UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002
/ / Transition Report under 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.
(Exact name of small business issuer as specified in its charter)
Nevada 95-4756822
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3830 Del Amo Blvd., Torrance, CA 90503
(Address of principal executive offices)
Issuer's telephone number including area code: (310) 642-0200
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports;) and (2)
has been subject to such filing requirements for the past 90 Days:
Yes / X / No / /
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock: $.001 par value 31,571,771 shares outstanding at March 31, 2002.
Documents incorporated by reference: None
Total sequentially numbered pages in this document: 21
1
INDEX
NOVA COMMUNICATIONS LTD.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements March 31, 2002 (unaudited) and
December 31, 2001 (audited)
(a) Consolidated Balance Sheets, March 31, 2002 and
December 31, 2001.
(b) Statements of Operations and Comprehensive Loss for the
Three Months Ended March 31, 2002 and 2001.
(c) Statements of Cash Flows for the Three Months Ended March
31, 2002 and 2001.
(d) Notes to Consolidated Financial Statements.
Item 2 Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
PART II. OTHER INFORMATION
Item 5 Other Information
Item 6 Exhibits And Reports On Form 8-K
2
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets
March 31 December 31
2002 2001
---------------- ---------------
ASSETS
------
Current assets:
Cash $ 169,894 $ 101,345
Accounts receivables, less allowance for uncollectible accounts of
$71,596 in 2002 and $58,935 in 2001 232,017 274,348
Notes receivable 38,198 39,446
Inventories 142,656 148,850
Prepaid expenses and deposits 50,143 42,532
Available-for-sale investments 32,625 32,625
-------------- --------------
Total current assets 665,533 639,146
Equipment, net 637,339 679,161
Other assets:
Goodwill, less accumulated amortization of $3,297,620 in 2002
and $3,296,647 in 2001 21,411 22,384
Deposits 43,047 67,078
-------------- --------------
Total other assets 64,458 89,462
-------------- --------------
$ 1,367,330 $ 1,407,769
============== ==============
See accompanying notes.
3
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets (continued)
March 31 December 31
2002 2001
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
(DEFICIT)
---------
Current liabilities:
Accounts payable $ 3,943,190 $ 4,043,521
Payable to related parties 20,000 20,000
Accrued payroll and payroll related liabilities 837,293 656,100
Customer deposits 409,435 304,482
Income taxes payable - 800
Other accrued liabilities 539,843 425,661
Long-term obligations, due within one year 393,410 287,807
-------------- --------------
Total current liabilities 6,143,171 5,738,371
Long-term obligations 1,071,883 1,113,497
Notes payable to related parties 1,260,033 1,226,596
Commitments
Stockholders' equity (deficit):
Preferred stock; no par value; authorized 10,000,000 shares - -
Common stock; $.001 par value; authorized 500,000,000 shares;
outstanding 31,571,771 shares in 2002 and 31,428,458 in 2001 31,572 31,429
Common stock to be issued 112,000 20,000
Additional paid-in capital 13,087,925 13,075,523
Retained deficit (19,874,122) (19,332,515)
Unrealized holding loss from available-for-sale
investments (465,132) (465,132)
-------------- --------------
Total stockholders equity (deficit) (7,107,757) (6,670,695)
--------------- ---------------
$ 1,367,330 $ 1,407,769
============== ===============
See accompanying notes.
4
NOVA COMMUNICATIONS LTD.
