SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2004.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___________to__________ .
Commission file number:333-82608
---------
ENCOMPASS HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4756822
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1005 TERMINAL WAY, SUITE 110, RENO, NEVADA 89502-2179
-----------------------------------------------------
(Address of principal executive office) (Zip Code)
(775) 324-8531
--------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB is not contained in this form and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ x ].
1
Issuer's revenues of its most recent fiscal year was $ 5,550.
The aggregate market value of the voting common stock held by
non-affiliates computed with reference to the average bid and asked price of
such common equity as of March 25, 2005 was $5,928,570 based on the average bid
and ask prices on March 25, 2005
As of December 31, 2004 , the number of outstanding shares of the
issuer's common stock, $0.001 par value was 4,981,332 shares.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [x]
2
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................. 4
ITEM 2. DESCRIPTION OF PROPERTY............................................. 5
ITEM 3. LEGAL PROCEEDINGS................................................... 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES............ 5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND
RESULTS OF OPERATIONS.............................................. 7
ITEM 7. FINANCIAL STATEMENTS............................................... 9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES............................... 9
ITEM 8A CONTROLS AND PROCEDURES............................................ 9
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 10
ITEM 10. EXECUTIVE COMPENSATION............................................. 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................... 11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 11
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................... 12
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................. 12
SIGNATURES.................................................................. 12
INDEX TO EXHIBITS........................................................... 14
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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. At the current time, we have one subsidiary, Aqua Xtremes,
Inc. which is in the business of manufacturing and marketing a personal
watercraft and the rotary engine that drives the jet pump and propels the
watercraft. Aqua Xtremes, Inc. in turn has a wholly-owned subsidiary, Xtreme
Engines, Inc. At the present time, we own 51% of the issued and outstanding
common stock of Aqua Xtremes, Inc. We are in the process of negotiating the
acquisition of the remaining 49%.
We have entered into a Memorandum of Understanding with Nacio Systems,
Inc. to acquire all of its assets. Nacio Systems and its wholly-owned
subsidiary, Interactive Holding Group, Inc. provide centralized information
technology services to corporate clients. The acquisition of the Nacio assets is
subject to further negotiation leading up to the execution of an Asset
Acquisition Agreement.
BUSINESS STRATEGY
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 surfing
anywhere, anytime. 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.
NACIO SYSTEMS, INC.
Nacio Systems, Inc. provides centralized information technolgoy
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.
4
Attest, a division of Nacio Systems, develops 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 2nd quarter of 2005.
POWER SKI INTERNATIONAL, INC.
In our annual report for the fiscal year ended December 31, 2003, we
described our Memorandum of Understanding, as amended, with PowerSki
International, Inc. pursuant to which we and PowerSki were to merge, with Nova
being the surviving corporation. Upon completion of further due diligence, we
elected not to pursuant the merger any further and made demand upon PowerSki for
the repayment of approximately $ 800,000, which we advanced to PowerSki for
operating expenses pending the completion of the merger. We sent a demand for
payment to Power Ski and have not received a satisfactory response. We have
filed an action against PowerSki for the recovery of funds advanced.
KADFIELD, INC.
Effective December 31, 2004, we discontinued the operations of our
subsidiary, Kadfield, Inc. We transferred all of the common stock of Kadfield,
Inc. to our former President and director, Kenneth D.Owen, in consideration of
the cancellation of a note payable to Mr. Owen in the amount of $83,674.17
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive and administrative offices are located at 1005
Terminal Way, Suite 110, Reno, Nevada.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
LOW HIGH
--- ----
Q1-2004 $ 0.02 $ 0.03
Q2-2004 0.01 0.03
Q3-2004 0.01 0.01
Q4-2004 .50 3.35
Q 1-2003 $ 0.01 $ 0.03
Q 2-2003 0.01 0.08
Q 3-2003 0.02 0.05
Q 4-2003 0.03 0.04
5
RECORD HOLDERS
We have only one class of common stock. As of December 31, 2004, there
were 1,052 shareholders of record for our common stock and a total of 4,981,332
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.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The
declaration and payment of dividends is within the discretion of the Company's
board of directors and will depend, among other factors, on earnings and debt
service requirements as well as the operating and financial condition of the
Company. At the present time, the Company's anticipated working capital
requirements are such that it intends to follow a policy of retaining earnings
in order to finance the development of its business. Accordingly, the Company
does not expect to pay a cash dividend within the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of unregistered securities sold during
the period covered by this report including the date sold, the title of the
securities, the amount sold, the identity of the person who purchased the
securities, the price or other consideration paid for the securities, and the
section of the Securities Act of 1933 under which the sale was exempt from
registration as well as the factual basis for claiming such exemption.
