**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

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**FORM 10-KSB**

 

**ANNUAL REPORT UNDERSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Fiscal YearEnded December 31, 2002**

** **

**Commission FileNumber 000-17510**

** **

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**MEGA GROUP, INC.**

(Name of Small Business Issuer in Its Charter)

 

| **New York**                                                      |   | **14-1653446**                         |
|-------------------------------------------------------------------|--------|----------------------------------------|
| (State  or Other Jurisdictionof Incorporation or  Organization)   |   | (I.R.S.  Employer  Identification No.) |
|                                                              |   |                                   |
| **1730 Rhode Island Ave., N.W., Suite 415  Washington, DC 20036** |   | **(202) 296-9594**                     |
| (Address  of Principal Executive Offices)                         |   | (Issuer’s  Telephone Number)      |

 

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Securitiesregistered under Section 12(b) of the Exchange Act:

 

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**Common Stock, $.016 Par Value**

**(Title of Class)**

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.    Yes  ý No  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.  o

 

Stateissuer’s revenues for its most recent fiscal year: $30,000.

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas sold, or the average bid and asked price of such common equity, as of aspecified date within the past 60 days: $510,274.55 as of February 20, 2003,based on the last reported sale price on that date.

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: 9,359,303 shares of common stock(including 75,302 shares held of record by our wholly-owned subsidiary), as ofMarch 3, 2003.

 

 

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**PART I**

 

**Item1.    *Description of theBusiness.***

 

We are MegaGroup, Inc., a New York corporation incorporated on December 28, 1983. Duringthe last three years, we discontinued our former business as a holding companyfor independent insurance agencies licensed and located in the State of NewYork. Until discontinuing that business, we had owned all or a majority of theinterest in as many as 41 agencies offering fire, casualty, fidelity andsurety, credit, inland and ocean marine, life, accident and health, and otherinsurance products to individuals and entities.

 

Our insuranceagency business was consistently unprofitable, the limited management providedby our executives proved to be ineffective, the economies of scale which we hadanticipated never developed, and several of our acquisitions of agencies, andaccompanying deferred payment arrangements and employment agreements with theagencies’ principals, eventually involved us in costly, time-consuming, anddestructive litigation.

 

EffectiveApril 27, 1999, we sold our commercial insurance policy expirations andrenewals, commission and profit sharing receivables, furniture, fixtures,equipment, supplies, and good will to Global Underwriters Agency, Inc.,Ballston Lake, New York, a nonaffiliated corporation, for cash of $150,000 anda non-negotiable promissory note for $100,000 payable, with interest at therate of 8% per annum, in sixty monthly installments beginning May 1, 1999. Weagreed to provide the purchaser, at no additional charge, with office space andthe use of equipment, supplies, and a bookkeeper and receptionist at our officein Ballston Lake, New York, for a period of one year after the sale. InFebruary 2000, we accepted a lump-sum payment of $50,000 in satisfaction of theprincipal indebtedness, then approximately $92,000, owing under the installmentnote.

 

By action dated March 14, 2000, our shareholders ratified the sale ofour remaining assets and the transfer of our control. EffectiveApril 1, 2000, we sold substantially all of our remaining assets to MegaPersonal Lines, Inc., New Hartford, New York, an affiliated insurance agency.These consisted primarily of furniture, fixtures, a computer and other equipment,records, property and casualty insurance customer lists, employment agreements,goodwill, a covenant not to compete, brokerage contracts, property and casualtyinsurance policies, and property and casualty insurance commission incomeaccruing after that date. The contracted-for purchase price was $427,000, paid$208,000 in cash, $92,000 by the setoff of a related obligation, and $127,000by the forgiveness of debt claimed owing to our president, director, andprincipal shareholder, Steven C. Gregory.

 

EffectiveApril 1, 2000, we transferred our remaining assets, believed to be nominal, toMr. Gregory, in return for his assumption of a real property lease in CliftonPark, New York and other related obligations. As a result, by April 1, 2000, wewere effectively without assets.

 

EffectiveOctober 11, 2000, we acquired all of the issued and outstanding common stock ofSmall Business Investment Corporation of America, Inc., an Oregon corporation,in a stock-for-stock exchange. As a result of the transaction, SBICOA’s formershareholders acquired a total of 9,309,396 shares of our common stock, or 86.4%of the common shares then issued and outstanding.

 

On October 11,2000, SBICOA was providing financial services under contract to the AfricanMethodist Episcopal Zion Church Mid-Atlantic II Episcopal District andadministrative services to an affiliated investment club. SBICOA also held100,000 restricted shares of the common stock of CytRx Corporation, Norcross,Georgia, subject to a registration rights agreement, which it acquired ascompensation for marketing services beginning September 22, 1999. At the timeof the acquisition, SBICOA had assets of $246,374 and a deficiency instockholders’ equity of $21,122.

 

 

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Since theSBICOA acquisition, pending the obtaining of necessary financing, our businessplan has been to provide diversified financial services to ethnic communitiesand faith-based entities in the United States. We have sought no governmentapprovals for, and we believe that none are necessary to, our proposedbusiness. Currently we have four officer-employees, and our wholly-ownedsubsidiary, SBICOA, has one additional officer-employee, all of them employedfull-time.

 

Directly orthrough SBICOA, we propose to operate as a specialized financial institution,known as a Community and Individual Investment Corporation (“CIIC”), under aninitiative of the U.S. Department of Housing and Urban Development (“HUD”).CIICs are for-profit, resident-owned, non-bank “banks” that, in the words ofHUD, “serve an important function by making business and housing loans forprojects in low- and moderate-income communities.”  HUD’s CIIC initiative has been designed to provide start-up moneyand other capital to CIICs. The initiative is intended to capitalize CIICs sothey may provide forgivable loans for workforce development, job creation, andbusiness growth. HUD’s funding requires CIICs to form partnerships to attractadditional private funds and credit.

 

CIICs areintended to supplement the growing availability of credit to inner-citycommunities afforded by community development banks, community developmentcredit unions, and other for-profit lending institutions providing credit andloans to locally owned and operated businesses and affordable housingdevelopers under programs of the U.S. Treasury Department; banks, otherfinancial institutions, and state and local development companies providingloans, microloans, and intensive marketing, management, and technicalassistance to small business concerns in areas of high unemployment or lowincome under programs of the U.S. Small Business Administration (“SBA”); andcommunity development block grants for economic development, and theempowerment zone and enterprise community programs, administered by HUD.

 

CIICs arefor-profit corporations that invest in economic development activities where atleast 51% of the residents are of low and moderate income. CIICs must offerthose residents an opportunity to purchase shares in the corporation. HUDprovides CIICs with community development block grant funds, Section 108 loanguarantees, and economic development initiative loans. Community developmentblock grants fund the creation of a CIIC and some of its subsequent activities.Section 108 allows a CIIC, through HUD, to guarantee repayment of bonds issuedby local governments to raise money for approved projects in the CIIC’scommunity. The guarantee permits the participating local governments to borrowfunds at below-market interest rates.

 

 

 

 

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Under the CIICinitiative, codified at 42 U.S.C. §§ 5301-20 and 24 C.F.R. Part 570, CIICs mayuse HUD funds to provide community development and business loans, businessstart-up or expansion loans, and rental housing rehabilitation loans. CIICs canalso use HUD funds to:

 

•      Provide a secondary market forloans from mainstream banks;

 

•      Offer management technicalassistance to business borrowers;

 

•      Give home ownership counseling tonew borrowers;

 

•      Develop programs to get residentsto patronize locally-owned businesses;

 

•      Help residents to enter the bankingand investment field;

 

•      Involve mainstream banks intraining and hiring local residents; and

 

•      Help local businesses train andhire local residents.

 

In addition,directly or through SBICOA, and subject to approval by the SBA, we propose toacquire, or become licensed to operate as, a Small Business Investment Company(“SBIC”) and a New Markets Venture Capital Company (“NMVCC”), under the SmallBusiness Investment Act of 1958, as recently amended, and accordingly toprovide:

 

•       SBA-guaranteed debtfinancing or equity capital, or both, to small-business concerns; and

 

•       Developmentalventure capital financing to concerns in identified low-income geographicareas.

 

We alsopropose to support community-based financing, through other financialinstitutions, by making direct investments, providing loan guarantees and othercredit enhancements, and purchasing loans. We intend to provide technicalassistance to lenders and borrowers and to assist banks in complying with therequirements of the Community Reinvestment Act (“CRA”). The CRA, codified at 12U.S.C. 2901 and 12 C.F.R. Parts 25, 228, 345, and 563e, encourages depositoryinstitutions to help meet the credit needs of the communities in which theyoperate by, among other things, helping to fund Community Development Entities(“CDE”) and Specialized Small Business Investment Companies (“SSBIC”). CDEs andSSBICs target loans for small- and medium-sized business entities. If properlyfunded and operated, CDEs and SSBICs can leverage investments from financialinstitutions and other funding sources to expand the availability of credit,investment capital, and financial services in urban and rural communities. Weexpect to facilitate that process by investing in CDEs and SSBICs, and byacting as a liquid intermediary between the capital markets, depositoryinstitutions, and CDEs and SSBICs.

 

As discussed below, throughour proposed business development company (“BDC”) affiliate, the EmergingGrowth Opportunity Fund (“EGOF”), we also expect to package, service,and advise closed-end investment companies and other savings and investmentprograms that will permit community-based equity participation in theseefforts. We propose to partner with a major financial services provider, notyet identified, to offer fee-based memberships in an investment plan and otherinvestment and community reinvestment products through faith-basedorganizations nationwide.

 

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Finally, wepropose to provide fee-based financial consulting services to local governmentsand businesses throughout the United States.

 

According to areport made available by the U.S. Department of Commerce, minorities —currently accounting for approximately 26% of the U.S. population — will growto comprise nearly 50% of the population over the next 50 years. Meanwhile,minority-owned businesses have shown impressive growth since 1990. According toU.S. Bureau of the Census estimates, there are now nearly two millionminority-owned firms in the United States, heavily concentrated in wholesaleand retail trade, having total annual sales of $205 billion. Of these, nearly25,000 firms have annual sales in excess of $1,000,000 each. On average, theowners of minority enterprises today possess higher levels of education andmanagerial skills, and cater to a much more diverse clientele, than theircounterparts of only a generation or two ago.

 

Thiscombination of changing demographics and the rapidly emerging minority businesscommunity may be expected to present significant opportunities forsophisticated investors. A 1990 study of Opportunity Funding Corp. estimatedthe total annual demand for capital in the minority business community at $144billion per year, only a portion of which was then apparently being met. Weestimate, based on statistics made available by the SBA, that there is anuntapped market in the United States of at least $47 billion for minority-ownedenterprise investments and loans.

 

Since October11, 2000, through SBICOA, we have sustained our operations substantiallythrough private borrowings.

 

On July 15,2002, together with SBICOA, we entered into a loan and security agreement withMatah Holdings, L.L.C., a nonaffiliated lender. The agreement provided us witha working capital facility under which we had the right to borrow up to$500,000, of which $300,000 is currently in use. The borrowings are evidencedby promissory notes due, together with interest at 12% per annum, on January14, 2003 and are personally guaranteed by our chairman of the board ofdirectors, chief executive officer, and principal shareholder, John H. Brown,and by our secretary-treasurer, director, and principal shareholder, Joyce L.Brown.

 

As discussedbelow, we believe that our implementation of a new business model and strategywill offer prospective shareholders and customers:

 

•      Liquidity

•      An experienced and focused management team

•      Access to the underserved faith-basedcommunity

•      A low cost and renewable pool of assets,thus ensuring sustainable earnings growth.

** **

**Business Strategy**

 

Our primary goals are to increase shareholder value by: (1) generatingsustainable earnings growth and stock appreciation; and (2) maintaining ourunique access to the capital markets. Our business plan is to offer diversified financial services to and tomake investments in companies that meet our criteria such as ethnic communitiesand faith-based entities in the United States. Our business plan shall beimplemented in two phases.

 

 

 

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*Phase One*

 

Phase one of our business plan contemplates engaging in one or morepublic or non-public equity financings and using the proceeds of such offerings(1) to invest in companies with substantial growth potential that will provideus with a revenue stream through equity participation and revenue sharingagreements with the companies in which we invest; (2) to initiate our investmentsin, product offerings to and consulting services for ethnic communities andfaith-based entities; and (3) to provide seed money to form and register ourBDC under the Investment Company Act of 1940, as amended.  Our initial strategy is to invest in companieswith substantial growth potential that will provide us with a revenue stream.We believe that our business model can successfully and profitably address theexpanding and profitable under-served small and medium sized business entities(“SME”) market segment by:

 

•      Financing the growth and expansion of CDEsand SMEs

•      Building on our strategic relationshipsestablished in the SME community

•     Increasing access to investment capital sources byproviding our proprietary investment products, and financial literacy trainingand consulting services to ethnic community and faith-based investment entities

•      Leveraging equity investments in SSBICs

•      Utilizing the network of more than 600CDEs and SSBICs to enhance quality deal flow

 

*Phase Two*

 

Implementation of the second phase of our business plan contemplatesoperating and managing our to be registered affiliate, EGOF, as a BDC under the Investment Company Act of1940.  Our  BDC’s primary focus will be investing in or lending to small tomedium size entities and making managerial assistance available to them.  Our BDC may use capital provided from publicofferings of securities and from other sources to make long-term investments inprivate growing businesses. BDCs can provide its shareholders with the potentialliquidity of a publicly traded company, while sharing in the possible benefits,if any, of investing in privately-held companies.  If successfully formed and registered, our BDC affiliate may beentitled to issue equity and debt securities, subject to the laws, rules andregulations of the Investment Company Act of 1940.

 

### **TheMarket**

### ** **

We believe the market opportunity is significant because our researchindicates that there is an unmet need for capital investment in urbancommunities.  There are approximately 2million minority-owned businesses in the United States and an additional 15million SMEs, annually accounting for $202 billion and $3.3 trillion worth oftransactions, respectively. The *Wall Street Journal*reported on April 25, 2002, thatminority-owned companies are growing at twice the rate of small firms ingeneral.  Moreover, recent legislationand public policy initiatives encourage the federal government and largecorporations to set aside twenty-three percent (23%) of their purchasing needs forfulfillment by SMEs and minority businesses. Based upon interviews conducted,we believe that little effort is made to attract the minority middle-class toinvest in the capital markets, and even less is done to finance SMEs in urbanand rural areas, or to provide investment savings and financial literacytraining.

