UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from __________________to______________
Commission File Number: 2-98014-D
NOVA COMMUNICATIONS LTD.
(formerly First Colonial Ventures, Ltd.)
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(Name of small business issuer in its charter)
NEVADA 95-4756822
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3830 DEL AMO BLVD., TORRANCE, CA 90503
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(Address of principal executive offices)
Issuer's telephone number (310) 642-0200
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange during the past 12 months (or for such shorter
period that the Company was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days:
YES /X/ NO / /
1
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB: / /
Issuer's revenues for its most recent fiscal year: $7,772,043
The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the average bid and asked price of such common equity
as of February 28, 2002 was $4,258,556 at February 28, 2002, based on the
average bid and ask prices during January and February, 2002.
The issuer had 31,428,458 shares of common stock outstanding as of February 28,
2002.
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format: Yes / / No /X/
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) General Development of Business
(1) Nova Communications Ltd. (the "Company"), formerly known as First
Colonial Ventures, Ltd., was organized under the laws of the State of Utah in
1985 for the purpose of acquiring a participating interest in one or more
businesses. Through its year ended December 31, 1994, the Company conducted
business through various wholly owned subsidiaries until electing in 1995 to
become a Business Development Company. In January 1995, the Registrant elected
to become an Investment Company pursuant to the Investment Company Act of 1940.
In June 1995, the Registrant terminated its Investment Company election and
elected to become a Business Development Company, as defined in the Small
Business Investment Incentive Act of 1980, which Act is an amendment to the
Investment Company Act of 1940. The election resulted in the Registrant becoming
a specialized type of Investment Company. Consistent with this change in type of
business entity, during the year ended December 31, 1995, the Registrant changed
its method of financial reporting and valuation of investments from cost to fair
value.
Stockholders of the Company met in June 1999 and voted to change the name
of the Company, change its state of incorporation from Utah to Nevada, and to
terminate its status under the Investment Company Act of 1940 as a Business
Development Company. Nova Communications Ltd. was never a Business Development
Company nor an Investment Company. The Company is primarily engaged in the
business of investing in and providing managerial assistance to developing
companies that, in its opinion, would have a significant potential for growth.
The Company's investment objective is to achieve long-term capital appreciation,
rather than current income on its investments. There is no assurance that the
Company's investment objective will be achieved. Effective January 1, 1999, the
Board of Directors resolved to cease its election to report its Financial
Statements as an investment company pursuant to the Investment Company Act of
1940.
(c) Narrative Description of Business
The Company continues to implement a new strategic course, which was begun
during 2000, based on its firm belief that business communications and
e-commerce will provide substantial opportunities over the next five years. The
Company and its subsidiaries have been hampered in their operations throughout
2001 by a shortage of working capital. It continues to seek new working capital
sources. When its efforts are successful, it will again focus on expanding the
operations of Communications 2000, Inc., a consolidated subsidiary, through
strategic acquisitions and opening of new locations in major market areas.
On October 1, 2000, the Company acquired a 35.02% interest (3,743,568
common shares) in Communications 2000, Inc. of Torrance, California
("Communications 2000") in exchange for 3,000,000 of the Company's newly issued
restricted common shares. On the effective date, the Company's shares reflected
a closing bid price of $.38 per common share
3
on the NASDAQ Over-The-Counter Bulletin Board. This acquisition was valued at
$1,140,000 and was accounted for as a purchase transaction. The Company and
other controlling shareholders owned 55.94% of Communications 2000 on October 1,
2000. On November 6, 2000, the Company acquired an additional 300,000
Communications 2000 shares in exchange for 500,000 of the Company's newly issued
restricted common shares. On the previous business day, the Company's shares
reflected a closing bid price of $.20 per common share that resulted in a
purchase price of $100,000 for these additional shares. On December 13, 2000,
the Company acquired an additional 1,000,000 Communications 2000 shares in
exchange for 1,000,000 of the Company's newly issued restricted common shares.
On the previous business day, the Company's shares reflected a closing bid price
of $.0625 per common share that resulted in a purchase price of $62,500 for
these additional shares. At December 31, 2001, the Company owned a 46.68%
interest in this subsidiary. The Company and other controlling shareholders
owned 55.34% of Communications 2000 on
December 31, 2001.
The Company's financial statements include the balance sheet of
Communications 2000 at December 31, 2001 and the results of its operations since
acquisition. All significant intercompany transactions have been eliminated. No
minority interest liability is recorded as Communications 2000 had a negative
net worth upon its acquisition and the results of its operations reflect a net
loss since acquisition.
Communications 2000 conducts its business under the trade name of
"TEC-networks". It engages in the sale, installation and service of business
communications systems, including computer networking and voice, data and
voice-over-the-Internet communications. Communications 2000 began its business
during 1995 in Torrance, CA (Los Angeles area). On June 1, 2000, it acquired and
merged the assets and liabilities of The Message On Hold of America, Inc. of
Tampa, FL. During July, 2000, it opened a new branch in Concord, CA (San
Francisco area).
Communications 2000 holds a national distributorship agreement with Nortel
Networks in addition to maintaining supplier relationships with several other
major equipment manufacturers and wholesalers, including Panasonic, Ronco and
Sprint North Supply. Deliveries are made to its warehouses or direct to customer
sites from manufacturers and wholesalers within one-to-three business days. This
allows it to maintain minimal levels of inventory and still provide excellent
service to its customers. Communications 2000 has over 5,000 customers and no
single account or group of accounts makes up a significant part of its revenues.
The loss of any individual account or group of accounts would not be expected to
cause a material adverse effect upon revenues. At December 31, 2001,
Communications 2000 had a backlog of equipment orders of about $260,000. It
competes in a very active marketplace. Major competitors include Pacific Bell,
Verizon, Staples and others.
On October 1, 2000, Communications 2000 acquired Kadfield, Inc. of Redondo
Beach, CA. On December 31, 2001, Kadfield, Inc. became a directly-owned
subsidiary of Nova Communications. Ltd. Kadfield, Inc. engages in the retail
sale of computing equipment and accessories by direct sale and via the Internet
under the trade name of
4
"BuyMicro". It markets computers, printers, monitors and networking solutions
manufactured by Apple Computer, Cisco Systems, Compaq, Hewlett Packard, Intel,
IBM, NEC, Nokia, Philips, Sony, SunMicrosystems, Toshiba, Zenith and others.
BuyMicro purchases products to fill each order from Ingram Micro, Tech Data and
other wholesalers. With over 100,000 products and 30,000 customers, BuyMicro
offers same day shipping from 27 wholesaler warehouses located throughout the
U.S.
During March, 1996, in exchange for 400,000 shares of its common stock,
the Company acquired a 10% interest in a non-public Florida corporation, And
Justice For All, Inc., which operates a nation-wide membership organization
providing its members with access to attorney services at a discounted rate.
