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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
MEGAWORLD, INC.
(Name of Small Business Issuer in its charter)
Delaware 11-3118271
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6250 North Rosslyn Road, Houston, Texas 77091-3410
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713)462-6906
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered Each class is to be registered
none
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock $0.0001 par value
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(Title of Class)
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Registration Statement contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended. All statements, other than statements of historical fact,
included in this Registration Statement regarding the Company's financial
position, future net revenues, net income, potential evaluations, business
strategy and plans and objectives for future operations are "forward-looking
statements." Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including, but not limited to, changes in political and economic conditions,
regulatory conditions, and competitive pricing pressures. Important factors that
could cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed elsewhere in this Registration
Statement. All forward-looking statements in this Registration Statement are
expressly qualified by the Cautionary Statements and by reference to the
underlying assumptions that may prove to be incorrect.
These forward-looking statements are commonly identified by the use of
such terms and phrases as "intends," "estimates," "expects," "projects,"
"anticipates," "foreseeable future," "seeks," "believes" and "scheduled" and, in
many cases, are followed by a cross-reference to "Risk Factors." Such statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND BUSINESS DEVELOPMENT
MegaWorld, Inc.'s (the "Company" or "MegaWorld") principal historic
revenue generating activities have been associated with its construction and
fabrication of modular structures, primarily for the energy, transportation and
telecommunications industries. The Company is developing its international and
domestic telecommunications services business, which, if successful, will enable
the Company to provide voice, fax, data and other communications service
principally for commercial customers.
The Company was incorporated in February 1989 as Nassau Ventures, Inc.
("Nassau"), a Delaware corporation. On February 3, 1997, Nassau acquired all the
issued and outstanding shares of MegaWorld and in March 1997, Nassau changed its
name to MegaWorld. In November 1998, MegaWorld acquired Total Building Systems,
Inc. ("Old TBS"), a company that designed and constructed modular buildings for
the offshore oil and gas, transportation and telecommunications industries,
through a merger with Texas TBS, Inc., a wholly-owned subsidiary of MegaWorld
("Texas TBS") (the "Merger"). Texas TBS changed its name to Total Building
Systems, Inc. ("TBS") immediately following the Merger. The Merger was
structured as a reverse acquisition of MegaWorld by shareholders of Old TBS. Old
TBS shareholders received an aggregate of 11,250,000 shares of MegaWorld common
stock, $.0001 par value per share ("Common Stock"), in consideration for the
Merger, representing 51.6% of the outstanding MegaWorld Common Stock immediately
following the Merger. MegaWorld issued an additional 17,089,780 shares of Common
Stock following the Merger to Charles D. McPhail, the former President and
majority stockholder of Old TBS, and his designees. As a result, Mr. McPhail and
his designees hold, in the aggregate, 70.3% of the Company's Common Stock. See
"History of the Company" and "Certain Relationships and Related Transactions."
The purpose of this merger was for shareholders of Old TBS to gain liquidity and
access to a public market for their equity and to acquire an interest in the
telecommunications business which was being developed by MegaWorld.
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THE BUSINESS
MEGAWORLD COMMUNICATIONS DIVISION
Prior to the Merger, MegaWorld had engaged in the development of three
separate businesses. See "History of the Company." MegaWorld currently plans to
focus its resources on higher margin businesses, especially international and
domestic telecommunications and data network communications and to conduct these
businesses through MegaWorld's Communications Division. Since the Merger, the
Company has focused on building its telecommunication infrastructure, including
its network operations site in Hackensack, New Jersey, and on developing its
telecommunications product and services. Management believes that the Company
will be able to take advantage of existing market dynamics to become a provider
of Internet telephony services to the United States and international markets.
To date, the Communications Division has not generated any significant revenues.
The primary objective of the MegaWorld Communications Division is to
provide telecom, Internet and data network communications services from the
United States to international and domestic destinations. The business
objectives of the Communications Division include providing high-speed internet
access to domestic internet service providers ("ISPs"), long distance
connections to international telephone carriers, and Voice over Internet
Protocol ("VoIP") transportation of voice, data and multimedia services from the
United States to select global destinations.
The Company's communications services are based on various methods of
transmitting data through telephone lines ("circuit-switched") and by dividing
the information into small "packets" that are individually routed primarily
through Internet connectors ("packet-switched"). The Company intends to
integrate circuit-switched data transmissions with packet-switched technologies
and currently markets these products and services to domestic and international
wholesale communication providers, Internet service providers and telephone
companies.
The Company has designed a core network of operations to accommodate
not only circuit-switched telecommunications but also "real-time" (i.e., the
operation of virtually simultaneous input and response) Internet communications
and other packet-switched communications. In designing its core network, the
Company incorporated what it believes to be the most advanced data network
technology available, including ATM core network packet switches that can
support up to 2.5 gigabytes of data transfer per second, IP (Internet Protocol)
Routers, fiber optic cables, and satellite communication networks. The Company
currently purchases its network servers from Sun Microsystems, Inc. and its data
network provider services from Level 3 Communications, Inc. ("Level 3"). The
Company intends to purchase system software from Oracle Corp. The Company
maintains its network servers and much of its other network equipment under
co-location agreements with Level 3, which provides worldwide telecommunications
access for the Company. In connection with these agreements, the Company
maintains a direct fiber optic connection to Level 3, enabling the Company to
provide the same type of service as Level 3 and making the Company a "Tier I"
Internet access provider.
The Company believes that most telecommunications providers and
virtually all wireless communications providers operate under Signaling System
number 7 software ("SS7"), which controls the dialing and routing of
connections. The Company's network also uses servers with SS7 technology, which
enables the Company to effectively communicate with both traditional wireline
and wireless network systems. This allows the Company's network to integrate
with the communications networks of other telecommunications providers and to
take advantage of the same network efficiencies as the large network providers,
thus reducing access time and costs.
The Company offers, or has plans to offer, the following services:
o Internet Access Services: The Company is developing new
systems and software which will enable it to offer high speed
internet access to internet service providers and other
service providers, such as telephone companies. The Company
plans to increase its internet access services with high speed
internet access and broadband network services. The Company
plans to begin beta testing of this new system in June 2000
with two or three test sites. The Company intends to complete
the beta testing and launch the system to internet service
providers and other service providers on or before July 1,
2000.
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o International Long Distance: The Company offers
circuit-switched international long distance services to
foreign communication service providers and telecommunication
companies. The Company's circuit switches will connect the
foreign third-party systems to the Company's international
network to deliver long distance telephone services in foreign
countries. The Company is currently negotiating contracts for
these services and has received an initial deposit from one
customer.
o Messaging Services: The Company offers a messaging services
package to organizations and wholesale communications
companies which allows their members or customers to deliver
voice mail, fax mail and e-mail messages to an e-mail address
where messages can be displayed or played as an e-mail
attachment. In addition, users can retrieve their messages,
including e-mail, by telephone and redirect them to any fax
machine. These messaging services are available to service
providers on a wholesale, private label basis. The Company has
begun providing messaging services and local and long distance
message transmission services under a contract with Sequel
Communications, Inc. signed in late 1999 but the Company has
received only minimal revenue from this contract to date.
o International Private Line Services: The Company offers
private line services which provide customers dedicated data
network access and Internet services to international
locations. These services can be configured with standard
telephone lines, private data circuits, or broadband ATM
(Asynchronous Transfer Mode) connections. An ATM connection is
a method of delivering multiple multimedia programs over a
single communications channel in which the information is
divided into small packets which are transmitted
simultaneously to their destination via high-speed networks.
The Company has not yet begun delivery of international
private line services and is now seeking to enter into initial
contracts to provide such services.
o 1-800 Enhanced Service: The Company offers an enhanced 1-800
service under which users obtain localized information such as
store locations through a toll free number. The Company is
currently marketing this service to various national
retailers, but has not yet begun providing service to
customers.
o Telecommunication Site Design and Construction: The Company
offers full telecommunication site planning and development
services for international and domestic customers, including
site location, construction, wiring plans, network design, and
installation. The Company is not actively marketing this
service at this time.
o Web Site Services: The Company plans to offer dedicated and
shared web hosting services, with full e-commerce support
services available, including service support, hardware,
software and Internet access. The Company is not actively
marketing this service at this time.
o On-line Data Storage: The Company plans to offer on-line data
storage systems for real-time data back up or long term data
archiving on tape and optical disk systems, which are located
in secure data sites within the United States. The Company is
not actively marketing this service at this time.
The Company's main data center is located in Hackensack, New Jersey,
where the Company leases approximately 5,000 square feet for computer and
network operations. The Company selected this location because many VoIP, data
network and communications service providers are located in the Northern New
Jersey area. The Company also has a co-location agreement with Level 3 that
provides MegaWorld with space on an as-needed basis at any of the Level 3 data
locations. The Company is currently leasing space in Level 3's New York facility
pursuant to this agreement.
The Company anticipates that it will require between $5 and $6 million
to develop the infrastructure required to implement its business plan and
initiate the delivery of commercial services in each of the categories described
above. However, the international telecommunications industry is highly
regulated. See "Government Regulations, Environment, Health and Safety." There
can be no assurance that the Company's business plan can be implemented for the
anticipated cost or within the anticipated period. See "Risk Factors."
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THE MARKET
Recent expansion of the Internet has increased the demand for
international and domestic communication services and networks. The
Communications Division is currently focusing its business development efforts
on the development and marketing of its Internet access software and on
developing a share of the international long distance market, especially from
the United States to the Caribbean and Central and South American destinations
(collectively, the "Target Markets").
Each of the Company's Target Markets is undergoing significant
expansion. "Trends in the U.S. International Telecommunications Industry,"
Federal Communications Commission, August 1998 ("1998 FCC Report"). The Company
believes that the demand for new communication services is very high and
supports capital investment in each of its Target Markets. Further, the Company
believes that these markets are undergoing a fundamental shift in communication
usage, driven by the Internet, data networks and cost efficiencies of new
technologies.
The Federal Communication Commission ("FCC") has estimated the demand
for international telephone services in and to the Company's Target Markets to
be in excess of $4.9 billion annually. See The 1997 Annual Report of the FCC on
Section 43.61 International Traffic Data ("The 1977 FCC International Traffic
Report"). The FCC estimated that the demand for international private line
telephone communication services between the United States and international
destinations within the Company's Target Markets, driven primarily by increased
data networking and Internet usage, was $137 million. See The 1997 FCC
International Traffic Report. In addition, International Data Corporation
("IDC"), a leading technology research firm, estimates that the domestic and
international demand for Internet access, and digital service connections that
are VoIP-enabled, will grow at a compounded average growth rate of 81% through
the year 2003, obtaining a projected market value of $7.7 billion. See "Remote
Access and VoIP-enabled RAS Market Review and Forecast, 1996-2003", IDC Report
#177747, December 1998.
New services in telecommunications, the Internet and data
communications require a high degree of technology expertise which is very
expensive to maintain on a company-by-company basis. The Company plans to market
its products and services through shared resource and wholesale distribution
channels which will allow private labeling of services by the Company's
customers. The Company expects its customers will establish and maintain brand
names for their products and services which are unique to their companies. The
Company believes that in many cases its customers would rather purchase these
services from the Company than build the products and perform the services
themselves.
COMPETITION
The international telecommunications business is highly competitive.
According to The 1997 FCC International Traffic Report, the major competitors
include (i) American Telephone and Telegraph Company ("AT&T") (ii) MCI WorldCom,
Inc. ("MCI"), and (iii) Sprint, Inc., which collectively account for over 90% of
the international long distance revenues within the Company's Target Markets.
Numerous smaller telecommunications companies also compete with the
Communications Division. Competition in this area generally focuses on price,
service, warranty and product performance. The remaining market share contains
many smaller carriers with no significant individual market share. In the
Caribbean, for example, 12% of the telecommunications traffic (measured by
connection minutes) is carried by all other communication companies. In South
America, that number is 6%. As demand for telecommunications services grows in
this region, the Company believes it has an opportunity to capture significant
business.
HISTORY OF THE COMPANY
Prior to the Merger, MegaWorld was engaged in the development of three
different business. In addition to its international telecommunications
business, MegaWorld had attempted to launch a lifestyle magazine of interest to
New York residents, but had abandoned the magazine by the time of the Merger,
and in April 1998, MegaWorld had entered into a contract to acquire rights to a
leasehold interest in Castello Torre Ratti, an ancient Italian castle, and was
planning development of the castle as a timeshare resort. At the time of the
Merger, MegaWorld had generated virtually no revenue from these endeavors.
Previous management believed it could capitalize on the historical revenue flow
from Old TBS to improve MegaWorld's financial position and become more
attractive to funding sources. Shareholders of Old TBS believed that MegaWorld's
developing businesses would provide cash through future operations that would
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fuel growth of Old TBS, provide steady revenue to sustain Old TBS through cyclic
downturns in the oil and gas industry and provide the necessary working capital
with which MegaWorld could fund further development of its communications
business and timeshare resort.
At the time of the Merger, MegaWorld valued Old TBS at $12 million. In
consideration for the Merger, shareholders of Old TBS, including the founder,
President and Chief Executive Officer of Old TBS, Charles D. McPhail, and his
designees received 11,250,000 shares of MegaWorld Stock, and Mr. McPhail and his
designees received a promissory note in the amount of $8,000,000 issued by the
Company, for a total consideration of $12 million. MegaWorld Shares of MegaWorld
common stock issued as consideration for the Merger were valued at $.35 per
share, which represented a discount of approximately 70% to then current market
prices because the shares were unregistered and illiquid in the hands of the Old
TBS shareholders. In addition, MegaWorld issued 17,089,780 shares of common
stock following the Merger to Mr. McPhail and/or his designees including, (i)
7,313,260 shares in connection with Mr. McPhail's exercise of stock options
granted to provide certain price protection in connection with the Merger; (ii)
6,400,000 shares for the conversion in September 1999 of the $8,000,000
promissory note issued by the Company to Mr. McPhail as partial consideration
for the Merger; (iii) 2,376,520 shares in connection with certain anti-dilution
rights granted to Mr. McPhail; (iv) 600,000 shares as consideration for Mr.
McPhail's agreement to subordinate and defer payment of certain loans he made to
the Company prior to the Merger; and (v) 400,000 shares as consideration for the
assumption by the Company of Mr. McPhail's employment agreement. See "Certain
Relationships and Related Transactions." Also under terms of the Merger
Agreement, MegaWorld agreed, for a term of fifteen years and for so long
thereafter as Charles D. McPhail and Lynn R. McPhail, or either of them shall
survive, to pay to Mr. and Mrs. McPhail one percent (1%) of the annual gross
revenue of the Company, in either cash or Common Stock, at the Company's option;
however, to date the Company has not delivered any such compensation. See
"Certain Relationships and Related Transactions" and "Recent Sales of
Unregistered Securities."
Although TBS reported profits with respect to two of the last four
years in which it conducted operations, as a result of a sustained downturn in
the domestic energy services industry and management's belief that the
telecommunications business was likely to yield a higher return on investment
than TBS, management discontinued all TBS operations in May 2000 and made plans
to dispose of all TBS assets.
MODULAR MANUFACTURING - TBS
TBS is a five-year-old company that operated two manufacturing
facilities in Houston, Texas, for the production of modular structures,
primarily for customers in the oil and gas industry. As a result of a
significant sustained downturn in the oil and gas industry, management
discontinued all TBS operations in May 2000 and has made plans to dispose of all
TBS assets. See "Liquidity and Capital Resources."
Prior to its discontinuation, the modular manufacturing facility, which
was located at the Company's headquarters in Northwest Houston, was dedicated to
products that can be shipped over land, primarily by tractor-trailer. The second
facility, which was located on the Houston ship channel in East Houston,
specialized in large products that must be shipped by marine transport.
During 1999, TBS earned revenue primarily from customers in the energy
industry and related service industries (approximately 85%) and from customers
in the communications industry (approximately 10%). The remainder of TBS's
business, approximately 5%, was derived from transportation and other economic
sectors. TBS's principal products included steel fabricated modular structures
and aluminum sandwich panel modular structures (primarily offshore crew quarters
for drilling and production platforms), and manufactured concrete structures for
the communications industry. All buildings were built to customer specifications
and many were engineered and designed by TBS.
Steel, concrete, fiberglass, lightweight aluminum and prefabricated
composite panels were the primary raw materials used for the Company's
manufacturing process. TBS maintained a diversified base of suppliers through
which it obtains its materials and components for its manufacturing process. The
Company relied on a wide range of distributors and other suppliers, none of
which represented more than 10% of TBS's yearly expenditures.
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TBS has been severely impacted by the cyclical demand of the oil and
gas industry and was unable to develop sufficient product lines that were not
oil and gas dependent. As a result, in May 2000, Management decided to
discontinue all TBS operations and focus its efforts on the Company's
telecommunications business.
ITALIAN TIMESHARE DEVELOPMENT
In April 1998, previous management of the Company entered into a
contract to acquire all outstanding shares of Castello Ratti Enterprises Srl
("CRE"), a Company whose principal asset was a 42-year leasehold interest in
Castello Torre Ratti, a 1,000-year-old castle near Milan, Italy (the "Castle"),
with the intention of developing weekly timeshare units in the Castle. Current
management understands that the initial plans contemplated pre-construction
sales of timeshare units which would fund the Castle's renovation. The plans
also included the construction of additional buildings, a golf course, tennis
courts and a spa. MegaWorld agreed to acquire CRE from Michael Giamalvo, a
director of the Company at the time of the acquisition, for 1,000,000 shares of
common stock, $50,000 in cash and $572,500 in deferred payments to Mr. Giamalvo,
with release of the CRE shares from escrow to MegaWorld to occur upon delivery
of the full amount of such payments to Mr. Giamalvo. Under terms of the
acquisition agreement and related escrow agreement, the CRE stock is to be
returned to Mr. Giamalvo if MegaWorld does not make such full payment.
The Company formed a wholly-owned subsidiary, MegaWorld Leisure, Inc.
("MLI"), to develop the Castle. Although at the time of the Merger current
management of the Company believed that the Castle could begin to generate
revenue with a minimal investment under the pre-construction sale plan described
above, however, this proved to be incorrect. To date MegaWorld has paid only
$150,000 of the deferred payments and Management is currently attempting to
rescind the Castle transaction. See "Certain Relationships and Related
Transactions " and "Legal Proceedings."
GOVERNMENTAL REGULATIONS, ENVIRONMENT, HEALTH AND SAFETY
FCC REGULATION OF TELECOMMUNICATIONS
The Communications Division is subject to varying degrees of federal,
state, local and international regulation. The Communications Division is
subject to regulation by the Federal Communications Commission ("FCC"). The FCC
requires the Company to obtain authority under Section 214 of the Communications
Act of 1934, as amended (the "Communications Act") and imposes certain other
obligations on carriers providing international telecommunication services.
