<PAGE>
U. S. Securities and Exchange Commission
Washington, DC 20549
------------------------
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 33-11875-A
MEGALITH CORPORATION
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Colorado 22-2701047
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4720 ESCO DRIVE, FORT WORTH, TEXAS 76140
-----------------------------------------
(Address of principal executive offices)
(817) 478-4251
--------------
(Issuer's telephone number)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ___X___ No________
The number of shares outstanding of the Company's common stock, $.005 par
value, as of August 18, 1997 is 21,136,258 shares.
<PAGE>
MEGALITH CORPORATION
TABLE OF CONTENTS
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Consolidated Unaudited Balance Sheets as of June 30, 1997
and September 30, 1996 3
Consolidated Unaudited Statement of Operations for three
months and nine months ended June 30, 1997 and 1996 4
Consolidated Unaudited Statements of Changes in
Stockholders Equity for nine months ended June 30, 1997 5
Consolidated Unaudited Statements of Cash Flows for nine
months ended June 30, 1997 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation. 14
PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities. 16
Item 6. Exhibits and Reports on Form 8-K. 16
Page 2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MEGALITH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, September 30,
1997 1996
ASSETS ----------- -----------
Current Assets:
Cash and equivalents $ 347,954 $ 131,438
Trade accounts receivable, net 631,553 195,343
Other receivables 571,839 75,000
Inventory 440,831 616,126
Prepaid expenses 15,630 -
----------- -----------
Total Current Assets 2,007,807 1,017,907
----------- -----------
Plant, Property and Equipment 8,973,600 9,102,366
Less: Accumulated depreciation (892,965) (525,630)
----------- -----------
Net Plant, Property & Equipment 8,080,635 8,576,736
----------- -----------
Investment in foreign joint venture 88,257 -
Goodwill, net of amortization 557,541 655,930
Other Assets, net of amortization - 2,180
----------- -----------
Total Assets 10,734,240 10,252,753
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade 381,980 594,767
Customer prepayments 90,550 74,760
Property and payroll taxes payable 907,739 538,963
Accrued interest payable 473,914 292,728
Other accrued expenses 187,239 26,000
Obligations of Dalcom Acquisition 416,000 516,000
Short term notes payable 647,925 400,000
Short term convertible note payable 140,000 -
Short term obligations to related parties 1,229,026 534,262
Current portion of long term debt 1,240,235 876,000
----------- -----------
Total Current Liabilities 5,714,608 3,853,480
----------- -----------
Long term notes payables, net of current portion 2,903,277 3,034,689
Stockholders' Equity:
Convertible preferred stock, Series A $10 par
value; 5,000,000 shares authorized; 2,749 and
8,807 shares outstanding at June 30, 1997 and
September 30, 1996 27,490 88,070
Common stock, $.005 par value; 50,000,000 shares
authorized; 18,998,890 and 14,597,862 shares
issued and outstanding at June 30, 1997 and
September 30, 1996 94,994 72,989
Additional paid-in capital 6,891,420 5,395,809
Stock subscriptions received - 99,850
Accumulated deficit (4,897,549) (2,292,134)
----------- -----------
Total Stockholders' Equity 2,116,355 3,364,584
----------- -----------
Total Liabilities and Stockholders' Equity $10,734,240 $10,252,753
----------- -----------
----------- -----------
See accompanying notes.