During 1997, the Company agreed to increase its investment in And Justice For
All, Inc. to a total of 15%. The agreement required the Company to issue an
additional 515,235 shares of its common stock and required And Justice For All,
Inc. to assume the Company's convertible debenture payable of $210,000 plus
accrued interest of approximately $55,000. On March 24, 1998, the name And
Justice For All, Inc. was changed to Legal Club of America Corporation (Legal
Club).
During 1999, the Company borrowed $525,000 using its Legal Club stock as
collateral. The lender, PFK Development Group, also bought from the Company
287,500 restricted shares of Legal Club stock for $28,750. The Company used the
proceeds of the loan and stock sale to repay the Company's bank loan and for
working capital. During 2000, the note to PFK Development Group was increased to
$608,878, as accrued interest was added to the principal, and was extended until
January 7, 2002. During January, 2001, PFK Development Group was issued 400,000
new restricted common shares of the Company as a payment of interest on its
loan. These were valued at $.12 per share, the closing bid price of the
Company's common stock at the date of issuance. During December 2001, PFK
Development Group agreed to extend the maturity of its note until December 2003,
in exchange for 400,000 additional restricted common shares of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive and administrative office is located at 3830 Del
Amo Boulevard, Torrance, California 90503, where the Company utilizes
approximately 900 square feet of 10,000 square feet being leased by
Communications 2000.
ITEM 3. LEGAL PROCEEDINGS
(a) During the year ended December 31, 2001, neither the Company nor its
subsidiaries were a party to or the subject of any material legal proceedings.
Communications 2000 is defendant in a number of collection actions and several
creditors have obtained monetary judgments. Communications 2000 has accrued all
known liabilities in accounts payable and other current liabilities at December
31, 2001.
(b) On October 21, 1997, the Securities Exchange Commission obtained an
order directing a private investigation and designating officers to take
testimony. On February 3, 2000, the Company and Murray W. Goldenberg personally,
submitted an Offer of Settlement
5
in this administrative proceeding. On April 10, 2000 the Commission deemed it
appropriate to accept the Offers of Settlement and ordered that pursuant to
Section 9(f) of the Investment Company Act, Section 8A of the Securities Act and
Section 21C of the Exchange Act, the Company cease and desist from committing or
causing any violation and any future violation of Sections 23(b), 31(a) and
55(a) of the Investment Company Act and Rule 31a-1thereunder, Section 5(a) and
5(c) of the Securities Act and Section 13(a) of the Exchange Act and Rules
13(a)-1 and 13a-13 hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information:
The equity securities of the Company are quoted on the NASDAQ
Over-The-Counter Bulletin Board. The following table sets forth the range of
high and low bid prices during each quarter for the Company's common stock for
the years ending December 31, 2001 and December 31, 2000. These over-the-counter
market quotations may reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions. The 2001
information was obtained on March 12, 2002, and the 2000 information was
obtained on February 27, 2001, from American On-Line (Standard & Poors
Comstock).
2001 SALES PRICES
-----------------
COMMON STOCK LOW HIGH
-------------- --- ----
Q1-2001 $.09 $.50
Q2-2001 .10 .44
Q3-2001 .045 .32
Q4-2001 .05 .31
2000 SALES PRICES
-----------------
COMMON STOCK LOW HIGH
-------------- --- ----
Q1-2000 $.06 $.20
Q2-2000 .10 .19
Q3-2000 .07 .41
Q4-2000 .0625 .42
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(b) Approximate Number
of Record Holders
Title of Class (as of February 28, 2002)
-------------- ------------------------
Common Stock,
$.001 Par Value 1,850
(c) Dividends:
The Company has never paid cash dividends on its common stock. The
declaration and payment of dividends is within the discretion of the Company's
board of directors and will depend, among other factors, on earnings and debt
service requirements as well as the operating and financial condition of the
Company. At the present time, the Company's anticipated working capital
requirements are such that it intends to follow a policy of retaining earnings
in order to finance the development of its business. Accordingly, the Company
does not expect to pay a cash dividend within the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The financial statements for the years ended December 31, 2001 and 2000
are filed under Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Management's discussion and analysis should be read in conjunction with
the financial statements and the notes thereto.
RESULTS OF OPERATIONS
These results include the operations of the Company and its consolidated
subsidiaries for the full year 2001. For the first three quarters of 2000, the
Company operated as a holding and investment company. The results of its
consolidated subsidiaries are included since their acquisition on October 1,
2000. Consolidated revenues and expenses increased significantly for 2001
compared with 2000 as a result of operating its subsidiaries for the full year.
The Company has experienced recurring losses from operations and as of December
31, 2001 had a working capital deficit of $5,765,652 and a net capital
deficiency of $6,670,695.
Comprehensive net loss, net loss and net loss per common share
Comprehensive net loss for 2001 was $(7,658,534), a loss increase of
$6,542,693 compared with a net loss of ($1,115,841) for 2000. As a result,
comprehensive net loss per share for 2001 was $(.343), a decrease of $.269 per
share compared with a comprehensive net loss per share of ($.074) for 2000. Net
loss for 2001 was $(7,604,159), a loss increase of $6,601,328 compared with a
loss of $(1,002,831) for 2000. As a result, net loss per share for
7
2001 was $(.340), a decrease of $.273 per share compared with a net loss per
share of ($.067) for 2000. These results include the operations of the Company
for the full year and its consolidated subsidiaries since their acquisition on
October 1, 2000.
Net revenues
Net revenues for 2001 were $7,772,043, an increase of $6,069,390 compared
with $1,702,653 for 2000. Net revenues increased as a result of consolidation of
the Company's subsidiaries after their acquisition on October 1, 2000.
Cost of sales and gross margin
Cost of sales for 2001 was $6,062,553, or 78.0% of net revenues. Cost of
sales for 2000 was $1,352,089, or 79.4% of net revenues. Gross margin for 2001
was $1,709,490 an increase of $1,358,926 compared with $350,564 for 2000.
Operating expenses
Operating expenses for 2001 were $8,729,934, an increase of $7,709,354
compared with $1,020,580 for 2000. Operating expenses increased as a result of
consolidation of the Company's subsidiaries after their acquisition on October
1, 2000. Depreciation and amortization, components of operating expenses, for
2001 were $3,316,612, an increase of $3,038,119 compared with $278,493 for 2000.
Goodwill, that remained from the acquisition of Communications 2000, Inc. by
Nova Communications, Ltd. and The Message On Hold of America, Inc. by
Communications 2000, Inc., was written-off during 2001, as recommended by
generally accepted accounting principles. These amortization charges for 2001
were $3,187,720, an increase of $3,063,363 compared with $124,357 for 2000.
Net interest expense
Net interest expense for 2001 was $586,760, an increase of $251,476
compared $335,284 for 2000. Net interest expense increased as a result of
guarantor, collateral and loan renewal fees and consolidation of the Company's
subsidiaries after their acquisition on October 1, 2000.