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.
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.
Each of these transactions is considered exempt from the registration
requirements of the Securities Act of 1933 in reliance upon the exemptions at
Section 4(2) and/or 4(6) of said Act.
6
ITEM 6. 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.
RESULTS OF OPERATIONS
---------------------
Year ended December 31, 2004 compared to the Year ended December 31, 2003:
--------------------------------------------------------------------------
During 2004 and 2003, the Company has been providing working capital advances
toward the development of recreational water sports products. On August 30,
2004, the Company acquired 51% of a dormant company in which further develop
these products and a marine engine for use in these products. In the fourth
quarter of 2004, the company ceased funding the development of these products to
an outside company and expensed the amount it had previously advanced
aggregating approximately $723,500 as research and development costs.
Accordingly, research and development costs increased by approximately
$1,209,700 in 2004. Selling expense also increased by $30,000 in 2004 as a
result of the above actions.
General and administrative expenses decreased by approximately $922,900 in 2004
primarily due to the decrease in outside management fees in 2004 of
approximately $909,300. With the Company's development of its recreational water
sports products, management has spent less effort identifying other business
investment and acquisition opportunities.
Interest expenses aggregated approximately $35,300 in 2004 compared to $24,800
in 2003. The increase was due to Company borrowing an additional $260,000 under
convertible notes payable during 2004.
On July 21, 2003 the Company decided to dispose of Kadfield. The disposal was
completed on December 31, 2004. The Company realized a gain of approximately
$139,500 as a result of the disposal 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.
7
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
As of December 31, 2004 compared to December 31, 2003:
------------------------------------------------------
The Company's total assets of $186,400 as of December 31, 2004 decreased by
$659,143 compared to assets as of December 31, 2003 primarily as a result of two
factors. During the fourth quarter of 2004, the Company expensed approximately
$723,500 of advances as research and development costs resulting in the Company
beginning to develop recreational water sports products itself rather than
funding an outside company. Also, the Company incurred capital expenditures of
approximately $100,600 for equipment associated with its newly created
subsidiary.
Total current liabilities aggregated $1,042,322 as of December 31, 2004 compared
to $1,495,961 as of December 31, 2003. The decrease of approximately $453,600
was a result of the following factors. On December 31, 2004, the Company
completed its disposal of Kadfield. The liabilities of Kadfield aggregating
approximately $394,000 were assumed by the purchaser of the common stock of
Kadfield. During the fourth quarter of 2004, the Company accrued additional
professional fees of approximately $152,800 relating to the development of its
recreational water sports products. And, the Company raised an additional
$260,000 of convertible notes payable in 2004. However, holder of $370,000 of
notes payable converted their notes in the Company's common stock.
During 2004, the Company received additional advances from a related party of
approximately $98,900 for working capital purposes. In the fourth quarter of
2004, payables to related party aggregating approximately $363,200 were
exchanged into the Company's preferred stock. Also during the fourth quarter of
2004 the Company received advances under notes payable from the minority
shareholder of its 51% owned subsidiary Aqua Extremes and two other individual
of approximately $436,500. These advances are to fund the development of the
Company's recreational water sports products.
The Company frequently has not been able to make timely payments to its trade
and other creditors. As of December 31, 2004, the Company had past-due payables
in the amount of approximately $149,600. Deferred payment terms had been
negotiated with most of these vendors. The Company is also non-compliant with
respect to certain federal and state payroll related taxes in the amount of
approximately $214,600. As a result, the Company has not been able to continue
its research and development activities as planned. The Company is currently
seeking sources of working capital financing sufficient to fund delinquent
balances and ongoing research and development activities.