Page 3
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MEGALITH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 651,974 $ 725,763 $ 2,478,754 $ 1,862,322
Cost of Good Sold 651,096 519,315 2,199,833 1,412,459
----------- ------------ ------------ ------------
Gross profit 878 206,448 278,921 449,863
Expenses:
Property taxes 46,000 19,500 80,000 51,285
Selling, general & administrative expenses 463,993 272,798 1,024,478 492,725
Depreciation and amortization 155,241 40,815 472,728 204,159
----------- ------------ ------------ ------------
665,234 333,113 1,577,206 748,169
----------- ------------ ------------ ------------
Operating loss (664,356) (126,665) (1,298,285) (298,306)
Other income (expense):
Interest expense, net (153,452) (97,379) (338,043) (208,391)
Costs to arrange financing (181,250) - (181,250) -
Other expenses (174,759) (201,668) -
----------- ------------ ------------ ------------
Net loss before extraordinary item $(1,173,817) $ (224,044) $ (2,019,246) $ (506,697)
----------- ------------ ------------ ------------
Extraordinary item:
Costs of China Joint Venture 586,168 - 586,168 -
----------- ------------ ------------ ------------
Net loss $(1,759,985) $ (224,044) $ (2,605,414) $ (506,697)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net loss per common and common equivalent shares $ (0.09) $ (0.02) $ (0.15) $ (0.07)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Weighted average number of common and common
equivalent shares outstanding 18,836,858 10,526,105 17,140,579 7,755,897
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
Page 4
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MEGALITH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
SERIES A
PREFERRED STOCK COMMON STOCK
ISSUED ISSUED
-------------------- --------------------- ADDITIONAL COMMON RETAINED TOTAL
AMOUNT AMOUNT PAID IN STOCK EARNINGS STOCKHOLDERS'
SHARES (AT $10 PAR) SHARES (AT $.005 PAR) CAPITAL SUBSCRIBED (DEFICIT) EQUITY
------ ------------ ------ -------------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SEPTEMBER 30, 1996 8,807 $ 88,070 14,597,862 $72,989 $5,395,809 $ 99,850 $(2,292,134) $3,364,584
Proceeds from sale of shares
pursuant to a private
placement 715 7,150 1,910,318 9,552 698,797 (99,850) - 615,649
Stock issued for services, 101 1,010 1,408,717 7,044 718,482 - - 726,536
expenses and interest
Stock issued to cancel payable - - 100,000 500 14,500 - - 15,000
for services
Preferred stock converted to (6,874) (68,740) 981,993 4,910 63,830 - - -
common stock
Current year earnings (loss) - - - - - - (2,605,414) (2,605,414)
----------------------------------------------------------------------------------------------
BALANCE JUNE 30, 1997 2,749 $27,490 18,998,890 $94,995 $6,891,418 $ - $(4,897,548) $2,116,355
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
Page 5
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MEGALITH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss): $ (2,605,414)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 472,728
Common and preferred stock issued for services 806,536
Provision for doubtful accounts 75,000
Loss on abandonment of equipment 133,066
Change in operating assets and liabilities:
Accounts receivable, trade (511,210)
Other receivables (281,839)
Inventory 175,295
Prepaid expenses (13,450)
Accounts payable, trade (212,789)
Customer prepayments 15,790
Accrued interest payable 181,186
Accrued compensation to officers 30,000
Other accrued expenses 176,239
Property and payroll taxes payable 368,776
------------
Net cash provided (used) by operating activities (1,190,086)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets (11,304)
Investment in China marketing ventures, net of amount expensed (88,257)
------------
Net cash provided (used) in investing activities (99,561)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans 677,000
Proceeds from sale of stock 320,651
Principal payments on notes (156,252)
Loans from related parties, net of repayments 664,764
------------
Net cash provided by (used in) financing activities 1,506,163
------------
Net increase (decrease) in cash 216,516
Cash, beginning of period 131,438
------------
Cash, end of period $ 347,954
------------
------------
See accompanying notes.
Page 6
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MEGALITH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 1997, the Company issued 1,608,717
shares of its Common Stock and 101 shares of its Series A Preferred in
exchange for services, for expenses for which the Company was obligated, and
for accrued but unpaid interest on indebtedness of the Company. The value of
the shares so issued were recorded based upon the amounts at which other
shares had been sold in private placements during the same time period.
See accompanying notes.
Page 7
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MEGALITH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements include Megalith
Corporation ("Megalith" or the "Company") and its wholly-owned subsidiaries,
Esco Elevator Corporation and Dalcom Elevator Corporation. Overline
Corporation ("Overline"), the former registrant, was formed in 1986 under the
laws of the State of Delaware. Megalith Corporation ("Megalith" or the
"Company") was incorporated on November 3, 1995 in the State of Colorado.
Pursuant to a Plan and Agreement of Merger dated as November 6, 1995,
Overline was merged with and into Megalith, and Megalith was the surviving
entity of the merger. In connection with the merger, all outstanding shares
of Overline were exchanged for an equal number of shares of Megalith. For
approximately five years prior to the merger in November 1995, Overline had
been essentially inactive, other than for its efforts in seeking business
opportunities. As more fully described in Note B below, effective as of
November 27, 1995, the Company, through its newly-formed subsidiary (Esco
Elevator Corporation), acquired substantially all of the assets (the "Esco
Assets") of Esco Elevators Inc. and Esco Properties, Inc. Upon the
acquisition of the Esco Assets on November 27, 1995, the Company's principal
business became the manufacture and sale of custom passenger and freight
elevators.