OPERATING STRATEGIES AND COST REDUCTIONS
The Company and its subsidiaries have been hampered in their operations
throughout 2001 by a shortage of working capital. Despite engaging the services
of several investment bankers and professional fundraisers during the year, no
significant amounts of contributed capital have been raised. The Company's
growth and strategic operating plans for Communications 2000 and its
subsidiaries were predicated upon raising $2,000,000 to $4,000,000 in working
capital during the first half of 2001. Without adequate working capital,
Communications 2000 was not able to expand its sales presence as planned. It was
also not able to sponsor levels of advertising programs necessary to create a
significant number of leads for its existing sales force.
8
Decisions were made in late 2001 to close the Tampa, FL and Concord, CA
offices of Communications 2000, as cost reduction measures. The Tampa, FL
location was closed on February 15, 2002, and the Concord, CA office was closed
on February 28, 2002. Lease agreements on these locations were simultaneously
cancelled. Compensation agreements with remaining sales agents have been
converted to a modest base salary with performance-based incentives.
Communications 2000 retains its ability to sell and install telecommunications
systems on a nationwide basis from its Torrance, CA location. Equipment is
shipped to a customer's location where it is installed by Torrance-based
technicians or outside contractors.
Communications 2000 is also currently in negotiations to acquire the
operations of a division of a publicly traded company that sells a product that
compliments its business communications systems operations. This division
currently has 27 strategically located offices throughout the Untied States.
Management believes they will be able to achieve economies of scale with the
additional markets and customers currently served by this division. There can be
no assurances that the Company will be able to successfully negotiate a
definitive agreement for the acquisition of this entity.
The Company has made an offer to acquire a data storage facility currently
operating in Chapter 11. Nova believes that it will be able to provide
managerial assistance to this facility in order for them to achieve profitable
operations. There can be no assurances that Nova's offer for this entity will be
accepted.
Kadfield, Inc., operating as BuyMicro, was successful in increasing its
lines of credit with its suppliers during 2001. It also has focused a portion of
its business in large systems that are financed under capital lease arrangements
for its customers. Its operations have been profitable since the fourth quarter
of 2001.
The Company and its principal subsidiary, Communications 2000, continue to
suffer from a severe working capital shortage. Their efforts to raise additional
working capital continue. The Company believes the above actions, events and
other factors will allow them to continue operations and ultimately achieve
profitability. Until then, the Company is dependent upon its ability to obtain
additional capital and debt financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-see attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with accountants during the most recent
two fiscal years.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) (b) The following table and text sets forth the names and ages of all
directors and executive officers of the Company and their positions and offices
with the Company as of December 31, 2001. All of the directors will serve until
the next annual meeting of the shareholders and until their successors are
elected and qualified, or until their earlier death, retirement, resignation or
removal. Officers serve at the discretion of the Board of Directors. A brief
description of the business experience of each director and executive officer
during the past five years, and an indication of directorships held by each
director in other companies subject to the reporting requirements under the
federal securities laws are also provided.
NAME AGE POSITION(S) DIRECTOR SINCE
Kenneth D. Owen 38 President and June 28, 1999
Director
Leslie I. Handler 64 Assistant Secretary August 27, 1991
and Director
Bryce Sherwood 49 Director September 30, 2000
(d) Family Relationships:
There are no family relationships between any director and executive
officer, or person nominated to become a director or executive officer.
(e) (1) Business Experience:
Kenneth D. Owen - President and Director -
Kenneth D. Owen has been a Director of the Company since June 28, 1999. Mr. Owen
has been in the communications industry for over 15 years and was previously
vice president of A T & T Business Systems for Southern California. He currently
is president of Communications 2000 a nationwide Nortel Distributor and a
Panasonic Diamond Dealer.
Leslie I. Handler - Assistant Secretary and Director -
Leslie I Handler has been a Director of the Company since August 27, 1991. From
1988 to 1992, Mr. Handler was president of Far West Commercial Finance
subsidiary of Far West Federal Bank, Portland, Oregon. Mr. Handler is an
experienced senior manager with more than 30 years of experience with
asset-based lending organizations. Since 1993, Mr. Handler has been a consultant
to the banking industry.
10
Bryce Sherwood - Director -
Bryce Sherwood has been a Director of the Company since September 30, 2000. Mr.
Sherwood is now retired, though he previously was a Securities Broker with A.G.
Edwards and Company.
(f) Resignation of Officer and Director
The Company's former President and Chief Executive Officer, Murray W.
Goldenberg resigned as an officer and director of the Company as of September
30, 2000. Mr. Goldenberg continues an association with the Company as a
management consultant.
ITEM 11. EXECUTIVE COMPENSATION
(a) (1) Cash Compensation Table
Name & Principal Year Principal Annual All Other Compensation
Position Compensation
Kenneth D. Owen 2001 $ 180,000 $ 6,875 (1)
President 2000 48,306 Nil
Murray W. Goldenberg 2001 $ - 9,625 (3)
Former President 2000 123,750 Nil
1999 165,000 Nil
1998 165,000 Nil
1997 165,000 Nil
Leslie I. Handler 2001 - 16,500 (1 & 2)
Director 2000 - 111,350 (4)
1999 - Nil
1998 - Nil
1997 8,275 Nil
Bryce Sherwood 2001 - 6,875 (1)
Director 2000 - Nil
(1) During November, 2001, Messrs. Owen, Handler and Sherwood were each issued
125,000 new restricted common shares of the Company in payment of Directors'
Fees. These were valued at $.055 per share, the closing bid price of the
Company's common stock at the date of issuance.
(2) During November, 2001, Mr. Handler was issued 175,000 new restricted common
shares of the Company in exchange for prior personal guarantees of Company
long-term obligations. These were valued at $.055 per share, the closing bid
price of the Company's common stock at the date of issuance.
11
(3) During November, 2001, Mr. Goldenberg was issued 175,000 new restricted
common shares of the Company in exchange for consulting services. These were
valued at $.055 per share, the closing bid price of the Company's common stock
at the date of issuance.
(4) During March, 2000, Mr. Handler was issued 927,914 new restricted common
shares of the Company in exchange for prior personal guarantees of Company
long-term obligations. These were valued at $.12 per share, the closing bid
price of the Company's common stock at the date of issuance.
Compensation Arrangements:
Mr. Owen is employed by Communications 2000 under the terms of a
three-year employment agreement effective June 1, 2000. The agreement provides
for an annual base compensation of $180,000 plus an annual bonus equal to 1% of
the gross revenue of Communications 2000, provided that this bonus can not
exceed the entity's net pre-tax income as computed before calculating and
accruing the bonus. Mr. Owen earned $180,000 during 2001 and $48,306 between
October 1 and December 31, 2000 under this agreement. Mr. Owen was paid $120,000
during 2001 and the balance of $60,000 was accrued to his note payable account.
