 $25,768 $109,422 $ 8,346 $ 10,354
F-5
<PAGE>
MEGA HOLDING CORP.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Total
September 1, 1993 Common Paid In Retained Stockholders'
To May 31, 1997 Stock Capital Earnings Equity
- ------------------- ------ --------- -------- ------------
September 1, 1993 $ 36,150 $ 488,616 $ (206,835) $ 317,931
Net Earnings 1994 -- -- 52,729 52,729
-------- --------- ----------- ----------
Total Stockholders' Equity
As Of August 31, 1994 36,150 488,616 (154,106) 370,660
Net Loss 1995 -- -- (70,829) (70,829)
-------- --------- ----------- ----------
Total Stockholders' Equity
As Of August 31, 1995 36,150 488,616 (224,935) 299,831
Net Earnings 1996 -- -- 243,874 243,874
-------- --------- ----------- ----------
Total Stockholders' Equity
As Of August 31, 1996 36,150 488,616 18,939 543,705
Net Loss for the Nine Months
Ended May 31, 1997 (Unaudited) -- -- (57,490) (57,490)
-------- --------- ----------- ----------
Total Stockholders' Equity
As Of May 31, 1997 (Unaudited) $ 36,150 $ 488,616 $(38,551) $ 486,215
======== ========= =========== ==========
F-6
<PAGE>
MEGA HOLDING CORP.
NOTES TO THE FINANCIAL STATEMENTS
(Information as of May 31, 1997 and for the nine months ended May 31,
1997 and 1996 is unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies:
Mega Holding Corp. (the Company) incorporated as a New York corporation and
commenced business on March 31, 1970. The Company offers its services to
corporations that are seeking banking and investment banking relationships. The
Company charges a fee for these services and at times earns an equity interest
in these companies. Fees are also earned from clients that wish to go public
and/or raise capital. The Company is licensed and registered with the New York
State Banking Department as a mortgage broker whereby it earns fees. In
addition, the Company receives royalties from Powderhorn Incorporated (a
subsidiary of Peabody Coal Company) located in Palisade, Colorado.
A) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the modified accelerated cost recovery
system as provided by the tax reform act of 1986 for property acquired after
December 31, 1986. The recovery classifications are five years for furniture and
fixtures and office equipment.
Expenditures for maintenance and repairs are charged to expense as incurred
whereas major improvements are capitalized.
B) Marketable Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective for fiscal years beginning after December
15, 1993. This statement considers debt securities that the Company has both the
positive intent and ability to hold to maturity are carried at amortized cost.
Debt securities that the Company does not have the positive intent and ability
to hold to maturity and all marketable equity securities are classified as
available-for-sale or trading securities and are carried at fair market value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of stockholders' equity.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings. Management determines the appropriate classification of
marketable equity and debt securities at the time of purchase and reevaluates
such designation as of each balance sheet date.
F-7
<PAGE>
Note 1 - Basis of Presentation and Significant Accounting Policies:
(continued)
C) Revenue Recognition
The Company recognizes revenues at the point in time when the stock in the
shell company is sold.
D) Cost of Sales
The cost of sales consist wholly of those expenses accumulated when
acquiring the stock of the original company.
E) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires a change
from the deferral method to the assets and liability method of accounting for
income taxes. Timing differences exist between book income and tax income which
relate primarily to the recognition of income.
F) Net Earnings/(Loss) Per Common Share
Net earnings/(loss) per common share is computed by dividing net
earnings/(loss) by the weighted average number of shares of common stock
outstanding during the period.
Note 2 - Royalties Receivable:
On September 29, 1994, the Company resolved a royalty dispute whereby
Powderhorn Incorporated will pay the Company additional royalties with a future
value of $624,044. This amount will be payable at $12,750 per annum for
non-production royalty and an 8.5% royalty should production resume.
F-8
<PAGE>
Note 2 - Royalties Receivable: (continued)
August 31, May 31,
1996 1995 1997
--------- -------- -------
Royalties Receivable From Court Settlement:
Non-interest bearing receivable,
receivable in annual installments
of $12,750; due 2043. $ 598,544 $ 611,294 $ 585,794
Less unamortized discount based on
imputed interest rate of 8% 443,333 455,766 430,926
Royalties receivable less unamortized
discount. 155,211 155,528 154,868
Less: Current Portion 343 317 375
Total Long-Term Royalties Receivable $ 154,868 $ 155,211 $ 154,493
========= ========= =========
Due to the large nature of Powderhorn and its prior history in payment of
like kind transactions, management believes all royalties will be collected on a
timely basis.