Statements of Operations and Comprehensive Loss
For The Three Months
Ended March 31
2002 2001
---------------- -------------
Revenues $2,553,844 $1,580,673
Cost of revenues 2,161,395 1,112,037
----------- -----------
Gross margin 392,449 468,636
Operating expenses:
Selling 235,863 138,990
Operating 352,800 576,470
General and administrative 294,505 370,060
----------- -----------
Total operating expenses 883,168 1,085,520
----------- -----------
Loss from operations (490,719) (616,884)
Other income (expenses):
Loan fees - -
Interest, net (50,888) (10,505)
----------- -----------
Total other income (expenses) (50,888) (10,505)
----------- -----------
Loss before provision (benefit) for income taxes (541,607) (627,389)
Provision (benefit) for income taxes - (2,583)
----------- -----------
Net loss $ (541,607) $ (624,806)
=========== ===========
Net loss per common share $ (.0172) $ (.0336)
=========== ============
Net loss $ (541,607) $ (624,806)
Unrealized holding gain (loss) on available-for-sale
investments - -
----------- -----------
Comprehensive loss $ (541,607) $ (624,806)
=========== ===========
Comprehensive loss per common share $ (.0172) $ (0336)
=========== ===========
See accompanying notes.
5
NOVA COMMUNICATIONS LTD.
Statements of Cash Flows
For The Three Months
Ended March 31
2002 2001
--------------- --------------
Cash flows from operating activities:
Net loss $ (541,607) $ (624,806)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 42,795 166,407
Changes in assets and liabilities, net of effects of purchase
of subsidiary:
Receivables 42,331 31,506
Inventories 6,194 (15,898)
Prepaid expenses and deposits (7,611) (32,714)
Investments - -
Checks issued in excess of cash on hand - 126,711
Accounts payable (100,331) (140,490)
Accrued liabilities 399,528 (102,984)
--------- ---------
382,906 32,538
Cash flows from investing activities:
Principal repayments on notes receivable 1,248 14,980
Deposits 24,031 (64,015)
Capital expenditures - (58,468)
-------- ---------
25,279 (107,503)
Cash flows from financing activities:
Proceeds from notes payable 66,011 246,679
Principal payments on capitalized lease obligations (2,022) (16,892)
Proceeds from notes payable to related parties 33,437
Principal payments on notes payable to related parties - (46,101)
Additional paid in capital resulting from sales of
common stock 104,545 -
Additional paid-in-capital resulting from sale of
common stock by subsidiary - 93,882
-------- --------
201,971 277,568
-------- --------
Net increase (decrease) in cash 68,549 (422,203)
Cash at beginning of quarter 101,345 422,203
-------- --------
Cash at end of quarter $ 169,894 $ -
============== ===========
See accompanying notes.
6
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
1. Business and summary of significant accounting policies
-------------------------------------------------------
Business: Nova Communications Ltd. (the "Company" or "Nova") was
incorporated under the laws of the State of Utah on March 25, 1985.
Effective June 28, 1999, the Company changed its name from First
Colonial Ventures, Ltd. to Nova Communications Ltd. and changed its
state of incorporation from Utah to 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, Communications 2000, Inc.
(also "TEC-networks") and Kadfield, Inc. All intercompany accounts and
transactions have been eliminated.
As of March 31, 2002 and 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
Communications 2000, Inc. and Kadfield, Inc. Accordingly, losses
applicable to the minority interest in Communications 2000, Inc. and
Kadfield, Inc. are charged against Nova, as there is no obligation of
the minority stockholders to guarantee such losses. If future earning
of Communications 2000, Inc. and Kadfield, Inc. do materialize, Nova
will be credited to the extent of such losses previously absorbed.
Interim reporting: The Company's year-end for accounting and tax
purposes is December 31. In the opinion of management of the Company,
the accompanying consolidated financial statements as of March 31, 2002
and for the three months then ended contain all adjustments, consisting
of only normal recurring adjustments, except as noted elsewhere in the
notes to the consolidated financial statements, necessary to present
fairly its financial position, results of its operations and cash
flows. The consolidated results of operations for the three months
ended March 31, 2002 are not necessarily indicative of the results to
be expected for the full year.
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 with original due dates within three months
of the date purchased.
The Company and its subsidiaries place their cash in financial
institutions and, 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.
7
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
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.
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
original term of the lease or the estimated useful lives of the assets,
whichever is shorter.
