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 June 30, 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 45,958,181 shares outstanding at June 30, 2002.
Documents incorporated by reference: Form S-8 filed February 12, 2002, March 26,
2002, April 1, 2002, April 1, 2002, April 1, 2002, April 8,2002, and April 15,
2002
Total sequentially numbered pages in this document: 24
1
INDEX
NOVA COMMUNICATIONS LTD.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements June 30, 2002 (unaudited) and December 31, 2001
(audited)
(a) Consolidated Balance Sheets, June 30, 2002 and December 31, 2001.
(b) Statements of Operations and Comprehensive Loss for the Six Months
Ended June 30, 2002 and 2001.
(c) Statements of Operations and Comprehensive Loss for the Three
Months Ended June 30, 2002 and 2001.
(d) Statements of Cash Flows for the Six Months Ended June 30, 2002
and 2001.
(e) 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
June 30 December 31
2002 2001
---------- ----------
ASSETS
Current assets:
Cash $ - $ 101,345
Accounts receivables, less allowance for uncollectible
accounts of $55,398 in 2002 and $58,935 in 2001 191,078 274,348
Notes receivable 35,932 39,446
Inventories 25,000 148,850
Prepaid expenses and deposits 133,666 42,532
Available-for-sale investments 32,625 32,625
---------- ----------
Total current assets 418,301 639,146
Equipment, net 595,516 679,161
Other assets:
Goodwill, less accumulated amortization of $6,813 in
2002 and $3,296,647 in 2001 20,437 22,384
Deposits 43,047 67,078
---------- ----------
Total other assets 63,484 89,462
$1,077,301 $1,407,769
========== ==========
See accompanying notes.
3
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets (continued)
June 30 December 31
2002 2001
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
Current liabilities:
Checks issued in excess of cash on hand $ 8,110 $ -
Accounts payable 3,978,899 4,043,521
Payable to related parties 20,000 20,000
Accrued payroll and payroll related liabilities 914,713 656,100
Customer deposits 222,134 304,482
Income taxes payable - 800
Other accrued liabilities 539,843 425,661
Long-term obligations, due within one year 433,092 287,807
---------- ----------
Total current liabilities 6,116,791 5,738,371
Long-term obligations 1,019,877 1,113,497
Notes payable to related parties 1,251,049 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 45,958,181,shares in 2002 and 31,428,458 shares 45,958 31,429
in 2001
Common stock to be issued 92,000 20,000
Additional paid-in capital 13,680,937 13,075,523
Retained deficit (20,664,179) (19,332,515)
Unrealized holding loss from available-for-sale
investments (465,132) (465,132)
---------- ----------
Total stockholders equity (deficit) (7,310,416) (6,670,695)
---------- ----------
$1,077,301 $1,407,769
========== ==========
See accompanying notes.
4
NOVA COMMUNICATIONS LTD.
Statements of Operations and Comprehensive Loss
For The Six Months
Ended June 30
2002 2001
----------- -----------
Revenues $ 4,949,288 $ 3,169,752
Cost of revenues 4,041,570 2,425,288
----------- -----------
Gross margin 907,718 744,464
Operating expenses:
Selling 407,886 255,503
Operating 729,772 1,143,612
General and administrative 417,925 753,416
Consulting fees (paid by stock issuance) 587,399 -
----------- -----------
Total operating expenses 2,142,982 2,152,531
----------- -----------
Loss from operations (1,235,264) (1,408,067)
Other income (expenses):
Loan fees - -
Interest, net (96,400) (140,363)
----------- -----------
Total other income (expenses) (96,400) (140,363)
----------- -----------
Loss before provision (benefit) for income taxes (1,331,664) (1,548,430)
Provision (benefit) for income taxes (-) (2,583)
----------- -----------
Net loss $(1,331,664) $(1,545,847)
=========== ===========
Net loss per common share $ (.0347) $ (.0797)
=========== ===========
Net loss $(1,331,664) $(1,545,847)
Unrealized holding gain (loss) on available-for-sale
investments - -
----------- -----------
Comprehensive loss $(1,331,664) $(1,545,847)
=========== ===========
Comprehensive loss per common share $ (.0347) $ (0797)
=========== ===========
See accompanying notes.
5
NOVA COMMUNICATIONS LTD.