8
ITEM 7. FINANCIAL STATEMENTS
Our consolidated, audited, condensed financial statements including a
balance sheet for the Company as of the year ended December 31, 2004 and audited
statements of income, cash flows and changes in shareholders' equity up to the
date of such balance sheet and the comparable period of the preceding year are
attached hereto as Pages F-1 through F-19 and are incorporated herein by this
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
During our two most recent fiscal years or any later interim period, we
have had no disagreements with our certifying accountants on accounting and
financial disclosures.
ITEM 8A. CONTROLS AND PROCEDURES
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.
9
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
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 the banking industry.
Arthur N. Robins has been retired since 2000. He came of out of
retirement to become Chief Executive Officer. Prior to his retirement, Mr.
Robins was Owner and Chief Executive Officer of several companies
simultaneously, which were in manufacturing of recylced plastics. Mr. Robins
became CEO in January 2005.
James F. Abel, III was the President of The Hines Group, Inc. a
precision custom metal stamping company with headquarters in Owensboro,
Kentucky. Mr. Abel is now retired.
Greg K. Hoggatt is a captain for Delta Airlines and resides in
Pensacola, Florida.
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.
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 at1005 Terminal Way, Suite 110, Reno,
Nevada 89502-2179
10
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
--------------------------
NAME AND ANNUAL
PRINCIPAL POSITION YEAR COMPENSATION LONG TERM COMPENSATION
------------------ ---- ------------ ----------------------
Kenneth D. Owen 2004 $ 0 320,000 shares of common stock
Former President/CEO
(a) The number of shares listed reflect a 1-for-100 reverse stock split,
effective October 8, 2004
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of April 15, 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 CLASS
-------------- ---------------- --------- -----
Common Stock Leslie I. Handler -0- 0%
382 Running Springs Dr.
Palm Desert, CA 92276
Common Stock Arthur N. Robins 2,000 *
362 Gulf Breeze Pkwy, #130
Gulf Breeze, FL 32561
Common Stock James F. Abel, III -0- 0%
3 Hilltop Rd.
Owensboro, KY 42303
Common Stock Greg K. Hoggatt -0- 0%
333 Panferio Dr.
Pensacola, FL 32561
Common Stock (all officers and
directors as a group-4 persons) 2,000 *
* Less than one percent
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no reportable transactions during the period covered by
this report.
11
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits required to be attached by Item 601 of Regulation S-B are
listed in the Index to Exhibits and are incorporated herein by this reference.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the period covered
by this Form 10- KSB:
January 26, 2004 Item 5. Other Events and FD Disclosures;
Item 7. Financial Statements and Exhibits
October 4, 2004 Item 5.03 Amendments to Articles of Incorporation
or Bylaws; Change in Fiscal Year.
Item 9.01 Financial Statements and Exhibits
October 8, 2004 Item 8.01 Other Events
December 30, 2004 Item 5.01 Changes in Control of Registrant;
Item 5.03 Amendments to Articles of Incorporation
or Bylaws; Change in Fiscal Year;
Item 9.01 Financial Statements and Exhibits
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
2004 2003
------- -------
Audit Fees $20,600 $24,495
Audit related fees
Review of annual, quarterly & other SEC filings $16,725 -
------- -------
$37,325 $24,495
======= =======
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized, this 3rd day of March, 2006.
ENCOMPASS HOLDINGS, INC.
By:/s/ ARTHUR N. ROBINS
---------------------
Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Leslie I. Handler President March 3, 2006
Leslie I. Handler
/s/ Arthur N. Robins Chief Executive Officer
Arthur N. Robins March 3, 2006
13
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
PLAN OF REORGANIZATION
2.1 * Articles and Agreement of Merger dated July 21, 1999
ARTICLES OF INCORPORATION AND BY-LAWS
3(i) * Articles of Incorporation of First Colonial Ventures Ltd.dated
March 25, 1985.
3(ii) * Articles of Incorporation of Nova Communications Ltd. dated
July 21, 1999.
3(iii) * Certificate of Amendment of First Colonial Ventures Ltd. dated
August 12, 1985.
3(iv) * Certificate of Amendment of First Colonial Ventures Ltd. dated
September 3, 1985.