During the periods 1997 through June 14, 2000, the services of Murray W.
Goldenberg were compensated pursuant to a month-to-month consulting agreement
with Palaut Management Ltd. ("Palaut"). On June 15, 2000, the Company entered
into a three-year agreement with Palaut that requires Palaut to provide the
Company with the services of personnel to act in the capacities of Chief
Executive Officer, Chief Financial Officer and Administrative Assistant.
Compensation to Palaut pursuant to this agreement will be $205,000 annually. The
services of Mr. Goldenberg are provided as a management consultant to the
Company under the terms of this agreement. Palaut was paid $105,500 during 2001
and the balance of $99,500 was accrued in accounts payable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as
consisting of sole or shared voting power (including the power to vote or direct
the vote) and/or sole or shared investment power (including the power to dispose
of or direct the disposition of) with respect to a security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws.
As of December 31, 2001, the Company had authorized 500,000,000 shares of
its common stock, $.001 par value (the "common stock"), 31,428,458 shares of
which were issued at December 31, 2001, and 10,000,000 shares of its preferred
stock, no par value, none of which were issued. At December 31, 2001, the
Company has recorded its obligation to issue 400,000 shares of common stock
pursuant to a loan extension agreement. These shares
12
were issued during January 2002. The Company's Board of Directors has the
authority, without approval of the shareholders, to issue all or any portion of
the authorized shares of preferred stock in one or more series, and to determine
the preferences as to dividends, redemption and liquidation, conversion rights,
and other rights of such series, which may carry rights superior to those of the
common stock. The holders of shares of preferred stock shall not have any voting
rights except as specifically required by law.
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of January 31, 2002. Listed below are (a) the
name and address of each beneficial owner of more than five percent (5%) of the
Company's common stock known to the Company, the number of shares of common
stock beneficially owned by each such person or entity, and the percent of the
Company's common stock so owned; and (b) the number of shares of common stock of
the Company beneficially owned, and the percentage of the Company's common stock
so owned, by each director and by all directors and officers of the Company as a
group. Each such person or entity has sole voting and investment power with
respect to the shares of common stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock, except as
otherwise indicated.
Name and Address of Amount and Nature Percent of
Beneficial Owner of Beneficial Ownership Shares of
Common Stock
Kenneth D. Owen 4,500,000 14.32%
President and Director
31913 Taylor Road
Thousand Palms, CA 92276
Leslie I. Handler 1,640,000 (1) 5.22%
Assistant Secretary and Director
1108 Via Zumaya
Palos Verdes Estates, CA 90274
Bryce Sherwood 125,000 *
Director
7517 Taylor Trace
Battle Creek, MI 49017
All Directors and 6,265,000 19.93%
Officers as a Group
(3 persons)
First Capital Services, Inc. 1,724,940 5.49%
2300 Glades Road, Suite 450
West Tower
Boca Raton, FL 33431
13
Murray W. Goldenberg 2,578,707 (2) 8.21%
8515 Falmouth Ave. #315
Playa del Rey, CA 90293
o Less than 1%
(1) This does not include 31,318 shares owned by Mr. Handler's wife, Judy, as to
which Mr. Handler has neither voting nor investment power and disclaims
beneficial ownership.
(2) This does not include 30,000 shares owned by Mr. Goldenberg's three adult
children, and 53,595 shares owned by Mr. Goldenberg's wife, Patricia, as to
which Mr. Goldenberg has neither voting nor investment power and disclaims
beneficial ownership.
(c) Changes in Control:
There are no contractual or other arrangements currently in effect or
contemplated that may later result in a change in control of the Company.
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description of Document
1. Financial Statements
3(3)(i)(1) First Colonial Ventures, Ltd. Articles of Incorporation -
March 25, 1985 (Incorporated by reference)
3(3) (2) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - August 12, 1985 (Incorporated by reference)
3(3) (3) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - September 3, 1985 (Incorporated by reference)
3(3) (4) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - February 3, 1992 (Incorporated by reference)
3(3)(ii)(1) Bylaws (Incorporated by reference)
3(13) Form 10QSB - March 31, 2001, June 30, 2001 and September 30,
2001 (Incorporated by reference)
(b) No reports on Form 8-K where filed during the last quarter of the
period covered by this report.
15
SIGNATURES:
In accordance with Section 13 or 15 (d) of the Exchange Act, the company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NOVA COMMUNICATIONS LTD.
(Company)
Date: April 11, 2002
By: /s/ Kenneth D. Owen
--------------------
Kenneth D. Owen,
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company in the capacities and on the dates
indicated:
April 11, 2002
/s/ Kenneth D. Owen
------------------------
Kenneth D. Owen President and Director
April 11, 2002
/s/ Leslie I. Handler Assistant Secretary and Director
--------------------------
Leslie I. Handler
April 11, 2002
/s/ Bryce Sherwood Director
-----------------------
Bryce Sherwood
16
NOVA COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
WITH
REPORT OF INDEPENDENT AUDITORS
NOVA COMMUNICATIONS, LTD.
Years ended December 31, 2001 and 2000
Contents
Page
----
Report of Independent Auditors................................. 1
Consolidated Financial Statements:
Balance sheets.............................................. 2
Statements of operations.................................... 3
Statements of comprehensive loss............................ 4
Statements of changes in stockholders' equity (deficit)..... 5 - 6
Statements of cash flows.................................... 7
Notes to consolidated financial statements.................. 8 - 18
1
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Nova Communications Ltd.
We have audited the accompanying consolidated balance sheet of Nova
Communications Ltd. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive loss, changes in
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nova Communications
Ltd. as of December 31, 2001 and 2000 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2001 in
accordance with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to the
consolidated financial statements, the Company has a working capital deficit, a
net capital deficiency, and recurring net losses that raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
April 3, 2002
Portland, Oregon
2
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets
December 31
-------------------------------------
2001 2000
---------------- ----------------
ASSETS
------
Current assets:
Cash $ 101,345 $ 422,203
Accounts receivable, less allowance for uncollectible
accounts of $58,935 in 2001 $96,737 in 2000) 274,348 371,055
Notes receivable 39,446 85,632
Inventories 148,850 237,115
Prepaid expenses and deposits 42,532 22,928
Available-for-sale investments 32,625 87,000
-------------- --------------
Total current assets 639,146 1,225,933
Equipment, net 679,161 803,558
Other assets:
Goodwill, less accumulated amortization of
$3,296,647 in 2001 ($124,357 in 2000) 22,384 3,110,996
Deposits 67,078 3,063
-------------- --------------
Total other assets 89,462 3,114,059
-------------- --------------
$ 1,407,769 $ 5,143,550
============== ==============
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets
December 31
-------------------------------------
2001 2000
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
Current liabilities:
Accounts payable $ 4,043,521 $ 1,997,572
Payable to related parties 20,000 63,286
Accrued payroll and payroll related liabilities 656,100 76,272
Customer deposits 304,482 551,550
Income taxes payable 800 800
Other accrued liabilities 425,661 244,995
Long-term obligations, due within one year 287,807 174,454
-------------- --------------
Total current liabilities 5,738,371 3,108,929
Long-term obligations 1,113,497 932,465
Notes payable to related parties 1,226,596 1,007,800
Stockholders' equity (deficit):
Preferred stock; no par value; authorized 10,000,000
shares - -
Common stock; $.001 par value; authorized
500,000,000 shares; outstanding 31,428,458
shares in 2001 (18,603,622 shares in 2000) 31,429 18,604
Common stock to be issued 20,000 371,953
Additional paid-in capital 13,075,523 11,842,912
Retained deficit (19,332,515) (11,728,356)
Unrealized holding loss from available-for-sale
investments (465,132) (410,757)
-------------- --------------
Total stockholders' equity (deficit) (6,670,695) 94,356
-------------- --------------
$ 1,407,769 $ 5,143,550
============== ==============
See accompanying notes.