 

We are well positioned tobe the financial intermediary between the mainstream institutions, the CRAdepositary community, SMEs, individuals and community developmentorganizations.  By virtue of being apublicly traded company, Mega affords individual and institutional investorsthe information, access, valuation, and liquidity they demand. Most smallbusiness investments do not afford investors timely information, liquidity oran exit strategy for their investments. Our current and planned organizational and operational structure mayenable us to accommodate those investment requirements, and is uniquelypositioned to offer investors fiscally responsible investments, and in somecases significant tax credits. For example, the New Markets Tax Credit permits,under certain conditions, individual and corporate taxpayers to receive acredit against Federal income taxes of up to 39 percent of invested funds forqualified equity investments in CDEs. To obtain detailed information regarding this program, you should visitthe U.S. Department of the Treasury’s website at www.cdfifund.gov.

 

Moreover,prospective loan and investment opportunity growth may come from the hundredsof networking contacts around the country that our senior management currentlyenjoys.  These sources include 

 

 

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investment bankers, communityleaders, principals of other private funds and the more that 600 CDEs and SBICslocated around the country.

 

**Investment Strategy**

 

Our proposedinvestment strategy is to make loans to and investments in SMEs and CDEs withannual revenues in the range of $1 million to $50 million, a market whichtraditionally does not have ready access to long-term, unsecured debtfinancing. Our loans may include features such as detachable warrants, equitykickers, and in some cases, may accrue tax benefits to investors’ under theU.S. Treasury’s New Markets Tax Credit program discussed above. Through EGOF, weplan to adhere to strict underwriting procedures and criteria when making loansto and investments in SMEs and CDEs.

 

**Underwriting Procedures**

 

Ourunderwriting procedures and criteria for making loans to and investments inCDEs and SMEs, as well as for joint investments with other SBICs, includes, butis not limited to:

 

•      Evaluating target investment portfoliocompany assumptions including recession impact analyses.

•      Preparing cash flow coverage of debtservice models under extreme conditions.

•      Participating in or membership on boardsof directors in our portfolio companies.

•      Assisting portfolio companies with makingstrategic business or accretive acquisitions, as well as devising investmentexit strategies.

 

Generally, wewill require that companies in which we invest demonstrate:

 

•      strong market position;

•      community involvement;

•      sales growth;

•      positive cash flow; and

•      profitability

 

We will alsoevaluate the quality of management, and seek experienced entrepreneurs with aproven track record, relevant industry experience, and significant cash equityin their business. We do not expect to invest, either directly or indirectly,in startups, turnarounds, high technology or highly leveraged entities.

 

Our business model carries elements of risk relevant to any investmentactivity, and may include, but is not limited to:

 

•       Investment risks associated with SMEsthat are undercapitalized, poorly managed or that lack access to the capitalmarkets for expansion and growth

•       Economic risks, including periodicbusiness downturns that impact portfolio companies

•       Competition for quality investment andloan opportunities with other investors/lenders who target our target market

•       In the case of SBICs, CDEs and BDCs, therisk that government regulations may adversely affect our investment strategies

 

**We will seekto mitigate these underwriting risks by ensuring strict adherence to ourinvestment policies and procedures.  Inall cases, our primary objective is the preservation of principal.Consequently, we will:**

** **

**•**      Conduct extensive initialdue diligence, including the use of risk models to stress test debt coverageunder a variety of business and economic conditions.

**•**      Continuously monitorportfolio companies, including stress testing and imposition of a gradingsystem to measure the finacial viability of a portfolio company.

**•**      We will aggressivelyintervene in cases when certain “threshold” financial ratios indicate financialdeterioration.

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**•**      Spread and diversify risk bypartnering with other investment funds, CDEs and SBICs to fund our portfoliocompanies.

**•**      Maintain our network ofquality investment opportunities through affiliations with national business,legal, and financial leaders.

**•**      Maintain relationships withother investment funds to voice our collective concerns at the state andFederal level.

** **

### **Competition**

 

Commercialbanks, private placement offerings, mezzanine funds are the primary competitorsfor our loans to and investments in CDEs and SMEs. Commercial banks primarilyprovide senior secured and unsecured short-term debt.  Generally, commercial banks do not provide long-term unsecuredloans.  Commercial finance companiesgenerally provide senior secured long-term debt. Private placement offerings ofequity and high-yield debt generally involve very large transactions, typicallywell in excess of $50 million.

 

Privatemezzanine funds also provide unsecured long-term debt to private companies, butthe shareholder or stakeholder nature of our investment strategy may permit usto be a better long-term partner for our portfolio companies compared to atraditional mezzanine fund, which typically has a defined investment horizon.

 

Generally, ourinvestments will be structured as unsecured, subordinated loans that carry afixed interest rate, with revenue sharing features to provide us with currentincome.  Moreover, the presence ofequity kickers on loans may provide additional income. Loans made by us may haveinterest only payments in the early years, with principal and interest paymentsin later years with maturities ranging from five to ten years. Moreover, we mayconsider preferred stock investments structured to provide us with dividendyield income. In addition, we will seek to generate management or consultingfees for managerial and consulting services that we provide to companies, aswell as to our portfolio companies.

 

Presently, wehave not identified any other company that has penetrated or controls the urbanand rural segment of the financial services market.  Given our “first to market” status and senior management’swell-established community and faith-based contacts and partnerships, ourprospects are reasonable for capturing a significant market share of thissegment.

 

**Item2.    *Description ofProperty.***

 

Weoccupy approximately 1,000 square feet of office space, as a month-to-monthsubtenant of a nonaffiliate, at 1730 Rhode Island Ave., N.W., Suite 415,Washington, D.C. 20036. We do not own, or invest in, any real property.

 

 

 

 

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 **Item 3.    *Legal Proceedings.***

 

We are one ofseveral defendants in a civil action, for the payment of a promissory note,captioned *David G. Becking, et al. v. MegaGroup, Inc., et al.,*which commenced April 29, 1997 in the SupremeCourt for the County of Albany, New York. The plaintiffs were the former owners of an insurance agency which theCompany purchased on December 30, 1988. The other defendants were guarantors of the promissory note.  Several of the defendants asserted claimsagainst third-party defendants who included the Company’s president, director,and principal shareholder, Steven C. Gregory. As of March 15, 2000, the plaintiffs’ claim against the defendants,including principal and interest, totaled $754,758.  On that date, the Company settled with the plaintiffs for apayment to them of $92,000 in cash and by delivering to them two promissorynotes, each in the amount of $75,000 due and payable in 48 consecutive monthlyinstallments, with interest at the rate of 9% per annum, payable $1,852commencing April 1, 2000, with the final payment due March 1, 2004.  By order dated November 16, 2000, the courtobligated the Company to pay defendant Martin J. Keary any portion of ajudgment for $146,397 which he must pay to the plaintiffs and to reimburse himfor his attorney’s fees in defending the action in an amount which the courtwill approve.  The court dismissed allremaining claims against Mr. Gregory and the Company.  The entire $146,397 is included in the current portion oflong-term debt on the accompanying December 31, 2002 and 2001 Balance Sheets.

 

We are theintervener-petitioner in a civil action for damages and injunctive reliefcaptioned *Mega Personal Lines, Inc. v.Robert L. Halton, et al.,* which commenced June 12, 2001 and ispending in the Supreme Court for the County of Saratoga, New York.  The petitioner is the purchaser, effectiveApril 1, 2000, of substantially all of the Company’s remaining assets, and therespondents include the Company’s our judgment creditor, Robert L. Halton, andvarious third-party garnishees.  MegaPersonal Lines, Inc. seeks the return and release to it of insurancecommissions which, it alleges, were improperly garnished by Mr. Halton in *Mega Group, Inc. v. Robert L. Halton*.  Mr. Halton seeks to invalidate and set asidethe transfer of the Company’s assets to Mega Personal Lines, Inc., so that theassets, including the insurance commissions, might be used to satisfy hisSeptember 29, 2000 partial summary judgment against the Company.  He alleges generally that the transfer ofthe assets was not supported by fair consideration and was made with actualintent to hinder, delay, or defraud the Company’s creditors. The Company isdefending itself against Mr. Halton’s claims. As of December 31, 2002, all pleadings had been served in thelitigation, and partial discovery had taken place.  Subsequent to December 31, 2001, the Company successfullyobtained Court authorization to intervene in the proceeding, as an interestedparty. Discovery continues to take place, and no trial date has been set.

 

We are one ofseveral defendants in a civil action for equitable relief captioned *Halton v. Gregory, et al*., which commencedon July 22, 2002, and is pending in the Supreme Court for the County ofSaratoga, New York.  The plaintiff,Robert L. Halton, is the Company’s judgment creditor, and the defendants alsoinclude the Company’s president, Steven C. Gregory.  In the action, Mr. Halton seeks to invalidate and set aside thetransfer, effective April 1, 2000, of the Company’s remaining assets to Mr.Gregory, as described in Note 1, so that the assets might be used to satisfyMr. Halton’s September 29, 2000 partial summary judgment against the Company.  Mr. Halton also seeks an accounting of theasset transfer.  He alleges generallythat the transfer of the assets was not for a fair equivalent value and wasmade with the actual interest to hinder, delay, or defraud our creditors.  The Company is defending its position in theaction.  From December 31, 2001 to thepresent, the defendants have served their answer, but no discovery has takenplace.

 

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We are arespondent in a civil action, for confirmation of an arbitration award captioned*HermanAdler v. Mega Group, Inc.*,*etal.,* which commenced on November 15, 1999, in the Supreme Court forthe County of Albany New York. The petitioner, now deceased, was the formerowner of an insurance agency which we purchased in 1985.  He claimed that the Company failed to honorthe payment terms of the agency purchase agreement.  On December 15, 1999, an arbitrator rendered, and on March 7,2000 the arbitrator modified, an award in favor of the petitioner and againstthe Company in the amount of $157,381. On January 8, 2001, the Supreme Court confirmed the arbitration awardand entered judgment against the Company for $168,808 including costs andinterest.  The judgment creditorrestrained the Company from making any sale, assignment, transfer, or interferencewith any property in which the Company has an interest until the judgment issatisfied or vacated.  The awardedamount is included in the current portion of long-term debt and related costsand interest are included in accounts payable and accrued expenses on theaccompanying December 31, 2002 and 2001 Balance Sheets.

 

We are thedefendant in a civil action for money damages, for breach of a computerfinancing agreement, captioned *First State Bank v. Mega Group, Inc.*, inthe Supreme Court for the County of Saratoga, New York.  On December 14, 2000, the Supreme Courtentered judgment against the Company in the amount of $48,000.  The judgment creditor restrained the Companyfrom making any sale, assignment, transfer, or interference with any propertyin which the Company has an interest until the judgment is satisfied orvacated.  The judgment amount isincluded in the current portion of long-term debt on the accompanying December31, 2002 and 2001 Balance Sheets.

 

We are a defendant in other pending lawsuits which, in the view ofmanagement, are not material to the financial statements.

 

**Item4.    *Submission ofMatters to a Vote of Security Holders.***

 

Notapplicable.

 

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**PART II**

 

**Item5.    *Market for CommonEquity and Related Stockholder Matters.***

 

Accordingto our transfer agent, there were 223 record holders of our common stock onDecember 31, 2002. It was listed on the OTC Bulletin Board until January 10,2000. Since then it has traded in the over-the-counter market and been quotedin the “pink sheets,” and accordingly the public trading market for our commonstock is limited. The range of the high and low bid prices for each quarterwithin the last two fiscal years, according to information provided by theelectronic quotations service of Pink Sheets LLC, follows. These quotationsreflect inter-dealer prices, without retail mark-up, mark-down, or commission,and may not represent actual transactions.

 
| **Quarter Ended**  |   | **High Bid** |   | **Low Bid** |   |
|--------------------|--------|--------------|--------|-------------|--------|
| March 31, 2000     |   | $            | .25    |        | $      | .125 |   |
| June 30, 2000      |   | $            | .75    |        | $      | .25 |   |
| September 30, 2000 |   | $            | .50    |        | $      | .35 |   |
| December 31, 2000  |   | $            | .375   |        | $      | .05 |   |
| March 31, 2001     |   | $            | .11    |        | $      | .08 |   |
| June 30, 2001      |   | $            | .11    |        | $      | .06 |   |
| September 30, 2001 |   | $            | .10    |        | $      | .06 |   |
| December 31, 2001  |   | $            | .06    |        | $      | .06 |   |
| March 31, 2002     |   | $            | .23    |        | $      | .23 |   |
| June 30, 2002      |   | $            | .20    |        | $      | .06 |   |
| September 30, 2002 |   | $            | 1.00   |        | $      | .75 |   |
| December 31, 2002  |   | $            | .95    |        | $      | .25 |   |

 

Wehave declared no dividends on our common equity since December 31, 1999 and, topreserve liquidity, are unlikely to pay any dividends on our common equity inthe foreseeable future.

 

On May 7,2002, the Company issued 692,391 shares of its common stock to its ChiefExecutive Officer for payment of previously accrued and unpaid wages valued at$41,543 ($0.06 per share based on the trading price of the Company’s shares onthe issuance date).

 

On June 30,2002, the Company issued 10,000 shares of its common stock for payment ofmembership dues to the Center for New Black Leadership valued at $1,000 ($0.10per share, based on management’s estimate of the fair market value of theshares at the issuance date).

 

On July 15,2002, the Company issued 100,000 shares of its common stock to Matah Holdings,LLC as partial consideration, valued at $10,000 ($0.10 per share, based onmanagement’s estimate of the fair market value of the shares at the issuancedate), for entering into a loan and security agreement.

 

On September30, 2002, the Company issued 400,000 shares of its common stock to anonaffiliated investment bank for financial consulting services valued at$40,000 ($0.10 per share, based on management’s estimate of the fair marketvalue of the shares at the issuance date).

 

On September30, 2002, the Company issued 100,000 shares of its common stock to a formerexecutive for past professional services valued at $10,000 ($0.10 per share,based on management’s estimate of the fair market value of the shares at theissuance date).

 

In October2000, the Company granted three stockholders/employees options, exercisable untilMarch 30, 2001, to purchase a total of 660,000 shares of its common stock for$3.00 per share. Because the exercise price under these stock purchase optionsis higher than the fair market value of a share of common stock at the date ofgrant, no expense has been recognized. At the same time, the Company granted the same three stockholders putoptions, exercisable until June 28, 2001, which, contingent on the occurrenceof certain events, required the Company to purchase a total of 660,000 of suchstockholders’ shares of its common stock for $0.50 per share.  These purchase and put options expiredunexercised.

 

In June 2001,the Company granted one of its directors options, exercisable until June 30,2006 or until 30 days prior to the commencement of any registered publicoffering of its equity securities, whichever comes first, to purchase a totalof 100,000 shares of its common stock for $.50 per share.