3(v) * Certificate of Amendment of First Colonial Ventures Ltd. dated
February 3, 1992.
3(vi) * Bylaws
MATERIAL CONTRACTS
SUBSIDIARIES
21 * Aqua Xtremes, Inc.
CERTIFICATIONS
31.1 Rule 15d-14(a) certification of Leslie I. Handler.
31.2 Rule 15d-14(a) certification of Arthur N. Robins.
32.1 Section 1350 certification of Leslie I. Handler.
32.2 Section 1350 certification of Arthur N. Robins.
* Incorporated herein by reference from filings previously made by the Company
14
NOVA COMMUNICATIONS LTD.
Table of Contents
Years ended December 31, 2004 (restated) and 2003 (restated)
Page
-------------
Report of Independent Registered Public Accounting Firm.......... F-2 - F-3
Consolidated Financial Statements:
Balance sheets................................................ F-4 - F-5
Statements of operations...................................... F-6
Statements of comprehensive loss.............................. F-7
Statements of net capital deficiency.......................... F-8 - F-9
Statements of cash flows...................................... F-10
Notes to consolidated financial statements.................... F-11 - F-20
F-1
REPORT OF INDEPENDENT REGISTETED PUBLIC ACCOUNTING FIRM
To the Stockholders
Nova Communications Ltd.
We have audited the accompanying consolidated balance sheet of Nova
Communications Ltd. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive loss, net capital
deficiency, and cash flows for each of the two years in the period ended
December 31, 2004. 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
December 31, 2004 and 2003 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2004, 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,
working capital deficit, and net capital deficiency 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.
As described in Note 5 to the consolidated financial statements, the Company
incorrectly reported the fixed percentage conversion feature of its notes
payable of $37,500 as of
F-2
December 31, 2004 and $147,000 as of December 31, 2003 and the amortization of
the beneficial conversion feature of $184,500 for the year ended December 31,
2004.
March 21, 2005, except with respect to Note 6
as to which the date is August 19, 2005
Portland, Oregon
F-3
NOVA COMMUNICATIONS LTD.
Balance Sheets
December 31
-------------------------------------
2004 2003
---------------- ----------------
(restated) (restated)
ASSETS
Current assets:
Cash $ 4,057 $ 51,451
Receivable from related party 57,480 -
Note receivable, due within one year - 9,557
Prepaid expenses 5,000 -
Current assets of discontinued operations, net - 51,435
---------------- ----------------
Total current assets 66,537 112,443
Equipment, less accumulated depreciation of $21,710 101,896 1,278
Equipment of discontinued operations, net - 140,221
Other assets:
Advances receivable 18,000 513,506
Note receivable - 15,317
Other assets of discontinued operations, net - 62,811
---------------- ----------------
Total other assets 18,000 591,634
---------------- ----------------
$ 186,433 $ 845,576
================ ================
Continued on next page.
F-4
NOVA COMMUNICATIONS LTD.
Balance Sheets (continued)
December 31
-------------------------------------
2004 2003
---------------- ----------------
(restated) (restated)
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 205,447 $ 159,637
Payable to related party 17,693 11,593
Accrued payroll and payroll related liabilities 224,791 392,445
Income taxes payable 3,200 2,400
Other accrued liabilities 211,191 45,902
Convertible notes payable, net of unamortized
discount due to beneficial conversion feature 342,500 343,000
Current liabilities of discontinued operations - 393,984
---------------- ----------------
Total current liabilities 1,004,822 1,348,961
Payable to related party - 264,232
Notes payable to related parties 436,510 -
Net Capital Deficiency:
Preferred stock; $.001 par value; authorized 100,000
shares; outstanding 100,000 shares 100 -
Common stock; $.001 par value; authorized
500,000,000 shares; outstanding 4,981,332 shares in
2004 (2,551,309 shares in 2003) 4,981 2,551
Common stock to be issued 169 150
Additional paid-in capital 23,208,171 19,327,551
Retained deficit (24,468,320) (20,097,869)
---------------- ----------------
Net capital deficiency (1,254,899) (767,617)
---------------- ----------------
$ 186,433 $ 845,576
================ ================
Continued on next page.