These include the obligation to file at the FCC and to maintain tariffs
containing the rates, terms and conditions applicable to their services; to file
certain reports regarding international traffic and facilities; to file certain
contracts with correspondent carriers; to disclose affiliations with foreign
carries and significant foreign ownership interests; to pay certain regulatory
fees based, among other things, upon the carrier's revenues and ownership of
international transmission capacity.
The Company has obtained a global Section 214 authority from the FCC to
use, on a facilities and resale basis, various transmission media for the
provision of international switched and private line services. The FCC reserves
the right to condition, modify or revoke Section 214 authorizations and impose
fines for violations of the Communications Act or the FCC's regulations, rules
or policies promulgated thereunder, or for violations of the clear and explicit
telecommunications laws of other countries that are unable to enforce their laws
against call reorigination.
The Company is also required to conduct its facilities-based
international business in compliance with the FCC's International Settlements
Policy (the "IS Policy"), or an FCC approved alternative settlement arrangement.
A facilities-based carrier holds an ownership, indefeasible-right-of-user, or
leasehold interest in bare capacity in the U.S. end of an international
facility. The IS Policy requires U.S. telecommunications carriers to pay
nondiscriminatory rates for the termination of international traffic in foreign
countries. It was developed to prevent foreign monopoly carriers from playing
U.S. carriers against each other to the disadvantage of U.S. carriers and U.S.
ratepayers in the form of higher rates for the completion of international calls
originating in the U.S. The IS Policy governs the permissible arrangements
between U.S. carriers and their foreign correspondents to settle the cost of
terminating traffic over each other's networks, the rates for such settlement
and permissible deviations from these policies. As a consequence of the
increasingly competitive global telecommunications market, the FCC has adopted a
number of policies that permit carriers to deviate from the IS Policy under
certain circumstances that promote competition.
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In May 1999, the FCC issued an order exempting competitive carriers and
specified competitive routes from the IS Policy. Specifically, the FCC's May
1999 Order eliminated the IS Policy for arrangements with non-dominant foreign
carriers (i.e., those that lack market power) and for arrangements with any
carrier, dominant or non-dominant, on routes deemed "competitive" by the FCC.
The FCC has designated the following international routes as being exempt from
the IS Policy and associated filing requirements: Canada, Denmark, France,
Germany, Hong Kong, Ireland, Italy, The Netherlands, Norway, Sweden, and the
United Kingdom. However, the FCC has not qualified any countries within the
Company's Target Market for relief from the FCC's IS Policy and associated
filing requirements.
In December 1996, the FCC adopted a policy that made it easier for
international carriers based in the United States to obtain authority to route
international public switched voice traffic to and from the United States
outside of the traditional settlement rate and proportionate return regimes. In
August 1998, the FCC proposed to modify its rules to make it easier for
U.S.-based international carriers to engage in alternative traffic routing.
WORLD TRADE ORGANIZATION AGREEMENT
In February 1997, the United States entered into a World Trade
Organization Agreement (the "WTO Agreement") that is designed to have the effect
of liberalizing the provision of switched voice telephone and other
telecommunications services in scores of foreign countries over the next several
years, including many countries located in the Company's target market. The WTO
Agreement became effective in February 1998. In light of the United States
commitments to the WTO Agreement, the FCC implemented new rules in February 1998
that liberalize existing policies regarding (1) the services that may be
provided by foreign-affiliated U.S.-based international common carriers,
including carriers controlled or more than 25 percent owned by foreign carriers
that have market power in their home markets, and (2) the provision of
alternative traffic routing. The new rules also make it much easier for
foreign-affiliated carries to enter the United States market for the provision
of international services.
In August 1997, the FCC adopted mandatory settlement rate benchmarks
intended to reduce the rates that United States carriers pay foreign carriers to
terminate traffic in their home countries. The FCC also prohibits a United
States carrier affiliated with a foreign carrier from providing facilities-based
service to the foreign carrier's home market until and unless the foreign
carrier has implemented a settlement rate at or below the benchmark. The FCC
also adopted new rules that will allow switched services over private lines
interconnected to the public switched network, sometimes referred to as
"international simple resale," to WTO member countries on routes where 50% or
more of the traffic billed to U.S. customers is being terminated in the foreign
country at or below the applicable settlement rate benchmark, or where the
foreign country's rules concerning provision of international switched services
over private lines are deemed equivalent to United States rules. In 1999, the
FCC's benchmark rules were upheld in their entirety by the U.S. Court of Appeals
for the D.C. Circuit.
The Company is unable to predict the full effect on the international
telecommunications market resulting from the WTO Agreement or the rules enacted
to implement its provisions or the establishment of mandatory settlement rate
benchmarks. These changes are expected to increase competition in the
telecommunications market. These changes may result in lower settlement payments
by the Company to terminate international traffic, however, there is a risk that
the payment that the Company will receive from inbound international traffic may
decrease to an even greater degree. The implementation of the WTO Agreement may
also make it easier for foreign carriers with market power in their home markets
to offer United States and foreign customers end-to-end services to the
disadvantage of the Company. The Company, meanwhile, may continue to face
substantial obstacles in obtaining from foreign governments and foreign carriers
the authority and facilities to provide such end-to-end services. There can be
no assurance that these events would not have a material adverse effect on the
Company's business, financial condition or results of operations.
Under the terms of the WTO Agreement, each of the signatories has
committed to opening its telecommunications market to competition, foreign
ownership and to adopt measures to protect against anticompetitive behavior,
effective January 1, 1998. Although the Company plans to obtain authority to
provide service under current and future laws of those countries in its target
market that are parties to the WTO Agreement, or, where permitted, provide
service without government authorization, there can be no assurance that foreign
laws will be adopted and implemented which will provide the Company with
effective practical opportunities to compete in these countries. Moreover, there
can be no assurance of the nature and pace of liberalization in any of these
markets. The Company's
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inability to take advantage of such liberalization could have a material adverse
affect on the Company's ability to expand its services as planned.
INTERNET TELEPHONY
The use of the Internet to provide telephone service is a relatively
recent development. If the FCC were to determine that certain services are
subject to FCC regulations as telecommunications services, the FCC noted that it
may find it reasonable to require Internet service providers to make universal
service contributions, pay access charges or to be subject to traditional common
carrier regulation.
To the Company's knowledge, there are currently no domestic laws or
regulations that prohibit voice communications over the Internet. Several
efforts have been made to enact federal legislation that would either regulate
or exempt from regulation services provided over the Internet. State public
utility commissions may also retain jurisdiction to regulate the provision of
intrastate Internet telephony services, and could initiate proceedings to do so.
A number of countries that currently prohibit competition in the provision of
voice telephony have also prohibited Internet telephony. Other countries permit
but regulate Internet telephony. If Congress, the FCC, state regulatory
agencies, foreign governments or supranational bodies begin to regulate Internet
telephony, there can be no assurances that any such regulation will not
materially adversely affect the Company's business, financial condition or
results of operations.
EMPLOYEES
As of June 3, 2000, the Company and its subsidiaries had a total of 8
full-time employees and no part-time employees. The employees of the Company are
not subject to collective bargaining agreements and the Company believes
relations with employees are good.
RISK FACTORS
In addition to the other information contained herein, the following
factors should be considered carefully by any person considering an investment
in the Company.
THE COMPANY HAS EXPERIENCED RECENT LOSSES AND NEEDS ADDITIONAL CAPITAL.
The Company incurred losses of $2,413,831 for the nine months ending September
30, 1999 and $601,589 for the year ended December 31, 1998 and negative cash
flows of $343,443 and $1,970,922 from operating activities for the same periods,
and had a working capital deficit of $8,858,941 and stockholders' deficit of
$3,880,072 at September 30, 1999. As a result of these losses the Company's
working capital position and ability to generate sufficient cash flows from
operations to meet its operating and capital requirements has deteriorated.
These matters raise substantial doubt about the Company's ability to continue
operations without a significant infusion of working capital from outside
sources. The Company has relied upon its majority stockholder to fund its cash
requirements in the past; however, this stockholder has no obligation to
continue to fund the necessary cash requirements in the future. See
"Management's Discussion and Analysis or Plan of Operation."
THE COMPANY'S STOCK PRICE IS VOLATILE AND THE STOCK IS ILLIQUID. The
Common Stock will be subject to significant fluctuation in response to
variations in operating results of the Company, investor perceptions of the
Company, supply and demand, interest rates, general economic conditions and
those specific to the industry, developments with regard to the Company's
activities, future financial condition and management. In recent years, the
Company's Common Stock has been listed on the NASD Over-the-Counter Bulletin
Board ("OTCBB") under the symbol MEGW. On February 9, 2000, the Company's Common
Stock was removed from listing on the OTCBB until such time as this registration
statement both becomes effective and is amended in response to SEC comments.
Trading in the Company's Common Stock will be reported in the National Quotation
Bureau's Pink Sheets until its Common Stock is again listed on the OTCBB. There
can be no assurance that the market will provide significant liquidity for the
Company's Common Stock. As a result, an investment in the Company's Common Stock
may be highly illiquid. Investors may not be able to sell their shares readily
or at all when the investor needs or desires to sell. Furthermore, under current
provisions of Regulation T adopted by the Board of Governors of the Federal
Reserve System, so long as
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the market price of MegaWorld Common Stock is less than $5.00 per share and the
Common Stock is traded in the over-the-counter market, the Common Stock is not
marginable and it is unlikely that a lending institution would accept the
Company's Common Stock as collateral for a loan.
LOW-PRICED STOCK RISK DISCLOSURE REQUIREMENTS APPLY TO THE STOCK AND
MAY DECREASE THE MARKET FOR THE STOCK. The shares of the Common Stock will be
considered low-priced securities in the United States under rules promulgated
under the Exchange Act. Under these rules, broker-dealers participating in
transactions in low-priced securities must first deliver a risk disclosure
document which describes the risks associated with such stocks, the
broker-dealer's duties, the customer's rights and remedies, and certain market
and other information, and make a suitability determination approving the
customer for low-priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer and obtain specific
written consent of the customer, and provide monthly account statements to the
customer. The likely effect of these restrictions will be a decrease in the
willingness of broker-dealers to make a market in the Common Stock, decreased
liquidity of the Securities and increased transaction costs for sales and
purchases of the Common Stock as compared to other securities.
THE COMPANY MAY INCUR SIGNIFICANT LEVERAGE AND DEBT SERVICE
REQUIREMENTS WHICH IT MAY BE UNABLE TO SERVICE. To provide necessary working
capital, the Company may incur additional outstanding indebtedness. The level of
the Company's indebtedness could have several important effects on the Company's
future operations, including among others, (i) its ability to obtain additional
financing for working capital, acquisitions, capital expenditures, general
corporate and other purposes may be limited, (ii) a portion of the Company's
cash flow from operations may be dedicated to the payment of interest on its
indebtedness, thereby reducing funds available for other purposes and (iii) the
Company's leverage could make it more vulnerable to economic downturns. The
Company's ability to meet its debt service obligations and reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to the success of its business strategy, general economic conditions,
industry cycles, interest rates, and financial business and other factors
affecting the operations of the Company, many of which are beyond its control.
There can be no assurance that the Company's business will generate sufficient
cash flow from operations to meet its debt service requirements and the payment
of principal when due, and if the Company is unable to do so, it may be required
to sell assets, to refinance all or a portion of its indebtedness, or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained.
THE COMPANY HAS A LIMITED OPERATING HISTORY AND LACK OF REVENUE, FACES
INVESTMENT BARRIERS AND WILL CONTINUE TO INCUR SIGNIFICANT EXPENSES. The Company
has historically derived all of its revenue through its TBS subsidiary, which
had a five-year operating history. Due to a sustained downturn in the domestic
energy services market which had an extremely adverse effect on TBS, the Company
discontinued all TBS operations in May 2000. MegaWorld's Communications Division
only began limited commercial operations in late 1999, although the Company has
been developing its telecommunications business since March 1998. In order for
the Communications Division to succeed, the Company will need to invest
significant additional resources, including time and money, in the construction
of the Communications Division's facilities-based network. Construction of this
infrastructure is expected to cost from $5 to $6 million. In addition, because
of the pace of deregulation in the international marketplace, the Communications
Division must act quickly to ensure it is not overtaken by existing competitors
and new market entrants. There can be no assurance that (i) the Company will be
able to fund investment costs, (ii) the Communications Division will
successfully implement any of its plans in a timely and effective manner or
(iii) that the Communications Division will be able to generate significant
revenues or operate profitably.
THE COMPANY FACES INTENSE COMPETITION. The Company is aware of a number
of competitors that will compete directly with the Company's products and
marketing concepts and those of its subsidiaries. There can be no assurance that
the Company will be able to overcome the competitive disadvantages it will face
with the limited capital available. If the Company cannot compete effectively it
will not succeed. See "MegaWorld Communications Division - Competition".
GOVERNMENTAL REGULATIONS MAY BE DIFFICULT TO PREDICT AND MAY ADVERSELY
IMPACT THE BUSINESS. The Company is unable to predict the full effect on the
international telecommunications market resulting from current and proposed
regulations of the United States, the WTO Agreement and the countries in which
the Company intends to do business.
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The Company may face substantial obstacles in obtaining authority and facilities
to provide its services and conduct its business from foreign governments and
foreign carriers. See "Governmental Regulations, Environment, Health and
Safety."
THE COMPANY MUST WIN NEW CONTRACTS AND OBTAIN RENEWALS ON EXISTING
CONTRACTS. The Communications Division's success will depend on its ability to
win contracts and to renew and extend such contracts. The Communications
Division currently has only one contract to provide communication services over
its proposed facilities-based data network. That contact has a one-year term,
with automatic month-to-month renewal unless terminated at the election of
either party. The contract has approximately four months remaining on its
primary term. The Communications Division faces the risk of non-renewal of this
contract; however, the Company has not earned significant revenue under the
contract to date.
THE COMPANY INTENDS TO ISSUE ADDITIONAL COMMON STOCK AND MAY ISSUE
CLASS A COMMON STOCK WHICH WOULD DILUTE CURRENT STOCKHOLDERS. The Company is
authorized to issue up to 98,808,259 shares of Common Stock, each carrying
one-twentieth (1/20) of one vote, of which 40,335,706 shares are currently
outstanding. The Company is also authorized to issue up to 1,191,741 shares of
Class A Common Stock $0.0001 par value (the "Class A Stock"), each carrying one
vote. No shares of Class A Stock are currently issued and outstanding. To the
extent it is authorized, the Board of Directors of the Company will have the
ability, without seeking stockholder approval, to issue additional shares of
Common Stock and Class A Stock in the future for such consideration as the Board
of Directors may consider sufficient. The issuance of additional Common Stock
and Class A Stock in the future will reduce the proportionate ownership and
voting power of the Common Stock. The Company is currently not authorized to
issue any preferred stock.
THE COMPANY'S SUCCESS IS DEPENDENT ON KEY EMPLOYEES AND SENIOR
MANAGEMENT. The Company's ability to achieve its growth strategy is dependent in
large part upon the efforts of its senior management, particularly Charles D.
McPhail, the Company's President and Chief Executive Officer. The loss of the
services of Mr. McPhail could have a material adverse effect on the Company.
Certain of the Company's officers and directors have significant experience in
the communications industry which will be important to the Company's success. As
the Company continues to redirect its focus from modular manufacturing to
telecommunications, its business strategy will become increasingly dependent
upon its ability to recruit and retain qualified personnel and senior
management, competition for which is expected to be fierce. There can be no
assurance that the Company will continue to recruit and retain a sufficient
number of qualified personnel and senior management. The inability to
successfully recruit and retain such persons could materially and adversely
affect the Company's ability to staff its facilities and to successfully
implement its growth strategy.
EXISTING MANAGEMENT AND STOCKHOLDERS CONTROL THE COMPANY. The existing
officers and directors beneficially own 19,653,580 shares of Common Stock and
control in the aggregate 48.7% of the votes of all shares of Common Stock and,
if acting in concert, may be able to exercise control over the Company's
affairs, elect the entire Board of Directors and control the outcome of any
matter submitted to a vote of the Company's stockholders. See "Security
Ownership of Certain Beneficial Owners and Management."
THE COMPANY'S INSURANCE COVERAGE MAY NOT BE ADEQUATE. The Company
carries general liability, comprehensive property damage, workers' compensation
and other insurance coverages that management considers adequate for the
protection of the Company's existing assets and current operations. There can be
no assurance, however, that the coverage limits in such policies will be
adequate as the Company expands its operations. A successful claim against the
Company in excess of its insurance coverage could have a material adverse effect
on the Company.
THE OFFICERS AND DIRECTORS OF THE COMPANY HAVE LIMITED LIABILITY. The
Company has adopted provisions to its Certificate of Incorporation and Bylaws
which limit the liability of its officers and directors and provides for
indemnification by the Company of its officers and directors to the full extent
permitted by the Delaware General Corporation Law ("DGCL"). The Company's
Certificate of Incorporation generally provides that its officers and directors
shall have no personal liability to the Company or its stockholders for monetary
damages for breaches of their fiduciary duties as directors, except for breaches
of their duties of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, acts involving unlawful
payment of dividends or unlawful stock purchases or redemptions, acts specified
in the DGCL, or any transaction from which a director derives an
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improper personal benefit. Such provisions substantially limit the stockholders'
ability to hold officers and directors liable for breaches of fiduciary duty,
and may require the Company to indemnify its officers and directors.
THE STOCKHOLDERS DO NOT HAVE CUMULATIVE VOTING AND PRE-EMPTIVE RIGHTS.
There are no pre-emptive rights in connection with the Company's Common Stock or
Class A Stock. Cumulative voting in the election of directors is not permitted.
Accordingly, the holders of a majority of the shares of Common Stock and Class A
Stock (if and when issued), present in person or by proxy, will be able to elect
all of the Company's Board of Directors. See "Description of Securities."
THE COMPANY DOES NOT PAY DIVIDENDS. The Company does not currently
intend to pay cash dividends on its Common Stock and does not anticipate paying
such dividends at any time in the foreseeable future. The Company will follow a
policy of retaining all of its earnings, if any, to finance development and
expansion of its business.
REPORTS TO SECURITY HOLDERS
Prior to the filing of this Registration Statement, the Company had not
been subject to the reporting requirements of the Securities Exchange Act of
1934 and had not filed any reports with the SEC. The public may read and copy
any materials the Company files in the future with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the Company intends to file all required
reports with the SEC electronically. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. This site is available
at http:/www.sec.gov. If the Company is not required to deliver an annual report
to security holders, the Company intends to voluntarily send an annual report to
its security holders, which report will include audited financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This management discussion contains certain forward-looking statements
as identified by the use of words like "expects", "believes", and "anticipates"
and other similar phrases. Such statements reflect management's current view of
future financial performance based on certain assumptions, risks and
uncertainties. If any assumptions, risk or uncertainty factors change, such
changes may have a material impact on actual financial results. The Company is
under no obligation to revise any forward-looking statements contained herein,
which are as of the date hereof. Readers are cautioned to not place undue
reliance on any forward-looking statements contained in this discussion, which
speak only as the date hereof.
