As filed with the Securities and Exchange Commission on January 11,
2006 Registration No. 333-130836
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
NOVA COMMUNICATIONS LTD.
(Name of small business issuer in its charter)
NEVADA 8741 95-4756822
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
1005 TERMINAL WAY, SUITE 110
RENO, NEVADA 89502-2179
(775) 324-8531
(Address and telephone number of principal executive offices
and principal place of business)
LESLIE I. HANDLER, PRESIDENT
NOVA COMMUNICATIONS LTD.
1005 Terminal Way, Suite 110
Reno, Nevada 89502-2179
(775) 324-8531
(Name, address and telephone number of agent for service)
Copies to:
Arthur S. Marcus, Esq.
Gersten Savage LLP
600 Lexington Avenue,
New York, NY 10022
Tel. (212) 752-9700
Fax (212) 980-5192
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION FEE
OFFERING PRICE AGGREGATE
PER SHARE (3) OFFERING PRICE
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.001 par value
issuable upon conversion of 26,315,789 $0.19 $4,999,999.9 $588.49
debentures (2)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par value
issuable upon exercise of 3,500,000 $0.50 $1,750,000 $205.97
warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par value
issuable upon exercise of 10,000,000 $0.19 $1,900,000 $223.63
warrants (4)
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 39,815,789 $8,649,999 $1,018.09
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of convertible debentures and the exercise of warrants held by
the selling stockholder. In addition to the shares set forth in the table, the
amount to be registered includes good faith estimate of the number of shares
issuable upon conversion of the debentures. The amount to be registered also
includes shares of common stock issuable upon exercise of the warrants, as such
number may be adjusted as a result of stock splits, stock dividends and similar
transactions in accordance with Rule 416. Should the conversion ratio of our
convertible debentures result in our having insufficient shares, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary. In addition,
should a decrease in the exercise price as a result of an issuance or sale of
shares below the then current market price, result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary.
(2) Includes a good faith estimate of the shares underlying convertible
debentures to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over- The-Counter Bulletin Board on
December 28, 2005, which was $ 0.19 per share.
(4) Includes 10,000,000 shares of Common Stock issued by us for sale in this
offering.
* Previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the
2
registration statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 11, 2006
NOVA COMMUNICATIONS LTD.
39,815,789 SHARES OF
COMMON STOCK
This prospectus relates to the sale of 10,000,000 shares of our common stock,
par value $.001 per share (the "Common Stock") which is being offered for cash
directly for our own account. We intend to sell up to 10,000,000 shares of our
Common Stock on a "best efforts, all or none" basis during the 90 day period
following the date of this prospectus at a fixed price between $0.15 and $0.5
per share. Our management has set the offering price for our shares primarily
based upon the anticipated cash needs of our company over the next 18 months,
the lack of liquidity in the shares, and the high level of risk considering our
history of losses. See "Risk Factors."
We may engage a registered broker-dealer to act as our placement agent on a
"best efforts, all or none" basis to assist us in the sale of our shares. Our
employees, officers or directors, none of whom are registered broker-dealers,
will not receive a commission or other compensation for shares sold by them.
There is no minimum number of shares that must be sold by us during the 90 day
selling period, and no proceeds will be placed in escrow, trust or any similar
account.
Additionally, we are registering for resale up to 29,815,789 shares of our
Common Stock, of which: (A) 26,315,789 shares are issuable upon the conversion
of $2,500,000 in aggregate principal amount of 8% callable secured convertible
notes and the payment of the principal amount of, and interest on, such notes to
AJW Partners, LLC and certain of its affiliates and (B) 3,500,000 shares
underlying warrants issuable to AJW Partners, LLC and certain of its affiliates.
The selling stockholders may sell their common stock from time to time at
prevailing market prices.
Our Common Stock is registered under Section 12(g) of the Securities Exchange
Act of 1934, as amended, and is quoted on the over-the-counter market and prices
are reported on the OTC Bulletin Board under the symbol "NVAC." On December 28,
2005, the closing price as reported was $0.19.
The selling stockholders, and any participating broker-dealers may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended,
and any commissions or discounts given to any such broker-dealer may be regarded
as underwriting commissions or discounts under the Securities Act of 1933. The
selling stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock. We agree to pay the expenses of registering the foregoing shares
of our Common Stock.
INVESTMENT IN THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A HIGH DEGREE
OF RISK. YOU MAY LOSE YOUR ENTIRE INVESTMENT. CONSIDER CAREFULLY THE "RISK
FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _______, 2006.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Nova
Communications, Ltd., with the Securities and Exchange Commission. The selling
stockholder may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
4
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 6
Risk Factors............................................................... 11
Use of Proceeds............................................................ 17
Capitalization............................................................. 19
Dilution................................................................... 20
Forward Looking Statements................................................. 22
Management's Discussion and Analysis or Plan of Operation.................. 22
Business................................................................... 26
Description of Property.................................................... 31
Legal Proceedings.......................................................... 31
Directors and Executive Officers........................................... 32
Executive Compensation..................................................... 33
Security Ownership of Certain Beneficial Owners and
Management................................................................. 34
Market for Common Equity and Related Stockholder
Matters.................................................................... 17
Selling Shareholders....................................................... 38
Certain Relationships and Related Transactions............................. 34
Description of Securities.................................................. 35
Plan of Distribution....................................................... 36
Legal Matters.............................................................. 42
Experts.................................................................... 42
Where You Can Find More Information........................................ 42
Index to Financial Statements.............................................. F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock. Nova
Communications Ltd. is referred to throughout this prospectus as "Nova," "we" or
"us."
OVERVIEW
We are in the business of acquiring ownership interests in developing companies
in a wide range of industries and providing financing and managerial assistance
to those companies. We seek to invest in companies that, in our opinion, have
the reasonable potential for growth. Our objective is to achieve long-term
growth. We have two wholly owned subsidiaries, AquaXtremes, Inc. and Nacio
Systems, Inc.
AQUA XTREMES, INC.
Aqua Xtremes, Inc, designs, manufacturers, and markets revolutionary water
sports equipment. One of its most notable products is the Xboard(TM) a
jet-powered personal watercraft that redefines extreme watersports. Xboards(TM)
allow riders of all skill levels to experience the exhilaration of riding a
personal watercraft. The Xboard(TM) design team has created a revolutionary
watercraft that combines an innovative hull design and a powerful EPA conforming
rotary engine. Aqua Xtremes is currently recruiting distributors and dealers.
Xtreme Engines, Inc., a wholly-owned subsidiary of Aqua Xtremes, was created to
design and produce the Xtreme engines which will be utilized not only in the
Xboard(TM) but in a wide variety of industries. Xtreme Engines features a rotary
configuration, which is similar to that of a 4 stroke engine, except it is done
in one stroke. Xtreme Engines is also working on a natural / propane gas engine,
which is being designed and tested as a "Green Engine."
NACIO SYSTEMS, INC.
Nacio Systems, Inc. provides centralized information technology solutions to
corporate clients, supporting their business operations with applications such
as e-commerce, content management, software auditing and customer relationship
management (CRM). Companies need no longer install, maintain and support complex
IT applications; Nacio hosts, manages and delivers mission critical IT
infrastructure from its secure, high-availability Tier 1 network/data operating
center in Northern California--reducing costs, mitigating risk, compressing
deployment times and increasing reliability.
Nacio's Professional Services and Application Development groups provide
customization services to ensure that the applications Nacio delivers are
tailored to specific business needs successfully deployed across the customer's
enterprise. In the face of increasing costs and the complexities of today's
corporate applications, Nacio Systems's hosted application services helps
companies stay focused on their core business by providing them cost-effective,
low-maintenance ways to update their websites, manage their data and documents,
leverage rapid application development and increase operational efficiency.
Interactive Holding Group, Inc., a wholly-owned subsidiary of Nacio Systems,
Inc. sells forensic software under the name "ATTEST Systems." Attest Systems has
developed GASP, a software product that enables companies to discover the
software and hardware assets deployed across their enterprise. Using GASP,
companies can remotely audit every computer on the corporate network, and, using
GASP's extensive reporting capabilities, compare the results against their owned
licenses. This allows companies to control software license and maintenance
costs, stay compliant with software license terms, inventory for disaster
recovery planning and make informed IT purchasing decisions. Attest will release
a new version of GASP, GASP V7.0 in the fourth quarter of 2005.
Our principal executive office is located at 1005 Terminal Way, Suite 110, Reno,
Nevada 89502-2179 our telephone number at that location is (775) 324-8531.
6
COMMON STOCK OFFERED BY SELLING Up to 29,815,789 shares, including
STOCKHOLDERS: 26,315,790 shares of Common Stock
underlying 8% secured convertible
callable notes in the aggregate amount
of $2,500,000 and up to 3,500,000 shares
of Common Stock issuable upon exercise
of common stock purchase warrants, based
on market prices and assuming full
conversion of the convertible debenture
and shares underlying warrants to
account for price protection
adjustments.
COMMON STOCK OUTSTANDING AFTER THE Up to 52,261,696 shares, assuming the
OFFERING full exercise of our warrants and
conversion of our convertible notes as
well as the sale of the shares offered
by the Company.
USE OF PROCEEDS We will not receive any proceeds of the
issuance of Common stock. However, we
will receive up to $1,750,000 upon
exercise of the warrants by certain
selling stockholders. We expect to use
the proceeds from the exercise of the
warrants, if any, for general working
capital purposes. We received $1,000,000
in connection with the issuance of the
convertible debenture to the selling
stockholder. We intend to use the
$1,000,000 for general working capital
purposes and the payment of professional
fees. We will receive an additional
$700,000 upon the filing of the
registration statement of which this
prospectus forms a part and an
additional $800,000 upon its
effectiveness for an aggregate
consideration of $1,500,000. We intend
to use such proceeds to purchase
equipment and for working capital.
RISK FACTORS An investment in our common stock
involves a high degree of risk and could
result in a loss of your entire
investment
The above information regarding common stock to be outstanding after the
offering is based on 12,445,907 shares of common stock outstanding as of
December 28, 2005 and assumes the subsequent conversion of our issued
convertible debenture and exercise of warrants by our selling stockholder.
SECURITIES PURCHASE AGREEMENT
To obtain funding for the purpose of payment of general corporate and operating
purposes, we entered into a Securities Purchase Agreement with New Millennium
Capital Partners II, LLC, AJW Partners, LLC, AJW Offshore, Ltd. and AJW
Qualified Partners, LLC on November 29, 2005 for the sale of: (i) $2,500,000 in
callable secured convertible notes and (ii) stock purchase warrants to buy an
aggregate of 3,500,000 shares of our Common Stock. This prospectus relates to
the resale of the Common Stock underlying these callable secured convertible
notes and warrants.
Unless otherwise indicated, all information contained in this prospectus is as
of the date hereof.
TERMS OF CALLABLE SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on November 29, 2005 for the
sale of (i) $2,500,000 in callable secured convertible notes and (ii) warrants
to buy 3,500,000 shares of our Common Stock. This prospectus relates to the
resale of our Common Stock
7
underlying these callable secured convertible notes and warrants. The investors
are obligated to provide us with an aggregate of $2,500,000 as follows:
o $1,000,000 was disbursed on December 1, 2005;
o $700,000 will be disbursed within five days of the filing of
this registration statement; and
o $800,000 will be disbursed immediately prior to this
prospectus being declared effective.
Accordingly, we will have received a total of $1,700,000 in proceeds pursuant to
the Securities Purchase Agreement.
The funds from the sale of the callable secured convertible notes will be used
for the purchase of equipment and working capital purpose. The callable secured
convertible notes bear interest at 8% (unless our common stock is greater than
$.2025 per share for each trading day of a month, in which event no interest is
payable during such month), mature within three years from the date of issuance,
and are convertible into our Common Stock, at the investors' option, at 55% of
the Market Price, where the "Market Price" means the average of the lowest three
(3) closing market prices of our shares of Common Stock during the period of
twenty (20) trading days ending one trading day prior to the date the selling
stockholders send us a notice of their intent to convert the notes. We cannot
presently determine what the conversion price of the notes will be.
The callable secured convertible notes become immediately due and payable and we
will pay an amount equal to the greater of (i) 130% times the sum of (w) the
then outstanding principal amount of such note plus (x) accrued and unpaid
interest on the unpaid principal amount of such note to the date of payment
("Mandatory Prepayment Date") plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and/or (x) plus (z) any amounts owed to the holder
(the "Default Sum"); or (ii) the "parity value" of the Default Sum to be repaid.
"Parity Value" means (a) the highest number of shares of our common stock
issuable upon the conversion of or otherwise pursuant to such Default Sum,
treating the Trading Day immediately preceding the Mandatory Prepayment Date as
the "Conversion Date" for purposes of determining the lowest applicable
conversion price multiplied by (b) the highest Closing Price for the Common
Stock during the period beginning on the date of first occurrence of the Event
of Default and ending one day prior to the Mandatory Prepayment Date (the
"Defaulting Amount") and all other amounts payable will be immediately due and
payable. The holder of the notes may require us to issue, in lieu of the Default
Amount, the number of shares of our Common Stock equal to the Default Amount
divided by the conversion price then in effect.
The warrants are exercisable until five years from the date of issuance. The
conversion price of the callable secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the callable secured convertible notes and
the exercise price of the warrants may be adjusted in certain circumstances,
such as, if we pay a stock dividend, subdivide or combine outstanding shares of
common stock into a greater or lesser number of shares, or take such other
actions as would otherwise result in dilution of the selling stockholder's
position. The selling stockholders have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock. In addition, we have granted the
investors a security interest in substantially all of our assets and
intellectual property.
The warrants have an exercise price of $0.50 per share. The selling stockholders
will be entitled to exercise the warrants on a cashless basis if the shares of
common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholder
exercises the warrants on a cashless basis, then we will not receive any
proceeds. In addition, the exercise price of the warrants will be adjusted in
the event we issue common stock at a price below market, with the exception of
any securities issued as of the date of the warrants or issued in connection
with the callable secured convertible notes issued pursuant to the Securities
Purchase Agreement, dated November 29, 2005.
8
Upon the issuance of shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly. The market price means: (i)
the average of the last reported sale prices for our shares of our Common Stock
for the five trading days immediately preceding such issuance as set forth on
our principal trading market; (ii) if the OTC BB is not the principal trading
market, the average of the last reported sale prices on the principal trading
market for the Common Stock during the same period or (iii) if the market value
cannot be calculated then the fair market value as reasonably determined in good
faith by our board of directors, or at the option of a majority-in-interest of
the holders of the outstanding warrants, by an independent investment bank. The
exercise price shall be determined by multiplying the exercise price in effect
immediately prior to the dilutive issuance by a fraction. The numerator of the
fraction is equal to the sum of the number of shares outstanding immediately
prior to the offering plus the quotient of the amount of consideration received
by us in connection with the issuance divided by the market price in effect
immediately prior to the issuance. The denominator of such issuance shall be
equal to the number of shares outstanding after the dilutive issuance.
9
SUMMARY FINANCIAL INFORMATION
The following tables set forth the summary financial information for our
company. You should read this information together with the financial statements
and the notes thereto appearing elsewhere in this prospectus and the information
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
==================================== =========================== ============================= =======================
FOR THE THREE MONTH ENDED FOR THE THREE MONTH ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 JUNE 30, 2005
(UNAUDITED) (UNAUDITED)
==================================== =========================== ============================= =======================
NET REVENUES 1,119,416 - 1,316,697
==================================== =========================== ============================= =======================
COST OF SALES 276,039 - 299,013
==================================== =========================== ============================= =======================
GROSS PROFIT 843,377 - 1,017,684
==================================== =========================== ============================= =======================
OPERATING EXPENSES 1,740,581 305,878 6,350,646
==================================== =========================== ============================= =======================
INTEREST EXPENSE 22,684 9,773 222,676
==================================== =========================== ============================= =======================
NET LOSS 919,888 315,651 5,418,341
==================================== =========================== ============================= =======================
NET LOSS PER COMMON SHARE (0.152) (0.084) (1.25)
==================================== =========================== ============================= =======================
=======================================================================================================================
CONDENSED CONSOLIDATED BALANCE SHEET DATA
=======================================================================================================================
AS OF SEPTEMBER 30, 2005 AS OF SEPTEMBER 30, 2004 AS OF JUNE 30, 2005
===================================== ========================== ============================= ========================
CASH AND CASH EQUIVALENT 13,502 - 46,296
===================================== ========================== ============================= ========================
TOTAL ASSETS 11,243,670 979,251 11,508,829
===================================== ========================== ============================= ========================
WORKING CAPITAL DEFICIENCY 4,756,940 1,211,663 3,821,541
===================================== ========================== ============================= ========================
CURRENT LIABILITIES 5,398,987 1,262,098 4,745,708
===================================== ========================== ============================= ========================
TOTAL LIABILITIES 8,007,122 1,704,830 7,356,554
===================================== ========================== ============================= ========================
STOCKHOLDERS' SURPLUS (DEFICIT) 3,236,548 (725,579) 4,150,275
===================================== ========================== ============================= ========================
10
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, REQUIRING US TO SEEK ADDITIONAL
SOURCES OF CAPITAL WHICH MAY NOT BE AVAILABLE, REQUIRING US TO CURTAIL OR CEASE
OPERATIONS.