F-5
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Operations
Years ended December 31
2004 2003
---------------- ----------------
(restated)
Selling expenses $ 30,000 $ -
General and administrative expenses 3,055,181 3,978,098
Research and development expenses 1,209,705 -
---------------- ----------------
4,294,886 3,978,098
Other operating income 5,550 9,768
---------------- ----------------
Loss from operations (4,289,336) (3,968,330)
Other expenses:
Loss on available-for-sale investments - (497,757)
Interest (219,832) (24,814)
---------------- ----------------
Total other expenses (219,832) (522,571)
---------------- ----------------
Loss before benefit for income taxes (4,509,168) (4,490,901)
Provision for income taxes 800 800
---------------- ----------------
Net loss from continuing operations (4,509,968) (4,491,701)
Discontinued operations:
Net gain on disposal, net of benefit for income taxes 139,517 -
Net loss, net of benefit for income taxes - (97,768)
---------------- ----------------
Net income (loss) from discontinued operations 139,517 (97,768)
---------------- ----------------
Net loss $ (4,370,451) $ (4,589,469)
================ ================
Net income (loss) per common share:
Continuing operations $ (1.259) $ (1.984)
================ ================
Discontinued operations $ .039 $ (.043)
================ ================
See accompanying notes.
F-6
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Comprehensive Loss
Years ended December 31
2004 2003
----------------- -----------------
(restated)
Net loss $ (4,370,451) $ (4,589,469)
Realized gain on available-for-sale investments - 465,132
----------------- -----------------
Comprehensive loss $ (4,370,451) $ (4,124,337)
================= =================
Comprehensive loss per common share $ (1.220) $ (1.821)
================= =================
See accompanying notes.
F-7
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Net Capital Deficiency
January 1, 2003 (restated) through December 31, 2004 (restated)
Preferred stock
---------------------------
Shares Amount
------------ ------------
Balance at January 1, 2002 - $ -
Effect of 1-for-100 reverse stock split - -
Common stock to be issued in exchange for long-term debt and interest - -
Common stock issued in exchange for notes payable and accrued liabilities
to related parties - -
Common stock issued in exchange for services - -
Beneficial conversion feature of convertible notes payable - -
Comprehensive loss - -
------------ ------------
Balance at December 31, 2003 - -
Common stock issued - -
Common stock to be issued in exchange for advances to subsidiary - -
Common stock issued upon conversion of notes payable and accrued interest - -
Common stock issued in exchange for accrued payroll - -
Common stock issued in exchange for services - -
Preferred stock issued in exchange for payable to related party 100,000 100
Beneficial conversion feature of convertible notes payable - -
Comprehensive loss - -
------------ ------------
Balance at December 31, 2004 100,000 $ 100
============ ============
Continued on next page.
F-8
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Net Capital Deficiency (continued)
January 1, 2003 (restated) through December 31, 2004 (restated)
Unrealized
holding
loss from
Common stock Common Additional available- Net
------------------------------- stock to paid-in Retained for-sale capital
Shares Amount be issued capital deficit investments deficiency
----------------- ----------- ------------- ---------------- ------------------ --------------- ---------------
46,958,181 $ 46,958 $ - $ 13,797,842 $ (15,508,400) $ (465,132) $ (2,128,732)
(46,488,104) (46,488) - 46,488 - - -
- - 150 753,777 - - 753,927
100,000 100 - 922,097 - - 922,197
1,981,232 1,981 - 3,660,347 - - 3,662,328
- - - 147,000 - - 147,000
- - - - (4,589,469) 465,132 (4,124,337)
----------------- ----------- ------------- ---------------- ------------------ --------------- ---------------
2,551,309 2,551 150 19,327,551 (20,097,869) - (767,617)
50,000 50 (50) - - - -
- - 69 49,931 - - 50,000
870,023 870 - 401,747 - - 402,617
105,000 105 - 269,895 - - 270,000
1,405,000 1,405 - 2,720,996 - - 2,722,401
- - - 363,051 - - 363,151
- - - 75,000 - - 75,000
- - - - (4,370,451) - (4,370,451)
----------------- ----------- ------------- ---------------- ------------------ --------------- ---------------
4,981,332 $ 4,981 $ 169 $ 23,208,171 $ (24,468,320) $ - $ (1,254,899)
================= =========== ============= ================ ================== =============== ===============
See accompanying notes.