OVERVIEW
The Company has historically derived all of its revenue from TBS. In
May 2000, due to a substantial and sustained downturn in the domestic energy
services market, management discontinued all TBS operations and made plans to
dispose of all TBS assets. The Company intends to provide integrated
communications services to international and domestic customers through the
Communications Division. Although the Communications Division reported nominal
revenue ($4,846) during the quarter ended December 31, 1999, it does not expect
to initiate commercial telecommunications service prior to July 1, 2000.
MegaWorld has experienced net losses during the last two years of
operations and expects losses from its continuing operations to continue through
MegaWorld's fiscal year 2000 (ending September 30, 2000), and possibly
thereafter.
The Company's primary business efforts in year 2000 will focus on the
development of its Communication Division. The Communications Division has begun
to secure contracts with suppliers. The contracts have not yet
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generated any significant revenue, however, management expects to report
revenues from the Communications Division by the second half of 2000.
The Company's business was organized and began operations in January,
1995 as Old TBS. Effective November 11, 1998, Old TBS merged with and into Texas
TBS, a wholly-owned subsidiary of MegaWorld , with Texas TBS as the surviving
corporation. Texas TBS changed its name to Total Building Systems, Inc. ("TBS")
immediately following the merger. Pursuant to Staff Accounting Bulletins issued
by the SEC relating to business combinations, this transaction was accounted for
as a reverse merger acquisition with Old TBS as the acquiring entity for
financial accounting purposes. The transaction was accounted for as a purchase
under GAAP, with the losses of MegaWorld included since the date of the Merger
and the TBS equity recapitalized with MegaWorld shares to reflect the reverse
merger acquisition. Therefore, the financial statements of the Company for
periods prior to November 11, 1998 are the financial statements of Old TBS, not
MegaWorld. In addition, in 1999, the Company changed its fiscal year end from
December 31 to September 30. In May 2000, the Company terminated all TBS
operations.
At the time of the Merger, MegaWorld valued Old TBS at $12 million. In
consideration for the Merger, shareholders of Old TBS, including the founder,
President and Chief Executive Officer of Old TBS, Charles D. McPhail, and his
designees received 11,250,000 shares of MegaWorld Stock, and Mr. McPhail
received a promissory note in the amount of $8,000,000 issued by the Company,
for a total consideration of $12 million. MegaWorld Shares of MegaWorld common
stock issued as consideration for the Merger were valued at $.35 per share,
which represented a discount of approximately 70% to then current market prices
because the shares were unregistered and illiquid in the hands of the Old TBS
shareholders. In addition, MegaWorld issued 17,089,780 shares of common stock
following the Merger to Mr. McPhail and/or his designees including, (i)
7,313,260 shares in connection with Mr. McPhail's exercise of stock options
granted to provide certain price protection in connection with the Merger; (ii)
6,400,000 shares for the conversion in September 1999 of the $8,000,000
promissory note issued by the Company to Mr. McPhail as partial consideration
for the Merger; (iii) 2,376,520 shares in connection with certain anti-dilution
rights granted to Mr. McPhail; (iv) 600,000 shares as consideration for Mr.
McPhail's agreement to subordinate and defer payment of certain loans he made to
the Company prior to the Merger; and (v) 400,000 shares as consideration for the
assumption by the Company of Mr. McPhail's employment agreement. See "Certain
Relationships and Related Transactions." Also under terms of the Merger
Agreement, MegaWorld agreed, for a term of fifteen years and for so long
thereafter as Charles D. McPhail and Lynn R. McPhail, or either of them shall
survive, to pay to Mr. and Mrs. McPhail one percent (1%) of the annual gross
revenue of the Company, in either cash or Common Stock, at the Company's option;
however, to date the Company has not delivered any such compensation. See
"Certain Relationships and Related Transactions" and "Recent Sales of
Unregistered Securities."
The Company has historically derived all of its revenue from TBS. TBS
revenues were $7.6 million for the 9 months ended September 30, 1999 and $17.4
million in 1998. During 1999, less than 15% of all revenue is from non-energy
related industries. TBS' dependence on the domestic oil and gas services
industry subjected it to volatile market fluctuations which resulted in
management's decision to terminate all TBS operations. The Company's business
plan currently focuses on the development of the Communications Division.
Developing the business of the Communications Division has required
significant capital resources and time. The Company has been unable to meet much
of these capital requirements. As a result, Mr. McPhail has loaned significant
money to the Company to support its operations and the development of the
Communication Division's VoIP business. See "Liquidity and Capital Resources"
and "Certain Transactions."
OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company incurred losses of $2,413,831 for the nine months ending
September 30, 1999 and $601,589 for the year ended December 31, 1998 and
negative cash flows of $343,443 and $1,970,922 from operating activities for the
same periods, and had a working capital deficit of $8,858,941 and stockholders'
deficit of $3,880,072 at September 30, 1999. As a result of these losses the
Company's working capital position and ability to generate sufficient cash flows
from operations to meet its operating and capital requirements has deteriorated.
These matters raise
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substantial doubt about the Company's ability to continue operations without a
significant infusion of working capital from outside sources. The Company has
relied upon its majority stockholder to fund its cash requirements in the past,
however, this stockholder has no obligation to continue to fund the necessary
cash requirements in the future.
During fiscal 1999, the Company was involved in discussions with
several entities as potential sources for the necessary working capital. As of
September 30, 1999, $513,000 of such funds had been raised through the issuance
of seven 12% convertible promissory notes. The notes are due on various dates
between April 29, 2000 and June 30, 2000 and bear interest on the unpaid
principal balance at the rate of 12% per annum. The holder may elect to convert
outstanding principal and interest at rates ranging from $1.25 to $2.50 per
share into shares of MegaWorld Common Stock. The Company is currently in default
on 6 of these notes, which total $263,000, and may default on the remaining
note, which is due on June 30, 2000. Similar discussions have resulted in the
generation of additional funds and cancellation of certain indebtedness during
the first half of fiscal 2000. See "Liquidity and Capital Resources." Management
believes a total of $5 to $6 million will be needed to support proposed
operations reflected in the current business plan.
The Company's gross profit from operations, contract revenues less cost
of contract revenues, was $1,980,234 and $4,089,757 for the nine months ending
September 30, 1999 and the year ending December 31, 1998, respectively. This is
a gross profit percentage of 26.02% and 23.50% for the respective periods. The
increase in gross profit margins in 1999 is attributable to cost cutting efforts
by the Company. General and administrative expenses were 46.75% and 24.59%
respectively. The increase in the percentage of general and administrative
expenses for 1999 is a reflection of the lower revenue reported for 1999. The
average monthly general and administrative expense for 1999 was approximately
$395,000 compared to $356,000 for the 12 months of 1998, a 9.75% increase.
Average monthly contract revenues were approximately $845,000 for 1999 compared
to $1,450,000 for 1998, a 41.71% decrease.
The increase in general and administrative expenses for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998
was $582,423. Depreciation and amortization accounted for an increase of
approximately $120,000, which was primarily connected with the depreciation
taken on the land and building contributed by the TBS stockholder in October
1998. Salaries and related expenses increased approximately $180,000, which
related to new personnel added to MegaWorld as a result of the Merger. The
remaining increases were additional legal and accounting expenses.
At December 31, 1998, as a result of the Merger, the Company had a note
payable to the Chairman of the Board and majority stockholder in the principal
amount of $8,000,000 bearing interest at the London Interbank Offered Rate
("LIBOR") plus 2% (8.035% at December 31, 1998) (the "Acquisition Note"). In the
Merger transaction, this note payable was treated as a distribution to
shareholder in the Company's financial statements because the same shareholder
held the voting control of the Company subsequent to the transaction. This note
was converted into capital in September 1999. This amount has been reflected as
an increase in capital of the Company. Interest expense increased $425,630 in
1999 over the 1998 period, primarily due to the accrual of interest on the
Acquisition Note. The interest expense related to the Acquisition Note for the
nine months of 1999 was $482,102 and for the two months of 1998 was $94,982.
Net loss and loss per share were $2,413,831 and $0.08, respectively,
for 1999 compared to $601,589 and $0.03, respectively, for 1998. The loss
increased $1,812,242 or 301.2% primarily as a result of lower contract revenues
brought on by the decline in oil and gas exploration and production spending in
the last 18 months.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
The Company incurred losses of $294,583 for the three months ended
December 31, 1999 and $67,883 for the three months ended December 31, 1998. The
Company, however, had positive cash flows from operating activities of $116,109
and $1,105,657 in the respective three month periods. The positive cash flows in
the interim periods are primarily attributed to timing of performance and
completion of certain large construction contracts.
Revenues were $1,437,848 for the three months ended December 31, 1999
and were $4,619,844 for the three months ended December 31, 1998. The decline in
revenues is directly attributable to the decline in the market the Company
serves. The gross profit for the respective three month periods was 39.67% and
33.25%, respectively. These
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profit percentages are higher than the fiscal year results due to timing of more
profitable jobs in these two interim periods. The higher margin for the three
months ended December 31, 1999 is primarily attributable to cost cutting
measures employed by the Company late in 1999 necessitated by the aforementioned
market decline.
General and administrative expenses have been reduced significantly
late in 1999 as is evidenced by the approximate 43% reduction from $1,305,331 in
the three months ended December 31, 1998 to $738,182 in the three months ended
December 31, 1999. During 1999, the Company consolidated numerous functions,
incurred staff reductions and consolidated operating locations, which resulted
in lower general and administrative expenses. The Company does not anticipate
any significant restructuring charges in connection with this consolidation and
the subsequent discontinuation of the Company's modular manufacturing business.
The payroll and related expenses decreased approximately $365,000 from the three
months ended December 31, 1999 compared to the three months ended December 31,
1998, which primarily related to the slow down in the modular building
construction activity.
Interest expense has decreased from $298,545 in the three months ended
December 31, 1998 to $126,799 in the three months ended December 31, 1999
primarily due to the conversion of the $8,000,000 note payable to a principal
stockholder that was outstanding approximately two months in 1998, which was
converted to equity in September 1999, and was, therefore, not outstanding in
the three months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Limited access to working capital and long-term capital, to date, has
effectively controlled the speed in which the Company has been able to implement
its business plan. The business plan has been and will continue to be
implemented as fast as funding is available and on a business opportunity or
project basis. The net effect has been reduced gross revenues, profits and
returns to investors. The Company's principal cash requirements to date have
been to fund working capital and to service its debts. Because revenue from
operations has been inadequate to completely fund these requirements, the
Company has supplemented its revenue from operations with proceeds from its
private offerings of securities, loans from the Chairman and extensions of
credit from vendors in order to meet its working capital requirements.
The Company has made arrangements to meet a significant portion of its
future capital requirements, and the Company is involved in discussions with
other potential sources to satisfy its remaining future capital needs. The
Company anticipates that within a few months after the infrastructure for the
Communications Division has been implemented and commercial service initiated,
the Company will be able to satisfy its funding requirements for operations from
such revenue.
CURRENT ARRANGEMENTS AND PRIOR PERIODS
On August 10, 1998, Charles D. McPhail and JoyVer Investments, LLC
entered into a term promissory note with Compass Bank providing for a loan of
$3,765,000 secured by a deed of trust with security agreement and assignment of
rents and leases on TBS's Northwest Houston modular manufacturing facility. The
loan provided for an interest rate of 8.5% per annum to be paid in 180 monthly
installments, with the last payment due on August 10, 2013. This note was
assumed by the Company in the Merger. In May 2000, the Company reached an
agreement with Compass Bank whereby the Bank would foreclose on the mortgage and
apply the proceeds of the sale of the facility to the mortgage and to the
balance due on the Revolving Loan between the Company and Compass Bank. The
Company estimates that after the foreclosure, it will owe approximately $785,000
to Compass Bank.
Effective March 12, 1998, the Company entered into an agreement with
Compass Bank under with MegaWorld could request revolving loans from time to
time in an aggregate amount not to exceed $1,000,000 (the "Revolving Loan"),
with Charles D. McPhail as guarantor. The Revolving Loan provided for an
interest rate of prime rate plus one-half percent per annum and was
collateralized by the Company's accounts, general intangibles, inventory and all
proceeds, products, additions and substitutions thereof. The Revolving Loan was
due on August 31, 1999. In connection with the Revolving Loan, the Company and
Charles D. McPhail agreed to subordinate a $397,610 note held by Charles D.
McPhail as lender to the Company. See "Certain Relationships and Related
Transactions". As of December 31, 1999, the Company had borrowed $1,000,000
under the Revolving Loan and was not in compliance with its covenant to
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maintain a minimum tangible net worth of at least $1,500,000 under the Revolving
Loan agreement. In May, 2000, the Company reached an agreement with Compass Bank
whereby the Bank would foreclose on certain property on which it held a
mortgage, consolidate all outstanding loans owed by the Company and apply the
proceeds of the sale of the property to the consolidated loans. The Company
estimates that after the foreclosure, it will owe approximately $785,000 to
Compass Bank on a note at 9.5% annual interest with monthly payments of interest
due and the balance due on November 1, 2000. See "Description of Property."
On May 19, 2000, management entered into an agreement with Machinery
Acquisition, Inc. ("MAI") whereby MAI purchased all of the tangible personal
property of TBS for $265,000, except certain items considered to be a part of
the real property located at TBS' Northwest Houston facility described above. In
early to mid-July, 2000, Plant Machinery, Inc. ("PMI"), an affiliate of MAI,
will auction the assets of TBS. From the proceeds of the auction, MAI will
recover a total of $315,000, which equals $50,000 in expenses and the $265,000
in cash paid to the Company. Any additional proceeds from the auction will be
paid 65% to the Company and 35% to MAI.
The Company entered into seven 12% convertible promissory notes which
are due on various dates between April 29, 2000 and June 30, 2000. The Company
is currently in default on 6 of these notes, totaling $263,000, and may default
on the remaining note which is due on June 30, 2000. The Company is currently
negotiating with the noteholders to extend the due date of the notes or to
encourage conversion of the notes into shares of Common Stock of the Company.
The Company has entered into revolving loan agreements with Mr. McPhail
dated as of December 15, 1998, and with JoyVer Investments, LLC dated as of
December 15, 1998, each provided for loans to the Company from time to time of
up to $600,000. As of December 31, 1999, the outstanding balance on each loan
was $40,250 and $594,738, respectively. In addition, Mr. Giamalvo has submitted
claims for expense reimbursements in the aggregate amount of $185,000 which are
disputed, in part, by the Company. See "Legal Proceedings." TBS entered into
another revolving loan agreement with Mr. McPhail providing for up to $600,000
from time to time with an outstanding balance of $297,419 as of December 31,
1999. Each of these loans is payable on demand and carries an interest rate of
6%. See "Certain Relationships and Related Transactions." The Company is not in
default on any of these notes. Although Mr. McPhail has indicated that he
currently does not intend to demand payment at any time in the foreseeable
future, he has not waived any rights in connection with such indebtedness and he
may elect to demand payment at any time. The Company is attempting to negotiate
a settlement with respect to all claims against the Company by Mr. Giamalvo. See
"Legal Proceedings."
FUTURE NEEDS
The Company anticipates that it will require between $5 and $6 million
to develop the infrastructure required to implement its business plan and
initiate the delivery of commercial services in each of the categories contained
in its business plan. However, the international telecommunications industry is
highly regulated. See "Government Regulations, Environment, Health and Safety."
There can be no assurance that the Company's business plan can be implemented
for the anticipated cost or within the anticipated period. See "Risk Factors."
The Company has taken several steps to address its capital needs and
liquidity requirements. In March and April, 2000, the Company agreed to
discharge $624,707 (49.8%) of TBS' outstanding trade payables in exchange for
common stock of the Company. In May 2000, the Company received $205,200 in
consideration for the issuance and sale of 135,000 shares of its common stock.
See "Recent Sales of Unregistered Securities." On June 9, 2000 MegaWorld entered
into a contract with Cabletron Systems, Inc. ("Cabletron"), a leading supplier
of telecommunications equipment, for the issuance of 1,500,000 shares of
MegaWorld common stock in consideration for telecommunications equipment valued
at $2,225,000 and 166,666 shares of MegaWorld common stock for $250,000 in cash.
In addition, Cabletron has agreed to purchase an additional 166,666 shares of
common stock for $250,000 in cash when MegaWorld has collected an aggregate of
$2 million in revenue from its service provider business and Cabletron has
agreed to make another such purchase when MegaWorld has collected an aggregate
of $4 million from its service provider business.
The Company anticipates that it will address the remainder of its
liquidity and capital requirements through a private placement of its common
stock. There can be no assurance, however, that such private placement will be
successful or that the Company will otherwise be successful in obtaining
sufficient funds to meet its capital and liquidity needs.
ITEM 3. DESCRIPTION OF PROPERTY
The Company maintains its headquarters in Houston, Texas and operates
the Communications Division from Hackensack, New Jersey. In addition, the
Company entered into an agreement to acquire the stock of CRE, a company that
owns leasehold rights to Castello Torre Ratti near Milan, Italy.
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<PAGE> 17
The Company's heavy fabrication/single-lift facility of TBS was located
in East Houston, with deep water access to Houston's ship channel. The facility
was comprised of approximately 9,000 square feet of office space, 20,000 square
feet of covered fabrication area, 10,000 square feet of protected receiving dock
area and 72,000 square feet of covered raw storage area. The property is subject
to a lease at $23,160 per month, terminating on January 31, 2003, with five (5)
one-year renewal options thereafter; however, the Company is currently
negotiating the termination of the lease.
The modular manufacturing facility of TBS was located in Northwest
Houston and had approximately 5,000 square feet of office space and 130,000
square feet of covered fabrication area. This facility was subject to a mortgage
in the principal amount of $3,765,000, held by Compass Bank. In May 2000, the
Company reached an agreement with Compass Bank whereby the Bank would foreclose
on the mortgage and apply the proceeds of the sale of the facility to the
mortgage and to the balance due on the Revolving Loan between the Company and
Compass Bank. The Company estimates that after the foreclosure, it will owe
approximately $785,000 to Compass Bank. See "Liquidity and Capital Resources."