We incurred net losses of $5,418,341 for the year ended June 30, 2004 and
$4,442,782 for the year ended December 31, 2003. In addition, for the three
months ended September 30, 2005, we incurred a net loss of $919,888. We will
require additional funds to sustain and expand our sales and marketing
activities. Additional capital will be required to effectively support the
operations and to otherwise implement our overall business strategy. There can
be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain additional capital will
restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our marketing and development plans and possibly
cease our operations. Any additional equity financing may involve substantial
dilution to our then existing shareholders.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
In their report dated August 19, 2005, our independent auditors stated that our
financial statements for the year ended June 30, 2005 were prepared assuming
that we would continue as a going concern. Our ability to continue as a going
concern is an issue raised as a result of significant operating losses and
working capital deficit. Our ability to continue as a going concern is subject
to our ability to obtain additional capital and debt financing until our
products are fully developed, manufactured and marketed and our operations
ultimately achieve profitability. There can be no assurances that we will be
able to successfully manufacture and market our products and become profitable.
OUR BUSINESS, AS WELL AS THE ENTIRE WATER SPORTS INDUSTRY, IS HIGHLY SEASONAL,
WITH SEASONALITY VARYING IN DIFFERENT GEOGRAPHIC MARKETS. IN ADDITION, WEATHER
CONDITIONS MAY ADVERSELY IMPACT OUR BUSINESS.
Our business in the United States is highly seasonal, with seasonality varying
in different geographic markets. However, our products are available worldwide.
There is a cyclical component of our waters sports business. In addition,
weather conditions may adversely impact our operating results. For example,
drought conditions, reduced rainfall levels, and excessive rain may force water
sports areas to close or be rendered dangerous or inconvenient, thereby
curtailing customer demand for our products. In addition, unseasonably cool
weather and prolonged winter conditions may lead to shorter selling seasons in
certain locations. As a result of the foregoing and other factors, our operating
results in some future quarters could be below the expectations of our
investors.
THE ELECTRICITY USED TO POWER NACIO'S ENTERPRISE SERVER FACILITIES IS PROVIDED
BY A SINGLE SOURCE SUPPLIER.
Nacio's enterprise server facilities are located at our executive offices at
1005 Terminal Way, Suite 110, Reno, Nevada, 89502. The electricity that powers
the enterprise service facility is obtained from a single-source supplier,
Pacific Gas & Electric. Nacio has available back-up power generators sufficient
to continue to power their enterprise server facilities in the event of
short-term power losses. However, if the supply of power to Nacio by Pacific Gas
& Electric were delayed or curtailed, the ability of Nacio Systems, Inc. to
provide services to its customers could be adversely affected.
11
WE COULD HAVE DIFFICULTY IN THE MANAGEMENT OF POTENTIAL GROWTH.
We anticipate that a period of significant expansion will be required to address
potential growth in our customer base and market opportunities. This expansion
will place a significant strain on our management, operational and financial
resources. Our failure to manage growth effectively could have a material
adverse effect on our business because we might be unable to meet purchase order
demands from our customers, or maintain a level of inventory sufficient to
support demand. This could cause us to lose customer relationships that would
have an adverse affect on our results of operations and financial condition. In
which case, our share price would be adversely affected.
IF WE CHOSE TO ACQUIRE NEW OR COMPLEMENTARY BUSINESSES, SERVICES OR
TECHNOLOGIES, WE MAY NOT BE ABLE TO COMPLETE THOSE ACQUISITIONS OR SUCCESSFULLY
INTEGRATE THEM.
In the case of Nacio, in addition to organic growth to expand our operations and
market presence, we intend to pursue a growth strategy driven by acquisitions
and business combinations of complementary business, services or technologies or
engage in other strategic alliances with third parties. Any such transactions
would be accompanied by the risks commonly encountered in such transactions,
including, among others, the difficulty of assimilating operations, technology
and personnel of the combined companies, the potential disruption of our ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize our financial and strategic position through
the successful integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, the maintenance of
uniform standards, controls and policies and the impairment of relationships
with existing employees and customers. We may not be successful in overcoming
these risks or any other potential problems. Any acquisition may have a material
adverse effect on our business if it any of the risks stated above materialize,
and each of the risks stated above could bring about adverse operating results
which would negatively impact our financial condition.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS AND
TO INTEGRATE THE OPERATIONS OF ACQUIRED BUSINESSES INTO OUR BUSINESS.
Our success depends, in part, on our ability to make successful acquisitions and
to integrate the operations of acquired businesses into our business. The
difficulties of combining the operations of these businesses may include:
the challenge of effecting integration while carrying on the ongoing businesses;
the necessity of coordinating geographically separate organizations; and
integrating personnel with diverse business backgrounds.
We may not be able to oversee the combined entity efficiently or to implement
effectively our growth and operating strategies. To the extent that we
successfully pursue our acquisition strategy, our resulting growth will place
significant additional demands on our management and infrastructure. The process
of integrating operations could cause an interruption of, or loss of momentum
in, the activities of our or the acquired company's businesses and the loss of
key personnel. The diversion of management's attention and any delays or
difficulties encountered in connection with the merger and the integration of
operations could have an adverse effect on our business, financial condition or
results of operations. Our failure to pursue successfully our acquisition
strategies or operate effectively the combined entity could have a material
adverse effect on our rate of growth and operating performance.
OUR OPERATIONS DEPEND UPON A NUMBER OF FACTORS RELATING TO OR AFFECTING CONSUMER
SPENDING FOR LUXURY GOODS, SUCH AS RECREATIONAL ITEMS
Unfavorable local, regional, national, or global economic developments or
uncertainties regarding future economic prospects could reduce consumer spending
in the markets we serve and adversely affect our business. Consumer spending may
decline as a result of lower consumer confidence levels, even if prevailing
economic conditions are favorable. In an economic downturn, consumer
discretionary spending levels generally decline, at times resulting in
disproportionately large reductions in the sale of luxury goods. We may be
unable to become profitable during any period of adverse economic conditions or
low consumer confidence.
12
WE FACE INTENSE COMPETITION.
We operate in a highly competitive environment. In addition to facing
competition generally from businesses in the recreational sports arena, seeking
to attract discretionary spending dollars, the water sports industry itself is
highly fragmented and involves intense competition for customers and suitable
retail locations, particularly on or near waterways. Competition increases
during periods of stagnant industry growth.
We also face intense competition in our managed and hosting business sector,
however we believe that we offer our customers additional and unique
professional services, tailored to meet the needs of each client, which services
are not typically provided by other information technology outsourcing
businesses.
Several of our existing or potential competitors have substantially greater
financial, technical and marketing resources than we do, which may enable them
to:
o develop and expand their infrastructure and service offerings more quickly
and achieve greater cost efficiencies;
o invest in new technologies;
o expand operations into new markets more rapidly;
o devote greater resources to marketing;
o compete for acquisitions more effectively and complete acquisitions more
easily; and
o aggressively price products and services and increase benefits in ways that
we may not be able to match economically.
In order to compete effectively in our markets, we must target our potential
clients carefully, continue to improve our efficiencies and the scope and
quality of our services, and rely on our service quality, innovation, education
and program clarity. If our competitive advantages are not compelling or
sustainable, then we are unlikely to increase or sustain profits and our stock
price could decline.
WE ARE HIGHLY DEPENDENT UPON TECHNOLOGY, AND OUR INABILITY TO KEEP UP WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY, OR OUR FAILURE OR INABILITY TO PROTECT
AND MAINTAIN OUR EXISTING SYSTEMS, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS.
Our success depends in part on our ability to develop internet technology
solutions that keep pace with continuing changes in the internet technology
industry, evolving industry standards, and changing client preferences. There
can be no assurance that we will be successful in adequately addressing these
developments on a timely basis or that, if these developments are addressed, we
will be successful in the marketplace. Our inability to effectively keep pace
with continuing changes in the internet technology industry could have a
material adverse effect on our business, financial condition, and results of
operations.
Moreover, experienced computer programmers and hackers may be able to penetrate
our network security, or that of our customers, and misappropriate our
confidential information, create system disruptions, or cause shutdowns. As a
result, we could incur significant expenses in addressing problems created by
security breaches of our network. Moreover, we could lose existing or potential
customers for information outsourcing services or other information technology
solutions, or incur significant expenses in connection with our customers'
system failures. In addition, sophisticated hardware and operating system
software and applications that we produce or procure from third parties may
contain defects in design and manufacture, including "bugs" and other problems
that can unexpectedly interfere with the operation of our systems. The costs to
eliminate or alleviate security problems, viruses, worms, and bugs could be
significant, and the efforts to address these problems could result in
interruptions, delays, or cessation of service.
Our operations are dependent upon our ability to protect our information
databases against damages that may be caused by fire and other disasters, power
failure, telecommunications failures, unauthorized intrusion, computer viruses,
and other emergencies. The temporary or permanent loss of such systems could
have a material adverse effect on our business, financial condition, and results
of operations. Notwithstanding precautions we have taken to protect ourselves
and our clients from events that could interrupt delivery of our services, there
can be no assurance
13
that a fire, natural disaster, human error, equipment malfunction or inadequacy,
computer virus, firewall breach, or other event would not result in a prolonged
interruption in our ability to provide support services to our clients. As we
commence delivering services from an offshore location, the risks attendant to
interruption of telecommunications increase. Any interruption to our data or
voice telecommunications networks could have a material adverse effect on our
business, financial condition, and our results of operations.
WE DEPEND ON KEY PERSONNEL
Our success depends to a significant extent upon the continued service of Leslie
Handler, our President and Arthur N. Robins, our Chief Executive Officer. Loss
of the services of Messrs. Handler and Robins could have a material adverse
effect on our growth, revenues, and prospective business. We may not be able to
retain our executive officers and key personnel or attract additional qualified
management in the future. In addition, in order to successfully implement and
manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense.
Nacio depends on key technical employees. If it is unable to retain or hire such
key technical employees in the future, then its ability to improve and implement
new systems could be adversely affected. Nacio's growth is expected to continue
to place, significant demands on all aspects of its business including its
management, financial, technical and administrative personnel and systems. Its
future operating results will depend upon its ability to manage growth,
including improving and implementing new systems and attracting, retaining,
training, managing and motivating skilled employees, particularly technical
personnel. There can be no assurance that a sufficient number of skilled
employees will continue to be available to Nacio or that it will be successful
in training, retaining and motivating current or future employees or that such
employees will achieve expected levels of performance. In addition, as Nacio
increase its product offerings and expand its target markets, there will be
additional demands on its sales and marketing resources.
There can be no assurance that we will be able to find, attract and retain
existing employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
IF WE ARE REQUIRED TO INCUR EXPENDITURES AS A RESULT OF INDEMNIFICATION OF OUR
DIRECTORS, OFFICERS OR EMPLOYEES FOR ANY REASON OUR NET INCOME WILL DECREASE AS
A RESULT OF INCREASE EXPENSES.
Our articles of incorporation include provisions to the effect that we may
indemnify any director, officer, or employee. In addition, provisions of Nevada
law provide for such indemnification. Any indemnification of directors, officer,
or employees, could result in substantial expenditures being made by our company
in covering any liability of such persons or in indemnifying them.
STOCKHOLDERS SHOULD NOT EXPECT DIVIDENDS.
We have not paid dividends or other distributions and do not intend to pay
dividends or other distributions for the foreseeable future, and we intend to
reinvest all of our earnings in the development of our business. In addition, we
may enter into agreements with lenders or other financing parties that restrict
or prohibit the payment of dividends or other distributions. Accordingly, no
assurance can be given that we will pay any dividend or other distributions to
the holders of our capital stock.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CALLABLE SECURED CONVERTIBLE
NOTES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of November 29, 2005, we had callable secured convertible notes outstanding
or an obligation to issue callable secured convertible notes that may be
converted into an estimated 29,815,789 shares of our Common
14
Stock at 55% of the current market prices, and outstanding warrants or an
obligation to issue warrants to purchase 3,500,000 shares of our Common Stock.
In addition, the number of shares of our Common Stock issuable upon conversion
of the outstanding callable secured convertible notes may increase if there is
an event of default. All of the shares, including all warrants, may be sold
without restriction. The sale of these shares may adversely affect the market
price of our Common Stock.
IF THERE IS AN EVENT OF DEFAULT, THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE
FEATURE OF OUR CALLABLE SECURED CONVERTIBLE NOTES BECOME APPLICABLE, WHICH COULD
HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
Upon an event of default, the callable secured convertible notes become
immediately due and payable and we will pay an amount equal to the greater of
(i) 130% times the sum of (w) the then outstanding principal amount of such note
plus (x) accrued and unpaid interest on the unpaid principal amount of such note
to the Mandatory Prepayment Date plus (y) Default Interest, if any, on the
amounts referred to in clauses (w) and/or (x) plus (z) the Default Sum; or (ii)
the Parity Value of the Default Sum to be repaid. The significant downward
pressure on the price of our Class A Common Stock as the selling stockholder
converts and sells material amounts could have an adverse effect on our stock
price. In addition, not only the sale of shares issued upon conversion or
exercise of notes, warrants and options, but also the mere perception that these
sales could occur, may adversely affect the market price of our Common Stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CALLABLE SECURED CONVERTIBLE NOTES
AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the callable secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their callable secured convertible notes and/or exercise their
warrants if such conversion or exercise would cause them to own more than 4.99%
of our outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
subsequently converting the remainder of their holdings. In this way, the
selling stockholders may sell more than 4.99% while never holding more than the
foregoing limit at any one time. There is no upper limit on the number of shares
that may be issued which may in effect further dilute the proportionate equity
interest and voting power of holders of our common stock, including investors in
this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CALLABLE SECURED
CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF
AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CALLABLE SECURED
CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH
COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
On November 29, 2005, we entered into a Security Purchase Agreement involving
the sale of an aggregate of $2,500,000 principal amount of callable secured
convertible notes and stock purchase warrants to buy 3,500,000 shares of our
Common Stock. The callable secured convertible notes are due and payable, with
8% interest, three years from the date of issuance, unless sooner converted into
shares of our common stock. Although we currently have $1,700,000 callable
secured convertible notes outstanding, the investor is obligated to purchase
additional callable secured convertible notes in the aggregate amount of
$800,000 immediately prior to the effective date of this Registration Statement.
In addition, any event of default such as our failure to repay the principal or
interest when due, our failure to issue shares of common stock upon conversion
by the holder, our failure to timely file a registration statement or have such
registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against us in excess of $50,000, the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against us and
the delisting of our common stock could require the early repayment of the
callable secured convertible notes, including a default interest rate of 15% on
the outstanding
15
principal balance of the notes if the default is not cured within the specified
grace period. We anticipate that the full amount of the callable secured
convertible notes will be converted into shares of our common stock, in
accordance with the terms of the callable secured convertible notes. If we are
required to repay the callable secured convertible notes, we would be required
to use our limited working capital and raise additional funds. If we were unable
to repay the notes when required, the note holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE
DEBENTURES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK,
WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The issuance of shares in connection with the exercise of the warrants and
conversion of the convertible notes results in the issuance of shares at a
discount to the trading price of the common stock prior to the conversion. The
significant downward pressure on the price of the common stock as the selling
stockholders convert and sell material amounts of common stock could encourage
short sales by investors. This could place further downward pressure on the
price of the common stock. The selling stockholder could sell common stock into
the market in anticipation of covering the short sale by converting their
securities, which could cause the further downward pressure on the stock price.
In addition, not only the sale of shares issued upon conversion or exercise of
debentures, warrants and options, but also the mere perception that these sales
could occur, may adversely affect the market price of the common stock.
RISKS RELATING TO OUR COMMON STOCK:
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
- that a broker or dealer approve a person's account for transactions in penny
stocks; and
- the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
- obtain financial information and investment experience objectives of the
person; and
16
- make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
- sets forth the basis on which the broker or dealer made the suitability
determination; and
- that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholder. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants in the amount up to $1,750,000 and we
received an aggregate of $1,700,000 in connection with the issuance of the first
two tranches of convertible notes to the selling stockholder. We expect to use
the proceeds received from the exercise of the warrants, if any, and from the
sale of the 10,000,000 shares of common stock that we are registering to sell on
a "best effort basis" for the purchase of equipment for our two subsidiaries
including infrastructure up grades to Nacio, UPS batteries, Backup processing
equipment, transmission lines, additional servers, and associate equipment; Aqua
Xtremes, and its' wholly own subsidiary Xtreme Engines, require production
equipment, which includes tooling for engines, injection molding, process
equipment as in dynamometers, lappers, CNC multi station positioner, Grinders,
Dyno-metric balance, Plasma guns, and a group of miscellaneous other equipment;
and for general working capital purposes. We also might utilize a portion of the
proceeds for unspecified acquisitions. We currently have no agreements to
acquire any other entity.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol "NVAC.OB".
Our common stock is quoted on the OTC Bulletin Board. The following table sets
forth the range of high and low bid prices during each quarter for the year
ended December 31, 2004 and for the year ended December 31, 2005, our new fiscal
year end. The over-the- counter market quotations may reflect inter-dealer
prices, without retail market-up, markdown or commission and may not represent
actual transactions. The market information was obtained from Allstock.com
(BigCharts) and from Standard & Poors Comstock.
LOW HIGH
Q1-2004 $ 0.02 $ 0.05
Q2-2004 0.03 0.04
17
Q3-2004 0.02 0.03
Q4-2004 0.01 0.03
Q1-2005 $ 0.01 $ 0.01
Q2-2005 0.50 3.35
Q3-2005 * *
Q4-2005 1.15 0.46
* During this period, our common stock was not quoted on the OTC Bulletin Board.
Quotations were posted only at PinkSheets.Com for which no historical quotations
are available.
HOLDERS
As of December 28, 2005, there were 1600 shareholders of record for our common
stock and a total of 12,445,907 shares of common stock issued and outstanding.
The holders of common stock are entitled to one vote per share of common stock
on all matters to be voted on by the stockholders. There are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive dividends,
if any, as may be declared by the board of directors out of funds legally
available for dividends. In the event of a liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in the net assets
remaining after payment in full of all liabilities, subject to the prior rights
of preferred stock, if any, then outstanding. There are no redemption or sinking
fund provisions applicable to the common stock.