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.
8
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
Revenue recognition: Revenue from Nova's managerial assistance services
is recognized when services are rendered. TEC-networks routinely enters
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
in progress are charged to operations in the period such losses are
determined. Revenue from service of business communications systems is
recognized when services are rendered. Revenue from Kadfield, Inc.'s
computer and electronic equipment sales is recognized when equipment is
shipped to customers.
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
$96,494 and $57,104 for the quarters ended March 31, 2002 and 2001
respectively. Computer and electronic equipment advertising expenses
were $93,240 and $21,055 for the quarters ended March 31, 2002 and 2001
respectively. Business communications equipment advertising expenses
were $3,254 and $36,049 for the quarters ended March 31, 2002 and 2001
respectively.
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 result 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
9
1. Business and summary of significant accounting policies (continued)
------------------------------------------------------------------
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 product and
services, geographic areas and major customers in annual and interim
consolidated financial statements under Statement of Financial
Accounting Standards No. 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.
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 31,430,050 for the quarter ended March 31,
2002 (18,603,622 for 2001). 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
is anti-dilutive.
Concentration risk: TEC-networks grants credit to customers primarily
in the States of California and Florida. 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
March 31, 2002 had a working capital deficit of $5,477,638 ($5,099,225
at December 31, 2001) and a net capital deficiency of $7,107,757
($6,670,695 at December 31, 2001). Various creditors have obtained
judgments against TEC-networks aggregating approximately $530,600 that
is included in current liabilities.
10
2. Operations (continued)
----------------------
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 facilitate efforts to reduce operating losses
and ultimately achieve profitability.
TEC-networks 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 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 definitive agreement for the acquisition of
this entity.
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 and its principal subsidiary, TEC-networks, 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. 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. Business combination
--------------------
Effective October 1, 2000, Nova acquired Communications 2000, Inc., dba
TEC-networks, in a business combination accounted for as a purchase.
TEC-networks engages in the sale, installation and service of business
communications systems, including computer networking and voice, data
and voice-over-the-Internet communications. TEC-networks began its
business during 1995 in Torrance, CA (Los Angeles area) and holds a
national distributorship agreement with Nortel Networks, in addition to
maintaining supplier relationships with several other major equipment
manufacturers and wholesalers Prior to the business combination, the
principal stockholder of TEC-networks was a stockholder of Nova and
Nova was providing management services to TEC-networks.
11
3. Business combination (continued)
--------------------------------
Also effective 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 computer and electronic equipment by
direct sale and via the Internet under the trade name of "BuyMicro".
Its customers are located nationwide.
4. Investments
-----------
All of the Company's investments are considered by Management to be
available-for-sale investments. The following is a summary of
investment securities:
March 31 December 31
2002 2001
-------------- -------------
Corporate securities:
Amortized cost $ 497,757 $ 497,757
Gross unrealized losses (465,132) (465,132)
----------- -----------
Estimated fair value $ 32,625 $ 32,625
=========== ===========
The Company's available-for-sale investments consist of the following
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.