 

In July andAugust 2001, the Company granted a promissory note holder options to purchase atotal of 60,000 shares of its common stock for $.50 per share, of which optionsto purchase 40,000 and 20,000 shares are exercisable until July 17, 2003 andAugust 6, 2003, respectively, or until 15 days prior to the effective date ofany registration statement covering its equity securities to be publiclyoffered and sold, whichever comes first. In October 2001, the Company granted a promissory note holder options,exercisable until September 24, 2003 or until 90 days after the closing of anyregistered public offering of equity securities, whichever comes first, topurchase 120,000 shares of its common stock for $.50 per share.

 

11

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Weissued or granted all of these securities, without registration under theSecurities Act of 1933, in non-underwritten, non-public transactions. In eachcase, we relied on the exemptions from registration in Section 4(2) or 4(6) ofthe Securities Act, and Rule 506 thereunder, for offers and sales to accreditedand other sophisticated investors. The persons acquiring our securitiesexecuted written representations consistent with status as an accredited orother sophisticated investor.

 

Thefollowing table provides information, as of December 31, 2002, concerning thenumber of shares of our common stock issuable under options then outstanding:

 

12

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| **Plan Category******                                        |   | **Number of Securities to  be Issued upon Exercise  of Outstanding Options,  Warrants, and Rights****** |   | **Weighted Average  Exercise Price of  Outstanding Options,  Warrants, and Rights****** |   | **Number of Securities  Remaining Available  for Future Issuance****** |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|
| Equity Compensation Plans Approved by Securities Holders     |   | —                                                                                                                                          |   | —                                                                                                      |   | —                                                                           |   |
| Equity Compensation Plans Not Approved by Securities Holders |   | 280,000  shares                                                                                                                                 |   | $                                                                                                           | 0.50   |                                                                             | — |   |
| Total                                                        |   | 280,000 shares                                                                                                                             |   | $                                                                                                           | 0.50   |                                                                             | — |   |

 

**Item6.    *Management’sDiscussion and Analysis or Plan of Operation.***

 

*Some of the statements contained or incorporated byreference in this report are “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. Statements about our expectations, beliefs, plans,objectives, assumptions, or future events or performance are not historicalfacts and may be forward-looking. Forward-looking statements are often, but notalways, made through the use of words or phrases like “anticipate,” “estimate,”“plans,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,”“we believe,” “we intend,” and similar words or phrases. Accordingly, thesestatements involve estimates, assumptions, and uncertainties. Anyforward-looking statements are qualified in their entirety by reference to thefactors, including risk factors, discussed in this report or incorporated by reference.Because the factors discussed in this report or incorporated by reference couldcause actual results or outcomes to differ materially from those expressed inforward-looking statements, you should not over-rely on forward-lookingstatements. Further, each forward-looking statement speaks only as of the dateon which it is made, and we undertake no obligation to update anyforward-looking statement to reflect later events or circumstances as theyoccur.*

 

As of December 31, 2002, we had a deficiencyin stockholders’ equity of approximately $2,415,000 and a working capitaldeficiency of approximately $2,420,000. In addition, we are in default on certain notes payable and otherobligations and are involved in significant litigation involving past businessdealings.  On October 11, 2000, as acondition of its acquisition of SBICOA, its president, Steven Gregory, agreedto indemnify the Company, SBICOA, and its respective directors, shareholders,affiliates, and certain other associated persons (collectively, the “IndemniteeGroup”) and to hold the Indemnitee Group harmless from and against all claimsor liabilities relating to its business, including all litigation claims thenbeing asserted against the Company (other than *theHerman Adler v. Mega Group, et al*., claim described in the “LegalProceedings” disclosure herein).  Mr.Gregory’s agreement is subject to certain conditions, among them that (i) it iseffective until not later than October 11, 2004, (ii) it is contingent on thesuccessful completion of a securities offering by the Company, and (iii) hisobligation shall be satisfied only by his delivery to the Company of suchnumber of its common shares owned by him, valued for this purpose at $2.50 pershare, as shall be equal to the amount of any claim settled or finallydetermined.  Mr. Gregory has granted theIndemnitee Group a security interest in his shares to secure his obligation.

 

The intent of the our management is to directit into new business lines providing financial services to currentlyunderserved ethnic minorities through alliances with churches and otherorganizations serving those groups.  Weintend in the near term to obtain additional equity funding and to obtainadditional debt financing to pursue these new lines of business and to providethe funds to satisfy its current obligations. The extent to which we can raise additional equity and financing andachieve profitable operations from new business activities will determine if wecan continue as a going concern.

 

On May 2, 2002, we entered into a non-bindingletter of intent with an underwriter to engage in a firm-commitment registeredpublic offering of 1,500,000 units, each unit consisting of one share of itscommon stock and a warrant to purchase one additional share of its commonstock, representing 35% of its equity fully diluted, at an offering pricecurrently estimated at $6.00 per unit. The letter of intent is subject to various conditions and to theexecution of formal written underwriting documents.

 

Management believes it will be successful inobtaining additional equity and debt financing, but no assurances can be givenin this regard.

 

13

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OnJuly 15, 2002, we entered into a loan and security agreement with Matah Holdings,L.L.C., a nonaffiliated lender. The agreement provided us with a workingcapital facility under which we had the right to borrow up to $500,000, ofwhich $300,000 is currently in use. The borrowings are evidenced by promissorynotes due, together with interest at 12% per annum, on January 14, 2003 and arepersonally guaranteed by our chairman of the board of directors, chiefexecutive officer, and principal shareholder, John H. Brown, and by oursecretary-treasurer, director, and principal shareholder, Joyce L. Brown.

 

 

Since October 11, 2000, through SBICOA, we have sustained operationssubstantially through private borrowings.

 

Our business plan calls for a capitalization of at least $30,000,000. Accordingly, we are now substantially undercapitalized. We estimate that we have sufficient liquidity to satisfy our cash requirements until at least May 2003. We expect to satisfy any liquidity needs during the foreseeable future by engaging in one or more public or non-public equity financings. The nature of our business and proposed business does not require any significant product research and development, purchase or sale of plant and equipment, or changes in the number of employees.

 

**Results ofOperations**

 

*Fiscal Year- Ended December 31, 2002*

 

During the fiscal year endedDecember 31, 2002, we generated nominal revenues of $30,000 from financialconsulting services. Our cash position decreased from $17,100 at December 31,2001 to $4,031 at December 31, 2002. During the same fiscal year ended December31, 2002, we realized a net loss of $684,439 after revenue of $30,000, ongoingexpenses in the total amount of $586,594, interest expense of $127,997,interest income of $640 and a realized loss from the sale of marketablesecurities in the amount of $488. During the fiscal year ended December 31,2002, we sustained operations substantially through private borrowingsin the aggregate amount of $315,000.

 

*Fiscal Year- Ended December 31, 2001*

 

During the fiscal year endedDecember 31, 2001, we generated no revenues. Our cash position decreased from$26,383 at December 31, 2000 to $17,100 at December 31, 2001. During the samefiscal year ended December 31, 2001, we realized a net loss of $554,637 afterongoing expenses in the total amount of $402,899, interest expense of $107,374,interest income of $404 and a realized loss from the sale of marketablesecurities in the amount of $84,402. During the fiscal year ended December 31,2001, we sustained operations substantially through private borrowingsin the aggregate amount of $90,547 and from proceeds from the sale ofmarketable securities of $147,332.

 

 **Item 7.    *Financial Statements.***

 

See pages F-1 through F-23attached hereto.

 

**Item8.    *Changes In andDisagreements With Accountants on Accounting and Financial Disclosure.***

 

Not applicable.

 

14

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**PART III**

 

**Item9.    *Directors,Executive Officers, Promoters and Control Persons; Compliance With Section16(a) of the Exchange Act.***

 

**Directorsand Executive Officers**

 

Our directors and executiveofficers are as follows:

 
| **Name**          |   | **Positions and Offices**                                       |
|-------------------|--------|-----------------------------------------------------------------|
| John H. Brown     |   | Chairman of the Board of  Directors and Chief Executive Officer |
|              |   |                                                            |
| Steven C. Gregory |   | President and Director                                          |
|              |   |                                                            |
| Merritt C. Brown  |   | Vice President, Chief  Financial Officer, and Director          |
|              |   |                                                            |
| Joyce L. Brown    |   | Secretary, Treasurer, and  Director                             |
|              |   |                                                            |
| Vern S. Morris    |   | Director                                                        |

 

John H. Brown, 56, has beenour chairman of the board of directors and chief executive officer sinceOctober 2000 and chairman of the board of directors and chief executive officerof SBICOA since March 2000. From August 1999 to October 2001, he was vicepresident and branch manager of Paulson Investment Co., Inc., an investmentbanking firm and member of the National Association of Securities Dealers, Inc.From April 1998 to July 1999, he was director of syndicate operations for TheChapman Company, another investment banking firm. Mr. Brown managed GlobalVenture Group, a venture capital company financing minority-owned enterprises,from June 1995 to April 1998. He is past president of the Oregon chapter of theNational Association of Minority Contractors. He is the husband of Joyce L.Brown.

 

Steven C. Gregory, 52, hasbeen our president and director since October 1997. Since 1981, he has beenpresident of Associates of Clifton Park, Inc., an insurance agency.

 

Merritt C. Brown, 56, hasbeen our vice president, chief financial officer, and director since September2002. From October 2000 to August 2002, he was senior vice president and chiefadministrative officer of J.P. Morgan Chase, an international investment bank,where his responsibilities included managing an investment portfolio,infrastructure review and evaluation, and managing a 2,500-person divisionworldwide. From September 1986 to August 2000, he was employed as a foreignservice officer by the U.S. Department of State, where he served as deputychief of mission (deputy ambassador) in two tours of duty. Merritt C. Brown isunrelated to John H. or Joyce L. Brown.

 

15

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Joyce L. Brown, 55, has beenour vice president, secretary, and director since October 2000 and an officerand director of SBICOA since March 2000. Since 1990, she has been a managementinformation systems consultant and staff coordinator.

 

Vern S. Morris, 47, has beenour director since October 2000 and a director of SBICOA since March 2000.Since February 1998, he has been market manager of Brinker International, Inc.,a retailer, with responsibility for multi-unit store operations having sales ofapproximately $5 million per year. From January 1996 to February 1998, he wasarea director for Boston Market, a restaurant operator and franchiser, withresponsibility for multi-unit store operations having sales of approximately $8million per year.

 

Each director serves untilthe next annual meeting of shareholders and until his or her successor shallhave been elected and qualified. Each executive officer serves until the firstmeeting of directors following the next annual meeting of shareholders anduntil his or her successor shall have been elected and qualified.

 

**SignificantEmployees**

 

Gordon T. Gant, 58, has beenSBICOA’s vice president of government and community affairs since November2001. Since January 2001, he has been a government relations consultant basedin Washington, D.C. Mr. Gant was a senior advisor and analyst with the U.S.Department of Commerce, from August 1998 to January 2001, and the U.S.Department of Defense, from August 1997 to August 1998.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

Several of our directors,officers, and more than 10% beneficial owners of our common stock furnished uscopies of Forms 3, 4, and 5 which they filed, during our last fiscal year, withthe Securities and Exchange Commission, under Section 16(a) of the SecuritiesExchange Act of 1934. Based solely on a review of those filings, it appearsthat some were not filed on a timely basis. Information concerning the latefilings has previously been reported.

 

**Item10.    *ExecutiveCompensation.***

 

The table below sets forthcertain information concerning all plan and non-plan compensation which wasearned by, or which we awarded or paid to, the individuals serving as our chiefexecutive officer during the years ended December 31, 2002, 2001 and 2000 and,if compensated and serving at year-end, as any of our other executive officersduring our fiscal years then ended (collectively, the “named executiveofficers”).

 

16

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**SUMMARY COMPENSATION TABLE**

 
|                               |   |             |   | **Annual Compensation** |         | **Long-Term Compensation** |   |                           |   |
|------------------------------------|--------|------------------|--------|-------------------------|--------------|----------------------------|--------|--------------------------------|--------|
| **Name and Principal Position**    |   | **Fiscal  Year** |   | **Salary**              |         | **Bonus**                  |   | **Other  Annual********Comp.** |   | **Restricted********Stock********Awards** |   | **Securities  Underlying  Options/SARs** |   | **LTIP  Payouts** |   | **All  Other  Comp.****** |   |
| John H. Brown,                     |   | 2002             |   | $                       | 75,000       |                       | — |                           | — |   | — |   | — |   | — |   | — |   |
| Chairman and Chief Executive       |   | 2001             |   | $                       | 75,000       |                       | — |                           | — |   | — |   | — |   | — |   | — |   |
| Officer                            |   | 2000             |   | —                  |         | —                     |   | —                         |   | — |   | — |   | — |   | — |   |
|                               |   |             |   |                    |         |                       |   |                           |   |   |   |   |   |   |   |   |   |
| Joyce L. Brown,                    |   | 2002             |   | $                       |  75,000 |                       | — |                           | — |   | — |   | — |   | — |   | — |   |
| Secretary and Treasurer            |   | 2001             |   | $                       |  75,000 |                       | — |                           | — |   | — |   | — |   | — |   | — |   |
|                               |   | 2000             |   | $                       |  75,000 |                       | — |                           | — |   | — |   | — |   | — |   | — |   |
|                               |   |             |   |                    |         |                       |   |                           |   |   |   |   |   |   |   |   |   |
| Merritt C. Brown,                  |   |             |   |                    |         | —                     |   | —                         |   | — |   | — |   | — |   | — |   |
| Vice President and Chief Financial |   | 2002             |   | $                       | 37,500       |                       | — |                           | — |   | — |   | — |   | — |   | — |   |
| Officer                            |   | 2001             |   | —                  |         | —                     |   | —                         |   | — |   | — |   | — |   | — |   |

 

Duringour fiscal years ended December 31, 2002 and 2001, we granted no stock optionsor stock appreciation rights to either of the named executive officers, andneither of them exercised any stock options or stock appreciation rights. Atfiscal year end, neither of the named executive officers held any unexercisedoptions or stock appreciation rights, or any restricted stock subject toperformance-based conditions to vesting. During our fiscal years ended December31, 2002 and 2001, we granted no awards to either of the named executiveofficers under any long-term incentive plan.

 

Wehave no standard arrangement under which we compensate our directors and,except as noted below, none of our directors received any compensation for anyservice as a director during our fiscal year ended December 31, 2002. On June8, 2001, we granted an option, to our former director, Anthony W. Robinson, forthe purchase of 100,000 shares of our common stock. The option is exercisable,at $.50 per share, until June 30, 2006 or until 30 days prior to thecommencement of any public offering of our equity securities, whichever comesfirst.