Statements of Operations and Comprehensive Loss
For The Three Months
Ended June 30
2002 2001
----------- -----------
Revenues $ 2,395,444 $ 1,589,079
Cost of revenues 1,880,175 1,313,251
----------- -----------
Gross margin 515,269 275,828
Operating expenses:
Selling 172,023 116,513
Operating 376,972 567,142
General and administrative 123,420 383,356
Consulting fees (paid by stock issuance) 587,399 _-
----------- -----------
Total operating expenses 1,259,814 1,067,011
----------- -----------
Loss from operations (744,545) (791.183)
Other income (expenses):
Loan fees - -
Interest, net (45,512) (129,858)
----------- -----------
Total other income (expenses) (45,512) (129,858)
----------- -----------
Loss before provision (benefit) for income taxes (790,057) (921,041)
Provision (benefit) for income taxes - -
----------- -----------
Net loss $ (790,057) $ (921,041)
=========== ===========
Net loss per common share $ (.0174) $ (.0464)
=========== ===========
Net loss $ (790,057) $ (921,041)
Unrealized holding gain (loss) on available-for-sale
investments - -
----------- -----------
Comprehensive loss $ (790,057) $ (921,041)
=========== ===========
Comprehensive loss per common share $ (.0174) $ (0464)
=========== ===========
See accompanying notes.
6
NOVA COMMUNICATIONS LTD.
Statements of Cash Flows
For The Six Months
Ended June 30
2002 2001
--------------- --------------
Cash flows from operating activities:
Net loss $ (1,331,664) $ (1,545,847)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 85,592 332,351
Changes in assets and liabilities:
Receivables 83,270 (8,072)
Inventories 123,850 (39,288)
Prepaid expenses and deposits (91,134) (346,557)
Investments - -
Checks issued in excess of cash on hand 8,110 157,363
Accounts payable (64,622) 253,125
Accrued liabilities 289,647 290,777
------- -----------
434,713 639,699
Cash flows from investing activities:
Principal repayments on notes receivable 3,514 25,882
Deposits 24,031 (64,015)
Capital expenditures - (80,245)
Increase in goodwill ______- (294,650)
- ------------
27,545 (413,028)
Cash flows from financing activities:
Proceeds from notes payable 60,561 448,688
Principal payments on capitalized lease obligations (8,896) (47,673)
Proceeds from notes payable to related parties 24,453
Principal payments on notes payable to related parties - (101,074)
Deferred loan fees - -
Issuance of common stock 691,943 503,150
Additional paid-in-capital resulting from sale of
common stock by subsidiary ______- 93,882
------- -----------
768,061 896,973
------- -----------
Net decrease in cash (101,345) (422,203)
Cash at beginning of period 101,345 422,203
------- -----------
Cash at end of period $ - $ -
============== ===========
See accompanying notes.
7
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 June 30, 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 June 30, 2002
and for the six 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 six months ended
June 30, 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.
8
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
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.
9
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
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. The Company reflects each stock based
compensation certificate as of its issue date in weighted average
number of common stock shares outstanding calculations.
Advertising: The Company and its subsidiaries expense the cost of
advertising as incurred as selling expenses. Advertising expenses were
$198,250 and $116,790 for the six months ended June 30, 2002 and 2001
respectively. Computer and electronic equipment advertising expenses
were $194,076 and $55,813 for the six months ended June 30, 2002 and
2001 respectively. Business communications equipment advertising
expenses were $4,174 and $60,977 for the six months ended June 30, 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
10
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
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 38,423,479 for the six months ended June
30, 2002 (19,407,527 for 2001). The weighted average number of common
stock shares outstanding was 45,340,058 for the quarter ended June 30,
2002 (19,850,022 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
June 30, 2002 had a working capital deficit of $5,698,490 ($5,099,225
at December 31, 2001) and a net capital deficiency of $7,310,416
($6,670,695 at December 31, 2001).
11
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
2. Operations (continued)
----------------------
Various creditors have obtained judgments against TEC-networks
aggregating approximately $1,000,000 that is included in current
liabilities.
TEC-networks closed its Tampa, Florida and Concord, California sales
offices during the first quarter of 2002, 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.
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.
12
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
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:
June 30 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.