We have never paid cash dividends on our common stock. The declaration and
payment of dividends is within the discretion of our board of directors and will
depend, among other factors, on earnings and debt service requirements as well
as our operating and financial condition. At the present time, our anticipated
working capital requirements are such that we intend to follow a policy of
retaining earnings in order to finance the development of our business.
Accordingly, we do not expect to pay a cash dividend within the foreseeable
future.
The transfer agent of our common stock is OTR, Inc. 1000 SW Broadway, Suite 920,
Portland, OR 97205.
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CAPITALIZATION
The following table sets forth our capitalization as of December 27, 2005:
- On an actual basis; and
- On a pro forma basis to give effect to: (i) the sale of 10,000,000
shares of common stock offered in this prospectus at an assumed
offering price of $.19 per share before deducting broker's commissions,
if any, and estimated offering expenses; and (ii) the issuance of
26,315,789 shares issuable upon the conversion of an aggregate of
$2,500,000 of outstanding callable secured Convertible notes, issuable
simultaneous with or immediately after the effectiveness of this
registration statement.
AS OF December 27th
2005
Actual Pro Forma
Preferred stock, $0.001 par value;
200,000 shares authorized; 200,000 issued
and outstanding..... $ 200 $ 200
Common stock, $0.001 par value; 500,000,000 shares
authorized and 12,445,907 and 52,261,696 shares
issued and outstanding respectively $ 12,445 $ 52,261
Common shares to be issued $ 8,703,927 $ 8,703,927
Convertible promissory note and accrued interest $ 101,140 $ 101,140
-------------- --------------
Additional paid-in capital.................. $ 23,002,916 $ 37,189,981
Accumulated deficit.......................... $(28,579,797) $(28,579,797)
-------------- --------------
Total shareholder's equity......... $ 3,240,631 $ 17,467,512
-------------- --------------
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DILUTION
- If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common
stock and the pro forma as adjusted net tangible book value per share
of our common stock immediately after this offering. Our net tangible
book value as of December 27, 2005 was $(3,240,631) or $(0.26) per
share. Net tangible book value per share is equal to our tangible net
assets, less total liabilities, divided by the number of shares of
common stock outstanding as of December 27, 2005. Net tangible book
value dilution per share to new investors represents the difference
between the amount per share paid by purchasers of our common stock in
this offering and our net tangible book value per share immediately
after completion of this offering after giving pro forma effect to: (i)
the sale of the 10,000,000 shares of common stock offered in this
prospectus at an assumed offering price of $.19 per share; and (ii) the
issuance of 26,315,789 shares issuable upon the conversion of an
aggregate of $2,500,000 of outstanding callable secured convertible
notes, and the exercise of 3,500,000 warrants which will be issued
simultaneously with or immediately subsequent to the effectiveness of
this registration statement. Our pro forma net tangible adjusted book
value at December 27, 2005 would have been approximately $17,467,512 or
$0.33 per pro forma share. This amount represents an immediate increase
in net tangible book value of $0.07 per share to existing stockholders
and an immediate dilution in net tangible book value of $3.87 per share
to new investors in the offering. The following table illustrates this
per share dilution:
Assumed initial cash offering price per share $ 4.25
Net tangible book value per share at March 31, 2005 $(0.01)
Increase per share attributable to new investors $ 4.26
Pro Forma net tangible book value per share after
this offering $ 0.39
Dilution per share to new investors $ 3.87
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
---------- ------- ----------- ------- ---------------
Existing
shareholders 28,019,414 89.3% $ 6,243,389 33.3% $0.22
Investors
converting
notes to
common stock 1,358,905 4.3% $ 4,000,000 21.3% $2.94
New investors 2,000,000 6.4% $ 8,500,000 45.4% $4.25
---------- ------- ----------- ------- ---------------
Total 31,378,319 100.0% $18,743,789 100.0% $0.60
The above table summarizes, as of March 31, 2005; after giving effect (for
existing shareholders) to: (1) 1,358,905 shares issuable upon conversion at
$2.94 per share of an aggregate of $4,000,000 of our outstanding notes issued
between April 2005 and July 2005, and (2) after giving effect (for new
shareholders) to the sale of all 2,000,000 shares of our Class A common stock we
20
are offering for sale at an assumed price of $4.25 per share, the total number
of shares of common stock outstanding, the total consideration paid, and the
average price per share paid by existing stockholders and by new investors
purchasing common stock from us in this offering, before deducting estimated
offering expenses payable by us.
The discussion and above table also assume no exercise of warrants or stock
options outstanding as of March 31, 2005. There were a total of 4,200,000
warrants and options to purchase 4,200,000 shares of Class A common stock at
March 31, 2005.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Some of the information in this Form SB-2 contains forward- looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
- discuss our future expectations;
- contain projections of our future results of operations or of our financial
condition; and
- state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
We were incorporated on March 25, 1985 under the name First Colonial Ventures,
Ltd., as a business development company. On June 28, 1999 our shareholders voted
to change the name of the Company to Nova Communications, Ltd, change our state
of incorporation from Utah to Nevada and change the nature of our business so as
to cease to be a business development company.
OUR BUSINESS
We are in the business of acquiring ownership interests in developing companies
in a wide range of industries and providing financing and managerial assistance
to those companies. We seek to invest in companies that, in our opinion, have
the reasonable potential for growth. Our objective is to achieve long-term
growth. We have two wholly owned subsidiaries, AquaXtremes, Inc. and Nacio
Systems, Inc.
Our operating strategies focus on the development of recreational water sports
products and managing our high-speed Internet access and enterprise server
facilities. We have begun selling distributorships for our recreational water
sports products and expects to begin manufacturing and selling these products in
2006.
Management has also devoted substantial efforts in the operations of Nacio
Systems, Inc. by pursuing aggressive cost cutting programs and eliminating
unprofitable products. Revenues for Nacio Systems, Inc. consist of dedicated
Internet access fees; hosting, co-location and enterprise service facility fees;
sales of third party hardware and software; fees for systems and technical
integration and administration; fees for power and server connection and
connectivity services. Monthly service revenue related to Internet access,
hosting, co-location and enterprise service facility.
Revenues for Interactive Holding Group, Inc., wholly owned subsidiary of Nacio
Systems, Inc. consist of computer software compliance monitoring services and
products.
Revenues for Aqua Xtremes, Inc. to date consist of the sale of dealerships.
On June 30, our Board of Directors approved the change of our fiscal year end
from December 31 to June 30 for accounting and reporting purposes.
AQUA XTREMES, INC.
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Aqua Xtremes, Inc, designs, manufacturers, and markets revolutionary water
sports equipment. One of its most notable products is the Xboard(TM) a
jet-powered personal watercraft that redefines extreme watersports. Xboards(TM)
allow riders of all skill levels to experience the exhilaration of riding a
personal watercraft. The Xboard(TM) design team has created a revolutionary
watercraft that combines an innovative hull design and a powerful EPA conforming
rotary engine. Aqua Xtremes is currently recruiting distributors and dealers.
Xtreme Engines, Inc., a wholly-owned subsidiary of Aqua Xtremes, was created to
design and produce the Xtreme engines which will be utilized not only in the
Xboard(TM) but in a wide variety of industries. Xtreme Engines features a rotary
configuration, which is similar to that of a 4 stroke engine, except it is done
in one stroke. Xtreme Engines is also working on a natural / propane gas engine,
which is being designed and tested as a "Green Engine."
NACIO SYSTEMS, INC.
Nacio Systems, Inc. provides centralized information technology solutions to
corporate clients, supporting their business operations with applications such
as e-commerce, content management, software auditing and customer relationship
management (CRM). Companies need no longer install, maintain and support complex
IT applications; Nacio hosts, manages and delivers mission critical IT
infrastructure from its secure, high-availability Tier 1 network/data operating
center in Northern California--reducing costs, mitigating risk, compressing
deployment times and increasing reliability.
Nacio's Professional Services and Application Development groups provide
customization services to ensure that the applications Nacio delivers are
tailored to specific business needs successfully deployed across the customer's
enterprise. In the face of increasing costs and the complexities of today's
corporate applications, Nacio Systems's hosted application services helps
companies stay focused on their core business by providing them cost-effective,
low-maintenance ways to update their websites, manage their data and documents,
leverage rapid application development and increase operational efficiency.
Interactive Holding Group, Inc., a wholly-owned subsidiary of Nacio Systems,
Inc. sells forensic software under the name "ATTEST Systems." Attest Systems has
developed GASP, a software product that enables companies to discover the
software and hardware assets deployed across their enterprise. Using GASP,
companies can remotely audit every computer on the corporate network, and, using
GASP's extensive reporting capabilities, compare the results against their owned
licenses. This allows companies to control software license and maintenance
costs, stay compliant with software license terms, inventory for disaster
recovery planning and make informed IT purchasing decisions. Attest will release
a new version of GASP, GASP V7.0 in the fourth quarter of 2005.
Management's discussion and analysis should be read in conjunction with the
financial statements and the notes thereto.
RESULTS OF OPERATIONS
Year ended June 30, 2005 compared to the Year ended June 30, 2004:
Years ended June 30:
2005 2004 Increase %
------------- ------------- ------------- -------------
Sales $ 1,316,697 $ - $ 1,316,697 100%
============= ============= ============= =============
The increase in sales during the year ended June 30, 2005 over 2004 was
attributable to the two factors: (1) the purchase of all of the operating assets
and liabilities of Nacio Systems, Inc., a California corporation effective April
1, 2005, and (2) Aqua Xtremes began selling dealerships. Sales as a result of
the purchase of the Nacio Systems, Inc. assets effective as of April 1, 2005
aggregated $977,478; sales attributable to Interactive Holding Group, Inc.,
purchased with Nacio Systems, Inc. aggregated $129,179; and sales of dealerships
by Aqua Xtremes, Inc. aggregated $210,040.
Years ended June 30:
2005 2004 Increase %
------------- ------------- ------------- -------------
Cost of sales $ 299,013 $ - $ 299,013 100%
============= ============= ============= =============
The increase in the cost of sales during the year ended June 30, 2005 over 2004
was also attributable to the purchase
23
of Nacio effective April 1, 2005. Cost of sales related entirely to our
products.
Years ended June 30:
2005 2004 Increase %
------------- ------------- ------------- -------------
Selling, general and administrative costs:
Aqua Xtreme, Inc. and Nova Communications Ltd. $ 4,261,365 $ 3,728,085 $ 533,280 12%
Nacio Systems, Inc. 1,135,459 - 1,135,459 100%
Interactive Holding Group, Inc. 208,965 - 208,965 100%
------------- ------------- -------------
$ 5,605,789 $ 3,728,085 $ 1,877,704
============= ============= =============
The increase in selling, general & administrative expenses consisted primarily
of the write-off of advances during the year ended June 30, 2005 aggregating
$723,506. The increase in selling, general & administrative expenses of Nacio
Systems, Inc. & Interactive Holding Group, Inc. resulted from their acquisition
effective April 1, 2005.
Years ended June 30:
2005 2004 Increase %
------------- ------------- ------------- -------------
Research & development expenses $ 744,677 $ - $ 744,677 100%
Research & development expenses related entirely to the development of the Aqua
Xtreme, Inc.'s recreational water sports products. We began developing those
products in August 2004.
Three months ended September 30, 2005 compared to the three months ended
September 30, 2004:
======================================================================================================================
Three months ended September 30:
------------------------------- -------------------- ------------------------ -------------------- -------------------
2005 2004 Increase %
------------------------------- -------------------- ------------------------ -------------------- -------------------
Sales $ 1,119,416 $ 0 $ 1,119,416 0%
----------------------------------------------------------------------------------------------------------------------
The increase in sales was attributable to the two factors: (1) the purchase of
NACIO effective April 1, 2005, and (2) Aqua began selling dealerships.
------------------------------- --------------------------------------------------------------------------------------
Three months ended September 30:
------------------------------- -------------------- ------------------------ -------------------- -------------------
2005 2004 Increase %
------------------------------- -------------------- ------------------------ -------------------- -------------------
Cost of sales $ 276,039 $ 0 $ 276,039 0%
----------------------------------------------------------------------------------------------------------------------
The increase in sales was attributable to the purchase of NACIO effective April
1, 2005. Cost of sales related to NACIO's products.
------------------------------- --------------------------------------------------------------------------------------
Three months ended September 30:
------------------------------- -------------------- ------------------------ -------------------- -------------------
2005 2004 Increase %
------------------------------- -------------------- ------------------------ -------------------- -------------------
General and administrative $ 1,739,934 $ 305,878 $ 1,434,056 469%
expenses
----------------------------------------------------------------------------------------------------------------------
The increase in selling, general & administrative expenses was attributed to two
factors: (1) the purchase of NACIO effecting April 1, 2005, and (2) the issuance
of common stock for services increased $ 289,339.
----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005 compared to June 30, 2004:
24
June 30:
Increase
2005 2004 (decrease) %
------------- ------------- ------------- ------
Total assets:
Aqua Xtreme, Inc. and Nova Communications Ltd. $ 401,114 $ 981,506 $ (580,392) (144)%
Nacio Systems, Inc. 10,763,652 - 10,763,652 100%
Interactive Holding Group, Inc. 342,063 - 342,063 100%
------------- ------------- -------------
$11,506,829 $ 981,506 $10,525,323
============= ============= =============
Our change in assets consist of the following. Effective December 31, 2004, we
divested the common stock of Kadfield resulting in the disposal of an aggregate
of $254,467. In August 2004, we ceased advancing an outside company funds to
develop recreational water sports products and wrote-off an aggregate of
$723,506. The increase in assets of Nacio & IHG resulted from their acquisition
effective April 1, 2005.
As of September 30, 2005 compared to June 30, 2005:
----------------------------------- ---------------------- ------------------ ------------------------ ---------------
September 30, 2005 June 30, 2005 (decrease) %
----------------------------------- ---------------------- ------------------ ------------------------ ---------------
Accounts receivable, net $ 138,196 $ 401,415 $ (263,219) (65.6)%
----------------------------------------------------------------------------------------------------------------------
The decrease in accounts receivable was attributed to NACIA placing a priority
in collecting accounts receivable more timely.
----------------------------------------------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
As required by Rule 13a-15 under the Exchange Act, within the ninety days prior
to the filing date of this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of our management, including our President and Chief Executive
Officer. Based upon that evaluation, we concluded that our disclosure controls
and procedures are effective. There have been no significant changes in our
internal controls subsequent to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of these financial statements requires our company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate these estimates, including those
related to revenue recognition and concentration of credit risk. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
25
BUSINESS
OVERVIEW
We were incorporated on March 25, 1985 under the name First Colonial Ventures,
Ltd., as a business development company. On June 28, 1999 our shareholders voted
to change the name of the Company to Nova Communications, Ltd, change our state
of incorporation from Utah to Nevada and change the nature of our business so as
to cease to be a business development company.
OUR BUSINESS
We are in the business of acquiring ownership interests in developing companies
in a wide range of industries and providing financing and managerial assistance
to those companies. We seek to invest in companies that, in our opinion, have
the reasonable potential for growth. Our objective is to achieve long-term
growth. We owned 51% percent of AquaXtremes, Inc. Effective May 9, 2005, we
acquired the remaining 49% of AquaXtremes, Inc. from Arthur N. Robins, our Chief
Executive Officer. Our wholly owned subsidiary, Aqua Xtremes, Inc., is in the
business of designing, manufacturing and marketing revolutionary water sports
equipment. Aqua Xtremes, Inc. wholly-owned subsidiary, Xtreme Engines, Inc.
designs and produces the Xtreme engines.
On April 1, 2005, we completed the acquisition of the assets of Nacio Systems,
Inc, based in Novato, California., through our wholly- owned subsidiary Nacio
Systems, Inc., a newly-formed Nevada corporation.
AQUA XTREMES, INC.
Aqua Xtremes, Inc, designs, manufacturers, and markets revolutionary water
sports equipment. One of its most notable products is the Xboard(TM) a
jet-powered personal watercraft that redefines extreme watersports. Xboards(TM)
allow riders of all skill levels to experience the exhilaration of riding a
personal watercraft. The Xboard(TM) design team has created a revolutionary
watercraft that combines an innovative hull design and a powerful EPA conforming
rotary engine. Aqua Xtremes is currently recruiting distributors and dealers.
Management believes that the Xboard(TM) is the first in a line of breakout
recreational vehicles.
Xtreme Engines, Inc., a wholly-owned subsidiary of Aqua Xtremes, was created to
design and produce the Xtreme engines which will be utilized not only in the
Xboard(TM) but in a wide variety of industries. Xtreme Engines features a rotary
configuration, which is similar to that of a 4 stroke engine, except it is done
in one stroke. Xtreme Engines is also working on a natural / propane gas engine,
which is being designed and tested as a "Green Engine." In addition, Xtreme
Engines has begun a program to refine the research developed by Curtis-Wright &
John Deere couples with today's technology. Nova is in the process of acquiring
a 51 % ownership of Rotary Engine Inc. The Letter of Intent was signed in August
2005. The finalization of the transaction should be completed in January 2006 or
February 2006. The R&D of Aqua Xtremes, and REI will be housed in West Palm
Beach, this will be accomplished in the beginning of December 2005. This will
allow the sharing, and develop a variety of engines which feature different
sizes, horse power, and will have the ability operate a multitude of different
fuels. Each of the engines is being designed and developed to exceed not only
today's standards but the proposed standards which will take effect in future.
NACIO SYSTEMS, INC.