 

Neithernamed executive officer has entered into any currently effective employmentagreement with us, and there is no compensatory plan or arrangement under whicheither named executive officer may receive any remuneration upon hisresignation, retirement, or any other termination of his employment with us orfrom a change in control or a change in the named executive officer’sresponsibilities following a change in control.

 

**Item11.    *SecurityOwnership of Certain Beneficial Owners and Management.***

 

Thefollowing table sets forth certain information, as of December 31, 2002,concerning the shares of our common stock owned by each more-than-five-percentbeneficial owner of our common stock, each of our directors and named executiveofficers, and all of our directors and executive officers as a group:

 

17

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**SECURITY OWNERSHIP TABLE**

 
| **Name and  Address  of Beneficial Owner**                              |   | **Shares Beneficially Owned** |   | **Percent of  Class** |   |
|-------------------------------------------------------------------------|--------|-------------------------------|--------|----------------------------|--------|
| John H. Brown  1730 Rhode Island Ave., N.W., #415Washington, D.C. 20036 |   | 2,603,132                     |   | 32.3                       | %(1)   |
|                                                                    |   |                          |   |                       |   |
| Joyce L. Brown1730 Rhode Island Ave., N.W.,  #415Washington, D.C. 20036 |   | 3,112,532                     | (2)    | 38.6                       | %(1)   |
|                                                                    |   |                          |   |                       |   |
| Steven C. Gregory313 Ushers RoadBallston Lake, NY 12019                 |   | 501,125                       | (3)    | 6.2                        | %(1)   |
|                                                                    |   |                          |   |                       |   |
| Vern S. Morris46619 Carriage CourtSterling, VA 20164                    |   | 505,498                       |   | 6.3                        | %(1)   |
|                                                                    |   |                          |   |                       |   |
| Merritt C. Brown51 Howell DriveWest Orange, NJ 07052                    |   | 500,000                       |   | 6.2                        | %      |
|                                                                    |   |                          |   |                       |   |
| Directors and Executive Officers as a Group (5 Persons)                 |   | 7,216,789                     | (2,3)  | 89.5                       | %(1)   |

 

OnDecember 31, 2002, Robert L. Halton, our former officer and director, owned10,000 shares of our 8% cumulative nonconvertible preferred stock, representingall of the issued and outstanding shares of our preferred stock, our only otheroutstanding class of equity securities.

 

Exceptas otherwise indicated, all of the persons named above hold their sharesdirectly and of record. None of them holds any shares under a trust or othercomparable agreement. We know of no arrangements which may result in a changein our control.

 

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(1)      Based on 8,833,605 shares of common stockissued and outstanding, less 75,302 shares held of record or beneficially bySBICOA, our wholly-owned subsidiary, plus any additional shares deemed“beneficially owned” by the respective beneficial owners, computed as providedin Section 13(d)(4) of the Securities Exchange Act of 1934 and SEC Rule 13d-3.John H. and Joyce L. Brown exercise shared voting and investment power withrespect to the shares held by SBICOA. 

 

(2)      Includes 9,400 shares of common stock held ofrecord by Small Business Investment Club of America, an affiliated generalpartnership, as to which Joyce L. Brown exercises voting and investment power. 

 

(3)      Includes 1,125 shares held of record byMargaret Laguardia Gregory, Mr. Gregory’s wife. Mr. Gregory disclaimsbeneficial ownership of the shares held by his wife. 

 

18

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**Item 12.    *Certain Relationships and Related Transactions.***

 

Our officer, director, and principal shareholder, Steven C. Gregory,has advised us that, in connection with the sale of our commercial insurancelines business to Global Underwriters Agency, Inc., on April 27, 1999, he arranged to receivecommission income, from the purchaser, in the aggregate amount of approximately$12,000 per year for servicing two accounts.

 

Thecontracted-for purchase price for thesale of substantially all of our remaining assets to Mega Personal Lines, Inc.,on April 1, 2000, was $427,000, of which $208,000 was paid in cash,$92,000 by the setoff of a related obligation, and $127,000 by the forgivenessof debt claimed owing to Mr. Gregory. Mr. Gregory has advised us that we incurredthe $127,000 debt to him for attorney’s fees, rent, automobile expenses,working capital advances, and other expenses in the ordinary course ofbusiness, and that he paid them on our behalf, from 1996 to 2000. He separatelywaived any claim against us for payment of such expenses. Mr. Gregory hasfurther advised us that, in connectionwith that transaction, he personally loaned $100,000 to the purchaser, that thepurchaser, on March 15, 2000, used $92,000 of the loan to settle *David G.Becking, et al. v. Mega Group, Inc., et al.*on our behalf, as described above, that the loan was subsequentlyconverted into a 40% equity interest in Mega Personal Lines, Inc., which Mr.Gregory continues to own, and that Mega Personal Lines, Inc. set off our$92,000 obligation to it against the purchase price. Mr. Gregory has furtheradvised us that, under an arrangementwhich he has with Mega Personal Lines, Inc., he is entitled to compensation of$2,000 per month for managing its office in Ballston Lake, New York. Wewere not a party to any agreement or arrangement under which Mr. Gregory madeor received, or is to receive, these payments or an equity interest in MegaPersonal Lines, Inc.

 

EffectiveApril 1, 2000, we transferred our remaining assets, believed to be nominal, toMr. Gregory, in return for his assumption of a real property lease in CliftonPark, New York and other related obligations.

 

We acquired nomaterial portion of the assets sold during the two years prior to each of thethree sales.

 

On August 27, 1999, SBICOA borrowed from Joyce L. Brown, then a founderof SBICOA, $100,000 evidenced by a promissory note payable, with interest atthe rate of 10% per annum, on December 31, 2002, as extended. On February 26,2000, SBICOA borrowed from Mrs. Brown an additional $15,000, evidenced by apromissory note payable, with interest at the rate of 15% per annum and 5,000shares of our common stock, on December 31, 2002, as extended. We have alsoadvanced a net of $7,500 to Mrs. Brown, who has been our officer, director, andprincipal shareholder since October 11, 2000, and $5,500 to Nelson H. Beebe,our former officer***.***

 

On November 1, 1999, SBICOA purchased from Mr. Gregory 776,693 sharesof our common stock, for cash of $40,000 and a promissory note for $40,000payable, together with interest at 6% per annum, in a single installment onJune 13, 2000. Payment of the note is currently past due.

 

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On March 1, 2000, SBICOA issued 2,000 cancelable shares of its commonstock to Vern S. Morris, then a director and principal shareholder of SBICOA,for a contract for services to be performed having a value of $83,887.25 and apromissory note for $16,112.75 payable, with interest at the rate of 6% perannum, in a single installment on December 31, 2001. Under the contract,entered into as of March 1, 2000, Mr. Morris was to plan, coordinate,establish, and manage an investment education program, for the benefit ofSBICOA, in conjunction with one or more recognized churches and meeting certainbenchmarks. On October 11, 2000, Mr. Morris exchanged his 2,000 cancelableshares of SBICOA common stock for 3,103,132 cancelable shares of our commonstock. Since then he has been our director and principal shareholder. Becausethe establishment of the investment education program was delayed and theprogram benchmarks therefore not met, effective December 31, 2000 we canceled2,603,132 shares of our common stock issued to him in the exchange.  Mr. Morris paid the promissory note when dueand therefore retains 500,000 shares of our common stock.

 

Effective October 11, 2000, we acquired all of the issued andoutstanding capital stock of SBICOA, in exchange for 9,309,396 authorized andunissued shares of our common stock, in a transaction intended to qualify as atax-free reorganization under Section 368(a)(1)(B) of the Internal RevenueCode. At the time of the acquisition, SBICOA was the record holder of 776,693of our shares of common stock and accordingly had a material interest in thetransaction as both buyer and seller. John H. Brown, Joyce L. Brown, and VernS. Morris, currently our officers, directors, and/or principal shareholders,were then officers, directors, and/or principal shareholders of SBICOA. Ourshares were valued by our Board of Directors at $.04 per share, based on theBoard’s judgment of the value of SBICOA at the time of the exchange.

 

In connection with the acquisition, we issued 500,000 and 60,000 sharesof our authorized and unissued common stock, for services valued at $.04 pershare, to our officer, director, and principal shareholder, Steven C. Gregory,and to our former officer, Nelson H. Beebe, respectively. We also entered intostock purchase and repurchase agreements with them, under which we gave themthe right, exercisable until March 30, 2001, to purchase up to 500,000 and60,000 additional shares of our common stock, respectively, for cash of $3.00per share. We also gave them the right, exercisable until June 28, 2001, torequire us to repurchase all or part of the shares which they acquired onOctober 11, 2000, for cash of $.50 per share. The purchase and repurchaseprices were arbitrarily determined by negotiation between SBICOA and Messrs.Gregory and Beebe and bore no relationship to any recognized standard of value.The purchase and repurchase rights expired unexercised.

 

In connection with the acquisition, and subject to various conditions,Mr. Gregory agreed to indemnify SBICOA, us, and persons associated with SBICOAand us for all claims and liabilities arising out of or related in any way toour business or operations, including our breach of any of the representations,warranties, and covenants set forth in an Agreement and Plan of Share Exchange,dated July 13, 2000, between SBICOA and us, and including also any claimasserted against us in certain civil actions. His October 11, 2000 agreement ofindemnity provides that he shall not be personally liable for the obligation toindemnify SBICOA and us, but rather that any liability for which he would otherwisebe responsible shall be satisfied by his transfer to the person or personsindemnified of such number of shares of our common stock held by him as shallbe equal to the amount of the liability divided by $2.50. This exchange ratiowas arbitrarily determined by negotiation between SBICOA and Mr. Gregory and bears no relationship toany recognized standard of value. To secure his agreement, Mr. Gregory gave

 

20

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SBICOA and us a security interest in all of our shares and consentedthat his certificates for our shares, which remain in his possession, shouldbear a restrictive legend and that stop transfer instructions might be noted inour transfer books and records.

 

In connection with the acquisition, Mr. Gregory consented to thetermination, without further consideration, of his employment agreement datedApril 28, 1992 with us.

 

John H. Brown, the beneficial owner of 2,603,132 shares of our commonstock, or 32.3% of our issued and outstanding common stock as computed in“Principal Shareholders,” and Joyce L. Brown, the beneficial owner of 3,109,732shares of our common stock, or 38.6% of our issued and outstanding common stockas computed in Item 11, may be deemed to be our “parents” within the meaning ofRule 405 under the Securities Act of 1933.

 

**Item13.    *Exhibits andReports on Form 8-K.***

 

(a)  *Exhibits.*

 

Thefollowing exhibits are filed as part of this report or incorporated byreference:

 

**EXHIBITS AND INDEX OF EXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                 |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                            |
| 2.1                 |   | Agreement  and Plan of Exchange between Mega Group, Inc. and Small Business Investment  Corporation of America, Inc., dated July 13, 2000*                                                      |
|                |   |                                                                                                                                                                                            |
| 3.1                 |   | Certificate of  Incorporation of Mega Group, Inc., as amended*                                                                                                                                  |
|                |   |                                                                                                                                                                                            |
| 3.2                 |   | Bylaws of Mega Group,  Inc., as amended*                                                                                                                                                        |
|                |   |                                                                                                                                                                                            |
| 4.1                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $100,000, of Small Business  Investment Corporation of America, Inc., Maker, to Joyce L. Brown, Payee,  dated August 27, 1999**    |
|                |   |                                                                                                                                                                                            |
| 4.2                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $15,000, of Small Business  Investment Corporation of America, Inc., Maker, to Joyce L. Brown, Payee,  dated February 26, 2000**   |
|                |   |                                                                                                                                                                                            |
| 4.3                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $40,000, of Small Business  Investment Corporation of America, Inc., Maker, to Steven C. Gregory, Payee,  dated March 15, 2000**   |
|                |   |                                                                                                                                                                                            |
| 4.4                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $100,000, of Small Business  Investment Corporation of America, Inc., Maker, to Kathleen Roberts, Payee,  dated October 17, 2000** |

 

21

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                              |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                         |
| 4.5                 |   | Promissory  Note and Option Contract, in the Original Unpaid Principal Amount of $60,000,  of Small Business Investment Corporation of America, Inc., Maker, to Sandra  Holly, Payee, dated September 24, 2001**             |
|                |   |                                                                                                                                                                                                                         |
| 4.6                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $150,000, of Mega Group,  Inc. and Small Business Investment Corporation of America, Inc., Makers, to  Matah Holdings, L.L.C., Payee, dated July 15, 2002**     |
|                |   |                                                                                                                                                                                                                         |
| 4.7                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $150,000, of Mega Group,  Inc. and Small Business Investment Corporation of America, Inc., Makers, to  Matah Holdings, L.L.C., Payee, dated July 29, 2002**     |
|                |   |                                                                                                                                                                                                                         |
| 4.7(1)              |   | Promissory  Note, in the Original Unpaid Principal Amount of $100,000, of Mega Group,  Inc. and Small Business Investment Corporation of America, Inc., Makers, to  Matah Holdings, L.L.C., Payee, dated January 15, 2003*** |
|                |   |                                                                                                                                                                                                                         |
| 4.8                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $75,000, of Mega Group,  Inc., Maker, to David G. Becking, Payee, dated February 14, 2000**                                                                     |
|                |   |                                                                                                                                                                                                                         |
| 4.9                 |   | Promissory  Note, in the Original Unpaid Principal Amount of $75,000, of Mega Group,  Inc., Maker, to Barton G. Smith, Payee, dated February 14, 2000**                                                                      |
|                |   |                                                                                                                                                                                                                         |
| 4.10                |   | Promissory  Note, in the Original Unpaid Principal Amount of $15,000, of Small Business  Investment Corporation of America, Inc., Maker, to John H. Brown, Payee,  dated December 10, 2002                                   |
|                |   |                                                                                                                                                                                                                         |
| 10.1                |   | Asset  Purchase Agreement between Mega Group, Inc. and Global Underwriters Agency,  Inc., dated April 27, 1999*                                                                                                              |
|                |   |                                                                                                                                                                                                                         |
| 10.2                |   | Asset Purchase Agreement  between Mega Group, Inc. and Mega Personal Lines, Inc., dated April 1, 2000*                                                                                                                       |
|                |   |                                                                                                                                                                                                                         |
| 10.3                |   | Stock  Purchase and Repurchase Agreement between Mega Group, Inc. and Steven C.  Gregory, dated October 11, 2000*                                                                                                            |
|                |   |                                                                                                                                                                                                                         |
| 10.4                |   | Stock  Purchase and Repurchase Agreement between Mega Group, Inc. and Nelson H.  Beebe, dated October 11, 2000*                                                                                                              |
|                |   |                                                                                                                                                                                                                         |
| 10.5                |   | Stock Purchase and  Repurchase Agreement between Mega Group, Inc. and Don Exum, dated October 11,  2000*                                                                                                                     |
|                |   |                                                                                                                                                                                                                         |
| 10.6                |   | Agreement of Indemnity  between Steven C. Gregory and Mega Group, Inc., dated October 11, 2000*                                                                                                                              |

 

22

----

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                         |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                    |
| 10.7                |   | Termination  of Employment Agreement between Mega Group, Inc. and Steven C. Gregory, dated  October 11, 2000*                                                                           |
|                |   |                                                                                                                                                                                    |
| 10.8                |   | Memorandum of  Understanding Between Mega Group, Inc. and Robert L. Halton, dated as of  January 1, 1987*                                                                               |
|                |   |                                                                                                                                                                                    |
| 10.9                |   | Restricted  Stock Purchase Agreement between Small Business Investment Corporation of  America, Inc. and Vern S. Morris, dated as of March 1, 2000*                                     |
|                |   |                                                                                                                                                                                    |
| 10.10               |   | Stock Option Agreement  between Mega Group, Inc. and Anthony W. Robinson, dated as of June 8, 2001**                                                                                    |
|                |   |                                                                                                                                                                                    |
| 10.11               |   | Loan  and Security Agreement between Mega Group, Inc. and Small Business Investment  Corporation of America, Inc., Borrower, and Matah Holdings, L.L.C., Lender,  dated July 15, 2002** |
|                |   |                                                                                                                                                                                    |
| 21.1                |   | Identification of  Subsidiary of Mega Group, Inc.*                                                                                                                                      |
|                |   |                                                                                                                                                                                    |
| 99.1                |   | Certifications under  Section 906 of the Sarbanes-Oxley Act                                                                                                                             |

 

----

*        Incorporated by reference to our Annual Report on Form 10-KSBfor the year ended December 31, 2000.