13
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
5. Equipment
Equipment consisted of the following:
June 30 December 31
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
$9,500 in 2002 (7,520 in 2001) 10,300 12,280
Leasehold improvements 233,341 233,341
----------- -----------
1,150,814 1,152,794
Less accumulated depreciation (555,298) (473,633)
----------- -----------
Equipment, net $ 595,516 $ 679,161
=========== ===========
14
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
6. Long-term obligations
Long-term obligations consisted of the following: June 30 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. $ 701,427 $ 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 86,966 62,309
Capitalized lease obligations 638,672 647,568
-------------- --------------
1,452,969 1,401,304
Less principal due within one year (433,092) (287,807)
-------------- --------------
Long-term obligations $ 1,019,877 $ 1,113,497
============= ==============
Aggregate minimum future lease payments under capitalized leases are as
follows for the years ending subsequent to June 30, 2002:
Years ending June 30:
2003 $ 401,551
2004 187,131
2005 160,992
2006 78,487
2007 580
-------------
Total minimum lease payment 828,741
Less amount representing interest (135,478)
-------------
Present value of minimum future lease payments $ 693,263
=============
15
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
7. Notes payable to related parties
--------------------------------
Notes payable to related parties consisted of the following:
June 30 December31
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. 626,049 601,596
-------------- --------------
Notes payable to related parties $ 1,251,049 $ 1,226,596
============== ==============
8. Commitments
-----------
The Company leases various facilities, equipment, and vehicles under
non-cancelable operating lease agreements that expire between the years
2002 and 2005. Aggregate minimum future lease payments under these
leases are approximately as follows:
Years ending June 30:
2003 $ 96,552
2004 96,552
2005 43,240
----------
Total minimum lease payments $ 236,344
==========
Lease expense aggregated approximately $48,276 for the six months ended
June 30, 2002.
9. Income taxes
The components of the provision for income taxes are as follows:
June 30 December31
2002 2001
----------- -----------
State of California $ - $ 800
----------- -----------
Currently provision (benefit) $ - $ 800
=========== ===========
16
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
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.
12. 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.
Financial information by business segment is as follows:
Computer
Business and
Managerial communication electronic Total
assistance systems equipment segments
-------------- ----------------- ------------- --------------
Six Months Ended June 30, 2002
-----------------------------------------------------------------
Revenues $ - $ 776,865 $4,172,423 $ 4,949,288
Loss from operations (714,340) (575,469) 56,491 (1,233,318)
Identifiable assets 90,170 510,556 456,138 1,056,864
Capital expenditures - - - -
Depreciation and
amortization 2,525 53,439 27,682 83,646
Computer
Business and
Managerial communication electronic Total
assistance systems equipment segments
-------------- ----------------- ------------- --------------
Six Months Ended June 30, 2001
-----------------------------------------------------------------
Revenues $ 6,145 $ 2,088,312 $1,075,295 $ 3,169,752
Loss from operations (147,916) (915,512) (111,999) (1,175,427)
Identifiable assets 335,261 1,295,841 395,334 2,026,436
Capital expenditures 1,970 78,275 - 80,245
Depreciation and
amortization 2,525 69,507 27,679 99,711
17
NOVA COMMUNICATIONS LTD.
Notes To Financial Statements
12. Segment information (continued)
-------------------------------
Reconciliation of the segment information to the consolidated balances
for loss from operations, total assets, and depreciation and
amortization are as follows:
For The Six Months
Ended June 30
2002 2001
--------------- --------------
Segment loss from operations $ (1,233,318) $ (1,175,427)
Amortization of goodwill (1,946) (232,640)
----------- --------------
Consolidated loss from operations $ (1,235,264) $ (1,408,067)
============ =============
June 30 June 30
2002 2001
------------- -------------
Segment identifiable assets $ 1,056,864 $ 2,026,436
Goodwill, net 20,437 3,169,506
------------ ------------
Consolidated total assets $ 1,077,301 $ 5,195,942
============ ============
For The Six Months
Ended June 30
2002 2001
--------------- --------------
Segment depreciation and amortization $ 83,646 $ 99,711
Amortization of goodwill 1,946 232,640
------------ ------------
Consolidated depreciation and amortization $ 85,592 $ 332,351
============ ============
18
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 six months ended June 30, 2002 and June 30,
2001.
Net loss, comprehensive loss, net loss per common share and comprehensive loss
per common share
Net loss and comprehensive loss for the six months ended June 30, 2002
was $(1,331,664), a loss decrease of $214,183 compared with a loss of
$(1,545,847) for the same six months of 2001. As a result, net loss per share
and comprehensive loss per share for the six months ended June 30, 2002 was
$(.0347), a loss decrease of $.0450 per share compared with a loss of $(.0797)
for the same six months of 2001.