3
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Operations
Years ended December 31
---------------------------------
2001 2000
---------------- --------------
Revenues $ 7,772,043 $ 1,702,653
Cost of sales 6,062,553 1,352,089
-------------- -------------
Gross margin 1,709,490 350,564
Operating expenses:
Selling 1,473,635 130,778
General and administrative expenses 7,256,299 889,802
-------------- -------------
Total operating expenses 8,729,934 1,020,580
-------------- -------------
Loss from operations (7,020,444) (670,016)
Interest, net 586,760 335,284
-------------- -------------
Loss before benefit for income taxes (7,607,204) (1,005,300)
Benefit for income taxes (3,045) (2,469)
-------------- -------------
Net loss $ (7,604,159) $ (1,002,831)
============== =============
Net loss per common share $ (.340) $ (.067)
============== =============
See accompanying notes.
4
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Comprehensive Loss
Years ended December 31
----------------------------------
2001 2000
----------------- --------------
Net loss $ (7,604,159) $ (1,002,831)
Unrealized holding loss on available-for-sale
investments (54,375) (113,010)
-------------- -------------
Comprehensive loss $ (7,658,534) $ (1,115,841)
============== =============
Comprehensive loss per common share $ (.343) $ (.074)
============== =============
See accompanying notes.
5
NOVA COMMUNICATIONS LTD.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
January 1, 2000 through December 31, 2001
Continued on next page.
Unrealized
holding
loss from Total
Preferred Common stock Common Additional available- stockholders'
---------------------- Stock to paid-in Retained for-sale equity
stock Shares Amount be issued capital deficit investments (deficit)
------------ ----------- ---------- ----------- --------- ---------- ------------- ----------
Balance at January 1, 2000 $ - 13,496,183 $ 13,496 $ - $ 9,760,955 $(10,725,525) $ (297,747) $(1,248,821)
Shares issued in exchange
for accounts payable - 60,000 60 - 7,440 - - 7,500
Common stock issued in
exchange for guarantee of
long-term obligations - 927,914 928 - 110,422 - - 111,350
Common stock issued for
purchase of subsidiary - 3,960,000 3,960 62,500 1,302,940 - - 1,369,400
Common stock issued in
exchange for services - 109,500 110 - 21,790 - - 21,900
Common stock issued in
exchange for accounts payable - 50,025 50 - 9,955 - - 10,005
Common stock to be issued in
exchange for long-term obligations - - - 309,453 - - - 309,453
Additional paid-in-capital from
sale of common stock by subsidiary - - - - 629,410 - - 629,410
Comprehensive loss - - - - - (1,002,831) (113,010) (1,115,841)
--------- ------------ -------- --------- ------------ ------------ ---------- ------------
Balance at December 31, 2000 $ - 18,603,622 $ 18,604 $ 371,953 $ 11,842,912 $(11,728,356) $ (410,757) $ 94,356
=========== ========== ======== ========= ============ ============ ========== ===========
Continued on next page.
6
NOVA COMMUNICATIONS LTD.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
January 1, 2000 through December 31, 2001 (continued)
Unrealized
holding
loss from Total
Preferred Common stock Common Additional available- stockholders'
---------------------- Stock to paid-in Retained for-sale equity
stock Shares Amount be issued capital deficit investments (deficit)
------------ ----------- ---------- ----------- --------- ---------- ------------- ----------
Balance at January 1, 2001 $ - 18,603,622 $ 18,604 $ 371,953 $ 11,842,912 $(11,728,356) $ (410,757) $ 94,356
Shares issued - 1,250,000 1,250 (371,953) 370,703 - - -
Common stock issued in
exchange for interest
and loan fees - 400,000 400 20,000 47,600 - - 68,000
Common stock issued to
employees of Communications
2000, Inc. - 365,000 365 - 58,035 - - 58,400
Common stock issued in
exchange for services - 10,809,836 10,810 - 724,890 - - 735,700
Additional paid-in-capital
from sale of common
stock by subsidiary - - - - 31,383 - - 31,383
Comprehensive loss - - - - - (7,604,159) (54,375) (7,658,534)
----------- ------------- -------- ---------- ------------ ------------ ---------- ------------
Balance at December 31, 2001 $ - 31,428,458 $ 31,429 $ 20,000 $ 13,075,523 $ 19,332,515) $ (465,132) $(6,670,695)
=========== ============= ======== ========== ============ ============ ========= ============
See accompanying notes.
7
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows
Years ended December 31
---------------------------------
2001 2000
--------------- --------------
Cash flows from operating activities:
Net loss $ (7,604,159) $ (1,002,831)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,316,612 278,493
Accrued interest converted to notes payable 57,549 55,293
Common stock issued for services 794,100 133,250
Common stock issued in exchange for accounts payable - 17,505
Common stock issued in exchange for accrued liabilities 68,000 -
Provision (benefit) for uncollectible accounts receivable (37,802) 23,185
Changes in assets and liabilities (net of effects of
purchase of subsidiary in 2000):
Receivables 34,007 136,852
Inventories 88,265 (90,265)
Prepaid expenses and deposits (19,604) 36,318
Accounts payable 1,962,271 348,944
Accrued liabilities 708,741 49,668
-------------- -------------
(632,020) (13,588)
Cash flows from investing activities:
Cash acquired from acquisition of subsidiary - 157,578
Principal repayments on notes receivable 46,186 57,666
Deposits (64,015) (1,353)
Capital expenditures (19,925) (51,343)
-------------- -------------
(37,754) 162,548
Cash flows from financing activities:
Proceeds from long-term obligations 135,515 -
Principal payments on long-term obligations (36,778) (217,786)
Advances from related parties 218,796 -
Principal payments on notes payable to related parties - (141,894)
Increase in additional paid-in-capital resulting from
common stock issued by subsidiary 31,383 629,410
-------------- -----------
348,916 269,730
-------------- -------------
Net increase (decrease) in cash (320,858) 418,690
Cash at beginning of year 422,203 3,513
-------------- -------------
Cash at end of year $ 101,345 $ 422,203
============== =============
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows (Continued)
Years ended December 31
---------------------------------
2001 2000
--------------- --------------
Supplemental disclosure of cash flow information -
cash paid for interest $ 518,760 $ 53,094
============== ===========
Non-cash investing and financing activities:
Equipment acquired under capitalized lease obligation $ - $ 375,238
============== ===========
Common stock issued in exchange for net assets of
subsidiary $ - $ 1,369,400
============== ===========
Common stock to be issued in exchange for long-term
obligations $ - $ 309,453
============== ===========
See accompanying notes.