 

**      Incorporated by reference to our Annual Report on Form 10-KSBfor the year ended December 31, 2001.

 

***    Incorporatedby reference to our Form SB-2 Registration Statement filed on January 24, 2003.

 

(b)  *Reports on Form 8-K.*

 

We filed no reports on Form8-K during the last quarter of the period covered by this report.

 

**Item 14.*    Controls and Procedures.***

 

Within the 90 days prior tothe filing date of this annual report, our principal executive officer andprincipal financial officer evaluated the effectiveness of the design andoperation of our disclosure controls and procedures. They have advised us that,based on that evaluation, they concluded that our disclosure controls andprocedures are effective to ensure that material information relating to us,and our consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is beingprepared. There have been no significant changes in our internal controls or inother factors that could significantly affect our internal controls since thedate of their evaluation. Our principal executive officer and principalfinancial officer identified no significant deficiencies and materialweaknesses requiring corrective action.

 

23

----

 

**SIGNATURES**

 

**In accordance with Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.**

 
|                | MEGA GROUP, INC.                                                                         |
|---------------------|------------------------------------------------------------------------------------------|
|                |                                                                                     |
|                | By:                                                                                      | /s/  JOHN H. BROWN |
|                | **John H. Brown****Chairman of the  Board of****Directors and  Chief Executive Officer** |
|                |                                                                                     |
| Date: March 7, 2003 |                                                                                     |

 

**In accordance with the Securities Exchange Act of 1934, asamended, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.**

 
|                |                                   |
|---------------------|----------------------------------------|
|                | By:                                    | /s/    JOHN H. BROWN |
|                | **John H. Brown,**                     |
|                | **Principal Executive Officer and**    |
|                | **Chairman of the Board of Directors** |
|                |                                   |
| Date: March 7, 2003 |                                   |
|                |                                   |
|                | By:                                    | /s/    MERRITT C. BROWN |
|                | **Merritt C. Brown,**                  |
|                | **Principal Financial and**            |
|                | **Accounting Officer and Director**    |
|                |                                   |
| Date: March 7, 2003 |                                   |
|                |                                   |
|                | By:                                    | /s/    STEVEN C. GREGORY |
|                | **Steven C. Gregory,**                 |
|                | **Director**                           |
|                |                                   |
| Date: March 7, 2003 |                                   |
|                |                                   |
|                | By:                                    | /s/    JOYCE L. BROWN |
|                | **Joyce L. Brown,**                    |
|                | **Director**                           |
|                |                                   |
| Date: March 7, 2003 |                                   |
|                |                                   |
|                | By:                                    | /s/    VERN S. MORRIS |
|                | **Vern S. Morris,**                    |
|                | **Director**                           |
|                |                                   |
| Date: March 7, 2003 |                                   |
|                     |                                        |  |  |

 

24

----

 

**CERTIFICATIONS**

 

CHIEFEXECUTIVE OFFICER CERTIFICATION

 

I,John H. Brown, certify that:

 

1.  Ihave reviewed this annual report on Form 10-KSB of Mega Group, Inc.;

 

2.  Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.  Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
|                |                                                                                                               |
|---------------------|--------------------------------------------------------------------------------------------------------------------|
|                | By:                                                                                                                | /s/  JOHN H. BROWN |
|                | **John H. Brown****Chairman of the  Board of Directors  and Chief Executive Officer  Principal Executive Officer** |
|                |                                                                                                               |
| Date: March 7, 2003 |                                                                                                               |

 

25

----

 

CHIEFFINANCIAL OFFICER CERTIFICATION

 

I,Merritt C. Brown, certify that:

 

1.  Ihave reviewed this annual report on Form 10-KSB of Mega Group, Inc.;

 

2.  Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.  Basedon my knowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand

 

26

----

 

reportfinancial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|                |                                                                                          |
|---------------------|-----------------------------------------------------------------------------------------------|
|                | By:                                                                                           | /s/    MERRITT C. BROWN |
|                | **Merritt C. Brown  Vice President and Chief Financial Officer  Principal Financial Officer** |
|                |                                                                                          |
| Date: March 7, 2003 |                                                                                          |

##### ** **

##### **27**

##### ****

##### ** **

##### **Mega Group, Inc. and Subsidiary**

 

**Tableof Contents**

 
| **Independent Auditor’s Report**          |
|------------------------------------------------|
|                                           |
| **Audited  Consolidated Financial Statements** |
|                                           |
|                                           | Consolidated Balance Sheets |
|                                           |   |
|                                           | Consolidated Statements of Operations |
|                                           |   |
|                                           | Consolidated Statements of Comprehensive  Income (Loss) |
|                                           |   |
|                                           | Consolidated Statements of Deficiency in  Stockholders’ Equity |
|                                           |   |
|                                           | Consolidated Statements of Cash Flows |
|                                           |   |
|                                           | Notes to Consolidated Financial Statements |

 

----

# **IndependentAuditor’s Report**

 

 

Board of Directors

**MegaGroup, Inc.**

Washington, DC

 

 

We have audited the accompanying ConsolidatedBalance Sheets of **Mega Group, Inc. and Subsidiary** as ofDecember 31, 2002 and 2001, and the related Consolidated Statements ofOperations, Comprehensive Income (Loss), Deficiency in Stockholders’ Equity andCash Flows for the years then ended. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of **Mega Group, Inc. and Subsidiary** as ofDecember 31, 2002 and 2001, and the consolidated results of their operationsand their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as a goingconcern.  As discussed in Note 10 to theconsolidated financial statements, the Company has deficiencies instockholders’ equity and working capital and is in default on certain of itsobligations. These conditions raise substantial doubt about the Company’sability to continue as a going concern. Management’s plans regarding those matters are also described in Note10.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Aronson & Company

 

 

Rockville, Maryland

February 12, 2003

 

F-1

----

 

**Mega Group, Inc. and Subsidiary**

** **

**ConsolidatedBalance Sheets**

 
| **December 31,**                                      |   | **2001** |   | **2002**    |       |
|-------------------------------------------------------|--------|----------|--------|-------------|------------|
| **Assets**                                            |   |     |   |        | ** ** |
|                                                  |   |     |   |        | ** ** |
| **Current assets**                                    |   |     |   |        | ** ** |
| Cash                                                  |   | $        | 17,100 |        | **$**      | **4,031** | ** ** |
| Marketable  securities                                |   | 1,544    |   | **1,025**   | ** ** |
| Accounts  receivable                                  |   | —   |   | **30,000**  | ** ** |
| Loans  receivable                                     |   | 45,134   |   | **19,904**  | ** ** |
| Loan  financing costs, net                            |   | —   |   | **1,667**   | ** ** |
| **Total current assets**                              |   | 63,778   |   | **56,627**  | ** ** |
|                                                  |   |     |   |        | ** ** |
| **Property and equipment**                            |   |     |   |        | ** ** |
| Computer  equipment                                   |   | 10,683   |   | **—**  | ** ** |
| Office  furniture and equipment                       |   | 13,695   |   | **25,140**  | ** ** |
| **Total**                                             |   | 24,378   |   | **25,140**  | ** ** |
| Less:  Accumulated depreciation and amortization |   | (13,802  | )      | **(16,587** | **)**      |
| **Net property and equipment**                        |   | 10,576   |   | **8,553**   | ** ** |
|                                                  |   |     |   |        | ** ** |
| **Total assets**                                      |   | $        | 74,354 |        | **$**      | **65,180** | ** ** |

 

The accompanying Notes to FinancialStatements are an integral part of these financial statements

 

F-2

----

 

**Mega Group, Inc. and Subsidiary**

** **

**Consolidated Balance Sheets**

 
|                                                                                                                                                           |   | **2001**   |    | **2002**       |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|----------------|------------|
| **Liabilities and Deficiency in Stockholders’ Equity**                                                                                                    |   |       |    |           | ** ** |
|                                                                                                                                                           |   |       |    |           |       |
| **Current liabilities**                                                                                                                                        |   |       |    |           | ** ** |
| Accounts payable and accrued expenses                                                                                                                          |   | $          | 661,429 |           | **$**      | **684,741** | ** ** |
| Accrued wages                                                                                                                                                  |   | 291,174    |    | **453,734**    | ** ** |
| Accrued interest                                                                                                                                               |   | 114,330    |    | **218,682**    | ** ** |
| Due to stockholders                                                                                                                                            |   | 70,976     |    | **116,966**    | ** ** |
| Due to affiliate                                                                                                                                               |   | 2,939      |    | **—**     | ** ** |
| Current portion of long-term debt                                                                                                                              |   | 716,582    |    | **1,002,494**  | ** ** |
| **Total current liabilities**                                                                                                                                  |   | 1,857,430  |    | **2,476,617**  | ** ** |
|                                                                                                                                                           |   |       |    |           |       |
| **Long-term debt, net of current portion**                                                                                                                     |   | 49,183     |    | **3,680**      | ** ** |
|                                                                                                                                                           |   |       |    |           |       |
| **Total liabilities**                                                                                                                                          |   | 1,906,613  |    | **2,480,297**  | ** ** |
|                                                                                                                                                           |   |       |    |           |       |
| **Commitments and contingencies**                                                                                                                              |   |       |    |           | ** ** |
|                                                                                                                                                           |   |       |    |           |       |
| **Deficiency in stockholders’ equity**                                                                                                                    |   |       |    |           | ** ** |
| Preferred stock, cumulative 8%, $1 par value per share, 400,000  shares authorized, 10,000 shares issued and outstanding                                       |   | 10,000     |    | **10,000**     | ** ** |
| Common stock, $0.016 par value per share, 25,000,000 shares  authorized, 9,359,303 and 8,056,912 shares issued and outstanding in 2002 and  2001, respectively |   | 128,911    |    | **149,749**    | ** ** |
| Additional paid-in capital                                                                                                                                     |   | 3,463,013  |    | **3,544,718**  | ** ** |
| Accumulated deficit                                                                                                                                            |   | (5,432,881 | )       | **(6,118,120** | **)**      |
| Accumulated other comprehensive loss                                                                                                                           |   | (1,302     | )       | **(1,464**     | **)**      |
|                                                                                                                                                           |   |       |    |           |       |
| **Total deficiency in stockholders’ equity**                                                                                                              |   | (1,832,259 | )       | **(2,415,117** | **)**      |
|                                                                                                                                                           |   |       |    |           |       |
| **Total liabilities and deficiency in stockholders’  equity**                                                                                             |   | $          | 74,354  |           | **$**      | **65,180** | ** ** |

 

F-3

----

** **

**Mega Group, Inc. and Subsidiary**

** **

**ConsolidatedStatements of Operations**

 
| **Years Ended December 31,**                                                          |   | **2001**  |         | **2002**      |       |
|---------------------------------------------------------------------------------------|--------|-----------|--------------|---------------|------------|
|                                                                                  |   |      |         |          |       |
| **Revenue**                                                                           |   | $         | —       |          | **$**      | **30,000** | ** ** |
|                                                                                  |   |      |         |          | ** ** |
| **Operating expenses**                                                                |   |      |         |          | ** ** |
| Compensation and benefits                                                             |   | 156,024   |         | **204,187**   | ** ** |
| Other selling, general and administrative expenses                                    |   | 243,445   |         | **371,289**   | ** ** |
| Depreciation and amortization                                                         |   | 3,430     |         | **11,118**    | ** ** |
|                                                                                  |   |      |         |          | ** ** |
| **Total operating expenses**                                                          |   | 402,899   |         | **586,594**   | ** ** |
|                                                                                  |   |      |         |          | ** ** |
| **Loss from operations**                                                              |   | (402,899  | )            | **(556,594**  | **)**      |
|                                                                                  |   |      |         |          | ** ** |
| **Other income (expense)**                                                            |   |      |         |          | ** ** |
| Realized loss on marketable securities                                                |   | (84,402   | )            | **(488**      | **)**      |
| Interest income                                                                       |   | 404       |         | **640**       | ** ** |
| Interest expense                                                                      |   | (107,374  | )            | **(127,997**  | **)**      |
| **Total**                                                                             |   | (191,372  | )            | **(127,845**  | **)**      |
|                                                                                  |   |      |         |          | ** ** |
| **Loss before provision (benefit) for income taxes**                                  |   | (594,271  | )            | **(684,439**  | **)**      |
|                                                                                  |   |      |         |          | ** ** |
| **Provision (benefit) for income taxes**                                              |   | (39,634   | )            | **—**    | ** ** |
|                                                                                  |   |      |         |          | ** ** |
| **Net loss**                                                                          |   | $         | **(554,637** | )             | **$**      | **(684,439** | **)** |
|                                                                                  |   |      |         |          | ** ** |
| **Basic and dilutive net loss per common share:**                                     |   |      |         |          | ** ** |
|                                                                                  |   |      |         |          | ** ** |
| Basic and dilutive net loss per common share                                          |   | $         | **(0.07**    | )             | **$**      | **(0.08** | **)** |
|                                                                                  |   |      |         |          | ** ** |
| Basic and dilutive weighted average common shares used to compute net  loss per share |   | 8,056,912 |         | **8,589,327** | ** ** |

 

Theaccompanying Notes to Financial Statements are an integral part of thesefinancial statements.