The Communications Division currently leases 5,000 square feet of space
in Hackensack, New Jersey. The facility is wired with fiber optic cables, making
it attractive to telecommunication companies. Further, Hackensack is a key
location for the Communications Division because of the concentration of VoIP,
data network, and telecommunications service provider companies located in the
Northern New Jersey area. The Company currently maintains its Communications
Division business office and main data center for severs at this location and
intends to sublease portions of the facility to other telecommunications
providers. The monthly rent for the facility is $2,750 per month until July 31,
2000; $3,000 per month thereafter until July 31, 2001; and $3,250 per month
after July 31, 2001, until termination on July 31, 2002. In addition, the
Communications Division must reimburse the landlord for real estate taxes which
are approximately $10,000 per year. The Communications Division has the option
of extending the lease for one year at a rental rate of $3,750 per month.
In April 1998, MegaWorld entered into a contract to acquire all of the
outstanding capital stock of Castello Ratti Enterprises Srl ("CRE"), an Italian
corporation which holds a leasehold interest in Castello Torre Ratti, a
1,000-year-old castle near Milan, Italy (the "Castle Acquisition"). The lease
provides for an annual rental of US$47,923, subject to increase based on
increases in the U.S. consumer price index, to be paid in monthly installments.
The initial term of the lease is for 25 years, renewable by the tenant for
another 25 year term, with a rent adjustment for inflation. The lease has a
remaining term, including extensions, of approximately 40 years.
The Company intended to develop weekly timeshare units in the Castle.
To date, the Company has sold no units. The Castle currently has several
renovated rooms, a kitchen and a dining hall. Management is currently attempting
to rescind the Castle Acquisition. Because the Castle is a unique property,
there is no readily ascertainable competition for the Company's proposed
timeshare plans or for the current use of the property. See "Certain
Relationships and Related Transactions" and "Legal Proceedings."
The Company believes that its properties are adequately insured and the
Company has no present intention of making further investments in real estate,
real estate mortgages or persons involved in real estate activities, except as
described above; however, the Company may change this policy at any time without
a vote of stockholders.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of May 31, 2000 as to (i)
each person known by the Company to own beneficially more than 5% of the
presently outstanding Common Stock; (ii) each director of the Company; and (iii)
all directors and officers of the Company as a group.
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<PAGE> 18
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
NUMBER OF
NAME AND ADDRESS OF SHARES
BENEFICIAL OWNER OWNED(1) PERCENT
------------------- ---------- -------
<S> <C> <C>
Charles D. McPhail(2) 19,402,980 48.1%
15411 Fawn Villa
Houston, TX 77068
Lynn R. McPhail(3) 19,402,980 48.1%
15411 Fawn Villa
Houston, TX 77068
JoyVer Investments, LLC(4) 13,975,000 34.6%
15411 Fawn Villa
Houston, TX 77068
Michael Giamalvo(5) 3,648,000 9.0%
119 Northgate Circle
Melville, NY 11747
Lori Lynn McPhail 2,945,000 7.3%
15411 Fawn Villa
Houston, TX 77068
Lisa Marie McPhail 2,945,000 7.3%
3313 Marcedonia Dr.
Plano, TX 75025
CLM Partners, Ltd.(6) 2,115,000 5.24%
15411 Fawn Villa
Houston, TX 77068
All officers and directors as a 19,653,580 48.7%
group (3 persons)
</TABLE>
-------------
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be the beneficial owner of a security if such person has or
shares the power to vote or direct the voting of such security or the
power to dispose or direct the disposition of such security. A person
is also deemed to be a beneficial owner of any securities if that
person has the right to acquire beneficial ownership within 60 days.
Accordingly, more than one person may be deemed to be a beneficial
owner of the same securities. Unless otherwise indicated by footnote,
the named entities or individuals have sole voting and investment power
with respect to the shares of Common Stock beneficially owned.
(2) Includes 1,920,000 shares of Common Stock owned by Mr. McPhail jointly
with Lynn R. McPhail, 13,975,000 shares owned by JoyVer Investments,
LLC, 1,000,000 shares owned by Lynn R. McPhail and 2,115,000 shares
owned by CLM Partners, Ltd. Does not include 2,945,000 shares owned by
Lori Lynn McPhail, and 2,945,000 shares owned by Lisa Marie McPhail,
the adult children of Charles D. and Lynn R. McPhail, as to which Mr.
McPhail disclaims beneficial ownership.
(3) Includes 1,920,000 shares of Common Stock owned by Lynn R. McPhail
jointly with Charles D. McPhail, 13,975,000 shares owned by JoyVer
Investments, LLC, 2,115,000 shares owned by CLM Partners, Ltd. and
392,980 shares owned by Charles D. McPhail. Does not include 2,945,000
shares owned by Lori Lynn McPhail, and 2,945,000 shares owned by Lisa
Marie McPhail, the adult children of Charles D. and Lynn R.
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<PAGE> 19
McPhail, as to which Mrs. McPhail disclaims beneficial ownership. Lynn
R. McPhail is the wife of Charles D. McPhail.
(4) CLM Partners, Ltd., a family partnership for the Charles D. McPhail
family, owns JoyVer Investments, LLC.
(5) Includes 100,000 shares of Common Stock owned by Mr. Giamalvo's spouse,
for which Mr. Giamalvo is the beneficial owner.
(6) Charles D. McPhail is the general partner of CLM Partners, Ltd.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information concerning the
Company's executive officers and directors. The number of directors consists of
such number as may from time to time be fixed by the Board of Directors.
Presently, there are three directors. Directors are elected at the annual
meeting of the stockholders, and hold office until the earlier to occur of (i)
the election of a successor at the next meeting of the stockholders, (ii) the
director's resignation, and (iii) the director's removal. See "Description of
Securities - Common Stock." All officers of the Company are elected annually by,
and serve at the discretion of, the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Charles D. McPhail.......................... 57 Chairman of the Board, President and Chief
Executive Officer
George S. Dinsdale.......................... 45 President and Chief Operating Officer,
Communications Division and Director
John L. Waddell, Jr......................... 56 Director and Secretary
</TABLE>
Charles D. McPhail has held his current position with the Company since
November 11, 1998 when the Company acquired Old TBS. Prior to November 11, 1998,
Mr. McPhail served as President and Chief Executive Officer of Old TBS, which he
founded in 1995. Mr. McPhail has held the position of Chairman and the title of
Chief Executive Officer of Texas Steel Conversion, Inc. ("Texas Steel") since
1990; prior to that date and beginning in October 1984, Mr. McPhail served as
Texas Steel's President and Chief Executive Officer. Prior to joining the
management team at Texas Steel, Mr. McPhail held various management positions at
Triangle Industries, Inc. and General Cable Corporation.
George S. Dinsdale has over 16 years of telecommunications and computer
telephony experience, much of it in management positions. Mr. Dinsdale has
served as President and Chief Operating Officer of MegaWorld's Communications
Division since April 1999 and has served as a director since May 2000. From
December 1992 until March 1999, Mr. Dinsdale served as Vice President of the Sun
Business Unit of Linkon Corporation. While at Linkon, he acted as product
manager for two products being developed by Linkon for Sun Microsystems: (i)
Voice over the Internet Protocol ("VoIP") Packet Switches and (ii) Computer
Telephony Equipment. Linkon has been renamed PacketPort (OTC BB: PKPT) and had
revenues of $722,000 for the nine months ended October 31, 1999. MegaWorld
believes that the Sun Business Unit represented from 50% to 80% of the revenues
of the company. From January 1991 to November 1992, Mr. Dinsdale served as
Director of Sales for RMC Research. From 1989 to 1991, Mr. Dinsdale served as
National Accounts Manager for Centigram Corporation, and from 1987 to 1989, Mr.
Dinsdale served as Eastern Regional Manager of Voice Automation Products for New
York Octel Communications. From 1982 to 1987, Mr. Dinsdale served as Branch
Manager (New York and New Jersey) for US Sprint Communications, Inc. Mr.
Dinsdale holds a Bachelor of Science degree in Business Administration and
Economics from Loyola College/Concordia University in Montreal, Quebec, Canada.
John L. Waddell, Jr. has been a director of MegaWorld since May 2000.
Since March 1999, he has been the President, CEO and a director of JoyVer, Inc.,
which markets a patented product that reduces the destructive force of
explosions. JoyVer, Inc. is owned by CLM Partners, Ltd. Mr. McPhail is the
general partner of CLM Partners, Ltd. From April 1998 to March 1999, Mr. Waddell
was an independent consultant for computer systems. From August 1997 to April
1998, he was the Vice President and General Manager of Smith Pipe & Steel
Company, a wholly-owned
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<PAGE> 20
subsidiary of Delta Steel, Inc. From August 1993 to May 1997, he was the
President, CEO and a director of Peregrine Energy, Inc., located in Houston,
Texas, and Minga Parinas Petroleum, S.A. located in Lima, Peru.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information with respect to all forms of
compensation paid or accrued by the Company and its subsidiaries to or on behalf
of the Company's Chief Executive Officer and each of the most highly compensated
executive officers and directors of the Company for the periods indicated below.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL FISCAL
POSITION YEAR(1) SALARY ($)
------------------ ------- ----------
<S> <C> <C>
Charles D. McPhail - 1999 146,154
President and Chief 1998 167,307
Executive Officer 1997 89,423
Charles F. Hicks - Vice 1999 91,346
President, Chief Financial 1998 --
Officer and Treasurer(2) 1997 --
George S. Dinsdale - 1999 73,269(3)
President and Chief 1998 --
Operating Officer 1997 --
(Communications Division)
</TABLE>
-----------------
(1) Represents fiscal years ended December 31, 1997, December 31, 1998 and
the nine months ended September 30, 1999.
(2) Mr. Hicks resigned from each of these positions in December 1999.
(3) Includes $4,800 annual car allowance.
EMPLOYMENT AGREEMENTS
Old TBS entered into an employment agreement with Charles D. McPhail on
September 1, 1996, which was assumed by the Company pursuant to the terms of the
Merger Agreement between Texas TBS and Old TBS (for purposes of this paragraph,
the "Employment Agreement"). The Employment Agreement is for an initial term of
five years (renewing automatically thereafter for additional five year periods
until canceled) and provides for an annual base salary of $200,000, payable in
equal semi-monthly installments of $8,333.33. Under terms of the Employment
Agreement, Mr. McPhail is entitled to receive a commission based on quarterly
net profits of the Company and annual stock options, each in amounts to be
determined by the board of directors. The Company may not terminate the
Employment Agreement, except for cause, on less than five years prior written
notice to Mr. McPhail. Mr. McPhail may cancel the Employment Agreement on 30
days' prior written notice to the Company. See "Certain Transactions."
Effective March 1, 1998, the Company and Michael Giamalvo, a former
director of the Company, entered into an employment agreement pursuant to which
Mr. Giamalvo is to develop and coordinate the marketing of the timeshare units
in the Castle (for purposes of this paragraph, the "Consulting Agreement"). The
Consulting Agreement provides for a base salary of $50,000 per year plus a
performance-based bonus based on the increase in assets, profits and other
criteria determined by the Board of Directors. Additional consideration was paid
to Mr. Giamalvo upon execution of the Consulting Agreement in the amount of
400,000 restricted shares of the Company's Common Stock. The Company is also
obligated to pay Mr. Giamalvo a 10% commission on the sale of each timeshare
interest in the Castle. The initial term of the Consulting Agreement is two
years, and shall continue thereafter, renewing daily. Termination following
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<PAGE> 21
the initial two year term is effective upon three months written notice by
either party. See "Certain Transactions." In May 2000, stockholders of the
Company removed Mr. Giamalvo as a director of the Company and on May 19, 2000,
the Company filed a demand for arbitration relating to several disputes with Mr.
Giamalvo, including compensation and reimbursements claimed by Mr. Giamalvo
under the Consulting Agreement. See "Legal Proceedings."
Effective April 1, 1999, the Company entered into an employment
agreement with George S. Dinsdale pursuant to which Mr. Dinsdale shall serve as
President of the Communications Division of the Company. The employment
agreement is for an initial term of three years with an option to renew for one
year. The Employment Agreement provides that Mr. Dinsdale shall receive a base
salary of $150,000 per year plus an incentive bonus of (i) $50,000, or 1/2% of
the pre-tax profits of the Communications Division during the calendar year
1999, whichever is greater, and (ii) during each of the next three years, 1/2%
of the pre-tax profits for each respective calendar year. The Employment
Agreement also provides for the grant of options to acquire 100,000 shares of
common stock for each of the three years from 1999 through 2001 and 200,000
shares for year 2002, all of which shall have a three year exercise period from
the date of grant. Mr. Dinsdale is entitled to an additional stock option at the
end of each calendar year based on the pre-tax performance of the Communications
Division. The number of shares subject to options each year is equal to the
amount of pre-tax profit of the Communications Division divided by the average
closing price of MegaWorld Common Stock during December of that year. The
exercise price with respect to all options granted to Mr. Dinsdale during the
year 1999 is $1.50, during the year 2000 is $2.00, during the year 2001 is $1.00
and during the year 2002 is $.0001. The employment agreement also grants to Mr.
Dinsdale an $800 per month car allowance plus expenses for tolls, parking and
other business expenses related to normal business activity. The employment
agreement contains a 12 month non-competition provision. See "Certain
Transactions."
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following agreements, with values exceeding $60,000, exist between
or among the Company and either (i) any executive officer, director or director
nominee of the Company, TBS or the Communications Division, (ii) any holder of
5% or more of the voting stock of the Company, or (iii) any member of the
immediate family of any director or officer as outlined above:
Lease Assignment and Castle Funding Agreement. Effective April 21,
1998, Michael Giamalvo, then a director of the Company, agreed to transfer his
100% interest in CRE, which held a leasehold interest in the Castle (with a
remaining leasehold term of approximately 42 years), to be held in escrow for
the Company in exchange for payment of 1,000,000 shares of the Company's Common
Stock and $622,500 ($50,000 of which was paid by the Company within 30 days of
closing, the remaining $572,500 to be paid on or before August 1, 1998) (the
"Castle Acquisition"). The shares of CRE were delivered to an escrow agent to be
released to the Company upon payment of the amount due under the Castle
Acquisition which was to be paid in full by July 31, 1998. In consideration for
the issuance of 1,200,000 shares on August 20, 1998, the deferred payment date
was extended one month to August 31, 1998. On November 11, 1998, pursuant to a
Castle Funding Agreement, the deferred payment date was extended until June 30,
1999 in consideration for the issuance to Mr. Giamalvo of an additional
1,200,000 shares of the Company's Common Stock, and the Company's agreement that
upon fulfilling the funding requirements for the first two pairs of equipment
for the ITS Jamaica operation, the Company would devote 50% of its net revenue
from ITS and CRE to pay the remaining amount to acquire CRE. The Company has not
paid the remaining amount to acquire CRE and the CRE shares remain in escrow.
See "Legal Proceedings."
ITS Joint Venture Agreement and Settlement. In late 1997 and 1998,
prior to the Merger, the Company entered into various joint venture agreements
with Nathan Berkowitz, Fred Simon and Kent Terpe (the "Berkowitz Group") both
individually and through various entities controlled by the Berkowitz Group (the
"ITS Joint Venture Agreements"). In 1998, Berkowitz served as a director and
Chief Financial Officer of the Company. Pursuant to the ITS Joint Venture
Agreements, each member of the Berkowitz Group, or his respective assignees,
received 550,000 shares of Common Stock. Mr. Terpe also received other
compensation and expense reimbursement (Messrs. Berkowitz and Simon received
none). In November, 1999, the Company entered into a settlement agreement with
the Berkowitz Group pursuant to which the ITS Joint Venture Agreements were
canceled and terminated and all parties thereto were released from their
obligations thereunder. In consideration of such cancellation and release, the
Berkowitz Group retained their respective
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<PAGE> 22
shares of Common Stock, subject to a Lockup Agreement which prohibits for a
period of 24 months any offer to sell, assign, pledge, issue, distribute,
contract to sell, grant any options or otherwise dispose of their respective
shares of Common Stock. The Lockup Agreement provides that beginning six (6)
months after the Settlement Agreement, the Company shall, upon written request
of any one of the Berkowitz Group, release from their respective Lockup
Agreement for sale by such shareholder up to 15,000 shares per fiscal quarter.
In addition, beginning with the execution of the Settlement Agreement, Terpe is
permitted to sell 15,000 shares per month (45,000 Shares per quarter) for six
(6) months for a total of 90,000 Shares and Berkowitz is permitted to sell 5,000
Shares per month (15,000 per quarter) for six (6) months for a total of 30,000
Shares. For each quarter, Terpe and Berkowitz can accumulate the shares and may
pledge or assign them should they not sell them. As additional consideration for
the Settlement Agreement, Terpe received 40,000 shares as compensation for all
delinquent salary and expenses owed to him by the Company. Any and all remaining
shares subject to the Lockup Agreements shall be released for sale two (2) years
after the date of the Settlement Agreement.
Merger Agreement. Effective November 11, 1998, Old TBS merged with and
into Texas TBS. Following the merger Texas TBS became a wholly-owned subsidiary
of the Company. The Company acquired Old TBS as a result of the Merger of Old
TBS with and into Texas TBS pursuant to a Merger Agreement among the Company,
Old TBS and Charles D. McPhail (the "Merger Agreement"). In August 1998, Mr.
McPhail and his designees received 1,050,000 shares of common stock in
consideration for entering into of a letter of intent with respect to the
Merger. As consideration for the merger, former stockholders of Old TBS received
1,020 shares of MegaWorld Common Stock for each share of Old TBS Common Stock
held at the time of the merger, as follows: (i) Charles D. McPhail and Lynn R.
McPhail (900,000 shares), (ii) Lisa Marie McPhail (1,400,000 shares), (iii) Lori
Lynn McPhail (1,400,000 shares), (iv) Lynn R. McPhail (1,400,000 shares) and (v)
JoyVer Investments, L.L.C. (a Texas limited liability company owned and
controlled by Charles D. McPhail and his wife, Lynn R. McPhail) (5,100,000
shares). As further consideration for entering into the Merger Agreement, the
Company agreed (i) to execute and deliver a promissory note in the principal
amount of $8,000,000 payable over a term of five years in semi-annual
installments together with interest at the London Inter-bank Offered Rate
("LIBOR") plus two percent; (ii) for a term of fifteen (15) years and for so
long thereafter as Charles D. McPhail and Lynn R. McPhail, or either of them,
shall survive, to pay to Mr. and Mrs. McPhail one percent (1%) of the annual
gross revenue of the Company, in either cash or Common Stock, at the Company's
option and (iii) to pay Charles D. McPhail an additional 400,000 shares of
MegaWorld Common Stock in consideration for Mr. McPhail's services as president
of MegaWorld following the Merger. In the event the revenue payment described
above shall be paid in common stock, such stock shall be valued at sixty percent
(60%) of the quarterly average market price of such shares. The Merger Agreement
also granted to Mr. McPhail the option to purchase up to one-half the number of
shares issued incidental to the Merger at no cost to Mr. McPhail in the event
that the price of MegaWorld common stock was below certain levels following the
Merger. Mr. McPhail exercised this option in June 1999, pursuant to terms of the
Merger Agreement, acquiring 7,313,260 shares for himself and his designees.