Note 3 - Notes Receivable:
In 1993, the Company entered into a loan agreement with AWEC for the sum of
$100,000. This loan is non-interest bearing and due in 1998. With this note, the
Company has two (2) options. Option one maintains the Company carry the note to
maturity and receive face value. Option two gives the Company the right to
convert the outstanding note receivable into AWEC common stock at fair market
value. This right may be exercised at the Company's option during 1997. At May
31, 1997, the Company has not yet exercised this option.
In 1996, the Company received notes from Bonsangue and Nocito companies in
the amounts of $30,000 and $5,000 respectively. Both notes are non-interest
bearing and are considered current. At May 31, 1997, Bonsangue has repaid
$10,500.
In 1997, the Company received a note from the Berkshire Group in the amount
of $20,000. This note is non-interest bearing and is payable within the next six
months. At May 31, 1997, the Berkshire Group has repaid $10,000.
F-9
<PAGE>
Note 4 - Marketable Securities:
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." At August 31, 1996, all of the
Company's marketable equity securities are classified as trading securities;
they were purchased with an intent to resell them within the next year.
The current marketable securities represents an equity investment in
various corporations which the Company considers as trading securities. The
securities had an original cost of $116,488; determined by multiplying the
number of shares being purchased by the fair market value of those shares (the
fair market value used is that amount which is stated on the given brokerage
statement). At May 31, 1997, August 31, 1996, and August 31, 1995, the market
value of these securities was $194,542, $218,747, and $ 0, respectively. These
market values were determined by multiplying the number of shares held by the
fair market value of those shares at each balance sheet date. The difference
between the cost and fair market value represents an unrealized holding gain and
is included in current earnings.
Note 5 - Restricted Securities:
The Company owns various securities that are restricted. These restricted
securities are carried at par value totaling $15,000. The fair market value of
the restricted securities held at the balance sheet date is determined by the
cost basis of those securities.
Note 6 - Executive Compensation:
As president, Thomas Abate intermittently receives shares of stock of the
shell companies as compensation. This non-cash compensation approximates
$60,500; $29,000; and $29,500 for the years 1996, 1995, and 1994 respectively.
Although value has been given to these securities, at the August 31, 1996
balance sheet date, these securities were not being traded.
For the nine months ended May 31, 1997, no additional non-cash compensation
has been issued. At the May 31, 1997 balance sheet date, these securities were
still not being traded.
F - 10
<PAGE>
Note 7 - Commitments and Contingent Liabilities:
The Company is engaged in a three year lease for its office space in the
amount of $1,302 per month. This non-cancelable lease begins January 1, 1996 and
expires December 31, 1998.
Future minimum lease payments are summarized as follows:
May 31, Amount
------
1998 $ 15,624
1999 9,114
Total $ 24,738
=========
Note 8 - Income Taxes:
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Standards (SFAS) No. 109 "Accounting for Income Taxes". Implementation
of SFAS 109 did not have a material cumulative effect on prior periods nor did
it result in a change to the current year's provision.
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
August 31,
1996 1995 1994
% % %
---- ---- ----
U.S. Federal Statutory Tax Rate 34 34 34
Valuation allowance for deferred tax
assets allocated to income tax expense (11) (34) (21)
----- ----- ----
Effective Tax Rat 23 0 13
===== ===== ====
B) Deferred income taxes are provided for differences between financial
statement and income tax reporting. The principal difference is the manner in
which income is recognized for financial and income tax reporting purposes.
F -11
<PAGE>
Note 9 - Officer's Loan:
An officer of the Company has loaned the Company $3,000. This loan is
non-interest bearing and payable on demand.
F-12
<PAGE>
PART II
Item 1. Market Price of and Dividends on Registrant's Common Equity and Related
Stockholder Matters
(a) Marketing Information -- There is presently no public trading for the
Company's stock; and the Company does not anticipate that there will be any
public trading in the near future.
(b) Holders -- There were approximately 293 holders of record of the
Company's Common Stock as of May 19, 1997 inclusive of those brokerage firms
and/or clearing houses holding the Company's securities for their clientele
(with each such brokerage house and/or clearing house being considered as one
holder). The aggregate number of shares of common stock outstanding as of May
19, 1997 was 3,615,000 shares.