Nacio Systems, Inc. provides centralized information technology solutions to
corporate clients, supporting their business operations with applications such
as e-commerce, content management, software auditing and customer relationship
management (CRM). Companies need no longer install, maintain and support complex
IT applications. Nacio hosts, manages and delivers mission critical IT
infrastructure from its secure, high-availability Tier 1
26
network/data operating center in Northern California--reducing costs, mitigating
risk, compressing deployment times and increasing reliability.
Nacio's Professional Services and Application Development groups provide
customization services to ensure that the applications Nacio delivers are
tailored to specific business needs successfully deployed across the customer's
enterprise. In the face of increasing costs and the complexities of today's
corporate applications, Nacio Systems' hosted application services helps
companies stay focused on their core business by providing them cost-effective,
low-maintenance ways to update their websites, manage their data and documents,
leverage rapid application development and increase operational efficiency.
Interactive Holding Group, Inc., a wholly-owned subsidiary of Nacio Systems,
Inc. sells forensic software under the name "ATTEST Systems." Attest Systems has
developed GASP, a software product that enables companies to discover the
software and hardware assets deployed across their enterprise. Using GASP,
companies can remotely audit every computer on the corporate network, and, using
GASP's extensive reporting capabilities, compare the results against their owned
licenses. This allows companies to control software license and maintenance
costs, stay compliant with software license terms, inventory for disaster
recovery planning and make informed IT purchasing decisions. Attest will release
a new version of GASP, GASP V7.0 in the fourth quarter of 2005.
For almost 10 years, Nacio has been creating powerful applications that blend
friendly, easy-to-use interfaces, smart database design and rapid application
development to connect businesses with their digital assets in productive and
profitable ways. Nacio develops and supports the systems on which vital aspects
of its clients' businesses run and serves as a trusted extension of their
business operations. Organizations can derive considerable benefits from moving
their core business processes online. Nacio's knowledge, experience and
imagination helps companies find solutions to their business needs to increase
operational efficiency, acquire, serve and retain customers, and generate
revenue and shareholder value.
Management believes that the Sarbannes-Oxley, Act OF 2002 Public Law 107-204,
will have a tremendous impact in boasting revenue for Nacio, as publicly traded
companies phase into this new requirement. Nacio has implemented the necessary
programs, which include; reporting, storage and compliances that its corporate
clients are required to perform and report.
Nacio services are delivered across four inter-related centers of excellence:
Enterprise-level hosting, connectivity and network support
Strategic e-business planning and analysis
Online application and solutions development
Interactive business services and management
Nacio provides business with network-based computing and communication services
on an outsourced basis. Nacio offers a comprehensive line of "best-of-breed"
products, and have developed unique tools and methodologies for their
deployment, management, and support. Management believes that it is these
products, tools, and methodologies that give NACIO a competitive edge in the
managed hosting and outsourcing market.
Nacio's multi-disciplinary staff of engineers (specialists in networking,
systems integration, and software) assist businesses through design and
deployment, selecting the right components, and performing final integration,
testing, and ongoing support. NACIO does not employ third-party companies for
fulfillment. Nacio designs, deploys, supports, and provides its own maintenance
to customers without utilizing third parties.
Some individual "netsourcing" products solve basic business problems for
customers, such as Internet connectivity, single-site web hosting, or outsourced
email. However, most customers have more complex requirements that involve
multiple web, application, and database servers; unique security requirements;
special storage needs; and other ancillary products and services. For this
reason, NACIO employs a modular approach to building solutions for businesses
creating unique systems from combinations of standard products and product
"kits" that have been pre-engineered and which is repeatedly deploy for other
customers. This avoids having to create "one-off" systems. This methodology,
along with the deployment tools Nacio has created to support it, allows Nacio to
offer businesses
27
more value than other providers.
Nacio's "netsourcing" products include Managed Hosting, Colocation Services,
Managed Network Services, Managed Data Security, Managed Storage and Backup
Services, and Managed Application Services. Nacio is able to offer business
value and flexibility because Nacio has built a comprehensive set of modular,
"building block" products that can be used singularly, or in combination, to
create solutions to application requirements ranging from simple to complex.
Managed Hosting Services
NACIO offers a range of dedicated and shared hosting services designed to meet
the needs of different customers and applications. For maximum flexibility,
NACIO Managed Servers can be combined with our customers servers located in the
Colocation area of the Netsource Center on a private, secure Virtual Local Area
Network (VLAN).
Colocation Services
NACIO PowerColo: NACIO's PowerColo colocation service is available in its state
of the art, N+2 fault-tolerant Netsource Center. This service is ideal for
customers who have an existing hardware investment they want to preserve, or
have special hosting requirements. Colocation cabinets and caged space are
available in a variety of configurations. All include secured space for our
customers equipment with 24x7 key access, 100% fault-tolerant power, network
access and 24x7 "remote hands and eyes" service from our facility staff.
Nacion Managed Services for PowerColo:
PowerColo users must provide their own server hardware, software and support,
but NACIO does offers a range of value-added, managed services to colocation
customers, including managed routers, basic and advanced managed firewall,
server load balancing, robotic backup, and 24x7 monitoring.
Managed Network Services
Nacio offers business-grade, fully managed Internet access and network
connectivity. We manage these services for our customers on a 24x7 basis,
including monitoring of the customer-premise equipment (e.g., routers), network
circuits, and end-to-end quality of service. Nacio is an authorized Pacific
Bell/SBC Agent and a WilTel Communications Partner. We also maintain
relationships with other major network providers including Sprint, WorldCom and
Qwest.
Managed Data Security
Data security is an essential ingredient in all information and network systems.
Both publicly and privately-accessible systems require protection from hackers,
cyber-terrorists, and internal security threats.
Nacio's Managed Data Security products include the following:
Nacio Managed Firewall Services:
Nacio's Basic Firewall Service provides an economical yet powerful safeguard
against most types of unauthorized access, while its Advanced Firewall Service
offers a higher level of protection with ICSA certification. All Managed
Firewall Services are available to both Dedicated Managed Server and Colocation
customers.
Nacio Network Intrusion Detection Service:
This service facilitates the detection and blocking of known vulnerabilities
that could compromise your data and affect the reliable operation of your
systems. Combined with our Advanced Managed Firewall Service, it forms the basis
of a complete managed security solution.
Managed Storage and Backup
28
Storage requirements are growing at a rapid rate, driven by applications such as
document management, streaming media, medical imaging, and data warehousing. All
servers and workstations require data backup as a remedy for hardware failure,
natural disasters, or human error.
Nacio offers a range of storage and backup products to meet these needs:
Nacio Robotic Backup: Fully automated, robotic tape backup with
capacities in the hundreds of terabytes.
Nacio Dedicated Storage Array: A flexible storage product based on
best-of-breed Storage Area Network (SAN) and fibre-channel technology
with capacities up to 15 terabytes and fault-tolerant operation.
Applications for the Nacio Dedicated Storage Array include
fault-tolerant database and file server clusters, web server farms and
streaming media servers.
TeraSafe(TM)DV (Digital Vault) for Off-Site Data Protection: Simple,
secure, automated service to protect your valuable data with off-site
electronic vaulting for backup, archival storage, and disaster
recovery. This affordable service can be easily integrated into your
network and can work with your existing backup software. Data is
available instantly via a secure web site.
TeraSafe(TM) NAS(Network Attached Storage): Powerful yet affordable
managed storage service available to customers with Nacio Dedicated
Manager Servers or with equipment colocated at Nacio. Storage capacity
starts at 10 GB, scalable to 10 terabytes and beyond.
Internet File Management (IFM) Service: Control document proliferation
and dramatically lower your operating costs by storing all your files
in a secure, central location where they can be accessed from any
computer connected to the internet.
Managed Application Services
Nacio hosts specialized and general-purpose applications on an outsourced basis
for its customers. Our current Application Services include the following:
Nacio email: Sold in blocks of 10 accounts, Nacio eMail features
support for virtually all POP3/SMTP mail clients and browser-based
email access and administration.
Nacio ClusterMail: Nacio ClusterMail is a highly-scalable,
standards-based outsourced email hosting service that can support up to
4 million mailboxes. It features a fault-tolerant, multi-server
architecture, browser-based administration, and support for all popular
mail protocols. Nacio ClusterMail is based on the award-winning
CommunigatePro email server.
Spam and Virus Filtering Service: Stop spam and virus attacks before
they reach your inbox. This service quarantines suspicious email before
it reaches your email servers. Users have secure, web-based access to
review suspicious messages and flexible filter setting to meet
individual needs.
Internet File Management (IFM) Service: Control document proliferation
and dramatically lower your operating costs by storing all your files
in a secure, central location where they can be accessed from any
computer connected to the internet.
Nacio Managed DNS Hosting: Everyone needs DNS (Domain Name Service) and
Nacio provides a commercial-grade DNS hosting service with multiple
servers for fault-tolerant operation, and offers a range of value-added
services to go with it (domain registration, etc.).
COMPETITION
Management believes that its XBoard is unique. Currently there are no similar
products available on the market.
29
Management however, believes that manufacturers such as Kawasaki will likely be
interested in penetrating this segment of the market.
Nacio faces competition from other internet outsourcing companies such as AT&T,
EDF, MCI, Sprint, and then you have very low end Co-locations service providers
on the internet such as Sonic, and Raging Wire. Management believes however,
because of the unique and individualized bundled services which are provided by
Nacio, Nacio will dominate its competitors.
MARKETING
We have identified four core segments that our marketing, tactical messaging and
communications activity as well as media and advertising budgets will target for
awareness, registration, conversion and acquisition.
Investor/Distributors
Our distributors will invest $50,00 to purchase common stock of Aqua Xtremes
along with an eight-mile exclusive distribution territory. We will recruit
potential distributors from the investment community and not necessarily from
the recreations water sports industry. We will use existing dealer market
segment to assist with identifying potential investor/distributors within their
business and social community.
Dealers
Our marketing program targets existing marine and personal watercraft dealers to
become authorized Xboard/Aqua Xtremes dealers. We will target and offer them an
incentive based program such as offering them a free Xboard after placing 10 or
more boards and assisting Aqua Xtremes in recruiting distributor/investors.
Resorts
We intend to generate customer awareness and demand for the Xboard by recruiting
resorts and cruise lines to buy or lease Xboards and offer them as a new and
exciting "one-of-a-kind" experience for thrill seekers on vacation. Management
hopes that after trying the Xboard they will return from vacation and seek out a
dealer to purchase their own Xboard.
Direct to Customer
We project that it will take up to eighteen months to create our nationally
covered network of distributors and dealers. During that time, management
intends to launch an aggressive direct to consumer marketing, advertising and
sales program. Our e-commerce website creates a platform for messaging,
awareness, conversion and selling Xboards via the direct channel. There will be
incentives for consumers to "tell a friend," by offering XBoard give away
contests for submitting ten or more qualified emails of friends who might also
be interested in purchasing the Xboard.
RESEARCH AND DEVELOPMENT
We currently have a number of products that are currently in the research and
development stage and/or prototype developmental stage, including:
Ultra Light Plane
Powered Power Sailing
ATV's
Snowmobiles
Ambtions ATV
Motorcycles
Aqua Cycles
Powered Catamarans
Jet powered Pontoon Boats
30
Zodiac or like Inflatable boats
Electric generators that would run on gas, propane or diesel
Electric Battery Jet Ski
EMPLOYEES
AquaXtremes does not currently have any employees. Nacio has a total of 30
employees, 24 of which provide technical services and 6 of which provide
administrative/managerial services.
DESCRIPTION OF PROPERTIES
Our principal executive and administrative offices are located at 1005 Terminal
Way, Suite 110, Reno Nevada and our telephone number is (775) 324-8531. Our
principal executive and administrative offices are located at 1005 Terminal Way,
Suite 110, Reno, Nevada. We have contracted with Nacio Systems, Inc. to provide
us with services such as computing power, website maintenance and other
professional services on an as-needed basis. This arrangement has allowed both
companies to minimize overhead expenses and has enabled their respective
executives and consultants access, in real time, to the engineering and
administrative data that they require to carry out their respective
responsibilities.
Nacio operates out its state-of-the-art Netsource Center facility. The Netsource
Center includes 15,000 square feet of raised floor space in a 28,000 square foot
building. The Novato campus, where the Netsource Center is located, totals over
35,000 square feet and also includes the Corporate Headquarters, the Client
Services Center (24 x 7 network operations and support), and Nacio Labs (our
Research and Development group). We lease this space at an annual rent of $
540,000.
Management believes that our office space will be adequate for our current
operating needs and continued near term growth.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
aware of the following legal proceedings or claims.
Nova Communications Ltd. and Arthur Robins v. Powerski International,
Robert E. Montgomery, and Does 1-10, Case # OSCC)4761 pending in the California
Superior Court, County of Orange. The complaint alleges breach of contract,
fraud and false advertising in connection sums advanced to Powerski. The
complaint seeks rescission of contract and the return of $916,000 advanced by
Nova to Powerski; return of $116,000 advanced by Robins; interest on the
advances; punitive damages; costs; and attorney fees.
Nacio Systems, Inc. v. Nacio Investment Group, LLC ("NIG"); Frank
Ehret; David Lyons; and Does 1-10; NIG v. Nacio Systems, Inc., a California
corporation and Nacio Systems, Inc., a Nevada corporation ; and Nova
Communications Ltd. Case # CV 052533 pending in the California Superior Court,
County of Marin. Relief sought in cross-complaint against Nova Communications
Ltd . involves rescission of any transaction by which Nova acquires or acquired
any assets from Nacio Systems, Inc. and recovery of any proceeds from the
disposition of those assets. NIG alleges that Nova has engaged in a fraudulent
conveyance with Nacio Systems, Inc. in violation of California Civil Code
3439.04. NIG claims it is entitled to rescission of the conveyance and recovery
of any proceeds received by Nova from any disposition of those assets.
MANAGEMENT
31
DIRECTORS AND EXECUTIVE OFFICERS
The following persons constitute all of the Company's Executive Officers and
Directors:
NAME AGE POSITION
-------- ----- -------------
Leslie I. Handler 67 President, Director
Arthur N. Robins 54 Chief Executive Officer, Director
James F. Abel, III 44 Corporate Secretary, Director
Greg K. Hoggatt 48 Director
Directors are elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified.
Directors serve without cash compensation and without other fixed remuneration.
Officers are elected by the Board of Directors and serve until their successors
are appointed by the Board of Directors. Biographical resumes of each officer
and director are set forth below.
LESLIE I. HANDLER has been a director since August 1991 and has served as
Corporate Secretary. From 1988 to 1992, Mr. Handler was president of Far West
Commercial Finance, a subsidiary of Far West Federal Bank, Portland, Oregon.
Since 1993, Mr. Handler has been a consultant to various companies in the
banking industry.
ARTHUR N. ROBINS has been retired since 2000. He came of out of retirement to
become our Chief Executive Officer in January 2005. Prior to his retirement, Mr.
Robins was Owner and Chief Executive Officer of several companies
simultaneously, which were in manufacturing of recycled plastics. Mr. Robins was
instrumental in successfully establishing several start up divisions and
companies, including, (i) Albert Industries from 1972 through 1981, Started-
Special Projects (Nuclear Power, Petro-Chemical, Chemical, Oil and Oil Patch,
(ii)Tubeline Corp. where Mr. Robins served as Executive VP, from 1981 through
1984; (iii) Imported Material PPC which had revenues of28M in its first year;
(iv)Things `N' Swings 1984 through 1987; (v)ANR Enterprises from 1987through
1997 is engaged in Swing manufacturing, cabinets, commercial and residence
construction companies,(vi) Wood Kingdom, Retail, and entertainment, from
1988through 1997; (vii)Beyond Natural Wood, from 1992 through 1997 which is
enaged in the business of recycled plastic lumber, and fabrication; (vii)Service
Coordinators of America, from 1991through 1997, IP, services and ADA
coordination; (viii) Fastruck, from 1997through 2000.
JAMES F. ABEL, III has been one of our Directors since February 2005. Mr. Abel
was the President of The Hines Group, Inc. from 1998 through March 2004, a
precision custom metal stamping company with headquarters in Owensboro,
Kentucky. Mr. Abel is now retired.
GREG K. HOGGATT has been one of our Directors since February 2005. Mr. Hoggatt
is a captain for Delta Airlines since 1987.
The Company's Bylaws currently authorize up to seven directors. Each director is
elected for one year at the annual meeting of stockholders and serves until the
next annual meeting or until a successor is duly elected and qualified.
Executive officers serve at the discretion of our board of directors. There are
no family relationships among any of the directors and executive officers.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
certain officers and persons holding 10% or more of our common stock to file
reports regarding their ownership and regarding their acquisitions and
dispositions of the Registrant's common stock with the Securities and Exchange
Commission ("SEC"). Such persons
32
are required by SEC regulations to furnish our company with copies of all
Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the registrant under Rule 16a-3(d) during fiscal 2004, and certain written
representations from executive officers and directors, we are unaware that any
required reports that have not been timely filed.
CODE OF ETHICS
Effective January 1, 2004, the Board of Directors adopted a Code of Ethics for
Senior Financial Officers. The Code of Ethics was adopted pursuant to the
requirements of the Sarbanes- Oxley Act of 2002 and the rules and regulations of
the Securities and Exchange Commission thereunder. A copy of the Code of Ethics
will be made available upon request at no charge. Requests should be directed in
writing to the Company at 1005 Terminal Way, Suite 110, Reno, Nevada 89502-2179.