12
5. Equipment
---------
Equipment consisted of the following:
March 31 December31
2002 2001
-------------- -------------
Office furniture and equipment $ 534,750 $ 534,750
Computer software 261,750 261,750
Vehicles 49,414 49,414
Marketing equipment 61,259 61,259
Equipment reported under capitalized leases, less accumulated
amortization of $8,510 in 2002 (7,520 in 2001) 11,290 12,280
Leasehold improvements 233,341 233,341
------------ ---------
1,151,804 1,152,794
Less accumulated depreciation (514,465) (473,633)
------------ ----------
Equipment, net $ 637,339 $ 679,161
============ ==========
6. Long-term obligations
---------------------
Long-term obligations consisted of the following: March 31 December 31
2002 2001
------------ -----------
Note payable and accrued interest payable to PFK Development Group,
secured by 337,500 shares of Legal Club stock, borrowings bear
interest at 10% per annum, borrowings and
accrued interest are due December 2003. $ 683,927 $ 666,427
Note payable to an individual, unsecured, borrowings bear interest
at 8% per annum, was due November 2001. 25,904 25,000
Other notes payable 88,439 62,309
Capitalized lease obligations 667,023 647,568
------- -------
1,465,293 1,401,304
Less principal due within one year (393,410) (287,807)
----------- ----------
Long-term obligations $ 1,071,883 $ 1,113,497
=========== =========
13
6. Long-term obligations (continued)
---------------------------------
Aggregate minimum future lease payments under capitalized leases are as
follows for the years ending subsequent to March 31, 2002:
Years ending March 31:
----------------------
2003 $ 366,443
2004 193,242
2005 166,296
2006 110,156
2007 6,995
-----------
Total minimum lease payment 843,132
Less amount representing interest (176,109)
-----------
Present value of minimum future lease payments $ 667,023
===========
7. Notes payable to related parties
--------------------------------
Notes payable to related parties consisted of the following:
March 31 December 31
2002 2001
-------------- -----------
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. 635,033 601,596
----------- ----------
Notes payable to related parties $ 1,260,033 $ 1,226,596
=========== =========
14
8. Commitments
-----------
The Company leases various facilities, equipment, and vehicles under
non-cancelable operating lease agreements that expire between the years
2002 and 2006. Aggregate minimum future lease payments under these
leases are approximately as follows:
Years ending March 31:
---------------------
2003 $ 96,552
2004 96,552
2005 63,232
2006 4,146
----------
Total minimum lease payments $ 260,482
==========
Lease expense aggregated approximately $24,138 for the three months
ended March 31, 2002.
9. Income taxes
------------
The components of the provision (benefit) for income taxes are as
follows:
March 31 December 31
2002 2001
-------- -----------
State of California $ - $ 800
------ -----
Currently provision (benefit) $ - $ 800
===== =====
10. Other related party transactions
--------------------------------
The Company has entered into an agreement with a company for management
consulting services. The management company is controlled by close
family members of a stockholder of Nova. 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.
15
11. Segment information (continued)
-------------------------------
Financial information by business segment is as follows:
Computer
Business and
Managerial communication electronic Total
assistance systems equipment segments
-------------- ----------------- ------------- --------------
Three Months Ended March 31, 2002
-----------------------------------------------------------------
Revenues $ - $ 454,315 $ 2,099,529 $ 2,553,844
Loss from operations (64,080) (462,959) 37,293 (489,746)
Identifiable assets 89,532 642,166 614,221 1,345,919
Capital expenditures - - - -
Advertising expenses - 3,254 93,240 96,494
Depreciation and
amortization 1,261 26,720 13,841 41,822
Computer
Business and
Managerial communication electronic Total
assistance systems equipment segments
-------------- ----------------- ------------- --------------
Three Months Ended March 31, 2001
-----------------------------------------------------------------
Revenues $ 486 $ 1,237,206 $ 342,981 $ 1,580,673
Loss from operations (103,204) (291,621) (102,237) (497,062)
Identifiable assets 184,956 1,133,255 370,164 1,688,375
Capital expenditures - 58,469 - 58,469
Advertising expenses - 36,049 21,055 57,104
Depreciation and
amortization 1,262 150,331 14,814 166,407
Reconciliation of the segment information to the consolidated balances
for loss from operations, total assets, and depreciation and
amortization are as follows:
For The Three Months
Ended March 31
-
2002 2001
--------------- ------------
Segment loss from operations $ (489,746) $ (497,062)
Amortization of goodwill (973) (119,822)
----------- ------------
Consolidated loss from operations $ (490,719) $ (616,884)
============ ============
16
11. Segment information (continued)
-------------------------------
March 31 March 31
2002 2001
-------------- -------------
Segment identifiable assets $ 1,345,919 $ 1,688,375
Goodwill, net 21,411 2,991,174
------------ ------------
Consolidated total assets $ 1,367,330 $ 4,679,549
============ ============
For The Three Months
Ended March 31
-
2002 2001
--------------- --------------
Segment depreciation and amortization $ 41,822 $ 46,585
Amortization of goodwill 973 119,822
-------------- --------------
Consolidated depreciation and amortization $ 42,975 $ 166,407
============== ===============
17
Item 2 Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
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 three months ended March 31, 2002 and March
31, 2001.