F-9
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows
Years ended December 31
-------------------------------
2004 2003
-------------- --------------
(restated) (restated)
Cash flows from operating activities:
Net loss from continuing operations $ (4,509,968) $ (4,491,701)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization - 13,877
Provision for uncollectible advances receivable 723,506 -
Common stock issued for services and compensation 2,722,401 3,679,828
Realized loss on available-for-sale investments - 497,757
Amortization of beneficial conversion feature 184,500 -
Changes in assets and liabilities:
Receivables - 702
Deposits - 1,478
Prepaid expenses (5,000) -
Accounts payable 51,910 (92,795)
Accrued liabilities 301,052 187,283
-------------- --------------
(531,599) (203,571)
Cash flows from discontinued operations - 126,349
Cash flows from investing activities:
Principal repayments on notes receivable 24,874 6,402
Advances paid (178,000) (513,506)
Advances paid on behalf of related parties (57,480) -
Capital expenditures (100,618) -
Net investing activities of discontinued operations - 1,585
-------------- --------------
(311,224) (505,519)
Cash flows from financing activities:
Advances from related parties 98,919 270,905
Borrowings from convertible notes payable 260,000 490,000
Borrowings from notes payable to related parties 436,510 -
Net financing activities of discontinued operations - (126,791)
-------------- --------------
795,429 634,114
-------------- --------------
Net increase (decrease) in cash (47,394) 51,373
Cash at beginning of year 51,451 78
-------------- --------------
Cash at end of year $ 4,057 $ 51,451
============== ==============
See accompanying notes.
F-10
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
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: On August 30, 2004,
the Company acquired 51% of Realize Development, Inc. in a business
combination accounted for as a purchase. Realize Development, Inc. was
dormant at the time of acquisition and had no assets or liabilities.
The Company paid $1,750 for Realized Development, Inc. which was
expensed. Realized Development, Inc. changed its name to Aqua Xtremes,
Inc. ("Aqua") in December 2004. Aqua is developing recreational water
sports products.
Also in December 2004, Aqua formed Xtreme Engines, Inc. ("Engines") and
owns 100% of its common stock. Engines is developing a marine engine
for use in recreational water sports products.
The 2004 consolidated financial statements include the accounts of Nova
and its 51% owned subsidiary Aqua and Aqua's 100% owned subsidiary
Engines. All intercompany accounts and transactions have been
eliminated.
Losses exceed the minority interest in the equity capital of Aqua as of
December 31, 2004. Accordingly, losses applicable to the minority
interest are charged against Nova as there is no obligation of the
minority stockholder to guarantee such losses. If future earnings of
Aqua do materialize, Nova will be credited to the extent of such losses
previously absorbed.
The 2003 consolidated financial statements include the accounts of Nova
and its 100% owned subsidiary Kadfield, Inc. ("Kadfield"). 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-11
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
1. Business and summary of significant accounting policies (continued):
--------------------------------------------------------------------
Investments: Investments are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS
115 requires that all applicable investments be classified as trading
securities, available-for-sale securities, or hold-to-maturity
securities. The statement further requires that hold-to-maturity
securities be reported at amortized cost and available-for-sale
securities be reported at fair market value, with unrealized gains and
losses excluded from earnings but reported in a separate component of
shareholders' equity (net of the effects of income taxes) until they
are disposed of or sold. At the time of disposal or sale, any gains or
losses, calculated by the specific identification method, are
recognized as a component of operating results.
Equipment: Equipment is carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
depreciable assets, which range from five to fifteen years.
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.
Stock options and warrants: The Company uses a fair value based method
of accounting for stock based compensation to employees.
The Company also accounts for stock options and warrants issued to
non-employees for services under the fair value method of accounting.
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-12
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
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 3,582,652 for the year ended December 31,
2004 (2,264,375 for 2003). 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.