COMMITTEES OF THE BOARD OF DIRECTORS
We do not currently have any committees of the Board of Directors.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and each of
our most highly-compensated executive officers whose total annual salary and
bonus for the fiscal year ending June 30, 2005, and December 31 2004 and 2003
exceeded $100,000:
SUMMARY COMPENSATION TABLE
--------------------------
NAME AND ANNUAL
PRINCIPAL POSITION YEAR COMPENSATION LONG TERM COMPENSATION
SALARY Bonus
----------------------- ------ ------------ ------- ------------------------
Arthur N. Robins (1) 2005 $ 240,000
CEO
Leslie I. Handler 2005 $ 0
President 2004 $ 0
2003 $ 0
Kenneth D. Owen (2) 2005 $ 0
Former President/CEO 2004 $ 0 320,000 shares
2003 $ 180,000 810,000 shares
(1) Mr. Robins' compensation is unpaid at this time and is being accrued.
(2) In April 2003, Mr. Owen was issued 72,000,000 shares of the Company's common
stock pursuant to a registration statement on Form S-8. On December 2, 2003, Mr.
Owen was issued an additional 5,000,000 shares of the Company's common stock
pursuant to a registration statement on Form S-8 plus 4,000,000 shares of common
stock, the latter being restricted securities under the Securities Act of 1933.
All of the 81,000,000 shares were issued to Mr. Owen in lieu of $360,000 of
accrued but unpaid compensation for 2002 and 2001. Mr. Owen has since disposed
of virtually all of those shares in open market and private resale transactions.
33
EMPLOYMENT CONTRACT
We have not entered into an employment agreement with any of our executive
officers or directors.
OTHER COMPENSATION
There are no annuity, pension or retirement benefits proposed to be paid to
officers, directors, or employees of our company in the event of retirement at
normal retirement date as there was no existing plan as of December 31, 2004
provided for or contributed to by our company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years there have not been any relationships,
transactions, or proposed transactions to which we were or are to be a party, in
which any of the directors, officers, or 5% or greater shareholders (or any
immediate family thereof) had or is to have a direct or indirect material
interest.
Effective May 9, 2005, we acquired the remaining 49% of the issued and
outstanding common stock of AquaXtremes, Inc., which we did not own, resulting
in the latter becoming our wholly-owned subsidiary. The shares were acquired
from Arthur N. Robins, our Chief Executive Officer and a director. In
consideration of the transfer by Mr. Robins, we issued to Mr. Robins 100,000
shares of our Series "B" Preferred Stock, which constituted the majority voting
power of the registrant. In addition, we issued to Mr. Robins a Subordinated
Convertible Non-Negotiable Promissory Note in the principal amount of $100,000.
The principal and interest balance of the Note will be repaid solely from the
conversion of the Note into 40,000,000 shares of common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 28, 2005, the number and
percentage of outstanding shares of common stock which, according to the
information supplied to us, were beneficially owned by (i) each current
director, (ii) each current executive officer, (iii) all current directors and
executive officers as a group, and (iv) each person who, to our knowledge, is
the beneficial owner of more than 5% of our outstanding common stock. Except as
otherwise indicated, the persons named in the table below have sole voting and
dispositive power with respect to all shares beneficially owned, subject to
community property laws (where applicable).
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP(1) CLASS (2)
------------------- --------------------------- --------------- ----------
Common Stock Leslie I. Handler
382 Running Springs Dr. - -
Palm Desert, CA 92276
Common Stock Arthur N. Robins
362 Gulf Breeze Pkwy, #130 500,000 (4) 4.0%
Gulf Breeze, FL 32561
Common Stock James F. Abel, III
3 Hilltop Rd. - -
34
Owensboro, KY 42303
Common Stock Greg K. Hoggatt
333 Panferio Dr. - -
Pensacola, FL 32561
* Less than one percent
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or exercisable or convertible within 60 days of
December 31, 2005 are deemed outstanding for computing the percentage of the
person holding such option or warrant but are not deemed outstanding for
computing the percentage of any other person.
(2) Percentage based on 12,445,907 shares of common stock outstanding as of
December 28, 2005.
(3) Does not include 31,319 shares held by Mr. Handler's wife as to which Mr.
Handler has neither voting nor investment control and for which he disclaims
beneficial ownership.
(4) Does not include 100,000 shares of Series B preferred stock which is
convertible into 40,000,000 shares of Common Stock.
DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK
We are authorized to issue up to 500,000,000 shares of Common Stock, par value
$.001. As of December 22, 2005, there were 12,445,907 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged OTR, Inc., 1000 SW Broadway, Suite 920, Portland, OR 97205, as
independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue up to 200,000 shares of Preferred Stock, par value
$.001. Our preferred stock may be voting or have other rights and preferences as
determined from time to time by our Board of Directors. In December 2004,
100,000 authorized preferred shares were designated as Series "A". On December
31, 2004, our Board of Directors agreed to exchange payables to a related party
aggregating $363,151 for 100,000 shares of our Series "A" preferred stock. On
January 17, 2005, our Board of Directors amended the rights of our 100,000
Series "A" preferred stock to be convertible, at our option, into 1,000,000
shares of our common stock. Also on January 17, 2005, the Board of Directors of
the Company increased the authorized preferred shares to 200,000.
35
We have reserved 1,000,000 shares of our common stock to be issued in the event
of conversion of its Series "A" preferred stock.
In June 2005, our Board of Directors designated 100,000 shares of its preferred
stock as Series "B". It was further resolved that the Series "B" preferred stock
be entitled to dividends in the same manner as holders of common stock be
entitled to vote on all matters at 250 votes per share as a single class of
shareholder and be entitled to liquidation preferences in the same manner as
holders of common stock. We issued 100,000 shares of our Series "B" preferred
stock to Art Robins, as consideration to Mr. Robins in connection with our
acquisition of 49% of the issued and outstanding common stock of AquaXtremes,
Inc.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholder and any of its pledgees, donees, assignees and other
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholder may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
- block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
- an exchange distribution in accordance with the rules of the applicable
exchange;
- privately-negotiated transactions;
- broker-dealers may agree with the selling stockholder to sell a specified
number of such shares at a stipulated price per share;
- through the writing of options on the shares
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
36
The selling stockholder may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling stockholder
shall have the sole and absolute discretion not to accept any purchase offer or
make any sale of shares if they deem the purchase price to be unsatisfactory at
any particular time.
The selling stockholder or its pledgees, donees, transferees or other successors
in interest, may also sell the shares directly to market makers acting as
principals and/or broker-dealers acting as agents for themselves or their
customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholder and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholder cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholder. The selling
stockholder and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholder,
but excluding brokerage commissions or underwriter discounts.
The selling stockholder, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholder may pledge its shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. The
selling stockholder and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholder or any other such person. In the
event that the selling stockholder are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholder will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder is contractually
restricted from engaging in short sells. In addition, if a such short sale is
deemed to be a stabilizing activity, then the selling stockholder will not be
permitted to engage in a short sale of our common stock. All of these
limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholder, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholder or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholder notifies us that it has a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling stockholder
and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or
37
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
- that a broker or dealer approve a person's account for transactions in penny
stocks; and
- the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must
- obtain financial information and investment experience objectives of the
person; and
- make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
- sets forth the basis on which the broker or dealer made the suitability
determination; and
- that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
SELLING STOCKHOLDERS
We agreed to register for resale shares of common stock by the selling
stockholders listed below. The selling stockholders may from time to time offer
and sell any or all of their shares that are registered under this prospectus.
All expenses incurred with respect to the registration of the common stock will
be borne by us, but we will not be obligated to pay any underwriting fees,
discounts, commissions or other expenses incurred by the selling stockholders in
connection with the sale of such shares.
The following table sets forth information with respect to the maximum
number of shares of common stock beneficially owned by the selling stockholders
named below and as adjusted to give effect to the sale of the shares offered
hereby. The shares beneficially owned have been determined in accordance with
rules promulgated by the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. The information in the table
below is current as of the date of this prospectus. All information contained in
the table below is based upon information provided to us by the selling
stockholders and we have not independently verified this information. The
selling stockholders are not making any representation that any shares covered
by the prospectus will be offered for sale. The selling stockholders may from
time to time offer and sell pursuant to this prospectus any or all of the common
stock being registered.
Except as indicated below, none of the selling stockholders has held
any position or office with us, nor are any of the selling stockholders
associates or affiliates of any of our officers or directors. Except as
indicated below, no selling stockholder is the beneficial owner of any
additional shares of common stock or other equity securities issued by us or any
securities convertible into, or exercisable or exchangeable for, our equity
securities. No selling stockholder is a registered broker-dealer or an affiliate
of a broker-dealer.
For purposes of this table, beneficial ownership is determined in
accordance with SEC rules, and includes voting power and investment power with
respect to shares and shares owned pursuant to warrants exercisable
38
within 60 days. The "Number of Shares Beneficially Owned After the Offering"
column assumes the sale of all shares offered.
As explained below under "Plan of Distribution," we have agreed with
the selling stockholders to bear certain expenses (other than broker discounts
and commissions, if any) in connection with the registration statement, which
includes this prospectus.
Name Number of Shares Number of Shares
Beneficially Owned Beneficially Owned
Prior to Offering Number of Shares Offered After the Offering
------------------------------------------------ ------------------ ------------------------ ------------------
AJW Partners, LLC (2)(3) 3,279,737 3,279,737 0
AJW Offshore, Ltd. (2)(3) 16,100,526 16,100,526 0
AJW Qualified Partners, LLC (2)(3) 9,839,210 9,839,210 0
New Millenium Capital Partners II, LLC (2)(3) 596,316 596,316 0
(1) Unless otherwise indicated, the selling stockholders have sole voting and
investment power with respect to their shares of common stock. The inclusion of
any shares in this table does not constitute an admission of beneficial
ownership for the selling stockholders.
(2) The actual number of shares of Class A Common Stock offered in this
prospectus, and included in the registration statement of which this prospectus
is a part, includes such additional number of shares of common stock as may be
issued or issuable upon conversion of the callable secured convertible notes and
exercise of the related warrants by reason of any stock split, stock dividend or
similar transaction involving the common stock, in accordance with Rule 416
under the Securities Act of 1933, as amended. However the selling stockholders
have contractually agreed to restrict their ability to convert their callable
secured convertible notes or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock as determined in
accordance with Section 13(d) of the Exchange Act. Accordingly, the number of
shares of common stock set forth in the table for the selling stockholders
exceeds the number of shares of common stock that the selling stockholders could
own beneficially at any given time through their ownership of the callable
secured convertible notes and the warrants. In that regard, the beneficial
ownership of the common stock by the selling stockholder set forth in the table
is not determined in accordance with Rule 13d-3 under the Securities Exchange
Act of 1934, as amended.
(3) Some of the selling stockholders are affiliates of each other because they
are under common control. AJW Partners, LLC is a private investment fund that is
owned by its investors and managed by SMS Group, LLC. SMS Group, LLC, of which
Mr. Corey S. Ribotsky is the fund manager, has voting and investment control
over the shares listed below owned by AJW Partners, LLC. AJW Partners, LLC
intends to transfer shares to certain of its affiliates. AJW Offshore, Ltd.,
formerly known as AJW/New Millennium Offshore, Ltd. and a designee of AJW
Partners, LLC, is a private investment fund that is owned by its investors and
managed by First Street Manager II, LLC. First Street Manager II, LLC, of which
Corey S. Ribotsky is the fund manager, has voting and investment control over
the shares owned by AJW Offshore, Ltd. AJW Qualified Partners, LLC, formerly
known as Pegasus Capital Partners, LLC and a designee of AJW Partners, LLC, is a
private investment fund that is owned by its investors and managed by AJW
Manager, LLC, of which Corey S. Ribotsky and Lloyd A. Groveman are the fund
managers, have voting and investment control over the shares listed below owned
by AJW Qualified Partners, LLC. New Millennium Capital Partners II, LLC, a
designee of AJW Partners, LLC, is a private investment fund that is owned by its
investors and managed by First Street Manager II, LLC. First Street Manager II,
LLC, of which Corey S. Ribotsky is the fund manager, has voting and investment
control over the shares owned
39
by New Millennium Capital Partners II, LLC.
(4) We have been notified by the selling stockholders that they are not
broker-dealers or affiliates of broker-dealers and that they believe they are
not required to be broker-dealers.
PLAN OF DISTRIBUTION
This prospectus relates to the sale of up to 10,000,000 shares of our common
stock that is being offered for cash directly for our account.
We intend to sell our common stock during the 90 day period following the date
of this prospectus at a fixed price between $0.15 and $0.50 per share. There is
no minimum number of shares that must be sold by us during the 90 day selling
period, and none of the proceeds will be placed in escrow, trust or any similar
account.
We may engage a registered broker-dealer to act as our placement agent on a
"best efforts, all or none" basis. We will indemnify any such placement agent
from certain liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments the placement agent may be
required to make in respect thereof.
Our offering will be "self-underwritten" in that 10,000,000 shares of our common
stock may be sold on a "best efforts, all or none" basis by certain of our
employees, officers or directors, except as otherwise provided herein. No
assurance, however, can be given that we will sell such shares.
We are relying upon Rule 3a4-1 of the Securities Act of 1933, as amended, to not
deem such persons associated with us as brokers. None of such persons are
registered broker-dealers or affiliates of broker-dealers, and in the event and
to the extent that members of our management sell shares, no commissions or
other remuneration based either directly or indirectly on transactions in
securities will be paid to such persons. In addition, such persons conduct their
selling activity in accordance with paragraph (a)(4)(ii) of Rule 3a4-1, in that
each person primarily performs substantial duties for the issuer other than in
connection with transactions in securities, each person is not a broker or
dealer or affiliated with a broker or dealer in the last twelve months and each
person does not participate in selling an offering of securities more than once
every twelve months other than as permitted under Rule 3a4-1.
Our management have set the offering price range for the new shares to be issued
as part of this offering largely based upon the anticipated cash needs of our
company over the next 18 months. Additional factors considered when determining
the offering price of our shares in this offering are the lack of liquidity in
the shares, and the high level of risk considering our history of losses. See
"Risk Factors."
This prospectus also related to the resale of up to 29,815,789 additional
shares, including : (i) 3,500,000 shares that are issued or issuable upon the
exercise of warrants; and (ii) 26,315,789 shares of our common stock issuable
upon the conversion of certain convertible promissory notes that are held by
certain selling shareholders identified in this prospectus.
The selling stockholders and any of their respective pledges, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
40
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales after this registration statement becomes
effective;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus. The
selling stockholders will have the sole and absolute discretion not to accept
any purchase offer or make any sale of shares if they deem the purchase price to
be unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box after
this registration statement becomes effective, puts and calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder. The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act of 1933.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgee or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or any other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933
41
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.
We are required to pay all fees and expenses incident to the registration of the
shares of common stock. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933.
Each of the selling stockholders acquired the securities offered hereby in the
ordinary course of business and have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act of 1933.
The anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the selling
stockholders.
LEGAL MATTERS
The validity of the common stock has been passed upon by Gersten Savage LLP, New
York, New York.
EXPERTS
Timothy L. Steers, CPA, LLC, have audited, as set forth in their report thereon
appearing elsewhere herein, our financial statements at June 30, 2004 and 2003
and for the year then ended that appear in the prospectus. The financial
statements referred to above are included in this prospectus with reliance upon
the auditors' opinion based on their expertise in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedules that were filed with the registration statement.
For further information with respect to the common stock and us, we refer you to
the registration statement and the exhibits and schedules that were filed with
the registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC at 100 F. Street, N.E., Washington D.C. 20549. Copies of all or any part of
the registration statement may be obtained from the SEC upon payment of the
prescribed fee. Information regarding the operation of the public reference
rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
42
NOVA COMMUNICATIONS LTD.
Table of Contents
Page
Consolidated Financial Statements - September 30, 2005
Consolidated Unaudited Balance sheets as of September 30, 2005
and June 30, 2005 F-2
Consolidated Unaudited Statements of Operations for the Quarters
ended September 30, 2005 and 2004 F-3
Consolidated Unaudited Statement of Cash Flows for the Quarters
ended September 30, 2005 and 2004 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Registered Public Accounting Firm.............. F-9
Consolidated Financial Statements:
Balance sheets................................................... F-10 - F-11
Statements of operations.......................................... F-12
Statements of comprehensive loss.................................. F-13
Statements of stockholders' equity (deficit)...................... F-14
Statements of cash flows.......................................... F-15
Notes to consolidated financial statements........................F-16 - F-30
F-1
NOVA COMMUNICATIONS LTD.
Consolidated Unaudited Balance Sheets as of September 30, 2005
and June 30, 2005
September 30, June 30,
2005 2005
------------------ ------------------
Assets
Current assets:
Cash $ 13,502 $ 46,296
Accounts receivable, less allowance for uncollectible accounts 138,196 401,415
Receivable from related party 148,256 67,603
Prepaid expenses 319,089 326,344
Other current assets 23,004 82,509
------------------ ------------------
Total current assets 642,047 924,167
Equipment, net 10,134,832 10,107,551
Other assets:
Note receivable 139,195 147,036
Deposits & other 324,596 325,075
Other assets 3,000 3,000
------------------ ------------------
Total other assets 466,791 475,111
------------------ ------------------
$ 11,243,670 $ 11,506,829
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,542,831 $ 1,185,731
Accrued liabilities 1,159,877 915,693
Unearned revenue 463,169 521,027
Long-term debt due within one year 1,858,247 1,858,257
Other current liabilities 374,863 265,000
------------------ ------------------
Total current liabilities 5,398,987 4,745,708
Long-term debt to related parties 241,152 241,152
Long-term debt 2,366,983 2,369,694
Stockholders' equity:
Preferred stock; $.001 par value; authorized 200,000 shares;
outstanding 200,000 shares 200 200
Common stock; $.001 par value; authorized 500,000,000
shares; issued and outstanding 8,162,032 shares (6,001,332
shares at June 30, 2005) 8,162 6,001
Common stock to be issued 8,703,927 8,703,927
Convertible promissory note and accrued interest 101,140 101,140
Additional paid in capital 23,002,916 22,998,916
Retained deficit (28,579,797) (27,659,909)
------------------ ------------------
Total stockholders' equity 3,236,548 4,150,275
------------------ ------------------
$ 11,243,670 $ 11,506,829
================== ==================
See accompanying notes.