Mr. McPhail Pre-Merger Loans. In August 1998, Mr. McPhail advanced
$285,000 in unsecured loans to MegaWorld in exchange for the Company's
promissory note dated August 27, 1998, bearing no interest and due October 15,
1998. On September 10, 1998, Mr. McPhail advanced an additional $24,000 to the
Company. In connection with the Merger, effective November 11, 1998, MegaWorld
and Mr. McPhail agreed that MegaWorld would repay such advances, after repayment
of certain other indebtedness, committing one-half of the Company's future net
revenues to such repayment. In consideration for such agreement, MegaWorld
issued 600,000 shares of Common Stock to Mr. McPhail and his designees.
MegaWorld Note Issued to Old TBS Stockholders. In connection with the
Merger, effective November 11, 1998, the Company issued its Promissory Note in
the principal amount of $8,000,000 which was to be paid to Charles D. McPhail
and Lynn McPhail (30%), Lisa Marie McPhail (10%), Lori Lynn McPhail (10%), and
JoyVer Investments, LLC (50%) (the "$8,000,000 Note"). Annual interest on unpaid
principal from November 11, 1998 accrues at LIBOR plus two percent (2%) and
interest on matured, unpaid amounts at accrues 18% per annum. The first interest
payment was due on May 13, 1999. The Note was converted into 6,400,000 shares of
MegaWorld Common Stock in September 1999.
Old TBS Promissory Notes. In March 1998, Charles D. McPhail advanced
$397,610 in unsecured loans to Old TBS in exchange for the promissory note of
Old TBS in such amount bearing interest at 6% per annum and payable on
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<PAGE> 23
demand (the "Old TBS Note"). In connection with the Merger, on November 11,
1998, MegaWorld assumed all obligations of the maker with respect to the Old TBS
Note. In connection with a $1,000,000 Revolving Loan from Compass Bank to Old
TBS, the Company and Mr. McPhail agreed to subordinate the Old TBS Note to the
Revolving Loan. See "Management's Discussion and Analysis or Plan of Operation
-- Liquidity and Capital Resources."
Deed of Trust. In connection with the Merger, effective November 11,
1998, Texas TBS granted Charles D. McPhail a deed of trust covering the real
property at 6250 North Houston Rosslyn Road, Houston, Harris County, Texas. The
deed of trust was given to Mr. McPhail to secure the obligations of Texas TBS
and Old TBS under the Merger Agreement. The Deed of Trust was terminated when
the $8,000,000 Note was converted to capital.
Security Agreement and Financing Statement. In connection with the
Merger, effective November 11, 1998, Texas TBS (as debtor) and Charles D.
McPhail (as secured party) entered into the Security Agreement and Financing
Statement in order to secure the $8,000,000 promissory note issued by the
Company to McPhail in connection with the Merger. Pursuant to the Security
Agreement, Texas TBS pledged to Mr. McPhail all personal property owned by Texas
TBS, including all accounts receivable, all contract rights, chattel paper,
notes, drafts, instruments, deposits, money, inventory, etc., and proceeds
thereof all as security for payment of debts owed by Texas TBS to Mr. McPhail
under (i) the Merger/Acquisition Agreement, (ii) the McPhail Employment
Agreement, (iii) the Texas TBS Continuing and Unconditional Guaranty Agreement,
(iv) every document executed by Texas TBS in connection with the Merger
Agreement and (v) any other document executed by Texas TBS in connection with
any other obligation to Mr. McPhail. The Security Agreement and Financing
Statement were terminated when the $8,000,000 Note was converted to capital.
MegaWorld Continuing and Unconditional Guaranty Agreement. In
connection with the Merger, effective November 11, 1998, the Company (as
guarantor), Texas TBS (as obligor) and Charles D. McPhail (as obligee) entered
into an agreement pursuant to which the Company guaranteed the full and punctual
performance of (i) the Merger Agreement, (ii) the McPhail Employment Agreement,
(iii) the Security Agreement and Financing Statement, (iv) every document
executed by Texas TBS in connection with the Merger Agreement, (v) any other
document executed by Texas TBS in connection with any other obligation to Mr.
McPhail and (vi) the performance of the "Required Shareholders" as defined in
the Merger Agreement, as an inducement for Charles D. McPhail and Old TBS to
enter into the Merger Agreement.
Texas TBS Continuing and Unconditional Guaranty Agreement. In
connection with the Merger, effective November 11, 1998, Texas TBS (as
guarantor), the Company (as obligor) and Charles D. McPhail (as obligee) entered
into an agreement pursuant to which Texas TBS guaranteed the full and punctual
performance of (i) the Merger Agreement, (ii) the Security Agreement and
Financing Statement, as an inducement for Charles D. McPhail and Old TBS to
enter into the Merger Agreement, (iii) every document executed by the Company in
connection with the Merger Agreement and (iv) any other document executed by the
Company in connection with any other obligation to Mr. McPhail.
Indemnification Agreement. In connection with the Merger, effective
November 11, 1998, Texas TBS and Charles D. McPhail entered into an
Indemnification Agreement pursuant to which Texas TBS agreed to indemnify,
defend and hold harmless Mr. McPhail from and against all loss, cost, risk,
expense, claims, demands, causes of action and liabilities arising from or in
any way related to (i) any obligation of Old TBS, including all obligations of
TBS for which Mr. McPhail has given personal guarantees or acted as co-signer or
co-obligor, (ii) any and all actions taken by Mr. McPhail as a director or
officer of Old TBS and (iii) the ownership or operation of assets of Old TBS by
Texas TBS and the Company.
McPhail Promissory Notes. Since the Merger, Mr. McPhail has advanced
sums up to $600,000 in unsecured loans to MegaWorld in exchange for the
Company's note for a like amount. The Company also issued its revolving
promissory note dated as of December 15, 1998 to Mr. McPhail. Amounts advanced
and outstanding by Mr. McPhail totaled $40,450 as of September 30, 1999 and
$40,450 as of December 31, 1999. Similarly, Mr. McPhail advanced amounts to TBS
in exchange for TBS issuing a revolving promissory note dated as of December 15,
1998 to Mr. McPhail. Amounts advanced and outstanding by Mr. McPhail totaled
$297,419 and $468,134 as of December 31, 1999 and December 31, 1998,
respectively. Both of these notes bear interest at a rate of 6% per annum and
are payable upon demand.
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JoyVer Promissory Note. The Company issued its $600,000 revolving
promissory note dated as of December 15, 1998, payable to JoyVer Investments,
LLC ("JoyVer"). Amounts advanced by JoyVer and outstanding as of December 31,
1999 and December 31, 1998 were $594,738 and $427,244, respectively. This note
bears interest at a rate of 6% per annum and is payable on demand. The note
arose from advances made by JoyVer to the Company.
Giamalvo Promissory Note. The Company issued a revolving note, dated as
of December 15, 1998, for expenses substantiated by Mr. Giamalvo incurred on
behalf of the Company, payable to Mr. Giamalvo, a stockholder and then director
of the Company, in the amount claimed by Mr. Giamalvo of $185,003 and $53,000 as
of December 31, 1999 and December 31, 1998, respectively. This note bears
interest at a rate of 6% per annum and is payable upon demand. A portion of
these claims is disputed by the Company. See "Legal Proceedings."
Miller Settlement Agreement. On March 27, 2000, the Company entered
into a settlement agreement with Kenneth Miller, the then President of MLI (the
"Miller Settlement Agreement"). On August 10, 1998, previous management of the
Company had issued 400,000 shares of common stock (the "Miller Shares") in
connection with his execution of an Employment Agreement. Mr. Miller was to pay
for these shares, at a price of $3.50 per share, over the course of his
employment. Pursuant to the terms of the Miller Settlement Agreement, the
Company forgave Mr. Miller's debt with respect to the Miller Shares in exchange
for Mr. Miller's immediate resignation and forgiveness of any and all amounts
due to him pursuant to his Employment Agreement.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 100,000,000
shares, $.0001 par value, of which 98,808,259 are shares of Common Stock. As of
May 31, 2000, 40,335,706 shares of Common Stock were issued and outstanding. The
holders of Common Stock are entitled to one-twentieth (1/20) of a vote per share
on the election of directors and on all other matters submitted to a vote of
stockholders. Shares of Common Stock do not have preemptive rights or cumulative
voting rights.
The holders of Common Stock are entitled to receive dividends ratably
when, as and if declared by the Board of Directors, and upon liquidation are
entitled to share ratably in the Company's net assets. The decision to pay
dividends is subject to such other financial considerations as the Board of
Directors of the Company may deem relevant. The Company has never paid any cash
dividends on its stock and anticipates that for the foreseeable future it will
retain earnings, if any, for use in the operation of its business. In addition,
the terms of the Company's Revolving Loan with Compass Bank prohibit the Company
from declaring or paying any dividends. Payment of cash dividends in the future
will depend upon the Company's earnings, financial condition, any contractual
restrictions, restrictions imposed by applicable law, capital requirements and
other factors believed relevant by the Company's Board of Directors.
CLASS A COMMON STOCK
The Certificate of Incorporation of the Company authorizes the issuance
of up to 1,191,741 shares of Class A Common Stock, $.0001 par value (the "Class
A Stock"), of which none have been issued or reserved for issuance. The holders
of Class A Stock are entitled to one vote per share on the election of directors
and on all other matters submitted to a vote of stockholders. Shares of Class A
Stock do not have preemptive rights or cumulative voting rights.
DEFENSES AGAINST HOSTILE TAKEOVERS
Introduction. While the following discussion summarizes the reasons
for, and the operation and effects of, certain provisions of the Company's
Certificate of Incorporation which management has identified as potentially
having an anti-takeover effect, it is not intended to be a complete description
of all potential anti-takeover effects, and it is qualified in its entirety by
reference to the Company's Certificate of Incorporation and By-Laws, copies of
which are available from the Company, which should be reviewed for more detailed
information.
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In general, the anti-takeover provisions in Delaware law and the
Company's Certificate of Incorporation are designed to minimize the Company's
susceptibility to sudden acquisitions of control which have not been negotiated
with and approved by the Company's Board of Directors. As a result, these
provisions may tend to make it more difficult to remove the incumbent members of
the Board of Directors. The provisions would not prohibit an acquisition of
control of the Company or a tender offer for all of the Company's capital stock.
The provisions are designed to discourage any tender offer or other attempt to
gain control of the Company in a transaction that is not approved by the Board
of Directors, by making it more difficult for a person or group to obtain
control of the Company in a short time and then impose its will on the remaining
stockholders. However, to the extent these provisions successfully discourage
the acquisition of control of the Company or tender offers for all or part of
the Company's capital stock without approval of the Board of Directors, they may
have the effect of preventing an acquisition or tender offer which might be
viewed by stockholders to be in their best interests.
Tender offers or other non-open market acquisitions of stock are
usually made at prices above the prevailing market price of a Company's stock.
In addition, acquisitions of stock by persons attempting to acquire control
through market purchases may cause the market price of the stock to reach levels
which are higher than would otherwise be the case. Anti-takeover provisions may
discourage such purchases, particularly those of less than all of the Company's
stock, and may thereby deprive stockholders of an opportunity to sell their
stock at a temporarily higher price. These provisions may therefore decrease the
likelihood that a tender offer will be made, and, if made, will be successful.
As a result, the provisions may adversely affect those stockholders who would
desire to participate in a tender offer. These provisions may also serve to
insulate incumbent management from change and to discourage not only sudden or
hostile takeover attempts, but any attempts to acquire control which are not
approved by the Board of Directors, whether or not stockholders deem such
transactions to be in their best interests.
Authorized Shares of Capital Stock. The Company's Certificate of
Incorporation authorizes the issuance of up to 1,191,741 shares of Class A
Stock. Shares of the Company's Class A Common Stock with different voting
strength could be issued and would then represent an additional class of stock
required to approve any proposed acquisition. Since one share of Class A Common
Stock carries twenty times the voting power of one share of Common Stock, the
issuance of Class A Common Stock could be used to prevent or inhibit the
acquisition. In addition, this Class A Common Stock, together with authorized
but unissued Shares of Common Stock (the Certificate of Incorporation authorizes
the issuance of up to 98,808,259 shares), could represent additional capital
stock required to be purchased by an acquiror. Issuance of such additional
shares may dilute the voting interest of the Company's stockholders.
Stockholder Meetings. Delaware law provides that the annual stockholder
meeting may be called by a corporation's board of directors or by such person or
persons as may be authorized by a corporation's certificate of incorporation or
by-laws. The Company's Certificate of Incorporation provides that annual
stockholder meetings may be called only by the Company's Board of Directors.
Although the Company believes that this provision may discourage stockholder
attempts to disrupt the business of the Company between annual meetings, its
effect may be to deter hostile takeovers by making it more difficult for a
person or entity to obtain immediate control of the Company between annual
meetings as a forum to address certain other matters and discourage takeovers
which are desired by the stockholders. The Company's Certificate of
Incorporation also provides, however, that stockholder action may be taken at a
special meeting of the shareholders and by written consent. The ability of
stockholders to act at special meetings and by written consent significantly
undermines any anti-takeover effect which might attend the general requirement
for holding annual meetings.
Restriction of Maximum Number of Directors and Filling Vacancies on the
Board of Directors. Delaware law requires that the board of directors of a
corporation consist of one or more members and that the number of directors
shall be set out in the Company's By-Laws, unless it is set out in the Company's
Certificate of Incorporation. The power to determine the number of directors
within these numerical limitations and the power to fill vacancies, whether
occurring by reason of an increase in the number of directors or by resignation,
is vested in the Company's Board of Directors. The overall effect of such
provisions may be to prevent a person or entity from quickly acquiring control
of the Company through an increase in the number of the Company's directors and
election of nominees to fill the newly created vacancies and thus allow existing
management to continue in office.
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Stockholder Vote Required to Approve Business Combinations with Related
Persons. To approve business combinations involving a "related person", the
Company's Certificate of Incorporation requires (i) the approval of the holders
of 75% of the Company's outstanding voting stock (and any class or series
entitled to vote separately) and (ii) a majority of the outstanding stock not
beneficially owned by the related person. The exception to the foregoing is
where the business combination has been approved in advance by two-thirds of
those members of the Company's Board of Directors who were directors prior to
the time the related person became a related person. As defined in the
Certificate of Incorporation, "related person" generally includes any person who
owns 10% or more of the Company's outstanding voting stock.
Section 203 of the DGCL prohibits, with certain exceptions, a Delaware
corporation from engaging in any of a broad range of business combinations with
an "interested stockholder" for a period of three years following the date such
stockholder became an interested stockholder. An "interested stockholder" is
defined in Section 203 as any person that is (i) the owner of 15% or more of the
outstanding voting stock of a corporation or (ii) an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder. However, Section 203 does not apply to a corporation
unless its voting stock is either (A) listed on a national securities exchange,
(B) authorized for quotation on the NASDAQ Stock Market or (C) held of record by
more than 2,000 stockholders. The Company does not currently satisfy any of
these conditions and, therefore, is not currently subject to Section 203. Unless
the Company amends its certificate of incorporation to elect not to be governed
by section 203, the Company will be subject to Section 203 upon satisfaction
upon the satisfactory of any of the foregoing conditions (A), (B), or (C).
The exceptions in Section 203 under which a corporation may engage in a
business combination with an interested stockholder are: (i) approval of the
acquisition by the board of directors prior to the date the stockholder became
an interested stockholder, (ii) the interested stockholder acquiring at least
85% of the outstanding voting stock (excluding shares owned by directors,
officers and certain employee stock plans) as a result of the transaction in
which it became an interested stockholder or (iii) approval of the transaction
by the board of directors and the affirmative vote at an appropriate meeting
(and not by written consent) of two-thirds of the outstanding voting stock not
owned by the interested stockholder on or after the date on which the interest
stockholder became and interested stockholder.
Under Delaware law, business combinations resulting in the sale of
substantially all of the assets of the Company or merger of the Company with
another business organization must be approved by vote of the majority of the
Company's outstanding voting stock entitled to vote at a duly called meeting.
The supermajority provisions in the Certificate of Incorporation and Section 203
of the DGCL, if applicable, may have the effect of foreclosing mergers and other
business combinations which the holders of a majority of the Company's stock
deem desirable and place the power to prevent such a transaction in the hands of
a minority of the Company's stockholders.
Under Delaware law, there is no cumulative voting by stockholders for
the election of directors unless authorized in the corporation's certificate of
incorporation. MegaWorld's Certificate of Incorporation does not authorize
cumulative voting. The absence of cumulative voting rights effectively means
that the holders of a majority of the stock voted at a stockholder meeting may,
if they so choose, elect all directors of the Company, thus precluding
representation of minority stockholders on the Company's Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALES
Currently the Company has 98,808,259 shares of Common Stock and
1,191,741 shares of Class A Common Stock authorized by its Certificate of
Incorporation, with 40,335,706 shares of Common Stock and no Class A Common
Stock outstanding. Under Delaware law and the Company's Certificate of
Incorporation, the Board of Directors is authorized to issue all of the
remaining authorized but unissued shares of Common Stock and class A Common
Stock from time to time without approval of the stockholders (except as required
by the rules of a national securities exchange, if applicable) for such value
(not less than par value) as they determine.
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Of the Common Stock currently outstanding, 38,018,907 shares are
"restricted securities," as that term is defined, under Rule 144 promulgated
under the Securities Act in that such shares were issued and sold by the Company
without registration, in private transactions not involving a public offering,
and/or are securities held be affiliates. All such shares may be resold publicly
only following their effective registration under the Securities Act or pursuant
to an exemption from the registration requirements of the act, such as Rule 144
thereunder. Although such restricted securities are not presently tradeable in
any public market which may develop for the Common Stock, such securities may in
the future be publicly sold in to any such market in accordance with the
provisions of Rule 144.
In general, Rule 144 was adopted by Securities and Exchange Commission
under the Securities Act to provide an exemption for public resales of
restricted securities through brokers' transaction effected without purchaser
solicitation. Securities sold in compliance with Rule 144 lose their status as
restricted securities in the hands of the purchaser and thereafter trade free of
restrictions in the same manner as securities sold by the issuer in a
transaction registered under the Securities Act. Restricted securities may be
resold pursuant to Rule 144 only if (i) the securities are held for at least one
year from the date of acquisition, provided that (A) the shares are sold in
ordinary brokers' transactions or transactions directly with a market maker
without public solicitation, (B) adequate current information about the Company
is publicly available and (C) the amount of securities sold by or for the
account of the holder during any three-month period does not exceed the greater
of 1% of the issuer's outstanding shares or the average weekly trading volume
for the four-week period prior to the notice required by Rule 144(h), or (ii)
the securities are held for at least two years from the date of acquisition.