In the opinion of management of the Company, the Company's unaudited
consolidated financial statements as of June 30, 1997 and for the interim
periods ended June 30, 1997 and 1996 include all adjustments which are
necessary for a fair presentation in accordance with generally accepted
accounting principles. Such adjustments consist of normal recurring
adjustments and accruals, except for the entries to record the acquisition of
Esco Assets described in Note B. These interim results are not necessarily
indicative of the results to be expected for the year ending September 30,
1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Quarterly Report on Form
10-QSB, pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1996, as filed
with the U.S. Securities and Exchange Commission. The balance sheet amounts
contained herein were derived from the audited financials on Form 10-KSB at
September 30, 1996; however, certain amounts within the liability accounts
have been reclassified in this Form 10-QSB for clarity and comparison
purposes.
NOTE B - ACQUISITION OF ESCO ASSETS
The Company, through its wholly-owned subsidiary, Esco Elevator
Corporation, acquired substantially all of the assets (the "Esco Assets") of
Esco Elevators Inc. and Esco Properties, Inc. effective as of November 27,
Page 8
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1995. The Esco Assets were acquired by the Company pursuant to a Plan of
Reorganization of Esco Elevators Inc. and Esco Properties Inc. which was
approved by the U.S. Bankruptcy Court on October 12, 1995. Esco Elevators
Inc. and Esco Properties Inc. (collectively, "Old Esco"), two affiliated
companies based in Fort Worth, Texas, had filed for relief under Chapter 11
of the U.S. Bankruptcy Code on December 14, 1994. During the period from
January through November, 1995, Old Esco was operated by a private company,
Epsitek, Inc., under a management agreement with the Bankruptcy Trustee.
Pursuant to an agreement between Epsitek, Inc. and Overline dated as of
November 6, 1995, Epsitek acquired the right from Overline to negotiate for
the purchase of the assets of Old Esco from the Bankruptcy Estate. Effective
November 27, 1995, Epsitek, Inc. assigned to Esco Elevator Corporation, the
wholly-owned subsidiary of the Company, all of its rights and equity in Old
Esco, including the right to acquire the Esco Assets pursuant to the Plan of
Reorganization and the accounts receivable generated during the time of the
management agreement, subject to expenses required to be paid during the same
period. Upon the acquisition of the Esco Assets, the Company began the
operation of its principal business in the manufacture and sale of custom
passenger and freight elevators.
The Esco Assets were acquired in exchange for $808,000 cash paid to the
Bankruptcy Estate of Old Esco, assumption by the Company of certain
installment debt and other obligations of Old Esco aggregating $4,273,642,
and the issuance to Epsitek, Inc. of 4,268,000 shares of the common stock of
the Company. The assets were recorded at their appraised values and the
Common Stock issued in the transaction was recorded at the residual amount
determined by subtracting the debts assumed from the total appraised value of
the assets. $800,000 of the cash consideration was borrowed from certain
shareholders or related parties of the Company on short term notes bearing
interest of eight percent, of which $200,000 of principal on the notes was
canceled in exchange for shares of common stock of the Company upon the
exercise of a stock option agreement by the chief executive officer of the
Company on December 4, 1995. Subsequently, an additional $325,000 of that
debt has also been canceled upon the issue of shares of the Company's Common
Stock to the noteholders. Of the debt assumed by the Company, $3,407,177 was
due to an individual who holds first lien rights to the substantial portion
of the Esco Assets, including the land, buildings and all equipment not
encumbered by other priority liens. The remaining debt assumed by the
Company is owed to various financing institutions and vendors for certain
items of equipment or improvements which are included in the assets acquired
by the Company, and generally have long term installment payment provisions
of up to 10 years as specified in the Plan of Reorganization.