F-2
NOVA COMMUNICATIONS LTD.
Consolidated Unaudited Statements of Operations for the
Quarters ended September 30, 2005 and September 30, 2004.
Three months ended
September 30
2005 2004
---------------- ---------------
Revenues $ 1,119,416 $ -
Cost of goods sold 276,039 -
---------------- ---------------
Gross profit 843,377 -
General and administrative expenses 1,739,934 305,878
Research and development expenses 647 -
---------------- ---------------
Net loss from operations (897,204) (305,878)
Interest expense, net (22,684) (9,773)
---------------- ---------------
Net loss from operations before provision for income taxes (919,888) (315,651)
Provision for income taxes - State of California - -
---------------- ---------------
Net loss $ (919,888) $ (315,651)
================ ===============
Net loss per common share $ (.152) $ (.084)
================ ===============
F-3
NOVA COMMUNICATIONS LTD.
Consolidated Unaudited Statements of Cash Flows for the
Quarters ended September 30, 2005 and 2004
Three months ended
September 30
2005 2004
----------------- -------------------
Cash flows from operating activities:
Net loss $ (919,888) $ (315,651)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation & amortization 303,197 -
Shares issued in exchange for compensation & services 606,839 317,500
Changes in assets and liabilities:
Receivables 263,219 -
Other assets (13,893) -
Accounts payable 357,100 969
Other liabilities (296,179) (12,674)
----------------- -------------------
300,395 (9,675)
Cash flows from investing activities -
Capital expenditures (330,478) -
Cash flows from financing activities -
Principal payment on long-term debt (2,711)
Advances received from related party - 7,420
----------------- -------------------
(2,711) 7,420
----------------- -------------------
Net change in cash (32,794) (2,255)
Cash at beginning of period 46,296 -
----------------- -------------------
Cash at end of period $ 13,502 $ -
================= ===================
Supplemental schedule of noncash financing activities -
Common stock issued in exchange for accrued notes payable
& accrued interest $ - $ 101,687
================= ===================
F-4
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Condensed Financial Statements
September 30, 2005
1. Summary of significant accounting policies
------------------------------------------
BUSINESS COMBINATIONS AND BASIS OF CONSOLIDATION: The consolidated
condensed financial statements include the accounts of Nova,
AquaXtremes, Inc., Xtreme Engines, Inc., NACIO Systems, Inc., and
Interactive Holding Group, Inc. since their acquisitions and Kadfield,
Inc. until its divestiture. All intercompany accounts and transactions
have been eliminated.
On August 30, 2004, the Company acquired 51% of Realized Development,
Inc. Realized Development, Inc. changed its name to AquaXtremes, Inc.
("Aqua") in December 2004. On May 9, 2005, the Company acquired the
remaining 49% of Aqua.
In December 2004, Aqua formed Xtreme Engines, Inc. ("Engines") and owns
100% of its common stock.
Effective April 1, 2005, the Company acquired 100% of NACIO Systems,
Inc. ("NACIO"). NACIO owns 100% of Interactive Holding Group, Inc.
("IHG").
The Company disposed of its' common stock of Kadfield effective
December 31, 2004.
INTERIM REPORTING: The Company's year-end for accounting purposes is
June 30. In the opinion of Management, the accompanying consolidated
condensed financial statements as of September 30, 2005 and 2004 and
for the three months then ended, consisting of only normal recurring
adjustments, except as noted elsewhere in the notes to the consolidated
condensed financial statements, necessary to present fairly its
financial position, results of its operations and cash flows. The
results of operations for the three months ended September 30, 2005 and
2004 are not necessarily indicative of the results to be expected for
the full year.
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 6,048,177 for the three months ended
September 30, 2005 (3,751,503 for the three months ended September 30,
2004). 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
dilutive.
2. Operations
----------
The Company's operating strategies focus on the development of
recreational water sports products and operating and managing its high
speed Internet access and enterprise server facilities.
The Company has begun selling distributorships for its recreational
water sports products and expects to begin manufacturing and selling
those products in 2006.
F-5
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Condensed Financial Statements
September 30, 2005
2. Operations (continued)
----------------------
Management of the Company believes that operations from the sale of
these products will be profitable by the fourth quarter of 2006 and
that the Company will recover its development costs within five years.
The Company also purchased NACIO effective April 1, 2005. Since its
acquisition, management has pursued aggressive cost cutting programs
and eliminated unprofitable products. Management believes these actions
will enable NACIO to achieve profitable operations.
The Company is dependent upon its ability to obtain additional capital
and debt financing until the Company ultimately achieve profitability,
if ever.
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. Common stock
------------
During the three months ended September 30, 2005, the Board of
Directors authorized the issuance of 2,160,700 shares of common stock
of the Company in exchange for accrued legal fees, management &
consulting services. Management of the Company valued the shares issued
at $.28 per share, the closing bid price of the Company's common stock
on 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.
F-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis contains various forward-looking statements
within the meaning of the Securities and Exchange Act of 1934. These statements
consist of any statement other than a recitation of historical fact and can be
identified by the use of forward looking terminology such as "may", "expect",
"anticipate", "estimates", or "continue" or use of negative or other variations
of comparable terminology. We caution that these statements are further
qualified by important factors that could cause actual results to differ
materially from those contained in our forward looking statements, that these
forward looking statements are necessarily speculative, and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in our forward looking statements.
Management's discussion and analysis should be read in conjunction with the
financial statements and the notes thereto.
EXECUTIVE LEVEL OVERVIEW
The Company's operating strategies focus on the development of recreational
water sports products and managing its high speed Internet access and enterprise
server facilities. The Company has begun selling distributorships for its
recreational water sports products and expects to begin manufacturing and
selling those products in 2006.
Management has also devoted substantial efforts in the operations of NACIO by
pursuing aggressive cost cutting programs and eliminated unprofitable products.
Revenues for NACIO consist of dedicated Internet access fees; hosting,
co-location and ESF fees; sales of third party hardware and software; fees for
systems and technical integration and administration; fees for power and server
connection and connectivity services. Monthly service revenue related to
Internet access, hosting, co-location and ESF.
Revenues for IHG consist of computer software compliance monitoring services and
products.
Revenues for Aqua to date consist of the sale of dealerships.
Nova Communications LTD presently has executive offices at 55 Leveroni Court,
Novato CA. NACIO's enterprise server facilities are also located at that
address. Currently, the only significant business risk of NACIO's operations is
that the electricity to power the ESF is obtained from a single-source supplier,
Pacific Gas & Electric. NACIO has available back-up power generators sufficient
to continue to power their enterprise server facilities in the event of
short-term power losses. However, if the supply of power to NACIO by Pacific Gas
& Electric were delayed or curtailed, the ability of NACIO to provide services
to its customers could be adversely affected.
F-7
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2005 compared to the three months ended
------------------------------------------------------------------------
September 30, 2004:
-------------------
Three months ended June 30:
----------------------------------------------------------
2005 2004 Increase %
------------ ------------ ------------- ------------
Sales $ 1,119,416 $ - $ 1,119,416 -%
============ ============ ============= ============
The increase in sales was attributable to the two factors: (1) the purchase of
NACIO effective April 1, 2005, and (2) Aqua began selling dealerships.
Three months ended June 30:
---------------------------------------------------------
2005 2004 Increase %
------------ ------------ ------------ ------------
Cost of sales $ 276,039 $ - $ 276,039 -%
============ ============ ============ ============
The increase in the cost of sales was attributable to the purchase of NACIO
effective April 1, 2005. Cost of sales related entirely to NACIO's products.
Three months ended June 30:
----------------------------------------------------------
2005 2004 Increase %
------------ ------------ ------------ -------------
General and administrative expenses $ 1,739,934 $ 305,878 $ 1,434,056 469%
============ ============ ============ =============
The increase in selling, general & administrative expenses was attributable to
two factors: the purchase of NACIO effecting April 1, 2005, and (2) the issuance
of common stock for services increased $289,339.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005 compared to June 30, 2005:
September 30, June 30,
2005 2005 (decrease) %
-------------- ------------- ------------- -------------
Accounts receivable, net $ 138,196 $ 401,415 $ (263,219) (65.6)
============== ============= ============= =============
The decrease in accounts receivable was attributed to NACIO placing a priority
in collecting accounts receivable more timely.
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
Nova Communications Ltd.
We have audited the accompanying consolidated balance sheets of Nova
Communications Ltd. as of June 30, 2005 and 2004, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity (deficit),
and cash flows for each of the two years in the period ended June 30, 2005.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall 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 the Company as of
June 30, 2005 and 2004 and the results of its operations and its cash flows for
each of the two years in the period ended June 30, 2005, in conformity 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's significant operating losses
and working capital deficit raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
TIMOTHY L. STEERS, CPA, LLC
Portland, Oregon
August 19, 2005
F-9
NOVA COMMUNICATIONS LTD.
Balance Sheets
June 30
-------------------------------------
2005 2004
---------------- ----------------
ASSETS
------
Current assets:
Cash $ 46,296 $ 2,255
Accounts receivable, less allowance for uncollectible
accounts of $140,025 401,415 -
Other receivables 27,570 -
Receivable from related party 67,603 -
Inventories 44,020 -
Note receivable due within one year 10,919 -
Prepaid expenses 326,344 -
Current assets of discontinued operations, net - 51,435
---------------- ----------------
Total current assets 924,167 53,690
Property & equipment:
Equipment 7,201,198 21,710
Furniture 229,872 1,278
Website 48,577 -
Leasehold improvements 7,142,345 -
---------------- ----------------
14,621,992 22,988
Less accumulated depreciation & amortization (4,514,441) (21,710)
---------------- ----------------
Net property & equipment 10,107,551 1,278
Equipment of discontinued operations, net - 140,221
Other assets:
Note receivable 147,036 -
Advances receivable - 723,506
Patents & trademarks 3,000 -
Deposits & other 325,075 -
Other assets of discontinued operations, net - 62,811
---------------- ----------------
Total other assets 475,111 786,317
---------------- ----------------
$ 11,506,829 $ 981,506
================ ================
Continued.
F-10
NOVA COMMUNICATIONS LTD.
Balance Sheets (continued)
June 30
-------------------------------------
2005 2004
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,185,731 $ 164,205
Accrued payroll & payroll related liabilities 171,571 215,772
Income taxes payable 3,200 2,400
Accrued interest 199,065 27,229
Other accrued liabilities 541,857 55,000
Unearned revenue 521,027 -
Notes payable 35,000 -
Convertible notes payable, net of unamortized
discount due to beneficial conversion feature 230,000 416,500
Long-term debt due within one year 1,828,257 -
Long-term debt to related parties due within one year 30,000 -
Current liabilities of discontinued operations - 393,984
---------------- ----------------
Total current liabilities 4,745,708 1,275,090
Payable to related party - 441,232
Long-term debt to related parties 241,152 -
Long-term debt 2,369,694 -
Stockholders' equity (deficit):
Preferred stock; $.001 par value; authorized 200,000 shares:
Series A - 100,000 shares designated, issued and
outstanding 100 -
Series B - 100,000 shares designated, issued and
outstanding 100 -
Common stock; $.001 par value; authorized
500,000,000 shares; outstanding 6,001,332 shares in
2005 (3,439,815 shares in 2004) 6,001 3,440
Common stock to be issued 8,703,927 753,927
Convertible promissory note and accrued interest 101,140 -
Additional paid-in capital 22,998,916 20,749,385
Retained deficit (27,659,909) (22,241,568)
---------------- ----------------
Total stockholders' equity (deficit) 4,150,275 (734,816)
---------------- ----------------
$ 11,506,829 $ 981,506
================ ================
See accompanying notes.
F-11
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Operations
Years ended June 30
---------------------------------
2005 2004
---------------- --------------
Sales $ 1,316,697 $ -
Cost of sales 299,013 -
---------------- --------------
Gross profit 1,017,684 -
Other operating income - 7,586
Operating expenses:
Selling, general & administrative 5,605,789 3,728,085
Research & development 744,677 -
---------------- --------------
Total operating expenses 6,350,466 3,728,085
---------------- --------------
Net operating loss (5,332,782) (3,720,499)
Other expenses:
Loss on available-for-sale investments - (497,757)
Interest expense (222,676) (89,946)
---------------- --------------
Total other expenses (222,676) (587,703)
---------------- --------------
Net loss before provision for income taxes (5,555,458) (4,308,202)
Provision for income taxes (2,400) (800)
---------------- --------------
Net loss from continuing operations (5,557,858) (4,309,002)
Discontinued operations:
Net gain (loss) on disposal, net of benefit for income taxes 139,517 (16,870)
Net loss, net of benefit for income taxes - (116,910)
---------------- --------------
Net income (loss) from discontinued operations 139,517 (133,780)
---------------- --------------
Net loss $ (5,418,341) $ (4,442,782)
================ ===============
Net income (loss) per common share:
Continuing operations $ (1,28) $ (1.35)
================ ===============
Discontinued operations $ .03 $ (.04)
================ ===============
See accompanying notes.
F-12
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Comprehensive Loss
Years ended June 30
--------------------------------
2005 2004
--------------- ---------------
Net loss $ (5,418,341) $ (4,442,782)
Realized loss on available-for-sale investments - 465,132
--------------- ---------------
Comprehensive loss $ (5,418,341) $ (3,977,650)
=============== ===============
Comprehensive loss per common share $ (1.25) $ (1.24)
=============== ===============
See accompanying notes.
F-13
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Stockholders' Equity (Deficit)
July 1, 2003 through June 30, 2005
Convertible Unrealized Total
promissory holding loss stock-
Preferred stock Common stock Common note and Additional from available holders'
-------------- ---------------- stock to accrued paid-in Retained -for-sale equity
Shares Amount Shares Amount be issued interest capital deficit investments (deficit)
------------------------ ------- ------ --------- ------ ---------- ----------- ------------ ------------ ----------- ------------
Balance at July 1, 2003 - $ - 2,957,314 $2,957 $ - $ - $ 16,979,504 $(17,798,786) $ (465,132) $(1,218,457)
Common stock to be
issued in exchange
for long-term debt
and interest - - - - - - - - - 753,927
Common stock issued in
exchange for
accrued payroll - - 45,000 45 - - 89,555 - - 90,000
Common stock issued in
exchange for services - - 437,501 438 - - 3,532,926 - - 3,533,364
Beneficial conversion
feature of convertible
notes payable - - - - - - 147,000 - - 147,000
Comprehensive loss - - - - - - - (4,442,782) 465,132 (3,977,650)
------- ---- --------- ----- ---------- ------- ----------- ------------ --------- ------------
Balance at June 30, 2004 - - 3,439,815 3,440 753,927 - 20,749,385 (22,241,568) - (734,816)
Common stock issued - - 50,000 50 (50,000) - 49,950 - - -
Common stock issued
for cash - - 68,965 69 - - 49,931 - - 50,000
Common stock issued
upon conversion of
notes payable &
accrued interest - - 1,110,000 1,110 - - 551,507 - - 552,617
Common stock issued in
exchange for
accrued payroll - - 60,000 60 - - 179,940 - - 180,000
Common stock issued in
exchange for services - - 1,272,552 1,272 - - 977,002 - - 978,274
Series "A" Preferred
stock issued in
exchange for payable
to related party 100,000 100 - - - - 363,051 - - 363,151
Common stock to be
issued in exchange for
subsidiary - - - - 8,000,000 - - - - 8,000,000
Series "B" Preferred
stock & convertible
promissory note in
exchange for
subsidiary 100,000 100 - - - 100,000 150 - - 100,250
Accrued interest on
convertible promissory
note - - - - - 1,140 - - - 1,140
Beneficial conversion
feature of convertible
notes payable - - - - - - 78,000 - - 78,000
Comprehensive loss - - - - - - - (5,418,341) - (5,418,341)
------- ---- --------- ----- ---------- ------- ----------- ----------- --------- -----------
Balance at June 30, 2005 200,000 $200 6,001,332 $6,001 $8,703,927 $101,140 $22,998,916 $(27,659,909) $ - $ 4,150,275
======= ==== ========= ===== ========== ======= =========== ============ ========= ============
See accompanying notes.
F-14
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows
Years ended June 30
---------------------------------
2005 2004
--------------- --------------
Cash flows from operating activities:
Net loss from continuing operations $ (5,557,858) $ (4,309,002)
Adjustments to reconcile net loss to net cash provide by operating
activities:
Depreciation & amortization 330,407 13,523
Provision for uncollectible advances receivable 737,590 -
Common stock issued for services & compensation 978,274 3,533,364
Unearned revenue 13,604 -
Write-off of excess purchase price of subsidiaries 2,896,666 -
Amortization of beneficial conversion feature 151,500 73,500
Loss on available-for-sale investments - 497,757
Changes in assets and liabilities, net of purchase of subsidiaries:
Accounts receivable 78,616 -
Inventories 12,144 -
Prepaid expenses (88,073) -
Deposits & other assets (408) 1,478
Accounts payable 104,637 (9,777)
Accrued liabilities 488,018 424,874
-------------- -------------
145,117 225,717
Cash flows from discontinued operations - (27,834)
Cash flows from investing activities:
Principal repayments on notes receivable - 26,873
Advances paid on behalf of related parties (67,603) -
Advances paid - (723,506)
Purchase of subsidiaries, net of cash acquired 8,136 -
Capital expenditures (439,761) -
Patents & trademarks expenditures (3,000) -
-------------- -------------
(502,228) (696,633)
Cash flows from financing activities:
Borrowings under convertible notes payable 260,000 490,000
Borrowings under notes payable 35,000 -
Borrowings under notes payable to related parties 106,152 -
Net financing activities of discontinued operations - 10,964
-------------- -------------
401,152 500,964
-------------- -------------
Net increase in cash 44,041 2,214
Cash at beginning of year 2,255 41
-------------- -------------
Cash at end of year $ 46,296 $ 2,255
============== =============
See accompanying notes.