(c) Dividends -- The Company has not paid or declared any dividends upon
its Common Stock since its inception, and does not contemplate or anticipate
paying any cash dividends on its common stock in the foreseeable future.
However, the Company does plan, in the future, to distribute a portion of the
shares that it receives in transactions with clients as dividends to the
Company's shareholders (see "Part I, Item 1. Description of Business; Spin-Off
Transactions").
16
<PAGE>
Item 2. Legal Proceedings.
The Company is not presently a party to any material litigation nor is any
such litigation pending or threatened.
Item 3. Changes in and Disagreements with Accountants.
There have been no changes in or disagreements with accountants with
respect to accounting and/or financial disclosure.
Item 4. Recent Sales of Unregistered Securities.
During the fiscal years ended August 31, 1996 and 1995 and during the six
months ended February 28, 1997, there were no sales of unregistered securities
of the Company.
Item 5. Indemnification of Directors and Officers.
Section 723 of the New York Business Corporation Law contains various
provisions entitling directors, officers, employees or agents of the Company to
indemnification from judgments, fines, amounts paid in settlement and reasonable
expenses, including attorney's fees, as the result of an action or proceeding
(whether civil, criminal, administrative or investigative) in which they may be
involved by reason of being or having been a director, officer, employee or
agent of the Company provided said persons acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the Company
(and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that the conduct complained of was unlawful).
PART III
Items 1&2. Index to Exhibits and Description of Exhibits.
Exhibits
2.a Certificate of Incorporation*
2.b Amendments to Certificate of Incorporation*
2.c By-Laws*
10.a Powderhorn Dispute Settlement Agreement
- ------------
*Previously submitted
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, "hereunto duly authorized.
MEGA HOLDING CORP.
Dated: October 15, 1997 By: /s/ Thomas M. Abate
------------------------
Thomas M. Abate
President and Principal
Executive Officer
By: /s/John M. Seroor
-------------------------
John M. Seroor
Treasurer and Principal
Financial Officer
18
<PAGE>
CONFIRMATION OF OVERRIDING ROYALTY INTEREST
IN FEDERAL COAL LEASE NO. C-01538
This Confirmation of Overriding Royalty Interest in Federal Coal Lease No.
C-01538 ("Confirmation") is made March 7, 1995, by Powderhorn Properties Company
("Powderhorn") for Frank G. Cooley and Mega Holding Corp. (collectively
"Grantees").
Recitals
A. The predecessors in interest of Powderhorn and of Grantees entered into an
Agreement to Exercise Purchase Option ("GEX Agreement") dated November 20, 1976
(effective as of November 1, 1976) which describes, inter alia, an overriding
royalty interest (the "Override") to be paid by General Exploration Co. ("GEX")
to the predecessors in interest of Grantees equal to $.50 per ton for each ton
of coal mined from certain properties. The GEX Agreement is attached hereto as
Exhibit "A" and incorporated herein by this reference.
B. The properties subject to the Override include Federal Coal Lease No.
C-01538 which is limited to the coal deposits in 2,720 acres of land, more or
less, located in Mesa County, Colorado, more particularly described as follows:
Township 10 South, Range 98 West, 6th P.M.
------------------------------------------
Section 20: S1/2, S1/2N1/2
Section 21: S1/2, S1/2N1/2
Section 22: SW1/4SE1/4, S1/2S1/2SW1/4 (coal in Cameo B seam only)
Section 27: E1/2NW1/4 (coal in Cameo B seam only)
Section 28 W1/2NW1/4
Section 29: All
Section 32 All
Section 33: NW1/4, N1/2SW1/4
C. GEX and the predecessors in interest of Grantees entered into a letter
agreement ("Letter Agreement") dated May 25, 1977, regarding the terms of
advance royalty payments provided in the GEX Agreement.
D. The Override in Federal Coal Lease No. C-01538 was conveyed to the
Grantees' predecessors in interest by an Assignment of Overriding Royalty dated
May 27, 1977, which was recording January 12, 1978 in Book 1133, Page 685 of the
official real estate records of Mesa County, Colorado ("County Records").
E. Grantees Frank G. Cooley and Mega Holding Corp. acquired interests in
the Override in Federal Coal Lease No. C-01538 pursuant to four separate
Assignments of
<PAGE>
Overriding Royalties dated as of June 11, 1979, which were recorded January 12,
1982 in Book 1352, Page 293, 302, 311 and 320 of the County Records.