Net loss and comprehensive loss for the three months ended June 30,
2002 was $(790,057), a loss decrease of $130,984 compared with a loss of
$(921,041) for the same three months of 2001. As a result, net loss per share
and comprehensive loss per share for the three months ended June 30, 2002 was
$(.0174), a loss decrease of $.0290 per share compared with a loss of $(.0464)
for the same three months of 2001.
Revenues
Net revenues for the six months ended June 30, 2002 were $4,949,288, an
increase of $1,779,536 compared with $3,169,752 for the same six months of 2001.
Sales of computer and electronic equipment for the six months ended June 30,
2002 were $4,172,423, an increase of $3,097,128 compared with $1,075,295 for the
same six months of 2001. Sales of business communications equipment for the six
months ended June 30, 2002 were $776,865, a decrease of ($1,311,447) compared
with $2,088,312 for the same six months of 2001.
Net revenues for the three months ended June 30, 2002 were $2,395,444,
an increase of $806,365 compared with $1,589,079 for the same three months of
2001. Sales of computer and electronic equipment for the three months ended June
30, 2002 were $2,072,894, an increase of $1,349,580 compared with $723,314 for
the same three months of 2001. Sales of business communications equipment for
the three months ended June 30, 2002 were $322,550, a decrease of ($528,556)
compared with $851,106 for the same three months of 2001.
19
Cost of revenues and gross margin
Cost of revenues for the six months ended June 30, 2002 was $4,041,570,
or 81.7% of net revenues. Gross margin for the six months ended June 30, 2002
was $907,718, an increase of $163,254 compared with $744,464 for the same six
months of 2001.
Cost of revenues for the three months ended June 30, 2002 was
$1,880,175, or 78.5% of net revenues. Gross margin for the three months ended
June 30, 2002 was $515,269, an increase of $239,441 compared with $275,828 for
the same three months of 2001.
Operating expenses
Operating expenses for the six months ended June 30, 2002 were
$2,142,982, a decrease of ($9,549) compared with $2,152,531 for the same six
months of 2001. In 2002, operating expenses included $587,399 in consulting fees
compared with $-0- in 2001. These fees were incurred for professional services
in connection with promoting the Company's businesses and its efforts to raise
working capital. Shares of common stock in the Company were exchanged for these
services, and their value was determined using the market bid price quotation on
the date of the respective issues. Without this item, other operating expenses
for the six months decreased ($596,948) from 2001 to 2002, as a result of cost
reduction efforts.
Operating expenses for the three months ended June 30, 2002 were
$1,259,814, an increase of $192,803 compared with $1,067,011 for the same three
months of 2001. In 2002, operating expenses included $587,399 in consulting fees
compared with $-0- in 2001. Without this item, other operating expenses for the
2nd quarter decreased ($394,596) from 2001 to 2002, as a result of cost
reduction efforts.
Other income (expenses)
Net interest expense for the six months ended June 30, 2002 was
$96,400, a decrease of ($43,963) compared with $140,363 for the same six months
of 2001.
Net interest expense for the three months ended June 30, 2002 was
$45,512, a decrease of ($84,346) compared with $129,858 for the same three
months of 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
20
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.
SUBSEQUENT EVENTS
On July 22, 2002 the Board of Directors met and approved the sale of
the Company's 46.68% interest in Communications 2000, Inc., which transaction
was effective on July 1, 2002. The financial statements for the six-month period
ended June 30, 2002 include the accounts of Communications 2000, Inc. If these
accounts were not included, the Company's total revenues for the six-month
period would have been reduced by $776,865. The Company's revenues from
continuing operations for the six-month period would have been $4,172,423. The
Company's total "Segment Loss from Operations" for the six-month period would
have been reduced by $575,469. The Company's "Segment Loss from Continuing
Operations" for the six-month period would have been $657,849. (See Footnote 12,
"Segment Information", on page 17.)
21
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
1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
22
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:
August 27, 2002
/s/Kenneth D. Owen
-----------------------------
Kenneth D. Owen President and Director
August 27, 2002
/s/Leslie I. Handler
-----------------------------
Leslie I. Handler Assistant Secretary and Director
23
EXHIBIT 1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly report of Nova Communications Ltd.
(the "Company") on Form 10-QSB for the period ending June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Kenneth D. Owen, Chief Executive Officer, of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Kenneth D. Owen
--------------------------------------
Kenneth D. Owen, Chief Executive Officer
(Authorized Officer)
Date: August 27, 2002
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 27, 2002
Nova Communications Ltd.
By: /S/ Kenneth D. Owen
--------------------------------------
Kenneth D. Owen, Chief Executive Officer
(Authorized Officer)
24