Future sales by current shareholders, especially of substantial amounts, could
depress the market price of the Common Stock in any market that may develop.
REGISTRAR TRANSFER AGENT AND WARRANT AGENT
The stock transfer agent and registrar for the Company is
Intercontinental Registrar & Transfer Agency, P.O. Box 62405, Boulder City, NV
89006, telephone number 702-293-6717.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
In recent years, the Company's Common Stock has been listed on the NASD
Over-the-Counter Bulletin Board ("OTCBB") under the symbol MEGW. On February 9,
2000, the Company's Common Stock was removed from listing on the OTCBB until
such time as this registration statement both becomes effective and is amended
in response to SEC comments. Trading in the Company's Common Stock will be
reported in the National Quotation Bureau's Pink Sheets until its Common Stock
is again listed on the OTCBB.
A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control. There can be no assurance that the market will
provide significant liquidity for the Company's Common Stock. As a result, an
investment in the Company's Common Stock may be highly illiquid. Investors may
not be able to sell their shares readily or at all when the investor needs or
desires to sell.
The following table sets forth the high and low sale prices for the
Common Stock for the periods indicated during the previous two fiscal years and
the period January 1, 1999 through December 31, 1999.
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<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1997:
First Quarter................ -- --
Second Quarter .............. 4.000 1.500
Third Quarter................ 3.750 1.875
Fourth Quarter............... 2.750 0.250
1998:
First Quarter................ 3.000 0.125
Second Quarter............... 8.625 1.062
Third Quarter................ 5.125 2.125
Fourth Quarter............... 2.625 1.000
1999:
First Quarter................ 2.625 1.406
Second Quarter............... 2.625 1.000
Third Quarter................ 1.437 0.630
Fourth Quarter............... 4.125 0.625
2000:
First Quarter................ 2.625 1.010
</TABLE>
As of May 31, 2000, there were 200,000 outstanding options and no
outstanding warrants. As of May 31, 2000, there were 284 holders of record of
the Common Stock, as shown on the records of the Transfer Agent and Registrar of
the Common Stock. Since many shares may be held by investors in nominee names,
such as the name of their broker or their broker's nominee, the number of record
holders often bears little relationship to the number of beneficial owners of
the Common Stock.
The Company has never paid any cash dividends on its stock and
anticipates that for the foreseeable future it will retain earnings, if any, for
use in the operation of its business. In addition, the terms of the Company's
Revolving Loan with Compass Bank prohibit the Company from declaring or paying
any dividends. Payment of cash dividends in the future will depend upon the
Company's earnings, financial condition, any contractual restrictions,
restrictions imposed by applicable law, capital requirements and other factors
believed relevant by the Company's Board of Directors.
ITEM 2. LEGAL PROCEEDINGS
Effective May 1, 2000, certain stockholders of MegaWorld removed
Michael Giamalvo as a director of the Company through action by written consent,
however, Mr. Giamalvo remains President of MLI and is a stockholder of the
Company. After removal of Mr. Giamalvo as a director of the Company, the Company
began negotiations to rescind the transaction in which the Company had agreed to
acquire all outstanding shares of CRE (the "Castle Acquisition Agreement"), a
company whose principal asset is its 40-year leasehold interest in the Castle.
The Company also (i) sought to recover common stock issued to Mr. Giamalvo to
extend the Company's deferred payment obligations under the Castle Acquisition
Agreement and (ii) attempted to settle a dispute with Mr. Giamalvo concerning
cash amounts due under his employment agreement with respect to base salary and
his reimbursement for payment of business-related expenses. On May 19, 2000, the
Company filed a demand for arbitration with the American Arbitration Association
in Houston, Texas and also filed a lawsuit in Harris County District Court (Case
No. 2000-25344) to resolve these issues. On June 1, 2000, Mr. Giamalvo filed a
demand for arbitration with the American Arbitration Association in New York
City, New York, claiming (i) $472,500 due under the Castle Acquisition Agreement
and (ii) amounts to be determined after a full accounting with respect to that
certain Castle Funding Agreement dated November 11, 1998
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<PAGE> 29
between the Company and Mr. Giamalvo. The situation may result in extended
arbitration or litigation, which may consume substantial amounts of the
Company's financial and managerial resources.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of
securities by Old TBS, the Company and its subsidiaries within the past three
years that were not registered under the Securities Act. The number of shares
reported with respect to each transaction has been adjusted, as required, to
give effect to the Company's 12 for 1 reverse split of its Common Stock which
occurred in March, 1998.
Under terms of separate consulting and advisory agreements executed by
the Company during the period from May 1997 to October 1997, the Company issued
an aggregate of 106,043 shares pursuant to Rule 701 of the Securities Act to the
following consultants and advisors: Tomasa Rodriguez, Ouziel Aryeh, Hector Cruz,
Thomas Ford, Steve Page, Rabbinical Assembly College, Menachem Scheiner, Mike
King, Princeton Research Inc., and Aurelia Rosner.
On June 26, 1997 and August 22, 1997, the Company issued 8,333 and
11,250 shares, respectively, to ITV, Inc. and its designees, and on October 24,
1997, the Company issued 4,167 shares to Igor Litovksy in consideration for
consulting and advisory services rendered in connection with the Company's
financing efforts. No funds were raised as a result of this arrangement.
In January 1998, the Company hired Avtar Sandhu as its Chief Executive
Officer and on February 12, 1998, the Company issued 208,333 shares to Mr.
Sandhu in consideration for his assuming the position of Chief Executive
Officer.
On February 24, 1998, the Company issued 833 shares to Valtek
Consultants, Inc., pursuant to Rule 701 of the Securities Act in consideration
for consulting services rendered to the Company with respect to the appraisal of
the Castle.
In April 1998, pursuant to Rule 504 of Regulation D, the Company issued
and sold 1,250,000 shares of Common Stock to 32 investors for an aggregate
consideration of $614,701.
On April 23, 1998, the Company issued 35,417 shares to Alfred Hymson
Associates in consideration for consulting and advisory services rendered in
connection with the Company's financing efforts. No funds were raised as a
result of this arrangement.
On May 14, 1998, the Company issued to Mr. Michael Giamalvo 400,000
shares in consideration of his execution of an Employment Agreement with the
Company and 1,000,000 shares of common stock pursuant to an agreement to acquire
the shares of CRE, which holds certain leasehold rights to Castello Torre Ratti
(the "Castle Acquisition"). The Company issued 1,200,000 shares on August 20,
1998 and an aggregate of 1,600,000 shares on November 11, 1998 and November 20,
1998 to Mr. Giamalvo and his designees, as consideration for extensions of the
last date upon which the Castle Acquisition could be finalized. In connection
with the Castle Acquisition, the Company also issued 42,135 shares to three
individuals on May 29, 1998.
On May 14, 1998, the Company issued 200,000 shares to Joanne Pello,
pursuant to Rule 701 of the Securities Act, as an employee bonus.
On May 18, 1998, the Company issued 15,000 shares to Paramjit Lal
Gaddu, pursuant to Rule 701 of the Securities Act, for consulting services
rendered to the Company.
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<PAGE> 30
On May 27, 1998, the Company issued 400,000 shares each to Berkowitz,
Simon and Terpe, or their respective designees, as compensation pursuant to a
joint venture agreement pursuant to which Berkowitz, Simon and Terpe and the
Company would pursue opportunities in the telephony business through the
Company's ITS subsidiary. On April 9, 1998 and November 20, 1998, the Company
issued 33,333 and 150,000 shares, respectively, to Simon's designees in
connection with the joint venture agreement. Also in connection with this
transaction, on October 22, 1998, the Company issued 75,000 shares to Azriee
Nagar. On November 20, 1998, the Company issued an additional 150,000 shares
each to Berkowitz, Simon and Terpe, and their designees, as additional
consideration under the joint venture agreement.
On July 20, 1998, the Company issued 504,101 shares to David Mahy,
Chief Operating Officer of MegaWorld prior to the merger of Old TBS into Texas
TBS (the "Merger") as an employee bonus.
On August 10, 1998, the Company issued 400,000 shares to Ken Miller for
consideration of his execution of an Employment Agreement with the Company.
On August 28, 1998, the Company issued 1,050,000 shares of stock to
Charles McPhail and his designees as consideration for entering into a letter of
intent with respect to the Merger.
On August 28, 1998, the Company issued 3,000,000 shares to MegaWorld,
Inc. to secure certain funding. The funding transaction was never consummated
and these shares were canceled on September 16, 1998.
On September 11, 1998, the Company issued 5,000,000 shares to Barclay's
Private Bank & Trust Company Limited pursuant to a Regulation S offering. The
offering was terminated and these shares were canceled on December 31, 1998,
prior to issuance to any individual investors.
On October 5, 1998, the Company issued an aggregate of 42,000 shares,
pursuant to Rule 701 of the Securities Act, for services rendered to the Company
to the following consultants and advisors: Malcolm Feinstein, Jeffrey Stern,
Jeffrey Clark and Frank Bauco.
On October 8, 1998, the Company issued 2,000,000 shares to Eric Aronson
as compensation for services to be rendered by Mr. Aronson. The Company
rescinded this sale on November 18, 1999, because Mr. Aronson failed to perform.
In October 1998, the Company adopted a program whereby every
free-trading share of Common Stock could be exchanged for two (2) shares of
restricted common stock. Under to this program, the Company issued an aggregate
of 465,886 shares, pursuant to Section 3(a)(9) of the Securities Act, to 28
individuals from October 26, 1998 through June 11, 1999.
In connection with the Merger, the Company issued an aggregate of
10,200,000 shares of Common Stock to Charles D. McPhail, Lisa Marie McPhail,
Lori Lynn McPhail, Lynn R. McPhail and JoyVer Investments, L.L.C. (a Texas
limited liability company owned and controlled by Charles D. McPhail and his
wife, Lynn R. McPhail) and other designees of Mr. McPhail (collectively, the
"McPhail Investors"). In addition, the Company issued 600,000 shares to Mr.
McPhail in consideration for his agreement to extend the terms of certain loans,
totaling approximately $450,000, Mr. McPhail had made to the Company, issued
400,000 shares as consideration for the assumption by the Company of Mr.
McPhail's Employment Agreement, and granted anti-dilution rights to the McPhail
Investors with respect to any share issuances from November 11, 1998 through
November 11, 1999, pursuant to which the McPhail Investors received 2,376,520
shares. On September 1, 1999, the Company issued to Mr. McPhail and his
designees, 7,313,260 shares of Common Stock pursuant to Mr. McPhail's exercise
of stock options at no cost to Mr. McPhail and pursuant to the terms of the
Merger Agreement.
On November 11, 1998, the Company issued an aggregate of 4,000 shares
to seven (7) employees as an end of the year performance bonus award.
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On February 1, 1999, the Company issued 100,000 shares, pursuant to
Rule 701 of the Securities Act, to Mayer Amsel and Rhonda Toppston for services
rendered to the Company.
On December 15, 1999, the Company issued 20,000 shares to Kent Terpe, a
former employee of the Company, in consideration for certain unpaid salary and
expenses owed to him by the Company.
In March and April 2000, the Company agreed to issue 394,310 shares of
common stock to 39 investors in exchange for payment and cancellation of an
aggregate of approximately $624,707 of debt of TBS. Each share of common stock
discharged an amount of debt of TBS equal to the average closing price of common
stock for the 10 trading days immediately preceding March 31, 2000. The Company
has agreed to register the shares sold as soon as practicable after completion
of the Form 10-SB review process.
In May and June, 2000, pursuant to Rule 506 of Regulation D, the
Company issued and sold 135,000 shares to 10 investors for an aggregate
consideration of $205,200.
Except as otherwise indicated, the Company believes that the
transactions described above were exempt from registration under the Securities
Act pursuant to Section 4(2) thereof as transactions not involving any public
offering because such securities were sold to a limited group of persons, each
of which was believed to have been a sophisticated investor or had a
pre-existing business or personal relationship with the Company or its
management and was purchasing for investment without a view to further
distribution. The Company took steps to ensure that the purchaser was acquiring
securities for purposes of investment and not with a view to distribution,
including the use of a restrictive legend on certificates representing such
shares and delivery of instructions to the Company's transfer agent to stop
resales of shares represented by such certificates except transfers supported by
an opinion of counsel to the effect that such resale qualifies for an exemption
from the registration requirements of the Securities Act. Except as otherwise
indicated, all sales of the Company's securities were made by officers of the
Company who received no commission or other remuneration for the solicitation of
any person in connection with the respective sales of securities described
above.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and By-laws provide, in
effect, that, to the fullest extent and under the circumstances permitted by
Section 145 of the Delaware General Corporation Law (the "DGCL"), the Company
will indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is a director, officer, incorporator, employee, or agent of the
Company or is or was serving at the Company's request as a director, officer,
incorporator, employee, partner, trustee or agent of another corporation or
enterprise. The Certificate of Incorporation also relieves directors of the
Company from monetary damages to the Corporation or its stockholders for breach
of such director's fiduciary duty as a director to the fullest extent permitted
by the DGCL. Under Section 102(b)(7) of the DGCL, a corporation may relieve its
directors from personal liability to such corporation or its stockholders for
monetary damages for any breach of their fiduciary duty as directors except (i)
for a breach of the duty of loyalty, (ii) for failure to act in good faith,
(iii) for intentional misconduct or knowing violation of law, (iv) for willful
or negligent violation of specific provisions in the DGCL imposing requirements
with respect to stock repurchases, redemption and dividends, or (v) for any
transactions from which the director derived an improper personal benefit.
Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Certificate of Incorporation may be indemnified by
the corporation for reasonable expenses, including attorneys' fees, if such
person has acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in the case of a derivative suit in respect of any
claim as to which an officer, employee or agent has been adjudged to be liable
to the corporation unless that person is determined to be fairly and reasonably
entitled to indemnity
-31-
<PAGE> 32
for proper expenses by the court in which such action or suit is brought.
Indemnification is mandatory in the case of a director, officer, employee, or
agent who is successful on the merits in defense of a suit against such person.
-32-
<PAGE> 33
PART F/S
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1998, September 30, 1999
and December 31, 1999 (unaudited)................................................................ F-3
Consolidated Statements of Operations for the Year Ended December 31, 1998, the
Nine Months Ended September 30, 1998 (unaudited) and 1999 and the
Three Months Ended December 31, 1998 and 1999 (unaudited)........................................ F-4
Consolidated Statements of Changes in Stockholders' Deficit for the Year Ended
December 31, 1998, the Nine Months Ended September 30, 1999 and the
Three Months Ended December 31, 1999 (unaudited)................................................. F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 1998, the
Nine Months Ended September 30, 1998 (unaudited) and 1999 and the
Three Months Ended December 31, 1998 and 1999 (unaudited)........................................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE> 34
INDEPENDENT AUDITOR'S REPORT
Board of Directors
MegaWorld, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of MegaWorld, Inc.
as of September 30, 1999 and December 31, 1998, and the related consolidated
statements of operations, changes in stockholders' deficit and cash flows for
the year ended December 31, 1998 and the nine months ended September 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MegaWorld, Inc. as of September 30, 1999 and December 31, 1998, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1998 and the nine months ended September 30, 1999, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that MegaWorld, Inc. will continue as a going concern. As more fully discussed
in Note 1 to the financial statements, the Company incurred losses of $2,413,831
and $601,589 for the nine months ended September 30, 1999 and the year ended
December 31, 1998, respectively. As a result of these losses, the Company's
working capital position and ability to generate sufficient cash flows from
operations to meet its operating and capital requirements have deteriorated.