NOTE C - LONG TERM NOTES PAYABLE
Long term notes payable consists of the following:
<TABLE>
June 30, Sep. 30,
1997 1996
---- ----
<S> <C> <C>
Promissory note to Ms. Ana McMillan, secured by first
lien deed of trust on substantially all equipment and
real estate, assumed effective as of November 27, 1995
as part of the Esco Asset acquisition, principal and
interest of 6.5% due in monthly installments of $45,425,
payable in full July 10, 2002 $ 3,269,820 $3,269,820
Notes payable, convertible into the common stock of the
Company at various rates 287,000 -0-
Various installment notes payable, assumed on
November 27, 1995 as part of the Esco Asset acquisition,
with various remaining terms from one to nine years at interest
Page 9
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rates ranging from 3% to 9.9%; secured by
certain property and equipment 454,900 454,437
Installment note payable to an individual, assumed on
November 27, 1995 as part of the Esco Asset acquisition;
due in monthly installments of principal only over five
years, with interest at 10% due at maturity;
unsecured 132,792 186,432
----------- ----------
$ 4,144,512 3,910,689
Less short term portion of long term debt (1,240,235) (876,000)
----------- ----------
Net long term debt $ 2,904,277 $3,034,689
</TABLE>
In addition to the promissory note due to Ms. McMillan as indicated
above, she is due $187,489 for interest accrued on the note during the months
prior to the acquisition of the Esco Assets by the Company and the assumption
of the subject note. This accrued interest has been reported as Accrued
Interest Payable, together with an interest accrual to June 30, 1997 of
$279,719 on all other accrued and unpaid interest.
NOTE D - SHORT TERM NOTES AND OBLIGATIONS
Short term notes payable consists of the following:
June 30, Sep. 30,
1997 1996
-------- --------
Short term notes payable to an individual;
unsecured; interest at 8.5% paid monthly; due
on demand; loan was incurred in connection with
Esco Asset acquisition $ 50,000 $ 50,000
Short term notes payable to two individuals,
non-interest bearing; due on demand; loans were
incurred in connection with Esco Asset acquisition 150,000 150,000
Short term notes payable convertible into shares of
the Company's common stock at various rates 140,000 -0-
-------- --------
Notes payable to a former officer/director; $200,000
is non-interest bearing, which note was issued for
cash advanced to the Company in connection with the
Dalcom acquisition and was due in October 1996;
secured by 3,025,862 shares of the Company owned by
Epsitek, Inc.; a separate note for $250,000 accrues
interest at 18% and is due October 27, 1997, and is
secured by inventory, of which $247,925 remains
unpaid 447,924 200,000
-------- --------
Total $787,924 $400,000
The Company is also obligated in the amount of $416,000 to the seller of
Dalcom Elevator Corporation as of June 30, 1997 in connection with the
acquisition in July, 1996. The obligation consists of the assumption of
indebtedness of Dalcom of $166,000 and $250,000 due to the seller. Also,
Dalcom currently has a negative reserve account with American Factoring of
Texas, Inc. of $252,000, which the Company disputes. The
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Company is reviewing the terms and conditions of the acquisition of Dalcom,
and is working with the independent auditor to clarify this situation. When
this process is complete certain adjustments may be in order.
NOTE E - SHORT TERM NOTES AND OBLIGATIONS TO RELATED PARTIES
Notes and accounts due to related parties consists of the following:
June 30, Sep. 30,
1996 1997
---- ----
Short term note payable to Epsitek, Inc., unsecured,
payable on demand, with interest at 8%; issued in
exchange for receivables (net of liabilities)
transferred from Epsitek, Inc. in connection with
the acquisition of the Esco Assets $139,855 $152,355
Short term note payable to the chief executive
officer of the Company; unsecured, with interest
at 8%, principal and interest due on demand; loan
incurred in connection with Esco Asset acquisition 893,073 180,109
Accrued compensation due to an officer/director
for amounts unpaid pursuant to an employment
agreement 86,798 56,798
Accrued compensation due to the chief executive
officer for amounts unpaid 109,300 145,000
---------- --------
Total $1,229,026 $534,262
NOTE F - STOCKHOLDERS' EQUITY
CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000
shares of common stock, par value $.005 per share ("Common Stock") and
5,000,000 shares of preferred stock, par value $10.00 per share ("Preferred
Stock"). At a special meeting of shareholders on December 18, 1996, an
amendment to the Company's Certificate of Incorporation was adopted to (i)
divide the Company's authorized Preferred Stock into series of Preferred
shares and to fix and determine the relative rights, limitations, and
preferences of the shares of the Company's Series A, B, and C Preferred
Stock, and (ii) to grant the authority to the Board of Directors of the
Company to fix and determine the relative rights, limitations, and
preferences of the remaining series of the Company's Preferred Stock.