F-15
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
June 30, 2005
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.
Business combinations and basis of consolidation: The 2005 consolidated
financial statements include the accounts of Nova, AquaXtremes, Inc.,
Xtreme Engines, Inc., NACIO Systems, Inc., and Interactive Holding
Group, Inc. since their acquisitions and Kadfield, Inc. until its
divestiture. The 2004 consolidated financial statements include the
accounts of Nova and Kadfield, Inc. All intercompany accounts and
transactions have been eliminated.
On August 30, 2004, the Company acquired 51% of Realized Development,
Inc. Realized Development, Inc. changed its name to AquaXtremes, Inc.
("Aqua") in December 2004. On May 9, 2005, the Company acquired the
remaining 49% of Aqua. Aqua is developing recreational water sports
products.
In December 2004, Aqua formed Xtreme Engines, Inc. ("Engines") and owns
100% of its common stock. Engine' is developing a marine engine for use
in recreational water sports products.
Effective April 1, 2005, the Company acquired 100% of NACIO Systems,
Inc. ("NACIO"). NACIO is an integrated communications provider ("ICP")
of high speed Internet access to businesses and provides enterprise
server facilities ("ESF"), offering a fully serviced managed server
program. Its' customers are generally business customers located
throughout the United States. NACIO owns 100% of Interactive Holding
Group, Inc. ("IHG"). IHG provides computer software compliance
monitoring services and products.
On July 21, 2003 the Company decided to dispose of Kadfield. Kadfield
has been accounted for as a discontinued operation and the results of
operations have been excluded from continuing operations in the
consolidated statements of operations for all periods presented. The
Company disposed of its' common stock of Kadfield effective December
31, 2004.
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 deposits their cash in financial institutions. At various
times throughout the year, cash held in these accounts exceeded Federal
Deposit Insurance Corporation limits. The Company has not experienced
any losses as a result of these cash concentrations.
F-16
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories: Inventories consist of computer server hardware, software
and software service agreements purchased for resale. Inventories are
reported at the lower of cost (using the specific identification
method) or market.
Property & equipment: Property & equipment are carried at cost.
Equipment & furniture is depreciated using the straight-line method
over the estimated useful lives of the depreciable assets, which range
from five to fifteen years. Leasehold improvements are depreciated
using the straight-line method over the lesser of the term of the lease
or the estimated useful lives of the assets, which range from five to
fifteen years. Website development costs are amortized using the
straight-line method over the estimated useful life of five years.
The Company accounts for website development costs under Emerging
Issues Task Force ("EITF") Issue No. 00-2, "Accounting for Web Site
Development Costs". Under EITF 00-2, costs that involve design of the
web page that do not change the content are capitalized and amortized
over the estimated useful life. The Company accounts for costs incurred
in operating their website under the American Institute of Certified
Public Accountants Statement of Position ("SOP") No. 98-1, "Accounting
for the Cost of Computer Software Developed for Internal Use". Under
SOP 98-1, costs that have a future benefit are capitalized and
amortized over the estimated future periods that are expected to
benefit from website changes. Costs incurred in operating the web site
that have no future benefits are expensed in the current period.
Computer software obtained or developed for internal use is also
capitalized in accordance with SOP 98-1. Amortization is computed using
the straight-line method over the estimated useful lives of the
software, which range from three to five years.
Impairment of long-lived assets: The Company assesses 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.
Revenue recognition: Revenues for NACIO consist of dedicated Internet
access fees; hosting, co-location and ESF fees; sales of third party
hardware and software; fees for systems and technical integration and
administration; fees for power and server connection and connectivity
services.
F-17
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition (continued): Monthly service revenue related to
Internet access, hosting, co-location and ESF is recognized over the
period services are provided. Service and equipment installation
revenue is recognized at completion of installation and upon
commencement of services. Payments received in advance of providing
services are deferred until the period such services are provided,
except in the case of non-refundable payments including last-month
deposits, which are recognized when service is initiated. Equipment
sales and installation revenue is recognized when installation is
completed.
Revenues for IHG consist of computer software compliance monitoring
services and products. Service revenues related to software compliance
monitoring are generally billed annually recognized ratably over the
period services are provided. Software product sales are recognized
when software is provided.
Revenues for Aqua consist of the sale of dealerships and are recognized
when dealership agreements are signed.
Advertising: The Company expenses advertising costs as they are
incurred.
Share-based payments: The Company uses a fair value based method of
accounting for share-based payments under Financial Accounting
Statement ("SFAS") No. 123R "Share-Based Payment, an amendment of FASB
Statements Nos. 123 and 95". Under SFAS 123R, share-based payment
transactions in which the Company receives services from employees and
non-employees, in exchange for either equity instruments of the Company
or liabilities that may be settled by the issuance of such equity
instruments, are valued at the fair value of the Company's equity
instruments and expensed in the consolidated statement of operations at
the time of issuance.
Reporting comprehensive income: The Company reports and displays
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 for 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
F-18
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes (continued): enactment date. The Company provides a
valuation allowance for certain deferred tax assets if it is more
likely than not that the Company will not realize tax assets through
future operations.
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 4,341,266 for the year ended June 30, 2005
(3,198,564 for 2004). Convertible notes payable and common stock to be
issued are not considered to be common stock equivalents as the effect
on net loss per common share would be anti-dilutive.
Segment Reporting: The Company reports information about operating
segments and related disclosures about products and services and major
customers in accordance with SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information". The Company views its
operations and manages its business in principally three segments: (1)
the development of recreational water sports products; (2) the provider
of high speed Internet access and enterprise server facilities; and (3)
the provider of computer software compliance monitoring services.
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. 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's operating strategies focus on the development of
recreational water sports products and operating and managing its high
speed Internet access and enterprise server facilities.
The Company had been providing funding to a company that was developing
recreational water sports products and had advanced this company
approximately $723,500 through August 30, 2004. On that date, the
Company ceased providing funding to this company because they had
failed to achieve certain development benchmarks and began directly
developing similar recreational water sports products. The Company
wrote-off its advances receivable to this company as management deemed
it uncollectible.
The Company has begun selling distributorships for its recreational
water sports products and expects to begin manufacturing and selling
those products in 2006.
F-19
2. OPERATIONS (CONTINUED)
Management of the Company believes that operations from the sale of
these products will be profitable by the fourth quarter of 2006 and
that the Company will recover its development costs within five years.
The Company also purchased NACIO effective April 1, 2005. Since its
acquisition, management has pursued aggressive cost cutting programs
and eliminated unprofitable products. Management believes these actions
will enable NACIO to achieve profitable operations.
The Company is dependent upon its ability to obtain additional capital
and debt financing until the Company ultimately achieve profitability,
if ever.
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 COMBINATIONS
On August 30, 2004, the Company acquired 51% of Aqua in a business
combination accounted for as a purchase. Aqua was dormant at the time
of acquisition and had no assets or liabilities. The Company paid
$1,750 for Aqua which was expensed. On May 9, 2005, the Company
acquired the remaining 49% of Aqua in exchange for 100,000 shares of
Series "B" preferred stock of Nova and $100,000 in the form of a
convertible promissory note payable. The aggregate purchase price was
valued at $102,000. Management determined that it was uncertain if they
would be able to recover the aggregate purchase price of Aqua and
charged that amount to operations.
The 100,000 shares of Nova's Series "B" preferred stock were valued at
$.0025 per share or $250. Management of the Company estimated the value
of the preferred shares exchanged after considering the historical
trend of the trading prices for its common stock and the limited volume
of shares being traded.
The convertible promissory note bears interest at 8% per annum and is
due quarterly over thirty-six months from the date of the note. Payment
of principal and interest of the note will be made solely by the
issuance of 40,000,000 shares of the common stock of Nova.
Effective April 1, 2005, Nova acquired 100% of the common stock of
NACIO in exchange for $8,000,000 of common stock of Nova. The business
combination was accounted for as a purchase.
F-20
3. BUSINESS COMBINATIONS (CONTINUED)
The acquisition of NACIO is summarized as follows:
Purchase price $ 8,000,000
Fair value of assets acquired:
Cash 10,186
Property & equipment 9,996,919
Other assets 1,301,411
-------------
11,308,516
Fair value of liabilities assumed (6,104,932)
-------------
Fair value of net assets acquired 5,203,584
-------------
Excess purchase price over fair value
of net assets acquired $ 2,796,416
=============
Management determined that they would not be able to recover the excess
purchase price over the estimated fair value of the net assets of NACIO
of $2,796,416 and charged that amount to operations.
The results of operations of NACIO are included in the accompanying
consolidated financial statements as of April 1, 2005. The following
pro forma summary presents consolidated financial position and results
of operations as if NACIO had been acquired as of July 1, 2003:
June 30
2005 2004
----------------- ----------------
Current assets $ 924,000 $ 826,000
Property & equipment 10,108,000 10,799,000
Total assets 10,798,000 12,160,000
Current liabilities 4,746,000 3,955,000
Long-term liabilities 2,611,000 3,425,000
Total stockholders' equity 3,441,000 4,780,000
Years ended June 30
2005 2004
----------------- ----------------
Net sales $ 4,713,000 $ 4,001,000
Gross profit 3,566,000 2,961,000
Operating expenses 6,651,000 11,748,000
Net loss (3,079,000) (9,455,000)
Loss per common share (.71) (2.96)
The above amounts are based upon certain assumptions and estimates,
which the Company believes are reasonable. The pro forma financial
position and results of operations do not purport to be indicative of
the results which would have been obtained had the business combination
occurred as of July 1, 2003 or which may be obtained in the future.
F-21
4. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows for the
years ended June 30:
2005 2004
--------------- ---------------
Cash paid for interest $ - $ 7,314
=============== ===============
Supplemental schedule of noncash financing activities are as follows
for the years ended June 30:
2005 2004
--------------- ---------------
Common stock issued in exchange for accrued payroll $ 180,000 $ 90,000
=============== ===============
Common stock issued upon conversion of notes
payable and accrued interest $ 552,617 $ -
=============== ===============
Preferred stock issued in exchange for payable to
related party $ 363,151 $ -
=============== ===============
Common stock issued in exchange for long-term debt $ - $ 753,927
=============== ===============
Common stock to be issued in exchange for subsidiary $ 8,000,000 $ -
=============== ===============
Preferred stock and convertible note payable issued in
exchange for subsidiary $ 100,250 $ -
=============== ===============
Net cash acquired from purchase of subsidiaries during the year ended
June 30, 2005 is as follows:
Consideration paid $ 8,102,000
Fair value of assets acquired (11,337,830)
Liabilities assumed 6,140,932
--------------
Excess of purchase price over net assets acquired 2,905,102
Excess of purchase price expensed 2,896,666
--------------
Net cash acquired $ 8,436
==============
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at June 30:
2005 2004
------------- ------------
Professional fees $ 220,612 $ 55,000
Sales taxes 2,638 -
Sales costs 318,607 -
------------- ------------
Total other accrued liabilities $ 541,857 $ 55,000
============= ============
F-22
6. CONVERTIBLE NOTES PAYABLE
Notes payable are due one year from the date of borrowings plus
interest at a rate of 8% per annum and are unsecured. The notes and any
unpaid interest may be convertible into shares of common stock of the
Company at conversion rates ranging from 50% to 75% of the closing bid
price of the Company's common stock on the date of conversion. The
notes may be converted at the option of the Company, but not before six
months, and at the option of the holder, but not before one year from
the date of the notes and only if certain events have occurred.
The Company accounted for the fixed percentage conversion feature of
the notes payable under EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios". Under EITF 98-5, the beneficial
conversion feature is calculated at the difference between the
conversion price and the fair value of the common stock into which the
debt is convertible at the commitment date. The portion of the proceeds
from the note that represents the beneficial conversion feature is
allocated to additional paid-in-capital. This debt discount is
amortized to interest expense using the interest method over the life
of the conversion feature. During the year ended June 30, 2005, the
Company received proceeds of $260,000 under convertible note agreements
and computed a beneficial conversion amount of $78,000 (the Company
received proceeds of $490,000 under convertible note agreements and
computed a beneficial conversion amount of $147,000 in 2004). The
Company amortized $151,500 of the beneficial conversion feature during
the year ended June 30, 2005 ($73,500 during 2004).
During the year ended June 30, 2005, holders converted $552,617 of
notes and accrued interest into 1,110,000 shares of the Company's
common stock.
7. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30:
2005 2004
-------------- --------------
Claims allowed under Plan of Reorganization of NACIO; payable
$800,000 by September 2006 and $20,000 per month plus 5% of the
first $200,000 of gross revenues in excess of $400,000, then 7% of
the next $200,000 of gross revenues, then 10% of the next $200,000
of gross revenues; over a five year period;
unsecured $ 4,197,951 $ -
Less principal due within one year 1,828,257
-------------- --------------
Long-term obligations $ 2,369,694 $ -
============== ==============
F-23
7. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt are as follows for the years ending
subsequent to June 30, 2006:
Years ending June 30:
2007 $ 789,898
2008 789,898
2009 789,898
--------------
$ 2,369,694
Long-term debt to relate parties consisted of the following at June 30:
2005 2004
-------------- --------------
Notes payable to an employee; due $2,500 per
month with interest at 6% per annum; unsecured $ 111,642 $ -
Notes payable to shareholders and directors;
unsecured and due on demand. The holders of
these notes have agreed not to demand
repayment before October 2006. 159,510 -
-------------- --------------
271,152 -
Less principal due within one year 30,000 -
-------------- --------------
Long-term debt to related parties $ 241,152 $ -
============== ==============
Future maturities of long-term debt to related parties are as follows
for the years ending subsequent to June 30, 2006:
Years ending June 30:
---------------------
2007 $ 191,152
2008 30,000
2009 20,000
--------------
$ 241,152
8. OTHER RELATED PARTY TRANSACTIONS
The Company occasionally pays for expenses on behalf of Palaut
Management, Inc. ("Palaut"). Palaut provides the Company with
management consulting services. Close family members of a stockholder
of Nova control Palaut Management, Inc.
9. LEASE COMMITMENTS
The Company leases its office and enterprise server facilities under a
non-cancelable agreement that expires in August 2010. Minimum lease
payments under the agreement are $38,000 per month with a provision for
annual increases based
F-24
9. LEASE COMMITMENTS (CONTINUED)
on the consumer price index. The lease agreement contains renewal
provisions for up to ten additional years.
Minimum lease payments are as follows:
Years ending June 30:
---------------------
2006 $ 456,000
2007 456,000
2008 456,000
2009 456,000
2010 456,000
2011 76,000
--------------
$ 2,356,000
Lease expense for the year ended June 30, 2005 was approximately
$117,400
10. PREFERRED STOCK
The Company's preferred stock may be voting or have other rights and
preferences as determined from time to time by the Board of Directors.
In December 2004, the Company designated 100,000 shares of its'
preferred stock as Series "A".
On December 31, 2004, the Board of Directors of the Company agreed to
exchange payables to a related party aggregating $363,151 for 100,000
shares of its' Series "A" preferred stock.
On January 17, 2005, the Board of Directors amended the rights of its'
100,000 Series "A" preferred stock to be convertible, at the option of
the Company, into 1,000,000 shares of its common stock. The Company has
reserved 1,000,000 shares of its common stock to be issued in the event
of conversion. Also on January 17, 2005, the Board of Directors of the
Company increased the authorized preferred shares to 200,000.
In June 2005, the Board of Directors designated 100,000 shares of its
preferred stock as Series "B". They further resolved that the Series
"B" preferred stock be entitled to dividends in the same manner as
holders of common stock; be entitled to vote on all matters at 250
votes per share as a single class of shareholder; and be entitled to
liquidation preferences in the same manner as holders of common stock.
F-25
11. COMMON STOCK
In December 2004, the Board of Directors authorized the sale of 68,965
shares of common stock of the Company to an individual for $50,000.
During the fiscal year ended June 30, 2005, the Company issued an
aggregate of 1,272,552 shares of its common stock in exchange for legal
and consulting services. Management of the Company valued the shares
issued at the closing bid price of the Company's common stock on the
date of issuance 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 and consulting fees aggregating
$978,274 during the year ended June 30, 2005 as a result of the
issuances.
In December 2003, the Board of Directors authorized the issuance of
150,000 shares of common stock of the Company to PFK Development Group
in exchange for a note payable and accrued interest of $753,927.
Management of the Company valued the shares issued at $.05 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 issued after considering the historical trend of the
trading prices for its common stock and the limited volume of shares
being traded.
During the fiscal year ended June 30, 2004, the Board of Directors
authorized the issuance of an aggregate of 437,501 shares of common
stock of the Company in exchange for management and consulting
services. Management of the Company valued the shares issued at the
closing bid price of the Company's common stock on the date of issuance
after considering the historical trend of the trading prices for its
common stock and the limited volume of shares being traded. The Company
recorded management and consulting fees aggregating $3,533,364 during
the year ended June 30, 2004 as a result of the issuances.