 

F-4

----

 

**MegaGroup, Inc. and Subsidiary**

 

**Consolidated Statements of Comprehensive Income (Loss)**

 
| **Years Ended December 31,**                                                                  |   | **2001** |       | **2002** |       |
|-----------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                                                          |   |     | ** ** |     |       |
| **Net loss**                                                                                  |   | $        | (554,637   | )        | **$**      | **(684,439** | **)** |
|                                                                                          |   |     |       |     | ** ** |
| **(Increase)  decrease in unrealized loss on marketable securities**                          |   | 14,680   |       | **(378** | **)**      |
| **Reclassification  of previously unrealized loss on marketable securities to realized loss** |   | 84,402   |       | **108**  | ** ** |
| **Tax  provision (benefit)**                                                                  |   | (39,634  | )          | **108**  | ** ** |
|                                                                                          |   |     |       |     | ** ** |
| **Other  comprehensive (loss) income**                                                        |   | 59,448   |       | **(162** | **)**      |
|                                                                                          |   |     |       |     | ** ** |
| **Comprehensive  loss**                                                                       |   | $        | (495,189   | )        | **$**      | **(684,601** | **)** |

 

Theaccompanying Notes to Financial Statements are an integral part of thesefinancial statements.

 

F-5

----

 

**MegaGroup, Inc. and Subsidiary**

** **

**ConsolidatedStatements of Deficiency in Stockholders’ Equity**

** **

**Years EndedDecember 31, 2002 and 2001**

 
|                                                                                                                                  |   | **Preferred Stock** |   | **Common Stock** |   |       |      |       |   |                             |   |                     |      |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------|--------|------------|-----------|------------|--------|----------------------------------|--------|--------------------------|-----------|
|                                                                                                                                  |   | **Shares**          |   | **Amount**       |   | **Shares** |      | **Amount** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |      | **Accumulated  Other  Comprehensive  Loss** |   | **Total  Deficiency in  Stockholders’  Equity** |   |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| **Balance,  January 1, 2001**                                                                                                         |   | 10,000              |   | $                | 10,000 |       | 8,056,912 |       | $      | 128,911                          |   | $                        | 3,463,013 |   | $ | (4,877,444 | ) | $ | (60,750 | ) | $ | (1,336,270 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Unrealized loss  on marketable securities, net of tax and reclassification adjustment for  losses included in statement of operations |   | —              |   | —           |   | —     |      | —     |   | —                           |   | —                   |      | 59,448 |   | 59,448 |   |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Net loss                                                                                                                              |   | —              |   | —           |   | —     |      | —     |   | —                           |   | (554,637                 | )         | — |   | (554,637 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Preferred stock  dividend                                                                                                             |   | —              |   | —           |   | —     |      | —     |   | —                           |   | (800                     | )         | — |   | (800 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| **Balance,  December 31, 2001**                                                                                                       |   | 10,000              |   | 10,000           |   | 8,056,912  |      | 128,911    |   | 3,463,013                        |   | (5,432,881               | )         | (1,302 | ) | (1,832,259 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Issuance of stock  for:                                                                                                               |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Compensation                                                                                                                          |   | —              |   | —           |   | 692,391    |      | 11,078     |   | 30,465                           |   | —                   |      | — |   | 41,543 |   |
| Membership dues                                                                                                                       |   | —              |   | —           |   | 10,000     |      | 160        |   | 840                              |   | —                   |      | — |   | 1,000 |   |
| Loan financing  cost                                                                                                                  |   | —              |   | —           |   | 100,000    |      | 1,600      |   | 8,400                            |   | —                   |      | — |   | 10,000 |   |
| Consulting and  professional services                                                                                                 |   | —              |   | —           |   | 500,000    |      | 8,000      |   | 42,000                           |   | —                   |      | — |   | 50,000 |   |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Unrealized loss  on marketable securities, net of tax and reclassification adjustment for  losses included in statement of operations |   | —              |   | —           |   | —     |      | —     |   | —                           |   | —                   |      | (162 | ) | (162 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Net loss                                                                                                                              |   | —              |   | —           |   | —     |      | —     |   | —                           |   | (684,439                 | )         | — |   | (684,439 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| Preferred stock  dividend                                                                                                             |   | —              |   | —           |   | —     |      | —     |   | —                           |   | (800                     | )         | — |   | (800 | ) |
|                                                                                                                                  |   |                |   |             |   |       |      |       |   |                             |   |                     |      |   |   |   |   |
| **Balance,  December 31, 2002**                                                                                                       |   | 10,000              |   | $                | 10,000 |       | 9,359,303 |       | $      | 149,749                          |   | $                        | 3,544,718 |   | $ | (6,118,120 | ) | $ | (1,464 | ) | $ | (2,415,117 | ) |

 

Theaccompanying Notes to Financial Statements are an integral part of thesefinancial statements.

 

F-6

----

** **

**MegaGroup, Inc. and Subsidiary**

** **

**Consolidated Statements of Cash Flows**

 
| **Years Ended December 31,**                                                    |   | **2001** |     | **2002**     |       |
|---------------------------------------------------------------------------------|--------|----------|----------|--------------|------------|
|                                                                            |   |     |     |         | ** ** |
| **Cash flows from operating activities**                                        |   |     |     |         | ** ** |
| Net loss                                                                        |   | $        | (554,637 | )            | **$**      | **(684,439** | **)** |
| **Adjustments to reconcile net loss to net cash used  by operating activities** |   |     |     |         | ** ** |
| Realized loss on sale of marketable securities                                  |   | 84,402   |     | **488**      | ** ** |
| Depreciation and amortization                                                   |   | 3,430    |     | **11,118**   | ** ** |
| Provision (benefit) for income taxes                                            |   | (39,634  | )        | **108**      | ** ** |
| Write-off of loans receivable                                                   |   | —   |     | **28,019**   | ** ** |
| Interest paid by shareholder on the Company’s behalf                       |   | —   |     | **7,579**    | ** ** |
| Common stock issued for payment of membership dues                              |   | —   |     | **1,000**    | ** ** |
| Common stock issued for payment of professional services                        |   | —   |     | **50,000**   | ** ** |
| Seizure of cash in litigation                                                   |   | 9,345    |     | **—**   | ** ** |
| **(Increase) decrease in**Accounts receivable                                   |   | —   |     | **(30,000**  | **)**      |
| Accrued interest receivable                                                     |   | 819      |     | **—**   | ** ** |
| **Increase (decrease) in**Accounts payable  and accrued expenses                |   | 101,380  |     | **23,312**   | ** ** |
| Accrued wages                                                                   |   | 140,000  |     | **204,187**  | ** ** |
| Accrued interest                                                                |   | 66,317   |     | **104,352**  | ** ** |
| **Net cash  used by operating activities**                                      |   | (188,578 | )        | **(284,276** | **)**      |
|                                                                            |   |     |     |         | ** ** |
| **Cash flows from investing activities**                                        |   |     |     |         | ** ** |
| Advances made under loans receivable                                            |   | (466     | )        | **(7,041**   | **)**      |
| Repayments received under loans receivable                                      |   | 16,113   |     | **4,252**    | ** ** |
| Proceeds from sale of marketable securities                                     |   | 147,332  |     | **—**   | ** ** |
| Purchase of marketable securities                                               |   | (54,196  | )        | **(323**     | **)**      |
| Purchase of property and equipment                                              |   | —   |     | **(762**     | **)**      |
| **Net cash (used) provided by investing activities**                            |   | 108,783  |     | **(3,874**   | **)**      |
|                                                                            |   |     |     |         | ** ** |
| **Cash flows from financing activities**                                        |   |     |     |         | ** ** |
| Proceeds from notes payable                                                     |   | 90,547   |     | **315,000**  | ** ** |
| Principal payments on notes payable                                             |   | (75,127  | )        | **(36,180**  | **)**      |
| Payments to affiliates                                                          |   | (464     | )        | **(2,939**   | **)**      |
| Advances from stockholder                                                       |   | 56,356   |     | **—**   | ** ** |
| Preferred dividends                                                             |   | (800     | )        | **(800**     | **)**      |
| **Net cash provided by financing activities**                                   |   | 70,512   |     | **275,081**  | ** ** |
|                                                                            |   |     |     |         |       |
| **Net decrease in cash**                                                        |   | $        | (9,283   | )            | **$**      | **(13,069** | **)** |
|                                                                            |   |     |     |         | ** ** |
| **Cash - beginning of year**                                                    |   | 26,383   |     | **17,100**   | ** ** |
|                                                                            |   |     |     |         | ** ** |
| **Cash - end of year**                                                          |   | $        | 17,100   |         | **$**      | **4,031** | ** ** |
|                                                                            |   |     |     |         | ** ** |
| **Supplemental cash flow information**                                          |   |     |     |         | ** ** |
| Actual cash payments for:                                                       |   |     |     |         | ** ** |
| Income taxes                                                                    |   | $        | 200      |         | **$**      | **—** | ** ** |
|                                                                            |   |     |     |         | ** ** |
| Interest                                                                        |   | $        | 33,603   |         | **$**      | **16,066** | ** ** |
|                                                                            |   |     |     |         | ** ** |
| **Noncash Investing and Financing Activities:**                                 |   |     |     |         | ** ** |
| Bank enforcement of guaranties against certain stockholders to  collect debt    |   | $        | 14,620   |         | **$**      | **—** | ** ** |
| Common stock issued for payment of loan financing costs                         |   | $        | —   |         | **$**      | **10,000** | ** ** |
| Common stock issued for payment of accrued wages                                |   | $        | —   |         | **$**      | **41,543** | ** ** |
| Marketable securities exchanged for payment of accrued wages                    |   | $        | —   |         | **$**      | **84** | ** ** |
| Payments made by shareholder on notes payable on behalf of the  Company         |   | $        | —   |         | **$**      | **38,411** | ** ** |

 

The accompanyingNotes to Financial Statements are an integral part of these financialstatements.

 

F-7

----

 

**Mega Group, Inc. and Subsidiary**

** **

**Notesto Consolidated Financial Statements**

** **
| **1.     Organization  and significant accounting policies** | **Nature of business:**  Mega Group, Inc. (Company) was incorporated on December 28, 1983 in the State  of New York.  The current business  plan is to provide diversified financial services to ethnic communities and  faith-based entities in the United States and to operate as a specialized  financial institution providing loans and investments for businesses in low  and moderate income communities.                                                                                                                                                                                                                                                              |
|----------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             | **Principles of consolidation:**  The consolidated financial statements include accounts of Mega Group, Inc.  and those of its wholly owned subsidiary, Small Business Investment  Corporation of America, Inc. (SBICOA).   All significant intercompany transactions have been eliminated in  consolidation.                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             | **Revenue  recognition:** Consulting fees revenue represents fees  earned in connection with financial consulting services rendered.  Revenue from these services is recognized  as the services are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             | **Cash and cash  equivalents:** For purposes of financial statement  presentation, the Company considers all highly liquid debt instruments with  initial maturities of ninety days or less to be cash equivalents.  The Company maintains cash balances which  may exceed federally insured limits, but the Company does not believe that  this results in any significant risk.                                                                                                                                                                                                                                                                                              |
|                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             | **Marketable  securities:** Marketable securities consist mainly of  an investment in common stock and are classified as available-for-sale and  reported at fair value.  The fair  value of marketable securities is based on quoted market prices.  Unrealized gains and losses on marketable  securities are reported at a net amount as a separate component of  stockholders’ equity.  As of December  31, 2002, the cost basis of and unrealized loss on marketable securities was  $3,464 and $2,439, respectively.  As  of December 31, 2001, the cost basis of and unrealized loss on marketable  securities was $3,712 and $2,168, respectively. |
|                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             | **Loan fees:**  Costs of obtaining the working  capital notes payable from Matah Holding, LLC in 2002 (Note 4) have been  capitalized and are being amortized over six months which correspond to the  loans original term.  The capitalized  loan fee in the accompanying Balance Sheets at December 31, 2002 are net of  amortization costs of $8,333.                                                                                                                                                                                                                                                                                                                  |
|                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                             | **Property and  equipment:** Property and equipment are stated at cost  and are being depreciated using the straight-line method over the estimated  useful lives of the related assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

F-8

----

 
|   | **Income taxes:**  The asset and liability method of accounting for income taxes is used.  Deferred tax assets and liabilities are  recognized for the future consequences attributable to differences between  the financial statement carrying amounts of existing assets and liabilities  and their respective tax bases.  When  necessary, a valuation allowance is recorded to reduce tax assets to an  amount for which realization is more likely than not.  The effect of changes in tax rates is  recognized in the period in which the rate change occurs. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | **Advertising costs:** The cost of advertising  is expensed as incurred.  Advertising  expense was $466 and $580 for 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | **Fair value of financial instruments:** The carrying amounts of cash, accounts  payable, notes payable, and accrued expense obligations approximate their  fair value due to the short-term nature or their underlying terms.                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | **Stock options:** In  accounting for stock options to employees, the Company follows the intrinsic  value method prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*,  as opposed to the fair value method prescribed by Statement of Financial  Accounting Standards No. 123, *Accounting  for Stock-Based Compensation*.   The following table illustrates the effect on net income and earnings  per share if the Company had applied the fair value recognition provisions of  FASB Statement No. 123:                   |

 
|   |                                                                                                                                                |   | **Year Ended  December 31,** |     |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|   |                                                                                                                                                |   | **2001**                     |     | **2002** |   |
|   |                                                                                                                                                |   |                         |     |   | ** ** |
|   | Net loss, as reported                                                                                                                               |   | $                            | (554,637 | ) | **$** | **(684,439** | **)** |
|   | Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | —                       |     | **—** | ** ** |
|   |                                                                                                                                                |   |                         |     |   | ** ** |
|   | Pro-forma net loss                                                                                                                                  |   | $                            | (554,637 | ) | **$** | **(684,439** | **)** |
|   |                                                                                                                                                |   |                         |     |   | ** ** |
|   | Earnings per share:                                                                                                                                 |   |                         |     |   | ** ** |
|   | Basic and dilutive - as reported                                                                                                                    |   | $                            | (0.07    | ) | **$** | **(0.08** | **)** |
|   |                                                                                                                                                |   |                         |     |   | ** ** |
|   | Basic and dilutive - pro forma                                                                                                                      |   | $                            | (0.07    | ) | **$** | **(0.08** | **)** |

 
|   | This disclosure is in accordance with  Statement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation -  Transition and Disclosure*, that the Company has adopted in these  financial statements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-9