PREFERRED STOCK
During the fiscal year ended September 30, 1996, the Company issued
11,307 shares of its Preferred Stock and in the nine months ended June 30,
1997 issued an additional 816 Preferred shares. These shares were issued
primarily in exchange for the cancellation of obligations to various
individuals in connection with loans to the Company, or its predecessor, for
the initial financing of the Company, and certain of the shares were issued
for cash pursuant to a private placement offering or as compensation for
financial consulting services provided to
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the Company. Pursuant to the amendments to the Articles of Incorporation
adopted by the shareholders at the special meeting on December 18, 1996, each
of the 11,307 shares issued to that date were designated as Series A
Preferred Stock. Of the 12,123 shares of Series A Preferred issued up to
June 30, 1997, a total of 9,374 shares have been exchanged for 1,341,516
shares of Common Stock as of June 30, 1997, as provided for such conversion
by the designation of the Series A Preferred Stock.
Pursuant to the amendments to the articles of incorporation of the
Company adopted at the special meeting of shareholders on December 18, 1996,
three million shares of the five million authorized Preferred shares are
divided into three series and designated as Series A, Series B, and Series C
Preferred Stock, and the corporation is authorized to issue one million
shares each for Series A, B and C. The Board of Directors is authorized to
divide the two million remaining shares of Preferred Stock into series, to
designate each series, to fix and determine separately for each series the
relative rights, limitations, and preference of such series, and to issue
shares of any series of Preferred Stock then or previously designated, fixed,
or determined. Although the Board of Directors has designated the term for
Series A, Series B and Series C of its Preferred Stock, only the Series A
shares have been issued. Each share of each series of Preferred Stock will
have rights identical to each other share of that series of Preferred Stock.
No dividend on any share of Series A, B or C Preferred Stock will accumulate.
Each share of Series A Preferred Stock has a stated value of $40.00, and
is convertible, at the option of the holder of such share, into Common Stock.
The conversion rate into Common is determined by dividing the $40 per share
stated value of the Preferred by 50% of the closing bid price of the Common
Stock. The term "Closing Bid Price" means, if the corporation stock is
actively traded, the published closing bid price of the Common on the trading
day immediately preceding the date of conversion. Series A shares may be
converted into Common Stock after the Preferred Stock has been issued and
outstanding for at least six months.
COMMON STOCK
During the quarter ended June 30, 1997, the Company issued 423,190
shares of its Common Stock to satisfy certain obligations of the Company for
services and expenses. Additionally, 185,000 common shares were issued
during the period pursuant to a private placement offering for cash to be
used for working capital.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters voted on by stockholders. The shares of the Common
Stock do not have cumulative voting rights, which means that the holders of
more than 50% of the shares of the common Stock voting for the election of
the directors can elect all of the directors to be elected by holders of the
Common Stock, in which event the holders of the remaining shares of Common
Stock will not be able to elect any director. Upon any liquidation,
dissolution, or winding-up of the affairs of the Company, holders of the
Common Stock would be entitled to receive, pro rata, all of the assets of the
Company available for distribution to stockholders, after payment of any
liquidation preference of any Preferred Stock that may be issued and
outstanding at the time. Holders of the Common Stock have no subscription,
redemption, sinking fund, or preemptive rights.
Common Stock is stated at the lower of par value or consideration
received, as permitted by state law. Common stock subscribed reflects
amounts received in September, 1996 for shares of the Company's Common Stock
for which the shares were not issued until October, 1996.
STOCK OPTIONS
On April 1, 1996 and on September 1, 1996 the Company granted to an
individual options to acquire up to 200,000 shares, or 400,000 shares in the
aggregate, of restricted common stock of the Company in conjunction with
agreements to provide services to the Company. The earlier option agreement
provided for an exercise price
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of $.50 per share and the latter agreement was at $.25 per share. Each of
the two agreements expire 24 months from the date the option was granted.
On May 29, 1996, the Company granted to Stacy Investments Partnership
Ltd. the option to purchase 50,000 shares of restricted common stock at a
price of $.60 per share. The option expires in 24 months from the date of
the agreement.
On September 5, 1996, the Company acknowledged to Dr. Arthur Malcolm, a
former Director of the Company, that the Company has previously granted to
him the option to purchase 100,000 shares of restricted common stock at $.37
per share and 100,000 shares at $1.00 per share, both expiring March 5, 1998.