8
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
1. Business and summary of significant accounting policies
-------------------------------------------------------
Business: Nova Communications Ltd. (the "Company" or "Nova") is incorporated
--------
under the laws of the State of Nevada. The Company invests in and provides
managerial assistance to developing companies.
Basis of consolidation: The consolidated financial statements include the
----------------------
accounts of Nova and its subsidiaries, Communication 2000, Inc., dba
TEC-networks ("TEC-networks") and Kadfield, Inc. ("Kadfield"). All
intercompany accounts and transactions have been eliminated.
As of December 31, 2001, the Company owned 46.68% of TEC-networks and 100%
of Kadfield. TEC-networks is consolidated because management believes it
exercises significant influence over this subsidiary.
Losses exceed the minority interest in the equity capital of TEC-networks.
Accordingly, losses applicable to the minority interest in TEC-networks are
charged against Nova, as there is no obligation of the minority stockholders
to guarantee such losses. If future earnings of TEC-networks do materialize,
Nova will be credited to the extent of such losses previously absorbed.
Cash and cash concentrations: For purposes of the statement of cash flows,
the Company and its subsidiaries consider cash equivalents to be highly
liquid instruments if, when purchased, their original due dates were within
three months.
The Company and its subsidiaries place their cash in financial institutions.
At various times throughout the year, cash held in these accounts has
exceeded Federal Deposit Insurance Corporation limits. Neither the Company
nor its subsidiaries have experienced any losses as a result of these cash
concentrations.
Investments: Investments are accounted for under the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires
that all applicable investments be classified as trading securities,
available-for-sale securities, or hold-to-maturity securities. The statement
further requires that hold-to-maturity securities be reported at amortized
cost and available-for-sale securities be reported at fair market value,
with unrealized gains and losses excluded from earnings but reported in a
separate component of shareholders' equity (net of the effects of income
taxes) until they are disposed of or sold. At the time of disposal or sale,
any gains or losses, calculated by the specific identification method, are
recognized as a component of operating results.
9
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Equipment: Equipment is carried at cost. Depreciation is computed using the
---------
straight-line method over the estimated useful lives of the depreciable
assets, which range from five to fifteen years.
Computer software obtained or developed for internal use is capitalized in
accordance with Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed for Internal Use". Amortization is computed
using the straight-line method over seven years.
Equipment under capitalized lease obligations is carried at estimated fair
market value determined at the inception of the lease. Amortization is
computed using the straight-line method over the shorter of the original
term of the lease or the estimated useful lives of the assets.
Goodwill: Goodwill represents the excess purchase price over the estimated
--------
fair value of the net assets of its subsidiaries. Amortization is computed
using the straight-line method over seven years.
Impairment of long-lived assets: The Company and its subsidiaries assess the
-------------------------------
recoverability of long-lived assets by determining whether the depreciation
and amortization of the asset's balance over its remaining life can be
recovered through projected undiscounted future cash flows. The amount of
impairment, if any, is measured based on fair value and charged to
operations in the period in which the impairment is determined by
management. During 2001, management determined that they would not be able
to recover the excess purchase price over the estimated fair value of the
net assets of its subsidiaries and charged to operations an expense of
approximately $2,738,300 for the impairment of goodwill.
Revenue recognition: Revenue from Nova's managerial assistance services is
--------------------
recognized when services are rendered.
TEC-networks routinely enter into contracts for the installation of its
business communications systems. Revenue from these sales contracts is
recognized under the percentage-of-completion method of accounting in the
ratio that costs incurred bear to estimated total costs. Adjustments to cost
estimates are made periodically, and losses expected to be incurred on
contracts is progress are charged to operations in the period such losses
are determined. Revenue from repair services of business communications
systems is recognized when services are rendered.
Revenue from Kadfield's computer and electronic equipment sales is
recognized when equipment is shipped to customers.
10
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Stock based compensation: The Company and its subsidiaries account for stock
------------------------
based compensation under Statement of Financial Accounting Standards No. 123
("SFAS 123"). SFAS 123 defines a fair value based method of accounting for
stock based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees". Entities electing to remain with the accounting method of APB 25
must make pro forma disclosures of net income and earnings per share, as if
the fair value method of accounting defined in SFAS 123 had been applied.
The Company has elected to account for its stock based compensation to
employees under APB 25.
Advertising: The Company and its subsidiaries expense the cost of
------------
advertising as incurred as selling expenses. Advertising expenses were
approximately $142,200 for 2001 ($91,500 for 2000).
Reporting comprehensive income: The Company and its subsidiaries report and
--------------------------------
display comprehensive income and its components as separate amounts in the
consolidated financial statements. Comprehensive income includes all changes
in equity during a period that results from recognized transactions and
other economic events other than transactions with owners.
Income taxes: Income taxes are provided on the liability method whereby
--------------
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and reported
amounts of assets and liabilities. Deferred tax assets and liabilities are
computed using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities from a change in
tax rates is recognized in income in the period that includes the enactment
date. The Company and its subsidiaries provide a valuation allowance for
certain deferred tax assets, if it is more likely than not that the Company
or its subsidiaries will not realize tax assets through future operations.
Segment Reporting: The Company and its subsidiaries report information about
-----------------
operating segments and related disclosures about products and services,
geographic areas and major customers under Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information". Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and
in assessing performance.
11
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Net loss per common share: Net loss per common share is computed by dividing
-------------------------
net loss by the weighted average number of common shares outstanding during
the period. The weighted average number of common stock shares outstanding
was 22,353,319 for 2001 (15,005,468 for 2000). Preferred stock is not
considered to be a common stock equivalent. Common stock to be issued is not
considered to be a common stock equivalent as the effect on net loss per
common share would be anti-dilutive.
Concentration risk: TEC-networks grants credit to customers primarily in the
-------------------
State of California. Their ability to collect receivables is affected by
economic fluctuations in this geographic area.