12. STOCK BASED COMPENSATION
On January 21, 2004, the Board of Directors authorized the issuance of
60,000 shares of common stock of the Company in exchange for $180,000
of accrued payroll to its president. Management of the Company valued
the shares issued at $3.00 per share, the closing bid price of the
Company's common stock on the date of issuance. Management of the
Company estimated the value of the Company's shares issued after
considering the historical trend of the trading prices for its common
stock and the limited volume of shares being traded.
On May 14, 2004, the Board of Directors authorized the issuance of
45,000 shares of common stock of the Company in exchange for $90,000 of
accrued payroll to its president. Management of the Company valued the
shares issued at $2.00 per share, the closing bid price of the
Company's common stock on the date of issuance. Management of the
Company estimated the value of the Company's shares issued
F-26
12. STOCK BASED COMPENSATION (CONTINUED)
after considering the historical trend of the trading prices for its
common stock and the limited volume of shares being traded.
During the year ended June 30, 2004, the Company issued an aggregate of
305,000 shares of its common stock to its president as compensation for
services. Compensation expense of $615,000 was recorded for the year
ended June 30, 2004 for the fair value of the services rendered.
During the year ended June 30, 2004, the Company issued an aggregate of
108,500 shares of its common stock to employees as compensation for
services. Compensation expense of $114,000 was recorded for the year
ended June 30, 2004 for the fair value of the services rendered.
13. INCOME TAXES
Deferred income taxes consisted of the following at June 30:
2005 2004
---------------- ---------------
Deferred tax assets:
Net operating loss carryovers $ 6,736,998 $ 5,025,906
Allowance for uncollectible accounts 47,608 -
---------------- ---------------
Deferred tax assets 6,784,606 5,025,906
Valuation allowance for deferred tax assets (6,784,606) (5,025,906)
---------------- ---------------
Net deferred income taxes $ - $ -
================ ===============
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 June 30, 2005 and
2004.
The components of the provision for income taxes are as follows for the
years ended June 30:
2005 2004
----------- -----------
State of California -
Currently payable $ 2,400 $ 800
=========== ===========
F-27
13. INCOME TAXES (CONTINUED)
The provision for income taxes is included in the accompanying
consolidated statement of operations under the following captions for
the years ended June 30:
2005 2004
----------- -----------
Continuing operations $ 2,400 $ 800
Discontinued operations - -
----------- ----------
$ 2,400 $ 800
=========== ==========
Reconciliation of income taxes computed at the Federal statutory rate
of 34% to the provision for income taxes is as follows for the years
ended June 30:
2005 2004
---------------- ----------------
Tax at statutory rates $ (1,842,236) $ (1,510,546)
Differences resulting from:
State tax, net of Federal tax benefit 1,584 528
Non-deductible and other items 84,352 25,818
Change in deferred tax valuation allowance 1,758,700 1,485,000
---------------- ----------------
Provision for income taxes $ 2,400 $ 800
================ ================
The Company has approximately $19,814,700 in Federal net operating
losses which, if not utilized, expire through 2024.
Utilization of the net operating loss carryforwards could be limited
due to restrictions imposed under Federal laws upon a change in
ownership. The amount of the limitation, if any, has not been
determined at this time.
14. 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: (1) the development of recreational water sports
products; (2) the provider of high speed Internet access and ESF; and
(3) the provider of computer software compliance monitoring services.
Financial information by business segment for the year ended June 30,
2005 is as follows:
Recreational High speed Computer
water sports Internet software Total
products and ESF compliance segment
---------------- ----------------- --------------- ----------------
Sales $ 210,040 $ 977,478 $ 129,179 $ 1,316,697
Gross profit 210,440 678,065 129,179 1,017,684
F-28
14. SEGMENT INFORMATION (CONTINUED)
Recreational High speed Computer
water sports Internet software Total
products and ESF compliance segment
---------------- ----------------- --------------- ----------------
Net operating loss (2,125,599) (457,394) (79,786) (2,436,116)
Identifiable assets 174,451 10,990,315 342,063 11,506,829
Depreciation &
amortization - 330,407 - 330,407
Reconciliation of the segment information to consolidated net operating
loss for the year ended June 30, 2005 is as follows:
Segment net operating loss $ (2,436,116)
Write-off of excess purchase price of subsidiaries (2,896,666)
----------------
Consolidated net operating loss $ (5,332,782)
================
15. CONCENTRATION RISK
NACIO grants credit to its customers, generally businesses located
throughout the United States. NACIO determines the credit worthiness of
its customers after reviewing each potential borrower's credit
application and generally does not require collateral. Trade
receivables are generally due within 30 days; approximately $107,500 of
trade receivables as of June 30, 2005 is past 30 days. The ability of
NACIO to collect its accounts receivable is affected by the economic
fluctuations of the industries of the Company's customers, and
interest-rate changes. Due to the large number and diversity of NACIO's
customer base, concentration of credit risk with respect to trade
receivables are limited.
NACIO's enterprise server facilities are located in Novato, California
and electricity to power the facilities is obtained from a
single-source supplier, Pacific Gas & Electric. NACIO has available
back-up power generators sufficient to continue to power their
enterprise server facilities in the event of short-term power losses.
However, if the supply of power to NACIO by Pacific Gas & Electric were
delayed or curtailed, the ability of NACIO to provide services to its
customers could be adversely affected.
16. RECENTLY ISSUED PRONOUNCEMENTS
In July 2004, the Emerging Issues Task Force issued a draft abstract
for EITF 04-08, "The Effect of Contingently Convertible Debt on Diluted
Earnings per Share". EITF 04-08 reflects the Task Force's tentative
conclusion that contingently convertible debt should be included in
diluted earnings per share computations regardless of whether the
market price trigger has been met. If adopted, the consensus reached by
the Task Force in this Issue will be effective for reporting periods
ending after December 15, 2004. Prior period earnings per share amounts
presented for comparative purposes would be required to be restated to
conform to this consensus
F-29
16. RECENTLY ISSUED PRONOUNCEMENTS (CONTINUED)
and the Company would be required to include the shares issuable upon
the conversion of its convertible notes payable in the diluted earnings
per share computation for all periods during which the convertible
notes payable are outstanding. Management does not expect the
implementation of this new standard to have a material impact on its
computation of diluted earnings per share.
In November 2004, the Financial Accounting Standards Board Statement
issued SFAS 151, "Inventory Costs". SFAS 151 provides guidance on
allocating certain costs to inventory and clarified that abnormal
amounts of idle facility expense, freight, handling costs, and wasted
materials should be recognized as current-period charges. In addition,
SFAS 151 requires allocation of fixed production overheads to the cost
of conversion be based on normal capacity of the production facilities.
The effective date of this standard is for fiscal years beginning after
June 15, 2005, and implementation is prospectively. Management does not
expect the implementation of this new standard to have a material
impact on its consolidated financial position, results of operations
and cash flows.
In December 2004, the FASB issued a revision to SFAS 123R, "Share-Based
Payment, an amendment of FASB Statements Nos. 123 and 95," that
addresses the accounting for share-based payment transactions in which
a Company receives employee services in exchange for either equity
instruments of the Company or liabilities that are based on the fair
value of the Company's equity instruments or that may be settled by the
issuance of such equity instruments. This statement would eliminate the
ability to account for share-based compensation transactions using the
intrinsic method and generally would require that such transactions be
accounted for using a fair-value-based method and recognized as expense
in the consolidated statement of operations. The effective date of this
standard is for periods beginning after June 15, 2005. The Company
previously adopted the fair-value-based method of valuing share-based
payments and management does not expect any further impact of this new
standard to have a material effect on its' consolidated financial
position, results of operations and cash flows.
In December 2004, the Financial Accounting Standards Board Statement
issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of
APB Opinion No. 29", by eliminating the exception for non-monetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No.153 is effective for
fiscal years beginning after June 15, 2005, and implementation is
prospectively. Management does not expect the implementation of this
new standard to have a material impact on its consolidated financial
position, results of operations and cash flows.
F-30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,018.09
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 4,304.50
TOTAL $ 50,322.59*
-------------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to a Stock Exchange Agreement with Seven Angels Ventures LLC ("SAV")
dated October 20, 2003, Nova Communications Ltd. agreed to issue 3,300,000
shares of its common stock to SAV in exchange for the issuance to Nova of
133,000 shares of common stock of Epic Financial Corp. held by SAV.
Between August 20, 2003 and December 29, 2003, the Company issued an aggregate
of $490,000 of its Convertible Promissory Notes to a select group of investors
totaling 19 persons.
On December 2, 2003, the Company issued 4,000,000 shares of its common stock to
Kenneth D. Owen, the Company's President and CEO.
43
In March 2003, the Board of Directors authorized the issuance of 100,000 shares
of common stock of the Company in exchange for notes payable of $625,000 and
accrued liabilities of $297,197 to a related party. Management of the Company
valued the shares issued at $.09 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 December 2003, the Board of Directors authorized the issuance of 150,000
shares of common stock of the Company to PFK Development Group in exchange for a
note payable o $753,927. Management of the Company valued the shares issued at
$.05 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.
During 2003, the Board of Directors authorized the issuance of an aggregate of
1,880,232 shares of common stock of the Company in exchange for services.
Management of the Company valued the shares issued at the closing bid price of
the Company's common stock on the date of issuance after considering the
historical trend of the trading prices for its common stock and the limited
volume of shares being traded. The Company recorded consulting fees aggregating
$3,557,328 during the year ended December 31, 2003 as a result of the issuances.
On January 21, 2004, the Board of Directors authorized the issuance of 60,000
shares of common stock of the Company in exchange for $180,000 of accrued
payroll. Management of the Company valued the shares issued at $3.00 per share,
the closing bid price of the Company's common stock on 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.
On May 14, 2004, the Board of Directors authorized the issuance of 45,000 shares
of common stock of the Company in exchange for $90,000 of accrued payroll.
Management of the Company valued the shares issued at $2.00 per share, the
closing bid price of the Company's common stock on 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 December 2004, the Board of Directors authorized the issuance of 68,965
shares of stock to an individual in exchange for $50,000 of payables of Aqua.
Management of the Company valued the shares issued at $.72 per share, which
represented a 50% discount from the closing bid price of the Company's common
stock on the date of issuance. The Company recorded the amount as advances to
subsidiaries.
During the fiscal year ended June 30, 2004, the Board of Directors authorized
the issuance of an aggregate of 437,501 shares of common stock of the Company in
exchange for management and consulting services. Management of the Company
valued the shares issued at the closing bid price of the Company's common stock
on the date of issuance after considering the historical trend of the trading
prices for its common stock and the limited volume of shares being traded. The
Company recorded management and consulting fees aggregating $3,533,364 during
the year ended June 30, 2004 as a result of the issuances.
Between January 1, 2004 and October 29, 2004, we issued an aggregate of $260,000
of Convertible Promissory Notes to a select group of seven investors. Each note
carried interest at 10% per annum. The principal amount of each note, plus
accrued interest, is convertible into our common stock at a conversion price of
70% of the closing bid price on the date of conversion, depending on the length
of time the notes have been outstanding. At this time, none of the holder of
these notes have exercised their respective conversion rights.
During fiscal year ended December 31, 2004, we issued 32,000,000 shares of our
common stock to our then current President and CEO, Kenneth D. Owen as long-term
compensation.
During the fiscal year ended June 30, 2005, the Company issued an aggregate of
1,272,552 shares of its common stock in exchange for legal and consulting
services. Management of the Company valued the shares issued at the closing bid
price of the Company's common stock on the date of issuance after considering
the historical trend of the
44
trading prices for its common stock and the limited volume of shares being
traded. The Company recorded legal and consulting fees aggregating $978,274
during the year ended June 30, 2005 as a result of the issuances.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with Golden Gate Investors, Inc. ("Golden Gate") on August
31, 2005 for the sale of (i) convertible debentures in the principal amount of
$30,000; (ii) warrants to purchase 3,000,000 shares of our common stock
("Warrant#1"); and (iii) warrants to purchase 1,447,368 ($825,000 divided by
120% of the VWAP for the 20 trading days prior to August 31, 2005) shares of our
common stock ("Warrant#2"). Warrant #1 is exercisable at a price of $1.09 per
share and expires on August 31, 2008. Warrant #2 is exercisable at a price of
.57 (120% of the VWAP for the 20 trading days prior to August 31, 2005) per
share and expires on August 31, 2008.
The debenture bears interest at 6 3/4% and matures on August 31, 2008. The
debentures are convertible into shares of our common stock, at Golden Gate's
option. The convertible debentures are convertible into the number of our shares
of common stock equal to the dollar amount of the debentures being converted
multiplied by 110, less the product of the conversion price multiplied by 100
times the dollar amount of the debentures being converted, which is then divided
by the conversion price. The conversion price for the debenture is the lesser of
(i) $1.00,or (ii) eighty-eight percent (84%) of the average of the three lowest
volume weighted average prices during the twenty (20) trading days prior to the
conversion. However, if Golden Gate elects to convert a portion of the debenture
and on the trading day immediately prior to the day that the election is made,
the volume weighted average price is less than $0.30, we shall have the right to
prepay that portion of the debenture that Golden Gate elected to convert at 150%
of such amount, plus any accrued and unpaid interest. We are currently
negotiating this arrangement ad may cansel or change the terms of it.
On November 29, 2005, we entered into a Securities Purchase Agreement with New
Millennium Capital Partners II, LLC, AJW Partners, LLC, AJW Offshore, Ltd. and
AJW Qualified Partners, LLC on November 29, 2005 whereby the Company authorized
the sale of the secured convertible term note in the aggregate principal amount
of $2,500,000 (the "AJW Notes"). The "AJW Notes" bear interest at 8% per annum,
unless our common stock is greater than 0.21 per share for each trading day of a
month, in which no event, no interest is payable during such month. The "AJW
Notes" are convertible into common stock of the Company at a 45% discount to the
average of the three lowest trading prices of our common stock during the 20
trading day period prior to conversion. In connection with the offering, the
Company issued an aggregate of 3,500,000 warrants to purchase our common stock
at a price of $0.50 per share/ The warrants are exercisable for a period of five
years. The offering was made pursuant to Section 4 (2) of the Securities Act and
is exempt from registration.
* Unless otherwise noted, the above offerings and sales were deemed to be exempt
under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933,
as amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of our company or
executive officers of our company, and transfer was restricted by the Company in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
ITEM 27. EXHIBITS.
The exhibits required to be filed herewith by Item 601 of Regulation S-B, as
described in the following index of exhibits, are either filed herewith or
incorporated herein by reference.
Exhibit Exhibit Name
------- ------------
2. Articles and Agreement of Merger between Nova Communication Ltd. and
First Colonial Ventures, Ltd. July 21, 1999**
2.1 Share Exchange Agreement and Plan of Reorganization dated July 25, 2000
(1)
2.2 Asset Purchase Agreement by and among Nacio Systems, Inc., a Nevada
corporation, Nova Communications, Ltd, and Nacio Systems, Inc. a
California corporation, dated April 1, 2005 (2)
45
2.3. Securities Purchase Agreement with New Millennium Capital Partners II,
LLC, AJW Partners, LLC, AJW Offshore, Ltd. and AJW Qualified Partners,
LLC dated as of November 29, 2005.***
2.4. Form of Conversion Note issued to AJW entities dated November 29,
2005.***
2.5. From of Warrant issued to AJW entities dated November 29, 2005.***
2.6. Security Agreement by and between the Company and the AJW entities
dated November 29, 2005.***
3.1 First Colonial Ventures, Ltd. Articles of Incorporation - March 25,
1985**
3.2 First Colonial Ventures, Ltd. Amendment to Articles of Incorporation -
August 12, 1985**
3.3 First Colonial Ventures, Ltd. Amendment to Articles of Incorporation
-September 3, 1985**
3.4 First Colonial Ventures, Ltd. Amendment to Articles of Incorporation
-February 3, 1992**
3.5 Nova Communications Ltd Articles of Incorporation - July 13, 1999**
3.6 Certificate of Change filed September 24, 2004 (3)
3.6 Bylaws.***
4.0 Certificate of Designation for Series "A" Convertible Preferred Stock
(4)
4.0 Amendment to Certificate of Designation for Series "A" Convertible
Preferred Stock (5)
4.1 Certificate of Designation for Series "B" Preferred Stock. (6)
5.1 Opinion of Gersten Savage, LLP*
9.0 Voting Trust Agreement dated January 24, 2005(5)
10.1 Stock Purchase Agreement dated May 9, 2005 between Nova Communications
Ltd. and Arthur N. Robins (6)
23.1 Consent of Independent Registered Public Accounting Firm*
23.2 Consent of Gersten Savage, LLP (Included in Exhibit 5.1)*
* Filed herewith
** To be filed by amendment
*** Previously filed
(1) Incorporated by reference to the Company's Form 8-K filed with the SEC on
October 17, 2000
(2) Incorporated by reference to the Company's Form 8-K filed with the SEC on
October 27, 2005.
(3) Incorporated by reference to the Company's Form 8-K filed with the SEC on
October 4, 2004.
(4) Incorporated by reference to the Company's Form 8-K filed with the SEC on
December 30, 2004.
(5) Incorporated by reference to the Company's Form 8-K filed with the SEC on
January 24, 2005.
(6) Incorporated by reference to the Company's Form 8-K filed with the SEC on
August 23, 2005.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
46
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
47
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on January 11, 2006.
NOVA COMMUNICATIONS LTD.
BY: /s/ ARTHUR N. ROBINS
----------------------------
Arthur N. Robins
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
/s/ LESLIE I. HANDLER President and Director January 11, 2006
-----------------------------
Leslie I. Handler
Secretary and Director
-----------------------------
James F. Abel, III
/s/ GREG K. HOGGART Director January 11, 2006
-----------------------------
Greg K. Hoggart
48