Significant risks and uncertainties: The process of preparing financial
statements in conformity with generally accepted accounting principles
requires the use of estimates and assumptions regarding certain types
of assets, liabilities, revenues and expenses. Management of the
Company has made certain estimates and assumptions regarding the
collectibility of notes receivable and estimated fair value of
investments. Such estimates and assumptions primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
Reclassifications: Certain 2003 balances have been reclassified in the
accompanying consolidated financial statements to conform to the 2004
presentation.
2. Operations
----------
In the last trimester of 2004, Aqua began research and development of
recreational water sports products. Funding for research and
development has been provided by the minority shareholder of Aqua and
other related parties.
The Company is dependent upon its ability to obtain additional capital
and debt financing until the products are fully developed,
manufactured, and marketed and operations of 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.
F-13
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
3. Cash flow information
---------------------
Supplemental disclosure of cash flow information is as follows for the
year ended December 31:
2004 2003
--------------- ---------------
Cash paid for interest $ - $ 7,314
=============== ===============
Supplemental schedule of noncash financing activities are as follows
for the year ended December 31:
2004 2003
--------------- ---------------
Common stock issued in exchange for accrued payroll $ 270,000 $ -
=============== ===============
Common stock issued upon conversion of notes payable and accrued interest $ 402,617 $ -
=============== ===============
Preferred stock issued in exchange for payable to related party $ 363,151 $ -
=============== ===============
Common stock issued in exchange for long-term debt $ - $ 1,658,624
=============== ===============
4. Other accrued liabilities
-------------------------
Other accrued liabilities consisted of the following at December 31:
2004 2003
--------------- ---------------
Professional fees $ 191,022 $ 38,219
Interest 20,169 6,673
Other - 1,010
--------------- ---------------
Total other accrued liabilities $ 211,191 $ 45,902
=============== ===============
5. 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 from50% 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
F-14
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
5. Convertible notes payable (continued)
-------------------------------------
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 December 31,
2004, the Company received proceeds of $250,000 under convertible note
agreements and computed a beneficial conversion amount of $75,000 (the
Company received proceeds of $490,000 under convertible note agreements
and computed a beneficial conversion amount of $147,000 in 2003). The
Company amortized $184,500 of the beneficial conversion feature during
the year ended December 31, 2004.
During 2004, holders converted $370,000 of notes and $32,617 of accrued
interest into 870,023 shares of the Company's common stock.
6. Prior period adjustment
-----------------------
In 2004 and 2003 the Company incorrectly reported the fixed percentage
conversion feature of its notes payable of $37,500 as of December 31,
2004 and $147,000 as of December 31, 2003 and the amortization of the
beneficial conversion feature of $184,500 for the year ended December
31, 2004. The adjustment resulted in a decrease in previously reported
current liabilities by $147,000; an increase of $147,000 of previously
reported additional paid-in-capital; and a decrease of previously
reported net capital deficiency of $147,000 as of December 31, 2003.
The adjustment did not have any effect on previously reported net loss
per share for the year ended December 31, 2003. The adjustment resulted
in a decrease of previously reported current liabilities of $37,500; an
increase of $75,000 of previously reported additional paid-in-capital;
and an increase in previously reported net capital deficiency of
$109,500 as of December 31, 2004 and a decrease in previously reported
net loss from operations and net loss of $184,500 for the year ended
December 31, 2004. The adjustment also resulted in an increase in
previously reported net loss per common share from continued operations
and comprehensive loss per common share by $.52 for the year ended
December 31, 2004.
7. Notes payable to related parties
--------------------------------
Notes payable to related parties are due to the minority stockholder of
Aqua and two other individuals. The borrowings are unsecured,
non-interest bearing, and due on demand. These individuals have agreed
not to demand repayment before April 2006.
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.
F-15
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
8. Other related party transactions
--------------------------------
Receivable from and payable to related party reported as current assets
and current liabilities are amounts owed from and to Palaut.
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 Palaut.
Management of the Company determined the number of shares to be issued
based on the closing bid price of the Company's common stock at 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 long-term payable to a related party reported in 2003 was due to a
company related to the President of Nova. The advances were unsecured,
non-interest bearing, and due on demand. In December 2004, the Board of
Directors agreed to exchange this payable into 200,000 shares of
preferred stock of the Company.