F. Powderhorn assumed the obligations of GEX and its affiliates to Grantees
under the GEX Agreement and the Assignment of Overriding Royalty described in
Recital D pursuant to an Assumption Agreement dated December 31, 1981.
G. Cameo Land Company, an affiliate of GEX, assigned all of its record
title to Federal Coal Lease No. C-01538 to Powderhorn in an instrument dated
December 31, 1981, which assignment was approved by the Bureau of Land
Management ("BLM") in a Decision dated November 30, 1984. Powderhorn subleased
its interest in Federal Coal Lease No. C-01538 to Powderhorn Coal Company,
reserving an overriding royalty interest more specifically described therein.
This sublease and the overriding royalty reserved by Powderhorn were approved by
the BLM in a Decision dated January 30, 1987.
H. In compliance with the Order dated August 8, 1994, as amended by the
Order dated September 29, 1994, in Silengo, et al. v. Powderhorn Properties
Company, et al., Case No. 90 CV 58, Division B, District Court, Mesa County,
Colorado, Powderhorn herein confirm the prior assignment of proportionate shares
of the Override in Federal Coal Lease No. C-01538 to Grantees in order that
Grantees may seek approval of their ownership of their proportionate shares of
the Override in Federal Coal Lease No. C-01538 from the BLM. This Confirmation
is not intended to grant or otherwise transfer to Grantees additional shares in
the Override beyond those set forth in the Assignments described in Recital E.
Confirmation
Pursuant to the Orders described in Recital H, Powderhorn does hereby
confirm the grant and assignment unto Grantees of the respective proportionate
shares of the Override in Federal Coal Lease No. C-01538 set forth opposite
their names below:
Name Interest
Frank G. Cooley $0.02125 per Ton (4.25% of $.50/Ton)
(Annual Advance Minimum Payment due
January 31: $6,375)
Mega Holding Corp. $.0425 per Ton (8.5% of $.50/Ton)
(Annual Advance Minimum Payment due
January 31: $12,750)
This confirmation is made subject to the following:
1. The GEX Agreement; the Letter Agreement, the Assignments and the
Assumption Agreement described in Recitals C, D, E and F above; the Orders of
the Court described in Recital H above; and the Order of the Court dated
November 245, 1992, which was partially vacated by the Order dated September 16,
1993. Any conflict between this Confirmation and the terms of the instruments
and Court Orders identified in this paragraph shall be governed by those
instruments and Orders.
2. The proportionate shares of the Override in Federal Coal Lease No.
C-01538 confirmed herein shall be payable from the overriding royalty interest
reserved by Powderhorn in the sublease referred to in Recital G above and not in
addition thereto. If and when the overriding royalty interest reserved by
Powderhorn in said sublease is extinguished, Grantees' proportionate shares of
the Override in "Federal Coal Lease C-0`1538 shall survive and remain payable,
in accordance with the terms of the Override, from the interest of Powderhorn
and its successors and assigns.
2
<PAGE>
3. Powderhorn Coal Company executes this Confirmation in order to
acknowledge its consent hereto.
IN WITNESS WHEREOF, this Confirmation is executed by:
POWDERHORN PROPERTIES
COMPANY
By: River Properties Corp., General Partner
ATTEST:
By: /s/ E. L. Sullivan By: /s/ P. B. Lilly, President
--------------------- -----------------------------
P. B. Lilly, President
POWDERHORN COAL COMPANY
By: Canyon Coal Corp., General Partner
ATTEST:
By: /s/ E. L. Sullivan By: /s/ P. B. Lilly
----------------------- -----------------------
P. B. Lilly, President
3
<PAGE>
STATE OF Missouri )
) ss.
COUNTY OF St. Louis )
The foregoing instrument was acknowledged before me this 7th day of March,
1995 by P. B. Lilly, as President of River Properties Corp., General Partner of
Powderhorn Properties Company, a general partnership, and as President of Canyon
Coal Corp., General Partner of Powderhorn Coal Company, a general partnership.
/s/Patricia Bacon
----------------------------
My Commission expires:--------- PATRICIA BACON
Notary Public - Notary Seal
STATE OF MISSOURI
St. Louis County
My Commission Expires May 18, 1998