On May 1, 1996, the Company accepted certain subscriptions for 105,000
shares of the Company's common stock from five individuals which could
require the Company to buy the shares back at a price of $1.20, only upon the
election of the holder and in the event that within 12 months the bid price
of the Company's Common Stock falls below $1.20 for any consecutive 60 day
period. The Company has not been requested to buy back any of the shares
under the agreements and, based upon the current level of the trading price
of the Common Stock which is in excess of the price required for an election
of the put option, management does not anticipate that the Company will be
required to buy back any shares prior to the expiration date of April 30,
1997. Accordingly, no provision has been made in the financials for any
obligation that might arise in connection with any put option.
NOTE G SUBSEQUENT EVENTS
On August 26, 1997, Esco Elevator, Corp., a wholly owned subsidiary of
the Company, filed a petition in federal bankruptcy court at Fort Worth,
Texas to be placed in a Chapter 11 (Reorganization) proceeding. Esco was
advised by legal counsel to institute this action in order to protect the
Company's interest in Esco which was being threatened by the shortage of
working capital. The Company and Esco are actively pursuing several possible
financing alternatives which would allow the Company and Esco to present a
plan of reorganization to the court. Such plan, when presented will be
subject to approval of the court and the creditors of Esco, and will require
management's full efforts to complete successfully.
On June 3, 1997, the Fort Worth, Texas District Office of the Securities
and Exchange Commission ("SEC") obtained a Formal Order of Investigation from
the SEC naming the Company as a subject of an investigation involving
possible violations of the federal securities laws. The inquiry is in a
preliminary stage. At present certain requested documents have been
furnished and at least one deposition has been taken by the SEC.
On August 21, 1997, at a Special Meeting of the Board of Directors, Syed
Zaidi, Irving, Texas, resigned as President and Chief Operating Officer of
the Company. Mr. Zaidi, however continued as a director and Chairman of the
Board of Directors. The Board of Directors named James W. Landrum, Terrell,
Texas, a director as President of the Company and President of Esco Elevator,
Corp. At the same meeting, Arthur W. Steber, Birmingham, Alabama, resigned
as a director.
The Company and certain of its subsidiaries and affiliates are involved
in litigation arising primarily from the shortage of working capital, and
from the Dalcom acquisition which was made in July of 1996. On November 11,
1997 the Company entered into a settlement agreement resolving the litigation
styled as Henry Seals Trustee for Esco Elevator, Inc., and Esco Property Inc.
v. Dick Ellis Davis et al v. Overline Corporation, R. Wayne Duke, Cassco
Corporation, Charles L. Stidham, Megalith and Syed G. Zaidi. The agreement
calls for a nominal cash payment to be made in the next few weeks, and
eliminates the claims of more than $1.8 million against the Company. The
Company is vigorously defending its interests in the remaining matters, but
management does not believe that these actions will have a material adverse
effect on the Company or its subsidiaries and affiliates.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
HISTORICAL BACKGROUND AND DESCRIPTION OF CURRENT OPERATIONS
Megalith Corporation ("Megalith" or the "Company") was incorporated on
November 3, 1995 in the State of Colorado. Overline Corporation
("Overline"), the former registrant, was formed in 1986 under the laws of the
State of Delaware. Pursuant to a Plan and Agreement of Merger dated as
November 6, 1995, Overline was merged with and into Megalith, and Megalith
was the surviving entity of the merger. In connection with the merger, all
outstanding shares of Overline were exchanged for an equal number of shares
of Megalith. For approximately five years prior to the merger on November
27, 1995, Overline had been essentially inactive, other than for its efforts
in seeking business opportunities.
The Company, through its wholly-owned subsidiary, Esco Elevator
Corporation, acquired substantially all of the assets (the "Esco Assets") of
Esco Elevators Inc. and Esco Properties, Inc. effective as of November 27,
1995. The Esco Assets were acquired by the Company pursuant to a Plan of
Reorganization of Esco Elevators Inc. and Esco Properties Inc. (collectively,
"Old Esco"), two affiliated companies that had filed for relief under Chapter
11 of the U.S. Bankruptcy Code on December 14, 1994. During the period of
January through November, 1995, Old Esco was operated by a private company,
Epsitek, Inc., under a management agreement with the Bankruptcy Trustee.
Pursuant to an agreement between Epsitek, Inc. and Overline dated November 6,
1995, Epsitek acquired the right to seek the purchase of the assets of Old
Esco from the bankruptcy estate, which right was assigned to Esco Elevator
Corporation, a subsidiary of Megalith. Upon the acquisition of the Esco
Assets, the Company began the operation of its principal business in the
manufacture and sale of custom passenger and freight elevators.