----

 
|                                                              | **Net loss per common  share:** Basic net loss per common share is calculated  by dividing the net loss attributable to common stockholders by the weighted  average number of common shares outstanding during the year.  Diluted earnings per share is calculated  using the weighted average number of common shares plus dilutive common stock  equivalents outstanding during the period.   Anti-dilutive common stock equivalents are excluded.  Common stock equivalents are stock options. |
|-------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                              | **Estimates:** The preparation of financial  statements in conformity with generally accepted accounting principles  requires management to make estimates and assumptions that affect the  reported amounts of assets and liabilities and 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.                                      |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **2.     Due  to stockholders and affiliate** | **Due to affiliate:**  A partnership in which a controlling stockholder is a partner has incurred  various expenses on the Company’s behalf.   The outstanding balance due to this partnership totaled $2,939 as of  December 31, 2001, and was repaid in full in 2002.                                                                                                                                                                                                                                 |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                              | **Due to  stockholders:** The Company was obligated to a bank  under a term note for $14,620 at December 31, 2000.  Due to its failure to make all scheduled payments under the  note and financial covenant violations, the bank enforced its guaranties  against certain stockholders during 2001.   As a result, the stockholders paid the indebtedness on the Company’s  behalf and the obligation is now due to stockholders as of December 31, 2002  and 2001.                               |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                              | The Company owes its president/stockholder  $102,346 and $56,356 at December 31, 2002 and 2001, respectively, for  payments made by the president on the Company’s behalf.  Such payments were in connection with the  David G. Becking, et al. v. Mega Group, Inc., et al. litigation (See Note 8).                                                                                                                                                                                                    |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                              | The foregoing obligations to stockholders  have no specified terms for interest or repayment.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                              | **Notes payable:**  The Company is obligated under notes  payable totaling $129,994 and $148,174 to certain of our stockholders and  officers at December 31, 2002 and 2001, respectively.  These obligations are described in detail  in Note 4.                                                                                                                                                                                                                                                       |
|                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **3.     Loans  receivable**                  | During 2002 and 2001, the Company made  informal loans to and incurred various expenses on behalf of investment  brokers with whom the Company shares its office space. These loans totaled  $19,904 and $45,134 as of December 31, 2002 and 2001, respectively, and are  expected to be repaid during 2003.                                                                                                                                                                                                      |

 

F-10

----

 
| **4.     Long-term  debt** | At December 31, 2002 and 2001, long-term debt consisted of the  following: |
|------------------------------------------------|----------------------------------------------------------------------------|

 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **2001** |        | **2002**       |       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------------|------------|
|   | Note payable for agency purchase, requiring  monthly payments based upon revenues generated by the book of business  purchased, including interest imputed at 10%.  Guaranteed by former Company directors.  The Company is in default on the  obligation and, accordingly, it is classified as a current liability.  The obligation was subject to arbitration  for which an award was rendered in December 1999.                                                      |   | $        | 157,381     | ** **     | **$**      | **157,381** | ** ** |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Notes payable for agency purchases,  requiring monthly payments ranging from approximately $600 to $6,000,  including interest, both stated and imputed, ranging from 8% to 9%, with  scheduled maturities through December 2008. The Company is in default on the  obligations and, accordingly, they are classified as current  liabilities.  (Includes $146,397  related to a November 2000 court order, as described in Note 8).                                              |   | 161,618  | ** **  | **161,618**    | ** ** |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Notes payable for agency purchase, as  settled, requiring 48 monthly payments of $3,705 including interest at 9%,  guaranteed by the president and his spouse, final payment due March 2004.                                                                                                                                                                                                                                                                                           |   | 87,592   | ** **  | **49,181**     | ** ** |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Capital lease obligation, refinanced in May  1998, requiring monthly payments of $2,221, including imputed interest at  10%, final payment due May 2001, collateralized by the leased equipment.  The Company is in default on the  obligation and, accordingly, it is classified as a current liability.  In June 2000 the lessor commenced legal  action against the Company for $56,000.   A judgment was entered against the Company for $48,000 in December  2000. |   | 48,000   | ** **  | **48,000**     | ** ** |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Note payable, unsecured, convertible into  6,000 shares of our common stock, bearing interest at 10%, due October  2001.  Principal on the note was paid  in full in July 2002.                                                                                                                                                                                                                                                                                                   |   | $        |  3,000 | ** **     | **$**      | ** —** |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Note payable to an individual for a cash  loan, unsecured, bearing interest at 12%. The noteholder insists the note is  in default, and accordingly, it is classified as a current liability.                                                                                                                                                                                                                                                                                          |   | 100,000  | ** **  | **100,000**    |       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Note payable to a stockholder and officer,  unsecured, bearing interest at 15%, due December 2003.                                                                                                                                                                                                                                                                                                                                                                                     |   | 15,000   | ** **  | **15,000**     |       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Note payable to a stockholder and officer,  unsecured, bearing interest at 15%, due December 2003.                                                                                                                                                                                                                                                                                                                                                                                     |   | —   | ** **  | **15,000**     |       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Notes payable to a stockholder and officer,  unsecured, bearing interest at 10%, due December 2003.                                                                                                                                                                                                                                                                                                                                                                                    |   | 92,627   | ** **  | **74,653**     |       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Note payable to the president of the  Company for redemption of the Company’s common shares, unsecured, bearing  interest at 6%, due June 15, 2000.   The Company is in default on this note and, accordingly, it is  classified as a current liability.                                                                                                                                                                                                                     |   | 40,547   | ** **  | **25,341**     |       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Note payable, unsecured, bearing interest  at 12.5%, due June 2003.  The note  also granted an option to the payee to purchase 120,000 shares at $.50 per  share (Note 7).  The holder of the  note may apply any part of the outstanding balance to exercise the option.                                                                                                                                                                                                    |   | 60,000   | ** **  | **60,000**     |       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     |        |           |       |
|   | Working capital notes payable to Matah  Holding, LLC, bearing interest at 12%, due April 14, 2003. (See below)                                                                                                                                                                                                                                                                                                                                                                         |   | —   | ** **  | **300,000**    |       |
|   | **Total**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 765,765  |        | **1,006,174**  |       |
|   | Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | (716,582 | )           | **(1,002,494** | **)**      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |     | ** **  |           |       |
|   | **Net long-term debt**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $        | 49,183      | ** **     | **$**      | **3,680** |   |

 

F-11

----

 

 
|   | Future annual maturities of long-term debt  as of December 31, 2002 are as follows: |
|--------|-------------------------------------------------------------------------------------|
|   |                                                                                |
|   |                                                                                |   |   |

 

|   | **Year Ending December 31** |   | **Amount** |       |
|--------|-----------------------------|--------|------------|------------|
|   |                        |   |       | ** ** |
|   | 2003                        |   | $          | 1,002,494  |   |
|   | 2004                        |   | 3,680      |       |
|   |                        |   |       |       |
|   | **Total**                   |   | $          | 1,006,174  |   |

 
|                                         | On July 15, 2002, the Company entered into  a Loan and Security Agreement with Matah Holdings, LLC (a New Jersey Limited  Liability Company) (“Matah”).  The  agreement provides the Company with a working capital loan facility under  which it could borrow up to $500,000 from July 18, 2002 through August 28,  2002.  During the year ended December  31, 2002, the Company received proceeds from two $150,000 promissory notes  dated July 18, 2002 and July 29, 2002.   The notes are personally guaranteed by the Company’s Chief Executive  Officer and Treasurer (who are also majority stockholders) and are secured by  common stock of the Company held by the Chief Executive Officer and  Treasurer.  Principal and accrued  interest at 12% per annum under each note are due on January 14, 2003 (no  monthly payments are required).  The  Company issued 100,000 shares of its common stock, which was valued at  $10,000, as additional consideration for the loan (See Note 6). |
|----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                         | In January  2003, Matah extended the maturity date of the loan to April 14, 2003 and  loaned the Company an additional $100,000.   The agreement called for 50,000 shares of common stock to be issued to  Matah as additional consideration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **5.     Income  taxes** | The  provision (benefit) for income taxes for 2002 and 2001, all of which is  deferred, was calculated as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 
|   |                                                   |   | **2001** |     | **2002**    |       |
|--------|--------------------------------------------------------|--------|----------|----------|-------------|------------|
|   |                                                   |   |     |     |        | ** ** |
|   | Federal income taxes at statutory rates                |   | $        | (201,984 | )           | **$**      | **(232,672** | **)** |
|   | State income taxes, net of Federal income  tax effect  |   | (37,248  | )        | **(42,908** | **)**      |
|   | Permanent differences                                  |   | 6,469    |     | **(21,686** | **)**      |
|   | Income taxes related to other comprehensive  income    |   | (39,634  | )        | **—**  | ** ** |
|   | Increase in valuation allowance on deferred  tax asset |   | 232,763  |     | **297,266** | ** ** |
|   |                                                   |   |     |     |        | ** ** |
|   | Provision (benefit) for income taxes                   |   | $        | (39,634  | )           | **$**      | **—** | ** ** |

 

F-12

----

 
|   | As of December 31, 2002 net operating losses of approximately  $4,132,000 are available to offset future taxable income and expire as  follows: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                            |

 
|   | **Expiring  December 31,** |   | **Amount** |
|--------|----------------------------|--------|------------|
|   |                       |   |       |
|   | 2003                       |   | $          | 67,000 |
|   | 2004                       |   | 155,000    |
|   | 2005                       |   | 903,000    |
|   | 2006                       |   | 132,000    |
|   | 2007                       |   | 513,000    |
|   | 2008                       |   | 76,000     |
|   | 2009                       |   | 51,000     |
|   | 2010                       |   | 123,000    |
|   | 2011                       |   | 274,000    |
|   | 2012                       |   | 68,000     |
|   | 2018                       |   | 89,000     |
|   | 2019                       |   | 100,000    |
|   | 2020                       |   | 313,000    |
|   | 2021                       |   | 587,000    |
|   | 2022                       |   | 681,000    |
|   |                       |   |       |
|   | **Total**                  |   | $          | 4,132,000 |

 
|                                                      | The loss  carryforwards result in a deferred tax asset available to the Company of  approximately $1,660,000 and $1,363,000 at December 31, 2002 and 2001,  respectively.  The Company has  provided an allowance for the full amount of this deferred tax asset because  management has determined it is more likely than not that it will not be  realized.                                                                                                                                                                                                                                                                                                                                        |
|-----------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **6.     Stockholders’  equity** | **Preferred stock:**  The Company has suspended the payment of  dividends on the 8% cumulative preferred stock.  As a result, although recorded in the accompanying financial  statements, the Company is in arrears in payment of the dividends for all  years 1993 through 2002.  As of  December 31, 2002 and 2001, the aggregate amount in arrears was $8,000 and  $7,200, respectively.  Upon any  voluntary liquidation, dissolution or winding up of the Corporation,  preferred stockholders are entitled, before any distribution shall be made to  common stockholders, to be paid out an amount equal to $1.00 per preferred  share plus any accrued but unpaid dividends. |

 

F-13

----

 
|                                                  | **Common stock:**  On May 7, 2002, the Company issued 692,391  shares of its common stock to its Chief Executive Officer for payment of  previously accrued and unpaid wages valued at $41,543 ($0.06 per share based  on the trading price of the Company’s shares on the issuance date).                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                  | On June 30, 2002, the Company issued 10,000  shares of its common stock for payment of membership dues to the Center for  New Black Leadership valued at $1,000 ($0.10 per share, based on management’s  estimate of the fair market value of the shares at the issuance date).                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                  | On July 15, 2002, the Company issued  100,000 shares of its common stock to Matah Holdings, LLC as partial  consideration, valued at $10,000 ($0.10 per share, based on management’s  estimate of the fair market value of the shares at the issuance date), for  entering into a loan and security agreement (See Note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                  | On September 30, 2002 the Company issued  400,000 shares of its common stock to a nonaffiliated investment bank for  financial consulting services valued at $40,000 ($0.10 per share, based on  management’s estimate of the fair market value of the shares at the issuance  date).                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                  | On September 30, 2002, the Company issued  100,000 shares of its common stock to a former executive for past  professional services valued at $10,000 ($0.10 per share, based on management’s  estimate of the fair market value of the shares at the issuance date).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **7.     Stock  and put options** | In October  2000, the Company granted three stockholders/employees options, exercisable  until March 30, 2001, to purchase a total of 660,000 shares of its common  stock for $3.00 per share. Because the exercise price under these stock  purchase options is higher than the fair market value of a share of common  stock at the date of grant, no expense has been recognized.  At the same time, the Company granted the  same three stockholders put options, exercisable until June 28, 2001, which,  contingent on the occurrence of certain events, required the Company to  purchase a total of 660,000 of such stockholders’ shares of its common stock  for $0.50 per share.  These purchase  and put options expired unexercised. |
|                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                  | In June  2001, the Company granted one of its directors options, exercisable until  June 30, 2006 or until 30 days prior to the commencement of any registered  public offering of its equity securities, whichever comes first, to purchase  a total of 100,000 shares of its common stock for $.50 per share.  Because the exercise price under the stock  purchase options issued to its director is higher than the fair market value  of a share of its common stock at the grant date, no compensation expense was  recorded.                                                                                                                                                                                                                        |

 

