<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A
AMENDMENT NO. 1
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
-----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6250 North Rosslyn Road, Houston, Texas 77091-3410
-----------------------------------------------------------------------
(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
------------------- ------------------------------
------------------- ------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock $0.0001 par value
------------------------------
(Title of Class)
<PAGE> 2
Following herewith is Part F/S of the registration statement on Form
10-SB for Registrant, identical in all respects to Registrant's original filing
of Part F/S except that the Independent Auditor's Report, dated November 11,
1999, has been revised to include the conformed signature of Hein + Associates
LLP, which was inadvertently omitted from Registrant's original filing.
-2-
<PAGE> 3
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, 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, 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> 4
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> 5
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 ......................................................... 442,117 876,350 756,048
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 10,089,468
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> 6
MEGAWORLD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE THREE
NINE MONTHS MONTHS MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
CONTRACT REVENUES $ 17,402,412 $ 7,608,478 $ 4,619,844 $ 1,437,848
COST OF CONTRACT REVENUES 13,312,655 5,628,244 3,083,851 867,450
------------ ------------ ------------ ------------
GROSS PROFIT 4,089,757 1,980,234 1,535,993 570,398
GENERAL AND ADMINISTRATIVE EXPENSES 4,279,614 3,556,703 1,305,331 738,182
INTEREST EXPENSE, NET 411,732 837,362 298,545 126,799
------------ ------------ ------------ ------------
NET LOSS $ (601,589) $ (2,413,831) $ (67,883) $ (294,583)
============ ============ ============ ============
EARNINGS PER SHARE - BASIC AND DILUTED $ (0.03) $ (0.08) $ - $ (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 21,391,298 29,804,881 16,538,227 40,203,829
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 7
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) 5,100,000 $ 510 $ 476,490 $ (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 23,580,706 2,358 (4,818) - (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> 8
MEGAWORLD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE THREE
YEAR NINE MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (601,589) $ (2,413,831) $ (67,883) $ (294,583)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 183,844 231,550 123,651 74,264
Common stock issued for consulting services - - - 16,600
Changes in assets and liabilities:
Accounts receivable (845,618) (51,708) 170,862 1,066,133
Costs and estimated earning in excess of billings
on uncompleted contracts (662,756) 814,671 (257,349) 30,646
Inventory (131,092) 826 (93,342) 17,186
Other assets (172,170) (29,474) (70,312) 4,778
Trade accounts payable (124,068) 358,686 468,231 166,897
Accrued expenses 318,180 434,230 155,075 (120,302)
Billings in excess of costs and estimated
earnings on uncompleted contracts 64,347 311,606 676,724 (845,510)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities (1,970,922) (343,444) 1,105,657 116,109
CASH FLOWS FROM INVESTING ACTIVITIES - purchases of property
and equipment (444,172) (57,269) (150,888) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayments) on notes payable from stockholders 1,581,878 164,198 (37,652) 4,999
Advances on notes payable 2,048,800 512,476 - 66,030
Repayments of notes payable (1,145,904) (400,009) (869,140) (258,563)
Change in capital lease obligations (42,594) (36,397) (44,472) 12,143
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 2,442,180 240,268 (951,264) (175,391)
------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 27,086 (160,445) 3,505 (59,282)
CASH AND CASH EQUIVALENTS, at beginning of period 216,589 243,675 240,170 83,230
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 243,675 $ 83,230 $ 243,675 $ 23,948
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 223,229 $ 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> 9
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, may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time.
F-7
<PAGE> 10
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
Company does not expect the majority stockholder will 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.
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.
F-8
<PAGE> 11
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
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.
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.
F-9
<PAGE> 12
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
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.
Unlimited Interim Information - The accompanying financial information
as of December 31, 1999 and for the three-month periods ended December
31, 1998 and 1999 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.
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 exchange ratio (see Note 7 for further discussion of capital
stock activity). Additionally, the majority stockholder of Texas TBS
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.) Proforma 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.
F-10
<PAGE> 13
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
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>
The following summarizes the results of construction contracts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED REVENUE GROSS PROFIT
SEPTEMBER 30, 1999 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
=============== =============== ===============
<CAPTION>
YEAR ENDED REVENUE GROSS PROFIT
DECEMBER 31, 1998 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>
F-11
<PAGE> 14
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
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> 15
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 is currently in
default. $ 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 is
currently in default. 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, and the Company is in negotiations with the financial institution
for extended terms.
F-13
<PAGE> 16
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.
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.
The financing company may demand repayment of the loan and seek other
remedies provided in the agreement. No such demand has been made. The
Company believes the financing company will continue to meet its
financing needs as they relate to the properties collateralizing the
related debt and does not anticipate the financing company, under the
present circumstances, taking any actions that would have a material
impact upon its operating activities. 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.
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 was 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.
F-14
<PAGE> 17
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
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.
These receivables related to vendor payments made by the Company on
behalf of the related entity.
The Company has a note payable due to a stockholder and director, which
totaled $472,500 and as of September 30, 1999 and December 31, 1998,
respectively. This note was an obligation of MegaWorld prior to the
Reverse Acquisition transaction and is to be repaid out of the revenue
generated by the ITS, if any, in the future. Additional balances
totaling $186,000 and $53,000 were due to the same stockholder at
September 30, 1999 and December 31, 1998, respectively, which arose
from advances to fund operations and a balance due in connection with
an employment agreement. (See Notes 10 and 11.)
The Company has a 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.
The Company had a note payable to the Chairman of the Board and
majority stockholder 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 currently due.
Interest expense on this note 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 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.
The Company has a payable to a stockholder totaling $40,450 at
September 30, 1999. This payable arose for advances made by the
stockholder.
F-15
<PAGE> 18
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
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.
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.
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>
F-16
<PAGE> 19
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
10. COMMITMENTS AND CONTINGENCIES: (continued)
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.
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 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.) There is an additional claim of $272,000 asserted
by the stockholder and director related to certain other expenses and a
two-year employment agreement dated March 1, 1998 that was assumed in
the Merger. 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 certain additional amounts could become due under
incentives within these agreements. 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.
11. ASSET HELD FOR SALE:
MegaWorld held a leasehold interest in a castle located in northern
Italy prior to the closing of the Reverse Acquisition transaction. The
MegaWorld management prior to the Reverse Acquisition had intended to
develop the property into a timeshare development. The new MegaWorld
management subsequent to the Reverse Acquisition currently intends to
focus on the Company's business activity in the United States and sell
the leasehold interest in the castle, pending receipt of sufficient
funding to develop the castle. The leasehold interest was originally
acquired in April 1998 from an individual, who was named as a director
of the Company prior to the transaction. The consideration given to
purchase the leasehold interest was a note payable of $622,500, and
MegaWorld common stock totaling 1,000,000 shares. The note payable was
refinanced in July and August of 1998 for the issuance of 2,400,000
additional shares of MegaWorld common stock. As of September 30, 1999,
the balance owed on this note was $472,500 (see Note 8 for discussion
of this note). In the purchase price allocation as of the Reverse
Acquisition date, management allocated $622,500 to this leasehold
interest. Any excess sales price over carrying value will be reflected
as a purchase price adjustment. Any deficiency between the sales price
and the carrying value of this asset will be reflected in the Company's
statement of operations.
F-17
<PAGE> 20
MEGAWORLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to September 30, 1999 is unaudited)
11. ASSET HELD FOR SALE: (continued)
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-18
<PAGE> 21
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: March 9, 2000 By: /s/ CHARLES D. MCPHAIL
-------------------- ---------------------------------
Charles D. McPhail
President