Net loss, comprehensive loss, net loss per common share and comprehensive loss
per common share
Net loss and comprehensive loss for the three months ended March 31,
2002 was $(541,607), a loss decrease of $83,199 compared with a loss of
$(624,806) for the same three months of 2001. As a result, net loss per share
and comprehensive loss per share for the three months ended March 31, 2002 was
$(.0172), a loss decrease of $.0164 per share compared with a loss of $(.0336)
for the same three months of 2001.
Revenues
Net revenues for the three months ended March 31, 2002 were $2,553,844,
an increase of $973,171 compared with $1,580,673 for the same three months of
2001. Sales of computer and electronic equipment for the three months ended
March 31, 2002 were $2,099,529, an increase of $1,756,548 compared with $342,981
for the same three months of 2001. Sales of business communications equipment
for the three months ended March 31, 2002 were $454,315, a decrease of
($782,891) compared with $1,237,206 for the same three months of 2001.
Cost of revenues and gross margin
Cost of revenues for the three months ended March 31, 2002 was
$2,161,395, or 84.6% of net revenues. Gross margin for the three months ended
March 31, 2002 was $392,449 (15.4% of revenues), a decrease of ($76,187)
compared with $468,636 (29.6% of revenues) for the same three months of 2001.
The gross margin percentage declined as a result of competition in the
marketplace and a change in the mix of revenues to lower margin product lines.
Operating expenses
Operating expenses for the three months ended March 31, 2002 were
$883,168, a decrease of ($202,352) compared with $1,085,520 for the same three
months of 2001.
18
Other income (expenses)
Net interest expense for the three months ended March 31, 2002 was
$50,888 compared with $10,505 for the same three months of 2001. Net interest
expense increased as a result of additional borrowings during 2002 and 2001.
OPERATING STRATEGIES AND COST REDUCTIONS
The Company and its subsidiaries have been hampered in their operations
during 2002 and 2001 by a shortage of working capital. Despite engaging the
services of several investment bankers and professional fundraisers, only
$92,000 has been raised from the sale of shares during 2002 to outside parties
($31,383 during 2001). The Company's growth and strategic operating plans for
TEC-networks were predicated upon raising $2,000,000 to $4,000,000 in working
capital during the first half of 2001. Without adequate working capital,
TEC-networks 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.
Decisions were made in late 2001 to close the Tampa, FL and Concord, CA
offices of TEC-networks, 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. TEC-networks 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.
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, TEC-networks, 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.
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PART II. OTHER INFORMATION
Item 5 Other Information
None
Item 6 Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
3(3)(i)(1) First Colonial Ventures, Ltd. Articles of Incorporation -
March 25, 1985 (Incorporated by reference)
3(3)(i)(2) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - August 12, 1985 (Incorporated by reference)
3(3)(i)(3) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - September 3, 1985 (Incorporated by reference)
3(3)(i)(4) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - February 3, 1992 (Incorporated by reference)
3(3)(ii)(1) Bylaws (Incorporated by reference)
(b) No reports on Form 8-K where filed during the period covered
by this report.
20
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:
May 14, 2002
/s/Kenneth D. Owen
-----------------------
Kenneth D. Owen President and Director
May 14, 2002
/s/Leslie I. Handler
-------------------------
Leslie I. Handler Assistant Secretary and Director
May 14, 2002
/s/Bryce Sherwood
----------------------
Bryce Sherwood Director
21