RESULTS OF OPERATIONS
Revenues of the Company are derived from the sale of passenger and
freight elevators, components, and replacement parts. To a lesser extent,
the Company obtains revenues from the installation and servicing of elevators
generally within the State of Texas, and relies upon sub-contractors to
perform the majority of such services. The revenues and expenses reflected
in the accompanying unaudited financial statements of the Company for the
previous quarter ended December 31, 1995 include only the period from the
purchase of the Esco Assets on November 27, 1995 to the end of the calendar
year, or a period of about one month. The Company did not have active
operations prior to November 27, 1995, and the only expenses incurred were in
the maintenance of the corporate entity and in seeking other business
opportunities. Therefore, the lack of active operations for a period of only
one month in the same quarter in the preceding year provides only limited
operating information for the purposes of comparative analysis.
For the nine months ended June 30, 1997, the revenues from the sales of
elevators, components, replacement parts, and service was $2,478,754, with a
gross profit of $278,921 (or 11.25% of sales). The revenues for the same
period of the previous year were $1,862,322 with a gross profit of $449,863,
although, as indicated above, the previous year period consisted of only
approximately seven months. The approximate $170,000 decrease in gross
profit for the period was due primarily to the inability to spread fixed
costs over expected higher sales. The operating loss for the current nine
month period was $1,298,285, as compared to an operating loss of $298,306 for
seven months in the previous year. After interest and other non-operating
expenses, the Company had a net loss of $2,019,246 for the current nine
months, as compared to a net loss of $506,697 for the same period in the
previous year. The increased losses in the current year are due in part to
the significant decrease in elevator sales in the current quarter, and a
significant increase in selling, general, and administrative expenses.
Selling, general, and administrative were adversely affected by increases in
costs incurred in acquiring new capital and legal and professional fees,
additionally, costs to arrange financing are
Page 14
<PAGE>
significant enough in the current period ($181,250) to warrant a separate
line item. The impact of decreased sales is reflected most dramatically in
the smaller gross profits in the current quarter, which indicates that fixed
costs are not adequately absorbed during periods of reduced revenues. The
Company elected to recognize the costs incurred in acquiring the China Joint
Venture in the current period as an extraordinary item. No previous cost
recognition was appropriate, thus it was not reported in prior periods.
For the quarter ended June 30, 1997, the revenues from the sales of
elevators, components, replacement parts, and service was $651,974, with a
gross profit of $878. The revenues for the same quarter of the previous year
were $725,763 with a gross profit of $206,448. The operating loss for the
current quarter was $664,356, as compared to an operating loss of $126,665
for same quarter in the previous year. After interest and other
non-operating expenses, the Company had a net loss before the extraordinary
item of $1,173,817 for the current quarter, as compared to a net loss of
$224,044 for the same quarter in the previous year.
All revenues in the periods presented were generated in operations of
the elevator manufacturing subsidiary. The interest expense was incurred
primarily in connection with the installment debt related to the Esco Asset
purchase. The Company's efforts are currently directed primarily to
reorganizing its operations for profitability and raising capital, which are
necessary to increase sales and obtain operating profits at its elevator
manufacturing subsidiary, following a period of severe reduction of sales as
a result of the bankruptcy of Old Esco. The gross revenues are expected to
remain at reduced levels until such time as the Company has completed
satisfactory financing arrangements that will ultimately permit a steady
growth in sales provided by a sustained marketing effort, both domestically
and in the foreign markets. However, more rapid growth could potentially be
obtained by commencing deliveries on the China Joint Venture, although that
venture is also dependent upon adequate financing. Upon the completion of
financing, the Company intends to commit funding to its marketing for the
remainder of the year, which will tend to increase S,G&A costs over present
levels. Conversely, such refinancing is also expected to reduce the interest
expense burden of the Company and will drastically reduce the costs involved
in raising capital. The manufacturing plant is operating at far less than
its design capacity and, with the present low volumes, results in cost
inefficiencies. The present headcount of 50 employees compares with a total
headcount of approximately 150 in the predecessor company during periods
immediately prior to the bankruptcy of Old Esco.
LIQUIDITY AND SOURCES OF CAPITAL
The Company had a working capital deficit of $3,722,001 as of June 30,
1997, which has been created in large part by the short term debt assumed in
connection with the acquisition of the Esco Assets in November 1995, increase
in short term debt, and by the operating losses in the intervening periods.