Significant risks and uncertainties: The process of preparing financial
--------------------------------------
statements in conformity with generally accepted accounting principles
requires the use of estimates and assumptions regarding certain types of
assets, liabilities, revenues and expenses. Management of the Company has
made certain estimates and assumptions regarding the collectibility of notes
receivable, net realizable value of inventories and estimated fair value of
investments. Such estimates and assumptions primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated
amounts.
2. Operations
The Company has experienced recurring losses from operations and as of
December 31, 2001 had a working capital deficit of $5,099,225 and a net
capital deficiency of $6,670,695. During 2001, various creditors obtained
judgments against TEC-networks aggregating approximately $530,600 that is
included in accounts payable.
TEC-networks recently closed its Tampa, Florida and Concord, California
sales offices, reduced its workforce to a more efficient level, and
restructured sales salaries to a method based upon performance. Management
of TEC-networks believes these cost reduction and sales incentive actions
will enable to Company to achieve profitability.
TEC-networks is also currently in negotiations to acquire the operations of
a division of a publicly traded company that sales a product that
compliments its business communications systems operations. This division
currently has 27 strategically located offices throughout the Untied States.
Management of TEC-networks believes they will be able to achieve economies
of scale with the additional markets and customers currently served by this
division. There can be no assurances that the Company will be able to
successfully negotiate a definite agreement for the acquisition of this
entity.
12
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
2. Operations (continued)
---------------------
Nova has made an offer to acquire a data storage facility company currently
operating in Chapter 11. Nova believes that it will be able to provide
managerial assistance to this company in order for them to achieve
profitable operations. There can be no assurances that Nova's offer for this
company will be accepted.
The Company believes the above actions and along with other plans will allow
them to continue operations and ultimately achieve profitability. Until
then, the Company is dependent upon its ability to obtain additional capital
and debt financing. The consolidated financial statements do not reflect
adjustments relating to the recorded asset amounts, or the amounts of
liabilities that would be necessary should the Company not be able to
continue in existence.
3. Investments
-----------
The following is a summary of investment securities:
2001 2000
-------------- -------------
U.S. corporate securities:
Amortized cost $ 497,757 $ 497,757
Gross unrealized losses (465,132) (410,757)
----------- -----------
Estimated fair value $ 32,625 $ 87,000
========== ===========
The Company's available-for-sale investments consist of the following U.S.
Corporate Securities:
Gulf Coast Hotels, Inc. ("Gulf Coast"): The Company is a minority
------------------------------------------
partner in Gulf Coast that was formed to purchase the rights to
approximately 1.4 acres in Biloxi, Mississippi and to develop a
high-rise condominium hotel on that site. Gulf Coast has been unable to
raise the approximately $1,000,000 necessary to complete the down
payment. The seller has provided extensions to Gulf Coast, however the
agreement is in default. Management of Nova has determined that its
investment in Gulf Coast had no value based upon the uncertainty of the
outcome of Gulf Coast's default.
Legal Club: The Company owns 337,500 shares of common stock of Legal
-----------
Club, a publicly traded, nationwide membership organization providing
access to attorney services at discounted rates. The value of the
Company's investment in Legal Club was determined based upon the
closing bid price of their common stock on December 31, 2001.
13
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
4. Equipment
---------
Equipment consisted of the following at December 31:
2001 2000
-------------- --------------
Office furniture and equipment $ 534,750 $ 428,601
Computer software 261,750 261,750
Vehicles 49,414 7,400
Marketing equipment 61,259 192,467
Equipment reported under capitalized leases, less
accumulated amortization of $7,520 in 2001
(5,220 in 2000) 12,280 14,580
Leasehold improvements 233,341 233,341
------------ ------------
1,152,794 1,138,139
Less accumulated depreciation (473,633) (334,581)
------------- ------------
Equipment, net $ 679,161 $ 803,558
============ ============
5. Long-term obligations
---------------------
Long-term obligations consisted of the following at December 31:
2001 2000
---------------- --------------
Note payable and accrued interest payable to a PFK
Development Group, secured by 337,500 shares of
Legal Club stock and Nova has pledged 35% of its
cash receipts from collections of its notes
receivable, borrowings bear interest at 10% per
annum, due December 2003. $ 666,427 $ 608,878
Note payable to an individual, unsecured, borrowings
bear interest at 8% per annum, was due November
2001. 25,000 -
Other notes payable 62,309 93,813
Capitalized lease obligations 647,568 404,228
------------- ------------
1,401,304 1,106,919
Less principal due within one year (287,807) (174,454)
-------------- ------------
Long-term obligations $ 1,113,497 $ 932,465
============= ============
14
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
5. Long-term obligations
Aggregate minimum future lease payments under capitalized leases are as
follows for the years ending subsequent to December 31, 2001:
Years ending December 31:
------------------------
2002 $ 323,630
2003 195,283
2004 173,095
2005 132,067
2006 25,747
----------
Total minimum lease payment 849,822
Less amount representing interest 202,254
----------
Present value of minimum future lease payments $ 647,568
==========
6. Notes payable to related parties
Notes payable to related parties consisted of the following at December 31:
2001 2000
------------- -------------
Note payable to Palaut Management, Inc. in
exchange for management consulting services,
unsecured and non-interest bearing, due June 2003.
Palaut Management, Inc. is controlled by close
family members of a stockholder of Nova. $ 625,000 $ 625,000
Note payable to a stockholder and officer of the
Company, unsecured, non-interest bearing, and due on
demand. This individual has agreed not to
demand repayment of the note before April 2003. 601,596 382,800
------------ ------------
Notes payable to related parties $ 1,226,596 $ 1,007,800
============ ============
7. Commitments
-----------
The Company and its subsidiaries lease various facilities, equipment, and
vehicles under non-cancelable operating lease agreements that expire in
2004. Aggregate minimum future lease payments under these leases are
approximately as follows:
Years ending December 31:
-------------------------
2002 $ 32,500
2003 32,500
2004 9,600
---------
Total minimum lease payments $ 74,600
=========
15
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
7. Commitments (continued)
----------------------
Lease expense aggregated approximately $156,100 for the year ended December
31, 2000 ($243,000 for 2000).
8. Common stock
------------
In June 2001, the Board of Directors authorized the issuance of 400,000
shares of common stock of the Company to PFK Development Group as loan fees
to extend the due date of a note payable to them from December 2002 to
December 2003. Management of the Company valued the shares issued at $.12
per share, the closing bid price of the Company's common stock at the date
of issuance, and recorded loan fees expense of $48,600. Management of the
Company estimated the value of the Company's shares granted after
considering the historical trend of the trading prices for its common stock
and the limited volume of shares being traded.
In June 2001, the Board of Directors authorized the issuance of 365,000
shares of common stock of the Company to key employees of TEC-networks.