9. 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 all of its authorized
preferred shares, consisting of 100,000 shares as Series "A". On
January 17, 2005, the Board of Directors of the 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 of its Series "A" preferred stock.
Also on January 17, 2005, the Board of Directors of the Company
increased the authorized preferred shares to 200,000.
10. Common stock
------------
On October 8, 2004, the Company's Board of Directors approved a
1-for-100 reverse stock split for all shareholders of record on that
date. All share amounts in the accompanying consolidated financial
statements have been restated to reflect the reverse stock split.
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.
F-16
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
10. Common stock (continued)
------------------------
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.
In 2004 the Company issued an aggregate of 1,092,500 shares of its
common stock in exchange for consulting and management 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 $1,823,401 during the year ended
December 31, 2004 as a result of the issuances.
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 $736,427 and accrued interest of
$17,500. 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
F-17
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
10. Common stock (continued)
------------------------
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.
11. Stock based compensation
------------------------
During 2004, the Company issued 215,000 shares of its common stock to
its president as compensation for services. Compensation expense of
$525,000 was recorded for 2004 for the fair value of the services
rendered.
During 2004, the Company issued an aggregate of 97,500 shares of its
common stock to employees as compensation for services. Compensation
expense of $99,000 was recorded for 2004 for the fair value of the
services rendered.
In December 2003, the Company issued 90,000 shares of its common stock
to its president as compensation for services. Compensation expense of
$90,000 was recorded for 2003 for the fair value of the services
rendered.
During 2003, the Company issued an aggregate of 11,000 shares of its
common stock to an employee as compensation for services. Compensation
expense of $15,000 was recorded for 2003 for the fair value of the
services rendered.
12. Income taxes
------------
Deferred income taxes consisted of the following at December 31:
2004 2003
--------------- ---------------
Deferred tax assets:
Net operating loss carryovers $ 6,737,000 $ 5,560,000
Allowance for uncollectible accounts 246,000 -
--------------- ---------------
Deferred tax assets 6,983,000 5,560,000
Valuation allowance for deferred tax assets (6,983,000) (5,560,000)
--------------- ---------------
Net deferred income taxes $ - $ -
=============== ===============
The components of the provision for income taxes are as follows for the
years ended December 31:
2004 2003
--------------- ---------------
State of California -
Currently payable $ 800 $ 800
=============== ===============
F-18
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
12. Income taxes (continued)
------------------------
The provision for income taxes is included in the accompanying
statement of operations under the following captions for the years
ended December 31:
2004 2003
--------------- ---------------
Continuing operations $ 800 $ 800
Discontinued operations - -
--------------- ---------------
$ 800 $ 800
=============== ===============
Reconciliation of income taxes computed at the Federal statutory rate
of 34% to the benefit for income taxes is as follows for the years
ended December 31:
2004 2003
--------------- ---------------
Tax at statutory rates $ 1,422,951 $ 1,560,419
Differences resulting from:
State tax, net of Federal tax benefit 528 528
Non-deductible and other items 321 53
Change in deferred tax valuation allowance (1,423,000) (1,560,200)
--------------- ---------------
Provision for income taxes $ 800 $ 800
=============== ===============
The Company has approximately $19,814,700 in Federal and State of
California 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 and state laws upon a
change in ownership. The amount of the limitation, if any, has not been
determined at this time. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax
assets will not be realized. As a result of the Company's continued
losses and uncertainties surrounding the realization of the net
operating loss carryforwards, management has determined that the
realization of deferred tax assets is uncertain. Accordingly, a
valuation allowance equal to the net deferred tax asset amount has been
recorded as of December 31, 2004 and 2003.
13. Recently issued pronouncements
------------------------------
In December 2004, the FASB issued a revision to SFAS 123, "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
F-19
NOVA COMMUNICATIONS LTD.
Notes to Consolidated Financial Statement
December 31, 2004
13. Recently issued pronouncements (continued)
------------------------------------------
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 financial position, results
of operations and cash flows.
In July 2004, the Emerging Issues Task Force issued a draft abstract
for EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt
on Diluted Earnings per Share" ("EITF 04-08"). 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 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 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.151is effective for
a fiscal year 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 financial position,
results of operations and cash flows.
F-20