These matters raise substantial doubt about the Company's ability to continue as
a going concern without new sources of working capital. Management's plans in
regard to these matters are also described in Note 1 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ HEIN + ASSOCIATES LLP
Houston, Texas
November 11, 1999
F-2
<PAGE> 35
MEGAWORLD, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1998 1999 1999
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 243,675 $ 83,230 $ 23,948
Receivables:
Trade, no allowance for doubtful accounts 1,604,222 1,652,970 591,837
Receivable from related party 186,729 244,914 239,914
Other 83,725 28,500 28,500
Costs and estimated earnings in excess of billings on
uncompleted contracts 845,317 30,646 --
Inventory 170,243 169,417 152,231
------------ ------------ ------------
Total current assets 3,133,911 2,209,677 1,036,430
PROPERTY AND EQUIPMENT, net 4,607,488 4,433,207 4,358,943
ASSET HELD FOR SALE 622,500 622,500 622,500
OTHER ASSETS 244,409 273,886 269,108
------------ ------------ ------------
Total assets $ 8,608,308 $ 7,539,270 $ 6,286,981
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 421,500 $ 3,553,154 $ 3,486,396
Line of credit 1,000,000 1,000,000 841,234
Advances from investors -- 513,000 579,030
Current portion of capital lease obligation 51,304 49,677 48,042
Notes and other payables to stockholders 9,581,878 1,746,076 1,751,075
Trade accounts payable 1,592,810 1,951,496 2,118,393
Accrued expenses 442,117 876,350 756,050
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,067,259 1,378,865 533,355
------------ ------------ ------------
Total current liabilities 14,156,868 11,068,618 10,113,575
LONG-TERM DEBT, net of current portion 3,769,163 236,976 230,000
CAPITAL LEASE OBLIGATION, net of current portion 142,357 107,587 95,300
DEFERRED INCOME TAXES 6,161 6,161 6,161
------------ ------------ ------------
Total liabilities 18,074,549 11,419,342 10,445,036
COMMITMENTS AND CONTINGENCIES
(Notes 1 and 10)
STOCKHOLDERS' DEFICIT:
Common stock, $0.0001 par value; 98,808,259 shares authorized;
24,315,926, 40,180,706 and 40,220,706 shares issued and outstanding
at December 31, 1998, September 30, 1999, and December 31, 1999
(unaudited), respectively 3,378 4,018 4,022
Class A common stock, $0.0001 par value; 1,191,741
shares authorized; none issued -- -- --
Additional paid-in capital -- 7,999,360 8,015,956
Accumulated deficit (9,469,619) (11,883,450) (12,178,033)
------------ ------------ ------------
Total stockholders' deficit (9,466,241) (3,880,072) (4,158,055)
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,608,308 $ 7,539,270 $ 6,286,981
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 36
MEGAWORLD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999 1998 1999
------------ ------------- ------------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES $ 17,402,412 $ 12,782,568 $ 7,608,478 $ 4,619,844 $ 1,437,848
COST OF CONTRACT REVENUES 13,312,655 10,228,804 5,628,244 3,083,851 867,450
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 4,089,757 2,553,764 1,980,234 1,535,993 570,398
GENERAL AND ADMINISTRATIVE EXPENSES 4,279,614 2,974,283 3,556,703 1,305,331 738,182
INTEREST EXPENSE, NET 411,732 113,187 837,362 298,545 126,799
------------ ------------ ------------ ------------ ------------
NET LOSS $ (601,589) $ (533,706) $ (2,413,831) $ (67,883) $ (294,583)
============ ============ ============ ============ ============
EARNINGS PER SHARE - BASIC AND DILUTED $ (0.03) $ (.10) $ (0.08) $ -- $ (0.01)
============ ------------ ============ ------------ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 21,391,298 5,100,000 29,804,881 16,538,227 40,203,829
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 37
MEGAWORLD, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1998, NINE MONTHS ENDED SEPTEMBER 30, 1999
AND THREE MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 (restated) 16,839,780 $ 1,684 $ 475,316 $ (1,119,874) $ (642,874)
Common stock issued for contribution of
net liability from affiliated entity
(restated) 5,100,000 510 (219,828) -- (219,318)
Conversion of capital to MegaWorld for
reverse merger 11,840,926 1,184 (3,644) -- (2,460)
Distribution to stockholder -- -- (251,844) (7,748,156) (8,000,000)
Net loss -- -- -- (601,589) (601,589)
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 1998 33,780,706 3,378 -- (9,469,619) (9,466,241)
Conversion of stockholder note payable to
common stock 6,400,000 640 7,999,360 -- 8,000,000
Net loss -- -- -- (2,413,831) (2,413,831)
------------ ------------ ------------ ------------ ------------
BALANCES, September 30, 1999 40,180,706 4,018 7,999,360 (11,883,450) (3,880,072)
Issuance of common stock for services
rendered (unaudited) 40,000 4 16,596 -- 16,600
Net loss (unaudited) -- -- -- (294,583) (294,583)
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 1999 (unaudited) 40,220,706 $ 4,022 $ 8,015,956 $(12,178,033) $ (4,158,055)
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 38
MEGAWORLD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1998 1999 1998 1999
------------ ------------- ------------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (601,589) $ (533,706) $ (2,413,831) $ (67,883) $ (294,583)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 183,844 115,911 231,550 123,651 74,264
Common stock issued for consulting
services -- -- -- 16,600
Changes in assets and liabilities:
Accounts receivable (845,618) (835,028) (51,708) 170,862 1,066,133
Costs and estimated earning in
excess of billings on uncompleted
contracts (662,756) (405,407) 814,671 (257,349) 30,646
Inventory (131,092) (37,750) 826 (93,342) 17,186
Other assets (172,170) (395,168) (29,474) (70,312) 4,778
Trade accounts payable (124,068) (601,092) 358,686 468,231 166,897
Accrued expenses 318,180 156,944 434,230 155,075 (120,302)
Billings in excess of costs and
estimated earnings on uncompleted
contracts 64,347 219,774 311,606 676,724 (845,510)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (1,970,922) (2,315,522) (343,444) 1,105,657 116,109
CASH FLOWS FROM INVESTING ACTIVITIES -
purchases of property and equipment (444,172) (352,003) (57,269) (150,888) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayments) on notes payable
from majority stockholder 1,581,878 1,594,530 31,198 (37,652) 4,999
Advance from a stockholder and director -- -- 133,000 -- --
Advances on notes payable 2,048,800 1,002,500 512,476 -- 66,030
Repayments of notes payable (1,145,904) (400,009) (869,140) (258,563)
Change in capital lease obligations (42,594) 94,175 (36,397) (44,472) 12,143
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 2,442,180 2,691,205 240,268 (951,264) (175,391)
------------ ------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 27,086 23,680 (160,445) 3,505 (59,282)
CASH AND CASH EQUIVALENTS, at beginning of
period 216,589 216,589 243,675 240,170 83,230
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 243,675 $ 240,269 $ 83,230 $ 243,675 $ 23,948
============ ------------ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 223,229 $ 108,594 $ 315,886 $ 59,972 $ 18,387
============ ============ ============ ============ ============
Equipment acquired under capital leases $ 92,297 $ $ -- $ -- $ --
============ ============ ============ ============ ============
Issuance of common stock for conversion of
note payable to the majority stockholder $ -- $ -- $ 8,000,000 $ -- $ --
============ ============ ============ ============ ============
Contribution of net liabilities from a
related entity $ 219,318 $ -- $ -- $ 219,318 $ --
============ ============ ============ ============ ============
Note payable issued to stockholders in
merger $ 8,000,000 $ -- $ -- $ 8,000,000 $ --
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 39
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization - MegaWorld, Inc. ("MegaWorld" or the "Company") was
incorporated under the laws of the state of Delaware on February 15,
1989. On November 11, 1998, Texas TBS, Inc. ("Texas TBS") acquired the
majority of the outstanding common stock of MegaWorld. Texas TBS, a
privately held corporation, was incorporated under the laws of the
state of Texas on September 18, 1998 to be the surviving corporation of
a merger with Total Building Systems, Inc. (the "Merger") on November
11, 1998, which was accounted for similar to a pooling of interest
method of accounting due to common ownership of the entities. Total
Building Systems, Inc. ("TBS"), a privately held corporation, was
incorporated under the laws of the state of Texas on January 27, 1995.
TBS manufactures modular living quarters for offshore drilling
platforms and modular buildings for private use. The Company is
currently located in Houston, Texas. See Note 2 "Reverse Acquisition By
Texas TBS."
For accounting purposes, the acquisition of Texas TBS by MegaWorld (the
"Reverse Acquisition") has been treated as a reverse acquisition of
MegaWorld by Texas TBS due to change in control of MegaWorld ownership.
Accordingly, the historical financial statements prior to November 11,
1998 are those of Texas TBS and TBS. All transaction costs were
expensed during fiscal 1998.
The Company also owns 100% of ITS Telephony, Inc. ("ITS"). ITS is a
start-up company in the telecommunications industry. There were no
revenues from ITS operations prior to September 30, 1999.
Continuing Operations - The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. As shown in the accompanying financial statements, the
Company incurred losses of $2,413,831 and $601,589 from operations and
negative cash flows of $343,444 and $1,970,922 from operating
activities for the nine months ended September 30, 1999 and the year
ended December 31, 1998, respectively, and had a working capital
deficit of $8,858,941 and stockholders' deficit of $3,880,072 as of
September 30, 1999. As a result of these losses, the Company's working
capital position and ability to generate sufficient cash flows from
operations to meet its operating and capital requirements has
deteriorated. These factors, among others, indicate that the Company
may be unable to continue as a going concern within a reasonable period
of time without new sources of capital.
F-7
<PAGE> 40
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. Management
is currently in discussions with several groups to provide additional
working capital to support operations until internal cash flows are
sufficient to support operations. The Company has relied on its majority
stockholder to fund its cash requirements in the past. The majority
stockholder has indicated his unwillingness to continue to fund its cash
requirements in the near term.
The Company will seek to find a permanent financing source to replace
the majority stockholder. In the event that a financing source is not
found, portions of the Company's future operations would be curtailed.
The Company believes that it will be successful in removing the threat
concerning its ability to continue as a going concern by raising
additional capital from the issuance of stock or other notes. The
Company is pursuing other sources of financing, but there is no
assurance any source of financing will be available.
Change in Year End - The Company has changed its year end from December
31 to September 30 in 1999.
Revenue and Cost Recognition - Profits and losses on construction and
fabrication contracts are recorded on the percentage-of-completion
method of accounting, measured by the percentage-of-contract costs
incurred to date to estimated total contract costs for each contract.
Contract costs include raw materials, direct labor, amounts paid to
subcontractors, equipment rented and an allocation of overhead expenses.
Anticipated losses on uncompleted construction contracts are charged to
operations as soon as such losses can be estimated. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset, "costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of
amounts billed. The liability, "billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in
excess of revenues recognized.
F-8
<PAGE> 41
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
Property and Equipment - Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets ranging from 3 to 10 years. Leasehold improvements are amortized
using the straight-line method over the term of the lease. Buildings are
depreciated over 40 years using the straight-line method. Major
improvements are capitalized; minor replacements, maintenance and
repairs are charged to current operations.
Income Taxes - The Company accounts for income taxes on the liability
method under which the amount of deferred income taxes is based upon the
tax effects of the differences between the financial and income tax
basis of the Company's assets and liabilities and operating loss
carryforwards at the balance sheet date based upon existing laws.
Deferred tax assets are recognized if it is more likely than not that
the future income tax benefit will be realized.
Long-lived Assets - The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount. The Company has not identified any such impairment
losses.
Use of Estimates - The preparation of the Company's financial
statements, in conformity with generally accepted accounting principles,
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's estimate of the value of the asset held for sale (as
described in Note 11) is expected to change as future information
becomes available. Such changes in the value of the asset held for sale
will be reflected as a purchase price adjustment in the period in which
such amounts are determinable.
Fair Value of Financial Instruments - The carrying value of cash and
cash equivalents, accounts receivable and accounts payable approximated
fair values due to the short-term debt is stated at market rates. All
other debt is approximate at fair value due to its current maturity.
F-9
<PAGE> 42
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
Cash Equivalents - For purposes of reporting cash flows, cash
equivalents include highly liquid investments purchased with maturity of
three months or less at the date of purchase.
Concentration of Credit Risk - Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
accounts receivable. Management does not believe a significant credit
risk existed at September 30, 1999. The Company maintains deposits in
banks which exceed, at times, the federal deposit insurance available.
Management periodically assesses the financial condition of the
institutions and believes that any possible deposit loss is minimal.
Stock-Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock Based Compensation, defines a
fair value based method of accounting for an employee stock option or
similar equity instrument or plan. However, SFAS 123 allows entities to
continue to measure compensation costs under APB 25 for employees and
directors, which recognizes expense with respect to the issuance of
warrants or options on the grant date as the excess fair value of the
Company's common stock over the exercise price of the instrument. The
Company has elected to account for employee and director stock
compensation as provided for under APB 25. The Company will comply with
the disclosure provisions as provided under SFAS 123.
Common stock, warrants or options issued to non-employees are recorded
on the grant date at fair value.
Comprehensive Income (Loss) - Comprehensive income is defined as all
changes in stockholder equity, exclusive of transactions with owners,
such as capital investments. Comprehensive income includes net income or
loss, changes in certain assets and liabilities that are reported
directly in equity such as translation adjustments on investments in
foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive income (loss) was equal to its
net loss for the nine months ended September 30, 1999 and the year ended
December 31, 1998.
Unaudited Interim Information - The accompanying financial information
as of December 31, 1999 and for the three-month periods ended December
31, 1998 and 1999 and the nine-month period ended September 30, 1998 has
been prepared by MegaWorld, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial
statements reflect all adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary to fairly
present such information in accordance with generally accepted
accounting principles.
F-10
<PAGE> 43
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
2. REVERSE ACQUISITION BY TEXAS TBS:
On November 11, 1998, the stockholders of Texas TBS approved a Reverse
Acquisition transaction with MegaWorld through an acquisition/merger
agreement (the "Agreement"). Pursuant to the Agreement, each outstanding
share of common stock of Texas TBS, par value $.01 per share, was
converted to the right to receive 1020 shares of MegaWorld, par value
$.0001 per share. For financial statement purposes, Texas TBS is
considered the acquiring company, and this transaction has been treated
as a purchase by Texas TBS of MegaWorld. For legal purposes, however,
MegaWorld remained the surviving entity. Therefore, the combined entity
retained MegaWorld's capital structure, and the common stock
transactions prior to the merger have been restated based upon the
1020-to-1 share exchange ratio (see Note 7 for further discussion of
capital stock activity). Additionally, the majority stockholder of Texas
TBS and his designees was given a note payable from MegaWorld of
$8,000,000 in conjunction with the Merger (see Note 8 for further
discussion of terms of this note.) Pro forma amounts are not shown for
the operations of MegaWorld from January 1, 1998 to the reverse merger
date as such information is considered immaterial to the Texas TBS
financial statements.
3. CONSTRUCTION ACCOUNTS:
Costs, estimated earnings and billings on uncompleted contracts
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 5,903,700 $ 1,055,866
Estimated earnings on uncompleted contracts 1,851,802 338,014
------------ ------------
7,755,502 1,393,880
Less billings to date (7,977,444) (2,742,099)
------------ ------------
$ (221,942) $ (1,348,219)
============ ============
</TABLE>
These amounts are included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 845,317 $ 30,646
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,067,259) (1,378,865)
------------ ------------
$ (221,942) $ (1,348,219)
============ ============
</TABLE>
F-11
<PAGE> 44
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
3. CONSTRUCTION ACCOUNTS: (continued)
The following summarizes the results of construction contracts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED GROSS PROFIT
SEPTEMBER 30, 1999 REVENUE EARNED COST INCURRED RECOGNIZED
------------------ -------------- ------------- ------------
<S> <C> <C> <C>
Completed contracts $ 6,214,598 $ 4,572,378 $ 1,642,220
Uncompleted contracts 1,393,880 1,055,866 338,014
------------ ------------ ------------
$ 7,608,478 $ 5,628,244 $ 1,980,234
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED GROSS PROFIT
DECEMBER 31, 1998 REVENUE EARNED COST INCURRED RECOGNIZED
------------------ -------------- ------------- ------------
<S> <C> <C> <C>
Completed contracts $ 9,646,910 $ 7,408,955 $ 2,237,955
Uncompleted contracts 7,755,502 5,903,700 1,851,802
------------ ------------ ------------
$ 17,402,412 $ 13,312,655 $ 4,089,757
============ ============ ============
</TABLE>
4. CONTRACTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Completed contracts $ 513,521 $ 786,662
Uncompleted contracts 1,090,701 866,308
------------ ------------
$ 1,604,222 $ 1,652,970
============ ============
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Land $ 518,437 $ 518,437
Building and improvements 1,716,434 1,738,419
Furniture and fixtures 359,225 318,334
Machinery and equipment 1,942,688 2,004,839
Vehicles 38,325 38,325
Leasehold improvements 453,395 453,395
------------ ------------
5,028,504 5,071,749
Accumulated depreciation and amortization (421,016) (638,542)
------------ ------------
$ 4,607,488 $ 4,433,207
============ ============
</TABLE>
F-12
<PAGE> 45
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
6. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Note payable to a bank, due in monthly installments of $20,917
with interest of 9%; due August 2003, and collateralized by
land. This note is guaranteed by a significant stockholder of
the Company. This note was in default as of November 11, 1999. $ 3,681,333 $ 3,492,559
Note payable to a bank, due in monthly installments of $1,555
with interest of 9%; due June 2001, and collateralized by
furniture and equipment. This note is guaranteed by a
significant stockholder of the Company. This note was
in default as of November 11, 1999. 41,563 30,071
Note payable to a vendor, due in monthly installments of
$10,416, with interest ranging from 2% to 8%, and
collateralized by aluminum equipment. 177,767 --
Note payable to an individual, due in monthly installments of
$2,500 with interest at Prime + 3.5% (11.75% as of
September 30, 1999) and due in June 2003. 290,000 267,500
------------ ------------
4,190,663 3,790,130
Less current portion (421,500) (3,553,154)
------------ ------------
Total long-term debt $ 3,769,163 $ 236,976
============ ============
</TABLE>
Following are scheduled maturities of long-term debt at September 30,
1999:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, AMOUNT
------------- ----------
<S> <C>
2000 $ 297,071
2001 294,476
2002 281,000
2003 2,917,583
----------
$3,790,130
==========
</TABLE>
The Company has a line of credit with a financial institution under
which $1,000,000 was outstanding at September 30, 1999 and December 31,
1998. The line has an interest rate of 8.25% and is guaranteed by a
significant stockholder of the Company. This line was due August 31,
1999. See Note 13 for discussion of foreclosure proceedings that
occurred subsequent to December 31, 1999.
F-13
<PAGE> 46
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
6. LONG-TERM DEBT: (continued)
The Company has received advances from certain individuals totaling
$513,000 at September 30, 1999. The Company is in discussions with these
individuals to negotiate payment terms. See Note 13 for discussion of
terms finalized subsequent to December 31, 1999.
Under the terms of the agreements with the notes due to financial
institutions, the Company must meet certain covenant requirements. The
most restrictive covenants include the maintenance of tangible net worth
of at least $1,500,000. In addition, the Company is to maintain a debt
to tangible net worth ratio of at least 3-to-1 and a current ratio of at
least 1-to-1. The Company was in non-compliance of the aforementioned
covenants at September 30, 1999.
See Note 13 for discussion of foreclosure proceedings that occurred
subsequent to December 31, 1999. The entire balance due to the financial
institution has been classified as current in the accompanying balance
sheet.
7. STOCKHOLDERS' EQUITY:
Common Stock - The Company's capital stock is comprised of two classes
of Common Stock with different voting rights. Each share of Common Stock
is entitled to one-twentieth (1/20) of one vote, while each share of
Class A Common Stock is entitled to one vote. As of September 30, 1999,
no shares of Class A Common Stock have been issued.
F-14
<PAGE> 47
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
7. STOCKHOLDERS' EQUITY: (continued)
Stock Issuances and Capital Contributions - The Company issued 5,100,000
shares (restated) of common stock to an existing stockholder in exchange
for the contribution of net liabilities totaling $219,318, including
cash of $1,000,000; land and buildings with a cost basis to the
stockholder totaling $2,545,682; and related mortgage debt owed on the
property totaling $3,765,000. The net liabilities of MegaWorld, which
totaled approximately $2,460 as of the Reverse Acquisition date, and the
11,840,926 common shares of MegaWorld outstanding prior to the merger,
have been recorded as an increase in common stock and decrease to the
accumulated deficit. On the Reverse Acquisition date, a majority
stockholder of Texas TBS and his designees were given an $8,000,000 note
from the Company, which is shown as a reduction of capital in the
accompanying financial statements (see Note 8 for further discussions of
terms of this note). In September 1999, the majority stockholder
converted the $8,000,000 note payable to 6,400,000 shares of the
Company's common stock.
8. RELATED PARTY TRANSACTIONS:
The Company has a receivable due from a related entity owned by the
Chairman of the Board and stockholder, which totaled $244,914 and
$186,729, as of September 30, 1999 and December 31, 1998, respectively.
The balance on the advances bears interest at 6%. These receivables
related to vendor payments made by the Company on behalf of the related
entity. Unpaid principle and interest are due December 31, 2000.
The Company had deferred payments due to a director pursuant to a
transaction described in Note 11 which totaled $472,500 as of September
30, 1999 and December 31, 1998, respectively. MegaWorld was to make this
deferred payment in connection with the acquisition of CRE, a
transaction which arose prior to the Reverse Acquisition transaction.
Under an agreement dated November 11, 1998 extending the term of the
deferred payment, the Company and the stockholder agreed that the
deferred payment was to be paid out of the revenue generated by ITS and
CRE, if any, in the future. The Company recorded additional non-interest
bearing balances totaling $186,000 and $53,000 were claimed by the same
individual at September 30, 1999 and December 31, 1998, respectively, a
portion of which is disputed by the Company. These amounts arose from
advances to fund operations and a balance due in connection with an
employment agreement. Unpaid principle and interest are due December 31,
2000. (See Notes 10 and 11.)