Management of the Company valued the shares issued at $.16 per share, the
closing bid price of the Company's common stock at the date of issuance, and
recorded compensation expense of $58,400. Management of the Company
estimated the value of the Company's shares granted after considering the
historical trend of the trading prices for its common stock and the limited
volume of shares being traded.
During 2001, the Board of Directors authorized the issuance of an aggregate
of 10,809,836 shares of common stock of the Company in exchange professional
services. The weighted average issuance price of the shares was $.06 per
share. Management of the Company valued the shares issued at the closing bid
price of the Company's common stock at the date of issuance. Management of
the Company estimated the value of the Company's shares granted after
considering the historical trend of the trading prices for its common stock
and the limited volume of shares being traded. The Company recorded
professional fees aggregating $735,700 during the year ended December 31,
2001 as a result of these grants.
In February 2000, the Board of Directors authorized the issuance of 60,000
shares of common stock of the Company in exchange for accounts payable of
$7,500. Management of the Company valued the shares issued at $.13 per
share, the closing bid price of the Company's common stock at the date of
issuance. Management of the Company estimated the value of the Company's
shares granted after considering the historical trend of the trading prices
for its common stock and the limited volume of shares being traded.
In March 2000, the Board of Directors authorized the issuance of 927,914
shares of common stock of the Company to an officer and director of Nova in
exchange for prior personal guarantees of Company long-term obligations.
Management of the Company valued the shares issued at $.12 per share, the
closing bid price of the
16
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
8. Common stock (continued)
-----------------------
Company's common stock at the date of issuance. Management of the Company
estimated the value of the Company's shares granted after considering the
historical trend of the trading prices for its common stock and the limited
volume of shares being traded. The Company recorded loan fees expense
totaling $111,350 during the year ended December 31, 2000 as a result of
these grants.
In November 2000, the Board of Directors authorized the issuance of an
aggregate of 109,500 shares of common stock of the Company in exchange for
legal and other professional services. Management of the Company valued the
shares issued at $.20 per share, the closing bid price of the Company's
common stock at the date of issuance. Management of the Company estimated
the value of the Company's shares granted after considering the historical
trend of the trading prices for its common stock and the limited volume of
shares being traded. The Company recorded legal expense totaling $1,900 and
other professional services of $20,000 during the year ended December 31,
2000 as a result of these grants.
In November 2000, the Board of Directors authorized the issuance of 50,025
shares of common stock of the Company in exchange for accounts payable of
$10,005. Management of the Company valued the shares issued at $.20 per
share, the closing bid price of the Company's common stock at the date of
issuance. Management of the Company estimated the value of the Company's
shares granted after considering the historical trend of the trading prices
for its common stock and the limited volume of shares being traded.
9. Income taxes
The components of the benefit for income taxes are as follows for the years
ended December 31:
2001 2000
---------- ---------
State of California -
Currently refundable $ 3,045 $ 2,469
========= ========
Deferred income taxes consisted of the following at December 31:
2001 2000
----------- -----------
Deferred tax assets:
Net operating loss carryovers $ 5,193,700 $ 2,607,000
Unrealized losses on investments 158,100 139,700
Allowance for uncollectible accounts 20,000 31,900
------------- ---------
5,371,800 2,778,900
Valuation allowance for deferred tax assets (5,371,800) (2,778,900)
------------- ---------
Net deferred income taxes $ - $ -
============= ============
17
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
9. Income taxes (continued)
-----------------------
Reconciliation of income taxes computed at the Federal statutory rate of 34%
to the benefit for income taxes is as follows for the years ended December
31:
2001 2000
------------ ---------
Tax at statutory rates $ (2,586,449) $ (340,963)
Differences resulting from:
State tax, net of Federal tax benefit 528 528
Non-deductible and other items (10,024) (48,134)
Change in deferred tax valuation allowance 2,592,900 386,100
------------- -----------
Benefit for income taxes $ (3,045) $ (2,469)
============= ===========
The Company has approximately $15,085,200 in Federal and State of California
net operating losses, which, if not utilized, expire through 2021.
The utilization of the net operating loss carryforwards could be limited due
to restrictions imposed under Federal and state laws upon a change in
ownership. The amount of the limitation, if any, has not been determined at
this time. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As
a result of the Company's continued losses and uncertainties surrounding the
realization of the net operating loss carryforwards, management has
determined that the realization of deferred tax assets is uncertain.
Accordingly, a valuation allowance equal to the net deferred tax asset
amount has been recorded as of December 31, 2001 and 2000.
10. Other related party transactions
--------------------------------
The Company has entered into an agreement with a company for management
consulting services. A close family member of a stockholder of Nova controls
the management company. The agreement expires in June 2003 with renewal
provisions. Under the terms of the agreement, the Company is obligated to
pay the management company $205,000 per year.
11. Segment information
-------------------
The Company considers its operations to be in three segments, each of which
are strategic businesses that are managed separately because each business
sells or provides distinct products and services. The segments are as
follows: managerial assistance to developing companies; sale, installation
and service of business communications systems, including computer
networking and voice, data and voice-over-the-Internet communications; and
sale of computer and electronic equipment.
18
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statements
December 31, 2001
11. Segment information (continued)
------------------------------
Financial information by business segment is as follows:
Computer
Business and
Managerial communication electronic Total
assistance systems equipment segment
-------------- ----------------- ------------- --------------
2001
----------------------------------------------------------
Revenues $ 3,252 $ 3,914,327 $ 3,854,464 $ 7,772,043
Loss from operations (856,303) (3,302,671) (260,510) (4,419,484)
Identifiable assets 95,765 713,145 576,475 1,385,385
Capital expenditures - 19,925 - 19,925
Depreciation and amortization 5,050 64,587 59,255 128,892
2000
----------------------------------------------------------
Revenues $ 125,801 $ 1,100,649 $ 476,203 $ 1,702,653
Loss from operations (91,645) (357,287) (96,727) (545,659)
Identifiable assets 202,040 1,211,467 619,047 2,032,554
Capital expenditures 1,783 49,560 - 51,343
Depreciation and amortization 5,000 19,623 13,966 38,589
Reconciliation of the segment information to consolidated total assets, loss
from operations, and depreciation and amortization are as follows:
2001 2000
-------------- -------------
December 31
-----------
Segment identifiable assets $ 1,385,385 $ 2,032,554
Goodwill, net 22,384 3,110,996
------------- ------------
Consolidated total assets $ 1,407,769 $ 5,143,550
============ =============
5,143,550
Years ended December 31
Segment loss from operations $ (4,419,484) $ (545,659)
Amortization of goodwill (3,187,720) (124,357)
------------- -------------
Consolidated loss from operations $ (7,607,204) $ (670,016)
============= ===========
Segment depreciation and amortization $ 128,892 $ 38,589
Amortization of goodwill 3,187,720 124,357
Amortization of loan fees - 115,547
-------------- ------------
Consolidated depreciation and amortization $ 3,316,612 $ 278,493
============== ============