The capital resources to fund operations and complete the acquisition of the
Esco Assets was provided primarily by short term loans to the Company and by
sales of the capital stock of the Company. Until such time as revenues have
increased substantially over the current level, or the current debt burden is
refinanced, or both, the Company can be expected to utilize additional
working capital in its operations. For the liquidity needs of the Company in
the following twelve months, the Company is dependent upon the operating cash
flows generated from the elevator business and on proceeds from loans and the
sale of capital stock. However, the Company does not presently have
available lines of credit to provide the necessary working capital for
expansion expected to occur in the coming year. Therefore, the Company is
currently seeking to refinance a substantial portion of its existing short
and long term debt with a combination of long term debt and equity, while
simultaneously providing additional working capital. In the interim period,
however, the Company intends to factor its accounts receivable to provide an
immediate source of working capital.
JOINT VENTURE AGREEMENT WITH CHINA PROVINCE
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<PAGE>
On January 16, 1997 Shaanxi Elevator Corp. in the Province of Shaanxi in
China and Esco Elevator Corporation entered into a Joint Venture Agreement to
manufacture and market a full line of hydraulic and traction elevators and
related products. Under the terms of the agreement, the provincial
government will provide a large plant capable of producing $100 million in
products a year. Esco will equip and manage the plant and China Shaanxi
Elevator Corp. will market the Joint Venture's elevators through its 36
offices in Northern and Central China. Esco will have the right to market
the products of the Joint Venture throughout North, Central and South
America, as well as to continue to manufacture and market elevators from its
existing facilities in Fort Worth, Texas.
Simultaneous with the execution of the Shaanxi Joint Venture Agreement,
Esco received an order from China Shaanxi Elevator Corp. for a minimum of
250, and up to 400, hydraulic elevators valued at $19 million to $30 million.
Esco is to commence the production of this order immediately so as to open
the China market as soon as possible for the benefit of the Joint Venture.
However, as discussed above, the Company must obtain adequate working capital
to manufacture the elevators, and the Company expects to be capable of
shipping the first of these products in approximately 120 days after funding.
The Company believes this order will be a "perpetual order" since the joint
venture plant, when operating at full capacity, is expected to supply only a
small portion of China's total needs.
In connection with the Shaanxi Joint Venture agreement, the Company
agreed to provide cash of $1,020,000 during 1997. The Company must obtain
these funds from outside sources which the Company is seeking in the $3.5MM
placement of its capital stock, and management is vigorously pursuing the
acquisition of the required funds, but at this time the successful conclusion
of this phase is dependent on several factors some of which are outside the
control of the Company. This agreement is to expire on October 15, 1997,
however, the Company is optimistic that this agreement can be renewed if
desired.
Additionally, on March 10, 1997, Esco reached an agreement to establish
a Marketing Joint Venture in the south of China. Esco will be 62% owner of
the venture with its Chinese counterpart, who is experienced in the elevator
business in Southern China. Funding for this JV will be minimal and will be
provided from the private placement of the Company's capital stock referred
to above. The Company intends to participate in opening three marketing
offices in Hong Kong and Southern China. The economic development and urban
construction are in high speed development in the region and the market
analysis for total elevator demand of up to 40,000 elevators per year has
encouraged the Company to pursue this market vigorously.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In connection with the purchase of the Esco Assets from the Bankruptcy
Estate on November 27, 1995, Esco Elevator Corporation, a subsidiary of the
Megalith, assumed an indebtedness in the amount of $3,407,177 due to an
individual (the surviving spouse of the founder of the Old Esco) who holds
first lien rights to the substantial portion of the Esco Assets, including
the land, buildings and all equipment not encumbered by other priority liens.
Esco Elevator Corporation has not made payments of principal and only
$10,000 interest due under the note for the months of May, 1996 through June,
1997. The total amount of arrearage is approximately $750,000 as of the date
of this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) FURNISH THE EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B.
Page 16
<PAGE>
Exhibit No. Exhibit Description
----------- -------------------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEGALITH CORPORATION:
- ---------------------
(Registrant)
/s/ Syed G. Zaidi November 11, 1997
- -------------------------------------------- -----------------
Syed G. Zaidi, Chief Executive Officer and Date
Chairman of the Board of Directors
Page 17
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