The Company has a non-interest bearing note payable due to stockholder,
which totaled $161,000 as of September 30, 1999 and December 31, 1998.
This note was for advances made to the Company. This note is currently
due, and the balance bears 6% interest.
F-15
<PAGE> 48
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
8. RELATED PARTY TRANSACTIONS: (continued)
The Company had a note payable to the Chairman of the Board and majority
stockholder and his designees for $8,000,000 as of December 31, 1998,
which was additional consideration due to Texas TBS in the MegaWorld
reverse merger. This amount has been reflected as a distribution to
stockholder in the accompanying statement of changes in stockholders'
deficit. The note accrues interest at LIBOR + 2% (8.035% at December 31,
1998), and the first interest payment was due on May 3,1999. This note
was converted to capital in September 1999. The Company has an
additional note payable to the Chairman of the Board and stockholder for
$297,419 and $468,134 as of September 30, 1999 and December 31, 1998,
respectively. This note accrues interest at 6% and is due on demand.
Interest expense on these notes totaled $482,100 and $94,963 for the
nine months ended September 30, 1999 and the year ended December 31,
1998, respectively. As of September 30, 1999, no amounts had been paid
on the accrued interest.
The Company has a payable due bearing interest at 6% to a related entity
owned by the Chairman of the Board and stockholder, which totaled
$588,707 and $427,244, as of September 30, 1999 and December 31, 1998,
respectively. These payables related to advances owed by the Company to
the related party. These notes are payable on demand.
The Company has a payable bearing interest at 6% to a stockholder
totaling $40,450 at September 30, 1999. This payable arose for advances
made by the stockholder. These notes are payable on demand.
9. INCOME TAXES:
There were no material deferred tax assets and liabilities as of
September 30, 1999, with the exception of the Company's net operating
loss carryforwards ("NOLs"). The Company has provided a valuation
allowance in the full amount of its net deferred tax asset totaling
approximately $774,000.
The NOLs will expire in 2018 and 2019. There are several limitations on
this NOL. The maximum amount of liability that may be realized to the
Company is $2,091,173. Future utilization of the NOLs may be limited by
changes in the ownership of the Company.
F-16
<PAGE> 49
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
10. COMMITMENTS AND CONTINGENCIES:
Lease Commitments - The Company is obligated under capital leases for
equipment which expire in 2001 and 2003. The carrying value of the
leased equipment and related accumulated amortization included in
equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Construction and transportation equipment $ 256,241 $ 256,241
Less accumulated amortization (53,072) (97,179)
------------ ------------
$ 203,169 $ 159,062
============ ============
</TABLE>
The Company leases office space and certain equipment under operating
leases which expire on various dates through June 2003. Rent expense
was approximately $230,000 and $330,000 for the nine months ended
September 30, 1999 and the year ended December 31, 1998.
Future minimum lease payments under noncancellable leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING SEPTEMBER 30, LEASES LEASES
-------------------------- ------------ ------------
<S> <C> <C>
2000 $ 65,773 $ 401,445
2001 54,450 344,783
2002 51,155 277,920
2003 18,430 92,640
------------ ------------
Total minimum lease payments 189,808 $ 1,116,788
============
Less amount representing interest (32,544)
------------
Present value of net minimum lease payments 157,264
Less current portion of capitalized lease obligation (49,677)
------------
Capitalized lease obligation, net of current portion $ 107,587
============
</TABLE>
Legal Claims - The Company is involved in legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's financial condition or results of operations.
F-17
<PAGE> 50
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
10. COMMITMENTS AND CONTINGENCIES: (continued)
Board of Directors - Management is in discussions with a stockholder
and director of the Company to resolve claims based upon an employment
agreement and certain other expenses. The Company has recorded in the
accompanying balance sheet amounts due to this stockholder and director
totaling $658,500 ($472,500 of deferred payments related to the
acquisition of CRE, as defined in Note 11, and approximately $186,000
of other expenses, a portion of which is disputed by the Company,
related to employment and castle maintenance) as of September 30, 1999,
which is management's best estimate of the liability. (See Note 8 for
further discussions of the term of this note.) Additionally, this
individual is claiming the Company owes him an additional amount of
approximately $250,000 related to certain other expenses and a two-year
employment agreement dated March 1, 1998 that was assumed in the
Merger. The Company is currently in dispute with this individual and is
attempting to settle the amounts owed this individual (see discussion
in Note 11). In the opinion of management, the ultimate disposition of
the additional claim will not have a material adverse effect on the
Company's financial condition.
Employment Agreements - The Company has employment agreements with
several Company officers. Under these agreements, which expire in 2001,
the Company is to pay a combined fixed salary of $350,000 per year
during that time, and at the discretion of the board, certain
additional amounts could become due under incentives within these
agreements. Additionally, the significant obligation calls for an
officer of the Company, or his surviving spouse, to receive one percent
(1%) of gross revenues of the Company for a term of fifteen (15) years
and for so long thereafter as either shall survive. See Note 13 for
discussion of termination of one employment agreement that will reduce
the Company's aforementioned continuing obligation by approximately
$150,000 through 2001.
F-18
<PAGE> 51
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
11. ASSET HELD FOR SALE:
In April 1998, previous management of the Company entered into a
contract to acquire all outstanding shares of Castello Ratti
Enterprises Srl ("CRE"), a Company whose principal asset was a 40-year
leasehold interest in Castello Torre Ratti, a 1,000-year-old castle
near Milan, Italy (the "Castle"), with the intention of developing
weekly timeshare units in the Castle (the "Castle Acquisition").
Current Management understands that the initial plans contemplated
pre-construction sales of timeshare units which would fund the Castle's
renovation. The plans also included the construction of additional
buildings, a golf course, tennis courts and a spa. MegaWorld agreed to
acquire CRE from a director of the Company for 1,000,000 shares of
common stock, $50,000 in cash and $572,500 in deferred payments to this
director, with release of the shares from escrow upon delivery of the
full amount of such payments. However, pursuant to the terms of the
Castle Acquisition agreement and escrow agreement related thereto, the
CRE stock was to be returned to the director in the event MegaWorld did
not make such full payment. The Company formed a wholly-owned
subsidiary, MegaWorld Leisure, Inc. ("MLI"), to develop the Castle.
Although at the time of the Merger, current management of the Company
believed that the Castle could begin to generate revenue with a minimal
investment under the pre-construction sale plan described above,
however, this proved to be incorrect. The deferred payments were
initially due August 1, 1998 but were extended in August and November
1998 until June 30, 1999 for an aggregate of 2,400,000 additional
shares of Company common stock. To date MegaWorld has paid only
$150,000 of the deferred payments and management is currently
attempting to rescind the Castle transaction. As of September 30, 1999,
the unpaid deferred payment under this transaction was $472,500 (see
Note 8 for discussion). In the purchase price allocation as of the
Reverse Acquisition date, management allocated $622,500 to this
investment that is classified as Asset Held For Sale.
The Castle has been generating operating losses since it was acquired.
Management believes the Company has recorded the value of this asset at
its net realizable value at September 30, 1999 and has captured all of
the obligations associated with maintaining and operating this
leasehold interest and included such in the accompanying financial
statements.
12. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan (the "Plan") which covers
substantially all of its employees meeting minimum age and service
requirements. The Plan provides for the employees to defer a portion of
their compensation into the Plan. The Company has made no matching
contribution to the Plan.
F-19
<PAGE> 52
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited.)
13. SUBSEQUENT EVENT (UNAUDITED):
Subsequent to September 30, 1999, the Company negotiated repayment
terms for the advances received from investors. Convertible note
payable agreements were executed with interest accruing at 12%, and
convertible into common stock of the Company at a conversion price of
$1.25 per share at the option of the holder. Unpaid principle and the
unpaid interest are convertible into stock. The conversion price was
considered the fair market value of the Company's common stock at the
date of issuance. These notes mature at various dated ranging from May
1, 2000 to July 23, 2000.
In March 2000, the Company's primary lender initiated foreclosure
proceedings on the land and buildings, used in the modular building
operation, which secured the outstanding bank debt. In June 2000,
the Company completed settlement negotiations to finalize the terms of
the settlement arrangement on the foreclosure. In May 2000, the Company
adopted a plan to sell its assets utilized in the modular building
manufacturing operation of the business. The completion of the sale of
such assets is expected to be completed during the fourth quarter of
fiscal 2000. Management does not anticipate recognizing a loss on
disposal in connection with the discontinued operation.
In March and April 2000, the Company successfully negotiated settlement
of approximately $625,000 of trade payables in exchange for Company
common stock.
In March 2000, the Company negotiated termination of an employment
agreement previously described in Note 10. Under the terms, the Company
would reduce the option price to the former employee to $0.0001 from
the original exercise price which approximated fair value of the stock
at the grant date. This re-pricing of 400,000 options created $500,000
of compensation expense to the Company as the options had previously
vested.
In May 2000, the Company sold 135,000 shares of Company common stock
for approximately $200,000.
F-20
<PAGE> 53
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
*2.1 Certificate of Incorporation of MegaWorld.
*2.2 By-laws of MegaWorld.
*3.1 Specimen of Common Stock Certificate.
*6.1 Loan Agreement, dated March 12, 1998, between TBS and Compass
Bank.
*6.2 First Amendment to Loan Agreement between TBS and Compass
Bank.
*6.3 Second Amendment to Loan Agreement between TBS and Compass
Bank.
*6.4 Revolving Promissory Note, dated March 12, 1998, for
$1,000,000 between TBS and Compass Bank.
*6.5 Term Promissory Note, dated August 10, 1998, for $3,765,000
between Charles D. McPhail and JoyVer Investments, LLC and
Compass Bank.
*6.6 Lease Agreement, dated February 10, 1998, between Stolthaven
Houston, Inc. and TBS.
*6.7 Mutual Release, Waiver and Settlement Agreement, dated
November 27, 1999, between the Company and Fairway Beech
Corporation, ITM Group, Inc., 1-900 USA, Inc., ITS Telephony,
Inc., Fred Simon, Nathan Berkowitz and Kent Terpe.
*6.8 Employment Agreement, dated January 1, 1996, between Old TBS
and Charles D. McPhail.
*6.9 Employment Agreement, dated March 30, 1999, between the
Company and George Dinsdale.
*6.10 Employment Agreement, dated March 1, 1998, between the Company
and Michael Giamalvo.
*6.11 Employment Agreement, dated June 22, 1998, between the Company
and Kenneth Miller.
*6.12 Lease Agreement, dated April 21, 1998, between the Company and
Michael Giamalvo.
*6.13 Tenancy Agreement, dated January 11, 1990, between Robert
Caffese, Michael Giamalvo, Vicinio Parodi, Valerio Parodi and
Fallabeni Renzina.
*6.14 Customer Agreement contract, dated November 1, 1999, between
the Company and Sequel Communications, Inc.
*6.15 Customer Agreement contract, dated November 1, 1999, between
the Company and WeCU, Inc.
*6.16 Revolving Credit Note, dated as of December 15, 1998, between
the Company and Charles D. McPhail.
*6.17 Revolving Credit Note, dated as of December 15, 1998, between
the Company and JoyVer Investments, LLC.
*6.18 Revolving Credit Note, dated as of December 15, 1998, between
the Company and Michael Giamalvo.
*6.19 Revolving Credit Note, dated as of December 15, 1998, between
TBS and Charles D. McPhail.
6.20 Master Lease Agreement, dated March 23, 2000, between the
Company and Sun Microsystems Finance.
6.21 Settlement Agreement, dated March 27,2000, between the Company
and Kenneth Miller.
6.22 Common Stock Purchase Agreement, dated June 2, 2000, between
the Company and Cabletron Systems, Inc.
6.23 Mutual Release, Waiver and Settlement Agreement, dated June
2000, between the Company and WeCU, Inc.
6.24 Letter Agreement dated May 19, 2000 by and between Machinery
Acquisitions International, Inc. and the Company incorporated
by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-QSB, Commission File 000-29795, for the
fiscal quarter ended March 31, 2000.
6.25 Settlement and Deficiency Agreement dated as of March 28, 2000
by and between TBS, JoyVer Investments, LLC, Charles D.
McPhail, the Company and Compass Bank incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report
on Form 10-QSB, Commission File 000-29795, for the fiscal
quarter ended March 31, 2000.
6.26 Guaranty of TBS and the Company with respect to the Deficiency
for the benefit of Compass Bank incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-QSB, Commission File 000-29795, for the fiscal
quarter ended March 31, 2000.
*8.1 Merger Agreement dated November 11, 1998, between MegaWorld,
Old TBS and Charles D. McPhail.
*8.2 Plan of Merger, dated November 11, 1998, between Old TBS and
Texas TBS.
*8.3 Deed of Trust, dated November 11, 1998, between Texas TBS and
Charles D. McPhail.
*8.4 Promissory Note, dated November 11, 1998, between MegaWorld
and TBS.
*8.5 Security Agreement and Financing Statement, dated November 11,
1998, between Texas TBS and Charles D. McPhail.
</TABLE>
<PAGE> 54
<TABLE>
<S> <C>
*8.6 Security Agreement and Financing Statement, dated November 11,
1998 between MegaWorld and Charles D. McPhail.
*8.7 Continuing and Unconditional Guaranty Agreement, dated
November 11, 1998, between Texas TBS and Charles D. McPhail.
*8.8 Continuing and Unconditional Guaranty Agreement, dated
November 11, 1998, between MegaWorld and Charles D. McPhail.
*8.9 Indemnification Agreement, dated November 11, 1998, between
Texas TBS and Charles D. McPhail.
*8.10 Assumption Agreement, dated November 11, 1998, between Old TBS
and Texas TBS.
</TABLE>
* Previously filed.
<PAGE> 55
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
MEGAWORLD, INC.
Date: June 16, 2000 By: /s/ Charles D. McPhail
--------------------------------
Charles D. McPhail
President
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
*2.1 Certificate of Incorporation of MegaWorld.
*2.2 By-laws of MegaWorld.
*3.1 Specimen of Common Stock Certificate.
*6.1 Loan Agreement, dated March 12, 1998, between TBS and Compass
Bank.
*6.2 First Amendment to Loan Agreement between TBS and Compass
Bank.
*6.3 Second Amendment to Loan Agreement between TBS and Compass
Bank.
*6.4 Revolving Promissory Note, dated March 12, 1998, for
$1,000,000 between TBS and Compass Bank.
*6.5 Term Promissory Note, dated August 10, 1998, for $3,765,000
between Charles D. McPhail and JoyVer Investments, LLC and
Compass Bank.
*6.6 Lease Agreement, dated February 10, 1998, between Stolthaven
Houston, Inc. and TBS.
*6.7 Mutual Release, Waiver and Settlement Agreement, dated
November 27, 1999, between the Company and Fairway Beech
Corporation, ITM Group, Inc., 1-900 USA, Inc., ITS Telephony,
Inc., Fred Simon, Nathan Berkowitz and Kent Terpe.
*6.8 Employment Agreement, dated January 1, 1996, between Old TBS
and Charles D. McPhail.
*6.9 Employment Agreement, dated March 30, 1999, between the
Company and George Dinsdale.
*6.10 Employment Agreement, dated March 1, 1998, between the Company
and Michael Giamalvo.
*6.11 Employment Agreement, dated June 22, 1998, between the Company
and Kenneth Miller.
*6.12 Lease Agreement, dated April 21, 1998, between the Company and
Michael Giamalvo.
*6.13 Tenancy Agreement, dated January 11, 1990, between Robert
Caffese, Michael Giamalvo, Vicinio Parodi, Valerio Parodi and
Fallabeni Renzina.
*6.14 Customer Agreement contract, dated November 1, 1999, between
the Company and Sequel Communications, Inc.
*6.15 Customer Agreement contract, dated November 1, 1999, between
the Company and WeCU, Inc.
*6.16 Revolving Credit Note, dated as of December 15, 1998, between
the Company and Charles D. McPhail.
*6.17 Revolving Credit Note, dated as of December 15, 1998, between
the Company and JoyVer Investments, LLC.
*6.18 Revolving Credit Note, dated as of December 15, 1998, between
the Company and Michael Giamalvo.
*6.19 Revolving Credit Note, dated as of December 15, 1998, between
TBS and Charles D. McPhail.
6.20 Master Lease Agreement, dated March 23, 2000, between the
Company and Sun Microsystems Finance.
6.21 Settlement Agreement, dated March 27,2000, between the Company
and Kenneth Miller.
6.22 Common Stock Purchase Agreement, dated June 2, 2000, between
the Company and Cabletron Systems, Inc.
6.23 Mutual Release, Waiver and Settlement Agreement, dated June
2000, between the Company and WeCU, Inc.
6.24 Letter Agreement dated May 19, 2000 by and between Machinery
Acquisitions International, Inc. and the Company incorporated
by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-QSB, Commission File 000-29795, for the
fiscal quarter ended March 31, 2000.
6.25 Settlement and Deficiency Agreement dated as of March 28, 2000
by and between TBS, JoyVer Investments, LLC, Charles D.
McPhail, the Company and Compass Bank incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report
on Form 10-QSB, Commission File 000-29795, for the fiscal
quarter ended March 31, 2000.
6.26 Guaranty of TBS and the Company with respect to the Deficiency
for the benefit of Compass Bank incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-QSB, Commission File 000-29795, for the fiscal
quarter ended March 31, 2000.
*8.1 Merger Agreement dated November 11, 1998, between MegaWorld,
Old TBS and Charles D. McPhail.
*8.2 Plan of Merger, dated November 11, 1998, between Old TBS and
Texas TBS.
*8.3 Deed of Trust, dated November 11, 1998, between Texas TBS and
Charles D. McPhail.
*8.4 Promissory Note, dated November 11, 1998, between MegaWorld
and TBS.
*8.5 Security Agreement and Financing Statement, dated November 11,
1998, between Texas TBS and Charles D. McPhail.
</TABLE>
<PAGE> 57
<TABLE>
<S> <C>
*8.6 Security Agreement and Financing Statement, dated November 11,
1998 between MegaWorld and Charles D. McPhail.
*8.7 Continuing and Unconditional Guaranty Agreement, dated
November 11, 1998, between Texas TBS and Charles D. McPhail.
*8.8 Continuing and Unconditional Guaranty Agreement, dated
November 11, 1998, between MegaWorld and Charles D. McPhail.
*8.9 Indemnification Agreement, dated November 11, 1998, between
Texas TBS and Charles D. McPhail.
*8.10 Assumption Agreement, dated November 11, 1998, between Old TBS
and Texas TBS.
</TABLE>
* Previously filed.