F-14

----

 
|   | In July and  August 2001, the Company granted a promissory note holder options to purchase  a total of 60,000 shares of its common stock for $.50 per share, of which  options to purchase 40,000 and 20,000 shares are exercisable until July 17,  2003 and August 6, 2003, respectively, or until 15 days prior to the  effective date of any registration statement covering its equity securities  to be publicly offered and sold, whichever comes first.  In October 2001, the Company granted a  promissory note holder options, exercisable until September 24, 2003 or until  90 days after the closing of any registered public offering of equity  securities, whichever comes first, to purchase 120,000 shares of its common  stock for $.50 per share.  Using the  Black-Scholes method, the Company determined that these options had no  value.  Therefore, no allocation of  the notes payable proceeds was made to additional paid-in capital. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | The Company  determined the fair value of each option granted during the year ended  December 31, 2001, using the Black-Scholes option pricing model with the  following  weighted average  assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 
|   | Expected life of options | 2.9 years |
|--------|--------------------------|-----------|
|   | Volatility               | 0.0%      |
|   | Risk-free interest rate  | 5.0%      |
|   | Divided yield            | zero      |

 
|   | A summary of the stock options described in the previous paragraphs  follows: |
|--------|-------------------------------------------------------------------------------|

 
|   |                                 |   | **Number of Option Shares** |   |
|--------|--------------------------------------|--------|-----------------------------|--------|
|   |                                 |   | **$ 3.00  Exercise  Price** |   | **$ 0.50  Exercise  Price** |   | **Total** |   |
|   |                                 |   |                        |   |   |   |   |   |
|   | Outstanding at January 1, 2001       |   | 660,000                     |   | — |   | 660,000 |   |
|   | Granted during 2001                  |   | —                      |   | 280,000 |   | 280,000 |   |
|   | Expired during 2001                  |   | (660,000                    | )      | — |   | (660,000 | ) |
|   |                                 |   |                        |   |   |   |   |   |
|   | Outstanding at December 31,  2001    |   | —                      |   | 280,000 |   | 280,000 |   |
|   | Granted during 2002                  |   | —                      |   | — |   | — |   |
|   | Expired during 2002                  |   | —                      |   | — |   | — |   |
|   |                                 |   |                        |   |   |   |   |   |
|   | **Outstanding at December 31, 2002** |   | —                      |   | 280,000 |   | 280,000 |   |

 
|   | None of the  options in the table above, however, would generate compensation costs under  either APB 25 or SFAS 123. |
|--------|-----------------------------------------------------------------------------------------------------------------------|

 

F-15

----

 
| **8.     Legal  matters** | The Company  is one of several defendants in a civil action, for the payment of a  promissory note, captioned *David G.  Becking, et al. v. Mega Group, Inc., et al.,*which commenced April  29, 1997 in the Supreme Court for the County of Albany, New York.  The plaintiffs were the former owners of  an insurance agency which the Company purchased on December 30, 1988.  The other defendants were guarantors of  the promissory note.  Several of the  defendants asserted claims against third-party defendants who included the  Company’s president, director, and principal shareholder, Steven C.  Gregory.  As of March 15, 2000, the  plaintiffs’ claim against the defendants, including principal and interest,  totaled $754,758.  On that date, the  Company settled with the plaintiffs for a payment to them of $92,000 in cash  and by delivering to them two promissory notes, each in the amount of $75,000  due and payable in 48 consecutive monthly installments, with interest at the  rate of 9% per annum, payable $1,852 commencing April 1, 2000, with the final  payment due March 1, 2004.  By order  dated November 16, 2000, the court obligated the Company to pay defendant  Martin J. Keary any portion of a judgment for $146,397 which he must pay to  the plaintiffs and to reimburse him for his attorney’s fees in defending the  action in an amount which the court will approve.  The court dismissed all remaining claims against Mr. Gregory  and the Company.  The entire $146,397  is included in the current portion of long-term debt on the accompanying  December 31, 2002 and 2001 Balance Sheets.                |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                          | The Company  is the plaintiff, counterclaim-defendant, and judgment debtor in a civil  action, for money damages and injunctive relief, captioned *Mega Group, Inc. v. Robert L. Halton*,  which commenced in February 2000 and is pending in the Supreme Court for the  County of Saratoga, New York.  The  defendant is one of the Company’s former officers and directors, and a former  officer and 49% shareholder of Anthony-Halton Associates, Inc., an insurance  agency which the Company purchased beginning in 1985.  In connection with the acquisition, the  Company entered into an employment agreement with the defendant.  That employment terminated in January  2000.  By order dated September 29, 2000,  the court held that the defendant was entitled to partial summary judgment  against the Company for $398,842 in deferred compensation and $42,500 in  profit sharing under the employment agreement, and the judgment creditor  restrained the Company from making any sale, assignment, transfer, or  interference with any property in which we have an interest until the  judgment is satisfied or vacated.  The  court dismissed the defendant’s counterclaim to the extent that it sought a  continuation or reinstatement of his life and medical insurance benefits as  an employee.  The judgment has been  partially satisfied, and the action is continuing as to the remaining claims  and counterclaims, which relate to the defendant’s pre-termination  compensation and the parties’ respective rights to own, purchase, and sell  defendant’s “book of business” upon his termination.  The $441,342 partial |

 

F-16

----

 
|   | summary  judgment was charged to other selling, general and administrative expenses in  2000.  Prior to December 31, 2000, the  Company made payments of $14,895 under the partial summary judgment.  The remaining obligation as of December  31, 2002 and 2001 of $409,600, is included in accounts payable and accrued  expenses on the accompanying Balance Sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | The Company  is the intervener-petitioner in a civil action for damages and injunctive  relief captioned *Mega Personal Lines, Inc.  v. Robert L. Halton, et al.,* which commenced June 12, 2001 and is  pending in the Supreme Court for the County of Saratoga, New York.  The petitioner is the purchaser, effective  April 1, 2000, of substantially all of the Company’s remaining assets, and  the respondents include the Company’s our judgment creditor, Robert L.  Halton, and various third-party garnishees.   Mega Personal Lines, Inc. seeks the return and release to it of  insurance commissions which, it alleges, were improperly garnished by Mr.  Halton in *Mega Group, Inc. v. Robert L.  Halton*.  Mr. Halton seeks  to invalidate and set aside the transfer of the Company’s assets to Mega  Personal Lines, Inc., so that the assets, including the insurance  commissions, might be used to satisfy his September 29, 2000 partial summary  judgment against the Company.  He  alleges generally that the transfer of the assets was not supported by fair  consideration and was made with actual intent to hinder, delay, or defraud  the Company’s creditors. The Company is defending itself against Mr. Halton’s  claims.  As of December 31, 2002, all  pleadings had been served in the litigation, and partial discovery had taken  place.  Subsequent to December 31,  2001, the Company successfully obtained Court authorization to intervene in  the proceeding, as an interested party. Discovery continues to take place,  and no trial date has been set. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | The Company  is one of several defendants in a civil action for equitable relief captioned  *Halton v. Gregory, et al*.,  which commenced on July 22, 2002, and is pending in the Supreme Court for the  County of Saratoga, New York.  The  plaintiff, Robert L. Halton, is the Company’s judgment creditor, and the  defendants also include the Company’s president, Steven C. Gregory.  In the action, Mr. Halton seeks to  invalidate and set aside the transfer, effective April 1, 2000, of the  Company’s remaining assets to Mr. Gregory, as described in Note 1, so that  the assets might be used to satisfy Mr. Halton’s September 29, 2000 partial  summary judgment against the Company.   Mr. Halton also seeks an accounting of the asset transfer.  He alleges generally that the transfer of  the assets was not for a fair equivalent value and was made with the actual  interest to hinder, delay, or defraud our creditors.  The Company is defending its position in  the action.  From December 31, 2001 to  the present, the defendants have served their answer, but no discovery has  taken place.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

 

F-17

----

 
|                                          | The Company  is a respondent in a civil action, for confirmation of an arbitration award  captioned *Herman  Adler v. Mega Group, Inc.*,*et  al.,* which commenced on November 15, 1999, in the Supreme Court  for the County of Albany New York. The petitioner, now deceased, was the  former owner of an insurance agency which we purchased in 1985.  He claimed that the Company failed to  honor the payment terms of the agency purchase agreement.  On December 15, 1999, an arbitrator  rendered, and on March 7, 2000 the arbitrator modified, an award in favor of  the petitioner and against the Company in the amount of $157,381.  On January 8, 2001, the Supreme Court confirmed  the arbitration award and entered judgment against the Company for $168,808  including costs and interest.  The  judgment creditor restrained the Company from making any sale, assignment,  transfer, or interference with any property in which the Company has an  interest until the judgment is satisfied or vacated.  The awarded amount is included in the  current portion of long-term debt and related costs and interest are included  in accounts payable and accrued expenses on the accompanying December 31, 2002  and 2001 Balance Sheets. |
|-----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                          | The Company  is the defendant in a civil action for money damages, for breach of a  computer financing agreement, captioned *First State Bank v. Mega Group, Inc.*, in  the Supreme Court for the County of Saratoga, New York.  On December 14, 2000, the Supreme Court  entered judgment against the Company in the amount of $48,000.  The judgment creditor restrained the  Company from making any sale, assignment, transfer, or interference with any  property in which the Company has an interest until the judgment is satisfied  or vacated.  The judgment amount is  included in the current portion of long-term debt on the accompanying  December 31, 2002 and 2001 Balance Sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                          | The Company  is a defendant in other pending lawsuits which, in the view of management,  are not material to the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **9.     Concentrations** | All 2002 revenue was earned under a  consulting agreement with one customer.   All of the revenue is included in and represents all of the Company’s  accounts receivable at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

F-18

----

 
| **10.  Financial  condition** | As of December 31, 2002, The Company has a  deficiency in stockholders’ equity of approximately $2,415,000 and a working  capital deficiency of approximately $2,420,000.  In addition, the Company is in default on certain notes payable  and other obligations and are involved in significant litigation involving  past business dealings.  On October  11, 2000, as a condition of its acquisition of SBICOA, its president, Steven  Gregory, agreed to indemnify the Company, SBICOA, and its respective  directors, shareholders, affiliates, and certain other associated persons  (collectively, the Indemnitee Group) and to hold the Indemnitee Group  harmless from and against all claims or liabilities relating to its business,  including all litigation claims then being asserted against the Company  (other than the Adler claim described in Note 8).  Mr. Gregory’s agreement is subject to certain conditions, among  them that (i) it is effective until not later than October 11, 2004, (ii) it  is contingent on the successful completion of a securities offering by the  Company, and (iii) his obligation shall be satisfied only by his delivery to  the Company of such number of its common shares owned by him, valued for this  purpose at $2.50 per share, as shall be equal to the amount of any claim  settled or finally determined.  Mr.  Gregory has granted the Indemnitee Group a security interest in his shares to  secure his obligation. |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                               | The intent of the Company’s management is  to direct it into new business lines providing financial services to  currently underserved ethnic minorities through alliances with churches and  other organizations serving those groups.   The Company intends in the near term to obtain additional equity  funding and to obtain additional debt financing to pursue these new lines of  business and to provide the funds to satisfy its current obligations.  The extent to which the Company can raise  additional equity and financing and achieve profitable operations from new  business activities will determine if the Company can continue as a going  concern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                               | On May 2, 2002, the Company entered into a  non-binding letter of intent with an underwriter to engage in a  firm-commitment registered public offering of 1,500,000 units, each unit  consisting of one share of its common stock and a warrant to purchase one  additional share of its common stock, representing 35% of its equity fully  diluted, at an offering price currently estimated at $6.00 per unit.  The letter of intent is subject to various  conditions and to the execution of formal written underwriting documents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                               | Management believes it will be successful  in obtaining additional equity and debt financing, but no assurances can be  given in this regard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

F-19

----

 
| **11.  Net  loss per share** | The following table sets forth the  computation of basic and diluted net loss per share for the years ended  December 31, 2002 and 2001: |
|-----------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|

 
|   |                                                  | ** ** | **2001** |      | **2002**   | ** ** |
|--------|-------------------------------------------------------|------------|----------|-----------|------------|------------|
|   |                                                  |       |     |      |       |       |
|   | Net loss                                              |       | $        | 554,637   |       | **$**      | **684,439** | ** ** |
|   | Preferred stock dividends                             |       | 800      |      | **800**    | ** ** |
|   |                                                  | ** ** |     |      |       | ** ** |
|   | Net loss - basic                                      |       | $        | 555,437   |       | **$**      | **685,239** | ** ** |
|   |                                                  | ** ** |     |      |       | ** ** |
|   | Weighted average shares - basic                       |       | $        | 8,056,912 |       | **$**      | **8,589,327** | ** ** |
|   |                                                  | ** ** |     |      |       | ** ** |
|   | Common shares issuable upon exercise of stock options |       | —   |      | **—** | ** ** |
|   |                                                  | ** ** |     |      |       | ** ** |
|   | Weighted average shares diluted                       |       | $        | 8,056,912 |       | **$**      | **8,589,327** | ** ** |
|   |                                                  | ** ** |     |      |       | ** ** |
|   | Basic and diluted net loss per share                  |       | $        | (0.07     | )          | **$**      | **(0.08** | **)** |

 
|                                            | For the  years ended December 31, 2002 and 2001, common shares issuable (280,000) upon  exercise of stock options were excluded from the dilutive calculation because  the effect was anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **12.  Recent  accounting pronouncements** | Statement of  Financial Accounting Standards No. 145, Recession of FASB Statements No. 4,  44, and 64, Amendment of FASB Statement No. 13 and Technical  Corrections:  The portion of this  Statement applicable to FASB Statement No. 4, applies to fiscal years  beginning after May 15, 2002.  The  other elements of the Statement became applicable during 2002.  The portion of the Statement applicable to  Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, has  the effect of changing the accounting for gains and losses from debt  extinguishments from extraordinary to operating.  The Company does not believe that this Statement will have any  impact on the financial statements when adopted.                                                                              |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                            | Statement of  Financial Accounting Standards No. 146, Accounting for Costs Associated with  Exit or Disposal Activities:  This  Statement nullifies Emerging Issues Task Force Issue No. 94-3, which required  the recognition of a liability for an exit cost at the date an entity made a  commitment to an exit plan.  SFAS No.  146 concludes that mere commitment to a plan, by itself, does not create an  obligation to others that meets the definition of a liability.  This Statement describes the costs to exit  an activity and when a liability for those costs should be recognized.  This Statement is applicable to exit or  disposal activities initiated after December 31, 2002. The Company does not  believe that this Statement will have any impact on the financial statements  when adopted. |

 

F-20

----

 
|   | Statement of  Financial Accounting Standards No. 147, Acquisitions of Certain Financial  Institutions:  This Statement  clarifies the accounting for financial institutions as a result of the new  standards issued for business combinations.   This Standard is not expected to have any effect on accounting  practices or financial reporting since the Company’s activities do not  involve those of financial institutions.                                                                                                                                                                                                                                                                      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | FASB  Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for  Guarantees, Including Indirect Guarantees of Indebtedness of Others:  This Interpretation supersedes FASB  Interpretation No. 34 and requires a guarantor to recognize a liability for a  non-contingent guarantee based upon the fair value of the guarantee.  The Interpretation requires specific disclosures  for guarantees, including product warranties, and indirect guarantees.  This Interpretation is applicable to  guarantees issued or modified after December 31, 2002.  The Company does not believe that this  Statement will have any impact on the financial statements when adopted. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | FASB Interpretation  No. 46, Consolidation of Variable Interest Entities: This interpretation is  not expected to have any effect on the Company’s accounting practices or  financial reporting since its activities do not include investments in or  transactions with such entities.                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

F-21

----